UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2022
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ______ to ______
Commission File Number: 001-38895
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (806 )
792-7101
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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☐
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☒
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Non-accelerated filer
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☐
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 6, 2022, the registrant had 17,618,573 shares of
common stock, par value $1.00 per share, outstanding.
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Page
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PART I.
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3
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Item 1.
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3
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3
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4
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6
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7
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8
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Item 2.
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27
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Item 3.
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48
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Item 4.
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48
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PART II.
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49
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Item 1.
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49
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Item 1A.
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49
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Item 2.
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49
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Item 3.
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49
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Item 4.
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49
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Item 5.
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49
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Item 6.
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50
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51
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Consolidated Financial Statements
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SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
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March 31,
2022
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December 31,
2021
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(Unaudited)
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ASSETS
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Cash and due from banks
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$
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$
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Interest-bearing deposits in banks
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Cash and cash equivalents
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Securities available for sale
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Loans held for sale
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Loans held for investment
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Allowance for loan losses
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(
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(
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Loans held for investment, net
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Accrued interest receivable
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Premises and equipment, net
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Bank-owned life insurance
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Goodwill
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Intangible assets, net
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Mortgage servicing rights
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Deferred tax asset, net
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Other assets
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Total assets
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$
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$
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Deposits:
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Noninterest-bearing
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$
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$
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Interest-bearing
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Total deposits
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Accrued expenses and other liabilities
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Subordinated debt securities
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Junior subordinated deferrable interest debentures
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Total liabilities
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Stockholders’ equity:
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Common stock, $
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Additional paid-in capital
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Retained earnings
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Accumulated other comprehensive income (loss)
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(
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)
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Total stockholders’ equity
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Total liabilities and stockholders’ equity
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$
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$
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
(Unaudited)
(Dollars in thousands, except per share data)
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Three Months Ended
March 31,
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2022
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2021
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Interest income:
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Loans, including fees
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$
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$
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Securities:
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Taxable
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Non-taxable
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Federal funds sold and interest-bearing deposits in banks
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Total interest income
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Interest expense:
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Deposits
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Notes payable & other borrowings
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Subordinated debt securities
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Junior subordinated deferrable interest debentures
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Total interest expense
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Net interest income
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Provision for loan losses
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(
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Net interest income, after provision for loan losses
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Noninterest income:
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Service charges on deposit accounts
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Income from insurance activities
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Net gain on sales of loans
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Bank card services and interchange fees
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Other mortgage banking income
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Investment commissions
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Fiduciary fees
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Other
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Total noninterest income
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Noninterest expense:
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Salaries and employee benefits
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Occupancy and equipment, net
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Professional services
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Marketing and development
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IT and data services
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Bank card expenses
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Appraisal expenses
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Other
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Total noninterest expense
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Income before income taxes
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Income tax expense
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Net income
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$
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$
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (CONTINUED)
(Unaudited)
(Dollars in thousands, except per share data)
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Three Months Ended
March 31,
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2022
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2021
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Earnings per share:
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Basic
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$
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$
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Diluted
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$
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$
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Net income
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$
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$
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Other comprehensive loss:
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Unrealized losses on securities available for sale
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(
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(
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Less: Change in fair value on hedged state and municipal securities
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Tax effect
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Other comprehensive loss
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(
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(
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Comprehensive income (loss)
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$
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(
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)
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$
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
(Unaudited)
(Dollars in thousands, except per share data)
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Common Stock
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Additional
Paid-in
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Retained
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Accumulated
Other
Comprehensive
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Shares
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Amount
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Capital
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Earnings
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Income (Loss)
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Total
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Three
Months Ended March 31,
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Balance at January 1, 2021
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$ | $ | $ | $ | $ | |||||||||||||||||||
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Net income
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—
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Cash dividends:
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Common - $
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—
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( |
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Other comprehensive loss
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—
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( |
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Exercise of employee stock options and vesting of restricted stock units, net of
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( |
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| Repurchases of common stock | ( |
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Stock based compensation
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—
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Balance at March 31, 2021
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$ | $ | $ | $ | $ | |||||||||||||||||||
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Balance at January 1, 2022
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$ | $ | $ | $ | $ | |||||||||||||||||||
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Net income
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—
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Cash dividends:
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Common - $
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—
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( |
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Other comprehensive loss
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—
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( |
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Exercise of employee stock options and vesting of restricted stock units, net of
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( |
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| Repurchases of common stock | ( |
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Stock based compensation
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—
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Balance at March 31, 2022
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$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
(Unaudited)
(Dollars in thousands)
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Three Months Ended
March 31,
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2022
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2021
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Cash flows from operating activities:
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Net income
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$
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$
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Adjustments to reconcile net income to net cash from operating activities:
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Provision for loan losses
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(
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Depreciation and amortization
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Accretion and amortization
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Other gains, net
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(
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)
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Net gain on sales of loans
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(
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)
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(
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Proceeds from sales of loans held for sale
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Loans originated for sale
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(
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)
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(
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)
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Deferred income tax expense (benefit)
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Earnings on bank-owned life insurance
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(
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)
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(
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)
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Stock-based compensation
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Change in valuation of mortgage servicing rights
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(
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(
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Net change in:
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Accrued interest receivable and other assets
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(
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)
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Accrued expenses and other liabilities
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Net cash provided by operating activities
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Cash flows from investing activities:
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Activity in securities available for sale:
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Purchases
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(
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)
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(
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)
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Maturities, prepayments, and calls
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Loan originations and principal collections, net
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(
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)
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(
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)
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Purchases of premises and equipment
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(
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)
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(
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)
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Proceeds from sales of premises and equipment
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Proceeds from sales of foreclosed assets
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Net cash used in investing activities
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(
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)
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(
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)
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Cash flows from financing activities:
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Net change in deposits
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Net change in short-term borrowings
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(
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)
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Payments to tax authorities for stock-based compensation
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(
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)
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(
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)
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Payments made on notes payable and other borrowings
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(
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)
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Cash dividends on common stock
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(
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)
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(
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Payments to repurchase common stock
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(
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)
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(
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)
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Net cash provided by financing activities
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Net change in cash and cash equivalents
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$
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$
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Beginning cash and cash equivalents
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Ending cash and cash equivalents
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$
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$
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Supplemental disclosures of cash flow information:
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Interest paid on deposits and borrowed funds
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$
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$
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Income taxes paid
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Supplemental schedule of noncash activities:
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Loans transferred to foreclosed assets
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$
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$
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Additions to mortgage servicing rights
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations – South Plains Financial, Inc.
(“SPFI”) is a Texas corporation and registered bank holding company that conducts its principal activities through its subsidiaries from offices located throughout Texas and Eastern New Mexico. Principal activities include commercial and retail
banking, along with insurance, investment, trust, and mortgage services. The following are subsidiaries of SPFI:
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Wholly-Owned, Consolidated Subsidiaries:
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Bank subsidiary
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Non-bank subsidiary
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Non-bank subsidiary
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Non-bank subsidiary
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Non-bank subsidiary
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Non-bank subsidiary
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Wholly-Owned, Equity Method Subsidiaries:
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Non-bank subsidiaries
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Basis of Presentation and Consolidation – The consolidated financial
statements in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (this “Form 10-Q”) include the accounts of SPFI and its wholly-owned consolidated subsidiaries (collectively referred to as the “Company”) identified above. All
significant intercompany balances and transactions have been eliminated in consolidation.
The interim consolidated financial statements in this Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of
management, reflect all adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows. All such adjustments were of a normal and recurring nature. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”).
Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements, and notes thereto
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
Use of Estimates – The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Determination of the adequacy of the allowance for loan losses is a material estimate that is particularly susceptible to significant change in the near term;
the assumptions used in stock-based compensation, derivatives, mortgage servicing rights, the valuation of foreclosed assets, and fair values of financial instruments can also involve significant management estimates.
Securities – Investment securities may be classified into
trading, held to maturity (“HTM”) or available for sale (“AFS”) portfolios. Securities that are held principally for resale in the near term are classified as trading. Securities that management has the ability and positive intent to hold to
maturity are classified as HTM and recorded at amortized cost. Securities not classified as trading or HTM are AFS and are reported at fair value with unrealized gains and losses excluded from earnings, but included in the determination of other
comprehensive income (loss). Management uses these assets as part of its
asset/liability management strategy; they may be sold in response to changes in liquidity needs, interest rates, resultant prepayment risk changes, and other factors. Management determines the appropriate classification of securities at the time of
purchase. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain (loss) on
sale of securities. The cost of securities sold is based on the specific identification method.
When the fair value of a security is below its amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists.
The analysis considers (i) whether there is intent to sell securities prior to recovery and/or maturity, (ii) whether it is more likely than not that securities will have to be sold prior to recovery and/or maturity, and (iii) whether there is a
credit loss component to the impairment. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than
estimated, the extent of the impairment of a security may be different than previously estimated, which could have a material effect on the Company’s results of operations and financial condition.
Loans – Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Interest
income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the straight-line method, which is not materially different
from the effective interest method required by GAAP.
Loans are placed on nonaccrual status when, in management’s opinion, collection of interest is unlikely, which typically occurs when principal or interest payments are
more than ninety days past due. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. The
interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Allowance for Loan Losses – The allowance for loan losses is established
by management as an estimate to cover probable loan losses through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. The Company’s allowance for loan losses consists of specific valuation allowances established for probable losses on specific loans and general valuation allowances calculated based on historical loan
loss experience for similar loans with similar characteristics and trends, judgmentally adjusted for general economic conditions and other qualitative risk factors internal and external to the Company.
The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s review of the collectability of the loans in the Company’s
loan portfolio in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The determination of the adequacy of the allowance for loan losses is based on estimates that are
particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. Loans
originated by the bank subsidiary are generally secured by specific items of collateral including real property, crops, livestock, consumer assets, and other business assets.
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on various factors. In
addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the bank subsidiary to recognize additional losses based on their judgments about information
available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be
estimated.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement. All loans rated substandard or worse and greater than $250
thousand are specifically reviewed to determine if they are impaired. Factors considered by management in determining whether a loan is impaired include payment status and the sources, amounts, and probabilities of estimated cash flow available to
service debt in relation to amounts due according to contractual terms. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of
the shortfall in relation to the principal and interest owed.
Loans that are determined to be impaired are then evaluated to determine estimated impairment, if any. GAAP allows impairment to be measured on a loan-by-loan basis by
either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Loans that are not individually
determined to be impaired or are not subject to the specific review of impaired status are subject to the general valuation allowance portion of the allowance for loan losses.
The Company may modify its loan agreement with a borrower. The modification will be considered a troubled debt restructuring (“TDR”) if the following criteria are met: (1)
the borrower is experiencing a financial difficulty and (2) the Company makes a concession that it would not otherwise make. Concessions may include debt forgiveness, interest rate change, or maturity extension. Each of these loans is impaired and is
evaluated for impairment, with a specific reserve recorded as necessary based on probable losses related to collateral and cash flow. A loan will no longer be required to be reported as restructured in calendar years following the restructure if the
interest rate at the time of restructure is greater than or equal to the rate the Company was willing to accept for a new extension of credit with similar risk and the loan is in compliance with its modified terms.
Acquired Loans – Loans that the Company acquires in connection with
business combinations are recorded at fair value with no carryover of the acquired entity’s related allowance for loan losses. The fair value of the acquired loans involves estimating the amount and timing of principal and interest cash flows expected
to be collected on the loans and discounting those cash flows at a market rate of interest.
Any
loans the Company determines have evidence of deterioration of credit quality since origination, and it is probable, at acquisition, that all contractually required payments will not be collected, are considered to be purchase credit impaired loans.The
excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the
loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. These loans are accounted for under Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require the Company
to evaluate the need for an additional allowance. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which the Company will then reclassify as accretable discount that
will be recognized into interest income over the remaining life of the loan.
Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20, Receivables—Nonrefundable
Fees and Other Costs. These loans are initially recorded at fair value, and include credit and interest rate marks associated with acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment
to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans
subsequent to acquisition.
Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether
the customer is contractually delinquent, if the Company expects to fully collect the new carrying value (i.e., fair value) of the loans. As such, the Company may no longer consider the loan to be nonaccrual or nonperforming at the date of acquisition
and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.
Mortgage Servicing Rights – When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income
statement effect recorded in net gain on sale of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates present value of estimated
future servicing income.
Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports change in fair value of servicing
assets in earnings in the period in which the changes occur, and are included with other noninterest income in the combined financial statements. The fair values of servicing rights are subject to significant fluctuations as a result of changes in
estimated and actual prepayment speeds and default rates and losses.
Goodwill
and Other Intangible Assets – Goodwill resulting from business combinations is generally
determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized, but is tested for impairment on October 31 of
each year or more frequently if events and circumstances exist that indicate that an impairment test should be performed. There was no
Core deposit intangible (“CDI”) is a measure of the value of checking and savings
deposit relationships acquired in a business combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding relative to an
alternative source of funding. CDI is amortized over the estimated useful lives of the existing deposit relationships acquired, but does not exceed 10
years. Substantially all CDI is amortized using the sum of the years’ digits method.
The remaining other intangible assets consist of customer relationship and employment
agreement intangible assets and are amortized over their estimated useful lives of 5
Mortgage Banking Derivatives – Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market, forward commitments for the future delivery of these mortgage loans, and
forward sales of mortgage-backed securities are accounted for as free standing derivatives. At the time of the interest rate lock, the Company determines whether the loan will be sold through a best efforts contract or a mandatory delivery contract.
In order to hedge the change in interest rates resulting from the commitments to fund the loans that will be sold through a best efforts contract, the Company enters
into forward loans sales commitments for the future delivery of mortgage loans when interest rate locks are entered. At inception, these interest rate locks and the related forward loan sales commitments, adjusted for the expected exercise of the
commitment before the loan is funded, are recorded with a zero value. Subsequent changes in fair value are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked.
In order to hedge the change in interest rates resulting from all other mortgage commitments to funds loans, the Company enters into forward sales of mortgage-backed
securities contracts. At inception, these interest rate locks are recorded at fair value and are adjusted for the expected exercise of the commitment before the loan is funded. Subsequent changes in fair value are estimated based on changes in
mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in net gain on sales of loans in the consolidated financial statements.
Derivatives – At the inception of a derivative contract,
the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging
designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain
or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that
are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported
currently in earnings, as noninterest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash
settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge
transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The
Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company
discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no
longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued,
the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash
flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.
Stock-Based Compensation – The Company sponsors an equity incentive plan under which options to acquire shares of the Company’s common stock may be granted periodically to all full-time employees and directors of the Company or its affiliates at a specific
exercise price. Shares are issued out of authorized and unissued common shares that have been reserved for issuance under such plan. Compensation cost is measured based on the estimated fair value of the award at the grant date and is recognized in
earnings on a straight-line basis over the requisite service period. The fair value of stock options is estimated at the date of grant using a closed form option valuation (“Black-Scholes”) option pricing model. This model requires assumptions as to
the expected stock volatility, dividends, terms and risk-free rates. The expected volatility is based on the combination of the Company’s historical volatility and the volatility of comparable peer banks. The expected term represents the period of
time that options are expected to be outstanding from the grant date. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the appropriate life of each stock option.
Earnings per Share – Basic earnings per share is net income divided by the weighted average number of
common shares outstanding during the period. Employee Stock Ownership Plan (“ESOP”) shares are considered outstanding for this calculation unless unearned. Diluted earnings per share includes the dilutive effect of unearned ESOP shares, if applicable. Diluted earnings per share includes the dilutive effect of
additional potential shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Segment Information – The Company has two reportable segments: banking and insurance. The accounting
policies of the segments are the same as those described in the summary of significant accounting policies. The Company’s reportable segments are strategic business units that offer different products and services. Operations are managed and
financial performance is evaluated on a Company-wide basis.
Reclassifications – Certain amounts from the 2021 consolidated financial statements have been
reclassified to conform to the March 31, 2022 presentation.
Recent Accounting Pronouncements – FASB ASC constitutes GAAP for nongovernmental entities. Updates to ASC are
prescribed in Accounting Standards Updates (“ASU”), which are not authoritative until incorporated into ASC.
ASU 2021-01, Reference Rate Reform (Topic 848). In January 2021, the FASB
issued ASU No. 2021-01 to clarify the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. This update additionally clarified that a
receive-variable-rate, pay-variable-rate cross-currency interest rate swap may be considered an eligible hedging instrument in a net investment hedge if both legs of the swap do not have the same repricing intervals and dates as a result of reference
rate reform. This update was effective upon issuance and generally can be applied through December 31, 2022. See the discussion regarding the adoption of ASU 2020-04 below.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting. In March 2020, the FASB issued ASU 2020-04 and it provides optional expedients and exceptions for accounting related to contracts,
hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This update applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected
to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that
an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The expedients and exceptions in this update are available to all entities starting March 12, 2020 through December 31, 2022.
The adoption of ASU 2020-04 did not significantly impact the Company’s consolidated financial statements.
ASU 2019-12, Income Taxes, Simplifying the Accounting for Income Taxes (Topic 740). In December 2019, the FASB issued ASU 2019-12 to simplify the accounting for income
taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This update is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material effect on the Company’s financial statements.
ASU 2016-13 Financial Instruments - Credit Losses (Topic 326). The FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable
to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held to maturity securities, and debt securities. ASU 2016-13 is effective for the Company for annual periods beginning after December
15, 2022, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.
The Company has contracted with a third-party vendor to assist in the implementation of CECL. The model has been developed and validation is underway. The Company expects to adopt CECL effective January 1, 2023.
ASU 2016-02 Leases (Topic 842). The FASB amended existing guidance that requires that lessees recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. These amendments are effective for the Company for
annual periods beginning after December 15, 2021, and interim periods beginning after December 15, 2022. Based upon an analysis performed, the Company estimates that the right of use asset and corresponding lease liability at adoption will be
between $10.8 11.3
Subsequent
Events – The Company
has evaluated subsequent events and transactions from March 31, 2022 through the date this Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP.
2. SECURITIES
The amortized cost and fair value of securities, with gross unrealized gains and losses, at the dates indicated follows (dollars in thousands):
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
March 31, 2022
|
||||||||||||||||
|
Available for sale:
|
||||||||||||||||
|
U.S. government and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
State and municipal
|
|
|
(
|
)
|
|
|||||||||||
|
Mortgage-backed securities
|
|
|
(
|
)
|
|
|||||||||||
|
Collateralized mortgage obligations
|
|
|
|
|
||||||||||||
|
Asset-backed and other amortizing securities
|
|
|
(
|
)
|
|
|||||||||||
|
Other securities
|
|
|
(
|
)
|
|
|||||||||||
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
December 31, 2021
|
||||||||||||||||
|
Available for sale:
|
||||||||||||||||
|
U.S. government and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
State and municipal
|
|
|
(
|
)
|
|
|||||||||||
|
Mortgage-backed securities
|
|
|
(
|
)
|
|
|||||||||||
|
Collateralized mortgage obligations
|
|
|
(
|
)
|
|
|||||||||||
|
Asset-backed and other amortizing securities
|
|
|
(
|
)
|
|
|||||||||||
|
Other securities
|
|
|
|
|
||||||||||||
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||
The amortized cost and fair value of securities at March 31, 2022 are presented below by contractual maturity (dollars in thousands). Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay obligations. Other securities are shown separately since they are not due at a single maturity date.
|
Available for Sale
|
||||||||
|
Amortized
Cost
|
Fair
Value
|
|||||||
|
Within 1 year
|
$
|
|
$
|
|
||||
|
After 1 year through 5 years
|
|
|
||||||
|
After 5 years through 10 years
|
|
|
||||||
|
After 10 years
|
|
|
||||||
|
Other
|
|
|
||||||
|
$
|
|
$
|
|
|||||
At both March 31, 2022 and December 31, 2021, there were no
Securities with a carrying value of approximately $479.2
million and $474.5 million at March 31, 2022 and December 31, 2021, respectively, were pledged to collateralize public deposits and for
other purposes as required or permitted by law.
The following table segregates securities with unrealized losses at the periods indicated, by the duration they have been in a loss position (dollars in thousands):
|
Less than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
|||||||||||||||||||
|
March 31, 2022
|
||||||||||||||||||||||||
|
U.S. government and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
State and municipal
|
|
|
|
|
|
|
||||||||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
|
|
||||||||||||||||||
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
||||||||||||||||||
|
Asset-backed and other amortizing securities
|
|
|
|
|
|
|
||||||||||||||||||
|
Other securities
|
|
|
|
|
|
|
||||||||||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||
|
December 31, 2021
|
||||||||||||||||||||||||
|
U.S. government and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
State and municipal
|
|
|
|
|
|
|
||||||||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
|
|
||||||||||||||||||
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
||||||||||||||||||
|
Asset-backed and other amortizing securities
|
|
|
|
|
|
|
||||||||||||||||||
|
Other securities
|
|
|
|
|
|
|
||||||||||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||
There were 130 securities with an unrealized loss at
March 31, 2022. Management does not believe that these losses are other than temporary as there is no intent to sell any of these securities before recovery and it is not probable the Company will be required to sell any of these securities before
recovery, and credit loss, if any, is not material. These unrealized losses are largely due to recent significant increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is
expected to recover as the securities approach their maturity date or if market yields for such investments decline in future periods. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of
March 31, 2022, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s combined financial statements.
3. LOANS HELD FOR INVESTMENT
Loans are summarized by category as of the periods presented below (dollars in thousands):
|
March 31,
2022
|
December 31,
2021
|
|||||||
|
Commercial real estate
|
$
|
|
$
|
|
||||
|
Commercial - specialized
|
|
|
||||||
|
Commercial - general
|
|
|
||||||
|
Consumer:
|
||||||||
|
1-4 family residential
|
|
|
||||||
|
Auto loans
|
|
|
||||||
|
Other consumer
|
|
|
||||||
|
Construction
|
|
|
||||||
|
|
|
|||||||
|
Allowance for loan losses
|
(
|
)
|
(
|
)
|
||||
|
Loans, net
|
$
|
|
$
|
|
||||
The Company has certain lending policies, underwriting standards, and procedures in place that are designed to maximize loan income with an acceptable level of risk.
Management reviews and approves these policies, underwriting standards, and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies,
non-performing, and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.
Commercial – General and Specialized – Commercial loans are underwritten
after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, evaluate current and projected cash flows to
determine the ability of the borrower to repay their obligations, as agreed and ensure appropriate collateral is obtained to secure the loan. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on
the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and include personal guarantees. Owner-occupied real
estate is included in commercial loans, as the repayment of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties. Commercial loans are
grouped into two distinct sub-categories: specialized and general. Commercial related segments that are considered “specialized” include
agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related segments that contain a broader diversity of borrowers, sub-industries, or serviced industries are grouped into the “general
category.” These include goods, services, restaurant & retail, construction, and other industries.
Commercial Real Estate – Commercial real estate loans are also subject
to underwriting standards and processes similar to commercial loans. These loans are underwritten primarily based on projected cash flows for income-producing properties and collateral values for non-income-producing properties. The repayment of
these loans is generally dependent on the successful operation of the property securing the loans or the sale or refinancing of the property. Real estate loans may be adversely affected by conditions in the real estate markets or in the general
economy. The properties securing the Company’s real estate portfolio are diversified by type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.
Construction – Loans for residential construction are for single-family
properties to developers, builders, or end-users. These loans are underwritten based on estimates of costs and completed value of the project. Funds are advanced based on estimated percentage of completion for the project. Performance of these loans
is affected by economic conditions as well as the ability to control costs of the projects.
Consumer – Loans to consumers include 1-4 family residential loans, auto
loans, and other loans for recreational vehicles or other purposes. The Company utilizes a computer-based credit scoring analysis to supplement its policies and procedures in underwriting consumer loans. The Company’s loan policy addresses types of
consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes the Company’s risk.
The Company generally requires mortgage title insurance and hazard insurance on 1-4 family residential loans.
The allowance for loan losses was $39.6 million at March 31, 2022, compared to $42.1 million at December 31, 2021.
The allowance for loan losses to loans held for investment was 1.62 % at March 31, 2022 and 1.73 % at December 31, 2021.
The following table details the activity in the allowance for loan losses for the periods indicated (dollars in thousands). Allocation of a portion of the allowance to
one category of loans does not preclude its availability to absorb losses in other categories.
|
Beginning
Balance
|
Provision for
Loan Losses
|
Charge-offs
|
Recoveries
|
Ending
Balance
|
||||||||||||||||
|
For the three months ended March 31, 2022
|
||||||||||||||||||||
|
Commercial real estate
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||
|
Commercial - specialized
|
|
(
|
)
|
(
|
)
|
|
|
|||||||||||||
|
Commercial - general
|
|
|
(
|
)
|
|
|
||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
1-4 family residential
|
|
(
|
)
|
(
|
)
|
|
|
|||||||||||||
|
Auto loans
|
|
|
(
|
)
|
|
|
||||||||||||||
|
Other consumer
|
|
|
(
|
)
|
|
|
||||||||||||||
|
Construction
|
|
|
|
|
|
|||||||||||||||
|
Total
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||||
|
For the three months ended March 31, 2021
|
||||||||||||||||||||
|
Commercial real estate
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Commercial - specialized
|
|
(
|
)
|
|
|
|
||||||||||||||
|
Commercial - general
|
|
|
(
|
)
|
|
|
||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
1-4 family residential
|
|
|
(
|
)
|
|
|
||||||||||||||
|
Auto loans
|
|
(
|
)
|
(
|
)
|
|
|
|||||||||||||
|
Other consumer
|
|
|
(
|
)
|
|
|
||||||||||||||
|
Construction
|
|
|
|
|
|
|||||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||
The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment at the dates indicated (dollars in thousands):
|
Recorded Investment
|
Allowance for Loan Losses
|
|||||||||||||||
|
Individually
Evaluated
|
Collectively
Evaluated
|
Individually
Evaluated
|
Collectively
Evaluated
|
|||||||||||||
|
March 31, 2022
|
||||||||||||||||
|
Commercial real estate
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Commercial - specialized
|
|
|
|
|
||||||||||||
|
Commercial - general
|
|
|
|
|
||||||||||||
|
Consumer:
|
||||||||||||||||
|
1-4 family residential
|
|
|
|
|
||||||||||||
|
Auto loans
|
|
|
|
|
||||||||||||
|
Other consumer
|
|
|
|
|
||||||||||||
|
Construction
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
December 31, 2021
|
||||||||||||||||
|
Commercial real estate
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Commercial - specialized
|
|
|
|
|
||||||||||||
|
Commercial - general
|
|
|
|
|
||||||||||||
|
Consumer:
|
||||||||||||||||
|
1-4 family residential
|
|
|
|
|
||||||||||||
|
Auto loans
|
|
|
|
|
||||||||||||
|
Other consumer
|
|
|
|
|
||||||||||||
|
Construction
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Impaired loan information at the dates indicated follows (dollars in thousands):
|
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment
With No
Allowance
|
Recorded
Investment
With
Allowance
|
Total
Recorded
Investment
|
Related
Allowance
|
Average
Recorded
Investment
|
|||||||||||||||||||
|
March 31, 2022
|
||||||||||||||||||||||||
|
Commercial real estate
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Commercial - specialized
|
|
|
|
|
|
|
||||||||||||||||||
|
Commercial - general
|
|
|
|
|
|
|
||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||
|
1-4 family
|
|
|
|
|
|
|
||||||||||||||||||
|
Auto loans
|
|
|
|
|
|
|
||||||||||||||||||
|
Other consumer
|
|
|
|
|
|
|
||||||||||||||||||
|
Construction
|
|
|
|
|
|
|
||||||||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
December 31, 2021
|
||||||||||||||||||||||||
|
Commercial real estate
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Commercial - specialized
|
|
|
|
|
|
|
||||||||||||||||||
|
Commercial - general
|
|
|
|
|
|
|
||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||
|
1-4 family
|
|
|
|
|
|
|
||||||||||||||||||
|
Auto loans
|
|
|
|
|
|
|
||||||||||||||||||
|
Other consumer
|
|
|
|
|
|
|
||||||||||||||||||
|
Construction
|
|
|
|
|
|
|
||||||||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
All impaired loans $250 thousand and greater were
specifically evaluated for impairment. Interest income recognized using a cash-basis method on impaired loans for the three months ended March 31, 2022 and the year ended December 31, 2021 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 at the dates indicated (dollars in thousands):
|
30-89 Days
Past Due
|
90 Days or
More Past Due
|
Nonaccrual
|
||||||||||
|
March 31, 2022
|
||||||||||||
|
Commercial real estate
|
$
|
|
$
|
|
$
|
|
||||||
|
Commercial - specialized
|
|
|
|
|||||||||
|
Commercial - general
|
|
|
|
|||||||||
|
Consumer:
|
||||||||||||
|
1-4 Family residential
|
|
|
|
|||||||||
|
Auto loans
|
|
|
|
|||||||||
|
Other consumer
|
|
|
|
|||||||||
|
Construction
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
December 31, 2021
|
||||||||||||
|
Commercial real estate
|
$
|
|
$
|
|
$
|
|
||||||
|
Commercial - specialized
|
|
|
|
|||||||||
|
Commercial - general
|
|
|
|
|||||||||
|
Consumer:
|
||||||||||||
|
1-4 Family residential
|
|
|
|
|||||||||
|
Auto loans
|
|
|
|
|||||||||
|
Other consumer
|
|
|
|
|||||||||
|
Construction
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
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 by the Company
about the risks of default associated with the loan. The Company reviews the grades on loans as part of the company's on-going monitoring of the credit quality of the 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 at the dates indicated (dollars in thousands):
|
Pass
|
Special
Mention
|
Substandard
|
Doubtful
|
Total
|
||||||||||||||||
|
March 31, 2022
|
||||||||||||||||||||
|
Commercial real estate
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Commercial - specialized
|
|
|
|
|
|
|||||||||||||||
|
Commercial - general
|
|
|
|
|
|
|||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
1-4 family residential
|
|
|
|
|
|
|||||||||||||||
|
Auto loans
|
|
|
|
|
|
|||||||||||||||
|
Other consumer
|
|
|
|
|
|
|||||||||||||||
|
Construction
|
|
|
|
|
|
|||||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
December 31, 2021
|
||||||||||||||||||||
|
Commercial real estate
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Commercial - specialized
|
|
|
|
|
|
|||||||||||||||
|
Commercial - general
|
|
|
|
|
|
|||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
1-4 family residential
|
|
|
|
|
|
|||||||||||||||
|
Auto loans
|
|
|
|
|
|
|||||||||||||||
|
Other consumer
|
|
|
|
|
|
|||||||||||||||
|
Construction
|
|
|
|
|
|
|||||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
Under section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), banks may elect to deem that loan modifications do not result in a
classification as a TDR if they are (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2020; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of
termination of the national emergency or (B) December 31, 2020. Under section 540 of the Consolidated Appropriations Act, 2021 (the “Act”), section 4013 of the CARES Act was amended to extend the period for loan modifications to the earlier of (1)
January 1, 2022, or (2) 60 days after the date of termination of the national emergency. The Company elected to adopt the provisions of the CARES Act and the Act.
Additionally, other short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief are not
TDRs under ASC 310-40 and the interagency statement released by the federal banking regulators on April 7, 2020 in response to the COVID-19 pandemic (the “Joint Interagency Regulatory Guidance”). This includes short-term (e.g., up to six months)
modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a
modification program is implemented.
In response to the COVID-19 pandemic, the Company implemented a short-term deferral modification program that complies with ASC 310-40 and the Joint Interagency
Regulatory Guidance. As of March 31, 2022 and December 31, 2021, the Company had no loans under an active modification that comply with ASC 310-40 and the Joint Interagency Regulatory Guidance.
Beginning in April 2020, the Company began offering additional COVID-19 related deferral and modification of principal and/or interest payments to selected borrowers on
a case-by-case basis that were outside the scope of the short-term deferral modification program. These additional modifications comply with the provisions of section 4013 of the CARES Act and section 501 of the Act. As of March 31, 2022, the Company
had 1 loan totaling approximately $6.0
million subject to these deferral and modification agreements. As of December 31, 2021 the Company had 3 loans totaling approximately $15.9 million subject to these deferral and modification agreements, representing 0.65 % of outstanding loans held for investment.
There were no
4. GOODWILL AND INTANGIBLES
The Company had goodwill of $19.5
Other intangible assets, which consist of CDI, customer lists,
and employment agreements at the dates indicated are summarized below (dollars in thousands):
|
March 31,
2022
|
December 31,
2021
|
|||||||
|
|
|
|||||||
|
Amortized intangible assets
|
||||||||
|
Core deposit intangible
|
$
|
|
$
|
|
||||
|
Less: Accumulated amortization
|
(
|
)
|
(
|
)
|
||||
|
|
|
|||||||
|
Other intangibles
|
|
|
||||||
|
Arising from business combinations
|
|
|
||||||
|
Less: Accumulated amortization
|
(
|
)
|
(
|
)
|
||||
|
|
|
|||||||
|
Other intangible assets, net
|
$
|
|
$
|
|
||||
5. Mortgage Servicing Rights
The following table reflects the changes in fair value of the Company’s mortgage servicing rights asset included in the Consolidated Balance Sheets, and other
information related to the serviced portfolio, for the periods or dates presented (dollars in thousands):
|
Three Months Ended
March 31,
|
||||||||
|
2022
|
2021
|
|||||||
|
Beginning balance
|
$
|
|
$
|
|
||||
|
Additions
|
|
|
||||||
|
Valuation adjustment
|
|
|
||||||
|
Ending balance
|
$
|
|
$
|
|
||||
| March 31, |
December 31, |
|||||||
| 2022 |
2021 |
|||||||
|
Mortgage loans serviced for others
|
$
|
|
$
|
|
||||
|
Mortgage servicing rights assets as a percentage of serviced mortgage loans
|
|
%
|
|
%
|
||||
The following table reflects the key assumptions used in measuring the fair value of the Company's mortgage servicing rights as of the dates indicated:
|
March 31,
|
December 31,
|
|||||||
|
2022
|
2021
|
|||||||
|
Weighted average constant prepayment rate
|
|
%
|
|
%
|
||||
|
Weighted average discount rate
|
|
%
|
|
%
|
||||
|
Weighted average life in years
|
|
|
||||||
6. BORROWING ARRANGEMENTS
Subordinated Debt Securities
In December 2018, the Company issued $26.5 million in
subordinated debt securities. $12.4 million of the subordinated debt securities have a maturity date of and a weighted average fixed rate of 5.74 %
for the first five years . The remaining $14.1
million of subordinated debt securities have a maturity date of and a weighted average fixed rate of 6.41 % for the first seven years . After the
fixed rate periods, the subordinated debt securities issued in December 2018 will float at the Wall Street Journal prime rate, with a floor of 4.5 7.5 five years
On September
29, 2020, the Company issued $50.0 million in subordinated debt securities. Proceeds from the issuance of these subordinated debt securities were reduced by approximately $926 thousand in debt issuance costs. The subordinated debt securities issued in September 2020 have a maturity date of with a fixed rate of 4.50 % for the first five years . After the expiration of the fixed rate period, the subordinated debt securities will reset quarterly at a variable rate equal to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 438 basis points. These subordinated debt securities pay interest semi-annually, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally, these subordinated debt securities are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.
As of March 31, 2022, the total amount of the Company’s subordinated debt securities outstanding was $76.5 million less approximately $651
thousand of remaining debt issuance costs for a total balance of $75.8 million. As of December 31, 2021, the total amount of
subordinated debt securities outstanding was $76.5 million less approximately $697 thousand of remaining debt issuance costs for a total balance of $75.8
million.
Notes Payable and Other Borrowings
As of March 31, 2022, and December 31, 2021, City Bank had no
7. 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, non-statutory 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 the 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 for the period indicated is presented in the table below (dollars in thousands, except per share data):
|
Number
of Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual
Life in Years
|
Aggregate
Intrinsic Value
|
|||||||||||||
|
Three Months Ended March 31, 2022
|
||||||||||||||||
|
Outstanding at beginning of year:
|
|
$
|
|
$
|
|
|||||||||||
|
Granted
|
|
|
|
|||||||||||||
|
Exercised
|
(
|
)
|
|
(
|
)
|
|||||||||||
|
Forfeited
|
(
|
)
|
|
(
|
)
|
|||||||||||
|
Expired
|
|
|
|
|||||||||||||
|
Balance, March 31, 2022
|
|
$
|
|
|
$
|
|
||||||||||
|
Exercisable at end of period
|
|
$
|
|
|
$
|
|
||||||||||
|
Vested at end of period
|
|
$
|
|
|
$
|
|
||||||||||
A summary of assumptions used to calculate the fair values of the awards granted during the periods noted is presented below:
|
ThreeMonths
Ended
March 31,
|
||||||
|
2022
|
2021
|
|||||
|
Expected volatility
|
|
|
||||
|
Expected dividend yield
|
|
|
||||
|
Expected term (years)
|
|
|
||||
|
Risk-free interest rate
|
|
|
||||
|
Weighted average grant date fair value
|
$
|
|
$
|
|
||
The total intrinsic value of options exercised during the three months ended March 31, 2022 and March 31, 2021 was $74 thousand and $9 thousand, respectively.
Restricted Stock Awards and Units
A summary of activity in the Plan for the period indicated is presented in the table below:
|
Number
of Shares
|
Weighted-Average
Grant Date
Fair Value
|
|||||||
|
Three Months Ended March 31, 2022
|
||||||||
|
Outstanding at beginning of year:
|
|
$
|
|
|||||
|
Granted
|
|
|
||||||
|
Vested
|
(
|
)
|
|
|||||
|
Forfeited
|
(
|
)
|
|
|||||
|
Balance, March 31, 2022
|
|
$
|
|
|||||
Restricted stock units granted under the Plan typically vest from
to four 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 March 31, 2022 was $4.6 million and will be recognized over a weighted average remaining period of 1.72
years. The total fair value of restricted stock units vested during each of the three months ended March 31, 2022 and March 31, 2021 was $464
and $489 thousand, respectively.
8. OFF-BALANCE-SHEET ACTIVITIES, 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 at the dates indicated follow (dollars in thousands):
|
March 31,
2022
|
December 31,
2021
|
|||||||
|
Commitments to grant loans and unfunded commitments under lines of credit
|
$
|
|
$
|
|
||||
|
Standby letters of credit
|
|
|
||||||
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 - In July 2020, a vendor claimed
that City Bank had breached a contract by failing to timely pay amounts allegedly due and owing. City Bank vigorously rejected any such non-payment contentions and filed suit against the vendor. With the lawsuit, City Bank sought, among other
claims and relief, an injunction against the vendor. After an evidentiary hearing, the court entered a temporary injunction against the vendor expressly prohibiting it from, among other things, terminating the contract pending trial. Based upon
discovery in the lawsuit, City Bank also filed a breach of contract claim against the vendor alleging that the vendor violated City Bank’s contractual exclusivity rights. The vendor has filed counterclaims, including for declaratory relief that
the contracts should be declared unenforceable. In October 2021, the vendor filed a counterclaim alleging that City Bank’s attempted enforcement of its exclusivity rights contravenes the Texas Free Enterprise and Antitrust Act. The vendor
purports to seek actual damages, to treble such actual damages, attorney's fees and expenses. The case remains ongoing and trial is set for October 2022. City Bank intends to continue a vigorous pursuit of its claims against the vendor. In
addition, City Bank pursues a number of substantive factual and legal challenges to the vendor’s counterclaims and believes the counterclaims are without merit. At this time, the ultimate outcome is unknown and an estimated range of any loss
cannot be made.
The Company is a defendant in legal actions arising from time to time in the normal course of business. Management believes that the ultimate
liability, if any, arising from these matters will not materially affect the combined financial statements, based on information known as of the date of the combined financial statements.
FHLB Letters of Credit - The Company may use FHLB letters of credit to pledge to certain public deposits. There were no
9. 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 Federal Reserve 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 CET1 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 and Tier 1 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 March 31, 2022 and December 31,
2021, that the Company and its bank subsidiary met all capital adequacy requirements to which they are subject.
As of March 31, 2022, 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 and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since March 31, 2022 that management believes have changed the bank subsidiary’s
category.
The Company and its bank subsidiary’s actual capital amounts and ratios at the dates indicated follows (dollars in thousands):
|
Actual
|
Minimum Required
Under BASEL III
Fully Phased-In
|
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
March 31, 2022
|
||||||||||||||||||||||||
|
Total Capital to Risk Weighted Assets:
|
||||||||||||||||||||||||
|
Consolidated
|
$
|
|
|
%
|
$
|
|
|
%
|
N/A
|
N/A
|
||||||||||||||
|
City Bank
|
|
|
%
|
|
|
%
|
$
|
|
|
%
|
||||||||||||||
|
Tier I Capital to Risk Weighted Assets:
|
||||||||||||||||||||||||
|
Consolidated
|
|
|
%
|
|
|
%
|
N/A
|
N/A
|
||||||||||||||||
|
City Bank
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
Common Equity Tier 1 to Risk Weighted Assets:
|
||||||||||||||||||||||||
|
Consolidated
|
|
|
%
|
|
|
%
|
N/A
|
N/A
|
||||||||||||||||
|
City Bank
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
Tier I Capital to Average Assets:
|
||||||||||||||||||||||||
|
Consolidated
|
|
|
%
|
|
|
%
|
N/A
|
N/A
|
||||||||||||||||
|
City Bank
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
December 31, 2021
|
||||||||||||||||||||||||
|
Total Capital to Risk Weighted Assets:
|
||||||||||||||||||||||||
|
Consolidated
|
$
|
|
|
%
|
$
|
|
|
%
|
N/A
|
N/A
|
||||||||||||||
|
City Bank
|
|
|
%
|
|
|
%
|
$
|
|
|
%
|
||||||||||||||
|
Tier I Capital to Risk Weighted Assets:
|
||||||||||||||||||||||||
|
Consolidated
|
|
|
%
|
|
|
%
|
N/A
|
N/A
|
||||||||||||||||
|
City Bank
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
Common Equity Tier 1 to Risk Weighted Assets:
|
||||||||||||||||||||||||
|
Consolidated
|
|
|
%
|
|
|
%
|
N/A
|
N/A
|
||||||||||||||||
|
City Bank
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
Tier I Capital to Average Assets:
|
||||||||||||||||||||||||
|
Consolidated
|
|
|
%
|
|
|
%
|
N/A
|
N/A
|
||||||||||||||||
|
City Bank
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
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.
10. DERIVATIVES
The Company utilizes
interest rate swap agreements as part of its asset-liability management strategy to help manage its interest rate risk position. These interest rate swaps are designated and qualify as fair value hedges and are entered into to reduce exposure to
changes in fair value of fixed rate financial instruments. The notional amount of the interest rate swaps do not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amounts and the other terms
of the individual interest rate swap agreements.
The following table reflects the changes in fair value hedges
included in the Consolidated Statements of Comprehensive Income (Loss) as of the periods indicated (dollars in thousands):
|
Three Months Ended
|
|||||||||
|
March 31,
|
|||||||||
|
Interest Rate Contracts
|
Location
|
2022
|
2021
|
||||||
|
Interest rate swaps - fair value hedges
|
Interest income
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Fair value hedge ineffectiveness
|
Other noninterest expense
|
$
|
|
$
|
|
||||
The following table reflects the fair value hedges included in
the Consolidated Balance Sheets at the dates indicated (dollars in thousands):
|
March 31, 2022
|
December 31, 2021
|
|||||||||||||||
|
Notional
Amount
|
Fair
Value
|
Notional
Amount
|
Fair
Value
|
|||||||||||||
|
Included in other liabilities:
|
||||||||||||||||
|
Interest rate swaps related to fixed rate loans
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Interest rate swaps related to state and municipal securities
|
|
|
|
|
||||||||||||
|
Included in other assets:
|
||||||||||||||||
|
Interest rate swaps related to fixed rate loans
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Interest rate swaps related to state and municipal securities
|
|
|
|
|
||||||||||||
Mortgage banking derivatives
The net gains (losses) relating to free standing derivative
instruments used for risk management are summarized below as of the periods indicated (dollars in thousands):
|
Three Months Ended
|
|||||||||
|
March 31,
|
|||||||||
|
|
Location |
2022
|
2021
|
||||||
|
Forward contracts related to mortgage loans held for sale
|
Net gain (loss) on sales of loans
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Interest rate lock commitments
|
Net gain (loss) on sales of loans
|
$
|
|
$
|
|
||||
The following table reflects the amount and fair value of mortgage banking derivatives in the Consolidated Balance Sheets at the dates indicated (dollars in thousands):
|
March 31, 2022
|
December 31, 2021
|
|||||||||||||||
|
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
|
|
|
|
|
||||||||||||
|
Total included in other assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Included in other liabilities:
|
||||||||||||||||
|
Forward contracts related to mortgage loans held for sale
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Interest rate lock commitments
|
|
|
|
|
||||||||||||
|
Total included in other liabilities
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The Company had received cash collateral of $12.3 million to
offset asset derivative positions on its interest rate swaps at March 31, 2022. This amount is reported in other liabilities in the consolidated balance sheets. The Company had advanced $1.1 million to offset liability derivative positions on its interest rate swaps at March 31, 2022. Additionally, the Company had advanced $440 thousand on its mortgage forward contracts at March 31, 2022. The advanced cash collateral amounts are reported in cash and due from banks in the consolidated balance sheets.
11. EARNINGS PER SHARE
The factors used in the earnings per share computation for the periods indicated follow (dollars in thousands, except per share data):
|
Three Months Ended
March 31,
|
||||||||
|
2022
|
2021
|
|||||||
|
Net income
|
$
|
|
$
|
|
||||
|
Weighted average common shares outstanding - basic
|
|
|
||||||
|
Effect of dilutive securities:
|
||||||||
|
Stock-based compensation awards
|
|
|
||||||
|
Weighted average common shares outstanding - diluted
|
|
|
||||||
|
Basic earnings per share
|
$
|
|
$
|
|
||||
|
Diluted earnings per share
|
$
|
|
$
|
|
||||
12. SEGMENT INFORMATION
Financial results by reportable segment as of the periods indicated are detailed below (dollars in thousands):
|
Three Months Ended March 31, 2022
|
Banking
|
Insurance
|
Consolidated
|
|||||||||
|
Net interest income
|
$
|
|
$
|
|
$
|
|
||||||
|
Provision for loan losses
|
|
|
|
|||||||||
|
Noninterest income
|
|
|
|
|||||||||
|
Noninterest expense
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Income before income taxes
|
|
(
|
)
|
|
||||||||
|
Income tax (expense) benefit
|
(
|
)
|
|
(
|
)
|
|||||||
|
Net income (loss)
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Three Months Ended March 31, 2021
|
Banking
|
Insurance
|
Consolidated
|
|||||||||
|
Net interest income
|
$
|
|
$
|
|
$
|
|
||||||
|
Provision for loan losses
|
(
|
)
|
|
(
|
)
|
|||||||
|
Noninterest income
|
|
|
|
|||||||||
|
Noninterest expense
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Income before income taxes
|
|
(
|
)
|
|
||||||||
|
Income tax (expense) benefit
|
(
|
)
|
|
(
|
)
|
|||||||
|
Net income (loss)
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
13. 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 - Significant 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 at the dates indicated (dollars in thousands):
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
March 31, 2022
|
||||||||||||||||
|
Assets (liabilities) measured at fair value on a recurring basis:
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
U.S. government and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
State and municipal
|
|
|
|
|
||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
||||||||||||
|
Collateralized mortgage obligations
|
|
|
|
|
||||||||||||
|
Asset-backed and other amortizing securities
|
|
|
|
|
||||||||||||
|
Other securities
|
|
|
|
|
||||||||||||
|
Loans held for sale (mandatory)
|
|
|
|
|
||||||||||||
|
Mortgage servicing rights
|
|
|
|
|
||||||||||||
|
Asset derivatives
|
|
|
|
|
||||||||||||
|
Liability derivatives
|
|
(
|
)
|
|
(
|
)
|
||||||||||
|
Assets measured at fair value on a non-recurring basis:
|
||||||||||||||||
|
Impaired loans
|
|
|
|
|
||||||||||||
|
December 31, 2021
|
||||||||||||||||
|
Assets (liabilities) measured at fair value on a recurring basis:
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
U.S. government and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
State and municipal
|
|
|
|
|
||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
||||||||||||
|
Collateralized mortgage obligations
|
|
|
|
|
||||||||||||
|
Asset-backed and other amortizing securities
|
|
|
|
|
||||||||||||
|
Other securities
|
|
|
|
|
||||||||||||
|
Loans held for sale (mandatory)
|
|
|
|
|
||||||||||||
|
Mortgage servicing rights
|
|
|
|
|
||||||||||||
|
Asset derivatives
|
|
|
|
|
||||||||||||
|
Liability derivatives
|
|
(
|
)
|
|
(
|
)
|
||||||||||
|
Assets measured at fair value on a non-recurring basis:
|
||||||||||||||||
|
Impaired loans
|
|
|
|
|
||||||||||||
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 using Level
3 inputs. The mortgage servicing rights asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the mortgage servicing rights asset is impacted by a variety of factors, including
prepayment and discount rates, which are significant unobservable inputs.
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.
The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at the dates indicated (dollars in thousands):
|
Fair
Value
|
Valuation
Techniques
|
Unobservable
Inputs
|
Range of
Discounts
|
||||||||
|
March 31, 2022
|
|||||||||||
| Non-recurring: |
|||||||||||
|
Impaired loans
|
$
|
|
Third party appraisals or inspections
|
Collateral discounts and selling costs
|
|
%
|
|||||
| Recurring: |
|||||||||||
|
Mortgage servicing rights
|
|
Discounted cash flows
|
Conditional prepayment rate
|
|
%
|
||||||
|
Discount rate
|
|
%
|
|||||||||
|
December 31, 2021
|
|||||||||||
| Non-recurring: |
|||||||||||
|
Impaired loans
|
$
|
|
Third party appraisals or inspections
|
Collateral discounts and selling costs
|
|
%
|
|||||
| Recurring: |
|||||||||||
|
Mortgage servicing rights
|
|
Discounted cash flows
|
Conditional prepayment rate
|
|
%
|
||||||
|
Discount rate
|
|
%
|
|||||||||
The estimated fair values, and related carrying amounts, of the Company’s financial instruments that are not previously disclosed in the recurring fair value section are
as follows (dollars in thousands):
|
Carrying
Amount
|
Level 1
|
Level 2
|
Level 3
|
Total
Fair Value
|
||||||||||||||||
|
March 31, 2022
|
||||||||||||||||||||
|
Financial assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Loans held for investment, net
|
|
|
|
|
|
|||||||||||||||
| Loans held for sale (best efforts) |
||||||||||||||||||||
|
Accrued interest receivable
|
|
|
|
|
|
|||||||||||||||
|
Financial liabilities:
|
||||||||||||||||||||
|
Deposits
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Accrued interest payable
|
|
|
|
|
|
|||||||||||||||
|
Junior subordinated deferrable interest debentures
|
|
|
|
|
|
|||||||||||||||
|
Subordinated debt securities
|
|
|
|
|
|
|||||||||||||||
|
Carrying
Amount
|
Level 1
|
Level 2
|
Level 3
|
Total
Fair Value
|
||||||||||||||||
|
December 31, 2021
|
||||||||||||||||||||
|
Financial assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Loans held for investment, net
|
|
|
|
|
|
|||||||||||||||
| Loans held for sale (best efforts) |
||||||||||||||||||||
|
Accrued interest receivable
|
|
|
|
|
|
|||||||||||||||
|
Financial liabilities:
|
||||||||||||||||||||
|
Deposits
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Short-term borrowings
|
||||||||||||||||||||
|
Accrued interest payable
|
|
|
|
|
|
|||||||||||||||
|
Junior subordinated deferrable interest debentures
|
|
|
|
|
|
|||||||||||||||
|
Subordinated debt securities
|
|
|
|
|
|
|||||||||||||||
14. SUBSEQUENT EVENTS
On April 21, 2022 , the Company declared a cash dividend
of $0.11 per share of common stock to be paid on May 16, 2022 to all shareholders of record as of May 2, 2022 .
| 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 Annual Report on Form 10-K for the year ended
December 31, 2021 (the “2021 Annual Report on Form 10-K”) 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 March 8, 2022. 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;
|
| ● |
business and economic conditions, particularly those affecting our market areas, as well as the concentration of our business in such market areas;
|
| ● |
the impact, duration and severity of the ongoing COVID-19 pandemic, or any current or future variants thereof, and the response of governmental authorities to the COVID-19 pandemic and our participation in
COVID-19-related government programs such as the Paycheck Protection Program (the “PPP”) administered by the Small Business Administration (the “SBA”) and created under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”);
|
| ● |
high concentrations of loans secured by real estate located in our market areas;
|
| ● |
risks associated with our commercial loan portfolio, including the uncertain economic consequences of the ongoing COVID-19 pandemic, or any current or future variants thereof, or any deterioration in value of
the general business assets that secure such loans;
|
| ● |
potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;
|
| ● |
risks associated with our agricultural loan portfolio, including the heightened sensitivity to weather conditions, commodity prices, and other factors generally outside the borrowers and our control;
|
| ● |
risks associated with the sale of crop insurance products, including termination of or substantial changes to the federal crop insurance program;
|
| ● |
risks related to the significant amount of credit that we have extended to a limited number of borrowers and in a limited geographic area;
|
| ● |
public funds deposits comprising a relatively high percentage of our deposits;
|
| ● |
potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;
|
| ● |
our ability to maintain our reputation;
|
| ● |
our ability to successfully manage our credit risk and the sufficiency of our allowance for loan losses;
|
| ● |
our ability to attract, hire and retain qualified management personnel;
|
| ● |
our dependence on our management team, including our ability to retain executive officers and key employees and their customer and community relationships;
|
| ● |
interest rate fluctuations, which could have an adverse effect on our profitability;
|
| ● |
competition from banks, credit unions and other financial services providers;
|
| ● |
our ability to keep pace with technological change or difficulties we may experience when implementing new technologies;
|
| ● |
system failures, service denials, cyber-attacks and security breaches;
|
| ● |
our ability to maintain effective internal control over financial reporting;
|
| ● |
employee error, fraudulent activity by employees or customers and inaccurate or incomplete information about our customers and counterparties;
|
| ● |
increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;
|
| ● |
our ability to maintain adequate liquidity and to raise necessary capital to fund our acquisition strategy and operations or to meet increased minimum regulatory capital levels;
|
| ● |
costs and effects of litigation, investigations or similar matters to which we may be subject, including any effect on our reputation;
|
| ● |
natural disasters, severe weather, acts of god, acts of war or terrorism, outbreaks of hostilities, public health outbreaks (such as the ongoing COVID-19 pandemic), other international or domestic calamities,
and other matters beyond our control;
|
| ● |
tariffs and trade barriers;
|
| ● |
compliance with governmental and regulatory requirements, including the Dodd-Frank Act Wall Street Reform and Consumer Protection Act, the Economic Growth, Regulatory Relief, and Consumer Protection Act
(“EGRRCPA”), and others relating to banking, consumer protection, securities and tax matters; and
|
| ● |
changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters, including the policies of the Board of Governors
of the Federal Reserve System (“Federal Reserve”) and as a result of initiatives of the Biden 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 2021
Annual Report on Form 10-K. 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 annual reports on Form 10-K, 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 subsidiary, City Bank is one of the largest independent banks in West Texas and has additional banking
operations in the Dallas, El Paso, Greater Houston, the Permian Basin, and College Station, Texas markets, and the Ruidoso, New Mexico market. 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.
Recent Developments
COVID-19 Update
The ongoing COVID-19 pandemic continues to cause significant disruptions in the U.S. economy. At this time, we cannot predict the impact or how long the economy or our impacted clients will be disrupted by the
ongoing COVID-19 pandemic and any current or future variants of COVID-19, which could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against variants, and the response by
governmental bodies and regulators. We are closely monitoring the current environment, and are preparing to quickly make any necessary adjustments to protect our employees and customers.
The Bank also continues to utilize a rigorous enterprise risk management (“ERM”) system that delivers a systematic approach to risk measurement and enhances the effectiveness of risk management across the Bank. The
Bank’s ERM system has allowed management to consistently and aggressively review the Bank’s loan portfolio for signs of potential issues during the ongoing COVID-19 pandemic and the Bank continues to closely monitoring its loans to borrowers in the
retail, hospitality and energy sectors.
Throughout the COVID-19 pandemic, the Bank has been proactive with its borrowers in those sectors most affected by the COVID-19 pandemic and has offered loan modifications to borrowers who are or may be unable to
meet their contractual payment obligations because of the effects of COVID-19. As part of the Bank’s efforts to support its customers and protect the Bank, the Bank offered varying forms of loan modifications including 90-day payment deferrals,
6-month interest only terms, or in certain select cases periods of longer than 6 months of interest only, to provide borrowers relief. As of March 31, 2022, total active loan modifications attributed to COVID-19 were approximately $6.0 million. All
active modifications are loans modified for either interest only periods longer than 6 months, primarily in the Bank’s hotel portfolio. The Bank expects that these remaining loans on deferral will return to full payment status at the end of their
respective deferral period.
The Paycheck Protection Program (“PPP”) was created by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and implemented by the U.S. Small Business Administration (the “SBA”) in March 2020. The
PPP allowed entities to apply for a 1.00% interest rate loan with payments generally deferred until the date the lender receives the applicable forgiveness amount from the SBA. The PPP loans may be partially or fully forgiven by the SBA if the
entity meets certain conditions. The maturity term for any principal portion left unforgiven is either 2 or 5 years from the funding date, depending on when the PPP loan was originated. For PPP loans that the SBA approved on or after June 5, 2020,
the loan must have a maturity of at least 5 years. All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding. The Economic Aid Act, signed into law on December 27, 2020, authorized an additional $284.5 billion in new
PPP loan funding and extended the authority of lenders to make PPP loans through March 31, 2021. The PPP Extension Act of 2021 was subsequently signed into law on March 30, 2021 and extended the PPP application deadline to May 31, 2021.
The Bank assisted approximately 2,100 customers for a total of $218 million in the first round of PPP. There has been approximately $217 million in PPP loan forgiveness by the SBA and loan repayments by customers,
leaving approximately $1 million outstanding as of March 31, 2022. The Bank began accepting new applications for PPP loans in January 2021 to assist customers with the new round of the PPP until funding for the PPP expired on May 31, 2021. The Bank
funded approximately 1,100 PPP loans for a total of $91 million in the second round of PPP. As of March 31, 2022, the SBA has forgiven approximately $64 million of PPP loans from the second round.
We are currently unable to fully assess or predict the extent of the effects of the COVID-19 pandemic, or any current or future variant of COVID-19, on our operations as the ultimate impact will
depend on factors that are currently unknown and/or beyond our control. Please refer to Part II, Item 1A, “Risk Factors” in this Form 10-Q.
Results of Operations
We had net income of $14.3 million, or $0.78 per diluted common share, for the three months ended March 31, 2022, compared to net income of $15.2 million, or $0.82 per diluted common share for
the three months ended March 31, 2021. Return on average equity was 14.58% and return on average assets was 1.47% for the three months ended March 31, 2022, compared to 16.51% and 1.66%, respectively, for the three months ended March 31, 2021. The
decrease in net income of $0.9 million was primarily the result of a decrease of $2.8 million in noninterest income, partially offset by a decrease of $2.2 million in provision for loan losses.
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 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 table presents, 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 March 31,
|
||||||||||||||||||||||||
|
2022
|
2021
|
|||||||||||||||||||||||
|
Average
Balance
|
Interest
|
Yield/
Rate
|
Average
Balance
|
Interest
|
Yield/
Rate
|
|||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||
|
Loans, excluding PPP(1)
|
$
|
2,447,009
|
$
|
28,624
|
4.74
|
%
|
$
|
2,163,114
|
$
|
26,283
|
4.93
|
%
|
||||||||||||
|
Loans - PPP
|
35,594
|
755
|
8.60
|
%
|
179,498
|
2,998
|
6.77
|
%
|
||||||||||||||||
|
Investment securities – taxable
|
520,672
|
2,354
|
1.83
|
%
|
545,994
|
2,432
|
1.81
|
%
|
||||||||||||||||
|
Investment securities – non-taxable
|
218,321
|
1,448
|
2.69
|
%
|
216,695
|
1,481
|
2.77
|
%
|
||||||||||||||||
|
Other interest-earning assets (2)
|
467,471
|
204
|
0.18
|
%
|
330,233
|
100
|
0.12
|
%
|
||||||||||||||||
|
Total interest-earning assets
|
3,689,067
|
33,385
|
3.67
|
%
|
3,435,534
|
33,294
|
3.93
|
%
|
||||||||||||||||
|
Noninterest-earning assets
|
262,178
|
269,612
|
||||||||||||||||||||||
|
Total assets
|
$
|
3,951,245
|
$
|
3,705,146
|
||||||||||||||||||||
|
Liabilities and Stockholders’ Equity:
|
||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
NOW, savings and money market deposits
|
$
|
1,937,764
|
$
|
911
|
0.19
|
%
|
$
|
1,807,963
|
$
|
1,104
|
0.25
|
%
|
||||||||||||
|
Time deposits
|
339,104
|
979
|
1.17
|
%
|
324,381
|
1,053
|
1.32
|
%
|
||||||||||||||||
|
Short-term borrowings
|
4
|
—
|
0.00
|
%
|
25,022
|
4
|
0.06
|
%
|
||||||||||||||||
|
Notes payable & other longer-term borrowings
|
—
|
—
|
0.00
|
%
|
74,444
|
35
|
0.19
|
%
|
||||||||||||||||
|
Subordinated debt securities
|
75,798
|
1,012
|
5.41
|
%
|
75,635
|
1,019
|
5.46
|
%
|
||||||||||||||||
|
Junior subordinated deferrable interest debentures
|
46,393
|
231
|
2.02
|
%
|
46,393
|
223
|
1.95
|
%
|
||||||||||||||||
|
Total interest-bearing liabilities
|
$
|
2,399,063
|
$
|
3,133
|
0.53
|
%
|
$
|
2,353,838
|
$
|
3,438
|
0.59
|
%
|
||||||||||||
|
Noninterest-bearing liabilities:
|
||||||||||||||||||||||||
|
Noninterest-bearing deposits
|
$
|
1,104,091
|
$
|
935,345
|
||||||||||||||||||||
|
Other liabilities
|
50,843
|
43,604
|
||||||||||||||||||||||
|
Total noninterest-bearing liabilities
|
1,154,934
|
978,949
|
||||||||||||||||||||||
|
Stockholders’ equity
|
397,248
|
372,359
|
||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$
|
3,951,245
|
$
|
3,705,146
|
||||||||||||||||||||
|
Net interest income
|
$
|
30,252
|
$
|
29,856
|
||||||||||||||||||||
|
Net interest spread
|
3.14
|
%
|
3.34
|
%
|
||||||||||||||||||||
|
Net interest margin(3)
|
3.33
|
%
|
3.52
|
%
|
||||||||||||||||||||
| (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 table 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 March 31,
|
||||||||||||
|
2022 over 2021
|
||||||||||||
|
Change due to:
|
Total
|
|||||||||||
|
Volume
|
Rate
|
Variance
|
||||||||||
|
(Dollars in thousands)
|
||||||||||||
|
Interest-earning assets:
|
||||||||||||
|
Loans, excluding PPP
|
$
|
3,449
|
$
|
(1,108
|
)
|
$
|
2,341
|
|||||
|
Loans - PPP
|
(2,404
|
)
|
161
|
(2,243
|
)
|
|||||||
|
Investment securities – taxable
|
(113
|
)
|
35
|
(78
|
)
|
|||||||
|
Investment securities – non-taxable
|
11
|
(44
|
)
|
(33
|
)
|
|||||||
|
Other interest-earning assets
|
42
|
62
|
104
|
|||||||||
|
Total increase (decrease) in interest income
|
985
|
(894
|
)
|
91
|
||||||||
|
Interest-bearing liabilities:
|
||||||||||||
|
NOW, Savings, MMDAs
|
79
|
(272
|
)
|
(193
|
)
|
|||||||
|
Time deposits
|
48
|
(122
|
)
|
(74
|
)
|
|||||||
|
Short-term borrowings
|
(4
|
)
|
—
|
(4
|
)
|
|||||||
|
Notes payable & other borrowings
|
(35
|
)
|
—
|
(35
|
)
|
|||||||
|
Subordinated debt securities
|
2
|
(9
|
)
|
(7
|
)
|
|||||||
|
Junior subordinated deferrable interest debentures
|
—
|
8
|
8
|
|||||||||
|
Total increase (decrease) interest expense:
|
90
|
(395
|
)
|
(305
|
)
|
|||||||
|
Increase (decrease) in net interest income
|
$
|
895
|
$
|
(499
|
)
|
$
|
396
|
|||||
Net interest income for the three months ended March 31, 2022 was $29.9 million, compared to $29.5 million for the three months ended March 31, 2021, an increase of $0.4 million, or 1.4%. The
increase in net interest income was mainly comprised of the $0.3 million, or 8.9%, decrease in interest expense. While interest income was consistent, there was a change in the amount of interest income from PPP loans and non-PPP loans. Interest
income on non-PPP loans grew $2.3 million and was primarily attributable to a $283.9 million increase in average non-PPP loan balances, partially offset by a 19 basis point decrease in interest rates for the three months ended March 31, 2022,
compared to the three months ended March 31, 2021. The increase in non-PPP loan balances was due to organic loan growth throughout the portfolio. Interest income on PPP loans and the related SBA fees declined $2.2 million as the average PPP loan
balance decreased $143.9 million for the three months ended March 31, 2022, compared to the same period in 2021. These fees are deferred and then accreted into interest income over the life of the applicable loans. During the three months ended
March 31, 2022, the Company had $88 thousand in interest income on PPP loans and recognized $667 thousand in PPP related SBA fees. At March 31, 2022, there was $1.3 million of deferred fees that have not been accreted to income. The Company expects
that the remaining outstanding PPP loans will continue to be forgiven by the SBA over the next several quarters.
The $0.3 million decrease in interest expense for the three months ended March 31, 2022 was primarily related to a 6 basis point decrease in the rate paid on interest-bearing liabilities,
partially offset by an increase of $45.2 million, or 1.9%, in average interest-bearing liabilities over the same period in 2021. The increase in average interest-bearing liabilities from March 31, 2021 to March 31, 2022 was largely due to growth in
deposits from PPP loan funding, other government stimulus payments and programs, and organic growth. Additionally, the decrease in the rate paid on interest-bearing liabilities was the result of repricing a portion of public fund deposits during
2021. Additionally, average noninterest-bearing demand deposits increased to $1.10 billion at March 31, 2022 from $935.3 million at March 31, 2021.
For the three months ended March 31, 2022, net interest margin and net interest spread were 3.33% and 3.14%, respectively, compared to 3.52% and 3.34%, respectively, for the same period in 2021,
which reflects the changes in interest income and interest expense discussed above.
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 March 31, 2022 was $(2.1) million, compared to $0.1 million for the three months ended March 31, 2021. The decrease in the provision for
loan losses in the first quarter of 2022 compared to the same quarter in 2021 is primarily due improving credit metrics in the loan portfolio, specifically in the hotel segment, direct energy segment, and other Permian Basin-related credits and a
decline in the amount of loans that are actively under a COVID-19 pandemic-related modification. The allowance for loan losses as a percentage of loans held for investment was 1.62% at March 31, 2022 and 1.73% at December 31, 2021. 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
March 31,
|
||||||||||||
|
2022
|
2021
|
Increase
(Decrease)
|
||||||||||
|
(Dollars in thousands)
|
||||||||||||
|
Noninterest income:
|
||||||||||||
|
Service charges on deposit accounts
|
$
|
1,773
|
$
|
1,573
|
$
|
200
|
||||||
|
Income from insurance activities
|
1,570
|
1,112
|
458
|
|||||||||
|
Bank card services and interchange fees
|
3,222
|
2,642
|
580
|
|||||||||
|
Mortgage banking activities
|
13,637
|
18,816
|
(5,179
|
)
|
||||||||
|
Investment commissions
|
546
|
430
|
116
|
|||||||||
|
Fiduciary income
|
612
|
836
|
(224
|
)
|
||||||||
|
Other income and fees(1)
|
2,337
|
1,091
|
1,246
|
|||||||||
|
Total noninterest income
|
$
|
23,697
|
$
|
26,500
|
$
|
(2,803
|
)
|
|||||
| (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 March 31, 2022 was $23.7 million, compared to $26.5 million for the three months ended March 31, 2021, a decrease of $2.8 million, or 10.6%. Income
from mortgage banking activities decreased $5.2 million, or 27.5%, to $13.6 million for the three months ended March 31, 2022 from $18.8 million for the three months ended March 31, 2021. The decrease in mortgage banking activities was primarily
due to a decrease of $201.0 million, or 46.1%, in mortgage loan originations for the three months ended March 31, 2022 compared to the same period for 2021. We experienced record volume in mortgage originations during 2020 and 2021, as the industry
benefitted from historic low levels of interest rates. Refinance activity also played a key role in this decrease, which has begun to taper off and return to more historic levels. The decrease in mortgage loan originations was partially offset by a
positive $4.5 million fair value adjustment to our mortgage servicing rights portfolio due to increased pricing for these assets as mortgage interest rates continue to rise. The decrease in mortgage banking activities was partially offset by
increased income during the first quarter of 2022 from an investment in a Small Business Investment Company (“SBIC”) of $869 thousand, growth in bank card services and interchange fees, and income from insurance activities.
Noninterest Expense
The following table sets forth the major components of our noninterest expense for the periods indicated:
|
Three Months Ended
March 31,
|
||||||||||||
|
2022
|
2021
|
Increase
(Decrease)
|
||||||||||
|
(Dollars in thousands)
|
||||||||||||
|
Noninterest expense:
|
||||||||||||
|
Salaries and employee benefits
|
$
|
22,703
|
$
|
24,318
|
$
|
(1,615
|
)
|
|||||
|
Occupancy expense, net
|
3,737
|
3,565
|
172
|
|||||||||
|
Professional services
|
2,625
|
1,573
|
1,052
|
|||||||||
|
Marketing and development
|
720
|
568
|
152
|
|||||||||
|
IT and data services
|
1,053
|
1,054
|
(1
|
)
|
||||||||
|
Bankcard expenses
|
1,323
|
1,049
|
274
|
|||||||||
|
Appraisal expenses
|
565
|
681
|
(116
|
)
|
||||||||
|
Other expenses(1)
|
5,198
|
4,249
|
949
|
|||||||||
|
Total noninterest expense
|
$
|
37,924
|
$
|
37,057
|
$
|
867
|
||||||
| (1) |
Other expenses include items such as telephone expenses, postage, courier fees, directors’ fees, and insurance.
|
Noninterest expense for the three months ended March 31, 2022 was $37.9 million compared to $37.1 million for the three months ended March 31, 2021, an increase of $0.9 million, or 2.3%. Salaries
and employee benefits decreased $1.6 million, or 6.6%, from $24.3 million for the three months ended March 31, 2021 to $22.7 million for the three months ended March 31, 2022. This decrease in salaries and employee benefits expense for the first
quarter of 2022 compared to the first quarter of 2021 was primarily driven by decreased commissions of $2.4 million paid on the lower volume of mortgage loan origination, partially offset by a rise in salary expense due to higher costs for new
hires in commercial lending and as a part of the data analytics and cloud projects, stock-based compensation and annual salary adjustments. Other noninterest expenses increased $1.0 million for the three months ended March 31, 2022, compared to the
same period in 2021. This increase was primarily due to a loss on disposal of assets of $362 thousand in the first quarter of 2022. Professional services expenses increased $1.1 million for the three months ended March 31, 2022, compared to the
same period in 2021. This increase was primarily due to a $712 thousand increase in legal fees largely as a result of the vendor dispute legal proceedings. See Part II, Item 1, “Legal Proceedings,” of this Form 10-Q for further discussion.
Financial Condition
Our total assets increased $97.9 million, or 2.5%, to $4.00 billion at March 31, 2022, compared to $3.90 billion at December 31, 2021. Our gross loans held for investment increased $16.1 million,
or 0.7%, to $2.45 billion at March 31, 2022, compared to $2.44 billion at December 31, 2021. Our securities portfolio increased $68.9 million, or 9.5%, to $793.4 million at March 31, 2022, compared to $724.5 million at December 31, 2021. Total
deposits increased $108.9 million, or 3.3%, to $3.45 billion at March 31, 2022, compared to $3.34 billion at December 31, 2021.
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.
Loans held for investment increased $16.1 million, or 0.7%, to $2.45 billion at March 31, 2022, compared to $2.44 billion at December 31, 2021. This increase in our loans was primarily the result
of organic net loan growth of $27.9 million, partially offset by a decrease due to SBA forgiveness and repayments of $11.8 million in PPP loans during the first quarter of 2022. The organic loan growth remained relationship-focused and occurred
primarily in land development and construction loans, restaurant and retail loans, and consumer loans.
The following table shows the contractual maturities of our loans held for investment portfolio at March 31, 2022:
|
Due in
One Year or
Less
|
Due after One
Year
Through
Five Years
|
Due after Five
Years
Through
Fifteen Years
|
Due after
Fifteen Years
|
Total
|
||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||
|
Commercial real estate
|
$
|
94,337
|
$
|
356,260
|
$
|
208,530
|
$
|
112,363
|
$
|
771,490
|
||||||||||
|
Commercial - specialized
|
79,831
|
114,648
|
109,574
|
46,090
|
350,143
|
|||||||||||||||
|
Commercial - general
|
63,573
|
166,555
|
143,158
|
102,307
|
475,593
|
|||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
1-4 family residential
|
40,711
|
61,662
|
69,771
|
206,217
|
378,361
|
|||||||||||||||
|
Auto loans
|
2,248
|
146,767
|
106,688
|
—
|
255,703
|
|||||||||||||||
|
Other consumer
|
4,977
|
41,947
|
26,321
|
—
|
73,245
|
|||||||||||||||
|
Construction
|
133,870
|
4,322
|
968
|
9,936
|
149,096
|
|||||||||||||||
|
Total loans
|
$
|
419,547
|
$
|
892,161
|
$
|
665,010
|
$
|
476,913
|
$
|
2,453,631
|
||||||||||
The following table shows the distribution between fixed and adjustable interest rate loans for maturities greater than one year as of March 31, 2022:
|
Fixed
Rate
|
Adjustable
Rate
|
|||||||
|
(Dollars in thousands)
|
||||||||
|
Commercial real estate
|
$
|
274,449
|
$
|
402,704
|
||||
|
Commercial - specialized
|
66,451
|
203,861
|
||||||
|
Commercial - general
|
153,018
|
259,002
|
||||||
|
Consumer:
|
||||||||
|
1-4 family residential
|
178,895
|
158,755
|
||||||
|
Auto loans
|
253,455
|
—
|
||||||
|
Other consumer
|
68,073
|
195
|
||||||
|
Construction
|
867
|
14,359
|
||||||
|
Total loans
|
$
|
995,208
|
$
|
1,038,876
|
||||
At March 31, 2022, there is $1.24 billion in adjustable rate loans, with $648.7 million of these loans that mature or reprice in the next twelve months. Of these loans that mature or reprice in
the next twelve months, $426.1 million will reprice immediately upon changes in the underlying index rate, with the remaining $222.6 million being subject to floors above the current index or a future repricing date. The Wall Street Journal prime rate is the predominate index used by the Bank.
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 67.8% of our loans were secured by real property as of March 31, 2022, compared to 69.4% as of December 31, 2021. We believe that these loans are not concentrated in any one single property type and that they are geographically dispersed
throughout the areas we serve. Although the Bank has diversified portfolios, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of the markets in which it operates, which consist primarily
of agribusiness, wholesale/retail, oil and gas and related businesses, healthcare industries and institutions of higher education. Commercial real estate loans represent 37.2% of loans held for investment as of March 31, 2022 and represented 36.7%
of loans held for investment as of December 31, 2021. Further, these loans are geographically diversified, primarily throughout the State of Texas as well as Eastern New Mexico.
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 increased $16.0 million, or 2.1%, to $771.5 million as of March 31, 2022 from $755.4 million as of December 31, 2021. The increase was primarily driven by an increase
of $14.3 million in residential land development loans and an increase in commercial land development loans of $6.6 million, partially offset with a decrease of $5.6 million retail loans.
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 & retail, construction, and other industries.
Commercial general loans increased $15.6 million, or 3.4%, to $475.6 million as of March 31, 2022 from $460.0 million as of December 31, 2021. The increase in commercial general loans was
primarily due to a $19.2 million of organic loan growth in restaurant and retail loans and a $4.1 million increase in construction loans, partially offset by a decrease in PPP loans of $11.8 million during the period.
Commercial specialized loans decreased $28.6 million, or 7.5%, to $350.1 million as of March 31, 2022 from $378.7 million as of December 31, 2021. This decrease was primarily due to net
repayments of $35.5 million in seasonal agricultural production loans, partially offset by organic loan growth of $8.7 million in finance/investment loans. A credit of approximately $46 million, in the energy sector, is expected to be paid off
during the second quarter of 2022 as it moves to a non-bank structure.
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 $10.8 million, or 1.5%, to $707.3 million as of March 31, 2022 from $696.5 million as of December 31, 2021. The increase in these loans was primarily a result
of a $15.0 million increase in auto loans as a result of increased auto buyer demand. As of March 31, 2022, our consumer loan portfolio was comprised of $378.4 million in 1-4 family residential loans, $255.7 million in auto loans, and $73.2 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 $2.2 million, or 1.5%, to $149.1 million as of March 31, 2022 from $146.9 million as of December 31, 2021. The increase resulted from continued higher demand for
residential construction as a result of home shortages in many of our markets.
Paycheck Protection Program. In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA under the
provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance
after forgiveness of any amounts is still fully guaranteed by the SBA. Terms of the PPP loans include the following (i) maximum amount limited to the lesser of $10 million or an amount calculated using a payroll-based formula, (ii) maximum loan
term of five years, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required for six months following the loan disbursement date and (vi) loan forgiveness up to the full principal amount of
the loan and any accrued interest, subject to certain requirements including that no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. In return for processing and booking the loan, the SBA paid the lender a
processing fee tiered by the size of the loan (5% for loans of not more than $350 thousand; 3% for loans more than $350 thousand and less than $2 million; and 1% for loans of at least $2 million). At March 31, 2022, outstanding PPP loans totaled
approximately $28.4 million and are included in commercial general loans.
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. Since 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.
|
March 31,
2022
|
December 31,
2021
|
|||||||
|
(Dollars in thousands)
|
||||||||
|
Commitments to grant loans and unfunded commitments under lines of credit
|
$
|
620,871
|
$
|
542,338
|
||||
|
Standby letters of credit
|
13,208
|
12,418
|
||||||
|
Total
|
$
|
634,079
|
$
|
554,756
|
||||
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 assessed by
regulatory examinations and the Company’s internal and external loan reviews. 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 thousand 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 $39.6 million at March 31, 2022, compared to $42.1 million at December 31, 2021, a decrease of $2.4 million, or 5.8%. The decrease is primarily the result of a
negative provision of $2.1 million being recorded in March 2022 based on improving credit metrics in the loan portfolio, specifically in the hotel segment, direct energy segment, and other Permian Basin-related credits, and a decline in the amount
of loans actively under a modification.
The following table provides an analysis of the allowance for loan losses and other data at the dates indicated.
|
March 31,
|
December 31,
|
|||||||
|
2022
|
2021
|
|||||||
|
(Dollars in thousands)
|
||||||||
|
Average loans outstanding during period(1)
|
||||||||
|
Commercial real estate
|
$
|
751,017
|
$
|
705,516
|
||||
|
Commercial – specialized
|
354,119
|
336,754
|
||||||
|
Commercial – general
|
472,498
|
490,945
|
||||||
|
Consumer:
|
||||||||
|
1-4 family residential
|
387,987
|
374,609
|
||||||
|
Auto loans
|
244,097
|
227,301
|
||||||
|
Other consumer
|
79,044
|
68,106
|
||||||
|
Construction
|
144,928
|
124,840
|
||||||
|
Loans held for sale
|
48,913
|
92,130
|
||||||
|
Total average loans outstanding during period
|
$
|
2,482,603
|
$
|
2,420,201
|
||||
|
Net charge-offs during the period
|
||||||||
|
Commercial real estate
|
$
|
(25
|
)
|
$
|
(109
|
)
|
||
|
Commercial – specialized
|
5
|
11
|
||||||
|
Commercial – general
|
185
|
459
|
||||||
|
Consumer:
|
||||||||
|
1-4 family residential
|
39
|
44
|
||||||
|
Auto loans
|
40
|
483
|
||||||
|
Other consumer
|
120
|
653
|
||||||
|
Construction
|
—
|
(4
|
)
|
|||||
|
Total net charge-offs during the period
|
$
|
364
|
$
|
1,537
|
||||
|
Total loans held for investment outstanding
|
$
|
2,453,631
|
$
|
2,437,577
|
||||
|
Nonaccrual loans
|
$
|
9,548
|
$
|
9,518
|
||||
|
Allowance for loan losses
|
$
|
39,649
|
$
|
42,098
|
||||
|
Ratio of allowance to total loans held for investment
|
1.62
|
%
|
1.73
|
%
|
||||
|
Ratio of allowance to nonaccrual loans
|
415.26
|
%
|
442.30
|
%
|
||||
|
Ratio of nonaccrual loans to total loans held for investment
|
0.39
|
%
|
0.39
|
%
|
||||
|
Ratio of net charge-offs to average loans during the period
|
||||||||
|
Commercial real estate
|
0.00
|
%
|
(0.02
|
)%
|
||||
|
Commercial – specialized
|
0.00
|
%
|
0.00
|
%
|
||||
|
Commercial – general
|
0.04
|
%
|
0.09
|
%
|
||||
|
Consumer:
|
||||||||
|
1-4 family residential
|
0.01
|
%
|
0.01
|
%
|
||||
|
Auto loans
|
0.02
|
%
|
0.21
|
%
|
||||
|
Other consumer
|
0.15
|
%
|
0.96
|
%
|
||||
|
Construction
|
0.00
|
%
|
0.00
|
%
|
||||
|
Total ratio of net charge-offs to average loans during the period
|
0.01
|
%
|
0.06
|
%
|
||||
Net charge-offs totaled $364 thousand and were 0.06% (annualized) of average loans outstanding for the three months ended March 31, 2022, compared to $623 thousand and 0.11% for the three months
ended March 31, 2021. The decrease in net charge-offs in the first quarter of 2022 was primarily the result of a decrease of $190 thousand in auto and other consumer net charge-offs in the first quarter of 2022 compared to the same period in 2021.
The allowance for loan losses as a percentage of loans held for investment was 1.62% at March 31, 2022 and 1.73% at December 31, 2021.
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:
|
March 31, 2022
|
December 31, 2021
|
|||||||||||||||
|
Amount
|
% of Total
|
Amount
|
% of Total
|
|||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||
|
Commercial real estate
|
$
|
14,621
|
36.9
|
%
|
$
|
17,245
|
41.0
|
%
|
||||||||
|
Commercial – specialized
|
3,275
|
8.3
|
4,363
|
10.4
|
||||||||||||
|
Commercial – general
|
9,940
|
25.1
|
8,466
|
20.1
|
||||||||||||
|
Consumer:
|
||||||||||||||||
|
1-4 family residential
|
4,931
|
12.4
|
5,268
|
12.5
|
||||||||||||
|
Auto loans
|
3,681
|
9.3
|
3,653
|
8.7
|
||||||||||||
|
Other consumer
|
1,384
|
3.4
|
1,357
|
3.2
|
||||||||||||
|
Construction
|
1,817
|
4.6
|
1,746
|
4.1
|
||||||||||||
|
Total allowance for loan losses
|
$
|
39,649
|
100.0
|
%
|
$
|
42,098
|
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.
Nonperforming loans include nonaccrual loans and loans past due 90 days or more. Nonperforming assets consist of nonperforming loans plus OREO.
At March 31, 2022, our total nonaccrual loans were $9.5 million, or 0.39% of total loans held for investment, as compared to $9.5 million, or 0.39% of total loans held for investment, at December
31, 2021. These loans were reviewed for impairment and specific valuation allowances were established as necessary and included in the allowance for loan losses as of March 31, 2022 to cover any probable loss. There were not any significant changes
in nonaccrual loans during the first quarter of 2022.
Nonperforming loans were $12.1 million at March 31, 2022 and $10.6 million at December 31, 2021 .
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 three months of 2022 or 2021. TDRs are excluded from our nonperforming loans unless they otherwise meet the definition of nonaccrual loans or
are past due 90 days or more.
COVID-19 Industry Exposures. The Company’s COVID-19 industry exposures at March 31, 2022 were:
| • |
Restaurant and retail owner-occupied loans totaled $141.6 million (5.8% of total loans). The average loan size is $502 thousand. There was $1.8 million in classified loans, $60 thousand in loans past due 30
days or more, and $1.2 million in nonaccrual loans. The related allowance for loan losses to total restaurant and retail owner-occupied loans is 2.65%. As of March 31, 2022, none of these loans were active modifications as a result of the
COVID-19 pandemic.
|
| • |
Hospitality and assisted living center loans totaled $116.0 million (4.7% of total loans). The average loan size is $3.0 million. There was $38.6 million in classified loans, no loans past due 30 days or
more, and $1.1 million in nonaccrual loans. The related allowance for loan losses to total hospitality and assisted living center loans is 6.94%. As of March 31, 2022, approximately 5% of these loans were active modifications as a result of
the COVID-19 pandemic. All of these modifications have original modified terms that extended up to 18 months. The Company expects that these remaining modified loans will return to full payment status at the end of their respective
modification period.
|
Oil and Gas Exposures. The Company’s direct energy sector loans totaled $121.6 million (5.0% of total loans) at March 31, 2022. There was $459 thousand
in classified loans, $128 thousand in loans past due 30 days or more, and $43 thousand in nonaccrual loans. Management has expanded the monitoring of the loans in this category. The related allowance for loan losses to direct energy loans is 1.26%.
As of March 31, 2022, none of these loans were active modifications as a result of the COVID-19 pandemic.
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 securities 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. 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. 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.
Our securities portfolio increased $68.9 million, or 9.5%, to $793.4 million at March 31, 2022, compared to $724.5 million at December 31, 2021. The increase was primarily due to a $132.4 million
in purchases, partially offset by $17.7 million in maturities, prepayments and calls and a $44.9 million decline in the unrealized gain at March 31, 2022 as compared to December 31, 2021 .
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. During the three months ended March 31, 2022, the fair value of the Company’s available for
sale securities declined by $44.9 million as a result of the recent significant increase in interest rates. At March 31, 2022, 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 March 31, 2022
|
||||||||||||||||||||||||||||||||
|
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
|
$
|
—
|
—
|
%
|
$
|
—
|
—
|
%
|
$
|
—
|
—
|
%
|
$
|
—
|
—
|
%
|
||||||||||||||||
|
State and municipal
|
954
|
3.29
|
8,480
|
2.52
|
10,185
|
2.14
|
243,699
|
2.24
|
||||||||||||||||||||||||
|
Mortgage-backed securities
|
—
|
—
|
2,598
|
1.69
|
56,701
|
2.20
|
363,304
|
2.08
|
||||||||||||||||||||||||
|
Collateralized mortgage obligations
|
—
|
0.00
|
—
|
0.00
|
103,976
|
0.56
|
—
|
0.00
|
||||||||||||||||||||||||
|
Asset-backed and other amortizing securities
|
—
|
—
|
—
|
—
|
2,072
|
2.91
|
22,703
|
2.81
|
||||||||||||||||||||||||
|
Other securities
|
—
|
0.00
|
—
|
0.00
|
12,000
|
4.47
|
—
|
0.00
|
||||||||||||||||||||||||
|
Total available-for-sale
|
$
|
954
|
3.29
|
%
|
$
|
11,078
|
2.32
|
%
|
$
|
184,934
|
1.43
|
%
|
$
|
629,706
|
2.17
|
%
|
||||||||||||||||
|
As of December 31, 2021
|
||||||||||||||||||||||||||||||||
|
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
|
$
|
—
|
—
|
%
|
$
|
—
|
—
|
%
|
$
|
—
|
—
|
%
|
$
|
—
|
—
|
%
|
||||||||||||||||
|
State and municipal
|
1,939
|
2.74
|
7,563
|
2.58
|
10,502
|
2.11
|
245,139
|
2.24
|
||||||||||||||||||||||||
|
Mortgage-backed securities
|
—
|
—
|
1,476
|
1.43
|
59,116
|
2.20
|
242,381
|
1.86
|
||||||||||||||||||||||||
|
Collateralized mortgage obligations
|
—
|
0.00
|
—
|
0.00
|
106,733
|
0.56
|
—
|
0.00
|
||||||||||||||||||||||||
|
Asset-backed and other amortizing securities
|
—
|
—
|
—
|
—
|
2,328
|
2.90
|
23,718
|
2.82
|
||||||||||||||||||||||||
|
Other securities
|
—
|
0.00
|
—
|
0.00
|
12,000
|
4.47
|
—
|
0.00
|
||||||||||||||||||||||||
|
Total available-for-sale
|
$
|
1,939
|
2.74
|
%
|
$
|
9,039
|
2.39
|
%
|
$
|
190,679
|
1.43
|
%
|
$
|
511,238
|
2.09
|
%
|
||||||||||||||||
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 March 31, 2022 were $3.45 billion, representing an increase of $108.9 million, or 3.3%, compared to $3.34 billion at December 31, 2021. As of March 31, 2022, 32.8% of total
deposits were comprised of noninterest-bearing demand accounts, 57.5% of interest-bearing non-maturity accounts and 9.7% of time deposits.
The following table shows the deposit mix as of the dates presented:
|
March 31, 2022
|
December 31, 2021
|
|||||||||||||||
|
Amount
|
% of Total
|
Amount
|
% of Total
|
|||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||
|
Noninterest-bearing deposits
|
$
|
1,131,215
|
32.8
|
%
|
$
|
1,071,367
|
32.1
|
%
|
||||||||
|
NOW and other transaction accounts
|
373,634
|
10.8
|
395,322
|
11.8
|
||||||||||||
|
Money market and other savings
|
1,610,735
|
46.7
|
1,534,795
|
45.9
|
||||||||||||
|
Time deposits
|
334,573
|
9.7
|
339,738
|
10.2
|
||||||||||||
|
Total deposits
|
$
|
3,450,157
|
100.0
|
%
|
$
|
3,341,222
|
100.0
|
%
|
||||||||
Average deposit balances and weighted average rates paid on deposits, on an annualized basis, for the periods indicated are shown below.
|
Three Months Ended
|
Year Ended
|
|||||||||||||||
|
March 31, 2022
|
December 31, 2021
|
|||||||||||||||
|
Average
Balance
|
Weighted
Average Rate
|
Average
Balance
|
Weighted
Average Rate
|
|||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||
|
Noninterest-bearing deposits
|
$
|
1,104,091
|
—
|
%
|
$
|
1,016,835
|
—
|
%
|
||||||||
|
Interest-bearing deposits:
|
||||||||||||||||
|
NOW and interest-bearing demand accounts
|
375,242
|
0.09
|
%
|
355,274
|
0.03
|
%
|
||||||||||
|
Savings accounts
|
149,016
|
0.09
|
%
|
132,426
|
0.09
|
%
|
||||||||||
|
Money market accounts
|
1,413,506
|
0.23
|
%
|
1,353,978
|
0.29
|
%
|
||||||||||
|
Time deposits
|
339,104
|
1.17
|
%
|
329,509
|
1.25
|
%
|
||||||||||
|
Total interest-bearing deposits
|
2,276,868
|
0.34
|
%
|
2,171,187
|
0.38
|
%
|
||||||||||
|
Total deposits
|
$
|
3,380,959
|
0.23
|
%
|
$
|
3,188,022
|
0.26
|
%
|
||||||||
The scheduled maturities of uninsured certificates of deposits or other time deposits as of March 31, 2022 follows:
|
(Dollars in thousands)
|
Three
Months
|
Three to
Six Months
|
Six to
12 Months
|
After
12 Months
|
Total
|
|||||||||||||||
|
$
|
11,971
|
$
|
4,679
|
$
|
62,339
|
$
|
3,084
|
$
|
82,073
|
|||||||||||
The estimated amount of uninsured deposits as of March 31, 2022 was $1.08 billion.
Time deposits issued in amounts of more than $250 thousand represent the type of deposit most likely to affect the Company’s future earnings because of interest rate sensitivity. The effective
cost of these funds is generally higher than other time deposits because the funds are usually obtained at premium rates of interest.
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 March 31, 2022 and December 31, 2021, we had total remaining borrowing capacity from the FHLB of $908.5 million and $903.9 million, respectively.
The following table sets forth our long-term FHLB borrowings as of and for the periods indicated:
|
As of/For the
Three Months Ended
March 31,
|
||||||||
|
2022
|
2021
|
|||||||
|
(Dollars in thousands)
|
||||||||
|
Amount outstanding at end of the period
|
$
|
—
|
$
|
25,000
|
||||
|
Weighted average interest rate at end of the period
|
0.00
|
%
|
0.16
|
%
|
||||
|
Maximum month-end balance during the period
|
$
|
—
|
$
|
75,000
|
||||
|
Average balance outstanding during the period
|
$
|
—
|
$
|
74,444
|
||||
|
Weighted average interest rate during the period
|
0.00
|
%
|
0.19
|
%
|
||||
The Company has used FHLB letters of credit to pledge to certain public deposits. These letters of credit expired in July 2021 and the Company began pledging securities to these public funds
rather than renewing the letters of credit. As a result, there were no FHLB letters of credit outstanding at March 31, 2022.
Federal Reserve Bank of Dallas. The Bank has a line of credit with the Federal Reserve Bank of Dallas (the “FRB”). The amount of the line is determined on
a monthly basis by the FRB. The line is collateralized by a blanket floating lien on all agriculture, commercial and consumer loans. The amount of the line was $608.6 million and $593.6 million at March 31, 2022 and December 31, 2021, respectively.
The following table sets forth our FRB borrowings as of and for the periods indicated:
|
As of/For the
Three Months Ended
March 31,
|
||||||||
|
2022
|
2021
|
|||||||
|
(Dollars in thousands)
|
||||||||
|
Amount outstanding at end of the period
|
$
|
—
|
$
|
—
|
||||
|
Weighted average interest rate at end of the period
|
0.00
|
%
|
0.00
|
%
|
||||
|
Maximum month-end balance during the period
|
$
|
—
|
$
|
—
|
||||
|
Average balance outstanding during the period
|
$
|
—
|
$
|
—
|
||||
|
Weighted average interest rate during the period
|
0.00
|
%
|
0.00
|
%
|
||||
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 $160.0 million and $160.0 million as of March 31, 2022 and December 31, 2021, respectively. The lines were not used during the three months ended March 31, 2022 or the three months ended March 31, 2021.
Subordinated Debt Securities. In December 2018, the Company issued $26.5 million in subordinated debt securities. Subordinated debt 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 subordinated debt securities issued in December 2018 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 subordinated debt securities issued in December 2018 will float at the Wall Street Journal prime rate, with a floor
of 4.5% and a ceiling of 7.5%. These subordinated debt 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 subordinated debt
securities are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.
On September 29, 2020, the Company issued $50.0 million in subordinated debt securities. Proceeds from the issuance of these subordinated debt securities were reduced by
approximately $926 thousand in debt issuance costs. The subordinated debt securities issued in September 2020 have a maturity date of September 2030 with a fixed rate of 4.50% for the first five years. After the expiration of the fixed rate
period, the subordinated debt securities will reset quarterly at a variable rate equal to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 438 basis points. These subordinated debt securities pay interest semi-annually, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less.
Additionally, these subordinated debt securities are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.
As of March 31, 2022, the total amount of subordinated debt securities outstanding was $76.5 million less approximately $651 thousand of remaining debt issuance costs for a total balance of $75.8
million.
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 March 31,
2022 and December 31, 2021. 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, as of March 31, 2022, 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; 2.91%
|
||||||||
|
South Plains Financial Capital Trust IV
|
2005
|
20,000
|
20,619
|
2035
|
3-mo. LIBOR + 139 bps; 2.22%
|
||||||||||
|
South Plains Financial Capital Trust V
|
2007
|
15,000
|
15,464
|
2037
|
3-mo. LIBOR + 150 bps; 2.33%
|
||||||||||
|
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 March 31, 2022.
|
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 (“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.
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.
Capital Requirements
Total stockholders’ equity decreased to $387.1 million as of March 31, 2022, compared to $407.4 million as of December 31, 2021, a decrease of $20.4 million, or 5.0%. The decrease from December
31, 2021 was primarily the result of $14.3 million in net earnings for the three months ended March 31, 2022, offset by a decrease in accumulated other comprehensive income of $30.0 million related to fair value changes in available for sale
securities and related fair value hedges, net of tax, $3.0 million in repurchases of common stock and $1.9 million of dividends paid.
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”
(described below), 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 March 31, 2022, both we and the Bank met all the capital adequacy requirements to which we and the Bank were subject. At March 31, 2022, we and the Bank were “well capitalized” under the
regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since March 31, 2022 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.
|
March 31, 2022
|
December 31, 2021
|
|||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||
|
South Plains Financial, Inc.:
|
||||||||||||||||
|
Total capital (to risk-weighted assets)
|
$
|
535,998
|
18.22
|
%
|
$
|
524,836
|
18.40
|
%
|
||||||||
|
Tier 1 capital (to risk-weighted assets)
|
423,358
|
14.39
|
413,322
|
14.49
|
||||||||||||
|
CET 1 capital (to risk-weighted assets)
|
378,358
|
12.86
|
368,322
|
12.91
|
||||||||||||
|
Tier 1 capital (to average assets)
|
423,358
|
10.78
|
413,322
|
10.77
|
||||||||||||
|
City Bank:
|
||||||||||||||||
|
Total capital (to risk-weighted assets)
|
$
|
431,140
|
14.66
|
%
|
$
|
425,748
|
14.93
|
%
|
||||||||
|
Tier 1 capital (to risk-weighted assets)
|
394,331
|
13.40
|
390,015
|
13.67
|
||||||||||||
|
CET 1 capital (to risk-weighted assets)
|
394,331
|
13.40
|
390,015
|
13.67
|
||||||||||||
|
Tier 1 capital (to average assets)
|
394,331
|
10.05
|
390,015
|
10.16
|
||||||||||||
Community Bank Leverage Ratio
On September 17, 2019, the federal banking agencies jointly finalized a rule to be effective January 1, 2020 and intended to simplify the regulatory capital requirements described above for qualifying community
banking organizations that opt into the Community Bank Leverage Ratio (“CBLR”) framework, as required by Section 201 of the EGRRCPA. The final rule became effective on January 1, 2020, and the CBLR framework became available for banks to use
beginning with their March 31, 2020 Call Reports. Under the final rule, if a qualifying community banking organization opts into the CBLR framework and meets all requirements under the framework, it will be considered to have met the
well-capitalized ratio requirements under the “prompt corrective action” regulations described above and will not be required to report or calculate risk-based capital. In order to qualify for the CBLR framework, a community banking organization
must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. Although the Company and the Bank are qualifying
community banking organizations, the Company and the Bank have elected not to opt in to the CBLR framework at this time and will continue to follow the Basel III capital requirements as described above.
Treasury Stock
The Company repurchased stock in accordance with its stock repurchase program during the three months ended March 31, 2022 and 2021. For the three months ended March 31, 2022, we repurchased
106,498 shares of common stock for a total of $3.0 million. For the three months ended March 31, 2021, we repurchased 43,184 shares of common stock for a total of $786 thousand. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use
of Proceeds,” of this Form 10-Q for further information.
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. 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:
|
March 31,
2022
|
December 31,
2021
|
||||||||
|
Change in Interest Rates (Basis Points)
|
Percent Change in
Net Interest Income
|
Percent Change in
Net Interest Income
|
|||||||
|
+300
|
5.20
|
6.89
|
|||||||
|
+200
|
3.14
|
4.53
|
|||||||
|
+100
|
1.42
|
2.02
|
|||||||
|
-100
|
(2.02
|
)
|
(1.05
|
)
|
|||||
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.
The Company’s asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of the Company are monetary in nature. Management believes the
impact of inflation on financial results depends upon the Company’s ability to react to changes in interest rates and by such reaction, reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction, or
at the same magnitude, as the prices of other goods and services. However, other operating expenses do reflect general levels of inflation. Management seeks to manage the relationship between interest rate-sensitive assets and liabilities in order
to protect against wide net interest income fluctuations, including those resulting from inflation.
Various information shown elsewhere in this Report will assist in the understanding of how well the Company is positioned to react to changing interest rates and inflationary trends. In particular, additional
information related to the Company’s interest rate-sensitive assets and liabilities is contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report under the heading “Interest Rate
Sensitivity and Market Risk.”
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 Report 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 U.S. 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 Report 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 Report 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 Report 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 stockholders’ 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 stockholders’
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:
|
March 31,
2022
|
December 31,
2021
|
|||||||
|
(Dollars in thousands)
|
||||||||
|
Total stockholders’ equity
|
$
|
387,068
|
$
|
407,427
|
||||
|
Less: Goodwill and other intangibles
|
(25,011
|
)
|
(25,403
|
)
|
||||
|
Tangible common equity
|
$
|
362,057
|
$
|
382,024
|
||||
|
Total assets
|
$
|
3,999,744
|
$
|
3,901,855
|
||||
|
Less: Goodwill and other intangibles
|
(25,011
|
)
|
(25,403
|
)
|
||||
|
Tangible assets
|
$
|
3,974,733
|
$
|
3,876,452
|
||||
|
Shares outstanding
|
17,673,407
|
17,760,243
|
||||||
|
Total stockholders’ equity to total assets
|
9.68
|
%
|
10.44
|
%
|
||||
|
Tangible common equity to tangible assets
|
9.11
|
%
|
9.85
|
%
|
||||
|
Book value per share
|
$
|
21.90
|
$
|
22.94
|
||||
|
Tangible book value per share
|
$
|
20.49
|
$
|
21.51
|
||||
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 consolidated financial statements and accompanying notes. These estimates, assumptions and
judgments are based on information available as of the date of the consolidated financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated 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 consolidated 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 consolidated 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 March 31, 2022.
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 (loss). Management uses these assets as part of its
asset/liability management strategy; they may be sold in response to changes in liquidity needs, interest rates, resultant prepayment risk changes, and other factors. Management determines the appropriate classification of securities at the time of
purchase. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain 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 thousand are specifically reviewed to determine if they are impaired. Factors considered by management in determining whether a
loan is impaired include payment status and the sources, amounts, and probabilities of estimated cash flow available to service debt in relation to amounts due according to contractual terms. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Loans that are determined to be impaired are then evaluated to determine estimated impairment, if any. GAAP allows impairment to be measured on a loan-by-loan basis by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Loans that are not individually determined to be impaired or
are not subject to the specific review of impaired status are subject to the general valuation allowance portion of the allowance for loan losses.
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.
Mortgage Servicing Rights Asset. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the
income statement effect recorded in net gain on sale of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates present value of
estimated future servicing income.
Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports change in fair value of servicing assets in earnings in the period
in which the changes occur, and are included with other noninterest income in the consolidated financial statements. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual
prepayment speeds and default rates and losses.
Goodwill and Other Intangible Assets. Goodwill resulting from business combinations is generally determined as the excess of the fair value of the
consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized, but is tested for impairment 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.
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 March 31, 2022 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 our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report on Form
10-K”) filed with the SEC on March 8, 2022. Except as described above or in our 2021 Annual Report on Form 10-K, we are not presently involved in any other 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 Notice Regarding Forward-Looking
Statements” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-Q and the risk factors previously disclosed under the heading “Risk Factors” in Part I, Item 1A of our 2021
Annual Report on Form 10-K. There have been no material changes in the risk factors disclosed by the Company in the 2021 Annual Report on Form 10-K.
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds
|
Issuer Purchases of Equity Securities
On October 29, 2021, the Company’s board of directors approved a stock repurchase program, effective November 6, 2021, pursuant to which the Company may, from time to time, purchase up to $10.0
million of its outstanding shares of common stock (the “Repurchase Program”). The shares may be repurchased from time to time in privately negotiated transactions or the open market, including pursuant to a Rule 10b5-1 trading plan adopted by the
Company, and in accordance with applicable regulations of the SEC. The Company is not obligated to purchase any shares of its common stock under the Repurchase Program, and the timing and exact amount of any repurchases will depend on various
factors, including the performance of the Company’s stock price, general market and other conditions, applicable legal requirements and other factors. The Repurchase Program has an expiration date of November 6, 2022. The Repurchase Program may
be terminated or amended by the Company’s board of directors at any time prior to the expiration date.
The following table summarizes the share repurchase activity for the three months ended March 31, 2022.
|
Total Shares
Repurchased
|
Average Price
Paid Per Share
|
Total Dollar Amount
Purchased Pursuant to
Publicly-Announced Plan
|
Maximum Dollar Amount
Remaining Available for
Repurchase Pursuant to
Publicly-Announced Plan
|
|||||||||||||
|
January 2022
|
41,646
|
$
|
28.68
|
$
|
1,194,530
|
$
|
6,520,899
|
|||||||||
|
February 2022
|
31,095
|
28.52
|
886,755
|
5,634,145
|
||||||||||||
|
March 2022
|
33,757
|
27.74
|
936,415
|
4,697,730
|
||||||||||||
|
Total
|
106,498
|
|||||||||||||||
| 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
|
|
|
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 SEC on April 12, 2019)
(File No. 333-230851).
|
||
|
Second Amended and Restated Bylaws of South Plains Financial, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 1,
2021) (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 March 31, 2022, 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
|
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:
|
May 9, 2022
|
By:
|
/s/ Curtis C. Griffith
|
|
Curtis C. Griffith
|
|||
|
Chairman and Chief Executive Officer
|
|||
|
Date:
|
May 9, 2022
|
By:
|
/s/ Steven B. Crockett
|
|
Steven B. Crockett
|
|||
|
Chief Financial Officer and Treasurer
|
|||
51
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Curtis C. Griffith, certify that:
| 1. |
I have reviewed this Quarterly Report on Form 10-Q of South Plains Financial, Inc. (the “registrant”) for the quarter ended March 31, 2022 (this “report”);
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| (a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| (b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| (c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
|
| (d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
| (a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
|
| (b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
|
Date: May 9, 2022
|
By:
|
/s/ Curtis C. Griffith
|
|
Curtis C. Griffith
|
||
|
Chairman and Chief Executive Officer
|
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven B. Crockett, certify that:
| 1. |
I have reviewed this Quarterly Report on Form 10-Q of South Plains Financial, Inc. (the “registrant”) for the quarter ended March 31, 2022 (this “report”);
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| (a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| (b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| (c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
|
| (d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
| (a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
|
| (b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
|
Date: May 9, 2022
|
By:
|
/s/ Steven B. Crockett
|
|
Steven B. Crockett
|
||
|
Chief Financial Officer
|
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of South Plains Financial, Inc. (the “Company”) for the quarter ended March 31, 2022 (the “Report”), as filed with the Securities and Exchange Commission on the
date hereof, I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| (1) |
The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
|
| (2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
|
Date: May 9, 2022
|
By:
|
/s/ Curtis C. Griffith
|
|
Curtis C. Griffith
|
||
|
Chairman and Chief Executive Officer
|
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of South Plains Financial, Inc. (the “Company”) for the quarter ended March 31, 2022 (the “Report”), as filed with the Securities and Exchange Commission on the
date hereof, I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| (1) |
The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
|
| (2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
|
Date: May 9, 2022
|
By:
|
/s/ Steven B. Crockett
|
|
Steven B. Crockett
|
||
|
Chief Financial Officer
|