PART I. FINANCIAL INFORMATION
Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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, 2020 (the “2020 Annual Report on Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2021. 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:
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the impact, duration and severity of the ongoing novel coronavirus (“COVID-19”) pandemic, 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”);
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our ability to effectively execute our expansion strategy and manage our growth, including identifying and consummating suitable acquisitions;
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business and economic conditions, particularly those affecting our market areas, as well as the concentration of our business in such market areas;
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high concentrations of loans secured by real estate located in our market areas;
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risks associated with our commercial loan portfolio, including the uncertain economic consequences of the ongoing COVID-19 pandemic or any deterioration in value of the general business assets that secure such loans;
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potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;
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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;
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risks associated with the sale of crop insurance products, including termination of or substantial changes to the federal crop insurance program;
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risks related to the significant amount of credit that we have extended to a limited number of borrowers and in a limited geographic area;
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public funds deposits comprising a relatively high percentage of our deposits;
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potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;
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our ability to maintain our reputation;
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our ability to successfully manage our credit risk and the sufficiency of our allowance for loan losses;
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our ability to attract, hire and retain qualified management personnel;
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our dependence on our management team, including our ability to retain executive officers and key employees and their customer and community relationships;
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interest rate fluctuations, which could have an adverse effect on our profitability;
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competition from banks, credit unions and other financial services providers;
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our ability to keep pace with technological change or difficulties we may experience when implementing new technologies;
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system failures, service denials, cyber-attacks and security breaches;
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our ability to maintain effective internal control over financial reporting;
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employee error, fraudulent activity by employees or customers and inaccurate or incomplete information about our customers and counterparties;
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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;
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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;
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costs and effects of litigation, investigations or similar matters to which we may be subject, including any effect on our reputation;
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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;
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tariffs and trade barriers;
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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
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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.
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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 2020 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, the Company cautions readers not to place undue reliance on any such 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. We have 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 spread of COVID-19 continues to cause significant disruptions in the U.S. economy since it was declared a pandemic in March 2020 by the World Health Organization. The changes have impacted our clients, their industries, as well as the financial services industry. 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. We are closely monitoring the current environment, given the rise in cases due to the Delta variant, 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.
While the duration of the COVID-19 pandemic and the scope of its impact on the economy is uncertain, the Bank continues to be proactive with its borrowers in those sectors most affected by the COVID-19 pandemic and offering 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 has 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 June 30, 2021, total active loan modifications attributed to COVID-19 were approximately $37 million, or 1.6%, of the Company’s loan portfolio. 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 PPP was created by the CARES Act and implemented by the SBA in March 2020. The PPP allows 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 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 extends 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. The SBA began the PPP loan forgiveness process in October 2020 and has forgiven approximately $188 million of PPP loans from the first round of the PPP, leaving $30 million outstanding as of June 30, 2021. 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. For the six months ended June 30, 2021, the Bank had funded approximately 1,100 PPP loans for a total of $91 million. The SBA has forgiven approximately $6 million of PPP loans from this last round.
We are currently unable to fully assess or predict the extent of the effects of the COVID-19 pandemic on our operations as the ultimate impact will depend on factors that are currently unknown and/or beyond our control. Please refer to Part I, Item 1A, “Risk Factors” in this Form 10-Q.
Results of Operations
We had net income of $13.7 million, or $0.74 per diluted common share for the three months ended June 30, 2021, compared to net income of $5.6 million, or $0.31 per diluted common share for the three months ended June 30, 2020. Return on average equity was 14.27% and return on average assets was 1.46% for the three months ended June 30, 2021, compared to 6.81% and 0.64%, respectively, for the three months ended June 30, 2020.
We had net income of $28.8 million, or $1.55 per diluted common share for the six months ended June 30, 2021, compared to net income of $12.7 million, or $0.69 per diluted common share for the six months ended June 30, 2020. Return on average equity was 15.35% and return on average assets was 1.56% for the six months ended June 30, 2021, compared to 7.88% and 0.76%, respectively, for the six months ended June 30, 2020.
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 tables present, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. For purposes of this table, interest income, net interest margin and net interest spread are shown on a fully tax-equivalent basis.
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Three Months Ended June 30,
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2021
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2020
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Average
Balance
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|
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Interest
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|
|
Yield/
Rate
|
|
|
Average
Balance
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|
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Interest
|
|
|
Yield/
Rate
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(Dollars in thousands)
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Assets:
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|
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Interest-earning assets:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Loans, excluding PPP(1)
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$
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2,211,825
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|
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$
|
27,084
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|
|
|
4.91
|
%
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|
$
|
2,204,441
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|
|
$
|
28,825
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|
|
|
5.26
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%
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Loans - PPP
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|
|
156,977
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|
|
|
2,277
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|
|
|
5.82
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|
|
|
171,304
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|
|
|
1,076
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|
|
|
2.53
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|
Investment securities – taxable
|
|
|
543,527
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|
|
|
2,377
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|
|
|
1.75
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|
|
|
547,971
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|
|
|
3,080
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|
|
|
2.26
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|
Investment securities – non-taxable
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|
|
220,006
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|
|
|
1,465
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|
|
|
2.67
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|
|
|
160,142
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|
|
|
1,192
|
|
|
|
2.99
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|
Other interest-earning assets(2)
|
|
|
370,634
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|
|
|
122
|
|
|
|
0.13
|
|
|
|
174,753
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|
|
|
124
|
|
|
|
0.29
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|
Total interest-earning assets
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|
|
3,502,969
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|
|
|
33,325
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|
|
|
3.82
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|
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|
3,258,611
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|
|
|
34,297
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|
|
|
4.23
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|
Noninterest-earning assets
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|
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255,093
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|
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|
|
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|
|
|
|
|
247,571
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|
|
|
|
|
|
|
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Total assets
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|
$
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3,758,062
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|
|
|
|
|
|
|
|
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$
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3,506,182
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Liabilities and Shareholders’ Equity:
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|
|
|
|
|
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|
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Interest-bearing liabilities:
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|
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|
|
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|
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|
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NOW, savings and money market deposits
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$
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1,873,699
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|
|
$
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1,150
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|
|
|
0.25
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%
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|
$
|
1,650,159
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|
|
$
|
1,330
|
|
|
|
0.32
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%
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Time deposits
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|
|
326,043
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|
|
|
1,036
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|
|
|
1.27
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|
|
|
326,561
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|
|
|
1,430
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|
|
|
1.76
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|
Short-term borrowings
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|
|
6,429
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|
|
|
1
|
|
|
|
0.06
|
|
|
|
16,449
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|
|
|
6
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|
|
|
0.15
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|
Notes payable & other longer-term borrowings
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|
|
4,121
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|
|
|
3
|
|
|
|
0.29
|
|
|
|
161,099
|
|
|
|
96
|
|
|
|
0.24
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|
Subordinated debt securities
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|
|
75,682
|
|
|
|
1,012
|
|
|
|
5.36
|
|
|
|
26,472
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|
|
|
403
|
|
|
|
6.12
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|
Junior subordinated deferrable interest debentures
|
|
|
46,393
|
|
|
|
221
|
|
|
|
1.91
|
|
|
|
46,393
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|
|
|
294
|
|
|
|
2.55
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|
Total interest-bearing liabilities
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|
$
|
2,332,367
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|
|
$
|
3,423
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|
|
|
0.59
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%
|
|
$
|
2,227,133
|
|
|
$
|
3,559
|
|
|
|
0.64
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
1,002,737
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|
|
|
|
|
|
|
|
|
|
$
|
901,761
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|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
39,215
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|
|
|
|
|
|
|
|
|
|
|
45,576
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|
|
|
|
|
|
|
|
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Total noninterest-bearing liabilities
|
|
|
1,041,952
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|
|
|
|
|
|
|
|
|
|
|
947,337
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|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
383,743
|
|
|
|
|
|
|
|
|
|
|
|
331,712
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
3,758,062
|
|
|
|
|
|
|
|
|
|
|
$
|
3,506,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
29,902
|
|
|
|
|
|
|
|
|
|
|
$
|
30,738
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.23
|
%
|
|
|
|
|
|
|
|
|
|
|
3.59
|
%
|
Net interest margin(3)
|
|
|
|
|
|
|
|
|
|
|
3.42
|
%
|
|
|
|
|
|
|
|
|
|
|
3.79
|
%
|
(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.
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, excluding PPP(1)
|
|
$
|
2,187,470
|
|
|
$
|
53,367
|
|
|
|
4.92
|
%
|
|
$
|
2,185,728
|
|
|
$
|
59,879
|
|
|
|
5.51
|
%
|
Loans - PPP
|
|
|
168,238
|
|
|
|
5,275
|
|
|
|
6.32
|
|
|
|
85,652
|
|
|
|
1,076
|
|
|
|
2.53
|
|
Investment securities – taxable
|
|
|
544,761
|
|
|
|
4,809
|
|
|
|
1.78
|
|
|
|
554,324
|
|
|
|
6,672
|
|
|
|
2.42
|
|
Investment securities – non-taxable
|
|
|
218,351
|
|
|
|
2,946
|
|
|
|
2.72
|
|
|
|
119,538
|
|
|
|
1,694
|
|
|
|
2.85
|
|
Other interest-earning assets(2)
|
|
|
350,434
|
|
|
|
222
|
|
|
|
0.13
|
|
|
|
162,944
|
|
|
|
858
|
|
|
|
1.06
|
|
Total interest-earning assets
|
|
|
3,469,253
|
|
|
|
66,619
|
|
|
|
3.87
|
|
|
|
3,108,186
|
|
|
|
70,179
|
|
|
|
4.54
|
|
Noninterest-earning assets
|
|
|
262,351
|
|
|
|
|
|
|
|
|
|
|
|
249,114
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,731,604
|
|
|
|
|
|
|
|
|
|
|
$
|
3,357,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, savings and money market deposits
|
|
$
|
1,840,831
|
|
|
$
|
2,254
|
|
|
|
0.25
|
%
|
|
$
|
1,598,048
|
|
|
$
|
3,986
|
|
|
|
0.50
|
%
|
Time deposits
|
|
|
325,213
|
|
|
|
2,089
|
|
|
|
1.30
|
|
|
|
340,016
|
|
|
|
3,057
|
|
|
|
1.81
|
|
Short-term borrowings
|
|
|
15,726
|
|
|
|
5
|
|
|
|
0.06
|
|
|
|
23,597
|
|
|
|
99
|
|
|
|
0.84
|
|
Notes payable & other longer-term borrowings
|
|
|
39,283
|
|
|
|
38
|
|
|
|
0.20
|
|
|
|
128,654
|
|
|
|
453
|
|
|
|
0.71
|
|
Subordinated debt securities
|
|
|
75,659
|
|
|
|
2,031
|
|
|
|
5.41
|
|
|
|
26,472
|
|
|
|
807
|
|
|
|
6.13
|
|
Junior subordinated deferrable interest debentures
|
|
|
46,393
|
|
|
|
444
|
|
|
|
1.93
|
|
|
|
46,393
|
|
|
|
695
|
|
|
|
3.01
|
|
Total interest-bearing liabilities
|
|
$
|
2,343,105
|
|
|
$
|
6,861
|
|
|
|
0.59
|
%
|
|
$
|
2,163,180
|
|
|
$
|
9,097
|
|
|
|
0.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
969,040
|
|
|
|
|
|
|
|
|
|
|
$
|
833,699
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
41,408
|
|
|
|
|
|
|
|
|
|
|
|
36,364
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
1,010,448
|
|
|
|
|
|
|
|
|
|
|
|
870,063
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
378,051
|
|
|
|
|
|
|
|
|
|
|
|
324,057
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
3,731,604
|
|
|
|
|
|
|
|
|
|
|
$
|
3,357,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
59,758
|
|
|
|
|
|
|
|
|
|
|
$
|
61,082
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.28
|
%
|
|
|
|
|
|
|
|
|
|
|
3.69
|
%
|
Net interest margin(3)
|
|
|
|
|
|
|
|
|
|
|
3.47
|
%
|
|
|
|
|
|
|
|
|
|
|
3.95
|
%
|
(1)
|
Average loan balances include nonaccrual loans and loans held for sale.
|
(2)
|
Includes income and average balances for interest-earning deposits at other banks, nonmarketable securities, federal funds sold and other miscellaneous interest-earning assets.
|
(3)
|
Net interest margin is calculated as the annualized net interest income, on a fully tax-equivalent basis, divided by average interest-earning assets.
|
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables sets forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume.
|
|
Three Months Ended June 30,
|
|
|
|
2021 over 2020
|
|
|
|
Change due to:
|
|
|
Total
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Variance
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Loans, excluding PPP
|
|
$
|
97
|
|
|
$
|
(1,838
|
)
|
|
$
|
(1,741
|
)
|
Loans - PPP
|
|
|
(90
|
)
|
|
|
1,291
|
|
|
|
1,201
|
|
Investment securities – taxable
|
|
|
(25
|
)
|
|
|
(678
|
)
|
|
|
(703
|
)
|
Investment securities – non-taxable
|
|
|
446
|
|
|
|
(173
|
)
|
|
|
273
|
|
Other interest-earning assets
|
|
|
139
|
|
|
|
(141
|
)
|
|
|
(2
|
)
|
Total increase (decrease) in interest income
|
|
|
567
|
|
|
|
(1,539
|
)
|
|
|
(972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, Savings, MMDAs
|
|
|
180
|
|
|
|
(360
|
)
|
|
|
(180
|
)
|
Time deposits
|
|
|
(2
|
)
|
|
|
(392
|
)
|
|
|
(394
|
)
|
Short-term borrowings
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
Notes payable & other borrowings
|
|
|
(94
|
)
|
|
|
1
|
|
|
|
(93
|
)
|
Subordinated debt securities
|
|
|
749
|
|
|
|
(140
|
)
|
|
|
609
|
|
Junior subordinated deferrable interest debentures
|
|
|
—
|
|
|
|
(73
|
)
|
|
|
(73
|
)
|
Total increase (decrease) interest expense:
|
|
|
829
|
|
|
|
(965
|
)
|
|
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
(262
|
)
|
|
$
|
(574
|
)
|
|
$
|
(836
|
)
|
|
|
Six Months Ended June 30,
|
|
|
|
2021 over 2020
|
|
|
|
Change due to:
|
|
|
Total
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Variance
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Loans, excluding PPP
|
|
$
|
48
|
|
|
$
|
(6,560
|
)
|
|
$
|
(6,512
|
)
|
Loans - PPP
|
|
|
1,037
|
|
|
|
3,162
|
|
|
|
4,199
|
|
Investment securities – taxable
|
|
|
(115
|
)
|
|
|
(1,748
|
)
|
|
|
(1,863
|
)
|
Investment securities – non-taxable
|
|
|
1,400
|
|
|
|
(148
|
)
|
|
|
1,252
|
|
Other interest-earning assets
|
|
|
987
|
|
|
|
(1,623
|
)
|
|
|
(636
|
)
|
Total increase (decrease) in interest income
|
|
|
3,357
|
|
|
|
(6,917
|
)
|
|
|
(3,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, Savings, MMDAs
|
|
|
606
|
|
|
|
(2,338
|
)
|
|
|
(1,732
|
)
|
Time deposits
|
|
|
(133
|
)
|
|
|
(835
|
)
|
|
|
(968
|
)
|
Short-term borrowings
|
|
|
(33
|
)
|
|
|
(61
|
)
|
|
|
(94
|
)
|
Notes payable & other borrowings
|
|
|
(315
|
)
|
|
|
(100
|
)
|
|
|
(415
|
)
|
Subordinated debt securities
|
|
|
1,499
|
|
|
|
(275
|
)
|
|
|
1,224
|
|
Junior subordinated deferrable interest debentures
|
|
|
—
|
|
|
|
(251
|
)
|
|
|
(251
|
)
|
Total increase (decrease) interest expense:
|
|
|
1,624
|
|
|
|
(3,860
|
)
|
|
|
(2,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
1,733
|
|
|
$
|
(3,057
|
)
|
|
$
|
(1,324
|
)
|
Net interest income for the three months ended June 30, 2021 was $29.6 million, compared to $30.4 million for the three months ended June 30, 2020, a decrease of $855 thousand, or 2.8%. The decrease in net interest income was comprised of a $1.0 million, or 2.9% decrease in interest income and a $136 thousand, or 3.8% decrease in interest expense. The decrease in interest income was primarily attributable to a 35 basis point decrease in non-PPP loan rates for the three-month period ended June 30, 2021, compared to the three-month period ended June 30, 2020, caused by the decline in the interest rate environment experienced in the first quarter of 2020 and its continued effects. The decline in loan interest rates was partially offset by interest income on PPP loans and the related SBA fees. These fees are deferred and then accreted into interest income over the life of the applicable loans. During the three months ended June 30, 2021 the Company had $393 thousand in interest income on PPP loans and recognized $1.9 million in PPP-related SBA fees as PPP loans were forgiven by the SBA or repaid. At June 30, 2021, there was $4.6 million of deferred fees that have not been accreted to income. The Company expects that the remaining first and second rounds of PPP loans will continue to be forgiven by the SBA or repaid over the next several quarters.
Interest expense on deposits for the three months ended June 30, 2021 decreased $574 thousand as compared to the three months ended June 30, 2020, primarily due to a decrease in the interest rate paid on interest-bearing deposits of 16 basis points, partially offset by an increase of $223 million, or 11.3% in average interest-bearing deposits over the same period in 2020. The increase in average interest-bearing liabilities from June 30, 2020 to June 30, 2021 was largely due to growth in deposits from PPP loan funding, other government stimulus payments and programs during the period, as well as organic growth. Interest expense on subordinated debt increased $609 thousand for the three months ended June 30, 2021 as compared to the same period in 2020 due to $50.0 million of subordinated notes that were issued in September 2020. Additionally, average noninterest-bearing demand deposits increased to $1.0 billion at June 30, 2021 from $901.8 million at June 30, 2020.
For the three months ended June 30, 2021, net interest margin and net interest spread were 3.42% and 3.23%, respectively, compared to 3.79% and 3.59% for the same three-month period in 2020, which reflects the changes in interest income and interest expense discussed above.
Net interest income for the six months ended June 30, 2021 was $59.1 million, compared to $60.6 million for the six months ended June 30, 2020, a decrease of $1.5 million, or 2.5%. The decrease in net interest income was comprised of a $3.7 million, or 5.4%, decrease in interest income and a $2.2 million, or 24.6% decrease in interest expense. The decrease in interest income was primarily attributable to a decrease of 59 basis points in the yield on non-PPP loans, partially offset by an increase of $82.6 million in average PPP loans outstanding and the related SBA fees recognized as PPP loans were forgiven by the SBA or repaid during the six-month period ended June 30, 2021, compared to the six-month period ended June 30, 2020.
The $2.2 million decrease in interest expense for the six months ended June 30, 2021 was primarily related to a decrease of 26 basis points in the rate paid on interest-bearing liabilities, partially offset by an increase of $180.0 million, or 8.3%, in average interest-bearing liabilities over the same six-month period in 2020. The increase in average interest-bearing liabilities was mainly due to increased deposits from PPP loan funding, other government stimulus payments and programs during the period as well as organic growth and the $50.0 million of subordinated notes issued in September 2020. Additionally, average noninterest-bearing demand deposits increased to $969.0 million at June 30, 2021 from $833.7 million at June 30, 2020.
For the six months ended June 30, 2021, net interest margin and net interest spread were 3.47% and 3.28%, respectively, compared to 3.95% and 3.69% for the same six-month period in 2020, 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 Company recorded a negative provision for loan losses for the three months ended June 30, 2021 of $2.0 million compared to a positive provision of $13.1 million for the three months ended June 30, 2020. The Company recorded a negative provision for loan losses for the six months ended June 30, 2021 of $1.9 million, compared to a positive provision of $19.4 million for the six months ended June 30, 2020. The decrease in the provision for loan losses in the three-month and six-month periods ended June 30, 2021 compared to the same three-month and six-month periods in 2020 is primarily a result of a negative provision being recorded in June 2021 based on general improvement in the economy, a decline in the amount of loans that are actively under a modification, and a decrease in nonperforming loans. The allowance for loan losses as a percentage of loans held for investment was 1.87% at June 30, 2021 and 2.05% at December 31, 2020. 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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Increase
(Decrease)
|
|
|
2021
|
|
|
2020
|
|
|
Increase
(Decrease)
|
|
|
|
(Dollars in thousands)
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
1,599
|
|
|
$
|
1,439
|
|
|
$
|
160
|
|
|
$
|
3,172
|
|
|
$
|
3,422
|
|
|
$
|
(250
|
)
|
Income from insurance activities
|
|
|
1,240
|
|
|
|
1,022
|
|
|
|
218
|
|
|
|
2,352
|
|
|
|
2,181
|
|
|
|
171
|
|
Bank card services and interchange fees
|
|
|
3,073
|
|
|
|
2,344
|
|
|
|
729
|
|
|
|
5,715
|
|
|
|
4,582
|
|
|
|
1,133
|
|
Mortgage banking activities
|
|
|
13,711
|
|
|
|
17,955
|
|
|
|
(4,244
|
)
|
|
|
32,527
|
|
|
|
26,708
|
|
|
|
5,819
|
|
Investment commissions
|
|
|
530
|
|
|
|
365
|
|
|
|
165
|
|
|
|
960
|
|
|
|
820
|
|
|
|
140
|
|
Fiduciary income
|
|
|
842
|
|
|
|
776
|
|
|
|
66
|
|
|
|
1,678
|
|
|
|
1,605
|
|
|
|
73
|
|
Gain on sale of securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,318
|
|
|
|
(2,318
|
)
|
Other income and fees(1)
|
|
|
1,255
|
|
|
|
995
|
|
|
|
260
|
|
|
|
2,346
|
|
|
|
2,135
|
|
|
|
211
|
|
Total noninterest income
|
|
$
|
22,250
|
|
|
$
|
24,896
|
|
|
$
|
(2,646
|
)
|
|
$
|
48,750
|
|
|
$
|
43,771
|
|
|
$
|
4,979
|
|
(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 June 30, 2021 was $22.3 million, compared to $24.9 million for the three months ended June 30, 2020, an decrease of $2.6 million, or 10.6%. Income from mortgage banking activities decreased $4.2 million, or 23.6%, to $13.7 million for the three months ended June 30, 2021 from $18.0 million for the three months ended June 30, 2020. The decrease was due primarily to a result of $61 million less in interest rate lock commitments and a decline in gain on sale margins. Additionally, bank card services and interchange fee income increased $729 thousand and income from insurance activities increased $218 thousand for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase in bank card services and interchange fee income was primarily tied to the growth in deposits and increased consumer spending. The increase in income from insurance activities is primarily related to Windmark Insurance Agency, Inc.’s 2020 acquisition.
Noninterest income for the six months ended June 30, 2021 was $48.8 million, compared to $43.8 million for the six months ended June 30, 2020, an increase of $5.0 million, or 11.4%. Income from mortgage banking activities increased $5.8 million, or 21.8%, to $32.5 million for the six months ended June 30, 2021 from $26.7 million for the six months ended June 30, 2020. This increase was primarily a result of an increase of $231 million in mortgage loan originations for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. We experienced record volume in mortgage originations during 2020, primarily in the last three quarters of the year, as the industry benefitted from historic low levels of interest rates. The increased mortgage activity has continued during the first two quarters of 2021. Refinance activity has also played a key role in this increase, which is expected to taper off in the latter part of 2021 and then return to more historic levels. Further, bank card services and interchange fee income increased $1.1 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase in bank card services and interchange fee income was primarily tied to the growth in deposits and increased consumer spending. These increases were partially offset by a decrease of $2.3 million in gain on sale of securities, which occurred in the first quarter of 2020.
Noninterest Expense
The following table sets forth the major components of our noninterest expense for the periods indicated:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Increase
(Decrease)
|
|
|
2021
|
|
|
2020
|
|
|
Increase
(Decrease)
|
|
|
|
(Dollars in thousands)
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
23,377
|
|
|
$
|
21,621
|
|
|
$
|
1,756
|
|
|
$
|
47,695
|
|
|
$
|
42,431
|
|
|
$
|
5,264
|
|
Occupancy expense, net
|
|
|
3,499
|
|
|
|
3,586
|
|
|
|
(87
|
)
|
|
|
7,064
|
|
|
|
7,186
|
|
|
|
(122
|
)
|
Professional services
|
|
|
1,522
|
|
|
|
1,961
|
|
|
|
(439
|
)
|
|
|
3,095
|
|
|
|
3,533
|
|
|
|
(438
|
)
|
Marketing and development
|
|
|
812
|
|
|
|
806
|
|
|
|
6
|
|
|
|
1,380
|
|
|
|
1,574
|
|
|
|
(194
|
)
|
IT and data services
|
|
|
907
|
|
|
|
1,079
|
|
|
|
(172
|
)
|
|
|
1,961
|
|
|
|
1,926
|
|
|
|
35
|
|
Bankcard expenses
|
|
|
1,252
|
|
|
|
1,017
|
|
|
|
235
|
|
|
|
2,301
|
|
|
|
2,069
|
|
|
|
232
|
|
Appraisal expenses
|
|
|
879
|
|
|
|
638
|
|
|
|
241
|
|
|
|
1,560
|
|
|
|
1,093
|
|
|
|
467
|
|
Other expenses(1)
|
|
|
4,530
|
|
|
|
4,499
|
|
|
|
31
|
|
|
|
8,779
|
|
|
|
9,406
|
|
|
|
(627
|
)
|
Total noninterest expense
|
|
$
|
36,778
|
|
|
$
|
35,207
|
|
|
$
|
1,571
|
|
|
$
|
73,835
|
|
|
$
|
69,218
|
|
|
$
|
4,617
|
|
(1)
|
Other expenses include items such as telephone expenses, postage, courier fees, directors’ fees, and insurance.
|
Noninterest expense for the three months ended June 30, 2021 was $36.8 million compared to $35.2 million for the three months ended June 30, 2020, an increase of $1.6 million, or 4.5%. Salaries and employee benefits increased $1.8 million, or 8.1%, from $21.6 million for the three months ended June 30, 2020 to $23.4 million for the three months ended June 30, 2021. This increase in salaries and employee benefits expense was primarily driven by a $1.8 million increase in personnel expense. This increase was predominantly related to $1.4 million in higher commissions paid on mortgage loan originations and a rise in salary and other personnel expenses to support mortgage activities. The remaining other noninterest expenses decreased $185 thousand, or 1.3%.
Noninterest expense for the six months ended June 30, 2021 was $73.8 million, compared to $69.2 million for the six months ended June 30, 2020, an increase of $4.6 million, or 6.7%. Salaries and employee benefits increased $5.3 million, or 12.4%, from $42.4 million for the six months ended June 30, 2020 to $47.7 million for the six months ended June 30, 2021. This increase in salaries and employee benefits expense was predominately driven by increased commissions paid on the higher volume of mortgage loan originations other personnel expenses to support mortgage activities. Other noninterest expenses decreased $647 thousand for the six months ended June 30, 2021 compared to the same six-month period in 2020. This decrease was primarily related to additional expenses incurred in the second quarter of 2020 related to the Company’s acquisition of West Texas State Bank.
Financial Condition
Our total assets increased $113.8 million, or 3.2%, to $3.71 billion at June 30, 2021, compared to $3.60 billion at December 31, 2020. Our gross loans held for investment increased $81.9 million, or 3.7%, to $2.30 billion at June 30, 2021, compared to $2.22 billion at December 31, 2020. Our securities portfolio decreased $25.5 million, or 3.2%, to $777.6 million at June 30, 2021, compared to $803.1 million at December 31, 2020. Total deposits increased $184.1 million, or 6.2% to $3.16 billion at June 30, 2021, compared to $2.97 billion at December 31, 2020.
Loan Portfolio
Our loans represent the largest portion of earning assets, greater than our securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing the Company’s financial condition. We originate substantially all of the loans in our portfolio, except certain loan participations that are independently underwritten by the Company prior to purchase.
The following table presents the balance and associated percentage of each major category in our loans held for investment portfolio at the dates indicated:
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial real estate
|
|
$
|
682,017
|
|
|
|
29.6
|
%
|
|
$
|
663,344
|
|
|
|
29.9
|
%
|
Commercial – specialized
|
|
|
323,576
|
|
|
|
14.0
|
|
|
|
311,686
|
|
|
|
14.0
|
|
Commercial – general
|
|
|
492,314
|
|
|
|
21.4
|
|
|
|
518,309
|
|
|
|
23.3
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
|
|
375,302
|
|
|
|
16.3
|
|
|
|
360,315
|
|
|
|
16.2
|
|
Auto loans
|
|
|
230,570
|
|
|
|
10.0
|
|
|
|
205,840
|
|
|
|
9.3
|
|
Other consumer
|
|
|
68,098
|
|
|
|
3.0
|
|
|
|
67,595
|
|
|
|
3.0
|
|
Construction
|
|
|
131,585
|
|
|
|
5.7
|
|
|
|
94,494
|
|
|
|
4.3
|
|
Gross loans
|
|
|
2,303,462
|
|
|
|
100.0
|
%
|
|
|
2,221,583
|
|
|
|
100.0
|
%
|
Allowance for loan losses
|
|
|
(42,963
|
)
|
|
|
|
|
|
|
(45,553
|
)
|
|
|
|
|
Net loans
|
|
$
|
2,260,499
|
|
|
|
|
|
|
$
|
2,176,030
|
|
|
|
|
|
Loans held for investment increased $81.9 million, or 3.7%, to $2.30 billion at June 30, 2021, compared to $2.22 billion at December 31, 2020. We had net organic growth in non-PPP loans of $137.7 during the six months ended June 30, 2021. This increase occurred in a majority of loan segments, with the largest volume growth in residential construction, consumer auto, and multifamily property loans. These increases were partially offset by a decrease in PPP loans of $55.8 million as the Company funded $91.4 million in new PPP loans and received forgiveness payments from the SBA or repayments totaling $147.2 million on PPP loans, during the first six months of 2021.
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 68.4% of our loans held for investment were secured by real property as of June 30, 2021, compared to 66.5% as of December 31, 2020. 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 a diversified loan portfolio, 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.
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 $18.7 million, or 2.8%, to $682.0 million as of June 30, 2021 from $663.3 million as of December 31, 2020. Our multifamily property loans increased $23.2 million, partially offset by decreases in our office and other commercial tenant 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 and retail, construction, and other industries.
Commercial specialized loans increased $11.9 million, or 3.8%, to $323.6 million as of June 30, 2021 from $311.7 million as of December 31, 2020. This increase was primarily due to organic growth in our direct energy sector of $14.1 million.
Commercial general loans decreased $26.0 million, or 5.0%, to $492.3 million as of June 30, 2021 from $518.3 million as of December 31, 2020. The decrease in commercial general loans was primarily due to a decrease in PPP loans of $55.8 million, partially offset with organic loan growth in the rest of the segment.
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 $40.2 million, or 6.3%, to $674.0 million as of June 30, 2021, from $633.8 million as of December 31, 2020. The increase in these loans was primarily a result of a $15.0 million increase in residential mortgage loans and a $24.7 million increase in consumer auto loans as a result of increased auto and home buyer demand related to the current low interest rate environment. As of June 30, 2021, our consumer loan portfolio was comprised of $375.3 million in 1-4 family residential loans, $230.6 million in auto loans, and $68.1 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 $37.1 million, or 39.3%, to $131.6 million as of June 30, 2021 from $94.5 million as of December 31, 2020. The increase resulted from continued higher demand for residential construction as a result of home shortages in many of our markets as the decline in mortgage interest rates has increased the number of buyers for homes.
Allowance for Loan Losses
The allowance for loan losses provides a reserve against which loan losses are charged as those losses become evident. Management evaluates the appropriate level of the allowance for loan losses on a quarterly basis. The analysis takes into consideration the results of an ongoing loan review process, the purpose of which is to determine the level of credit risk within the portfolio and to ensure proper adherence to underwriting and documentation standards. Additional allowances are provided to those loans which appear to represent a greater than normal exposure to risk. The quality of the loan portfolio and the adequacy of the allowance for loan losses is reviewed by regulatory examinations and the Company’s 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 $43.0 million at June 30, 2021, compared to $45.6 million at December 31, 2020, a decrease of $2.6 million, or 5.7%. The decrease is primarily a result of a negative provision being recorded in June 2021 based on general improvement in the economy, a decline in the amount of loans that are actively under a modification, and a decrease in nonperforming loans.
The following table provides an analysis of the allowance for loan losses at the dates indicated.
|
|
Beginning
Balance
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Balance
|
|
|
|
(Dollars in thousands)
|
|
Three Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
19,020
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,732
|
)
|
|
$
|
17,288
|
|
Commercial – specialized
|
|
|
5,458
|
|
|
|
(5
|
)
|
|
|
23
|
|
|
|
(653
|
)
|
|
|
4,823
|
|
Commercial – general
|
|
|
8,979
|
|
|
|
(34
|
)
|
|
|
86
|
|
|
|
(83
|
)
|
|
|
8,948
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
|
|
4,890
|
|
|
|
—
|
|
|
|
2
|
|
|
|
172
|
|
|
|
5,064
|
|
Auto loans
|
|
|
3,891
|
|
|
|
(139
|
)
|
|
|
50
|
|
|
|
13
|
|
|
|
3,815
|
|
Other consumer
|
|
|
1,480
|
|
|
|
(119
|
)
|
|
|
85
|
|
|
|
(12
|
)
|
|
|
1,434
|
|
Construction
|
|
|
1,301
|
|
|
|
—
|
|
|
|
2
|
|
|
|
288
|
|
|
|
1,591
|
|
Total
|
|
$
|
45,019
|
|
|
$
|
(297
|
)
|
|
$
|
248
|
|
|
$
|
(2,007
|
)
|
|
$
|
42,963
|
|
|
|
Beginning
Balance
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Balance
|
|
|
|
(Dollars in thousands)
|
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
7,192
|
|
|
$
|
—
|
|
|
$
|
108
|
|
|
$
|
7,856
|
|
|
$
|
15,156
|
|
Commercial – specialized
|
|
|
4,555
|
|
|
|
(836
|
)
|
|
|
23
|
|
|
|
2,872
|
|
|
|
6,614
|
|
Commercial – general
|
|
|
7,980
|
|
|
|
(532
|
)
|
|
|
72
|
|
|
|
1,773
|
|
|
|
9,293
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
|
|
2,744
|
|
|
|
—
|
|
|
|
1
|
|
|
|
181
|
|
|
|
2,926
|
|
Auto loans
|
|
|
4,312
|
|
|
|
(262
|
)
|
|
|
57
|
|
|
|
(168
|
)
|
|
|
3,939
|
|
Other consumer
|
|
|
1,639
|
|
|
|
(383
|
)
|
|
|
179
|
|
|
|
205
|
|
|
|
1,640
|
|
Construction
|
|
|
652
|
|
|
|
—
|
|
|
|
1
|
|
|
|
414
|
|
|
|
1,067
|
|
Total
|
|
$
|
29,074
|
|
|
$
|
(2,013
|
)
|
|
$
|
441
|
|
|
$
|
13,133
|
|
|
$
|
40,635
|
|
|
|
Beginning
Balance
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Balance
|
|
|
|
(Dollars in thousands)
|
|
Six Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
18,962
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,674
|
)
|
|
$
|
17,288
|
|
Commercial – specialized
|
|
|
5,760
|
|
|
|
(5
|
)
|
|
|
100
|
|
|
|
(1,032
|
)
|
|
|
4,823
|
|
Commercial – general
|
|
|
9,227
|
|
|
|
(377
|
)
|
|
|
130
|
|
|
|
(32
|
)
|
|
|
8,948
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
|
|
4,646
|
|
|
|
(52
|
)
|
|
|
3
|
|
|
|
467
|
|
|
|
5,064
|
|
Auto loans
|
|
|
4,226
|
|
|
|
(327
|
)
|
|
|
83
|
|
|
|
(167
|
)
|
|
|
3,815
|
|
Other consumer
|
|
|
1,671
|
|
|
|
(377
|
)
|
|
|
146
|
|
|
|
(6
|
)
|
|
|
1,434
|
|
Construction
|
|
|
1,061
|
|
|
|
—
|
|
|
|
4
|
|
|
|
526
|
|
|
|
1,591
|
|
Total
|
|
$
|
45,553
|
|
|
$
|
(1,138
|
)
|
|
$
|
466
|
|
|
$
|
(1,918
|
)
|
|
$
|
42,963
|
|
|
|
Beginning
Balance
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Balance
|
|
|
|
(Dollars in thousands)
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
5,049
|
|
|
$
|
—
|
|
|
$
|
215
|
|
|
$
|
9,892
|
|
|
$
|
15,156
|
|
Commercial – specialized
|
|
|
2,287
|
|
|
|
(850
|
)
|
|
|
87
|
|
|
|
5,090
|
|
|
|
6,614
|
|
Commercial – general
|
|
|
9,609
|
|
|
|
(1,380
|
)
|
|
|
89
|
|
|
|
975
|
|
|
|
9,293
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
|
|
2,093
|
|
|
|
—
|
|
|
|
1
|
|
|
|
832
|
|
|
|
2,926
|
|
Auto loans
|
|
|
3,385
|
|
|
|
(704
|
)
|
|
|
109
|
|
|
|
1,149
|
|
|
|
3,939
|
|
Other consumer
|
|
|
1,341
|
|
|
|
(749
|
)
|
|
|
252
|
|
|
|
796
|
|
|
|
1,640
|
|
Construction
|
|
|
433
|
|
|
|
—
|
|
|
|
1
|
|
|
|
633
|
|
|
|
1,067
|
|
Total
|
|
$
|
24,197
|
|
|
$
|
(3,683
|
)
|
|
$
|
754
|
|
|
$
|
19,367
|
|
|
$
|
40,635
|
|
Net charge-offs totaled $49 thousand and were 0.01% (annualized) of average loans outstanding for the three months ended June 30, 2021, compared to $1.6 million and 0.27% (annualized) for the three months ended June 30, 2020. Net charge-offs totaled $672 thousand and were 0.06% (annualized) of average loans outstanding for the six months ended June 30, 2021, compared to $2.9 million and 0.26% (annualized) for the six months ended June 30, 2020. The decrease in net charge-offs for the year-to-date comparison was primarily the result of a $518 thousand charge-off on a retail commercial relationship in the first quarter of 2020, a $822 thousand charge-off of an acquired direct energy relationship in the second quarter of 2020, as well as other smaller commercial-general charge-offs during 2020. The allowance for loan losses as a percentage of loans held for investment was 1.87% at June 30, 2021 and 2.05% at December 31, 2020.
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:
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial real estate
|
|
$
|
17,288
|
|
|
|
40.2
|
%
|
|
$
|
18,962
|
|
|
|
41.6
|
%
|
Commercial – specialized
|
|
|
4,823
|
|
|
|
11.2
|
|
|
|
5,760
|
|
|
|
12.6
|
|
Commercial – general
|
|
|
8,948
|
|
|
|
20.8
|
|
|
|
9,227
|
|
|
|
20.3
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
|
|
5,064
|
|
|
|
11.8
|
|
|
|
4,646
|
|
|
|
10.2
|
|
Auto loans
|
|
|
3,815
|
|
|
|
8.9
|
|
|
|
4,226
|
|
|
|
9.3
|
|
Other consumer
|
|
|
1,434
|
|
|
|
3.4
|
|
|
|
1,671
|
|
|
|
3.7
|
|
Construction
|
|
|
1,591
|
|
|
|
3.7
|
|
|
|
1,061
|
|
|
|
2.3
|
|
Total allowance for loan losses
|
|
$
|
42,963
|
|
|
|
100.0
|
%
|
|
$
|
45,553
|
|
|
|
100.0
|
%
|
Asset Quality
Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.
A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and performing restructured loans. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The impairment amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.
The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans and loans past due 90 days or more.
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
2,559
|
|
|
$
|
6,311
|
|
Commercial – specialized
|
|
|
169
|
|
|
|
272
|
|
Commercial – general
|
|
|
6,008
|
|
|
|
5,489
|
|
Consumer:
|
|
|
|
|
|
|
|
|
1-4 family residential
|
|
|
2,154
|
|
|
|
1,595
|
|
Auto loans
|
|
|
40
|
|
|
|
—
|
|
Other consumer
|
|
|
48
|
|
|
|
51
|
|
Construction
|
|
|
166
|
|
|
|
—
|
|
Total nonaccrual loans
|
|
|
11,144
|
|
|
|
13,718
|
|
Past due loans 90 days or more and still accruing
|
|
|
1,394
|
|
|
|
1,246
|
|
Total nonperforming loans
|
|
|
12,538
|
|
|
|
14,964
|
|
Other real estate owned
|
|
|
1,146
|
|
|
|
1,353
|
|
Total nonperforming assets
|
|
$
|
13,684
|
|
|
$
|
16,317
|
|
|
|
|
|
|
|
|
|
|
Restructured loans - nonaccrual(1)
|
|
$
|
383
|
|
|
$
|
88
|
|
Restructured loans - accruing
|
|
$
|
1,629
|
|
|
$
|
1,687
|
|
(1)
|
Restructured loans, nonaccrual, are included in nonaccrual loans which are a component of nonperforming loans.
|
In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”). Included in certain loan categories of impaired loans are TDRs on which we have granted certain material concessions to the borrower as a result of the borrower experiencing financial difficulties. The concessions granted by us may include, but are not limited to: (1) a modification in which the maturity date, timing of payments or frequency of payments is modified, (2) an interest rate lower than the current market rate for new loans with similar risk, or (3) a combination of the first two factors.
If a borrower on a restructured accruing loan has demonstrated performance under the previous terms, is not experiencing financial difficulty and shows the capacity to continue to perform under the restructured terms, the loan will remain on accrual status. Otherwise, the loan will be placed on nonaccrual status until the borrower demonstrates a sustained period of performance, which generally requires six consecutive months of payments. Loans identified as TDRs are evaluated for impairment using the present value of the expected cash flows or the estimated fair value of the collateral, if the loan is collateral dependent. The fair value is determined, when possible, by an appraisal of the property less estimated costs related to liquidation of the collateral. The appraisal amount may also be adjusted for current market conditions. Adjustments to reflect the present value of the expected cash flows or the estimated fair value of collateral dependent loans are a component in determining an appropriate allowance for loan losses, and as such, may result in increases or decreases to the provision for loan losses in current and future earnings.
We had no loans restructured as TDRs during the first six months of 2021 or 2020. TDRs are excluded from our nonperforming loans unless they otherwise meet the definition of nonaccrual loans or past due 90 days or more.
COVID-19 Industry Exposures. The Company’s COVID-19 industry exposures at June 30, 2021 were:
|
•
|
Restaurant and retail owner-occupied loans totaled $102.6 million, or 4.5% of total loans. The average loan size is $361 thousand. There was $1.8 million in classified loans, less than $50 thousand in loans past due 30 days or more, and $1.3 million in nonaccrual loans. The related allowance for loan losses to total restaurant and retail owner-occupied loans is 3.65%. As of June 30, 2021, approximately 1% of these loans were active modifications as a result of the COVID-19 pandemic.
|
|
•
|
Hospitality and assisted living center loans totaled $120.6 million, or 5.2% of total loans. The average loan size is $2.8 million. There was $48.6 million in classified loans, $3.2 million in loans past due 30 days or more, and $1.2 million in nonaccrual loans. The related allowance for loan losses to total hospitality and assisted living center loans is 8.59%. As of June 30, 2021, approximately 29% of these loans were active modifications as a result of the COVID-19 pandemic. All of these modifications were interest-only periods of 12 months or a combination of a 90-day deferral and nine months of interest only.
|
Oil and Gas Exposures. The Company’s direct energy sector loans totaled $78.1 million, or 3.4% of total loans, at June 30, 2021. There was $5.6 million in classified loans, $176 thousand in loans past due 30 days or more, and $53 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 3.50%. As of June 30, 2021, 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 portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning asset when loan demand is weak or when deposits grow more rapidly than loans.
The securities portfolio consists of securities classified as either held-to-maturity or available-for-sale. All held-to-maturity securities are reported at amortized cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. All available-for-sale securities are reported at fair value. Securities available-for-sale consist primarily of state and municipal securities, mortgage-backed securities and U.S. government sponsored agency securities. We determine the appropriate classification at the time of purchase.
Our securities portfolio decreased $25.5 million, or 3.2%, to $777.6 million at June 30, 2021, compared to $803.1 million at December 31, 2020. The decrease was primarily due to a $7.9 million decline in the unrealized gain at June 30, 2021 compared to December 31, 2020, in addition to $72.0 million in maturities, prepayments, and calls, partially offset by $56.6 million in purchases.
The following table summarizes the fair value of the securities portfolio as of the dates presented.
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Unrealized
Gain/(Loss)
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Unrealized
Gain/(Loss)
|
|
|
|
(Dollars in thousands)
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,750
|
|
|
$
|
4,753
|
|
|
$
|
3
|
|
State and municipal
|
|
|
267,615
|
|
|
|
278,815
|
|
|
|
11,200
|
|
|
|
261,023
|
|
|
|
272,607
|
|
|
|
11,584
|
|
Mortgage-backed securities
|
|
|
342,490
|
|
|
|
347,575
|
|
|
|
5,085
|
|
|
|
359,542
|
|
|
|
373,362
|
|
|
|
13,820
|
|
Collateralized mortgage obligations
|
|
|
106,976
|
|
|
|
107,920
|
|
|
|
944
|
|
|
|
107,175
|
|
|
|
106,715
|
|
|
|
(460
|
)
|
Asset-backed and other amortizing securities
|
|
|
29,316
|
|
|
|
30,891
|
|
|
|
1,575
|
|
|
|
31,509
|
|
|
|
33,572
|
|
|
|
2,063
|
|
Other securities
|
|
|
12,000
|
|
|
|
12,412
|
|
|
|
412
|
|
|
|
12,000
|
|
|
|
12,078
|
|
|
|
78
|
|
Total available-for-sale
|
|
$
|
758,397
|
|
|
$
|
777,613
|
|
|
$
|
19,216
|
|
|
$
|
775,999
|
|
|
$
|
803,087
|
|
|
$
|
27,088
|
|
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At June 30, 2021, 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 June 30, 2021
|
|
|
|
Due in One
Year or Less
|
|
|
Due after One Year
Through Five Years
|
|
|
Due after Five Year
Through Ten Years
|
|
|
Due after
Ten Years
|
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
|
(Dollars in thousands)
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
State and municipal
|
|
|
1,130
|
|
|
|
1.92
|
|
|
|
5,325
|
|
|
|
3.08
|
|
|
|
13,944
|
|
|
|
2.14
|
|
|
|
247,216
|
|
|
|
2.24
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
1,208
|
|
|
|
1.59
|
|
|
|
10,887
|
|
|
|
1.95
|
|
|
|
330,395
|
|
|
|
1.94
|
|
Collateralized mortgage obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
106,976
|
|
|
|
0.56
|
|
|
|
—
|
|
|
|
—
|
|
Asset-backed and other amortizing securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
720
|
|
|
|
2.90
|
|
|
|
28,596
|
|
|
|
2.82
|
|
Other securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,000
|
|
|
|
4.47
|
|
|
|
—
|
|
|
|
—
|
|
Total available-for-sale
|
|
$
|
1,130
|
|
|
|
1.92
|
%
|
|
$
|
6,533
|
|
|
|
2.80
|
%
|
|
$
|
144,527
|
|
|
|
1.16
|
%
|
|
$
|
606,207
|
|
|
|
2.10
|
%
|
|
|
As of December 31, 2020
|
|
|
|
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
|
|
$
|
4,750
|
|
|
|
2.75
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
State and municipal
|
|
|
1,982
|
|
|
|
11.60
|
|
|
|
3,397
|
|
|
|
2.70
|
%
|
|
|
14,079
|
|
|
|
2.11
|
|
|
|
241,565
|
|
|
|
2.28
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
577
|
|
|
|
1.50
|
%
|
|
|
12,723
|
|
|
|
1.94
|
|
|
|
346,242
|
|
|
|
1.95
|
|
Collateralized mortgage obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
107,175
|
|
|
|
0.62
|
|
Asset-backed and other amortizing securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
820
|
|
|
|
2.89
|
%
|
|
|
30,689
|
|
|
|
2.82
|
|
Total available-for-sale
|
|
$
|
6,732
|
|
|
|
5.35
|
%
|
|
$
|
3,974
|
|
|
|
2.52
|
%
|
|
$
|
39,622
|
|
|
|
2.78
|
%
|
|
$
|
725,671
|
|
|
|
1.90
|
%
|
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 June 30, 2021 were $3.16 billion, representing an increase of $184.1 million, or 6.2%, compared to $2.97 billion at December 31, 2020. The increase in total deposits since December 31, 2019 is primarily due to organic growth, customers depositing funds received from PPP loans and maintaining higher balances, and other government stimulus payments and programs. We anticipate that as customers spend down their PPP loan funds, this will result in a reduction in deposits. As of June 30, 2021, 31.6% of total deposits were comprised of noninterest-bearing demand accounts, 58.0% of interest-bearing non-maturity accounts and 10.4% of time deposits.
The following table shows the deposit mix as of the dates presented:
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
|
(Dollars in thousands)
|
|
Noninterest-bearing deposits
|
|
$
|
998,941
|
|
|
|
31.6
|
%
|
|
$
|
917,322
|
|
|
|
30.9
|
%
|
NOW and other transaction accounts
|
|
|
361,616
|
|
|
|
11.4
|
|
|
|
332,829
|
|
|
|
11.2
|
|
Money market and other savings
|
|
|
1,470,525
|
|
|
|
46.6
|
|
|
|
1,398,699
|
|
|
|
47.0
|
|
Time deposits
|
|
|
327,413
|
|
|
|
10.4
|
|
|
|
325,501
|
|
|
|
10.9
|
|
Total deposits
|
|
$
|
3,158,495
|
|
|
|
100.0
|
%
|
|
$
|
2,974,351
|
|
|
|
100.0
|
%
|
The following table sets forth the remaining maturity of time deposits of $100 thousand and greater as of the date indicated:
(Dollars in thousands)
|
|
June 30,
2021
|
|
Time deposits $100,000 or greater with remaining maturity of:
|
|
|
|
Three months or less
|
|
$
|
31,933
|
|
After three months through six months
|
|
|
36,575
|
|
After six months through twelve months
|
|
|
66,658
|
|
After twelve months
|
|
|
113,217
|
|
Total
|
|
$
|
248,383
|
|
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 June 30, 2021 and December 31, 2020, we had total remaining borrowing capacity from the FHLB of $584.2 million and $512.5 million, respectively.
The following table sets forth our FHLB borrowings as of and for the periods indicated:
|
|
As of/For the
Three Months Ended
June 30,
|
|
|
As of/For the
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(Dollars in thousands)
|
|
Amount outstanding at end of the period
|
|
$
|
—
|
|
|
$
|
170,000
|
|
|
$
|
—
|
|
|
$
|
170,000
|
|
Weighted average interest rate at end of the period
|
|
|
0.00
|
%
|
|
|
0.29
|
%
|
|
|
0.00
|
%
|
|
|
0.29
|
%
|
Maximum month-end balance during the period
|
|
$
|
—
|
|
|
$
|
170,000
|
|
|
$
|
75,000
|
|
|
$
|
170,000
|
|
Average balance outstanding during the period
|
|
$
|
4,121
|
|
|
$
|
158,462
|
|
|
$
|
39,283
|
|
|
$
|
126,731
|
|
Weighted average interest rate during the period
|
|
|
0.29
|
%
|
|
|
0.24
|
%
|
|
|
0.20
|
%
|
|
|
0.71
|
%
|
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 $609.0 million and $700.8 million at June 30, 2021 and December 31, 2020, respectively.
The following table sets forth our FRB borrowings as of and for the periods indicated:
|
|
As of/For the
Three Months Ended
June 30,
|
|
|
As of/For the
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(Dollars in thousands)
|
|
Amount outstanding at end of the period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Weighted average interest rate at end of the period
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Maximum month-end balance during the period
|
|
$
|
—
|
|
|
$
|
30,000
|
|
|
$
|
—
|
|
|
$
|
30,000
|
|
Average balance outstanding during the period
|
|
$
|
—
|
|
|
$
|
2,637
|
|
|
$
|
—
|
|
|
$
|
2,115
|
|
Weighted average interest rate during the period
|
|
|
0.00
|
%
|
|
|
0.31
|
%
|
|
|
0.00
|
%
|
|
|
0.29
|
%
|
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 $796.0 million and $799.3 million as of June 30, 2021 and December 31, 2020, respectively. The lines were not used during the three or six month periods ended June 30, 2021 or the three or six month periods ending June 30, 2020.
Subordinated Debt Securities. In December 2018, the Company issued $26.5 million in subordinated debt securities. Securities totaling $12.4 million have a maturity date of December 2028 and an average fixed rate of 5.74% for the first five years. The remaining $14.1 million of securities have a maturity date of December 2030 and an average fixed rate of 6.41% for the first seven years. After the fixed rate periods, all securities will float at the Wall Street Journal prime rate, with a floor of 4.5% and a ceiling of 7.5%. These securities pay interest quarterly, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally, these securities qualify for tier 2 capital treatment, subject to regulatory limitations.
On September 29, 2020, the Company issued $50.0 million in subordinated debt securities. Proceeds were reduced by approximately $926 thousand in debt issuance costs. The securities 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 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 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 securities qualify for Tier 2 capital treatment, subject to regulatory limitations.
The balance of subordinated debt securities as of June 30, 2021 and December 31, 2020 was $75.7 million and $75.6 million, respectively.
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 June 30, 2021 and December 31, 2020. The Company has the right, as has been exercised in the past, to defer payments of interest on the securities for up to twenty consecutive quarters. During such time, corporate dividends may not be paid. The Company is current in its interest payments on the debentures.
The chart below indicates certain information about each of the statutory trusts and the junior subordinated deferrable interest debentures, including the date the junior subordinated deferrable interest debentures were issued, outstanding amounts of trust preferred securities and junior subordinated deferrable interest debentures, the maturity date of the junior subordinated deferrable interest debentures, the interest rates on the junior subordinated deferrable interest debentures and the investment banker.
Name of Trust
|
Issue Date
|
|
Amount of
Trust Preferred
Securities
|
|
|
Amount of
Debentures
|
|
|
Stated
Maturity Date of
Trust Preferred
Securities and
Debentures(1)
|
|
Interest Rate of
Trust Preferred
Securities and
Debentures(2)(3)
|
|
(Dollars in thousands)
|
South Plains Financial Capital Trust III
|
2004
|
|
$
|
10,000
|
|
|
$
|
10,310
|
|
|
|
2034
|
|
3-mo. LIBOR + 265 bps; 2.82%
|
South Plains Financial Capital Trust IV
|
2005
|
|
|
20,000
|
|
|
|
20,619
|
|
|
|
2035
|
|
3-mo. LIBOR + 139 bps; 1.51%
|
South Plains Financial Capital Trust V
|
2007
|
|
|
15,000
|
|
|
|
15,464
|
|
|
|
2037
|
|
3-mo. LIBOR + 150 bps; 1.62%
|
Total
|
|
|
$
|
45,000
|
|
|
$
|
46,393
|
|
|
|
|
|
|
(1)
|
May be redeemed at the Company’s option.
|
(2)
|
Interest payable quarterly with principal due at maturity.
|
(3)
|
Rate as of last reset date, prior to June 30, 2021.
|
Liquidity and Capital Resources
Liquidity
Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.
Interest rate sensitivity involves the relationships between rate-sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on the Company’s net interest income. Interest rate-sensitive assets and liabilities are those with yields or rates that are subject to change within a future time period due to maturity or changes in market rates. The model is used to project future net interest income under a set of possible interest rate movements. The Company’s Investment/Asset Liability Committee (the “ALCO Committee”), reviews this information to determine if the projected future net interest income levels would be acceptable. The Company attempts to stay within acceptable net interest income levels.
Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and the FRB discount window. At June 30, 2021, the Bank had the capacity to borrow additional funds from the FHLB of up to approximately $584.2 million and the capacity to borrow from the FRB discount window of approximately $609.0 million. The FRB has also lowered the primary credit rate to 0.25% and extended the term to 90 days to enhance liquidity and encourage use of the FRB discount window. In addition, the Company maintains overnight fed fund purchase arrangements with correspondent banks.
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. Management believes that these sources of liquidity will provide adequate funding and liquidity to address the economic uncertainties caused by the ongoing COVID-19 pandemic. However, during this period management is closely monitoring the Company’s potential liquidity needs, and if general economic conditions, the COVID-19 pandemic, or other events cause these sources of liquidity to become restricted or are eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or operating restrictions in order to raise the necessary funds to support the Company’s operations and growth.
Capital Requirements
Total shareholders’ equity increased to $392.8 million as of June 30, 2021, compared to $370.0 million as of December 31, 2020, an increase of $22.8 million, or 6.2%. The increase from December 31, 2020 was primarily the result of $28.8 million in net earnings for the six months ended June 30, 2021, partially offset by a change in accumulated other comprehensive income of $2.9 million, net of tax and $2.2 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. In July 2013, the Board of Governors of the Federal Reserve System published final rules for the adoption of the Basel III regulatory capital framework (“Basel III”). Under the Basel III capital adequacy guidelines and the regulatory framework for “prompt corrective action,” we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and ratio of common equity tier 1 (“CET1”) capital, tier 1 capital and total capital to risk-weighted assets and of tier 1 capital to average consolidated assets, referred to as the “leverage ratio.”
The risk-based capital ratios measure the adequacy of a bank’s capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for “prompt corrective action” or other regulatory enforcement action. In assessing a bank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level of earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management’s overall ability to monitor and control risks.
At June 30, 2021, both the Company and the Bank met all the capital adequacy requirements to which the Company and the Bank were subject. At June 30, 2021, the Bank was “well capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since June 30, 2021 that would materially adversely change such capital classifications. From time to time, we may need to raise additional capital to support the Company’s and the Bank’s further growth and to maintain our “well capitalized” status.
The following table presents the Company’s and the Bank’s regulatory capital ratios as of the dates indicated.
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
South Plains Financial, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
$
|
502,095
|
|
|
|
18.95
|
%
|
|
$
|
473,425
|
|
|
|
19.08
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
393,164
|
|
|
|
14.84
|
|
|
|
366,639
|
|
|
|
14.78
|
|
CET1 capital (to risk-weighted assets)
|
|
|
348,164
|
|
|
|
13.14
|
|
|
|
321,639
|
|
|
|
12.96
|
|
Tier 1 capital (to average assets)
|
|
|
393,164
|
|
|
|
10.54
|
|
|
|
366,639
|
|
|
|
10.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
City Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
$
|
413,791
|
|
|
|
15.59
|
%
|
|
$
|
404,138
|
|
|
|
16.29
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
380,498
|
|
|
|
14.34
|
|
|
|
372,947
|
|
|
|
15.03
|
|
CET1 capital (to risk-weighted assets)
|
|
|
380,498
|
|
|
|
14.34
|
|
|
|
372,947
|
|
|
|
15.03
|
|
Tier 1 capital (to average assets)
|
|
|
380,498
|
|
|
|
10.20
|
|
|
|
372,947
|
|
|
|
10.42
|
|
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. However, Section 4012 of the CARES Act required that the CBLR be temporarily lowered to 8%. The federal regulators issued a rule implementing the lower CBLR effective April 23, 2020. The rule also established a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% CBLR requirement so long as the bank maintains a leverage ratio of 7% or greater. Another rule was issued to transition back to the 9% CBLR by increasing the ratio to 8.5% for calendar year 2021 and 9% thereafter. 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 2021. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds”, of this Form 10-Q for further information.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit to our customers is represented by the contractual or notional amount of those instruments. Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. The amount and nature of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the potential borrower.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private short-term borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary.
The following table summarizes commitments we have made as of the dates presented.
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
|
(Dollars in thousands)
|
|
Commitments to grant loans and unfunded commitments under lines of credit
|
|
$
|
585,233
|
|
|
$
|
417,798
|
|
Standby letters of credit
|
|
|
9,432
|
|
|
|
10,481
|
|
Total
|
|
$
|
594,665
|
|
|
$
|
428,279
|
|
We use our line of credit with the FHLB to take out letters of credit. These letters of credit pledged as collateral for certain public fund deposits. These letters of credit are off-balance sheet liabilities and would only be funded in the event of a default by the Company. See “Borrowed Funds - FHLB Advances” herein for a discussion for amounts of letters of credit.
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our interest rate risk policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Our exposure to interest rate risk is managed by the ALCO Committee, in accordance with policies approved by the Bank’s board of directors. The ALCO Committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO Committee considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The ALCO Committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO Committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model.
We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model. The average lives of non-maturity deposit accounts are based on decay assumptions and are incorporated into the model. All of the assumptions used in our analyses are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
On a quarterly basis, we run a simulation model for a static balance sheet and other scenarios. These models test the impact on net interest income from changes in market interest rates under various scenarios. Under the static model, rates are shocked instantaneously and ramped rates change over a 12-month and 24-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Our internal policy regarding internal rate risk simulations currently specifies that for gradual parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 7.5% for a 100 basis point shift, 15% for a 200 basis point shift, and 22.5% for a 300 basis point shift.
The following tables summarize the simulated change in net interest income over a 12-month horizon as of the dates indicated:
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Change in Interest Rates (Basis Points)
|
|
Percent Change in
Net Interest Income
|
|
|
Percent Change in
Net Interest Income
|
|
+300
|
|
|
7.11
|
%
|
|
|
5.33
|
%
|
+200
|
|
|
4.75
|
%
|
|
|
2.90
|
%
|
+100
|
|
|
2.10
|
%
|
|
|
1.06
|
%
|
-100
|
|
|
(1.13
|
)%
|
|
|
(1.24
|
)%
|
Impact of Inflation
Our consolidated financial statements and related notes included elsewhere in this Form 10-Q have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.
Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.
The Jumpstart Our Business Startups Act (the “JOBS Act”) permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this Form 10-Q, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.
The following is a discussion of the critical accounting policies and significant estimates that we believe require us to make the most complex or subjective decisions or assessments. Additional information about these policies can be found in Note 1 of the Company’s consolidated financial statements as of June 30, 2021.
Basis of Presentation and Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents. The Company includes all cash on hand, balances due from other banks, and Federal funds sold, all of which have original maturities within three months, as cash and cash equivalents.
Securities. Investment securities may be classified into trading, held-to-maturity, or available-for-sale portfolios. Securities that are held principally for resale in the near term are classified as trading. Securities that management has the ability and positive intent to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities not classified as trading or held-to-maturity are available-for-sale and are reported at fair value with unrealized gains and losses excluded from earnings, but included in the determination of other comprehensive income. Management uses these assets as part of its asset/liability management strategy; they may be sold in response to changes in liquidity needs, interest rates, resultant prepayment risk changes, and other factors. Management determines the appropriate classification of securities at the time of purchase. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses and declines in value judged to be other than temporary are included in gain or loss on sale of securities. The cost of securities sold is based on the specific identification method.
Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the straight-line method, which is not materially different from the effective interest method required by GAAP.
Loans are placed on non-accrual status when, in management’s opinion, collection of interest is unlikely, which typically occurs when principal or interest payments are more than ninety days past due. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Company’s allowance for loan losses consists of specific valuation allowances established for probable losses on specific loans and general valuation allowances calculated based on historical loan loss experience for similar loans with similar characteristics and trends, judgmentally adjusted for general economic conditions and other qualitative risk factors internal and external to the Company.
The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. The Bank’s loans are generally secured by specific items of collateral including real property, crops, livestock, consumer assets, and other business assets.
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on various factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. All loans rated substandard or worse and greater than $250 thousand are specifically reviewed to determine if they are impaired. Factors considered by management in determining whether a loan is impaired include payment status and the sources, amounts, and probabilities of estimated cash flow available to service debt in relation to amounts due according to contractual terms. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Loans that are determined to be impaired are then evaluated to determine estimated impairment, if any. GAAP allows impairment to be measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Loans that are not individually determined to be impaired or are not subject to the specific review of impaired status are subject to the general valuation allowance portion of the allowance for loan loss.
Loans Held for Sale. Loans held for sale are comprised of residential mortgage loans. Loans that are originated for best efforts delivery are carried at the lower of aggregate cost or fair value as determined by aggregate outstanding commitments from investors or current investor yield requirements. All other loans held for sale are carried at fair value. Loans sold are typically subject to certain indemnification provisions with the investor; management does not believe these provisions will have any significant consequences.
Goodwill and Other Intangible Assets. Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events and circumstances exist that indicate that an impairment test should be performed. Intangible assets with definite lives are amortized over their estimated useful lives.
Recently Issued Accounting Pronouncements
See Note 1, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements included elsewhere in this Form 10-Q regarding the impact of new accounting pronouncements which we have adopted.