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CBTX CBTX

June

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM  10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____   to   ____.

Commission File Number: 001-38280

 

CBTX, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Texas

 

20‑8339782

 

 

 

(State or other jurisdiction of

 

(I.R.S. employer

 

 

 

incorporation or organization)

 

identification no.)

9 Greenway Plaza, Suite 110

Houston, Texas 77046

(Address of principal executive offices)

 

(713) 210‑7600

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

CBTX

The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No 

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

Large accelerated filer

 

Accelerated filer 

 

 

 

Non-accelerated filer

 

Smaller reporting company 

 

 

 

 

 

Emerging growth company 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes  No 

 

 

As of April 25, 2020, there were 24,949,027 shares of the registrant’s common stock outstanding, including 202,874 shares of unvested restricted stock.

 

 

 

 

CBTX, INC.

 

 

Page

PART I — FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements – (Unaudited)

1

 

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

1

 

Condensed Consolidated Statements of Income for the Three Months ended March 31, 2020 and 2019

2

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2020 and 2019

3

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months ended March 31, 2020 and 2019

4

 

Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2020 and 2019

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

 

Cautionary Note Regarding Forward-Looking Statements

34

 

Overview

35

 

Information Regarding COVID-19 Impact and Uncertain Economic Outlook

36

 

Results of Operations

37

 

Financial Condition

41

 

Liquidity and Capital Resources

48

 

Interest Rate Sensitivity and Market Risk

50

 

Impact of Inflation

51

 

Non-GAAP Financial Measures

52

 

Critical Accounting Policies

53

 

Recently Issued Accounting Pronouncements

54

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

54

Item 4. 

Controls and Procedures

54

 

 

 

PART II — OTHER INFORMATION 

 

Item 1. 

Legal Proceedings

55

Item 1A. 

Risk Factors

55

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3. 

Defaults Upon Senior Securities

60

Item 4. 

Mine Safety Disclosures

60

Item 5. 

Other Information

60

Item 6. 

Exhibits

61

 

SIGNATURES

62

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except par value and share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

ASSETS

 

 

  

 

 

  

Cash and due from banks

 

$

47,895

 

$

51,259

Interest-bearing deposits at other financial institutions

 

 

237,003

 

 

320,805

Total cash and cash equivalents

 

 

284,898

 

 

372,064

Securities

 

 

234,014

 

 

231,262

Equity investments

 

 

16,807

 

 

16,710

Loans held for sale

 

 

882

 

 

1,463

Loans, net of allowance for credit losses of $31,194 and $25,280 at March 31, 2020 and December 31, 2019, respectively

 

 

2,640,393

 

 

2,613,805

Premises and equipment, net of accumulated depreciation of $33,665 and $32,923 at March 31, 2020 and December 31, 2019, respectively

 

 

50,243

 

 

50,875

Goodwill

 

 

80,950

 

 

80,950

Other intangible assets, net of accumulated amortization of $16,020 and $15,809 at March 31, 2020 and December 31, 2019, respectively

 

 

4,700

 

 

4,938

Bank-owned life insurance

 

 

72,297

 

 

71,881

Operating lease right-to-use asset

 

 

12,577

 

 

12,926

Deferred tax asset, net

 

 

7,026

 

 

7,432

Other assets

 

 

20,863

 

 

14,238

Total assets

 

$

3,425,650

 

$

3,478,544

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

  

 

 

  

Liabilities

 

 

  

 

 

  

Noninterest-bearing deposits

 

$

1,195,541

 

$

1,184,861

Interest-bearing deposits

 

 

1,596,692

 

 

1,667,527

Total deposits

 

 

2,792,233

 

 

2,852,388

Federal Home Loan Bank advances

 

 

50,000

 

 

50,000

Repurchase agreements

 

 

1,415

 

 

485

Operating lease liabilities

 

 

15,356

 

 

15,704

Other liabilities

 

 

29,772

 

 

24,246

Total liabilities

 

 

2,888,776

 

 

2,942,823

Commitments and contingencies (Note 16)

 

 

  

 

 

  

Shareholders’ equity

 

 

  

 

 

  

Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued

 

 

 —

 

 

 —

Common stock, $0.01 par value, 90,000,000 shares authorized, 25,601,835 and 25,837,048 shares issued at March 31, 2020 and December 31, 2019, respectively, 24,746,013 and 24,979,702 shares outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

256

 

 

258

Additional paid-in capital

 

 

341,713

 

 

346,559

Retained earnings

 

 

203,080

 

 

201,080

Treasury stock, at cost, 855,822 and 857,346 shares held at March 31, 2020 and December 31, 2019, respectively

 

 

(14,536)

 

 

(14,562)

Accumulated other comprehensive gain, net of tax of $1,058 and $634 at March 31, 2020 and December 31, 2019, respectively

 

 

6,361

 

 

2,386

Total shareholders’ equity

 

 

536,874

 

 

535,721

Total liabilities and shareholders’ equity

 

$

3,425,650

 

$

3,478,544

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

1

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2020

    

2019

Interest income

 

 

  

 

 

  

Interest and fees on loans

 

$

33,617

 

$

33,793

Securities

 

 

1,363

 

 

1,557

Other interest-earning assets

 

 

1,055

 

 

1,483

Equity investments

 

 

176

 

 

152

Total interest income

 

 

36,211

 

 

36,985

Interest expense

 

 

  

 

 

  

Deposits

 

 

3,766

 

 

3,584

Federal Home Loan Bank advances

 

 

221

 

 

64

Repurchase agreements

 

 

 —

 

 

 1

Note payable and junior subordinated debt

 

 

 4

 

 

 8

Total interest expense

 

 

3,991

 

 

3,657

Net interest income

 

 

32,220

 

 

33,328

Provision for credit losses

 

 

 

 

 

 

Provision for credit losses for loans

 

 

4,739

 

 

1,147

Provision for credit losses for unfunded commitments

 

 

310

 

 

 —

Total provision for credit losses

 

 

5,049

 

 

1,147

Net interest income after provision for credit losses

 

 

27,171

 

 

32,181

Noninterest income

 

 

  

 

 

  

Deposit account service charges

 

 

1,485

 

 

1,629

Card interchange fees

 

 

922

 

 

864

Earnings on bank-owned life insurance

 

 

416

 

 

430

Net gain on sales of assets

 

 

123

 

 

88

Other

 

 

1,381

 

 

482

Total noninterest income

 

 

4,327

 

 

3,493

Noninterest expense

 

 

  

 

 

  

Salaries and employee benefits

 

 

14,223

 

 

13,822

Occupancy expense

 

 

2,424

 

 

2,267

Professional and director fees

 

 

1,152

 

 

2,091

Data processing and software

 

 

1,222

 

 

1,154

Regulatory fees

 

 

103

 

 

464

Advertising, marketing and business development

 

 

364

 

 

440

Telephone and communications

 

 

419

 

 

378

Security and protection expense

 

 

374

 

 

323

Amortization of intangibles

 

 

221

 

 

232

Other expenses

 

 

1,587

 

 

1,414

Total noninterest expense

 

 

22,089

 

 

22,585

Net income before income tax expense

 

 

9,409

 

 

13,089

Income tax expense

 

 

1,868

 

 

2,599

Net income

 

$

7,541

 

$

10,490

Earnings per common share

 

 

  

 

 

  

Basic

 

$

0.30

 

$

0.42

Diluted

 

$

0.30

 

$

0.42

 

See accompanying notes to condensed consolidated financial statements.

 

2

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2020

    

2019

Net income

 

$

7,541

    

$

10,490

 

 

 

 

 

 

 

Change in unrealized gains on securities available for sale arising during the period, net

 

 

5,023

 

 

3,027

Reclassification adjustments for net realized gains included in net income

 

 

10

 

 

 3

Change in related deferred income tax

 

 

(1,058)

 

 

(637)

Other comprehensive income, net of tax

 

 

3,975

 

 

2,393

Total comprehensive income

 

$

11,516

 

$

12,883

 

See accompanying notes to condensed consolidated financial statements.

3

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(Dollars in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Treasury Stock

 

Comprehensive

 

 

 

 

    

Shares

    

Amount

    

Capital

    

Earnings

    

Shares

    

Amount

    

Income (Loss)

    

Total

Balance at December 31, 2018

 

25,777,693

 

$

258

 

$

344,497

 

$

160,626

 

(870,272)

 

$

(14,781)

 

$

(2,975)

 

$

487,625

Net income

 

 —

 

 

 —

 

 

 —

 

 

10,490

 

 —

 

 

 —

 

 

 —

 

 

10,490

Dividends on common stock, $0.10 per share

 

 —

 

 

 —

 

 

 —

 

 

(2,513)

 

 —

 

 

 —

 

 

 —

 

 

(2,513)

Stock-based compensation expense

 

 —

 

 

 —

 

 

545

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

545

Vesting of restricted stock, net of shares withheld for employee tax liabilities

 

211

 

 

 —

 

 

(2)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(2)

Exercise of stock options, net of shares withheld for employee tax liabilities

 

 —

 

 

 —

 

 

(69)

 

 

 —

 

10,844

 

 

184

 

 

 —

 

 

115

Other comprehensive income, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,393

 

 

2,393

Balance at March 31, 2019

 

25,777,904

 

$

258

 

$

344,971

 

$

168,603

 

(859,428)

 

$

(14,597)

 

$

(582)

 

$

498,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

25,837,048

 

 

258

 

 

346,559

 

 

201,080

 

(857,346)

 

 

(14,562)

 

 

2,386

 

 

535,721

Net income

 

 —

 

 

 —

 

 

 —

 

 

7,541

 

 —

 

 

 —

 

 

 —

 

 

7,541

Cumulative effect of accounting changes from adoption of CECL, net of deferred tax asset

 

 —

 

 

 —

 

 

 —

 

 

(3,045)

 

 —

 

 

 —

 

 

 —

 

 

(3,045)

Dividends on common stock, $0.10 per share

 

 —

 

 

 —

 

 

 —

 

 

(2,496)

 

 —

 

 

 —

 

 

 —

 

 

(2,496)

Stock-based compensation expense

 

 —

 

 

 —

 

 

557

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

557

Vesting of restricted stock, net of shares withheld for employee tax liabilities

 

5,232

 

 

 —

 

 

(35)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(35)

Exercise of stock options, net of shares withheld for employee tax liabilities

 

 —

 

 

 —

 

 

(10)

 

 

 —

 

1,524

 

 

26

 

 

 —

 

 

16

Shares repurchased

 

(240,445)

 

 

(2)

 

 

(5,358)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(5,360)

Other comprehensive income, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,975

 

 

3,975

Balance at March 31, 2020

 

25,601,835

 

$

256

 

$

341,713

 

$

203,080

 

(855,822)

 

$

(14,536)

 

$

6,361

 

$

536,874

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

4

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2020

 

2019

Cash flows from operating activities:

 

 

  

 

 

 

Net income

 

$

7,541

 

$

10,490

Adjustments to reconcile consolidated net income to net cash provided by operating activities:

 

 

  

 

 

 

Provision for credit losses

 

 

5,049

 

 

1,147

Depreciation expense

 

 

775

 

 

824

Amortization of intangibles

 

 

221

 

 

232

Amortization of premiums on securities

 

 

368

 

 

256

Amortization of lease right-to-use assets

 

 

349

 

 

329

Accretion of lease liabilities

 

 

133

 

 

131

Earnings on bank-owned life insurance

 

 

(416)

 

 

(430)

Stock-based compensation expense

 

 

557

 

 

545

Deferred income tax provision

 

 

158

 

 

622

Net gain on sales of assets

 

 

(123)

 

 

(88)

Earnings on securities

 

 

(24)

 

 

(9)

Change in operating assets and liabilities:

 

 

  

 

 

 

Loans held for sale

 

 

670

 

 

(820)

Other assets

 

 

(6,625)

 

 

303

Other liabilities

 

 

1,759

 

 

(3,517)

Total adjustments

 

 

2,851

 

 

(475)

Net cash provided by operating activities

 

 

10,392

 

 

10,015

Cash flows from investing activities:

 

 

  

 

 

 

Purchases of securities

 

 

(160,580)

 

 

(153,962)

Proceeds from sales, calls and maturities of securities

 

 

153,005

 

 

153,056

Principal repayments of securities

 

 

9,522

 

 

4,969

Net increase in loans

 

 

(30,168)

 

 

(97,639)

Purchases of loan participations

 

 

(2,500)

 

 

(1,256)

Proceeds from sales of Small Business Administration loans

 

 

508

 

 

818

Net contributions to equity investments

 

 

(97)

 

 

(2,039)

Net purchases sales of premises and equipment

 

 

(143)

 

 

 —

Proceeds from sales of repossessed real estate and other assets

 

 

 —

 

 

20

Proceeds from insurance claims

 

 

 —

 

 

(653)

Net cash used in investing activities

 

 

(30,453)

 

 

(96,686)

Cash flows from financing activities:

 

 

  

 

 

 

Net increase in noninterest-bearing deposits

 

 

10,680

 

 

46,114

Net decrease in interest-bearing deposits

 

 

(70,835)

 

 

(61,397)

Net increase (decrease) in securities sold under agreements to repurchase

 

 

930

 

 

(898)

Redemption of trust preferred securities

 

 

 —

 

 

(1,571)

Dividends paid on common stock

 

 

(2,501)

 

 

(1,245)

Payments to tax authorities for stock-based compensation

 

 

(35)

 

 

(2)

Proceeds from exercise of stock options

 

 

16

 

 

115

Repurchase of common stock

 

 

(5,360)

 

 

 —

Net cash provided by financing activities

 

 

(67,105)

 

 

(18,884)

Net decrease in cash, cash equivalents and restricted cash

 

 

(87,166)

 

 

(105,555)

Cash, cash equivalents and restricted cash, beginning

 

 

372,064

 

 

382,070

Cash, cash equivalents and restricted cash, ending

 

$

284,898

 

$

276,515

 

See accompanying notes to condensed consolidated financial statements.

 

5

CBTX, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

CBTX, Inc., or the Company, or CBTX, operates 35 branches, 19 in the Houston market area, 15 in the Beaumont/East Texas market area and one in Dallas, through its wholly-owned subsidiary, CommunityBank of Texas, N.A., or the Bank. The Bank provides relationship-driven commercial banking products and services primarily to small and mid-sized businesses and professionals with operations within the Bank’s markets. The Bank operates under a national charter and therefore is subject to regulation by the Office of the Comptroller of the Currency, or OCC, and the Federal Deposit Insurance Corporation, or FDIC. The Company is subject to regulation by the Board of Governors of the Federal Reserve, or the Federal Reserve.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP, but do not include all the information and footnotes required for complete consolidated financial statements. In management’s opinion, these interim unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of the Company’s consolidated financial position at March 31, 2020 and December 31, 2019, consolidated results of operations and consolidated shareholders’ equity for the three months ended March 31, 2020 and 2019, and consolidated cash flows for the three months ended March 31, 2020 and 2019.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results for the interim periods shown in this report are not necessarily indicative of results to be expected for the full year due in part to global economic and financial market conditions, interest rates, access to sources of liquidity, market competition and interruptions of business processes. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included within the Company’s Annual Report on Form 10-K.

Reclassification—Within noninterest expense for 2019, data processing and software have been combined together. In addition, printing, stationary and office, correspondent bank and customer related transaction fees, loan processing costs and repossessed real estate and other asset expenses have been combined with other expenses. These reclassifications were made to conform to the 2020 financial statement presentation in the condensed consolidated statements of income.

Share Repurchase Program

During the three months ended March 31, 2020, 240,445 shares were repurchased under the Company’s share repurchase program at an average price of $22.29 per share and retired and returned to the status of authorized but unissued shares. There were no shares repurchased during the three months ended March 31, 2019.

 

6

Accounting Standards Recently Adopted

The Company adopted Accounting Standards Update, or ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments effective January 1, 2020. The scope of ASU 2016-13 includes loans, debt securities classified as held to maturity, other receivables, off-balance sheet credit exposures and any other financial assets not excluded from the scope that have the contractual right to receive cash. In addition, ASU 2016-13 amends the accounting and reporting for credit losses on available for sale securities.

ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. As part of the implementation of ASU 2016-13, the Company changed its methodology of determining the allowance for credit losses, or ACL, for loans and for determining an ACL associated with the Company’s off-balance sheet credit exposures, which are primarily unfunded commitments to borrowers. Through a one-time cumulative effect reduction of retained earnings of $3.0 million, the adoption of ASU 2016-13 increased the ACL for loans by $874,000, increased the liability related to the ACL for unfunded commitments by $2.9 million, with the associated deferred tax assets increasing by $809,000.

 

The adoption of ASU 2016-13 did not have any impact on held-to-maturity securities as the Company did not hold any as of January 1, 2020. Additionally, the Company assessed the impact of ASU 2016-13 on its available for sale securities utilizing various qualitative factors and determined there were no credit losses within the portfolio requiring an allowance upon adoption. The Company did not have any purchased financial assets with credit deterioration as of January 1, 2020. See Note 6—Allowance for Credit Losses for further discussion related to ASC 2016-13 and related disclosures.

 

Accounting Standards Not Yet Adopted

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to be discontinued, if certain criteria are met. LIBOR is used as an index rate for the Company’s interest-rate swaps and approximately 12.9% of the Company’s loans as of March 31, 2020.

If reference rates are discontinued, the existing contracts will be modified to replace the discontinued rate with a replacement rate. For accounting purposes, such contract modifications would have to be evaluated to determine whether the modified contract is a new contract or a continuation of an existing contract. If they are considered new contracts, the previous contract would be extinguished. Under one of the optional expedients of ASU 2020-04, modifications of contracts within the scope of Topic 310, Receivables, and 470, Debt, will be accounted for by prospectively adjusting the effective interest rates and no such evaluation is required. When elected, the optional expedient for contract modifications must be applied consistently for all eligible contracts or eligible transactions. The expedients and exceptions in this update are available to all entities starting March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the impact of this pronouncement on those financial assets where LIBOR is used as an index rate.

Cash Flow Reporting

The Bank is required to maintain regulatory reserves with the Federal Reserve Bank and the reserve requirements for the Bank were $17.2 million and $18.6 million at March 31, 2020 and December 31, 2019, respectively. Additionally, as of March 31, 2020 and December 31, 2019, the Company had $9.3 million and $3.1 million, respectively, in cash collateral for interest rate swap transactions. The reserves maintained with the Federal Reserve Bank and the cash collateral used in interest rate swap transactions are considered restricted cash.

7

Supplemental disclosures of cash flow information are as follows for the periods indicated below:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(Dollars in thousands)

    

2020

 

2019

Supplemental disclosures of cash flow information:

 

 

  

 

 

 

Cash paid for taxes

 

$

 —

 

$

 —

Cash paid for interest

 

 

3,944

 

 

3,599

Supplemental disclosures of non-cash flow information:

 

 

 

 

 

 

Operating lease right-to-use asset obtained in exchange for lease liabilities

 

 

 —

 

 

13,208

Dividends accrued

 

 

 5

 

 

1,268

Repossessed real estate and other assets

 

 

 —

 

 

41

 

 

NOTE 2: SECURITIES

The amortized cost and fair values of investments in securities, including the gross unrealized gains and losses reported net of tax in other comprehensive income, as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

(Dollars in thousands)

    

Cost

    

Gains

    

Losses

    

Fair Value

March 31, 2020

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

State and municipal securities

 

$

48,988

 

$

1,898

 

$

 —

 

$

50,886

U.S. agency securities:

 

 

 

 

 

 

 

 

 

 

 

  

Collateralized mortgage obligations

 

 

51,433

 

 

1,632

 

 

 —

 

 

53,065

Mortgage-backed securities

 

 

124,370

 

 

4,522

 

 

 —

 

 

128,892

Equity securities

 

 

1,161

 

 

10

 

 

 —

 

 

1,171

Total

 

$

225,952

 

$

8,062

 

$

 —

 

$

234,014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

(Dollars in thousands)

    

Cost

    

Gains

    

Losses

    

Fair Value

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

State and municipal securities

 

$

51,525

 

$

1,761

 

$

(7)

 

$

53,279

U.S. agency securities:

 

 

  

 

 

  

 

 

  

 

 

  

Collateralized mortgage obligations

 

 

55,784

 

 

324

 

 

(119)

 

 

55,989

Mortgage-backed securities

 

 

119,787

 

 

1,315

 

 

(255)

 

 

120,847

Equity securities

 

 

1,155

 

 

 —

 

 

(8)

 

 

1,147

Total

 

$

228,251

 

$

3,400

 

$

(389)

 

$

231,262

 

8

The amortized cost and estimated fair value of securities, by contractual maturities, as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

Amortized

 

Fair

(Dollars in thousands)

    

Cost

    

Value

March 31, 2020

 

 

  

 

 

  

Amounts maturing in:

 

 

  

 

 

  

1 year or less

 

$

1,759

 

$

1,776

1 year through 5 years

 

 

3,050

 

 

3,131

5 years through 10 years

 

 

15,042

 

 

15,536

After 10 years

 

 

206,101

 

 

213,571

 

 

$

225,952

 

$

234,014

December 31, 2019

 

 

  

 

 

  

Amounts maturing in:

 

 

  

 

 

  

1 year or less

 

$

2,535

 

$

2,532

1 year through 5 years

 

 

3,081

 

 

3,145

5 years through 10 years

 

 

14,564

 

 

14,874

After 10 years

 

 

208,071

 

 

210,711

 

 

$

228,251

 

$

231,262

 

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities with a carrying amount of $358,000 were sold in the three months ended March 31, 2019. No securities were sold in the three months ended March 31, 2020. At March 31, 2020 and December 31, 2019, securities with a carrying amount of $51.5 million and $50.8 million, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.

The Company held 3 securities at March 31, 2020 and 27 securities at December 31, 2019, respectively, that were in a gross unrealized loss position. Total gross unrealized losses at March 31, 2020 was below $1,000.  The unrealized losses are attributable primarily to changes in market interest rates relative to those available when the securities were acquired. There are multiple qualitative factors considered by the Company in its assessment to determine if an ACL was necessary for those securities where the amortized cost basis exceeds the fair value. These factors include, among other things, (i) the extent to which the fair value was less than the amortized cost basis of the security and the length of time; (ii) the structure of the payments and likelihood that the issuer has the ability to make future payments; (iii) adverse conditions related to the security, industry or geographic area; (iv) changes in any credit ratings or financial conditions of the issuer; (v) failure by the issuer to make previous payments; and (vi) past events related to the security, current economic conditions and reasonable and supportable forecasts. Management did not believe that any of the securities the Company held were impaired due to reasons of credit quality and believed the unrealized losses detailed in the tables below were temporary. No ACL for available for sale securities has been recorded in the Company’s condensed consolidated balance sheets at March 31, 2020 and upon adoption of ASU 2016-03.

Amortized costs, as defined by GAAP, includes acquisition costs, applicable accrued interest and accretion or amortization of premiums and discounts. The Company made a policy election to exclude accrued interest from amortized costs in the determination of ACL. The Company continues its policy of reversing previously accrued interest when it has been deemed uncollectible.

Accrued interest receivable for securities was $674,000 and $1.1 million at March 31, 2020 and December 31, 2019, respectively, and is included in other assets in the condensed consolidated balance sheets.

9

Securities with unrealized losses as of the dates shown below, aggregated by category and the length of time were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than Twelve Months

 

Twelve Months or More

 

 

 

 

Gross

 

 

 

Gross

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

(Dollars in thousands)

    

Value

    

Losses

    

Value

    

Losses

March 31, 2020

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

State and municipal securities

 

$

489

 

$

 —

 

$

 —

 

$

 —

U.S. agency securities:

 

 

  

 

 

  

 

 

  

 

 

  

Collateralized mortgage obligations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Mortgage-backed securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Equity securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

$

489

 

$

 —

 

$

 —

 

$

 —

December 31, 2019

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

State and municipal securities

 

$

3,539

 

$

(7)

 

$

106

 

$

 —

U.S. agency securities:

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities

 

 

 —

 

 

 —

 

 

 

 

 

 —

Collateralized mortgage obligations

 

 

10,687

 

 

(46)

 

 

7,994

 

 

(73)

Mortgage-backed securities

 

 

11,628

 

 

(26)

 

 

21,745

 

 

(229)

Equity securities

 

 

 —

 

 

 —

 

 

1,147

 

 

(8)

 

 

$

25,854

 

$

(79)

 

$

30,992

 

$

(310)

 

 

NOTE 3: EQUITY INVESTMENTS

The Company’s unconsolidated investments that are considered equity securities as they represent ownership interests, such as common or preferred stock, were as follows for the dates indicated below:    

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

March 31, 2020

 

December 31, 2019

Federal Reserve stock

 

$

9,271

 

$

9,271

Federal Home Loan Bank stock

 

 

4,286

 

 

4,249

The Independent Bankers Financial Corporation stock

 

 

141

 

 

141

Community Reinvestment Act investments

 

 

3,109

 

 

3,049

 

 

$

16,807

 

$

16,710

 

Banks that are members of the Federal Home Loan Bank are required to maintain a stock investment in the Federal Home Loan Bank calculated as a percentage of aggregate outstanding mortgages, outstanding Federal Home Loan Bank advances and other financial instruments. As a member of the Federal Reserve, the Bank is required to annually subscribe to Federal Reserve stock in specific ratios to the Bank’s equity. Although Federal Home Loan Bank and Federal Reserve stock are considered equity securities, they do not have readily determinable fair values because ownership is restricted, and they lack a readily-available market. These investments can be sold back only at their par value of $100 per share and can only be sold to the Federal Home Loan Banks or the Federal Reserve banks or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company because of the oversight role exercised by regulators in the process of budgeting and approving dividends. As a result, these investments are carried at cost and evaluated for impairment.

The Company also holds an investment in the stock of The Independent Bankers Financial Corporation, which has limited marketability. As a result, this investment is carried at cost and evaluated for impairment.

The Company has investments in investment funds and limited partnerships that are qualified Community Reinvestment Act, or CRA, and investments under the Small Business Investment Company program of the Small

10

Business Administration, or SBA. There are limited to no observable price changes in orderly transactions for identical investments or similar investments from the same issuers that are actively traded and, as a result, these investments are stated at cost. At March 31, 2020 and December 31, 2019, the Company had $4.8 million and $4.9 million, respectively, in outstanding unfunded commitments to these funds, which are subject to call.

The Company’s equity investments are evaluated for impairment based on an assessment of qualitative indicators. Impairment indicators to be considered include, but are not limited to (i) a significant deterioration in the earnings, performance, credit rating, asset quality or business prospects of the investee, (ii) a significant adverse change in the regulatory, economic or technological environment of the investee, (iii) a significant adverse change in the general market conditions of either the geographical area or the industry in which the investee operates, and (iv) a bona fide offer to purchase, an offer by the investee to sell, or completed auction process for the same or similar investment for an amount less than the carrying amount of the investment. There were no such qualitative indicators as of March 31, 2020.

NOTE 4: LOANS

Loans by loan class, or major loan category, as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

(Dollars in thousands)

    

March 31, 2020

 

December 31, 2019

Commercial and industrial

 

$

542,650

 

20.3%

 

$

527,607

 

19.9%

Real estate:

 

 

  

 

 

 

 

  

 

 

Commercial real estate

 

 

904,395

 

33.8%

 

 

900,746

 

34.0%

Construction and development

 

 

558,343

 

20.8%

 

 

527,812

 

19.9%

1-4 family residential

 

 

276,142

 

10.3%

 

 

280,192

 

10.6%

Multi-family residential

 

 

267,152

 

10.0%

 

 

277,209

 

10.5%

Consumer

 

 

38,133

 

1.4%

 

 

36,782

 

1.4%

Agriculture

 

 

7,520

 

0.3%

 

 

9,812

 

0.4%

Other

 

 

84,076

 

3.1%

 

 

86,513

 

3.3%

Total gross loans

 

 

2,678,411

 

100.0%

 

 

2,646,673

 

100.0%

Less allowance for credit losses for loans

 

 

(31,194)

 

  

 

 

(25,280)

 

  

Less deferred loan fees and unearned discounts

 

 

(5,942)

 

  

 

 

(6,125)

 

  

Less loans held for sale

 

 

(882)

 

  

 

 

(1,463)

 

  

Loans, net

 

$

2,640,393

 

  

 

$

2,613,805

 

  

 

Accrued interest receivable for loans was  $7.8 million and $7.5 million at March 31, 2020 and December 31, 2019, respectively, and is included in other assets in the condensed consolidated balance sheets.

From time to time, the Company will acquire and dispose of interests in loans under participation agreements with other financial institutions. Loan participations purchased and sold during the three months ending March 31, 2020 and 2019, by loan class, were as follows:

 

 

 

 

 

 

 

 

 

Participations

 

Participations

 

 

Purchased

 

Sold

 

 

During the

 

During the

(Dollars in thousands)

    

Period

    

Period

March 31, 2020

 

 

  

 

 

  

Commercial real estate

 

$

2,500

 

$

 —

 

 

 

 

 

 

 

March 31, 2019

 

 

  

 

 

  

Commercial real estate

 

$

1,256

 

$

 —

 

The Company participates in the SBA loan program. When advantageous, the Company will sell the guaranteed portions of these loans with servicing retained. SBA loans that were sold with servicing retained during the three months ended March 31, 2020 and 2019, totaled $508,000  and $818,000, respectively.

 

 

11

NOTE 5: LOAN PERFORMANCE 

Nonaccrual loans, segregated by loan class, as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

March 31, 2020

    

December 31, 2019

Commercial and industrial

 

$

449

 

$

596

Real estate:

 

 

  

 

 

  

Commercial real estate

 

 

67

 

 

67

Construction and development

 

 

519

 

 

 —

1-4 family residential

 

 

413

 

 

314

Total nonaccrual loans

 

$

1,448

 

$

977

 

 

 

 

 

 

 

 

Interest income that would have been earned under the original terms of the nonaccrual loans was $33,000 and $48,000 for the three months ended March 31, 2020 and 2019, respectively.

The following is an aging analysis of the Company’s past due loans, segregated by loan class, as of the dates shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days or

 

 

 

 

 

 

 

 

 

 

 90 days

 

 

30 to 59 days

 

60 to 89 days

 

greater

 

Total past

 

Total current

 

 

 

 

past due and

(Dollars in thousands)

    

past due

    

past due

    

past due

    

due

    

loans

    

Total loans

    

still accruing

March 31, 2020

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Commercial and industrial

 

$

1,549

 

$

 7

 

$

 —

 

$

1,556

 

$

541,094

 

$

542,650

 

$

 —

Real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Commercial real estate

 

 

1,532

 

 

 —

 

 

 —

 

 

1,532

 

 

902,863

 

 

904,395

 

 

 —

Construction and development

 

 

2,973

 

 

 —

 

 

 —

 

 

2,973

 

 

555,370

 

 

558,343

 

 

 —

1-4 family residential

 

 

133

 

 

 —

 

 

32

 

 

165

 

 

275,977

 

 

276,142

 

 

 —

Multi-family residential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

267,152

 

 

267,152

 

 

 —

Consumer

 

 

15

 

 

 —

 

 

 —

 

 

15

 

 

38,118

 

 

38,133

 

 

 —

Agriculture

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,520

 

 

7,520

 

 

 —

Other

 

 

 —

 

 

 —

 

 

 

 

 

 —

 

 

84,076

 

 

84,076

 

 

 

Total loans

 

$

6,202

 

$

 7

 

$

32

 

$

6,241

 

$

2,672,170

 

$

2,678,411

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Commercial and industrial

 

$

664

 

$

31

 

$

240

 

$

935

 

$

526,672

 

$

527,607

 

$

 —

Real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Commercial real estate

 

 

865

 

 

 —

 

 

 

 

 

865

 

 

899,881

 

 

900,746

 

 

 —

Construction and development

 

 

 —

 

 

532

 

 

 —

 

 

532

 

 

527,280

 

 

527,812

 

 

 —

1-4 family residential

 

 

499

 

 

 —

 

 

 

 

 

499

 

 

279,693

 

 

280,192

 

 

 —

Multi-family residential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

277,209

 

 

277,209

 

 

 —

Consumer

 

 

43

 

 

 —

 

 

 —

 

 

43

 

 

36,739

 

 

36,782

 

 

 —

Agriculture

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,812

 

 

9,812

 

 

 —

Other

 

 

 —

 

 

 —

 

 

 

 

 

 —

 

 

86,513

 

 

86,513

 

 

 —

Total loans

 

$

2,071

 

$

563

 

$

240

 

$

2,874

 

$

2,643,799

 

$

2,646,673

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

There were no loans restructured due to borrower’s financial difficulties during the three months ended March 31, 2019. Loans restructured due to the borrower’s financial difficulties during the three months ending March 31, 2020, which remained outstanding as of the end of that period were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Post-modification recorded investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extended Maturity,

 

 

 

 

Pre-modification

 

 

 

 

 

 

 

Extended

 

Restructured

 

 

 

 

Outstanding

 

 

 

 

 

 

 

Maturity and

 

Payments

 

 

Number

 

Recorded

 

Restructured

 

Extended

 

Restructured

 

and Adjusted

(Dollars in thousands)

    

of Loans

    

Investment

    

Payments

    

Maturity

    

Payments

    

Interest Rate

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 3

 

$

657

 

$

426

 

$

 —

 

$

231

 

$

 —

Commercial real estate

 

 3

 

 

4,813

 

 

4,813

 

 

 —

 

 

 —

 

 

 —

Total

 

 6

 

$

5,470

 

$

5,239

 

$

 —

 

$

231

 

$

 —

 

The recorded investment in troubled debt restructurings was $15.9 million and $8.8 million as of March 31, 2020 and December 31, 2019, respectively. At March 31, 2020 and December 31, 2019, $1.0 million and $393,000 of restructured loans were nonaccrual loans and $14.9 million and $8.4 million of restructured loans were accruing interest as of those periods, respectively. At December 31, 2019, the Company had an outstanding commitment to fund $2.0 million on a line of credit previously restructured. The Company had no such commitment at March 31, 2020.

 

There were no loans modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default. For purposes of this disclosure, a default is a loan modified as a troubled debt restructuring where the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.

Loan modifications related to a loan refinancing or restructuring other than a troubled debt restructuring are accounted for as a new loan if the terms provided to the borrower are at least as favorable to the Company as terms for comparable loans to other borrowers with similar collection risks that is not a loan refinancing or restructuring. If the loan refinancing or restructuring does not meet this condition or if only minor modifications are made to the original loan contract, it is not considered a new loan and is considered a renewal or modification of the original contract.

 

In support of customers impacted by the corona-virus, or COVID-19, the Company began providing short-term loan modifications by offering relief through payment deferrals during the first quarter of 2020. The Company has deferred payments, including principal and interest, totaling $936,000 as of March 31, 2020. The majority of the deferral arrangements provide for one-month to six-month deferral periods. Under regulatory guidance, there short-term deferrals are not assessed as troubled debt restructurings.

 

NOTE 6: ALLOWANCE FOR CREDIT LOSSES

Effective on January 1, 2020 upon adoption of Topic 326, the Company’s ACL for the loan portfolio has two main components: a reserve for expected losses determined from the historical loss rates, adjusted for qualitative factors, and forecasted expected losses on the segments associated with the individual loan classes with similar risk characteristics, or general reserve, and a separate allowance representing the reserves assigned to individually evaluated loans that do not share similar risk characteristics with other loans, or specific reserve. The Company defines the loan class to be the grouping of the loan receivable based on risk characteristics and the method for monitoring and assessing credit risk, which is represented by the loan type or major category of loans. 

 

For specific reserves, loans identified as not sharing similar risk characteristics with other assets are individually evaluated for the net amount expected to be collected and reserves are determined for them outside of general reserve computation. For determination of credit losses on loans individually evaluated, the Company utilizes various methods such as discounted cash flow analysis, appraisal valuation on collateral, among others, to determine any impairment of the loan and need for additional allowance for expected losses. 

 

For the general reserve computation, the Company selected an aged-based vintage model, or the Vintage model, based on the model’s ability to predict credit risks associated with the loan portfolio and capture the expected life of loan losses associated with each segment of loans. The Company primarily manages credit quality and determines credit risk of its loans based on the risk grade assigned to each individual loan within the loan class. See risk grade discussion later

13

in this footnote. The factors considered include the age of the loan, interest rate, loan size, payment structure, term, risk ratings, loan to value, collateral type, geographical pattern, and industrial sector. The breakdown of the loan classes into portfolio segments was a judgement election based upon identified risk criteria. The Company has limited specific historical loss experience to directly tie to an attribute and thus the use of one factor over another is based on management’s perceived risk of the identified factor in combination with the data analyzed.

 

After consideration of the factors previously discussed, the Company determined segmenting the portfolio into 16 segments, plus overdrafts, based on the identified risk characteristics present within each segment. These risk characteristics are determined based on call code, collateral types, and loan terms. The Company believes that this segmentation best represents the portfolio segments at a level to develop the systematic methodology in the determination of the ACL. Certain loans were aggregated and disaggregated to align with the concentrations of risk and expected loss exposures associated with those loans. Oil and gas loans were carved out of commercial and industrial loans and oil and gas real estate loans were carved out of commercial real estate loans due to the inherent risk related to the oil and gas industry, the volatile nature of the price of oil and its potential impact on the local economy of the Company’s primary geographical area. Commercial and industrial loans were divided into two pools based on terms greater than one year and less than or equal to one year. Commercial and industrial loans with terms less than or equal to one year are typically revolving credits and have different risk characteristics based on the short-term nature of the loan than commercial and industrial loans with terms longer than one year. Commercial real estate loans are split out further into owner occupied and non-owner occupied based on their different risk profiles. Community development loans were split-out as a separate component of construction and multi-family residential loans based on the unique underwriting of these loans and some underlying guarantees which impact the risk profile of these loans. The remaining construction loans were split between 1-4 family primary construction and 1-4 family single family residential construction loans as they are deemed to have differing risk profiles. The loans were then subdivided by year of origination or vintage, as determined by an identifiable credit decision date. See the table that follows this discussion. 

 

Historical net losses are used to calculate a historical loss rate for each vintage within each portfolio segment and then subjective adjustments for internal and external qualitative risk factors are applied to the historical loss rates to generate a total expected loss rate for each vintage within each portfolio segment. For portfolio segments of loans with no historical losses, the Company is using the weighted average of its the annual historical loss rates as a proxy loss rate floor or, specifically for oil and gas and oil and gas real estate portfolio segments, historical average loss rate based on peer group data.

 

There are multiple qualitative factors, both internal and external, that could impact potential collectability of the underlying loans. The various internal factors that may be considered include, among other things, (i) effectiveness of loan policies, procedures and internal controls; (ii) portfolio growth and changes in loan concentrations; (iii) changes in loan quality; (iv) experience, ability and effectiveness of lending management and staff; (v) legal and regulatory compliance requirements associated with underwriting, originating and servicing a loan and the impact of exceptions; and (vi) the effectiveness of the internal loan review function. The various external factors that may be considered include, among other things, (i) current national and local economic conditions; (ii) changes in the political, legal and regulatory landscape; (iii) industry trends, in particular those related to loan quality and (iv) forecasted changes in the economy.

 

As part of this assessment, the Company considers the need to adjust historical information to reflect the extent to which current conditions and forecasts differ from the conditions that existed for the period over which historical information was evaluated. The Company uses an economic forecast qualitative factor as noted above to adjust the expected loss rates for the effects of forecasted changes in the economy. The Company uses economic indicators and indexes including, but not limited to, inflation indexes, unemployment rates, fluctuations of interest rates, economic growth, government expenditures, gross domestic product indexes, productivity indicators, leading indexes and debt levels and narratives such as those supplied by the Federal Reserve’s beige book and Moody’s Analytics that provide information for determining an appropriate impact ratio for macro-economic conditions. The Company has determined that a two-year forecast period provides a balance between the level of forecast periods reasonably available and forecast accuracy. The Company utilized, at adoption and during the three-month period ending March 31, 2020, an immediate reversion to historical levels after the two-year forecast period. The Company believes a two-year period is the limit of a reasonable and supportable forecast and chose to revert to historical levels immediately afterward as current adjusted loss history is the more relevant indicator of expected losses beyond the forecast period.

 

14

The historical loss rates, adjusted for current conditions and forecasting assumptions, are multiplied by the respective loan’s amortized cost balances in each vintage within each segment to compute an estimated quantitative reserve for expected losses in the portfolio. The quantitative reserve for expected loan losses and the qualitative reserve for expected loan losses combined together make up the total estimated loan loss reserve.

 

Loan amortized costs, as defined by GAAP, includes principal, deferred fees or costs associated with the loan, premiums, discounts and accrued interest. The Company made a policy election to exclude accrued interest in the determination of an ACL. The Company continues its policy of reversing previously accrued interest when it has been deemed uncollectible and accrued interest receivable is included in other assets in the consolidated balance sheets. Loans available for sale are excluded from the computation of expected loan loss as they are carried at the lower of cost or market value.

 

As part of the implementation of ASU 2016-13, the Company changed its methodology for determining the ACLs for loans. As a result of this adoption, the percentage of the ACL for loans to loans increased from 0.96% to 0.99%, effective January 1, 2020. At March 31, 2020, the percentage of the ACL for loans to total loans increased to 1.16%, reflecting the impact of current and forecasted economic factors for the local and national economy due to the impact of COVID-19 and the drop in the price of oil and gas during the first quarter of 2020. The Company’s total factors ranged from 0.67% to 2.42% at January 1, 2020 and ranged from 0.85% to 2.61% at March 31, 2020 and all factors were reassessed at the end of the first quarter. At the time of the assessment, there was limited economic forecasted data related to COVID-19 and the drop in the price of oil and gas. The increase in the ACL related to these events reflects the Company’s assessment based on the information available at March 31, 2020. 

 

Risk Grading

As part of the on‑going monitoring of the credit quality of the Company’s loan portfolio, management assigns and tracks loan grades as described below that are used as credit quality indicators.

Pass—Credits in this category contain an acceptable amount of risk.

Special Mention—Credits in this category contain more than the normal amount of risk and are referred to as “special mention” in accordance with regulatory guidelines. These credits possess clearly identifiable temporary weaknesses or trends that, if not corrected or revised, may result in a condition that exposes the Company to a  higher level of risk of loss.

Substandard—Credits in this category are “substandard” in accordance with regulatory guidelines and of unsatisfactory credit quality with well‑defined weaknesses or weaknesses that jeopardize the liquidation of the debt. Credits in this category are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Often, the assets in this category will have a valuation allowance representative of management’s estimated loss that is probable to be incurred. Loans deemed substandard and on nonaccrual status are considered impaired and are individually evaluated for impairment.

Doubtful—Credits in this category are considered “doubtful” in accordance with regulatory guidelines, are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near‑term event which lacks certainty. Generally, these credits will have a valuation allowance based upon management’s best estimate of the losses probable to occur in the liquidation of the debt.

Loss—Credits in this category are considered “loss” in accordance with regulatory guidelines and are considered uncollectible and of such little value as to question their continued existence as assets on the Company’s financial statements. Such credits are to be charged off or charged down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. This category does not intend to imply that the debt or some portion of it will never be paid, nor does it in any way imply that the debt will be forgiven.

The methodology used by the Company in the determination of its ACL, which is performed at least on a quarterly basis, is designed to be responsive to changes in the credit quality of the loan portfolio as well as forecasted economic conditions. The credit quality of the loan portfolio is assessed through different processes. At origination, a risk grade is assigned to each loan based on underwriting procedures and criteria. The Company monitors the credit quality of the loan

15

portfolio on an on-going basis by performing loan reviews, both internally and through a third-party vendor, on loans meeting certain risk and exposure criteria. Through these reviews, loans that require risk grade changes are approved by executive management. In addition, executive management reviews classified and criticized loans on to assess changes in credit quality of the underlying loan, and when determined appropriate based on an individual evaluation, approve specific reserves. The review of the appropriateness of the ACL, which includes evaluation of historical loss trends, qualitative adjustments and forecasted economic conditions applied to general reserves, is performed by executive management and presented to the board of directors for their review on a quarterly basis as part of our interim and annual consolidated financial statements.

The loans by risk grades, loan class and vintage at March 31, 2020 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

2020

    

2019

    

2018

    

2017

    

2016

    

Prior

 

Revolving Loans

 

Converted Revolving Loans

    

Total

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

16,734

 

$

120,547

 

$

67,560

 

$

19,418

 

$

12,466

 

$

9,688

 

$

270,877

 

$

11,585

 

$

528,875

Special mention

 

 

33

 

 

266

 

 

 —

 

 

15

 

 

 —

 

 

 —

 

 

436

 

 

 —

 

 

750

Substandard

 

 

1,000

 

 

786

 

 

464

 

 

39

 

 

354

 

 

2,406

 

 

4,012

 

 

3,964

 

 

13,025

Total commercial and industrial

 

 

17,767

 

 

121,599

 

 

68,024

 

 

19,472

 

 

12,820

 

 

12,094

 

 

275,325

 

 

15,549

 

 

542,650

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

57,116

 

 

213,693

 

 

214,659

 

 

139,415

 

 

86,079

 

 

129,764

 

 

36,851

 

 

2,322

 

 

879,899

Special mention

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,587

 

 

 —

 

 

 —

 

 

11,000

 

 

12,587

Substandard

 

 

 —

 

 

1,926

 

 

4,967

 

 

216

 

 

1,600

 

 

3,200

 

 

 —

 

 

 —

 

 

11,909

Total commercial real estate

 

 

57,116

 

 

215,619

 

 

219,626

 

 

139,631

 

 

89,266

 

 

132,964

 

 

36,851

 

 

13,322

 

 

904,395

Construction and development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

35,419

 

 

184,260

 

 

196,235

 

 

45,597

 

 

8,477

 

 

35,240

 

 

40,564

 

 

 —

 

 

545,792

Substandard

 

 

 —

 

 

519

 

 

1,500

 

 

10,532

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12,551

Total construction and development

 

 

35,419

 

 

184,779

 

 

197,735

 

 

56,129

 

 

8,477

 

 

35,240

 

 

40,564

 

 

 —

 

 

558,343

1-4 family residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

7,110

 

 

35,961

 

 

66,602

 

 

49,164

 

 

27,973

 

 

70,808

 

 

11,094

 

 

1,277

 

 

269,989

Special mention

 

 

 —

 

 

 —

 

 

40

 

 

 —

 

 

392

 

 

386

 

 

 —

 

 

 —

 

 

818

Substandard

 

 

 —

 

 

547

 

 

 —

 

 

249

 

 

20

 

 

3,034

 

 

 —

 

 

1,485

 

 

5,335

Total 1-4 family residential

 

 

7,110

 

 

36,508

 

 

66,642

 

 

49,413

 

 

28,385

 

 

74,228

 

 

11,094

 

 

2,762

 

 

276,142

Multi-family residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

7,770

 

 

8,527

 

 

23,743

 

 

50,750

 

 

4,361

 

 

172,001

 

 

 —

 

 

 —

 

 

267,152

Total multi-family residential

 

 

7,770

 

 

8,527

 

 

23,743

 

 

50,750

 

 

4,361

 

 

172,001

 

 

 —

 

 

 —

 

 

267,152

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

3,020

 

 

6,506

 

 

3,443

 

 

2,528

 

 

323

 

 

411

 

 

19,689

 

 

2,208

 

 

38,128

Substandard

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 5

 

 

 —

 

 

 —

 

 

 5

Total consumer

 

 

3,020

 

 

6,506

 

 

3,443

 

 

2,528

 

 

323

 

 

416

 

 

19,689

 

 

2,208

 

 

38,133

Agriculture:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

936

 

 

1,701

 

 

547

 

 

162

 

 

38

 

 

 5

 

 

3,975

 

 

79

 

 

7,443

Substandard

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

27

 

 

50

 

 

 —

 

 

77

Total agriculture

 

 

936

 

 

1,701

 

 

547

 

 

162

 

 

38

 

 

32

 

 

4,025

 

 

79

 

 

7,520

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

623

 

 

15,233

 

 

5,026

 

 

162

 

 

128

 

 

1,551

 

 

35,662

 

 

17,424

 

 

75,809

Substandard

 

 

 —

 

 

 —

 

 

1,381

 

 

 —

 

 

1,241

 

 

 —

 

 

5,645

 

 

 —

 

 

8,267

Total other

 

 

623

 

 

15,233

 

 

6,407

 

 

162

 

 

1,369

 

 

1,551

 

 

41,307

 

 

17,424

 

 

84,076

Total

 

$

129,761

 

$

590,472

 

$

586,167

 

$

318,247

 

$

145,039

 

$

428,526

 

$

428,855

 

$

51,344

 

$

2,678,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

Loans by risk grades and loan class as of the date shown below were as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

(Dollars in thousands)

    

Pass

    

Mention

    

Substandard

    

Total Loans

December 31, 2019

 

 

  

 

 

  

 

 

  

 

 

  

Commercial and industrial

 

$

513,417

 

$

2,963

 

$

11,227

 

$

527,607

Real estate:

 

 

  

 

 

  

 

 

  

 

 

  

Commercial real estate

 

 

876,207

 

 

18,570

 

 

5,969

 

 

900,746

Construction and development

 

 

515,247

 

 

12,565

 

 

 —

 

 

527,812

1-4 family residential

 

 

274,731

 

 

594

 

 

4,867

 

 

280,192

Multi-family residential

 

 

277,209

 

 

 —

 

 

 —

 

 

277,209

Consumer

 

 

36,566

 

 

 —

 

 

216

 

 

36,782

Agriculture

 

 

9,733

 

 

50

 

 

29

 

 

9,812

Other

 

 

79,860

 

 

 —

 

 

6,653

 

 

86,513

Total loans

 

$

2,582,970

 

$

34,742

 

$

28,961

 

$

2,646,673

 

Charge-offs and recoveries by loan class and vintage for the three months ended March 31, 2020 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

2020

    

2019

    

2018

    

2017

 

2016

 

Prior

 

Revolving Loans

    

Total

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-off

 

$

 —

 

$

 —

 

$

 —

 

$

(29)

 

$

 —

 

$

 —

 

$

(1)

 

$

(30)

Recovery

 

 

 —

 

 

 2

 

 

87

 

 

16

 

 

10

 

 

133

 

 

180

 

 

428

Total commercial and industrial

 

 

 —

 

 

 2

 

 

87

 

 

(13)

 

 

10

 

 

133

 

 

179

 

 

398

1-4 family residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-off

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Recovery

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 1

Total 1-4 family residential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 1

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-off

 

 

 —

 

 

 —

 

 

(8)

 

 

(95)

 

 

 —

 

 

 —

 

 

 —

 

 

(103)

Recovery

 

 

 3

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 4

Total consumer

 

 

 3

 

 

 —

 

 

(8)

 

 

(95)

 

 

 —

 

 

 1

 

 

 —

 

 

(99)

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-off

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Recovery

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 1

Total other

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 1

Total

 

$

 3

 

$

 2

 

$

79

 

$

(107)

 

$

10

 

$

135

 

$

179

 

$

301

 

Activity in the total ACL for loans for the three months ended March 31, 2020 and 2019, was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and

 

Commercial

 

and

 

1-4 family

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

industrial

    

real estate

    

development

    

residential

    

residential

    

Consumer

    

Agriculture

    

Other

    

Total

March 31, 2020

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Beginning balance

 

$

7,671

 

$

7,975

 

$

4,446

 

$

2,257

 

$

1,699

 

$

388

 

$

74

 

$

770

 

$

25,280

Impact of CECL adoption

 

 

852

 

 

(140)

 

 

100

 

 

(275)

 

 

294

 

 

(25)

 

 

64

 

 

 4

 

 

874

Provision (recapture) for credit losses for loans

 

 

614

 

 

1,741

 

 

1,249

 

 

447

 

 

420

 

 

213

 

 

(9)

 

 

64

 

 

4,739

Charge-offs

 

 

(30)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(103)

 

 

 —

 

 

 —

 

 

(133)

Recoveries

 

 

428

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 4

 

 

 —

 

 

 1

 

 

434

Net (charge-offs) recoveries

 

 

398

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

(99)

 

 

 —

 

 

 1

 

 

301

Ending balance

 

$

9,535

 

$

9,576

 

$

5,795

 

$

2,430

 

$

2,413

 

$

477

 

$

129

 

$

839

 

$

31,194

Period-end amount allocated to:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Specific reserve

 

$

409

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

409

General reserve

 

 

9,126

 

 

9,576

 

 

5,795

 

 

2,430

 

 

2,413

 

 

477

 

 

129

 

 

839

 

 

30,785

Total

 

$

9,535

 

$

9,576

 

$

5,795

 

$

2,430

 

$

2,413

 

$

477

 

$

129

 

$

839

 

$

31,194

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and

 

Commercial

 

and

 

1-4 family

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

industrial

    

real estate

    

development

    

residential

    

residential

    

Consumer

    

Agriculture

    

Other

    

Total

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

7,719

 

$

6,730

 

$

4,298

 

$

2,281

 

$

1,511

 

$

387

 

$

62

 

$

705

 

$

23,693

Provision (recapture) for credit losses for loans

 

 

903

 

 

52

 

 

402

 

 

(33)

 

 

(54)

 

 

(36)

 

 

(12)

 

 

(75)

 

 

1,147

Charge-offs

 

 

(280)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4)

 

 

 —

 

 

 —

 

 

(284)

Recoveries

 

 

74

 

 

 2

 

 

 —

 

 

 1

 

 

 —

 

 

10

 

 

 —

 

 

 —

 

 

87

Net (charge-offs) recoveries

 

 

(206)

 

 

 2

 

 

 —

 

 

 1

 

 

 —

 

 

 6

 

 

 —

 

 

 —

 

 

(197)

Ending balance

 

$

8,416

 

$

6,784

 

$

4,700

 

$

2,249

 

$

1,457

 

$

357

 

$

50

 

$

630

 

$

24,643

Period-end amount allocated to:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Specific reserve

 

$

582

 

$

33

 

$

 —

 

$

77

 

$

 —

 

$

 —

 

$

 —

 

$

96

 

$

788

General reserve

 

 

7,834

 

 

6,751

 

 

4,700

 

 

2,172

 

 

1,457

 

 

357

 

 

50

 

 

534

 

 

23,855

Total

 

$

8,416

 

$

6,784

 

$

4,700

 

$

2,249

 

$

1,457

 

$

357

 

$

50

 

$

630

 

$

24,643

 

 

The ACL for loans by loan class as of the periods indicated was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

(Dollars in thousands)

 

Amount

 

Percent

 

Amount

 

Percent

Commercial and industrial

 

$

9,535

 

30.6

%  

 

$

7,671

 

30.3

%

Real estate:

 

 

  

 

  

 

 

 

  

 

  

 

Commercial real estate

 

 

9,576

 

30.7

%  

 

 

7,975

 

31.6

%

Construction and development

 

 

5,795

 

18.6

%  

 

 

4,446

 

17.6

%

1-4 family residential

 

 

2,430

 

7.8

%  

 

 

2,257

 

8.9

%

Multi-family residential

 

 

2,413

 

7.7

%  

 

 

1,699

 

6.7

%

Consumer

 

 

477

 

1.5

%  

 

 

388

 

1.5

%

Agriculture

 

 

129

 

0.4

%  

 

 

74

 

0.3

%

Other

 

 

839

 

2.7

%  

 

 

770

 

3.1

%

Total allowance for credit losses for loans

 

$

31,194

 

100.0

%  

 

$

25,280

 

100.0

%

 

Allocation of a portion of the ACL to one class of loans above does not preclude its availability to absorb losses in other classes.  

The loans evaluated individually and the related specific ACL at the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

(Dollars in thousands)

 

Recorded Investment

 

Specific ACL

 

Net

 

Recorded Investment

 

Specific ACL

 

Net

Loans evaluated individually

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,528

 

$

409

 

$

1,119

 

$

999

 

$

416

 

$

583

Commercial real estate

 

 

5,818

 

 

 —

 

 

5,818

 

 

1,404

 

 

 —

 

 

1,404

Construction and development

 

 

519

 

 

 —

 

 

519

 

 

 —

 

 

 —

 

 

 —

1-4 family residential

 

 

3,703

 

 

 —

 

 

3,703

 

 

3,651

 

 

15

 

 

3,636

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

210

 

 

 —

 

 

210

Other

 

 

8,267

 

 

 —

 

 

8,267

 

 

6,653

 

 

 6

 

 

6,647

Total

 

$

19,835

 

$

409

 

$

19,426

 

$

12,917

 

$

437

 

$

12,480

 

At March 31, 2020, the Company had one 1-4 family residential collateral dependent loan with a principal balance of $32,000. 

 

 The Company has unfunded commitments, comprised of letters of credit and commitments to extend credit that are not unconditionally cancellable by the Company. See Note 16: Commitments and Contingencies and Financial Instruments with Off-Balance-Sheet Risk. Unfunded commitments have similar characteristics as funded loans based on

18

segment type and their expected credit losses were determined using the Vintage model and established qualitative factors. Activity in the ACL for unfunded commitments for the three months ended March 31, 2020, was as follows:

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

March 31, 2020

 

 

 

 

Beginning balance

 

$

378

Impact of CECL adoption

 

 

2,981

Provision for credit losses for unfunded commitments

 

 

310

Ending balance

 

$

3,669

 

 

NOTE 7: PREMISES AND EQUIPMENT

The components of premises and equipment as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

March 31, 2020

 

December 31, 2019

Land

 

$

13,466

 

$

13,466

Buildings and leasehold improvements

 

 

53,874

 

 

53,869

Furniture and equipment

 

 

16,022

 

 

15,917

Vehicles

 

 

203

 

 

203

Construction in progress

 

 

343

 

 

343

 

 

 

83,908

 

 

83,798

Less accumulated depreciation

 

 

(33,665)

 

 

(32,923)

Premises and equipment, net

 

$

50,243

 

$

50,875

 

Depreciation expense was $775,000 and $824,000 for the three months ended March 31, 2020 and 2019, respectively, which is included in net occupancy expense on the Company’s condensed consolidated statements of income.

 

19

NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill was $81.0 million at March 31, 2020 and December 31, 2019 and there were no changes in goodwill during the three months ended March 31, 2020 or the year ended December 31, 2019. Based on the results of the Company’s assessment, management does not believe any impairment of goodwill or other intangible assets existed at March 31, 2020 or December 31, 2019. Other intangibles, net of accumulated amortization, were as follows as of the dates shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Weighted-

    

 

    

 

 

    

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

Gross

 

 

 

 

Net

 

 

Amortization

 

Intangible

 

Accumulated

 

Intangible

(Dollars in thousands)

 

Period

 

Assets

 

Amortization

 

Assets

March 31, 2020

 

 

 

 

  

 

 

  

 

 

  

Core deposits

 

3.9 years

 

$

13,750

 

$

(13,069)

 

$

681

Customer relationships

 

8.8 years

 

 

6,629

 

 

(2,762)

 

 

3,867

Servicing assets

 

11.2 years

 

 

341

 

 

(189)

 

 

152

Total other intangible assets, net

 

 

 

$

20,720

 

$

(16,020)

 

$

4,700

December 31, 2019

 

 

 

 

  

 

 

  

 

 

  

Core deposits

 

4.2 years

 

$

13,750

 

$

(12,979)

 

$

771

Customer relationships

 

9.0 years

 

 

6,629

 

 

(2,651)

 

 

3,978

Servicing assets

 

12.8 years

 

 

368

 

 

(179)

 

 

189

Total other intangible assets, net

 

 

 

$

20,747

 

$

(15,809)

 

$

4,938

 

Servicing Assets

Changes in the related servicing assets as of the dates indicated below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(Dollars in thousands)

    

2020

    

2019

Balance at beginning of year

 

$

189

 

$

166

Increase from loan sales

 

 

 9

 

 

14

Decrease from serviced loans paid off or foreclosed

 

 

(26)

 

 

(19)

Amortization

 

 

(20)

 

 

(8)

Balance at end of period

 

$

152

 

$

153

 

NOTE 9: BANK OWNED LIFE INSURANCE

Bank-owned life insurance policies and the net change in cash surrender value during the periods shown below were as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(Dollars in thousands)

    

2020

 

2019

Balance at beginning of period

 

$

71,881

 

$

71,525

Purchases

 

 

 —

 

 

 —

Redemptions

 

 

 —

 

 

 —

Net change in cash surrender value

 

 

416

 

 

430

Balance at end of period

 

$

72,297

 

$

71,955

 

 

20

NOTE 10: DEPOSITS

Deposits as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

March 31, 2020

 

December 31, 2019

Interest-bearing demand accounts

 

$

359,943

 

$

369,744

Money market accounts

 

 

760,036

 

 

805,942

Saving accounts

 

 

90,227

 

 

92,183

Certificates and other time deposits, $100,000 or greater

 

 

212,341

 

 

208,018

Certificates and other time deposits, less than $100,000

 

 

174,145

 

 

191,640

Total interest-bearing deposits

 

 

1,596,692

 

 

1,667,527

Noninterest-bearing deposits

 

 

1,195,541

 

 

1,184,861

Total deposits

 

$

2,792,233

 

$

2,852,388

 

At March 31, 2020 and December 31, 2019, the Company had $60.4 million and $56.8 million in deposits from public entities and brokered deposits of $112.4 million and $128.9 million, respectively. Accrued interest payable for deposits was $976,000 and $931,000 at March 31, 2020 and December 31, 2019 and is included in other liabilities in the condensed consolidated balance sheets. The Company had no major concentrations of deposits at March 31, 2020 or December 31, 2019 from any single or related groups of depositors.

NOTE 11: LINES OF CREDIT

Frost Line of Credit

The Company has entered into a loan agreement with Frost Bank, or Loan Agreement, which has been periodically amended and provides for a $30.0 million revolving line of credit, or Line of Credit. At March 31, 2020, there were no outstanding borrowings on this Line of Credit and the Company did not draw on this Line of Credit during 2019. The Company can make draws on the Line of Credit for a period of 24 months, which began on December 13, 2019, after which the Company will not be permitted to make further draws and the outstanding balance will amortize over a period of 60 months. Interest accrues on outstanding borrowings at a rate equal to the maximum “Latest” U.S. prime rate of interest per annum and payable quarterly over 24 months beginning December 13, 2019, and thereafter, quarterly principal and interest payments are required over a term of 60 months. The entire outstanding balance and unpaid interest is payable in full on December 13, 2026.

The Company may prepay the principal amount of the Line of Credit without premium or penalty. The obligations of the Company under the Loan Agreement are secured by a valid and perfected first priority lien on all of the issued and outstanding shares of capital stock of the Bank.

Covenants made under the Loan Agreement include, among other things, the Company maintaining tangible net worth of not less than $300 million, the Company maintaining a  free cash flow coverage ratio of not less than 1.25 to 1.00, the Bank’s Texas Ratio (as defined in the Loan Agreement) not to exceed 15%, the Bank’s Total Capital Ratio (as defined under the Loan Agreement) of not less than 12% and restrictions on the ability of the Company and its subsidiaries to incur certain additional debt. The Company was in compliance with these covenants at March 31, 2020.

Additional Lines of Credit

The Federal Home Loan Bank allows the Company to borrow on a blanket floating lien status collateralized by certain loans. Total borrowing capacity available under this agreement was $1.0 billion at both March 31, 2020 and December 31, 2019. Federal Home Loan Bank advances outstanding totaled $50.0 million both March 31, 2020 and December 31, 2019, and these borrowings were on a long-term basis. See maturity information below. There were no borrowings under this agreement during the three months ended March 31, 2020. During the three months ended March 31, 2019, the Company borrowed under this agreement on a short-term basis. The average outstanding balance for Federal Home Loan Bank advances for the three months ended March 31, 2020 and 2019, was $50.0 million and $9.7 million,

21

respectively. The weighted-average rate for the three months ended March 31, 2020 and 2019, was 1.78% and 2.67%, respectively.

The scheduled maturities of Federal Home Loan Bank advances as of the date shown below were as follows:

 

 

 

 

(Dollars in thousands)

 

March 31, 2020

2020

 

$

 —

2021

 

 

 —

2022

 

 

10,000

2023

 

 

20,000

2024

 

 

20,000

Thereafter

 

 

 —

Total

 

$

50,000

 

At March 31, 2020 and December 31, 2019, the Company maintained four federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate of $75.0 million, in federal funds. There were no funds under these lines of credit outstanding at March 31, 2020 or December 31, 2019.

 

 

NOTE 12: RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company, through the Bank, has and expects to continue to conduct routine banking business with related parties, including its executive officers and directors. Related parties also include shareholders and their affiliates who directly or indirectly have 5% or more beneficial ownership in the Company.

Loans—In the opinion of management, loans to related parties were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectability or present any other unfavorable features to the Company. The Company had approximately $155.8 million and $158.7 million in loans to related parties at March 31, 2020 and December 31, 2019, respectively. At March 31, 2020 and December 31, 2019, there were no loans made to related parties deemed nonaccrual, past due, restructured in a trouble debt restructuring or classified as potential problem loans.

Unfunded Commitments—At March 31, 2020 and December 31, 2019, the Company had approximately $52.2 million and $48.7 million in unfunded loan commitments to related parties, respectively.

Deposits—The Company held related party deposits of approximately $233.8 million and $233.9 million at March 31, 2020 and December 31, 2019, respectively.

NOTE 13: FAIR VALUE DISCLOSURES

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. In estimating fair value, the Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques refer to the assumptions used in pricing the asset or liability. Valuation inputs are categorized in a three-level hierarchy, that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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

Level 2 Inputs—Other observable inputs that may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are

22

observable for the asset or liability such as interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates or inputs that are observable or can be corroborated by observable market data.

Level 3 Inputs—Unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

During the three months ended March 31, 2020 and the year ended December 31, 2019, there were no transfers of assets or liabilities within the levels of the fair value hierarchy.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use observable market-based parameters as inputs. Valuation adjustments may be made to ensure that assets and liabilities are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.

The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could result in different estimates of fair value. Fair value estimates are based on judgments regarding current economic conditions, risk characteristics of the various instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

Financial Instruments Measured at Fair Value on a Recurring Basis

The Company’s assets and liabilities measured at fair value on a recurring basis include the following:

Debt Securities Available for Sale—Debt securities classified as available for sale are recorded at fair value. For those securities classified as Level 2, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies for reasonableness.

Equity Securities Available for Sale—Equity securities are classified as available for sale and are recorded at fair value. The fair value measurements are based on observable data obtained from a third-party pricing service. The Company reviews the prices supplied by the services against publicly available information. The equity securities are mutual funds publicly traded on the National Association of Securities Dealers Automated Quotations, or Nasdaq, and the fair value is determined by using unadjusted quoted market prices which are considered Level 1 inputs.

Interest Rate Swaps—The Company obtains fair value measurements for its interest rate swaps from an independent pricing service which uses the income approach. The income approach calls for the utilization of valuation techniques to convert future cash flows as due to be exchanged per the terms of the financial instrument, into a single present value amount. Measurement is based on the value indicated by the market expectations about those future amounts

23

as of the measurement date. The proprietary curves of the independent pricing service utilize pricing models derived from industry standard analytic tools, considering both Level 1 and Level 2 inputs.

 

Financial assets and financial liabilities measured at fair value on a recurring basis as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

(Dollars in thousands)

 

March 31, 2020

 

December 31, 2019

Fair value of financial assets:

 

 

  

 

 

  

Level 1 inputs: securities available for sale - equity securities

 

$

1,171

 

$

1,147

Level 2 inputs:

 

 

 

 

 

 

Debt securities available for sale

 

 

 

 

 

 

State and municipal securities

 

 

50,886

 

 

53,279

U.S. Agency Securities:

 

 

  

 

 

  

Collateralized mortgage obligations

 

 

53,065

 

 

55,989

Mortgage-backed securities

 

 

128,892

 

 

120,847

Interest rate swaps

 

 

9,092

 

 

2,638

Total fair value of financial assets

 

$

243,106

 

$

233,900

Fair value of financial liabilities:

 

 

  

 

 

  

Level 2 inputs: interest rate swaps

 

$

9,092

 

$

2,638

Total fair value of financial liabilities

 

$

9,092

 

$

2,638

 

 

Financial Instruments Measured at Fair Value on a Non-recurring Basis

A portion of financial instruments are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances. Financial assets measured at fair value on a non-recurring basis during the dates shown below include certain loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral or a discounted cash flow method if not. Prior to foreclosure, estimated fair values for collateral is estimated based on Level 3 inputs based on customized discounting criteria. The Company’s financial assets measured at fair value on a non-recurring basis are certain impaired loans and as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

 

 

(Dollars in thousands)

 

Recorded Investment

 

Specific ACL

 

Net

 

Recorded Investment

 

Specific ACL

 

Net

 

 

Level 3 inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans evaluated individually

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,528

 

$

409

 

$

1,119

 

$

999

 

$

416

 

$

583

 

 

1-4 family residential

 

 

3,703

 

 

 —

 

 

3,703

 

 

3,651

 

 

15

 

 

3,636

 

 

Other

 

 

8,267

 

 

 —

 

 

8,267

 

 

6,653

 

 

 6

 

 

6,647

 

 

 

 

$

13,498

 

$

409

 

$

13,089

 

$

11,303

 

$

437

 

$

10,866

 

 

 

Non-Financial Assets and Non-Financial Liabilities Measured on a Non-recurring Basis

The Company’s non-financial assets measured at fair value on a non-recurring basis for the periods reported are foreclosed assets (upon initial recognition or subsequent impairment). The Company’s other non-financial assets whose fair value may be measured on a non-recurring basis when there is evidence of impairment and may be subject to impairment adjustments include goodwill and intangible assets, among other assets.

The fair value of foreclosed assets may be estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria less estimated selling costs. There were no write-downs of

24

foreclosed assets for fair value remeasurement subsequent to initial foreclosure during the three months ended March 31, 2020 and during 2019. There were no outstanding foreclosed assets at March 31, 2020 and December 31, 2019.

Financial Instruments Reported at Amortized Cost

Fair market values and carrying amounts of financial instruments that are reported at cost as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

 

    

 

    

Carrying

 

 

    

Carrying

(Dollars in thousands)

 

Fair Value

 

Amount

 

Fair Value

 

Amount

Financial assets:

 

 

  

 

 

  

 

 

  

 

 

  

Level 1 inputs:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

284,898

 

$

284,898

 

$

372,064

 

$

372,064

Level 2 inputs:

 

 

 

 

 

 

 

 

 

 

 

 

Bank-owned life insurance

 

 

72,297

 

 

72,297

 

 

71,881

 

 

71,881

Accrued interest receivable

 

 

8,653

 

 

8,653

 

 

8,742

 

 

8,742

Servicing asset

 

 

152

 

 

152

 

 

189

 

 

189

Level 3 inputs:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including held for sale, net

 

 

2,611,139

 

 

2,641,275

 

 

2,654,362

 

 

2,615,268

Other investments

 

 

16,807

 

 

16,807

 

 

16,710

 

 

16,710

Total financial assets

 

$

2,993,946

 

$

3,024,082

 

$

3,123,948

 

$

3,084,854

Financial liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

Level 1 inputs:

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

1,214,222

 

$

1,195,541

 

$

1,184,861

 

$

1,184,861

Level 2 inputs:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

1,595,014

 

 

1,596,692

 

 

1,651,359

 

 

1,667,527

Federal Home Loan Bank advances

 

 

50,727

 

 

50,000

 

 

48,822

 

 

50,000

Repurchase agreements

 

 

1,414

 

 

1,415

 

 

485

 

 

485

Accrued interest payable

 

 

1,049

 

 

1,049

 

 

1,005

 

 

1,005

Total financial liabilities

 

$

2,862,426

 

$

2,844,697

 

$

2,886,532

 

$

2,903,878

 

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value and as such the fair values shown above are not necessarily indicative of the amounts the Company will realize. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS

The Company, through the Bank, has outstanding interest rate swap contracts in which the Bank entered into an interest rate swap with a customer and entered into an equal and offsetting interest rate swap with another financial institution at the same time. These interest rate swap contracts are not designated as hedging instruments for mitigating interest rate risk of the Bank. The objective of the transactions is to allow the Bank’s customers to effectively convert a variable rate loan to a fixed rate.

In connection with each swap transaction, the Bank agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Bank agrees to pay a third-party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. Because the Bank acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts are designed to offset each other and would not significantly impact the Company’s operating results except in certain situations where there is a significant deterioration in the customer’s credit worthiness or that of the counterparties. At March 31, 2020 and December 31, 2019, no such deterioration was determined by management.

25

At March 31, 2020 and December 31, 2019, the Company had 22 and 19 interest rate swap agreements outstanding with borrowers and financial institutions, respectively. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in noninterest income or expense. Fair value amounts are included in other assets and other liabilities. Derivative instruments outstanding as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

    

 

 

 

    

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

Notional

    

Fair

 

 

 

 

 

Maturity

(Dollars in thousands)

 

Classification

 

Amounts

 

Value

 

Fixed Rate

 

Floating Rate

 

(Years)

March 31, 2020

 

 

 

 

  

 

 

 

 

  

 

  

 

  

Interest rate swaps with customers

 

Other Assets

 

$

144,101

 

$

9,092

 

3.25% - 5.89%

 

LIBOR 1M + 2.50% - 3.00%

 

6.90

Interest rate swaps with financial institution

 

Other Liabilities

 

 

144,101

 

 

(9,092)

 

3.25% - 5.89%

 

LIBOR 1M + 2.50% - 3.00%

 

6.90

Total derivatives

 

 

 

$

288,202

 

$

 —

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

Notional

    

Fair

    

 

 

 

    

Maturity

(Dollars in thousands)

 

Classification

 

Amounts

 

Value

 

Fixed Rate

 

Floating Rate

 

(Years)

December 31, 2019

 

 

 

 

  

 

 

  

 

  

 

  

 

  

Interest rate swaps with customers

 

Other Assets

 

$

69,189

 

$

2,599

 

4.40% - 5.89%

 

LIBOR 1M + 2.50% - 3.00%

 

6.65

Interest rate swaps with financial institution

 

Other Assets

 

 

5,987

 

 

39

 

4.00%

 

LIBOR 1M + 2.50%

 

6.71

Interest rate swaps with customers

 

Other Liabilities

 

 

5,987

 

 

(39)

 

4.00%

 

LIBOR 1M + 2.50%

 

6.71

Interest rate swaps with financial institution

 

Other Liabilities

 

 

69,189

 

 

(2,599)

 

4.40% - 5.89%

 

LIBOR 1M + 2.50% - 3.00%

 

6.65

Total derivatives

 

 

 

$

150,352

 

$

 —

 

  

 

  

 

  

 

 

NOTE 15: OPERATING LEASES

The Company’s lease liabilities represent the Company’s liability to make lease payments under operating leases of office space, stand-alone buildings and land leases, on a discounted basis and at March 31, 2020, totaled $15.4 million. The weighted-average discount rate for the three months ended March 31, 2020 was 3.50%. Right-of-use assets represent the Company’s right to use, or control the use of, leased assets for their lease term and at March 31, 2020, totaled $12.6 million. The weighted-average remaining lease term for operating leases outstanding at March 31, 2020 was 11.1 years. Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended March 31, 2020 totaled $481,000.  

Lease costs for the period shown below were as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(Dollars in thousands)

 

2020

 

2019

Operating lease cost

 

$

481

 

$

461

Short-term lease cost

 

 

17

 

 

19

Sublease income

 

 

(25)

 

 

(6)

Total lease cost

 

$

473

 

$

474

 

26

A maturity analysis of operating lease liabilities as of the date shown below was as follows:

 

 

 

 

 

 

 

(Dollars in thousands)

 

March 31, 2020

2020

 

$

2,140

2021

 

 

2,423

2022

 

 

2,482

2023

 

 

2,405

2024

 

 

1,812

Thereafter

 

 

9,792

Total undiscounted lease liability

 

 

21,054

Less:

 

 

 

Discount on cash flows

 

 

(3,658)

Lease signed, but not yet commenced

 

 

(2,040)

Total operating lease liability

 

$

15,356

 

 

 

NOTE 16: COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF‑BALANCE‑SHEET RISK

Financial Instruments with Off-Balance-Sheet Risk

In the normal course of business, the Company enters into various transactions, which in accordance with GAAP are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These financial instruments include commitments to extend credit for loans in process and standby letters of credit. The Company uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit and standby letters of credit as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

    

 

 

 

(Dollars in thousands)

 

March 31, 2020

 

December 31, 2019

Commitments to extend credit, variable interest rate

 

$

603,620

 

$

652,611

Commitments to extend credit, fixed interest rate

 

 

145,160

 

 

141,439

 

 

$

748,780

 

$

794,050

Standby letters of credit

 

$

28,440

 

$

23,547

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to the Company’s customers.

Litigation

The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Company, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the financial position or results of operations of the Company.

 

27

NOTE 17: EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION ARRANGEMENTS

Employee Benefit Plans

The Company maintains a 401(k) employee benefit plan and substantially all employees that complete three months of service may participate. The Company matches a portion of each employee’s contribution and may, at its discretion, make additional contributions. During the three months ended March 31, 2020 and 2019, the Company contributed $758,000 and $683,000 to the plan, respectively.

Executive Deferred Compensation Arrangements

The Company established an executive incentive compensation arrangement with several officers of the Bank, in which these officers are eligible for performance-based incentive bonus compensation. As part of this compensation arrangement, the Company contributes one‑fourth of the incentive bonus amount into a deferred compensation account. The deferred amounts accrue at a market rate of interest and are payable to the employees upon separation from the Bank provided vesting arrangements have been met. At March 31, 2020 and December 31, 2019, the amount payable, including interest, for this deferred plan was approximately $2.7 million and $2.7 million, respectively, which is included in other liabilities in the condensed consolidated balance sheets.

Salary Continuation Agreements

The Company entered into a salary continuation arrangement in 2008 with the Company’s then President and CEO that calls for payments of $100,000 per year for a period of 10 years commencing at age 65. Payments under the plan began during 2014. The Company’s liability was $313,000 and $335,000 at March 31, 2020 and December 31, 2019, respectively, which is included in other liabilities in the condensed consolidated balance sheets and equals the present value of the benefits expected to be provided.

In October 2017, the Company entered into a salary continuation arrangement with the Company’s President and CEO that calls for payments of $200,000 per year payable for a period of 10 years commencing at age 70. Payments under the plan will begin in 2024. The Company’s liability was $476,000 and $437,000 at March 31, 2020 and December 31, 2019, respectively, which is included in other liabilities in the condensed consolidated balance sheets. The liability will continue to accrue over the remaining period until payments commence such that the accrued amount at the eligibility date will equal the present value of all the future benefits expected to be paid.

NOTE 18: STOCK-BASED COMPENSATION

The Company acquired a stock option plan which originated under VB Texas, Inc. as a part of a merger of the two companies. The options granted to employees under this plan must be exercised within 10 years from the date of grant and vesting schedules are determined on an individual basis. At the merger date, all outstanding options became fully vested and were converted to options to acquire the Company’s common stock at an exchange ratio equal to the acquisition exchange rate for common shares. No options were granted under this plan after October 24, 2016.

In May 2014, the Company adopted the 2014 Stock Option Plan, or the 2014 Plan. The 2014 Plan was approved by the Company’s shareholders and limits the number of shares that may be optioned to 1,127,200. The 2014 Plan provides that no options may be granted after May 20, 2024. Options granted under the 2014 Plan expire 10 years from the date of grant and become exercisable in installments over a period of one to five years, beginning on the first anniversary of the date of grant. At March 31, 2020, 963,200 shares were available for future grant under the 2014 Plan.

In September 2017, the Company adopted the 2017 Omnibus Incentive Plan, or the 2017 Plan. The 2017 Plan authorizes the Company to grant options and performance-based and non-performance based restricted stock awards as well as various other types of stock-based and other awards that are not stock-based to eligible employees, consultants and non‑employee directors up to an aggregate of 600,000 shares of common stock. At March 31, 2020, 279,228 shares were available for future grant under the 2017 Plan.

28

Stock option activity for the periods shown below was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2020

 

2019

 

 

Number of

 

Weighted

 

Number of

 

Weighted

 

 

Shares

 

Average

 

Shares

 

Average

 

 

Underlying

 

Exercise

 

Underlying

 

Exercise

 

 

Options

 

Price

 

Options

 

Price

Outstanding at beginning of period

 

213,078

 

$

16.92

 

232,322

 

$

16.66

Granted

 

 —

 

 

 —

 

 —

 

 

 —

Exercised

 

(1,524)

 

 

10.34

 

(10,844)

 

 

10.68

Forfeited/expired

 

 —

 

 

 —

 

 —

 

 

 —

Outstanding at end of period

 

211,554

 

 

16.97

 

221,478

 

 

16.96

 

A summary of stock options as of the dates shown below was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

Stock Options

 

 

Exercisable

 

 

Unvested

 

 

Outstanding

Number of shares underlying options

 

 

161,355

 

 

50,199

 

 

211,554

Weighted-average exercise price per share

 

$

15.78

 

$

20.81

 

$

16.97

Aggregate intrinsic value (in thousands)

 

$

425

 

$

 2

 

$

427

Weighted-average remaining contractual term (years)

 

 

4.7

 

 

7.2

 

 

5.3

 

The fair value of the Company’s restricted stock awards is estimated based on the market value of the Company’s common stock at the date of grant. Restricted stock shares are considered fully issued at the time of the grant and the grantee becomes the record owner of the restricted stock and has voting, dividend and other shareholder rights. The shares of restricted stock are non-transferable and subject to forfeiture until the restricted stock vests and any dividends with respect to the restricted stock are subject to the same restrictions, including the risk of forfeiture.

Non-performance based restricted stock grants vest over the service period in equal increments over a period of two to five years, beginning on the first anniversary of the date of grant.

The number of shares earned under the Company’s performance-based restricted stock award agreements is based on the achievement of certain branch production goals. Compensation expense for performance-based restricted stock is recognized for the probable award level over the period estimated to achieve the performance conditions and other goals, on a straight-line basis. If the probable award level and/or the period estimated to be achieved change, compensation expense will be adjusted via a cumulative catch-up adjustment to reflect these changes. The performance conditions goals must be achieved within five years or the awards expire. The number of performance-based shares granted presented in the table below is based upon the attainment of the maximum number of shares possible to be earned.

29

Restricted stock activity for the periods shown below was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performance Based

 

Performance-based

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

Average

 

 

 

Average

 

 

Number of

 

Grant Date

 

Number of

 

Grant Date

 

 

Shares

 

Fair Value

 

Shares

 

Fair Value

Outstanding at December 31, 2018

 

181,773

 

$

27.05

 

24,000

 

$

34.46

Granted

 

19,187

 

 

32.25

 

 —

 

 

 —

Vested

 

(300)

 

 

29.27

 

 —

 

 

 —

Forfeited

 

 —

 

 

 —

 

 —

 

 

 —

Outstanding at March 31, 2019

 

200,660

 

$

27.54

 

24,000

 

$

34.46

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2019

 

161,443

 

$

28.20

 

18,000

 

$

34.46

Granted

 

37,107

 

 

29.55

 

 —

 

 

 —

Vested

 

(6,450)

 

 

32.11

 

 —

 

 

 —

Forfeited

 

(204)

 

 

30.64

 

 —

 

 

 —

Outstanding at March 31, 2020

 

191,896

 

$

28.33

 

18,000

 

$

34.46

 

A summary of restricted stock as of the dates shown below was as follows:

 

 

 

 

 

 

 

 

 

 

March 31, 2020

Restricted Stock

 

 

Non-performance Based

 

 

Performance-based

Number of shares underlying restricted stock

 

 

191,896

 

 

18,000

Weighted-average grant date fair value per share

 

$

28.33

 

$

34.46

Aggregate fair value (in thousands)

 

$

3,410

 

$

320

Weighted-average remaining vesting period (years)

 

 

2.6

 

 

2.6

 

The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options. During the periods shown below, the shares of stock subject to options exercised, restricted stock vested, shares withheld, and shares issued were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised/Vested

 

 

Shares Withheld

 

 

Shares Issued

Three Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

Stock options

 

 

1,524

 

 

 —

 

 

1,524

Non-performance based restricted stock

 

 

6,450

 

 

(1,218)

 

 

5,232

Performance-based restricted stock

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

Stock options

 

 

10,844

 

 

 —

 

 

10,844

Non-performance based restricted stock

 

 

300

 

 

(89)

 

 

211

Performance-based restricted stock

 

 

 —

 

 

 —

 

 

 —

 

 

For the three months ended March 31, 2020 and 2019, stock compensation expense was $557,000 and $545,000, respectively. As of March 31, 2020, there was approximately $5.3 million of total unrecognized compensation expense related to the unvested stock options, non-performance based restricted stock and performance-based restricted stock, which is expected to be recognized in the Company’s consolidated statements of income over a weighted-average period of 2.5 years.

30

NOTE 19: REGULATORY MATTERS

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off‑balance‑sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

The Company and the Bank’s Common Equity Tier 1 capital includes common stock and related capital surplus, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, the Company and the Bank elected to opt‑out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.

The Basel III Capital Rules require the Company and the Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk‑weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk‑weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk‑weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2) to risk‑weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company and the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the minimum required risk‑weighted capital ratios. Banking institutions with a ratio of Common Equity Tier 1 capital to risk‑weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

In October 2019, the federal bank regulatory agencies, or the Agencies, issued a final rule, the Community Bank Leverage Ratio Framework, or the Framework, to simplify capital calculations for community banks. The Framework provides for a simple measure of capital adequacy for certain community banking organizations and is consistent with Section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act. The Framework is optional and is designed to reduce burden by removing requirements for calculating and reporting risk-based capital ratios. Depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, are considered qualifying community banking organizations and are eligible to opt into the Framework. The final rule became effective January 1, 2020, and organizations that opt into the Framework and meet the criteria established by the rule can use the Framework for regulatory reports for the quarter ending March 31, 2020. In April 2020, the Agencies announced two interim final rules to provide relief associated with Section 4012 of the Coronavirus Aid, Relief and Economic Security Act. For institutions that elect the Framework, the interim rules temporarily lower the leverage ratio requirement to 8% for the second quarter of 2020 through the end of calendar year 2020 and to 8.5% for the 2021 calendar year. An institution will have until January 1, 2022 before the 9% leverage ratio requirement is re-established. The Company has elected not to opt into the Framework and will continue to compute regulatory capital ratios based on the Basel III Capital Rules discussed above.

In March 2020, the Agencies issued an interim final rule that allows banking organizations to mitigate the effects of CECL on their regulatory capital computations. This interim rule is in addition to the three-year transition period already in place under the capital transition rule previously issued in February 2019. Banking organizations that are required under U.S. accounting standards to adopt CECL in 2020 can mitigate the estimated cumulative regulatory capital effects for an additional two years.  This rule allows an institution to defer the full effect of adopting CECL in January 2020 and transitioning that impact into its regulatory capital calculation, including ratios, over an extended period. Additionally, the interim rule extends the transition period whereby an institution can defer the impact from CECL on the current period, determined based on the difference between the new CECL ACL and the allowance for loan losses under the incurred loss

31

method from previous GAAP, for up to two years. The total impact related to CECL would then be transitioned into regulatory capital and the associated ratios over a three-year transition period, beginning after the initial two-year deferral period, for a total transition period of five years. The Company has elected not to opt into the transition election and has reported the full effect of CECL upon adoption and for the current reporting period in its regulatory capital calculation and ratios.

The Company is subject to the regulatory capital requirements administered by the Federal Reserve and, for the Bank, those administered by the OCC. Regulatory authorities can initiate certain mandatory actions if the Company or the Bank fail to meet the minimum capital requirements, which could have a direct material effect on the Company’s financial statements. Management believes, as of March 31, 2020 and December 31, 2019, that the Company and the Bank met all capital adequacy requirements to which they were subject.

At March 31, 2020 and December 31, 2019, the Company and the Bank, were “well capitalized” based on the ratios presented below. Actual and required capital ratios for the Company and the Bank were as follows for the dates presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

Required to be

 

 

 

 

 

 

Capital Required

 

Considered Well

 

 

Actual

 

Basel III

 

Capitalized

(Dollars in thousands)