EX-99.2 4 ex99_2.htm EXHIBIT 99.2
Exhibit 99.2

WEST TEXAS STATE BANK

FINANCIAL STATEMENTS

JUNE 30, 2019

-1-
WEST TEXAS STATE BANK

June 30, 2019

TABLE OF CONTENTS

 
Page
   
Financial Statements (Unaudited):
  
   
Statements of Financial Condition
3
Statements of Income
4
Statements of Comprehensive Income
5
Statements of Changes in Stockholders’ Equity
6
Statements of Cash Flows
7
Notes to Unaudited Financial Statements
9

-2-
WEST TEXAS STATE BANK

STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)

   
June 30,
2019
    
December 31,
2018
  
ASSETS
      
             
Cash and due from banks
  
$
10,200
    
$
10,534
  
Interest-bearing deposits in banks
    
64,304
      
41,372
  
Federal funds sold
    
27,700
      
31,000
  
                 
Total cash and cash equivalents
    
102,204
      
82,906
  
                 
Certificate of deposits held in other banks
    
26,223
      
23,887
  
Loans receivable, net of allowance for loan losses of $4,173 and $3,850
    
200,617
      
210,060
  
Securities available for sale, at estimated fair value (amortized cost of $77,237 and $81,465)
    
77,206
      
79,463
  
Securities held to maturity, at amortized cost (estimated fair value of $2,331 and $1,088)
    
2,240
      
1,087
  
Restricted investments held at cost
    
618
      
616
  
Premises and equipment, net
    
4,145
      
4,356
  
Goodwill
    
370
      
370
  
Accrued interest receivable
    
1,023
      
1,062
  
Cash surrender value of life insurance
    
11,331
      
11,195
  
Other assets
    
3,339
      
2,566
  
                 
Total assets
  
$
429,316
    
$
417,568
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                 
Non-interest-bearing demand deposits
  
$
214,174
    
$
205,041
  
Interest-bearing deposits
    
161,981
      
161,763
  
                 
Total deposits
    
376,155
      
366,804
  
                 
Accrued interest payable and other liabilities
    
954
      
1,283
  
                 
Total liabilities
    
377,109
      
368,087
  
                 
Stockholders’ equity:
                
Common stock - $5 par value; 200,000 shares authorized, 134,280 issued and outstanding
    
671
      
671
  
Additional paid-in capital
    
15,329
      
15,329
  
Retained earnings
    
36,238
      
35,483
  
Accumulated other comprehensive loss
    
(31
)
    
(2,002
)
                 
Total stockholders’ equity
    
52,207
      
49,481
  
 
                
Total liabilities and stockholders’ equity
  
$
429,316
    
$
417,568
  

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

-3-
WEST TEXAS STATE BANK

STATEMENTS OF INCOME
(Dollars in thousands)

   
Six Months Ended June 30,
  
   
2019
    
2018
  
       
Interest income
            
Loans, including fees
  
$
6,455
    
$
6,140
  
Securities available for sale and held to maturity
    
819
      
755
  
Tax exempt securities
    
410
      
28
  
Due from banks
    
329
      
221
  
Federal funds sold and interest bearing deposits in banks
    
741
      
594
  
                 
Total interest income
    
8,754
      
7,738
  
                 
Interest expense:
                
Deposits
    
375
      
216
  
                 
Net interest income
    
8,379
      
7,522
  
Provision for loan losses
    
30
      
60
  
                 
Net interest income after provision for loan losses
    
8,349
      
7,462
  
                 
Noninterest income:
                
Service charges on deposit accounts
    
556
      
571
  
Cash surrender value of life insurance appreciation
    
136
      
143
  
Other income
    
657
      
243
  
                 
Total noninterest income
    
1,349
      
957
  
                 
Noninterest expense:
                
Salaries and employee benefits
    
3,560
      
3,458
  
Occupancy expenses
    
467
      
322
  
Data and check processing
    
599
      
774
  
Professional services
    
699
      
715
  
Other expenses
    
1,598
      
1,113
  
                 
Total noninterest expense
    
6,923
      
6,382
  
                 
Income before income taxes
    
2,775
      
2,037
  
Income tax
    
6
      
9
  
                 
Net income
  
$
2,769
    
$
2,028
  

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

-4-
WEST TEXAS STATE BANK

STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)

   
Six Months Ended June 30,
  
   
2019
    
2018
  
       
             
Net income
  
$
2,769
    
$
2,028
  
                 
Other items of comprehensive income
                
Change in unrealized appreciation/(depreciation) on investment securities available for sale
    
1,378
      
(1,221
)
Reclassification adjustment for realized losses on investment securities included in net income
    
593
      
155
  
                 
Total other items of comprehensive income (loss)
    
1,971
      
(1,066
)
                 
Comprehensive income
  
$
4,740
    
$
962
  

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

-5-
WEST TEXAS STATE BANK

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2019 and 2018
(Dollars in thousands)

    Common Stock    
Additional
Paid-in
     Retained
   
Accumulated
Other
Comprehensive
        
    Shares    
Amount
     Capital    
Earnings
    
Income (Loss)
     Total
 
                                     
Balance, December 31, 2017
    
134,280
    
$
671
    
$
15,329
    
$
30,179
    
$
(1,021
)
  
$
45,158
  
Net income
    
-
      
-
      
-
      
2,028
      
-
      
2,028
  
Change in net unrealized losses on available for sale securities
    
-
      
-
      
-
      
-
      
(1,066
)
    
(1,066
)
 
                                                
Balance, June 30, 2018
    
134,280
    
$
671
    
$
15,329
    
$
32,207
    
$
(2,087
)
  
$
46,120
  
 
                                                
Balance, December 31, 2018
    
134,280
    
$
671
    
$
15,329
    
$
35,483
    
$
(2,002
)
    
49,481
  
Net income
    
-
      
-
      
-
      
2,769
      
-
      
2,769
  
Cash divideds on common stock
                            
(2,014
)
            
(2,014
)
Change in net unrealized gains on available for sale securities
    
-
      
-
      
-
      
-
      
1,971
      
1,971
  
 
                                                
Balance, June 30, 2019
    
134,280
    
$
671
    
$
15,329
    
$
36,238
    
$
(31
)
  
$
52,207
  

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

-6-
WEST TEXAS STATE BANK

STATEMENTS OF CASH FLOWS
(Dollars in thousands)

   
Six Months Ended June 30,
  
   
2019
    
2018
  
       
             
Cash flows from operating activities
            
Net income
  
$
2,769
    
$
2,028
  
Adjustments to reconcile net income to net cash provided by operating activities
                
Depreciation
    
138
      
174
  
Amortization of core deposit intangible assets
    
14
      
14
  
Provision for loan losses
    
30
      
60
  
Net amortization of security discounts and premiums
    
350
      
605
  
Net realized loss on sale of available for sale securities
    
593
      
-
  
Net realized loss on trading securities
    
-
      
155
  
Net realized gain on sale of premises and equipment
    
(328
)
    
-
  
Appreciation in cash surrender value of life insurance
   
(136
)
    
(143
)
(Increase) decrease in assets
                
Accrued interest receivable and other assets
   
(748
)
    
221
  
Increase (decrease) in liabilities
                
Accrued interest payable and other liabilities
    
(329
)
    
505
  
                 
Net cash provided by operating activities
    
2,353
      
3,619
  
                 
Cash flows from investing activities
                
Net change in certificate of deposits held in other banks
    
(2,338
)
    
(6,967
)
Activity in available for sale securities
                
Purchases
    
(89,592
)
    
(27,874
)
Proceeds from the sale of securities
    
36,951
      
-
  
Proceeds from paydowns, calls and maturities
    
55,947
      
31,472
  
Activity in held to maturity securities
                
Proceeds from paydowns, calls and maturities
    
-
      
14
  
Purchases
    
(1,174
)
    
-
  
Proceeds from the sale of trading securities
    
-
      
6,479
  
Loan originations and principal collections, net
    
9,413
      
(7,414
)
Additions to premises and equipment
    
(93
)
    
(487
)
Proceeds from the sale of premises and equipment
    
494
      
-
  
Net change in restricted investments held at cost
    
-
      
(2
)
                 
Net cash provided by (used in) investing activities
    
9,608
      
(4,779
)

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

-7-
WEST TEXAS STATE BANK

STATEMENTS OF CASH FLOWS – Continued
(Dollars in thousands)

   
Six Months Ended June 30,
  
   
2019
    
2018
  
             
Cash flows from financing activities
            
Net increase in deposits
    
9,351
      
19,674
  
Cash dividends paid on common stock
    
(2,014
)
    
-
  
                 
Net cash provided by financing activities
    
7,337
      
19,674
  
                 
Net change in cash and cash equivalents
    
19,298
      
18,514
  
Cash and cash equivalents, beginning
    
82,906
      
75,754
  
                 
Cash and cash equivalents, end
  
$
102,204
    
$
94,268
  
                 
Supplementary disclosure of cash flow information                
Interest paid
  
$
375
    
$
230
  
Supplementary disclosure of noncash investing and financing activities
   
     

Change in unrealized gain (loss) on securities
     1,971
     
(1,066
 )

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

-8-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)

1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – West Texas State Bank (the Bank or the Company) is a Texas state-chartered bank which offers a full range of banking services. The Bank’s primary source of income is from providing loans to small and medium sized businesses and individuals in its market area. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC), subject to regulatory limits.

West Texas State Bank (a Texas S corporation) was incorporated in Texas on January 1, 1937.

Summary of Significant Accounting Policies – The accounting and reporting policies of West Texas State Bank conform to accounting principles generally accepted in the United States of America (GAAP) and the prevailing practices within the financial services industry. A summary of significant accounting policies is as follows.

Use of Estimates – The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant changes relate to valuation of goodwill and other intangibles and their respective analysis of impairment, the fair values of financial instruments, the valuation of foreclosed real estate, the valuation and potential impairment of investment securities, the determination of accrued expenses and the determination of the allowance for loan losses.

ASU 2016-13 Financial Instruments - Credit Losses (Topic 326).  The FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model.  The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held to maturity securities,  and debt securities. ASU 2016-13 is effective for the Company for annual periods beginning after December 15, 2023, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the impact adoption of ASU 2016-13 will have on its operating results and financial condition.

-9-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

2.
SECURITIES

All securities have been classified as available for sale or held to maturity in the statement of financial condition according to management’s intent at June 30, 2019 and December 31, 2018. All fair values as of June 30, 2019 and December 31, 2018 are measured on a recurring basis and considered Level 2 fair value measurements for reporting purposes in accordance with FASB ASC 820, Fair Value Measurement and Disclosures.

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

   
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Fair
Value
  
                         
June 30, 2019
                        
Available for sale
                        
U.S. Government Bonds
  
$
63,753
    
$
127
    
$
-
    
$
63,880
  
State and municipal
    
600
      
-
      
-
      
600
  
Mortgage-backed & CMO securities
    
12,884
      
10
      
(168
)
    
12,726
  
                                 
   
$
77,237
    
$
137
    
$
(168
)
  
$
77,206
  
Held to maturity CMO securities
  
$
2,240
    
$
91
    
$
-
    
$
2,331
  
                                 
December 31, 2018
                                
Available for sale
                                
U.S. Government Bonds
  
$
27,828
    
$
7
    
$
(27
)
  
$
27,808
  
Mortgage-backed & CMO securities
    
53,637
      
-
      
(1,982
)
    
51,655
  
                                 
   
$
81,465
    
$
7
    
$
(2,009
)
  
$
79,463
  
                                 
Held to maturity CMO securities
  
$
1,087
    
$
1
    
$
-
    
$
1,088
  

Expected maturities of securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The contractual maturities of available for sale and held to maturity securities at June 30, 2019 were as follows:
 
   
Available for Sale
    
Held to Maturity
  

 
Amortized
Cost
    
Fair
Value
    
Amortized
Cost
    
Fair
Value
  
                         
Due in one year or less
  
$
60,355
    
$
60,448
    
$
-
    
$
-
  
Due from one year to five years
    
3,998
      
4,032
      
-
      
-
  
Due from five to ten years
    
-
      
-
      
2,240
      
2,331
  
Due after ten years
    
-
      
-
      
-
      
-
  
Mortgage-backed & CMO securities
    
12,884
      
12,726
      
-
      
-
  
                                 
   
$
77,237
    
$
77,206
    
$
2,240
    
$
2,331
  

-10-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

The Company does not own securities that have an aggregate adjusted cost exceeding ten percent (10%) of stockholders’ equity at June 30, 2019 or December 31, 2018. Securities with carrying and fair values totaling $11,876 and $11,207 were pledged to secure public deposits at June 30, 2019 and December 31, 2018, respectively.

Gross Unrealized Losses and Fair Value

Securities with unrealized losses, segregated by length of unrealized losses at period-end were as follows:

   
Less than 12 Months
    
12 Months or More
    
Total
  
   
Fair Value
    
Unrealized Loss
    
Fair Value
    
Unrealized
Loss
    
Fair Value
    
Unrealized
Loss
  
June 30, 2019
                                    
Available for sale
                                    
U.S. Government Bonds
  
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
  
Mortgage-backed & CMO Securities
    
721
      
(1
)
    
9,428
      
(167
)
    
10,149
      
(168
)
                                                 
   
$
721
    
$
(1
)
  
$
9,428
    
$
(167
)
  
$
10,149
    
$
(168
)
                                                 
December 31, 2018
                                                
Available for sale
                                                

                                               
U.S. Government Bonds
  
$
19,841
    
$
(27
)
  
$
-
    
$
-
    
$
19,841
    
$
(27
)
Mortgage-backed & CMO Securities
    
6,180
      
(77
)
    
45,281
      
(1,905
)
    
51,461
      
(1,982
)
                                                 
   
$
26,021
    
$
(104
)
  
$
45,281
    
$
(1,905
)
  
$
71,302
    
$
(2,009
)

There were 11 securities with an unrealized loss at June 30, 2019.  Management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair values are expected to recover as the bonds approach their maturity date or re-pricing date. Management does not believe any of the securities are impaired due to reasons of credit quality and the declines in fair value are largely due to changes in interest rates and other market conditions. Accordingly, management believes the impairments detailed in the tables above are temporary and no impairment loss has been realized in the Company’s statement of income.

-11-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

3.
LOANS RECEIVABLE

The components of loans receivable in as of the period-end follows:

   
June 30,
2019
    
December 31,
2018
  
             
Real estate
  
$
130,692
    
$
138,350
  
Commercial
    
66,635
      
71,233
  
Consumer and other
    
7,463
      
4,327
  
                 
     
204,790
      
213,910
  
Less: allowance for loan losses
    
(4,173
)
    
(3,850
)
                 
Net loans receivable
  
$
200,617
    
$
210,060
  

An analysis of the loan portfolio and other assets at follows:

   
June 30,
2019
    
December 31,
2018
  
             
Loans that are ninety days or more past due and still accruing interest
  
$
100
    
$
-
  
Loans whose accrual of interest had been discontinued
    
334
      
723
  
Interest income that would have been recorded if such loans had been on full-accrual status
    
21
      
18
  
Foreclosed and repossesed assets other than real estate
    
-
      
-
  
Overdraft balances classified as consumer loans
    
40
      
55
  

The Company’s recorded investment in impaired loans and the related valuation allowance are as follows:

   
June 30,
2019
    
December 31,
2018
  
             
Recorded investment
  
$
6,817
    
$
9,488
  
Valuation allowance
  
$
65
    
$
390
  

-12-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

Non-accrual loans consisted of the following:

   
June 30,
2019
    
December 31,
2018
  
             
Real estate
  
$
-
    
$
-
  
Commercial
    
334
      
721
  
Consumer and other
    
-
      
2
  
                 
   
$
334
    
$
723
  

No additional funds are committed to be advanced in connection with impaired loans.

The Company’s impaired loans and related allowance is summarized in the following tables:

   
Unpaid
Contractual
Principal
Balance
    
Recorded
Investment
With No
Allowance
    
Recorded
Investment
With
Allowance
    
Total
Recorded
Investment
    
Related
Allowance
    
Average
Recorded
Investment
  
                                     
June 30, 2019
                                    
Real estate
  
$
3,796
    
$
3,796
    
$
-
    
$
3,796
    
$
-
    
$
1,898
  
Commercial
    
2,994
      
1,159
      
1,835
      
2,994
      
62
      
6,241
  
Consumer and other
    
27
      
27
      
-
      
27
      
3
      
13
  
                                                 
Total
  
$
6,817
    
$
4,982
    
$
1,835
    
$
6,817
    
$
65
    
$
8,152
  
                                                 
December 31, 2018
                                                
Real estate
  
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
  
Commercial
    
9,488
      
8,240
      
1,248
      
9,488
      
390
      
6,053
  
Consumer and other
    
-
      
-
      
-
      
-
      
-
      
-
  
                                                 
Total
  
$
9,488
    
$
8,240
    
$
1,248
    
$
9,488
    
$
390
    
$
6,053
  

Interest payments received on impaired loans are recorded as interest income unless collections of the remaining recorded investment are doubtful, at which time payments received are recorded as reductions of principal. The Company recognized interest income on impaired loans in the amount of $299 and $1,738 and received $10 and $810 of interest since impairment on a cash-basis during the six months ended June 30, 2019 and 2018, respectively. From a credit risk standpoint, the Company classifies its loans in one of four categories: (i) pass, (ii) special mention, (iii) substandard or (iv) doubtful. Loans classified as loss are charged-off. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits as part of its on-going monitoring of the credit quality of the loan portfolio. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each monthly reporting period. The methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

-13-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on nonaccrual.

   
Pass
    
Special
Mention
    
Substandard
    
Doubtful
    
Total
  
                               
June 30, 2019
                              
Real Estate
  
$
127,907
    
$
-
    
$
2,785
    
$
-
    
$
130,692
  
Commercial
    
62,630
      
-
      
4,000
      
5
      
66,635
  
Consumer and other
    
7,436
      
-
      
27
      
-
      
7,463
  
                                         
Total
  
$
197,973
    
$
-
    
$
6,812
    
$
5
    
$
204,790
  
                                         
December 31, 2018
                                        
Real Estate
  
$
138,350
    
$
-
    
$
-
    
$
-
    
$
138,350
  
Commercial
    
61,745
      
-
      
9,228
      
260
      
71,233
  
Consumer and other
    
4,327
      
-
      
-
      
-
      
4,327
  
                                         
Total
  
$
204,422
    
$
-
    
$
9,228
    
$
260
    
$
213,910
  

-14-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

The Company’s past due loans are as follows:

   
30-89 Days Past
Due
    
90 Days or More
Past Due and Still
Accruing
    
Nonaccrual
  
                   
June 30, 2019
                  
Real estate
  
$
440
    
$
100
    
$
-
  
Commercial
    
566
      
-
      
334
  
Consumer and other
    
11
      
-
      
-
  
                         
Total
  
$
1,017
    
$
100
    
$
334
  
                         
December 31, 2018
                        
Real estate
  
$
-
    
$
-
    
$
-
  
Commercial
    
171
      
-
      
721
  
Consumer and other
    
13
      
-
      
2
  
                         
Total
  
$
184
    
$
-
    
$
723
  

The following tables detail the allowance for loan loss by portfolio segment. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

   
Real Estate
    
Commercial
    
Consumer
and Other
    
Total
  
                         
June 30, 2019
                        
Loans indivdually evaluated for impairment
  
$
-
    
$
65
    
$
-
    
$
65
  
Loans collectively evaluated for impairment
    
592
      
3,203
      
313
      
4,108
  
                                 
   
$
592
    
$
3,268
    
$
313
    
$
4,173
  
December 31, 2018
                                
Loans indivdually evaluated for impairment
  
$
-
    
$
390
    
$
-
    
$
390
  
Loans collectively evaluated for impairment
    
523
      
2,620
      
317
      
3,460
  
                                 
   
$
523
    
$
3,010
    
$
317
    
$
3,850
  

-15-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

The level of the allowance for loan losses (the allowance) reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for loan losses is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates, and the regulatory environment.

An analysis of the change in the allowance for loan losses was as follows:

   
Beginning
Balance
    
Provision for
loan losses
    
Charge-offs
    
Recoveries
    
Ending
Balance
  
                               
For the six months ended
                              
June 30, 2019
                              
Real Estate
  
$
523
    
$
3
    
$
-
    
$
66
    
$
592
  
Commercial
    
3,010
      
24
      
(230
)
    
464
      
3,268
  
Consumer and other
    
317
      
3
      
(8
)
    
1
      
313
  
                                         
Total
  
$
3,850
    
$
30
    
$
(238
)
  
$
531
    
$
4,173
  
                                         
For the six months ended
                                        
June 30, 2018
                                        
Real Estate
  
$
523
    
$
3
    
$
-
    
$
-
    
$
526
  
Commercial
    
3,618
      
54
      
(956
)
    
229
      
2,945
  
Consumer and other
    
322
      
3
      
(16
)
    
4
      
313
  
                                         
Total
  
$
4,463
    
$
60
    
$
(972
)
  
$
233
    
$
3,784
  

-16-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

The Company’s recorded investment in loans related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology was as follows:

   
Recorded Investment
  
   
Individually
Evaluated
    
Collectively
Evaluated
  
             
June 30, 2019
            
Real Estate
  
$
3,796
    
$
142,766
  
Commercial
    
2,994
      
49,358
  
Consumer and other
    
27
      
5,849
  
                 
Total
  
$
6,817
    
$
197,973
  
                 
December 31, 2018
                
Real Estate
  
$
-
    
$
138,350
  
Commercial
    
9,488
      
61,745
  
Consumer and other
    
-
      
4,327
  
                 
Total
  
$
9,488
    
$
204,422
  

The Company had no loans that were modified in the six months ended June 30, 2019 and year ended December 31, 2018 and considered a troubled debt restructuring.

As of June 30, 2019 and December 31, 2018, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

4.
COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company has outstanding commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments to extend credit as it does for instruments that are included in the financial statements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company, upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies and may include accounts receivable, inventory, property and equipment, and income producing commercial properties.

-17-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. In the event of nonperformance by the customers, the Company has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The credit risk to the Company in issuing letters of credit is essentially the same as that involved in extending loan facilities to its customers.

Financial instruments whose contract amounts represent off-balance-sheet credit risk are as follows:
 
   
June 30,
2019
    
December 31,
2018
  
Commitments to extend credit
  
$
33,769
    
$
35,383
  
Standby letters of credit
    
3,234
      
1,485
  

Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s financial statements.

5.
LINES OF CREDIT

Amounts of unused lines of credit, subject to terms of the related agreements with correspondent financial institutions, available as of June 30, 2019 and December 31, 2018 were $162,386 and $128,227, respectively, with no balances outstanding as of June 30, 2019 and December 31, 2018. The agreements have terms expiring in 2019 and 2020.

6.
RELATED-PARTY TRANSACTIONS

The Company has entered into transactions with its executive officers, directors, stockholders, and their affiliates (related parties). Fees paid to directors during the six months ended June 30, 2019 and 2018 were $81 and $64, respectively.

In the ordinary course of business, the Company has granted loans to such related parties. As of June 30, 2019 and December 31, 2018, the aggregate amount of all extensions of credit to all executive officers, directors, principal shareholders, and their related interests amounted to $4,295 and $3,044, respectively.

7.
FAIR VALUE MEASUREMENTS

In general, fair value is based upon quoted market prices, where available. If such quoted prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. 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 of certain financial instruments could result in a different estimate of fair value at the reporting date. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. Transfers, if any, between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly or annual valuation process. The Company has no nonfinancial assets or nonfinancial liabilities measured at fair value on a recurring basis.
-18-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

Investment Securities Available for Sale, held to maturity and trading – Securities classified as available for sale, held to maturity and trading are reported at fair value using Level 2 inputs. For these securities, 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 prepayment speeds, credit information and the bond’s terms, among other things.

Foreclosed Real Estate – The fair values are estimated based upon recent appraisal values of the property, less estimated costs to sell the property or based upon applicable sale contract. Certain inputs in appraisals are not observable, and, therefore, foreclosed real estate is categorized as Level 3 within the fair value hierarchy. Fair values are based upon the appraisals performed by appraisers approved by the Company. The assumptions in the appraisals are unadjusted by management; however, estimated costs to sell the assets of 5% to 7% are deducted from the appraised value.

Impaired Loans – Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria. As of June 30, 2019 and December 31, 2018, a valuation allowance of $65 and $390, respectively, was recorded on impaired loans; resulting in a net fair value of $6,752 and $9,098, respectively.

The tables below present the assets and liabilities measured at fair value on a recurring basis aggregated by the level in the fair value hierarchy within which those measurements fall.

   
Total Fair
Value
    
Level 1
    
Level 2
    
Level 3
  
                         
June 30, 2019
                        
Financial assets
                        
Securities available for sale
  
$
77,206
    
$
-
    
$
77,206
    
$
-
  
Securities held to maturity
    
2,331
      
-
      
2,331
      
-
  
                                 
   
$
79,537
    
$
-
    
$
79,537
    
$
-
  
December 31, 2018
                                
Financial assets
                                
Securities available for sale
  
$
79,463
    
$
-
    
$
79,463
    
$
-
  
Securities held to maturity
    
1,088
      
-
      
1,088
      
-
  
                                 
   
$
80,551
    
$
-
    
$
80,551
    
$
-
  

Certain assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, evidence of impairment). Fair value is used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values.

There were no nonfinancial assets and liabilities measured at fair value after initial recognition on a nonrecurring basis during the periods ended June 30, 2019 and December 31, 2018.

-19-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

FASB ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The Company’s lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair values of these instruments are not significant and are not recognized in the financial statements or the schedule below. The methodologies for other financial assets and financial liabilities are discussed below:


 a)
Cash and cash equivalents and certificates of deposits held in other banks. The estimated fair value approximates carrying (book) value based on the short-term nature of the instrument.


b)
Accrued interest receivable and accrued interest payable. The estimated fair value approximates carrying value based on the short-term nature of the instrument.


c)
Restricted investments held at cost. No ready market exists for the stocks and it has no quoted market value. The carrying value of the stock is accounted for using the cost basis of accounting, which approximates fair value as that is the amount it will be repurchased by the FHLB or TIB.


d)
Loans, net of allowance for loan losses. The estimated fair value approximates carrying value for variable rate loans that re-price frequently and with no significant change in credit risk. The fair value of fixed rate loans and variable rate loans which re-price on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.


e)
Deposits. The estimated fair value approximates carrying value for demand deposits, savings and NOW deposits. The fair value of time deposits is estimated by discounting future cash flows using the interest rates currently offered for deposits of similar remaining maturities. The estimated fair value of deposits does not take into account the Company’s long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments. Nonetheless, the Company would likely realize a core deposit premium if its portfolio were sold in the principal market for such deposits.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a transaction between willing parties.

-20-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

   
Book
Value
    
Estimated
Fair Value
  
             
June 30, 2019
            
Financial assets:
            
Cash and cash equivalents
  
$
102,204
    
$
102,204
  
Certificate of deposits held in other banks
    
26,223
      
26,223
  
Securities available for sale
    
77,206
      
77,206
  
Securities held to maturity
    
2,240
      
2,331
  
Loans, net
    
200,617
      
196,386
  
Accrued interest receivable
    
1,023
      
1,023
  
Restricted investments held at cost
    
618
      
618
  
                 
Financial liabilites:
                
Deposits
    
376,155
      
354,104
  
Accrued interest paybale
    
125
      
125
  

   
Book
Value
    
Estimated
Fair Value
  
             
December 31, 2018
            
Financial assets:
            
Cash and cash equivalents
  
$
82,906
    
$
82,906
  
Certificate of deposits held in other banks
    
23,887
      
23,887
  
Securities available for sale
    
79,463
      
79,463
  
Securities held to maturity
    
1,087
      
1,088
  
Loans, net
    
210,060
      
205,936
  
Accrued interest receivable
    
1,062
      
1,062
  
Restricted investments held at cost
    
616
      
616
  
                 
Financial liabilites:
                
Deposits
    
366,804
      
345,308
  
Accrued interest paybale
    
80
      
80
  

8.
REGULATORY MATTERS

The Company is subject to various regulatory capital requirements administered by the state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

-21-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

The Basel III Capital Rules, a new comprehensive capital framework for U.S. banking organizations, became effective for the Company on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

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

Effective January 1, 2019, the Basel III Capital Rules require the Company 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 implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and was phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). 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. 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.

Management believes, as of June 30, 2019 and December 31, 2018, that the Bank met all capital requirements to which it is subject. The amount of dividends or distributions which the Company may pay is subject to restrictions and minimum levels of capital required by bank regulatory agencies.

-22-
WEST TEXAS STATE BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)

The Company’s actual capital amounts and ratios follow:

   
Actual
    
Minimum Required
Under BASEL III
Fully Phased-In
    
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
  
   
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
       
June 30, 2019
                                    
Common Equity Tier 1 (to risk-weighted assets)
  
$
51,791
      
21.1
%
  
$
17,184
      
7.0
%
  
$
15,956
      
6.5
%
                                                 
Total Capital (to risk-weighted assets)
  
$
54,873
      
22.3
%
  
$
25,775
      
10.5
%
  
$
24,258
      
10.0
%
                                                 
Tier 1 Capital (to risk-weighted assets)
  
$
51,791
      
21.1
%
  
$
20,866
      
8.5
%
  
$
19,638
      
8.0
%
                                                 
Tier 1 Capital (to average assets)
  
$
51,791
      
12.1
%
  
$
17,083
      
4.0
%
  
$
21,353
      
5.0
%
                                                 
December 31, 2018
                                                
Common Equity Tier 1 (to risk-weighted assets)
  
$
51,023
      
18.7
%
  
$
19,136
      
7.0
%
  
$
17,741
      
6.5
%
                                                 
Total Capital (to risk-weighted assets)
  
$
54,440
      
20.0
%
  
$
28,704
      
10.5
%
  
$
27,294
      
10.0
%
                                                 
Tier 1 Capital (to risk-weighted assets)
  
$
51,023
      
18.7
%
  
$
23,337
      
8.5
%
  
$
21,835
      
8.0
%
                                                 
Tier 1 Capital (to average assets)
  
$
51,023
      
12.0
%
  
$
16,954
      
4.0
%
  
$
21,192
      
5.0
%


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