Red River Bank - SEC Filing

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: June 30, 2020



☐	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: 001-38888



	Red River Bancshares, Inc.
	(Exact name of registrant as specified in its charter)



Louisiana		72-1412058
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)



1412 Centre Court Drive, Suite 501,	Alexandria,	Louisiana	71301
(Address of Principal Executive Offices)			(Zip Code)

Registrant’s telephone number, including area code: (318) 561-5028

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, no par value	RRBI	The Nasdaq Stock Market, LLC

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

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

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



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 July 31, 2020, the registrant had 7,328,157 shares of common stock, no par value, issued and outstanding.

TABLE OF CONTENTS



		Page
Glossary of Terms		3
Cautionary Note Regarding Forward-Looking Statements		4

PART I	Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	6
	Consolidated Statements of Comprehensive Income	7
	Consolidated Statements of Changes in Stockholders' Equity	8
	Consolidated Statements of Cash Flows	9
	Notes to Unaudited Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	54

PART II	Other Information
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Use of Proceeds from Registered Sales of Equity Securities	57
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	58
	Signatures	59

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GLOSSARY OF TERMS

Unless the context indicates otherwise, references in this filing to “we,” “our,” “us,” “the Company,” and “our company” refer to Red River Bancshares, Inc., a Louisiana corporation and bank holding company, and its consolidated subsidiaries. All references in this filing to “Red River Bank,” the “bank,” and the “Bank” refer to Red River Bank, our wholly owned bank subsidiary.

Other abbreviations or acronyms used in this filing are defined below.



ABBREVIATION OR ACRONYM		DEFINITION
AFS		Available-for-sale
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
Basel III		Basel Committee's 2010 Regulatory Capital Framework (Third Accord)
BOLI		Bank-owned life insurance
bp(s)		Basis point(s)
CARES Act		Coronavirus Aid, Relief, and Economic Security Act, as amended
CBLR		Community Bank Leverage Ratio
CECL		Current Expected Credit Losses, related to ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
COVID-19		Coronavirus Disease 2019
Economic Growth Act		Economic Growth, Regulatory Relief, and Consumer Protection Act
EPS		Earnings per share
Exchange Act		Securities Exchange Act of 1934, as amended
FDIC		Federal Deposit Insurance Corporation
Federal Reserve		Board of Governors of the Federal Reserve System
FHLB		Federal Home Loan Bank of Dallas
FTE		Fully taxable equivalent basis
GAAP		Generally Accepted Accounting Principles in the United States of America
HFI		Held for investment
HFS		Held for sale
HTM		Held-to-maturity
IPO		Initial public offering
MSA		Metropolitan statistical area
NOW		Negotiable order of withdrawal
NPA(s)		Nonperforming asset(s)
OTTI		Other-than-temporary impairment
PPP		Paycheck Protection Program
SBA		Small Business Administration
SBIC		Small Business Investment Company
Securities Act		Securities Act of 1933, as amended
SEC		Securities and Exchange Commission
TDR(s)		Troubled debt restructuring(s)

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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


•	business and economic conditions generally and in the financial services industry, nationally and within our local market areas;


•	the impact of COVID-19 on our business, the communities where we have our banking centers, the state of Louisiana, and the United States, related to the economy and overall financial stability;


•	government and regulatory responses to the COVID-19 pandemic;


•	government intervention in the U.S. financial system, including the effects of recent and future legislative, tax, accounting, and regulatory actions and reforms, including the CARES Act and other changes in banking, securities, accounting, and tax laws and regulations, and their application by our regulators;


•	changes in management personnel;


•	increased competition in the financial services industry, particularly from regional and national institutions;


•	volatility and direction of market interest rates;


•	our ability to maintain important deposit customer relationships, our reputation, and to otherwise avoid liquidity risks;


•	factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers, and the success of construction projects that we finance, including any loans acquired in acquisition transactions;


•	changes in the value of collateral securing our loans;


•	risks associated with system failures or failures to protect against cybersecurity threats, such as breaches of our network security;


•	deterioration of our asset quality;


•	the adequacy of our reserves, including our allowance for loan losses;


•	operational risks associated with our business;


•	natural disasters and adverse weather, acts of terrorism, pandemics, an outbreak of hostilities or other international or domestic calamities, and other matters beyond our control;


•	our ability to prudently manage our growth and execute our strategy;


•	compliance with the extensive regulatory framework that applies to us;


•	uncertainty regarding the future of LIBOR and the impact of any replacement alternatives on our business;


•	changes in the laws, rules, regulations, interpretations, or policies relating to financial institution, accounting, tax, trade, monetary, and fiscal matters; and


•	other risks and uncertainties listed from time to time in our reports and documents filed with the SEC.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. Additional information on these and other risk factors can be found in "Part II - Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q and in "Part I - Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RED RIVER BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS



(in thousands, except share amounts)	(Unaudited) June 30, 2020			(Audited) December 31, 2019
ASSETS
Cash and due from banks	$	31,097		$	25,937
Interest-bearing deposits in other banks	210,254			107,355
Total Cash and Cash Equivalents	241,351			133,292
Securities available-for-sale	413,246			335,573
Equity securities	4,032			3,936
Nonmarketable equity securities	3,441			1,350
Loans held for sale	14,578			5,089
Loans held for investment	1,615,298			1,438,924
Allowance for loan losses	(14,882		)	(13,937		)
Premises and equipment, net	41,465			41,744
Accrued interest receivable	6,492			5,251
Bank-owned life insurance	22,131			21,845
Intangible assets	1,546			1,546
Right-of-use assets	4,355			4,553
Other assets	8,813			9,059
Total Assets	$	2,361,866		$	1,988,225
LIABILITIES
Noninterest-bearing deposits	$	858,397		$	584,915
Interest-bearing deposits	1,210,925			1,136,205
Total Deposits	2,069,322			1,721,120
Accrued interest payable	1,994			2,222
Lease liabilities	4,419			4,603
Accrued expenses and other liabilities	15,014			8,382
Total Liabilities	2,090,749			1,736,327
COMMITMENTS AND CONTINGENCIES	—			—
STOCKHOLDERS' EQUITY
Preferred stock, no par value: Authorized - 1,000,000 shares; None Issued and Outstanding	—			—
Common stock, no par value: Authorized - 30,000,000 shares; Issued and Outstanding - 7,322,532 and 7,306,221 shares	68,177			68,082
Additional paid-in capital	1,429			1,269
Retained earnings	195,291			182,571
Accumulated other comprehensive income (loss)	6,220			(24		)
Total Stockholders' Equity	271,117			251,898
Total Liabilities and Stockholders' Equity	$	2,361,866		$	1,988,225

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

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RED RIVER BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



(in thousands, except per share data)	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2020		2019			2020		2019
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	17,076	$	15,945		$	33,542	$	31,448
Interest on securities	1,876		1,784			3,667		3,547
Interest on federal funds sold	37		212			150		425
Interest on deposits in other banks	32		306			238		722
Dividends on stock	2		9			6		19
Total Interest and Dividend Income	19,023		18,256			37,603		36,161
INTEREST EXPENSE
Interest on deposits	2,051		2,449			4,543		4,746
Interest on other borrowed funds	16		—			16		—
Interest on junior subordinated debentures	—		156			—		312
Total Interest Expense	2,067		2,605			4,559		5,058
Net Interest Income	16,956		15,651			33,044		31,103
Provision for loan losses	1,525		529			2,028		1,055
Net Interest Income After Provision for Loan Losses	15,431		15,122			31,016		30,048
NONINTEREST INCOME
Service charges on deposit accounts	718		1,083			1,946		2,109
Debit card income, net	896		785			1,651		1,481
Mortgage loan income	1,947		657			2,835		1,171
Brokerage income	395		626			1,139		991
Loan and deposit income	627		382			927		727
Bank-owned life insurance income	144		137			287		270
Gain (Loss) on equity securities	33		56			96		104
Gain (Loss) on sale of securities	840		—			1,223		—
SBIC income	190		376			368		496
Other income (loss)	33		(3		)	82		46
Total Noninterest Income	5,823		4,099			10,554		7,395
OPERATING EXPENSES
Personnel expenses	7,646		7,005			14,995		13,645
Occupancy and equipment expenses	1,235		1,334			2,419		2,509
Technology expenses	615		558			1,202		1,101
Advertising	215		396			476		605
Other business development expenses	256		277			551		560
Data processing expense	471		483			921		942
Other taxes	438		455			875		808
Loan and deposit expenses	273		392			519		615
Legal and professional expenses	605		383			1,100		702
Regulatory assessment expenses	139		133			164		275
Other operating expenses	976		988			1,597		1,800
Total Operating Expenses	12,869		12,404			24,819		23,562
Income Before Income Tax Expense	8,385		6,817			16,751		13,881
Income tax expense	1,531		1,279			3,152		2,647
Net Income	$	6,854	$	5,538		$	13,599	$	11,234
EARNINGS PER SHARE
Basic	$	0.94	$	0.79		$	1.86	$	1.64
Diluted	$	0.93	$	0.78		$	1.85	$	1.63

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

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RED RIVER BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)



(in thousands)	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
Net income	$	6,854		$	5,538		$	13,599		$	11,234
Other comprehensive income (loss):
Unrealized net gain (loss) on securities arising during period	1,386			4,213			9,126			9,131
Tax effect	(291		)	(885		)	(1,916		)	(1,918		)
(Gain) loss on sale of securities included in net income	(840		)	—			(1,223		)	—
Tax effect	177			—			257			—
Total change in other comprehensive income (loss)	432			3,328			6,244			7,213
Comprehensive Income	$	7,286		$	8,866		$	19,843		$	18,447

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

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RED RIVER BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)



(in thousands, except share amounts)	Common Shares Issued	Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
Balance as of December 31, 2018	6,627,358	$	41,094		$	1,042	$	159,073		$	(7,506	)	$	193,703
Net income	—	—			—		5,696			—			5,696
Stock incentive plan	—	—			49		—			—			49
Issuance of shares of common stock through exercise of stock options	7,200	80			—		—			—			80
Issuance of shares of common stock as board compensation	2,368	97			—		—			—			97
Cash dividend - $0.20 per share	—	—			—		(1,326		)	—			(1,326		)
Other comprehensive income (loss)	—	—			—		—			3,885			3,885
Balance as of March 31, 2019	6,636,926	$	41,271		$	1,091	$	163,443		$	(3,621	)	$	202,184
Net income	—	—			—		5,538			—			5,538
Stock incentive plan	—	—			50		—			—			50
Issuance of shares of common stock through IPO	663,320	26,812			—		—			—			26,812
Board compensation adjustment	—	(1		)	—		—			—			(1		)
Other comprehensive income (loss)	—	—			—		—			3,328			3,328
Balance as of June 30, 2019	7,300,246	$	68,082		$	1,141	$	168,981		$	(293	)	$	237,911

Balance as of December 31, 2019	7,306,221	$	68,082		$	1,269	$	182,571		$	(24	)	$	251,898
Net income	—	—			—		6,745			—			6,745
Stock incentive plan	—	—			64		—			—			64
Issuance of shares of common stock through exercise of stock options	14,720	8			—		—			—			8
Issuance of shares of common stock as board compensation	1,591	87			—		—			—			87
Cash dividend - $0.06 per share	—	—			—		(439		)	—			(439		)
Other comprehensive income (loss)	—	—			—		—			5,812			5,812
Balance as of March 31, 2020	7,322,532	$	68,177		$	1,333	$	188,877		$	5,788		$	264,175
Net income	—	—			—		6,854			—			6,854
Stock incentive plan	—	—			96		—			—			96
Cash dividend - $0.06 per share	—	—			—		(440		)	—			(440		)
Other comprehensive income (loss)	—	—			—		—			432			432
Balance as of June 30, 2020	7,322,532	$	68,177		$	1,429	$	195,291		$	6,220		$	271,117

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

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RED RIVER BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



(in thousands)	For the Six Months Ended June 30,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	13,599		$	11,234
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation	900			847
Amortization	260			151
Share-based compensation earned	160			99
Share-based board compensation earned	35			52
(Gain) Loss on other assets owned	9			11
Net (accretion) amortization on securities AFS	1,293			566
Gain on sale of securities AFS	(1,223		)	—
Provision for loan losses	2,028			1,055
Deferred income tax (benefit) expense	(292		)	(263		)
Net (increase) decrease in loans HFS	(9,489		)	(3,125		)
Net (increase) decrease in accrued interest receivable	(1,241		)	(557		)
Net (increase) decrease in BOLI	(286		)	(269		)
Net increase (decrease) in accrued interest payable	(228		)	241
Net increase (decrease) in accrued income taxes payable	3,108			(431		)
Other operating activities, net	1,819			(272		)
Net cash provided by (used in) operating activities	10,452			9,339
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in securities AFS:
Sales	86,925			—
Maturities, prepayments, and calls	42,076			33,255
Purchases	(198,841		)	(34,893		)
Purchase of nonmarketable equity securities	(2,091		)	(43		)
Net (increase) decrease in loans HFI	(177,480		)	(65,495		)
Proceeds from sales of foreclosed assets	302			333
Purchases of premises and equipment	(615		)	(1,174		)
Net cash provided by (used in) investing activities	(249,724		)	(68,017		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits	348,202			(10,993		)
Proceeds from other borrowed funds	50,000			—
Repayments of other borrowed funds	(50,000		)	—
Redemption of junior subordinated debentures	—			(6,186		)
Proceeds from exercise of stock options	8			80
Proceeds from initial public offering, net	—			26,812
Cash dividends	(879		)	(1,326		)
Net cash provided by (used in) financing activities	347,331			8,387
Net change in cash and cash equivalents	108,059			(50,291		)
Cash and cash equivalents - beginning of period	133,292			151,906
Cash and cash equivalents - end of period	$	241,351		$	101,615

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

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RED RIVER BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)



(in thousands)	For the Six Months Ended June 30,
	2020		2019
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest	$	4,788	$	4,817
Income taxes	$	317	$	3,323
Initial measurement and recognition of operating lease assets in exchange for lease liabilities	$	—	$	4,954
SUPPLEMENTAL INFORMATION FOR NON-CASH INVESTING AND FINANCING ACTIVITIES
Assets acquired in settlement of loans	$	23	$	792

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

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RED RIVER BANCSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with GAAP for interim financial information, general practices within the financial services industry, and with instructions for Form 10-Q and Regulation S-X. Accordingly, these interim financial statements do not include all of the information or footnotes required by GAAP for annual financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results which may be expected for the entire fiscal year. These 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 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Certain prior period amounts have been reclassified to conform to the current period presentation. These changes in presentation did not have a material impact on the Company's financial condition or results of operations.

Critical Accounting Policies and Estimates

There were no material changes or developments during the reporting period with respect to methodologies the Company uses when applying critical accounting policies and developing critical accounting estimates as disclosed in Note 1 of the notes to the audited consolidated financial statements for the year ended December 31, 2019, that were included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. In preparing the financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the Company’s financial condition, results of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the interim period presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.

Accounting Standards Adopted in 2020

ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds, and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. This standard was effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. ASU 2018-13 was adopted as of January 1, 2020, and did not have a material impact on the Company's financial statements.

ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment based on that difference. The impairment will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the requirement to calculate a goodwill impairment using Step 2, which requires an entity to calculate any impairment by comparing the implied fair value of goodwill with its carrying amount. This standard was effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. ASU 2017-04 was adopted as of January 1, 2020, and did not have a material impact on the Company's financial statements.

Recent Accounting Pronouncements

ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted tax changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual periods beginning after December 15, 2020, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 sets forth the CECL model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 requires enhanced disclosures related to the significant estimates and judgments

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used in estimating credit losses. In addition, the update amends the accounting for credit losses on AFS securities. As an SEC registrant with smaller reporting company filing status as determined on June 30, 2019, CECL is effective for the Company beginning January 1, 2023. The Company continues to evaluate the impact of this ASU on the consolidated financial statements and disclosures. In that regard, the Company has formed a cross-functional working group and is currently working through an implementation plan. The implementation plan includes an assessment of data, model development and documentation, documentation of processes, and implementation of a third-party vendor solution to assist in the adoption of ASU 2016-13.


2.	Securities

Securities held for indefinite periods of time are classified as AFS and carried at estimated fair value. The Company did not have any HTM securities as of June 30, 2020. Investment activity for the six months ended June 30, 2020, included $198.8 million of securities purchased, partially offset by $86.9 million in sales and $42.1 million in maturities, prepayments, and calls. The net unrealized gain of the securities AFS portfolio increased $7.9 million for the six months ended June 30, 2020. The amortized cost and estimated fair values of securities AFS are summarized in the following tables:



	June 30, 2020
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities AFS:
Mortgage-backed securities	$	251,298	$	4,439	$	(106	)	$	255,631
Municipal bonds	147,630		3,422		(68		)	150,984
U.S. agency securities	6,445		186		—			6,631
Total Securities AFS	$	405,373	$	8,047	$	(174	)	$	413,246



	December 31, 2019
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities AFS:
Mortgage-backed securities	$	236,572	$	299	$	(1,200	)	$	235,671
Municipal bonds	91,929		1,108		(279		)	92,758
U.S. agency securities	7,102		46		(4		)	7,144
Total Securities AFS	$	335,603	$	1,453	$	(1,483	)	$	335,573

The amortized costs and estimated fair value of debt securities as of June 30, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers have the right to call or repay obligations with or without call or prepayment penalties.



(in thousands)	Amortized Cost		Fair Value
Within one year	$	585	$	596
After one year but within five years	37,058		37,779
After five years but within ten years	49,938		51,395
After ten years	317,792		323,476
Total	$	405,373	$	413,246

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Information pertaining to securities with gross unrealized losses as of June 30, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is described as follows:



	Less than twelve months					Twelve months or more
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
June 30, 2020
Securities AFS:
Mortgage-backed securities	$	(106	)	$	35,432	$	—		$	—
Municipal bonds	(67		)	5,987		(1		)	269
U.S. agency securities	—			—		—			—
Total Securities AFS	$	(173	)	$	41,419	$	(1	)	$	269

December 31, 2019
Securities AFS:
Mortgage-backed securities	$	(474	)	$	109,416	$	(726	)	$	70,425
Municipal bonds	(172		)	18,735		(107		)	9,323
U.S. agency securities	(4		)	1,020		—			—
Total Securities AFS	$	(650	)	$	129,171	$	(833	)	$	79,748

As of June 30, 2020, the number of investment securities in an unrealized loss position totaled 19. The aggregate unrealized loss of these securities as of June 30, 2020, was 0.04% of the amortized cost basis of the total securities AFS portfolio. Management and the Asset-Liability Committee continually monitor the securities portfolio and are able to effectively measure and monitor the unrealized loss positions on these securities. Management does not intend to sell these securities prior to recovery, and it is more likely than not that the Company will have the ability to hold them, primarily due to adequate liquidity, until each security has recovered its cost basis. The unrealized losses on these securities have been determined by management to be a function of the movement of interest rates since the time of purchase. Based on review of available information, including recent changes in interest rates and credit rating information, management believes the declines in fair value of these securities are temporary. The Company does not consider these securities to have OTTI.

Management evaluates securities for OTTI on at least a quarterly basis, and more frequently if economic or market concerns merit such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; and (3) whether the Company intends to, and it is more likely than not that it will be able to, retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Additionally, the Company annually performs a detailed credit review of the municipal securities owned to identify any potential credit concerns. There were no OTTI losses on debt securities related to credit losses recognized during the six months ended June 30, 2020, or the year ended December 31, 2019.

The proceeds from sales of securities AFS and their gross gain (loss) for the three and six months ended June 30, 2020 and 2019, are shown below:



	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)	2020			2019		2020			2019
Proceeds⁽¹⁾	$	55,765		$	—	$	86,925		$	—
Gross gain	$	861		$	—	$	1,316		$	—
Gross loss	$	(21	)	$	—	$	(93	)	$	—


⁽¹⁾	The proceeds include the gross gain and loss.

Pledged Securities

Securities with carrying values of approximately $110.6 million and $89.8 million were pledged to secure public entity deposits as of June 30, 2020 and December 31, 2019, respectively.

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3.	Loans and Asset Quality

Loans

Loans HFI by category and loans HFS are summarized below:



(in thousands)	June 30, 2020		December 31, 2019
Real estate:
Commercial real estate	$	536,166	$	531,990
One-to-four family residential	420,545		420,020
Construction and development	140,907		132,461
Commercial and industrial	244,587		267,940
SBA PPP, net of deferred income	192,655		—
Tax-exempt	56,065		56,494
Consumer	24,373		30,019
Total loans HFI	$	1,615,298