Business Context and Reporting Period
South Plains Financial, Inc. is a Texas bank holding company operating primarily through City Bank, with commercial and retail banking, mortgage, insurance, investment and trust services across Texas and Eastern New Mexico. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019. Dollar amounts are in thousands unless otherwise stated.
Comparisons with 2018 are affected by the Company’s conversion from an S corporation to a C corporation effective May 31, 2018; 2018 pro forma C-corporation net income for the nine-month period was $14.9 million.
Key Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net interest income | $26.6 million, versus $24.8 million | $76.0 million, versus $70.9 million |
| Provision for loan losses | $0.4 million, versus $3.4 million | $1.9 million, versus $5.7 million |
| Noninterest income | $14.1 million, versus $13.3 million | $39.9 million, versus $37.7 million |
| Noninterest expense | $30.0 million, versus $28.6 million | $90.0 million, versus $84.9 million |
| Income before taxes | $10.2 million, versus $6.0 million | $23.9 million, versus $18.0 million |
| Net income | $8.3 million, versus $4.9 million | $19.1 million, versus $23.4 million reported; $14.9 million on a pro forma C-corporation basis |
| Diluted EPS | $0.45, versus $0.33 | $1.15, versus $1.59 reported; comparability is affected by tax status and share issuance |
| Net interest margin | 4.07%, versus 4.02% | 3.96%, unchanged |
| Return on average assets / equity | 1.18% / 11.10%, versus 0.74% / 9.08% | Not clearly provided in the filing text |
Mortgage banking activities generated $7.0 million of noninterest income in the third quarter and $18.5 million year to date. Net gain on sales of loans was $6.6 million in the third quarter and $17.5 million year to date.
Balance Sheet, Capital and Liquidity
- Total assets were $2.80 billion at September 30, 2019, up 3.1% from December 31, 2018.
- Loans held for investment were $1.96 billion, essentially flat year to date; net loans were $1.94 billion.
- Available-for-sale securities increased 18.7% to $401.3 million, primarily from investing excess Federal Reserve deposits.
- Total deposits were $2.29 billion, up 0.4%; noninterest-bearing deposits represented 24.4% of total deposits.
- Cash and cash equivalents were $244.6 million. The Company had $432.6 million of remaining FHLB borrowing capacity, unused $135.0 million of uncollateralized bank lines, and an unused Federal Reserve line of $556.1 million.
- Outstanding long-term FHLB borrowings were $95.0 million. Other debt included $26.5 million of subordinated debt securities and $46.4 million of junior subordinated debentures.
- Stockholders’ equity was $299.0 million, compared with $212.8 million at year-end 2018. The increase primarily reflected $51.4 million of IPO proceeds, earnings, accumulated other comprehensive income and the reclassification of stock-based liabilities to equity.
- At September 30, 2019, City Bank was classified as well capitalized, with total risk-based capital of 13.81%, Tier 1 risk-based capital of 12.72%, CET1 capital of 12.72% and Tier 1 leverage of 10.25%.
Material Changes Versus Comparable Period
- Third-quarter net income rose $3.4 million, or approximately 68%, primarily because of higher net interest income and a $3.0 million reduction in the loan-loss provision, partly offset by higher operating expenses.
- Nine-month net income increased $4.2 million versus 2018 pro forma C-corporation net income, driven by a $5.0 million increase in net interest income, a $3.8 million reduction in loan-loss provision and a $2.2 million increase in noninterest income. The comparison with reported 2018 net income is not meaningful because of the former S-corporation tax treatment.
- Average loan balances and loan yields increased. Funding costs also rose, with the average rate on interest-bearing liabilities increasing 42 basis points year to date; the nine-month net interest spread declined to 3.59% from 3.70%.
- Net charge-offs fell to $0.9 million year to date from $6.1 million, while the allowance for loan losses increased to $24.2 million, or 1.23% of loans held for investment, from 1.18% at year-end.
- The May 2019 IPO issued 3.207 million shares at $17.50 per share, generating $51.4 million of net proceeds. The ESOP repurchase obligation terminated upon the IPO and ESOP-owned shares were no longer deducted from equity.
- The Company recorded a $1.3 million after-tax cumulative adjustment to retained earnings for changing its stock appreciation rights accounting from intrinsic value to fair value.
- Windmark acquired the operating assets of a Texas crop insurance agency for $2.8 million in September 2019, recording $193,000 of goodwill and $2.3 million of other intangible assets.
- On November 12, 2019, after the reporting date, the Company completed its $76.1 million cash acquisition of West Texas State Bank. Purchase accounting remained subject to evaluation at the filing date.
Guidance, Outlook, Commentary and Risks
The filing does not provide quantitative earnings or balance-sheet guidance. Management expects liquidity needs to be met through profitability, loan and securities repayments and maturities, deposit gathering and available borrowing arrangements.
- Key risks include credit deterioration, particularly in commercial real estate, agricultural, energy-related and other commercial exposures; real estate values; commodity prices and weather conditions; and geographic or borrower concentrations.
- At September 30, 2019, nonperforming loans were $6.5 million and nonperforming assets were $8.8 million. Real-estate-secured loans represented 63.7% of loans held for investment.
- Off-balance-sheet commitments totaled $386.1 million, including $376.2 million of unfunded loan and line-of-credit commitments and $10.0 million of standby letters of credit.
- Interest-rate volatility could affect net interest income, funding costs and securities valuations. The Company’s modeled 12-month net interest income sensitivity ranged from a 1.11% decline under a 100-basis-point rate decrease to increases under rate increases.
- Management considered $1.4 million of unrealized securities losses temporary and did not identify credit-related impairment.
- The Company is evaluating the future impact of the current expected credit loss standard and other lease accounting requirements. The allowance for loan losses remains subject to management estimates and regulatory review.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material litigation developments were reported.
Most Important Facts to Verify
- Reconcile 2018 reported and pro forma C-corporation earnings before assessing year-over-year profitability or EPS trends.
- Review the final purchase accounting, funding impact and integration results of the WTSB acquisition completed November 12, 2019.
- Monitor credit quality, criticized and classified loans, nonaccrual trends, charge-offs and the adequacy of the $24.2 million allowance.
- Assess the sustainability of mortgage banking income and the effect of higher deposit funding costs on the 3.96% year-to-date net interest margin.
- Verify liquidity after using IPO proceeds and cash on hand for the WTSB transaction, including remaining borrowing capacity and deposit stability.
- Evaluate exposure to real estate, agriculture, energy-related borrowers, public-funds deposits and other geographic or concentration risks.
- Confirm the effect of the CECL adoption, future accounting changes and any goodwill or intangible-asset impairment testing.