South Plains Financial, Inc. 10-Q Summary
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 in Texas and Eastern New Mexico. This unaudited Form 10-Q covers the three and six months ended June 30, 2019. The company became publicly traded on Nasdaq under SPFI following its May 2019 initial public offering.
Because the company revoked its S corporation election effective May 31, 2018, management presents certain 2018 comparisons on a pro forma C corporation basis. The reported 2018 net income comparisons are therefore not directly comparable without considering the related tax effects.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Net interest income | $24.8 million | $23.4 million | $49.4 million | $46.2 million |
| Provision for loan losses | $0.9 million | $1.5 million | $1.5 million | $2.3 million |
| Noninterest income | $13.7 million | $13.0 million | $25.8 million | $24.4 million |
| Noninterest expense | $29.9 million | $28.4 million | $60.0 million | $56.3 million |
| Net income | $6.1 million | $13.0 million reported; $5.3 million pro forma | $10.9 million | $18.5 million reported; $10.0 million pro forma |
| Diluted earnings per share | $0.37 | $0.88 reported | $0.69 | $1.25 reported |
| Net interest margin | 3.88% | 3.98% | 3.91% | 3.92% |
| Return on average assets | 0.89% | 0.84% | Not clearly provided in the filing text | Not clearly provided in the filing text |
| Return on average equity | 9.57% | 9.98% | Not clearly provided in the filing text | Not clearly provided in the filing text |
For the second quarter, pro forma net income increased approximately 14% from $5.3 million to $6.1 million. For the first six months, pro forma net income increased approximately 9% from $10.0 million to $10.9 million. Growth was driven by higher net interest income, lower loan-loss provisions and increased noninterest income, partly offset by higher operating expenses.
Average loans increased 2.5% in the second quarter and 4.7% in the first six months, while loan yields increased 48 basis points in both comparisons. Higher funding costs, particularly on interest-bearing deposits, reduced the net interest margin to 3.88% for the quarter from 3.98% in the prior-year quarter.
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets were $2.78 billion at June 30, 2019, up 2.4% from December 31, 2018.
- Gross loans held for investment were $1.94 billion, down 1.1% from year-end. Consumer loans and construction loans increased, while commercial general loans declined following several early payoffs.
- The allowance for loan losses was $24.2 million, or 1.25% of loans held for investment, compared with 1.18% at year-end.
- Securities available for sale were $263.6 million, down 22.1% from year-end after approximately $75.0 million of short-term U.S. Treasury securities matured. Proceeds remained in interest-bearing deposits rather than being reinvested.
- Total deposits were $2.28 billion, essentially unchanged from year-end. Noninterest-bearing deposits represented 22.5% of total deposits.
- Cash and cash equivalents increased to $408.1 million from $246.0 million at year-end.
- Six-month net cash provided by operating activities was $21.7 million; investing activities provided $101.1 million, primarily from securities maturities and net loan collections; financing activities provided $39.4 million, including $51.4 million of IPO proceeds.
- Outstanding notes payable and other borrowings were $95.0 million. Subordinated debt securities were $26.5 million, and junior subordinated deferrable interest debentures were $46.4 million.
- Remaining FHLB borrowing capacity was $437.3 million, and the company had additional Federal Reserve and uncollateralized bank lines available. Management stated that liquidity was adequate.
- The company and City Bank met applicable regulatory capital requirements. At June 30, 2019, City Bank was well capitalized, with total risk-based capital of 14.12%, CET1 capital of 12.99% and Tier 1 leverage capital of 10.21%.
Material Changes Versus Prior Comparable Period
- Net interest income increased 6.0% in the second quarter and 7.0% for the first six months, but deposit and borrowing costs rose substantially.
- Noninterest income increased 5.7% in the quarter and 5.5% year to date, supported by mortgage banking, insurance and deposit-related activities.
- Noninterest expense increased 5.3% in the quarter and 6.5% year to date. Higher staffing costs reflected the November 2018 mortgage origination acquisition, while professional services included increased IPO-related legal expenses.
- The loan-loss provision declined from $1.5 million to $0.9 million in the quarter and from $2.3 million to $1.5 million year to date. Net charge-offs also declined materially from the prior year, which included a $1.4 million commercial real estate charge-off.
- The company issued 3,207,000 common shares in its IPO at $17.50 per share, generating $56.1 million of gross proceeds and $51.4 million of net proceeds. The offering and termination of the ESOP repurchase right increased reported stockholders’ equity to $291.1 million from $212.8 million at year-end.
- The company changed its accounting for cash-settled stock appreciation rights from the intrinsic value method to the fair value method, recording a $1.3 million after-tax cumulative adjustment to retained earnings. Approximately $11.5 million of liability-classified awards were converted to equity-classified stock options.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management described plans to use IPO proceeds to support organic growth, potential acquisitions and general corporate purposes.
On July 25, 2019, after quarter-end, the company agreed to acquire West Texas State Bank in an all-cash merger valued at $76.1 million. Closing is expected in the fourth quarter of 2019, subject to shareholder and regulatory approvals and other customary conditions.
- Credit risks include concentrations in commercial real estate, commercial and agricultural lending, real estate collateral and limited geographic markets. Approximately 64.3% of loans were secured by real property at June 30, 2019.
- Nonperforming assets increased to $10.3 million from $9.2 million at year-end, including $7.9 million of nonperforming loans and $2.3 million of other real estate owned.
- Commitments to grant loans and unfunded lines of credit totaled $386.6 million, and standby letters of credit totaled $8.2 million.
- Management determined that $160,000 of unrealized losses on 27 available-for-sale securities were temporary and not credit-related.
- Interest-rate volatility may affect net interest income, funding costs and securities values. The company’s sensitivity analysis indicated that a 100-basis-point decline in rates could reduce projected one-year net interest income by 2.24%, while a 100-basis-point increase could increase it by 1.30%.
- The company is evaluating the future effects of the CECL credit-loss standard and the lease accounting standard. The filing does not provide a clear quantified estimate of either impact.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It also stated that there were no material changes to previously disclosed risk factors or legal proceedings.
Important Facts for Investors to Verify
- Reconcile reported versus pro forma 2018 earnings and tax effects when assessing year-over-year profitability.
- Monitor deposit pricing and the net interest margin as higher funding costs continue to pressure spread income.
- Evaluate loan concentrations, criticized loans, nonaccrual loans and the adequacy of the $24.2 million allowance.
- Review the terms, funding sources and regulatory approvals associated with the proposed $76.1 million West Texas State Bank acquisition.
- Assess how the IPO proceeds and increased share count affect capital ratios, tangible book value and future earnings per share.
- Verify the availability and conditions of FHLB, Federal Reserve and correspondent-bank liquidity sources.
- Track the future impact of CECL adoption, interest-rate changes, real estate conditions, agricultural exposure and regional economic concentration.