South Plains Financial, Inc. 2019 Form 10-K Summary
Business context and reporting period
South Plains Financial, Inc. is a Texas bank holding company headquartered in Lubbock. Through City Bank, it provides commercial and consumer banking, mortgage, insurance, investment and trust services across Texas and Eastern New Mexico. The filing covers the fiscal year ended December 31, 2019; it is an annual report, not a standalone fourth-quarter filing. The company operated 26 full-service banking locations, 12 loan production offices and had approximately 679 full-time-equivalent employees.
The company reports community banking and insurance segments. On November 12, 2019, it completed the $76.1 million cash acquisition of West Texas State Bank, adding six Permian Basin branches and approximately $447.2 million of assets, $196.2 million of loans and $386.2 million of deposits.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total assets | $3.237 billion | $2.713 billion | 19.3% increase |
| Gross loans held for investment | $2.144 billion | $1.957 billion | 9.5% increase |
| Total deposits | $2.697 billion | $2.277 billion | 18.4% increase |
| Shareholders’ equity | $306.2 million | $154.6 million reported | Increase primarily from IPO and ESOP accounting change |
| Net interest income | $104.6 million | $95.6 million | 9.4% increase |
| Provision for loan losses | $2.8 million | $6.9 million | 59.4% decrease |
| Noninterest income | $56.6 million | $52.1 million | 8.7% increase |
| Noninterest expense | $121.7 million | $115.4 million | 5.4% increase |
| Net income | $29.2 million | $29.3 million | 0.2% decrease |
| Diluted EPS | $1.71 | $1.98 | Decrease due primarily to higher share count and taxes |
| Net interest margin | 3.98% | 3.94% | 4 basis-point increase |
| Return on average assets | 1.04% | 0.79% | Increase |
| Return on average equity | 10.94% | 9.66% | Increase |
| Efficiency ratio | 75.29% | 77.64% | Improvement |
Net income was essentially flat on a GAAP basis because stronger net interest income, noninterest income and lower loan-loss provision were largely offset by higher operating expenses and a $7.5 million income tax expense. The 2018 comparison was affected by the company’s transition from S corporation to C corporation taxation; management also presents pro forma C corporation results for comparability.
- Mortgage originations were $640.7 million, with approximately 95% sold. Mortgage banking revenue increased to $25.1 million from $21.4 million.
- Insurance revenue was approximately $7.0 million; crop insurance premium volume exceeded $117 million.
- Trust assets under management were $349.8 million and investment-services assets under management were $528.6 million at year-end.
- Cash and cash equivalents were $158.1 million, down from $246.0 million. Available-for-sale securities increased to $707.7 million from $338.2 million.
Credit quality, capital and liquidity
- The allowance for loan losses was $24.2 million, or 1.13% of gross loans, compared with $23.1 million, or 1.18%, in 2018. Net charge-offs declined to $1.7 million from $5.2 million.
- Nonperforming loans declined to $6.0 million from $7.0 million; nonperforming assets declined to $7.9 million from $9.2 million. Nonaccrual loans were $4.7 million and other real estate owned was $1.9 million.
- The portfolio remained concentrated in commercial and real-estate-related lending: 65.5% of gross loans were secured by real property, commercial real estate represented 30.7%, indirect dealer loans represented approximately 9.9%, agricultural loans 6.1% and energy loans 2.9%.
- At year-end, the company had $37.2 million of short-term borrowings, $95.0 million of notes payable and other borrowings, $26.5 million of subordinated debt securities and $46.4 million of junior subordinated debentures.
- FHLB borrowing capacity was approximately $719.1 million, with $394.3 million of remaining availability. The Federal Reserve line of credit was $547.0 million and unused; additional uncollateralized bank lines totaled $135.0 million and were unused.
- City Bank remained well-capitalized. Its CET1 ratio was 13.70%, Tier 1 risk-based capital ratio was 13.70%, total risk-based capital ratio was 14.67% and Tier 1 leverage ratio was 11.45%.
- Unfunded loan commitments were $410.0 million and standby letters of credit were $10.7 million. FHLB letters of credit totaling $199.0 million supported certain public-funds deposits.
Cash flow and capital actions
| Cash flow category | 2019 | 2018 |
|---|---|---|
| Operating activities | $30.5 million | $26.9 million |
| Investing activities | $(213.5) million | $(184.1) million |
| Financing activities | $95.1 million | $108.6 million |
| Net change in cash | $(87.9) million | $(48.6) million |
The company completed its May 2019 initial public offering, issuing 3.207 million shares for net proceeds of $51.4 million. It paid $1.1 million of common dividends in 2019, or $0.06 per share, compared with $30.0 million in 2018. The company paid quarterly dividends of $0.03 per share in the third and fourth quarters.
Material changes versus the prior comparable period
- The WTSB acquisition materially increased assets, loans, deposits, branches and goodwill. The acquisition generated $18.6 million of goodwill and $6.7 million of core deposit intangible assets; purchase accounting values remained preliminary at the filing date.
- The IPO and termination of the ESOP repurchase obligation increased reported shareholders’ equity. The 2019 equity balance is therefore not directly comparable with the 2018 reported balance.
- Investment securities more than doubled as the company deployed existing liquidity and liquidity acquired from WTSB.
- Net interest margin improved modestly, but the net interest spread narrowed to 3.61% from 3.66% as funding costs increased.
- The company’s S corporation tax status was revoked effective May 31, 2018. Consequently, 2019 GAAP net income includes income taxes, while historical periods are not fully comparable without the company’s pro forma C corporation adjustments.
- The company adopted revenue-recognition guidance in 2019 without a material effect. CECL adoption is scheduled for annual periods beginning after December 15, 2022 under the extended emerging-growth-company transition period.
Outlook, risks, contingencies and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management emphasizes continued growth through banking, mortgage, insurance and potential acquisitions, but cautions that actual results may differ materially from forward-looking expectations.
- Management identified COVID-19, which was emerging at the filing date, as a potentially significant risk to borrowers, asset quality, liquidity, loan demand and operating continuity. The filing states that the financial impact could not be reliably estimated.
- Key credit risks include geographic concentration in Texas and New Mexico; commercial real estate, agricultural, energy and indirect auto exposure; dependence on collateral values; and concentration among large borrowers. The 20 largest borrowing relationships totaled approximately $430.1 million of commitments, or 16.8% of total commitments.
- The 20 largest deposit relationships represented approximately 15.8% of deposits. Public-funds deposits were $249.8 million, or 9.3% of deposits, creating sensitivity to withdrawals, collateral requirements and funding costs.
- Mortgage revenue depends on refinancing activity, interest rates, secondary-market liquidity and mortgage-servicing-right valuations. Crop-insurance revenue depends materially on federal subsidies and the federal crop insurance program.
- The company faces interest-rate, liquidity, cybersecurity, technology, regulatory, acquisition-integration and capital-raising risks. It also has exposure to the transition away from LIBOR through certain subordinated debentures and other arrangements.
- A townhome-association lawsuit remains on appeal after the trial court dismissed claims against the Bank. The association sought approximately $8.0 million of repair damages plus potential treble, exemplary and other damages. Insurers have acknowledged defense obligations, but some have issued reservation-of-rights letters. Management does not believe current litigation will materially affect the company’s financial statements.
- Management reported effective disclosure controls and effective internal control over financial reporting. The auditor did not perform an attestation of internal-control effectiveness because the company is an emerging growth company, and management’s assessment excluded WTSB because of the timing of the acquisition.
Important facts for investors to verify
- Confirm final purchase-accounting adjustments for WTSB, including goodwill, core deposit intangibles, loan marks and any post-acquisition credit deterioration.
- Assess COVID-19-related changes in delinquencies, criticized loans, charge-offs, provisioning, borrower assistance and liquidity after December 31, 2019.
- Review the sustainability of mortgage banking revenue and the sensitivity of mortgage-servicing rights to refinancing and interest-rate changes.
- Evaluate commercial real estate, agricultural, energy and indirect auto concentrations against current collateral values and regional economic conditions.
- Monitor deposit stability, public-funds deposits, uninsured or above-FDIC-limit time deposits and the cost and availability of wholesale funding.
- Reconcile GAAP earnings and EPS with pro forma C corporation results and consider the effect of IPO shares, options and other equity awards on dilution.
- Review the pending townhome litigation, insurance coverage and any subsequent settlement or adverse ruling.
- Determine the eventual effect of CECL adoption and the company’s preparedness for implementation.