UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2019
 
OR
 
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: 001-38895
 


South Plains Financial, Inc.
(Exact name of registrant as specified in its charter)
 

 
 Texas
 
75-2453320
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
5219 City Bank Parkway
Lubbock, Texas
 
79407
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (806) 792-7101
 


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, $1.00 par value per share
SPFI
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.

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 August 14, 2019, the registrant had 17,983,146 shares of common stock, par value $1.00 per share, outstanding.



TABLE OF CONTENTS

   
Page
PART I.
3
Item 1.
3
 
3
 
4
  6
 
7
  9
Item 2.
33
Item 3.
60
Item 4.
60
PART II. 
60
Item 1.
60
Item 1A.
60
Item 2.
60
Item 3.
61
Item 4.
61
Item 5.
61
Item 6.
61
61

PART I.
FINANCIAL INFORMATION
 
Item 1.
Consolidated Financial Statements (Unaudited)

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share data)

   
June 30,
2019
   
December 31,
2018
 
ASSETS
     
Cash and due from banks
 
$
38,302
   
$
47,802
 
Interest-bearing deposits in banks
   
367,064
     
198,187
 
Federal funds sold
   
2,750
     
-
 
Cash and cash equivalents
   
408,116
     
245,989
 
Securities available for sale
   
263,564
     
338,196
 
Loans held for sale
   
38,932
     
38,382
 
Loans held for investment
   
1,935,653
     
1,957,197
 
Allowance for loan losses
   
(24,171
)
   
(23,126
)
Accrued interest receivable
   
9,976
     
12,957
 
Premises and equipment, net
   
59,705
     
59,787
 
Bank-owned life insurance
   
57,794
     
57,172
 
Other assets
   
27,601
     
26,191
 
Total assets
 
$
2,777,170
   
$
2,712,745
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Deposits:
               
Noninterest-bearing
 
$
513,383
   
$
510,067
 
Interest-bearing
   
1,768,475
     
1,767,387
 
Total deposits
   
2,281,858
     
2,277,454
 
Short-term borrowings
   
8,810
     
17,705
 
Accrued expenses and other liabilities
   
27,524
     
29,416
 
Notes payable & other borrowings
   
95,000
     
95,000
 
Subordinated debt securities
   
26,472
     
34,002
 
Junior subordinated deferrable interest debentures
   
46,393
     
46,393
 
Total liabilities
   
2,486,057
     
2,499,970
 
Commitments and contingent liabilities
   
         
ESOP owned shares
    -       58,195
 
                 
Stockholders’ equity:
               
Common stock, $1.00 par value per share, 30,000,000 shares authorized; 17,978,520 and 14,771,520 issued and outstanding at June 30, 2019 and December 31, 2018, respectively
   
17,979
     
14,772
 
Additional paid-in capital
   
140,189
     
80,412
 
Retained earnings
   
129,408
     
119,834
 
Accumulated other comprehensive income (loss)
   
3,537
     
(2,243
)
     
291,113
     
212,775
 
Less ESOP owned shares
    -       58,195
 
                 
Total stockholders’ equity
    291,113
       154,580  
Total liabilities and stockholders’ equity
 
$
2,777,170
   
$
2,712,745
 

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

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Interest income:
                       
Loans, including fees
 
$
28,592
   
$
25,627
   
$
56,690
   
$
49,736
 
Securities:
                               
Taxable
   
1,816
     
792
     
3,992
     
1,587
 
Non taxable
   
218
     
1,021
     
443
     
2,116
 
Federal funds sold and interest-bearing deposits in banks
   
1,883
     
968
     
3,388
     
2,252
 
Total interest income
   
32,509
     
28,408
     
64,513
     
55,691
 
Interest expense:
                               
Deposits
   
6,139
     
3,796
     
12,028
     
7,289
 
Notes payable & other borrowings
   
618
     
473
     
1,268
     
903
 
Subordinated debt securities
   
403
     
245
     
809
     
490
 
Junior subordinated deferrable interest debentures
   
512
     
455
     
1,025
     
852
 
Total interest expense
   
7,672
     
4,969
     
15,130
     
9,534
 
Net interest income
   
24,837
     
23,439
     
49,383
     
46,157
 
Provision for loan losses
   
875
     
1,540
     
1,483
     
2,318
 
Net interest income, after provision for loan losses
   
23,962
     
21,899
     
47,900
     
43,839
 
Noninterest income:
                               
Service charges on deposit accounts
   
1,979
     
1,861
     
3,884
     
3,778
 
Income from insurance activities
   
1,210
     
1,135
     
2,960
     
2,530
 
Net gain on sales of loans
   
6,235
     
5,899
     
10,895
     
10,210
 
Bank card services and interchange fees
   
2,071
     
2,051
     
4,081
     
4,009
 
Investment commissions
   
493
     
425
     
826
     
875
 
Other
   
1,715
     
1,597
     
3,132
     
3,034
 
Total noninterest income
   
13,703
     
12,968
     
25,778
     
24,436
 
Noninterest expense:
                               
Salaries and employee benefits
   
18,784
     
17,818
     
37,909
     
35,419
 
Occupancy and equipment, net
   
3,416
     
3,391
     
6,823
     
6,715
 
Professional services
   
1,611
     
1,400
     
3,317
     
2,829
 
Marketing and development
   
796
     
760
     
1,513
     
1,578
 
IT and data services
   
689
     
553
     
1,382
     
1,103
 
Bank card expenses
   
806
     
659
     
1,530
     
1,323
 
Appraisal expenses
   
407
     
354
     
730
     
639
 
Other
   
3,421
     
3,487
     
6,762
     
6,693
 
Total noninterest expense
   
29,930
     
28,422
     
59,966
     
56,299
 
Income before income taxes
   
7,735
     
6,445
     
13,712
     
11,976
 
Income tax expense (benefit)
   
1,655
     
(6,568
)
   
2,859
     
(6,538
)
Net income
 
$
6,080
   
$
13,013
   
$
10,853
   
$
18,514
 

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

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED)
(Unaudited)
(Dollars in thousands, except per share data)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Earnings per share:
                       
Basic
 
$
0.37
   
$
0.88
   
$
0.69
   
$
1.25
 
Diluted
 
$
0.37
   
$
0.88
   
$
0.69
   
$
1.25
 
                                 
Net income
 
$
6,080
   
$
13,013
   
$
10,853
   
$
18,514
 
Other comprehensive income (loss):
                               
Change in net unrealized loss on securities available for sale
   
4,410
     
(1,011
)
   
7,317
     
(4,171
)
Tax effect
   
(926
)
   
970
     
(1,537
)
   
970
 
Other comprehensive income (loss)
   
3,484
     
(41
)
   
5,780
     
(3,201
)
Comprehensive income
 
$
9,564
   
$
12,972
   
$
16,633
   
$
15,313
 
                                 
Pro Forma Information (unaudited):
                               
Net income
         
$
5,333
           
$
9,981
 
Income tax expense
         
$
969
           
$
1,852
 
Earnings per share:
                               
Basic
         
$
0.36
           
$
0.68
 
Diluted
         
$
0.36
           
$
0.68
 

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

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share data)

   
Common Stock
   
Additional
Paid-in
   
Retained
   
Accumulated
Other
Comprehensive
   
Treasury
   
Less:
ESOP
Owned
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Shares
   
Total
 
                                                 
Six Months Ended June 30
                                               
Balance at January 1, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
120,589
   
$
(446
)
 
$
(5,858
)
 
$
(57,121
)
 
$
158,206
 
Net income
   
-
     
-
     
-
     
18,514
     
-
     
-
     
-
     
18,514
 
Cash dividends:
                                                               
Common - $1.19 per share
   
-
     
-
     
-
     
(17,544
)
   
-
     
-
     
-
     
(17,544
)
Other comprehensive (loss), (net of tax)
   
-
     
-
     
-
     
-
     
(3,201
)
   
-
     
-
     
(3,201
)
Balance at June 30, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
121,559
   
$
(3,647
)
 
$
(5,858
)
 
$
(57,121
)
 
$
155,975
 
                                                                 
Balance at January 1, 2019
   
14,771,520
   
$
14,772
   
$
80,412
   
$
119,834
   
$
(2,243
)
 
$
-
   
$
(58,195
)
 
$
154,580
 
Issuance of common stock, net
   
3,207,000
     
3,207
     
48,185
     
-
     
-
     
-
     
-
     
51,392
 
Net income
   
-
     
-
     
-
     
10,853
     
-
     
-
     
-
     
10,853
 
Other comprehensive income, (net of tax)
   
-
     
-
     
-
     
-
     
5,780
     
-
     
-
     
5,780
 
Terminated ESOP put option
   
-
     
-
     
-
     
-
     
-
     
-
     
58,195
     
58,195
 
Stock based compensation
   
-
     
-
     
142
     
-
     
-
     
-
     
-
     
142
 
Share-based liability awards modified to equity awards
   
-
     
-
     
11,450
     
-
     
-
     
-
     
-
     
11,450
 
Cumulative change in accounting principle
   
-
     
-
     
-
     
(1,279
)
   
-
     
-
     
-
     
(1,279
)
Balance at June 30, 2019
   
17,978,520
   
$
17,979
   
$
140,189
   
$
129,408
   
$
3,537
   
$
-
   
$
-
   
$
291,113
 

Three Months Ended June 30
                                               
Balance at April 1, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
123,875
   
$
(3,606
)
 
$
(5,858
)
 
$
(57,121
)
 
$
158,332
 
Net income
   
-
     
-
     
-
     
13,013
     
-
     
-
     
-
     
13,013
 
Cash dividends:
                                                               
Common - $1.04 per share
   
-
     
-
     
-
     
(15,329
)
   
-
     
-
     
-
     
(15,329
)
Other comprehensive (loss), (net of tax)
   
-
     
-
     
-
     
-
     
(41
)
   
-
     
-
     
(41
)
Balance at June 30, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
121,559
   
$
(3,647
)
 
$
(5,858
)
 
$
(57,121
)
 
$
155,975
 
                                                                 
Balance at April 1, 2019
   
14,771,520
   
$
14,772
   
$
80,412
   
$
123,328
   
$
53
   
$
-
   
$
(58,195
)
 
$
160,370
 
Issuance of common stock, net
   
3,207,000
     
3,207
     
48,185
     
-
     
-
     
-
     
-
     
51,392
 
Net income
   
-
     
-
     
-
     
6,080
     
-
     
-
     
-
     
6,080
 
Other comprehensive income, (net of tax)
   
-
     
-
     
-
     
-
     
3,484
     
-
     
-
     
3,484
 
Terminated ESOP put option
   
-
     
-
     
-
     
-
     
-
     
-
     
58,195
     
58,195
 
Stock based compensation
   
-
     
-
     
142
     
-
     
-
     
-
     
-
     
142
 
Share-based liability awards modified to equity awards
   
-
     
-
     
11,450
     
-
     
-
     
-
     
-
     
11,450
 
Balance at June 30, 2019
   
17,978,520
   
$
17,979
   
$
140,189
   
$
129,408
   
$
3,537
   
$
-
   
$
-
   
$
291,113
 

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

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

   
For the Six Months Ended June 30,
 
   
2019
   
2018
 
             
Cash flows from operating activities:
           
Net income
 
$
10,853
   
$
18,514
 
Adjustments to reconcile net income to net cash from operating activities:
               
Provision for loan losses
   
1,483
     
2,318
 
Depreciation and amortization
   
2,474
     
2,611
 
Accretion and amortization
   
(296
)
   
1,228
 
Other gains, net
   
(149
)
   
(107
)
Net gain on sales of loans
   
(10,895
)
   
(10,210
)
Proceeds from sales of loans held for sale
   
274,021
     
275,120
 
Loans originated for sale
   
(263,676
)
   
(266,918
)
Earnings on bank-owned life insurance
   
(622
)
   
(666
)
Stock based compensation
   
142
     
-
 
Net change in:
               
Accrued interest receivable and other assets
   
45
     
(6,340
)
Accrued expenses and other liabilities
   
8,279
     
5,152
 
Net cash from operating activities
   
21,659
     
20,702
 
                 
Cash flows from investing activities:
               
Activity in securities available for sale:
               
Purchases
   
(11,233
)
   
(200,664
)
Maturities, prepayments, and calls
   
93,478
     
210,172
 
Activity in securities held to maturity:
               
Maturities, prepayments, and calls
   
-
     
14,675
 
Loan originations and principal collections, net
   
19,940
     
(83,319
)
Purchases of premises and equipment, net
   
(2,406
)
   
(1,721
)
Proceeds from sales of premises and equipment
   
74
     
35
 
Proceeds from sales of foreclosed assets
   
1,244
     
1,848
 
Net cash from investing activities
   
101,097
     
(58,974
)
                 
Cash flows from financing activities:
               
Net change in deposits
   
4,404
     
29,550
 
Net change in short-term borrowings
   
(8,895
)
   
10,800
 
Proceeds from common stock issuance, net
   
51,392
     
-
 
Payments made on notes payable and other borrowings
   
(7,530
)
   
-
 
Cash dividends on common stock
   
-
     
(17,544
)
Net cash from financing activities
   
39,371
     
22,806
 

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

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(Dollars in thousands)

   
For the Six Months Ended June 30,
 
   
2019
   
2018
 
             
Net change in cash and cash equivalents
 
$
162,127
   
$
(15,466
)
Beginning cash and cash equivalents
   
245,989
     
294,563
 
Ending cash and cash equivalents
 
$
408,116
   
$
279,097
 
                 
Supplemental disclosures of cash flow information:
               
Interest paid on deposits and borrowed funds
 
$
14,866
   
$
7,313
 
Income taxes paid
   
2,853
     
-
 
Supplemental schedule of noncash investing and financing activities:
               
Loans transferred to foreclosed assets
 
$
1,166
   
$
5,526
 
Share-based liability awards modified to equity awards
   
11,450
     
-
 

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

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – South Plains Financial, Inc. (“SPFI”) is a Texas bank holding company that conducts its principal activities through its subsidiaries from offices located throughout Texas and Eastern New Mexico.  Principal activities include commercial and retail banking, along with insurance, investment, trust, and mortgage services. The following are subsidiaries of SPFI:

Wholly Owned, Consolidated Subsidiaries:
 
City Bank
Bank subsidiary
Windmark Insurance Agency, Inc.
Non-bank subsidiary
Ruidoso Retail, Inc.
Non-bank subsidiary
CB Provence, LLC
Non-bank subsidiary
CBT Brushy Creek, LLC
Non-bank subsidiary
CBT Properties, LLC
Non-bank subsidiary
Wholly Owned, Equity Method Subsidiaries:
 
South Plains Financial Capital Trusts (SPFCT) III-V
Non-bank subsidiaries

Basis of Presentation and Consolidation – The consolidated financial statements in this Quarterly Report on Form 10-Q (“Report”) include the accounts of SPFI and its wholly owned consolidated subsidiaries (collectively referred to as the “Company”) identified above.  All significant intercompany balances and transactions have been eliminated in consolidation.

The interim consolidated financial statements in this Report have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature.  The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”).  Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2018 in our prospectus filed with the SEC pursuant to Rule 424(b) of the Securities Act of 1933, as amended, on May 9, 2019 (“IPO Prospectus”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates – The preparation of 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.  Determination of the adequacy of the allowance for loan losses is a material estimate that is particularly susceptible to significant change in the near term; the assumptions used in stock-based compensation, the valuation of foreclosed assets, and fair values of financial instruments can also involve significant management estimates.

Change in Capital Structure
On March 11, 2019, the Company amended and restated its Certificate of Formation.  The original Certificate of Formation was amended to change the capital structure to authorize the issuance of 30,000,000 shares of common stock, par value $1.00 per share.

The Company completed a 29-to-1 stock split of the Company’s outstanding shares of common stock for shareholders of record as of March 11, 2019.  The stock split was payable in the form of a dividend on or about March 11, 2019.  Shareholders received 29 additional shares for each share held as of the record date.  All share and per share amounts in the consolidated financial statements have been retroactively adjusted to reflect this stock split for all periods presented.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

Stock Offering – The Company consummated the underwritten initial public offering of its common stock in May 2019.  In connection with the initial public offering, the Company issued and sold 3,207,000 shares of its common stock, including 507,000 shares of common stock pursuant to the underwriters’ full exercise of their option to purchase additional shares at a public offering price of $17.50 per share, for aggregate gross proceeds of $56.1 million before deducting underwriting discounts and offering expenses, and aggregate net proceeds of $51.4 million after deducting underwriting discounts and offering expenses.

Pro Forma Information – As a result of the revocation of the Company’s S corporation election effective May 31, 2018, the net income and earnings per share data prior to that date are not comparable with subsequent periods, which include federal income tax expense.  As a result, the consolidated statements of comprehensive income in this Report include a pro forma section for the periods ended June 30, 2018, as if the conversion to a C corporation had occurred effective January 1, 2018.  The federal tax rate used is 21%.

In accordance with applicable provisions of the Internal Revenue Code of 1986, as amended, the terms of the South Plains Financial, Inc. Employee Stock Ownership Plan (“ESOP”), provided that, for so long as we were a privately held company, ESOP participants would have the right, for a specified period of time, to require us to repurchase shares of our common stock that were distributed to them by the ESOP.  This repurchase obligation terminated upon the consummation of our initial public offering and listing of our common stock on the NASDAQ Global Select Market in May 2019. However, because we were privately held at December 31, 2018, the shares of common stock held by the ESOP have been reflected in our consolidated balance sheets as a line item called ESOP-owned shares, that appears between total liabilities and stockholders’ equity during that period. As a result, the value of ESOP-owned shares have been deducted from stockholders’ equity in our consolidated balance sheet for that period. For all periods following our initial public offering and continued listing of our common stock on the NASDAQ Global Select Market, the ESOP-owned shares are and will be included in stockholders’ equity.

Change in Accounting Principle – Prior to January 1, 2019, the Company accounted for its cash-settled stock appreciation rights (“SARs”) using the intrinsic value method, as permitted by ASC 718.  As a result of the Company filing its IPO Prospectus with the SEC, the Company is now required to use the fair value method for these SARs.  The Company’s calculation of the fair value of the SARs, as of January 1, 2019, exceeded the recorded intrinsic value by $1.6 million.  ASC 250 states that an “entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.”  Retrospective application of the effects of a change from the intrinsic value to fair value would be impracticable due to the need to objectively determine assumptions that would be used in prior periods without using current information.  Additionally, SEC Staff Accounting Bulletin Topic 14.B states that entities changing from nonpublic to public status are not permitted to apply the fair-value-based method retrospectively.  Therefore, the Company recorded a cumulative-effect adjustment to retained earnings for $1.3 million ($1.6 million net of $340,000 in tax) effective January 1, 2019 and applied this change prospectively.

Stock-based Compensation – The Company sponsors an equity incentive plan under which options to acquire shares of the Company common stock may be granted periodically to all full-time employees and directors of the Company or its affiliates at a specific exercise price to acquire shares of the Company’s common stock. Shares are issued out of authorized unissued common shares that have been reserved for issuance under such plan. Compensation cost is measured based on the estimated fair value of the award at the grant date and is recognized in earnings on a straight-line basis over the requisite service period. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model. This model requires assumptions as to the expected stock volatility, dividends, terms and risk-free rates. The expected volatility is based on the combination of the Company’s historical volatility and the volatility of comparable peer banks. The expected term represents the period of time that options are expected to be outstanding from the grant date. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the appropriate life of each stock option.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

Recent Accounting PronouncementsFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) constitutes U.S. GAAP for nongovernmental entities. Updates to ASC are prescribed in Accounting Standards Updates (“ASU”), which are not authoritative until incorporated into ASC.

ASU 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  ASU 2016-01, among other things, eliminates the requirement to disclose the fair value of financial instruments at amortized cost for entities that are not public business entities. We originally adopted the new standard effective January 1, 2018, the effective date of the guidance. Accordingly, the Company’s fair value of financial instruments at amortized cost were not disclosed in our consolidated financial statements for 2018.  However, based on the Company becoming a public company, these disclosures are now required and have been included in our consolidated financial statements.

ASU 2016-02 Leases (Topic 842).  The FASB amended existing guidance that requires that lessees recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The Company is in the process of determining the effect of the standard on its consolidated operating results and financial condition.  These amendments are effective beginning January 1, 2020.
 
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, 2021, 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 consolidated operating results and financial condition.

2.
SECURITIES

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 and agencies
 
$
10,343
   
$
63
   
$
(2
)
 
$
10,404
 
State and municipal
   
31,249
     
772
     
(31
)
   
31,990
 
Mortgage-backed securities
   
179,509
     
3,199
     
(127
)
   
182,581
 
Asset-backed and other amortizing securities
   
37,986
     
603
     
-
     
38,589
 
   
$
259,087
   
$
4,637
   
$
(160
)
 
$
263,564
 

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
December 31, 2018
                       
Available for sale:
                       
U.S. government and agencies
 
$
84,765
   
$
18
   
$
(76
)
 
$
84,707
 
State and municipal
   
32,205
     
480
     
(375
)
   
32,310
 
Mortgage-backed securities
   
184,267
     
29
     
(2,040
)
   
182,256
 
Asset-backed and other amortizing securities
   
39,799
     
1
     
(877
)
   
38,923
 
   
$
341,036
   
$
528
   
$
(3,368
)
 
$
338,196
 

The amortized cost and fair value of securities at June 30, 2019 are presented below by contractual maturity.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.  Other securities are shown separately since they are not due at a single maturity date.

   
Available for Sale
 
   
Amortized
Cost
   
Fair
Value
 
             
Within 1 year
 
$
3,496
   
$
3,496
 
After 1 year through 5 years
   
7,317
     
7,380
 
After 5 years through 10 years
   
10,105
     
10,249
 
After 10 years
   
20,674
     
21,269
 
Other
   
217,495
     
221,170
 
   
$
259,087
   
$
263,564
 

At June 30, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

Securities with a carrying value of approximately $207.1 million and $200.0 million at June 30, 2019 and December 31, 2018, respectively, were pledged to collateralize public deposits and for other purposes as required or permitted by law.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

The following table segregates securities with unrealized losses at the periods indicated, by the duration they have been in a loss position:

   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair Value
   
Unrealized
Loss
   
Fair Value
   
Unrealized
Loss
   
Fair Value
   
Unrealized
Loss
 
June 30, 2019
                                   
U.S. government and agencies
 
$
-
   
$
-
   
$
5,591
   
$
2
   
$
5,591
   
$
2
 
State and municipal
   
-
     
-
     
4,395
     
31
     
4,395
     
31
 
Mortgage-backed securities
   
-
     
-
     
42,240
     
127
     
42,240
     
127
 
Asset-backed and other amortizing securities
   
-
     
-
     
-
     
-
     
-
     
-
 
   
$
-
   
$
-
   
$
52,226
   
$
160
   
$
52,226
   
$
160
 
                                                 
December 31, 2018
                                               
U.S. government and agencies
 
$
77,891
   
$
27
   
$
2,048
   
$
49
   
$
79,939
   
$
76
 
State and municipal
   
5,662
     
92
     
9,781
     
283
     
15,443
     
375
 
Mortgage-backed securities
   
108,962
     
293
     
54,035
     
1,747
     
162,997
     
2,040
 
Asset-backed and other amortizing securities
   
-
     
-
     
37,351
     
877
     
37,351
     
877
 
   
$
192,515
   
$
412
   
$
103,215
   
$
2,956
   
$
295,730
   
$
3,368
 

There were 27 securities with an unrealized loss at June 30, 2019.  Management does not believe that these losses are other than temporary as there is no intent to sell any of these securities before recovery and it is not probable that we will be required to sell any of these securities before recovery, and credit loss, if any, is not material.  Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the securities approach their maturity date or if market yields for such investments decline.  Management does not believe any of the securities are impaired due to reasons of credit quality.  Accordingly, as of June 30, 2019, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s consolidated financial statements.
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

3.
LOANS

Loans are summarized by category as follows:

   
June 30,
2019
   
December 31,
2018
 
             
Commercial real estate
 
$
533,680
   
$
538,037
 
Commercial - specialized
   
294,188
     
305,022
 
Commercial - general
   
391,434
     
427,728
 
Consumer:
               
1-4 family residential
   
348,569
     
346,153
 
Auto loans
   
206,777
     
191,647
 
Other consumer
   
71,559
     
70,209
 
Construction
   
89,446
     
78,401
 
     
1,935,653
     
1,957,197
 
Allowance for loan losses
   
(24,171
)
   
(23,126
)
Loans, net
 
$
1,911,482
   
$
1,934,071
 
 
The Company has certain lending policies, underwriting standards, and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies, underwriting standards, and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing, and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

Commercial – General and Specialized – Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations, as agreed and ensure appropriate collateral is obtained to secure the loan. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and include personal guarantees.  Owner-occupied real estate is included in commercial loans, as the repayment of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties.  Commercial loans are grouped into two distinct sub-categories: specialized and general. Commercial related segments that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related segments that contain a broader diversity of borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries.

Commercial Real Estate – Commercial real estate loans are also subject to underwriting standards and processes similar to commercial loans. These loans are underwritten primarily based on projected cash flows for income-producing properties and collateral values for non-income-producing properties. The repayment of these loans is generally dependent on the successful operation of the property securing the loans or the sale or refinancing of the property. Real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are diversified by type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

Construction – Loans for residential construction are for single-family properties to developers, builders, or end-users.  These loans are underwritten based on estimates of costs and completed value of the project.  Funds are advanced based on estimated percentage of completion for the project.  Performance of these loans is affected by economic conditions as well as the ability to control costs of the projects.

Consumer – Loans to consumers include 1-4 family residential loans, auto loans, and other loans for recreational vehicles or other purposes. The Company utilizes a computer-based credit scoring analysis to supplement its policies and procedures in underwriting consumer loans. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimize the Company’s risk.  The Company generally requires mortgage title insurance and hazard insurance on 1-4 family residential loans.

The following table details the activity in the allowance for loan losses.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

   
Beginning
Balance
   
Provision for
loan losses
   
Charge-offs
   
Recoveries
   
Ending
Balance
 
For the three months ended
June 30, 2019
                                           
 
Commercial real estate
 
$
5,335
   
$
(28
)
 
$
-
   
$
108
   
$
5,415
 
Commercial - specialized
   
2,327
     
985
     
(5
)
   
39
     
3,346
 
Commercial - general
   
8,504
     
(324
)
   
(60
)
   
205
     
8,325
 
Consumer:
                                       
1-4 family residential
   
2,416
     
(127
)
   
-
     
21
     
2,310
 
Auto loans
   
3,067
     
202
     
(248
)
   
46
     
3,067
 
Other consumer
   
1,174
     
216
     
(233
)
   
42
     
1,199
 
Construction
   
558
     
(49
)
   
-
     
-
     
509
 
Total
 
$
23,381
   
$
875
   
$
(546
)
 
$
461
   
$
24,171
 
                                         

For the three months ended
June 30, 2018
                                                           
Commercial real estate
 
$
5,129
   
$
746
   
$
(1,539
)
 
$
-
   
$
4,336
 
Commercial - specialized
   
2,650
     
265
     
-
     
9
     
2,924
 
Commercial - general
   
8,925
     
(313
)
   
(28
)
   
149
     
8,733
 
Consumer:
                                       
1-4 family residential
   
1,427
     
160
     
(140
)
   
4
     
1,451
 
Auto loans
   
2,386
     
372
     
(184
)
   
29
     
2,603
 
Other consumer
   
1,053
     
184
     
(140
)
   
61
     
1,158
 
Construction
   
399
     
126
     
(15
)
   
-
     
510
 
Total
 
$
21,969
   
$
1,540
   
$
(2,046
)
 
$
252
   
$
21,715
 

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

   
Beginning
Balance
   
Provision for
loan losses
   
Charge-offs
   
Recoveries
   
Ending
Balance
 
For the six months ended
June 30, 2019
                             
Commercial real estate
 
$
5,579
   
$
(379
)
 
$
-
   
$
215
   
$
5,415
 
Commercial - specialized
   
2,516
     
804
     
(37
)
   
63
     
3,346
 
Commercial - general
   
8,173
     
(60
)
   
(65
)
   
277
     
8,325
 
Consumer:
                                       
1-4 family residential
   
2,249
     
28
     
(19
)
   
52
     
2,310
 
Auto loans
   
2,994
     
500
     
(506
)
   
79
     
3,067
 
Other consumer
   
1,192
     
429
     
(513
)
   
91
     
1,199
 
Construction
   
423
     
161
     
(75
)
   
-
     
509
 
                                         
Total
 
$
23,126
   
$
1,483
   
$
(1,215
)
 
$
777
   
$
24,171
 

For the six months ended
June 30, 2018
                             
Commercial real estate
 
$
3,769
   
$
2,106
   
$
(1,539
)
 
$
-
   
$
4,336
 
Commercial - specialized
   
2,367
     
530
     
(38
)
   
65
     
2,924
 
Commercial - general
   
10,151
     
(1,626
)
   
(127
)
   
335
     
8,733
 
Consumer:
                                       
1-4 family residential
   
1,787
     
(199
)
   
(141
)
   
4
     
1,451
 
Auto loans
   
2,068
     
892
     
(418
)
   
61
     
2,603
 
Other consumer
   
971
     
438
     
(349
)
   
98
     
1,158
 
Construction
   
348
     
177
     
(15
)
   
-
     
510
 
                                         
Total
 
$
21,461
   
$
2,318
   
$
(2,627
)
 
$
563
   
$
21,715
 

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment:


 
Recorded Investment
   
Allowance for Loan Losses
 

 
Individually
Evaluated
   
Collectively
Evaluated
   
Individually
Evaluated
   
Collectively
Evaluated
 

                       
June 30, 2019
                       
Commercial real estate
 
$
403
   
$
533,277
   
$
-
   
$
5,415
 
Commercial - specialized
   
1,922
     
292,266
     
68
     
3,278
 
Commercial - general
   
2,667
     
388,767
     
333
     
7,992
 
Consumer:
                               
1-4 family residential
   
2,432
     
346,137
     
35
     
2,275
 
Auto loans
   
-
     
206,777
     
-
     
3,067
 
Other consumer
   
-
     
71,559
     
-
     
1,199
 
Construction
   
-
     
89,446
     
-
     
509
 
                                 
Total
 
$
7,424
   
$
1,928,229
   
$
436
   
$
23,735
 
                                 
December 31, 2018
                               
Commercial real estate
 
$
1,819
   
$
536,218
   
$
-
   
$
5,579
 
Commercial - specialized
   
2,116
     
302,906
     
-
     
2,516
 
Commercial - general
   
2,950
     
424,778
     
233
     
7,940
 
Consumer:
                               
1-4 family residential
   
2,475
     
343,678
     
8
     
2,241
 
Auto loans
   
-
     
191,647
     
-
     
2,994
 
Other consumer
   
-
     
70,209
     
-
     
1,192
 
Construction
   
-
     
78,401
     
-
     
423
 
                                 
Total
 
$
9,360
   
$
1,947,837
   
$
241
   
$
22,885
 

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

Impaired loan information follows:

   
Unpaid
Contractual
Principal
Balance
   
Recorded
Investment
With No
Allowance
   
Recorded
Investment
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
   
Average
Recorded
Investment
 
                                     
June 30, 2019
                                   
Commercial real estate
 
$
858
   
$
403
   
$
-
   
$
403
   
$
-
   
$
1,111
 
Commercial - specialized
   
3,137
     
1,875
     
47
     
1,922
     
68
     
2,019
 
Commercial - general
   
3,260
     
-
     
2,667
     
2,667
     
333
     
2,809
 
Consumer:
                                               
1-4 family
   
2,851
     
1,976
     
456
     
2,432
     
35
     
2,454
 
Auto loans
   
-
     
-
     
-
     
-
     
-
     
-
 
Other consumer
   
-
     
-
     
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
                                                 
Total
 
$
10,106
   
$
4,254
   
$
3,170
   
$
7,424
   
$
436
   
$
8,393
 
                                                 
December 31, 2018
                                         
Commercial real estate
 
$
2,274
   
$
1,819
   
$
-
   
$
1,819
   
$
-
   
$
4,590
 
Commercial - specialized
   
2,116
     
2,116
     
-
     
2,116
     
-
     
3,742
 
Commercial - general
   
4,758
     
240
     
2,710
     
2,950
     
233
     
3,963
 
Consumer:
                                               
1-4 family
   
2,894
     
2,111
     
364
     
2,475
     
8
     
2,881
 
Auto loans
   
-
     
-
     
-
     
-
     
-
     
-
 
Other consumer
   
-
     
-
     
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
                                                 
Total
 
$
12,042