UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒	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)

 

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.

 

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.

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TABLE OF CONTENTS

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)

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands, except per share data)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED)

(Unaudited)

(Dollars in thousands, except per share data)

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

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share data)

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.

(Unaudited)

(Dollars in thousands)

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(Dollars in thousands)

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

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

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.

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.

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.

Recent Accounting Pronouncements – Financial 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 2016-13 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

		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.

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.

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.

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