SOUTH PLAINS FINANCIAL, INC. quarterly report, Q1 FY2023

South Plains Financial, Inc. — Form 10-Q Summary

Reporting period: Three months ended March 31, 2023. The unaudited consolidated results cover South Plains Financial, Inc., City Bank and other subsidiaries. The company is a Texas-based bank holding company providing commercial and retail banking, investment, trust and mortgage services in Texas and Eastern New Mexico.

Key Financial Metrics

Metric	Q1 2023	Comparable period or prior date
Total interest income	$47.4 million	$33.1 million in Q1 2022
Net interest income	$34.3 million	$29.9 million in Q1 2022
Net interest margin	3.75%	3.33% in Q1 2022
Provision for credit losses	$1.0 million	$(2.1) million in Q1 2022
Noninterest income	$10.7 million	$23.7 million in Q1 2022
Noninterest expense	$32.4 million	$37.9 million in Q1 2022
Net income	$9.2 million	$14.3 million in Q1 2022
Diluted EPS	$0.53	$0.78 in Q1 2022
Return on average equity	10.34%	14.58% in Q1 2022
Return on average assets	0.95%	1.47% in Q1 2022
Operating cash flow	$25.4 million	$70.6 million in Q1 2022
Ending cash and cash equivalents	$328.0 million	$234.9 million at December 31, 2022

Balance Sheet, Credit and Capital

Total assets increased 2.9% from December 31, 2022 to $4.06 billion.
Loans held for investment increased 1.5% to $2.79 billion. Commercial real estate loans were $926.0 million, or 37.2% of the portfolio; 68.8% of total loans were secured by real property.
Total deposits increased 3.0% to $3.51 billion. Noninterest-bearing deposits represented 31.7% of deposits, while interest-bearing nonmaturity deposits represented 60.1%.
The estimated uninsured deposits were $600.2 million, approximately 17% of total deposits, excluding collateralized public funds.
The allowance for credit losses on loans was $39.6 million, or 1.42% of loans, compared with 1.43% at year-end 2022. Net charge-offs were $630 thousand, and nonaccrual loans were $5.1 million, or 0.18% of loans.
Available-for-sale securities totaled $698.6 million and had $95.1 million of gross unrealized losses. Management attributed the losses to interest-rate and market factors rather than credit deterioration and stated it did not intend, and was not required, to sell the securities before recovery.
Stockholders’ equity increased to $368.0 million from $357.0 million. Tangible common equity to tangible assets was 8.54%, and tangible book value per share was $20.19.
Subordinated debt was $76.0 million and junior subordinated deferrable interest debentures were $46.4 million. City Bank had no FHLB advances at March 31, 2023.
South Plains Financial and City Bank exceeded applicable Basel III minimums and were classified as well-capitalized. City Bank’s total risk-based capital ratio was 13.59%, CET1 ratio was 12.37% and Tier 1 leverage ratio was 10.48%.

Material Changes Versus Prior Comparable Period

Net income declined $5.0 million, or approximately 35%, primarily because noninterest income fell $13.0 million and the provision for credit losses increased $3.1 million, partly offset by $4.4 million of higher net interest income and $5.6 million of lower noninterest expense.
Net interest income increased 14.6%. Loan interest income benefited from higher average loan balances and a 98-basis-point increase in loan yields, while interest expense increased $10.0 million as deposit costs rose sharply.
Mortgage banking income declined to $2.3 million from $13.6 million. Mortgage loan originations decreased $148.5 million, or 63.1%, due primarily to higher interest rates and fewer mortgage loan originators.
Mortgage servicing rights declined to $25.8 million after a $2.0 million fair-value adjustment, compared with a $4.5 million positive adjustment in Q1 2022.
Noninterest expense declined 14.7%, largely due to lower mortgage compensation and commissions, lower professional services costs and lower variable mortgage-related expenses.
The company adopted the CECL model on January 1, 2023, recording a $997 thousand after-tax reduction to retained earnings, increasing the loan allowance by approximately $100 thousand and increasing the off-balance-sheet credit exposure allowance by approximately $1.2 million.

Liquidity, Cash Flow and Outlook

Cash provided by operating activities was $25.4 million; investing activities used $31.3 million; financing activities provided $99.1 million, primarily from a $101.6 million increase in deposits. Cash and cash equivalents increased $93.1 million during the quarter.
Management reported approximately $1.75 billion of available borrowing capacity through the FHLB, Federal Reserve Discount Window and BTFP. This included approximately $988 million of unused FHLB capacity and $586 million of unused Federal Reserve capacity. No advances were made on these lines during the quarter.
The company also had $160 million of uncollateralized bank lines, although management stated it was not relying on those lines. Approximately $179 million of securities were available for potential BTFP collateral.
No earnings, revenue or margin guidance was provided. Management stated that future provisions may be required because economic conditions remain uncertain amid elevated interest rates and inflation.
Management expects interest-rate volatility, deposit competition and changes in customer behavior to affect funding costs, liquidity and net interest margin. Its interest-rate simulation indicated that a gradual 300-basis-point increase would reduce projected 12-month net interest income by 1.78% under the reported model.

Subsequent Events, Risks and Unusual Items

On April 1, 2023, the company sold Windmark Insurance Agency to Alliant Insurance Services for aggregate consideration of $35.5 million, subject to a potential working-capital adjustment. Transaction costs were approximately $3.1 million. The transaction includes transition, indemnification and five-year restrictive covenant obligations.
On May 5, 2023, the board authorized a stock repurchase program of up to $15.0 million through May 5, 2024. The program does not require the company to repurchase any shares.
On April 20, 2023, the company declared a $0.13-per-share dividend payable May 15, 2023.
Key disclosed risks include a potential recession, recent bank failures and related deposit confidence concerns, higher deposit costs, liquidity restrictions, interest-rate volatility, real-estate and agricultural concentration, commercial credit risk, CECL estimation risk, cybersecurity and technology risks, regulatory changes and risks associated with the Windmark sale.
Management identified a goodwill impairment triggering event because of economic uncertainty and the decline in the company’s stock price, but its interim analysis indicated that estimated fair value exceeded carrying value; no goodwill impairment charge was recorded.
Disclosure controls and procedures were deemed effective as of March 31, 2023. The company reported no material changes in internal control over financial reporting other than controls implemented or modified for CECL.

Important Facts for Investors to Verify

Whether deposit growth and the reported liquidity sources remain stable as deposit competition and industry-wide confidence concerns continue.
The sensitivity of net interest margin and earnings to further increases or decreases in interest rates and deposit repricing.
The adequacy of the $39.6 million loan allowance under the newly adopted CECL methodology, including the effects of economic forecasts and commercial real-estate exposure.
The performance of the mortgage banking business after the substantial decline in originations and mortgage-related noninterest income.
The amount and timing of proceeds, costs, tax effects and post-closing obligations associated with the Windmark divestiture.
The effect of the new $15.0 million repurchase authorization and the $0.13-per-share dividend on capital and liquidity.
The extent to which $95.1 million of unrealized securities losses could affect capital or liquidity if securities must be sold before recovery.
Future changes in nonaccrual loans, nonperforming loans, charge-offs and classified commercial loans.