South Plains Financial, Inc. — Form 10-Q Summary
Business context and reporting period
South Plains Financial, Inc. is a Texas bank holding company headquartered in Lubbock, Texas. Through City Bank and other subsidiaries, it provides commercial and retail banking, mortgage, insurance, investment, trust and related financial services in Texas and Eastern New Mexico. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared primarily with the corresponding 2020 periods and December 31, 2020 balance-sheet amounts. Amounts are in thousands except per-share data.
Financial performance and key metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Net interest income | $29,593 | $30,448 | $59,137 | $60,647 |
| Provision for loan losses | $(2,007) | $13,133 | $(1,918) | $19,367 |
| Noninterest income | $22,250 | $24,896 | $48,750 | $43,771 |
| Noninterest expense | $36,778 | $35,207 | $73,835 | $69,218 |
| Net income | $13,650 | $5,615 | $28,810 | $12,698 |
| Diluted EPS | $0.74 | $0.31 | $1.55 | $0.69 |
| Return on average equity | 14.27% | 6.81% | 15.35% | 7.88% |
| Return on average assets | 1.46% | 0.64% | 1.56% | 0.76% |
| Net interest margin | 3.42% | 3.79% | 3.47% | 3.95% |
- Total assets were $3.713 billion at June 30, 2021, up 3.2% from December 31, 2020.
- Loans held for investment were $2.303 billion, up 3.7%; net loans were $2.260 billion.
- Deposits were $3.158 billion, up 6.2%, including $998.9 million of noninterest-bearing deposits.
- Cash and cash equivalents were $383.9 million, compared with $300.3 million at year-end 2020.
- Securities available for sale were $777.6 million, down from $803.1 million at year-end 2020.
- The allowance for loan losses was $43.0 million, or 1.87% of loans held for investment, compared with $45.6 million and 2.05% at December 31, 2020.
- Total stockholders’ equity was $392.8 million, compared with $370.0 million at year-end 2020.
- Net cash provided by operating activities was $69.2 million for the first six months, compared with net cash used of $8.6 million in the prior-year period. Investing activities used $68.1 million and financing activities provided $82.5 million.
Material changes versus comparable periods
- Quarterly net income increased 143% year over year, while six-month net income increased 127%. The principal driver was the shift from substantial loan-loss provisions in 2020 to negative provisions in 2021.
- Net interest income declined 2.8% in the second quarter and 2.5% year to date. The net interest margin declined 37 basis points in the quarter and 48 basis points year to date, primarily because of lower yields on non-PPP loans and other earning assets.
- Noninterest income declined 10.6% in the quarter because mortgage banking income decreased $4.2 million, but increased 11.4% year to date because mortgage banking income rose $5.8 million and card-related income increased.
- Noninterest expense increased 4.5% in the quarter and 6.7% year to date. Salaries and employee benefits were the primary contributor, reflecting higher mortgage commissions and staffing.
- Gross loans grew $81.9 million. Non-PPP loans increased organically by approximately $137.7 million, partly offset by a $55.8 million decline in PPP loans.
- Construction loans increased 39.3% to $131.6 million, consumer loans increased 6.3% to $674.0 million, and commercial general loans decreased 5.0% to $492.3 million.
- Nonperforming loans declined to $12.5 million from $15.0 million at year-end 2020, and total nonperforming assets declined to $13.7 million from $16.3 million.
- City Bank repaid all $75.0 million of FHLB advances outstanding at December 31, 2020. Subordinated debt securities remained approximately $75.7 million, and junior subordinated debentures remained $46.4 million.
Guidance, outlook, risks and unusual items
- The filing does not provide formal earnings or financial guidance. Management expects remaining PPP loans to be forgiven or repaid over the next several quarters and expects mortgage refinance activity to taper later in 2021 toward more historical levels.
- COVID-19 and the Delta variant remained significant uncertainties. At June 30, 2021, six COVID-related modified loans totaling approximately $36.6 million remained under CARES Act provisions; no loans remained in the short-term modification program. Hospitality and assisted-living loans had approximately 29% under active COVID-related modifications.
- PPP activity included approximately $91 million of new loans funded during the first six months of 2021. Approximately $188 million of first-round PPP loans and $6 million of the later-round loans had been forgiven by the SBA; approximately $4.6 million of PPP fees remained deferred.
- Credit concentrations and risks include commercial real estate, agricultural and energy lending, geographic concentration in Texas and Eastern New Mexico, and exposure to restaurant, retail, hospitality and assisted-living borrowers. Direct energy loans totaled $78.1 million, or 3.4% of total loans.
- Management recorded a $2.0 million negative provision in the second quarter, citing economic improvement, fewer active modifications and lower nonperforming loans. The allowance remains subject to significant estimation risk and possible regulatory adjustment.
- Off-balance-sheet commitments to grant loans and unfunded credit lines totaled $585.2 million, with standby letters of credit of $9.4 million. Litigation was described as ordinary course and not expected to materially affect results.
- The bank was well capitalized at June 30, 2021. City Bank’s total risk-based capital ratio was 15.59%, CET1 ratio was 14.34% and Tier 1 leverage ratio was 10.20%.
- Liquidity included approximately $584.2 million of remaining FHLB borrowing capacity, a $609.0 million Federal Reserve discount-window line and $796.0 million of uncollateralized bank lines. Management stated that liquidity was adequate, while noting that pandemic or economic disruption could restrict funding sources or increase costs.
- Management concluded that disclosure controls and procedures were effective and reported no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether the large improvement in earnings is sustainable after the unusually favorable negative loan-loss provision and elevated PPP fee accretion.
- The durability of mortgage banking revenue as refinancing activity declines and gain-on-sale margins normalize.
- Credit performance in hospitality, assisted living, restaurant and retail, commercial real estate, agricultural and energy portfolios after COVID-related relief ends.
- Whether the 1.87% allowance-to-loans ratio remains adequate under changing economic conditions and the eventual transition to CECL accounting.
- The effect of declining net interest margins and future interest-rate movements on net interest income.
- Potential deposit reductions as customers spend PPP proceeds and government stimulus balances.
- Exposure associated with $594.7 million of total off-balance-sheet credit commitments and the collateral supporting those commitments.
- The terms, refinancing or repricing risks of subordinated debt and junior subordinated debentures, including instruments referencing LIBOR or other reference-rate reforms.