South Plains Financial, Inc. — First-Quarter 2021 Form 10-Q
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 across Texas and Eastern New Mexico. This unaudited Form 10-Q covers the three months ended March 31, 2021, with comparisons to the three months ended March 31, 2020 and December 31, 2020 balance-sheet amounts.
Key financial metrics
| Metric | Q1 2021 | Comparable period or prior date |
|---|---|---|
| Total assets | $3.733 billion | $3.599 billion at December 31, 2020 |
| Gross loans held for investment | $2.243 billion | $2.222 billion at December 31, 2020 |
| Total deposits | $3.156 billion | $2.974 billion at December 31, 2020 |
| Cash and cash equivalents | $413.4 million | $300.3 million at December 31, 2020 |
| Net interest income | $29.5 million | $30.2 million in Q1 2020 |
| Provision for loan losses | $89 thousand | $6.2 million in Q1 2020 |
| Noninterest income | $26.5 million | $18.9 million in Q1 2020 |
| Noninterest expense | $37.1 million | $34.0 million in Q1 2020 |
| Net income | $15.2 million | $7.1 million in Q1 2020 |
| Diluted EPS | $0.82 | $0.38 in Q1 2020 |
| Net interest margin | 3.52% | 4.13% in Q1 2020 |
| Return on average equity | 16.51% | 9.00% in Q1 2020 |
| Return on average assets | 1.66% | 0.89% in Q1 2020 |
Net cash provided by operating activities was $8.1 million, compared with $4.3 million in Q1 2020. Investing activities used $15.5 million, while financing activities provided $120.5 million, primarily reflecting a $181.3 million increase in deposits and repayment of $50.0 million of notes payable. Cash and cash equivalents increased by $113.1 million during the quarter.
The allowance for loan losses was $45.0 million, or 2.01% of loans held for investment, compared with $45.6 million, or 2.05%, at December 31, 2020. Net charge-offs were $623 thousand, or 0.11% annualized of average loans, compared with $1.4 million, or 0.25%, in Q1 2020.
Debt at March 31, 2021 included $25.0 million of notes payable, $75.6 million of subordinated debt securities and $46.4 million of junior subordinated deferrable interest debentures. The Bank had approximately $590.0 million of additional FHLB borrowing capacity, $594.0 million of Federal Reserve discount-window capacity and $165.0 million of unused bank lines of credit.
Material changes versus prior comparable periods
- Net income increased $8.1 million, or approximately 114%, primarily because noninterest income rose $7.6 million and the loan-loss provision declined $6.1 million. These benefits were partly offset by a $3.0 million increase in noninterest expense and a $2.0 million increase in income-tax expense.
- Mortgage banking activity was the principal earnings driver: related noninterest income increased to $18.8 million from $8.8 million, supported by a 101.9% increase in mortgage originations. Management expects refinancing activity to taper in mid-2021 and return toward more historical levels thereafter.
- Net interest income declined 2.2% despite lower funding costs. The net interest margin fell to 3.52% from 4.13%, primarily due to lower yields on non-PPP loans and mortgage loans held for sale.
- Total assets increased 3.7% from year-end 2020. Loans held for investment increased 0.9%, securities decreased 3.2% to $777.2 million, and deposits increased 6.1%.
- Nonperforming loans declined to $14.3 million from $15.0 million at year-end 2020; total nonperforming assets declined to $15.7 million from $16.3 million.
- Stockholders’ equity increased to $374.7 million from $370.0 million, as quarterly earnings exceeded dividends and the $9.1 million decline in accumulated other comprehensive income. The Company repurchased 38,285 shares during the quarter.
Guidance, outlook, risks and unusual items
- No formal earnings or financial guidance is provided in the filing. Management expects remaining first- and second-round PPP loans to continue being forgiven by the SBA over the next several quarters.
- PPP loans totaled approximately $173.5 million at March 31, 2021. The Bank had funded approximately $78 million of new PPP loans during the quarter and an additional $12.1 million through April 27, 2021. Approximately $122 million of first-round PPP loans had been forgiven, leaving $96 million outstanding from that round.
- COVID-19-related active loan modifications totaled approximately $47 million, or 2.1% of the loan portfolio. Nine loans totaling approximately $46.1 million were subject to CARES Act-related deferral or modification agreements; short-term modifications outside that program totaled $766 thousand.
- Management continues to monitor retail, hospitality, assisted living and energy exposures. Hospitality and assisted-living loans totaled $123.0 million, including $52.7 million of classified loans and approximately 36% under active COVID-19 modifications. Direct energy loans totaled $63.5 million, including $7.7 million of classified loans.
- Credit risk remains sensitive to COVID-19 effects, commercial real estate, agricultural conditions, commodity prices, energy markets, borrower concentrations and the adequacy of the allowance for loan losses. Management states that the allowance is inherently subjective and may require material revisions as conditions change.
- The available-for-sale securities portfolio had $5.8 million of unrealized losses at March 31, 2021, compared with $787 thousand at year-end. Management considered the losses temporary and did not record an impairment charge.
- Off-balance-sheet commitments to grant loans and fund lines of credit totaled $512.2 million, and standby letters of credit totaled $8.8 million. Litigation is described as ordinary-course matters not expected to have a material adverse effect.
- The Company and City Bank met applicable regulatory capital requirements; City Bank was classified as well capitalized. Consolidated total capital and CET1 ratios were 19.24% and 13.23%, respectively.
- The filing states that there were no material subsequent events requiring recognition or disclosure and no material changes to previously disclosed risk factors. Disclosure controls and procedures were assessed as effective.
Important facts for investors to verify
- Whether mortgage origination and refinancing volumes normalize as interest rates rise, and the resulting effect on mortgage banking income and compensation expense.
- The performance of COVID-19-modified loans, particularly the hospitality and assisted-living portfolio, and whether additional provisions or charge-offs become necessary.
- Trends in net interest margin as excess liquidity, PPP forgiveness, deposit growth and interest-rate movements affect asset yields and funding costs.
- The adequacy of the $45.0 million allowance for loan losses and changes in classified, nonaccrual and past-due loans.
- Liquidity availability and funding concentration, including public deposits, FHLB capacity, Federal Reserve capacity and unused bank lines.
- The effect of unrealized securities losses and accumulated other comprehensive income on capital if interest rates or market values change further.
- The timing and economics of PPP forgiveness, including recognition of remaining deferred SBA fees.
- The Company’s ability to maintain its well-capitalized status while continuing dividends, share repurchases and loan growth.