South Plains Financial, Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
South Plains Financial, Inc. is a Texas bank holding company operating primarily through City Bank across Texas and Eastern New Mexico. Its businesses include commercial and retail banking, insurance, investment, trust and mortgage services. This unaudited Form 10-Q covers the three months ended March 31, 2020; comparative results are for the three months ended March 31, 2019, and balance-sheet comparisons are to December 31, 2019. Amounts are in thousands, except per-share data.
Key Financial Metrics
| Metric | Q1 2020 | Comparable / Prior Period |
|---|---|---|
| Total assets | $3.217 billion | $3.237 billion at Dec. 31, 2019 |
| Gross loans held for investment | $2.109 billion | $2.144 billion at Dec. 31, 2019 |
| Securities available for sale | $734.8 million | $707.7 million at Dec. 31, 2019 |
| Total deposits | $2.666 billion | $2.697 billion at Dec. 31, 2019 |
| Net interest income | $30.2 million | $24.5 million in Q1 2019 |
| Provision for loan losses | $6.2 million | $0.6 million in Q1 2019 |
| Noninterest income | $18.9 million | $12.1 million in Q1 2019 |
| Noninterest expense | $34.0 million | $30.0 million in Q1 2019 |
| Net income | $7.1 million | $4.8 million in Q1 2019 |
| Basic / diluted EPS | $0.39 / $0.38 | $0.32 / $0.32 in Q1 2019 |
| Net interest margin | 4.13% | 3.93% in Q1 2019 |
| Return on average assets / equity | 0.89% / 9.00% | 0.71% / 8.98% in Q1 2019 |
Cash Flow, Debt, Liquidity and Capital
- Cash and cash equivalents were $136.1 million at March 31, 2020, down from $158.1 million at year-end 2019. Operating, investing and financing cash flows were $4.3 million, $25.0 million and negative $51.4 million, respectively.
- Total debt and other borrowings included $95.0 million of notes payable and other borrowings, $26.5 million of subordinated debt securities and $46.4 million of junior subordinated debentures. Short-term borrowings were $17.4 million.
- The Bank reported approximately $504.8 million of remaining FHLB borrowing capacity, $540.6 million of Federal Reserve discount-window capacity and $135.0 million of uncollateralized bank lines. Management stated that the Company had excess liquidity and more than $450 million of unpledged securities.
- Stockholders’ equity increased to $326.9 million from $306.2 million, primarily due to quarterly earnings and a $13.9 million increase in accumulated other comprehensive income.
- At March 31, 2020, City Bank was well capitalized. Its total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios were 14.87%, 13.71%, 13.71% and 10.89%, respectively.
Material Changes Versus Prior Comparable Period
- Net income increased $2.3 million, or approximately 48%, to $7.1 million. Net interest income rose $5.7 million, or 23%, primarily from higher average loan and securities balances following the November 2019 acquisition of West Texas State Bank and lower funding costs.
- Noninterest income increased $6.8 million, or 56%, driven by higher mortgage banking income, a $2.3 million securities-sale gain and increased fiduciary income. Mortgage banking income rose to $8.8 million from $4.9 million.
- Noninterest expense increased $4.0 million, or 13%, reflecting the WTSB acquisition, higher mortgage commissions and variable expenses, data-conversion costs and branch equipment expenditures.
- The allowance for loan losses increased to $29.1 million from $24.2 million at year-end 2019, and the allowance-to-loans ratio increased to 1.38% from 1.13%. The increase reflected COVID-19 and oil-and-gas price risks.
- Nonperforming assets increased to $9.1 million from $7.9 million at year-end 2019. Nonaccrual loans were $5.9 million, compared with $4.7 million.
- Net charge-offs were $1.4 million, or 0.25% annualized of average loans, compared with $0.4 million, or 0.07%, in Q1 2019.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal earnings or financial guidance. It stated that the duration and economic effects of COVID-19 could not be predicted and that additional loan-loss provisions may be required.
- COVID-19 loan modifications totaled approximately $155 million, or 7% of the loan portfolio, at March 31, 2020, increasing to approximately $390 million, or 18%, by May 1, 2020. Modifications included payment deferrals and interest-only periods.
- As of May 5, 2020, City Bank had funded more than $210 million of Paycheck Protection Program loans for more than 1,800 customers. These loans were SBA-guaranteed and the Company had not used the PPP Liquidity Facility.
- The Company temporarily suspended its stock repurchase program to preserve capital and liquidity. It paid a $0.03-per-share quarterly dividend.
- Key credit exposures included $83.0 million of restaurant and retail owner-occupied loans, $113.5 million of hospitality and assisted-living loans and $90.0 million of direct energy loans. The decline in oil and gas prices and exposure to energy, hospitality, agriculture, commercial real estate and concentrated geographic markets were identified as material risks.
- Management performed an interim goodwill impairment analysis because of COVID-19 disruption, oil-price volatility and the decline in the stock price; no impairment charge was recorded at March 31, 2020.
- The Company filed litigation related to the WTSB acquisition, alleging misrepresentations concerning transaction-related expenses. The ultimate outcome could not be determined, and potential indemnification and litigation costs may be incurred.
- Commitments to grant loans and unfunded credit-line commitments were $471.7 million, and standby letters of credit were $12.0 million. Management stated that ordinary-course litigation was not expected to have a material effect, except for the WTSB-related matter described above.
Important Facts for Investors to Verify
- Whether COVID-19 loan modifications convert into higher delinquencies, nonaccrual loans, charge-offs and additional provisioning in subsequent quarters.
- The performance of the $210 million-plus PPP portfolio, including fee recognition, funding sources and any operational or credit costs.
- Trends in energy, hospitality, restaurant and retail exposures, collateral values and criticized or classified loans.
- Whether the allowance for loan losses remains adequate as economic conditions and oil prices evolve.
- The sustainability of elevated mortgage banking income and the one-time $2.3 million securities-sale gain.
- Liquidity, deposit stability, borrowing capacity and capital ratios if customer drawdowns or credit losses increase.
- The outcome and potential cost of the WTSB-related litigation and the finalization of WTSB acquisition measurement-period adjustments.
- Potential goodwill impairment, securities impairment or reductions in accumulated other comprehensive income arising from continued market volatility.