South Plains Financial, Inc. 2021 Form 10-K Summary
Business context and reporting period
South Plains Financial, Inc. is a Texas bank holding company headquartered in Lubbock. Through City Bank, it provides commercial and retail banking, mortgage, insurance, trust, investment and related financial services across Texas and Eastern New Mexico. The filing covers the fiscal year ended December 31, 2021; financial statements were audited by Weaver and Tidwell, L.L.P.
At year-end, the Company operated 25 full-service banking locations and 15 loan production offices, with approximately 680 employees. It reported two segments: community banking and insurance.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net income | $58.6 million | $45.4 million | 29.2% increase |
| Diluted EPS | $3.17 | $2.47 | 28.3% increase |
| Net interest income | $121.8 million | $122.3 million | 0.4% decrease |
| Provision for loan losses | $(1.9) million credit | $25.6 million expense | $27.5 million favorable change |
| Noninterest income | $97.5 million | $101.6 million | 4.1% decrease |
| Noninterest expense | $148.0 million | $141.7 million | 4.5% increase |
| Return on average assets | 1.56% | 1.31% | Up 25 basis points |
| Return on average equity | 15.08% | 13.40% | Up 168 basis points |
| Net interest margin | 3.51% | 3.84% | Down 33 basis points |
| Efficiency ratio | 67.14% | 62.99% | Higher expenses relative to revenue |
| Balance-sheet or cash-flow measure | December 31, 2021 | Change versus 2020 |
|---|---|---|
| Total assets | $3.90 billion | 8.4% increase |
| Gross loans held for investment | $2.44 billion | 9.7% increase |
| Total deposits | $3.34 billion | 12.3% increase |
| Total stockholders’ equity | $407.4 million | 10.1% increase |
| Cash and cash equivalents | $486.8 million | Increase from $300.3 million |
| Borrowings | $122.2 million | Decrease from $223.5 million |
| Net cash from operating activities | $96.3 million | Increase from $5.6 million |
| Net cash used in investing activities | $(159.8) million | Comparable with $(156.2) million |
| Net cash from financing activities | $250.1 million | Decrease from $292.8 million |
Mortgage originations totaled approximately $1.5 billion, with 97% sold during the year. Mortgage banking activities generated $59.7 million of noninterest income, representing approximately 61% of total noninterest income. Mortgage servicing rights increased to $19.7 million, and the Company serviced approximately $2.0 billion of mortgages sold to third parties.
Material changes versus the prior comparable period
- Net income improved primarily because the 2021 provision for loan losses was a $1.9 million credit compared with a $25.6 million provision in 2020. Net charge-offs declined to $1.5 million from $4.2 million.
- Loan growth was broad-based. Non-PPP loans grew organically by approximately $345.8 million, while PPP loans declined by approximately $129.8 million. Commercial real estate loans increased 13.9% to $755.4 million, commercial specialized loans increased 21.5% to $378.7 million, and construction loans increased 55.4% to $146.9 million.
- Deposits increased $366.9 million, supported by organic growth, PPP-related funds and government stimulus balances. Noninterest-bearing deposits represented 32.1% of total deposits at year-end.
- Net interest margin declined to 3.51% from 3.84%, reflecting lower yields on interest-earning assets despite asset growth. Interest expense declined as deposit and borrowing costs fell.
- Noninterest income declined $4.1 million as mortgage banking income fell $5.3 million and the prior-year period included a $2.3 million securities gain. Noninterest expense increased $6.3 million, primarily from mortgage commissions, personnel costs, technology investments and bank-card expenses.
- The Company repaid $75.0 million of FHLB advances during 2021; no FHLB advances or short-term borrowings were outstanding at year-end. It issued no new subordinated debt during 2021.
- The Company repurchased 393,529 shares for $9.2 million and paid $0.30 per share in dividends during 2021, compared with $0.14 per share in 2020.
Asset quality, liquidity and capital
- Nonperforming assets were 0.30% of total assets, compared with 0.45% in 2020. Nonperforming loans were 0.43% of loans held for investment, compared with 0.67%.
- The allowance for loan losses declined to $42.1 million, or 1.73% of loans held for investment, from $45.6 million, or 2.05%. Management attributed the reduction to economic improvement, fewer modified loans and lower nonperforming loans.
- Credit concentrations remain significant: approximately 71.4% of loans were to commercial borrowers, 69.4% were secured primarily by real estate, and non-owner-occupied commercial real estate represented 36.7% of total loans.
- COVID-19-related active loan modifications totaled $15.9 million, or approximately 0.7% of the loan portfolio, at year-end. No TDRs were recorded in 2021, 2020 or 2019.
- The Company and City Bank exceeded fully phased-in Basel III requirements. Consolidated CET1, Tier 1 leverage and total risk-based capital ratios were 12.91%, 10.77% and 18.40%, respectively. City Bank was classified as well-capitalized under prompt corrective action standards.
- Liquidity included $486.8 million of cash and cash equivalents, $724.5 million of securities, $903.9 million of remaining FHLB capacity, a $593.6 million Federal Reserve Bank line and $160.0 million of unused uncollateralized bank lines.
Outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects continued loan and deposit growth through commercial lender hiring and organic expansion, but noted that deposits may decline as customers spend remaining PPP funds. Mortgage refinance activity is expected to taper as interest rates rise, potentially reducing mortgage revenue and noninterest income.
- COVID-19, including Delta and Omicron variants, remained a source of uncertainty. Management continued monitoring retail, hospitality and energy exposures and expected remaining modified loans to return to full payment status.
- Interest-rate risk is material. The Company’s models estimated that a 100-basis-point rate increase would increase one-year net interest income by 2.02%, while a 100-basis-point decline would reduce it by 1.05%; actual results may differ from modeled outcomes.
- Key credit risks include commercial real estate, real estate collateral, commercial borrowers, energy lending, agriculture, auto lending and geographic concentration in Texas and Eastern New Mexico.
- The Company expects to adopt CECL for its first fiscal quarter after December 15, 2022. The filing states that adoption could materially increase the allowance for credit losses, but it does not provide a quantified estimate of the impact.
- Future mortgage servicing rights values may fluctuate with prepayment speeds and interest rates. The filing also identifies LIBOR transition risk because certain debt, swaps and one loan were indexed to LIBOR.
- City Bank is involved in ongoing litigation with Kasasa relating to software, trademark and exclusivity agreements. Trial was scheduled for October 2022; the ultimate outcome and any potential loss could not be estimated.
- The Company disclosed $554.8 million of commitments to extend credit and standby letters of credit at year-end, including $542.3 million of loan commitments and unfunded lines.
- Management concluded that disclosure controls and internal control over financial reporting were effective. The independent auditor did not provide an ICFR attestation because the Company qualified as an emerging growth company.
Important facts for investors to verify
- Whether loan growth, particularly commercial real estate, construction and energy lending, remains consistent with underwriting standards and available capital.
- Whether nonperforming loans, classified hospitality loans and COVID-19-related modifications improve or require additional provisions.
- The sensitivity of net interest margin and deposit costs to the expected rise in market interest rates and possible deposit runoff.
- The sustainability of mortgage banking income as refinancing activity declines and the valuation of mortgage servicing rights changes.
- The quantified effect of CECL adoption on the allowance, retained earnings and regulatory capital.
- The status and potential financial impact of the Kasasa litigation and any other material contingencies.
- The treatment and replacement timetable for LIBOR-linked instruments, including the $46.4 million of junior subordinated debentures.
- Whether the Company’s capital, liquidity and dividend capacity remain comfortably above regulatory requirements after growth, repurchases and potential credit losses.