Business Context and Reporting Period
South Plains Financial, Inc. is a Texas bank holding company operating primarily through City Bank, with commercial and retail banking, insurance, investment, trust and mortgage services across Texas and eastern New Mexico. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022; comparable results are for the periods ended September 30, 2021, and balance-sheet comparisons are primarily to December 31, 2021.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Interest income | $41.1 million | $34.4 million | $114.9 million | $100.4 million |
| Net interest income | $35.1 million | $31.2 million | $102.2 million | $90.3 million |
| Net interest margin | 3.70% | 3.58% | 3.68% | 3.51% |
| Noninterest income | $20.9 million | $25.8 million | $63.5 million | $74.5 million |
| Noninterest expense | $37.4 million | $38.1 million | $111.4 million | $111.9 million |
| Net income | $15.5 million | $15.2 million | $45.6 million | $44.0 million |
| Diluted EPS | $0.86 | $0.82 | $2.52 | $2.38 |
| Annualized ROA | 1.53% | 1.61% | 1.53% | 1.57% |
| Annualized ROE | 17.37% | 15.24% | 16.25% | 15.32% |
- Total assets were $3.99 billion at September 30, 2022, up 2.3% from December 31, 2021.
- Loans held for investment were $2.69 billion, up 10.4%; deposits were $3.46 billion, up 3.6%.
- Cash and cash equivalents were $330.0 million, compared with $486.8 million at year-end 2021. Operating cash flow for the first nine months was $118.9 million; investing activities used $369.9 million, primarily for net loan growth and securities purchases, while financing activities provided $94.1 million.
- Allowance for loan losses was $39.7 million, or 1.47% of loans, versus $42.1 million, or 1.73%, at December 31, 2021. Nonaccrual loans were $4.9 million, or 0.18% of loans, versus $9.5 million, or 0.39%.
- Subordinated debt securities totaled $75.9 million net of issuance costs, and junior subordinated debentures totaled $46.4 million. City Bank had no FHLB advances outstanding; remaining FHLB borrowing capacity was $902.7 million, with additional Federal Reserve and correspondent-bank lines available.
- City Bank was well capitalized. Its total risk-based capital ratio was 13.37%, CET1 ratio was 12.18%, and Tier 1 leverage ratio was 10.26% at September 30, 2022.
Material Changes Versus Prior Comparable Period
- Q3 net income increased 1.8%, and nine-month net income increased 3.7%, primarily reflecting higher net interest income and lower operating expenses.
- Net interest income increased 12.6% in Q3 and 13.1% for the first nine months. Higher loan balances, rising asset yields and higher returns on securities and cash more than offset increased deposit costs.
- Noninterest income declined 18.8% in Q3 and 14.9% year to date. Mortgage banking income fell to $6.3 million in Q3 and $28.6 million for the nine months as higher mortgage rates reduced refinancing and origination activity.
- Loan growth was concentrated in commercial real estate, residential mortgage and auto loans. Commercial real estate loans increased to $869.2 million, while consumer loans increased to $814.4 million. PPP loans declined to approximately $2.0 million outstanding.
- The allowance declined despite loan growth because management recorded negative provision expense of $782 thousand in Q3 and $2.9 million for the first nine months, supported by improving credit metrics and recoveries.
- Stockholders’ equity fell 16.1% to $341.8 million, primarily because accumulated other comprehensive loss increased by $87.2 million after-tax as interest-rate increases reduced the fair value of available-for-sale securities. The company also repurchased $18.9 million of common stock and paid $6.0 million in dividends.
- Available-for-sale securities had $114.5 million of unrealized losses at September 30, 2022, compared with $4.8 million at year-end 2021. Management considered the losses temporary and did not record an impairment loss.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide quantitative earnings or revenue guidance. Management expects to maintain liquidity through profitability, loan and securities repayments and continued deposit gathering.
- Management expects the remaining PPP loans to be forgiven or repaid over the next several quarters. The company had no active COVID-19-related loan modifications at September 30, 2022.
- Management expects to adopt the current expected credit loss model effective January 1, 2023. The model was under development and validation, and the filing does not provide a quantified expected transition adjustment.
- Key risks include rising interest rates, persistent inflation, potential deterioration in credit quality, commercial real estate and agricultural concentrations, dependence on Texas and eastern New Mexico markets, deposit repricing and liquidity, mortgage-volume contraction, cybersecurity and operational risks, regulatory capital requirements, and potential changes in securities values.
- Interest-rate sensitivity modeling indicated estimated 12-month net interest income increases of 0.74%, 1.29% and 2.03% under immediate rate increases of 100, 200 and 300 basis points, respectively, and a 1.96% decline under a 100-basis-point decrease. Actual results may differ materially from modeled outcomes.
- Q3 noninterest income included approximately $2.1 million from legal settlements. A vendor dispute was settled and dismissed with prejudice in October 2022; management stated that remaining litigation is not expected to have a material adverse effect.
- The company adopted lease accounting Topic 842 in 2022, recording a $9.4 million right-of-use asset, a $10.3 million lease liability and a $717 thousand after-tax reduction to retained earnings.
Investor Verification Items
- Verify whether loan growth, particularly in commercial real estate and consumer lending, remains credit-positive as interest rates and inflation rise.
- Monitor deposit pricing, deposit mix, uninsured deposits of approximately $1.15 billion, and the effect of higher funding costs on net interest margin.
- Assess the potential capital impact if the $114.5 million unrealized securities loss worsens or securities must be sold before recovery.
- Review the January 1, 2023 CECL adoption adjustment and subsequent changes in provision expense and allowance coverage.
- Determine the sustainability of mortgage banking income after the sharp decline in originations and refinancing activity.
- Reconcile reported earnings with unusual legal settlement income, loan recoveries and other nonrecurring items.
- Confirm the effect of continued share repurchases and dividends on tangible book value, regulatory capital and liquidity.