South Plains Financial, Inc. 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. The interim consolidated financial statements are unaudited and presented in accordance with U.S. GAAP. South Plains Financial is a Texas bank holding company operating primarily through City Bank across Texas and Eastern New Mexico, with banking, insurance, investment, trust, and mortgage activities.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 |
|---|---|---|
| Total interest income | $34.4 million | $100.4 million |
| Net interest income | $31.2 million | $90.3 million |
| Noninterest income | $25.8 million | $74.5 million |
| Noninterest expense | $38.1 million | $111.9 million |
| Provision for loan losses | $0 | $(1.9) million, a negative provision |
| Net income | $15.2 million | $44.0 million |
| Diluted earnings per share | $0.82 | $2.38 |
| Return on average equity, annualized | 15.24% | 15.32% |
| Return on average assets, annualized | 1.61% | 1.57% |
| Fully tax-equivalent net interest margin | 3.58% | 3.51% |
Balance Sheet, Liquidity, and Capital
- Total assets were $3.77 billion, up 4.9% from December 31, 2020.
- Gross loans held for investment were $2.43 billion, up 9.3%; net loans were $2.39 billion.
- Total deposits were $3.21 billion, up 8.0%. Noninterest-bearing deposits represented 32.8% of total deposits.
- Cash and cash equivalents were $327.6 million, compared with $300.3 million at year-end 2020.
- Securities available for sale were $752.6 million, down from $803.1 million at year-end 2020.
- The Company had no short-term borrowings or FHLB advances at September 30, 2021. Subordinated debt securities totaled $75.7 million and junior subordinated debentures totaled $46.4 million.
- Available liquidity included approximately $584.2 million of FHLB borrowing capacity, $609.0 million of Federal Reserve discount-window capacity, and $796.0 million of unused uncollateralized bank lines.
- Stockholders’ equity was $398.3 million, up 7.6% from December 31, 2020. The bank subsidiary was classified as well capitalized, with a total risk-based capital ratio of 14.91% and a CET1 ratio of 13.65%.
Cash Flow and Capital Allocation
- Net cash provided by operating activities was $77.7 million for the first nine months of 2021.
- Investing activities used $176.8 million, primarily reflecting net loan originations and collections of $(209.0) million.
- Financing activities provided $126.4 million, including a $237.9 million increase in deposits, offset by repayment of $26.6 million of short-term borrowings and $75.0 million of longer-term borrowings.
- The Company paid $3.8 million in common-stock dividends and repurchased $6.1 million of common stock, retiring approximately 272,822 shares year to date.
- In October 2021, the board approved a new $10.0 million stock repurchase program effective November 6, 2021.
Material Changes Versus Comparable Periods
- Third-quarter net income declined 9.2% from $16.7 million to $15.2 million, while nine-month net income increased 49.5% from $29.4 million to $44.0 million.
- Third-quarter diluted EPS decreased from $0.92 to $0.82; nine-month diluted EPS increased from $1.61 to $2.38.
- Net interest income declined 0.3% in the quarter and 1.7% year to date. Net interest margin declined from 3.82% to 3.58% in the quarter and from 3.91% to 3.51% year to date, primarily reflecting lower asset yields.
- Third-quarter noninterest income decreased 18.5%, primarily because mortgage banking income declined 30.9% to $14.8 million. Year-to-date noninterest income declined 1.2%.
- Noninterest expense increased 5.8% in the quarter and 6.4% year to date, driven largely by salaries, mortgage commissions, loan-officer hiring, technology, bank-card activity, and appraisal expenses.
- The allowance for loan losses declined to $42.8 million from $45.6 million, and the allowance-to-loans ratio declined to 1.76% from 2.05%. Net charge-offs were $0.9 million year to date versus $3.6 million in the prior-year period.
- Loans increased primarily through organic growth in commercial real estate, specialized commercial, construction, residential mortgage, and auto lending. PPP loans declined by $107.8 million as forgiveness and repayments exceeded new originations.
Outlook, Commentary, Risks, and Unusual Items
- Management continued to monitor the COVID-19 pandemic and Delta variant, particularly exposures in retail, hospitality, assisted living, and energy. Active COVID-related modifications totaled approximately $16.4 million, or 0.7% of loans, at September 30, 2021.
- PPP forgiveness and repayments reduced outstanding PPP loans to approximately $64 million: $2 million from the first round and $62 million from the later round. Deferred PPP-related SBA fees of approximately $2.9 million remained to be recognized.
- Management attributed the reduced loan-loss provision to economic improvement, fewer modified loans, and lower nonperforming loans. Nonperforming loans were $10.9 million, compared with $15.0 million at December 31, 2020.
- Hospitality and assisted-living loans totaled $129.4 million, including $48.2 million of classified loans. Direct energy loans totaled $107.2 million, including $5.9 million of classified loans.
- Management identified key risks including COVID-19 and variants, concentrated geographic and industry exposures, commercial real estate and agricultural credit risk, interest-rate volatility, deposit runoff, liquidity restrictions, competition, cybersecurity, regulatory capital requirements, litigation, and the adequacy of the allowance for loan losses.
- Available-for-sale securities had $4.5 million of unrealized losses at September 30, 2021. Management considered the losses temporary and recorded no impairment charge.
- Off-balance-sheet commitments totaled $560.2 million, consisting of $547.7 million of loan and line-of-credit commitments and $12.4 million of standby letters of credit.
- The Company is evaluating the future effects of CECL and lease accounting standards. The filing does not provide a quantified expected impact.
- No material changes to previously disclosed risk factors were reported. Management stated that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether lower net interest margins persist as rates, deposit balances, PPP runoff, and asset mix change.
- Whether mortgage banking volume and gain-on-sale margins continue to decline after the strong prior-year comparison.
- The performance of hospitality, assisted-living, commercial real estate, agricultural, and direct energy exposures as loan modifications expire.
- Whether the $42.8 million allowance remains adequate under changing economic conditions and the eventual adoption of CECL.
- The extent to which elevated deposits related to PPP loans, stimulus programs, and customer liquidity are retained or withdrawn.
- The timing and amount of repurchases under the new $10.0 million program and the resulting effect on capital and per-share metrics.
- The potential effects of interest-rate changes on net interest income, securities valuations, mortgage servicing rights, and regulatory capital.
- The eventual quantified impact of new accounting standards, particularly CECL and ASC 842 leases, which the filing does not clearly provide.