South Plains Financial, Inc. 2020 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 and investment services across Texas and Eastern New Mexico. The filing covers the fiscal year ended December 31, 2020; the requested “2020 Q4” period is included in this annual filing. Results include a full year of operations from West Texas State Bank, acquired in November 2019.
- 25 full-service banking locations and 13 loan production offices.
- Approximately 682 employees at year-end.
- Reportable segments: banking and insurance.
- Mortgage originations were $1.4 billion, with approximately 97% sold; 53% were refinances.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net income | $45.4 million | $29.2 million | +55.2% |
| Diluted EPS | $2.47 | $1.71 | +$0.76 |
| Net interest income | $122.3 million | $104.6 million | +16.9% |
| Provision for loan losses | $25.6 million | $2.8 million | +$22.8 million |
| Noninterest income | $101.6 million | $56.6 million | +79.4% |
| Noninterest expense | $141.7 million | $121.7 million | +16.4% |
| Return on average assets | 1.31% | 1.04% | +27 bps |
| Return on average equity | 13.40% | 10.94% | +246 bps |
| Net interest margin | 3.84% | 3.98% | -14 bps |
| Efficiency ratio | 62.99% | 75.29% | Improved |
| Net cash from operating activities | $5.6 million | $30.5 million | -$24.9 million |
Mortgage banking activities generated $65.0 million of noninterest income, compared with $25.1 million in 2019, reflecting record refinancing and origination volume. Insurance income was $7.6 million, fiduciary income was $3.2 million, and bank card and interchange income was $10.0 million.
Balance sheet, credit quality, debt and liquidity
| Metric at December 31 | 2020 | 2019 | Change |
|---|---|---|---|
| Total assets | $3.60 billion | $3.24 billion | +11.2% |
| Gross loans held for investment | $2.22 billion | $2.14 billion | +3.6% |
| Loans held for sale | $111.5 million | $49.0 million | Increased |
| Investment securities | $803.1 million | $707.7 million | +13.5% |
| Total deposits | $2.97 billion | $2.70 billion | +10.3% |
| Shareholders’ equity | $370.0 million | $306.2 million | +20.9% |
| Cash and cash equivalents | $300.3 million | $158.1 million | +90.0% |
| Total borrowings and subordinated debt | Approximately $223.5 million | Approximately $205.0 million | Increased |
- The allowance for loan losses increased to $45.6 million, or 2.05% of loans, from $24.2 million, or 1.13%, primarily due to COVID-19 and energy-sector risks.
- Net charge-offs were $4.2 million, or 0.18% of average loans, compared with $1.7 million, or 0.09%, in 2019.
- Nonperforming loans rose to $15.0 million, or 0.67% of gross loans, from $6.0 million, or 0.28%. Nonperforming assets were $16.3 million, or 0.45% of total assets.
- Approximately 71.5% of loans were to commercial borrowers and 66.5% were secured by real estate. Commercial real estate represented 29.9% of gross loans.
- Active COVID-19 loan modifications totaled approximately $64 million, or 2.9% of the loan portfolio, at year-end. The filing also reports approximately $61 million of modifications under CARES Act relief and $3 million under short-term modification guidance.
- The Bank originated approximately 2,050 PPP loans totaling $215 million; approximately $170 million remained outstanding at year-end. Deferred PPP fees not yet accreted were $4.1 million.
- Liquidity included $512.5 million of available FHLB borrowing capacity, a $700.8 million Federal Reserve line, and $165.0 million of unused unsecured bank lines.
- In September 2020, the Company issued $50 million of subordinated debt securities. Total subordinated debt securities outstanding were $75.6 million net of issuance costs.
Material changes versus the prior comparable period
- Net income benefited from higher net interest income and a substantial increase in mortgage banking revenue, partly offset by higher loan-loss provisions and operating expenses.
- Interest expense declined 43.8% to $15.9 million as funding costs fell in the low-rate environment, while average interest-bearing liabilities increased.
- Average loans increased 9.2%, but the total loan yield declined 51 basis points. Net interest margin decreased from 3.98% to 3.84%.
- Noninterest expense increased $20.0 million, primarily from mortgage commissions, a full year of WTSB personnel costs, intangible amortization and technology expenses.
- Credit deterioration increased: nonaccrual loans rose to $13.7 million from $4.7 million, and substandard loans increased to $86.0 million from $26.3 million.
- Accumulated other comprehensive income increased to $21.3 million from $1.0 million, largely due to unrealized gains on available-for-sale securities.
- The Company paid $0.14 per share in dividends during 2020 and repurchased 19,035 shares for approximately $293,000. The $10 million repurchase program was suspended in April and resumed in November.
Guidance, outlook, management commentary, risks and unusual items
- Management did not provide formal earnings guidance. It stated that refinancing activity was expected to taper in mid-2021 and that fiduciary fees could decline by approximately $410,000 per quarter beginning in the third quarter of 2021 before organic growth.
- Management could not predict the duration or full financial impact of COVID-19. Key areas under monitoring included hospitality, retail, energy, borrower payment performance, collateral values, liquidity and operating continuity.
- Management expects remaining first-round PPP loans to continue being forgiven over subsequent quarters and participated in the second PPP round; approximately $60 million of additional PPP loans had been originated by February 28, 2021.
- Material risks include commercial real estate and other real estate concentration, geographic concentration in Texas and New Mexico, energy and agricultural exposure, higher future credit losses, interest-rate changes, deposit outflows, liquidity risk, cybersecurity and regulatory compliance.
- CECL adoption is scheduled for the first fiscal quarter after December 15, 2022 under the Company’s extended emerging growth company transition period and could materially increase the allowance for credit losses.
- The Company identified a goodwill impairment triggering event in March 2020 related to COVID-19 and oil-price volatility, but its analysis indicated fair value exceeded carrying value; no goodwill impairment was recorded.
- The securities portfolio had $787,000 of unrealized losses at year-end, which management considered temporary. No other-than-temporary impairment was recorded.
- Legal proceedings arise in the ordinary course of business; management did not believe existing matters would materially affect the Company. The independent auditor issued an unqualified opinion, and management concluded internal control over financial reporting was effective; auditor attestation was not required because the Company is an emerging growth company.
Most important facts for investors to verify
- Whether COVID-19 modifications, particularly the $52.6 million of classified hospitality and assisted-living loans and related exposures, convert into higher nonperforming loans or charge-offs.
- Whether the $45.6 million allowance for loan losses is adequate as pandemic relief programs expire and CECL adoption approaches.
- The sustainability of the $65.0 million mortgage banking revenue, given the unusually high refinance contribution and expected tapering in 2021.
- Deposit stability, public-funds concentration and the Company’s ability to maintain liquidity without materially higher funding costs.
- Future net interest margin performance in a low-rate environment and the sensitivity of earnings to rate changes.
- Execution and repayment risks related to PPP loans, including SBA forgiveness and any potential lender liability.
- Capital and dividend capacity after the additional subordinated debt issuance, share repurchases and potential credit losses.