South Plains Financial, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2023. The unaudited filing covers South Plains Financial, Inc., a Texas bank holding company operating primarily through City Bank in Texas and Eastern New Mexico. Its activities include commercial and retail banking, mortgage, trust and investment services. On April 1, 2023, the Company sold Windmark Insurance Agency, Inc.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net interest income | $35.7 million | $35.1 million | $104.6 million | $102.2 million |
| Provision for credit losses | $(0.7) million | $(0.8) million | $4.0 million | $(2.9) million |
| Noninterest income | $12.3 million | $20.9 million | $70.1 million | $63.5 million |
| Noninterest expense | $31.5 million | $37.4 million | $104.3 million | $111.4 million |
| Net income | $13.5 million | $15.5 million | $52.4 million | $45.6 million |
| Diluted EPS | $0.78 | $0.86 | $3.01 | $2.52 |
| Net interest margin | 3.52% | 3.70% | 3.64% | 3.68% |
- Q3 net income declined 12.7% year over year, while nine-month net income increased 14.9%, primarily due to the $33.8 million pretax gain on the Windmark sale.
- Q3 return on average equity was 14.01% and return on average assets was 1.27%; nine-month figures were 18.70% and 1.73%, respectively.
- Interest income increased substantially as loan balances and asset yields rose, but deposit funding costs increased faster. Q3 average interest-bearing liability cost rose to 3.07% from 1.02%.
- Total assets increased 6.1% to $4.19 billion from December 31, 2022. Loans held for investment increased 8.9% to $2.99 billion, led by commercial real estate, residential mortgage and commercial lending.
- Securities available for sale declined 16.6% to $585.0 million. The portfolio had $128.7 million of unrealized losses, attributed by management to interest-rate and market factors rather than credit losses.
- Total deposits increased 6.3% to $3.62 billion. Noninterest-bearing deposits represented 28.9% of total deposits, while interest-bearing nonmaturity deposits represented 61.4%.
- The allowance for credit losses on loans increased to $42.1 million from $39.3 million, while the allowance-to-loans ratio declined to 1.41% from 1.43%. Nonaccrual loans declined to $3.0 million from $5.8 million.
- Net cash provided by operating activities was $52.0 million for the first nine months, compared with $118.9 million in the prior-year period. Ending cash and cash equivalents were $352.4 million, up from $234.9 million at December 31, 2022.
Material changes versus prior periods
- Windmark sale: The Company sold Windmark for $36.1 million and recorded a $33.8 million pretax gain. Insurance income declined by $6.5 million for the first nine months because the business was no longer owned.
- Mortgage banking slowdown: Nine-month mortgage banking income fell 57.5% to $12.1 million as higher mortgage rates reduced originations and refinancing activity. Mortgage servicing rights declined by $0.9 million in valuation during the period, versus a $6.0 million increase in 2022.
- Funding-cost pressure: Q3 net interest margin fell 18 basis points, and the nine-month margin fell 4 basis points, despite higher loan yields and loan growth.
- Credit-loss accounting: The Company adopted CECL on January 1, 2023, recording a $997 thousand after-tax reduction to retained earnings and increasing the allowance for off-balance-sheet exposures by approximately $1.2 million.
- Capital returns: The Company repurchased 467,475 shares for $11.9 million during the first nine months and paid $6.6 million of dividends. Shares outstanding declined to 16.6 million at September 30, 2023.
- Accumulated other comprehensive loss: AOCI declined to $(84.6) million from $(65.1) million, primarily due to unrealized losses on available-for-sale securities and related hedges.
Guidance, outlook, risks and unusual items
- The filing does not provide formal earnings or revenue guidance. Management expects results to remain sensitive to interest rates, deposit pricing, loan demand, mortgage activity and credit performance.
- Available borrowing capacity was approximately $1.89 billion through the FHLB, Federal Reserve facilities and the Bank Term Funding Program. No FHLB or Federal Reserve advances were outstanding at September 30, 2023.
- The Company and City Bank were classified as well-capitalized. At September 30, 2023, consolidated total capital to risk-weighted assets was 16.82%, consolidated CET1 was 12.19%, and City Bank’s total capital ratio was 14.10%.
- Management identifies risks from recession, inflation, higher interest rates, deposit competition, banking-industry volatility, liquidity constraints, commercial real estate and other loan concentrations, agricultural and energy exposure, cybersecurity, regulatory changes and the adequacy of the CECL allowance.
- Commercial real estate represented 39.5% of loans held for investment, and 64.1% of loans were secured by real property. Non-owner-occupied office real estate loans totaled $130.6 million.
- Unfunded loan commitments and lines of credit totaled $669.9 million, and standby letters of credit totaled $9.9 million. The filing states that these amounts do not necessarily represent future cash requirements.
- After quarter-end, the Company declared a $0.13 per-share dividend and announced redemption of approximately $12.4 million of 2028 subordinated notes effective December 15, 2023, plus approximately $146 thousand of accrued interest.
Important facts for investors to verify
- Whether deposit costs continue to rise faster than loan and securities yields, further compressing net interest margin.
- Whether loan growth, particularly commercial real estate, agricultural, energy and office-related lending, produces higher delinquencies, charge-offs or CECL provisions.
- The potential liquidity and capital impact of the $128.7 million unrealized loss position in available-for-sale securities if securities must be sold before recovery.
- The sustainability of earnings excluding the one-time $33.8 million Windmark sale gain and the decline in mortgage and insurance income.
- The level and stability of uninsured or uncollateralized deposits, reported at approximately $590.1 million, or 16% of total deposits.
- The effect of the planned subordinated-debt redemption on regulatory capital, funding costs and future interest expense.
- Management’s assumptions underlying CECL, mortgage servicing rights valuations and other fair-value measurements, which are subject to significant estimation risk.