Business Context and Reporting Period
South Plains Financial, Inc. is a Texas bank holding company headquartered in Lubbock, Texas. Through City Bank, it provides commercial and retail banking, investment, trust, and mortgage services across Texas and Eastern New Mexico. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 |
|---|---|---|
| Net income | $29.7 million | $38.9 million |
| Diluted EPS | $1.71 | $2.23 |
| Net interest income | $34.6 million | $68.9 million |
| Provision for credit losses | $3.7 million | $4.7 million |
| Total noninterest income | $47.1 million | $57.8 million |
| Total noninterest expense | $40.5 million | $72.9 million |
| Net interest margin | 3.65% | 3.70% |
| Return on average equity | 31.33% | 21.14% |
| Return on average assets | 2.97% | 1.98% |
- Three-month net income increased 86.9% from $15.9 million in the prior-year quarter; six-month net income increased 29.1% from $30.2 million.
- Three-month net interest income declined 6.8%, while six-month net interest income increased 2.8%. Higher asset yields and loan growth were offset by substantially higher deposit funding costs.
- Average interest-earning asset yield was 5.35% in the quarter, compared with 4.41% in the prior-year quarter. The average cost of interest-bearing liabilities increased to 2.63% from 0.62%.
- Total assets were $4.15 billion at June 30, 2023, up 5.2% from December 31, 2022. Loans held for investment increased 8.4% to $2.98 billion.
- Total deposits increased 4.9% to $3.57 billion. Noninterest-bearing deposits represented 30.8% of total deposits, while interest-bearing nonmaturity deposits represented 60.2%.
- Cash and cash equivalents were $295.6 million, compared with $234.9 million at year-end 2022.
- Stockholders’ equity increased 9.8% to $392.0 million. Book value per share was $23.13 and tangible book value per share was $21.82.
- Subordinated debt was $76.1 million and junior subordinated deferrable interest debentures were $46.4 million. The company had no FHLB advances outstanding at June 30, 2023.
Cash Flow, Liquidity and Capital
- For the six months ended June 30, 2023, operating activities provided $25.7 million of cash, investing activities used $125.8 million, and financing activities provided $160.8 million. Cash and cash equivalents increased $60.7 million.
- Management reported approximately $1.82 billion of available borrowing capacity through the FHLB, Federal Reserve Discount Window and BTFP. Detailed disclosures include approximately $1.01 billion of unused FHLB capacity, $611.7 million of Federal Reserve capacity and $140 million of uncollateralized bank lines.
- Approximately 16% of deposits, or $576.9 million, were estimated to be uninsured or uncollateralized. Retail customers represented approximately 45% of deposits, commercial customers approximately 45%, and public funds approximately 10%.
- At June 30, 2023, consolidated total capital, Tier 1 capital, CET1 capital and Tier 1 leverage ratios were 16.75%, 13.37%, 12.11% and 11.67%, respectively. City Bank was classified as well capitalized, with corresponding ratios of 13.73%, 12.48%, 12.48% and 10.97%.
Material Changes Versus Prior Comparable Period
- Noninterest income increased 150.1% in the quarter and 35.9% year to date, primarily because of a $33.5 million pretax gain on the April 1, 2023 sale of Windmark Insurance Agency to Alliant for $35.5 million.
- The Windmark transaction also reduced insurance-related income and removed the insurance segment from segment reporting. Management incurred approximately $4.5 million of transaction and related incentive-based compensation expenses.
- Mortgage banking income declined to $5.3 million in the quarter and $7.5 million year to date, reflecting lower mortgage originations as higher interest rates reduced refinance activity.
- The securities portfolio declined 10.5% to $628.1 million. The company sold approximately $56.2 million of available-for-sale securities, recognizing a $3.4 million loss, with proceeds used to support loan growth.
- The company adopted the CECL model on January 1, 2023, recording a $997 thousand after-tax reduction to retained earnings and increasing the allowance for loan losses to $43.1 million at June 30, 2023 from $39.3 million at year-end 2022.
- Nonaccrual loans increased to $16.6 million, or 0.56% of loans, from $5.8 million, or 0.21%, at year-end. Nonperforming loans increased to $21.0 million from $7.8 million.
- The company repurchased 112,954 shares for $2.5 million during the six months and approved a new $15.0 million repurchase program expiring May 5, 2024.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects results to remain sensitive to interest rates, deposit pricing, loan growth, credit quality and mortgage activity.
- Management identified persistent inflation, elevated market interest rates, recession risk, increased competition for deposits and continued uncertainty in the banking industry as material factors affecting funding costs, liquidity and credit quality.
- Commercial real estate represented 38.7% of loans held for investment, and 64.4% of loans were secured by real property. Management cited risks from declines in real estate values, borrower cash flows, agricultural conditions, commodity prices and regional economic conditions.
- The allowance for credit losses was 1.45% of loans at June 30, 2023. Management stated that additional provisions may be required if economic conditions deteriorate; regulatory examinations may also require additional loss recognition.
- A $13.3 million commercial relationship was placed on nonaccrual in May 2023 and carried a $1.3 million specific reserve. Management expected material principal reductions during the third quarter, but the filing does not establish that the expected reductions occurred.
- Available-for-sale securities had $97.8 million of gross unrealized losses, primarily attributable to market-rate changes. Management stated it did not intend, and was not likely required, to sell the securities before recovery and recorded no credit-loss allowance for those positions.
- Off-balance-sheet commitments included $637.4 million of loan and line-of-credit commitments and $12.8 million of standby letters of credit.
- Management stated that disclosure controls were effective as of June 30, 2023 and that no material changes in internal control occurred other than implementation controls related to CECL.
Most Important Facts to Verify
- Whether the $13.3 million nonaccrual relationship produces the expected third-quarter principal reductions and whether additional specific reserves or charge-offs are required.
- Deposit stability, particularly the level and cost of brokered, public-fund and other interest-bearing deposits, and the approximately $576.9 million of uninsured or uncollateralized deposits.
- The sustainability of earnings excluding the $33.5 million Windmark sale gain and related transaction expenses.
- Future net interest margin trends as deposit costs reprice and loan yields respond to changes in market interest rates.
- Changes in commercial real estate exposure, nonperforming assets, charge-offs and the adequacy of the $43.1 million CECL allowance.
- Realized or unrealized losses in the securities portfolio and the availability of securities as collateral for liquidity facilities.
- Whether mortgage banking volumes and mortgage servicing rights valuations recover or continue to decline in the higher-rate environment.