South Plains Financial, Inc. 10-Q Summary
Reporting period: Three months ended March 31, 2022. South Plains Financial, Inc. is a Texas bank holding company operating primarily through City Bank in Texas and Eastern New Mexico. Its businesses include commercial and retail banking, insurance, investment, trust, and mortgage services. The interim financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 or Period-End Comparison |
|---|---|---|
| Total interest income | $33.1 million | $33.0 million in Q1 2021 |
| Net interest income | $29.9 million | $29.5 million; up 1.4% |
| Net interest margin | 3.33% | 3.52% |
| Noninterest income | $23.7 million | $26.5 million; down 10.6% |
| Noninterest expense | $37.9 million | $37.1 million; up 2.3% |
| Provision for loan losses | $(2.1) million benefit | $0.1 million provision |
| Net income | $14.3 million | $15.2 million; down 5.8% |
| Diluted earnings per share | $0.78 | $0.82 |
| Return on average assets | 1.47% | 1.66% |
| Return on average equity | 14.58% | 16.51% |
| Operating cash flow | $70.6 million | $8.1 million |
| Total assets at period end | $4.00 billion | $3.90 billion at December 31, 2021 |
| Loans held for investment | $2.45 billion | $2.44 billion at December 31, 2021 |
| Total deposits | $3.45 billion | $3.34 billion at December 31, 2021 |
| Cash and cash equivalents | $528.6 million | $486.8 million at December 31, 2021 |
Material Changes and Operating Trends
- Net income declined primarily because noninterest income fell $2.8 million, partly offset by a $2.2 million improvement in the provision for loan losses.
- Mortgage banking income declined $5.2 million, or 27.5%, as mortgage originations decreased $201.0 million, or 46.1%, from the unusually strong 2021 period. The decline was partly offset by a $4.5 million favorable mortgage servicing rights valuation adjustment.
- Net interest income increased modestly as non-PPP loan interest income grew $2.3 million, while PPP-related interest and fee income declined $2.2 million. The average non-PPP loan balance increased $283.9 million, while the average PPP balance declined $143.9 million.
- Net interest margin contracted to 3.33% from 3.52%, reflecting lower asset yields despite lower funding costs.
- Loans held for investment increased $16.1 million, or 0.7%, during the quarter. Organic growth was partly offset by $11.8 million of PPP forgiveness and repayments.
- Securities available for sale increased $68.9 million to $793.4 million. Rising interest rates produced $35.1 million of unrealized losses at March 31, 2022 and a $30.0 million after-tax reduction in accumulated other comprehensive income. Management classified the losses as temporary.
- Deposits grew $108.9 million, or 3.3%, with noninterest-bearing deposits representing 32.8% of total deposits at quarter-end.
- Stockholders’ equity decreased $20.4 million to $387.1 million, primarily because of accumulated other comprehensive losses, $3.0 million of share repurchases, and $1.9 million of dividends, partly offset by quarterly earnings.
Credit Quality, Capital, Debt, and Liquidity
- The allowance for loan losses was $39.6 million, or 1.62% of loans held for investment, compared with $42.1 million, or 1.73%, at December 31, 2021. Net charge-offs were $364 thousand, and nonaccrual loans were $9.5 million, or 0.39% of loans.
- Nonperforming loans increased to $12.1 million from $10.6 million at December 31, 2021. Classified loans totaled $75.8 million, compared with $64.6 million at year-end.
- Loans secured by real property represented 67.8% of loans held for investment. Commercial real estate represented 37.2% of the portfolio.
- COVID-19-related active loan modifications totaled approximately $6.0 million at March 31, 2022, consisting of one loan. Management expects the remaining modified loans to return to full payment status.
- Outstanding subordinated debt securities were $75.8 million, and junior subordinated deferrable interest debentures were $46.4 million. There were no FHLB or Federal Reserve borrowings outstanding at quarter-end.
- Remaining FHLB borrowing capacity was $908.5 million, the Federal Reserve Bank of Dallas line was $608.6 million, and uncollateralized bank lines of credit totaled $160.0 million. The company stated that it expects available liquidity to meet contractual obligations.
- Commitments to grant loans and unfunded lines of credit totaled $620.9 million, and standby letters of credit totaled $13.2 million.
- South Plains Financial and City Bank met applicable regulatory capital requirements. At March 31, 2022, consolidated total capital to risk-weighted assets was 18.22%, consolidated CET1 capital was 12.86%, and City Bank was classified as well capitalized.
Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal quantitative earnings or revenue guidance. Management expects continued deposit gathering, loan and securities repayment activity, profitability, and access to borrowing sources to support liquidity.
- Management continues to monitor COVID-19 effects, particularly in retail, hospitality, energy, and other Permian Basin-related credits. The ultimate economic impact remains uncertain.
- Key risks include interest-rate volatility, compression of net interest margin, real estate and commercial loan concentrations, agricultural and energy exposure, public-funds deposits, credit-loss estimation, liquidity, competition, cybersecurity, regulatory capital requirements, and broader economic conditions.
- The company is defending a vendor litigation matter involving alleged contract breaches, exclusivity rights, and antitrust counterclaims. Trial was scheduled for October 2022; the ultimate outcome and any potential loss could not be estimated.
- Other expenses included a $362 thousand loss on disposal of assets. Professional services expense increased $1.1 million, primarily from higher legal fees related to the vendor dispute.
- The company expects to adopt the current expected credit loss standard effective January 1, 2023. The model was under development and validation at the filing date.
- Lease accounting adoption is expected to add a right-of-use asset and corresponding lease liability of approximately $10.8 million to $11.3 million.
- On April 21, 2022, the company declared a $0.11-per-share dividend payable May 16, 2022. The company repurchased 106,498 shares for approximately $3.0 million during the quarter, with $4.7 million remaining under the repurchase authorization at March 31, 2022.
- Management concluded that disclosure controls and procedures were effective, and reported no material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify whether mortgage banking volumes and related income continue to normalize from 2021 levels and whether mortgage servicing rights valuations remain favorable.
- Monitor net interest margin as market rates rise, including repricing of adjustable-rate loans, deposit costs, and securities portfolio yields.
- Review changes in classified, nonaccrual, and nonperforming loans, especially commercial real estate, hospitality, energy, agricultural, and restaurant and retail exposures.
- Assess the effect of unrealized securities losses on tangible equity, regulatory capital, liquidity, and potential securities sales.
- Track the remaining COVID-19 loan modifications and the company’s transition to CECL in 2023.
- Follow developments in the vendor litigation and determine whether an adverse outcome could materially affect earnings or financial condition.
- Reconcile future cash flow, deposit trends, unfunded commitments, borrowing capacity, dividends, and share repurchases against liquidity and capital objectives.