South Plains Financial, Inc. — Form 10-Q Summary
Business context and reporting period
South Plains Financial, Inc. is a Texas bank holding company operating primarily through City Bank, with banking, insurance, investment, trust and mortgage operations across Texas and Eastern New Mexico. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the 2019 periods. The company’s results reflect the COVID-19 pandemic, lower interest rates, the 2019 West Texas State Bank acquisition and increased mortgage and PPP activity.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net income | $16.7 million | $8.3 million | $29.4 million | $19.1 million |
| Diluted EPS | $0.92 | $0.45 | $1.61 | $1.15 |
| Net interest income | $31.3 million | $26.6 million | $91.9 million | $76.0 million |
| Provision for loan losses | $6.1 million | $0.4 million | $25.4 million | $1.9 million |
| Noninterest income | $31.7 million | $14.1 million | $75.4 million | $39.9 million |
| Noninterest expense | $36.0 million | $30.0 million | $105.2 million | $90.0 million |
| Net interest margin | 3.82% | 4.07% | 3.91% | 3.96% |
Q3 net income increased 102.6% year over year, while nine-month net income increased 54.0%. Annualized Q3 return on average equity was 19.32% and return on average assets was 1.88%, compared with 11.10% and 1.18%, respectively, in Q3 2019.
- Total assets were $3.54 billion at September 30, 2020, up 9.4% from December 31, 2019.
- Gross loans held for investment were $2.29 billion, up 6.7%; net loans were $2.24 billion.
- Total deposits were $2.94 billion, up 9.2%; noninterest-bearing deposits represented 30.8% of total deposits.
- Cash and cash equivalents were $290.9 million, compared with $158.1 million at year-end 2019.
- Stockholders’ equity was $352.6 million, up 15.1%, primarily from earnings and higher accumulated other comprehensive income.
- The allowance for loan losses was $46.1 million, or 2.01% of loans held for investment, compared with $24.2 million, or 1.13%, at year-end 2019.
- Net cash provided by operating activities was $33.8 million; investing activities used $145.9 million and financing activities provided $244.8 million. Cash increased by $132.8 million during the first nine months.
Material changes versus prior comparable periods
- Net interest income rose 17.7% in Q3 and 21.0% for the first nine months, driven by loan growth, the West Texas State Bank acquisition, PPP lending and lower funding costs. The Q3 net interest margin declined from 4.07% to 3.82% because of lower asset yields.
- Noninterest income increased 124.3% in Q3 and 89.1% year to date. Mortgage banking income rose to $21.4 million in Q3 and $48.1 million for the first nine months, primarily from higher mortgage originations.
- The provision for loan losses increased sharply because of COVID-19-related economic uncertainty, lower oil and gas prices and credit-risk migration, particularly in energy and hospitality exposures.
- Noninterest expense increased 19.9% in Q3 and 16.9% year to date, primarily from higher mortgage commissions, costs associated with acquired branches and other operating expenses.
- Nonperforming assets increased to $16.3 million from $7.9 million at year-end 2019. Nonaccrual loans increased to $13.1 million from $4.7 million.
- The company issued $50.0 million of 4.50% fixed-to-floating subordinated debt due 2030 on September 29, 2020. Total subordinated debt securities increased to $75.5 million from $26.5 million.
- The company completed a $687,000 acquisition of the operating assets of a Nebraska crop insurance agency and recorded a $751,000 measurement-period increase to goodwill related to the West Texas State Bank acquisition.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management states that the duration and economic effects of COVID-19 remain uncertain and that additional loan-loss provisions may be required. Deposits benefited from PPP proceeds, government stimulus and higher customer balances; management expects deposits may decline as PPP funds are spent.
- As of September 30, 2020, active COVID-19-related loan modifications totaled approximately $124 million, or 5.4% of the loan portfolio, down from $464 million at June 30, 2020. Hospitality represented 58% of modified balances.
- The company originated approximately 2,100 PPP loans totaling $218 million and had received $7.8 million of related SBA fees, of which $6.1 million remained deferred at quarter-end.
- Hospitality and assisted-living loans totaled $119.4 million, with $46.4 million classified and approximately 61% under active COVID-19 modification. Direct energy loans totaled $70.6 million, with $8.5 million classified.
- Liquidity included approximately $514.9 million of remaining FHLB borrowing capacity, approximately $692.3 million of Federal Reserve discount-window capacity and $165.0 million of unused uncollateralized bank lines. Management believed liquidity was adequate but noted that market or pandemic conditions could restrict access or increase funding costs.
- The bank was classified as well capitalized. City Bank’s September 30, 2020 total risk-based capital, Tier 1 risk-based capital, CET1 and Tier 1 leverage ratios were 16.10%, 14.84%, 14.84% and 10.37%, respectively.
- The company conducted an interim goodwill impairment analysis because of COVID-19 and crude-oil-related market volatility; estimated fair value exceeded carrying value and no impairment charge was recorded.
- A lawsuit related to the West Texas State Bank acquisition was settled in September 2020. The former owner agreed to pay the company $1.0 million, and the parties provided mutual releases.
- Off-balance-sheet commitments totaled $446.6 million, including $439.6 million of loan and line-of-credit commitments and $7.0 million of standby letters of credit.
- Principal risks include COVID-19 credit deterioration, real estate, energy and hospitality concentrations, interest-rate and margin pressure, PPP compliance and forgiveness risk, liquidity, cybersecurity, regulatory capital, goodwill impairment and litigation.
Important facts for investors to verify
- Whether COVID-19 loan modifications convert into materially higher delinquencies, nonaccrual loans, charge-offs or future provisions.
- The adequacy of the $46.1 million allowance relative to hospitality, energy, commercial real estate and other classified exposures.
- The pace and profitability of mortgage banking activity after the unusually strong 2020 production period.
- The timing of PPP loan forgiveness and recognition of the remaining $6.1 million of deferred SBA fees, as well as any SBA reimbursement or compliance issues.
- The sustainability of elevated noninterest income and the effect of lower interest rates on net interest margin.
- Future deposit runoff as PPP proceeds and government stimulus balances are spent.
- Capital, liquidity and debt-service effects of the new $50.0 million subordinated debt issuance.
- Potential future goodwill or securities impairments if market, oil-price or pandemic conditions worsen.
- The status and economics of the resumed $10.0 million stock repurchase authorization; only $61,000 had been used by September 30, 2020.