South Plains Financial, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
South Plains Financial, Inc. is a Texas bank holding company headquartered in Lubbock, Texas. Through City Bank and other subsidiaries, it provides commercial and retail banking, insurance, investment, trust and mortgage services across Texas and Eastern New Mexico. This unaudited report covers the three and six months ended June 30, 2022, with comparisons to June 30, 2021 and December 31, 2021.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $37.1 million | $29.6 million | $67.1 million | $59.1 million |
| Noninterest income | $18.8 million | $22.3 million | $42.5 million | $48.8 million |
| Noninterest expense | $36.1 million | $36.8 million | $74.0 million | $73.8 million |
| Net income | $15.9 million | $13.7 million | $30.2 million | $28.8 million |
| Diluted EPS | $0.88 | $0.74 | $1.66 | $1.55 |
| Net interest margin | 4.02% | 3.42% | 3.68% | 3.47% |
| Annualized ROE | 16.96% | 14.27% | 15.74% | 15.37% |
| Annualized ROA | 1.60% | 1.46% | 1.54% | 1.56% |
All dollar amounts are presented in millions unless otherwise noted. The Q2 net interest margin increased primarily because of higher loan yields, loan growth and rising market rates. Q2 net income increased 16.4% year over year, while six-month net income increased 4.7%.
- Total assets were $3.97 billion at June 30, 2022, up 1.9% from December 31, 2021.
- Loans held for investment were $2.58 billion, up 5.9%; organic loan growth was partly offset by PPP forgiveness and repayments.
- Total deposits were $3.43 billion, up 2.5%. Noninterest-bearing deposits represented 35.0% of total deposits.
- Cash and cash equivalents were $375.7 million, compared with $486.8 million at year-end 2021.
- Available-for-sale securities were $763.9 million. Rising interest rates generated $76.3 million of unrealized losses at June 30, 2022 and reduced accumulated other comprehensive income by $60.5 million during the first six months.
- The allowance for loan losses was $39.8 million, or 1.54% of loans, compared with 1.73% at December 31, 2021. Net charge-offs were $0.2 million for the six months.
- Nonaccrual loans were $7.2 million, or 0.28% of loans, versus $9.5 million, or 0.39%, at year-end. Nonperforming loans were $7.9 million.
- Subordinated debt securities totaled $75.9 million net of issuance costs, and junior subordinated deferrable interest debentures totaled $46.4 million. The company had no outstanding FHLB advances.
- Net cash provided by operating activities was $89.4 million. Investing activities used $271.9 million, principally for securities purchases and net loan funding; financing activities provided $71.3 million.
- Regulatory capital remained strong. City Bank was classified as well capitalized, with total risk-based capital of 13.91%, Tier 1 risk-based capital of 12.66%, CET1 capital of 12.66% and Tier 1 leverage of 10.13%.
Material changes versus comparable periods
- Net interest income rose 25.4% in Q2 and 13.4% for the first six months, driven by higher average non-PPP loans, improved loan yields and higher securities and other asset yields.
- Mortgage banking and other noninterest income weakened as refinancing activity slowed and mortgage originations declined. Mortgage banking income fell 36.8% in Q2 and 31.4% for the first six months.
- Noninterest expense declined 2.0% in Q2 but increased slightly for the six-month period. Lower mortgage commissions and variable mortgage costs were partly offset by higher professional fees, primarily legal costs related to a vendor dispute.
- No loan-loss provision was recorded in Q2 2022, compared with a $2.0 million negative provision in Q2 2021. The six-month 2022 negative provision was $2.1 million.
- Stockholders’ equity declined 10.6% to $364.2 million, primarily due to the $60.5 million after-tax decline in accumulated other comprehensive income, $9.2 million of share repurchases and $3.9 million of dividends, partly offset by $30.2 million of net income.
- The company repurchased 256,988 shares for $6.2 million in Q2. A new $15.0 million repurchase authorization became effective after the prior program was depleted.
Outlook, risks, contingencies and unusual items
The filing does not provide specific quantitative earnings or revenue guidance. Management expects remaining PPP loans, approximately $7.1 million at June 30, 2022, to be forgiven or repaid over the next several quarters; $0.4 million of deferred PPP fees remained to be recognized.
- Management cited uncertainty from rising interest rates, persistent inflation, economic conditions, credit quality and the continuing effects of COVID-19. No COVID-19-related loan modifications remained active at June 30, 2022.
- Approximately 68.3% of loans were secured by real property, and commercial real estate represented 36.9% of loans. Key exposures include commercial real estate, agriculture, energy, hospitality, assisted living, restaurant and retail borrowers.
- Available-for-sale securities had substantial unrealized rate-related losses. Management considered the losses temporary and stated it did not intend, and was not likely, to be required, to sell the securities before recovery.
- Off-balance-sheet commitments included $637.6 million of loan commitments and unfunded lines of credit and $14.0 million of standby letters of credit.
- A vendor litigation matter remains pending, with trial scheduled for October 2022. The ultimate outcome and any potential loss range were not estimable.
- The company adopted Topic 842 lease accounting effective January 1, 2022, recording a $9.4 million right-of-use asset, a $10.3 million lease liability and a $0.7 million after-tax reduction to retained earnings.
- The company expects to adopt the CECL credit-loss standard on January 1, 2023. Model development and validation were underway, but the filing does not provide a clear estimate of the adoption impact.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher interest rates continue to expand net interest margin without materially increasing deposit costs, credit losses or securities valuation losses.
- The sustainability of organic loan growth and the credit performance of commercial real estate, agricultural, energy, hospitality and consumer auto portfolios.
- The effect of the mortgage slowdown on mortgage banking revenue and the valuation of mortgage servicing rights.
- The future impact of CECL adoption on retained earnings, the allowance for credit losses and regulatory capital.
- The outcome and potential financial exposure from the vendor litigation.
- The company’s ability to maintain liquidity and capital while funding loan growth, repurchasing shares and paying dividends.
- The effect of the $60.5 million accumulated other comprehensive loss on tangible book value and capital metrics.
A cash dividend of $0.12 per share was declared on July 21, 2022, payable August 15, 2022 to shareholders of record as of August 1, 2022.