South Plains Financial, Inc. — 2020 Q2 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020. The interim financial statements are unaudited and presented in accordance with U.S. GAAP. South Plains Financial is a Texas bank holding company operating primarily through City Bank, with commercial and retail banking, mortgage, insurance, investment and trust services in Texas and Eastern New Mexico.
Key Financial Metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Net interest income | $30.4 million | $24.8 million | $60.6 million | $49.4 million |
| Provision for loan losses | $13.1 million | $0.9 million | $19.4 million | $1.5 million |
| Noninterest income | $24.9 million | $13.7 million | $43.8 million | $25.8 million |
| Noninterest expense | $35.2 million | $29.9 million | $69.2 million | $60.0 million |
| Net income | $5.6 million | $6.1 million | $12.7 million | $10.9 million |
| Basic EPS | $0.31 | $0.37 | $0.70 | $0.69 |
| Diluted EPS | $0.31 | $0.37 | $0.69 | $0.69 |
| Net interest margin | 3.79% | 3.88% | 3.95% | 3.91% |
- Second-quarter net income declined $0.5 million, or approximately 7%, primarily because the $12.3 million increase in loan-loss provision and $5.3 million increase in noninterest expense exceeded growth in net interest and noninterest income.
- Six-month net income increased $1.8 million, or approximately 17%, despite a $17.9 million increase in the loan-loss provision.
- Mortgage banking activities generated $18.0 million of noninterest income in the second quarter and $26.7 million year to date, compared with $6.7 million and $11.5 million, respectively, in the prior-year periods.
- Return on average equity and return on average assets for the second quarter were 6.81% and 0.64%, respectively, compared with 9.57% and 0.89% in the prior-year quarter.
Balance Sheet, Liquidity and Capital
| Balance-sheet item | June 30, 2020 | December 31, 2019 |
|---|---|---|
| Total assets | $3.585 billion | $3.237 billion |
| Loans held for investment | $2.332 billion | $2.144 billion |
| Allowance for loan losses | $40.6 million | $24.2 million |
| Securities available for sale | $730.7 million | $707.7 million |
| Cash and cash equivalents | $256.1 million | $158.1 million |
| Total deposits | $2.948 billion | $2.697 billion |
| Notes payable and other borrowings | $170.0 million | $95.0 million |
| Stockholders’ equity | $336.5 million | $306.2 million |
- Assets increased $347.4 million, or 10.7%; gross loans increased $188.1 million, or 8.8%; and deposits increased $251.0 million, or 9.3%.
- Noninterest-bearing deposits represented 31.9% of total deposits at June 30, 2020, compared with 29.3% at year-end 2019.
- In April 2020, City Bank borrowed $75 million from the Federal Home Loan Bank of Dallas, primarily to support liquidity needs related to Paycheck Protection Program lending. Total FHLB borrowing was $170 million at quarter-end.
- Remaining borrowing capacity was approximately $416.6 million from the FHLB and $686.9 million from the Federal Reserve Bank of Dallas. Unused uncollateralized bank lines totaled $165 million.
- City Bank was classified as well capitalized. At June 30, 2020, its total risk-based capital ratio was 13.90%, common equity tier 1 ratio was 12.65%, and tier 1 leverage ratio was 10.04%.
- Cash flows from operating activities were negative $8.6 million and investing cash flows were negative $190.5 million for the six months, offset by $297.1 million of financing cash flows. Ending cash and cash equivalents increased by $98.0 million from year-end 2019.
Material Changes and Unusual Items
- COVID-19 and credit provisioning: The allowance for loan losses increased 67.9% to $40.6 million, or 1.74% of loans held for investment, from 1.13% at December 31, 2019. Management attributed the increase primarily to COVID-19, lower oil and gas prices, and downgrades in energy and hospitality exposures.
- Loan modifications: Approximately $415.6 million of loans were modified under short-term COVID-19 relief programs, including interest-only periods and payment deferrals. An additional 19 loans totaling approximately $48.8 million were modified under Section 4013 of the CARES Act. The MD&A separately reports total COVID-19-related modifications of approximately $464 million, or 19.9% of the loan portfolio.
- Paycheck Protection Program: City Bank originated approximately 2,050 PPP loans totaling approximately $215 million during the second quarter. The company had received and deferred $7.7 million of related SBA fees and recognized $641,000 in PPP fee income during the quarter.
- Asset quality: Nonperforming assets increased to $11.8 million from $7.9 million at year-end 2019. Nonperforming loans were $10.5 million, including $7.4 million of nonaccrual loans and $3.1 million of loans 90 days or more past due and still accruing.
- Mortgage banking: Higher mortgage originations drove significant growth in loan-sale gains and related compensation expense.
- Acquisition activity: Windmark acquired the operating assets of a Nebraska crop insurance agency for $687,000. The company also recorded a $1.2 million measurement-period increase to goodwill related to the 2019 West Texas State Bank acquisition.
- Goodwill: A COVID-19- and oil-price-related decline in the stock price triggered an interim impairment analysis. Estimated fair value exceeded carrying value, so no goodwill impairment was recorded.
- Capital preservation: The company temporarily suspended its $10 million stock repurchase program in April 2020. It repurchased and cancelled 4,700 shares for $61,000 before the suspension.
Outlook, Commentary and Risks
Management stated that the duration and economic impact of COVID-19 remain uncertain and that additional loan-loss provisions may be required. Management believes available liquidity sources are adequate, but warned that prolonged economic disruption could restrict funding access, increase funding costs, weaken collateral values, impair deposits and capital, and increase borrower defaults.
- Key concentrations include real-estate-secured loans, commercial and agricultural lending, hospitality, restaurant and retail, energy, and geographically concentrated markets.
- Hospitality and assisted-living loans totaled $115.2 million, with $46.5 million classified and $2.8 million nonaccrual. Direct energy loans totaled $78.6 million.
- PPP participation creates operational, regulatory, litigation and credit risks, including the possibility that the SBA may not fund some guarantees or forgiveness amounts.
- Interest-rate reductions and prolonged low rates may pressure asset yields, net interest income and profitability, although lower funding costs supported second-quarter results.
- Remote work and reliance on third-party service providers increase operational, cybersecurity and business-continuity risks.
- The company is a plaintiff in litigation against the former West Texas State Bank chief executive and West Texas State Bank concerning alleged misrepresentations about acquisition-related expenses. The ultimate outcome cannot presently be determined.
- No material subsequent events requiring recognition or disclosure were identified through the filing date. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether COVID-19 loan modifications return to normal payment schedules and whether further provisions or charge-offs materially exceed the June 30, 2020 allowance.
- Credit performance in hospitality, assisted living, restaurant and retail, energy, commercial real estate and other classified portfolios.
- The timing and amount of PPP loan forgiveness, SBA fee recognition and any related SBA guarantee or litigation exposure.
- Sustainability of elevated mortgage banking income and the associated compensation and production costs.
- Liquidity usage, FHLB and Federal Reserve borrowing capacity, deposit stability and the effect of public-funds deposits.
- Whether goodwill, securities or collateral values require impairment or additional write-downs as economic conditions evolve.
- Resolution and potential financial exposure from the West Texas State Bank acquisition litigation.