South Plains Financial, Inc. — 2023 Form 10-K Summary
Business context and reporting period
South Plains Financial, Inc. is a Texas bank holding company headquartered in Lubbock, Texas. Through wholly owned City Bank, it provides commercial and retail banking, mortgage, trust, investment and related financial services across Texas and Eastern New Mexico. The filing covers the fiscal year ended December 31, 2023; it is an annual report rather than a standalone fourth-quarter filing.
At year-end, the Company operated 25 full-service banking locations and eight loan production offices, with approximately 618 employees. The Company reported $4.20 billion of assets, $3.01 billion of gross loans held for investment, $3.63 billion of deposits and $407.1 million of shareholders’ equity.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net interest income | $139.7 million | $138.5 million | +0.9% |
| Provision for credit losses | $4.6 million | $(2.6) million | Higher expense |
| Noninterest income | $79.2 million | $76.1 million | +4.0% |
| Noninterest expense | $134.9 million | $144.1 million | −6.3% |
| Net income | $62.7 million | $58.2 million | +7.7% |
| Diluted EPS | $3.62 | $3.23 | +12.1% |
| Return on average assets | 1.54% | 1.47% | Improved |
| Return on average equity | 16.58% | 15.79% | Improved |
| Net interest margin | 3.61% | 3.73% | −12 basis points |
| Efficiency ratio | 61.33% | 66.76% | Improved |
- Interest income increased substantially as average loans grew and market rates rose, but interest expense increased by $49.6 million as deposit and funding costs repriced upward. Average interest-bearing liabilities increased by $221.7 million, and the average rate paid increased 185 basis points.
- Noninterest income included a $33.8 million pretax gain on the April 1, 2023 sale of Windmark Insurance Agency for $36.1 million. The transaction was not reported as discontinued operations.
- Mortgage banking income declined to $13.8 million from $31.4 million as mortgage originations fell 46.2% to $322.1 million. Mortgage banking represented approximately 17% of 2023 noninterest income.
- Noninterest expense declined primarily because of lower mortgage personnel costs, the Windmark sale and lower professional fees. The Company also recorded a $3.4 million loss on the sale of available-for-sale securities.
- Cash and cash equivalents increased to $330.2 million from $234.9 million. Net cash provided by operating activities was $58.5 million, investing activities used $143.4 million and financing activities provided $180.1 million.
Balance sheet, credit quality, debt and liquidity
- Total assets increased 6.6% to $4.20 billion. Gross loans held for investment increased 9.7% to $3.01 billion, primarily from organic commercial real estate, residential mortgage and commercial loan growth.
- Commercial real estate loans were $1.08 billion, or 40.1% of loans. Approximately 72.7% of the loan portfolio was secured by real estate, and commercial borrowers represented approximately 69.7% of total loans.
- Deposits increased 6.5% to $3.63 billion. Noninterest-bearing deposits declined to 26.9% of total deposits from 33.8%; brokered deposits were $206.9 million, or 5.7% of total deposits. Estimated uninsured deposits were $918 million, or approximately 16% of total deposits, excluding $325 million of collateralized public funds.
- The allowance for credit losses on loans was $42.4 million, or 1.41% of loans, compared with $39.3 million, or 1.43%, at year-end 2022. Net charge-offs increased to $2.0 million, or 0.07% of average loans, from $0.2 million, or 0.01%.
- Nonperforming assets were 0.14% of total assets. Nonperforming loans were $5.2 million, or 0.17% of loans, and nonaccrual loans were $3.2 million, or 0.11%, both improved from 2022.
- Subordinated debt declined to $63.8 million from $76.0 million after the Company redeemed $12.4 million of 2028 subordinated notes in December 2023. Junior subordinated deferrable interest debentures totaled $46.4 million.
- The Company reported unused capacity of approximately $1.10 billion from the Federal Home Loan Bank, $595.4 million from the Federal Reserve Bank of Dallas and access to approximately $134 million of securities eligible for the Bank Term Funding Program. It also maintained $140 million of uncollateralized bank lines, although management stated it was not relying on those lines.
- At December 31, 2023, the consolidated total risk-based capital ratio was 16.74%, CET1 ratio was 12.41% and Tier 1 leverage ratio was 11.33%. City Bank was well-capitalized under applicable regulatory standards.
Material changes versus the prior comparable period
- Net income rose $4.5 million, supported by lower operating expenses and the Windmark sale gain, despite higher credit-loss provision expense and materially higher deposit costs.
- Net interest margin contracted from 3.73% to 3.61% as funding costs rose faster than asset yields.
- Loans and deposits grew, but the deposit mix shifted away from noninterest-bearing accounts toward interest-bearing accounts and brokered deposits.
- Mortgage activity continued to weaken because of elevated interest rates; originations declined by $276.4 million.
- Accumulated other comprehensive loss improved by $13.4 million, primarily reflecting a recovery in the fair value of available-for-sale securities.
- The Company adopted the CECL model on January 1, 2023. The adoption reduced retained earnings by $997,000 and increased the allowance for off-balance-sheet exposures by approximately $1.2 million.
- The filing corrects immaterial prior-period cash-flow presentation errors for 2021 and 2022. The corrections did not affect balance sheets, income statements, stockholders’ equity or previously reported net income.
Outlook, management commentary, risks and unusual items
The filing does not provide formal numerical earnings, revenue or margin guidance. Management emphasizes organic loan and deposit growth, relationship-based commercial banking, disciplined credit administration and maintaining strong liquidity and capital. The Company states that it has no current material acquisition agreement, although acquisitions remain part of its potential growth strategy.
- Management identifies deposit competition, higher funding costs, interest-rate volatility, inflation, recession risk and uncertainty following 2023 bank failures as key operating risks.
- Credit risk is concentrated in Texas and Eastern New Mexico, with significant exposure to commercial real estate, real estate collateral, commercial borrowers, agriculture and energy-related businesses.
- Commercial real estate loans increased 17.6% during 2023. The filing reports $442.5 million of acquisition, development and construction loans and $666 million of HVCRE loans.
- Interest-rate sensitivity modeling indicated that a gradual 300-basis-point increase could reduce projected one-year net interest income by 10.02%, while a 300-basis-point decline was not presented in the cited table.
- The securities portfolio had $82.1 million of gross unrealized losses at year-end, primarily attributed to market interest rates. Management reported no credit-related impairment and stated that it did not intend, and was not expected, to sell the affected securities before recovery or maturity.
- Off-balance-sheet commitments included $598.8 million of loan and line-of-credit commitments and $11.5 million of standby letters of credit.
- The Company paid quarterly dividends of $0.13 per share in 2023, repurchased 685,638 shares for $17.8 million, and approved a new $10.0 million repurchase authorization on February 21, 2024.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor’s report did not include an internal-control attestation because the Company remains an emerging growth company.
Important facts for investors to verify
- Determine how much of 2023 earnings reflects the nonrecurring $33.8 million Windmark sale gain and assess normalized earnings excluding that item.
- Monitor the net interest margin, deposit pricing, noninterest-bearing deposit runoff, brokered deposit usage and future funding costs.
- Review commercial real estate concentrations, loan growth, criticized and classified loans, borrower concentrations and collateral values, particularly in Texas and Eastern New Mexico.
- Assess whether the $42.4 million allowance for credit losses remains adequate under higher-for-longer rates, recessionary conditions and weaker real estate or energy markets.
- Evaluate the liquidity value of securities with unrealized losses and the consequences if the Company must sell securities before maturity.
- Reconcile reported cash flow figures with the corrected prior-period presentation and review the effect of CECL adoption on retained earnings and credit-loss reserves.
- Track mortgage originations, mortgage servicing-rights valuations and the effect of interest rates on mortgage-related fee income.
- Review the terms, call features and future repricing of the Company’s subordinated debt and junior subordinated debentures.
- Confirm the sustainability of dividends and share repurchases given regulatory capital requirements and the Bank’s role as the parent company’s primary funding source.