South Plains Financial, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter filing. South Plains Financial is a Texas bank holding company operating primarily through City Bank across Texas and eastern New Mexico, with community banking, mortgage, insurance, trust and investment services.
Business context
- City Bank operated 25 full-service banking locations and 11 loan production offices across seven geographic markets.
- As of December 31, 2022, the Company reported total assets of $3.94 billion, gross loans held for investment of $2.75 billion, deposits of $3.41 billion and stockholders’ equity of $357.0 million.
- Mortgage originations were $719.4 million, with approximately 89% sold. Mortgage servicing rights were $27.5 million, supporting a serviced portfolio of approximately $2.05 billion.
- Windmark Insurance generated $10.6 million of revenue from a crop-insurance premium base exceeding $211 million.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net interest income | $138.5 million | $121.8 million | Up 13.7% |
| Provision for loan losses | $(2.6) million | $(1.9) million | More favorable credit provision |
| Noninterest income | $76.1 million | $97.5 million | Down 21.9% |
| Noninterest expense | $144.1 million | $148.0 million | Down 2.7% |
| Net income | $58.2 million | $58.6 million | Down 0.6% |
| Diluted earnings per share | $3.23 | $3.17 | Up 1.9% |
| Net interest margin | 3.73% | 3.51% | Up 22 basis points |
| Return on average assets | 1.47% | 1.56% | Down 9 basis points |
| Return on average equity | 15.79% | 15.08% | Up 71 basis points |
| Efficiency ratio | 66.76% | 67.14% | Improved |
Net interest income benefited from loan growth and higher market interest rates. Interest income increased $26.1 million, while interest expense increased $9.4 million as deposit and funding costs rose. The Federal Reserve’s rate increases resulted in a 425-basis-point increase in the prime rate between March and December 2022.
Balance sheet, credit quality and capital
| Metric | December 31, 2022 | December 31, 2021 | Change |
|---|---|---|---|
| Total assets | $3.94 billion | $3.90 billion | Up 1.1% |
| Loans held for investment | $2.75 billion | $2.44 billion | Up 12.7% |
| Deposits | $3.41 billion | $3.34 billion | Up 2.0% |
| Cash and cash equivalents | $234.9 million | $486.8 million | Down $251.9 million |
| Investment securities | $701.7 million | $724.5 million | Down 3.1% |
| Borrowings | $122.4 million | $122.2 million | Approximately flat |
| Stockholders’ equity | $357.0 million | $407.4 million | Down 12.4% |
| Allowance for loan losses | $39.3 million | $42.1 million | Down 6.7% |
- Nonperforming assets were 0.20% of total assets, compared with 0.30% in 2021. Nonperforming loans were 0.28% of loans held for investment, compared with 0.43%.
- Nonaccrual loans declined to $5.8 million from $9.5 million. Net charge-offs were $0.2 million, or 0.01% of average loans, compared with $1.5 million, or 0.06%, in 2021.
- Commercial real estate loans represented 38.7% of loans held for investment, while approximately 69.8% of the loan portfolio was secured by real estate. Commercial borrowers represented approximately 68.6% of total loans.
- Commercial real estate loans increased 21.7% to $919.4 million. Consumer loans increased 23.9% to $862.9 million, including $321.5 million of auto loans and $460.1 million of 1-4 family residential loans.
- The securities portfolio had $102.8 million of gross unrealized losses at year-end, primarily attributable to higher interest rates. Management determined the losses were temporary and did not record impairment losses.
- The Company and City Bank exceeded Basel III capital requirements. Consolidated CET1, Tier 1 leverage and total risk-based capital ratios were 11.81%, 11.03% and 16.58%, respectively. City Bank was considered well-capitalized under prompt corrective action rules.
Cash flow, debt and liquidity
- Net cash provided by operating activities was $123.6 million, compared with $96.3 million in 2021.
- Net cash used in investing activities was $408.9 million, driven primarily by $311.5 million of net loan originations and $95.5 million of net securities purchases.
- Financing activities provided $33.3 million, principally from a $65.2 million increase in deposits, partially offset by $22.7 million of share repurchases and $8.0 million of dividends.
- Ending cash and cash equivalents declined to $234.9 million from $486.8 million.
- Debt consisted primarily of $76.0 million of subordinated debt and $46.4 million of junior subordinated deferrable interest debentures. No FHLB advances or Federal Reserve line borrowings were outstanding at year-end.
- Available borrowing capacity included approximately $920.2 million from the FHLB, $648.3 million through the Federal Reserve Bank of Dallas and $160.0 million of uncollateralized bank lines.
- Estimated uninsured deposits were approximately $1.04 billion. The 20 largest deposit relationships represented approximately 16.7% of total deposits.
Material changes versus 2021
- Loan growth and higher asset yields increased net interest income and expanded the net interest margin, but higher deposit and subordinated-debt costs increased interest expense.
- Noninterest income declined $21.3 million, principally because mortgage banking income fell $28.4 million to $31.4 million. Mortgage originations decreased 52.1%, reflecting higher mortgage rates, lower refinance activity, the departure of mortgage originators and lower gain-on-sale margins.
- Noninterest expense declined $3.9 million, primarily because lower mortgage commissions and related personnel costs more than offset higher legal, professional and occupancy expenses.
- Stockholders’ equity declined primarily because of a $78.8 million reduction in accumulated other comprehensive income from securities valuation changes, $22.7 million of stock repurchases and $8.0 million of dividends, partially offset by net income.
- The Company repurchased 859,802 shares for $22.7 million during 2022. The $15.0 million repurchase authorization was fully spent and terminated in December 2022.
- The Company settled and dismissed with prejudice its litigation against Kasasa in October 2022. The filing states that a gain contingency was recorded at settlement but does not provide a clear settlement amount in the summarized filing text.
- The employee stock ownership plan was terminated effective December 31, 2022, with distribution of plan assets to participants to follow completion of final accounting and allocation procedures.
Outlook, risks and unusual items
- Management did not provide a quantified earnings or revenue forecast in the filing. The Company expects to continue organic growth, commercial-lender expansion and deposit-gathering activities, while remaining open to acquisitions; it reported no current material acquisition agreement.
- Management expects a one-time, after-tax CECL transition charge of approximately $900 thousand in the first quarter of 2023, including an estimated $100 thousand increase to the allowance for credit losses and a $1.0 million increase to the off-balance-sheet reserve for unfunded commitments.
- Primary risks include higher interest rates, deposit repricing and outflows, unrealized securities losses, liquidity costs, commercial real estate concentration, geographic concentration in Texas and New Mexico, commercial and consumer credit losses, agricultural and energy exposure, and mortgage-volume contraction.
- Off-balance-sheet commitments totaled $696.2 million, including $682.3 million of unfunded loan commitments and $13.9 million of standby letters of credit.
- Commercial real estate and acquisition, development and construction exposures require continued monitoring. ADC loans were $413.7 million and HVCRE loans were $6.3 million at year-end.
- The Company remains exposed to crop-insurance program changes, cybersecurity incidents, regulatory and compliance costs, LIBOR transition risk, competition and potential impairment of goodwill or mortgage servicing rights.
- The filing states that disclosure controls and internal control over financial reporting were effective as of December 31, 2022. The independent auditor did not provide an internal-control attestation because the Company qualifies as an emerging growth company.
Most important facts for investors to verify
- Whether loan growth, particularly commercial real estate and consumer auto lending, remains consistent with underwriting standards as interest rates and economic conditions evolve.
- The composition and stability of the approximately $1.04 billion of estimated uninsured deposits, including concentrations among large deposit relationships.
- The effect of deposit repricing, funding costs and further Federal Reserve policy changes on net interest margin and liquidity.
- The realizability of the $102.8 million of unrealized securities losses and the potential effect of any required securities sales on capital and earnings.
- The size and composition of the CECL adjustment actually recorded in the first quarter of 2023 compared with management’s estimate.
- Future mortgage production, gain-on-sale margins, mortgage servicing-rights valuations and the contribution of insurance income as mortgage activity normalizes.
- Future credit migration, nonperforming assets, charge-offs and allowance adequacy in the commercial real estate, construction, energy, agricultural and auto portfolios.
- Any subsequent changes to the completed Kasasa settlement, regulatory capital classification, dividend capacity or share-repurchase policy.