Workflow
South Plains Financial(SPFI) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the Company's unaudited consolidated financial statements, management's discussion and analysis, and disclosures on market risk and internal controls for the reporting period Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements of South Plains Financial, Inc. and its subsidiaries for the period ended March 31, 2023, including the balance sheets, statements of comprehensive income (loss), changes in stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies and financial instrument specifics Consolidated Balance Sheets (Unaudited) This section presents the unaudited consolidated balance sheets, detailing assets, liabilities, and stockholders' equity as of March 31, 2023, and December 31, 2022 Consolidated Balance Sheets (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (Unaudited, in thousands) | December 31, 2022 (in thousands) | | :----------------------------------- | :--------------------------- | :------------------ | | ASSETS | | | | Cash and cash equivalents | $328,002 | $234,883 | | Securities available for sale | $698,579 | $701,711 | | Loans held for investment, net | $2,749,080 | $2,708,793 | | Total assets | $4,058,049 | $3,944,063 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total deposits | $3,508,054 | $3,406,430 | | Total liabilities | $3,690,085 | $3,587,049 | | Total stockholders' equity | $367,964 | $357,014 | | Total liabilities and stockholders' equity | $4,058,049 | $3,944,063 | Consolidated Statements of Comprehensive Income (Loss) (Unaudited) This section presents the unaudited consolidated statements of comprehensive income (loss) for the three months ended March 31, 2023 and 2022, detailing revenue, expenses, and net income Consolidated Statements of Comprehensive Income (Loss) (Three Months Ended March 31, 2023 vs. 2022) | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Total interest income | $47,448 | $33,080 | | Total interest expense | $13,133 | $3,133 | | Net interest income | $34,315 | $29,947 | | Provision for credit losses | $1,010 | $(2,085) | | Total noninterest income | $10,691 | $23,697 | | Total noninterest expense | $32,361 | $37,924 | | Net income | $9,244 | $14,278 | | Basic earnings per share | $0.54 | $0.81 | | Diluted earnings per share | $0.53 | $0.78 | | Other comprehensive income (loss) | $4,729 | $(30,003) | | Comprehensive income (loss) | $13,973 | $(15,725) | Consolidated Statements of Changes in Stockholders' Equity (Unaudited) This section presents the unaudited consolidated statements of changes in stockholders' equity for the three months ended March 31, 2023 and 2022, showing movements in equity components Consolidated Statements of Changes in Stockholders' Equity (Three Months Ended March 31, 2023 vs. 2022) | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :----------------------------------- | :------------- | :------------- | | Balance at January 1 | $357,014 | $407,427 | | Net income | $9,244 | $14,278 | | Cash dividends declared | $(2,208) | $(1,950) | | Other comprehensive income (loss) | $4,729 | $(30,003) | | Impact of adoption of ASU 2016-13 - CECL | $(997) | — | | Exercise of employee stock options and vesting of restricted stock units, net | $(343) | $(195) | | Repurchases of common stock | — | $(3,017) | | Stock-based compensation | $525 | $528 | | Balance at March 31 | $367,964 | $387,068 | Consolidated Statements of Cash Flows (Unaudited) This section presents the unaudited consolidated statements of cash flows for the three months ended March 31, 2023 and 2022, detailing cash movements from operating, investing, and financing activities Consolidated Statements of Cash Flows (Three Months Ended March 31, 2023 vs. 2022) | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $25,375 | $70,616 | | Net cash used in investing activities | $(31,329) | $(132,598) | | Net cash provided by financing activities | $99,073 | $103,773 | | Net change in cash and cash equivalents | $93,119 | $41,791 | | Ending cash and cash equivalents | $328,002 | $528,612 | Notes to Consolidated Financial Statements (Unaudited) This section provides detailed notes to the unaudited consolidated financial statements, explaining significant accounting policies, financial instrument specifics, and other relevant disclosures 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the Company's core business activities, basis of financial statement presentation, use of estimates, and recent accounting changes, particularly the adoption of the CECL model. It details policies for securities, loans, allowance for credit losses, goodwill, and earnings per share, and notes the divestiture of the insurance segment - South Plains Financial, Inc. (SPFI) is a Texas-based bank holding company primarily engaged in commercial and retail banking, investment, trust, and mortgage services through its subsidiaries across Texas and Eastern New Mexico19 - The Company adopted the Current Expected Credit Loss (CECL) model on January 1, 2023, recognizing a one-time, after-tax cumulative effect debit adjustment of $997 thousand to retained earnings, increasing the ACL for loans by approximately $100 thousand and for off-balance sheet credit exposures by approximately $1.2 million23 Impact of CECL Model Adoption on ACL (January 1, 2023) | (Dollars in thousands) | Pre-Adoption | Impact of Adoption | Post-Adoption | | :----------------------------------- | :------------- | :----------------- | :------------ | | Total allowance for credit losses on loans | $39,288 | $102 | $39,390 | | Allowance for credit losses for off-balance sheet exposures | $580 | $1,160 | $1,740 | - Effective January 1, 2023, the Company removed segment reporting disclosures as the insurance segment was no longer significant to operating results and was subsequently sold on April 1, 202343 2. SECURITIES This note provides details on the Company's securities available for sale portfolio, including amortized cost, unrealized gains and losses, and fair values. It highlights that unrealized losses are primarily due to increases in market rates and are not considered credit-related, with no allowance for credit losses recognized Securities Available for Sale (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----------------------------------- | :------------- | :---------------- | | Amortized Cost | $792,713 | $804,469 | | Gross Unrealized Gains | $972 | $27 | | Gross Unrealized Losses | $(95,106) | $(102,785) | | Fair Value | $698,579 | $701,711 | - At March 31, 2023, there were 161 securities with unrealized losses, primarily due to increases in market rates. Management believes these losses are non-credit related and expects recovery as securities approach maturity or if market yields decline, with no intent to sell before recovery49 - Securities with a carrying value of approximately $496.2 million at March 31, 2023, were pledged to collateralize public deposits and for other purposes47 3. LOANS HELD FOR INVESTMENT This section details the Company's loan portfolio, categorized by commercial real estate, specialized commercial, general commercial, consumer, and construction loans. it provides an overview of underwriting standards, changes in the Allowance for Credit Losses (ACL), impaired loan information, and credit quality indicators, including the impact of the CECL model adoption Loans Held for Investment (March 31, 2023 vs. December 31, 2022) | Loan Category | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----------------------------------- | :------------- | :---------------- | | Commercial real estate | $926,018 | $919,358 | | Commercial - specialized | $315,473 | $327,513 | | Commercial - general | $510,917 | $484,783 | | Consumer: 1-4 family residential | $485,396 | $460,124 | | Auto loans | $321,309 | $321,476 | | Other consumer | $81,413 | $81,308 | | Construction | $148,114 | $153,519 | | Total loans held for investment | $2,788,640 | $2,748,081 | | Allowance for credit losses on loans | $(39,560) | $(39,288) | | Loans, net | $2,749,080 | $2,708,793 | - The Allowance for Credit Losses (ACL) for loans increased to $39.6 million at March 31, 2023, from $39.3 million at December 31, 2022. The ACL to loans held for investment ratio was 1.42% at March 31, 2023, slightly down from 1.43% at December 31, 202255 Activity in ACL for Loans (Three Months Ended March 31, 2023) | Loan Category | Beginning Balance (Jan 1, 2023, in thousands) | CECL Adoption Impact (in thousands) | Provision for Credit Losses (in thousands) | Charge-offs (in thousands) | Recoveries (in thousands) | Ending Balance (Mar 31, 2023, in thousands) | | :----------------------------------- | :------------------------------ | :------------------- | :-------------------------- | :---------- | :--------- | :---------------------------- | | Commercial real estate | $13,029 | $827 | $(475) | $0 | $0 | $13,381 | | Commercial - specialized | $3,425 | $33 | $(11) | $0 | $63 | $3,510 | | Commercial - general | $9,215 | $(2,574) | $(237) | $(199) | $62 | $6,267 | | Consumer: 1-4 family residential | $6,194 | $1,700 | $635 | $0 | $2 | $8,531 | | Auto loans | $3,926 | $(332) | $298 | $(254) | $76 | $3,714 | | Other consumer | $1,376 | $(235) | $68 | $(214) | $106 | $1,101 | | Construction | $2,123 | $683 | $522 | $(272) | $0 | $3,056 | | Total ACL for loans | $39,288 | $102 | $800 | $(939) | $309 | $39,560 | - The Company grades loans on a thirteen-point scale (pass, special mention, substandard, doubtful, loss) to assess default risk, with nonaccrual loans over $250,000 and substandard accruing loans over $1 million subject to individual evaluation6166 Loans Modified to Borrowers in Financial Distress (Three Months Ended March 31, 2023) | Loan Class | Term Extension (in thousands) | Term Extension and Interest Rate Reduction (in thousands) | Total Class of Financing Receivable (%) | | :----------------------------------- | :------------- | :--------------------------------------- | :-------------------------------------- | | Commercial - general | $2,999 | $42 | 0.60% | | Consumer: 1-4 family | $199 | — | 0.04% | | Auto loans | $40 | — | 0.01% | | Total | $3,238 | $42 | 0.12% | 4. GOODWILL AND INTANGIBLES This note reports the Company's goodwill and other intangible assets, primarily core deposit intangibles (CDI). Goodwill remained stable, and an interim impairment analysis due to economic uncertainty found no impairment. CDI is amortized over its estimated useful life - Goodwill remained at $19.5 million at March 31, 2023, and December 31, 2022. An interim goodwill impairment quantitative analysis was performed due to economic uncertainty and a decrease in stock price, but no impairment charge was recorded4076 Other Intangible Assets, Net (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----------------------------------- | :------------- | :---------------- | | Core deposit intangible, net | $3,046 | $3,259 | | Other intangibles, net | $942 | $1,090 | | Total other intangible assets, net | $3,988 | $4,349 | 5. MORTGAGE SERVICING RIGHTS This note details the changes in the fair value of the Company's mortgage servicing rights (MSR) asset and key valuation assumptions. The MSR balance decreased due to a negative valuation adjustment, reflecting market volatility Mortgage Servicing Rights Activity (Three Months Ended March 31, 2023 vs. 2022) | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Beginning balance | $27,474 | $19,700 | | Additions | $271 | $1,250 | | Valuation adjustment | $(1,950) | $4,475 | | Ending balance | $25,795 | $25,425 | - Mortgage loans serviced for others decreased slightly to $2.037 billion at March 31, 2023, from $2.046 billion at December 31, 2022. The MSR asset as a percentage of serviced mortgage loans was 1.27% at March 32, 202377 Key Assumptions for Mortgage Servicing Rights Valuation (March 31, 2023 vs. December 31, 2022) | Assumption | March 31, 2023 | December 31, 2022 | | :----------------------------------- | :------------- | :---------------- | | Weighted average constant prepayment rate | 7.44% | 7.47% | | Weighted average discount rate | 9.65% | 9.15% | | Weighted average life in years | 7.93 | 7.91 | 6. BORROWING ARRANGEMENTS This section details the Company's subordinated debt and other borrowing arrangements. It outlines the terms of two subordinated debt issuances and confirms no outstanding advances from the Federal Home Loan Bank (FHLB) - The Company has $76.0 million in total subordinated debt outstanding as of March 31, 2023, comprising two issuances from December 2018 ($26.5 million) and September 2020 ($50.0 million). These notes are unsecured, pay interest quarterly/semi-annually, and qualify for Tier 2 capital treatment787980 - City Bank had no outstanding advances from the Federal Home Loan Bank of Dallas (FHLB) at March 31, 2023, or December 31, 202281 7. STOCK-BASED COMPENSATION This note describes the Company's 2019 Equity Incentive Plan, covering stock options and restricted stock awards. It provides details on activity, valuation assumptions, and unrecognized compensation costs for these awards - The 2019 Equity Incentive Plan authorizes the issuance of up to 2,300,000 shares of common stock, with potential annual increases of up to 3% of outstanding shares, for various stock-based awards82 Stock Option Activity (Three Months Ended March 31, 2023) | Metric | Number of Shares | Weighted-Average Exercise Price | | :----------------------------------- | :--------------- | :------------------------------ | | Outstanding at beginning of year | 1,354,189 | $16.11 | | Granted | 47,816 | $27.46 | | Exercised | (25,521) | $12.75 | | Forfeited | (1,125) | $20.19 | | Balance, March 31, 2023 | 1,375,359 | $16.57 | - Total unrecognized compensation cost for outstanding awards under the Plan was $4.6 million at March 31, 2023, to be recognized over a weighted average remaining period of 1.83 years87 8. OFF-BALANCE-SHEET ACTIVITIES, COMMITMENTS AND CONTINGENCIES This note details the Company's off-balance-sheet financial instruments, including commitments to extend credit and standby letters of credit. These instruments expose the Company to credit and interest rate risk, with total commitments increasing slightly from December 31, 2022 Off-Balance-Sheet Credit Risk Outstanding (March 31, 2023 vs. December 31, 2022) | Instrument | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----------------------------------- | :------------- | :---------------- | | Commitments to grant loans and unfunded commitments under lines of credit | $720,851 | $682,296 | | Standby letters of credit | $12,821 | $13,864 | - The total commitment amounts do not necessarily represent future cash requirements as many commitments for lines of credit may expire without being drawn upon90 9. LEASES This note provides information on the Company's operating lease arrangements as both a lessee and a lessor. It details the balance sheet components, operating lease costs, cash flow information, and future undiscounted lease payments Balance Sheet Components of Leases (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----------------------------------- | :------------- | :---------------- | | Operating lease right of use assets | $7,871 | $7,938 | | Operating lease liabilities | $8,829 | $8,897 | - Operating lease costs for the three months ended March 31, 2023, were $705 thousand, up from $597 thousand in the prior year period. Cash paid for operating leases was $503 thousand for the same period9495 Future Undiscounted Operating Lease Payments (March 31, 2023) | Year | Amount (thousands) | | :----------------------------------- | :----------------- | | 2023 | $1,443 | | 2024 | $1,501 | | 2025 | $1,102 | | 2026 | $1,101 | | 2027 | $1,063 | | Thereafter | $5,050 | | Total minimum lease payments | $11,260 | 10. CAPITAL AND REGULATORY MATTERS This note confirms that the Company and its bank subsidiary meet all regulatory capital requirements and are categorized as 'well-capitalized' under applicable Basel III and FDIC regulations. It provides detailed capital ratios for both the consolidated entity and City Bank - As of March 31, 2023, and December 31, 2022, the Company and its bank subsidiary met all capital adequacy requirements and were categorized as 'well-capitalized' under applicable regulations101102 Regulatory Capital Ratios (March 31, 2023) | Ratio | Consolidated (Actual) | City Bank (Actual) | Minimum Required (Basel III) | Well Capitalized (Prompt Corrective Action) | | :----------------------------------- | :-------------------- | :----------------- | :--------------------------- | :------------------------------------------ | | Total Capital to Risk Weighted Assets | 16.70% | 13.59% | 10.50% | 10.00% | | Tier I Capital to Risk Weighted Assets | 13.24% | 12.37% | 8.50% | 8.00% | | Common Equity Tier 1 to Risk Weighted Assets | 11.92% | 12.37% | 7.00% | 6.50% | | Tier I Capital to Average Assets | 11.22% | 10.48% | 4.00% | 5.00% | 11. DERIVATIVES This note describes the Company's use of interest rate swap agreements for fair value hedging and mortgage banking derivatives for risk management. It details the changes in fair value and the balance sheet impact of these instruments - The Company uses interest rate swap agreements as fair value hedges to manage interest rate risk, with changes in fair value of these swaps and hedged investment securities largely offsetting each other106107 Fair Value Hedges (Three Months Ended March 31, 2023) | Interest Rate Contracts | Location | 2023 Change in Fair Value (in thousands) | | :----------------------------------- | :----------------------- | :------------------------ | | Interest rate swaps hedging investment securities | Other noninterest expense | $(2,654) | | Hedged investment securities | Other noninterest expense | $2,638 | | Interest rate swaps hedging fixed rate loans | Interest income - Loans | $0 | | Hedged fixed rate loans | Interest income - Loans | $0 | - Mortgage banking derivatives, not designated as hedging instruments, resulted in a net loss of $(281) thousand for the three months ended March 31, 2023, compared to $(1,093) thousand in the prior year110 12. EARNINGS PER SHARE This note provides the computation of basic and diluted earnings per share for the Company, showing a decrease in both metrics compared to the prior year period Earnings Per Share (Three Months Ended March 31, 2023 vs. 2022) | Metric | Three Months Ended March 31, 2023 (in thousands, except per share data) | Three Months Ended March 31, 2022 (in thousands, except per share data) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $9,244 | $14,278 | | Weighted average common shares outstanding - basic | 17,046,713 | 17,716,136 | | Weighted average common shares outstanding - diluted | 17,560,756 | 18,392,397 | | Basic earnings per share | $0.54 | $0.81 | | Diluted earnings per share | $0.53 | $0.78 | 13. FAIR VALUE DISCLOSURES This note provides detailed fair value measurements for the Company's financial instruments, categorized by Level 1, Level 2, and Level 3 inputs. It explains the valuation techniques used for securities, mortgage servicing rights, derivatives, and loans held for investment, highlighting the recurring and non-recurring fair value measurements - The fair value hierarchy prioritizes quoted prices in active markets (Level 1) over observable inputs (Level 2) and unobservable inputs (Level 3)114116 Assets (Liabilities) Measured at Fair Value on a Recurring Basis (March 31, 2023) | Asset/Liability | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total (in thousands) | | :----------------------------------- | :------ | :------ | :------ | :------ | | Securities available for sale | $0 | $698,579 | $0 | $698,579 | | Loans held for sale (mandatory) | $0 | $11,576 | $0 | $11,576 | | Mortgage servicing rights | $0 | $0 | $25,795 | $25,795 | | Asset derivatives | $0 | $18,931 | $0 | $18,931 | | Liability derivatives | $0 | $(409) | $0 | $(409) | - Mortgage servicing rights are the only Level 3 asset measured at fair value on a recurring basis, valued using discounted cash flows with conditional prepayment rate (7.44%) and discount rate (9.65%) as key unobservable inputs119124 Estimated Fair Values of Financial Instruments Not Previously Disclosed (March 31, 2023) | Instrument | Carrying Amount (in thousands) | Fair Value (Total, in thousands) | | :----------------------------------- | :-------------- | :----------------- | | Cash and cash equivalents | $328,002 | $328,002 | | Loans held for investment, net | $2,749,080 | $2,697,002 | | Deposits | $3,508,054 | $3,507,917 | | Junior subordinated deferrable interest debentures | $46,393 | $32,395 | | Subordinated debt securities | $76,007 | $64,498 | 14. SUBSEQUENT EVENTS This note discloses significant events occurring after March 31, 2023, including a dividend declaration, the sale of the Windmark insurance subsidiary, and the approval of a new stock repurchase program - On April 20, 2023, the Company declared a cash dividend of $0.13 per share of common stock127 - The Company completed the sale of its wholly-owned insurance subsidiary, Windmark, to Alliant Insurance Services, Inc. on April 1, 2023, for an aggregate purchase price of $35.5 million. The sale includes post-closing obligations and restrictive covenants128 - On May 5, 2023, the Board approved a new stock repurchase program for up to $15.0 million of common stock, effective until May 5, 2024129 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations for the three months ended March 31, 2023. It covers key financial performance indicators, recent economic developments, detailed analysis of net interest income, noninterest income and expense, loan portfolio, asset quality, securities, deposits, liquidity, and capital resources, along with critical accounting policies and non-GAAP financial measures Overview This section provides a high-level overview of South Plains Financial, Inc.'s business activities, focusing on its commercial and retail banking, investment, trust, and mortgage services - South Plains Financial, Inc. is a Texas-based bank holding company primarily engaged in commercial and retail banking, investment, trust, and mortgage services through its subsidiaries across Texas and Eastern New Mexico139 Recent Developments This section discusses recent market interest rate increases, deposit composition, available borrowing capacity, and the sale of the insurance subsidiary, highlighting their impact on the Company's financial condition - The Company's financial condition has been impacted by significant market interest rate increases due to Federal Reserve actions in response to inflation, leading to increased focus on investment securities, interest rate risk, liquidity, and capital140 Deposit Composition (March 31, 2023) | Deposit Type | Percentage of Total Deposits | | :----------------------------------- | :--------------------------- | | Noninterest-bearing deposits | 32% | | Time deposits | 8% | | Interest-bearing nonmaturity deposits | 60% | | Retail customers | 45% | | Commercial customers | 43% | | Public funds | 12% | | Uninsured or uncollateralized deposits | 17% | - The Company had approximately $1.75 billion in available borrowing capacity at March 31, 2023, through the FHLB ($988 million unused), FRB's Discount Window ($586 million unused), and access to the BTFP ($179 million available securities for collateral)142 - The Company completed the sale of its insurance subsidiary, Windmark, on April 1, 2023, and approved a new $15.0 million stock repurchase program on May 5, 2023143144 Results of Operations This section analyzes the Company's financial performance for the three months ended March 31, 2023, detailing changes in net income, earnings per share, and key profitability ratios Key Financial Results (Three Months Ended March 31, 2023 vs. 2022) | Metric | Three Months Ended March 31, 2023 (in millions, except per share data) | Three Months Ended March 31, 2022 (in millions, except per share data) | Change (YoY, in millions, except per share data) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net income | $9.2 | $14.3 | $(5.1) | | Diluted common share | $0.53 | $0.78 | $(0.25) | | Return on average equity (annualized) | 10.34% | 14.58% | (4.24)% | | Return on average assets (annualized) | 0.95% | 1.47% | (0.52)% | - The $5.0 million decrease in net income was primarily due to a $13.0 million decrease in noninterest income and a $3.1 million increase in the provision for credit losses, partially offset by a $4.4 million increase in net interest income and a $5.6 million decrease in noninterest expense145 Net Interest Income Net interest income increased by $4.4 million, or 14.6%, driven by a significant rise in interest income from loans and securities due to higher interest rates and loan growth, partially offset by a substantial increase in interest expense on deposits Net Interest Income (Three Months Ended March 31, 2023 vs. 2022) | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Total interest income | $47,750 | $33,385 | | Total interest expense | $13,133 | $3,133 | | Net interest income | $34,617 | $30,252 | | Net interest spread | 2.95% | 3.14% | | Net interest margin | 3.75% | 3.33% | - Interest income on loans grew by $10.2 million, primarily due to a $296.3 million increase in average loan balances and a 98 basis point increase in interest rates. Interest income on securities and other interest-earning assets increased by $4.1 million153 - Interest expense increased by $10.0 million, or 319.2%, mainly due to a 169 basis point increase in the rate paid on interest-bearing liabilities, reflecting rising short-term interest rates153154 Provision for Credit Losses The provision for credit losses shifted from a negative provision in the prior year to a positive $1.0 million in Q1 2023, primarily due to organic loan growth and provisions for off-balance sheet credit exposures. The ACL as a percentage of loans held for investment remained stable Provision for Credit Losses (Three Months Ended March 31, 2023 vs. 2022) | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Provision for credit losses | $1.0 | $(2.1) | | Provision for credit losses for loans | $0.8 | — | | Provision for credit losses on off-balance sheet credit exposures | $0.2 | — | | Allowance for credit losses as % of loans held for investment | 1.42% | 1.43% | - The negative provision in Q1 2022 was due to improved credit metrics, particularly in the hotel and energy segments. Current provisions reflect organic loan growth and ongoing economic uncertainty157 Noninterest Income Noninterest income significantly decreased by $13.0 million, or 54.9%, primarily driven by an $11.4 million decline in mortgage banking activities due to lower loan originations and a negative fair value adjustment to mortgage servicing rights Noninterest Income Components (Three Months Ended March 31, 2023 vs. 2022) | Component | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (YoY, in thousands) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Service charges on deposit accounts | $1,701 | $1,773 | $(72) | | Income from insurance activities | $1,411 | $1,570 | $(159) | | Bank card services and interchange fees | $2,956 | $3,222 | $(266) | | Mortgage banking activities | $2,286 | $13,637 | $(11,351) | | Investment commissions | $389 | $546 | $(157) | | Fiduciary income | $600 | $612 | $(12) | | Other income and fees | $1,348 | $2,337 | $(989) | | Total noninterest income | $10,691 | $23,697 | $(13,006) | - Mortgage banking income decreased by $11.4 million (83.2%) due to a 63.1% decrease in mortgage loan originations and a negative fair value adjustment of $2.0 million to mortgage servicing rights in Q1 2023 (compared to a positive $4.5 million in Q1 2022)160 Noninterest Expense Noninterest expense decreased by $5.6 million, or 14.7%, primarily due to a $3.4 million reduction in salaries and employee benefits, driven by lower mortgage salaries and incentive-based compensation, and a $1.0 million decrease in professional services Noninterest Expense Components (Three Months Ended March 31, 2023 vs. 2022) | Component | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (YoY, in thousands) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Salaries and employee benefits | $19,254 | $22,703 | $(3,449) | | Occupancy expense, net | $3,832 | $3,737 | $95 | | Professional services | $1,648 | $2,625 | $(977) | | Marketing and development | $936 | $720 | $216 | | IT and data services | $864 | $1,053 | $(189) | | Bankcard expenses | $1,352 | $1,323 | $29 | | Appraisal expenses | $278 | $565 | $(287) | | Other expenses | $4,197 | $5,198 | $(1,001) | | Total noninterest expense | $32,361 | $37,924 | $(5,563) | - The decrease in salaries and employee benefits was mainly due to a $2.7 million reduction in mortgage salaries and commissions, reflecting lower mortgage loan originations and incentive-based compensation163 - Professional services expenses decreased by $1.0 million, primarily due to an $0.8 million decrease in legal fees related to a vendor dispute resolved in 2022163 Financial Condition This section analyzes the Company's financial position, including changes in total assets, loans, securities, and deposits, providing insights into the balance sheet structure and key trends - Total assets increased by $114.0 million (2.9%) to $4.06 billion at March 31, 2023, from $3.94 billion at December 31, 2022163 - Loans held for investment increased by $40.6 million (1.5%) to $2.79 billion, while the securities portfolio decreased by $3.1 million (0.4%) to $698.6 million163 - Total deposits increased by $101.6 million (3.0%) to $3.51 billion at March 31, 2023163 Loan Portfolio The loan portfolio, the largest component of earning assets, grew by $40.6 million, primarily in commercial real estate and residential mortgage loans, offset by a decrease in residential construction loans. The portfolio remains diversified by type and geography, with 68.8% secured by real property - Loans held for investment increased by $40.6 million (1.5%) to $2.79 billion at March 31, 2023, driven by organic growth in commercial real estate loans and residential mortgage loans, partially offset by a decrease in residential construction loans165 Contractual Maturities of Loans Held for Investment (March 31, 2023) | Loan Category | Due in One Year or Less (in thousands) | Due after One Year Through Five Years (in thousands) | Due after Five Years Through Fifteen Years (in thousands) | Due after Fifteen Years (in thousands) | Total (in thousands) | | :----------------------------------- | :---------------------- | :------------------------------------ | :----------------------------------------- | :---------------------- | :------ | | Commercial real estate | $84,584 | $499,958 | $255,615 | $85,861 | $926,018 | | Commercial - specialized | $74,929 | $124,114 | $62,990 | $53,440 | $315,473 | | Commercial - general | $83,091 | $165,161 | $132,813 | $129,852 | $510,917 | | Consumer: 1-4 family residential | $33,913 | $83,364 | $74,474 | $293,645 | $485,396 | | Auto loans | $2,932 | $168,656 | $149,721 | $0 | $321,309 | | Other consumer | $7,176 | $49,049 | $25,188 | $0 | $81,413 | | Construction | $123,731 | $16,350 | $0 | $8,033 | $148,114 | | Total loans | $410,356 | $1,106,652 | $700,801 | $570,831 | $2,788,640 | - 68.8% of the loan portfolio was secured by real property at March 31, 2023, diversified by type and geographic location across Texas and Eastern New Mexico169 Fixed vs. Adjustable Interest Rate Loans (Maturities > 1 Year, March 31, 2023) | Loan Category | Fixed Rate (in thousands) | Adjustable Rate (in thousands) | | :----------------------------------- | :--------- | :-------------- | | Commercial real estate | $391,565 | $449,869 | | Commercial - specialized | $67,546 | $172,998 | | Commercial - general | $168,265 | $259,561 | | Consumer: 1-4 family residential | $270,985 | $180,498 | | Auto loans | $318,377 | $0 | | Other consumer | $73,783 | $454 | | Construction | $1,243 | $23,140 | | Total loans | $1,291,764 | $1,086,520 | - Commitments to grant loans and unfunded commitments under lines of credit totaled $720.9 million at March 31, 2023, up from $682.3 million at December 31, 2022185 Allowance for Credit Losses for Loans The Allowance for Credit Losses (ACL) for loans increased slightly to $39.6 million at March 31, 2023, primarily due to organic loan growth. The Company adopted the CECL model on January 1, 2023, which requires recording life-of-loan projected losses based on future economic events - The ACL for loans was $39.6 million at March 31, 2023, an increase of $0.3 million (0.7%) from $39.3 million at December 31, 2022, primarily due to an $0.8 million provision for credit losses on loans in March 2023189 - Net charge-offs totaled $630 thousand (0.09% annualized) for the three months ended March 31, 2023, up from $364 thousand (0.06% annualized) in the prior year, mainly due to an increase of $272 thousand in residential construction net charge-offs193 Allocation of Allowance for Credit Losses (March 31, 2023 vs. December 31, 2022) | Loan Category | March 31, 2023 Amount (in thousands) | March 31, 2023 % of Total | December 31, 2022 Amount (in thousands) | December 31, 2022 % of Total | | :----------------------------------- | :-------------------- | :------------------------ | :----------------------- | :------------------------- | | Commercial real estate | $13,381 | 33.8% | $13,029 | 33.1% | | Commercial – specialized | $3,510 | 8.9% | $3,425 | 8.7% | | Commercial – general | $6,267 | 15.8% | $9,215 | 23.5% | | Consumer: 1-4 family residential | $8,531 | 21.6% | $6,194 | 15.8% | | Auto loans | $3,714 | 9.4% | $3,926 | 10.0% | | Other consumer | $1,101 | 2.8% | $1,376 | 3.5% | | Construction | $3,056 | 7.7% | $2,123 | 5.4% | | Total allowance for credit losses | $39,560 | 100.0% | $39,288 | 100.0% | Asset Quality The Company's asset quality remained stable, with a slight decrease in nonaccrual loans and nonperforming loans. Loans are placed on nonaccrual status when collectability is doubtful, and specific allowances are established for individually analyzed impaired loans - Total nonaccrual loans decreased to $5.1 million (0.18% of total loans held for investment) at March 31, 2023, from $5.8 million (0.21%) at December 31, 2022199 - Nonperforming loans were $7.6 million at March 31, 2023, down from $7.8 million at December 31, 2022200 - Loans are placed on nonaccrual status when principal or interest payments are past due 90 days or when collectability is doubtful. Individually analyzed impaired loans (nonaccrual loans $250k or greater) have specific valuation allowances196197199 Securities Portfolio The securities portfolio, the second-largest earning asset, slightly decreased. While it experienced an increase in unrealized gains in Q1 2023 after a significant decline in 2022, management does not consider the unrealized losses to be credit-related and expects full recovery by maturity - Total securities decreased by $3.1 million (0.4%) to $698.6 million at March 31, 2023, primarily due to $10.8 million in maturities, prepayments, and calls, partially offset by an $8.6 million increase in the unrealized gain/loss206 - The fair value of available-for-sale securities increased by $8.6 million in Q1 2023, recovering from a $114.4 million decline in 2022. Management believes unrealized losses are non-credit related and expects full recovery, with no intent to sell before maturity207 - The securities portfolio serves multiple purposes: collateral for deposits/borrowings, liquidity, interest rate risk management, and an alternative earning asset203 Deposits Deposits, the Company's primary funding source, increased by $101.6 million. The deposit mix shows a significant portion in interest-bearing non-maturity accounts, with a slight decrease in noninterest-bearing demand accounts - Total deposits increased by $101.6 million (3.0%) to $3.51 billion at March 31, 2023, from $3.41 billion at December 31, 2022212 Deposit Mix (March 31, 2023 vs. December 31, 2022) | Deposit Type | March 31, 2023 Amount (in thousands) | March 31, 2023 % of Total | December 31, 2022 Amount (in thousands) | December 31, 2022 % of Total | | :----------------------------------- | :-------------------- | :------------------------ | :----------------------- | :------------------------- | | Noninterest-bearing deposits | $1,110,939 | 31.7% | $1,150,488 | 33.8% | | NOW and other transaction accounts | $321,644 | 9.2% | $350,910 | 10.3% | | Money market and other savings | $1,787,621 | 50.9% | $1,618,833 | 47.5% | | Time deposits | $287,850 | 8.2% | $286,199 | 8.4% | | Total deposits | $3,508,054 | 100.0% | $3,406,430 | 100.0% | - The estimated amount of uninsured deposits was $600.2 million (approximately 17% of total deposits) at March 31, 2023, excluding collateralized public fund deposits214 Borrowed Funds The Company utilizes FHLB advances, Federal Reserve Bank lines of credit, and subordinated debt as supplementary funding sources. It maintains significant unused borrowing capacity and has no long-term FHLB or FRB borrowings - The Company had total remaining borrowing capacity of $987.8 million from the FHLB and $585.6 million from the Federal Reserve Bank of Dallas at March 31, 2023217218 - No long-term FHLB or FRB borrowings were outstanding during the three months ended March 31, 2023 or 2022218219 - The Company has $76.0 million in subordinated debt securities and $46.4 million in junior subordinated deferrable interest debentures outstanding as of March 31, 2023223224 Liquidity and Capital Resources This section assesses the Company's liquidity position and capital adequacy, highlighting its ability to meet financial obligations and maintain regulatory compliance - Management believes the Company has adequate liquidity, supported by liquid assets (cash, interest-bearing deposits, federal funds sold, unpledged investment securities) and access to alternative funding sources (wholesale deposits, FHLB, Federal Reserve discount window)229230231 - Total stockholders' equity increased by $10.9 million (3.1%) to $368.0 million at March 31, 2023, primarily due to net earnings and an increase in accumulated other comprehensive income related to fair value changes in available-for-sale securities232 - The Company and City Bank continue to meet all regulatory capital requirements and are categorized as 'well-capitalized' under Basel III and FDIC frameworks236 Liquidity The Company maintains strong liquidity through a combination of liquid assets and access to various borrowing facilities, enabling it to meet short-term and long-term cash requirements. Management continuously monitors its liquidity position to ensure financial stability - Liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities229 - Additional liquidity sources include wholesale deposits, and borrowings from correspondent banks, FHLB, and the Federal Reserve discount window, with significant unused capacity229 Capital The Company's total stockholders' equity increased, driven by net earnings and fair value changes in securities. Both the Company and its bank subsidiary remain well-capitalized, exceeding all regulatory capital ratios under Basel III guidelines - Total stockholders' equity increased to $368.0 million at March 31, 2023, from $357.0 million at December 31, 2022, an increase of $10.9 million (3.1%)232 - The increase in equity was primarily due to $9.2 million in net earnings and a $4.7 million increase in accumulated other comprehensive income related to fair value changes in available-for-sale securities, net of tax232 Regulatory Capital Ratios (March 31, 2023) | Ratio | South Plains Financial, Inc. | City Bank | | :----------------------------------- | :--------------------------- | :-------- | | Total capital (to risk-weighted assets) | 16.70% | 13.59% | | Tier 1 capital (to risk-weighted assets) | 13.24% | 12.37% | | CET 1 capital (to risk-weighted assets) | 11.92% | 12.37% | | Tier 1 capital (to average assets) | 11.22% | 10.48% | Community Bank Leverage Ratio The Company and City Bank have elected not to opt into the Community Bank Leverage Ratio (CBLR) framework, despite qualifying, and continue to follow the Basel III capital requirements - The CBLR framework simplifies capital requirements for qualifying community banks with a Tier 1 leverage ratio greater than 9% and less than $10 billion in assets239 - The Company and City Bank, though qualifying, have chosen not to adopt the CBLR framework and continue to adhere to Basel III capital requirements239 Treasury Stock The Company did not repurchase any common stock during the three months ended March 31, 2023, in contrast to the prior year period - No common stock was repurchased by the Company during the three months ended March 31, 2023283 - In the three months ended March 31, 2022, the Company repurchased 106,498 shares for $3.0 million240 Interest Rate Sensitivity and Market Risk The Company actively manages interest rate risk through its ALCO Committee, using simulation models and shock analyses to assess the impact of interest rate fluctuations on net interest income and fair value of equity. The Company's policy limits potential declines in net interest income under various interest rate shifts - The Company's primary market risk is interest rate volatility, managed by the ALCO Committee through guidelines and a measurement system for net interest rate sensitivity241245 - Simulation models and shock analyses are used to project future net interest income under various interest rate movements, with a policy limit of not more than a 7.5% decline for a 100 basis point shift over a one-year period246247 Simulated Change in Net Interest Income (12-Month Horizon) | Change in Interest Rates (Basis Points) | March 31, 2023 (% Change) | December 31, 2022 (% Change) | | :----------------------------------- | :------------------------ | :--------------------------- | | +300 | (1.78) | (1.50) | | +200 | (1.17) | (0.96) | | +100 | (0.58) | (0.61) | | -100 | 0.21 | (1.50) | | -200 | 0.46 | (2.81) | Impact of Inflation The Company's financial statements are prepared using historical dollars, and management addresses inflation's impact by actively managing the relationship between interest rate-sensitive assets and liabilities to mitigate fluctuations in net interest income - The Company's assets and liabilities are primarily monetary, and management aims to reduce inflation's impact by managing interest rate-sensitive assets and liabilities to protect against wide net interest income fluctuations249250 Non-GAAP Financial Measures This section presents non-GAAP financial measures, specifically tangible book value per common share and tangible common equity to tangible assets, which are used by investors to evaluate financial institutions by excluding the impact of goodwill and other intangible assets - Non-GAAP measures like tangible book value per common share and tangible common equity to tangible assets are used to evaluate financial institutions, excluding goodwill and other intangible assets254255 Non-GAAP Financial Measures Reconciliation (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (in thousands, except per share data) | December 31, 2022 (in thousands, except per share data) | | :----------------------------------- | :------------- | :---------------- | | Total stockholders' equity | $367,964 | $357,014 | | Less: Goodwill and other intangibles | $(23,496) | $(23,857) | | Tangible common equity | $344,468 | $333,157 | | Total assets | $4,058,049 | $3,944,063 | | Less: Goodwill and other intangibles | $(23,496) | $(23,857) | | Tangible assets | $4,034,553 | $3,920,206 | | Shares outstanding | 17,062,572 | 17,027,197 | | Total stockholders' equity to total assets | 9.07% | 9.05% | | Tangible common equity to tangible assets | 8.54% | 8.50% | | Book value per share | $21.57 | $20.97 | | Tangible book value per share | $20.19 | $19.57 | Critical Accounting Policies and Estimates This section highlights the Company's critical accounting policies and estimates, which require significant management judgment and assumptions. Key policies include those for securities, loans, allowance for credit losses (ACL), loans held for sale, mortgage servicing rights, and goodwill and other intangible assets, with particular emphasis on the CECL model's impact on ACL - The preparation of financial statements requires management to make estimates, assumptions, and judgments, particularly for the allowance for credit losses, which is susceptible to significant changes in the economic environment257265 - The Company has elected the extended transition period for complying with new or revised accounting standards under the JOBS Act259 - The ACL for loans is established for future expected credit losses using internal and external information, historical experience, current conditions, and reasonable forecasts, estimated over the contractual term of loans and adjusted for prepayments264 - For securities in an unrealized loss position, the Company assesses intent and likelihood of sale before recovery of amortized cost. If a credit loss exists, an ACL is recorded, limited by the fair value less amortized cost270 Recently Issued Accounting Pronouncements This section outlines the Company's adoption of new accounting standards, specifically ASU No. 2016-13 (CECL model), and its impact on credit loss estimation policies and processes - The Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, effective January 1, 2023, leading to changes in policies, processes, and controls over ACL estimation278 Item 3. Quantitative and Qualitative Disclosure about Market Risk The Company manages market risk, primarily interest rate volatility, through its ALCO Committee, which uses simulation models and shock analyses to assess the impact of interest rate changes on net interest income and fair value of equity. The Company is not subject to foreign exchange or commodity price risk - Market risk, primarily interest rate volatility, is managed by the ALCO Committee in accordance with board-approved policies276 - Interest rate risk simulation models and shock analyses are used to test the sensitivity of net interest income and fair value of equity to changes in interest rates276 - The Company is not exposed to foreign exchange or commodity price risk and does not own any trading assets244 Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023. Changes were implemented in internal control over financial reporting due to the adoption of the CECL model, focusing on assumptions, qualitative adjustments, and loan scorecard processes - The Company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2023277 - Changes to internal control over financial reporting were implemented due to the adoption of the CECL model, including new controls over economic forecast assumptions, qualitative adjustment risks, and the loan scorecard process278 PART II. OTHER INFORMATION This section provides disclosures on legal proceedings, risk factors, equity security sales, defaults, mine safety, and other relevant information not covered in the financial statements Item 1. Legal Proceedings The Company and its subsidiaries are subject to various legal actions, as previously disclosed in the Annual Report on Form 10-K. No new material litigation is reported that would adversely affect financial position or results of operations - The Company is subject to various legal actions, as detailed in its 2022 Annual Report on Form 10-K280 - No new material litigation is currently threatened or involved that would significantly impact the Company's financial position or results of operations280 Item 1A. Risk Factors This section highlights that recent bank failures and the resulting decline in customer confidence pose a new material risk factor for the Company, potentially impacting liquidity, funding costs, loan capacity, net interest margin, capital, and results of operations - Recent bank failures (Silicon Valley Bank, Signature Bank, First Republic Bank) and the associated market volatility and uncertainty in the banking industry are identified as a new material risk factor282 - This risk could negatively impact customer confidence, leading to deposit shifts to larger institutions or higher-yielding securities, thereby adversely affecting the Company's liquidity, cost of funding, loan funding capacity, net interest margin, capital, and results of operations282 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not make any purchases of its common stock during the three months ended March 31, 2023 - There were no purchases of common stock by the Company during the three months ended March 31, 2023283 Item 3. Defaults Upon Senior Securities This item is not applicable to the Company for the reporting period Item 4. Mine Safety Disclosures This item is not applicable to the Company for the reporting period Item 5. Other Information No other information is reported under this item for the reporting period Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL formatted financial statements - Exhibits include the Amended and Restated Certificate of Formation, Second Amended and Restated Bylaws, Certifications of Principal Executive and Financial Officers (Sections 302 and 906 of Sarbanes-Oxley Act), and XBRL formatted financial statements287 SIGNATURES This section contains the official signatures of the Company's executive officers, certifying the accuracy and completeness of the report Signatures The report is duly signed on behalf of South Plains Financial, Inc. by its Chairman and Chief Executive Officer, Curtis C. Griffith, and Chief Financial Officer and Treasurer, Steven B. Crockett, on May 8, 2023 - The report was signed by Curtis C. Griffith, Chairman and Chief Executive Officer, and Steven B. Crockett, Chief Financial Officer and Treasurer, on May 8, 2023289