South Plains Financial, Inc. (NASDAQ:SPFI) has delivered consistent financial performance, reporting annual net income of $62.7 million and annual revenue of $212.0 million in its latest fiscal year. The company's annual operating cash flow stood at $33.1 million, while its annual free cash flow reached $28.4 million.
In the second quarter of 2024, the company reported diluted earnings per share of $0.66, up from $0.64 in the previous quarter. This strong performance was driven by robust organic loan growth, which lifted the yield on the loan portfolio and contributed to margin expansion. South Plains Financial's management team has remained focused on maximizing profitability and returns, while also maintaining a strong capital position to navigate the current economic environment.
Business Overview
South Plains Financial, Inc. is a bank holding company headquartered in Lubbock, Texas, with its wholly-owned subsidiary, City Bank, operating as one of the largest independent banks in West Texas. The company provides a wide range of commercial and consumer financial services to small and medium-sized businesses and individuals across its market areas, which include Texas and Eastern New Mexico.
The company's principal business activities include commercial and retail banking, along with investment, trust, and mortgage services. South Plains Financial has a diversified loan portfolio, with commercial real estate loans representing 40.5% of the total loan book as of the latest quarter. The company's consumer loan portfolio, which includes 1-4 family residential loans, auto loans, and other consumer loans, accounts for 30.4% of the total loan portfolio.
Geographic Footprint and Loan Growth
South Plains Financial has a strong presence in its core Texas and Eastern New Mexico markets, with a growing footprint in major metropolitan areas such as Dallas, Houston, and El Paso. In the second quarter of 2024, the company's loans in these major metropolitan markets grew by $8 million, or 3% annualized, to $1.07 billion, representing 34.5% of the total loan portfolio.
The company's overall loan portfolio grew by $82.5 million, or 10.9% annualized, in the second quarter, driven by increases in direct energy loans, seasonal agriculture-related loans, and single-family property loans. Management expects full-year 2024 loan growth to be in the low to mid-single-digit range, as the company navigates potential payoffs and a moderation in construction and development loan growth.
Margin Expansion and Deposit Management
South Plains Financial's net interest margin, calculated on a tax-equivalent basis, expanded to 3.63% in the second quarter, up from 3.56% in the previous quarter. This improvement was primarily due to higher loan yields, which more than offset the rise in the company's cost of deposits.
The company has been actively managing its deposit costs, with the average cost of deposits increasing by 2 basis points to 243 basis points in the second quarter. Management has noted that competitive pressures for deposits have started to ease, allowing the company to be more selective in its deposit pricing. South Plains Financial has also seen a modest decline in its non-interest-bearing deposit base, which stood at 26.3% of total deposits at the end of the second quarter.
Credit Quality and Capital Strength
South Plains Financial's credit quality remains a key focus, with the company's ratio of allowance for credit losses to total loans held for investment standing at 1.40% as of the end of the second quarter. The company did experience an increase in non-performing loans during the quarter, primarily due to the placement of a $20.6 million multifamily property loan on non-accrual status.
Despite this isolated credit event, the company remains well-capitalized, with a consolidated common equity Tier 1 risk-based capital ratio of 12.61% and a Tier 1 leverage ratio of 11.81% as of June 30, 2024. This strong capital position provides South Plains Financial with the flexibility to continue growing its business while also returning capital to shareholders through its quarterly dividend and share repurchase program.
Diversified Revenue Streams and Efficiency Improvements
In addition to its core net interest income, South Plains Financial has been successful in growing its non-interest income, which represented 26% of total bank revenues in the second quarter. This was driven by increases in bank card service charges, interchange revenue, and income from investments in small business investment companies.
The company has also made progress in improving its efficiency, with its efficiency ratio declining to 66.7% in the second quarter, compared to 67.9% in the previous quarter. Management remains focused on maintaining a disciplined approach to expense management while investing in the company's growth initiatives.
Outlook
Looking ahead, South Plains Financial's management team expects the company's net interest margin expansion to moderate in the second half of 2024 as deposit costs are likely to move modestly higher, while loan growth returns to more normal levels. The company remains well-positioned to navigate the current economic environment, with a strong capital base, diversified revenue streams, and a focus on prudent credit risk management.
Conclusion
Despite the potential challenges posed by rising interest rates, economic uncertainty, and competitive pressures, South Plains Financial has demonstrated its ability to deliver consistent financial performance and create value for its shareholders. The company's steady progress, combined with its disciplined approach to growth and risk management, make it a compelling investment opportunity in the regional banking space.