South Plains Financial : Second Quarter 2023 Earnings Call Transcript

South Plains Financial - Second Quarter 2023 Earnings Call, July 25, 2023

C O R P O R A T E P A R T I C I P A N T S

Steven B. Crockett, Chief Financial Officer and Treasurer

Curtis C. Griffith, Chairman and Chief Executive Officer

Cory T. Newsom, President

Brent A. Bates, Chief Credit Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Brady Gailey, KBW

Brett Rabatin, Hovde Group

Graham Dick, Piper Sandler & Co.

Joseph Yanchunis, Raymond James

P R E S E N T A T I O N

Operator

Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial Second Quarter 2023 Earnings Conference Call.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Mr. Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead, sir.

Steven B. Crockett

Thank you, Operator, and good afternoon, everyone.

We appreciate your participation in our second quarter 2023 earnings conference c all. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer; Cory Newsom, our Pres ident; and Brent Bates, our Chief Credit Officer.

A slide deck presentation to complement today's discussion is available on the News & Events section of our website, www.spfi.bank.

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South Plains Financial - Second Quarter 2023 Earnings Call, July 25, 2023

Before we begin, I'd like to remind everyone that this call may contain forward -looking statements that are subject to a variety of risks, uncertainties, and other factors that c ould cause ac tual res ul ts to d iffer materially from those anticipated future results. Please see our Safe Harbor statement in o ur earnings press release that was issued this afternoon and on Slide 2 of the slide deck presentation. All comments made during today's call are subject to those Safe Harbor statements. Any forward-looking s tatements presented herein are made only as of today's date, and we do not undertake any duty to update s uch forward-looking statements except as required by law.

Additionally, during today's call, we may discuss certain non-GAAP measures which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP measures to the most c omparable GAAP measures can also be found at the end of our earnings release and beginning on Slide 23 o f the slide deck presentation.

Curtis, let me hand it over to you.

Curtis C. Griffith

Thank you, Steve, and good afternoon.

On today's call, I will briefly review the highlights of our second quarter 2023 results, as well as provide an update on our capital allocation priorities following the sale of Windmark, which closed in April. Co ry will discuss our loan portfolio in more detail and how we continue to benefit from competitor mergers in o ur key markets. Steve will then conclude with a more detailed review of our financial results.

To start, I'm very pleased with our second quarter results, as they highlight the strength of our culture and the commitment that our employees have to our customers and to our Company , es pecially in s uc h a challenging environment for our industry. We've exited the second quarter in a strong financial position, and I'd like to thank our employees for their hard work, which can clearly b e s een in o ur res ults o nce again this quarter.

Turning to today's call, there are six key points that I hope you will take away.

First, our deposits remained stable through the second quarter, further demonstrating the strength of o ur community-based deposit franchise.

Second, despite the continued rising market interest rate environment, our net interest margin held steady from March's level, as higher loan yields are offsetting the rise in our cost of funds.

Third, our organic loan growth was very strong in the second quarter, as we benefited from a robust loan pipeline combined with lower competition across our markets. That said, we continue to be s elective in the new loans that we fund as we maintain our underwriting discipline.

Fourth, the credit profile of our loan portfolio improved through the second quarter, though we d id have one non-accrual addition, which I will touch on in more detail in a moment.

Fifth, we further built capital this quarter through our earnings and the sale of Windmark , as our Tier 1 capital to average assets ratio increased to 11.7%.

Lastly, we strategically sold a portion of our investment securities p ortfolio in the q uarter, which we believe to be advantageous given the gain we recorded from the Windmark sale, combined with the yield improvement that we were able to achieve as we reinvested the securities sale proceeds into new loans.

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South Plains Financial - Second Quarter 2023 Earnings Call, July 25, 2023

Turning to our results in more detail on Slide 4 of our earnings presentation, we delivered net income of $29.7 million or $1.71 diluted earnings per share as compared to $9.2 million or $0.53 d iluted earnings per share f or the first quarter of 2023. This compares to net income of $15.9 million or $0.88 per d iluted common share in the year-ago second quarter.

As we discussed on our first quarter call, we completed the sale of Windmark, City Bank's wholly owned insurance subsidiary, for $35.5 million in April in an all-cash transaction. The after-tax sale proceeds, less transaction expenses, the incentive compensation triggered by the transaction, and the realized lo ss o n the sale of our investment securities during the second quarter, resulted in $1.16 per share of one-time net income in the second quarter. Excluding these items, we earned $0.55 per share.

Given the large gain that we recorded, we made the strategic decision to sell $56 million of inv estment securities from our portfolio, which resulted in a realized loss of $3.4 million. We believe this was a tax - efficient transaction and will boost our earnings in future periods given that the securities we s old were yielding approximately 2.7% and we reinvested the proceeds in loans that are yielding more than 7% in the second quarter. The incremental income will help replace the loss of future net income fro m the Windmark operations.

Turning to our loan portfolio, we grew loans 6.8% in the second quarter as we continued to ex perience healthy economic growth, combined with customer dislocation in many of our markets from recent competitor mergers. Additionally, we are seeing larger competitors pull back in s ome markets, whic h allowing our team to bring new relationships to the bank, as Cory will touch on in more detail.

We recorded a provision for credit losses of $3.7 million in the second quarter as compared to $1 million in the first quarter of 2023. The provision was primarily for the strong loan growth that we delivered in the quarter, and a $1.3 million increase in specific reserves related to one previously classified credit relationship totaling $13.3 million that was placed on nonaccrual in May of 2023. This cred it was for a business that is currently in borrower directed liquidation and from which we expect to see larger repayments starting in the third quarter of 2023. While there continues to be payment performance, we placed the relationship on nonaccrual and recorded the specific reserve given that the bus in ess is no longer a going concern.

As Steve will touch on in more detail, the overall credit quality of our p ortfolio c ontinued to improve through the second quarter. Of note, our budget and consensus es timates were f or $1. 25 million of provision expense in the second quarter. Our recorded provision expense was approximately $0. 14 p er share above these expectations. As a result, we believe the run rate earnings of the bank, ex cluding all one-time items and the increased provision, was $0.69 per share in the second quarter, which bodes well for the second half of the year, as we will fully benefit from the second quarter's loan growth and improved loan yields.

We grew deposits $66.5 million or 1.9% to $3.57 billion at June 30, 2023, as compared to the end of the first quarter 2023. Our deposit growth was primarily due to an $81 million increase in brokered depos its, partially offset by a $67 million reduction in public funds which had grown $118 million d uring the p rior quarter. We are making a concerted effort to manage overall deposit levels and related interest c osts . Ultimately, we will continue to build out our deposit-gathering capabilities as we s trive to g row c ore deposits and manage our cost of funds.

The stability of our deposit franchise and strong liquidity position can further be seen on Slide 5, whic h also highlights the competitive position that South Plains holds. At quarter end, 81% of our deposits were in our rural markets, with only 19% in our major metropolitan markets of Dallas, Houston, and El Paso. Additionally, our average deposit account balance is approximately $36,000, and only an estimated 16 % of our total deposits are uninsured or uncollateralized.

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South Plains Financial - Second Quarter 2023 Earnings Call, July 25, 2023

We believe we also ended the second quarter in a strong liquidity position with $1.82 billion of untapped borrowing capacity. We have $1.01 billion of availability from the Federal Home Loan Bank of Dallas, $612 million of availability from the Federal Reserve's Discount Window, and $200 million of c apac ity from the Federal Reserve's Bank Term Funding Program. We have ample capital to take advantage of growth opportunities both organic and otherwise as they present themselves.

Given our strong capital and liquidity position, our Board of Directors authorized a $15 million stock repurchase program in May, and we bought back approximately 113,000 shares during the second quarter for $2.6 million. We continue to believe that our shares are trading below intrinsic v alue and do not reflect our strong results and the opportunities that we see to further grow the bank. That said, we will be cautious with our capital given the uncertain economic environment combined with the dislocation in the banking sector. We will be patient and continue to review a broad range of options to d etermine the best uses for the capital generated from the Windmark sale.

As part of our capital allocation, returning a steady stream of income to our shareholders through o ur quarterly dividend has been a focus since going public over four years ago. Our Board of Directors ag ain authorized a $0.13 per share quarterly dividend, as announced last week . This will be our s eventeenth consecutive quarterly dividend to be paid on August 14, 2023, for shareholders of record on J uly 31, 2023.

To conclude, we are successfully navigating what is a challenging environment and remain cautious ly optimistic looking into the second half of the year. Economic growth is holding remarkably s teady in o ur markets, while unemployment remains low. We will maintain our capital as we look to take advantage of opportunities in the market and continue to conservatively grow the bank.

Now, let me turn the call over to Cory.

Cory T. Newsom

Thanks, Curtis, and good afternoon, everyone.

Starting on Slide 6, loans held for investment increased during the second quarter by $190. 4 million or 6.8% compared to the first quarter of 2023. Demand was broad-based acro ss both our mark ets and industry sectors, highlighted by organic loan growth in residential mortgage, commercial real estate, and energy. We were fortunate to end the second quarter with a strong loan pipeline, which contributed to this growth. Additionally, the competitive environment continued to ease as we benefited from the c ustomer dislocation created by competitor mergers, as well as from a reduction in credit availability from several competitors through the quarter. We believe this is an opportunity to bring high-quality,long-term customer relationships to South Plains. While the competitive environment has improved, we are maintaining our underwriting standards, as we will not sacrifice credit quality fo r growth. We remain focused on funding high-quality loans with good risk and return profiles.

Our loan yield was 5.94% in the second quarter, which compares to 5.78% in the first quarter of 2023. We continue to proactively price new loans to account for a higher market interest rate environment, whic h is contributing to rising funding costs. We continue to believe that loan yields are b eginning to p eak and remain focused on managing our deposit growth and funding costs to mitigate margin pres sure as we look to the second half of the year.

Skipping to Slide 8, we grew our loan portfolio by $65 million or 7.3% in our major metropolitan markets of Dallas, Houston, and El Paso as compared to the first quarter of 2023. The commercial lenders that we have added in these markets continue to grow their loan portfolios by bringing new customer relationships

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ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only.

1-888-562-02621-604-929-1352www.viavid.com