SPFI - NASDAQ

Good afternoon, ladies and gentlemen, and welcome to South Plains Financial, Inc. First Quarter 2024 Earnings Conference Call. During today's presentation. [Operator Instructions]. 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.

Thank you, operator, and good afternoon, everyone. We appreciate you joining our earnings conference call. With me here today are Curtis Griffin, our Chairman and Chief Executive Officer; Cory Newsom, our President; and Brent Bates, our Chief Credit Officer. The related earnings press release and earnings presentation are available on the News and Events section of our website, spfi.bank. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements and are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated future results. Please see our safe harbor statements in our earnings press release and in our earnings presentation. All comments made during today's call are subject to those safe harbor statements. Any forward-looking statements presented herein are made only as of today's date, and we do not undertake any duty to update such 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 comparable GAAP measures can also be found in our earnings release and in the earnings presentation. Curtis, let me hand it over to you.

Thank you, Steve, and good afternoon. On today's call, I will briefly review the highlights of our first quarter 2021 results as well as spend some time on our business philosophy and initiatives to become our customers' primary banking relationship. Cory will discuss our loan portfolio as well as our initiatives to drive growth across the bank. Steve will then conclude with a more detailed review of our first quarter financial results. Starting on Slide 4 of our earnings presentation, I'm pleased with our first quarter results as we've started to see our net interest margin stabilize driven by improved loan yields, including interest recoveries combined with a slowing of the rate of deposit cost increases. Our loan production was strong through the first quarter, though it was largely offset by our typical seasonal agricultural paydowns as well as the early payoffs of several loans that we've been working to move out of the bank. We continue to aggressively manage the credit quality of our loan portfolio as evidenced by our ratio of nonperforming assets to total assets, which was only 10 basis points at the end of the first quarter. Additionally, our classified loans remained near the lowest level since the start of the pandemic. Lastly, while competition for deposits remains a challenge in the current banking environment, we delivered modest deposit growth as our community-based deposit franchise remains a competitive advantage, and we believe provides adequate liquidity to fund loan growth as we move through the year. I am proud of our results, which are a testament to our employees, our culture and how we do business. On these calls, we often discuss our focus on relationships that we're looking for long-term customer relationships and not transactions. What we've not spent time talking about on our calls is the compass behind that as well as our mission statement and values. At South Plains, our core purpose is to use the power of relationships to help people succeed and live better. For our customers, that means providing personalized advice and solutions to help them achieve their goals. Over the years, we've invested in our product and people to ensure that we can do this better than our peers. As a result, I believe that we can achieve significant organic growth over time by leveraging what we have in place today, while also taking advantage of the dislocation that is occurring across our markets. This dislocation is creating customer dissatisfaction, which is providing our bankers with the opportunity to move relationships to South Plains. To further take advantage of this dislocation, we've been recruiting experienced treasury management executives to meet the customer demand that we see across our markets. We have also been refining our go-to-market strategy by focusing more on our customers' needs and challenges. By taking a solutions-based sales approach, we are first identifying our customers' needs and then providing the right product to meet those needs. That positions us to win their business and become their primary bank. We've already started to see the early signs of success as this approach is resonating with our customers. Additionally, we significantly exceed the minimum regulatory levels necessary for the company to be deemed well capitalized. And we are focused on both growing the bank while also returning a steady stream of income to our shareholders through our quarterly dividend. This past week, our Board of Directors authorized a $0.14 per share quarterly dividend, which is an 8% increase over our prior dividend levels. This will be our 20th consecutive quarterly dividend to be paid on May 13, 2024, for shareholders of record on April 29, 2024. Our Board of Directors also authorized a $10 million stock repurchase program in February given our belief that our shares continue to trade at a discount to intrinsic value. Now let me turn the call over to Cory.

Thank you, Curtis, and good afternoon, everyone. Starting on Slide 6, our loan portfolio held steady through the first quarter as compared to the linked quarter. Importantly, our production in multifamily and single-family property loans in general commercial loans largely offset $28 million of seasonal agricultural paydowns, a $16 million reduction in residential construction loans and a $13 million decline in our indirect auto portfolio. Further, we had $26 million of principal reduction in watch list loans. As Curtis touched on, we continue to aggressively manage the credit quality of our loan portfolio, having moved several loans that are on our watch list out of the bank. We will continue to take a proactive approach to credit and are very pleased with the credit quality of our loan portfolio. So, this is a headwind to the loan growth in the first quarter. We remain confident in our full year guidance of low single-digit loan growth. The yield on our loan portfolio was 6.53% in the first quarter, up 24 basis points as compared to 6.29% in the linked quarter. Steve will give a little bit more color on the increase in a moment. Stepping to Slide 8, we grew loans by $22 million or 8.5% annualized to $1.06 billion in our major metropolitan markets of Dallas, Houston and El Paso as compared to the linked quarter. Looking forward, we will continue to seek to selectively add lenders across all of our markets, both metro and rural who fit our culture and can bring business to the bank given the continued organic growth opportunities that we see. The Permian Basin is a region that is experiencing dislocation as competitors go through both ownership and leadership changes, which is creating an opportunity to attract high-quality loan and deposit relationships to South Plains. These are relationships that we've been after for several years and in some cases, are changing banks for the first time in their careers. To bring these relationships to the bank, we've invested in our people, branches and infrastructure. It takes time to build your brand in a new market, and we are just beginning to hit our stride as our Citibank brand is starting to gain acceptance in Midland and Odessa. Additionally, the investments that we have made across the Permian demonstrate our long-term commitment to the market. We remain optimistic with organic growth opportunities that we have across our markets and believe we have a long runway ahead of us. So, we've experienced recent headwinds which have slowed loan growth, we do have near-term opportunities to drive interest income for growth with loan repricing as on Slide 9. As we have been discussing on prior earnings calls, we expect to continue to deliver interest income growth as many lower rate loans continue to experience principal repayments and/or rate resets. While we expect the majority of this repricing to begin accelerating in the second half of 2024 -- and into 2025, we believe loan yields may remain elevated evidenced begins to cut interest rates at some point in the second half of this year given lower liquidity in the market. This should benefit our net interest income and net interest margin in the third and fourth quarters of this year. Turning to Slide 10. Our indirect auto loan portfolio decreased by approximately $13 million to $273.4 million in the first quarter as compared to the end of the fourth quarter of 2023. We remain cautious with a focus on maintaining the credit quality of this portfolio. Through the quarter, we've also seen volumes moderate while competitors are becoming more aggressive at the higher end of the credit spectrum. We're not changing how we price risk and our clinical seeing our portfolio gradually shrink. We will never sacrifice credit quality for the sake of growth. The strong credit quality of our indirect portfolio can be seen in 30-plus days past due, which were 22 basis points in the first quarter, down from 40 basis points in the fourth quarter. Additionally, we monitor our 10- to 29-day past dues closely as this is where you typically begin to see signs of trouble with the consumer. Importantly, we did not see an increase in the level of these past due loans during the first quarter. Turning to Slide 11. We generated $11.4 million of noninterest income in the first quarter as compared to $9.1 million in the linked quarter. This was primarily due to an increase of $2.3 million in mortgage banking revenues. We recorded a $55,000 increase to the fair value of our mortgage servicing rights asset during the quarter, which compares to a $1.5 million write-down in the linked quarter as interest rates that affect the value rose modestly in the first quarter after falling late in the fourth quarter of 2023. As we have discussed on prior calls, we have aggressively managed our mortgage business to ensure it would run at or near a breakeven pace at the bottom of the cycle while having the nuclei in place for the eventual upturn in the residential housing market. We believe our team has managed the cycle well and we are starting to see the benefits as purchase volumes modestly rose in the first quarter. We are also beginning to see successes in our treasury management business as our team has seen customer wins, as Curtis touched on earlier. We expect to see a moderate increase in fee income for treasury management starting in the second quarter as momentum visibility. For the first quarter, noninterest income was 24% of bank revenues as compared to 21% in the fourth quarter of 2023. We continue to grow our noninterest income remains a focus of our team. I would now like to turn the call over to Steve.

Thanks, Cory. For the first quarter, diluted earnings per share was $0.64, which compares to $0.61 per share in the linked quarter and $0.53 in the year ago quarter. Turning to Slide 13. Net interest income was $35.4 million for the first quarter as compared to $35.2 million for the linked quarter. Interest income increased $1.5 million in the first quarter, primarily due to a $1 million expansion in loan interest income. The growth in loan interest income was mainly due to a 24 basis points rise in loan yields, which includes approximately $667,000 in recoveries of interest on loans that had previously been maintained on nonaccrual. The overall increase in interest income was largely offset by a $1.3 million growth in interest expense in the first quarter, given the continued rise in deposit costs. Our net interest margin calculated on a tax equivalent basis was 3.56% in the first quarter as compared to 3.52% in the linked quarter. The 4 basis point increase to our NIM was due primarily to higher loan yields, including approximately 7 basis points from interest recoveries, partially offset by the rise in our cost of deposits. Importantly, our noninterest-bearing deposits held steady through the first quarter at 26.8% of total deposits and helped to mitigate the rise in our funding cost as compared to the linked quarter. As outlined on Slide 14, our average cost of deposits was 241 basis points in the first quarter, an increase of 17 basis points from the linked quarter. Given the rising interest rate environment over the past year and the resulting increase in competition for deposits, we've had to be proactive in maintaining deposit relationships, which has led to the rise in our funding costs. Overall, our core deposit franchise continues to remain steady. Looking ahead to the second quarter, we expect modest upward pressure on deposit costs, which could slightly pressure our NIM if loan growth remains subdued. However, we continue to expect our NIM to trough through the second quarter of 2024. Turning to Slide 15. Our ratio of allowance for credit losses to total loans held for investment was 1.4% at the end of the first quarter, largely unchanged from the end of the prior quarter. We recorded an $830,000 provision for credit losses in the first quarter, which was largely attributable to net charge-off activity in the quarter. Our nonperforming loans totaled $3.4 million at the end of the first quarter, which was a decrease from $5.2 million at the end of 2023. Our allowance for credit losses to nonperforming loans was 1,248% at March 31, 2024. Skipping ahead to Slide 19. Our noninterest expense was $31.9 million in the first quarter as compared to $30.6 million in the linked quarter. The $1.3 million increase was largely the result of a rise of $1 million in personnel costs, which predominantly came from higher health care insurance costs and an increase in incentive-based compensation. Looking ahead to the second quarter, we expect noninterest expense to modestly rise from the first quarter's level as mortgage volumes improved through the spring selling season. Moving to Slide 21. We will remain well capitalized with tangible common equity to tangible assets of 9.22% at the end of the first quarter, largely unchanged from the end of the fourth quarter of 2023. Tangible book value per share increased to $23.56 as of the end of the first quarter compared to $23.47 as of the end of 2023. We -- the $8.7 million of net income after dividends paid was mainly offset by the after-tax decrease in fair value of our available-for-sale securities, net of fair value hedges as a result of increases in long-term market interest rates during the period. I'll turn the call back to Curtis for concluding remarks.

Thank you, Steve. I am proud of our results, which clearly demonstrate that the bank is operating at a high level as our margin is beginning to stabilize. The credit quality of our loan portfolio is very strong, and we have many organic growth initiatives underway that we believe will deliver value to our shareholders. To conclude, I'd like to thank our employees for their efforts and commitment to both the bank and to our customers. Our continued success would not be possible without their dedication and hard work. Thank you again for your time today. Operator, please open the line for any questions.

[Operator Instructions]. Our first question is from Brett Rabatin with Hub Group.

I wanted to start with the treasury platform, and you guys talked about some wins and expecting fee income to be stronger from here, partially as a result of that. Can you maybe talk a little bit about the magnitude of fees we might see from treasury? And then if any of that showed up in DDA this quarter?

This is Corey, Brett. I don't think a lot of that showed up yet because we've gone through a lot of -- we started out by resetting some of our pricing. And we've gone back, we spent a lot of time trying to make sure that we didn't price ourselves out of the market to make sure that we weren't necessarily underpriced in any area. Through that, we figured out the teras a relatively decent lift, probably, I would guess, under 10%, 15% range of increase in fees that we'll start seeing coming our way. So, I think that's one of the -- when we talked to the fact that we think we'll see it, we were simply looking at that. We weren't even taking into consideration the new business that we're just continuing to add on and bring in there. So, I think we're definitely going to see a lift.

Okay.

This is Curtis. I can really give you a hard number on what the total volume will be. But from a personal perspective, our treasury informed me just a couple of days ago that one of our other outside company accounts is one of the ones that's going to see a pretty significant increase in there. So, it's going to be significantly more than what we've been having in fees under the new structure. So again, we'll have to work closely with customers and make sure they understand what's going on, but we think we're staying within market. But I do look for a fairly substantial bump in the charges that we laid back primarily customer accounts. And of course, you've got earnings credit numbers against those 2. So, it just depends on the account balances and all of that. But I'm really pleased with the direction we're going. I think it's going to be something you will see a meaningful number show up on the noninterest income part back the...

I do want to clarify that we've spent a lot of time running impact reports. We know how this is going to impact our customers. We don't think it's going to be a massive impact on any 1 customer to where it becomes an issue. But we think as an overall inclusive level, it's going to be meaningful. So, we've tried to look at it from every direction and feel good about it. But I don't think we stand in a position to feel like that we're going to jeopardize ourselves with business because it's so significant.

Okay. That's helpful, guys. And then I wanted to talk about capital. It seems like your ratios are really healthy. And I just wanted to get your sense of appetite for the buyback near term versus maybe keeping some powder dry for M&A and maybe what you see as the right capital levels for the environment we're in.

Let me take a crack at that one. Really, we look at capital as having 4 components on how we might use things. First and foremost, be sure we have plenty for organic growth. I think we will see some good growth as we keep emphasizing in the presentations we're giving. Texas is doing well. There is -- even with the current rate environment, there's a lot of opportunities there. Our pipelines are picking up. And we do need to have, first and foremost, plenty of capital to back that up. We will use some for a buyback. We're probably not going to be as aggressive maybe as we were last year with it, but we're going to keep a buyback in place for now, it's what the board authorized. So, we'll see how that works at the levels that we feel comfortable acquiring some stock. I do think that given the current environment, buying our own stock is provides a better and more media benefit to our shareholders than buying anybody else in terms of an acquisition. So right now, we're looking at pursuing that. And third on the list, we'll keep paying dividends because we do believe we need to have a good cash return back to shareholders. But then it came down in fourth place, we will have some drive powder available for an acquisition if the right deal happened to come along. I just don't know that we're going to see that until we get some normalization reduction or whatever we want to call it, in overall rates because nearly anybody that we'd be looking at out there, if you try to look at a multiple over tangible, it would be one that today, I don't think you're going to find any good seller that would be willing to take it, just my opinion.

Okay. That's really helpful. If I could sneak in one last one. Maybe talk about some of the credits moving out. You guys think with the pipeline that kind of that mid-single-digit growth number is still reasonable? And does that kind of build from here in the back half? Or do you see some of that more in 2Q?

This is Brent. I feel very confident about our single-digit growth. I mean, when you think about the ag portfolio seasonal decline that we had in the first quarter. And then on top of that, we exited some credits substantially and still remain flat. That's an indication of really the production that we have going, and we're seeing that pipeline come up toward the end of the first quarter. So I think I can see that even as a start to make put as early as the second quarter, see some good growth in the second quarter.

Brett, I mean, I'll be talking about exiting a few credits, but I mean we'll exit some more. I mean, we're -- we very much work our portfolio at all times. And I mean we've got -- the majority of our portfolio we're extremely proud of. We'll do everything we can to retain it. But when we start seeing some weak points that we don't think we want to be with in a little bit more distill environment. -- we're going to start working our way out of them. And I'm kind of proud of that.

Appreciate all the color, guys.

Our next question is from Woody Lay with KBW.

Maybe just a follow-up on the watchlist credits that you did exit. Were they concentrated in any segments? Or were they truly just a couple of one-offs?

Well, this is Brent again. It was a mix of credits from small to kind of medium size, the largest being a multifamily credit.

Okay. Got it. Maybe shifting over to the net interest margin. I believe in your opening remarks, you said it could be down modestly in the second quarter. I'm assuming that's excluding the impact of the interest recovery, so if you strip that out, then on an apples-to-apples basis, it will be down a couple of basis points from there?

Yes. So, this is Steve. I mean, yes, we have 7 basis points in that number. So, we would have been at 349. We're going to start from that number and say it could decline slightly from there. But again, there's just a lot of movements in rates and deposit costs really even every single day as we've seen what's been going on in the market, our stance changes a little bit. And so, we've been hoping that, that was we'd be on the upward trend, but with moving some of those credits out that had some of that nonaccrual interest, that allowed us to bump that up a little bit during the quarter.

Yes. And then based on the loan repricing, I mean, do you think it's realistic the margin starts to expand in the back half of the year?

Again, given what we know today, which can change given the markets, I would say we should be able to see that. I mean, even if you exclude out that those interest recoveries, you can see the loan yield is increasing. And as we fund new loans, they are at generally at higher rates, we're getting some of the lower stuff off the book. So, I think we feel good given having loan growth. If loans, I think we said earlier, if loans somehow change is we have had additional payoffs maybe that are not forecasted you could have a little bit more headwind to that. But I think given what we see right now, that's reasonable.

Our next question is from Stephen Scouten with Piper Sandler.

I appreciate all the color so far here. Just kind of curious on -- Brent, you're talking about the new loan yields coming on a bit higher than the average, and we're seeing some of that momentum already. But I wonder if you could give me a feel for where those new loan yields are coming on in the quarter and kind of what the incremental cost of new deposits has been?

This is Brent. As far as the growth, I mean, first quarter growth, we saw growth in both multifamily, most of which was completed construction projects. C&I business and some and residential rental properties. And then again, we talked about a seasonal paydowns. But if I look at our pipeline, I was talking about earlier, haven't grown in the first quarter. It's a pretty good nexus CNI business and real estate. And so, I mean, that's really where the growth is coming from. And then as far as the cost of deposits on the.

From a pricing standpoint, though, I mean, we're putting stuff on Primes. We're trying to be very careful about how we do that and making sure that we're doing a good job with floors in much of the -- we're not having trouble yet.

Yes. On the deposit side, I mean you do see a mix. I mean, it's -- obviously, we're able to get some lower cost deposits we're putting -- I mean putting on some new noninterest-bearing, although the overall balances were fairly flat. But I mean, we do still see new business coming in with some of the new lending relationships at that level. On the high end, I mean there's definitely stuff that pushes up to 5%. I mean there's still a lot of competition here on the deposits. Fortunately, our liquidity position at the end of the quarter allows for a little bit more room that will be accretive to us in the shorter term of getting some of that deployed into loans.

I think one thing that we have been able to do though is to strategically move away some higher cost deposits when it works. And then a lot of those are with relationships if we need to bring them back. We can bring it back. But we're very much watching that to exit those when we can.

Yes. No, that's very helpful. And Cory, do you happen to know -- you may not have this off hand, but in terms of how much of your book you might have with floors on the loans at this point in time?

You got a company put it on that one. Steve?

I do not have that here in front. I don't have that handy either. I was just like.

Yes, no problem. And then maybe just kind of the last thing. I know you said some kind of very early signs of deposit cost pressure starting to mean I guess, kind of digging into that a little bit further. What exactly are you seeing that give you some encouragement and you just referenced kind of noninterest-bearing to at least stabilizing this quarter. Do you think those noninterest-bearing deposits can stay kind this it 20 to 26.5% average deposits in that range?

I mean, we've had good luck in the last quarter. We're seeing some good things. However, this quarter, you've got -- you do have tax payments going out, a lot of tax payments. And so those -- that can be from a broad base of account types. But just I think with the different initiatives that we got, which we talked a little bit about on treasury management and a few other things that are just trying to grow deposits at a reasonable cost to them. I think the increased focus will help the success there. But there -- I mean, there's still going to be -- there's a lot of competition and we see it every single day of somebody who's shown us what they can get at another institution.

There is no question that we were facing pressure. I don't even in the slightest way want away from that. But I will tell you that I think consistently, we find ourselves on larger deposits, pricing them anywhere from 15 to 20 basis points cheaper today than we were doing that 3 months ago. And we're very carefully doing that.

I'm just looking at what we see in the advertising media, we are not seeing as many of the really high rate CD thresholds in our -- certainly in our Lubbock market, as we were seeing just a few months ago. So, I think perhaps some of our competitors out there have got enough of those, they think, on the books and address immediate liquidity needs perhaps. And it has reduced a little pressure on that.

Yes. That's great color. Glad to hear some people are being a little bit more rational. So, I appreciate all the color and congrats on a great quarter here.

[Operator Instructions]. Our next question is from Joe Yanchunis with Raymond James.

Good afternoon. So, I was hoping to circle back on loan growth here. And do you have that handy, how much kind of gross production you had in the quarter and then kind of maybe how that's trended versus prior quarters?

Gosh, I don't -- I do not have that handy, Joe. But I can tell you, I mean, it's -- from the back half of last year to the first quarter, it feels -- the production is a little better. I mean when you factor in some of the areas -- I mean, different segments are different. So, in auto, we contracted. And that's all per well, kind of a little bit industry driven. -- we're not chasing growth in that area by pricing too cheap. And in other areas, as we mentioned earlier, with ag being down. So no, I feel like it was comparable to the back half of last year, but I do think our pipeline is a little bit better than it was at the beginning of the first quarter right now.

Joe, this is Curtis. I think one thing that you can look at, I'm looking at Slide 8, if you look at what we did in the metropolitan markets, -- that was about an 8.5% annualized growth rate in those markets in that first quarter, even though we were flat overall. We -- even in those markets, we did have a couple of credits that we wanted to exit, and I got out there. That's obviously not a place we have farm loans. But even with those couple of reductions that we had, that's still 8.5% growth rate. And while we expect we'll get some growth here in Lubbock and some of our other rural markets, and we will start funding up on some ag loans as well as seasonally as that starts to happen. So, I think I still feel pretty good about us hitting at least low single-digit growth for the year, and it could be better than that. It's just like they kind of dependent on the economy and our borrowers gauge out there on what they can make more interstate right now.

I don't think we've had any disappointment in the sites way of how we --the first part of the second quarter has kicked off.

Okay. I appreciate that. And kind of moving over to treasury management, I just kind of want to take a step back and think big picture here. So, if we look at your refreshed approach, can you quantify what success would look like from this new initiative, whether that's increased fee income or noninterest-bearing deposits over, say, the next 2, 3 years?

Is it -- so have you been listening into our meetings. I think it takes both. And I think the increased fee income is very much a piece of that. But the noninterest-bearing deposits are bigger. I mean, from my perspective it drives an overall NIM up with what we're trying to do. That's what we are so focused on. But from a treasury side of the thing that I look at, we continue to mature in that area in such a good way. And the success that we're having, and it gets on to the quality, it gets them to the level of education. They're willing to put the effort in front of our teams to understand what we can do, how we do it and then basically get it down to a lot of service to take care of clients. And I think we're doing that on a daily basis and we get better and better at it. The thing is, we can talk about treasury. And treasury isn't -- I mean we don't have a new approach every time we turn around. We just continue to mature what we've had. We have good products. We have good teams, but our treasury is at the table at the beginning, not at the end, when we're sitting here having these discussions. And I think that's where it's coming from. We think it's going to be very easy to deliver pretty quickly, increase the income other than worrying in the slide as way. But we're focused on the deposits. And at the end of the day, as we look at pricing on loans or anything else, it all gets down to how we bring operating accounts and everything into play with all of this stuff, and those are the wins we're having.

Understood. I appreciate the color on that.

We have reached the end of our question-and-answer session. I will now turn the call back over to Curtis Griffith for closing remarks.

Thank you, operator. Thank you to everyone for participating in our call today. We've had a very solid quarter to begin 2024. I'm pleased with how we're pursuing the many opportunities that we have in front of us. The disruptions in several of our markets from changes in other banks' ownership and leadership continue to open doors for our team to bring high-quality customer relationships to South Plains. We continue to recruit talented and experienced bankers in all of our markets because we believe that building strong personal relationships with our customers is the key to our growth and profitability. I'm very blessed to be a part of our family of employees, customers and shareholders, and I remain very optimistic about our future. Thank you again for your time today.