Good afternoon, ladies and gentlemen and welcome to the South Plains Financial, Inc. Second Quarter 2021 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..

Thank you, operator and good afternoon everyone. We appreciate your participation in our second quarter 2021 earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer; Cory Newsom, our President; and Brent Bates, Citibank’s Chief Credit Officer.

As a reminder, a replay of this call will be available within 2 hours of the conclusion of the call until August 10, 2021. Additionally, a slide deck presentation to complement today’s discussion is available on the News and Events section of our website..

Thank you, Steve and good afternoon. On today’s call, I will briefly review the highlights of our second quarter 2021 results and our strategy to grow the bank. Cory will discuss our initiatives designed to accelerate organic loan growth in more detail and Steve will conclude with a more granular review of our second quarter 2021 financial results.

We will then open the call for your questions. To start, there are five points that I would like you to take away from today’s call and our second quarter results. First, economic activity continues to accelerate across Texas as the environment has continued to normalize.

That said, we are closely monitoring the current environment given the rise in cases due to the Delta variant and are prepared to quickly make any necessary adjustments to protect our employees and customers.

Second, while we are benefiting from this improved economic activity, we are also focused on expanding our loan portfolio and are in the process of actively hiring bankers across all of our markets, but with a particular focus on our major metropolitan markets of Dallas and Houston.

Third, as we put our excess liquidity to work in organic loan growth, we expect to see margins expand, earnings growth accelerate and our returns improve. Fourth, as we increase our loans, we will maintain our conservative underwriting standards as we will never sacrifice credit quality for growth.

Lastly, we will continue to pursue a thoughtful capital allocation strategy focused on share buybacks, maintaining and growing our dividend over time and tactical M&A..

Thank you, Curtis and good afternoon everyone. Starting with our loan portfolio on Slide 5, loans held for investment at the end of the second quarter of 2021 were $2.3 billion, which is a $60.8 million or 2.7% increase from the first quarter of 2021.

The increase from the first quarter of 2021 was largely driven by organic net loan growth of $120.1 million partially offset by a net decrease of $59.3 million in PPP loans, primarily as a result of SBA repayments on PPP loans received during the second quarter.

Our loan growth in the second quarter was primarily driven by residential construction, multifamily properties and agricultural production loans. While CAP rates on new projects that we are currently reviewing are often very low, we are requiring more equity in new loans as we maintain our strict underwriting discipline.

Despite our more conservative origination practices, we are seeing solid opportunities as we work with builders with whom we have longstanding relationships. We are a relationship bank and do not seek participations or shared credits. We have a strong team of bankers in place that we have developed longstanding relationships with our customers.

Looking forward, we see an opportunity to build on this foundation by adding scale across our markets. As Curtis touched on, our strategy is to grow our presence in our metropolitan markets of Dallas and Houston, where we can take share by continuing to redeploy our low-cost funds into attractive loans.

To accomplish this, we have a goal of adding 20 lenders to our 60 lender team over the next 2 years. We are actively hiring in all of our markets with a focus on Dallas and Houston, where we have commercial loan offices. It’s important to stress that we are not pursuing a branch strategy in those MSAs.

We are expanding the amount of lease space we currently have in our metropolitan branches as opposed to opening additional locations. This is an effective way to grow within our metropolitan markets. In addition, we are being careful and prudent in who we hire.

We are focused on veteran bankers who have strong relationships, a history of success and most importantly, who fit our culture. Our expectation is that our new hires will ramp quickly and breakeven within the first 6 months at the bank..

Thank you, Cory. Starting on Slide 10, net interest income was $29.6 million for the second quarter of 2021 as compared to $29.5 million for the first quarter of 2021 and $30.4 million for the second quarter of 2020.

The decrease since the second quarter of 2020 was due to a decline of 9 basis points in loan rates, partially offset by a decrease of 16 basis points in the cost of interest-bearing deposits.

During the second quarter of 2021, we recognized $1.9 million in PPP related SBA fee income as an adjustment to interest income, which included accelerated income on PPP loans forgiven by the SBA during the quarter.

At the end of the second quarter, there was $4.6 million in unrecognized deferred PPP related SBA fees, the majority of which are expected to be recognized as PPP loans continue to be forgiven by the SBA over the next several quarters.

Our net interest margin decreased to 3.42% in the second quarter of 2021 as compared to 3.52% in the first quarter of 2021. Our non-PPP loan rates declined two basis points as rate pressure on our loan portfolio moderated.

Additionally, our margin declined approximately 12 basis points from the continued growth in average deposits that is added to our excess liquidity.

Our average cost of deposits declined 2 basis points to 27 basis points in the second quarter of 2021 as compared to 29 basis points in the first quarter of 2021 and declined from 39 basis points in the second quarter of 2020.

Continuing on Slide 11, deposits held steady in the second quarter of 2021 at $3.16 billion and increase of $2.9 million as compared to the first quarter of 2021. Deposit balances grew through mid-June, but then declined as many of our customers made tax payments, some of which have been extended from April 15.

We ended the second quarter of 2021 with total non-interest-bearing deposits of approximately $1 billion or 31.6% of total deposits. Turning to Slide 12, our non-performing assets to total assets ratio declined 5 basis points to 37 basis points in the second quarter of 2021 as compared to 42 basis points in the first quarter of 2021.

As Curtis touched on, the robust Texas economy is providing a tailwind to our customers and is leading to positive credit migrations in several areas of our loan portfolio.

At quarter end, total active loan modifications attributed to the COVID-19 pandemic were $36.6 million or 1.6% of our loan portfolio, which is down from $46.9 million or 2.1% of our loan portfolio at the end of the first quarter of 2021.

Approximately 96% of our active modified loans at quarter end are in our hotel portfolio, where we continue to experience improving fundamentals. Overall, we continue to believe that our loan portfolio remains well reserved as our ALLL to total loans was 1.87% at June 30, 2021, which is a decline of 14 basis points from the first quarter of 2021.

Looking forward, we continue to believe that the reserves that we have built to help guardians in an uncertain outlook are appropriate, and we will continue to evaluate our reserve in the coming quarters.

Skipping ahead to Slide 15, our non-interest expense was $36.8 million in the second quarter of 2021 as compared to $37.1 million in the first quarter of 2021.

This decrease was primarily due to a decline in personnel, salary and commissioned expense following our lower mortgage production, partially offset by increases in marketing and business development expenses, bank card expenses and other non-interest expenses.

As Curtis touched on, we are investing to optimize our marketing as well as move our IT infrastructure to the Cloud, which will modestly add to our quarterly expense run rate starting in the second half of 2021. We are also experiencing an increase in personnel expenses as we add bankers across our markets.

That said, we expect to deliver a strong return on the marketing spend and our investments to grow our loan portfolio. Our efficiency ratio was 70.5% in the second quarter of 2021 as compared to 65.8% in the first quarter of 2021 and 63.3% in the year ago second quarter.

This increase in the efficiency ratio is a direct result of decreased volume and tighter gain on sale margins in our mortgage origination business.

Skipping ahead to Slide 17, we remain well capitalized with tangible common equity to tangible assets of 9.98% at the end of the second quarter of 2021 compared to 9.39% at the end of the first quarter of 2021 and 8.66% in the second quarter of 2020. I would now like to turn the call back to Curtis for concluding remarks..

Thank you, Steve. While I am very proud of our accomplishments, I’m even more excited about the future for South Plains. We are attracting experienced bankers who fit our culture and are poised to drive results as they excel in their new positions.

Over the next 2 years, we will dramatically expand our lending team, which we believe will lead to improved loan growth, margins and earnings as our excess liquidity is repositioned into attractive loans. The plans that we have put in place have firmly set us on a path for growth, which will ultimately benefit all of our stakeholders.

I would like to conclude by thanking all of our employees for their hard work. And for those on the call, thank you for your time today. Operator, please open the line for any questions..

Our first question is from Brad Milsaps with Piper Sandler. Please proceed with your question..

Hi, good afternoon, guys..

Hi, Brad. Good afternoon..

It looks like you guys had a nice quarter. Just maybe want to start on the loan yields. Obviously, they stayed relatively flat linked quarter. I think last time that we spoke, you were talking about new loans coming on, maybe in the low-4s.

Just sort of, can you guys talk about anything that might not be recurring in the quarter to kind of help prop those up or are you seeing loans come on at higher rates to where you think those can maybe hang in there as you continue to grow the loan portfolio?.

Yes. Brad, this is Steve. There really wasn’t anything significant extra in the quarter. We are seeing, as we talked about last quarter, some of these newer loans that are coming on at a little bit lower yield, and we probably saw that maybe in June with some of the numbers that are being put on.

So yes, I would look for there to be a little bit more compression there on the loan side. And as some of the older existing loans that are at the higher rates as those continue to pay down..

This is the Cory. I think we are still getting some pretty good yields on a lot of the loans in the portfolio. I mean, we are not – I mean, there is some that we are having to kind of get down there on price, but we are not making that as a whole that we are having to do that..

Got it. And then just on loan growth in general, Curtis, I think you said that you hope to kind of hit mid-single digit growth this year. Are you talking about on the entire portfolio or I mean, because you are essentially already passed that point on the HFI book.

Just kind of curious to make sure kind of what you are referring to there in terms of kind of your loan growth guidance, you said you wanted to replace at least all of the PPP loans that you have remaining, is that correct?.

Yes, sir. That’s really what we are doing because, as you know, we are continuing to see the drop in the balances on the PPP side. And our goal out there, and it’s – we are feeling better about it that we may be able to hit mid-single digit looking across the entire portfolio, even taking into account those PPP loan runoffs.

We are getting some opportunities at some slightly larger credits. Some of the folks we brought on board as lenders have good relationships that are bringing in some $20 million to $25 million, even $30 million loan possibilities out there, and we are getting where we can execute on some of those.

So, I do think that we are going to see some very reasonable loan growth from now and through the balance of the year..

And as you think out maybe into 2022, I mean, with the folks that you have hired thus far, I mean, do you think you are in a position to sort of accelerate above kind of what’s been historically this kind of mid-single digit rate that you have guided to?.

We think so. It’s still a little early to tell. But when we bring some of these folks on, and we have got literally some hiring taking place as we speak today, that it will take a few months for them to get some of their relationships and to get loan opportunities to get them to the table, get them underwritten and get them funded.

So, 2022, is looking pretty good. Internally, we are talking about getting better than mid-single digit loan growth in 2022. Obviously, that’s not a guarantee. But given the folks we are bringing on board and the relationships they have, we think that’s doable..

So, this is Cory. One of the things we have talked about is we had our goals from the hiring process. And I mean we are extremely involved in that hiring process, making sure that we bring the right one to come on from a culture perspective. But we are by no means just starting this process. We are very well mature into it.

And that’s how we think we will be able to see some of the results that Curtis is talking about..

Okay, great. I will hop back in queue. Thank you..

And our next question is from Brady Gailey with KBW. Please proceed with your question..

Hi. Thank you. Good afternoon guys..

Hi Brady..

When adding – taking the lender base from 60 to 80, that’s a big move.

Maybe just talk about have you hired any of those new incremental 20 lenders yet? And then just talk about – are these all coming from geographies that you are already in or are they new geographies? And what lender type are you looking for, C&I, CRE? Just any additional color on the plan there..

So Brady, this is Cory. So, I mean – but when you look at it from the discussion from going from 60 to 80, well, we are well into that. So, I mean, I would say, of the increase hires that we are looking at doing. We are 40%, nearly 50% into that process. So, I mean – if we are hiring in markets that we are already in.

We are by no means going into a new geography that we know nothing about. We are looking for relationship lenders. I don’t know at what point you fell out of the queue a while ago when we were – when Brad had his question. But I don’t know if you were able to hear.

But one of the things that, I mean – for us to hire, it’s a big process and not that we make it cumbersome, but we make it thorough. And we have got to make sure these are cultural fits for people that are bringing relationships that are the type of customers that we want to do. I mean, CRE, we have no problem with it. C&I is good.

I mean we are kind of balanced on construction. But I mean we are definitely looking at a lot of real estate, and we like that. We – as Curtis mentioned, there are some opportunities out there on the energy side, but it’s very measured. As we go through that, we are not – I mean, we are not trying to become an energy bank.

But we think that we have the talent to do some energy loans that make sense. But this is – we are definitely not just trying to start out and decide we are going to go hire some lenders.

This is something that we put a lot of thought into and make sure that the growth that we can do from this point, we know we are going to spend money, but we think the returns that are going to come with it will far outweigh what we are trying to do right now. We are already seeing the results.

I mean, that’s why – I mean, that’s what we are meeting and exceeding some of the projections that we had..

Kind of like we are seeing all across the country, a lot of people are just changing jobs. I don’t know blame it on COVID or whatever. But of course, we have also seen, as you guys know, some change upheaval and just M&A activity happening in our Texas markets.

And we are seeing some opportunities for some of those lenders who were pretty happy with the bank they were with, but now it’s not the same bank anymore. And so we are seeing opportunities to work with those people. And again, like Cory has been saying, we didn’t just start this yesterday.

We have – we are just now really talking about it because we are seeing some of the results. We are getting those hires in place, and that’s what we really feel good about. And we do vet them very carefully. Senior management is always involved in every one of the hires.

And it’s just – it’s growing the team the way we think we can to have some good sustainability and maintain our conservative culture..

Alright. That’s good color. And then I know revenue will outpace it over time. So, when you look at the expense impacts, you are bringing on some new lenders. You also talked about the – a couple of technology things that should put a little upward pressure on expenses.

How do you think about what level of expense creep will be had from next year or so?.

Yes, Brady, this is Steve. We kind of look at it that it could add up to 2% to 3% to the annual non-interest expense number to that run rate starting in Q3. Now that won’t hit immediately in Q3, but that will be over the next several quarters into next year.

And obviously, that’s going to exclude kind of some of the fluctuations we have got on the mortgage side as their operations, whenever they slow or ramp back up or whatever happens, as that number changes a little bit. But that’s kind of how we are looking at it right now..

This is Cory. But at the same time, we are spending some money to go out there and help us grow the bank in a good, safe fashion. We are also very conscientious of the expense side of it and other areas and trying to cut back everywhere possible to try to offset this as much as we can..

Specifically on the marketing area, of course, we are going to be front-loaded with some of the development costs and other things on moving to digital marketing or much heavier digital marketing. But over time, realistically, we should spend fewer marketing dollars as we try to spend less in mass media areas.

We just think that’s the trend to follow because we definitely can see the effectiveness of it when we can target our customers and prospective customers out there and make a great presentation to them for products they are actually interested in as opposed to just spending money buying space in newspapers and time on TV stations..

And keep in mind, we have talked about this on every call we have had. We have talked about our infrastructure that we have built. This is where we get to actually go out there. And I mean, we have always said, we know we have to add production, but back office is intact.

I mean we are able to handle the growth without incrementally having to add additional expense to come on with it..

Got it. That’s great to hear. Thanks guys..

Thank you..

And we have reached the end of the question-and-answer session. I will now turn the call over to management for closing remarks..

This is Curtis Griffith. Again, we thank everybody for participating in the call today and for your involvement with South Plains Financial. We feel very good about our direction for the company for the way that we have survived through the pandemic months and the prospects ahead of us as the economy rebounds out there.

As we have been talking about, we are doing some investment in lending talent and technology. We think both of those are going to have really great rates of return for us as we move into the future.

We are always open to great M&A opportunities, and we do believe that’s going to be a continuing thing here in the State of Texas, especially over the next several months. But we also know that the quickest insurers return on the investment is through some conservative organic growth.

And that’s what we are setting out to do with the team that we are putting in place, and I think you are going to see some great results over the next several months. So thanks, everybody, for being with us today, and look forward to talking to you next quarter..

And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation..