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00:07 Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial Incorporated Third Quarter twenty twenty one Earnings Conference Call. During today's presentation, all parties will be in a only mode. Following the presentation, the conference will be opened for questions with instructions to follow at that time.
As a reminder, this conference call is being recorded. 00:28 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..
00:37 Thank you, operator, and good afternoon, everyone. We appreciate your participation in our third quarter twenty twenty one earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer; and Cory Newsom, our President.
As a reminder, a replay of this call will be available on our website within two hours of the conclusion of the call until November nine twenty twenty one. Additionally, a slide deck presentation to complement today's discussion is available on the News and Events section of our website.
01:08 Before we begin, let me remind everyone that this call may contain forward-looking statements that 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 statement in our earnings press release that was issued this afternoon and on slide two of the slide deck presentation available on our website. 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. 01:49 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 be found in our earnings release nineteen of the slide presentation. 02:07 At this point, I'll turn the call over to Curtis..
02:10 Thank you, Steve, and good afternoon. On today's call, I will briefly review the highlights of our third quarter twenty twenty one results.
Cory will provide an update on our successful efforts to expand our lending team and accelerate organic loan growth, and Steve will then conclude with a more detailed review of our third quarter twenty twenty one financial results.
02:33 To start, I’m very pleased with our team's performance again this quarter, and I'd like to thank our employees for their hard work as they continue to deliver outstanding service to our customers, which continues to translate into strong financial results for South Plains.
Along those lines, there are six key points that I would like you to take away from today's call. 02:54 First, our local Texas markets are seeing strong economic growth and continued population gain from across the country, which is providing a robust backdrop for new business.
Second, our experienced lending team is benefiting from this strong economic backdrop, as well as our market share gains in our communities large and small, which we believe are contributing to our strong results.
03:17 Third, we have continued to make solid progress adding new lenders to our platform through the quarter as we work to grow our team by twenty lenders or about thirty percent over a two year time timeframe. Importantly, we have been very impressed with our new lenders ability to bring new clients to Citibank and quickly build their portfolios.
03:37 Fourth, we have grown our loan portfolio by more than nine percent year-to-date and expect loan growth to continue at a robust pace into twenty twenty two. We believe we have ample liquidity to fund this growth, which will drive continued margin expansion, earnings and book value growth along with improved returns.
03:58 Fifth, we expect our mortgage business to decline to about ten percent to fifteen percent of total revenues over the next few years as mortgage originations gradually normalize in future periods. I think it is important to reiterate that we are not a mortgage bank. We have simply taken advantage of a strong cycle which has been very lucrative.
As mortgage revenues decline, we expect organic loan growth to drive improved net interest income, and we anticipate this growth will more than offset the decline in mortgage income over the next two to three years.
04:31 Lastly, we will continue to pursue a thoughtful capital allocation strategy, focused on share buybacks, maintaining and growing our dividend over time and tactical (ph). During the quarter, we were aggressive with our share buyback given the opportunity that we see ahead for South Plains.
We do not believe this is fully reflected in our current share price. 04:52 Turning to our third quarter twenty twenty one results on slide four.
We reported net income of fifteen point two million dollars or zero point eight two dollars per diluted common share, which compares to net income of thirteen point seven million dollars or zero point seven four dollars per diluted common share in the second quarter of twenty twenty one.
05:12 We did not record a provision for loan loss in the third quarter of twenty twenty one compared to a negative provision for loan loss of two million dollars in second quarter of this year.
This decision was made in light of the continued general improvement in the economy, as well as a decline in the amount of loans in our portfolio that are actively under a modification, and we remain confident in the credit quality of our loan portfolio as well as the strong reserves that we've built over the last year.
Additionally, the credit metrics of our hospitality portfolio continued to improve through the third quarter of twenty twenty one.
05:49 Turning to loan growth, we delivered five point five percent growth in the third quarter of twenty twenty one as we benefited from our lending teams strong execution, combined with our new lenders who are quickly growing their portfolios as they bring new relationships to Citibank.
While recruiting takes time, we're very pleased with the lenders that we have been able to attract. Importantly, we have been deliberant in our growth as we look for lenders who share our culture and values.
We will remain laser focused on credit quality and we will not sacrifice our conservative approach to underwriting to derive growth as we expand our loan portfolio. 06:26 Looking to future periods, we have excess liquidity to deploy. As our loan to deposit ratio at the end of the third quarter of twenty twenty one was seventy six percent.
Our goal is to ultimately drive that ratio up into the mid high eighties over time, which represents significant earnings power and leverage of the infrastructure we have to support five billion dollars or more in assets.
As we execute our strategic plan to profitably grow South Plains, we will also continue to employ a thoughtful capital allocation strategy to create value for our shareholders. 06:59 During the third quarter of twenty twenty one, we continue to see our shares trade below the intrinsic value.
And as a result, we repurchased approximately one hundred and ninety thousand common shares under our previously announced ten million dollars share repurchase program.
Additionally, our Board of Directors authorized a quarterly dividend of zero point zero nine dollars per share this past week, which is in line with the last quarterly dividend that we paid in August of this year.
This will be our eleventh consecutive quarterly dividend and will be paid on November sixteen, twenty twenty one to shareholders of record on November one twenty twenty one. 07:37 Lastly, we continue to evaluate potential M&A candidates as activity has print.
As we’ve said in the past, we are looking at banks with good deposit franchises in rural markets where there could be leadership changes over the next few years. We will be very disciplined and focused on finding the right bank with a similar culture and at an attractive price.
Thus far, we have not found a target that meets our acquisition criteria and metrics. Now, let me turn the call over to Cory..
08:07 Thank you, Curtis, and good afternoon, everyone.
Starting with our loan portfolio on slide five, loans held for investment at the end of the third quarter of twenty twenty one were two point four three billion dollars which is one hundred and twenty six million dollars or a five point five percent increase from the second quarter of twenty twenty one.
This increase was largely driven by organic net loan growth of one hundred and seventy eight million dollars, partially offset by a decrease of fifty two million dollars from SBA repayments on PPP loans.
08:35 Our loan growth in the third quarter of twenty twenty one was broad based and relationship focused as economic activity remains robust in our markets with particular strength in multi-family properties, agricultural production loans and direct energy loans.
08:49 In our ag portfolio, agricultural loans increased to one hundred and nineteen million dollars as compared to ninety six million dollars as of the end of the second quarter of twenty twenty one as we experienced typical seasonal funding.
With economic activity taking up combined with strong raise in energy prices, we also took advantage of opportunities in the Permian Basin with longstanding customers of the bank in addition to new relationships generated by recently hired loan officers.
09:15 Importantly, our leading team has continued to bring new business and clients to Citibank in the third quarter of twenty twenty one, which has kept our loan pipelines at healthy levels.
Looking forward, we remain confident in our goal of delivering high single digit loan growth in twenty twenty two and could even see better results depending up on our ability to hire additional lenders over the next several quarters.
09:37 As we discussed on last quarter’s earnings call, we have a strong team of bankers in place that have developed standing relationships with our customers and continue to drive new business and grow market share as can be seen in our results this quarter.
Our opportunity is to build on the foundation by adding scale across our markets with a focus on our metropolitan markets of Dallas and Houston, where we can add to our bottom line by continuing to redeploy our low cost funds into attractive loans.
10:03 To accomplish this, we have outlined the goal of adding twenty lenders to our sixty lender team over a two year time timeframe and are actively hiring in all markets. We are focused on better bankers we have strong relationships, a history of success and most importantly, who fit our culture.
I'm very pleased with our success as we are almost halfway to our goal, and I've been very impressed with how quickly they have started to bring relationships to Citibank. A good example is the Huston market where we have hired a new market later who is attracting both quality lenders as well as attractive new business.
10:35 Our focus is on delivering sustainable organic growth and we are cognizant of the outsized revenues that we have achieved over the last eighteen months in our mortgage business in this low rate, high margin environment as can be seen on slide seven.
10:47 For the third quarter of twenty twenty one, we generated three seventy three million dollars in mortgage originations as compared to three seventy nine million dollars of originations in the second quarter of twenty twenty one.
We had a one point one million dollars increase in mortgage banking activity revenues in the third quarter of twenty twenty one as compared to the second quarter of twenty twenty one.
11:10 As Curtis touched on, we expect our mortgage banking revenues to decline over time as the mortgage market gradually normalizes in future periods, while we continue to grow other revenue sources.
As a result, we expect mortgage revenues to decline to about ten percent to fifteen percent of total revenues over several years as compared to about twenty six percent of total revenues today.
11:30 As we have discussed on prior calls, we've been very focused on managing cost and margins through this cycle and have utilized technology to scale the business as volumes have increased.
Looking forward, we expect volumes and revenues related to our mortgage banking activities to gradually decline and we'll continue to manage expenses to maintain profitability.
11:49 Importantly, we expect net interest income growth to offset the decline in mortgage income as we grow our lending platform and our excess liquidity to work in higher yielding loans.
11:59 As outlined on slide eight, we generated twenty five point eight million dollars of non-interest income in the third quarter of twenty twenty one compared to twenty two point three million dollars in the second quarter of twenty twenty one.
The growth from the second quarter of twenty twenty one was primarily due to the seasonal increase of two point six million dollars in income from insurance activities, an increase of one point one million dollars in mortgage banking activities revenue.
12:24 To conclude, our local Texas market are strong and our team has continued to execute very well. We've gotten off to a strong start recruiting experienced lenders to Citibank, which provides visibility to future growth, while our existing team of lenders continue to perform at a very high level.
We're proud of our results this quarter and we're optimistic as to what the future holds for South Plains. 12:46 I would now like to turn the call over to Steve..
12:49 Thank you, Cory. Starting on slide ten, net interest income was thirty one point two million dollars for the third quarter of twenty twenty one as compared to twenty nine point six million dollars for the second quarter of twenty twenty one and thirty one point three million dollars for the third quarter of twenty twenty.
13:06 The increase since the second quarter of twenty twenty one was due primarily to an increase of one point four million dollars in loan interest income as a result of the growth of eighty three million dollars in average loans outstanding during the third quarter of twenty twenty one.
13:21 We recognized one point seven million dollars in deferred PPP related SBA fee income as an adjustment to interest income, which included accelerated income on PPP loans forgiven by the SBA during the third quarter of twenty twenty one.
13:38 At September thirty, twenty twenty one there was two point nine million dollars 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 or repaid over the next several quarters.
13:57 We are very pleased that our net interest margin increased to three point five eight percent in the third quarter of twenty twenty one as compared to three point four two percent in the second quarter of twenty twenty one.
The expansion in our net interest margin was primarily due to the increase of eighty three million dollars in average loans outstanding during the third quarter of twenty twenty one as we continue to deploy our excess liquidity.
14:22 Our average cost of deposits declined two basis points to twenty five basis points in the third quarter of twenty twenty one as compared to twenty seven basis points in the second quarter of twenty twenty one and declined from thirty four basis points in the third quarter of twenty twenty.
14:39 Continuing on Slide eleven, deposits increased in the third quarter of twenty twenty one to three point two one billion dollars, an increase of fifty three point eight million dollars from June thirty twenty twenty one. The largest increase in deposits for the third quarter was in non-personal demand accounts.
We ended the third quarter of twenty twenty one with total non-interest bearing deposits of one point zero five billion dollars or thirty two point eight percent of total deposits. 15:08 Turning to slide twelve.
Our performing assets to total assets ratio declined five basis points to thirty two basis points in the third quarter of twenty twenty one as compared to thirty seven basis points in the second quarter of twenty twenty one.
As Curtis touched on, the robust Texas economy has provided a tailwind to our customers has led to positive credit migrations in several areas of our loan portfolio.
15:34 At September thirty, twenty twenty one active loan modifications attributed to the ongoing COVID-nineteen pandemic totaled sixteen point four million dollars or seventy basis points of our loan portfolio.
Approximately ninety seven percent of these active modified loans are in our hotel portfolio where we continue to experience improving fundamentals. We expect that these remaining modified loans will return to full payment status at the end of their respective modification periods.
16:05 Also, as it is noted on this slide, we had an increase of six million dollars in classified assets during the third quarter of twenty twenty one. This was largely the result of one credit being downgraded due to the loss of its underlying cash flow source. Subsequent to the end of the quarter, the borrower repaid this loan in full.
16:24 Overall, we continue to believe that our loan portfolio remains well reserved as our ALLL to total loans was one point seven six percent at September thirty twenty twenty one, which is an eleven basis points decline from the second quarter of twenty twenty one.
16:41 Looking forward, we continue to believe that the reserves that we have built to help guard against the uncertain outlook are appropriate, and we will continue to evaluate our reserve in the coming quarters. 16:52 Skipping ahead to slide fifteen.
Our non-interest expense was thirty eight point one million dollars in the third quarter of twenty twenty one as compared to thirty six point eight million dollars for the second quarter of twenty twenty one.
This increase was primarily due to an increase in personnel expense from the payment of higher commissions on insurance activities versus the prior quarter. 17:14 Our efficiency ratio was sixty six point five percent in the third quarter of twenty twenty one as compared to seventy point five percent in the second quarter of twenty twenty one.
This decrease in the efficiency ratio is primarily a result the improved net interest margin experienced during the third quarter of twenty twenty one, but we remain focused on improving this ratio.
17:35 Moving ahead to slide seventeen, we remain well capitalized with tangible common equity to tangible assets of nine point nine four percent at the end of the third quarter of twenty twenty one, unchanged from the end of the second quarter of twenty twenty one and nine point two five percent in the third quarter of twenty twenty.
17:53 Before turning the call back to Curtis, I would like to highlight that our audit committee has completed a competitive process to review the appointment of our independent registered public accounting firm for the fiscal year ending December thirty one twenty twenty two.
18:08 Several firms, including our current firm Weaver and Tidwell were invited to participate.
As a result of this process and following careful deliberation our audit committee has selected BKD, a national CPA and advisory firm to become our independent register public accounting firm after the filing of our 10-K for the year ending December thirty one twenty twenty one. 18:31 I will now turn the call back to Curtis for concluding remarks..
18:35 Thank you, Steve. To conclude, our team continue to implement our strategy through the third quarter of twenty twenty one and have delivered impressive results once again. I'm proud of the consistent results that we've delivered since our IPO two years ago which can be seeing in our book value growth as well as our improved returns.
18:54 At the end of the third quarter, twenty twenty one, our tangible book value per share was twenty point nine zero dollars which compares to eighteen point nine seven dollars at the end of twenty twenty and fifteen point four six dollars at the end of twenty nineteen.
19:11 Likewise, our annualized return on average assets for the first nine months of twenty twenty one was one point five seven percent, which compares to one point three one percent for the full year twenty twenty and one point zero four percent for the full year of twenty nineteen.
19:27 Our consistent book value growth and improved return on assets clearly demonstrate not only our team's execution, but also the excellent value we are creating for all of our stakeholders. 19:38 Thank you again for your time today. Operator, please open the line for any questions..
19:46 Our first question is from Brady Gailey of KBW. Please proceed with your question..
20:17 Thanks. Good afternoon guys..
20:20 Hi, Brady..
20:21 Hi, Brady..
20:22 On the lender hiring front, I heard and last quarter I think mentioned it too, you want to hire twenty people. I think you're halfway through that hiring process.
What do you expect the timeline to be on the remaining ten lender hires? Is that something that happens in the next quarter or two or is that longer term?.
Brady, this is Cory. I think we'd love to see it happen in the next quarter too. I don't think that's really realistic. I think it's -- I think – will probably go through the better part of next year, getting those exactly the way we want them. You kind to go back and think through our process.
I mean, we're not at looking for people that are typically looking to change jobs. We're looking for that much more high quality seasoned lender that is pretty content where they are.
21:13 So, I guess our approach is probably a little bit more methodical on what we go about and looking for that culture fit and making sure that the bedding process is really what we wanted to be. So, I'd like to say that it's in the next couple of quarters, but I think it easily the next three..
21:30 Okay.
All right And then how does that play into growth in your expense base? I know it will provide operating leverage longer term, which will -- is going to good to profitability, but how do you think about expense growth from kind of the 3Q base as we had into twenty twenty two?.
21:55 This is Curtis, let me phrase at this way. Of course, we're trying to reduce non-interest expense in some areas like traditional media advertising, but we know we've got upward pressure out there on personnel cost. We're not immune from the wage inflation that we're seeing occur all across the country.
But our goal is to retain the top quality talent that we have and while we're continuing to handle those lenders who will and pretty quickly generate far more revenues than the cost of adding them to the team. So while we will see some upward movement out there in specifically personnel cost with the hires that we're making.
I think you're going to see corresponding revenue increase come right along pretty quickly..
22:39 Brady, this is Cory. As we fit around the ones that we've done so far, really kind of trying to say focused on about six months breakeven. And so I think we're probably in some cases feeding that. But I mean Curtis is exactly right, we're all seeing a little bit of upward pressure. We're making sure ours is the right kind.
Filling in the quality team that want to have as we move forward..
23:09 All right. And then finally for me. I'm just curious, the one hundred and ninety thousand shares that were repurchased was about one percent of the company.
But do you what the average repurchase price was for your share?.
23:22 Yes, Brady, this is Steve. I’ve got that right here. It was about -- approximately twenty three roughly..
23:41 And the stock said twenty five now, so it's a little higher, but you still have an expensive stock growth, so how do you think about the buyback going forward?.
23:53 Well, we continue to have discussions with our board about that. And I think so far the general consensus is that, as we said in the earnings, we've already -- the earnings call we just did that we don't think we're really up to fully intrinsic value yet. So we'll discuss it.
We're coming up and would have to look at the buyback program and we will be doing that over the next couple of months.
But I think the consensus in the Board is that, we've done well with what we've bought so far, and we'll have to just look out in the future and see how far we think want to go, but we still believe that our stock isn't valued I think all of us feel that way..
24:43 All right. Great. Thank you, guys..
24:47 Thanks, Brady..
24:50 Our next question is from Brad Milsaps of Piper Sandler. Please proceed with your question..
24:57 Good afternoon..
24:59 Hi, Brad..
25:00 Hi, Brad..
25:03 Cory, I appreciate the guidance on high single digit loan growth in twenty twenty two. And I think I heard you mentioned that potentially that could work higher. I mean, you guys have put on three hundred million dollars ex PPP the last few quarters.
I mean, I think the growth this quarter was eight percent on annualized, but take out PPP, I mean, it seems you're tracking at a much higher rate than that. Just kind of curious kind of what sort of maybe as you more anchored in that high single digit spot.
Is that just conservatism on you guys part? Or is there something else there, may be in terms of payoffs or something else I'm missing where that number could be a lot higher based on kind of what you're seeing right now..
25:49 I mean, if you look our pipeline, I mean, we still see a lot of optimism out there, but we're -- I mean we're trying to -- we're backfilling with what we've got out there. But loans that it comes through we've done a really good close rate with the things that we've had. I mean, we're definitely being conservative.
I mean, we think the team that we have and the new lenders that we brought on, we're pretty optimistic about where we're going to go, but we're trying to go -- try to go out there and put out double digit guidance will be pretty hard for us to do right now..
26:24 And Brad right now -- This is Curtis. The economy is strong here, but it's hard to judge how much of that is just kind of a snapback from COVID. And we might see some things slowed a little bit in twenty twenty two.
We don't know, but we do feel pretty confident that we can hit those high single digit numbers at this point with the people we're bringing in, the activity that we see. But right now I don't think we'd out and predict particularly, we can do a whole better than that..
26:55 Okay, Great. And with the plan B, just to continue to fund that with the cash that you have on the balance sheet, I suspect that if the growth continues, you're not really interested in growing the bond portfolio from here, but just kind of curious how to think about sort of the positioning of the balance sheet..
27:14 We really think we're in a guiding position. We do have a lot of liquidity on the balance sheet right now. We have plenty of capital. Frankly, we're also seeing some good opportunities from some already completed and some announced acquisitions out here in our West Texas markets. So we think we're getting some great spots to grow loans.
27:34 And we have the ability out there with the cash on hand to do it. Obviously, on a time that we're going to get more aggressive at looking at an acquisition to add it to that liquidity, but we continue to see deposit growth out there at the very time we're still seeing our deposit cost decline.
So it's kind of hard to get excited about trying to go out and making kind of an M&A play on something as long as we've got plenty of our own money to spend..
28:00 And this quarter, one other the thing though I’ll probably add to that is, we're very pleased with some of the results of the treasury initiatives that we've got out there working with our commercial customers. So, I think if you look at all those things coming together, I mean, we think that the funding were in pretty good shape..
28:22 Okay. And maybe one last one for me for Steve maybe. Just to kind of go to the Brady’s expense question another way. It would almost seem that your personnel costs might have been closer to flat without the kind of seasonal insurance commissions and then maybe some of the occupancy expense was also somewhat seasonal.
Do you think that given some of the investments that you're making vis-a-vis declining mortgage commission in twenty twenty two, they kind of offset and you can kind of hold the run rate flattish is those two kind of swap out for one another?.
29:06 Yes, I think we will definitely have declines on the mortgage side with the variable expenses we've got as we believe that that revenue will come down as that normalizes on the refinance side.
29:22 Yes, the things you mentioned with the new lenders had to the personnel cost, the initiatives we've talked about with the cloud migrations will be some offsets to that. But as Cory mentioned, I think we are continuing to look at other expenses to back on.
So it's a long way of saying that we hope it's going to be flat, but we know that there is -- as Curtis mentioned, just that upward pressure on personnel costs, not just for us, but I think industry wide and nationwide..
30:06 Great. That's helpful. Really appreciate. Thank you, guys. Nice quarter..
30:11 Thank you..
30:11 Thanks, Brad..
00:14 We have reached the end of the question-and-answer session. I will now turn the call back over to Mr. Curtis Griffith for closing remarks..
30:22 Thank you, operator. In summary, we certainly had an excellent quarter. Just to reiterate compared to second quarter of twenty one our net income is up one point five million dollars, but we had a negative provision of two million dollars in the second quarter versus no provision at all in Q3.
30:40 We've seen excluding the PPP balance decrease of twenty -- of fifty two million dollars, we achieved net loan growth of one hundred and seventy seven point six million dollars. We're getting good production from our lending team, including significant solid business from our new hires, and we are well on the way to hiring twenty great lenders.
The credit quality generally does continue to improve and economic activity is robust in our markets. 31:03 Our mortgage volume is slowing not that much, and over time we expect it will only be ten percent to fifteen percent of our net income as our other revenue sources increase. Our deposits continue to increase even as our cost of funds declined.
Out tangible book value is increasing. It's up sixteen percent from third quarter of a year ago in twenty twenty. We believe that we are on a path to create significant value for all of our stakeholders. In summary, I want to thank all of you -- all of our amazing employees that make that possible, and thanks to you for joining us on the call today.
Thank you, operator. And I'll turn it back to you..
31:40 Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day..