South Plains Financial, Inc. Q4 FY2024 Earnings Call

Good morning, ladies and gentlemen and welcome to the South Plains Financial, Inc. Fourth Quarter 2024 Earnings Conference Call. During this presentation all parties will be in listen-only mode. Following the presentation the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead.

Thank you, operator and good morning, everyone. We appreciate you joining our earnings conference call. With me here today are Curtis Griffith, our Chairman and CEO; Cory Newsom, our President; and Brent Bates, the Bank's 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 would 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 expressed or implied 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 financial measures, which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial 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 morning. On today's call, I will briefly review the highlights of our full year 2024 results, as well as provide an update on our capital allocation priorities. Cory will discuss our loan portfolio and the strong underlying demand that we are seeing which is being partially offset by the continued headwinds of unexpected payoffs. Steve will then conclude with a more detailed review of our fourth quarter financial results. To start, I am very proud of our performance this past year as we successfully managed through a challenging environment and delivered solid financial results. We managed our liquidity to optimize our profitability and return metrics, while maintaining a conservative approach to underwriting and risk management. We believe that we are well-positioned to take advantage of the opportunities that we see in the year ahead, as we expect the pace of economic growth to improve while the headwinds that we all experienced in 2024 appear to be diminishing. Turning to Slide 4 of our presentation. We delivered diluted earnings per share of $2.92 for the full year as compared to $3.62 in 2023. As a reminder, we sold Windmark, the bank's wholly-owned insurance subsidiary in the second quarter of 2023, which resulted in a $22.9 million onetime gain, net of charges and taxes, our diluted earnings per share of $1.32. Excluding this one-time gain, we outperformed 2023 by $0.62 per diluted share. We grew our loan portfolio 1.4% for the full year as the loan production that built through the year helped us effectively manage the decline in our indirect auto portfolio, as well as heightened level of loan payoffs and paydowns. As we discussed on our third quarter call, we’re seeing real optimism across our customer base that is translating into the strongest new business production pipeline that we've seen in more than two years. This bodes positively for the year ahead where we expect to deliver low to mid-single-digit loan growth for the full year 2025. We take pride in conservatively managing the bank, as we strive to always under promise and over deliver as we did this past year. Turning to the other side of our balance sheet. Our community-based deposit franchise held steady at $3.6 billion in 2024 as compared to December 31, 2023. Through the year, we carefully controlled our liquidity to optimize our margin and returns as can be seen in the fourth quarter where we managed our deposits down by approximately $50 million while also experiencing our typical seasonal declines in our escrow accounts, which decreased by approximately $35 million. Our core customer deposit accounts held steady through the quarter, and we expect to see deposit balances rebuild as loan growth occurs through the year ahead. We will carefully add liquidity to match the pace of loan growth through the year. Our community-based deposit franchise remains a competitive advantage for South Plains with 79% of our deposits in our rural markets and 21% in our major metropolitan markets of Dallas, Houston and El Paso. Given the makeup of our deposit franchise, we were able to reprice some of our deposits lower in the fourth quarter, which was a primary factor in driving our net interest margin higher by 10 basis points, which Steve will discuss more in a moment. As we have said many times, we will never sacrifice credit quality for loan growth, and I'm very pleased with the continued strong credit quality of our loan portfolio as we enter 2025. We believe that we are well positioned for varying economic conditions. For the full year, we delivered return on average assets of 1.17% and an efficiency ratio of 65.1%. Looking ahead, we also believe that we continue to be in a strong position to capitalize on opportunities to drive growth as the bank and the company each significantly exceed the minimum regulatory capital levels necessary to be deemed well capitalized. At December 31, 2024, our consolidated common equity Tier 1 risk-based capital ratio was 13.53% and our Tier 1 leverage ratio was 12.04%. Additionally, our loans held for investment to deposit ratio stood at 84% at year-end. Given our capital position, we remain focused both on growing the bank while also returning a steady stream of income to our shareholders through our quarterly dividend. As previously announced this week, our Board of Directors authorized a $0.15 per share quarterly dividend, which will be our 23rd consecutive quarterly dividend. We also have a $10 million stock repurchase program in place which will expire no later than February 26, 2025. Our Board will consider authorizing another share repurchase plan next month as we generally believe it's important to have a buyback in place to have flexibility during volatile market environments. As we commented last quarter, we expect our buyback activity to remain more muted as we balance liquidity for growth, as well as being mindful of the continued economic uncertainty that exists. Looking forward, we still expect community bank M&A activity to pick up in the coming quarters with the growing optimism that deals can now be completed much quicker under the new presidential administration and despite unrealized securities losses on bank balance sheets growing. We expect to be even more diligent looking at potential acquisitions in this environment, but we have not yet seen an opportunity that meets our high hurdle for our team to pursue. Our acquisition criteria remains focused while having a strong cultural fit with minimal dilution to our shareholders, a reasonable earn back while making real sense for the bank and our shareholders. As activity picks up, we will remain disciplined while also weighing any deal against the economics of buying back our own shares. We see substantial organic growth ahead and are comfortable staying on the sidelines and benefiting from any disruption that does occur in our markets from competitor transactions much like what we have experienced over the last few years. Now let me turn the call over to Cory.

Thank you, Curtis, and good morning, everyone. Our loan portfolio grew by $17.7 million to $3.06 billion in the fourth quarter compared to the previous quarter. We saw growth in commercial owner-occupied real estate, which outweighed the payoffs and paydowns we continued to encounter during the fourth quarter, along with the typical seasonal decrease in agricultural balances. The yield on our loan portfolio was 6.69% in the fourth quarter, remaining stable from the prior quarter. We maintained the yield despite a decrease in short-term rates from September to December. Looking ahead, we may experience a slight decline in yield as we face maturities and repayments across various interest rate segments. In our major metropolitan markets of Dallas, Houston, and El Paso, loans increased by $9 million in the fourth quarter to $1.06 billion. Our major metro markets also saw a rise in loan payoffs this quarter, affecting growth, but underlying loan demand has remained strong in El Paso and Houston, as well as in our Permian markets of Midland and Odessa. At the end of the quarter, our major metro loan portfolio represented 34.6% of our total loan portfolio, highlighting both the scale our lenders have achieved and the potential for organic loan growth. Our indirect auto portfolio remained steady at $236 million at the end of the fourth quarter, slightly up from $235 million in the previous quarter. We have managed this portfolio carefully throughout the year, prioritizing credit quality despite competitors being more aggressive in lending to higher-quality credit segments, which led to a $15 million decrease in loan balances through 2024. Although we anticipated this decline, it has posed a notable challenge to loan growth. We are, however, confident that the portfolio can stabilize at its current level given the recent rate declines and improved volumes, leading to more rational pricing. This stabilization will allow the strong demand we are observing in commercial real estate and commercial and industrial loans to translate into growing loan balances. Additionally, the credit quality of our indirect auto portfolio has remained strong throughout the cycle, with 30-plus days past due at 47 basis points, a slight increase from 34 basis points in the third quarter. Looking ahead to the first quarter, we expect our loan growth to remain relatively flat, as we typically see agricultural loans paying off seasonally early in the year, and loan payoffs could continue at a high rate. Nevertheless, the foundational momentum in our business is strengthening as our customers express more optimism and activity increases. This is also reflected in our new business pipeline, which is at its highest levels since mid-2022. In the fourth quarter, we generated $13.3 million of non-interest income, up from $10.6 million in the previous quarter. This increase was mainly due to a $3.1 million rise in mortgage banking revenues, driven by a $3.5 million increase in the fair value adjustment of mortgage servicing rights, as interest rates affecting value rose in the fourth quarter. The growth in mortgage income was partially offset by approximately $700,000 of non-recurring interest proceeds received for property damage in the third quarter of 2024. Overall, we have managed to keep the mortgage business profitable during this downturn through disciplined expense management. We believe we are well positioned to benefit from the eventual increase in residential purchase volumes as rates gradually decline, and we are optimistic about the upcoming spring selling season. For the fourth quarter, non-interest income made up 26% of bank revenues, compared to 22% in the third quarter. Growing our non-interest income remains a priority for our team. I would like to now turn the call over to Steve.

Thanks, Cory. For the fourth quarter, diluted earnings per share was $0.96 compared to $0.66 from the linked quarter. Of note, our fourth quarter earnings were positively impacted by $0.07 per share, after tax, for the fair value adjustment of the mortgage servicing rights assets as mortgage interest rates rose in the fourth quarter. Turning to Slide 13. Net interest income was $38.5 million for the fourth quarter as compared to $37.3 million for the linked quarter. The rise in net interest income was largely due to a $1.6 million decline in interest expense, partially offset by a decrease of $243,000 in loan interest income. Our net interest margin calculated on a tax-equivalent basis was 3.75% in the fourth quarter as compared to 3.65% in the linked quarter. The 10 basis point increase to our net interest margin was primarily due to an 18 basis point decline in our cost of deposits in the quarter as compared to the prior quarter as we effectively repriced our interest-bearing deposits as the Fed reduced their short-term interest rate. At year-end, our noninterest-bearing deposits decreased to 25.8% of total deposits as compared to 26.9% in the linked quarter, largely due to the seasonal decline in mortgage escrow balances. As outlined on Slide 14, deposits decreased by $94.8 million to $3.62 billion at December 31. Our cost of deposits was 229 basis points in the fourth quarter, a decrease of 18 basis points from the linked quarter. Turning to Slide 15, our ratio of allowance for credit losses to total loans held for investment was 1.42% at December 31, 2024, an increase of 1 basis point from the end of the prior quarter. We recorded a $1.2 million provision for credit losses in the fourth quarter, which was largely attributable to net charge-off activity and by increased loan balances during the quarter. Our nonperforming loans totaled $24 million at the end of the fourth quarter, a slight decrease from $24.7 million in the third quarter. Skipping ahead to Slide 18, our non-interest expense was $29.9 million in the fourth quarter as compared to $33.1 million in the linked quarter. The $3.2 million decrease from the third quarter of 2024 was largely a result of a decline of $1.4 million in personnel expenses, primarily from decreased health insurance costs of approximately $675,000 as annual rebates were received in the current quarter. Additionally, we had a $400,000 reduction in mortgage commissions as mortgage activity slowed in the current quarter given the rise in mortgage interest rates. Looking ahead to the first quarter of 2025, we expect non-interest expense to be more in line with the third quarter's level given the number of one-time benefits that we experienced in the fourth quarter, including annual salary adjustments. Moving to Slide 21. We remain well capitalized with tangible common equity to tangible assets of 9.92% at the end of the fourth quarter, an increase of 15 basis points from the end of the third quarter. Tangible book value per share decreased to $25.40 as of December 31, 2024 compared to $25.75 as of September 30, 2024. The decrease was primarily driven by an $18.2 million decrease in accumulated other comprehensive income as the fair value of available-for-sale securities decreased, partially offset by $14 million of net income after dividends paid. I'll give the call back to Curtis for concluding remarks.

Thank you, Steve. To conclude, and as I said, I am very proud of our financial results. We have effectively managed our liquidity to optimize our profitability and returns while taking proactive steps to ensure that we maintain the credit quality of our loan portfolio. Importantly, we are experiencing strong underlying loan demand, which we believe will begin to come through as our payoffs begin to return to more normal levels. We remain optimistic that economic growth is set to accelerate under the new administration and are well positioned to drive organic growth across both our community and metropolitan markets as we focus on expanding the bank and delivering value to all of our stakeholders. I would also like to thank our employees for their hard work over the last year. They are the key to our success, and I am grateful for their continued commitment to our bank and our customers. Thank you again for your time today. Operator, please open the line for any questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Woody Lay with KBW. Please go ahead with your question.

Good morning guys. Wanted to start with the loan yield in the fourth quarter. I mean it was pretty impressive to see that be relatively flat quarter-over-quarter given the rate cuts. Any color on what allowed the loan yields to remain stable? There wasn't a sort of one-time interest benefit, was there?

Woody, this is Steve. There was a little bit less than $200,000 of non-accrued interest that we got, not necessarily out of line with what we see in other quarters, really between that and just having loans pay off. We had some loans paying off that were at lower rates, quite frankly, which we were glad to see even some of the 4% to 5% loans pay off and then some of the new loans being booked that are at rates higher than what the average is. So overall, again, we were very pleased with where that ended up, but no real one big-time nonrecurring item.

Got it. That's helpful. And then any expectations near term for the margin, do you think it can remain stable around the 375 level? Or is there a chance that it could even move higher?

We've had a lot of discussion about that. We will be more conservative, as you know, and what we would say is that I hope we can maintain the current level and hopefully see some incremental improvement. However, much of that will depend on loan growth and its final outcome. You will notice that deposit costs will decrease slightly as we adjust for the rate cuts made midway through the quarter and similar factors. Loan yields may also decline slightly depending on how things unfold for a full quarter after those cuts. Overall, with the right loan growth, I believe we could see stabilization and possibly incremental growth.

Wood. This is Cory. I think the one thing that's going to help us do that is the fact that our liquidity position is where it is. It just gives us some opportunities to make sure we are not overpricing on the cost side.

Yes. And like for everybody, you know this a lot is going to depend on what the Fed decides to do. If they move forward with more rate cuts and the President indicated, he's sure like to see that. We'll see where we go. But certainly, rate cuts in our case, will likely help our net interest margin. It may not be, again one-for-one, but I think we would continue to gain by lower short-term rates. But we'll just have to see where that goes. But I kind of agree with Cory and Steve, we've got a lot of things in place that we should still see minor improvements in the net interest margin, but it may not be quite as strong as what we saw in the fourth quarter, but I think we'll continue to get some improvements through the year.

Right. Well, you all have consistently been beating the net interest margin guide, so we'll see how it turns out. Lastly, on the loan pipeline, I mean, it's great to hear all the color on the new customer activity. Just is that concentrated in any one segment? And then is it a reflection of new hires? Or is it just a reflection of hard work?

Yes, Woody, this is Brent. It's a combination, I think of all those factors. We have good production from new hires, but really I think we've got a lot of optimism we're seeing from our clients and capital outlays that they're planning to make. And our pipeline is much better than it was this time last year. So we feel optimistic about it, too.

All right. That’s all for me. Thanks for taking my questions.

Thanks, Woody.

Thanks, Woody.

Our next question comes from the line of Brett Rabatin with Hovde Group. Please proceed with your question.

Hi, guys good morning.

Good morning.

Wanted to start on the payoffs. You talked about it quite a bit, but if you gave it, I missed the number, but the number of or dollar amount of payoffs that you guys had in the quarter? And then it sounds like the pipeline continues to build. I guess I'm a little surprised you're being a little conservative and saying low- to mid-single-digit loan growth. I thought that number might be more mid-to-high single digits. So was just hoping for some additional color on that.

Hi, Brett, you're surprised, we're being conservative.

Yes, Brett, we are aiming to exceed expectations on that front. Payments were higher in the fourth quarter, and there's no need for any apologies as our clients experienced some liquidity events. Several clients either chose to sell their real estate or had significant excess liquidity and opted to reduce their debt. This is beneficial for them, and we fully support it. We might see more customers selling assets, which could carry into the first or maybe even the second quarter. However, we remain confident in our pipeline and believe that our production will surpass these occurrences, if that makes sense.

Brett, one of the things that I was kind of pleased to see on a number of the that we have, I mean, you're going to have the seasonal stuff that comes along. You're going to have the stuff that we have no control over. But what was really nice is to see some of the transactions we had that were life events that actually happened to people that converted into investment opportunities for us on the other side that stayed here, and it goes back to the relationship aspect of what we fight for daily.

Okay. And then the other thing I wanted to ask about was just M&A and your capital ratio has gotten pretty healthy. I don't know if you are thinking about using the buyback more at some point. But just you briefly mentioned M&A and talking about that. Can you talk maybe a little bit more about what you're seeing from maybe potential partners? And is there a lot of interest from community banks at this point? What's your outlook is for the potential acquisition market?

This is Curtis. We're seeing an increase in the number of proposals from investment bankers, indicating they view this as a significant opportunity. Given the recent lean years, we haven't found anything compelling enough to start negotiating prices yet. Many sellers of quality banks still expect a higher multiple than what the market is offering. We are focused on finding the right deal and would prefer to avoid a transaction that wouldn't bring long-term benefits to our shareholders. It's crucial to ensure that the acquisition is valued positively by all parties involved and that the institution we acquire is eager to join us. We're actively looking for more opportunities both in our region and elsewhere in Texas. I believe we may have some developments to discuss later this year, but that will depend on what we encounter. The current environment for potential transactions is definitely more favorable than it has been recently.

Brett, this is Cory. The important thing to note is that I believe we have never been better positioned than we are today to pursue an acquisition. We just need to ensure we select the right one, and we are very focused on that objective.

Okay. Appreciate the color guys.

Thanks Brett.

Our next question comes from the line of Stephen Scouten with Piper Sandler. Please proceed with your question.

Hi, good morning everyone. Thanks. I'm not sure, Steve, if you gave this data earlier to one of the questions I might have missed it, but can you give us a feel for where new loan yields are coming on versus maybe some of the where the portfolio yields are rolling off at?

Yes. I would say they are in the 7% range, it could be all over in the 7s, but generally probably in the low-to-mid some. There will be some in the high, but that lower-end probably.

Got you. And that's coming off the books where as some of the fixed rate loans repriced on the average.

Yes. Could you please clarify your question for me?

Yes. So I mean, your total average yield is like 6.69% but I imagine some of the fixed rate loans that are coming off the books and repricing in that 7% range or probably more in the, I don't know, 4% or 5% range, I would guess? There is probably some five-year old loans that are in that range, but just trying to get a feel for that kind of on-off yield dynamic.

Yes. We have some of those, but honestly, we've also seen some high-yield loans being paid off. Generally, the fixed-rate loans that are coming off are in the upper 4s and 5s.

Okay. So still potentially getting a 150, 200 basis point pickup on some of that fixed rate loan book as it reprices?

Yes. And I think one thing, Stephen, keep in mind, if you look at the quality of our portfolio, it's never going to be the highest portfolio out there because the credit quality is good. And so we really try to stay competitive. We try to price it to market and I really do feel good about the stuff that we're seeing coming in, whether it's the spreads around prime, that is what we've really pressed a lot of our stuff off of.

Yes. No, for sure. And I'm just kind of thinking about the net interest margin dynamic. I know obviously, I think your net interest margin would respond best with some lower rates given slight liability sensitivity, but with the fixed rate loan book, I would think you could still see some NIM expansion throughout the year in a stable rate environment. Would you agree with that?

Yeah. This is Curtis. I absolutely would. That's the reason, why I still feel confident we'll get some net interest margin expansion moving through '25 because, again, just with keeping rates exactly where they are, and if our business pipeline moves as we think it will, you'll see a moderate increase in net interest margin, nothing dramatic, but we'll continue to move up, probably not down. And if we got slightly lower short-term rates, it should move a little more in our favor, I think.

Yes, that's great. Honestly, I've been getting most of my Texas economic information from the show Landman. I would love to hear your thoughts on how potential drilling activity in the Gulf of America could impact your economies. Specifically, I'm interested in how oil prices might influence those economies and overall loan demand. How are you considering this?

Brent, everyone is having to purchase more insurance for the well blowouts that are currently happening. This is likely going to affect the price of oil. Our service teams are very optimistic about their future right now.

Yes, I completely agree with that. There is a strong sense of optimism in the Permian area and in our markets. One reason is the energy prices; this region is likely the lowest cost producer in the country and has the highest volume, leading to significant activity that is noticeable when driving through. Therefore, I believe we will have opportunities in this area. Additionally, this optimism about broader economic conditions has contributed to the significant expansion of our pipeline.

If you consider the size of the bank and the customers we serve in those markets, there are many lower-class providers, and they are currently finding promising opportunities there. We are also experiencing good lending opportunities as a result.

On a broader scale, no one in our area, Texas, wants to see oil prices drop to the 50s. I don't anticipate that happening. However, one of Mr. Trump's new acquaintances might be pressured to lower the global rate a bit. We'll have to wait and see what happens. Realistically, if oil prices remain stable and regulations are somewhat relaxed, we can expect to see more drilling than we've witnessed recently. For cities like Houston, this could be a positive development for the economy, significantly boosting overall business in the Houston market.

Stephen, just one last thing. Just know that we underwrite to much cheaper oil.

Got it. Got it. That's helpful. And that's kind of what I was hoping to hear is, and that's helpful that it sounds like the Permian maybe in and of itself as an area could do a little bit better given its lower cost to produce. So let us say, drilling activity, it hasn't happened yet, but it does take down the price per barrel in the 60s or whatever, the Permian should be more insulated from any negative impacts in other parts of the country is what I hear you saying?

Yes, absolutely. Sure.

Yeah, that's super helpful. Thank you guys for the color.

Our next question comes from the line of Joe Yanchunis with Raymond James. Please proceed with your question.

Good morning. I’m doing great. So I kind of want to start on loans here for a moment. I appreciate the detail in the deck on the loans coming up for renewal. But as they come up for renewal, do you have a sense kind of historically speaking, for how much of these loans you typically retain versus what's being rolled off? Just trying to get a little deeper sense into that repricing opportunity with how much stays at the bank.

Brent, the good thing for us is that we have a lot of loans coming up for repricing that are not due for renewal, which plays a significant role in our operations. But Brent, I’ll let you continue.

That's right. Yes. So that's repricing. Those aren't all maturing. I mean, we've so far been pretty successful at retention of repriced loans. Of course, there are times, and that's part of the payoff experience we've had in the fourth quarter where customers have just decided to take advantage of gains and recapture equity and projects and that's okay too. I mean, we retain those relationships that may have lost the loan but retain the relationship. So it's kind of tough to predict who's going to decide to do that. But as far as the ones that we wanted to retain, we've retained them.

And Joe, one thing that helps us is the ones that are up for repricing and not necessarily maturity, the refinancing penalty still stays. So we at least have that try to help us from a negotiation stand point. If we don't wait until these things are right at maturity. We're working way early.

Got it. That's very helpful. And then just kind of shifting over to credit. In the prior quarters, you discussed optimism around resolving rather chunky multifamily problem loan. Can you provide an update on how that process is progressing?

Yes, we're executing our plan as anticipated, and I feel positive about our credit quality and its trends. We might face some challenges ahead, but we will address them as they arise. Currently, I am optimistic not only about our past achievements but also about what we expect to accomplish in the future.

I think we've done a good job of trying to identify what challenges we think we're going to have and start working them early.

Understood. That’s all for me. Thanks for taking my questions.

Thanks, Joe.

Thank you. Mr. Griffith, we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thank you, operator. As we've mentioned today, South Plains Financial is well positioned for a variety of opportunities and different economic scenarios. Our customers are more optimistic than they have been in a long time. According to a national survey from last week, small business optimism is at its highest point since 2018, which we believe will lead to loan growth and improved economic conditions overall. Our credit quality remains strong, and we remain mindful of potential risks. We will continue to focus on managing expenses and increasing our net interest margin, and we are prepared to act if the right M&A opportunity arises. We will keep looking for opportunities across all sectors. Thank you for your time today, and we look forward to your questions. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.