South Plains Financial, Inc. Q2 FY2025 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial Second Quarter 2025 Earnings Conference Call. 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 afternoon, 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, Chief Credit Officer. The related earnings press release and earnings presentation are available on the News & Events section of our website, spfi.bank. Before we begin, I'd like to remind everyone that any forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from these 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 made during this call 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. 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 afternoon. I would like to start by extending our deepest sympathies to all of those impacted by the floods in the Texas Hill Country over the fourth of July weekend as well as the more recent flooding in our Ruidoso, New Mexico market, including our employees and customers. This has been a tragic event for those regions and across the states, and we will do our part to help those impacted through this challenging time. Turning to Slide 4 of our presentation. Our second quarter results are a testament to the hard work of our dedicated employees who I always thank for their commitment to the bank and our customers. Their efforts have positioned us for success as we continue to achieve margin expansion through the second quarter as our cost of funds declined once again. Additionally, we believe the credit quality of our loan portfolio remains solid as we aggressively manage the portfolio to proactively address challenges with our customers. As Cory will touch on, our proactive management of our loan portfolio has also contributed to a higher level of early paydowns, once again this quarter, which has been expected. Despite this headwind, we achieved modest loan growth in the quarter and continue to have a healthy loan pipeline. We also continued to build capital through the quarter, which positions us for continued growth. I'm very proud to say that our bank sits on a strong foundation, and we believe is positioned to weather potential economic headwinds that may arise from the uncertainty created by the ongoing tariff negotiations and ultimate tariff rates that will be enacted. That said, Texas continues to perform well, having delivered healthy economic growth through the second quarter. Against this backdrop, we believe that we are in a strong position to take advantage of opportunities as they present themselves and are pursuing a strategy to increase the assets of the bank centered on both organic growth and M&A. As Cory will cover, our organic growth strategy is focused on expanding our lending capabilities to accelerate the pace of loan growth over time. Our community-based deposit franchise continues to provide a stable, lower cost funding source for loan growth across our markets, and our team has done a terrific job growing our loan portfolio over the past 5 years. We believe that we have opportunities to accelerate that growth as well as continue to push for core deposit growth as we seek to balance our liquidity goals. M&A has also been part of our strategy to grow the bank and an area that we have experienced, most recently having acquired West Texas State Bank in 2019, which expanded our reach into the Permian Basin. We remain interested in further growing through an accretive acquisition and have already begun to see the pace of industry transactions accelerate, most notably Huntington's announced acquisition of Veritex on Monday, which reflects the current political and regulatory environment. We believe this improved climate for deals will also help sellers' expectations become more realistic. While we are closely watching the market and are always open to having conversations, we have not yet found an opportunity that makes sense for the bank and our shareholders. We continue to have a strict criteria for a deal and are only interested in acquiring a bank with the right culture and asset liability profile that meets our needs, a stable deposit base, and added valuation that makes sense. We can be patient given the organic growth opportunities that we have across our markets. Importantly, we believe that we are 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 June 30, 2025, our consolidated common equity Tier 1 risk-based capital ratio was 13.86%, and our Tier 1 leverage ratio was 12.12%. We have the capital to support our customers as they continue to expand their businesses. Given our capital position, we remain focused on both growing the bank while also returning a steady stream of income to our shareholders through our quarterly dividend and keeping a share buyback program in place. Now let me turn the call over to Cory.

Thank you, Curtis, and hello, everyone. Starting on Slide 5. Our loans held for investment increased by $23.1 million or 3% annualized to $3.1 billion in the second quarter as compared to the linked quarter. We experienced broad-based loan growth across our portfolio as we continue to bring solid business to the bank focused on long-term customer relationships. Our yield on loans was 6.99% in the second quarter as compared to 6.67% in the linked quarter. Our loan yield was boosted by 23 basis points in the second quarter as a result of a $1.7 million interest recovery from the full repayment of a loan that had been on nonaccrual. Excluding this one-time gain, the yield on loans was 6.76%, an increase of 9 basis points as compared to the first quarter. Looking forward, we expect the yield on our loan portfolio to stabilize near current levels pending further short-term interest rate changes by the FOMC. Importantly, our new loan production pipelines remain solid, and economic activity continues to be healthy. As we look across our markets, we have a strong position in each of the communities and metro markets where we do business. We also have the capacity within our existing infrastructure and through actively recruiting lenders who fit our culture to grow our lending capabilities as we work to accelerate our loan growth and increase the assets of the bank. We are working to expand our team across our entire footprint and are pleased with the quality of bankers that we are speaking with and who have an interest in joining South Plains. During the second quarter, we recruited several experienced lenders in the Dallas area who have long successful track records and strong relationships in the market. We believe that they will be able to bring new relationships to South Plains, which will be supportive of loan and deposit growth over time. While we believe in the strength of our loan production and new business pipeline, we continue to experience a heightened level of loan payoffs. We had payoffs of 3 multifamily property loans that totaled $49.1 million in the second quarter and mitigated our loan growth. We expect this higher level of loan payoffs to continue and that our loan growth will be flat to up low single digits in the third quarter. Skipping to Slide 7. Loans in our major metropolitan markets of Dallas, Houston and El Paso decreased by $26 million in the second quarter to $1.01 billion. Of note, the heightened level of loan payoffs in the second quarter exceeded our new loan production in these markets which drove the decline in loan balances. The good news is that these payoffs included the problem loan we’ve discussed on prior calls. Importantly, this had been expected, and we anticipate that loan payoffs will begin to moderate in the third quarter but will remain a headwind to loan growth. Looking forward, we are optimistic that the loan growth will reaccelerate given expected economic growth, combined with the addition of new lenders in the Dallas market. At quarter end, our major metro loan portfolio represented 32.7% of our total loan portfolio. Skipping to Slide 10. Our indirect auto loan portfolio modestly decreased to $241 million at the end of the second quarter as compared to $243 million at the end of the linked quarter. We saw a change in behavior as consumers began to slow their spending in May as a result of the expected tariffs which were announced in early April. This behavior may persist to remain a headwind to indirect auto loan production in the short term. As we discussed on the first quarter call, we tightened our loan-to-value requirements in our indirect auto portfolio to ensure we proactively managed the current environment and any potential challenges to come. We are closely monitoring the effects of the expected tariffs on our local economy, the consumer, and used car prices as we tightly manage our portfolio. Importantly, we believe the credit quality of our indirect portfolio remains very strong, and we're pleased to see our 30-plus days past due loans improved 9 basis points to 32 basis points in the second quarter as compared to 41 basis points in the first quarter and 47 basis points in the fourth quarter of 2024. We believe our tightened credit standards will further protect the bank in the credit profile of our indirect auto portfolio. Looking to the second half of 2025, we remain cautiously optimistic that economic growth across our Texas markets can remain resilient and continue to expect our loan growth to trend to the lower end of our low to mid-single-digit range for the full year 2025. Turning to Slide 11. We generated $12.2 million of noninterest income in the second quarter as compared to $10.6 million in the linked quarter. This was primarily due to an increase of $1.5 million in mortgage banking revenues, mainly from the increase of $1.4 million in the fair value adjustment of mortgage servicing rights asset as interest rates that affect the value stabilized in the second quarter of 2025. For the second quarter, noninterest income was 22% of bank revenues consistent with the first quarter. Continuing to grow our noninterest income remains a focus of our team. I would now like to turn the call over to Steve.

Thanks, Cory. In the second quarter, diluted earnings per share were $0.86 compared to $0.72 from the linked quarter. As Cory discussed, there was a $1.6 million recovery of interest, fees, and legal expenses net of tax related to the full repayment of a loan that had previously been on nonaccrual. This equated to a one-time benefit of $0.09 per diluted share in the quarter. Starting on Slide 13. Net interest income was $42.5 million for the second quarter compared to $38.5 million in the linked quarter. Our net interest margin, calculated on a tax-equivalent basis was 4.07% in the second quarter as compared to 3.81% in the linked quarter. The rise in our NIM in the second quarter was positively impacted by 17 basis points due to the one-time interest recovery that I just mentioned. Excluding this one-time gain, our NIM rose 9 basis points to 3.90% primarily due to a 5 basis point decline in our cost of deposits. As outlined on Slide 14, deposits decreased by $53.6 million to $3.74 billion at the end of the second quarter. As we have previously discussed, we experienced a large inflow of public fund deposits during the first quarter, which are higher cost. These funds moved back out of the bank in the second quarter due to seasonality. Noninterest-bearing deposits increased $32.3 million in the second quarter. This, coupled with the decline in public fund deposits, contributed to our noninterest-bearing deposits to total deposits ratio increasing to 26.7% in the second quarter from 25.5% in the linked quarter. The mix shift change in deposits, along with the continued drop in CD rates contributing to the 5 basis point decline in our cost of deposits to 214 basis points in the second quarter down from 219 basis points in the linked quarter. Turning to Slide 16. Our ratio of allowance for credit losses to total loans held for investment was 1.45% at June 30, 2025, and an increase of 5 basis points from the end of the prior quarter. We recorded a $2.5 million provision for credit losses in the second quarter, which was largely attributable to an increase in specific reserves, net charge-off activity, increased loan balances, and several credit quality downgrades. Skipping ahead to Slide 18. Our noninterest expense was $33.5 million in the second quarter as compared to $33.0 million in the linked quarter. The $513,000 increase from the first quarter of 2025 was largely the result of an increase of $267,000 in personnel expenses and $144,000 in increased professional service expenses. Moving to Slide 20. We remain well-capitalized with tangible common equity to tangible assets of 9.98%. At the end of the second quarter, an increase of 34 basis points from the end of the first quarter. Tangible book value per share increased to $26.70 as of June 30, 2025, and compared to $26.05 as of March 31, 2025. The increase was primarily driven by $12.2 million of net income after dividends paid partially offset by a $2.3 million decrease in accumulated other comprehensive income. This concludes our prepared remarks. I will now turn the call back to the operator to open the line for any questions.

Thank you. Our first question comes from Stephen Scouten with Piper Sandler.

I guess I'd love to start on kind of the loan pipeline. And Cory, I appreciate your comments. You kind of said, I think, lower end of the low to mid-single-digit loan growth for '25 based on what you're seeing. But just wondering if you can give some color there on what the pipeline looks like maybe quarter-over-quarter just so we can kind of frame up what growth could do in the potential absence of the higher repayments.

This is Brent. And I think kind of like Cory said, we feel really good about what we're seeing in the pipeline and really our trend in originations, what's really a bit harder to predict or we think we can predict the payments that we're getting. But this quarter, our payments were in the neighborhood of $15 million higher than last quarter, and that's really causing us to see the second half kind of in that low to mid-single-digit kind of range. If that makes sense?

Stephen, this is Cory. I would just add that for the remainder of the year, we are anticipating flat to low single-digit growth. In terms of hiring, we plan to maintain that level. Our objective is to increase it to mid- to high-single digits after 2025, and I feel confident about the hires we are making. I also want to emphasize the importance of maintaining our existing structure.

Yes. And I mean that maybe leads to my next question, just kind of like how do you think about that balance of investing in additional new hires versus the potential for M&A? It sounds like it's kind of a both and strategy. If you were to find the right sort of deal, do you think that would lead you to put some new hiring activity on hold? Or can you continue to kind of do both concurrently, do you think?

We have no plans to pause our hiring efforts even if we find a suitable opportunity because we believe there are still chances for growth. Many others express similar sentiments, but we pride ourselves on being a relationship-focused bank. If new partners can bring valuable relationships to us, it will only enhance our efforts. However, our aim is not solely focused on increasing loans but also on growing deposits simultaneously. We are undertaking initiatives that we believe will aid in expanding that aspect as well.

Okay. Great. And then maybe just last thing. Any color you can lend on the increase in specific reserves in particular? Was that associated with that 1 large credit that you called out a multifamily loan? Or is that related to other types of credits?

Yes, Stephen, we did notice a lot of movement in criticized assets during the quarter, with significant amounts going out and a smaller portion coming in. The overall result was a slight increase, which led to a rise in general reserves. However, we also had a few smaller loans that went into nonaccrual status, and we opted for a conservative approach with those.

Yes, Stephen, this is Steve. I'll add to that there was not a specific reserve on that larger credit that we discussed. This is relevant to a few of the other credits.

Stephen, I think it's very nice to see a recovery and to have some of those developments occur in the same quarter. You can just take it for what it is.

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

I wanted to talk about the margin sum from here. And if I heard you correctly, you kind of talked about the loan yields kind of being more flattish from here on a core basis. And I know we had talked about some potential deposit exception pricing that could lower the cost of funds. But the interest-bearing cost of deposits was down 2 bps. Linked quarter, it would seem like you'd have a flattish outlook from here, but I wanted to get your perspective where we might go from here.

Yes, this is Steve. I'll start. We've seen that the CD book is repricing down. CDs account for about 10% to 11% of total deposits, so they're not a major driver overall, but the trend is positive. The remainder of the book, aside from the Federal Reserve's rate movements, is changing more slowly in response to those rates. Towards the end of the quarter, we made some progress with a few public fund deposits and certain clients that could yield some savings. However, without a change in the Fed's rates, there aren't significant adjustments to be made, but we will keep monitoring those rates.

This is Cory. I mean I do think we'll have some NIM expansion. And I mean we're extremely focused on that. And the exception-based pricing that we've talked about in the past is no different than what we do. We continue to do on a daily basis. But I think we'll continue to be focused on trying to expand that.

Okay. That's helpful. And then just back on the M&A topic. We've obviously seen a couple of deals in Texas here in the past week or 2. And just wanted to hear from you guys' perspective, the environment as you see it in terms of, if there are any things that are impediments, is it valuation expectations or other things that might hold you guys up from doing something? And then if you could remind us kind of your range from an asset perspective, what you might be looking at, that would be helpful.

Brett, this is Curtis. Yes, buyer expectations are probably our biggest challenge. We are keen to find a partner with the right culture, and if we don’t see that alignment, discussions about pricing don't really happen. We have several investment bankers generating ideas for us, but we need to motivate some sellers to accept market prices. We are actively searching and working through this. We believe we’d like to operate within a range of around $600 million to $700 million as a baseline, and we are comfortable going above $1 billion for the right opportunity, possibly even higher if it is an ideal fit. However, there are sellers dealing with significant AOCI issues who are reluctant to acknowledge that selling would mean losing out on that money. We need more realistic pricing from these sellers to proceed effectively. The current regulatory environment has become much more favorable, and I think as more deals are announced, we might see some longstanding sellers realize that now is the time to act as it is becoming easier to navigate the deal process.

Okay. And then maybe just one last one on mortgage banking. And I guess, it depends on what will happen with rates here, but I was curious if you got any thoughts on mortgage banking performance in the back half as you see the environment.

Cory here. It's been relatively stable, and I believe it will continue to be stable. As we've mentioned before, we've maintained our infrastructure and are consistently processing mortgages. While we're not experiencing significant growth, we aren't incurring losses either, and we're ensuring that we nurture our relationships in the process. Keeping our mortgage operations profitable during tough times reflects positively on our team. This is why we've been hesitant to move away from this area; we appreciate the opportunity to continue operations and manage some reasonable rate fluctuations. We're ready to move forward, and we're really looking forward to it.

Our next question comes from Woody Lay with KBW.

I wanted to start on loan yields. Even backing out for the interest recovery, I mean they saw really nice expansion in the quarter. I was just hoping to get some color on maybe where new loan production rates are coming on and how that compared to the payoffs you saw in the quarter?

I think for new rates, come on, this is Cory. I mean you're seeing low 7s, high 6s on some of the larger, more sophisticated borrowers that we're doing business with. But I mean, we're still trying to collect fees at the same time in doing some of this stuff. And we're also doing some stuff trying to hold our position if rates start cutting that it will be a little bit of delay in process for our loans to start cutting. So we think there's still some expansion there for us.

Yes. Another positive factor that contributed to our performance, in addition to the one-time recovery, was removing that loan from nonaccrual status. We had $20 million in loans that were not accruing, so if those had been accruing at a normal rate, our yields would have been higher in previous quarters as well.

This is Curtis. And part of our Board committees today, we were going over a list of loans that will be either maturing or hitting a rate reset dates over the next 18 months or so. And while it's not going to be 1 huge, big spike there are several large credits in there that will reprice at looking at current numbers, probably reprice a good 200 basis points up from where they are today. So again, it's not going to make the big jump and move the needle enormously in the next 3 months but it will help continue to hold that NIM up as we do that as well as bringing new ones on. We just don't know what kind of pay downs we do have. I know we'll get a few more I think the ones we've had recently and probably will have in this quarter are certainly significant. I personally kind of doubt that we see quite those levels going forward the rest of the year. But it's something we have to work for. If you look at where we would be with new loan production, without a couple of these major paydowns on it, we'd be hitting the kind of numbers we really like to hit. It's only these big blocks paydowns that kind of skew the numbers back down toward being low single digit.

To keep in mind, not all of these are the same. However, if you consider some of the headwinds we’ve discussed regarding certain paydowns, there are quite a few that were inexpensive loans that we were not unhappy to see disappear. The most significant one was at zero, and we are comfortable with moving up to loans that have higher interest rates.

Yes, that's really helpful color. Maybe shifting over to noninterest-bearing deposits. You saw a nice growth in the quarter. Was there any strategies that drove that growth? Or just any color you can provide on the higher balances?

No, I'd like to say that we are quite skilled in this area. However, the truth is our treasury management solutions continue to improve. We take pride in our alignment with new loan production, which likely accounts for the majority of our success. We haven't introduced anything radically new; rather, we are consistently enhancing how we serve our clients.

Yes. And then last for me, I just wanted to hit on the hiring strategy and just try to sort of get a better idea of the scope or opportunity of hiring that's out there and just how that impact expense growth from here?

It's going to affect our expense growth. We acknowledge this and are comfortable with it because we have set a short timeline for when we expect to breakeven on new hires. We anticipate some short-term impact on expenses, but we view that as part of our growth development. We're focusing on improving our loan origination system internally to ensure we're ready for the growth we aim to achieve. This will certainly influence various areas, as we plan to expand our hiring across the board. However, we are very selective in our hiring process and thoroughly screen candidates. The hires we have successfully made are those we believe will fit well into our team.

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

I know we've discussed this before, but I want to bring it up again. The strategy in Dallas has seen a decrease in loan balances in your metro markets, which has happened again this quarter. Is the hiring strategy linked to these declining balances? Also, I might have missed it, but how many lenders have you hired? Do you have any insight into the size of their book of business?

We've been actively hiring over the last month, bringing on a couple more lenders. This is part of our ongoing process. If we look specifically at Dallas, the significant nonaccrual loan that recently paid off was connected to that market because that's where the originating lender was located. This has contributed to some challenges we've faced. However, we believe we're managing those challenges effectively. Some issues needed to be addressed, and we anticipated the need for changes, including finding new opportunities. There were also some low-priced assets that were due for repricing, and the parties involved were aware they needed to seek other solutions. While these challenges haven't completely disappeared, we've handled them well. Our hiring of lenders is not directly linked to these obstacles; instead, we see opportunities to recruit talented individuals for our team. Our focus is not limited to Dallas; we're looking for candidates across the board who align with our culture and business strategy, ensuring they fit into our overall credit culture and the type of business we want to pursue.

Got it. I appreciate it. And then just kind of one last one for me here. You had a pretty nice gain on noninterest-bearing deposit balance in the quarter. Do you have a sense for how much of that came from new customers?

I don't think I can even take a shot at there at this minute. I mean I think there's a fair amount of it because that's our focus. I mean, every discussion we have over a loan ends up with a discussion over a deposit as well. So I would say that there is some of that contributed to it, but I wouldn't try to go say it was the lion's share by any means.

I understand that we've communicated the importance of securing deposits for existing customers, just as much as having their loans. This message is reaching customers through our loan servicing officers, which allows us to introduce our treasury management team to them. We've observed a significant increase in deposits from customers with whom we’ve had loans for 2 to 4 years, as we've started to push harder for these deposits. It's a combination of factors, and while I can't provide a specific percentage breakdown, we are indeed acquiring more customers. Often, we may have a loan relationship with a customer who has an operating account but without substantial balances. Now we're reconnecting with the key individuals in those relationships and showing them that they have significant deposits elsewhere, and demonstrating how we can serve them better than their current bank. Although it's a gradual process, we are seeing steady progress, and I believe this growth will continue.

Joe, I'd like to go back and give a little bit of credit to the fact that I think the way our ICP plan actually works, these lenders are incentivized on deposits as well as on loans. And they're not only incentivized, but they've got metrics that they need to meet. I think that has as much to do with this across the board as anything.

There are no further questions at this time. I'd like to turn the floor back over to Curtis Griffith for closing comments.

Thanks, operator. Thanks to everybody that participated on today's call. We do believe our second quarter results demonstrate our strong financial position as well as the growing earnings power and the liquidity of the bank. Our markets are generally enjoying healthy economic growth. We see opportunities to accelerate organic loan growth through continuing to hire experienced lenders who can bring high-quality customer relationships to the bank. We have a strong position in our markets where we do business, and we do believe we can grow market share over time. We also see opportunities to grow through M&A as the deal environment improves in our industry, that said, though, we will be very selective and ensure any acquisition that we consider makes economic sense for our shareholders. Taken together, we believe we're in an advantageous position to succeed and continue to deliver value to our shareholders as we work to accelerate the growth of South Plains. Thanks again for your time today.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.