South Plains Financial, Inc. Q3 FY2025 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial, Inc. Third Quarter 2025 Earnings Conference Call. 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, 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'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 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 qualified by 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. 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 afternoon. As outlined on Slide 4 of our presentation, we delivered strong third quarter results, highlighted by solid earnings growth as we continue to experience net interest income expansion, supported by our low-cost community-based deposit franchise. The credit quality of our loan portfolio also continued to improve, and our return on assets markedly expanded. Our results demonstrate the strong foundation that we have purposefully built. We've added exceptional talent across the bank while also making the necessary investments in our technology platform that positions South Plains to efficiently scale our operations as we grow. We have also built strong liquidity and capital while continuing to improve the asset quality of our loan portfolio. As a result, I believe the bank is firmly positioned to accelerate our asset growth through both organic growth and accretive M&A opportunities. As Cory will expand upon, we continue to benefit from our competitors' acquisitions by attracting experienced lenders to the bank. We expect they will bring high-quality, long-term customer relationships they have built in their successful careers to South Plains. While we have been experiencing higher-than-normal loan paydowns, which has proved a headwind to loan growth, we expect an acceleration in growth next year through increasing our lending team by up to 20%. The investments that we've made in the bank, combined with the experience that we gained through the acquisition of West Texas State Bank also positions us to explore further acquisitions. Of note, we continue to engage in discussions with potential target banks in our core markets that we believe have the potential to fit our conservative nature and overall culture and meet our strict criteria for a deal. As I have said on many of these calls, we are only interested in acquiring a bank that possesses these qualities and makes sense for us and our shareholders. Importantly, M&A is not the only option that we have to grow. Our organic growth initiative is just in the early innings, and we are optimistic that we will see a sharp acceleration in loan growth in the year ahead. As a result, we will only do a deal that makes sense for the bank and our shareholders, of which my family and I are the largest. 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 September 30, 2025, our consolidated common equity Tier 1 risk-based capital ratio was 14.41%, and our Tier 1 leverage ratio was 12.37%. 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. Last week, our Board of Directors authorized a $0.16 per share quarterly dividend, which will be our 26th consecutive dividend. Now let me turn the call over to Cory.

Thank you, Curtis, and hello, everyone. Starting on Slide 5. Our loans held for investment decreased by $45.5 million to $3.05 billion in the third quarter as compared to the linked quarter. The decline was primarily due to a decrease of $46.5 million in multifamily property loans, mainly due to the payoff of 2 loans totaling $39.6 million. As Curtis mentioned and we have discussed on previous calls, we've been experiencing a heightened level of loan payoffs and paydowns through the year, which have been a headwind to loan growth. Looking forward, we expect the level of paydowns and payoffs to moderate as we look to 2026. Our yield on loans was 6.92% in the third quarter as compared to 6.99% in the linked quarter. Our loan yield was boosted by 8 basis points in the third quarter due to $640,000 in interest and fees related to the resolution of credit workouts. As a reminder, our loan yield was also boosted by 23 basis points in the second quarter due to $1.7 million interest recovery from the full repayment of a loan that had been on nonaccrual. Excluding these onetime gains, our yield on loans was 6.84% in the third quarter and 6.76% in the second quarter, representing an increase of 8 basis points. Looking ahead, the impact to our loan yields from the FOMC's 25 basis point reduction in their benchmark interest rate in September was not material, though we do expect our loan yields to moderate. That said, we remain optimistic that we can continue to reprice our deposits and manage our margin as market rates decline. Importantly, our new loan production pipeline continues to remain solid and economic activity continues to be healthy. As we discussed on our second quarter call, we have a strong position in each of the communities and metro markets where we do business and have capacity within our existing infrastructure to expand our lending platform. We're actively recruiting lenders who fit our culture to grow our lending capabilities as we work to accelerate our loan growth, which is a priority for our management team. We continue to be very pleased with the quality of bankers that we are speaking with who have an interest in joining South Plains. We are also seeing dislocation from recent acquisitions in Texas, which is creating more opportunity to expand our platform. As Curtis touched on, our goal is to grow our lending platform by up to 20%, and we are more than halfway there, having added lenders in Houston and Midland since our last call. This builds on our success from the second quarter where we recruited several experienced lenders in our Dallas MSA. While loans in our major metropolitan markets of Dallas, Houston and El Paso held steady in the third quarter at $1.01 billion, as can be seen on Slide 7, we remain optimistic that loan growth will reaccelerate as we continue to add lenders across our metropolitan markets. At quarter end, our major metro loan portfolio represented 33.2% of our total loan portfolio. Skipping to Slide 10. Our indirect auto loan portfolio totaled $239 million at the end of the third quarter, which is relatively unchanged as compared to $241 million at the end of the linked quarter. We've been carefully managing this portfolio with a focus on maintaining its credit quality over the last 2 years, which has resulted in a decline in loan balances of $57 million since the third quarter of 2023 when the portfolio was $296 million. Over this time period, we have seen competitors become more aggressive at the higher end of the credit spectrum while volumes have declined. More recently, we have tightened our loan-to-value requirements to further ensure that we are proactively managing this portfolio in the current environment as well as any potential challenges to come. It is also important to highlight that we are primarily a lender through auto dealers to borrowers who are in our markets, 86% with super-prime or prime credit ratings at origination. Our borrowers' strong credit profiles can further be seen in the credit metrics of this portfolio as our 30-plus days past due loans, which totaled approximately $575,000, improved 8 basis points to 24 basis points in the third quarter as compared to 32 basis points in the second quarter. At year-end 2024, our 30-plus days past due loans stood at 47 basis points. We believe our 30-plus past due loans are the best early indicator to any potential signs of credit stress in this portfolio and believe our tightened credit standards will further protect the bank and the credit profile of our indirect auto portfolio as we look forward. Additionally, our net charge-offs for all consumer autos were approximately $160,000 for the quarter as compared to $350,000 in the linked quarter. Given the stable profile of our indirect portfolio, combined with the success that we are having adding lenders to the bank, we expect loan growth to gradually accelerate to a mid- to high single-digit rate through 2026. We expect our new hires to begin contributing to loan growth in '26, while the level of payoffs begins to diminish. We also remain cautiously optimistic that economic growth across our Texas markets can remain resilient and provide a tailwind to growth. Turning to Slide 11. We generated $11.2 million of noninterest income in the third quarter as compared to $12.2 million in the linked quarter. This was primarily due to a decrease of $1 million in mortgage banking revenues as can be seen on Slide 12. The decrease was mainly from a $769,000 quarter-over-quarter decline in the fair value adjustment of the mortgage servicing rights asset. Overall, our mortgage banking revenues have been relatively flat over the last 4 quarters given persistently high mortgage rates combined with low housing supply. We are pleased with how the business is performing in this low transaction environment and the recent easing of market interest rates and believe we are well positioned for the eventual upturn in volumes as rates look set to decline further. For the third quarter, noninterest income was 21% of bank revenues, essentially flat with the linked quarter and the year ago 2024 third quarter. Continue to grow our noninterest income remains a focus of our team. I would now like to turn the call over to Steve.

Thanks, Cory. For the third quarter, diluted earnings per share were $0.96 compared to $0.86 from the linked quarter. This increase is primarily a result of the reduction in provision for credit losses and increase in net interest income, which I'll cover, partially offset by the decrease in MSR fair value adjustment Cory mentioned. Starting on Slide 14. Net interest income was $43 million for the third quarter compared to $42.5 million in the linked quarter. Our net interest margin calculated on a tax equivalent basis was 4.05% in the third quarter as compared to 4.07% in the linked quarter. As Cory touched on, we had loan interest and fee items related to specific credit workouts that positively impacted our NIM in both the third quarter and the second quarter. The third quarter impact was 6 basis points or $640,000, while the second quarter impact was 17 basis points or $1.7 million. Excluding these onetime items in both periods, our third quarter NIM increased by 9 basis points to 3.99% from the linked quarter. As outlined on Slide 15, deposits increased by $142.2 million to $3.88 billion at the end of the third quarter due to organic growth in both retail and commercial deposits. The increase was predominantly noted in the loan market and follows the overall $53.6 million decline during the second quarter. Noninterest-bearing deposits increased $50.7 million in the third quarter. Additionally, our noninterest-bearing deposit to total deposit ratio increased to 27% in the third quarter from 26.7% in the linked quarter. The mix shift change in deposits along with the continued drop in CD rates contributed to the 4 basis point decline in our cost of deposits to 210 basis points in the third quarter, down from 214 basis points in the linked quarter. Turning to Slide 17. Our classified loans decreased $21.1 million during the quarter. This includes the full collection of a $32 million multifamily property loan that had been talked about on prior calls. This is the second consecutive quarter with a positive resolution to a large previously classified and/or nonperforming loan that included full repayment of all amounts owed and shows our commitment to asset quality. Our ratio of allowance for credit losses to total loans held for investment was 1.45% at September 30, 2025, unchanged from the end of the prior quarter. We recorded a $500,000 provision for credit losses in the third quarter compared to $2.5 million in the linked quarter. The decrease in provision expense was largely attributable to a decrease in specific reserves, decreased loan balances and overall improved credit quality. I would note that we believe we continue to be well positioned for varying economic conditions. Skipping ahead to Slide 19. Our noninterest expense was $33 million in the third quarter as compared to $33.5 million in the linked quarter. $519,000 decrease from the linked quarter was largely the result of a decrease of $581,000 in professional service expenses related primarily to consulting on technology projects and initiatives. On September 30, 2025, we redeemed $50 million in subordinated debt. The redemption was done in conjunction with the end of the initial 5-year fixed rate period as the debt was to begin floating quarterly at a higher interest rate. We made the decision to repay the debt given the higher rates, combined with our view that we can readily access the fixed income market if and when a need arises. Moving to Slide 21. We remain well capitalized with tangible common equity to tangible assets of 10.25% at the end of the third quarter, an increase of 27 basis points from the end of the second quarter. Tangible book value per share increased to $28.14 as of September 30, 2025, compared to $26.70 as of June 30, 2025. The increase was primarily driven by $13.7 million of net income after dividends paid and by an increase in accumulated other comprehensive income of $9.1 million. This concludes our prepared remarks. I will now turn the call back to our operator to open the line for any questions.

Our first question is from Joe Yanchunis with Raymond James.

So you discussed your plan to increase your lending team by up to 20% next year. And that follows a relatively rapid pace of hires over the past couple of years. I guess how much of that growth is coming from true lenders versus support staff? And for context, can you tell us how many lenders we should use as a base to go off this growth?

Yes. From the base, it's probably about 40, and none of that includes support staff; that's all production. Based on the 20% we discussed, we've likely already achieved over 10% so far this year.

We're partway to that.

And are there any particular markets that you can highlight where that growth has either come from or where you're expecting that growth to come from?

Yes. Permian, Houston and definitely in the Dallas area.

Okay. So shifting gears here, and I apologize, I only heard most of your comments on your indirect auto portfolio. And I certainly understand your great past due ratios and low charge-off activity. However, I noticed in your deck, your concentration of subprime and deep prime indirect loans increased pretty materially. Can you talk about that?

Repeat part of that. I didn't hear part of what you said.

Yes. It looks like there was an increase in subprime and deep subprime kind of concentration in that portfolio.

I mean I don't see that. We haven't had much of it.

Yes. Joe, this is Steve. I'll start with that. I want to clarify that the information presented reflects the category at origination. The numbers provided are updated data, not from the origination date as they typically are. It seems we did not capture the consistent data we've been sharing. This is more current and highlights some shifts in borrower credit scores. That's why it appears different from what you've seen before.

Got it. Okay. That's helpful. And then lastly for me, just kind of a modeling question. Based on that $50 million of sub debt you guys redeemed, what was the incremental cost associated with that? If you happen to have that.

Well, I mean, the $50 million, we were paying $4.5 million, and it would have been going up to $8 million.

No, I was wondering about any expenses that you incurred in the P&L from redeeming that. Yes, just to kind of try to understand the true run rate.

Yes. And I may not be understanding. I mean, there was no expense to redeem it. It was at the end of the call period.

If that's what you're wondering. We didn't go outside of the call period. We had the opportunity. The window opened and we took it.

Our next question is from Woody Lay with KBW.

I wanted to follow up on the hiring initiative. You did a similar initiative back in 2021, and I believe it was pretty successful. So could you talk about your kind of previous experience being aggressive on the hiring front and how you're translating those past experiences to what you're doing now in the market?

Yes. Looking back at that time, we were quite proactive in our hiring efforts. However, it's important to note that we also faced a significant number of retirements shortly after that period. Consequently, we were equally focused on ensuring that we could replace those individuals while simultaneously expanding our team. Today, the situation is different. We believe we are well-positioned to capitalize on some excellent opportunities and to grow in those markets. Whenever we evaluate a new model, we aim for breakeven within six months or less, which remains a primary focus for us. The hiring process itself is quite rigorous, as we strive to ensure new hires align with our credit culture and overall values. It's a considerable task, but one we take pride in and have achieved great success with.

Yes, I understand you mentioned you are about 50% done with that, but it doesn't seem like we have experienced a significant expense impact from it. How should we consider the expense growth rate moving forward, given the additional hires you anticipate?

Steve, you're usually on cleanup on me for stuff like that. But I mean, these guys are covering the way as we go on this. So the expense run hasn't been that bad. I mean it's from a net perspective. But Steve, what would you?

Yes, I believe it will increase. There has been a slight increase as we have progressed. It hasn't all happened at once; the impact has been spread out. Therefore, I expect overall noninterest expense to see a modest increase.

We've kind of taken the approach that this is the kind of money we're quite proud to be spending and having the increases on.

And remember that a significant part of the compensation will be in their ICP packages, and that won't get paid out until well into next year, even for the ones that are bringing the business on.

Yes. And maybe just last for me on M&A. You all sound a little bit more optimistic on the M&A front than maybe previous quarters. I know you are very stringent on who you look at and who would make a good target for you all. So could you just remind us sort of go down the checklist and what makes a good target for South Plains?

I'm going to lead it off. It's number one, got to be a culture fit. And we've got to make sure that this is somebody that we think that we could go achieve success with long term. And the numbers have got to line up. There's no question. And I'll let Curtis talk a little bit further about this, but we're as focused on culture as anything that you can find because that's where we've seen more of the train breaks that really come from.

If we can't successfully integrate the acquired banks, it won't be beneficial for anyone, including their customers and our shareholders. As Cory mentioned, our main focus is on this integration. We also prioritize acquiring successful banks that have strong customer loyalty and a long-term commitment from their employees. Our goal is to transition these teams to work with us, and we look for groups that align with this vision. The financials also need to make sense. Currently, there is a lot of market activity, interestingly enough, during a time when bank stocks aren't performing well. Many acquirers, including us, have limited multiples to work with, so we need to find partners who share our long-term vision. In the end, their shareholders will benefit from the growth of our stock. I believe we will see some activity, as we are currently exploring some promising opportunities.

Woody, both of your questions are kind of funny because they're kind of tied together. Typically, unless there's disruption involved, we're not hiring lenders or employees that are looking for a job. We look for contentment. I think the same thing goes as we look for an acquisition. There's a difference between somebody who may want to sell and somebody who has to sell, and we're much more focused on somebody who might want to sell.

Our next question is from Stephen Scouten with Piper Sandler.

I'll check if you’ve grown tired of discussing these new hires yet. When you onboard these individuals, I know, Cory, you mentioned considering a six-month breakeven. Are you currently targeting any specific segments of lenders, like commercial and industrial versus commercial real estate? Additionally, what size of business do you expect each of these hires to bring in? Is it around a $50 million portfolio over time, or how do you suggest framing the potential of each hire at a high level?

So, Stephen, I would say a good portion of these will still involve commercial real estate. Generally, we prefer commercial and industrial when we can get it, but we've always identified as a real estate bank, and much of this ties together. I want to emphasize that we've never gone out actively to hire someone based solely on what portion of their book they could bring. We focus on understanding their capabilities and how they generate business. Typically, we hire individuals under the assumption that they won't bring anything initially. The people we are hiring are managing portfolios that can range from $75 million to $300 million or even $400 million. These individuals have demonstrated their capacity to produce results and have been successful for long periods before joining our organization. So, I consider myself quite conservative when discussing those numbers.

That's helpful. If I am calculating correctly, it seems like you need to add about four or five more lenders to reach this 20%. The four or five you have already added, accounting for the 10% you mentioned, what have they achieved so far? What progress have you observed with them over the time since they joined?

I think you have to factor in that you're probably on the longest of 2 quarters in place as opposed to some that have been a little bit shorter than that. So I mean, I'm not prepared really to, I guess, rattle off any numbers because I didn't kind of expect that one. Are we seeing nice good-sized transactions coming across the table? Absolutely. Absolutely. I would venture to say I can't think of one that's not already breakeven.

Most of them have been with us for less than six months, and it seems like many have been here for about three months. So it's all been quite recent. Got it. And then maybe going back on that.

Typically, many of the individuals you bring on may have a nonsolicit agreement for a certain period at the beginning. This ensures that their new pursuits do not conflict with any existing agreements they may have. We are quite cautious about these matters. What we observe is that their overall potential and what we see in the first six months might differ a bit.

Got it. Helpful. And then maybe this one will be for Steve. I'm kind of curious on where you think like a good starting point is for the NIM next quarter. Obviously, there's a lot of puts and takes there with the recovery. I guess maybe starting from that 3.99% net of the recovery, but then I assume it looks like you're paying the sub debt off with existing liquidity. So I assume there'll be some NIM benefit there and then rate cuts. So if there's maybe a starting point you think about for fourth quarter as a jumping off point?

Yes, that's a good question. There are many factors to consider. We did show a 9 basis point increase, but the Fed's movement happened right at the end of the quarter with a couple more scheduled. I don't necessarily expect us to increase our net interest margin. We might see a basis point or two increase, or it could decline by a couple of basis points. In the short term, we've mentioned before that some of our public funds are tied to an index, which may lag until the following month before they catch up. Overall, I think we've done well. In the immediate term, there may be a slight decline in our net interest margin until everything adjusts in the system and we can reprice deposits as needed. Additionally, we have loans rolling off low rates as they reach the three- or five-year mark. As I said, there are many factors at play, but that range is not a bad spot.

Okay. That's helpful. And maybe one last one for me. Just kind of going back to the indirect auto, and I hear what you're saying, Cory, losses obviously haven't really been material this quarter or in the past. But that data of credit scores and the migration, even though I know it's not apples-to-apples in the quarter-over-quarter presentation of it, but it does obviously show a migration of credit scores downwards. I mean, does that concern you at all? Or is that kind of part of why you guys have been pulling back a little bit in indirect auto? Or maybe any more color you can give about that credit score migration and what that maybe means for the consumer part of your book?

Yes, this is Brent. We conduct an annual analysis where we evaluate the performance of our entire portfolio's credit scores. This year, as well as last year, we've observed a decline in the lower half of those credit scores. However, during this 24-month period, we have not experienced any increase in delinquencies or other credit concerns that would be alarming. Nonetheless, we are continuously monitoring this situation along with all other aspects of credit risk to identify any potential issues.

And average duration on these loans ends up being, what, a little over 2 years. So it's...

Pretty.

We just stayed so focused on the upper portion of that growing the higher-end stuff on the portfolio that we want to be very, very careful with it.

Stephen, it is very true all across the country, the folks kind of on the lower end, life is getting harder. It's getting tight out there, and you're seeing it in all kinds of areas. And I worry about that some just from the overall economy. The good news for us is, yes, we do have some of those, but we have very few of those. So we're not immune to some of our people having some credit problems. But so far, it just hasn't impacted us on any meaningful losses. And we don't think it will because so much of that portfolio is much higher credit scores.

Yes. And go back and keep in mind one thing. I mean, if you put the dollar amount to it, you're still looking at less than $20 million that is in subprime or deep subprime in the whole portfolio, less than 2% of that is in non-autos, which would be in any type of an RV or something like that. We just don't get out into some of that stuff that's a little bit questionable. We're very, very careful about what we're going to put on our books.

Yes. Yes. No, that makes sense. And I guess at the end of the day, if the past dues are still good, maybe they're not paying their credit card, but they're continuing to pay their auto payment to make sure they got some way to get to work and the like.

Our next question is from Brett Rabatin with the Hovde Group.

I wanted to go back to payoffs. And I know that's been a topic for some quarters now, and you guys are optimistic. Obviously, all this hiring is going to help drive origination activity. To what extent does the commercial real estate book look vulnerable to the curve here to the permanent market, just given a dip here recently in rates. Does that concern you guys at all about continued payoffs maybe in the CRE book, just given where rates are?

Yes, this is Brent. We still have some payoffs scheduled, and we anticipate these will continue into the first and possibly the second quarter. This is part of our usual process. Over the past six months, we've focused on identifying and resolving potential credit issues, which has slightly impacted loan balances. However, we expect to see some additional payments in the first and second quarters of next year, possibly even a bit earlier.

We noticed that our multifamily segment has decreased by approximately $100 million over the past three quarters. To break that down a bit, over half of this decrease is attributed to two credits that we announced we were exiting. It was not a significant issue for us as we exited without incurring any losses; we just didn't feel they fit well within our balance sheet. Furthermore, about 25% of the decline was related to a nontraditional bank lender that allowed them to shift from a principal and interest loan to interest-only payments. We are not engaging in such practices. It’s important for us not to compromise our credit standards simply to maintain certain entries on our books. We are committed to sourcing new business to replace any losses but will not lower our credit standards out of concern for potential payoff outcomes. Additionally, in almost every instance we've discussed, the loans in question were at below-market rates, so we were fine with them being paid off. Consequently, not all challenges arising from paydowns are negative, particularly if those loans were at rates of 4% or 5%, which we prefer not to retain.

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

Thank you, operator. Thank you to all of those that participated on today's call. To conclude, we do believe our third quarter results demonstrate a strong financial position as well as growing earnings power and capital of the bank. While delivering our strong earnings growth, we've been making necessary investments to expand our capabilities, position South Plains to be a much larger company. Our growth will come from our strategic initiative focused on reaccelerating organic loan growth while seeking to expand South Plains through accretive M&A opportunities. We've continued to add experienced lenders all across our markets to expand our lending platform and increase our loan growth through 2026. We also continue to engage in discussions with potential acquisition candidates and are pleased with the opportunities we're evaluating. Fortunately, the organic loan growth initiative is also just in the early innings. We're optimistic we'll see that growth in the year ahead. As a result, we're only going to do a deal that makes sense for the bank and our shareholders. Taken together, we believe we're in a good position to deliver on our initiatives and drive value for our shareholders as we work to accelerate the growth of South Plains Financial. Thank you again for your time today.

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