South Plains Financial Second Quarter 2026 Earnings Call

The South Plains Financial Incorporated Second Quarter 2026 Earnings Conference Call. During today's 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'd 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. The related earnings press release and earnings slide deck presentation issued today are available on the SEC's website, as well as on the news and events section of our website, spfi.bank. Please refer to slide two of the presentation for our safe harbor statements regarding forward-looking statements. All comments expressed or implied made during today's call are made only as of today's date, and are subject to the safe harbor statements in the presentation and earnings release. In addition, please refer to slide two of the presentation for our disclaimer regarding the use of non-GAAP financial measures. The reconciliation of these measures to the most comparable GAAP financial measures can be found in our presentation and earnings release. I'm joined here today by Curtis Griffith, our Chairman and CEO, Corey Newsom, our President, and Brent Bates, Citibank's Chief Credit Officer. Curtis, let me hand it over to you.

Thank you, Steve, and good morning, everyone. Before we get into the second quarter's results, I want to take a moment to touch on the leadership transition that we have been planning for many years. As we announced in June, I will retire as the company's Chief Executive Officer at the end of this year, and Corey will then take over as CEO on January 1, 2027. I will continue to serve as the company's chairman of the board, but in a non-executive capacity. I am so grateful to have been a part of Citibank's transformation from a small institution to one of the largest banks in West Texas, with a brand recognized across the entire state. I joined the First State Bank's Board of Directors in 1972 and was elected chairman in 1984 when it was a small-town institution with just $30 million in assets. At that time, we saw an opportunity to grow the bank through both organic growth and accretive acquisitions. I'm very proud to report that we now have approximately $5.4 billion in assets at the end of the second quarter. Our growth and success are an incredible accomplishment that was only made possible through the hard work and commitment of our employees. I would like to thank each and every one of them for their hard work and dedication to the bank and our customers over the years. You are the reason for our success. I am most proud of the culture that we've created, one centered on relationships and a shared commitment to helping people succeed. Our customers and the communities that we serve have always been the key to our success. We have maintained a strong brand which continues to be well recognized for the best-in-class service that we provide, the high-quality products that we deliver, and the relationships that we build. These attributes have continued to differentiate our bank from the competition and allow us to hold a leading deposit market share across our core rural markets. The bank is in a strong position, and the time is right for me to retire from the management team. As I noted, we've been planning this transition for many years. Corey has been instrumental throughout this process. He has been leading our day-to-day operations and driving our growth strategy with a clear focus on disciplined organic loan growth and strategic M&A, most notably the recent successful acquisition and integration of the Bank of Houston. With Corey's expertise and dedication, we've set ourselves up for a seamless leadership transition at year-end. I'm confident that he is the right leader to oversee the company as we continue to execute our growth strategy and create long-term shareholder value. I'm also going to stay engaged with the bank and with Corey as I continue to be Citibank's chairman of the board as well as work as a consultant to the company. Before I turn the call over to Corey, I want to address my recent stock sale as disclosed in our press release and related 8K filing in June. Similar to our leadership transition, this sale has been a part of our long-term plan and is representative of a long-standing estate planning strategy that I've had in place. Additionally, my family has several agricultural businesses that we've made investments into over the years and a portion of the proceeds from my share sale will also help fund investments into those businesses over the medium term. Importantly, my family and I continue to be significant shareholders of South Plains and remain confident in the company's outlook. I absolutely believe that the future is very bright for our company, and I'm very pleased to see Corey officially take over at year end. Let me now turn the call over to him. Corey?

Thank you, Curtis, and thank you for all your support and guidance over the years. I'm very proud of the bank that we've built together and excited to transition into the role of CEO. As you mentioned, the bank is performing at a high level as we execute our strategy focused on maximizing our lending team across our high-growth Texas markets while also pursuing an accretive M&A. We look to continue this execution as we work to grow the earnings power of the bank. Importantly, we are pleased with our talented lending team and the meaningful or granted growth opportunities we believe are in front of us. Looking ahead, a major focus will remain squarely on the organic growth while maximizing the efficiency of our operations and delivering improved returns over time. I'm also pleased with our second quarter results as we delivered another solid quarter as can be seen on slide four. Our profitability remained resilient, supported by a stable net interest margin and continued balance sheet management. Our conservative credit culture remains unchanged as we proactively identify and address risk. Specifically, we believe the overall credit quality of our loan portfolio remains a strength of the bank. Additionally, economic activity in our Texas markets remains healthy as demonstrated by our strong loan pipeline and higher than expected deposit performance in the quarter. That said, we are maintaining our cautious and conservative approach, especially given the elevated interest rate environment and lingering inflationary pressures while remaining optimistic with the opportunities that we see ahead. Now let me get into some of the second quarter financial results. Turning to slide six, our loans held for investment increased by $677.3 million to $3.77 billion as compared to the lean quarter. The increase was primarily a result of $632 million in loans from our Bank of Houston acquisition and $35 million of organic loan growth during the quarter. Of note, we continue to experience elevated levels of payoffs as two loans totaling $37.5 million paid off. Looking to future periods, we expect paydowns to continue to be a headwind to overall loan growth. However, underlying loan demand is healthy, and we remain confident in delivering our full-year loan growth guidance in the mid-single digits. Our yield on loans was 6.81% in the second quarter, down slightly from 6.83% in the first quarter. Excluding problem loan interest and fee recoveries noted on slide 6, our yield on loans was held relatively steady over the last five quarters. Though there are still economic uncertainties in forecasted interest rates, we will remain focused on maintaining our margin as we look to grow our balance sheet. Turning to slide seven, our loan sales for investment in our major metropolitan markets of Dallas, Houston, and El Paso increased $682 million to $1.69 billion as compared to the lean quarter. This increase was due to the $632 million of loans for the Bank of Houston acquisition and $50 million in organic loan growth. I'm pleased to report that three months after the transaction closing, the integration of Bank at Houston has been largely completed with a conversion occurring in May. We continue to be impressed with the new Houston team, the dedication they have to delivering strong results from their market and the similarities in our cultures. The success of the acquisition and integration reflects the planning, preparation, and operational capabilities of both our teams, and I would like to thank our employees for their efforts. We'll see further opportunities to optimize the acquired balance sheet as we continue to evaluate higher-cost funding sources and certain relationships to ensure they align with our long-term strategic and profitability objectives. Overall, the acquired loan portfolio has performed in line with our expectations. As we have discussed on prior calls, M&A is part of our strategic growth plan, and we have the capacity and ability to execute another acquisition, though we've not yet identified a potential transaction partner that meets our strict criteria. We will remain highly disciplined as we are not interested in growth for growth's sake and continue to believe that any potential partner must align with our culture, credit discipline, and community banking focus and be in the best strategic and financial interests of our shareholders. Additionally, we have ample organic growth opportunities ahead to further expand the bank, which is our primary focus today. Moving to slide 11, we generated $14.1 million of non-interest income for the second quarter of 2026 compared to $11.3 million in the linked quarter. The increase from the first quarter was primarily due to an increase of $929,000 in mortgage banking revenues as mortgage originations approved during the quarter and an increase of $894,000 in bank card services and interchange revenue, mainly due to continued growth in customer card usage and incentives received during the period. As it can be seen on slide 12, the increase in mortgage banking revenues was mainly due to improved mortgage originations during the quarter given the spring selling season, though volumes remain subdued given the higher level of interest rates. That said, our mortgage business continues to perform well despite the low transactional environment and remains poised for the eventual upturn as rates normalize lower. For the second quarter, non-interest income was 22 percent of bank revenues, essentially flat with the linked quarter. Continuing to grow our non-interest income remains the focus of our team. To conclude, we believe that we are in a strong capital position that will allow us to execute our growth strategy and benefit from the many opportunities that we have in front of us. Given our capital position, we also remain focused on both growing Citibank while returning a steady stream of income to our shareholders through our quarterly dividend and keeping a share buyback program in place. To that end, our Board of Directors authorized a 6% increase to our quarterly dividend to $0.18 per share on July the 15th, which will be our 29th consecutive dividend. I'm also pleased that we were able to buy back a portion of Curtis's shares as we focus on creating value for our shareholders. With that, I'd like to turn the call over to Steve.

For the second quarter, diluted earnings per share were $0.96 compared to $0.85 from the linked quarter. The increase was primarily due to the BOH acquisition, combined with improved non-interest income, which Corey discussed. Starting on slide 14, net interest income was $50.3 million for the second quarter, up $7.4 million from the first quarter, largely due to the increase of BOH's $667 million of interest-earning assets. Its margin on a tax-equivalent basis was 4% in the second quarter, as compared to 4.04% in the linked quarter. Our first quarter NIM was positively impacted by five basis points due to $545,000 of non-accrual loan interest recovery. Excluding the problem loan interest and fee recoveries noted on this slide, we've held our NIM steady over the last four quarters. Our goal is to maintain our profitability at current levels while growing our balance sheet as we execute our organic loan growth strategy. which we believe will drive earnings growth and improving returns over time. On slide 15, deposits increased by $613 million for the linked quarter, $4.64 billion. Acquired BOH deposits were $596 million, while we organically grew deposits by $17 million. There is a strong result given that we typically see deposits flow into the bank in the first quarter and then seasonally flow out in the second quarter as our customers make tax payments and a portion of our public funds exit. Looking to the second half of the year, we expect moderate deposit growth to continue, though we are starting from a relatively higher base than in previous years, which is encouraging. The deposits represent 24.8% of total deposits at the end of the second quarter, compared to 25.7% at the end of the linked quarter, largely due to BOH's ratio at acquisition being approximately 16%. Our cost of deposits increased by 11 basis points, which was in line with the expectations that we outlined on the first quarter's earnings call. Looking forward, we continue to see an opportunity to reduce higher-cost broker deposits and non-core funding sources as they mature, which is an important lever in maintaining our profitability at current levels. Turning to slide 17, our ratio of allowance for credit losses to total loans was 1.41% at the end of the second quarter, stable from the prior quarter end. We recorded a $350,000 provision for credit losses, which related to our organic loan growth and net charge-off activity in the quarter. We continue to believe that we are appropriately reserved for varying economic conditions. We did see an uptick in classified and non-performing loans, primarily from BOH acquired loans, which we have expected. Our credit team is actively working these loans and will continue to help ensure a proper resolution. Next on slide 19, our non-interest expense increased by $4.3 million to $39.9 million in the second quarter as compared to the linked quarter. The increase from the first quarter of 2026 primarily resulted from an increase of $2.7 million in core operating expenses related to the BOH acquisition and higher incentive-based compensation expense. There was approximately $1.1 million of acquisition-related expenses in the second quarter of 2026, of which $710,000 was for personnel expenses. Moving to the third quarter, we would expect the acquisition expense to be largely behind us. Moving to slide 21, we remain well-capitalized with tangible common equity to tangible assets of 10.47% at the end of the second quarter and in line with the first quarter. Tangible book value per share was $29.57 as of June 30, 2026, in line with $29.65 as of March 31, 2026.

This concludes our prepared remarks.

I will now turn the call back to the operator to open the line for any questions. Operator?

Thank you. We will now be conducting a question and answer session. To ask a question at this time, you may press star 1 from your telephone keypad, and a confirmation tone will indicate your lines in the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For persistence using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, for our first question. Thank you. And our first question is from the line of Brett Brubenton with StoneX Group. Please just use your questions.

And congratulations, Curtis and Corey, on your new gigs.

Thanks, Brett.

Wanted to start on just a forward margin and just thinking about, We've talked in the past, and you mentioned the opportunities to continue or to work on the brokered CDs of Bank of Houston and their cost of funds. Was any of that work done during the quarter? My guess is most of it's ahead of us, as opposed to during 2Q. If you can reduce their cost of funds, it would seem like the margin could continue to hold around 4%. I just wanted to get some outlook on the margin and just how much Bank of Houston cost of funds management might impact the overall number.

Yeah, Brett, this is Steve. I'll start on that. We did do a little bit in the quarter, but as you can tell, we still have opportunity to continue. We got to see things a little bit better working on that. Again, with the brokered stuff, definitely the CDs as they've come back on those. What we've got on their side, a little bit better.

This is Curtis. We did pay all the federal home loan bank. That's already done. But like Steve said, we've got maturities on some of these others that we'll be dealing with as they come to you. But, yeah, we do believe there's still a good opportunity there to get their cost of funds more in line with what our historical cost of money is.

You know, in one fell swoop, it would be pretty easy, and you could see a pretty good move in what's there. but we also are in the process i mean we're negotiating rate differences on a lot of this stuff and taking them we think there's opportunities to improve that and do it in a very effective manner if you couple that with we still think our loan demand is strong and we just want to be very smart about how we approach okay um and then specifically guys what do you think the cost of funds can be managed much lower from here in the face of people talking about increased deposit competition um and then just you know any thoughts on the forward margin being target here with

With what's going on at a macro level, yeah, I think we're in a good spot. Some of that will depend on, again, what competition we do, again, and some of it will look like and where we want liquidity to be. We can, again, optimize some of what we brought over. Outside of that, you know, overall cost, a whole lot that we would want to do. Really want to maintain the – be able to fund the loans that we – But overall, we still want to try to manage NIM.

I appreciate the caller on that. And then the other question I had was just around, you've done the conversion in May. I think the total expense savings from the deal was 25% or like $4.6 million. Do expenses in 3Q come down a little bit, or maybe just any thoughts on the progression on the expense side from here?

Yeah, we should. We should, even before the conversion expenses largely behind us.

We were able to do the conversion.

Okay, great. Appreciate the color. Congrats on the quarter, guys.

Our next question is in the line of Joey and Kunis with Raymond James. Please use your three questions.

Hi, Joe.

So you talked about your prepared remarks about paydowns likely being a partial headwind to future loan growth. Should we think about that starting to moderate in the back half of the year? And then in a similar vein, has the commercial pipeline continued to build since quarter end? Have you seen any meaningful change in customer demand or utilization rates?

I feel really good about it. I mean, you've got to think about the increase in the number of bankers, both from the acquisition and through hiring, along with just our overall increase in our pipeline. I mean, we feel pretty good about our growth prospects for the second half of the year. Despite whether or not we have kind of this level of payoffs going forward, I feel like we can – Think about this with us.

We still – I mean, we had some paydowns, and we still maintained a decent position on our loans. But we did that all the while going through the amount of training that we've had to have focused. there's been a ton of noise inside this organization for this quarter trying to get everything put in place like it's supposed to and we still were able to manage the loans where we were we're getting all that stuff behind us and these guys are really i mean there's i would i would venture to say that there was probably several weeks in there that kind of bank of houston really probably came to a little bit of a screeching halt on putting fundings on and getting stuff done because as we went through that not only did they we come in and do conversions but all the training and everything that went with that. So, there was a fair amount of noise that we mixed in with this and still had.

I appreciate that. That was helpful.

And, you know, as you addressed one of Brett's questions about, you know, potentially pulling forward some of the expense savings from the deal, you know, if we were to pivot just to think about kind of the revenue side and any cross-sell ability there from, say, treasury management or other services to the legacy the Vega Houston customer base. I mean, have those cross-sell efforts begun? And, you know, if so, when should we expect, you know, to see, you know, an uptick in the P&L?

And I want to be – it takes a little while to get some of that stuff booked. But, I mean, as far as the cross-sell aspect of it, unequivocally. I mean, it's very much we've already started that. And our team is – they've been very, very focused on it and deploying. Maybe Houston always had the ability to be able to go out and do what we've been fortunate enough to be successful with on our treasury. Yeah, I think maybe fourth quarter you might see a little bit more uptick. I mean you're already seeing some positive things if you look at non-interest income improvements on this quarter. It continues to become more of our DNA on how we go about and approach treasury on each and every loan customer and relationship we have.

Okay.

And then, you know, maybe stepping back here, if we look beyond the integration of Bank of Houston, what do you view as the biggest driver of earnings growth over, call it, the next two to three years? Is that Houston expansion, lender hires, improvement operating leverage, maybe another deal? I mean, what do you think the best way is to think about that?

I think you pretty much check the boxes of kind of what we're focused on. But if you think that we can really make some strong impacts, I mean, lender hires, yes. I mean, we're not trying to patience on that. But our focus is really – I just think there's – we have a lot of momentum going in each one of those different directions and feel really good about it.

Well, that was great. I was happy to hear. Thank you for taking the questions.

Our next question is in the line of Woody Light, KBW. you. Let's just see with your questions.

Hey, good morning, guys.

Good morning. What is Nick?

I wanted to start on the loan-to-deposit ratio. It feels like there's an opportunity to have some deposit remix just on the Bank of Houston side, but at the same time, it feels like we might see loan growth picking up pretty nicely here in the back half of the year. So, just wanted to get your thoughts on where you're comfortable running that loan-to-deposit ratio longer term.

Loan-to-deposit range that we like to be at, we definitely have room to run that up a little bit, but we don't, you know, 85%, I don't know that anybody wants to get up much higher than that. So, we've kind of changed for a little bit, kind of with what's happened over the last number of quarters and even year or so, a little bit. But that's also part of why, you know, we have some room to let some deposit. Again, it all plays into what does our loan growth look like. And so we just, when we try to make, you know, if we would try to make too big of a move on any one side, so we've got a little bit of room to run on that, but we don't want to let loan to deposit get.

Woody, this is Curtis. Anyways, like Steve said, let me just ditto there that I think what you'll see is we'll probably move both sides of the fraction a little bit. Hopefully the bulk of it will be through loan growth because we do have a great pipeline and quite a few things that are likely to come on in the latter half of the year. But we knew going in and we talked about it that we are fortunate right now to have a lot of on-sheet balance liquidity, on-balance sheet liquidity at Citibank. And that gives us the flexibility to just let some of those higher cost deposits that were at BOH go away. And so you could see, I don't know that we will because we've had higher deposit growth than we thought we would have. But if that slows some, you might actually see the deposit number drop off just a little. But it's a matter of still maintaining good customer relationships with those legacy customers coming out of BOH and being sure the people we want to keep and do business with. But a lot of the brokered funds and other things that are not core deposits, you can see those go away. And we'll do that definitely with maintaining or improving NIM as our target.

That's a really helpful color. I appreciate you breaking it down. Maybe on the payoffs, and you saw some elevated payoffs this quarter, which I think you had previously messaged. We would see that on the last earnings call. I was just curious on what was driving that. Is it just normal course of business? I know in the past you've run off some credits that maybe didn't fit the credit profile of your company. I mean, I was just curious on what drove the payoffs this quarter.

This is Brent Woody. No, it was normal. None of this was – and what we're seeing in a lot of cases are – and our clients are getting gains off of those sales and taking advantage of that. There's plenty there as well, but there's not one single thing driving up a little bit this quarter. Like I said, our production is picking up as well nicely, and the pipeline's picking up, So they'll get about over.

Got it. And then maybe just last for me, you know, I think, as you mentioned, you're you remain interested in M&A. Just any updated thoughts on what what an ideal target would look like to South Plains following the Bank of Houston acquisition?

I mean, and that we've been we've been pretty open to something that we think the creative that makes sense that we we think would be a culture fit. But one of the things that we focused on how we've handled this last transaction, because we feel like that's going to be a pretty good example of how someone else is going to look at us and be comfortable going into a merger acquisition type with us. And it all really came together quite well. Our team performed very, very good. So, I mean, yeah, we've got some areas that we probably wouldn't be – we'll probably be a little bit more cautious about. But overall, the state of Texas is kind of where we're looking, and we're just looking for something that we think makes sense and it fits our culture and would be a nice complement to what we're trying to do.

Got it. All right, well, that's all from me. Thanks for taking my questions.

Thank you. At this time, I'll turn the floor back to Curtis Griffith for closing remarks.

Thank you, Operator. Thanks, everyone, who joined us on our call today. To conclude, I'm very pleased with our second quarter results. We delivered strong profitability. maintained the credit quality of our loan portfolio, successfully completed the integration of Bank of Houston, and continued to execute on the growth strategy that has driven our success for many years. Just as importantly, we remain well positioned for the future with a strong balance sheet, a talented team, and meaningful opportunities across our markets. Having spent more than four decades helping lead this organization, I'm incredibly proud of what we've built together. What began as a small community bank has grown into a premier banking franchise, serving customers across some of the most attractive markets in Texas. I would like to especially thank our employees, both past and present, whose dedication, hard work, and commitment to our customers have made South Plains what it is today. I would also like to thank our board of directors for their support and guidance over the years, our customers for the trust they place in us every day, and our shareholders for their continued confidence in the company. Most importantly, I'm extremely confident in the future of South Plains. We have a strong leadership team in place. I firmly believe Cori is the right person to lead the company into its next chapter of growth and success. While my role will be changing, I look forward to remaining actively involved as chairman and supporting the team as we continue building on the foundation we've created together. Thank all of you for joining us today and for your continued interest in South Plains Financial.

This concludes today's conference. You may disconnect your lines at this time.

Thank you for your participation.