Earnings Call
South Plains Financial, Inc. (SPFI)
Earnings Call Transcript - SPFI Q2 2023
Operator, Operator
Good afternoon, ladies and gentlemen. And welcome to the South Plains Financial Second Quarter 2023 Earnings Conference Call. During today’s presentation, all parties will be in a 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 Mr. Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead, sir.
Steve Crockett, CFO
Thank you, Operator, and good afternoon, everyone. We appreciate your participation in our second quarter 2023 earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer; Cory Newsom, our President; and Brent Bates, our Chief Credit Officer. Slide deck presentation to complement today’s discussion is available on the News and Events section of our website spfi.bank. Before we begin, I’d 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 statement in our earnings press release that was issued this afternoon and on slide two of the slide deck presentation. All comments made during today’s call are subject to those Safe Harbor statements. Any forward-looking statements presented herein are made only as of today’s date and we do not undertake any duty to update such forward-looking statements, except as required by law. Additionally, during today’s call, we may discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can also be found at the end of our earnings release and beginning on slide 23 of the slide deck presentation. Curtis, let me hand it over to you.
Curtis Griffith, CEO
Thank you, Steve, and good afternoon. On today’s call, I will briefly review the highlights of our second quarter 2023 results, as well as provide an update on our capital allocation priorities following the sale of Windmark, which closed in April. Cory will discuss our loan portfolio in more detail and how we continue to benefit from competitor mergers in our key markets. Steve will then conclude with a more detailed review of our financial results. To start, I am very pleased with our second quarter results as they highlight the strength of our culture and the commitment that our employees have to our customers and to our company, especially in such a challenging environment for our industry. We have exited the second quarter in a strong financial position and I’d like to thank our employees for their hard work, which can clearly be seen in our results once again this quarter. Turning to today’s call, there are six key points that I hope you will take away. First, our deposits remained stable through the second quarter, further demonstrating the strength of our community-based deposit franchise. Second, despite the continued rising market interest rate environment, our net interest margin held steady from March’s level as higher loan yields are offsetting the rise in our cost of funds. Third, our organic loan growth was very strong in the second quarter as we benefited from a robust loan pipeline combined with lower competition across our markets. That said, we continue to be selective in the new loans that we fund as we maintain our underwriting discipline. Fourth, the credit profile of our loan portfolio improved through the second quarter, though we did have one non-accrual addition, which I will touch on in more detail in a moment. Fifth, we further built capital this quarter through our earnings and the sale of Windmark as our Tier 1 capital to average assets ratio increased to 11.7%. And lastly, we strategically sold a portion of our investment securities portfolio in the quarter, which we believe to be advantageous given the gains we recorded from the Windmark sale combined with the yield improvement that we were able to achieve as we reinvested the securities sale proceeds into new loans. Turning to our results in more detail on slide four of our earnings presentation. We delivered net income of $29.7 million or $1.71 diluted earnings per share, as compared to $9.2 million or $0.53 diluted earnings per share for the first quarter of 2023. This compares to net income of $15.9 million or $0.88 per diluted common share in the year ago second quarter. As we discussed on our first quarter call, we completed the sale of Windmark, Citibank’s wholly-owned insurance subsidiary for $35.5 million in April in an all-cash transaction. The after-tax sale proceeds less transaction expenses, the incentive compensation triggered by the transaction, and the realized loss on the sale of our investment securities during the second quarter resulted in $1.16 per share of one-time net income in the second quarter. Excluding these items, we earned $0.55 per share. Given the large gain that we recorded, we made the strategic decision to sell $56 million of investment securities from our portfolio, which resulted in a realized loss of $3.4 million. We believe this was a tax-efficient transaction and will boost our earnings in future periods given that the securities we sold were yielding approximately 2.7% and we reinvested the proceeds and allowance that are yielding more than 7% in the second quarter. The incremental income will help replace the loss of future net income from the Windmark operations. Turning to our loan portfolio. We grew loans 6.8% in the second quarter as we continue to experience healthy economic growth combined with customer dislocation in many of our markets from recent competitive mergers. Additionally, we are seeing larger competitors pull back in some markets, which is allowing our team to bring new relationships to the bank as Cory will touch on in more detail. We recorded a provision for credit losses of $3.7 million in the second quarter, as compared to $1 million in the first quarter of 2023. The provision was primarily for the strong loan growth that we delivered in the quarter and a $1.3 million increase in specific reserves related to one previously classified credit relationship totaling $13.3 million that was placed on non-accrual in May of 2023. This credit was for a business that is currently in borrower-directed liquidation and from which we expect to see larger repayments starting in the third quarter of 2023. While there continues to be payment performance, we placed the relationship on non-accrual and recorded a specific reserve given that the business is no longer a going concern. As Steve will touch on in more detail, the overall credit quality of our portfolio continued to improve through the second quarter. Notably, our budget and consensus estimates were for $1.25 million of provision expense in the second quarter. Higher recorded provision expense was approximately $0.14 per share above these expectations. Consequently, we believe the run rate earnings of the bank, excluding all one-time items and the increased provision was $0.69 per share in the second quarter, which bodes well for the second half of the year as we will fully benefit from the second quarter’s loan growth and improved loan yields. We grew deposits $66.5 million or 1.9% to $3.57 billion at June 30, 2023, as compared to the end of the first quarter 2023. Our deposit growth was primarily due to an $81 million increase in brokered deposits, partially offset by a $67 million reduction in public funds, which had grown $118 million during the prior quarter. We are making a concerted effort to manage overall deposit levels and related interest costs. Ultimately, we will continue to build out our deposit gathering capabilities as we strive to grow core deposits and manage our cost of funds. The stability of our deposit franchise and strong liquidity position can further be seen on slide five, which also highlights the competitive position that South Plains holds. At quarter end, 81% of our deposits were in our rural markets with only 19% in our major metropolitan markets of Dallas, Houston, and El Paso. Additionally, our average deposit account balance is approximately $36,000 and only an estimated 16% of our total deposits are uninsured or uncollateralized. We believe we also ended the second quarter in a strong liquidity position with $1.82 billion of untapped borrowing capacity. We have $1.01 billion of availability from the Federal Home Loan Bank of Dallas, $612 million of availability from the Federal Reserve’s Discount Window, and $200 million of capacity from the Federal Reserve’s Bank Term Funding Program. We have ample capital to take advantage of growth opportunities both organic and otherwise as they present themselves. Given our strong capital and liquidity position, our Board of Directors authorized a $15 million stock repurchase program in May, and we bought back approximately 113,000 shares during the second quarter for $2.6 million. We continue to believe that our shares are trading below intrinsic value and do not reflect our strong results and the opportunities that we see to further grow the bank. That said, we will be cautious with our capital given the uncertain economic environment, combined with the dislocation of the banking sector. We will be patient and continue to review a broad range of options to determine the best uses for the capital generated from the Windmark sale. As part of our capital allocation, returning a steady stream of income for our shareholders through our quarterly dividend has been a focus since going public over four years ago, and our Board of Directors again authorized a $0.13 per share quarterly dividend as announced last week. This will be our 17th consecutive quarterly dividend to be paid on August 14, 2023, for shareholders of record on July 31, 2023. To conclude, we are successfully navigating what is a challenging environment and remain cautiously optimistic looking into the second half of the year. Economic growth is holding remarkably steady in our markets, while unemployment remains low. We will maintain our capital as we look to take advantage of opportunities in the market and continue to conservatively grow the bank. Now let me turn the call over to Cory.
Cory Newsom, President
Thanks, Curtis, and good afternoon, everyone. Turning on slide six. Loans held for investment increased during the second quarter by $190.4 million or 6.8% compared to the first quarter of 2023. Demand was broad-based across both our markets and industry sectors highlighted by organic loan growth in residential mortgage, commercial real estate, and energy. We were fortunate to end the second quarter with a strong loan pipeline which contributed to this growth. Additionally, the competitive environment continued to ease as we benefited from the customer dislocation created by competitor mergers, as well as from a reduction in credit availability from several competitors through the quarter. We believe this is an opportunity to bring high-quality long-term customer relationships to South Plains. While the competitive environment has improved, we are maintaining our underwriting standards as we will not sacrifice credit quality for growth. We remain focused on funding high-quality loans with good risk and return profiles. Our loan yield was 5.94% in the second quarter, which compares to 5.78% in the first quarter of 2023. We continue to proactively price new loans to account for a higher market interest rate environment, which is contributing to rising funding costs. We continue to believe that loan yields are beginning to peak and remain focused on managing our deposit growth and funding costs to mitigate margin pressure as we look to the second half of the year. Skipping to slide eight, we grew our loan portfolio by $65 million or 7.3% in our major metropolitan markets of Dallas, Houston, and El Paso as compared to the first quarter of 2023. The commercial lenders that we have added in these markets continue to grow their loan portfolios by bringing new customer relationships to the bank. We are watching the Texas economy closely and will be cautious as we grow with a focus on expenses. The Permian Basin is another market we are pleased with this quarter as we experienced an increase in loan demand. Since completing our acquisition with West Texas State Bank in 2019, we have been investing in our facilities, people, and technology in order to tap into the strong potential that exists in this region from both a lending and deposit gathering perspective. It has taken time and the pandemic certainly set us back, but our operations are running well and we are beginning to take share. We believe that we are in the early stages of our growth in the Permian. Taken together, we are pleased with our loan growth for the first six months of the year but expect loan growth to moderate given the impact of higher interest rates on loan demand. Therefore, we expect full-year loan growth to be in the high single-digit to low double-digit range, which is meaningfully above our prior guidance of low single-digit growth for the full year of 2023. Skipping ahead to slide 10, we have approximately $1.1 billion of commercial real estate exposure in our loan portfolio at quarter end, which represented 36.5% of our total loan portfolio. Our office exposure represented 16.8% of our CRE portfolio and 6.1% of our total loan portfolio at the end of the second quarter. Of note, 29% of our office exposure is owner-occupied and medical offices comprised 11% of our office exposure. Our office portfolio is performing well and our largest credits have strong guarantors. We continue to stress test the individual credits in our portfolio for challenges. As Steve will discuss, the overall credit quality of our loan portfolio improved through the second quarter, which provides confidence if the economy were to slow. As I discussed on our first quarter’s earnings call, we are strategically enhancing our treasury management and liquidity team as we focus on growing deposits. The focus is on how we deliver, not just adding expense. This includes enhancing the level of education for our team on all aspects of treasury products. If we want to win the business, we have to be better than our competition in providing solutions and identifying needs. We look to further build our core deposit franchise as we focus on relationships for the long term. We believe this initiative can have a meaningful impact on our deposit base and to a lesser degree our fee income over the medium term. Turning to slide 11, our indirect auto loan portfolio decreased by $2.4 million to $297.9 million in the second quarter as compared to the end of the first quarter of 2023. Our strategy this year has been to level out or modestly reduce the indirect auto loan portfolio over time while replacing some of the runoff with higher-quality loans with strong credit profiles. We are also maintaining a disciplined approach to underwriting at 62% of the indirect auto loan portfolio was originated with a credit score of 719 or better, which is super prime, and 28% of the portfolio was originated with a credit score of 660 to 719, which is prime. The strong credit profile positions the portfolio for resilience across varying economic cycles. Turning to slide 12, we generated $47.1 million of non-interest income in the second quarter, which included a $33.5 million gain from the sale of Windmark. Excluding this gain, we generated $13.6 million of non-interest income, which compares to $10.7 million in the first quarter of 2023. The increase was primarily due to a $3 million increase in mortgage banking activities revenue, partially offset by a reduction of $1.4 million in income from interest activities due to the sale of Windmark. During the second quarter, mortgage loan originations increased $46 million to $132 million, as compared to $86 million in the first quarter of 2023, given the normal pickup from the spring selling season. Additionally, there was a write-up of $400,000 in the fair value of our mortgage servicing rights portfolio in the second quarter, as compared to a $2 million write-down in the first quarter of 2023, given the rise in market interest rates. Our secondary mortgage origination division, which excludes mortgage servicing activities, was breakeven in the second quarter. Looking forward, we will remain in the mortgage business as long as it is profitable and drive incremental business through cross-selling. For the second quarter, non-interest income excluding the one-time gain for Windmark was 28% of bank revenues, as compared to 24% in the first quarter of 2023. To conclude, we delivered strong results through the second quarter, and we believe we remain well positioned for the current environment. We are strategically taking market share given the customer dislocation that is occurring in our market and are always looking to add talented lenders where it makes sense. We will continue to focus on driving organic deposit growth while mitigating margin pressure as we strive to grow the earnings power of the bank. I will now turn the call over to Steve.
Steve Crockett, CFO
Thanks, Cory. Starting on slide 14. Net interest income was $34.6 million for the second quarter, as compared to $34.3 million for the first quarter of 2023. The modest increase was primarily the result of a $3.4 million increase in the interest income due to higher average loan balances and loan yields, largely offset by a $3.1 million increase in interest expense due to the rise in short-term interest rates. Our net interest margin calculated on a tax-equivalent basis was 3.65% in the second quarter, as compared to 3.75% in the first quarter of 2023. Our NIM was impacted by a 33 basis point increase in our cost of deposits in the second quarter as compared to the first quarter of 2023. This was partially offset by our organic loan growth, combined with the corresponding increase in our loan yields of 16 basis points as compared to the first quarter of 2023. Importantly, our NIM dropped 15 basis points in the month of March 2023 to 3.65% and has held steady through the second quarter. We remain focused on managing our profitability in this more challenging environment. Our average cost of deposits was 169 basis points in the second quarter, an increase from 136 basis points in the first quarter of 2023. Given the rising interest rate environment through the year, we have had to be proactive in maintaining deposit relationships, which has led to the rise of our funding cost. Importantly, we have continued to see organic core deposit growth while not having to rely on time deposits, as outlined on slide 15. During the second quarter, our deposit mix was relatively stable as non-interest-bearing deposits decreased slightly to 30.8% of total deposits, as compared to 31.7% of total deposits in the first quarter of 2023. Turning to slide 16, we continue to believe that our loan portfolio remains appropriately reserved as our ratio of allowance for credit losses to total loans was 1.45% at June 30, 2023, as compared to 1.42% at March 31, 2023. As Curtis touched on earlier, we recorded a provision for credit losses of $3.7 million in the second quarter. The larger provision was largely due to our organic loan growth in the quarter and $1.3 million in specific reserves attributable to one previously classified credit relationship totaling $13.3 million that was placed on non-accrual in May 2023. Due to the relationship being placed on non-accrual, our non-performing assets to total assets ratio increased to 51 basis points in the second quarter from 19 basis points in the first quarter of 2023. That said, classified loans declined approximately $3 million during the second quarter to $68 million from $71 million at March 31, 2023. Further, a classified relationship with $3.2 million in non-performing loans paid off in full the first week of July 2023. Nevertheless, future economic conditions remain uncertain, due to the continued rising market interest rate environment, persistent inflation levels that are impacting consumers and businesses in the United States and the recent dislocations in the banking sector, which may make additional provision for credit losses necessary in future periods. Keeping ahead to slide 18, our non-interest expense was $40.5 million in the second quarter, as compared to $32.4 million in the first quarter of 2023. The increase was primarily due to $4.5 million of transaction expenses and related incentive-based compensation from the Windmark transaction and the $3.4 million loss on the sale of securities. As a result, we see our core non-interest expense as $32.6 million for the second quarter, and we do not expect additional expenses related to the transaction in future quarters. Importantly, we continue to manage our personnel expense by implementing efficiencies and closely managing personnel based on the activity in our operations, which has allowed us to manage wage inflation across the bank as we adapt to the current market. Looking to the third quarter of 2023 and the year ahead, we expect non-interest expense to be flat or slightly increase based on continued rising costs. That said, we will keep looking for offsets to manage non-interest expense as we continue to selectively add talent to our team. Moving ahead to slide 20, we remain well-capitalized with tangible common equity to tangible assets of 8.96% at the end of the second quarter, an increase from 8.54% at the end of the first quarter of 2023. The increase was driven by $27.5 million in net income after dividends paid, partially offset by $2.6 million in share repurchases. Tangible book value per share increased by $1.63 to $21.82 during the second quarter. Let me turn the call back to Curtis for concluding remarks.
Curtis Griffith, CEO
Thank you, Steve. To conclude, I am very proud of our results through the second quarter as we continue to successfully navigate a challenging environment and position South Plains for the future. Through the quarter, we grew loans and deposits while maintaining our profitability in spite of turmoil in the banking industry in March, which is a testament to the franchise value of South Plains. Additionally, the sale of Windmark added capital to our balance sheet for growth, while also enabling us to strategically sell a portion of our investment securities portfolio in a tax-advantaged way, which we believe has further improved the earnings power of the bank. We will continue to look for opportunities to deploy capital to further enhance the earnings power of the bank as we strive to create value for our shareholders. Thank you again for your time today. Operator, please open the line for any questions.
Operator, Operator
Thank you. Your first question comes from Brady Gailey with KBW. Please go ahead.
Brady Gailey, Analyst
Hey. Thanks. Good afternoon, guys.
Steve Crockett, CFO
Hi, Brady.
Cory Newsom, President
Hi, Brady.
Curtis Griffith, CEO
Hi, Brady.
Brady Gailey, Analyst
Maybe just a little more color on the $13 million non-performing asset. What type of business is that, and what happened there?
Cory Newsom, President
This is Cory. Regarding the commercial and industrial business, I wanted to highlight something we mentioned in our script about it being a borrower-directed liquidation. The individual involved is engaged in various businesses across different industries and attempted to expand into a related area that didn’t turn out as planned. Consequently, he decided to self-liquidate and close that part of the business. We will always ensure we account for our assets correctly. However, this person has a robust network, a strong balance sheet, and substantial income from other ventures, which can back this debt. We found ourselves in a situation where we needed to manage the accounting appropriately, but overall, we feel quite positive about it.
Brady Gailey, Analyst
Okay. All right. And then when you talk about expenses being flat to slightly up, are you basing that off of kind of the second quarter core run rate of that $32.6 million? Is that what you are basing that off of?
Steve Crockett, CFO
Yeah. This is Steve. That’s correct. That’s what we are looking at after we normalize for the transaction costs and additional expenses, so right around that $32.5 million.
Brady Gailey, Analyst
All right. Then, I mean, loan growth was incredible this quarter, I mean, 27% linked-quarter annualized. Maybe just a little more color on kind of what drove that level of loan growth?
Cory Newsom, President
I will start and let Brent provide more details on this. We have had a strong pipeline this quarter. We have discussed for a while how our team is set up and our ability to build valuable relationships. Considering the different markets we are in and the disruptions that have occurred, we have really benefitted from that. However, we have been quite cautious and have passed on many opportunities because we chose to be selective. Brent?
Brent Bates, Chief Credit Officer
We had a strong performance in the second quarter, with significant growth in industrial storage, as well as in both multifamily and single-family owner-occupied and non-owner-occupied sectors, along with energy. The performance varied between the South Plains areas and more urban markets, resulting in a good balance overall. We anticipate continued fundings in our construction book in the near term, which will support this growth and definitely contribute in the second quarter. Additionally, our paydowns were lighter than expected, which also had an impact, as we mentioned last quarter. Overall, I'm optimistic about our performance this quarter; we achieved a lot.
Brady Gailey, Analyst
All right. And then finally for me, the margin was down about 10 basis points linked-quarter. Maybe your outlook on how the margin should trend in the back half of this year.
Steve Crockett, CFO
Our net interest margin remained stable throughout the quarter. In March, we maintained that level at approximately 3.65%. We were fortunate to be consistent during the second quarter. However, we face daily challenges, particularly with competitive pricing on deposits, which may lead to some compression in our net interest margin. We aim to minimize that impact as much as possible.
Cory Newsom, President
This is Cory. I think our new pricing on our loans, the funding, the stuff that we are getting will continue to hopefully keep that as flat as possible.
Curtis Griffith, CEO
And Brady, this is Curtis. And I agree with what they said that, we are going to get some benefit from the loans that we are putting on the books now. You are going to have a full quarter of a lot of those. We did, as we noted, sell off some of the low-yielding securities and those are now largely funded back up and some of the loans we are putting on the books. And with the other steps in the pipeline, still in the stage of construction where we are going to be providing funding now that the customers basically put in their equity. We are going to continue to push up the yield on loans. It’s just a question of can we stay up with the increase in deposit cost, because we do know deposit costs are moving up some more. We are going to do all we can to keep it down. We think the deposit mix we have is one that lends itself to maybe not reacting as fast as sometimes deposits do. But it’s going to be a challenge, and I would say that, we will see a little more NIM compression. We are going to hold it as firm as we can. But I’d expect it tightening up a little in both third quarter and fourth quarter.
Brady Gailey, Analyst
Okay. Got it. Thank you, guys.
Curtis Griffith, CEO
Thanks, Brady.
Steve Crockett, CFO
Thanks, Brady.
Operator, Operator
Your next question comes from Brett Rabatin with Hovde Group. Please go ahead.
Brett Rabatin, Analyst
Hey. Good afternoon, everybody. Thanks for taking my question.
Steve Crockett, CFO
Hi, Brett.
Brett Rabatin, Analyst
I wanted to revisit the deposits and their costs, which were only 1.69% on average in the second quarter. Is there any concern about a potential catch-up quarter regarding betas, and could you provide any details about the rates at which you added those broker deposits in the second quarter?
Curtis Griffith, CEO
Well, I don’t see a catch-up quarter coming at all unless there’s a significant movement in rates. We made some adjustments earlier this year and late last year to address some of our interest-bearing accounts that were falling behind market rates. Overall, I feel confident about our mix and what we’re doing. Much of it is tied to the types of deposits we hold, especially in some rural markets, which we take pride in. So, I don’t anticipate a catch-up quarter. Steve, passing on to you...
Brett Rabatin, Analyst
Okay. Okay.
Steve Crockett, CFO
I would like to add that the brokered deposits were introduced towards the end of the quarter, so we didn't have a full quarter's contribution from them. They are on the higher end of the cost range, due to tight fed funds, making them a more expensive deposit option. This will increase our deposit costs for the quarter. However, as Curtis mentioned, the loans associated with these deposits were not funded for the entire quarter either. We will benefit from a full quarter's earnings from those new loans, which are being issued at interest rates ranging from over 7% to 8%, which will help to offset the cost increase.
Cory Newsom, President
Yes, Brett, we are quite different from others. We are using the broker to help manage our overall costs and…
Brett Rabatin, Analyst
... we think it’s working…
Curtis Griffith, CEO
... throughout the year.
Brett Rabatin, Analyst
Yeah.
Curtis Griffith, CEO
What we have been able to do, while it’s not inexpensive, is more effective than running numerous CD specials, which would require rates above 5% to attract new funds in our markets. We are trying to maintain our rates at lower levels, and if you look at our deposit mix, we don't rely heavily on CDs. Therefore, we aren't faced with a significant number of maturing CDs, especially jumbo CDs, that would compel us to raise rates to retain them. Most of our deposits are in transaction accounts and money market accounts, allowing us to adjust rates competitively and maintain customer relationships. This flexibility means that when rates eventually decline, we can swiftly reduce rates on these accounts.
Brett Rabatin, Analyst
Okay. That’s helpful. And then I know your DDA has been fairly stable over the past year, but I was really impressed it was only down end of period $10 million from Q1 to Q2. Are you guys opening up a bunch of new accounts that’s helping keep that fairly stable or are you just not seeing mix shift change away from non-interest-bearing to interest-bearing?
Cory Newsom, President
Well, I think we have discussed this in the past few quarters. Deposits are a key factor when we are approving loans for the relationships that are coming in, and it’s very important. We have conversations about loan approvals where we start by discussing what a positive relationship looks like. We are focusing more on this aspect in our process, and it has helped us maintain stable demand.
Steve Crockett, CFO
Yeah. I mean we are seeing some move out, but those new ones coming in are helping to mitigate that.
Brett Rabatin, Analyst
Okay. And then just last quick one for me on the loans. You had talked about a strong loan pipeline, and obviously, the really strong growth in 2Q. Would you attribute the growth in 2Q to any kind of market share movement or just people getting stuff done in front of any additional rate hikes or any additional color on the strong growth relative to the pipeline?
Curtis Griffith, CEO
Yeah, of course. Brent, I will let you start off with that one.
Brent Bates, Chief Credit Officer
This is Brent. I will start off. The majority of our new loan funding that we had during the quarter was expansions of existing relationships. So these are long relationships that had an opportunity to either acquire, but most of the time acquire. In some cases, they had a maturing credit that they wanted to move from one place to another to raise maybe capital for another venture. But the majority of our business we booked as new funding outside of the construction funding are existing clients that came to us for expansion of their relationship and that was both in metro markets and in the South Plains side of the company.
Cory Newsom, President
Yeah, Brett, I would likely address part of your question about funding related to people trying to secure a better rate for movement. I don’t believe that’s the case at all since so much of what we are doing involves a floating rate, and they will be impacted regardless. We all observed that there are attempts to get things done, and we monitor that situation. Most of the incoming deals are floating rates, and we understand that they will have to deal with any rate increases that occur.
Curtis Griffith, CEO
Yeah. We definitely saw that back in second quarter 2022. It was pretty obvious what was happening on them. But that ship’s already sailed I think, and right now, as Cory said, I think, we are booking things at rates that look pretty favorable and a lot of them are floating. And yes, we are picking up some business related to some of the institution sales and consolidations that we have seen, particularly out in our West Texas markets, and I think we are going to continue to see that over the next couple of quarters. People are not terribly happy with some of the new ownership in some cases and they are looking to either move entire relationships, or as Brent indicated, maybe they have already got a relationship with us and now they are going to take what they had over the bank X and move that over to us as well and we have got room. We are going to have to bring them on and we already have the underwriting to look at the credits, and it’s a fairly easy transition for them. So I think that was a key trend in Q2 and I think we will see more of it in Q3 and Q4. But, overall, we are going to see a slowdown. The pipeline has already shrunk some and I think the rate of increase is definitely going to slow. But I don’t see us actually going backwards. I think we will continue to grow loans out through the balance of the year.
Cory Newsom, President
Well, Brett, I would add one more to it. I mean, you know over time, we have spent time making sure that we have really done a good job with some of our metro markets, making sure the right teams, leaderships, and everything is in place, but we are still just as focused on taking care of that in our rural markets. So we are seeing opportunities to take market share in those areas and picking up good leadership in some of the rural markets that, where some of those good deposits and good loan opportunities are. So we want to take care of both sides of our balance sheet, meaning metro and rural knowing that they are both beneficial.
Brett Rabatin, Analyst
Okay. Great. Appreciate all the color.
Curtis Griffith, CEO
Thanks, Brett.
Steve Crockett, CFO
Thank you.
Cory Newsom, President
Thanks, Brett.
Operator, Operator
Next question comes Graham Dick with Piper Sandler. Please go ahead.
Graham Dick, Analyst
Hey. Good evening, guys.
Curtis Griffith, CEO
Hi, Graham.
Steve Crockett, CFO
Hi, Graham.
Graham Dick, Analyst
I wanted to emphasize the point about customers possibly being dissatisfied with their banks and considering switching to your services. Given the impact of mergers and acquisitions on banks, are there any lenders you're currently evaluating, perhaps those from banks that have recently gone through M&A and may be struggling with capital or liquidity issues that affect their ability to lend, unlike your institution? I know you've brought in several new hires over the past few years, though that has somewhat decreased recently. Given your current capital position and deposit base, are you exploring any hiring or acquisition opportunities?
Cory Newsom, President
We have recently become a market leader in various rural markets, which brings significant opportunities. We anticipate an increase in deposits and loans, which is beneficial for us. We have made it clear that we will be making selective strategic hires. While we frequently interview candidates, we do not hire often, as we are very careful about ensuring that new team members are a long-term fit and can build relationships that align with our goals. We have consistently adhered to this approach for years, which has helped us build a high-caliber team. We remain committed to making only a few selective strategic hires.
Graham Dick, Analyst
Okay. I wanted to discuss loan yields a bit. You mentioned they might be leveling off. Assuming the Fed is mostly done after this month or possibly one more hike, what loan yield do you anticipate while factoring in a slight contraction in NIM in the latter half of the year? What kind of loan yield growth do you expect through the end of the year?
Steve Crockett, CFO
Regarding our loans, we are continuing to add new fixed-rate loans, which are currently in the upper 7s and possibly slightly higher. A positive aspect is our indirect portfolio, which, although it has lower rates, amortizes quickly, helping those lower yields return effectively. As a result, we anticipate an overall expansion in loan yield. In the last quarter, we increased our yields by about 15 to 16 basis points, and I expect to see similar growth for Q3, especially considering the progress we made in Q2.
Cory Newsom, President
If you examine those rates, some of the aspects that Steve was mentioning are related to the minor fixed elements we noticed in the portfolio. We've also incorporated a significant amount of prime plus loans, which are floating and I believe will be quite advantageous.
Brent Bates, Chief Credit Officer
Yes, this is Brent. We have calls on construction loans that are primarily variable rate. Additionally, as Steve pointed out, there is a very short duration on the indirect portfolio, which is a little over $300 million in the direct portfolio. The lower rates have rolled off that portfolio and been replaced by much higher rates, leading to an increase in that segment. The same applies to agriculture, which will be funded at a variable rate for the second half of the year, so we can expect to see some improvement in that yield.
Cory Newsom, President
The other thing that’s interesting is that we are not missing opportunities due to rates right now. For a while, that was a challenge. However, I believe we are not losing opportunities in relation to charge-offs. It's important to remain competitive, and I think our rates are indeed competitive. We are not simply allowing ourselves to lose ground over rates; we focus on credit quality and assess whether these are relationships we want to maintain.
Graham Dick, Analyst
Okay. I guess that’s a perfect segue to what I have last for you guys is just talking about the provision. I know you budgeted for $1.25 million this quarter, obviously, it’s a little bit higher with the growth and that specific reserve you talked about. But would you expect that $1.25 million is adequate for the provision line going forward, or is there anything that might cause it to increase or decrease?
Steve Crockett, CFO
I will start and then let Brent join in. At this point, that’s our hope of where we want to be. We typically have some net charge-offs during the quarter along with net loan growth. I believe we have a healthy reserve right now, and given the current economic perspective, I don’t see any need to increase it at this time.
Brent Bates, Chief Credit Officer
Yeah. This is Brent. We feel really good about the reserve level and we are not seeing broad risk trends in the portfolio. So it will really, I think, the provision is going to be largely just like this quarter, most likely going to be driven by growth. What does the total portfolio look like and the mix of the portfolio and that’s likely going to be the driver at least in the near term.
Curtis Griffith, CEO
Graham, this is Curtis. We have put significant effort into our CECL model and we are being cautious. As you know, she monitors our progress. We expect to maintain a higher reserve than our peers, not because we believe we have more credit issues, but rather due to our cautious approach and consideration of the prevailing economic uncertainty. It increasingly seems that we might face a recession, potentially brief and mild, but currently, we cannot predict with certainty. Therefore, we aim to be adequately prepared for any developments. There may be isolated incidents like the ones we've discussed today. However, we believe our underwriting is solid and do not anticipate major losses, even if some credits transition to non-performing status. At this moment, we do not observe any concerning trends in that direction. Nonetheless, we will remain vigilant to ensure our reserve levels are sufficient to handle any potential challenges.
Graham Dick, Analyst
All right. Appreciate it. Thanks, guys.
Steve Crockett, CFO
Thank you.
Curtis Griffith, CEO
Thank you.
Cory Newsom, President
Thank you.
Operator, Operator
Your next question comes from Joe Yanchunis with Raymond James. Please go ahead.
Joe Yanchunis, Analyst
Good afternoon.
Cory Newsom, President
Hi, Joe.
Steve Crockett, CFO
Hi, Joe.
Curtis Griffith, CEO
Good afternoon.
Joe Yanchunis, Analyst
So you touched on your strategy to modestly reduce the size of the indirect auto portfolio, and I was curious, what is the time horizon of this reduction and how low would you like to take it?
Brent Bates, Chief Credit Officer
This is Brent. I apologize if I caused any confusion. Currently, we are maintaining a stable portfolio in that segment, which we feel positively about. However, the duration there is quite short, leading us to frequently replace lower rates. The key point I wanted to emphasize is that the production in that unit isn't necessarily driving growth or a contraction but is instead helping us shift the portfolio towards higher rates. While the percentage has decreased slightly, I believe this is mainly because we are pushing the rates in that portfolio higher, and the industry has also contracted a bit. I don't anticipate a significant contraction unless the industry continues to tighten, but we are still capturing our fair share of volume and simultaneously improving our yields.
Cory Newsom, President
We experienced a decrease of $2.4 million quarter-over-quarter. One reason for this is that we are not aiming to be the lowest price option. When we evaluate ourselves against our competitors, particularly in terms of credit quality, we excel. We focus on high-quality assets for the majority of our portfolio, and we don't need to be the cheapest to achieve that. Our strategic positioning allows us to maintain this approach.
Joe Yanchunis, Analyst
Understood. And moving over to deposits, you previously kind of guided to a cumulative interest-bearing deposit gain of about 50% by year-end, do you still think that holds?
Curtis Griffith, CEO
I will let Steve jump in here. This is Curtis. I kind of said that when we started into this. We managed to stay a little below that up to now. I still think this is probably kind of upper end for us unless we see some real anomaly pop up on something out there. But that currently being based as we are with a fairly high percentage of rural market deposits, they are just not as volatile as what we see in some of the larger communities, and as long as we can keep those relationships in place, I think we can hold to that 50% or lower level. Steve?
Steve Crockett, CFO
I agree with what you said. I mean, we have been able to maintain it below that level. We said earlier, there’s pressure every day on deposit costs and we are monitoring it every day. But as of now we still feel that we can just come in right at that level or slightly below.
Joe Yanchunis, Analyst
Perfect. I appreciate it. And then kind of the last one for me here is, you talked a lot about the opportunity in the Permian, and I was curious to know what was deposit loan growth like in that market in the recent quarter. Maybe you have that handy.
Steve Crockett, CFO
Let me pull that and see what I can grab real quick.
Curtis Griffith, CEO
While Steve is looking that up, we definitely are getting decent loan growth there and the good news in that market, our loans down there quite often do come with strong deposit relationships. That’s an area where there’s still a lot of liquidity given the nature of the oil and gas business and the ancillary industries. So as we are getting opportunities to move those families and those companies in, it doesn’t happen real fast, but the whole idea is like the relationships that stay with us a long time as well and we are seeing those opportunities pop up more and more. That’s a combination, I think, of having the kind of leadership that we have been looking for in those markets, as well as in that market, as little dissatisfaction with some of the changes that they have seen in the banks they have been at. Steve, do you get something/
Steve Crockett, CFO
About 10% of our loan growth came from the Permian region during the quarter. Deposits increased slightly, though not significantly.
Joe Yanchunis, Analyst
Understood. Thank you for taking my questions.
Steve Crockett, CFO
Thanks, Joe.
Curtis Griffith, CEO
Thanks.
Cory Newsom, President
Thank you.
Operator, Operator
Thank you. I would like to turn the floor over to Curtis for closing remarks.
Curtis Griffith, CEO
Thank you, Operator. Thank you to all of you who participated in today’s call and a very sincere thank you to our outstanding employees who make all this possible. As I said at the beginning, we had a very good quarter. We exited a strong financial position. Our deposits and deposit costs remained stable through the quarter as we work to maintain profitability in this higher rate environment. We also delivered excellent loan growth in the quarter, but we do expect it to moderate through the balance of the year. The higher yields from these loans will help mitigate the expected continuing rise in deposit costs. Very importantly, we continue to improve the credit profile of our loan portfolio and are maintaining our strict credit underwriting standards as we conservatively grow the bank. Finally, we do remain well-capitalized with strong liquidity to take advantage of opportunities to improve shareholder returns as they present themselves. So I am truly excited about what I see in our future for Citibank and South Plains Financial. Thank you all again. Have a good day.
Operator, Operator
This concludes today’s teleconference. You may disconnect your lines and thank you for your participation.