Earnings Call Transcript - SPFI Q1 2024

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to South Plains Financial, Inc. First Quarter 2024 Earnings Conference Call. During today's presentation, please note that 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.

Steven Crockett, CFO

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 Chief Executive Officer; Cory Newsom, our President; and Brent Bates, our 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 this call may contain forward-looking statements and are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated future results. Please see our safe harbor statements in our earnings press release and in our earnings presentation. All comments 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 in our earnings release and in the earnings 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 first quarter 2021 results as well as spend some time on our business philosophy and initiatives to become our customers' primary banking relationship. Cory will discuss our loan portfolio as well as our initiatives to drive growth across the bank. Steve will then conclude with a more detailed review of our first quarter financial results. Starting on Slide 4 of our earnings presentation, I'm pleased with our first quarter results as we've started to see our net interest margin stabilize driven by improved loan yields, including interest recoveries combined with a slowing of the rate of deposit cost increases. Our loan production was strong through the first quarter, though it was largely offset by our typical seasonal agricultural paydowns, as well as the early payoffs of several loans that we've been working to move out of the bank. We continue to aggressively manage the credit quality of our loan portfolio as evidenced by our ratio of nonperforming assets to total assets, which was only 10 basis points at the end of the first quarter. Additionally, our classified loans remained near the lowest level since the start of the pandemic. Lastly, while competition for deposits remains a challenge in the current banking environment, we delivered modest deposit growth as our community-based deposit franchise remains a competitive advantage, and we believe provides adequate liquidity to fund loan growth as we move through the year. I am proud of our results, which are a testament to our employees, our culture and how we do business. On these calls, we often discuss our focus on relationships that we're looking for long-term customer relationships and not transactions. What we've not spent time talking about on our calls is the compass behind that as well as our mission statement and values. At South Plains, our core purpose is to use the power of relationships to help people succeed and live better. For our customers, that means providing personalized advice and solutions to help them achieve their goals. Over the years, we've invested in our product and people to ensure that we can do this better than our peers. As a result, I believe that we can achieve significant organic growth over time by leveraging what we have in place today, while also taking advantage of the dislocation that is occurring across our markets. This dislocation is creating customer dissatisfaction, which is providing our bankers with the opportunity to move relationships to South Plains. To further take advantage of this dislocation, we've been recruiting experienced treasury management executives to meet the customer demand that we see across our markets. We have also been refining our go-to-market strategy by focusing more on our customers' needs and challenges. By taking a solutions-based sales approach, we are first identifying our customers' needs and then providing the right product to meet those needs. That positions us to win their business and become their primary bank. We've already started to see the early signs of success as this approach is resonating with our customers. Additionally, we significantly exceed the minimum regulatory levels necessary for the company to be deemed well capitalized. And we are focused on both growing the bank while also returning a steady stream of income to our shareholders through our quarterly dividend. This past week, our Board of Directors authorized a $0.14 per share quarterly dividend, which is an 8% increase over our prior dividend levels. This will be our 20th consecutive quarterly dividend to be paid on May 13, 2024, for shareholders of record on April 29, 2024. Our Board of Directors also authorized a $10 million stock repurchase program in February given our belief that our shares continue to trade at a discount to intrinsic value. Now let me turn the call over to Cory.

Cory Newsom, President

Thank you, Curtis, and good afternoon, everyone. Starting on Slide 6, our loan portfolio remained stable in the first quarter compared to the previous quarter. Notably, our production in multifamily, single-family property loans, and general commercial loans largely compensated for $28 million in seasonal agricultural paydowns, a $16 million reduction in residential construction loans, and a $13 million decrease in our indirect auto portfolio. Furthermore, we experienced a $26 million principal reduction in watch list loans. As Curtis mentioned, we are actively managing the credit quality of our loan portfolio, having removed several loans from the watch list. We will maintain a proactive credit management approach and are pleased with the credit quality of our loan portfolio, which presents a challenge to loan growth in the first quarter. However, we remain confident in our full-year guidance of low single-digit loan growth. The yield on our loan portfolio was 6.53% in the first quarter, an increase of 24 basis points from 6.29% in the previous quarter. Steve will provide more details on this increase shortly. Moving to Slide 8, our loans grew by $22 million, or 8.5% annualized, totaling $1.06 billion in our major metropolitan markets of Dallas, Houston, and El Paso compared to the previous quarter. Looking ahead, we will continue to selectively add lenders throughout our metro and rural markets who align with our culture and can bring business to the bank, given the ongoing organic growth opportunities we see. The Permian Basin is currently experiencing dislocation due to ownership and leadership changes among competitors, creating opportunities to attract high-quality loan and deposit relationships to South Plains. These are relationships we've pursued for several years and, in some cases, involve clients switching banks for the first time in their careers. To secure these relationships, we have invested in our staff, branches, and infrastructure. Building our brand in a new market takes time, and we are beginning to establish ourselves in Midland and Odessa with our Citibank brand gaining acceptance. Additionally, our investments in the Permian demonstrate our long-term commitment to the area. We remain optimistic about the organic growth opportunities in our markets, believing we have considerable potential ahead. Although we have faced recent headwinds that have slowed loan growth, we also see near-term opportunities to increase interest income through loan repricing. As we have mentioned in previous calls, we expect to see interest income growth as many lower-rate loans continue to repay principal and/or reset rates. We anticipate that most of this repricing will pick up in the second half of 2024 and into 2025, while we expect loan yields to remain high as interest rates may drop at some point in the latter half of this year due to lower market liquidity. This should positively impact our net interest income and net interest margin in the third and fourth quarters of this year. Moving to Slide 10, our indirect auto loan portfolio declined by approximately $13 million to $273.4 million in the first quarter compared to the end of the fourth quarter of 2023. We are maintaining a cautious stance focused on preserving the credit quality of this portfolio. Throughout the quarter, we noted a moderation in volumes while competitors have become more aggressive at the higher end of the credit spectrum. We are not altering our risk pricing and are continuing to see our portfolio gradually decrease. We will never compromise on credit quality for growth. The strong credit quality of our indirect portfolio is evident in the 30-plus days past due rate, which was 22 basis points in the first quarter, down from 40 basis points in the fourth quarter. We also closely monitor our 10- to 29-day past dues as this is often where early signs of consumer trouble appear. Importantly, we did not see an uptick in these past due loans during the first quarter. Moving to Slide 11, we generated $11.4 million in noninterest income in the first quarter compared to $9.1 million in the prior quarter. This increase was primarily driven by a $2.3 million rise in mortgage banking revenues. We recorded a $55,000 increase in the fair value of our mortgage servicing rights asset during the quarter, contrasting with a $1.5 million write-down in the previous quarter, as interest rates that influence value modestly increased in the first quarter after declining late in the fourth quarter of 2023. As we've discussed before, we have meticulously managed our mortgage business to ensure it operates at or near breakeven during market downturns while being prepared for future growth in the residential housing sector. We believe our team has navigated this cycle effectively, and we are starting to see the benefits as purchase volumes increased slightly in the first quarter. We're also beginning to achieve successes in our treasury management business, as Curtis mentioned earlier. We expect moderate growth in treasury management fee income starting in the second quarter as momentum builds. For the first quarter, noninterest income accounted for 24% of bank revenues, compared to 21% in the fourth quarter of 2023. We remain committed to growing our noninterest income.

Steven Crockett, CFO

Thanks, Cory. For the first quarter, diluted earnings per share was $0.64, which compares to $0.61 per share in the linked quarter and $0.53 in the year-ago quarter. Turning to Slide 13. Net interest income was $35.4 million for the first quarter as compared to $35.2 million for the linked quarter. Interest income increased $1.5 million in the first quarter, primarily due to a $1 million expansion in loan interest income. The growth in loan interest income was mainly due to a 24 basis points rise in loan yields, which includes approximately $667,000 in recoveries of interest on loans that had previously been maintained on nonaccrual. The overall increase in interest income was largely offset by a $1.3 million growth in interest expense in the first quarter, given the continued rise in deposit costs. Our net interest margin calculated on a tax-equivalent basis was 3.56% in the first quarter as compared to 3.52% in the linked quarter. The 4 basis point increase to our NIM was due primarily to higher loan yields, including approximately 7 basis points from interest recoveries, partially offset by the rise in our cost of deposits. Importantly, our noninterest-bearing deposits held steady through the first quarter at 26.8% of total deposits and helped to mitigate the rise in our funding cost as compared to the linked quarter. As outlined on Slide 14, our average cost of deposits was 241 basis points in the first quarter, an increase of 17 basis points from the linked quarter. Given the rising interest rate environment over the past year and the resulting increase in competition for deposits, we've had to be proactive in maintaining deposit relationships, which has led to the rise in our funding costs. Overall, our core deposit franchise continues to remain steady. Looking ahead to the second quarter, we expect modest upward pressure on deposit costs, which could slightly pressure our NIM if loan growth remains subdued. However, we continue to expect our NIM to trough through the second quarter of 2024. Turning to Slide 15. Our ratio of allowance for credit losses to total loans held for investment was 1.4% at the end of the first quarter, largely unchanged from the end of the prior quarter. We recorded an $830,000 provision for credit losses in the first quarter, which was largely attributable to net charge-off activity in the quarter. Our nonperforming loans totaled $3.4 million at the end of the first quarter, which was a decrease from $5.2 million at the end of 2023. Our allowance for credit losses to nonperforming loans was 1,248% at March 31, 2024. Skipping ahead to Slide 19. Our noninterest expense was $31.9 million in the first quarter as compared to $30.6 million in the linked quarter. The $1.3 million increase was largely the result of a rise of $1 million in personnel costs, which predominantly came from higher health care insurance costs and an increase in incentive-based compensation. Looking ahead to the second quarter, we expect noninterest expense to modestly rise from the first quarter's level as mortgage volumes improve through the spring selling season. Moving to Slide 21. We will remain well capitalized with tangible common equity to tangible assets of 9.22% at the end of the first quarter, largely unchanged from the end of the fourth quarter of 2023. Tangible book value per share increased to $23.56 as of the end of the first quarter compared to $23.47 as of the end of 2023. The $8.7 million of net income after dividends paid was mainly offset by the after-tax decrease in fair value of our available-for-sale securities, net of fair value hedges as a result of increases in long-term market interest rates during the period. I'll turn the call back to Curtis for concluding remarks.

Curtis Griffith, CEO

Thank you, Steve. I am proud of our results, which clearly demonstrate that the bank is operating at a high level as our margin is beginning to stabilize. The credit quality of our loan portfolio is very strong, and we have many organic growth initiatives underway that we believe will deliver value to our shareholders. To conclude, I'd like to thank our employees for their efforts and commitment to both the bank and to our customers. Our continued success would not be possible without their dedication and hard work. Thank you again for your time today. Operator, please open the line for any questions.

Operator, Operator

Our first question is from Brett Rabatin with Hub Group.

Brett Rabatin, Analyst

I wanted to start with the treasury platform, and you guys talked about some wins and expecting fee income to be stronger from here, partially as a result of that. Can you maybe talk a little bit about the magnitude of fees we might see from treasury? And then if any of that showed up in DDA this quarter?

Cory Newsom, President

This is Cory. I don't think much of that has reflected yet because we've been adjusting our pricing. We aimed to ensure we weren't priced out of the market while also not being underpriced in any area. Through this process, we found there's likely a decent increase, probably in the 10%-15% range, in fees that we can expect to start seeing. When we mentioned that we expect to see this increase, we were mainly referring to this aspect, without even factoring in the new business we're consistently adding. So, I believe we're definitely going to see an increase.

Curtis Griffith, CEO

This is Curtis. I can’t give you a hard number on what the total volume will be. But from a personal perspective, our treasury informed me just a couple of days ago that one of our other outside company accounts is one of the ones that's going to see a pretty significant increase in there. So, it's going to be significantly more than what we've been having in fees under the new structure. So again, we'll have to work closely with customers and make sure they understand what's going on, but we think we're staying within market. But I do look for a fairly substantial bump in the charges that we laid back primarily for customer accounts. And of course, you've got earnings credit numbers against those too. So, it just depends on the account balances and all of that. But I'm really pleased with the direction we're going. I think it's going to be something you will see a meaningful number show up on the noninterest income part.

Cory Newsom, President

I do want to clarify that we've spent a lot of time running impact reports. We know how this is going to impact our customers. We don't think it's going to be a massive impact on any one customer to where it becomes an issue. But we think as an overall inclusive level, it's going to be meaningful. So, we've tried to look at it from every direction and feel good about it. But I don't think we stand in a position to feel like that we're going to jeopardize ourselves with business because it's so significant.

Brett Rabatin, Analyst

Okay. That's helpful, guys. And then I wanted to talk about capital. It seems like your ratios are really healthy. And I just wanted to get your sense of appetite for the buyback near term versus maybe keeping some powder dry for M&A and maybe what you see as the right capital levels for the environment we're in.

Curtis Griffith, CEO

Let me address that. We view capital as having four key components for utilization. First, we need to ensure we have sufficient funds for organic growth. I believe we will see positive growth, as highlighted in our recent presentations. Texas is performing well, and there are numerous opportunities even in the current rate environment. Our pipelines are gaining momentum, and maintaining ample capital to support that growth is our priority. We also plan to allocate some capital for stock buybacks. However, we are not planning to be as aggressive with them as we were last year, but we will maintain a buyback program as authorized by the board. We'll evaluate it at levels where we’re comfortable with purchasing our stock. In the current environment, we believe that buying back our own stock offers a more immediate advantage to our shareholders compared to pursuing acquisitions. Currently, that is our focus. Thirdly, we will continue to pay dividends, as we recognize the importance of delivering solid cash returns to our shareholders. Lastly, we will keep some funds available for acquisitions if the right opportunity arises. However, I believe we won't see much in that space until there is a normalization in overall rates, as anyone we’d consider likely won't agree to a favorable multiple over tangible assets at this time.

Brett Rabatin, Analyst

Okay. That's really helpful. If I could sneak in one last one. Maybe talk about some of the credits moving out. You guys think with the pipeline that kind of that mid-single-digit growth number is still reasonable? And does that kind of build from here in the back half? Or do you see some of that more in Q2?

Brent Bates, CFO

This is Brent. I feel very confident about our single-digit growth. I mean, when you think about the ag portfolio seasonal decline that we had in the first quarter. And then on top of that, we exited some credits substantially and still remain flat. That's an indication of really the production that we have going, and we're seeing that pipeline come up toward the end of the first quarter. So I think I can see that even as a start to make put as early as the second quarter, see some good growth in the second quarter.

Cory Newsom, President

Brett, I’ll discuss exiting a few credits, and we plan to exit more as we constantly manage our portfolio. We take great pride in the majority of our portfolio and will do everything possible to keep it. However, if we identify weak points that we prefer to avoid in a more challenging environment, we will begin to exit those positions. I take pride in that decision-making process.

Brett Rabatin, Analyst

Appreciate all the color, guys.

Operator, Operator

Our next question is from Woody Lay with KBW.

Woody Lay, Analyst

Maybe just a follow-up on the watchlist credits that you did exit. Were they concentrated in any segments? Or were they truly just a couple of one-offs?

Brent Bates, CFO

Well, this is Brent again. It was a mix of credits from small to kind of medium size, the largest being a multifamily credit.

Woody Lay, Analyst

Okay. Got it. Maybe shifting over to the net interest margin. I believe in your opening remarks, you said it could be down modestly in the second quarter. I'm assuming that's excluding the impact of the interest recovery, so if you strip that out, then on an apples-to-apples basis, it will be down a couple of basis points from there?

Steven Crockett, CFO

Yes. So, this is Steve. I mean, yes, we have 7 basis points in that number. So, we would have been at 3.49%. We're going to start from that number and say it could decline slightly from there. But again, there's just a lot of movements in rates and deposit costs really every single day as we've seen what's been going on in the market, our stance changes a little bit. And so, we've been hoping that, that will be an upward trend, but with moving some of those credits out that had some of that non-accrual interest, that allowed us to bump that up a little bit during the quarter.

Woody Lay, Analyst

Yes. And then based on the loan repricing, I mean, do you think it's realistic the margin starts to expand in the back half of the year?

Brent Bates, CFO

Again, given what we know today, which can change given the markets, I would say we should be able to see that. I mean, even if you exclude out those interest recoveries, you can see the loan yield is increasing. And as we fund new loans, they are at generally higher rates, we're getting some of the lower stuff off the book. So, I think we feel good given having loan growth. If loans, I think we said earlier, if loans somehow change and we have had additional payoffs maybe that are not forecasted, you could have a little bit more headwind to that. But I think given what we see right now, that's reasonable.

Operator, Operator

Our next question is from Stephen Scouten with Piper Sandler.

Stephen Scouten, Analyst

I appreciate all the information provided so far. Brent, you've mentioned that the new loan yields are coming in a bit higher than average, and we're already noticing some of that momentum. Could you provide insight into what those new loan yields look like for this quarter and the incremental cost of new deposits?

Brent Bates, CFO

This is Brent. As far as the growth, I mean, first quarter growth, we saw growth in both multifamily, most of which was completed construction projects. C&I business and some residential rental properties. And then again, we talked about a seasonal paydown. But if I look at our pipeline, I was talking about earlier, I haven't grown in the first quarter. It's a pretty good nexus of C&I business and real estate. And so, I mean, that's really where the growth is coming from. And then as far as the cost of deposits on the.

Steven Crockett, CFO

From a pricing standpoint, we're being cautious about our pricing strategies and ensuring that we maintain strong foundational prices, and so far, we haven't encountered any issues.

Brent Bates, CFO

Yes. On the deposit side, there is a mix. We're able to acquire some lower-cost deposits and are introducing new noninterest-bearing accounts, although the overall balances remained relatively stable. We continue to attract new business through our new lending relationships at this level. On the higher end, there are definitely offerings that reach up to 5%. The competition for deposits remains strong. Fortunately, our liquidity position at the end of the quarter provides us with some flexibility to allocate more resources to loans in the short term.

Cory Newsom, President

I think one thing that we have been able to do though is to strategically move away from some higher-cost deposits when it works. And then a lot of those are with relationships if we need to bring them back. We can bring them back. But we're very much watching that to exit those when we can.

Stephen Scouten, Analyst

Yes, that's very helpful. Cory, do you know how much of your book currently has floors on the loans?

Cory Newsom, President

You got a company put it on that one. Steve?

Steven Crockett, CFO

I do not have that here in front. I don't have that handy either. I was just like.

Stephen Scouten, Analyst

Yes, no problem. And then maybe just kind of the last thing. I know you said some kind of very early signs of deposit cost pressure starting to mean I guess, kind of digging into that a little bit further. What exactly are you seeing that give you some encouragement and you just referenced kind of noninterest-bearing to at least stabilizing this quarter. Do you think those noninterest-bearing deposits can stay kind of at 20 to 26.5% average deposits in that range?

Steven Crockett, CFO

We've had positive developments in the last quarter, and we're seeing several encouraging signs. However, in the current quarter, we are facing significant tax payments which come from a variety of account types. With the various initiatives we've introduced, particularly in treasury management and efforts to grow deposits at a reasonable cost, I believe our increased focus will contribute to our success. Nonetheless, competition remains high as we encounter daily challenges from other institutions showcasing their offerings.

Cory Newsom, President

There is no question that we were facing pressure. I don't even in the slightest way want to back away from that. But I will tell you that I think consistently, we find ourselves on larger deposits, pricing them anywhere from 15 to 20 basis points cheaper today than we were doing that three months ago. And we're very carefully doing that.

Curtis Griffith, CEO

I'm observing that in the advertising media, we are not encountering as many of the high-rate CD thresholds in our Lubbock market as we were seeing just a few months ago. It seems that some of our competitors might have enough of those to meet their immediate liquidity needs, which has somewhat alleviated pressure in that area.

Stephen Scouten, Analyst

Yes. That's great color. Glad to hear some people are being a little bit more rational. So, I appreciate all the color and congrats on a great quarter here.

Operator, Operator

Our next question is from Joe Yanchunis with Raymond James.

Joseph Yanchunis, Analyst

Good afternoon. So, I was hoping to circle back on loan growth here. And do you have that handy, how much kind of gross production you had in the quarter and then kind of maybe how that's trended versus prior quarters?

Steven Crockett, CFO

I don’t have that information available right now, Joe. However, I can share that production has improved slightly from the second half of last year to the first quarter. Different segments are showing varied results; for example, in the auto sector, we saw a decline, which was somewhat driven by industry factors. We are not pursuing growth in that segment by lowering prices. In other areas, such as agriculture, we've experienced a downturn. Overall, I believe our performance is similar to the latter half of last year, but I do think our pipeline is looking a bit stronger now compared to the start of the first quarter.

Curtis Griffith, CEO

Joe, this is Curtis. One thing to note is that in the metropolitan markets, we experienced an annualized growth rate of about 8.5% in the first quarter, even though our overall performance was flat. We did have a couple of credits we aimed to exit, which is not related to our farm loans. Despite those reductions, we maintained an 8.5% growth rate. We anticipate some growth in Lubbock and our other rural markets, and we will begin to finance some agricultural loans as the season progresses. I remain optimistic about achieving at least low single-digit growth for the year, which may improve depending on the economy and our borrowers' capability to secure better options currently.

Cory Newsom, President

I don't think we've had any disappointment in how the first part of the second quarter has started.

Operator, Operator

We have reached the end of our question-and-answer session. I will now turn the call back over to Curtis Griffith for closing remarks.

Curtis Griffith, CEO

Thank you, operator. Thank you to everyone for participating in our call today. We've had a very solid quarter to begin 2024. I'm pleased with how we're pursuing the many opportunities that we have in front of us. The disruptions in several of our markets from changes in other banks' ownership and leadership continue to open doors for our team to bring high-quality customer relationships to South Plains. We continue to recruit talented and experienced bankers in all of our markets because we believe that building strong personal relationships with our customers is the key to our growth and profitability. I'm very blessed to be a part of our family of employees, customers, and shareholders, and I remain very optimistic about our future. Thank you again for your time today.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.