South Plains Financial Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 7 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial Third 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 opened 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.

Operator

Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead, sir.

Speaker 1

Thank you, operator, and good afternoon, everyone. We appreciate your participation in our Q3 2023 earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer Corey Newsome, our President and Brent Bates, our Chief Credit Officer. A slide deck presentation to complement today's discussion is available on the News and Events section of our website, spfi. Bank.

Speaker 1

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 earlier today and on Slide 2 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, 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.

Speaker 1

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 and the slide deck presentation. Curtis, let me hand it over to you.

Speaker 2

Thank you, Steve, and good afternoon. On today's call, I will briefly review the highlights of our Q3 2023 results as well as provide an update on our capital allocation priorities. Corey will discuss our loan portfolio in more detail and the opportunities We have to reprice our portfolio to drive interest income growth over the next year. Steve will then First, our core deposits have remained relatively stable through the year with only a modest decline in the 3rd quarter, further demonstrating the strength of our community based deposit franchise. 2nd, we experienced healthy net interest income growth As our loan growth through the year combined with the improving yield of our loan portfolio drove strong interest income growth more than offsetting the notable rise in our cost of funds.

Speaker 2

3rd, while loan growth moderated through the 3rd quarter, We believe that we have opportunities to further drive interest income growth as approximately 30% of our loan portfolio will mature our can reprice over the next year. 4th, the credit profile of our loan portfolio continued to improve through the 3rd quarter as our non performing assets are at their lowest level since our IPO in 2019. And lastly, we repurchased 355,000 shares for $9,300,000 In the Q3, as we continue to believe that our shares are trading below intrinsic value. Turning to our results in more detail on Slide 4 of our earnings presentation. We delivered net income of 13,500,000 Our $0.78 of diluted earnings per share in the 3rd quarter as compared to $29,700,000 are $1.71 of diluted earnings per share in the Q2 of 2023.

Speaker 2

This compares to net income of 15,500,000 Our $0.86 per diluted common share in the year ago 3rd quarter. As a reminder, we completed the sale of Winmark, Citibank's wholly owned insurance subsidiary in the previous quarter. The after tax sales proceeds less transaction expenses, the incentive compensation triggered by the transaction And the realized loss on the sale of investment securities during the Q2 resulted in $1.16 Per share of one time net income in the 2nd quarter. Excluding these items, the comparable 2nd quarter diluted earnings was $0.55 per share. Turning to our loan portfolio.

Speaker 2

We grew loans 1.9% annualized in the 3rd quarter. This was expected given the strong loan growth that we delivered in the 2nd quarter, which reduced our loan pipeline and which Corey will discuss in more detail in a moment. We recorded a negative provision for credit losses of $700,000 in the 3rd quarter as compared to a provision of $3,700,000 in the Q2 of 2023. The reserve release was primarily due through a reduction of $1,300,000 in specific reserves, partially offset by loan growth and net charge off activity. As we discussed on our Q2 call, we placed a classified relationship totaling $13,300,000 On non accrual in May, the credit was for a business that was in borrower directed liquidation and from which we had expected to see some repayments starting in the Q3 of 2023.

Speaker 2

However, this credit was fully repaid in the Q3 and we released the related specific provision that we had taken in the prior quarter. As Steve will touch on in more detail, The credit quality of our loan portfolio is strong as our classified loans are at the lowest level since the start of the pandemic. Our $700,000 reserve release after tax represented approximately $0.03 per share of earnings in the quarter. As a result, we believe the run rate earnings of the bank was $0.75 per share in the 3rd quarter. We grew deposits $46,100,000 or 1.3 percent to $3,620,000 at September 30, 2023 as compared to the end of the Q2 of 2023.

Speaker 2

Our deposit growth was primarily due to While our community based deposit franchise remained stable through the 3rd quarter, it is important to point out that we that we expected to achieve through the year. Broker deposits have historically been a small portion of our deposit base And building this funding was part of our liquidity strategy predating the bank failures in March. We began to add broker deposits at the end of the 2nd quarter given the strong loan growth that we had achieved. Today, brokered deposits represent less than 6% of our deposit base and we expect that percentage to remain stable to moderately higher in the 4th quarter. Ultimately, we're paying a small premium to hold excess liquidity, which we believe is the right decision in the current environment.

Speaker 2

The stability of our deposit franchise and Strong liquidity position can further be seen on Slide 5, which also highlights the competitive position that South Plains holds. At quarter end, 81% of our deposits were in our rural markets with 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 either uninsured or uncollateralized. The strength of our community deposit base can also be seen in the market share gains we have achieved largely due to competitor dislocation from recent mergers. In Lubbock, we have been a strong number 2 in deposit share for many years.

Speaker 2

We are now the market share leader for the first time in 8 years With an 18% deposit share with the 2nd place bank coming in at 15.1%. We are also seeing competitor dislocation In Midland and Odessa, where we're seeing deposit share gains as well and which contributed to the strong deposit growth that we achieved in the Permian Basin in the 3rd quarter. Overall, we have the number 1 of our 2 deposit market share in many of our rural markets, which is a testament to our employees and their dedication to our customers. Turning to our liquidity. We ended the 3rd quarter in a strong position with $1,89,000,000 of untapped borrowing capacity.

Speaker 2

We have $1,090,000,000 of availability from the Federal Home Loan Bank of Dallas, $612,000,000 of availability from the Federal Reserve's discount window and $179,000,000 of capacity from the Federal Reserve's Bank term funding program. Given our strong capital and liquidity position, our Board of Directors authorized a $15,000,000 stock repurchase program in May. We bought back approximately 113,000 shares during the 2nd quarter for $2,600,000 and 355,000 shares during the Q3 for $9,300,000 At September 30, we had $3,100,000 remaining on our stock repurchase program. Looking forward, we believe that more challenging economic environments can lead to opportunities for those with strong balance sheets, ample liquidity and sound loan portfolios. While we expect M and A to remain subdued given the current interest rate environment, Conversations are beginning to pick up in our markets.

Speaker 2

Over time, we will look to further expand the bank through acquisitions that make financial sense and fit our culture. However, the most attractive acquisition that we have had is purchasing our own shares, which we will continue to do as long as they trade below our view of intrinsic value. When we exhaust our current share repurchase program, our Board will review our capital allocation priorities and consider the merits of another stock repurchase program. As part of our capital allocation, returning a steady stream of income to our shareholders Our quarterly dividend has also been a focus since going public over 4 years ago, and our Board of Directors again authorized $0.13 per share quarterly dividend as announced last week. This will be our 18th consecutive quarterly dividend and is to be paid on November 13, 2023 for shareholders of record on October 30, 2023.

Speaker 2

To conclude, we continue to deliver results for our shareholders despite economic headwinds and a challenging environment for our industry. We remain focused on conservatively growing the bank, managing risk and strategically using our capital to buy back shares. While we are having conversations with other parties, the economic environment still poses challenges for M and A. In the meantime, We will manage 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 Corey.

Speaker 3

Thank you, Curtis, and good afternoon, everyone. Starting on Slide 6, Loans held for investment increased during the Q3 by $14,500,000 or 1.9 percent annualized compared to the Q2 of 2023. Loan demand remained primarily in Commercial Real Estate, Residential Mortgage, Seasonal Agricultural and Energy Loans. As expected, we experienced a moderation following the 2nd quarter strong loan growth, which reduced our loan pipeline and which was slow to rebuild through the 3rd quarter. We also experienced the payoffs of $16,500,000 in non performing loans and an early payoff of a $14,900,000 relationship, which taken together proved a headwind to loan growth in the quarter.

Speaker 3

Excluding these payoffs, we would have delivered approximately 6% annualized loan growth in the 3rd quarter. Our loan yield was 6.10 percent in the 3rd quarter as compared to 5.94% in the Q2 of 2023. We continue to proactively pursue loans to account for a higher market interest rate environment, which is contributing to rising funding costs. We remain focused on loan pricing while managing our deposit growth and funding costs to mitigate margin pressure as we look to the Q4 and into the year ahead. Looking at our rural markets in more detail, we continue to benefit from customer dislocation created by competitive mergers, which is providing opportunities to bring great customer relationships and talented lenders to Citibank.

Speaker 3

During the quarter, we recruited 2 lenders in our rural markets We're bringing both loan and deposit relationships to the bank. We will continue to selectively add experienced lenders who fit our culture as we continue to grow the bank. Shifting to Slide 8, we grew loans by $40,000,000 or 16.8 percent annualized to $995,000,000 in our major metropolitan markets Dallas, Houston and El Paso as compared to the Q2 of 2023. The commercial lenders that we have added in these markets of loan growth more than offset the pay downs that we experienced in our community markets during the Q3. Looking ahead to the 4th quarter, But in this environment, we're being much more selective in who we do business with and what loans we decide to underwrite.

Speaker 3

We're turning down solid loans that include healthy levels of equity because they are deals, We want to do business with customers that will be long term relationships for the bank. We strongly believe in light of the current environment that This is the right decision to be cautious and remain focused on funding high quality loans with good risk and return profiles. Turning to Slide 9. We believe we are in an advantageous position as almost $875,000,000 of our loan portfolio will Sure. Or can we price over the next 12 months, which is approximately 30% of our loan portfolio.

Speaker 3

Additionally, Our fixed rate indirect auto portfolio continues to increase its yield with monthly principal amortization being redeployed at a higher rate loan. There were approximately $35,000,000 in these repayments during the Q3. While we expect only moderate loan growth in 2024, we believe We have the opportunity to pick up considerable interest income even if our balance sheet remains relatively flat. Moving ahead to Slide 11. We have approximately $1,100,000,000 of commercial real estate exposure in our loan portfolio at quarter end, which represented 36.9 percent of our total loan portfolio.

Speaker 3

Our office exposure represented 17% of our CRE portfolio and 6% of our total loan portfolio at the end of the 3rd quarter. Of note, our office exposure is 30% owner occupied and 11% medical offices. 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. Given the focus on commercial real estate by Community, we have decided to provide more detail on our CRE portfolio as outlined on Slide 12, where we show our loan balances by segment, the percent which are owner occupied as well as the geographical location, which is important.

Speaker 3

As you can see, a significant majority of our CRE portfolio is outside of central business districts and more insulated from the current challenges that those areas are encountered given that many employees have been We will continue to remain vigilant and stress test the individual credits in our portfolio for challenges. That said, the credit quality of our loan portfolio continued to improve through the Q3, which Steve will discuss in more detail in a moment. Turning to Slide 13. We generated $12,300,000,000 of non interest income in the 3rd quarter as compared to $47,100,000 In the Q2, which included the $33,500,000 gain from the sale of Winmark, 3rd quarter non interest Income declined by $1,300,000 from the 2nd quarter when excluding the gain from Wynnmark. This decline was largely due to a $900,000 which has normalized in the Q3.

Speaker 3

Additionally, mortgage banking revenues also declined given the rise in interest rates combined with typical seasonality. We continue to be focused on expense management in our mortgage business to offset declining revenue. For the 3rd quarter, Non interest income was 26% of the bank's revenues as compared to 28% in the Q2 of 2023 when excluding the one time gain from Windmark. To conclude, we delivered strong results through the Q3 and believe we remain well positioned for the current environment. We continue to take market share given the customer dislocation that is occurring in our markets and have added outstanding lenders to our team This quarter, we will continue to focus on driving organic deposit growth while mitigating margin pressure.

Speaker 3

I would now like to turn the call over to Steve.

Speaker 1

Thanks Corey. Starting on Slide 15, net interest income was $35,700,000 for the 3rd quarter as compared to $34,600,000 for the Q2 of 2023. The increase was primarily the result From a $5,700,000 increase in interest income given our strong loan production in the first half of this year, combined with the rise in new loan rates, which lifted the yield on our loan portfolio by 16 basis points in the 3rd quarter. Further, earnings on the additional liquidity added in the quarter helped drive the increase. More than offset the $4,600,000 increase in interest expense due to the rise in short term interest rates on interest bearing liabilities.

Speaker 1

Our net interest margin calculated on a tax equivalent basis was 3.52% in the 3rd quarter as compared to 3.65 percent in the Q2 of 2023. Our NIM was impacted by a 38 basis point in our cost of deposits in the Q3 as compared to the Q2 of 2023. This was partially offset by organic loan growth combined with corresponding increase in our loan yields of 16 basis points as compared to the Q2 of 2023. As outlined on Slide 16, our average cost of deposits was 2 0 7 basis points in the 3rd quarter, an increase of 38 basis points from the Q2 of 2023. Given the rising interest rate environment through the year, We've had to be proactive in maintaining deposit relationships, which has led to the rise in our funding costs.

Speaker 1

Additionally, as Curtis touched on, we strategically expanded our broker deposit funding to augment our liquidity as we funded loan growth during the year. In the Q3, the increase in those deposits contributed approximately 18 basis points to the increase in our average cost of funds. Overall, our core deposit franchise has remained relatively steady through the year with only a small decline in the 3rd quarter, and we've also not had to heavily rely on time deposits. Our deposit mix of non interest bearing deposits to total deposits modestly declined to 28.9% as compared to 30.8% in the Q2 of Turning to Slide 17, our ratio of allowance for credit losses to total loans was 1.41% at September 30, 2023 as compared to 1.45% at June 30, 2023. As Curtis touched on, we recorded a negative provision for credit losses of $700,000 in the 3rd quarter.

Speaker 1

The negative provision was largely due to reduction of $1,300,000 in specific reserves, partially offset by loan growth and net charge off activity for the 3rd quarter. The reduction in specific reserves was a result of the full repayment of a $13,300,000 non accrual relationship in the quarter. Due to this full payoff and other repayments, our non performing assets to total assets ratio decreased to 12 basis points in the 3rd quarter from 51 basis points in the Q2 of 2023. Classified loans declined approximately $16,700,000 during the Q3 to $50,700,000 from $67,400,000 at June 30, 2023. Skipping ahead to Slide 19, Our non interest expense was $31,500,000 in the 3rd quarter as compared to $40,500,000 in the Q2 of 2023.

Speaker 1

The decrease was primarily due to the $4,500,000 in personnel and transaction expenses from the sale of Winmark plus related incentive compensation as well as the $3,400,000 loss on the sale of securities which impacted us in the Q2 came in below the run rate that we have delivered over the last three quarters as we have taken more cost out of our mortgage operations while continuing to implement further efficiencies across the bank. Looking to the Q4 and the year ahead, We expect non interest expense to be flat or slightly increased based on continued rising costs. That said, we will keep looking for to manage non interest expense as we continue to selectively add talent to our team. Moving ahead to Slide 21, We remain well capitalized with tangible common equity to tangible assets of 8.4% at the end of the 3rd quarter, a decrease from 8.96% at the end of the Q2 of 2023. The decrease was driven by the $9,300,000 in share repurchases in the quarter and a $22,800,000 decrease in accumulated other comprehensive income, which was partially offset by $11,300,000 of net income after dividends paid.

Speaker 1

AOCI was negatively impacted again this quarter as longer term bond rates rose during the quarter, which resulted in lower fair values of our investment securities. Tangible book value per share declined to $21.07 as of September 30 compared to $21.82 as of June 30, 2023 largely due to the impact of AOCI. I'll turn the call back to Curtis for concluding remarks.

Speaker 2

Thank you, Steve. To conclude, I'm very proud of our performance once again this quarter as we delivered net interest income growth despite continued pressure on our funding costs as we benefit from the strong loan growth delivered over the last 6 months combined with a healthy rise in our loan portfolios yield. We believe we have ample opportunities to reprice both our commercial and indirect auto portfolios over the next year, which will continue to drive interest income which I am pleased to see given the uncertain macroeconomic outlook. We will also continue to recruit outstanding talent like the lenders we brought in this quarter to position South Plains for long term growth and value creation. Taken together, we believe we're in a strong position heading into the Q4 and the year ahead.

Speaker 2

Thank you again for your time today. Operator, please open the line for any questions.

Speaker 3

Thank you.

Operator

And at this time, we will conduct our question and answer session. Our first question comes from Graham Dyck with Piper Sandler. Please state your question.

Speaker 4

Hey, good afternoon guys.

Speaker 3

Hi, Brent. Good afternoon.

Speaker 2

So I kind of just wanted

Speaker 4

to start on the margin. It sounds like you guys are pretty encouraged by what you're going to see on the asset repricing front over the next couple of quarters. But I just wanted to get your sense of how that might relate to The funding side from here and if you think if you're pretty confident that the asset repricing can offset any further increase in deposit costs from here And lead to not only better NII, but I guess a NIM bottom being this past quarter.

Speaker 1

Yes. This is Steve. I'll start. Yes, we feel good. We're what's coming on the income side.

Speaker 1

The interest Vince, I mean, we still believe that number will continue to increase. The hope is That it will offset, but we still see pressures every day on the deposit side. And so I'd like to say we were at the bottom of the NIM compression, but I think we will continue to see that See some challenges there. I mean, I don't think we would see a decline like what we saw this quarter with the brokerage side, but We'll continue to see pressure there.

Speaker 3

Yes. I mean, I agree with Steve. I mean, what we're really excited about is the repricing that we know we have coming in the next 12 months. But I think we're all kidding ourselves that we don't think we'll see some pressure on deposit costs to keep going.

Speaker 2

Chris, obviously, a lot of it depends on what the Fed decides Going forward, but I do think that you mentioned finding a trough in the NIM. I think like many of our peers out there that we're not quite there yet likely, but I don't think we're very far away from it. And I do think probably during 2024, We began to find a bottle. I wish I knew exactly what quarter that'd be in, but I do think it's probable that somewhere in 2024, we're going to see that because by then, Deposit costs will pretty well have repriced. And if we don't see additional rate increases coming from the Fed, That will slow the opportunities for our depositors and other depositors to seek Depositing their money somewhere else.

Speaker 2

That's been the challenge obviously. And I think it's really helped us to have strong relationships that we have with depositors So we have not had to run at the top of the market on our product offerings. But as Corey said, we're kidding ourselves. Don't think we're going to still have some additional deposit pressure coming.

Speaker 3

But I think you can also see the fact that we've I mean we've tried to hold our liquidity And check as much as we can without just reprice the bank as a whole. So we've been very careful about it. We are going to face some of those pressures. Do I think it's insurmountable? No, I don't.

Speaker 3

I think we've done a pretty good job of it. I think we'll continue doing a pretty good job of it.

Speaker 4

Okay. All very helpful. And then I guess just on the repricing side, you said 30% of loans repriced over the next 12 months. Do you have the like the average rate of those loans today? And then where you think they would reprice to over that time period?

Speaker 2

Steve?

Speaker 1

Yes. No, there are not a specific rate we've got on those. I mean, They're really across the board, I would say. I mean, there's some of that is newer stuff. So some is at the higher rates, but I mean, there's definitely some that are That have been on the books for a little while.

Speaker 1

So I mean it's just going to be a blend. There's no specific Average yield we've got on that at this point?

Speaker 3

Yes. I don't think we've got that information in front of us right now. Do I think it will be a nice improvement? Yes.

Speaker 4

Okay. Yes. That's helpful. And then I guess just lastly is on the funding side. What's your outlook, I guess, on non interest bearing from here?

Speaker 4

Last quarter, they were a little bit more stable and then we've obviously this quarter saw a little bit more acceleration on that front. How are you guys viewing non interest bearing balances? And how are they acting this quarter? How do you think they'll act throughout 2020 And how does that play into your strategy, I guess, from here on the growth side?

Speaker 3

Well, I mean, I think we've had this we talked about this every Every loan discussion we have comes with the non interest bearing balances that actually come with it. We're making much more concerted effort as it revolves around that. Some of it's a little bit of an ebb and flow that happens with those balances. Some of it is, I mean people are using the money. I mean and So that's shrinking, but as a whole, I think we do a pretty good job of trying to keep those that percentage of Non interest bearing in check pretty good.

Speaker 3

We can't help but have a little bit of pressure from it. I mean the value of those dollars are now worth more than they were in the past. But our loan I mean, we're doing a better job of even on our loans of making requirements to keep those balances in check.

Speaker 2

We are definitely Working on incentive packages for our officers that will really put a lot of emphasis on bringing those non interest bearing balances in. So As Corey said, you're going to have a continuing runoff a little bit of that as people do recognize the value of Money, value of money, which up until fairly recently, obviously, wasn't very much. Now it does behoove them to get something earned on that. But there's still a lot of business balances out there that are non interest bearing, high volume accounts, high accounts, there's a lot of things that we can do with them and make a little bit of money off of the treasury management side as well. So we are really pushing and Not only preaching to, but monetarily incentivizing our team to go out and find more of those.

Speaker 2

So it's certainly our hope that Well, we'll probably see a little more decline. I don't think we're going to see a drop down to some of the levels again, but I know some of our peers and some larger banks I mentioned maybe on their calls. So we're certainly trying to hold on to it. That's the best money we can have in the bank right now.

Speaker 4

Okay. I appreciate it guys. Thank you.

Speaker 3

Thanks, Graham. Thanks, Graham. Thank you.

Operator

Our next question comes from Brett Rabatin with Hovde Group. Please state your question.

Speaker 5

Hey guys, good afternoon. Thanks for the questions. Wanted to start back just on clarifying that 30% that matures in the next year of the loan portfolio. If I look at those fixed rate loans that are maturing, so if I look at I believe it's Slide 8 or 9, I think it's Slide 9. Where what piece of that pie is repricing relative to the fixed versus variable?

Speaker 1

Yes. So it should be the fixed that matures 12 months or less and then also the variable Immediately repriceable and those that can reprice within 12 months or less. So There should be 8%, 16% and the 6%.

Speaker 2

It's not just maturities. Yes, it's maturity and repricing. But they just they reprice On schedule and many of them are actually on 1 year schedules and some others that are coming up on As a lot of banks did, we certainly have a fair amount of stuff that was put on the books with a Maybe a 10 year maturity, but a 5 year fix on the rate, and we're starting to hit some of those dates out there on those 5 years. So we'll certainly take that opportunity to reprice. And besides what we're saying there, we are going to have our Scrub our loan portfolio constantly and as opportunities arise due to whatever situation that might trigger it in a loan agreement, We're not going to be bashful about seeking higher rates on those loans as well.

Speaker 2

So that might be coming in a little bit in addition to even the 30%. It's not a big number I would expect, but it's certainly meaningful. Okay.

Speaker 5

And then wanted to make sure I understood the kind of the Verbiage around capital uses from here, it sounds like you guys are getting a little more And possible M and A scenarios if it made sense, but it also sounds like you're still committed to maybe continuing the Share repurchase. And so just wanted to make sure I understood how you were thinking about both of those two things as you allocate capital here in the coming quarters.

Speaker 2

Well, what we're trying to say carefully out there is that while we're not getting terribly excited about the M and A, We are beginning to get some inquiries about it. So I think it's still a challenging market to do anything in, But we'll stay aware of opportunities in our markets and see what comes along. But I think our Board is still Looking at having a probably some sort of repurchase program in place. Don't know what it's going to look Mike, we'll be talking about that real soon and revamping a little bit. As you can tell, we've been really pretty aggressive in this past quarter, Perhaps even a little more than we thought we might have given the way pricing and everything worked out.

Speaker 2

But I still think it's a good idea to have The repurchase program in place out there. I don't know what the market is going to do. Nobody does, but we've seen some fairly Dramatic swings just in the last few days. And our Board's position has been pretty clear that we've kind of got some metrics in there on where we think Our stock is really good buying. We get down to those levels, then it's highly likely we'd be looking at buying some more.

Speaker 2

So I think you may see a little adjustment in that So provide that program from what we've been doing, but we still have one in place. I think it's probable that we will.

Speaker 5

Okay. That's helpful. So more dialogue in M and A, but not necessarily because you're getting more interested per se?

Speaker 2

I think that's fair that we obviously need to stay aware of what's happening. And as you well know, we've certainly seen Multiple acquisitions happened in some of our home markets out here

Speaker 4

and

Speaker 2

some of those haven't gone particularly well. And I would say we certainly don't want to replicate that situation. But the right deal may walk through the door, We really want to do it, but we're going to be very cautious about it and certainly have some metrics that we would feel like we can defend very clearly to the market on what we decide to do. Okay. But

Speaker 3

I think the other thing is when it gets down to the M and A side of it, I mean, what's really interesting is the fact that our phone is ringing more so than anything than it has in the

Speaker 5

Okay. That's helpful. And if I could sneak in one last one, I'm just curious, Your indirect auto portfolio is almost all prime and super prime, but I'm curious if you've seen anything on the consumer Todd, that maybe would indicate that the consumer is starting to show some signs of weakness or slowing down spending. Anything that you're seeing that would

Speaker 1

This is Brent. We're really not, not at least at this stage. Our delinquencies are in check, still below pre pandemic and same with repo is still well below Pretty pandemic level. So not really seeing any chinks there at this time. I mean we've got, as you pointed out, A heavy weight toward higher credit score consumers, so that may be a part of that.

Speaker 3

And I think one thing this is Corey. I think one thing to keep in mind, if you look at our indirect portfolio, it kind of comes with more necessities as opposed to toys. And so we've been very careful in making sure that we don't have we've not done much in the way of financing the things that people can walk away from.

Speaker 5

Okay. That's helpful.

Speaker 2

Thanks for

Speaker 5

all the additional color on CRE2.

Speaker 1

You bet. Thank you.

Operator

Our next question comes from Brady Gailey with KBW. Please state your question.

Speaker 6

Hey, thank you. Good afternoon, guys.

Speaker 3

Hi, Brady. Hi, Brady. Hi.

Speaker 2

So I know we had

Speaker 6

The partial bond restructuring last quarter, I think you put those proceeds to use in loans. Such a big pickup in yield. Are you contemplating doing any additional bond restructuring where you sell bonds at a loss and then Transition it into a higher earning asset over time?

Speaker 1

Yes. This is Steve. I mean, We look at it, I mean, there's nothing specific strategy that we're going to say we're definitely going to do one, but Definitely want to look at it, and see if it makes sense. Obviously, with all the volatility in the bond market in the last Several weeks and months, it's been a little bit more challenging than maybe it was at the beginning of Q3. But I think it's always good for us to at least see what it looks like and try to evaluate any of the merits of doing it.

Speaker 2

Yes, this is Curtis. I would say I'm very pleased with our timing for what we did given the additional change in the Longer end of the curve. So like Steve said, we watch it all the time and Never say never, but right now it's a little hard to figure out. That really justifies taking that additional Income loss out there to try to reposition it. But there may be a point in that where it really starts to make some sense.

Speaker 2

We watch it all the time.

Speaker 3

I think part of that would kind of come with increased loan demand. I think as long as loan demand continues to slow down a little bit, Hard to justify that right now.

Speaker 2

It just is nice to have the one time gains out there from the sale of WynnBAR. And I noticed that another bank significantly larger than us who sold off an insurance business, that's apparently what they chose to do with the Big Peace of Fears. So it may be a pretty good use of some one time earnings. But right now, we're looking at it. And I think as Corey indicated, for us, Probably more than just trying to reposition the bond portfolio.

Speaker 2

It'd be more about if we do ramp up some loan demand more than we're expecting, That would be a good source of funding.

Speaker 6

All right. That's helpful. And then on the loan growth guidance of low Single digits, I think you said moderate loan growth next year in 2024. How are you thinking about the deposit side? And do you think you can grow Deposits at a similar pace or should we expect a change in the loan to deposit ratio going forward?

Speaker 3

I'll start and Steve can finish, but I think I don't see how you can grow the loan the deposits at the same pace as loans. But I think Curtis alluded to this a while ago and one of the things that we've worked on is we're probably we're going to be very focused on how we incent our team In trying to build deposits as it relates to loans, we want to stay much more balanced in that process. I I think there's some opportunities there. The thing that I'm really proud of is that we've kept the relationship side of this. So at the front center and it's always been who we are, what we believe in.

Speaker 3

We're are focused on deposits. There is no question that we are focused on deposits. But to sit here and tell you that we can keep it at the same level, I don't think anybody can tell you that, Not right now.

Speaker 2

Well, I'll argue the other side a little bit. Yes, we can. It's just we're not going to like what it does to them and you won't add it. Yes. We can pay up anytime we need to for deposits to fill more in.

Speaker 2

But so far, our strategy has worked. We are competitive, but we don't have to be up to the top of the market to do this. And as long as we can handle deposits that way, I think it benefits our shareholders to do it that way.

Speaker 6

All right. And then finally for me, it's interesting to hear about kind of a higher level of inbound calls related to bank M and A. I know it's probably not near term, but as bank M and A defaults and you all more seriously look at opportunities, can you just remind us What the ideal target is like from an asset size? Do you want it to be in market? Do you want Low loaner deposit ratio, like what are the things that you're looking for in an ideal acquisition target?

Speaker 3

Well They don't make an ideal looking for that.

Speaker 2

Exactly. We haven't found that one yet. We'd already be announcing. It's likely to be a Texas franchise. I mean, I don't see our appetite for really going out of state.

Speaker 2

But as far as what it is, where it is, There's a lot of options out there and we've heard about some. We've been directly called by some that are quite different In the ones that we've had some discussion with. So I'm not going to try to narrow it down to one that would be just perfect. But Historically, I would still say this, that if we find a West Texas based franchise with a relatively The low loan deposit ratio and a really strong core deposits that are still in the bank at fairly inexpensive rates, that's Pretty attractive, but finding those right now in a situation where the seller would be willing to Recognize how much the AOCI again is likely to be, that's a unicorn to go find right now, I'll just tell

Speaker 3

For us, what we're trying to find something that doesn't exasperate liquidity problems, That you're not taking on some problems that you weren't prepared to deal with. I mean, you really got to understand the mentality of the seller as much as you do have the desire of the buyer to be sitting here looking at what you want to do. And trying to find something that doesn't that would add value to our franchise as opposed to taking it away and bluntly taking our focus away. Mean, we've got to make sure that we don't do anything that does that. But let's not forget, I mean, the number one thing that I would probably go and add to what Curtis was talking about is trying to find a culture fit that works.

Speaker 3

And if you sit here and you look at West Texas and you look at the transactions that we've had recently in our market, culture has been The downfall of a lot of the success of those transactions. And so we're going to be very, very focused on all of the things that we've talked about, whether it be liquidity, Capital loan demand, all that stuff, the culture is going to be a tremendously large part of that. I think we're probably I think our franchise value that I'm most proud of is the culture that we have and the way our team pulls together.

Speaker 6

Okay. That's helpful. Thanks guys. Thanks.

Operator

Our next question comes from Joe Yancunis with Raymond James. Please state your question.

Speaker 2

Good afternoon. Thank you

Speaker 1

for taking my questions.

Speaker 3

Hi, Tim. Hi, gentlemen.

Speaker 1

Just to kind of piggyback on the M and A question just now. The fact that you already have that West Texas presence, do you think that would kind of mitigate any sort of Cultural integration issues with some of the banks out there?

Speaker 2

Not necessarily. It might, but no, I don't culture is such a challenge out there. And I'm not going to say that there are Great banks in other parts of the state. There wouldn't be a better cultural fit in some ways than some banks that are here in our neighborhood. That's just something you have to look at and it's on a case by case basis.

Speaker 2

I wouldn't make a generic statement that West Texas would be necessarily a better fit.

Speaker 3

Joe, so here's the thing I would tell you though. I think you've got to put as much effort in trying to Determine how those cultures are going to come together as you do every other aspect of the balance sheet. And it can't just be all the numbers. And so I think that's just a big part of it. And I think being very focused on it on the front end will make it make the outcome of that work.

Speaker 3

So we have to you can't take it for granted.

Speaker 1

Understood. And if I could circle back to capital, Is there a capital ratio that you target to manage the bank to whether that's CET1 or TCE?

Speaker 3

Yes. I mean,

Speaker 1

we tangible common equity is one We've definitely looked at it. I mean, we're we've been in the high 8s. We were in the Low 9s, I guess. Previously, in AOCI, it's kind of brought that back down, but That's one that we keep up with. And I mean, we feel good with where we're at.

Speaker 1

And even unfortunately, what could I'll incur if the bond portfolio went down a little bit more, but I think we're that's a ratio that we keep up with. Curtis, is there any?

Speaker 2

Well, that's I mean, we look at CET1 as well. But at the end of the day, TCE is really what you got at the end of it. And I think if you don't recognize that and you're not understanding the real value of your bond portfolio, If you continue to put it in there just at a basically an inflated number. So that's really the one we look at more. And yes, I think somewhere in the 8s on that is a good place to run a bank.

Speaker 1

Understood. Well, those are all the questions I had. Thank you very much.

Speaker 2

Thanks, Joe.

Operator

Thank you. There are no further questions at this time. I'll hand the floor back to management for closing remarks. Thank you.

Speaker 2

This is Curtis Griffith. And thanks everyone today for participating in the call. We continue to work through the challenges and there certainly a lot of them out there in the current environment. It's we're dealing with rapidly rising deposit costs across the economy. And we are very thankful to have the kind of long term, longstanding depositor relationships that we do To be fortunate to be out here in some rural markets across West Texas that allowed us to retain deposits A little better than some of our peers.

Speaker 2

And I think we're going to still work hard to do that. But at the same time, we see some Continuing economic growth in the state of Texas, it certainly slowed and I think markets will have to be very in specific areas that we're advancing our loans, but we have a great team that handles the loan production and the underwriting, We're going to be very cautious in how we do that. And going forward, try to certainly minimize whatever Loan losses may occur and I do think that as we peak out in interest rates that there will be some difficulty Out there in our loan books all across all banks, we need to be well prepared for that. We think we are with a very strong Allowance for credit loss today and we'll watch it all the time. We continue to stress our loan portfolio and look for any cracks So with that kind of cautious and conservative management in place, We still think that our stock is a good place to keep your money, and we're excited to move forward and take advantage of some opportunities that we do think be coming our way in 'twenty four.

Speaker 2

And I think some of those will be the result of disruptions in our local markets. And we'll continue to monitor all those chances. And Again, we have an awesome team and I'm so proud of them and we will continue to add additional team members when those opportunities present themselves. With that, I'll end the call and thanks everyone for being here today.

Operator

Thank you. This concludes today's conference. All parties may disconnect. Have a great evening. Thank you.

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Earnings Conference Call
South Plains Financial Q3 2023
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