South Plains Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 9 speakers on the call.

Operator

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. 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.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator, and good afternoon, everyone. We appreciate your participation in our Q2 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 this afternoon 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, 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.

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 of 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 Q2 2023 results as well as provide an update on our capital allocation priorities following the sale of Winmark, which closed in April. Hori will discuss our loan portfolio in more detail 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'm very pleased with our 2nd 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 challenging environment for our industry.

Speaker 2

We've exited the 2nd 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 6 key points that I hope you will take away. First, our deposits remained stable through the Q2, further demonstrating the strength of our community based deposit franchise. 2nd, 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. 3rd, 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.

Speaker 2

That said, we continue to be of our loan portfolio improved through the 2nd quarter, but we did have one non accrual addition, which I will touch on in more detail in a moment. 5th, we further built capital this quarter through our earnings and the sale of Winmark 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 gain we recorded from the Winmark 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 4 of our earnings presentation. We delivered net income of $29,700,000 or $1.71 diluted earnings per share as compared to $9,200,000 or $0.53 diluted earnings per share for the Q1 of 2023.

Speaker 2

This compares to net income of $15,900,000 or $0.88 per diluted common share in the year ago 2nd quarter. As we discussed on our Q1 call, we completed the sale of Winmark, Citibank's wholly owned insurance subsidiary for $35,500,000 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 2nd quarter resulted in $1.16 per share of one time net income in the 2nd quarter. Excluding these items, we earned $0.55 Given the large gain that we recorded, we made the strategic decision to sell $56,000,000 of investment securities from our portfolio, which resulted in a realized loss of $3,400,000 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 in loans that are yielding more than 7% in the 2nd quarter. The incremental income will help replace the loss of future net income from the Windmark operations.

Speaker 2

Turning to our loan portfolio. We grew loans 6.8% in the 2nd quarter as we continue to experience healthy economic growth combined with customer dislocation in many of our markets from to the bank as Corey will touch on in more detail. We recorded a provision for credit losses of $3,700,000 in the 2nd quarter as compared to $1,000,000 in the Q1 of 2023. The provision was primarily for the strong loan growth that we delivered in the quarter and a $1,300,000 increase in specific reserves related to one previously classified credit relationship totaling $13,300,000 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 Q3 of 20 While there continues to be payment performance, we placed the relationship on non accrual and recorded the specific reserve given that the business is no longer a going concern.

Speaker 2

As Steve will touch on in more detail, the overall credit quality of our portfolio continued to improve through the Q2. Of note, our budget and consensus estimates were for $1,250,000 of provision expense in the Q2. Our recorded provision expense was approximately $0.14 per share above these expectations. As a result, 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 2nd quarter, which bodes well for the second half of the year as we will fully benefit from the 2nd quarter's loan growth and improved loan yields. We grew deposits $66,500,000 or 1.9 percent to $3,570,000,000 at June 30, 2023 as compared to the end of the Q1 2023.

Speaker 2

Our deposit growth was primarily due to an $81,000,000 increase in brokered Partially offset by a $67,000,000 reduction in public funds, which had grown $118,000,000 during the prior quarter. We are making a concerted effort to manage overall deposit levels and related interest costs. Ultimately, we will continue 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 only 19 Our major metropolitan markets of Dallas, Houston and El Paso. Additionally, our average deposit account balance is approximately 36 $1,000 and only an estimated 16% of our total deposits are uninsured or uncollateralized.

Speaker 2

We believe we also ended the 2nd quarter in a strong liquidity position with $1,820,000,000 of untapped borrowing capacity. We have $1,010,000,000 of availability from the Federal Home Loan Bank of Dallas, dollars 612,000,000 of from the Federal Reserve's discount window and $200,000,000 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 $15,000,000 stock repurchase program in May And we bought back approximately 113,000 shares during the Q2 for $2,600,000 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.

Speaker 2

We will be patient and continue to review a broad range of options to determine the best uses for the capital generated from the Renmark sale. As part of our capital allocation, returning a steady stream of income to our shareholders through our quarterly dividend has been a focus since going public over 4 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 Looking into the second half of the year, economic growth is holding remarkably steady in our markets, while unemployment remains low.

Speaker 2

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 Corey.

Speaker 3

Thanks, Curtis, and good afternoon, everyone. Starting on Slide 6, loans held for investment increased during the Q2 by $190,400,000 or 6.8% compared to the Q1 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.

Speaker 3

We believe this is an opportunity to bring high quality long term customer relationships 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 2nd quarter, which compares to 5.78 percent in the Q1 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.

Speaker 3

Shifting to Slide 8. We grew our loan portfolio by $65,000,000 or 7.3 percent in our major metropolitan markets of Dallas, Houston and El Paso as compared to the Q1 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. Permian Basin is another market we are pleased with this quarter as we experienced an increase in loan demand.

Speaker 3

Since completing our acquisition with West Texas State Bank in 2019, We've 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 1st 6 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.

Speaker 3

Getting ahead to Slide 10, we have $1,100,000,000 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 percent of our CRE portfolio and 6.1% of our total loan portfolio at the end of the 2nd quarter. Of note, 29% of our office exposure is owner occupied and medical offices comprise 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 and our portfolio for challenges.

Speaker 3

As Steve will discuss, the overall credit quality of our loan portfolio improved through the 2nd quarter, which provides confidence that the economy were to slow. As I discussed on our first quarter's earnings call, we are strategically enhancing our treasury 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 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.

Speaker 3

We believe this initiative can have a meaningful impact on our deposit And to a lesser degree our fee income over the medium term. Turning to Slide 11. Our indirect auto loan portfolio decreased by $2,400,000 $297,900,000 in the 2nd quarter as compared to the end of the Q1 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 yielding loans with We're also maintaining a disciplined approach to underwriting as 62% of the indirect auto loan portfolio was originated with a credit score of 7 19 or better, which is super prime and 28% of the portfolio was originated with a credit score of 6 The strong credit profile positions the portfolio for resilience across varying economic cycles. Turning to Slide 12.

Speaker 3

We generated $47,100,000 of non interest income in the 2nd quarter, which included 30 $3,500,000 gain from the sale of Winmark. Excluding this gain, we generated $13,600,000 of non interest income, which compares to $10,700,000 in the Q1 of 2023. The increase was primarily due to $3,000,000 increase in mortgage banking Activities revenue partially offset by a reduction of $1,400,000 in income from insurance activities due to the sale of Windmark. During the Q2, mortgage loan originations increased $46,000,000 to $132,000,000 as compared to $86,000,000 in the Q1 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 2nd quarter as compared to $2,000,000 write down in the Q1 of 2023 given the rise in market interest rates.

Speaker 3

Our secondary mortgage origination division, which excludes mortgage servicing activities, was breakeven in the 2nd 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 Q2, non interest income excluding the one time gain for Winmark was 28% of bank revenues is compared to 24% in the Q1 of 2023. To conclude, we delivered strong results through the Q2 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 markets and are always looking to add talented lenders where it makes sense.

Speaker 3

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.

Speaker 1

Thanks Corey. Starting on Slide 14, net interest income was $34,600,000 for the 2nd quarter as compared to $34,300,000 for the Q1 of The modest increase was primarily the result of a $3,400,000 increase in interest income due to higher average loan balances and loan yields, largely offset by a $3,100,000 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 2nd quarter as compared to 3.75 Our NIM was impacted by a 33 basis point increase in our cost of deposits in the 2nd quarter as compared to the Q1 of 2023. This was partially offset by our organic loan growth combined with the corresponding increase and our loan yields of 16 basis points as compared to the Q1 of 2023. Importantly, our NIM dropped 15 basis points in the month of March 2023 to 3.65 percent and has held steady through the 2nd quarter.

Speaker 1

We remain focused on managing our profitability in this more challenging environment. Our average cost of deposits 169 basis points in the 2nd quarter, an increase from 136 basis points in the Q1 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 in 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 Q2, 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 Q1 of 2023.

Speaker 1

Turning to Slide 16, we continue to believe that our loan portfolio remains appropriately reserved as our ratio of allowance for credit losses Total loans was 1.45 percent 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 $3,700,000 in the 2nd quarter. The larger provision was largely due to our organic loan growth in the quarter and $1,300,000 in specific Reserves attributable to one previously classified credit relationship totaling $13,300,000 that was placed on non accrual in May 2023. Due to the relationship being placed on non accrual, our non performing to total assets ratio increased to 51 basis points in the 2nd quarter from 19 basis points in the Q1 of 2023. That said, classified loans declined approximately $3,000,000 during the 2nd quarter to $68,000,000 from $71,000,000 at March 31, 2023.

Speaker 1

Further, a classified relationship with 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 $40,500,000 in the 2nd quarter as compared to $32,400,000 in the Q1 of 2023. The increase was primarily due to $4,500,000 of transaction expenses and related incentive based compensation from the Winmark transaction and the $3,400,000 loss on the sale of securities. As a result, we see our core non interest expense as $32,600,000 for the 2nd 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.

Speaker 1

Looking to the Q3 of 2023 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 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 The tangible assets of 8.96 percent at the end of the 2nd quarter, an increase from 8.54% at the end of the Q1 of 2023. The increase was driven by $27,500,000 in net income after dividends paid, partially set by $2,600,000 in share repurchases. Tangible book value per share increased by $1.63 to $21.82 during the Q2.

Speaker 1

Let me turn the call back to Curtis for concluding remarks.

Speaker 2

Thank you, Steve. To conclude, I am very proud of our results through the Q2 as we continue to successfully navigate a challenging environment and position South 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.

Speaker 2

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

Operator

Thank you. We will now be conducting a question and answer session. Your first question comes from Brady Gailey with KBW. Please go ahead.

Speaker 4

Hey, thanks. Good afternoon, guys.

Speaker 3

Hi, Brady.

Speaker 4

Maybe just a little more color on the $13,000,000 MPA. What type of business is that and what happened there?

Speaker 3

Well, this is Corey Brady. So that's C and I business, so a little color and one of the things that kind of hope you would pick up is when we talked about this in our script about it being Borrower directed liquidation, you got a guy that's got in a lot of different businesses and a lot of different industries. He got into He expanded into kind of a related type business, didn't really work out like he wanted it to. So he's, in his own discretion, made the decision to self liquidate, kind of shut it down, self liquidate. We're always going to account for our stuff appropriately, but this guy has very strong network, Strong balance sheet, a lot of income from other businesses and we even have those other businesses that actually guarantee this debt.

Speaker 3

So it just We kind of got caught in a window that we needed to account for it appropriately, but feel pretty good about it.

Speaker 4

Okay. All right. And then when you talk about expenses being flat To slightly up. Are you basing that off of kind of the 2nd quarter core run rate of that $32,600,000 Is that what you're basing that off of?

Speaker 1

Yes. This is Steve. That's correct. That's what we're looking at after we kind of normalize that for those For the transaction cost and additional expenses, so right around that $32,500,000 All right.

Speaker 4

Then I mean, loan growth was incredible this quarter. I mean, it's 27% linked quarter annualized. Maybe just a little more color on kind of what drove that level of loan growth?

Speaker 3

Yes. I'll kick it off and let Brent kind of clean it up on this one. We went into the quarter with a good pipeline. I mean, We've talked about this for a long time that with our team in place the way we have it and opportunities to It's got good relationships. I mean, if you look at some of the different markets we're in and some of the disruption that's happened, I mean, it just really worked.

Speaker 3

But I mean, we've been very conservative and I mean, we walked away from a lot of stuff that we could have done, just didn't want to. We really cherry picked it. Brent?

Speaker 5

Yes. We had we pulled a lot through the pipeline in the 2nd quarter. Growth centered in industrial storage. You have some multifamily and some single family owner occupied, non owner occupied growth there as well as energy. But it was a mix between The South Plains side of the company and the more metro markets,

Speaker 2

so we had

Speaker 5

a pretty good blend of a mix. And we still have a pipeline of fundings on our construction book that we anticipate to continue Near term, that's kind of going to be a tailwind to that growth and added to it for sure in the second quarter. I think our pay downs were a little lighter than what we thought they were going to be in the 2nd quarter. So that kind of attributed to it too. I know we talked about that last quarter, But overall, feel really good about it.

Speaker 5

We pulled a lot through this quarter.

Speaker 4

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?

Speaker 1

Yes. So I mean we're NIM held steady through the quarter. We kind of Looked at where we not for the quarter of March, but the month of March, we were right about that same level, 3.65. So we were fortunate and stayed pretty consistent during the Q2 at that level. I mean, it's a challenge Every day, so there's still competitive issues on pricing on deposits.

Speaker 1

And so we've got to Face that and so some compression

Speaker 3

in them, I think is out there. We just hope to minimize that as much as we can. This is Corey. I think our new pricing on our loans, the funding, the stuff that we're getting We'll continue to help, hopefully keep that as flat as possible.

Speaker 2

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're putting on the books now. You're going to have 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're putting on the books. And with the other stuff still in the pipeline, still in the stage of construction where we're going to be providing funding now that The customers basically put in their equity.

Speaker 2

We're 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 We do know deposit costs are moving up some more. We're going to do all we can to keep it down. We think 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'll see a little more NIM compression.

Speaker 2

We're going to hold it as firm as we can, but I'd expect it tightening up a little in both 3rd and 4th quarter.

Speaker 4

Okay, got it. Thank you guys.

Speaker 1

Thanks Brady. Thanks Brady.

Operator

Your next question comes from Brett Rabatin with Hovde Group. Please go ahead.

Speaker 6

Hey, good afternoon, everybody. Thanks for the question. Wanted to go back just to the deposits and the cost of deposits, only 1 point 6%, 9%, on average in 2Q. Is there not, Carter's or Cory, is there not any concern that there might be a catch up quarter In terms of betas, and then could you just give us any color around what rate you added those broker deposits on during 2Q?

Speaker 3

Well, I mean, I really don't, unless you see some big movement in rate, I don't see a catch up order coming at all. I do think that we've had we made some moves early in the year, in late last year to try to take care of some of our Some of the interest bearing accounts that we felt like that were a little bit below where they should be for market. But I feel pretty good about the mix and what we're actually doing. I mean, think a lot of it goes back to the type of deposits we have, especially in some of the rural markets, and that's what we're so proud of. So I don't really see a catch up quarter coming.

Speaker 3

Steve, the passing on that.

Speaker 1

Yes. I mean, I'll just add to that just a little bit. I mean, as far as brokered, That was added toward the end of the quarter. So there wasn't necessarily a full definitely not a full quarter of that in. I mean, It is at the upper end of the cost range there, tied to Fed funds.

Speaker 1

And so It is a costlier deposit. So that will increase our deposit costs in the quarter. As Curtis said, on the flip side, we've got the loans that those loans were not funded for the entire quarter. So we'll have a full quarter's worth Earnings on those new loans that have been that are being put on at 7% plus, 8% In different cases, so to help offset that cost. And this is Brad.

Speaker 3

I don't I think we're much different than anybody else. But I mean we are using The brokered is a way to manage our overall cost. And we think it's working.

Speaker 1

Okay. So we've just turned it down.

Speaker 2

So What we've been able to do with that, well, as we've indicated, it's not inexpensive, but we think it's better than trying to run a whole bunch of CD specials out there. And that's going to take in our markets, that's going to take something north of 5% if you're really going after new money to get that in. And so we're trying to do all we can to still hold ours more in line at a little lower levels. And if you can See our deposit mix, we just don't have that much in CDs. So we're not having to deal with a bunch of CDs, particularly jumbo CDs maturing That we've got to be really up there with high rates or they're going to walk out the door.

Speaker 2

A lot of ours are in transaction accounts and money market accounts, And we're able to adjust those rates and kind of do things competitively and keep the customer And also we still have that flexibility that when, and it is a when, not an if, rates go back down at some point, we'd be able to quickly pull rates back down on those

Speaker 6

Okay, that's helpful. And then I know your DDA has been fairly Stable the past year, but I was really impressed it was only down in the period $10,000,000 1Q to 2Q. Are you guys opening up a bunch New accounts that's helping keep that fairly stable or you're just not seeing mix shift change away from non interest bearing to interest bearing?

Speaker 3

Well, I think and we've talked about this last couple of quarters. I mean deposits are such a focus when we're approving loans of the relationships that are actually coming in. And I mean, It's real. I mean, literally, we sit down and have a conversation over loan approvals and we start out what the positive relationship looks like. And so we're making that much more of a focus when we're doing it, and it helped us keep those demands pretty stable.

Speaker 1

Yes, I mean, we are seeing some move out, but those new ones coming in are helping to mitigate that.

Speaker 6

Okay. And then just last quick one for me on the loans. You had talked about a strong 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?

Speaker 2

Yes. Brent, I'll let you start off that one.

Speaker 5

This is Brent. I'll 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 fundings outside of the construction fundings are existing clients that came to us for expansion of their relationship.

Speaker 5

And that was both in the metro markets And in the Southpoint side of the company.

Speaker 3

Yes. Brett, I would probably catch on to that with part of your question The fundings trying to people trying to beat the rate for a movement, I don't think at all because I mean so much of what we're doing is going with a floating rate, they're going to catch it anyway. And so we all saw some of that year in NAVCO, people trying to get some stuff done. We saw that movie. Yes.

Speaker 3

Most of this stuff coming in is floating and knowing that we're going to they're going to face whatever rate increases come.

Speaker 2

Yes. We definitely saw that back in Q2 of 2022. It was pretty obvious what was happening then, but That ship's already sailed, I think. And right now, as Corey said, I think we're 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've seen particularly out in our West Texas markets.

Speaker 2

And I think we're 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're looking to either move entire relationships or as Brett indicated, Maybe they've already got a relationship with us and now they're going to take what they had over at the Bank X And move that over to us as well and we've got room. We're glad to bring them on and we already have the underwriting and to look at the credits and it's fairly easy transition for them. So I think that was a key trend in Q2, and I think we'll see more of it in Q3 and Q4. But overall, we are going to see a slowdown.

Speaker 2

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'll continue to grow loans out through the balance of the year.

Speaker 3

Well, Brett, I'll just add one more to it. I mean, you know, over time we've spent time making sure that we've really done a good job with some of our metro markets, making sure the right teams, leaderships, everything's in place. But we're still just as focused on taking care of that in our rural markets. So we're seeing opportunities to take share in those areas and Taking out 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're both beneficial.

Speaker 6

Okay, great. Appreciate all the color.

Speaker 3

Thanks, Brett. Thank you. Thanks, Brett.

Operator

Next question, Graham Dyck with Piper Sandler. Please go ahead.

Speaker 7

Hey, good evening, guys.

Speaker 3

Good morning.

Speaker 7

So I kind of just wanted to stick with, I guess, that last point there about customers maybe being unhappy with their bank and looking to move over to you guys, banks that have impacted by M and A and kind of look at the other side of that and say, are there lenders out there that you guys are looking at right now that maybe at a bank that Has done M and A recently and they're not happy with it or the bank isn't doesn't have the capital or liquidity to make loans like you guys have in this And I know you guys made a handful of hires or a lot of hires over the

Speaker 1

last couple of years and

Speaker 7

it's kind of slowed down a bit. But just wondering With your capital position now and the deposit base you have, if you're looking at all for hires or inorganic opportunities?

Speaker 3

So I mean, just go with what I was just saying. I mean, we just picked that market leader and different ones in a rural market that fit everything you just described. And it's going to bring a lot of opportunity with it. And so we're excited about that. But it will bring deposits and loans.

Speaker 3

And so that's what we like. I mean, but if I mean, we said it, we're going to make selective hires, strategic hires. And I mean, I will tell you that we interview frequently. We don't hire frequently. We're very, very careful about who gets to come on and be a part of And make sure that it's going to be a long term fit that can bring relationships that fit what we're looking for.

Speaker 3

And that's what we've done. We've been very consistent with this for years. It is why we built the caliber team that we truly have. And we're not backing down from it, but we're doing we're making very selective strategic hires.

Speaker 7

Okay. I hear you. All right. And then I guess just shifting more to the margin, I Wanted to touch on loan yields a little bit. I know you said they might be you feel as if they're topping out a bit.

Speaker 7

I guess maybe on new loan yields if you Your assumptions that NIM is going to contract a little bit in the back half of the year. What kind of, I guess, loan yield expansion do you have through the end of the year Do you expect?

Speaker 1

So as far as loans go, I mean, Again, we're putting on loans and I'll get Brent to help me out. We're putting loans on when they're fixed. I mean, they've been In the upper 7s mid to upper 7s, I would say, even so maybe slightly Higher than that. We've got a good thing is we've got our indirect portfolio that while that's That's at some lower rates, that stuff amortizes a lot faster off and is so those lower yields

Speaker 2

Are

Speaker 1

paying off and coming back in. So I mean, we're still we should show expansion And the overall loan yield, I mean, we went up roughly, I guess, around 15, 16 basis points In the quarter, we should see a decent size, I'll say hopefully in that range for Q3 Given especially given the growth that we had in Q2. If you look

Speaker 3

at those rates, so I mean some of the ones I think what you're talking what Steve was trying to explain was some of the little fixed stuff that we put on the books. So we're putting a lot of Prime plus on the books too, that's floating that I think will be very beneficial to it as well.

Speaker 5

Right. Scott, this This is Brent. You've got draws on construction loans that for the most part are variable rate. And then to what Steve was alluding to, you have a Really short duration on indirect portfolio, but a little over $300,000,000 indirect portfolio that Those lower rates have rolled off of that portfolio and been replaced by much higher rates. So you're seeing a lift in that segment.

Speaker 5

And same with ag. Ag is going to be a variable rate funding for the second half of the year. You should see some lift in that yield.

Speaker 3

Here's the other thing that's kind of interesting. We're not missing opportunities over rate right now. I mean because that's And it's for a while that was kind of a challenge, but I mean, I don't believe that you go out there and charge all you can get. I don't I think you still have Stay competitive. But I think our rates are competitive.

Speaker 3

I think that we're not sitting around losing them over that. It's we get down to a credit quality. Do we want it? This is a relationship that we want to, I mean, tie into.

Speaker 7

Okay. I guess, and that's a perfect segue to what I have last for you guys is just Talking about the provision, I know you guys said that you budgeted for $1,250,000 this quarter, obviously, it's a little bit higher with the growth and That specific reserve you talked about, but would you expect, I mean, are you guys looking at the rest of the year saying 1.25% is Good for the provision line going forward? Or is there anything in there that might take that higher or lower?

Speaker 1

I mean, this is Steve. I'll start and I'll let definitely let Brent pipe in. I mean, at this point, I mean, that would be our hope of Where we want to be, we do typically, I mean, we always have some net charge off during the quarter and Along with net loan growth, so I think we've got a healthy reserve out there currently. And given the view of the economy, I don't think there's any view that, that needs to ramp up at this point.

Speaker 5

Yes, this is Brent. We feel really good about the reserve level and we're not seeing Broad risk trends in the portfolio. So it will really I think 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 or the mix of the portfolio? And that's likely going to be the driver, At least in the near term.

Speaker 2

Graham, this is Curtis. We've worked pretty hard on our CECL model and We are cautious. You know that. You've watched us. We're probably going to run a higher reserve than peer.

Speaker 2

And it's not because we think we have more credit problems than peer. It's just that we're trying to be cautious and we're taking into account the Lot of uncertainty is still out there in the overall economy. It looks more and more like if we have a recession, it may be a fairly short lived and soft one. But today, frankly, we don't know. And we're just going to try to be well prepared for what comes.

Speaker 2

But there will be some one offs that happen, Just like the one we've been describing today. But we think we're pretty well underwritten and don't look for big losses out there And even if we do have some credits that move on to nonperforming status, but we just don't see the trends building right now in that Correction, but we're still going to be real cautious and make sure that reserve level stays up where we think we can withstand whatever ills may befall us.

Speaker 7

All right. I appreciate it. Thanks guys.

Speaker 1

Thank you,

Operator

Your next question comes from Joe Yanchunis with Raymond James. Please go ahead.

Speaker 1

Good afternoon. Hey, Joe. Hey, Joe.

Speaker 8

So you touched on your strategy to modestly reduced the size of the indirect auto portfolio. And I was curious, what is the time horizon of this reduction and how low

Speaker 3

would you like to take it?

Speaker 5

This is Brad. Sorry, if I may have caused some confusion. Right now, we're Keeping a pretty stable portfolio in that segment. We like it. But the duration there is so short that We're routinely replacing cheap rate.

Speaker 5

I think that was a point I was trying to make is the production we have in that unit isn't And yes, the percentage has come down a little bit, but I think that's really just because we're driving The rates in that portfolio up and frankly, the industry itself has kind of contracted

Speaker 1

a little bit. So I

Speaker 5

don't see a significant contraction unless the industry continues to contract some, but I think we're still getting our fair share of volume out of that

Speaker 3

and meanwhile increasing our yield pretty good. Yes, we were only down $2,400,000 I think quarter over quarter. Part of that is we're not going to be the cheapest around. And if you look at it, if you look how we stack up on our the way we view them as compared to like CFBB, I mean, We want top end credit. I mean, we want the really good stuff for the majority of our portfolio and we don't have to be the cheapest to do it.

Speaker 3

Mean, we're strategically placed where they don't have to be.

Speaker 8

Understood. And moving over to deposits, you previously And I've guided to a cumulative interest bearing deposit vein of about 50% by year end. Do you still think that holds?

Speaker 2

I'll 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 that's probably kind of upper end for us Unless we see some real anomaly pop up on something out there, but that currently in being based as we are With a fairly high percentage of rural market deposits, they're 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 Well, Steve?

Speaker 1

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, but and we're monitoring it Every day, but as of now, we still feel that we can just come in right at that level or slightly below.

Speaker 8

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

Speaker 1

market in the recent quarter?

Speaker 8

If you have that handy.

Speaker 1

Let me pull that and see what I can grab real quick.

Speaker 2

While Steve is looking that up, we definitely are getting some decent Loan growth there and the good news in that market, 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're getting opportunities to move those families and those companies in, it doesn't happen real fast, But the whole idea is the relationships 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've been looking for in those markets As well as in that one as well as we've seen here in Lubbock and some of the others, a little dissatisfaction with some of the changes that they've seen in the banks they've been at.

Speaker 2

Steve, did you get some?

Speaker 1

Yes. I mean, I think about 10% of our loan growth Permian region during the quarter. Deposits were up slightly, but not a significant Hi, Mel.

Speaker 8

Understood. Thank you for taking my questions.

Speaker 1

Thanks, Joseph. Thank you.

Operator

Thank you. I would like to turn the floor over to Curtis for closing remarks.

Speaker 2

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 As I said at the beginning, we had a very good quarter. We exited in 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.

Speaker 2

The higher yields from these loans will help mitigate We expect a 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, Take advantage of opportunities to improve shareholder returns as they present themselves. So I'm truly excited about what I see in our future for Citibank and South Plains Thank you all again. Have a good day.

Operator

This concludes today's teleconference. You may disconnect your lines and thank you for your participation.

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Earnings Conference Call
South Plains Financial Q2 2023
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