South Plains Financial : Fourth Quarter 2022 Earnings Call Transcript

Fourth Quarter and Full Year 2022

Earnings Call Transcript

January 26, 2023

South Plains Financial, Inc. - Fourth Quarter and Full Year 2022 Earnings Call, January 26, 2023

C O R P O R A T E P A R T I C I P A N T S

Steven B. Crockett, Chief Financial Officer and Treasurer

Curtis C. Griffith, Chairman and Chief Executive Officer

Cory T. Newsom, President

C O N F E R E N C E C A L L P A R T I C I P A N T S

Bradley Milsaps, Piper Sandler & Co.

Brady Gailey, KBW

P R E S E N T A T I O N

Operator

Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial, Inc. Fourth Quarter 2022 Earnings Conference Call.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Mr. Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead, sir.

Steven B. Crockett

Thank you, Operator and good afternoon everyone. We appreciate your participation in our fourth quarter 2022 earnings conference call.

With me here today are Curtis Griffith, our Chairman and Chief Executive Officer, and Cory Newsom, o ur President.

A replay of this call will be available on our website within two hours of the conclusion of the c all until February 2, 2023. Additionally, a slide deck presentation to complement today's discussion is available on the News and Events section of our website.

Before we begin, let me remind everyone that this call may contain forward-looking statements and are subject to a variety of risk, uncertainties, and other factors that could cause actual results to differ materially from those anticipated future results. Please see our Safe Harbor statement in o ur earnings press release that was issued this afternoon and on Slide 2 of the slide deck presentation av ailable o n our website. All comments made during today's call are subject to those Safe Harbor s tatements. Any

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South Plains Financial, Inc. - Fourth Quarter and Full Year 2022 Earnings Call, January 26, 2023

forward-looking statements presented herein are made only as of today's date and we do not undertake any duty to update such forward-looking statements except as required by law.

Additionally, during today's call, we may discuss certain non-GAAP measures which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP measures to the most c omparable GAAP measures can also be found in our earnings release and on Slide 22 of the slide deck presentation.

At this point, I'll turn the call over to Curtis.

Curtis C. Griffith

Thank you, Steve and good afternoon.

On today's call, I will briefly review the highlights of our fourth quarter and Full Year 2022 results as well as our outlook for the year ahead. Cory will discuss our loan growth and the credit profile of our lo an portfolio in more detail as well as review our strategic initiatives for 2023. Steve will then conclude with a more detailed review of our Q4 results.

To start, I am very proud of our execution over the last year as we successfully navigated a c hallenging economic environment, and while the economic outlook remains uncertain, we believe we have positioned South Plains for continued success in the future. Central to our success has been the expansion of our commercial lending platform, which has driven the ac cel eration in o ur organic loan growth and contributed to an improvement to our run rate net interest income.

As our net interest income improved through the year, it began to offs et the expec ted dec line in o ur mortgage banking revenues as the Federal Reserve aggressively raised their benchmark interest rate to combat inflation. Looking forward, we believe we are well-positioned to continue to deliver returns in line with or better than our peers.

Given that backdrop, there are five key points that I hope you will take away from our results and today's call.

First, we delivered 8.6% annualized loan growth in our seasonally slower fo urth quarter, driven by strength in both our community markets as well as our major metropolitan markets of D allas, Hous ton, and El Paso.

Second, our major metropolitan markets experienced 13.9% annualized loan growth to $879 million, which now represents 32% of our total loan portfolio at year-end as our new lenders continued to successfully grow their portfolios.

Third, the credit quality of our portfolio remained stable through the fourth quarter, and we believe we are well-positioned for the uncertain economic outlook.

Fourth, we have diligently managed our expenses to drive profitability, as our mortgage banking revenues have declined and wage pressure has increased across the Bank.

Lastly, we remain focused on returning capital to our shareholders. During 2022, we repurchased 4.8% of the Company shares of common stock that were outstanding as of December 31, 2021. We also distributed $0.46 per share in quarterly cash dividends in 2022, representing a 53% increase as compared to 2021.

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South Plains Financial, Inc. - Fourth Quarter and Full Year 2022 Earnings Call, January 26, 2023

Turning to our results in more detail on Slide 4 of our earnings presentation, we delivered net income of $12.6 million or $0.71 per diluted common share for the fourth quarter of 2022. This compares to net income of $15.5 million or $0.86 per diluted common share in the third quarter of 2022 and $14.6 million or $0.79 per diluted common share in the year-ago fourth quarter.

As we discussed on last quarter's earnings call, our third quarter 2022 results benefited from $0.10 p er share of legal settlements net of increased legal expense and a negative provision for loan loss net of tax. As a result, our fourth quarter earnings per share experienced their more typical seasonal decline like we have experienced in prior years. We recorded a provision for loan losses of $248,000 in the fourth quarter of 2022 as compared to a negative provision of $782,000 in the third quarter of 2022 and no provision in the year-ago fourth quarter. The provision was mainly due to our loan growth in the fourth quarter.

Looking forward, we believe we are well-reserved for an uncertain economic environment, given that o ur allowance for loan loss ratio is 30 basis points higher than our p re-pandemic lev els . Our b ase c ase outlook is for the national economy to experience a mild recession in 2023, with the Tex as ec onomy seeing a slowdown but avoiding recession given the continued strong in migration and low unemployment that we have been experiencing. As a result, provisions for loan losses may be necessary in future periods.

While we expect economic growth to slow in Texas as the Federal Reserve continues to raise their target benchmark interest rate, loan demand remained strong through our seasonally slower fourth q uarter as we grew our loan portfolio 8.6% annualized from the third quarter of 2022. Our loan growth was driven by gains in both our community markets, as well as our major metropolitan markets.

For the Full Year 2022, we grew our loan portfolio 12.7% to $2.75 billion, which exceeded our ex pected mid-to-highsingle-digit loan growth. This strong loan growth contributed to net interest income gro wth of 13.7% to $138.5 million as compared to 2021, and which helped to offset the 47.5% decline in mortgage banking income that we experienced through 2022. As a result, we were able to modes tly gro w diluted earnings per share to $3.23 in 2022 as compared to $3.17 per share in 2021, which is quite an achievement.

Overall, I am very proud of our accomplishments in 2022 as we've grown our Lending team, taken s hare across our markets, and delivered results above our expectations. That said, our share price has not fully reflected this improvement as we believe our shares have continued to trade below intrinsic v alue. As a result, we utilized the remaining capacity on our share repurchase authorization to buy back 130,000 shares during the fourth quarter.

For the Full Year 2022, we repurchased 860,000 shares, representing approximately 4.8% of our s hares outstanding at December 31, 2021. Our Board of Directors is currently analyzing our prior buybacks and evaluating the merits of another share repurchase program. We also unders tand that liquidity in o ur shares is important and we need to balance our liquidity with the benefits of our share repurchase programs.

Additionally, as was disclosed earlier this month, our Board of Directors adopted resolutions to terminate our employee stock ownership plan on December 30, 2022. This plan was created in 1994 and no longer served its intended purpose. The plan will be distributing the shares to the plan's participants, which may improve our stock liquidity over time, and will also reduce the expense required to maintain the plan. We believe this will benefit the Company, our employees, and our shareholders.

Returning a steady stream of capital to our shareholders through our share repurchases and quarterly dividends remains a priority for our Management team. Along those lines, our Board of Directors authorized a $0.13 per share quarterly dividend, as announced last week. This will be our 16th

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South Plains Financial, Inc. - Fourth Quarter and Full Year 2022 Earnings Call, January 26, 2023

consecutive quarterly dividend to be paid on February 13, 2023 for shareholders of record on January 30, 2023. For the Full Year 2022, we distributed $0.46 per share through quarterly cash dividends, representing a 53% increase as compared to 2021.

To conclude, we remain cautiously optimistic that the Texas economy can deliver moderate g rowth in 2023 and avoid a recession, but we do expect a mild recession in the national economy . That s aid , we will remain vigilant and will not sacrifice credit quality for growth. We have been underwriting the more conservative assumptions and remain confident in the credit quality of our portfolio.

Looking forward, we also believe that more challenging economic environments can lead to opportunities for those with strong balance sheets and sound loan portfolios. While we expect M&A to remain subdued through 2023, we look to further expand the Bank and remain in contact with p otential s ellers , as we believe there could be a resurgence in 2024.

Now, let me turn the call over to Cory.

Cory T. Newsom

Thank you, Curtis and good afternoon everyone.

As Curtis touched on, loans held for investment increased during the fourth q uarter of 2022 b y $57. 7 million or 8.6% annualized compared to the third quarter of 2022, as outlined on Slide 5. Our loan demand remained primarily in commercial real estate, residential mortgage, and consumer auto. Overall loan demand remained strong despite the fourth quarter being a seasonally slower quarter for the Bank, combined with principal payments and a hotel segment which is not a growth sector for us.

Our loan yield in the fourth quarter of 2022 was 5.59%, which compares to 5.12% in the third q uarter of 2022. The rise in our loan yields in the fourth quarter reflects our efforts to proactively price new lo ans to account for a higher market interest rate environment.

Our funding costs did accelerate in the fourth quarter as the Federal Reserve continued their aggress iv e interest rate increases and quantitative tightening policy. As we will discuss, managing our funding cos ts and deposit growth is a focus for our team in 2023.

As we have discussed on prior calls, we are a community retail bank in our smaller markets and primarily a commercial bank in our major metropolitan markets of Dallas, Houston, and El Pas o, as outlined on Slide 6. Our strategy has been to redeploy our excess liquidity, consisting of lower cost deposits from our community-oriented markets into major metro markets. To accomplish this, we have added experienced commercial lenders who share our culture and values and who focus on developing long-term cus tomer relationships done in the right way.

Our expansion and growing scale in our metropolitan markets is a key factor to the acc elerating loan growth that we delivered in 2022, combined with a market share gain that our community bankers continued to deliver. As outlined on Slide 7, we grew loans in our metropolitan markets by $29.5 million in the fourth quarter of 2022, representing 13.9% annualized growth as compared to the third quarter of 2022. Year-to-date, we've grown our loan portfolio by 19.2% to $879 million in our major metro mark ets, which has strongly contributed to the Bank's 12.7% total loan growth for the full year of 2022.

As Curtis touched on, we expect the national economy to experience a mild recession during 2023, w ith Texas seeing a slowdown but avoiding a recession as our economy digests the impact of higher market interest rates. We are fortunate to operate in Texas, given the favorable env ironment for businesses ,

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ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only.

1-888-562-02621-604-929-1352www.viavid.com