South Plains Financial : Third Quarter 2022 Earnings Call Transcript

Third Quarter 2022 Earnings Call

Transcript

October 21, 2022

South Plains Financial, Inc. - Third Quarter 2022 Earnings Call, October 21, 2022

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

Steve Crockett, Chief Financial Officer and Treasurer

Cory Newsom, Director and President

Curtis Griffith, Chairman and Chief Executive Officer

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

Brady Gailey, KBW

Brad Milsaps, Piper Sandler

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

Operator

Good morning, ladies and gentlemen. Welcome to the South Plains Financial Incorporated Third Quarter 2022 Earnings Conference Call.

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

Steve Crockett

Thank you, Operator, and good morning, everyone.

We appreciate your participation in our third quarter 2022 earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer, and Cory Newsom, our President. A rep lay of this call will be available on our website within two hours of the conclusion of this call until November 4, 2022. Additionally, a slide deck presentation to compliment 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 that 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 morning and on Slide 2 of the slide deck presentation available on our website.

All comments made during today's call are subject to those Safe Harbor statements. Any forward-look ing statements presented herein are made only as of today's date and we do no t und ertake any duty to update such forward-looking statements except as required by law.

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South Plains Financial, Inc. - Third Quarter 2022 Earnings Call, October 21, 2022

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 Griffith

Thank you, Steve, and good morning.

On today's call, I will briefly review the highlights of our third quarter 2022 results, which we believe are a clear validation of our ongoing strategy to grow the bank. Cory will discuss our loan growth in more detail as well as review the credit profile of our portfolio, which remains strong. Steve will then conclude with a more detailed review of our Q3 results.

To start, there are five key points that I hope you will take away from today's call. First, we s poke to our business being at an inflection point on last quarter's call and I'm proud to say that our results this quarter validate that view. Second, we delivered 17% annualized loan growth in the third quarter, driven by strength in both our community markets and our major markets of Dallas, Houston and El Pas o. Third , this strong loan growth is building the earnings power of the bank and we continue to hav e liquidity to fund further loan growth. Fourth, the credit quality of our portfolio continues to improve through the third quarter, and we believe we are well positioned for an uncertain economy. Lastly, we continue to b elieve that our shares have been trading below intrinsic value and remained active with our s hare rep urchase program, having bought back approximately 366,000 shares in the third quarter.

Looking at our results on slide 4 of our earnings presentation, we delivered net income of $15.5 million or $0.86 per diluted common share for the third quarter of 2022. This compares to net income of $15.9 million or $0.88 per diluted common share in the second quarter of 2022 and $15.2 million or $0. 82 for diluted common share in the year ago third quarter.

It's important to highlight that our results over the last three quarters have included certain items whic h are making comparisons difficult, as well as obscuring the improving earnings power of the bank. Thes e items include large recoveries, negative provisions for loan losses and fair value increas es in our MSR portfolio.

Looking at this in more detail, our second quarter 2022 results benefited from $0.24 per s hare of these items net of tax, which we had discussed on last quarter's call. Likewise, our third quarter results benefited from approximately $0.10 per share of these items net of tax. As a res ult, our third q uarter earnings per share increased by approximately 19% from the second quarter of 2022, when normalizing for these items.

We recorded a negative provision for loan loss of $782,000 in the third quarter of 2022, which was triggered by a loan loss recovery in our energy segment of $822,000 combined with paydowns of $19. 6 million in our hotel portfolio, over half of which of those paydowns was adversely classified. The improving credit quality of the portfolio largely offset the reserves required for the new organic loan growth experienced during the quarter.

Looking forward, we remain well reserved for an uncertain economic outlook, given that our allowance for loan loss ratio is 34 basis points higher than pre-pandemic levels. Nev ertheless , c oncerns reg arding forecasted economic conditions continue to increase due to the rising interes t rate env ironment and persistent high inflation levels in the United States and our markets and provisions for loan losses may be necessary in future periods.

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South Plains Financial, Inc. - Third Quarter 2022 Earnings Call, October 21, 2022

While we expect economic growth to moderate as the Federal Reserve continues to rais e their target benchmark interest rate, loan demand remains strong through the third q uarter , as we g rew o ur loan portfolio 17% annualized from second quarter of 2022. Our loan growth was driven by gains in both our community markets as well as our major metropolitan markets.

Importantly, the scale that we have achieved in our lending portfolio has more than offset the declines in our mortgage business where our mortgage banking revenues declined to 11% of bank revenues in the third quarter of 2022. This is significant as the core earnings power of the bank is now readily visible and expected to continue to grow through year-end.

Additionally, we continue to have liquidity to fund future loan growth as o ur loan-to-depos it ratio was 77.7% at September 30, 2022, as compared to 75.3% at the end of the second quarter of 2022. We hav e historically been comfortable running the bank at a loan-to-deposit ratio in the mid to upper 80% range, which provides significant capacity for future loan growth as we work to redeploy our lo w-cost deposits into higher yielding commercial loans.

This liquidity represents significant earnings potential as we continue to fund higher yielding loans over time. Overall, I am very proud of our accomplishments as we have grown our lending team, increased share across our markets and delivered results above our expectations. Most notably, we have achieved 10.4% loan growth year-to-date, which is ahead of our mid-to-high single digit loan growth g uidance for the full year, 2022.

As we have improved the earnings power of the bank through the year, our s hare price has not fully reflected this improvement as we believe our shares have been trading below intrinsic value. As a res ult, we accelerated our share repurchases in the third quarter, having bought back 366,000 shares as compared to 257,000 shares in the second quarter. Year-to-date, we have repurchased approx imately 730,000 shares under our stock repurchase program.

Returning a steady stream of capital through our shareholders through our stock repurchases and dividend remains a priority for our management team. Along those lines, our Board of Directors authorized a $0.12 per share dividend as announced earlier this week. This will be our 15th cons ecutive quarterly dividend to be paid on November 15, 2022, for shareholders of record on October 31, 2022.

To conclude, we remain cautiously optimistic as the Texas economy continues to ex perience healthy economic growth and low unemployment. While we expect growth to moderate, we are not seeing concerning signs in our portfolio nor in our markets. The credit quality of our loan portfolio is strong, and we continue to underwrite to more conservative assumptions, including not sacrificing cred it quality for loan growth.

We believe that we are in an advantageous position and remain excited with the opportunities that lie ahead.

Now, let me turn the call over to Cory.

Cory Newsom

Thank you, Curtis, and good morning, everyone.

As Curtis touched on, loans held for investment increased during the third q uarter of 2022 b y $109. 9 million or 17% annualized compared to the second quarter of 2022, as o utlined on s lide 5. Our lo an demand remained primarily in the commercial real estate market, residential mortgage, and c onsumer auto. Overall loan demand was strong despite the noted paydowns in our hotel segment, which is not a growth sector for us.

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South Plains Financial, Inc. - Third Quarter 2022 Earnings Call, October 21, 2022

Our loan yield in the third quarter of 2022 was 5.12%, which compares to 5.57% in the second quarter of 2022. That said, it is important to adjust our second quarter loan yield for the $4.4 million of large recoveries and prepayment penalties that we experience. When adjusting for thos e items, o ur s e cond quarter 2022 loan yield was 4.88%. As Curtis touched on, the improving trends and our results o ver the last three quarters have been obscured and we believe it is important to adjust for these benefits in order to properly model the growing earnings power of the bank.

The rise in our loan yields in the third quarter also reflects our concerted effort to proactiv ely price new loans to account for a higher interest rate environment combined with the rise in funding costs, whic h we have started to see through the third quarter. We are working hard to stay ahead of the market while also maintaining our competitive position, which will remain a focus as the Federal Reserve c ontinues their aggressive interest rate increases and tightening policy.

As we discussed in our second quarter 2022 call, we are a community retail bank in our smaller mark ets and primarily a commercial bank in our major markets of Dallas, Houston and El Paso. As o utlined on slide 6, our strategy is to redeploy our excess liquidity consisting of low-cost deposits from our community-oriented markets into our major metropolitan markets. To accomplish this, we hav e added experienced commercial lenders who share our culture values and who focus on developing a long-term customer relationships done the right way.

Our expansion and growing scale in our metropolitan markets is a key factor to the acc elerating loan growth that we have delivered through the year, combined with this share gain that our community bankers continue to deliver. As outlined on slide 7, we grew loans in our metropoli tan markets by $30 million in a third quarter of 2022, representing 14.6% annualized g rowth as c ompared to the s econd quarter of 2022.

Year-to-date, we've grown our loan portfolio by 15.2% to $849 million in our major markets, whi ch is strongly contributed to the bank's 10% total loan growth through the first three quarters of the y ear. Our growing scale and presence in the metro markets provide us with optimism on our ability to sus tain mid - to-high single digit loan growth over time.

Additionally, we have the ability to add space and bankers on our metro markets as growth opportunities present themselves. As Curtis touched on, we have seen loan growth moderate given the rap id ris e in rates as borrowers need to put more equity into deals and builders are beginning to offer more inc entive to borrowers to keep deals going.

That said, inventory remains constrained, and the Texas economy is still very healthy. If the ec onomy transitions to a higher market interest rate environment, we are proactively underwriting to more normal levels and asking for more money down on new loans as we focus on discipline g rowth. Likewise, we continue underwriting to lower energy prices in the Permian Basin to ensure we avoid potential problems if an economic downturn occurs.

We are continually stress testing our loan portfolio and remain pleased with the improving c redit quality that we have experienced year-to-date. Overall, we want to enter the next downturn in an advantageous position and remain pleased with our asset quality, liquidity and strong capital position.

Skipping ahead to slide 9, our indirect auto loan portfolio increased by $7 million to $289 million in the third quarter of 2022, as compared to the second quarter of 2022. While there was growth in this sector, the level of increase has declined given the rising market interest rate environment. Importantly, we hav e maintained a disciplined approach to underwriting a 78% of the indirect auto loan portfolio originated with a credit score of 690 or better. This strong credit profile position portfolio for res ilience ac ross vary ing economic cycles.

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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.

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