South Plains Financial : Second Quarter 2022 Earnings Call Transcript

Second Quarter 2022 Earnings Call

Transcript

July 22, 2022

South Plains Financial, Inc. - Second Quarter 2022 Earnings Conference Call, July 22, 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

Curtis Griffith, Chairman and Chief Executive Officer

Cory 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

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 and welcome to the South Plains Financial, Inc . Second Quarter 2022 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. Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead, sir.

Steve Crockett

Thank you, Operator, and good morning everyone. We appreciate your participation in our Second 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 conclusi on of the c all, until August 5, 2022. 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 risks, uncertainties and other factors that could c ause ac tual res ults to differ

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South Plains Financial, Inc. - Second Quarter 2022 Earnings Conference Call, July 22, 2022

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-looking statements presented herein are made only as of today 's date and we do not undertak e 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 , whic h we believe are useful in evaluating our performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can also be found in our earnings press 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 review the main drivers to our strong second quarter results, highlighted b y ro bust organic loan growth, combined with stabilizing mortgage banking revenues, which, taken together, hav e increased the earnings power of South Plains as we look to the second half of the y ear. Co ry will t hen discuss our loan growth in more detail as we expand our commercial lending capabilities in o ur major markets of Dallas, Houston and El Paso. Steve will then conclude with a more detailed review of our Q2 results.

Beginning on Slide 4, we delivered net income of $15.9 million, or $0.88 per diluted common s hare, for the second quarter of 2022, which compares to net income of $14.3 million, or $0.78 per diluted common share, in the first quarter of 2022, and $13.7 million, or $0.74 per diluted common share, in the y ear ag o second quarter.

Our second quarter 2022 results benefited from $0.25 per share of income received related to four loan credits for the recovery of interest income on previously charged off credits, purchase discount p rinc ipal recovery and prepayment penalties. We also had $0.11 per share from SBIC investment income and an increase in the fair value of our mortgage servicing rights. The total of these items was $0.28 p er s hare, net of tax. As a reminder, our first quarter 2022 earnings included $0.28 per share, net of tax, of a positive fair value adjustment to our mortgage servicing rights and a negative provision for loan losses.

The strong earnings growth that we experienced in the second quarter was primarily driven by the 20. 8% annualized increase in our loan portfolio, compared to the first quarter of 2022, as we continue to b enefit from our newly hired commercial lenders who are building their loan portfolios more quickl y than anticipated, combined with our existing team's continued focus on organic growth. As we enter the third quarter, we've largely completed our initial hiring plan, which we outlined a year ag o, and remain v ery pleased with our lenders' initial success.

As Cory will discuss, we have the infrastructure in place in our major markets of Dallas, Houston and El Paso to support further expansion, given the significant growth potential that we b elieve ex is ts as we strive to redeploy our low-cost deposits into higher yielding commercial loans. Additionally, we b elieve that we have ample liquidity to fund our growth given our comfort running the bank at a lo an to deposit ratio in the mid to upper 80% range, as compared to our 75.3% at the end of the sec ond q uarter. This excess liquidity represents significant earnings potential as we continue to fund higher yielding loans over time.

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South Plains Financial, Inc. - Second Quarter 2022 Earnings Conference Call, July 22, 2022

Importantly, our second quarter results mark a clear inflection point, as we b elieve that our mortgage banking revenues have largely moderated to more historical levels. As we have discussed on prior c alls, we have expected our mortgage revenues to bottom at 10% to 15% of total bank revenues over time. In the second quarter, our mortgage banking revenue, excluding the large MSR fair value adjustments, was 14% of total bank revenue, which compares to 19% of total bank revenue in the first quarter of 2022, and 23% in the fourth quarter of 2021. Given current mortgage rates, we believe refinance v olumes hav e largely bottomed, while demand for housing and construction remains robust given the s trength of the Texas economy, which continues to enjoy strong in-migration and job growth.

Looking to the second half of the year, we expect the financial benefits of our strong second quarter lo an growth to continue to flow through to the bottom line as our mortgage revenues stabilize, combined with our plans to continue to redeploy our excess liquidity. Taken together, we believ e this will c ontinue to improve the earnings power and value of South Plains, which we believe is not currently reflected i n o ur share price.

Given our view that our shares are trading below intrinsic value, we increas ed the pac e of our s hare repurchases through the second quarter of 2022, having repurchased approximately 257,000 shares, as compared to 106,000 shares in the first quarter of 2022. We will continue to strategically utilize our s hare repurchase plan, while steadily returning capital to our shareholders through our quarterly dividend, as our Board authorized a $0.12 per share dividend this week, which is a $0.01 per share increase from the prior quarter's dividend. This will be our fourteenth consecutive quarterly dividend, to be paid on August 15, 2022, for shareholders of record on August 1, 2022.

To conclude, we continue to experience healthy loan growth across our markets as the Tex as ec onomy continues to deliver employment and GDP growth above the national average. While we expect activity to slow in light of the continued uncertainty about future economic conditions due to the rising interest rate environment and persistent high inflation levels, we remain cautiously optimistic on the second half of the year, as our loan pipelines remain healthy and our new lenders continue to have s ucc es s in b ringing quality credits to the Bank. This provides confidence in our meeting, or exceeding, our mid- to high-single- digit loan growth guidance for the full year of 2022. That said, we will not sacrifice credit quality for growth and will remain vigilant to ensure that we maintain our disciplined credit culture, which can also be seen in this quarter's results, as our credit metrics continued to improve.

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 by $126. 9 million, or 20.8% annualized, compared to the first quarter of 2022, as outlined on Slide 5. Underlying loan demand was even stronger given the payoff of a $46 million relationship in the energy sector, which we d isc us sed last quarter, combined with a $21.3 million reduction in PPP loans due to SBA forgiveness and rep ayments. Loan growth this quarter was primarily in commercial real estate, commercial retail, residential mortgage and consumer auto.

Excluding PPP loans, our loan yields in the second quarter were 5.47%. Excluding the large loan recoveries and prepayment penalties which we benefited from in the second quarter, our loan yields were 4.77%, which compares to 4.74% in the first quarter of 2022. We have made a d eliberate d ecision to proactively price new loans to account for a higher rate environment and the ev entual ris e in funding costs to ensure we stay ahead of the market, while trying to stay competitive.

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South Plains Financial, Inc. - Second Quarter 2022 Earnings Conference Call, July 22, 2022

Turning to Slide 6, it is also important to highlight that we are a community retail bank in o ur s maller markets and primarily a commercial bank in our major markets of D allas, Houston and El Paso. Our strategy is to redeploy our excess liquidity consisting of low-cost deposits from our community -oriented markets into our commercial markets. To accomplish this, we hav e added ex perienced commerc ial lenders who share our culture and values, and who focus on developing long-term customer relationships done the right way. Our loan growth this quarter is a validation of our strategy, as our new c ommerc ial lenders have quickly grown their portfolios and are reaching breakeven ahead of our original expectation of six months, on average, while our seasoned bankers continued to deliver solid organic loan growth.

A good example of our commercial lending strategy is in Houston where we have added a new mark et leader and two experienced lenders over the last year. Our new team has quickly built their pipelines and started to generate meaningful business. In the second quarter, our Houston team grew their loan portfolio approximately 122%, compared to the end of the first quarter of 2022, which was primarily in commercial real estate. Additionally, our new lenders share our focus on developing long-term cus tomer relationships, which can be seen in the type of business that they are generating as they bring new relationships to South Plains that include deposits, commercial loans, and other services, like Treas ury management. Overall, we grew total loans 28% in our major markets of Dallas, Hous ton and El Paso during the second quarter, combined, as can be seen on Slide 7.

Another region that we continue to be very excited about is the Permian Basin , g iv en the c ommercial lending and deposit opportunities that we see in the region. While it has taken time for us to ins tall the right leaders and attract experienced lenders, we believe our team is now in a good position and starting to deliver results. This can be seen in the region's underlying loan momentum during the second quarter, despite the previously mentioned payoff of a large relationship that moved to a non-bank struct ure. We continue to believe that we can double our loan portfolio in the Permian Basin over time as we focus o n developing private banking relationships, while also growing our C&I l o an p ortfolio. Importantly, our building momentum in this market is tied much more to our improved execution than the benefits of a stronger commodity environment. We believe there is significant low-hanging fruit within our c urrent customer base, as well as the opportunity to take market share.

Skipping ahead to Slide 9, we also saw healthy loan growth in our community markets across the South Plains region, as we continue to benefit from focused organic growth in various portfolio sec tors. Our indirect auto loan portfolio increased by $40.8 million to $280.4 million in the second quarter of 2022, as compared to the first quarter of 2022. This was due to continued strong demand for c ar loans and the addition of a few high-quality auto dealerships to our customer base. Importantly, we've maintained a disciplined approach to underwriting, as 78% of the indirect auto loan portfolio has a credit score of 690 or better. This strong credit profile positions the portfolio for resilience across varying economic cycles.

Along those lines, remaining disciplined on credit is ingrained in our culture and has been a focus of o ur recent hiring, as we continue to add seasoned professionals from larger banks to our lo an rev iew team and underwriting staff . We've also implemented a loan approval process to include our regional presidents, which we believe has further improved our underwriting process.

Turning to our mortgage business, on Slide 10, mortgage loan o riginations decreas ed 12% to $207 million in the second quarter of 2022, as compared to the first quarter of 2022. We continue to aggressively manage our business for profitability, having reduced lenders and back-office staff. This has been a deliberate effort over the last year, as mortgage volumes have steadily declined and now appear to have bottomed, as Curtis noted.

Turning to Slide 11, we generated $18.8 million of non-interest income in the s econd q uarter of 2022, compared to $23.7 million in the first quarter of 2022. The decrease was primarily due to a $5 million decrease in mortgage banking activities revenue. For the second quarter of 2022, no n -interest income

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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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