South Plains Financial, Inc. (NASDAQ:SPFI) Q2 2023 Earnings Call Transcript

South Plains Financial, Inc. (NASDAQ:SPFI) Q2 2023 Earnings Call Transcript July 25, 2023

South Plains Financial, Inc. misses on earnings expectations. Reported EPS is $0.55 EPS, expectations were $0.61.

Operator: Good 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. Following the presentation, the conference will be open 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 afternoon, everyone. We appreciate your participation in our second quarter 2023 earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer; Cory Newsom, our President; and Brent Bates, our Chief Credit Officer. Slide deck presentation to complement today’s discussion is available on the News and Events section of our website spfi.bank. 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 two 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. 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.

Curtis Griffith: Thank you, Steve, and good afternoon. On today’s call, I will briefly review the highlights of our second quarter 2023 results, as well as provide an update on our capital allocation priorities following the sale of Windmark, which closed in April. Cory will discuss our loan portfolio in more detail and 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 am very pleased with our second 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 a challenging environment for our industry. We have exited the second 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 six key points that I hope you will take away. First, our deposits remained stable through the second quarter, further demonstrating the strength of our community-based deposit franchise. Second, 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. Third, 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. That said, we continue to be selective in the new loans that we fund as we maintain our underwriting discipline. Fourth, the credit profile of our loan portfolio improved through the second quarter though we did have one non-accrual addition, which I will touch on in more detail in a moment.

Fifth, we further built capital this quarter through our earnings and the sale of Windmark 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 gains we recorded from the Windmark 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 four of our earnings presentation. We delivered net income of $29.7 million or $1.71 diluted earnings per share, as compared to $9.2 million or $0.53 diluted earnings per share for the first quarter of 2023. This compares to net income of $15.9 million or $0.88 per diluted common share in the year ago second quarter.

As we discussed on our first quarter call, we completed the sale of Windmark, Citibank’s wholly-owned insurance subsidiary for $35.5 million in 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 second quarter resulted in $1.16 per share of onetime net income in the second quarter. Excluding these items, we earned $0.55 per share. Given the large gain that we recorded, we made the strategic decision to sell $56 million of investment securities from our portfolio, which resulted in a realized loss of $3.4 million. 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 and allowance that are yielding more than 7% in the second quarter.

The incremental income will help replace the loss of future net income from the Windmark operations. Turning to our loan portfolio. We grew loans 6.8% in the second quarter, as we continue to experience healthy economic growth combined with customer dislocation in many of our markets from recent competitive mergers. Additionally, we are seeing larger competitors pull back in some markets, which is allowing our team to bring new relationships to the bank as Cory will touch on in more detail. We recorded a provision for credit losses of $3.7 million in the second quarter, as compared to $1 million in the first quarter of 2023. The provision was primarily for the strong loan growth that we delivered in the quarter and a $1.3 million increase in specific reserves related to one previously classified credit relationship totaling $13.3 million 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 third quarter of 2023. While there continues to be payment performance, we placed the relationship on non-accrual and recorded a specific reserve given that the business is no longer a going concern. As Steve will touch on in more detail, the overall credit quality of our portfolio continued to improve through the second quarter. Of note, our budget and consensus estimates were for $1.25 million of provision expense in the second quarter. Higher 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 second quarter, which bodes well for the second half of the year as we will fully benefit from the second quarter’s loan growth and improved loan yields.

We grew deposits $66.5 million or 1.9% to $3.57 billion at June 30, 2023, as compared to the end of the first quarter 2023. Our deposit growth was primarily due to an $81 million increase in brokered deposits, partially offset by a $67 million reduction in public funds, which had grown $118 million during the prior quarter. We are making a concerted effort to manage overall deposit levels and related interest costs. Ultimately, we will continue to build out our deposit gathering capabilities as we strive to grow core deposits and manage our cost of funds. The stability of our deposit franchise and strong liquidity position can further be seen on slide five, 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% 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 uninsured or uncollateralized. We believe we also ended the second quarter in a strong liquidity position with $1.82 billion of untapped borrowing capacity. We have $1.01 billion of availability from the Federal Home Loan Bank of Dallas, $612 million of availability from the Federal Reserve’s Discount Window and $200 million 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 million stock repurchase program in May and we bought back approximately 113,000 shares during the second quarter for $2.6 million.

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

Cory Newsom: Thanks, Curtis, and good afternoon, everyone. Turning on slide six. Loans held for investment increased during the second quarter by $190.4 million or 6.8% compared to the first quarter 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. We believe this is an opportunity to bring high quality long-term customer relationships to South Plains.

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 profile. Our loan yield was 5.94% in the second quarter, which compares to 5.78% in the first quarter 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. Skipping to slide eight, we grew our loan portfolio by $65 million or 7.3% in our major metropolitan markets of Dallas, Houston and El Paso as compared to the first quarter 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. Since completing our acquisition with West Texas State Bank in 2019, we have 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 first six 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. Skipping ahead to slide 10, we have approximately $1.1 billion 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% of our CRE portfolio and 6.1% of our total loan portfolio at the end of the second quarter. Of note, 29% of our office exposure is owner-occupied and medical offices comprised 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 our portfolio for challenges. As Steve will discuss the overall credit quality of our loan portfolio improved through the second quarter, which provides confidence if the economy were to slow. As I discussed on our first quarter’s earnings call, we are strategically enhancing our treasury management and 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 on all aspects of treasury products. 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. We believe this initiative can have a meaningful impact on our deposit base and to a lesser degree our fee income over the medium-term. Turning to slide 11, our indirect auto loan portfolio decreased by $2.4 million to $297.9 million in the second quarter as compared to the end of the first quarter 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 building loans with strong credit profiles. We are also maintaining a disciplined approach to underwriting at 62% of the indirect auto loan portfolio was originated with a credit score of 719 or better, which is super prime and 28% of the portfolio was originated with a credit score of 660 to 719, which is prime.

The strong credit profile positions the portfolio for resilience across varying economic cycles. Turning to slide 12, we generated $47.1 million of non-interest income in the second quarter, which included $33.5 million gain from the sale of Windmark. Excluding this gain, we generated $13.6 million of non-interest income, which compares to $10.7 million in the first quarter of 2023. The increase was primarily due to a $3 million increase in mortgage banking activities revenue partially offset by a reduction of $1.4 million in income from interest activities due to the sale of Windmark. During the second quarter, mortgage loan originations increased $46 million to $132 million, as compared to $86 million in the first quarter 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 second quarter, as compared to $2 million write-down in the first quarter of 2023, given the rise in market interest rates. Our secondary mortgage origination division, which excludes mortgage servicing activities was breakeven in the second 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 second quarter, non-interest income excluding the one-time gain for Windmark was 28% of bank revenues, as compared to 24% in the first quarter of 2023. To conclude, we delivered strong results through the second quarter, 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 market and are always looking to add talented lenders where it makes sense. 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.

Steve Crockett: Thanks, Cory. Starting on slide 14. Net interest income was $34.6 million for the second quarter, as compared to $34.3 million for the first quarter of 2023. The modest increase was primarily the result of a $3.4 million increase in the interest income due to higher average loan balances and loan yields, largely offset by a $3.1 million 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 second quarter, as compared to 3.75% in the first quarter of 2023. Our NIM was impacted by a 33 basis point increase in our cost of deposits in the second quarter as compared to the first quarter of 2023. This was partially offset by our organic loan growth, combined with the corresponding increase in our loan yields of 16 basis points as compared to the first quarter of 2023.

Importantly, our NIM dropped 15 basis points in the month of March 2023 to 3.65% and has held steady through the second quarter. We remain focused on managing our profitability in this more challenging environment. Our average cost of deposits was 169 basis points in the second quarter, an increase from 136 basis points in the first quarter 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 of 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 second quarter, 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 first quarter of 2023.

Turning to slide 16, we continue to believe that our loan portfolio remains appropriately reserved is our ratio of allowance for credit losses to total loans was 1.45% 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 $3.7 million in the second quarter. The larger provision was largely due to our organic loan growth in the quarter and $1.3 million in specific reserves attributable to one previously classified credit relationship totaling $13.3 million that was placed on non-accrual in May 2023. Due to the relationship being placed on non-accrual, our non-performing assets to total assets ratio increased to 51 basis points in the second quarter from 19 basis points in the first quarter of 2023.

That said, classified loans declined approximately $3 million during the second quarter to $68 million from $71 million at March 31, 2023. Further, a classified relationship with $3.2 million in non-performing loans paid off in full the first week of July 2023. 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 $40.5 million in the second quarter, as compared to $32.4 million in the first quarter of 2023.

The increase was primarily due to $4.5 million of transaction expenses and related incentive-based compensation from the Windmark transaction and the $3.4 million loss on the sale of securities. As a result, we see our core non-interest expense as $32.6 million for the second 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 deficiencies 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. Looking to the third quarter of 2023 and the year ahead, we expect non-interest expense to be flat or slightly increase 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 to tangible assets of 8.96% at the end of the second quarter, an increase from 8.54% at the end of the first quarter of 2023. The increase was driven by $27.5 million in net income after dividends paid, partially offset by $2.6 million in share repurchases. Tangible book value per share increased by $1.63 to $21.82 during the second quarter. Let me turn the call back to Curtis for concluding remarks.

Curtis Griffith: Thank you, Steve. To conclude, I am very proud of our results through the second quarter as we continue to successfully navigate a challenging environment and position South Plains 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. Thank you again for your time today. Operator, please open the line for any questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Brady Gailey with KBW. Please go ahead.

Brady Gailey: Hey. Thanks. Good afternoon, guys.

Steve Crockett: Hi, Brady.

Cory Newsom: Hi, Brady.

Curtis Griffith: Hi, Brady.

Brady Gailey: Maybe just a little more color on the $13 million NPA. What type of business is that and what happened there?

Cory Newsom: Well, this is Cory, Brady. So that’s a C&I business. So a little color and one of the things that kind of hoped you would pick up is when we talked about this in our script about it being a borrower directed liquidation. You got a guy that’s in a lot of different businesses and a lot of different industries. He got into — expanded into kind of a related type business. It didn’t really work out like he wanted it to. So he — in his own discretion, made the decision to self-liquidate kind of shut it down, self-liquidate. We are 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 can have those other businesses that actually guarantee this debt. 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.

Brady Gailey: Okay. All right. And then when you talk about expenses being flat to slightly up, are you basing that off of kind of the second quarter core run rate of that $32.6 million. Is that what you are basing that off of?

Steve Crockett: Yeah. This is Steve. That’s correct. That’s what we are looking at after we kind of normalize that for those — for the transaction cost and additional expenses, so right around that $32.5 million.

Brady Gailey: All right. Then, I mean, loan growth was incredible this quarter, I mean, 27% linked-quarter annualized. Maybe just a little more color on kind of what drove that level of loan growth?

Cory Newsom: Yeah. I will kick up and let Brent kind of clean it up on this one. We have been in the quarter with a good pipeline. I mean, we have talked about this for a long time that with our team in place the way we have it and opportunities to pick up good relationships. I mean if you look at some of the different markets we are in and some of the disruption that’s happened, I mean, it just really worked. But I mean we have 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?

Brent Bates: Yeah. We had — we pulled a lot through the pipeline in the second 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. So we had 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 paydowns were a little lighter than what we thought they were going to be in the second quarter. So that kind of attributed to it too, I know we talked about that last quarter, but overall, feel really good about it, we pulled a lot through this quarter.

Brady Gailey: All right. 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.

Steve Crockett: Yeah. So I mean we are — 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 second quarter at that level. I mean, it’s a challenge every day. So they are still competitive issues on pricing on deposits and so we have got to face that and so some compression in NIM, I think, is out there. We just hope to minimize that as much as we can.

Cory Newsom: This is Cory. I think our new pricing on our loans, the funding, the stuff that we are getting will continue to hopefully keep that as flat as possible.

Curtis Griffith: 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 are putting on the books now. You are going to have a 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 are putting on the books. And with the other steps do in the pipeline, still in the stage of construction where we are going to be providing funding now that the customers basically put in their equity. We are 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, because we do know deposit costs are moving up some more.

We are going to do all we can to keep it down. We think the 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 will see a little more NIM compression. We are going to hold it as firm as we can. But I’d expect it tightening up a little in both third quarter and fourth quarter.

Brady Gailey: Okay. Got it. Thank you, guys.

Curtis Griffith: Thanks, Brady.

Steve Crockett: Thanks, Brady.

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

Brett Rabatin: Hey. Good afternoon, everybody. Thanks for taking my question.

Steve Crockett: Hi, Brett.

Brett Rabatin: I wanted to go back just to the deposits and the cost of deposits, only 1.69% on average in 2Q. Is there not — Curtis 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?

Curtis Griffith: Well, I mean, I really don’t — unless you see some big movement in rate, I don’t see a catch-up quarter coming at all. I do think that we have 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 they were a little bit below where they should be for market. But no, I feel pretty good about the mix and what we are actually doing. I mean I 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 are so proud of. So I don’t really see a catch-up quarter coming. Steve, passing on the…

Brett Rabatin: Okay. Okay.

Steve Crockett: Yeah. I mean, I will just add to that just a little bit. I mean as far as brokered, that was added towards 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, tight fed funds and so it is a costlier deposit. So that will increase our deposit costs during the quarter. But as Curtis said, on the flip side, we have got the loans that — those loans were not funded for the entire quarter. So we will have a full quarter’s worth of earnings on those new loans that have been — that are being put on at 7%-plus to 8% in different cases, so to help offset that cost.

Cory Newsom: Yes. Brett, I don’t — and we are much different than anybody else. But I mean we are using the broker as a way to manage our overall costs and…

Brett Rabatin: Okay.

Cory Newsom: … we think it’s working…

Curtis Griffith: Yeah.

Cory Newsom: … throughout the year.

Brett Rabatin: Yeah.

Curtis Griffith: What we have been able to do with that, while as we have 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 are really going after new money to get that in. And so we are trying to do all we can to still hold ours more in line, a little lower levels, and if you see our deposit mix, we just don’t have that much in CDs. So we are not having to deal with a bunch of CDs and particularly jumbo CDs maturing that we have got to be really up there with higher rates or they are going to walk out the door. A lot of ours are in transaction accounts and money market accounts and we are able to adjust those rates and kind of do things competitively and keep the customer relationship there, so we will have that flexibility that when and it is a win, not an if, rates go back down at some point, we would be able to quickly pull rates back down on those type of comps.

Brett Rabatin: Okay. That’s helpful. And then I know your DDA has been fairly stable over the past year, but I was really impressed it was only down end of period $10 million 1Q to 2Q. Are you guys opening up a bunch of new accounts that’s helping keep that fairly stable or are you just not seeing mix shift change away from non-interest-bearing to interest-bearing.

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

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

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

Curtis Griffith: Yeah. Of course. Brent, I will let you start off with that one.

Brent Bates: This is Brent. I will 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 funding outside of the construction fundings are existing clients that came to us for expansion of their relationship and that was both in metro markets and in the South Plains side of the company.

Cory Newsom: Yeah. Brett, I would probably catch on that with part of your question of the funding is 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 are doing is going in with a floating rate, they are going to catch it anyway. And so we all saw some of that, you are going to have to go, people trying to get some stuff done, we follow that movie. It’s most of the stuff coming in, it’s floating and knowing that we are going to — they are going to face whatever rate increases come.

Curtis Griffith: Yeah. We definitely saw that back in second quarter 2022. It was pretty obvious what was happening on them. But that ship’s already sailed I think and right now, as Cory said, I think, we are booking things at rates 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 have seen, particularly out in our West Texas markets and I think we are 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 are looking to either move entire relationships, or as Brent indicated, maybe they have already got a relationship with us and now they are going to take what they had over the bank X and move that over to us as well and we have got room.

We are going to have to bring them on and we already have the underwriting to look at the credits and it’s a fairly easy transition for them. So I think that was a key trend in Q2 and I think we will see more of it Q3 and Q4. But, overall, we are going to see a slowdown. 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 will continue to grow loans out through the balance of the year.

Cory Newsom: Well, Brett, I would add one more to it. I mean, you know over time, we have spent time making sure that we have really done a good job with some of our metro markets, making sure the right teams, leaderships and everything is in place, but we are still just as focused on taking care of that in our rural markets. So we are seeing opportunities to take make share in those areas and picking up 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 are both beneficial.

Brett Rabatin: Okay. Great. Appreciate all the color.

Curtis Griffith: Thanks, Brett.

Steve Crockett: Thank you.

Cory Newsom: Thanks, Brett.

Operator: Next question Graham Dick with Piper Sandler. Please go ahead.

Graham Dick: Hey. Good evening, guys.

Curtis Griffith: Hi, Graham.

Steve Crockett: Hi, Graham.

Graham Dick: 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 have been impacted by M&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&A recently and they are not happy with it or the bank isn’t — doesn’t have the capital or liquidity to make loans like you guys have in the current environment. I know you guys made a handful of hires or a lot of hires over the last couple of years and it’s kind of slowed down a bit, but just wondering with your capital position now and the deposit base you have, if you are looking at all for hires or inorganic opportunities?

Cory Newsom: So, I mean, just go with what I would just say, I mean, we just picked up market leader and different ones in a real market, everything you just described and it’s going to bring a lot of opportunity with it and so we are excited about that. But it will bring deposits and loans, and so that’s what we like. I mean — but I mean, we said it, we are going to make selective higher strategic hires, and I mean, I will tell you that we interview frequently, we don’t hire frequently. We are very, very careful about how who gets to come on and be a part of the team and make sure that it’s going to be a long-term fit that can bring relationships that fit what we are looking for. And that’s what we have done, we have been very consistent with this for years and it’s why we built the caliber team that we truly have. And we are not backing down from it, but we are doing — we are making very selective strategic hires.

Graham Dick: Okay. Yeah. All right. And then I guess just shifting more to the margin. I just wanted to touch on loan yields a little bit. I know you said they might be — you feel as if they are topping out a bit. I guess, maybe on new loan yields, if you assume the Fed is pretty much done after this month or maybe one more hike after that. What sort of loan yield do you have baked into 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 you have through the end of the year you expect?

Steve Crockett: So as far as loans go, I mean, again, we are putting on loans and I will get Brent to help me out. We are putting loans on when they are fixed. I mean they have been in the upper 7s, mid-upper 7s, I would say, even so maybe slightly higher than that. We have got — the good thing is, we have got our indirect portfolio that while that had some lower rates, that stuff amortizes a lot faster off and is — so those lower yields are paying off and coming back in. So, I mean, we are still — we should show expansion in the overall loan yield. I mean we went out roughly, I guess, around 15 basis points to 16 basis points in the quarter. We should see a decent size, I will say, hopefully in that range for Q3, given — especially given the growth that we had in Q2.

Cory Newsom: So if you look at those rates, I mean, some of the ones I think what you are talking — what Steve was trying to explain was some of the little fixed stuff that we felt in the book. So we have made a lot of prime plus on the books too, that’s floating that, I think, will be very beneficial to it as well.

Brent Bates: Yes. This is Brent. You have got calls on construction loans that for the most part are variable rate. And then what Steve was alluding to, you have a really short duration on indirect portfolio of — a little over $300 million in direct portfolio that those lower rates have rolled off of that portfolio and been replaced by much higher rates. So you are seeing lift in that segment. And same with Ag, Ag is going to be a variable rate funding for the second half of the year. So you should see some lift in that yield.

Cory Newsom: The other thing that’s kind of interesting, not — I mean, we are not missing opportunities over rate right now. I mean, because that’s — I mean, it’s — for a while, that was kind of a challenge. But, I mean, I don’t believe that you got there in charge-off you can get. I don’t — I think you still have to stay competitive. But I think our rates are competitive, I think, though, that we are not sitting around losing them over that is, we get down to the credit quality, so we want it, is this a relationship that we want to, I mean, tie on to.

Graham Dick: Okay. I guess 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 $1.25 million 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 million is good for the provision line going forward or is there anything in there that might take that higher or lower?

Steve Crockett: I mean — this is Steve. I will start and I will let — definitely let Brent hop in. I mean, at this point, I mean, that’s — that would be our hope of where we want to be. We do typically, I mean, we always have some net charge-offs during the quarter and along with net loan growth. So I think we have 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.

Brent Bates: Yeah. This is Brent. We feel really good about the reserve level and we are not seeing broad risk trends in the portfolio. So it will really, I think, the 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 and the mix of the portfolio and that’s likely going to be the driver at least in the near-term.

Curtis Griffith: Graham, this is Curtis. We have worked pretty hard on our CECL model and we are cautious. She know that, she watches us. We do — we are probably going to run a higher reserve than peer and it’s not because we think we have more credit problems than peer, it’s just that we are trying to be cautious and we are taking into account the lot of uncertainty still out there in the overall economy. It looks more and more like if we have a recession and maybe a fairly short-lived and soft one, but today, frankly, we don’t know and we are just going to try to be well prepared for what comes. But there will be some one-offs that happen just like the one we have been describing today. But we think we are pretty well underwritten and don’t look for big losses out there even if we do have some credits that do move on to non-performing status.

But we just don’t see the trends building right now in that direction. But we are still going to be real cautious to make sure of that reserve level stays up where we think we can withstand whatever ills may be falls us.

Graham Dick: All right. Appreciate it. Thanks, guys.

Steve Crockett: Thank you.

Curtis Griffith: Thank you.

Operator: [Operator Instructions] Your next question comes from Joe Yanchunis with Raymond James. Please go ahead.

Joe Yanchunis: Good afternoon.

Cory Newsom: Hi, Joe.

Steve Crockett: Hi, Joe.

Curtis Griffith: Good afternoon.

Joe Yanchunis: So you touched on your strategy to modestly reduce the size of the indirect auto portfolio and I was curious, what is the time horizon of this reduction and how low would you like to take it?

Brent Bates: This is Brent. I — sorry, if I may have caused some confusion. Right now we are keeping a pretty stable portfolio in that segment. We like it. But the duration there is so short that we are routinely replacing cheap rate. I think that was the point I was trying to make is the production we have in that unit isn’t necessarily producing growth or contracting, but it’s churning that portfolio into higher rate into higher rate loans. And yeah, the percentage has come down a little bit, but I think that’s really just because we are driving the rates in that portfolio up, and frankly, the industry itself has kind of contracted a little bit. So I don’t see a significant contraction unless the industry continues to contract some, but I think we are still getting our fair share of volume out of that and meanwhile increasing our yield pretty good.

Cory Newsom: Yeah. We were only down $2.4 million, I think, quarter-over-quarter. Part of that is, we are not going to be the cheapest around. And if you look at it — if you look at how we stack up on our — the way we view them as compared to lot CFEB [ph], I mean we won top in 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. I mean we are strategically placed where we will have to be.

Joe Yanchunis: Understood. And moving over to deposits, you previously kind of guided to a cumulative interest-bearing deposit gain of about 50% by year-end, do you still think that holds?

Curtis Griffith: I will 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 this is probably kind of upper end for us unless we see some real anomaly pop up on something out there. But that currently being based as we are with a fairly high percentage of rural market deposits, they are 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 level. Steve?

Steve Crockett: 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 and we are monitoring it every day. But as of now we still feel that we can just come in right at that level or slightly below.

Joe Yanchunis: 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 market in the recent quarter. Maybe you have that handy.

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

Curtis Griffith: While Steve is looking that up, we definitely are getting decent loan growth there and the good news in that market, our 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 are getting opportunities to move those families and those companies in, it doesn’t happen real fast, but the whole idea is like the relationships that 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 have been looking for in those markets, as well as in that market as little as [ph] we have seen here in Lubbock and some of the others a little dissatisfaction with some of the changes that they have seen in the banks they have been at. Steve, do you get something/

Steve Crockett: Yeah. I mean I think about 10%, excuse me, about 10% of the — of our loan growth was in the Permian region during the quarter. Deposits were up slightly, but not a significant amount.

Joe Yanchunis: Understood. Thank you for taking my questions.

Steve Crockett: Thanks, Joe.

Curtis Griffith: Thanks.

Cory Newsom: Thank you.

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

Curtis Griffith: 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 all this possible. As I said at the beginning, we had a very good quarter. We exited 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. The higher yields from these loans will help mitigate the expected 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 am truly excited about what I see in our future for Citibank and South Plains Financial. 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.