South Plains Financial, Inc. (NASDAQ:SPFI) Q4 2023 Earnings Call Transcript January 26, 2024
South Plains Financial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the South Plains Financial, Inc. Fourth Quarter and Full Year 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. Mr. Crockett, please go ahead, sir.
Steven Crockett: Thank you, operator, and good morning, everyone. We appreciate your participation in our 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. The related earnings press release and earnings presentation are available on the News & Events section of our website spfi.bank. Before we begin, I’d like to remind everyone that this call may contain forward-looking statements that 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 or on slide two of the earnings 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 in our earnings release and in the earnings presentation. Curtis, let me hand it over to you.
Curtis Griffith: Thank you, Steve, and good morning. On today’s call, I will briefly review the highlights of our full year 2023 results as well as provide an update on our capital allocation priorities. Cory will discuss our loan portfolio as well as our initiatives to drive deposit and fee income growth in the year ahead. Steve will then conclude with a more detailed review of our fourth quarter financial results. I would like to start by thanking our employees for their efforts and commitment to both the bank and our customers during an extremely challenging year for our industry. Our success would not be possible without their dedication and hard work. As shown on slide four of our earnings presentation, we delivered 9.7% loan growth for the full year driven by the expansion of our lending platform, combined with a resilient economy as Texas continues to benefit from in-migration and a favorable business climate.
If inflation continues to moderate and the Federal Reserve begins to reduce their benchmark interest rate, we expect economic growth to accelerate as we look to the second half of 2024. Looking back at the past year, our community-based deposit franchise grew modestly, which is impressive given the significant dislocation that occurred following the failures of Silicon Valley Bank and Signature Bank in the first quarter. For the full year, our core deposits grew 1%, excluding brokered deposits to $3.26 billion, which demonstrates the resilience of our franchise combined with our strong customer relationships. At quarter-end, 81% of our deposits were in our rural markets with 19% in our major metropolitan markets of Dallas, Houston and El Paso.
Additionally, our average deposit account balance is approximately $36,000 with only an estimated 16% of our total deposits being uninsured or uncollateralized. The credit quality of our loan portfolio also remained strong through the fourth quarter as our classified loans have remained at the lowest level since the start of the pandemic as we ended the year. Lastly, we increased our return on average assets to 1.54% for the full year 2023 as compared with 1.47% for the full year 2022. We also completed the sale of our Windmark Crop Insurance subsidiary in April for a pre-tax gain of $33.8 million. The gain that we recorded positioned us to strategically sell $56 million of investment securities at a loss in a tax-efficient manner and reinvest those proceeds into higher-yielding loans.
Given our strong capital and liquidity position, our Board of Directors authorized a $15 million stock repurchase program in May, which has been exhausted. We repurchased 218,000 shares in the fourth quarter and a total of 686,000 shares during 2023. Through the year, our Board has believed that our shares have traded below intrinsic value, and we have been aggressive buying our stock in the open market. Looking to the year ahead, we will maintain our liquidity and continue to watch for opportunities to expand the bank and our earnings power. M&A is an area of interest and we believe you will see transactions take place in the market as sellers’ expectations are becoming more realistic. The decline in interest rates at the end of the year also led to a recovery in bank securities portfolios, which will increase the probability that we will see deal volumes pick up.
However, we will only be interested in acquiring the bank with the right culture, excess liquidity, a stable deposit base and at a valuation that makes sense for us and our shareholders. In the meantime, we remain focused on organic growth while returning a steady stream of income to our shareholders through our quarterly dividend. Our Board of Directors again authorized a $0.13 per share quarterly dividend as announced last week. This will be our 19th consecutive quarterly dividend to be paid on February 12th, 2024 for shareholders of record on January 29th, 2024. Now I’ll turn the call over to Cory.
Cory Newsom: Thank you, Curtis, and hello, everyone. Starting on slide six, loans held for investment increased $20.6 million or 2.8% annualized as compared to the linked quarter. Loan demand was primarily in commercial real estate during the quarter and was partially offset by an approximate $10 million decline in our indirect auto portfolio. As we’ve said on previous calls, we’re carefully managing our indirect auto portfolio with a focus on maintaining the portfolio’s credit quality while reinvesting a portion of the monthly principal amortization into higher-yielding loans. The yield on our loan portfolio was 6.29% in the fourth quarter as compared to 6.1% in the linked quarter. We continue to price new loans to account for the higher interest rate environment that we are operating in combined with the upward pressure on our deposit costs.
Skipping to slide eight, we grew loans by $44 million or 17.8% annualized to $1.04 billion in our major metropolitan markets of Dallas, Houston and El Paso as compared to the linked quarter. Our metro markets continue to be an important source of loan growth and more than offset the paydowns that we experienced in our community markets as well as the expected decline in our indirect auto portfolio. We remain in a hiring mode as we look for good lenders who fit our culture and can bring new business to the bank though we’ll remain extremely selective. Turning to slide nine. Demand across our markets remains healthy as we continue to experience solid economic growth, though we continue to be selective in who we do business with and what loans we underwrite.
As a result, we expect low single-digit loan growth for 2024, though we expect to continue to deliver interest income growth as many lower rate loans continue to experience principal repayments and/or rate resets. While we expect the majority of this repricing to begin accelerating in the second half of 2024, we believe loan yields will remain elevated, even if the Fed begins to cut interest rates given lower liquidity in the market which will benefit our net interest income, NIM, in the third and fourth quarters. In conjunction with our effort to drive loan growth, we also need to deliver deposit growth while stabilizing our noninterest-bearing deposit balances. Though our lenders have always had an emphasis on deposits as part of their incentive comp plan, we have brought a renewed focus on the type and value of these deposits.
More specifically, true core deposits and noninterest-bearing balances now carry more weight in these plans. Better said, we are focused on the profitability of the whole relationship. We’re also getting much better at putting in loan covenants to new loan originations centered on deposit requirements and liquidity maintenance agreements. While we’ve always targeted this, we’re getting much better negotiating these covenants. Treasury management is another area where we have made real progress as we’ve improved our team, our product and our capabilities over the last year. During the fourth quarter, we recruited a senior treasury management executive from a top seven US bank to head this business, which follows several additions to our team as we improve the talent of this group.
I’m so excited with the level of people and product that we have today, which is unmatched in our history. We’re also doing a better job than we ever have in making sure we align the right treasury products with the customer’s financial needs, thus allowing us to continue to drive both deposit growth and fee income. Turning to slide 11. We generated $9.1 million of noninterest income in the fourth quarter as compared to $12.3 million in the third quarter. This decline was largely due to a $2.9 million decline in mortgage banking revenues, which includes a $2.2 million decline in the fair market value adjustment to our mortgage servicing rights portfolio. Importantly, we’ve aggressively managed our mortgage banking expense base as volumes have decreased over the last 18 months with a focus on maintaining profitability.
While this downturn in mortgage originations has been the most severe in more than three decades, we’ve experienced negligible lawsuits while maintaining our mortgage capabilities for the eventual turn in volumes as mortgage rates continue to decline. And as I mentioned, we expect our initiatives in treasury management to begin to impact fee income beginning in the second quarter. For the fourth quarter, noninterest income was 21% of bank revenues as compared to 26% in the third quarter of 2023. To conclude, we delivered strong results through the fourth quarter. I believe we will remain well positioned. That said, we’re not standing still and are aggressively addressing the current environment to manage deposit cost pressures while accelerating fee income growth.
We need to stabilize our noninterest-bearing deposits and grow our deposit franchise in order to position us to take advantage of improving loan demand as we move through 2024. I’m confident that we have the right people and plan, and I’m excited about the opportunities ahead. I will now turn the call over to Steve.
Steven Crockett: Thanks, Cory. For the fourth quarter, diluted earnings per share was $0.61, which compares to $0.78 per share in the linked quarter. We recorded a $1.5 million write-down at the fair value of our mortgage servicing rights asset during the quarter as compared to a $700,000 write-up in the linked quarter. The current quarter impact on our earnings per share was $0.07 after tax. Turning to slide 13. Net interest income was $35.2 million for the fourth quarter as compared to $35.7 million for the linked quarter. Our loan production in the third quarter, combined with the rise in new loan rates lifted the yield on our loan portfolio by 19 basis points in the fourth quarter, resulting in a $1.7 million increase in loan interest income.
The rise in loan interest income was offset by $1.3 million increase in interest expense due to the rise in short-term interest rates on interest-bearing liabilities and a decrease of $900,000 in the income on other interest-earning assets as average investable liquidity declined in the fourth quarter. Our net interest margin calculated on a tax equivalent basis held steady at 3.52% in the fourth quarter as compared to the linked quarter. Higher loan balances and loan yields offset the rise in our cost of deposits and the decline in noninterest-bearing deposits. As outlined on slide 14, our average cost of deposits was 224 basis points in the fourth quarter, an increase of 17 basis points from the linked quarter. Given the rising interest rate environment through the year, we’ve had to be proactive in maintaining deposit relationships, which has led to the rise in our funding cost.
Overall, our core deposit franchise continues to remain steady with only a slight decrease in the fourth quarter. As Cory touched on, we put initiatives in place designed to stabilize our noninterest-bearing deposit balances while also driving core deposit growth. We expect these initiatives to begin to have an impact as we move through 2024. In the meantime, we expect continued upward pressure on deposit costs, which will modestly pressure our NIM. That said, we expect our NIM to trough through the first half of 2024. Turning to slide 15. Our ratio of allowance for credit losses to total loans held for investment was 1.41% at December 31st, 2023, which is unchanged from the end of the prior quarter. We recorded a $600,000 provision for credit losses in the fourth quarter, which was largely attributable to our organic loan growth as well as net charge-off activity in the quarter.
Skipping ahead to slide 19. Our noninterest expense was $30.6 million in the fourth quarter as compared to $31.5 million in the linked quarter. The $900,000 decrease was largely due to lower mortgage costs as we continue to manage through the decline in mortgage volumes. That said, we would expect noninterest expense to modestly rise through the first half of 2024 as mortgage volume increase through the spring selling season. Moving ahead to slide 21. We remain well capitalized with tangible common equity to tangible assets of 9.21% at the end of the fourth quarter, an increase from 8.4% at the end of the third quarter of 2023. The increase was largely driven by $32.9 million increase in accumulated other comprehensive income or AOCI, and $8.2 million of net income after dividends paid.
AOCI was positively impacted by decreases in long-term market interest rates during the fourth quarter. Tangible book value per share increased to $23.47 as of December 31st compared to $21.07 as of September 30th, 2023, largely due to the impact of AOCI in our net earnings in the fourth quarter. I’ll turn the call back to Curtis for concluding remarks.
Curtis Griffith: Thank you, Steve. To conclude, I’m very proud of our performance over the past year. Our community-based deposit franchise remained resilient, while our lenders continue to drive high-quality loan growth that contributed to our strong earnings growth in 2023. We also sold Windmark, which provided capital for share repurchases as well as a strategic reposition of a portion of our securities portfolio. The bank is operating very well as we enter 2024, but we know we have much more to do. As Cory outlined, we have initiatives in place that we believe will stabilize our noninterest-bearing deposit balances, grow core deposits and drive fee income growth. This will provide improved liquidity for loan growth looking to the second half of 2024, when we expect to see a meaningful portion of our loan portfolio reprice and an acceleration in the Texas economy from already healthy levels.
We expect competitor liquidity to fund new loans in our markets to be limited and believe we will be well positioned to add high-quality customers and attractive loans to our portfolio. We also expect our fee income to improve starting in the second quarter. We remain optimistic on the year ahead as we focus on delivering value to our shareholders. Thank you again for your time today. Operator, please open the line for any questions.
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Q&A Session
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Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Graham Dick from Piper Sandler. Your line is now live.
Graham Dick: Hey, good morning, guys.
Curtis Griffith: Good morning, Graham.
Graham Dick: I just wanted to start on loan growth. I heard your guidance there for low single-digit growth, which I guess, aligns with the last two quarters pretty well, but for the full year 2023, 10% is definitely slower. And then also for you to sort of frame that up with, I guess, what you see between your community markets and in the metro markets because it sounds like, the growth in the metro markets has been pretty strong, which is a little different than some of the metro-focused or headquartered banks in Texas. So I just would like to hear maybe what you are doing differently to grow loans faster there? And then also how the community banking payoffs might play into that low single-digit growth?
Curtis Griffith: Graham, this is Curtis. Yes. I think a lot of our growth, it’s getting — it’s a result of making some great hires that we’ve done in some of those markets in the last couple of years and all that’s kind of coming to fruition. It is still a little more challenging to get the growth out here in some of the more rural markets, but we’re seeing good activity, too. I’m going to let Brent Bates to kind of elaborate on that and what he kind of sees going forward a little here in ’24.
Brent Bates: This is Brent. Last year, in ’23, we saw a real strong growth in the first half and closer to that 3% second half of the year. And I think what we’re expecting this year is still to see some tailwinds from our construction portfolio, advances in the first half of the year on the construction portfolio, which is predominantly multifamily and industrial projects in our metro markets and still see some pullback in residential construction. And then we’re still seeing good activity from our existing clients even out in our rural markets. So I think the low single-digit growth for ’24 is realistic. It’s attainable and definitely ’24, I would expect to be much more of a smooth growth period than 2023 was.
Cory Newsom: Graham, this is Cory. I think the other thing we’ve got to keep in mind is we’re being much more selective about what we’re wanting to fund. So we’ve had opportunities to look at a number of transactions that we just passed on. We don’t think it’s the right time on some of those for us right now or for some of the clients. So we just — we have selectively pulled back a little bit, and we’re okay with that.
Graham Dick: Yes, definitely makes sense, and that’s helpful, Brent. Thanks for that. And I guess just moving to the margin a little bit, it was flat quarter-over-quarter. I know you guys said that you’re calling for a trough maybe in the first half of the year. I was wondering if you’d be willing to maybe give an idea of where you see that trough. I mean, is that low 3.40s or is it just slightly below this level? Just trying to get an idea for the trends going forward given we saw flat margin quarter-over-quarter. And it seems like the rate environment should get a little bit better to start the year, but obviously, still very competitive out there.
Steven Crockett: Yes. Graham, this is Steve. I’ll start, and then I’ll let Cory or Curtis jump in as well. I mean we were fortunate that we were able to keep it flat during the fourth quarter. We do continue to see pricing pressure, particularly on the deposit side. We did — while we did increase the cost of deposits during the quarter that rate of growth did slow down, and we’re prepared for that to still increase but that overall growth has continued to slow down. Yes, we hope there will be some relief inside depending on what they do with rates, been a little bit of mixed messages in the first three weeks of the year so far, it seems like looking like they’re headed down and then kind of pulling back up a little bit, not on ours specifically, but just when you look at the treasury market and some other rates.
So we are hopeful that we can keep NIM close to where it is. A little bit of a drop. I hate to put any specific number out there, but I mean, 5 basis point drop, 3 to 5, 3 to 7 or so, something like that would not be unrealistic, but we’re going to do everything we can to try to keep it close to where it is today.
Cory Newsom: Graham, I think one thing, though, that this is the first quarter that we felt comfortable to start making minor changes in less sensitive — less rate-sensitive deposits throughout the company. And so I think that’s really says a lot when you start looking at the fact that we finally feel comfortable to start making some minor rate reductions across the board. Those are going to be small and incremental, and it’s going to take a while for it to start really showing. But I think that says a lot if you kind of think about the fact that we’re finally willing to start doing that.
Graham Dick: No, absolutely, definitely does. And I guess just stand here with the NIM. So is some of the trough that’s going to happen, I guess, the pressure in one half , is that because the fixed rate repricing is weighted towards the back half of the year, Curtis, did I hear that correctly?
Steven Crockett: We definitely have more of that repricing that will occur as we get to the second half of ’24. We have some going along, but it accelerates a lot more as we get to the second half.
Curtis Griffith: One other point. This is the time of year that our ag loans do pay down. And in the big scheme of things, it’s not a significant number, but it does move things a penny or two here and there because most of those operating lines were priced up at current rates, as we went through 2023, and they’ll be priced at current rates when they renew and they start drawing up again in ’24. But there is a little drop there, and it will be in some of our higher-yielding notes that are out there right now.
Graham Dick: Okay. Okay. That makes sense. And then the last one is just more housekeeping. I just want to make sure I got the mortgage servicing right adjustments correctly. So you said that there was a $1.5 million mark this quarter — negative mark compared to last quarter, what was the $700,000 write-up, which is the — that’s the 2.2 number is really the delta between the two quarters, right?
