Q3 2020 South Plains Financial Inc Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the South Plains financial third quarter 2020 earnings conference call. During todays presentation. All parties will be you know listen only mode. Following the presentation. The conference will be open for questions with instructions to follow at that.
Todd I'd.
As a reminder, this conference call is being recorded.
I'd like now to turn the call over to Mr., Stephen Crockett, Chief Financial Officer of South Plains Financial. Please go ahead Sir.
Thank you operator, and good afternoon, everyone. We appreciate your participation in our third quarter 2020 earnings Conference call with me here today are Curtis Griffith, our chairman and Chief Executive Officer, Cory Newsome, our President and Brent Bates Citibank's, Chief Credit Officer.
As a reminder, a replay of this call will be available through November 10, 2025.
Additionally, a slide deck to complement today's discussion is available on the investors 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 cause actual results to differ materially from those anticipated future results.
Please see our safe Harbor statement beginning on page four of our earnings press release and on slide two of the presentation.
All comments made during today's call are subject to that safe Harbor statement.
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 be found in our earnings release at this point I'll turn the call over to Curtis.
Thank you, Steve and good afternoon honor.
On today's call I will provide a high level review of our results and an update on our priorities for capital in light of our recent subordinated note issuance.
Cory will discuss the stabilization that we've experienced in our loan portfolio as we have seen a sharp decline in active modifications related to COVID-19 during the third quarter as well as the success that we have achieved growing our mortgage business and scaling our infrastructure.
Steve will conclude with a more detailed review of our third quarter 2020 financial results and we will then open the call for your questions.
To start I'm very pleased with our performance as the bank's operations continued to run smoothly and our customers have largely weathered the uncertain economic environment to date.
Our ability to manage through this crisis is a testament to our team and the significant steps that we've taken over the last six years to improve our systems as well as instill a conservative credit culture at the bank, which can be seen in our credit metrics this quarter.
Turning to slide four we reported net income of $16.7 million or 92 cents per diluted common share for the third quarter of 2020, which compares to net income of $8.3 million or 45 cents per diluted common share that we reported in the third quarter of 2000.
Hi, Tim.
Pre tax pre provision income for the third quarter of 2020 was $26.9 million, which compares to $20.1 million in the second quarter of 2020 and $10.7 million in last years third quarter.
We recorded a $6.1 million provision for loan loss in the third quarter of 2020, which compares to $13.1 million in the second quarter of 2020 and $420000 provision in the year ago quarter.
Our provision expense in the third quarter was largely qualitative as we continue to take a conservative approach to credit.
Our decision to allow our borrowers to modify their loans to interest only payments early in the pandemic has proven to be a sounder. One as this has allowed our customers to build cash and better manage their businesses during the peak of this crisis.
Importantly, we have experienced a sharp decline in active modifications related to COVID-19 during the third quarter with only 5.4% of our portfolio remaining in modification versus 19.9% of the portfolio at June Thirtyth 2020, as detailed on slide five.
Yeah.
While we are optimistic that our local economies are improving with the pace of business accelerating we will continue to aggressively manage our portfolio and the credit quality of the bank.
As I touched on last quarter. The bank continues to enjoy substantial growth. Despite the challenges that we've faced as a result of the pandemic.
In the third quarter of 2020, we grew book value per share to $19.52 as compared to $18.64 in the second quarter of 2020.
I'm very proud of the growth that we have been able to deliver and what has been a challenging environment and despite recording an outsize provision expense again this quarter.
Turning to capital, we issued $50 million, a 4.5% fixed to floating rate subordinated notes at the end of the third quarter that qualifies as tier two capital for regulatory purposes.
We were very pleased to be able to issue. These notes at an attractive interest rate they will position the bank to take advantage of dislocations that may arise from the pandemic.
Looking forward to having very strong capital levels will allow us to focus on opportunistic and accretive M&A, while providing a steady return to our shareholders through our quarterly dividend. We believe this approach will maximize value for our shareholders in.
In regards to M&A, our goal is to find attractive acquisitions like West, Texas State Bank, or Wtsp, which will allow us to expand our geographic reach while also scaling our infrastructure, which has the capacity to handle upwards of $5 billion in asset with minimal incremental expense.
We believe this will help us to achieve our longer term goal of delivering returns in line with or better than our peer group.
Despite the drop in energy prices and slowing economic activity in the Permian Our acquisition of Wtsp has been very successful as we have exceeded our cost save goals and are in the process of driving cross sale opportunities to accelerate revenue growth too.
To accomplish this we recently launched an internal application, which encourages employees to focus on cross selling that has raised awareness and is beginning to deliver results.
We also rolled out our community rewards program on October Onest, which encourages members of the community to visit our website to vote for their favorite not for profit organizations.
We have found this program to drive real customer engagement and see this as a way to further embed citibank into the local Permian communities.
In regards to our dividend I am pleased to report that our board of directors approved an increase in our dividend to five cents per share on October 22nd which represents our sixth consecutive quarterly dividend.
Importantly, our capital raise provides the balance sheet strength to provide the flexibility to pursue accretive acquisitions and maintain our dividend while the economic environment remains uncertain.
Turning to our local economies, we started to see a rebound through the summer which was echoed by the Dallas Feds. Most recent report where they also noted an acceleration across Texas driven by the state wide decline in new covert cases from the July peak and the resulting improvement in consumer spending we.
Our watching the pandemic and recent trends closely as cases have once again started to rise.
That said, we remain optimistic as the economy in Lubbock is seeing a nice pickup as new projects are breaking ground lifting local employment and spending and Texas Tech University remains in session now.
Now, let me turn the call over to Corey.
Thank you Carlos and good afternoon, everyone.
Starting with our loan portfolio on slide seven loans held for investment at the end of the third quarter of 2020 were 2.29 billion, which is a 43 million a decrease from the second quarter of 2020, and a 326 million increase from the third quarter of 20 not team the.
The decline from the second quarter of 2020, it was largely driven by pay downs of $10 million in non residential consumer loans and 8 million indirect energy loans.
We also experienced early payoffs of several large commercial real estate loans during the third quarter of 2020.
As cartus touched on our aggressive management of our loan portfolio and assistance that we provided to our customers are in the crisis has paid dividends by allowing our borrowers to modify their loans primarily to interest only for six months, they were able to more effectively manage and run their businesses during a very uncertain time.
As the economy has improved the majority of our customers have returned to pre modification payment terms. These preliminary results are also a validation of our investment in the U.R.M. system, which has provided a process to quickly detect and address potential problems in our loan portfolio.
Our ERM system has greatly improved our ability to manage our loan portfolio through the pandemic.
Turning to slide that the one area of the portfolio, which will take more time to resolve is our hospitality exposure, which has 119 million in loans, representing approximately 5.7% of our portfolio excluding PPP lows.
At the end of the third quarter, our hospitality portfolio with approximately 60% of our active loan modifications.
These modifications are generally 12 month interest only our combination of a 90 day deferral and nine month interest out.
Importantly, only 2% of these loans are on nonaccrual and none are 30 days or more past due at September thirtyth.
We're also looking for opportunities to improve the bank's position and obtain additional collateral as we work with our borrowers through the modification process.
Our direct energy exposure at quarter end was 71 billion or 3.4% of our loan portfolio, excluding PPP loans.
This is a modest decline from the second quarter's level of 79 million, we continue to feel comfortable with our exposure as oil prices have stabilized and activity in the Permian has modestly improved from the second quarter's levels as.
As a reminder, almost half of our direct energy exposure is one service sector alone, where we have strong guarantor support outside of the energy industry.
Turning to fee income on slide 10, we generated 31.7 million of noninterest income in the third quarter of 2020, which compares to the 24.9 million that we generated in the second quarter of 2020, and 14.1 billion that we generated in the third quarter of 2019.
The increase from the second quarter of 2020 was primarily due to the growth to $3.5 million in mortgage banking revenue.
Given an increase of 31.8 million in mortgage loan originations.
We also experienced a 2.3 million increase in income related to our insurance activities.
For the third quarter fee income represented 50% of total revenues as compared to 35% in the quarter a year ago.
A key focus for the bank has been increasing efficiencies as we grow in order to expand our profitability and improve our return on assets to.
To accomplish this we have maintained our expense structure as volumes that our mortgage business have grown which has contributed to our strong barking gain while insulating the bank against eventual decline in refinance volumes.
This can be seen in our efficiency ratio for the third quarter of 2020, which was 56.9% as compared to 63.3% in the second quarter of 2020 and 73.6% in the third quarter of 2019.
Im very pleased with the continued progress that we have achieved scaling our infrastructure and see room for further growth and profitability gains that said I would expect our efficiency ratio to pull back with the eventual decline in refinance volumes through next year.
We expect the earnings power of the bank. However to remain robust as credit continues to normalize and the growth investments that we have made recruiting talented bankers to take market share becomes more evident with an improving economy. In fact, we are already starting to see the benefits of our investments in our mortgage business, while the low interest rate environment.
Has certainly benefited refinance activity the seasoned mortgage teams that we have brought on over the last year have been instrumental in driving market share gains in the builder and purchase markets.
Another. Good example is in our commercial lending at El Paso, where we brought on a new market leader, who has strong relationships in the city and has been instrumental in bringing new business to Citibank.
Taken together this provides optimism for organic growth as we are seeing similar positive France than many of our local economies as our investments are starting to bear results.
I would now like to turn the call over to Steve.
Thank you Corey starting on slide 12, net interest income was $31.3 million for the third quarter of 2020 as compared to $30.4 million for the second quarter of 2020 and $26.6 million for the third quarter of 2019.
The increase since the third quarter of 2019 was primarily attributable to a rise in our average loans $414 million from the Wtsp acquisition as well as PPP loans that were funded largely in the second quarter.
Partially offset by a decrease of 63 basis points in non PPP loan rates.
Due to the sharp decline in the rate environment experienced in the first quarter of 2020.
During the third quarter 2020, we recognize $1.1 billion of ERP fees as an adjustment to interest income.
There is currently $6.1 million in unrecognized deferred PPP fees.
Our net interest margin increased to 3.82% in the third quarter of 2020 as compared to 3.79% in the second quarter of 2020.
Our average cost of deposits declined five basis points to 34 basis points in the third quarter of 2020.
As compared to 39 basis points in the second quarter of 2020, and 98 basis points in the third quarter of 2019.
This improvement was largely due to the 150 basis point decline in the federal funds rate in March of this year, which allowed us to further lower the rate we pay on deposits.
We believe there is some additional room to lower deposit cost in the future and we will continue to monitor our rates.
In the third quarter of 2020 deposits were essentially constant at $2.94 billion as compared to $2.95 billion in the second quarter of 2020 as can be seen on slide 13.
We ended the third quarter of 2020, with total noninterest bearing deposits to $906 million or 30.8% of total deposits, which compares to $941 million or 31.9% of total deposits at the end of the 2022nd quarter.
And 24.3% in the year ago third quarter.
Turning to slide 14, our nonperforming assets total assets ratio increased 13 basis points to 46 basis points in the third quarter of 2020 as compared to the second quarter of 2020.
The increase in third quarter related to a $5.4 million relationship in the transportation industry that was put on non accrual.
Loans have performed as agreed but were placed on non accrual status due to stress in the borrower's industry.
Subsequent to quarter end, the borrower paid off $2.1 million of this debt in October.
As Curtis mentioned, we did add to our allowance for loan losses in the third quarter of 2020, given the uncertainty that continues to exist as a result of COVID-19.
That said our provision recorded for the third quarter was largely qualitative represents our conservative credit culture.
Additionally, our portfolio remains very well reserved as our a triple l. to total loans, excluding TPP loans was 2.22% at September Thirtyth 2020, compared to 1.91% at June 32020.
The yield on average interest, earning assets was 4.21% for the third quarter of 2020, a decrease of 95 basis points as compared to the same quarterly period in 2019. It was driven by the overall decline in interest rates over the time period.
Additionally, our interest earning assets increased $691 million, primarily to our acquisition of Debbie TSB and the origination of ERP loans.
Given ahead to slide 16.
Our noninterest expense was $36.0 million in the third quarter of 2020 as compared to $35.2 million in the second quarter of 2020. This.
This increase was primarily due to an additional $758000 and commissions and other higher variable expenses related to the strong mortgage activity. This quarter, partially offset by a recovery of $303000 from the previously disclosed settlement of a lawsuit as well as other expense reductions.
Skipping ahead to slide 18, we remain well capitalized with tangible common equity to tangible assets of 9.25% at the end of the third quarter of 2020 compared to 8.66% at the end of the second quarter of 2020.
And 10.62% in the third quarter of 2019.
I'll now turn the call back to Curtis for concluding remarks.
Thank you Steve Arthur.
Our third quarter results are a validation of the strategy that we laid out on our IPO Road show a little more than a year ago. As we have remained disciplined on expenses and are effectively scaling our infrastructure, which can be seen in our record efficiency ratio of 56.9% this quarter as compared to 81.
0.8% at our IPO.
We have instilled a conservative credit culture, and our ERM system has helped us manage the current cycle.
Importantly, we feel well reserved and capitalized to take advantage of future opportunities.
We successfully acquired Wtsp and have over achieved on our expense save expectations.
Through the integration, we have developed a skill set which will help us to more efficiently and profitably execute our next acquisition.
Lastly, we have attracted talented bankers, who have contributed to our organic growth this quarter and who will help position the bank for future growth as the Texas economy continues to normalize.
We have accomplished much in a short period of time and are excited with the opportunity ahead.
None of this however would have been possible without the tireless efforts of our employees and their commitment to both the bank and our customers I would like to thank them Cory Steve ramp and myself greatly appreciate everything that you do.
With that I'd like to ask the operator to open up the line for any questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q.
One moment, please while we poll for questions.
Thank you. Our first question comes from Brady Gailey with KBW. Please proceed with your question.
Hey, Thanks, good afternoon guys.
African unrated.
Okay. So on the sub debt raises.
I hear you that your edge that in today.
Longer term and building out west to this but I mean, if you look at where your stock trades, it's a little below 80% of tangible book value, which is the compelling.
Compelling and what do you think about share repurchase does.
[noise] this Kurdish let me address that one.
We do see some of our other banks in our markets that are coming back and to restart some share repurchase active.
Activity and frankly, I think when you have a bank that is trading below tangible book, that's our brides use of our capital to go out and do that we've had some discussions at board level about that and I.
I think that's that's something we would certainly consider here in the near term.
Our product [noise].
All right and then I mean, you guys have done a great job of building your reserves up for me now a little over 2.2% of nod PPP loans.
Would you consider that a high watermark or do you think that you could see the reserve continue to build from here.
Okay.
Yeah. This is Brad.
Yes, I think we feel I feel really good about where our reserves are right now we're not seeing as you can tell we're not seeing broad deterioration in sectors and you know as we continue on through this pandemic I think we're just going to have to.
You know continue to evaluate it but.
Right now I feel really good about where we have reserved.
Okay. Then you guys did a really nice job of holding that the net interest margin this quarter, even up a couple of other points. How do you think about the net interest margin or I'm not sure. If you look at your spread income dollars. However, you want to look at EBITDA, how do you think about that going.
Forward.
Yes Brady this is Steve Yes, we added we ended up with a good quarter on net interest margin.
We did have we did have a few basis points of additional purchase loan income in there. We've otherwise we would have been basically flat.
Going forward I mean, we do we.
We know we will continue to see pressure on on the loan side with repricing, some loans and new loans that come on the books.
Of may be having some some lower rates than what we had on the books, but we do as you know this our deposit side, we were able to reprice.
Alan There and we believe there is still some.
Some room there that we can continue to.
Lower that but I mean, we do we do expect to see no Esa insert some modest pressure.
Pressure to the to the NIM This next quarter.
Okay, and then finally for me.
Yeah. If you look at loans X PPP, there were down a little bit.
Linked quarter. This quarter, how are you thinking about your loan growth as we enter 2021.
Hi, This is curtis.
One reason that we did see.
Or didnt have the growth that we would normally experience in Q3.
Add portfolio for various reasons, just didnt find that and that's really weather related.
Our out here as well as some of the the help that came to our farmers from U.S.J. programs I think we'll be back to a more normal situation on that in 2021, we're also at reaching out to our commercial side and being pretty aggressive on trying to get some new loans on the books that are.
Our season to quality real estate loans in particular, and we're being pretty aggressive on some rights on those that may have a little bit of a push down effect on the NIM, but I think it's going to have a positive effect on our bottom line is we are trying to get our our loan to deposit ratio more back in line with historical norms for us It is.
Tough environment right now there's still so much uncertainty, but we are definitely seeing people look around and looking for ways to potentially refinance some of their existing projects and we want to be on top of mind for a lot of those folks when they're looking for a new home.
So Curtis would you think mid single digit loan growth would be an appropriate number for the next couple of years for you all and excluding any sort of impact from PPP shrinkage all.
All right, yes, or if you do if you do that XP pay because obviously thats couple of hundred million dollars that we all certainly hope goes away during Q4 and Q1.
Taking that out of the equation, we really do think that that.
Mmm low to mid single digit loan growth levels in 21, and 22 would be achievable with the team that we have in place.
Okay, great. Thanks, guys.
Thank you Brian.
Thank you. Our next question comes from Brad Milsaps with Parker Piper Sandler. Please proceed with your question.
Hi, good afternoon.
Hi, Brett.
Yeah. So a lot of the questions have been asked but maybe.
Just just quickly on expenses Steve.
I know you guys have been working hard to.
Well look for ways to continue to get more efficient I know the mortgage banking can play a little bit of habit with those numbers, but just kind of curious.
Hi, I think about you know sort of your expense line.
So excluding the impact of what what may happen in a mortgage.
Yes so.
Obviously, you said mortgage.
It does skew that upwards.
Upwards in that but thats a good thing whenever we're generating the revenue that they are.
Kind of when you when you exclude them and even our insurance activities in the third quarter, and we actually were able to.
To to shrink our net interest our noninterest expense.
You.
About a million dollars now some of that had a as we've talked about in the release had had that a legal settlement that offsets. Some some of our expenses, but the point is we are we are continuing to.
To address non interest expense and look into to drive that down.
You may be thinking about another way if mortgage originations return to maybe the first quarter level of this year, even you know some of the quarters. Yet in 2019 would you kind of expect total operating expense to sort of dropped back to those levels or do you think you've got no further room to push you down.
Of course, if we go back to the first quarter you know, we we still had some of the no conversion.
Conversion expenses and before.
Before we were able to do the cost saves with the with the acquisition, but it.
It it.
It would probably it's going to be closer back to.
I'd I'd say that for fourth quarter.
As kind of a level, we're we're trending toward.
Hey, guys Curtis.
Well I just I have to comment that revenue yeah. We are still a great going through things and we passed all of our department heads are we're still looking for good places we can do some cost saves and we're still finding some some of that certain personnel areas, but we've also got some other areas of just our operating expenses that we're finding that we can trim.
And now I think we're going to continue to see our moderate cost saves across the organization are you can't save your way into prosperity completely but we are very cognizant of it and we're in area. A time like this were achieving a lot of organic growth is very difficult. Obviously, it's certainly something we can focus on right now and I think again.
Nice results out of some 21.
Great and that's helpful and just maybe one follow up on fee income I apologize if I missed this I know.
You've had some.
Your acquisitions in any youve changed the way on some of the reporting with with insurance, but I was thinking the fourth quarter tends to be your kind of biggest quarter.
With some of the commission dollars did that you get.
Obviously, a lot of that revenue came in this quarter is that a is that a change on 40 explode still expect the bigger fourth quarter. He typically get.
Yes. So it definitely we had we did have a change from what we know from the timing on the on the recognition of revenue.
This this year and it was Oh a lot of that really came in right at the end of the third quarter, we do still expect to see.
In our fourth quarter, which is really kind of based on.
I won't get too far down into the weeds on this but on on some profit sharing bonuses that we give based on how the all the insurance companies do and its.
We we would expect to see that hit like we did historically come in the fourth in the fourth quarter. I know there were some of their ratios were pretty close this year. So we're still waiting to see what that would look like but.
But we would expect to see a bump in the in the fourth quarter, but it won't be like what weve seen like what we would have seen last year. Because now we did have we had we would have that additional revenue plus so a lot of the rest of the commission that would come in and as you said, we did get some of that came in the third quarter. So.
Sorry, that's a little confusing.
Yes, we've got a best to look at it kind of an annual number you know if you did 7 million and insurance last year, you're going to be.
Plus or minus kind of that that number depending upon how some of those.
Factors at the end of the year play out.
Yes, yes, that's a great way to look at it.
Got it Okay, alright, guys I really appreciate it thank you.
Thank you revenue right.
There are no further questions at this time I would like to turn the floor back over to management for closing comments.
[noise] this Kurdish and I want to thank everybody that was on the call today and appreciate your interest and continued support of South Plains financial we think we're moving forward on the direction that we had set out back when we plan for the IPO. Obviously, the pandemic has disrupted a whole lot of things, including the Oh.
One of our near term plans.
We do hope that everyone can move through this and that we do get back to a safe at more normal activity levels that during a certain time during 2021 for right now we're going to be very cautious we are definitely requiring mask wearing in all of our our locations and trying to keep our people safe and healthy and productive.
And I hope everyone else out there can you can do the same and we look forward to reporting some great results for you.
For the fourth quarter. Thanks again.
[laughter].
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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