Q3 2021 South Plains Financial Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the South Plains financial incorporated third third quarter 2021 earnings conference call. During today's presentation, all parties will be in a listen only mode.
During the presentation. The conference will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded I would now like to turn the call over to Mr. Steve Crockett, Chief Financial Officer, and Treasurer at South Plains Financial. Please go ahead Sir.
Thank you operator, and good afternoon, everyone. We appreciate your participation in our third quarter 2021 earnings Conference call with me here today are Curtis Griffith, our chairman and Chief Executive Officer, and Cory Newsome our president.
As a reminder, a replay of this call will be available on our website within two hours at the conclusion of the call until November 19 2021.
Additionally, a slide deck presentation to complement today's discussion is available on the news and events section of our website.
Before we begin let me remind everyone that this call may contain forward looking statements and are subject to a variety of risks uncertainties and other factors that could 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 available on our website.
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.
Reconciliation of these non-GAAP measures to the most comparable GAAP measures can also be found in our earnings release and on slide 19 of the slide presentation at.
At this point I'll turn the call over to Curtis.
Thank you, Steve and good afternoon.
On today's call I will briefly review the highlights of our third quarter 2021 results.
Cory will provide an update on our successful efforts to expand our lending team and accelerate organic loan growth and Steve will then conclude with a more detailed review of our third quarter 2021 financial results.
To start I'm very pleased with our team's performance again this quarter and we'd like to thank our employees for their hard work as they continue to deliver outstanding service to our customers, which continues to translate into strong financial results for South Plains.
Along those lines there are six key points, but I would like you to take away from today's call.
First our local Texas markets are seeing strong economic growth and continued population gains from across the country, which is providing a robust backdrop for new business.
Second our experienced lending team is benefiting from the strong economic backdrop as well as our market share gains in our communities large and small which we believe are contributing to our strong results.
Third we have continued to make solid progress, adding new lenders to our platform during the quarter as we work to grow our team by 20 lenders are about 30% over a two year timeframe.
Importantly, we have been very impressed with our new lenders ability to bring new clients to Citibank and quickly build their portfolios.
Fourth we have grown our loan portfolio by more than 9% year to date and expect loan growth to continue at a robust pace into 2020 two.
We believe we have ample liquidity to fund this growth, which will drive continued margin expansion earnings and book value growth along with improved returns.
Fifth we expect our mortgage business to decline to about 10% to 15% of total revenues over the next few years as mortgage originations gradually normalize in future periods. I think it is important to reiterate that we are not a mortgage bank. We have simply taken advantage of a strong cycle, which has been very lucrative and.
Mortgage revenues declined we expect organic loan growth to drive improved net interest income and we anticipate this growth will more than offset the decline in mortgage income over the next two to three years.
Lastly, we will continue to pursue a thoughtful capital allocation strategy focused on share buybacks, maintaining and growing our dividend overtime and tactical M&A.
During the quarter, we were aggressive with our share buyback given the opportunity that we see ahead for South Plains. We do not believe this is fully reflected in our current share price.
Turning to our third quarter 2021 results on slide four we reported net income of $15.2 million or <unk> 82 cents per diluted common share, which compares to net income of $13 $7 million or 74 cents per diluted common share in the second quarter of 2021.
We did not record a provision for loan loss in the third quarter of 2021 compared to a negative provision for loan loss of $2 million in the second quarter of this year.
This decision was made in light of the continued general improvement in the economy as well as a decline in the amount of loans in our portfolio that are actively under a modification and we remain confident in the credit quality of our loan portfolio as well as the strong reserves that we built over the last year. Additionally, the credit metrics of our hospitality portfolio.
Continue to improve through the third quarter of 2021.
Turning to loan growth, we delivered five 5% growth in the third quarter of 2021, as we benefited from our lending teams strong execution combined with our new lenders who are quickly growing their portfolios as they bring new relationships with Citibank.
While recruiting takes time, we're very pleased with the lenders that we have been able to attract importantly, we have been deliberate in our growth as we look for lenders who share our culture and values. We will remain laser focused on credit quality and we will not sacrifice our conservative approach to underwriting to drive growth as we expand our loan portfolio.
Looking to future periods, we have excess liquidity to deploy as our loan to deposit ratio at the end of the third quarter of 2021 was 76%.
Our goal is to ultimately drive that ratio up into the mid to high Eighty's overtime, which represents significant earnings power and leverage the infrastructure, we have to support 5 billion or more and I have a sense.
As we execute our strategic plan to profitably grow South Plains. We will also continue to employ a thoughtful capital allocation strategy to create value for our shareholders.
During the third quarter of 2021, we continue to see our shares trade below the intrinsic value and as a result, we repurchased approximately 190000 common shares under our previously announced $10 million share repurchase program.
Additionally, our board of directors authorized a quarterly dividend of <unk> <unk> per share. This past week, which is in line with the last quarterly dividend that we paid in August of this year. This will be our 11th consecutive quarterly dividend and will be paid on November 16th 2021 to shareholders of record on November one 2021.
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Lastly, we continue to evaluate potential M&A candidates as activity has picked up as we've said in the past we are looking at banks with good deposit franchises in rural markets, where there could be leadership changes over the next few years, we will be very disciplined and focused on finding the right bank with a similar culture and at an attractive.
Price, thus far we have not found a target that meets our acquisition criteria and metrics now let me turn the call over to Corey.
Thank you Curtis and good afternoon, everyone, starting with our loan portfolio on slide five loans held for investment at the end of the third quarter of 2021 were $2 $43 billion.
Which is $126 million or a five 5% increase from the second quarter of 2021.
This increase was largely driven by organic net loan growth of $178 million, partially offset by a decrease of $52 million from SBA repayments on PPP loans.
Our loan growth in the third quarter of 2021 was broad based and relationship focused as economic activity remains robust in our markets with particular strength in multifamily properties agricultural production loans and direct energy loans.
In our AG portfolio agricultural loans increased to $119 million as compared to $96 million as of the end of the second quarter of 2021.
We experienced typical seasonal fundings with economic activity picking up combined with strong rise in energy prices. We also took advantage of opportunities in the Permian basin was with long standing customers of the bank. In addition to new relationships generated.
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Importantly, our lending team has continued to bring new business and clients to Citibank at the third quarter of 2021, which has kept our loan pipelines at healthy levels looking forward. We remain confident in our goal of delivering high single digit loan growth in 2022 and could even see better results, depending upon our ability to hire additional lenders over the next several quarters.
As we discussed on last quarter's earnings call. We have a strong team of bankers in place that have developed long standing relationships with our customers and continue to drive new business and grow market share as can be seen in our results this quarter.
Our opportunity is to build on this foundation by adding scale across our markets with a focus on our metropolitan markets of Dallas, and Houston, where we can add to our bottom line, but by continuing to redeploy our low cost funds into attractive loans.
To accomplish this we have outlined a goal of adding 20 lenders to our 60 lender team over a two year timeframe and are actively hiring in all markets.
We are focused on veteran bankers, who have strong relationships and a history of success and most importantly, who fit our culture I am very pleased with our success as we are almost halfway to our goal and I've been very impressed with how quickly they've started to bring relationships to citibank.
A good example is the Houston market, where we have hired a new market later, who is attracting both quality lenders as well as attractive new business.
Our focus is on delivering sustainable organic growth and we are cognizant of the outsized revenues that we have achieved over the last 18 months that our mortgage business in this low rate high margin environment as can be seen on slide seven.
For the third quarter of 2021, we generated $373 million and mortgage loan originations as compared to $379 million of originations in the second quarter of 2021.
We had a $1 1 million increase in mortgage banking activity revenues in the third quarter of 2021 as compared to the second quarter of 2021.
As Curtis touched on we expect our mortgage banking revenues to decline over time as the mortgage market gradually normalizes in future periods, while we continue to grow other revenue sources as.
As a result, we expect mortgage revenues to decline to about 10% to 15% of total revenues over several years as compared to about 26% of total revenues today.
As we have discussed on prior calls we've been very focused on managing costs and margins through the cycle and have utilized technology to scale. The business as volumes have increased looking forward, we expect volumes and revenues related to our mortgage banking activities to gradually decline and we will continue to manage expenses to maintain profitability importantly, we expect.
Net interest income growth to offset the decline in mortgage income as we grow our lending platform at that our excess liquidity to work in higher yielding loans.
As outlined on slide eight we generated $25 $8 million of noninterest income in the third quarter of 2021 compared to $22 3 million in the second quarter of 2021 the growth from the second quarter of 2021 was primarily due to the seasonal increase of $2 $6 million in income from insurance activities and the <unk>.
Kris a $1 $1 billion in mortgage banking activities revenue.
To conclude our local Texas markets are strong and our team has continued to execute very well, we've gotten off to a strong start recruiting experienced lenders to citibank, which provides visibility to future growth while our existing team of lenders continue to perform at a very high level. We're proud of our results this quarter and we're optimistic as to what the future holds for south.
I would now like to turn the call over to Steve.
Thank you Cory starting on slide 10, net interest income was $31 2 million for the third quarter of 2021 as compared to $29 6 million for the second quarter of 2021, and $31 3 million for the third quarter of 2020.
The increase since the second quarter of 2021, due primarily to an increase of $1 $4 million in loan interest income as a result of the growth of $83 million in average loans outstanding during the third quarter of 2021.
We recognized $1 $7 million and deferred PPP related SBA fee income as an adjustment to interest income.
Which included accelerated into them on PPP loans forgiven by the SBA during the third quarter of 2021.
At September 32021, there was $2 $9 million in unrecognized deferred PPP related SBA fees. The majority of which are expected to be recognized as PPP loans continue to be forgiven by the SBA or repaid over the next several quarters.
We are very pleased that our net interest margin increased to $3 five 8% in the third quarter of 2021 as compared to 342% in the second quarter of 2021.
The expansion in our net interest margin was primarily due to the increase of $83 million in average loans outstanding during the third quarter of 2021, as we continue to deploy our excess liquidity.
Our average cost of deposits declined two basis points to 25 basis points in the third quarter of 2021 as compared to 27 basis points in the second quarter of 2021 and declined from 34 basis points in the third quarter of 2020.
Continuing on slide 11.
Deposits increased in the third quarter of 2021 to $3 two 1 billion.
An increase of $53 $8 million from June 32021.
The largest increase in deposits for the third quarter was a non personal demand accounts.
We ended the third quarter of 2021 with total noninterest bearing deposits of 1.15 billion or 32, 8% of total deposits.
Turning to slide 12.
Our nonperforming assets to total assets ratio declined five basis points to 32 basis points in the third quarter 2021, as compared to 37 basis points in the second quarter of 2021.
As Carl just touched on the robust, Texas economy has provided a tailwind to our customers has led to positive credit migrations in several areas of our loan portfolio.
At September 32021 active loan modifications attributed to the ongoing COVID-19, pandemic totaled $16 4 million or 70 basis points of our loan portfolio.
Approximately 97% of these active modified loans are in our hotel portfolio, where we continue to experience improving fundamentals.
We expect that these remaining modified loans will return to full payment status at the end of their respective modification periods.
Also as noted on this slide we had an increase of $6 million in classified assets. During the third quarter of 2021. This was largely the result of one credit being downgraded due to the loss of its underlying cash flow source.
Sequentially the end of the quarter the borrower repaid this loan in full.
Overall, we continue to believe that our loan portfolio remains well reserved as our <unk> to total loans was 176% at September 32021, which is an 11 basis points decline from the second quarter of 2021.
Looking forward, we continue to believe that the reserves that we have built to help guard against an uncertain outlook are appropriate and we will continue to evaluate our reserve in the coming quarters.
Skipping ahead to slide 15, our noninterest expense was $38 1 million in the third quarter of 2021 as compared to $36 8 million for the second quarter of 2021. This increase was primarily due to an increase in personnel expense from the payment of higher commissions on insurance activities versus the prior quarter.
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Our efficiency ratio was 66, 5% in the third quarter of 2021 as compared to 75% in the second quarter of 2021.
This decrease in the efficiency ratio was primarily a result of the improved net interest margin experienced during the third quarter of 2021, but we remain focused on improving this ratio.
Moving ahead to slide 17, we remain well capitalized with tangible common equity to tangible assets of 994% at the end of the third quarter of 2021 unchanged from the end of the second quarter of 2021 and $9 two 5% in the third quarter of 2020.
Before turning the call back to Curtis I would like to highlight that our audit Committee has completed a competitive process to review the appointment of our independent registered public accounting firm for the fiscal year ending December 31 2022.
Several firms, including our current firm we've rented will we're invited to participate.
As a result of this process and following careful deliberation. Our audit committee has selected <unk>, a national CPA and advisory firm to become our independent registered public accounting firm. After the filing of our 10-K for the year ending December 31 2021.
I'll now turn the call back to Curtis for concluding remarks.
Thank you Steve to conclude our team continued to implement our strategy through the third quarter of 2021 and have delivered impressive results once again.
I'm proud of the consistent results that we've delivered since our IPO two years ago, which can be seen in our book value growth as well as our improved returns.
At the end of the third quarter of 2021, our tangible book value per share was $20.90, which compares to $18 97 at the end of 2020 and $15 46 at the end of 2019.
Likewise, our annualized return on average assets for the first nine months of 2021, whereas 157%, which compares to 131% for the full year 2020, and 1.14% for the full year of 2019.
Our consistent book value growth and improved return on assets clearly demonstrate not only our team's execution, but also the excellent value we're creating for all of our stakeholders. Thank you again for your time today operator. Please open the line for any questions.
Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question.
Star one on your telephone keypad.
Tom indicate your line is in the question Kim You May Press Star two if he would like to remove your questions I'm not sure that participant.
Once using speaker equipment, it may be necessary to pick up your handset before pressing the star key one moment, please as always call for question.
My first question is from Brady Gailey of <unk>. Please proceed with your question.
Hey, Thanks, good afternoon guys.
Hi, Brady of ratings.
So on the lender hiring front because I heard you last quarter I think you mentioned it to you want to hire 20 people I think you're halfway through that.
Hiring process, but what do you expect the timeline to be on the on the remaining term.
Lender hires that that's something that happens in the next quarter or two or is that longer term.
Yes, Brady this is Cory I think.
We'd love to see it happen in the next quarter or two I don't think Thats really realistic I think it's I think.
It will probably go through the better part of next year getting those exactly the way we want them.
You got to go back and think through our process I mean, we're not out <unk>.
Looking for people that are typically looking to change jobs, we're looking for that much more high quality seasoned lender that pretty good tenant where they are so I guess our approach is probably a little bit more methodical on how we go about in <unk>.
Looking for that cultural fit and making sure that the vetting process is really what we want it to be so.
I have to say that it's in the next couple of quarters, but I think it's easily the next three.
Okay Alright.
Alright, and then how does that.
Play into growth in your expense base I know.
It will provide operating leverage longer term, which will be good.
Profitability, but how do you think about.
Expense growth from kind of a <unk> base as we head into 2022.
Oh this Kurdish let me phrase it this right of course, we're trying to reduce noninterest expense.
In some areas like traditional media advertising, but we know we've got upward pressure out there on personnel cost were.
We're not immune from the wage inflation that we're seeing occur all across the country.
But our goal is to retain the top quality talent that we have and while we're continuing to add those lenders, who will and theyre doing it pretty quickly generate far more revenue from the cost of adding him to the team. So while we will see some upward movement out there in and specifically personnel cost with the hires that we're making.
I think youre going to see corresponding revenue increase come right along pretty quickly.
Brady This is where it is we sit around and the ones that we've done so far.
Really kind of trying to stay focused on about a six month breakeven.
And so.
I think we're probably in some cases, leading that but.
But.
I mean, courtesy exactly right. We're seeing we're all seeing a little bit of upward pressure, we're making sure hours as the rack com.
Bill on the quality team that we want to have as we move forward.
And then finally for me I'm just curious.
The 190000 shares that were repurchased was about 1% of the company, but do you know what the average repurchase price was for those ships.
Yes, Brady this is Steve.
Let me I've got that right here it was about.
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Approximately 23.
23 <unk>.
Roughly.
I mean, the stocks at 25 now that's a little higher but you still have it still are inexpensive stock price. So how how do you think about the buyback going forward.
Well, we continue to have discussions with our board about that and.
I think so far the general consensus is that as we said.
And the earnings.
We've already to earnings call, we just did that.
We don't think we're really up the full intrinsic value yet so.
We don't discuss it.
We're coming up.
I'd have to look at.
The buyback program and we will be doing that over the next couple of months, but I think the consensus and the board is that we've we've done well with what we bought so far and we'll have to just look out in the future and see how far are we think we're going to go but we still believe that our stock is valued.
It really ought to be I think all of us feel that way.
Alright, great. Thank you guys.
Thanks, Brian.
Okay.
Our next question is from Brad Milsap with Piper Sandler. Please proceed with your question.
Oh, Hey, good afternoon.
Hi, Brad Brad Brad.
Hum.
Cory I appreciate that.
Guidance on high single digit loan growth in 2022, and I think I heard you mentioned that.
Potentially that could work higher I mean, you guys put on $300 million X P. P. P. The last few quarters I mean, I think the growth this quarter was <unk>.
8% on annualized but take out PPP.
I mean, it seems you're tracking at a much higher rate than that I'm, just kind of curious you know kind of what sort of maybe has more anchored.
That the high single digit spot is that just conservatism on your got part or is there something else there maybe in terms of payoffs or something else I'm missing.
Where where that number could be a lot higher based on kind of what you're seeing right now.
Well I mean.
If you look at our pipeline I mean, we're still.
We still see a lot of optimism out there, but we're I mean, we're trying to we're back filling with what we've got out there with the loans that would come through there. We've got a really good close rates with the things that we've had.
I mean, we're definitely being conservative I mean, we think that with the team that we have and the new lenders that we brought on.
We're pretty optimistic about where we're gonna go before.
Trying to go into trying to go out there and put out double digit guidance it would be pretty hard for us to do right now.
I mean brand right now this is Curtis Bay or.
The economy is strong here, but it's hard to judge how much of that is just kind of a cap a snap back from Covid and.
We might see some things slow down a little bit in 2002, we don't know, but we do feel pretty confident that we can hit those high single digit numbers at this point, whereas the people, we're bringing in and the activity that we see but right now I don't think I don't think we'd want to go out and predict we can do a whole lot better than that.
Okay, great and with the plan B just to continue to fund that with.
The cash that you have on the balance sheet I suspect that it's.
The growth continues you're not really interested in growing the bond portfolio from here, but just kind of curious how to think about you know sort of the positioning of the balance sheet.
Yeah, we really think we're in a great position, we do have a lot of liquidity on the balance sheet right now we have plenty of capital.
Frankly, we're also seeing some good opportunities from some are already completed and some announced acquisitions out here on our west Texas markets. So we think we're getting some bright spots to grow loans and we have the ability out there with the cash on hand to do it.
Obviously, there might come a time that we're going to get more aggressive at looking at an acquisition to handle to that liquidity, but we continue to see deposit growth out there at the very time, we're still seeing our deposit cost decline. So it's kind of hard to get excited about trying to go out and make any kind of an M&A play on something as long as we've got plenty of our own money to spend.
And this is Cory what are the thing that I would probably add to that is we're we're very pleased with some of the results of the treasury initiatives that we've got out there.
Working with our <unk>.
Commercial customers.
So I think if you look at all those things coming together I mean, we're we.
We think that the funding we're in pretty good shape.
Okay, and maybe one last one for me for Steve maybe.
Just to kind of get the break expense question another way.
It would almost seem.
That.
Your personnel costs might have been closer to flat without the kind of seasonal.
Insurance commissions and then you know maybe some of the occupancy expense was also somewhat seasonal.
Do you think that you know given.
Some of the investments that you're making.
Visa the declining mortgage commissions in 2020 do they they they kind of offset and you can kind of hold the run rate.
Flattish.
Those two kind of swap out for one another.
Yes.
I think we will we will definitely have declined on the mortgage side with the variable expenses. We've got as we believe that that that revenue will come down as that normalizes on the refinance side.
Yes, the things you mentioned with the new lenders added to the personnel cost.
The initiatives, we've talked about with the cloud.
Cloud migration.
We will be some offsets to that.
That is Cory mentioned I think we are we are continuing to look at and other expenses too.
Back on so that's a long way of saying that.
We hope it we hope it's going to be flat, but we know that there is.
And as Curtis mentioned, just that upward pressure on personnel cost not just for us, but I think industry wide and nationwide.
Yeah.
Great. That's helpful really appreciate it thank you guys nice quarter.
Thank you.
We have reached the end of the question and answer session I will now turn the call back over to you Mr. Curtis Griffith for closing remarks.
Thank you operator.
In summary, we certainly had an excellent quarter.
Just to reiterate compared to second quarter of 'twenty. One our net income is up one 5 million, but we had a negative provision of $3 million in the second quarter versus no provision at all in Q3.
We've seen excluding the PPP balance decrease of 20 $52 million, we achieved net loan growth of $177 6 million.
We're getting good production from our lending team, including significant solid business from new hires and we are well on the way to hiring 20, great lenders.
Credit quality generally does continue to improve and economic activity is robust in our markets.
Our mortgage volume is slowing not by much and over time, we expect it will only be 10% to 15% of our net income as our other revenue sources increase are.
Deposits continue to increase even as our cost of funds decline our tangible book value is increasing it's up 16% from third quarter of a year ago in 2020.
We believe that we are on a path to create significant value for all of our stakeholders and summary, I want to thank all of you all of our amazing employees that make that possible and thanks to all of you for joining us on the call today.
Thank you operator, I will turn it back to you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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