Q1 2022 South Plains Financial Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial Inc. First quarter 2022 earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation. The conference will be opened for questions with instructions to follow at that time.
As a reminder, this conference 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.
Thank you operator, and good afternoon, everyone. We appreciate your participation in our first quarter 2022 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 May 10 2022.
Additionally, a slide deck presentation to complement today's discussion is available on the news and events section of our website.
Before we begin let me remind everyone that this call may contain forward looking statements and are subject to a variety of risks uncertainties and other factors that could 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.
All comments made during today's call are subject to the 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 deck presentation.
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 first quarter 2022 results.
Cory will provide an update on our efforts to accelerate loan growth as well as the successes that we're beginning to achieve in many of our markets Steve.
Steve will then conclude with a more detailed review of our Q1 results.
Turning to slide four we reported net income of $14 $3 million or 78 cents per diluted common share rich.
Which compares to net income of $14 $6 million or 71 cents per diluted common share in the fourth quarter of 2021, and $15 2 million or 82 cents per diluted common share in the first quarter of 2021 .
It's important to note that our first quarter results included a positive fair value adjustment on our mortgage servicing rights portfolio and added 19 cents per share and a reserve release equating to nine cents per share both net of tax.
Excluding the impact of these two items, we see core earnings for the first quarter of 2020 to 50 cents per share, which we believe provides a better baseline for the run rate earnings of the company.
During the first quarter, we grew loans, two 6% annualized compared to the fourth quarter of 2021 as.
And as Cory will discuss we experienced the typical softer trends through the fourth and first quarters, which suppress loan growth.
However, underlying loan demand remains strong as we continued to experience solid momentum across all of our markets.
Well look we're benefiting from recent acquisitions by out of state banks, which are creating customer disruption and opening up opportunities to bring new relationships with our clients.
And our Msas of Dallas, Houston, and El Paso economic growth is strong and our recently hired lenders continue to build their portfolios, which we expect to accelerate loan growth as we move through the year.
And we are excited with the progress that we've achieved in the Permian basin as we have invested in our employees infrastructure and operations to position Citibank to gain market share in this very dynamic region.
We also believe that we have an attractive deposit franchise, which continues to demonstrate robust growth and increased $109 million or 13% annualized from the fourth quarter of 2021.
Our cost of deposits remained stable at 23 basis points in the first quarter of 2022, which was consistent with the fourth quarter's level, while noninterest bearing deposits represented 33% our total deposits.
Our deposit franchise will provide the liquidity to fund loan growth in our <unk> Sciences, we continue to work to improve our loan to deposit ratio, which was 71% at the helm.
The first quarter of 2022.
As we put this excess liquidity to work in higher yielding loans, we expect to see increased net interest earnings that will help offset the decline in our mortgage business in this rising interest rate environment.
During the first quarter mortgage banking income excluding the MSR fair value adjustment was approximately 19% of total revenue, which compares to 23% in the fourth quarter of 2021 and 34% in the first quarter of 2021.
We continue to expect mortgage banking income to normalize at approximately 10% to 15% of revenues.
As we continue to grow the bank, we will remain disciplined on credit which is central to our culture.
During the first quarter of 2022, we continued to experience improving credit metrics and our loan portfolio driven by improvements in our hotel and direct energy segments.
As a result, we recorded a negative provision for loan losses of $2 $1 million in the first quarter of 2022 compared to no provision for loan losses in the fourth quarter of 2021.
Turning to capital we remain focused on our capital allocation through our dividend, which has grown over time and strategically utilizing our share repurchase program.
As a result, our board of directors authorized a quarterly dividend of 11 <unk> per share. This past week. This will be our 13th consecutive quarterly dividend and will be paid as of May 16th 2022 to shareholders of record on my second to 'twenty to 'twenty two.
We also repurchased approximately 106000 shares during the first quarter of 2022 under our share repurchase program.
Now, let me turn the call over to Corey.
Thank you Carlos and good afternoon, everyone, starting with our loan portfolio on slide our loans held for investment at the end of the first quarter of 2022 or two for $5 billion, which is an increase of $16 $1 million from the fourth quarter of 2021.
This increase was primarily the result of organic net loan growth of 27 $9 billion, partially offset by a decrease due to SBA forgiveness and repayments up $11.8 million in PPP loans during the first quarter of 2022.
Organic loan growth remained relationship focused and I've heard primarily Atlanta development and construction loans commercial retail loans and consumer loans.
As Charlie noted loan growth is typically soft in the first quarter given seasonality from our AG portfolio, which experiences repayments during the first quarter, we had net repayments of $35 $5 million.
Looking to the second quarter, we also expect to see a large relationship in the energy sector of approximately $46 million payoff as it moves to a nonbank structure.
This has been expected and will be a headwind to second quarter loan growth.
That said.
Underlying loan demand remains robust and we remain confident in our goal of delivering mid to high single digit loan growth for the full year of 2022.
We expect to see an acceleration in the organic loan growth in the second half of the year as we continued to benefit from strong economic growth combined with our newly added lenders continued to bring new relationships to South Lake.
As we've discussed on our prior calls we were adding experienced bankers, who share our lending philosophy credit philosophy and culture across our MSA markets with a focus on Dallas, Houston and El Paso.
Our strategy is to redeploy our excess low cost deposits from our smaller non metropolitan markets into our larger more debt more dynamic living markets, where we have had strong success.
This can clearly be seen in Houston, where we recruited a new market had and have experienced 67% loan growth over the last year.
Likewise, we've experienced 13% loan growth in Dallas over the last year as we continue adding to our lending team.
As a result of our success. We are also expanding our commercial office space and some of our key metro locations given the significant potential that we see to increase our presence in these large and growing markets.
Importantly, we believe we have a competitive advantage given that we can close deals more quickly than our larger competitors, while not sacrificing on underwriting.
We can make rapid decisions or processes are less onerous and we are not cutting corners, we're taking unwarranted credit risk. This provides the foundation to move profitable relationships from our larger competitors as we continue to add to our lending team.
Another market that holds real potential is the Permian basin. The Permian is unique given that it is approximately 12 billion dollar deposit market with no dominant bank in the region. It is a relationship focused market with a significant private banking opportunity combined with C&I and real estate lending since we entered the market over two years ago, we have worked to istar.
Our culture demonstrates how we service our customers as well as Ive radar facilities and technology. We also took the time necessary to install the right market leaders in Midland and Odessa.
We are beginning to see the benefits of these actions and expect to see many more in the months and years ahead.
Over the medium term, we believe we see an opportunity to more than double our loan portfolio in this region as we focus on developing private banking relationships, while also growing our C&I loan portfolio.
Permian Basin is a dynamic market with the south plains and not just because oil has risen sharply in recent months. There is generational wealth in the region that wants to do business with a local bank.
Given that there are only four community banks in Midland and Odessa, we see an opportunity to gain significant share of the market.
Turning to slide seven mortgage loan originations decreased 25% to $235 million in the first quarter of 2022 as compared to the fourth quarter of 2021.
This slowdown has been expected given the rapid rise in interest rates pressuring refinance volumes combined with the record volumes that we've experienced over the last two years.
We continue to manage this business for profitability and are making the best long term decisions for south plains and our shareholders.
As a result, we made the decision in the first quarter to not counter aggressive employment offers for several large mortgage producers in our Dallas area, given our view of the cycle looking forward, we expect originations to begin to stabilize in the second quarter with a seasonal pick up in mortgage man that we typically typically experienced in the spring.
While mortgage originations were lower we did experience a $4 5 million dollar positive fair value adjustment to the company's mortgage servicing rights portfolio. This was due to the rise in interest rates experienced in Q1, which is slow and the prepayment rate of causing a longer estimated life of the portfolio overall, we continue to expect our.
Mortgage banking revenues to decline to approximately 10% to 15% of the total revenues and believe that this will likely occur more quickly than originally expected given the rapid rise in interest rates and the staffing reductions that we had during the first quarter.
Turning to slide eight we generated $23 $7 million of noninterest income in the first quarter of 2022 compared to $22 $9 million in the fourth quarter of 2021.
The increase was primarily due to an increase of $1.2 million in mortgage banking activities revenue as just discussed and an $869000 increase in income from an investment in a small business investment company, which was partially offset by the seasonal decrease of $598000 and income from interest activities.
To conclude we believe we've made good progress through the first quarter positioning South plains for sustained organic loan growth improved profitability and accelerating earnings growth. We continue to add to our lending teams in our MSA markets, which positions us for share gains we.
We have made necessary investments in our facilities infrastructure and people in the Permian basin to achieve sustainable long term growth there for south plains and not growth just attributable to the rise in oil prices.
Lastly, our home market of Lubbock continues to see strong population growth as well as disruption from recent bank acquisitions, which we believe will present further market share gain opportunities taken together, we remain confident in our outlook for mid to high single digit loan growth in 2022, I would now like to turn the call over to Steve.
Thank you Cory starting on slide 10, net interest income was $29 $9 million for the first quarter of 2022 as compared to $31 $4 million for the fourth quarter of 2021.
The decrease since the fourth quarter of 2021 was due primarily to a decline of $1 $7 million in loan interest income as a result of a decrease of four basis points of yield recognized in the fourth quarter of 2021 on several large loan pay offs.
A decline of $388000 in interest and fees on PPP loans as the amount of PPP loan forgiveness payments.
Receipts fell 47%.
And having two fewer days in the quarter.
Looking forward, we believe that we're well positioned for our net interest income to benefit as we grow our loan portfolio and benefit from the anticipated rise in interest rates through the year.
We recognized $667000 in P. P. P fee income as an adjustment to interest income.
Which included accelerated income on P. P. P loans forgiven by the SBA during the first quarter of 2022.
At March 31, 2022, the company had $1 $3 million in deferred P. P. P fees. The majority of which are expected to be recognized as P. P. P loans continued to be forgiven by the SBA or repaid over the next several quarters.
Our net interest margin was 333% in the first quarter of 2022 as compared to three 5% in the fourth quarter of 2021.
The contraction in our net interest margin was primarily due to the 10 basis point decline in our average yield on loans, which included the payoff fees and higher P. P. P fees in the prior quarter.
Additionally, our $86 million rise in average deposits in the first quarter of 2022 pressured our NIM by a further eight basis points.
As Curtis mentioned, our average cost of deposits remained consistent at 23 basis points in Q1.
As the fed is expected to continue to raise interest rates, we plan to lag our increase in deposit rates.
Continuing to slide 11.
<unk> increased $108 $9 million in Q1 to 345 billion from December 30, <unk> 2021 .
This increase was primarily a result of organic growth as well as existing customers generally maintained higher liquidity due to perceived uncertainty in the economy.
We ended the first quarter of 2022 with total noninterest bearing deposits of $1.13 billion or 33% of total deposits.
Turning to slide 12, we continue to believe that our loan portfolio remains appropriately reserved as our allowance to total loans was 162% at March 31, 2022, as compared to $1 seven 3% at December 31, 2021, and hardest touched on our reserve release.
During Q1 earlier.
Looking forward, we will continue to monitor our reserved for future provisions or releases.
Skipping ahead to slide 15, our noninterest expense was $37 $9 million in the first quarter of 2022 as compared to $36 $1 million in the fourth quarter 2021.
The increase was primarily due to an increase of $1 $2 million in personnel expense due to higher costs for new hires in commercial lending and as part of our data analytics and cloud projects stock based compensation and annual salary adjustments, partially offset by a decrease in commissions.
Related to our decline in mortgage loan originations.
Additionally, there was a $480000 increase in legal expense and a $362000 loss on fixed asset disposals during the first quarter of 2022.
Our efficiency ratio was 73% in the first quarter of 2022 as compared to 66, 1% in the fourth quarter of 2021.
This was expected and largely attributable to the slowdown in our mortgage banking activity and increased personnel costs.
Moving ahead to slide 17, we remain well capitalized with tangible common equity to tangible assets of nine point, 11%.
At the end of the first quarter of 2022, a decline from $9 eight 5% at the end of the fourth quarter of 2021. The decline was mainly driven by a $30 million change in the fair value of our available for sale securities and cash flow hedges net of tax.
The change was caused by the large increase in interest rates experienced in Q1, and which reduced our tangible book value per share by $1 70.
I will now turn the call back to Curtis for concluding remarks.
Thank you Steve to conclude I am pleased with our first quarter results as we continue to position the company for steady growth and improved profitability.
We are recruiting experienced lenders to our MSA markets have transformed our operations in the Permian basin and are benefiting from strong economic growth in our home market of Lubbock and all across Texas.
We are benefiting from strong underlying loan demand and I have confidence we will achieve our goal of mid to high single digit loan growth in 2022.
Additionally, as the fed raises interest rates, we believe our deposit costs will lag the rising rates, which will further contribute to margin expansion.
Lastly, the credit quality of our loan portfolio has continued to improve through the first quarter and positioned our team to release a portion of our reserves.
Our results and the accomplishments of our outstanding employees provide us with optimism for the future. Thank.
Thank you again for your time today operator, please open the line for any questions.
At this time, we'll be conducting a question and answer session. If you'd 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'd like to remove your question from the queue.
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One moment, please while we poll for questions.
Our first question is from Brady Gailey with K B W. Please proceed with your question.
Hey, Thanks, good afternoon guys.
I'm ready.
Why don't we start with an update on where we are on the lender hiring front I think last quarter. You guys said you were about halfway through you know hiring the planned 20 lenders maybe last quarter you about Tim through but you know as you said, there's a lot of.
Acacia and Oh.
They're locally in Lubbock from some perhaps.
Perhaps some M&A, maybe just an update on how that's going and how the disruption may.
I was playing out if they would potentially increase the plans beyond the 'twenty.
Hey, Brady. This is Cory so I don't know that we're necessarily trying to increase the plant's although we're consistently going to be looking for good hires that meet our credit culture and and.
And the philosophy or the way, we do it but here's the good thing we think we're approaching about 75%.
Success on where we've come on the lenders.
Recall back in the last time, we had a conversation you know step really slow down at the end of the year. So that just that kind of as people were waiting for bonuses and thanks to kind of settle back out and it's kind of open back up for us and a lot of the ones that we've been cultivating during that timeframe are starting to come to fruition right now.
Alright, and then I know, we've talked about the expense base growing at kind of a low to mid single digit level.
This year, but I know you.
Inflation continues to pick up so any update on how you think expense growth will pay it off this year.
Yeah, Brian This is Steve.
Yeah, we did see a little bit.
Probably a little bit larger increases on the on the salary side than we would have we would've hoped initially, but you know with with inflation in wages.
With with mortgage being a big part of it.
That was somewhat of a slowdown in.
In the mortgage area, we should see some benefit back to us Oh on on the expense side.
With commission expenses and then.
Just some of the other other line items, there that would that would lower that number.
So we're still.
Still on track Q1 was maybe just a little bit higher.
<unk> was still some of the higher mortgage numbers in there.
Now this Kurdish spray and yeah, I don't want to say Q1 was not total anomaly, but we certainly did have a few things in there that are.
Probably won't be repeated at those levels. We did have some kind of stacked up legal expenses that all got paid during that quarter.
Related to various projects.
And as Steve indicated we did have a kind of a pay along a good bit of mortgage activity gross commissions did get paid out and.
As the mortgage activity slowed.
That won't be repeated that lowest level certainly in Q2, So I think you'll see us kind of get back on track for that inflation is very real low and everybody's going to have to be competitive out there.
What they're going to do with the personnel and the way they say no inflationary.
Inflationary pressures on our suppliers as well.
Anybody buys out there as we all know the word is getting pushed up a little bit so we hope that.
We are seeing the peak on that in the next few weeks. Some people seem to think we are and maybe this Scott Campbell at least moderate and not continue to say this.
7% levels.
The increase is just across the board.
Okay.
Right.
Lastly for me is just on the reserve level.
It's been coming down, but you're still north of 160 basis points.
Your allowance which is still.
A pretty healthy level.
Do you think we continue to see that come down over the course here as things improve or do you start to pick up more of a recessionary scenario and hold that stable.
Well, we had some really detailed discussion about that at all.
Last board meeting in fact.
There's a lot of uncertainty out there in the world.
We continue to see new variance on Covid and even unfortunately, it doesn't seem to be a serious.
Some of the earlier versions, but it's still happening and I don't think anybody knows the full effect of what's going on over in Europe , you crying and how that affects our micro levels across the whole world economy, and we've got the fed is pushing rates up quite clearly and that will have some impact on borrowers as it tightens up.
Cash flow for them as.
And so those rates start moving up.
So all of those uncertainties Amyris, we just don't want to be cautious as.
As we've said all along we're going to follow the math.
It's very good at running my numbers on it and we're going to try to abide by what our models jealous.
With some good qualitative adjustments thrown in there as well, but are we probably it's still a little on the high side, where we might be.
But I.
I think where we're going very slow and very cautiously on pulling money out and I think you'll see that trend continue Brady.
Brady. This is Cory we're always going to be conservative and we're always going to use that lands in everything we do the one good thing depending on the other side of it is if you look at our pipelines and where we're going in the future. Our pipelines are strong and you may see some reduction in the percentage just as it has the effect of that as long as asset quality continues to improve like it is.
Okay, great. Thanks, guys.
Thanks, Brian .
Our next question is from Brad Milsap with Piper Sandler. Please proceed with your question.
Hey, good afternoon.
Hi, Brad.
I appreciate you guys taking my questions.
Just kind of curious if you could maybe talk about the NIM a little bit.
I know there are a lot of moving parts with the.
The liquidity.
And then some some payoffs that you expect in the second quarter, but do you think you're getting close.
To a bottom in the NIM this quarter and you can start to move.
Move higher with a you know maybe with what the Fed's doing I know historically, you guys, maybe a little bit more neutral.
Maybe there's been some but anyway.
Any color you could provide there would greatly appreciate it.
Yes sure Brad This is Steve I would say you know, we're we're hopeful that that has gotten gotten toward the bottom.
We do continue to to grow loans.
But theres still you know a lot of competition on on loans and primarily on on rates. So.
You know where.
We're having we're having to be competitive on that a little bit. So we're still seeing pressure on that side and we did you know we have redeployed some of the liquidity.
Into securities.
Securities as well that are that are at higher rates.
That should help us.
Offset some of the pressure, where we would see on the loan side, but yeah, I mean generally it.
And in a rates up environment. We are you know we are slightly asset sensitive and so that is should be helpful to us overall. So we are hopeful that we'll see that kind of that bottoming out.
That deposit growth, we want to still see deposit growth, but that may not be at the same rate that we've seen that growth over the last year two years.
Brian If you look at this is Cory and if you look at the amount of liquidity that we've got I mean, we've never hit from the fact that we're gonna lag right Pat.
We just are we think that we think by the time, we kind of work through the transition with some of this movement and theirs and unfortunately, there's a lot of competitive pressures out there are people still trying to get at that price on what it was like before the rate increases and we're just having to adjust out of that.
We don't necessarily agree with and I.
I don't know if we're at the very bottom, but I don't think we're far off I think it's hard to around the right way.
Two I think we'll start seeing a probably during Q2 might be.
Dan will start easing back up a bit for the reasons corium staying for mentioning that there is also a factor in there as we've worked through some of these larger pretty complex real estate transactions that we've been putting on the books in Q1.
Many of those were at rates that were negotiated are even weeks earlier than women alone actually gets funded so we are going to live up to what we felt at the customer and now we are getting to make some adjustments in the deals. We're looking at today as you see some of those come on other books later on in Q2, some of those are going to be.
The instrument prudent levels the competitive pressures are still real strong and we're going to pass on a few things.
So I think we're just still making some awfully cheap pricing out there and we're beginning to work hours are up a bit and I think he will will begin to see them start creeping up during during Q2 and hopefully upper tract commentary the rest of the year, we'd love to get it back up to our more historic levels.
Great. That's helpful and just on that topic, where are you seeing new loan yields come on the books I think that the core yield was $4 74.
In the quarter.
I assume it's competitive is it somewhere south of there, but just trying to get a sense of how much more pressure you could see and can you remind me.
The percentage of the loans that that reprice.
Fairly short order with within your move in fed funds or LIBOR.
Yes, so I'll start first and I Should've mentioned it earlier in the in the deck we.
We did a we did out of our graph on slide number six.
That's got some information on on fixed versus variable rate about that 40, 49, almost 50% of our loans are.
Our our fixed but we get.
17.
17% would reprice immediately with another.
9% or so that would that will mature or reprice in the next 12 months.
We had a lot of what we're trying to do is we're trying to avoid as much of the fixed rate as we can and try to get back more to a floating version.
Because this is where you wanna be flooding when things are headed back up and while we were probably a little bit more competitive in pricing, which are spread is not quite as good as we'd like to have its kind of like the devil you know through the whole thing. We are that's what we're focused on right now is making sure that we can maintain whatever spread that we agreed to throughout the life of alone and not and not wait.
In a few quarters and start regretting some decisions.
Got it sorry, Steve I see that now I apologize for that and then maybe just final two questions for me.
Would you guys anticipate sort of being active in a similar manner in the buyback to the extent the stock stays here and then Curtis in your initial comments you kind of mentioned run rate earnings.
It sounds like you're excluding the MSR and then the SBC gain was there anything else in there that that you guys are sort of taking out to get to that 50% number.
Now that's really that's really what it out because it was more kind of one timers right there.
But.
Uh huh.
Yeah.
Got it.
We're focusing.
I mean, a lot of the things that we're trying to do is we look at that as well.
We know we might spend a little bit of money right now, but we're everything we're trying to spend money on things that help us make money in the near term.
So that's great any any any thoughts on the buyback.
Well first of all we want.
We continue.
As we've said all along we think at these levels.
<unk> is a good investment so we will continue to spend some money doing that.
As you can see the track on it you can probably tell that sometimes we bought more than others, but we still think there's good value out there and I would expect unless we see a significant upturn in the end.
Hi, broader market that will probably still be in the market and buying back some of our own stock.
Great. Thank you guys I appreciate it.
Especially I think sprint.
Yeah.
We have reached the end of the question and answer session and I'll now turn the call over to Curtis Griffith for closing remarks.
Thanks, operator, and we appreciate everybody being on the call today and appreciate the questions. We.
We used to.
We have some interesting challenges ahead in a very interesting environment, but we do think that we're positioning the company well for additional growth and additional profitability and we're very thankful for all of you that are continue to invest in our stock and those that do have some consideration for it.
Do you have any questions. Please give us call, we'd love to visit about it. Thanks.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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