Q2 2023 South Plains Financial Inc Earnings Call
Yes.
Good afternoon, ladies and gentlemen, and welcome to the South Plains financial second quarter 2023 earnings Conference call. During today's presentation. All parties will be in a listen only mode. Following the presentation. The conference will be opened for questions with instructions to follow at that time.
Mind you. This conference call is being recorded I would now like to turn the call over to Mr. Steve Crockett, Chief Financial Officer, and Treasurer of South Plains Financial. Please go ahead Sir.
Thank you operator, and good afternoon, everyone. We appreciate your participation in our second quarter 2023 earnings Conference call with me here today are Curtis Griffith, our chairman and Chief Executive Officer, Corey Newsome, our President and Brent Bates, our Chief Credit Officer.
Slide deck presentation to complement today's discussion is available on the news and events section of our website <unk> Dot bank.
Before we begin I'd like to remind everyone that this call may contain forward looking statements and are subject to a variety of risks uncertainties and other factors that could cause actual results to differ materially from those anticipated future results.
Please see our safe Harbor statement in our earnings press release that was issued this afternoon and on slide two of the slide deck presentation.
All comments made during today's call are subject to those safe Harbor statements.
Any forward looking statements presented herein are made only as of today's date and we do not undertake any duty to update such forward looking statements, except as required by law.
Additionally, during today's call we may discuss certain non-GAAP measures, which we believe are useful in evaluating our performance a reconciliation of these non-GAAP measures to the most comparable GAAP measures can also be found at the end of our earnings release and beginning on slide 23 of the slide deck presentation.
Let me hand, it over to you.
Thank you, Steve and good afternoon.
On today's call I'll briefly review the highlights of our second quarter 2023 results as well as provide an update on our capital allocation priorities. Following the sale of Widmer, which closed in April .
He will discuss our loan portfolio in more detail and how we continue to benefit from competitor mergers in our key markets.
Steve will then conclude with a more detailed review of our financial results.
To start I'm very pleased with our second quarter results highlight the strength of our culture and the commitment that our employees have to our customers and to our company, especially in such a challenging environment for our industry.
We've exited the second quarter in a strong financial position and I'd like to thank our employees for their hard work, which can clearly be seen in our results once again this quarter.
Turning to today's call there were six key points that I hope you will take away.
First our deposits remained stable through the second quarter further demonstrating the strength of our community based deposit franchise.
Second despite the continued rising market interest rate environment, our net interest margin held steady from march's level is higher loan yields are offsetting the rise in our cost of funds.
Third our organic loan growth was very strong in the second quarter as we benefited from a robust loan pipeline combined with lower competition across our markets.
That said, we continue to be selective in the New Orleans that we found as we maintain our underwriting discipline.
Fourth the credit profile of our loan portfolio improved through the second quarter, but we did have one nonaccrual with dish, which I will touch on in more detail in a moment.
Fifth we further built capital this quarter through our earnings and the sale of Lindmark as our tier one capital to average assets ratio increased to 11, 7%.
Lastly, we strategically sold a portion of our investment securities portfolio in the quarter, which we believe to be advantageous given the gain we recorded from the win Mark sale combined with the yield improvement that we were able to achieve as we reinvested the securities sale proceeds into new loans.
Turning to our results in more detail on slide four of our earnings presentation. We delivered net income of 20 $917 million or $1.71 diluted earnings per share as compared to $9.2 million or 53 cents diluted earnings per share for the first quarter of 2023.
This compares to net income of $15.9 billion or 88 cents per diluted common share in the year ago second quarter.
As we discussed on our first quarter call. We completed the sale of landmark Citibank's wholly owned insurance subsidiary for $35.5 million April in an all cash transaction.
The after tax sale proceeds west transaction expenses incentive compensation triggered by the transaction and the realized loss on the sale of our investment securities. During the second quarter resulted in $1.16 cents per share of one time net income in the second quarter.
Putting these items, we earned <unk> 55 per share.
Given the large gain that we recorded we made the strategic decision to sell $56 million of investment securities from our portfolio, which resulted in a realized loss of $3 $4 million.
We believe this was a tax efficient transaction will boost our earnings in future periods given that the securities. We sold were yielding approximately two 7% and we reinvested the proceeds in loans that are yielding more than 7% in the second quarter Dan.
The incremental <unk> com will help replace the loss of future net income from but when Mark operations.
Turning to our loan portfolio, we grew loans, 6.8% in the second quarter as we continued to experience healthy economic growth combined with customer dislocation on many of our markets from recent competitor mergers.
Its really we are seeing larger competitors pull back in some markets, which are allowing our team to bring new relationships to the bank as Corey will touch on in more detail.
We recorded a provision for credit losses of three $7 million in the second quarter as compared to $1 million in the first quarter of 2023.
The provision was primarily for the strong loan growth that we delivered in the quarter and a $1.3 million increase in specific reserves related to one previously classified credit relationship.
$13.3 million it was placed on nonaccrual in my 2023.
This credit was for a business that is currently in borrower directed liquidation and from which we expect to see larger repayments starting in the third quarter of 2023.
While there continues to be payment performance, we placed the relationship on nonaccrual and recorded a specific reserve given that the business is no longer a going concern.
So Steve will touch on in more detail the overall credit quality of our portfolio continued to improve through the second quarter.
Of note our budget and consensus estimates were for $1.35 million of provision expense in the second quarter.
I recorded provision expense was approximately 14 cents per share above expectations.
As a result, we believe the run rate earnings of the bank. Excluding all one time items and the increased provision was 69 cents per share in the second quarter, which bodes well for the second half of the year, because we will fully benefit from the second quarter as loan growth and improved loan yields.
We grew deposits $66 $5 million or one 9% to $357 billion at June 32023, as compared to the end of the first quarter 2023.
Our deposit growth was primarily due to an $81 million increase in broker deposits, partially offset by a 67 million dollar reduction in public funds, which had grown $118 million during the prior quarter.
We are making a concerted effort to manage overall deposit levels and related interest costs.
We will continue to build out our deposit gathering capabilities as we strive to grow core deposits and manage our cost of funds.
The stability of our deposit franchise and strong liquidity position can further be seen on slide five which also highlights the competitive position of south plains holes.
At quarter end, 81% of our deposits were in our rural markets with only 19% of our major metropolitan markets of Dallas, Houston and El Paso.
Additionally, our average deposit account balance is approximately $36000 in Illinois, and estimated 16% of our total deposits are uninsured or collateralized.
We believe we also ended the second quarter in a strong liquidity position with $182 billion of untapped borrowing capacity.
We have one point a $1 billion of availability from the federal home loan bank of Dallas $612 million of availability from the federal reserve discount window and $200 million of capacity from the federal Reserve's Bank funding program.
We have ample capital to take advantage of growth opportunities, both organic and otherwise as they present themselves.
Given our strong capital and liquidity position, our board of directors authorized a $15 million stock repurchase program in May and we bought back approximately 113000 shares during the second quarter for $2.6 million.
We continue to believe that our shares are trading below intrinsic value and do not reflect our strong results and the opportunities that we see to further grow the bank.
That said, we will be cautious with our capital given the uncertain economic environment combined with the dislocation in the banking sector.
We will be patient and continue to review a broad range of options to determine the best uses for the capital generated from the wind Mark sale.
As part of our capital allocation, returning a steady stream of income to our shareholders through our quarterly dividend has been our focus since going public over four years ago, and our board of directors again authorized a 13 cents per share quarterly dividend as announced last week.
This will be our 17th consecutive quarterly dividend to be paid on August 14, 2023 for shareholders of record on July 31 2023.
To conclude we are successfully navigating what is a challenging environment and remain cautiously optimistic looking into the second half of the year.
Economic growth is holding remarkably steady and our markets well unemployment remains low.
We will maintain our capital as we look to take advantage of opportunities in the market and continue to conservatively grow the bank now let me turn the call over to Corey.
Thanks, Curtis and good afternoon, everyone starting on slide six loans held for investment increased during the second quarter about $194 million or six 8% compared to the first quarter of 2023.
And was broad based across both of our markets and industry sectors highlighted by organic loan growth in residential mortgage commercial real estate and energy.
We were fortunate fortunate to enter the second quarter with a strong loan pipeline, which contributed to this growth. Additionally, the competitive environment continue to ease as we benefited from the customer dislocation created by a competitor mergers as well as from a reduction in credit availability from several competitors through the quarter.
We believe this is an opportunity to bring high quality long term customer relationships to south plains.
While the competitive environment has improved.
We are maintaining our underwriting standards as we will not sacrifice credit quality for growth, we remain focused on finding high quality loans with good risk and return profile.
Our loan yield was 594% in the second quarter, which compares to $5 seven 8% in the first quarter of 2023.
We continued to proactively price new loans to account for a higher market interest rate environment, which is contributing to rising funding costs.
We continue to believe that loan yields are beginning to peak and remain focused on managing our deposit growth and funding cost to mitigate margin pressure as we look to the second half of the year.
It then to slide eight we grew our loan portfolio by $65 million or seven 3% and our major metropolitan markets of Dallas, Houston and El Paso.
As compared to the first quarter of 2023, the commercial lenders that we have added in these markets continue to grow their loan portfolios by bringing new customer relationships to the bank.
We were watching the Texas economy closely and we'll be cautious as we grow with a focus on expenses.
Permian Basin is another market, we were pleased with this quarter as we experienced an increase in loan demand.
Since completing our acquisition with West, Texas State Bank in 2019, we've been investing in our facilities people and technology in order to tap into the strong potential that exist in this region for both lending and deposit gathering perspective.
It has taken time and the pandemic certainly set us back, but our operations are running well and we were beginning to take share. We believe that we are in the early stages of our growth in the Permian.
Taken together, we are pleased with our loan growth for the first six months of the year, but expect loan growth to moderate given the impact of higher interest rates on loan demand. Therefore, we expect full year loan growth to be in the high single digit to low double digit range, which is meaningfully above our prior guidance of low single digit growth for the full year of 2023.
Skipping ahead to slide 10, we have approximately $1 $1 billion of commercial real estate exposure in our loan portfolio at quarter end, which represented 36, 5% of our total loan portfolio.
Our office exposure represented 16, 8% of our CRE portfolio and six 1% of our total loan portfolio at the end of the second quarter.
Of note, 29% of our office exposure is owner occupied and medical office is comprised 11% of our office exposure.
Our office portfolio is performing well and our largest credits have strong guarantors, we continue to stress test the individual credits in our portfolio for challenges as Steve will discuss the overall credit quality of our loan portfolio improved through the second quarter, which provides confidence that the economy were to slow.
As I discussed on our first quarter's earnings call, we were strategically enhancing our treasury management and liquidity team as we focus on growing deposits. The focus is on how we deliver not just adding experience. This includes enhancing the level of education for our team, but all of those types of treasury products. If we want to win the business, we have to be better than our competition and providing solutions.
<unk> and identifying needs.
We look to further build our core deposit franchise as we focus on relationships for the long term.
We believe this initiative can have a meaningful impact on our deposit base and to a lesser degree our fee income over the medium term.
Turning to slide 11, our indirect auto loan portfolio decreased by $2 $4 billion to 297 $9 million in the second quarter as compared to the end of the first quarter 2023.
Our strategy this year has been to level out or modestly reduce the indirect auto loan portfolio over time, while replacing some of the run off with higher yielding loans with strong credit profiles.
We're also maintaining a disciplined approach to underwriting is 62% of the indirect auto loan portfolio was originated with a credit score of 719 or better which is super Prime and 28% of the portfolio was originated with a credit score of 667 19, which is prime.
The strong credit profile position the portfolio for resilience across varying economic cycles.
Turning to slide 12, we generated $47 $1 billion of noninterest income in the second quarter, which included $33 5 million dollar gain from the seller windler.
Excluding this gain we generated $13 $6 billion of noninterest income, which compares to $10 $7 million in the first quarter of 2023.
The increase was primarily due to $3 million increase in mortgage banking activities revenue, partially offset by a reduction of $1 $4 million in income from insurance activities do the Selic landmarks during the second quarter mortgage loan originations increased 46 million to $132 million as compared to 80.
$6 million.
In the first quarter of 'twenty twenty-three given the normal pickup from the spring selling season. Additionally, there was a write up of $400000 in the fair value of our mortgage servicing rights portfolio in the second quarter as compared to $2 million right down in the first quarter of 2023, given the rise in market interest rates.
Our secondary mortgage origination division, which excludes mortgage servicing activities was breakeven in the second quarter looking forward, we will remain in the mortgage business as long as it is profitable and drive incremental business through cross selling.
For the second quarter noninterest income excluding the one time gain for when Mark was 28% of bank revenues as compared to 24% in the first quarter of 2023.
To conclude we delivered strong results through the second quarter, and we believe we remain well positioned for the current environment. We are strategically taking market share given the customer dislocation that is occurring in our markets and are always looking to add talented lenders, where it makes sense. We will continue to focus on driving organic deposit growth while mitigating.
<unk> pressure as we strive to grow the earnings power of the bank I will now turn the call over to Steve.
Thanks Corey.
Starting on slide 14, net interest income was $34 $6 million for the second quarter as compared to $34 $3 million for the first quarter of 2023.
Modest increase was primarily the result of a $3 $4 million increase in interest income due to higher average loan balances and loan yields largely offset by a $3 $1 million increase in interest expense due to the rise in short term interest rates, our net interest margin calculated on a tax equivalent basis.
<unk> was $3 six 5% in the second quarter as compared to $3 seven 5% in the first quarter of 2023.
Our NIM was impacted by a 33 basis point increase in our cost of deposits in the second quarter as compared to the first quarter of 2023.
This was partially offset by our organic loan growth combined with a corresponding increase in our loan yields up 16 basis points as compared to the first quarter of 2023 <unk>.
Accordingly, our NIM dropped 15 basis points in the month of March 2023 to $3 six 5% and has held steady through the second quarter.
We remain focused on managing our profitability in this more challenging environment.
Our average cost of deposits was 169 basis points in the second quarter, an increase from 136 basis points in the first quarter of 2023.
Given the rising interest rate environment through the year, we've had to be proactive in maintaining deposit relationships, which has led to the rise in our funding cost.
Importantly, we have continued to see organic core deposit growth, while not having to rely on time deposits as outlined on slide 15.
During the second quarter, our deposit mix was relatively stable as non interest bearing deposits decreased slightly to 38% of total deposits as compared to 31, 7% of total deposits in the first quarter 2023.
Turning to slide 16, we continue to believe that our loan portfolio remains appropriately reserved.
Ratio of allowance for credit losses to total loans was 145% at June 32023, as compared to 1.42% at March 31 2023.
As Curtis touched on earlier, we recorded a provision for credit losses of $3 $7 million in the second quarter.
The larger provision was largely due to our organic loan growth in the corner and $1.3 million in specific reserves attributable to one previously classified credit relationships totaling $13 $3 million that was placed on non accrual and may 2023.
Due to the relationship being placed on nonaccrual or nonperforming assets to total assets ratio increased 51 basis points in the second quarter and 19 basis points in the first quarter of 2023.
That said classified loans declined approximately $3 million during the second quarter to $68 million from $71 million at March 31, 2023.
Further our classified relationship with $3 $2 million in nonperforming loans paid off in full the first week of July 2023.
Nevertheless, future economic conditions remain uncertain due to the continued rising market interest rate environment persistent inflation levels that are impacting consumers and businesses in the United States and the recent dislocations in the banking sector, which may make additional provision for credit losses necessary in few.
Periods.
Keeping ahead to slide 18, our noninterest expense was $40 $5 million in the second quarter as compared to $32 $4 million in the first quarter of 2023.
The increase was primarily due to $4 $5 million of transaction expenses and related incentive based compensation in the wind market transaction and the $3 $4 million loss on the sale of securities.
As a result, we see our core noninterest expense.
It's $32 $6 million for the second quarter, and we do not expect additional expenses related to the transaction in future quarters.
Importantly, we continue to manage our personnel expense by implementing deficiencies and closely managing personnel based on the activity in our operations, which has allowed us to manage wage inflation across the bank as we adapt to the current market.
Looking to the third quarter of 2023 and the year ahead.
We expect noninterest expense to be flat or slightly increase based on continued rising costs.
That said, we will keep looking for offsets to manage noninterest expense as we continued to selectively add talent to our team.
Moving ahead to slide 20, we remain well capitalized with tangible common equity to tangible assets of $8, 96% at the end of the second quarter, an increase from $8 five 4% at the end of the first quarter of 2023.
The increase was driven by $27 $5 million and net income after dividends paid.
Really offset by $2 $6 million in share repurchases.
Tangible book value per share increased by $1 63.
$21.82 during the second quarter.
Let me turn the call back to Curtis for concluding remarks. Thank.
Thank you stage to conclude I am very proud of our results through the second quarter as we continue to successfully navigate a challenging environment and position South plains for the future.
During the quarter, we grew loans and deposits, while maintaining our profitability in spite of turmoil in the banking industry in March which is a testament to the franchise value of South plains.
Additionally, the sale of a wind Mark added capital to our balance sheet for growth, while also enabling us to strategically sell a portion of our investment securities portfolio in a tax advantage right, which we believe has further improved the earnings power of the bank.
We will continue to look for opportunities to deploy capital to further enhance the earnings power of the bank as we strive to create value for our shareholders. Thank you again for your time today operator, please open the line for any questions.
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 queue for participants using speaker equipment. It may be necessary to pick up your hats.
Before pressing the star keys.
Your first question comes from Brady Gailey with <unk>. Please go ahead.
Hey, Thanks, good afternoon guys.
That's right.
Yes.
But maybe just a little more color on the 13 million dollar MTA, what what type of business is that and what what happened there.
Well this is Corey Grady so that's the C&I business.
Color and what are the things that kind of helps you would pick up as when we talked about this ben and in our script about it being a borrower directed liquidation you got a guy that's been.
And a lot of different businesses and a lot of different industry. If he got he got into heat.
We expanded into kind of a related type business.
Didn't really work out like you wanted it to.
So he's got his own discretion made the decision to self liquidate kind of shut it down it sounds like one eight.
We were always going to account for our staff appropriately but.
This guy is very strong that we're a strong balance sheet a lot of income from other businesses and we even have those other businesses that actually guarantee this debt. So it just we kind of got caught in the window that we needed to account for it appropriately.
Feel pretty good about it.
Okay Alright.
Then when you talk about expenses being flat to slightly up or are you basing that off of kind of the second quarter core run rate of that $32 6 million of that is that what you're basing that off of.
Yes. This is Steve that's that's correct. That's that's what we're looking at after we kind of normalize that for those for the transaction cost and then additional expenses so right around that 32 and a half million.
Yeah.
Alright, and then I mean loan growth was.
Incredible this quarter was 27% linked quarter annualized, but maybe just a little more color on you know kind of what drove that level of loan growth.
Yeah, I'll kick it off and let Brent kind of cleaning up on this one.
We when we went into the quarter with a good pipeline I mean, you know we've we've talked about this for a long time that.
With our team in place the way, we have it and opportunities to do.
They've got good relationships I mean, if you look at some of the different markets. We're in and some of the disruption. That's happened I mean, it's just really worked but I mean, we've been very conservative and I mean, we walked away from a lot of stuff that we could've done.
It just didn't want to we've really cherry picked it Brent Yeah, we had we pulled a lot through the pipeline in the second quarter.
You know growth centered.
And industrial storage you'd have some multifamily.
And some single family owner occupied non owner occupied growth there as well as energy.
It was a mix between the south point inside of the company on them and the more metro markets.
So we had a pretty good blend of a mix and we still have a pipeline of fundings on our construction book that are what we anticipate to continue near term that's kind of going to be a tailwind to that growth and attitude for sure in the second quarter.
I think our pay downs were a little lighter than what we thought they were going to be in the second quarter, so that kind of attributed to it.
Talked about that last quarter, but.
But overall still feel really good about it we we pulled a lot through this quarter.
Alright, and then finally for me the margin was down about 10 basis points linked quarter, but maybe your outlook on how the margin should trend in the back half of this year.
Yeah, So I mean, where NIM NIM held steady through the quarter, we kind of.
Looked at where we not for them for the quarter of March but the month of March we were right about that same level three $3 65.
We were fortunate and stay stayed pretty consistent.
During the second quarter at that level I mean, it's it's it's a challenge every.
Every day so.
They are still competitive.
She was on pricing on deposits and so we've got a we've got a face to face that and so you know some some compression.
In in them.
He is out there, we just hope to minimize that as much as much as we can.
This is Cory I think I think our new pricing on our loans to funding and stuff that we're getting we will continue to help hopefully keep that as flat as possible.
Yeah Brady this is Curtis and.
Agree with what they said.
We are going to get some benefit from the loans that we're putting on the books now.
I'm sure you're going to have a full quarter of a lot of those we did.
We noted sell off some of the wider yielding securities and brochure now largely funded back up and some are ones, where we're putting on the books and what's the other steps to when the pipeline is still in the startup stage of construction, where we're going to be providing funding now that the customers basically put it in their equity.
We're going to continue to push up the yield on loans. It's just a question of can we stay up with the increase in deposit costs, because we do know hows. It cost are moving up some more work to do all we can but keep it down and we think that deposit mix. We have is one that lends itself to maybe not reacting as fast as sometimes deposit stay but it's going.
To be a challenge and I would say, it's roughly a little more NIM compression, we're gonna Harlan.
As firms, we can but unexpected tightening up a level in both third and fourth quarter.
Okay got it thank you guys.
Thanks, Brendon Frey.
Your next question comes from Brett Robinson with Hockey Group. Please go ahead.
Hey, good afternoon everybody.
Thanks for the question what is it.
Wanted to wanted to go back just to the deposits and the cost of deposits you know only 1.69%.
You know on average in two Q is they're not carters of Korea is there not any concern that there might be a catch up quarter in terms of betas and then could you just give us any color around what.
Ray you added those broker deposits on during <unk>.
Well I mean.
I really don't unless you see some big movement in rate I don't see it catch up poor coming at all.
I do think that we've had.
We we made some moves early in the year and late last year to try to take care of some of our our.
I'm gonna like interest bearing accounts that we felt like they were a little bit below where they should be for market.
But no I.
I feel pretty good about the mix and what we're actually doing I mean, I think a lot of it goes back to the type of deposits, we had especially in some of the rural markets and that's what we're so proud of it.
I don't really I don't really see a catch up for comment.
Save the passing on the yeah, I mean, I'll I'll, just I'll just add to that just a little bit I mean as far as brokered you know that that was added towards the end of the quarter and so you know there wasn't necessarily a full <unk>.
Definitely not a full quarter of that in I mean, it's it is that it is at the upper end of the.
All of the cost range there you know.
Tied to fed funds and so it is it is it is a costlier deposit so that that will you know that that will increase our our deposit cost during the quarter, but it is Curtis said.
On the flip side, we've got we've got the loans that those loans were not funded for the entire quarters, we'll have a full quarter's worth of earnings on those on those new loans that have been.
You know that are being put on it.
Seven seven plus eight 8%.
And different cases, so to help offset that cost.
That's right.
Let's hear from anybody else, but I mean, we were using the brokered as it is a way to manage our overall cost.
And we think it's working capital is that for years.
What we've been able to do with that.
It's not inexpensive, but we think it's better than trying to run a whole bunch of CD specials out there and that's going to take.
And in our markets, that's going to take something north of 5%, if you're really going after new money.
To get that in and so we're trying to do all we can still hold ours are more in line a little over 11, and if you can see our deposit mix. We just don't have that merchant sea days. So we're not having to deal with a bunch of Cds, particularly jumbo Cds maturing that we've got a big you know really out there with high rates or are there going to walk out the door a lot of hours or even <unk>.
Transaction accounts and money market accounts, and we're able to adjust those rates and.
Kind of defense competitively and keep the customer relationship there and also still here.
That win and it is a when not an if rates go back down at some point, we'd be able to quickly put rights back down all those type of accounts.
Okay. That's helpful. And then you know I know your departure D. D. E has been fairly stable over the past year, but I was really impressed it was only down.
End of period 10 million. One Q2 Q are you guys opening up a bunch of new accounts, that's helping keep that fairly stable or you're just not seeing mix shift change away from from noninterest bearing to interest bearing.
I think it is and we've talked about this last couple of quarters I mean.
There's such a focus when we're a proven loans of the relationships that are actually coming in.
Okay.
Okay.
Oh, okay.
Hi.
And we're making it.
Uh huh.
And it did help us.
That demand to be stable.
But yeah, we I mean, we are seeing some move out but those new ones coming in are helping to mitigate that.
Okay and then just last quick one for me on on the loans you had talked about a strong loan pipeline and obviously the really strong growth into Q would you attribute the growth in to Q2, you know any kind of market share movement or just people getting getting stuff done.
All in front of any additional rate hikes or any additional color on the strong growth you know relative to the pipeline.
Yes.
First I'll, let you start off that way this is Brent I'll start off.
The majority of our new loan funding that we had during the quarter was exit are expansions of existing relationships. So these are long relationships that had an opportunity to either acquire but most of the time acquire in some cases are that are maturing credit that they wanted to move move.
From one place to another.
To raise capital for another venture.
But but the majority of our business, we booked as new fundings outside of the construction fundings are existing clients that came to us for expansion of their relationship and that was Bolton and Metro markets and then in the south.
South point inside of the company and Bret I would I would probably.
Catch on it that was part of your question of of the fundings trending people trying to beat the rate for a moment I don't think at all because I mean, so much of what we're doing is when it was a funny right, they're going to they're going to catch it anyway.
So you know we all saw some of that.
You're so you're going to have to go people trying to get some stuff that we.
We saw that movie Nat it's most of the stuff coming in it is floating and knowing that we're going to they're going to they're going to face whatever rate increases come yeah. We definitely saw that back in second quarter of 'twenty two.
It was pretty hobbyists, what was happening or opinion, but that's that ships already settled I think right now as Corey said I think we're both confirms that Reits talked pretty favorable and a lot of them are floating.
And yes, we are picking up some business related to some of the.
So institution sales and consolidations that we've seen particularly on our west Texas markets and I think we're going to continue to see that over the next couple of quarters people are not terribly happy with sort of a new ownership in some cases and they're looking to either move entire relationships are spread indicated maybe they've already got a relation.
Ship with us and now they're going to pay what they had over it.
Bank X and move that over to us as well and we've got room, we're going have to bring them on and we already have the underwriting.
Look at credits and it's fairly easy transition for them. So I think that that was a key trend in Q2, and I think we'll see more of it in Q3 and Q4, but overall, we are going to see a slowdown in the pipeline has already shrunk some and and I think the rate of increase is definitely going to slow, but I don't see us actually going backwards.
I think we'll continue to grow arms out through the balance of the year.
Red.
I'll just add one more to it.
I mean, you know overtime, we have spent time, making sure that we've really done a good job with some of our metro markets, making sure. The right teams leaderships everything's in place, but we're still just as focused on taking care of that in our rural markets that we're seeing opportunities to take share in those areas and picking up good leadership and in some of the rural markets that where some.
Are those good deposits and good loan opportunities are so.
We we want to take care of both sides of our balance sheet being in metro and rural knowing that there are both beneficial.
Okay, Great appreciate all the color.
Thanks, Brett. Thank you Thanks, Brett next.
Next question Graham <expletive> with Piper Sandler. Please go ahead.
Hey, good evening guys.
Good afternoon.
So I kind of just wanted to stick with I guess that last point there about you know customers, maybe being unhappy with their banking you know looking to move over to you guys. You know makes it a impacted by M&A and kind of look at the other side of that and say you know what are their lenders out there that you guys are looking at right now that you know maybe at a bank that has done M&A recently and they're not.
Happy with it or the bank isn't you know it doesn't have the capital and liquidity to make loans like you guys have in this current environment.
I know you guys made you know a handful of hires are a lot of hires over the last couple years, and it's kind of slowed down a bit but just wondering with with your capital position now and in the deposit base you have if youre looking at all for them, you know hires or inorganic opportunities.
So I mean, just go with what I was just saying I mean, we just picked up.
Market leader in different was that a real market fit everything you just described and it's going to bring in a lot of opportunity.
With it and so we're we're excited about that.
But it'll it'll bring deposits and loans and so that's what that's what we like I mean, but if we.
We said it we're going to make selected higher strategic hires and I mean, I will tell you that.
We interviewed frequently we don't car frequently we're very very careful about who gets to come on and be a part of the team and make sure that it's going to be a long term thing that they can bring relationships that fit what we're looking for and that's what we've done we've been very consistent with this for years and it's why we built the caliber team that we truly have an.
We're not backing down from it but we're doing we're making very selective strategic hires.
Okay, I hear Ya, Alright, and then I guess just shifting more to you the margin I just wanted to touch on loan yields a little bit I know you said they might be you feel as if theyre topping out a bit I guess, maybe on new loan yields if you assume that that's pretty much done out there. After this month or maybe one more hike after that.
What what sort of loan yield do you have baked into your assumptions of the NIM is going to contract a little bit in the back half of the year, what kind of I guess on your expansion do you have through the end of the year do you expect.
Okay.
Okay.
So as far as far as loans go I mean again, we're we're putting on loans and then I'll give Brent helped me out where we're putting we're putting loans on them when they're fixed I mean, they've been in the upper sevens.
Mid mid to upper Sevens, I would say, even maybe slightly.
Higher than that.
You know we've got a good thing is that you know we've got our we've got our indirect portfolio that while that sets and that's had some lower rates that stuff amortizing a lot faster up and is so those lower yields or are are paying off and coming back in so I mean, we were still you know we.
We should show our expansion in the overall loan.
Loan yields I mean, we went out for it.
Please I guess around 15 16 basis points.
In the in the quarter.
You know, we we should we should see of.
A decent size is I'll I'll say hopefully in that range.
For Q3.
Given especially given the given the growth that we had.
And.
In Q2.
So if you look at those rates. So I mean, some of the ones I think what you were taught state what Steve was trying to explain was some of the stuff that we build the book So we're putting a lot of.
Prime plus on the books too that's floating.
I think it would be very beneficial to it as well.
Right. Geoff this is Brad you've got draws on construction loans for the most part are variable rate.
And then to what Steve was alluding to you have a really short duration on indirect portfolio by a little over 300 million indirect portfolio that.
Those lower rates have rolled off of that portfolio and been replaced by much higher rates, so you're seeing lift in that segment.
And same with an egg is gonna be a variable rate funding for the second half of the year or so.
You should see some some lift in that.
That yield.
Here's the other thing that's kind of interesting.
We're not we're.
We're not missing.
Opportunities over rate right now I mean, because that's.
For the for a while but that was kind of a challenge, but I mean, it's I don't believe that you got there and charge. All you can get I don't I think you still have to stay competitive, but I think our rates are competitive I think though that we're not sitting around losing them over that is we get down to a credit quality that we want it.
Is this a relationship that we wanted I mean talented.
Okay, I guess and that's a perfect segue to what I have watched for you guys is just.
Talking about the provision I know you guys said that you budgeted for one in accord a million this quarter, obviously, a little bit higher with the growth in that specific reserve you talked about but would you expect I mean are you guys looking at the rest of the year, saying one in a quarter is is good for the provision line going forward or is there anything in there that might take that higher or lower.
Yeah.
I mean, this is Steve I'll I'll start and I'll, let Helen definitely let Brent pipe in I mean that at this point I mean, that's that would be our hope.
Where do we want to be.
We do typically I mean, we always have some some net charge offs during the quarter and along with net loan growth. So.
I think we've got a healthy.
The reserve out there currently.
Given the view of the economy I don't I don't think there's any.
Are you that that needs to do to ramp up at this point.
Yeah. This is this is Brent we feel really good about the reserve level and we're not seeing broad.
Broad risk trends in the portfolio. So it'll really I think provision is gonna be largely just like this quarter, most likely going to be driven by growth. What is the total portfolio look like or the mix of the portfolio.
And and and that's likely going to be the driver at least in the near term.
[noise] Graham this Curtis.
You know we've worked pretty hard on our seasonal model and we are cautious you know that you've watched us we didn't we're probably going to run a higher reserve than peer and it's not because we think we have more credit problems and Pierre it's just that we're trying to be cautious and we're taking them to their care.
Aren't they a lot of uncertainty still out there in the overall economy, it looks more and more like if we have a recession it might be a fairly short lived in software, but today frankly, we don't know.
And we're just going to try to think well prepared for what comes but there will be some one offs that happen just like the one we've been describing today, but we think we're pretty well underwritten and don't look for big losses out there and even if we do have some credits that moved on to nonperforming.
Nonperforming status, but we just don't see the trends building right now in that direction, but we're still going to be real cautious and be sure of that reserve level stays.
Where we think we can withstand whatever whatever else might be for all of us.
Yeah.
Alright, I appreciate it thanks guys.
Thank you.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Your next question comes from Joe <unk> with Raymond James. Please go ahead.
Okay.
Good afternoon.
Thanks Jody.
So you touched on your strategy to modestly reduce the size of the indirect auto portfolio and I was curious what is the time horizon of this reduction how long would you like to take it.
Yeah.
This is Brad.
Sorry, if I may have caused some confusion I right now, where we're keeping a pretty stable portfolio in that segment, we like it but the duration there so sure that you know.
We're routinely.
Routinely replacing cheap rate I think that was appointed I was trying to make is the the production we have in that unit isn't necessarily produce some growth or contracting, but it's turning the portfolio into higher rate and into higher rated loans.
And yeah, the percentage has come down a little bit, but I think that's really just because we're driving you know that the rates in that portfolio up and frankly, the that the industry itself is kind of contracted a little bit. So I don't see a significant contraction unless the industry continues to tick.
Tracked some but I think we're still getting our fair share of volume out of that and and Meanwhile, increasing our yield pretty good yeah, we were only down $2 $4 million.
I think quarter over quarter.
Part of that is we're not gonna be the cheapest route.
And if you look at it do you look how we stack up on our.
The way, we view them as compared to like the CFPB I mean, we will topping credit I mean, we want to really good stuff for the majority of our portfolio and.
We don't have to be the cheapest to do it I mean, the word and we're strategically placed where they'll have to be.
Understood.
And moving over to deposits you previously.
Kind of guided to a cumulative interest bearing deposit beta of about 50% by year end you still think that holds.
I'll, let Steve jump in here this is curtis.
I kind of said that when we started into this we've managed to stay a little below that up to now.
I still think that's probably kind of upper end for us.
Unless we see some real anomaly popping up on something out there but.
That currently.
Being based as we are with a fairly.
Fairly high percentage of rural market deposits, they're just not as volatile as what we see in some of the larger communities and as long as we can keep those relationships in place.
I think we can hold to that.
At 50% or lower.
Stacey.
I agree with what you said I mean, we have we have been able to maintain it below that level.
We said earlier, there's there's pressure everyday on on deposit costs, but.
And we're monitoring it every day, but as of as of now we still we still feel that we can we can just come come in right at that level or slightly below.
Perfect I appreciate it.
And then kind of in the last one for me here is.
You talked a lot about the opportunity in the Permian.
I was curious to know what was deposit and loan growth like in that market in recent quarter.
Maybe you have that handy.
Let me pull that see what I can grab real quick.
Real estate is worth matter.
We definitely are getting based on loan growth there and the good news in that market of flowers down there quite often do come with strong deposit relationships. That's an area, where there's still a lot of liquidity given the nature of the oil and gas business.
Ancillary industries.
As we're getting opportunities to move those pros family.
Please know those companies in a bit.
But it doesn't happen real fast, but the whole idea of select the relationships straight with us a long time as well and we are seeing most of those opportunities pop up more and more that's a combination I think of having the kind of leadership that we've been looking forward to those markets as well as in that market. We've trained here and why we're concerned with the others.
A little dissatisfaction with some of the changes that they've seen in the Bronx, they've been at.
Dave did you get some yeah.
I think about about 10, 10%.
Do you need about 10% of the.
Of our loan growth was in the Permian Permian region during the quarter.
Deposits were up slightly but not a not a significant.
M L.
Understood. Thank you for taking my questions.
Thanks, Joe Sir Thank you.
Thank you I would like to turn the floor over to Curtis for closing remarks.
Thank you operator.
Oh, Thank you to all of you who participated in today's call and a very sincere. Thank you to our outstanding employees, who made all this possible.
As I said at the beginning we had a very good quarter, we exited in a strong financial position.
Our deposits and deposit cost remained stable through the quarter as we work to maintain profitability in this higher rate environment.
We also delivered excellent loan growth in the quarter, but we do expect it to moderate through the balance of the year, but.
The higher yields from these loans will help mitigate the expected continuing rise in deposit costs.
Very importantly, we continue to improve the credit profile of our loan portfolio and are maintaining our strict credit underwriting standards as we conservatively grow the bank.
Finally, we do remain well capitalized with strong liquidity to take advantage of opportunities to improve shareholder returns as they present themselves. So I'm truly excited about what I see in our future for Citibank and South Plains financial.
Thank you all again have a good day.
This concludes today's teleconference. You may disconnect your lines and thank you for your participation.
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