Q3 2023 South Plains Financial Inc Earnings Call
Good afternoon, ladies and gentlemen.
And welcome to the South Plains financial third quarter 2023 earnings Conference call.
During todays 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 call is being recorded.
I would now like to turn the call over to Mr. Steve Crockett Finance, 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 third quarter 2023 earnings Conference call with me here today are Curtis Griffith, our chairman and Chief Executive Officer.
Cory Newson, 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 at S. P. F. I don't think.
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 it.
Issued earlier today and on slide two of the slide deck presentation.
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.
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 in the slide deck presentation.
Let me hand, it over to you.
Thank you, Steve and good afternoon.
On today's call I will briefly review the highlights of our third quarter 2023 results as well as provide an update on our capital allocation priorities.
Cory will discuss our loan portfolio in more detail and the opportunities that we have to reprice our portfolio to drive interest income growth over the next year.
Steve will then conclude with a more detailed review of our financial results.
Start there are five key points that I hope you will take away from the call.
First our core deposits have remained relatively stable throughout the year with only a modest decline in the third quarter further demonstrating the strength of our community based deposit franchise.
Second we experienced healthy net interest income growth as our loan growth through the year combined with the improving yield of our loan portfolio drove strong interest income growth more than offsetting the notable rise and our cost of funds.
Third while loan growth moderated through the third quarter, we believe that we have opportunities to further drive interest income growth is approximately 30% of our loan portfolio will mature or can reprice over the next year.
Fourth the credit profile of our loan portfolio continued to improve through the third quarter as our nonperforming assets are at their lowest level since our IPO in 2019.
And lastly, we repurchased 355000 shares for $9 $3 million in the third quarter as we continue to believe that our shares are trading below intrinsic value.
Turning to our results in more detail on slide four of our earnings presentation. We delivered net income of $13 5 million or 78 cents of diluted earnings per share in the third quarter as compared to $29.7 million or dollar and 71 cents of diluted earnings per share in the <unk>.
Second quarter of 2023.
This compares to net income of $15 $5 million or 86 cents per diluted common share in the year ago third quarter.
As a reminder.
We completed the sale of Widmark Citibank's wholly owned insurance subsidiary in the previous quarter. The after tax sales proceeds less transaction expenses the incentive compensation triggered by the transaction and the realized loss on the sale of investment securities. During the second quarter resulted in a dollar in 16.
Per share of one times net income in the second quarter.
Excluding these items the comparable second quarter diluted earnings was 55 cents per share.
Turning to our loan portfolio, we grew loans, 1.9% annualized in the third quarter. This was expected given the strong loan growth that we delivered in the second quarter, which reduced our loan pipeline and which Greg will discuss in more detail in a moment.
We recorded a negative provision for credit losses of $700000 in the third quarter as compared to a provision of $3 $7 million in the second quarter of 2023.
The reserve release was primarily due to a reduction of $1.3 million in specific reserves, partially offset by loan growth and net charge off activity.
As we discussed on our second quarter call, we placed a classified relationship totaling $13 $3 million on nonaccrual in my.
The credit was for a business that was in bar were directed liquidation and from which we had expected to see some repayments starting in the third quarter of 2023.
This credit was fully repaid in the third quarter and we released a related specific provision that we had taken in the prior quarter.
Steve will touch on in more detail the credit quality of our loan portfolio is strong as our classified loans are at the lowest level since the start of the pandemic.
Our $700000 reserve release after tax represented approximately <unk> <unk> per share of earnings in the quarter.
As a result, we believe the run rate earnings of the bank was 75 cents per share in the third quarter.
We grew deposits $46 $1 million or one 3% to 3.62 billion at September 32023, as compared to the end of the second quarter of 2023.
Our deposit growth was primarily due to a $71 million increase in brokered deposits, partially offset by $14 million decrease in public fund deposits, while our community base deposit franchise remains stable through the third quarter.
It is important to point out that we started work to expand our broker deposit funding early in 2020 three as a strategy to provide excess liquidity for the loan growth that we expected to achieve through the year.
Brokered deposits have historically been a small portion of our deposit base and building. This funding was part of our liquidity strategy Predating the bank failures in March.
We began to add broker deposits at the end of the second quarter, given the strong loan growth that we had achieved.
Broker deposits represent less than 6% of our deposit base and we expect that percentage to remain stable to moderately higher in the fourth quarter.
Ultimately, we're paying a small premium to hold excess liquidity, which we believe is the right decision in the current environment.
The stability of our deposit franchise and strong liquidity position can further be seen on slide five which also highlights the competitive position that south plains holds.
At quarter end, 81% of our deposits are in our rural markets with 19% of our major metropolitan markets of Dallas, Houston and El Paso.
Additionally, our average deposit account balance is approximately $36000 and only an estimated 16% of our total deposits are either uninsured or uncollateralized.
The strength of our community deposit base can also be seen in the market share gains we have achieved largely due to competitor dislocation from recent mergers.
In Lubbock, we have been a strong number two in deposit share for many years. We are now the market share leader for the first time in eight years with an 18% deposit share with a second place bank coming in at 15, 1%.
We are also seeing competitor dislocation in Midland and Odessa, where we're seeing deposit share gains as well and which contributed to the strong deposit growth that we achieved in the Permian basin in the third quarter.
Overall, we have to remember one two deposit market share in many of our rural markets, which is a testament to our employees and their dedication to our customers.
Turning to our liquidity we ended the third quarter in a strong position with $1.89 billion of untapped borrowing capacity.
We have $1.09 billion of availability from the federal home loan bank of Dallas.
$612 million of availability from the federal reserve discount window.
And $179 million of capacity from the Federal Reserve Bank term funding program.
Given our strong capital and liquidity position, our board of directors authorized a $15 million stock repurchase program in May.
We bought back approximately 113000 shares during the second quarter for $2.6 million and 355000 shares during the third quarter for $9 $3 million.
At September 30, we had $3 $1 million remaining on our stock repurchase program.
Looking forward, we believe that more challenging economic environments can lead to opportunities for those with strong balance sheets ample liquidity and sound loan portfolios.
We expect M&A to remain subdued given the current interest rate environment conversations are beginning to pick up in our markets over time, we will look to further expand the bank through acquisitions that make financial sense and fit our culture.
However, the most attractive acquisition that we have had is purchasing our own shares which we will continue to do as long as they trade below our view of intrinsic value.
When are we exhaust our current share repurchase program, our board will review, our capital allocation priorities and consider the merits of another stock repurchase program.
As part of our capital allocation, returning a steady stream of income to our shareholders through our quarterly dividend has also been a 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 18th consecutive quarterly dividend and is to be paid on November 13, 2023 for shareholders of record on October 30th.
'twenty three.
To conclude we continue to deliver results for our shareholders, despite economic headwinds and a challenging environment for our industry.
We remain focused on conservatively growing the bank managing risks and strategically using our capital to buy back shares.
While we are having conversations with other parties economic environment still poses challenges for M&A.
In the meantime, we will manage 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.
Thank you Curtis and good afternoon, everyone. Starting on slide six loans held for investment increased during the third quarter by $14 $5 million or one 9% annualized compared to the second quarter of 2023.
Loan demand remained primarily in commercial real estate residential mortgage seasonal agricultural and energy loans as expected we experienced a moderation following the second quarter's strong loan growth, which reduced our loan pipeline, which was slow to rebuild through the third quarter. We also experienced the pay offs of $16 $5 million in nonperforming loans.
And an early pay off of a $14 9 million dollar relationship.
Which taken together proved a headwind to loan growth in the quarter. Excluding these payoffs we would have delivered approximately 6% annualized loan growth in the third quarter.
Our loan yield was six point, 100% in the third quarter as compared to $5 nine 4% in the second quarter of 2023.
We continue to proactively proxy loans to account for a higher market interest rate environment, which is contributing to rising funding costs.
We remain focused on loan pricing, while managing our deposit growth and funding cost to mitigate margin pressure as we look to the fourth quarter and into the year ahead.
Looking at our rural markets in more detail, we continued to benefit from customer dislocation created by competitive mergers, which is providing opportunities to bring great customer relationships and talented lenders to citibank during the quarter. We recruited two lenders in our rural markets, where we're bringing both loan and deposit relationships to the bank.
We will continue to selectively add experienced lenders, who fit our culture as we continue to grow the bank.
Shifting to slide eight we grew loans by $40 million or 16, 8% annualized to $995 million and our major metropolitan markets of Dallas, Houston, and El Paso as compared to the second quarter of 2023.
The commercial lenders that we've added in these markets continue to grow their loan portfolios by bringing new relationships to the bank. Our metro markets are an important source of loan growth more than offset the pay downs that we experienced in our community markets during the third quarter.
Looking ahead to the fourth quarter, we're seeing our loan pipeline rebuild and believe low single digit annualized loan growth is achievable.
Importantly, we are seeing healthy demand, but in this environment, we're being much more selective in who we do business with and what loans, we decided to underwrite.
We're turning down solid loans that include healthy levels of equity because they were deals not relationships, we want to do business with customers that will be long term relationships for the bank.
We strongly believe in light of the current environment.
This is the right decision to be cautious and remain focused on finding high quality loans with good risk and return profile.
Turning to slide nine we believe we are in an advantageous position is almost $875 million of our loan portfolio will mature or reprice over the next 12 months, which is approximately 30% of our loan portfolio.
Additionally, our fixed rate indirect auto portfolio continues to increase its yield.
Monthly principal amortization being redeployed into higher rate loans.
There were approximately 35 being in these repayments during the third quarter, while we expect only moderate loan growth in 2020 four we believe that we have the opportunity to pick up considerable interest income even if our balance sheet remains relatively flat.
Skipping ahead to slide 11.
We have approximately $1 $1 billion of commercial real estate exposure in our loan portfolio at quarter end, which represented 36, 9% of our total loan portfolio.
Our office exposure represented 17% of our CRE portfolio and 6% of our total loan portfolio at the end of the third quarter of note. Our office exposure is 30% owner occupied and 11% medical offices.
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.
Given the focus on commercial real estate by investment community, we've decided to provide more detail on our CRE portfolio as outlined on slide 12, we show our loan balances by segment the percent, which are owner occupied as well as the geographical location, which is important.
As you can see a significant majority of our CRE portfolio is outside of central business District, and more insulated from the current challenges that those areas are encountered given that many employees have been slow to return to their offices.
We will continue to remain vigilant in stress tests, the individual credits in our portfolio for challenges.
Operator: Good afternoon, ladies and gentlemen. And welcome to the South Plains financial third quarter 2023 earnings conference call. During today's presentation, all parties will be in a listen only mode.
That said the credit quality of our loan portfolio continue to improve through the third quarter, which Steve will discuss in more detail in a moment.
Turning to slide 13, we generated $12 $3 billion of noninterest income in the third quarter as compared to $47 $1 billion in the second quarter, which included the $33 $5 million gain for the sell it when mark.
Operator: Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded.
Steve Crockett: I would now like to turn the call over to Mr. Steve Crockett, financial 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 third quarter 2023 earnings conference call. With me here today, our Curtis Griffith, our chairman and chief executive officer. Cory Newsom, our president and Brent Bates, our chief credit officer. A slide deck presentation to compliment today's discussion is available on the news and events section of our website, spfi.bank.
Third quarter noninterest income declined by $1.3 million from the second quarter, when excluding the gain for wind bar.
This decline was largely due to a 900000 dollar decline in bank card services and interchange fees.
Of note the second quarter included larger incentives and rebates and Bankcard services, which has normalized in the third quarter <unk>.
Additionally, mortgage banking revenues also declined given the rise in interest rates combined with typical seasonality.
We continue to be focused on expense management in our mortgage business to offset declining revenue.
Steve Crockett: Before we begin, I'd like to remind everyone that this call may contain forward looking statements and are subject to a variety of risk 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 earlier today and on slide to the side that presentation. All comments made during today's call are subject to those safe harbor statements.
For the third quarter noninterest income was 26% of the bank's revenues as compared to 28% in the second quarter of 2023, when excluding the one time gain for Windler.
To conclude we delivered strong results through the third quarter and believe we remain well positioned for the current environment we.
We continue to take market share given the customer dislocation that is occurring in our markets and have added outstanding lenders to our team. This quarter. We will continue to focus on driving organic deposit growth, while mitigating margin pressure I would now like to turn the call over to Steve.
Steve Crockett: 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 is required by law. Additionally, during today's call, we may discuss certain non-gap measures which we believe are useful in evaluating our performance. The reconciliation of these non-gap measures to the most comparable gap measures and also be found at the end of our earnings release and begin on slide 23 of the slide deck presentation.
Thanks Corey.
On slide 15, net interest income was $35 $7 million for the third quarter as compared to $34 $6 million for the second quarter of 2023.
The increase was primarily the result.
And the $5 $7 million increase in interest income given our strong loan production in the first half of this year combined with the rise in new loan rates, which lifted the yield on our loan portfolio of about 16 basis points in the third quarter.
Curtis Griffith: Curtis, let me hand it over to you. Thank you, Steve, and good afternoon. On today's call, I will briefly review the highlights of our third quarter of 2023 results as well as provide an update on our capital allocation priorities. Cory will discuss our loan portfolio in more detail and the opportunities that we have to reprise our portfolio to drive interest income growth over the next year. Steve will then conclude with a more detailed review of our financial results.
Further earnings on the additional liquidity added in the quarter helped drive the increase.
Verizon interest income more than offset a $4 $6 million increase in interest expense due to the rise in short term interest rates on interest bearing liabilities.
Our net interest margin calculated on a tax equivalent basis was 3.52% in the third quarter as compared to $3 six 5% in the second quarter of 2023.
Curtis Griffith: Start there are five key points that I hope you will take away from the call. First, our core deposits have remained relatively stable through the year with only a modest decline in the third quarter further demonstrating the strength of our community based deposit franchise. Second, we experienced healthy net interest income growth as our loan growth through the year combined with the improving yield of our loan portfolio drove strong interest income growth more than all setting the notable rise in our cost of funds.
Our NIM was impacted by a 38 basis point increase in our cost of deposits in the third quarter as compared to the second quarter of 2023.
This was partially offset by our organic loan growth.
With a corresponding increase in our loan yields of 16 basis points as compared to the second quarter of 2023.
As outlined on slide 16, our average cost of deposits was 207 basis points in the third quarter, an increase of 38 basis points from the second quarter of 2023, given the rising interest rate environment through the year.
Curtis Griffith: Third, while loan growth moderated through the third quarter, we believe that we have opportunities to further drive interest income growth as approximately 30% of our loan portfolio. When mature, our can reprise over the next year. Fourth, the credit profile of our loan portfolio continued to improve through the third quarter, as our non-performing assets are at their lowest level since our IPO in 2019. And lastly, we repurchased 355,000 shares for $9.3 million in the third quarter, as we continue to believe that our shares are trading below intrinsic value.
It had to be proactive in maintaining deposit relationships, which has led to the rise in our funding cost.
Additionally, and as Curtis touched on we strategically expanded our broker deposit funding to augment our liquidity as we funded loan growth during the year and.
In the third quarter the increase in those deposits contributed approximately 18 basis points to the increase in our average cost of funds.
Overall, our core deposit franchise has remained relatively steady through the year. It's only a small decline in the third quarter and we've also not had to heavily rely on time deposits our deposit mix with noninterest bearing deposits to total deposits modestly declined 28, 9% as compared to 38.
Curtis Griffith: Turning to our results in more detail on slide 4 of our earnings presentation, we delivered net income of $13.5 million, or 78 cents, of diluted earnings per share, in the third quarter is compared to $29.7 million, or $1.71 of diluted earnings per share, in the second quarter of 2023. This compares to net income of $15.5 million, or 86 cents, per diluted common share, in the year ago, third quarter. As a reminder, we completed the sale of Windmark City Bank's wholly owned insurance subsidiary in the previous quarter.
Percent in the second quarter of 2023.
Turning to slide 17.
Our ratio of allowance for credit losses to total loans was 1.41% at September 32023.
As compared to 1.45% at June 32023.
As Curtis has shown we recorded a negative provision for credit losses of $700000 in the third quarter.
The negative provision was largely due to reduction at $1.3 million in specific reserves, partially offset by loan growth and net charge off activity for the third quarter.
Curtis Griffith: The after-tack sales proceeds, less transaction expenses, the incentive compensation triggered by the transaction, and the realized loss on the sale of investment securities during the second quarter, resulted in a $1.16 cents per share of one-time net income in the second quarter. Excluding these items, the comparable second quarter diluted earnings, was 55 cents per share. Turning to our loan portfolio, we grew loans 1.9% annualized in the third quarter. This was expected given the strong loan growth that we delivered in the second quarter, which reduced our loan pipeline, and which Cory will discuss in more detail in a moment.
The reduction in specific reserves was a result of the full repayment of a $13 $3 million non accrual relationship in the quarter.
Due to this full pay off another repayments, our nonperforming assets to total assets ratio decreased to 12 basis points in the third quarter from 51 basis points in the second quarter of 2023.
Classified loans declined approximately $16 $7 million during the third quarter at $57 million from $67.4 million at June 32023.
Skipping ahead to slide 19.
Our noninterest expense was $31.5 million in the third quarter as compared to $45 million in the second quarter of 2023.
Curtis Griffith: We've recorded a negative provision for credit losses of $700,000 in the third quarter, as compared to a provision of $3.7 million in the second quarter of 2023. The reserve release was primarily due to a reduction of $1.3 million in specific reserves, partially offset my loan growth and net charge-off activity. As we discussed on our second quarter call, we placed a classified relationship totaling $13.3 million on non-accrual in May. The credit was for a business that was in borrowed directed liquidation, and from which we had expected to see some repayments starting in the third quarter of 2023.
The decrease was primarily due to the $4 $5 million in personnel and transaction expenses from the sale of Widmer plus related incentive compensation.
As well as the $3 $4 million loss on the sale of securities, which impacted us in the second quarter 2023, and did not recur in the third quarter.
Importantly, our third quarter noninterest expense came in below the run rate that we have delivered over the last three quarters as we've taken more costs out of our mortgage operations, while continuing to implement further efficiencies across the bank.
Looking to the fourth quarter and the year ahead, we expect noninterest expense to be flat or slightly increase based on continued rising cost.
Curtis Griffith: However, this credit was fully repaid in the third quarter, and we released the related specific provision that we had taken in the prior quarter. As Steve will touch on in more detail, the credit quality of our loan portfolio is strong, as our classified loans are at the lowest level since the start of the pandemic. Our $700,000 reserve release, after tax, represented approximately three cents per share of earnings in the quarter. As a result, we believe the run rate earnings of the bank was 75 cents per share in the third quarter.
We will keep looking for offsets to manage noninterest expense as we continued to selectively add talent to our team.
Moving ahead to slide 21.
We remain well capitalized with tangible common equity to tangible assets of eight 4% at the end of the third quarter, a decrease from $8, 96% at the end of the second quarter of 2023.
The decrease was driven by the $9 $3 million in share repurchases completed in the quarter and $22 $8 million decrease in accumulated other comprehensive income.
Curtis Griffith: We grew deposits, $46.1 million or $1.3% to $3.62 million as September 30, 2023, as compared to the end of the second quarter of 2023. Secretary. Our deposit growth was primarily due to a $71 million increase in broker deposits, partially offset by $14 million decrease in public fund deposits, while our community-based deposit franchise remains stable through the third quarter. It is important to point out that we started work to expand our broker deposit funding early in 2023 as a strategy to provide excess liquidity for the loan growth that we expected to achieve through the year.
Which was partially offset by $11 $3 million and net income after dividends paid.
A OCI was negatively impacted again this quarter as longer term bond rates rose during the quarter, which resulted in lower fair values of our investment securities.
Tangible book value per share declined to $21.07 as of September 30, compared to $21.82 as of June 32023.
Largely due to the impact of a OCI.
I'll turn the call back to the hardest for concluding remarks.
Thank you Steve.
I'm very proud of our performance once again this quarter as we delivered net interest income growth. Despite continued pressure on our funding cost as we benefit from the strong loan growth delivered over the last six months combined with a healthy rise in our loan portfolios yield.
Curtis Griffith: Broker deposits have historically been a small portion of our deposit base and building this funding with part of our liquidity strategy predating the bank failures in March. We began to add broker deposits at the end of the second quarter given the strong loan growth that we had achieved. Today, broker deposits represent less than 6% of our deposit base and we expect that percentage to remain stable to moderately higher in the fourth quarter. Ultimately, we're paying a small premium to hold excess liquidity, which we believe is the right decision in the current environment.
We believe we have ample opportunities to reprice, both our commercial and indirect auto portfolios over the next year, which will continue to drive interest income growth, even if our balance sheet already experiencing moderate growth given the slowing economy.
Additionally, the credit metrics of our loan portfolio remains strong as our nonperforming assets are at their lowest level since before our IPO in 2019, which I am pleased to say, giving me uncertain macroeconomic outlook.
Curtis Griffith: The stability of our deposit franchise and strong liquidity position can further be seen on slide five, which also highlights the competitive position that South Plains holds. At quarter end, 81% of our deposits were in our rural markets, with 19% in our major metropolitan markets of Dallas, Houston, and El Paso. Additionally, our average deposit account balance is approximately $36,000, and only an estimated 16% of our total deposits are either uninsured or uncollateralized.
We will also continue to recruit outstanding talent like the lenders we brought in this quarter to position South plains for long term growth and value creation like.
Taken together, we believe we're in a strong position heading into the fourth quarter and the year ahead.
You again for your time today operator, please open the line for any questions.
Thank you.
And at this time, we will conduct 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 that your line is in the question queue.
Curtis Griffith: The strength of our community deposit base can also be seen in the market share gains we have achieved largely due to competitor dislocation from recent mergers. In Lubbock, we have been a strong number two in deposit share for many years. We are now the market share leader for the first time in eight years, with an 18% deposit share, with the second place bank coming in at 15.1%. We are also seeing competitor dislocation in Midland and Odessa, where we're seeing deposit share gains as well, and which contributed to the strong deposit growth that we achieved in the Permian Basin in the third quarter. Overall, we have the number one two deposit market share in many of our rural markets, which is a testament to our employees and their dedication to our customers.
You May press Star followed by the number two if you would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick or pick up your handset before pressing the star keys, one moment. Please while we poll for questions.
Our first question comes from Graham <expletive> with Piper Sandler. Please state your question.
Hey, good afternoon guys.
Hi, good afternoon.
So I kind of just wanted to start on the margin. It sounds like you guys are are pretty encouraged by what youre going to see on the asset repricing front over the next couple of quarters, but I just wanted to get your sense of how that might relate to the funding side from here and if you think if you're pretty confident that the asset repricing can offset any further increase in deposit costs from <unk>.
Curtis Griffith: Pretty dual liquidity. We ended the third quarter in a strong position, with $1.89 billion of untapped borrowing capacity. We have $1.09 billion of availability from the Federal Home Long Bank of Dallas, $612 million of availability from the Federal Reserve's discount window, and $179 million of capacity from the Federal Reserve's bank term funding program. Given our strong capital and in May, we bought back approximately 113,000 shares during the second quarter for $2.6 million, and $355,000 shares during the third quarter for $9.3 million.
Here and lead to you know not only better than I, but I guess, our NIM bottom being this past quarter.
Yeah. This is Steve I'll start.
Yeah, we feel good where what's coming on the on the income side. The interest expense side I mean, we still believe that that number will be will continue to increase our you know the the hope is that that that it will offset but we still see we still see pressures every day.
On the deposit side and so.
I'd like to say we were at the.
At the bottom of the NIM compression, but I think we will continue to see that see some challenges. There I mean, I don't think we would see a decline like what we saw that this quarter with the with the brokerage side, but we'll continue to see pressure there.
Curtis Griffith: At September 30th, we had $3.1 million remaining on our stock repurchase program Looking forward, we believe that more challenging economic environments can lead to opportunities for those with strong balance sheets, ample liquidity, and sound loan portfolios. While we expect to emanate, who remain subdued given the current interest rate environment, conversations are beginning to pick up in our markets. Over time, we will look to further expand the bank through acquisitions that make financial sense and fit our culture.
Yeah, I mean, I agree with Steve I mean, what we're really excited about is the repricing that we know we have coming in the next 12 months, but I think we're all kidding ourselves. If we don't think we'll see some pressure on deposit costs keep going.
Of course, obviously a lot of it depends on what the fed decides to do going forward, but I do think that you mentioned finding a trough in the mem.
Like many of our peers out there that we're not quite there yet lightweight, but I don't think we're very far away from it and I do think probably during 'twenty four we began to find a bottom.
Curtis Griffith: However, the most attractive acquisition that we have had is purchasing our own shares, which we will continue to do as long as they trade below our view of intrinsic value. When we exhaust our current share repurchase program, our board will review our capital allocation priorities and consider the merits of another stock repurchase program. As part of our capital allocation, returning a steady stream of income to our shareholders through our quarterly dividend has also been a focus since going public over four years ago, and our board of directors again authorized a $0.13 per share quarterly dividend as announced last week. This will be our 18th consecutive quarterly dividend and is to be paid on November 13, 2023 for shareholders of record on October 30, 2023.
I wish I knew exactly what quarter that'd be in but I do think it's probably somewhere in 'twenty four and we're going to see that because by then deposit costs were all pretty well have repriced and if we don't see additional.
Rate increases coming from the fed.
That will slow down they are opportunities for us.
Our depositors and other depositors to shake the processing their money somewhere else that's been the challenge, obviously and I think it's just.
Really helped us to have strong relationships that we have with depositors. So that we have not had to write off the top of the market on our product offerings, but as Corey said, where we're at.
Kidding ourselves, we don't think we're going to still have some additional deposit pressure coming.
Curtis Griffith: To conclude, we continue to deliver results for our shareholders despite economic headwinds and a challenging environment for our industry. We remain focused on conservatively growing the bank, managing risk, and strategically using our capital to buy back shares. While we are having conversations with other parties, the economic environment still poses challenges for M&A. In the meantime, we will manage our capital as we look to take advantage of opportunities in the market and continue to conservatively grow the bank.
I don't think I think you can also see the fact that we.
I mean, we've tried to hold our liquidity in check as much as we can without just.
Repriced the bank as a whole so we've been very careful about it we are going to face some of those pressures, but do I think it's insurmountable no I know I think we've done a pretty good job at that and I think we'll continue doing a pretty good job of it.
Okay. All very helpful. And then I guess just on the repricing side, you said, 30% of loans reprice over the next 12 months do you have the like the average rate of those loans today, and then where you think they would reprice to over that time period.
Cory Newsom: Now, let me turn the call over to Corey. Thank you, Curtis, and good afternoon, everyone. Starting on slide six, loans health investment increased during the third quarter by $14.5 million are 1.9% annualized compared to the second quarter of 2023. Loan demand remained primarily in commercial real estate, residential mortgage, seasonal agricultural, and energy loans. As expected, we experienced a moderation following the second quarter's strong loan growth, which reduced our loan pipeline, in which was slow to rebuild through the third quarter.
[laughter], yeah, no they're not.
A specific rate we've we've got on those I mean, they're they're really across across the board I would say I mean, there's some.
Some of that is is newer stuff. So so somebody is at the higher rates, but I mean, there's definitely some that are that had been on the books for a little while so I mean, it's.
It's oh.
Cory Newsom: We also experienced the payoffs of $16.5 million in non-performing loans and an early payoff of a $14.9 million relationship, which taken together proved a headwind to loan growth in the quarter. Excluding these payoffs, we would have delivered approximately 6% annualized loan growth in the third quarter. Our loan yield was 6.10% in the third quarter as compared to 5.94% in the second quarter of 2023. We continued to proactively price through loans to account for a higher market interest rate environment, which is contributing to rising funding costs.
Just because it's just going to be a blend there there's no specific average yield we've got on that at this at this point.
I don't think we've got that information in front of US right now do I think it'll be a nice improvement yes, yes, okay. Yeah now that that's helpful. And then I guess, just lastly is on the funding side.
What's your outlook I guess on noninterest bearing from here last quarter. They were a little bit more stable and then we'd obviously this quarter saw a little bit more acceleration on that front. How are you guys viewing noninterest bearing balances and you know how.
How are they acting this quarter, how do you think they'll act throughout 'twenty 'twenty four and how does that play into your own strategy I guess from here on on the grid side.
Cory Newsom: We remained focused on loan pricing, while managing our deposit growth and funding costs to mitigate margin pressure as we look to the fourth quarter and into the year ahead. Looking at our real markets in more detail, we continued to benefit from customer dislocation created by competitive mergers, which is providing opportunities to bring great customer relationships and talented lenders to the city bank. During the quarter, we recruited two lenders in our real markets who are bringing both loan and deposit relationships to the bank. We will continue to selectively add experienced lenders who fit our culture as we continue to grow the bank.
Well I mean I think.
We've had this we talked about this every time every every loan discussion we have comes with the non interest bearing balances that actually come with it where we're making much more concerted effort is it revolves around that.
Some of it is a little bit of an ebb and flow that happens with those balances. Some of it is I mean people are using the money I mean, and so that that's shrinking but it's a as a whole I think I think we do a pretty good job of trying to keep those.
Cory Newsom: Bank. Getting to slide eight, we grew loans by $40 million or 16.8% annualized to $95 million in our major metropolitan markets of Dallas, Houston, and El Paso, as compared to the second quarter of 2023. The commercial lenders that we have added in these markets continue to grow their loan portfolios by bringing new relationships to the bank. Our metro markets are an important source of loan growth, more than offset the pay downs that we experienced in our community markets during the third quarter.
That percentage of noninterest bearing and in check pretty good.
We can't help it have a little bit of pressure from it I mean, the value of those dollars are now worth more than they were in the past, but our monk I mean, we're doing a better job of even our mounted making requirements to keep those balances in check.
Well, we are definitely working on incentive packages for our officers that will really put a lot of emphasis on bringing those noninterest bearing balances in them. So as Corey said youre going to have a continuing a.
Cory Newsom: Looking ahead to the fourth quarter, we're seeing our loan pipeline rebuilt and believed low single-digit annualized loan growth is achievable. Importantly, we are seeing healthy demand, but in this environment we're being much more selective into who we do business with and what loans we decide to underwrite. We're turning down solid loans that include healthy levels of equity because they are deals, not relationships. We want to do business with customers that will be long-term relationships for the bank.
Run off a little bit of that as people.
People do recognize the value of our money fund money, which up until fairly recently, obviously wasn't very much now I'd try it does behoove them to get something earned on that but there's still a lot of business. Our balances out there that are noninterest bearing a high volume accounts high activity accounts, there's a lot of.
Things that we can do with them.
Cory Newsom: We strongly believe in a lot of the current environment that this is the right decision to be conscious and remain focused on funding high-quality loans with good risk and return profiles. Turning to slide nine, we believe we are in an advantageous position as almost $875 million of our loan portfolio will mature or can reprise over the next 12 months, which is approximately 30% of our loan portfolio. Additionally, our fixed rate and direct auto portfolio continues to increase the yield with monthly principal amortization being redeployed into higher rate loans.
And make them better money off from the Treasury management side as well. So we are really pushing and not only preaching to Brett monetarily incentivizing our team to go out and find more of those so.
Certainly our hope that well, we're probably seeing a little more decline I don't think we're going to see it drop down to similar levels again, and there were some of our or our peers from some larger banks have mentioned maybe on their calls so.
We're certainly trying to hold onto it that's the best money wouldn't happen back right now.
Okay I appreciate it guys. Thank you.
Cory Newsom: There were approximately 35 being in these repayments during the third quarter. While we expect only moderate loan growth in 2024, we believe that we have the opportunity to pick up considerable interest income even if our balance sheet remains relatively flat. Giving ahead to slide 11, we have approximately $1.1 billion of commercial real estate exposure in our loan portfolio at quarter end, which represented 36.9% of our total loan portfolio. Our office exposure represented 17% of our CRE portfolio in 6% of our total loan portfolio at the end of the third quarter.
Thank you.
Our next question comes from Brett Robinson with Hovde Group. Please state your question.
Hey, guys. Good afternoon, thanks for the questions.
Wanted to start back just on clarifying that 30% that matures in the next year of our loan portfolio. If I look like those fixed rate loans that are maturing. So if I if I if I look at I believe it's bought eight or nine I think it's slide slide nine where what piece of that pie is repriced.
And relative to the fixed versus variable.
Cory Newsom: Of note, our office exposure is 30% owner occupied and 11% medical offices. Our office portfolio is performing well and our largest credits have strong guarantors. We continue to stress test the individual credits at our portfolio for challenges. Given the focus on commercial real estate by investment community, we have decided to provide more detail on our CRE portfolio as outlined on slide 12 when we show our loan balances by segment the percent, which are owner occupied as well as the geographical location, which is important.
Yeah, so it shouldn't be that should be the fixed debt that matures 12 months or less and then also the variable.
Immediately reprice the bowl.
And in those those that can reprice within 12 months or less so there's a there should be a having say 816 and the 6%.
And it's not just mature.
Yes, its maturity and an reprising, but they just oh wait.
They re price right.
Hum schedules and many of them are actually I'm one year schedule.
Cory Newsom: As you can see, a significant majority of our CRE portfolio is outside of central business districts and more insulated from the current challenges that those areas are encountered given that many employees have been slow to return to their offices. We will continue to remain vigilant in stress test the individual credits at our portfolio for challenges.
And some others that are coming up on that.
A lot of banks did we certainly have a fair amount of stuff that was put on the books with our.
Oh no.
Maybe a 10 year maturity, but a five year fix on the right and where you're starting to get some of those dates out there almost five years. So we will certainly take that opportunity to reprice.
Cory Newsom: That said, the credit quality of our loan portfolio continue to improve through the third quarter, which Steve will discuss in more detail in a moment. Turning to slide 13, we generated $12.3 billion of non-interesting income in the third quarter as compared to $47.1 in the second quarter, which included the $33.5 million gain for the sale of windmars. 3rd quarter non-interest income declined by $1.3 million from the 2nd quarter when excluding the gain from Windward.
And besides what we're saying there are we are going to.
Ever scrub, our loan portfolio constantly as opportunities arise due to whatever situation that might trigger it in a loan agreement, we're not gonna be bashful about seeking higher rates on those loans as well so that might be coming in a little bit. In addition to you from a 30%.
Cory Newsom: This decline was largely due to a $900,000 decline in bank card services and interchange fees. Of note, the 2nd quarter included larger incentives and rebates in bank card services which has normalized in the 3rd quarter. Additionally, mortgage banking revenues also declined given the rise in interest rates combined with typical seasonality. We continue to be focused on expense management and our mortgage business to offset declining revenue. For the 3rd quarter, non-interest income was 26% of the bank's revenues as compared to 28% in the 2nd quarter of 2023 when excluding the one-time gain from Windward.
Not a big number I would expect certainly meaningful.
Okay.
And then wanted to make sure I understood the kind of the.
Verbiage around capital usage from here. It sounds like you guys are getting a little more interested in an impossible M&A scenarios if it if it made sense.
But it also sounds like you're still committed to maybe continuing the share repurchase and so just wanted to make sure I understood. How you were thinking about both of those two things as you allocate capital here in the coming quarters.
Well, what we're trying to strike carefully out there does that well, we're not getting terribly excited around M&A.
Cory Newsom: To conclude, we deliver strawberry results to the 3rd quarter and believe we remain well positioned for the current environment. We continue to take market share given the customer dislocation that is occurring in our markets and have added outstanding lenders to our team this quarter. We will continue to focus on driving organic deposit growth while mitigating margin pressure.
We're beginning to get some inquiries about it so.
So I think it's a it's still a challenging market to do anything yet, but we will.
Well stay aware of opportunities in our markets and see what comes along but I think our board is still are looking at having a problem.
Steve Crockett: I would now like to turn the call over to Steve. Thanks, Cory. Starting on site 15, net interest income was $35.7 million for the 3rd quarter as compared to $34.6 million for the 2nd quarter of 2023. The increase was primarily the result of a $5.7 million increase in interest income given our strong loan production in the first half of this year combined with the rise in new loan rates, which lifted the yield on our loan portfolio by 16 basis points in the 3rd quarter.
Probably some sort of repurchase program in place. So don't know what it's going to work like real what we'll be talking about that real soon and revamping a little bit weird.
As you can tell we've been really pretty aggressive in this past quarter, perhaps even a little more than we thought we might have to give them the right pricing and everything worked out but.
Pat.
Still think its a good idea to hamper the repurchase program in place out there.
I don't know what the market's going to do nobody does but we've seen some fairly dramatic swings just in the last few days.
Steve Crockett: Further, earnings on the additional liquidity added in the quarter helped drive the increase. Rise in interest income more than offset $4.6 million increase in interest expense due to the rise in short term interest rates on interest bearing liabilities. Our net interest margin calculated on a tax equivalent basis was 3.52% in the 3rd quarter as compared to 3.65% in the 2nd quarter of 2023. Our name was impacted by 38 basis point increase in our cost of deposits in the 3rd quarter as compared to the 2nd quarter of 2023.
Our our board's position has been pretty clear that Oh, we've kind of got some metrics in there on where we think our stock's really goodbye, we're getting down to those levels. Then it's highly likely we would be looking at and buying some more so I think you might see a little adjustment in that.
The buyback program from what we've been doing but.
We still have one in place I think it's probable that we will.
Okay. That's helpful more some more dialogue on M&A, but not necessarily because you are getting more interested per se.
I think Thats fair right.
Steve Crockett: This was partially offset by our organic loan growth combined with corresponding increase in our loan yields of 16 basis points as compared to the 2nd quarter of 2023. As outlined on slide 16, our average cost of deposits was 207 basis points in the 3rd quarter an increase of 38 basis points from the 2nd quarter of 2023 given the rising interest rate environment through the year. We've had to be proactive in maintaining deposit relationships, which is led to the rise in our funding cost.
We obviously need to stay aware of what's happening and as you well know, we've certainly seen multiple acquisitions happening in some of our home markets.
And some of them haven't gone, particularly well.
I would say, we certainly don't want to replicate that situation.
But yeah, Brian Bill My my walks in the door and we'd really want to do it but we're gonna be very cautious about it and certainly have some metrics that we would feel like we can defend very clearly to the market on what we decide to do.
Okay.
The thing is when it when it gets down to the M&A side of it I mean, what's really interesting is the fact that our phones ringing more so than anything than it has in the past yeah.
Steve Crockett: Additionally, and as Curtis touched on, we strategically expanded our broker deposit funding to augment our liquidity as we funded loan growth during the year. In the 3rd quarter, the increase in those deposits contributed approximately 18 basis points to the increase in our average cost of funds. Overall, our core deposit franchise has remained relatively steady through the year, with only a small decline in the 3rd quarter. We've also not had heavily rely on time deposit.
Okay.
Okay.
That's helpful and if I could sneak in one last one I'm just curious.
Sure.
Your.
Indirect auto portfolio is almost all prime and Super Prime, but I'm curious if you've seen anything on the consumer side that.
Maybe it would indicate that the consumer is starting to show some signs of weakness or slowing down spending any anything that you're seeing that would point to a slowing consumer.
Steve Crockett: DePosits. Our deposit makes of non-interest bearing deposits to total deposits modestly declined to 28.9% as compared to 30.8% in the second quarter of 2023. Turning to side 17, a ratio of allowance for credit losses to total loans was 1.41% at September 30, 2023 as compared to 1.45% at June 30, 2023. As Curtis touched on, we recorded a negative provision for credit losses of $700,000 in the third quarter. The negative provision was largely due to a reduction of $1.3 million in specific reserves partially offset by loan growth in that charge-off activity for the third quarter.
Yeah. This is Brent.
Really not not at least at this stage our delinquencies are in check still below pre pandemic and same with repo is still well below.
Pre pandemic levels, so not really seeing any any chink sir at this time I mean, we've got as you pointed out a heavy way toward higher credit score.
Consumer so that may be a part of that.
And I think one thing this is Cory I think one thing to keep in mind. If you look at our indirect portfolio. It kind of comes with with more necessities as opposed to toys.
And so we've been very careful in making sure that where we don't have we have not done much in the way of financing or piece of things that people can want to walk away from.
Steve Crockett: The reduction in specific reserves was a result of the full repayment of a $13.3 million non-accrual relationship in the quarter. Due to this bull pay off and other repayments are non-performing assets to total assets for a ratio of decreased to 12 basis points in the third quarter from 51 basis points in the second quarter of 2023. Classified loans declined approximately $16.7 million during the third quarter, but $50.7 million from $67.4 million at June 30, 2023.
Okay.
That's helpful. Thanks for all the additional color on CRE too.
You bet. Thank you.
Okay.
Our next question comes from Brady Gailey with K B W. Please state your question.
Hey, Thank you good afternoon guys.
I've already very high.
So I know we had the.
The partial bond restructuring last quarter I think if you put those proceeds to use in loans. So that's a big big pick up in yield are you contemplating doing any additional bond restructuring, where you sell bonds at a loss and then transition that into a higher earning.
Steve Crockett: Keeping ahead to slide 19, our non-interest expense was $31.5 million in the third quarter, as compared to $40.5 million in the second quarter of 2023. The decrease was primarily due to the $4.5 million in personnel and transaction expenses from the sale of windmark, plus related incentive compensation, as well as the $3.4 million loss on the sale of securities, which impacted us in the second quarter of 2023 and did not recur in the third quarter.
Earning asset overtime.
Yeah. This is Steve I mean, we we we look at it I mean, there is nothing.
A specific strategy that we're gonna, saying, we're definitely gonna do one but definitely want to look at it and see if it makes sense, obviously with with all the volatility in the bond market in the last several weeks and months, it's been a little bit more more challenge challenging that maybe it was at the beginning of the.
Steve Crockett: Importantly, our third quarter non-interest expense came in below the run rate that we have delivered over the last three quarters, as we have taken more cost out of our mortgage operations while continuing to implement further efficiencies across the bank. Looking to the fourth quarter in the year ahead, we expect non-interest expense to be flat or slightly increased based on continued rising cost. That said, we will keep looking for offsets to manage non-interest expense as we continue to selectively add talent to our team.
Third quarter, but I think it's I think it's always good for us to at least see what it looks like in and try to evaluate any of the merits of doing it.
Yeah. This is Curtis I would tell you I'm very pleased that our timing for what we did.
Given the additional change in the longer end of the curve.
So like Steve said, we watch it all the time and.
Steve Crockett: Moving ahead to slide 21, we remain well capitalized with tangible common equity, detangible assets of 8.4 percent at the end of the third quarter, a decrease from 8.96 percent at the end of the second quarter of 2023. The decrease was driven by the $9.3 million in share repurchases completed in the quarter and a $22.8 million decrease in a accumulated other comprehensive income, which was partially offset by $11.3 million of net income after dividends paid.
Never say never but right now, it's a little hard to figure out that really justifies taking that additional oh.
Tom loss out there to try to reposition it but there may be a point in there where it really starts to make sense, we watch it all the time.
Nothing I think part of that would kind of come with increased loan demand.
As long as as loan demand continues to slow down a little bit it's kind of hard to justify that right now.
It just stays nice there is.
They are the one time gains out there from the sale of wind Mark.
Steve Crockett: AOCI was negatively impacted again this quarter as longer term bond rates rose during the quarter, which resulted in lower fair values of our investment securities. Pansible book value per share declined to $21.7 as of September 30, compared to $21.82 as of June 30, 2023. Largely due to the impact of AOCI.
And I noticed it another bank significantly larger than us who sold off an insurance business. That's apparently what they chose to do it to make these fares. So it might be a pretty good use of some one time earnings but right now we're looking at it and I think it's Corey indicated for us.
Probably more than just trying to reposition the bond portfolio. It would be more about if we do ramp up some more loan demand more than we're expecting that would be a good source of funding.
Curtis Griffith: I'll turn the call back to Curtis for concluding remarks. Thank you, Steve. To conclude, I'm very proud of our performance once again this quarter, as we delivered net interest income growth, despite continued pressure on our funding costs as we benefit from the strong loan growth delivered over the last six months, combined with the healthy rise in our loan portfolios yield. We believe we have ample opportunities to reprise both our commercial loan and indirect auto portfolios over the next year, which will continue to drive interest income growth, even if our balance sheet only experiences moderate growth given the slowing economy.
Alright, that's helpful and then on the loan growth guidance of low single digits. I think you said moderate loan growth next year in 2024.
Are you thinking about the deposit side and you do you think you can grow deposits at a similar pace or should we expect a change in the loan to deposit ratio going forward.
I mean, I'll start and Steve can finish, but I think I don't I don't see how you can grow the loan the deposits at the same pace as well.
But I think.
I think part as I alluded to this while it goes one of the things that we've worked on is.
Curtis Griffith: Additionally, the credit metrics of our loan portfolio remain strong, as our non-performing assets are at their lowest level since before our IPO in 2019, which I am pleased to see given the uncertain macroeconomic outlook. We will also continue to recruit outstanding talent, like the lenders we brought in this quarter, to position South Plains for long-term growth and value creation.
We're probably we're going to be very focused on how we incent our team.
In in trying to build deposits in it as it relates to loans, we want to stay much more balanced in that process.
I think there's some opportunities there the thing that I'm really proud of is we've kept the relationship side of this so at the front and center and it's always been who we are what we believe in.
Operator: Taken together, we believe we're in a strong position, heading into the fourth quarter and the year ahead. Thank you again for your time today. Operator, please open the line for any questions. Thank you.
We're focused on deposits Theres no question that we're focused on deposits, but to sit here and tell you that we can keep it at the same level I don't think anybody can tell you that right now well I'll.
I'll argue the other side a little bit yeah. We can it's just we're not going to like what it does do you have now and you won't have any pets. So yeah, yeah, where you can pay up anytime we need to for deposits Moran, but so far.
Operator: And at this time, we will conduct our 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 that your line is in the question queue. You may press star followed by the number 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 handset before pressing the star keys. One moment, please, while we pull for questions.
Our strategy has worked and we are competitive, but we don't have to be up at the top of the market to do this and as long as we can handle deposits that were I think it benefits our shareholders to do it that way.
Alright.
Finally for me, it's interesting to hear about them.
A higher level of inbound calls related to bank M&A I know, it's probably not near term but as.
Graham Dick: Our first question comes from Graham Dick with Piper Soundler. Please state your question. Hey, good afternoon, guys.
As bank M&A do calls with you all more seriously look at opportunities, but can you just remind us what the ideal target is like from an asset size do you want it to be a market do you want low loan to deposit ratio like what are the things that you're looking for in an ideal acquisition target.
Curtis Griffith: I kind of just wanted to start on the margin. It sounds like you guys are pretty encouraged by what you're going to see on the asset repricing front over the next couple of quarters. But I just wanted to get your sense of how that might relate to the funding side from here. And if you think, if you're pretty confident that the asset repricing can offset any further increase in deposit costs from here and lead to not only better in eye, but I guess an in bottom being this past quarter.
Well I don't like the they.
They don't make an idea of what exactly we haven't found that one yet.
Already be announcing.
Yeah, it's it's likely to be a Texas franchise, I mean, I don't see our appetite from really going out of state, but as far as what it is where it is a there's a lot of options out there and.
Curtis Griffith: Yeah, this is this theme. I'll start. Yeah, we feel good. We're what's coming on the on the income side. The interest expense side. I mean, we still believe that that number will continue to increase. The hope is that it will offset, but we still see pressures every day on the deposit side. And so I'd like to say we were at the bottom of the minimum compression, but I think we will continue to see that see some challenges there.
We've heard about some regional directly called by some that are quite different.
The ones that we've had some discussion with so.
I'm not going to try to narrow it down to one that would be just what was it but historically I would still say this that if we find a west Texas based franchise with a relatively low loan to deposit ratio and a really strong core deposits that are still in the bank at fairly inexpensive rights.
That's pretty attractive.
Curtis Griffith: I mean, I don't think we would see a decline like what we saw this quarter with the with the broker side, but we'll continue to see pressure there. Yeah, I mean, I agree with you. I mean, what we're really excited about is the repricing that we know we have coming in the next 12 months. But I think we're all kidding our feels that we don't think we'll see some pressure on deposit costs keep going.
Finally, as I was right now in a situation where the the seller would be willing to.
Recognize how much the AMC I hear there's likely debate.
That's a that's a unicorn to go find right now I'll just tell you.
Yeah, you know for us what we're.
Yeah.
Try to find something that doesn't exact sprague's liquidity problems, but you're not taking on some problems that you weren't prepared to deal with I mean, you really got to understand the mentality of the seller as much as you do have the desire or the buyer to be sitting here looking at what you want to do and try to find something that doesn't that would add value to our franchise as opposed to taking a wait and blindly.
Curtis Griffith: Chris, obviously, a lot of it depends on what the Fed decides to do going forward, but I do think that when you mention finding a trough in the name, I think like many of our peers out there that we're not quite there yet, likely, but I don't think we're very far away from it, and I do think probably during 24 we began to find a bottle. I wish I knew exactly what quarter that'd be in, but I do think it's probable that somewhere in 24 we're going to see that because by then deposit costs will pretty well have reprised and if we don't see additional rating increases coming from the Fed, that will slow the opportunities for our depositors and other depositors to seek depositing their money somewhere else.
<unk> taken our focus away I mean, we've got to make sure that we don't do anything that does that but let's not forget I mean, the number one thing that I would probably go and add to what Chris was talking about is trying to find the cultural fit that works and if you sit here and you look at West, Texas and you'd look at the transactions that we've had recently in our market culture has been.
The downfall of a lot of the success of those transactions and so we're gonna be very very focused on all of the things that we've talked about whether it be liquidity capital loan demand and all of that is that our culture is going to be a tremendously large part of that thing.
Curtis Griffith: That's been the challenge obviously, and I think it's really helped us to have strong relationships that we have with depositors so that we have them out at the top of the market on our product offerings, but as Chris said, we're kidding ourselves, if we don't think we're going to still have some additional deposit pressure coming. But I think you can also see the fact that we've, I mean, we've kind of hold our liquidity in check as much as we can without just reprised the bank as a whole.
We're probably I think are our franchise value.
Proud of is the culture that we have the way our team pulled together.
Okay. That's helpful. Thanks, guys.
Thanks.
I think you never monitor audience to ask a question press star one on your phone to remove yourself from the queue Press star two on your phone.
Our next question comes from Joe <unk> with Raymond James Please state your question.
Curtis Griffith: So we've been very careful about it. We are going to face some of those pressures, but do I think it's in survival now? I don't. I think we've done a pretty good job of it and I think we'll continue doing a pretty good job of it. Okay, it's all very helpful. And then I guess just on the reprising side, you said 30% of loans reprised over the next 12 months. If you have like the average rate of those loans today and then where you think they would reprise too over that time period.
Good afternoon, Thanks for taking my questions.
Thank you Jonathan.
Just kind of piggyback on the M&A question. Just now just the fact that you're already had that west Texas presence do you think that would kind of mitigate any sort of.
Cultural integration excuse me some of the banks out there.
Oh, I don't want necessarily [laughter], it might but no I don't I don't culture, such a challenge out there and I'm not going to say that there aren't great banks in other parts of the state there wouldn't be a better cultural fit in some ways than some banks that are here in our neighborhood.
Curtis Griffith: Yeah, no, they're not a specific rate we've got on those. I mean, they're really across across the board, I would say. I mean, there's some of that is newer stuff. So some is at the higher rates, but I mean, there's definitely some that are that have been on the books for a little while. So, I mean, it's because it's just going to be a blend. There's no specific average yield we've got on that at this point. Yeah, I don't think we've got that information in front of us right now. Do I think it'll be a nice improvement? Yes. Okay. Yeah. Now, that's helpful.
That's just something you have to look at and its on a case by case basis I wouldn't make a generic statement that west, Texas would be necessarily a matter for you Joe.
Here's the thing I would tell you though.
I think you've got to put as much effort in trying to determine how those cultures are gonna come together as you do every other aspect of the balance sheet.
And it can't just be all of the numbers and so I think.
Curtis Griffith: And then I guess just lastly is on the funding side. What's your outlook, I guess, on non-interesting from here? Last quarter they were a little bit more stable, and then we obviously, you know, this quarter saw a little bit more acceleration on that front. How are you guys viewing non-interesting balances? And, you know, how are they acting this quarter? How do you think they'll act throughout 2024? And how does that play into your old strategy, I guess, from here on the growth side?
It's just a big part of it I think being able to be in.
Being very focused on it on the front end will make it make the outcome of that work, but we have to you can't take it for granted.
Understood and if I could circle back to capital.
Is there a capital ratio that you target to manage the bank to whether that's C. E T one or T C E.
Curtis Griffith: Well, I mean, I think, you know, we've had this, we've talked about this every time, every, every loan discussion we have comes with non-interesting balances that actually come with it. We're making much more concerted effort as it revolves around that. You know, some of it's a little bit of an avid flow that happens with those balances. Some of it is, I mean, people are using the money. I mean, and so that's shrinking, but it's as a whole, I think we do a pretty good job of trying to keep those that percentage of non-interesting bearing in check pretty good.
Yeah, I mean, we had.
Tangible common equity is one way we've definitely looked at I mean, we're.
Eight.
We've been in the in the high Eights, we were in the low nines I guess previously an Aoc is kind of.
But brought that back down but.
Yeah.
That's one that's one that we keep up with and I mean, we feel we feel good with where we're at and even unfortunately with what could occur if it if the bond portfolio went down a little bit more but I think we're that's that's a ratio that we keep up with artist is there any.
Curtis Griffith: We can't help but have a little bit of pressure from it. I mean, the value of those dollars are now worth more than they were in the past. But our loan, I mean, we're doing a better job of even on our loans to make it requirements to keep those balances in check, and we are definitely working on incentive packages for our officers that will really put a lot of emphasis on bringing those non-interest bearing balances in.
Well, that's I mean, when we look at that one as well, but that's the end of the day TCE is really what you got at the end of it and I think if you don't recognize that in your your.
Curtis Griffith: So as Cory said, you're going to have a continuing run off a little bit of that as people do recognize the value of money, the value of money, which up until fairly recently obviously wasn't very much. Now, it does behoove them to get something earned on that. But there's still a lot of business balances out there that are non-interest bearing high volume accounts, high activity accounts. There's a lot of things that we can do with them and make a little bit of money on the Treasury Management side as well.
You're you're not understanding the real value of your bond portfolio.
You continue to put it in there just basically.
Basically an inflated number so that's really the one that we look at more and yeah, I think somewhere in the eights on that is there is a good place to run a bank.
Okay.
Understood well knows Theres all the questions I had thank you very much.
Sure. Thanks, Jeremy show.
Thank you there are no further questions at this time I'll hand, the floor back to management for closing remarks. Thank you.
Curtis Griffith: So we are really pushing and not only preaching too, but monetarily and incentivizing our team to go out and find more of those. So certainly our hope that, well, we'll probably see a little more decline. I don't think we're going to see it drop down to some of the levels again, but on some of our peers, some larger banks have mentioned maybe on their calls. So we're certainly trying to hold on to it. That's the best money we can have in the bank right now. Okay. I appreciate it, guys. Thank you.
Well this is Curtis Griffith.
And thanks, everyone for participating in the call. We continue to work through these challenges and there are certainly a lot of them out there in the current environment.
It's a we're dealing with a rapidly rising deposit costs across the economy and we are very thankful to have the kind of long term long standing a depositor relationships that we do to be fortunate to be out here in some rural.
Markets and across West, Texas that has allowed us to retain deposits a little better than some of our peers.
Brad Rabatin: Our next question comes from Brad Rabbitton with Hope the Group.
And I think we're gonna still work hard to do that.
Brad Rabatin: Please say a question. Hey guys, good afternoon. Thanks for the questions. Want to just start back just on clarifying that 30% that mature is in the next year of the loan portfolio. If I look at those fixed rate loans that are maturing, so if I look at, I believe it's spot 8 or 9, I think it's spot 9. What piece of that pie is repricing relative to the fixed versus variable? Yeah.
Same time, we see some.
Continuing economic growth in the state of Texas is certainly slowed and I think markets will have to be very that'd be very selective in specific areas.
Advancing our loans, but we have a great team that handles their loan production handling underwriting and we're trying to be very cautious in how we do that and going forward.
Product certainly minimized whatever lung losses may occur and I do think that as.
Brad Rabatin: So it should be the fixed that mature 12 months or less, and then also the variable immediately repricable. And those that can reprise within 12 months or less, so there should be the 8, I think it's the 8, 16 and the 6%. It's not just maturing. Yeah, it's maturing and repricable, but they just think only they reprise on schedule, and many of them are actually on one year schedules. And some others that are coming up on, you know, a lot of banks did.
We peak out in interest rates, there will be some difficulty out there in our in our loan books, all across all banks and like we need to be well prepared for that we think we are where they're very strong.
Our allowance for credit loss today, and we'll watch it all the time, we continue to stress our loan portfolio and look for any cracks that might be a peering and be prepared for them. So with that kind of a cautious and conservative management in place. We still think that our stock is a good place to keep some money and we're excited.
To move forward and take advantage of some opportunities that we do think will be coming our way in 'twenty four and I think some of those will be the result of disruptions in our local markets and we'll continue to monitor all of our chances and again, we have an awesome team and I'm. So proud of them and we will continue to add additional team members for a notional.
Brad Rabatin: We certainly have a fair amount of stuff that was put on the books with a lot of, maybe a 10 year maturity, but a five year fix on the rate. And we're starting to hit some of those dates out there on those five years. So we'll certainly take that opportunity to reprise. And, you know, besides what we're saying there, we are going to, you know, have a scrub our loan portfolio constantly.
Communities present themselves with that I'll end, the call and thanks, everyone for being here today.
Thank you. This concludes today's conference all parties may disconnect have a great evening. Thank you.
Brad Rabatin: And as opportunities arise due to whatever situation that might trigger it in a loan agreement, we're not going to be bashful about seeking higher rates on those loans as well. So that might be our coming in a little bit in addition to even the 30%. It's not a big number, I would expect, but it's certainly meaningful.
Curtis Griffith: Okay. And then wanted to make sure I understood the kind of the verbage around capital uses from here. It sounds like you guys are getting a little more interested and possible emanates in areas if it made sense, but it also sounds like you're still committed to maybe continuing the share repurchase. And so just wanted to make sure I understood how you were thinking about both of those two things as you allocate capital here in the coming quarter.
Curtis Griffith: Well, what we're trying to say carefully out there is that, well, we're not getting terribly excited about M&A. We are beginning to get some inquiries about it. So I think it's still a challenging market to do anything in, but we'll stay aware of opportunities in our markets and see what comes along, but I think our board is still looking at having a, probably some sort of repurchase program in place, don't know what it's going to look like.
Curtis Griffith: We'll be talking about that real soon and re-bamping a little bit. As you can tell, we've been really pretty aggressive in this past quarter. Perhaps even a little more than we thought we might have been given the way pricing and everything worked out, but that I still think it's a good idea to have the repurchase program in place out there. I don't know what the market's going to do. Nobody does, but we've seen some fairly dramatic swings just in the last few days.
Curtis Griffith: And our board's position has been pretty clear that we've kind of got some metrics in there on where we think our stocks are really good by, and we get down to those levels, and highly likely we've been looking at buying some more. So I think you may see a little adjustment in that to buy that program from what we've been doing, but we still have one in place. I think it's probable that we will.
Curtis Griffith: Okay, that's helpful more for more dialogue and emanate, but not necessarily because you're getting more interested per se. I think that's fair that we obviously need to stay aware of what's happening, and as you well know, we've certainly seen multiple acquisitions happening from our home markets out here, and some of those haven't gone particularly well, and I would say we certainly don't want to replicate that situation. But the right deal may walk through the door, and we'd really want to do it, but we're going to be very cautious about it, and certainly have some metrics that we would feel like we can defend very clearly to the market on what we decided to do.
Curtis Griffith: Okay, but I think the other thing is what it's going to have an M&A side of it. I mean, what's really interesting is the fact that our phone's ringing or so, than anything, than it has in the past.
Curtis Griffith: Okay, that's helpful.
Curtis Griffith: And if I get sneak in one last one, I'm just curious, you know, your indirect auto portfolio is almost all prime and super prime, but I'm curious if you've seen anything on the consumer side that maybe would indicate that the consumers starting to show some signs of weakness or slowing down and spending anything that you're seeing that would point to a swelling consumer. Now, this is brand. We're really not, not at least at this stage, or our delinquencies are in check, still below pre-pandemic and same with repose, still well below pre-pandemic levels.
Curtis Griffith: So not really seeing any jinx there at this time. I mean, we've got, as you pointed out, a heavy weight toward higher credit score customers. So that may be a part of that. And I think one thing this is core. I think one thing you're keeping mine. If you look at our indirect portfolio, it kind of comes with more necessities as opposed to toys, and so we've been very careful in making sure that we don't have, we've not done much in the way of financing or the things that people can want to walk away from. Okay. That's helpful.
Curtis Griffith: Thanks for all the additional color on CRE2. Thank you.
Brady Gailey: Our next question comes from Brady Gailey with KBW, please, to your question. Hey, thank you. Good afternoon, guys. I know we had the partial bond restructuring last quarter. I think you put those proceeds to use in loans. So that's a big, big pickup in yield.
Steve Crockett: Are you contemplating doing any additional bond restructuring where you sell bonds at loss and then transition it into a higher earning asset over time? Yeah, this is Steve. I mean, we look at it. I mean, there's nothing, a specific strategy that we're going to say we're definitely going to do one, but definitely want to look at it and see if it makes sense. Obviously, with all the volatility in the bond market in the last several weeks and months, it's a little bit more challenging than maybe it was at the beginning of the third quarter.
Steve Crockett: But I think it's always good for us to at least see what it looks like and try to evaluate any of the merits of doing it. Yeah, this occurs. I'm very pleased that our timing for what we did given the additional change in the longer end of the curve. So like Steve said, we've watched it all the time and never say never, but right now it's a little hard to figure out that really, you know, justifies taking that additional income loss out there to try to reposition it.
Steve Crockett: But there may be a point in there where it starts to make sense. We watch it all the time. I think part of that would kind of come with increased loan demand. You know, I think as long as his loan demand continues to slow down a little bit, it's kind of hard to justify that right now. It just is nice to have the one time gains out there from the sale of win mark.
Steve Crockett: And I noticed that the bank is significantly larger than us who sold off an insurance business. That's apparently what they chose to do with big piece of theirs. So it may be a pretty good use of some one time earnings, but right now we're looking at it. And I think it's quite indicated for us. Probably more than just trying to reposition the bond portfolio. It'd be more about if we do ramp up some loan demand more than we're expecting. That would be a good source of funding.
Steve Crockett: All right, that's helpful. And then, you know, on the loan growth guidance of low single digits, I think you said moderate loan growth next year in 2024. How do you think about the deposit side and you think you can grow the positive to the similar pace or should we expect to change in the loan deposit ratio going forward? I mean, I'll start and see if you can finish, but I think I don't see how you can grow the loan the deposits at the same pace as well.
Steve Crockett: But I think I think Curtis alluded to this while it goes and one of the things that we've worked on is we're probably going to be very focused on how we incent our team in trying to build deposits as it relates to loans. We want to stay much more balanced in that process. I think there's some opportunities there, the thing that I'm really proud of is that we've kept the relationship side of this so at the front center and it's always been who we are, what we believe in.
Steve Crockett: We're focused on deposits. There's no question that we're focused on deposits, but to sit here and tell you that we can keep it at the same level, I don't think anybody can pay that right now. Well, I'll argue the other side a little bit. Yeah, we can. We're not going to like what it does to them and you won't buy it. We can pay up anytime we need to for deposits to pool more in.
Steve Crockett: But so far, our strategy has worked. We are competitive, but we don't have to be at the top of the market to do this. And as long as we can handle deposits that way, I think it benefits our shareholders to do it that way.
Curtis Griffith: All right, and then finally, for me, it's interesting to hear about, you know, kind of a higher level of inbound calls related to bank M&A. I know it's probably not near term, but as bank M&A defaults and you all more seriously look at opportunities, can you just remind us, you know, what the ideal target is like from an asset size. If you want it to be in market, do you want low-loader odds or you're like, what are the things that you're looking for in an ideal acquisition target?
Curtis Griffith: Well, I think they'll make an ideal one. We haven't found that one yet. We'd already be announcing. It's likely to be a Texas franchise. I mean, I don't see our appetite for really going out of state. But as far as what it is, where it is, there's a lot of options out there. And, you know, we've heard about some. We've been directly called by some that are quite different in the ones that we've had some discussion with.
Curtis Griffith: So, I'm not going to try to narrow it down to one that would be just a move it. But historically, I would still say this, that if we find a West Texas-based franchise with a relatively low-loan deposit ratio and a really strong core deposits that are still in the bank at fairly inexpensive rates, that's pretty attractive. But finding those right now in a situation where the seller would be willing to recognize how much the AOC I get is likely to be.
Curtis Griffith: That's a unicorn to go find right now, just tell you. You know, for us, what we're trying to find something that doesn't exasperate liquidity problems, that you don't take it on some problems that you weren't prepared to deal with. I mean, you really got to understand the mentality of the sellers as much as you do have the desire of a buyer to be sitting here looking at what you want to do.
Curtis Griffith: And trying to find something that doesn't that would add value to our franchise as opposed to taking it away and bluntly taking our focus away. I mean, we've got to make sure that we don't do anything that does that, but let's not forget. I mean, the number one thing that I would probably go and add to what Curtis was talking about is trying to find a culture fit that works. And if you sit here and you look at West Texas and you look at the transactions that we've had recently in our market, culture has been...
Curtis Griffith: The downfall of a lot of the success of those transactions. And so we're going to be very, very focused on all of the things that we've talked about whether it be liquidity, capital loan demand, all this stuff. But culture is going to be a tremendously large part of that. I think our franchise value that I'm most proud of is the culture that we have and the way our team pulls together.
Curtis Griffith: Okay, that's all cool. Thanks guys. Thanks.
Operator: And thank you and a reminder to our audience. Ask a question. Press star one on your phone to remove yourself from the queue. Press star two on your phone.
Joe Yanchunis: Our next question comes from Joe Yanchunis with Raymond James. Please say your question. The afternoon, they bring me questions.
Curtis Griffith: Hello, Joe. Just kind of piggyback on the M&A question just now. The fact that you already have that West Texas president, do you think that we kind of mitigate any sort of cultural integration issues with some of the banks out there? I don't want to say that there are great banks in other parts of the state. There wouldn't be a better cultural fit in some ways than some banks that are here in our neighborhood.
Curtis Griffith: That's just something you have to look at. It's only case by case basis. I wouldn't make a generic statement that West Texas would be necessarily a better fit. Joe, so here's the thing I would tell you though. I think you've got to put as much effort in trying to determine how those cultures are going to come together as you do every other aspect of the balance sheet. And it can't just be all the numbers.
Curtis Griffith: And so I think that's just a big part of it. I think being very focused on it on the front end will make it make the outcome of that work. But we have to, you can't take it for granted. I understand it.
Steve Crockett: And if I could circle back to capital. Is there a capital ratio that you target to manage the bank to whether that's C.E.T.Warn or T.C.E.? Yeah, I mean, we, we, we've definitely looked at. I mean, we're, you know, we've been in the, in the high age. We were in the low nines. I guess previously in AOC, I was kind of brought that back down. But, you know, we, that's one that we keep up with.
Steve Crockett: And I mean, we feel, we feel good. We're rad. And even, unfortunately, what could occur if the bond portfolio went down a little bit more. But I think we're, that's a ratio that we keep up with. Curtis, is there any? Well, that's, I mean, we look at that C.E.T.Warn as well. But at the end of the day, T.C.E, is really what you got, you know, at the end of the day. And I think if you don't recognize that and you're, you're, you're not understanding the real value of your bond portfolio.
Steve Crockett: If you continue to put it in there, just at a basically an inflated number. So that's really the one we look at more. And yeah, I think somewhere in the eights on that is a, is a good place to run a bank.
Curtis Griffith: Hunter said, well, there's all the questions I have. Thank you very much. Thank you. Thank you for the further questions at this time.
Operator: I'll hand the floor back to management for closing remarks. Thank you.
Curtis Griffith: Well, this Curtis Griffith, again, thanks everyone for participating in the call. We continue to work through the challenges, and there are certainly a lot of them out there in the current environment. We're dealing with rapidly rising deposit costs across the economy, and we are very thankful to have the kind of long-term, long-standing, deposit or relationships that we do to be fortunate to be out here in some rural markets and across West Texas that allowed us to retain deposits a little better than some of our peers.
Curtis Griffith: And I think we're going to still work hard to do that, but at the same time, we see some continuing economic growth in state of Texas. It's certainly slowed, and I think markets will have to be very selective in specific areas that were advancing our loans. But we have a great team that handles the loan production and the underwriting, and we're going to be very cautious in how we do that. And going forward, try to certainly minimize whatever loan losses may occur.
Curtis Griffith: And I do think that as we peak out in interest rates, that there will be some difficulty out there in our loan books all across all banks. And I need to be well prepared for that. We think we are. We're the very strong allowance for credit loss today. And we'll watch it all the time. We continue to stress our loan portfolio and look for any cracks that may be appearing and be prepared for them.
Curtis Griffith: So with that kind of cautious and conservative management in place, we still think that our stock is a good place to keep money. And we're excited to move forward and take advantage of some opportunities that we do think will be coming our way in 24. And I think some of those will be the result of disruptions in our local markets, and we'll continue to monitor all those chances. And again, we have an awesome team, and I'm so proud of them, and we will continue to add additional team members when those opportunities present themselves.
Curtis Griffith: With that, I'll end the call and thanks everyone for being here today.