SOUTH PLAINS FINANCIAL, INC. Q3 FY2024 earnings call

• Capitalization: Well capitalized with consolidated common equity Tier 1 risk-based capital ratio at 13.25% and Tier 1 leverage ratio at 11.76% as of September 30, 2024.
• Loan Portfolio Management: Managed decline in indirect auto and homebuilder portfolios; credit quality remains solid; multifamily loan on non-accrual has an agreed resolution with credit enhancements.
• Deposits: Strong deposit growth, with $95 million increase in Q3; holds number one or two deposit share in many rural Texas and New Mexico markets.
• Dividend and Stock Repurchase: Board authorized 7% increase to quarterly dividend to $0.15 per share; repurchased 40,000 shares in the quarter, with muted buyback activity expected.
• M&A Outlook: Expect community bank M&A activity to pick up, but any potential deal needs strong cultural fit, minimal dilution, and reasonable earn back.

Loan Portfolio: Declined by $57 million to $3.04 billion in the third quarter. Indirect auto loan portfolio declined $19 million to $235 million. Major metropolitan loans (Dallas, Houston, El Paso) declined $20 million to $1.05 billion, representing 34.5% of total loan portfolio. Deposits: Increased by $95 million to $3.72 billion in the third quarter, with non-interest-bearing deposits at 26.9% of total deposits. Non-Interest Income: $10.6 million in the third quarter, down from $12.7 million in the linked quarter, impacted by decreases in mortgage banking revenues, bank card services, and investments in small business investment companies, partially offset by non-recurring insurance proceeds.

• Loan Growth: Expected to be flat in the fourth quarter, with optimism for acceleration in 2025 as interest rates decline.
• Dividend: Quarterly dividend increased by 7% to $0.15 per share.
• Stock Repurchase: Buyback activity expected to remain muted as liquidity is balanced for growth.
• M&A: Watching for community bank M&A but with high hurdles for any potential deal to be considered.

• Economic Uncertainty: Impact on loan growth and deposit costs due to ongoing economic uncertainty.
• Competitive Pressures: From community bank mergers and competitor actions affecting deposit share and loan pricing.
• Interest Rate Fluctuations: Effect on net interest margin and fair value adjustment of mortgage servicing rights.

Q: On deposits, how much treasury helped DDA and thoughts on seasonality and lowering cost of funds?

A: Cory Newsom noted treasury helped via delivering right service and lenders requiring deposit relationships; Steve Crockett mentioned non-interest bearing deposits increased and projected to manage cost of funds down as rates decline.

Q: On loan growth guidance and 2025 initiatives, any focus on segments?

A: Cory Newsom stated pipeline is strongest in 2 years, Brent Bates mentioned contraction in indirect and homebuilder portfolios slowing; both expect growth to reemerge in 2025.

Q: On margin with lower rates, thoughts?

A: Steve Crockett projected to improve net interest margin as rates go down, but short-term liquidity pressure from loan paydowns and deposit growth may slightly impact; Curtis Griffith emphasized funding loan growth with core deposits instead of short-term funds.

Q: On deposit betas pre and post rate cut, trends?

A: Steve Crockett said deposits trending as anticipated, Cory Newsom noted not racing to top like peers so future cuts will be more beneficial; Curtis Griffith mentioned softening on CD rates across most markets but some still paying up.

Q: On loan payoffs impact on NII and prepayment fees?

A: Brent Bates and Cory Newsom stated no impact on NII and no larger prepayment fees on payoffs.

Q: On mortgage outlook, after MSR impact?

A: Cory Newsom said mortgage fees down about $800,000, expecting activity to pick up at start of next year as rates move; Curtis Griffith noted team still doing business despite rate fluctuations.

Q: On loan yields with robust pipeline, expectation?

A: Brent Bates and Cory Newsom said expect loan yields to improve as loans reprice, with good pricing on loans and mix of C&I, CRE, construction.

Q: On CD rates trend and expected maturity schedule?

A: Steve Crockett said majority of CDs are one-year or less, beginning to reprice down; Curtis Griffith mentioned CDs percentage below peer, cutting rates on some but not having much demand for longer term CDs.

Q: On bond book trend?

A: Steve Crockett said no addition to bond book during quarter, fair value of securities increased; Curtis Griffith noted choosing not to reposition bond book significantly due to hedged municipals and economic uncertainty.