SOUTH PLAINS FINANCIAL, INC. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Earnings Growth: Strong third quarter results with net interest income expansion, improved credit quality, and increased return on assets.
• Talent and Technology: Added exceptional talent and invested in technology platform for efficient scaling.
• Liquidity and Capital: Strong liquidity and capital, well above regulatory requirements.
• Lending Team Expansion: Plan to increase lending team by up to 20%, with progress already made in markets like Permian, Houston, and Dallas.
• Indirect Auto Portfolio: Carefully managed, with improved credit metrics, but monitoring credit score migration.
• Noninterest Expense: Decreased by $519,000, primarily from lower professional service expenses. Redeemed $50 million in subordinated debt.

Segment Performance

• Loans: Loans held for investment decreased by $45.5 million to $3.05 billion in Q3 2025. Multifamily property loans saw a $46.5 million decrease. Loan yield was 6.92% in Q3, down from 6.99% in the linked quarter. Excluding one-time gains, loan yield was 6.84%. Indirect auto loan portfolio was $239 million, relatively unchanged. 30-plus days past due loans improved to 24 basis points. Net charge-offs for consumer autos were $160,000.
• Noninterest Income: Generated $11.2 million in Q3, down from $12.2 million in the linked quarter. Primarily due to a $1 million decrease in mortgage banking revenues.
• Deposits: Deposits increased by $142.2 million to $3.88 billion, with noninterest-bearing deposits up $50.7 million.
• Capital: Well capitalized with tangible common equity to tangible assets at 10.25%, tangible book value per share at $28.14.

Guidance

• Loan Growth: Expect loan growth to gradually accelerate to mid- to high single-digit rate through 2026, with new hires contributing in 2026 and payoffs diminishing.
• M&A: Open to accretive M&A opportunities, focusing on culture fit and successful banks that align with South Plains' conservative nature.
• Dividend: Board authorized $0.16 per share quarterly dividend, 26th consecutive.

Risks

• Loan Payoffs: Higher-than-normal loan paydowns were a headwind, though expected to moderate.
• Credit Score Migration: Monitoring credit score migration in indirect auto portfolio for potential credit issues.
• Economic Conditions: Cautious optimism about economic growth across Texas markets, but potential impact on loan portfolio.

Question and Answer

• Q: Plan to increase lending team by up to 20% next year. How much of growth is from true lenders vs support staff? Base number of lenders? A: Cory Newsom: Base is about 40, all production. Already achieved north of 10% growth this year.
• Q: Indirect auto portfolio concentration of subprime and deep prime. Talk about that. A: Steve Crockett: Deck data may not be consistent; updated info shows changes in borrower credit scores, not a significant increase in subprime/deep subprime.
• Q: Incremental cost associated with redeeming $50 million sub debt. A: Steven Crockett: Was paying $4.5 million, would have gone up to $8 million, but no expense to redeem.
• Q: Hiring initiative expense growth. How to think about expense growth? A: Steven Crockett: Noninterest expense will modestly increase, with compensation in ICP packages paid out into next year.
• Q: M&A checklist for good target. What makes a good target? A: Cory Newsom: Culture fit, successful bank with customer loyalty, employees committed for long term, numbers line up.
• Q: Indirect auto credit score migration. Concern? A: Brent Bates: Monitoring, migration in bottom half of scores, but no significant delinquencies or credit issues yet.
• Q: Commercial real estate payoffs. Vulnerability? A: Brent Bates: Scheduled payoffs in first and second quarter, some from resolving credit issues, not lowering standards just to keep loans.