South Plains Financial, Inc. (SPFI) Earnings Call Transcript

Thank you. Ladies and gentlemen, and welcome to the South Plains Financial Inc. Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Additionally, the company has issued their earnings press release and earnings slide deck presentation, which are available on the SEC's website, as well as on the news and events section of their website, spfi.bank. Please refer to slide 2 of the presentation for management's safe harbor statements regarding forward-looking statements. All comments expressed or implied are made during today's call are made only as of today's date and are subject to the Safe Harbor Statements in the presentation and earnings release. In addition, please refer to slide 2 of the presentation for the company's disclaimer regarding the use of non-GAAP financial measures. A reconciliation of these measures to the most comparable GAAP financial measures can be found in our presentation and earnings release. On today's call, we have Curtis Griffith, Chairman and Chief Executive Officer, Corey Newsom, President, Steve Crockett, Chief Financial Officer and Treasurer, Brent Bates, City Bank's Chief Credit Officer, and Tyler Haynes, City Bank's Chief Banking Officer. I would now like to turn the call over to Mr. Curtis Griffith. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Before I turn the call over to Corey, I want to take a moment to thank our employees, our customers, and our shareholders for their support over the years. As I prepare to retire as Chief Executive Officer at the end of this year, I've been reflecting on what we have built together, and I could not be prouder of what City Bank has done and South Plains have become. Over the years, we've built a strong relationship-driven franchise, a unique culture, and a team that has always remained committed to serving our customers and communities. What gives me the greatest confidence about the future is the people we have in place today. The leadership transition that will be completed at year-end has been planned for many years. Along with the rest of our experienced management team, [Corey Newsom] has been leading the day-to-day operations for quite some time. We have worked hard to build a deep and experienced leadership team while also developing the next generation of talent across the company, including Tyler Haynes, who joins us on the call today, and many others who represent the future of South Plains. While my role will change at year-end, I will remain involved as Chairman of both South Plains and City Bank. My focus will shift toward helping guide the long-term strategy of the company and the bank alongside our boards of directors and management team. I am confident that South Plains is in an excellent position with a strong balance sheet, attractive growth opportunities, and a talented leadership team that's well prepared to continue building on our success. The strong results we delivered during the third quarter, including near-record earnings per share, stable profitability, and solid organic loan growth, reinforced that confidence and demonstrate the continued success of the strategy we have been executing. With that, let me turn the call over to Corey.

Thank you, Curtis, and thank you for your leadership, support, and guidance over the years. It's been a privilege to work alongside you for many years. The culture, customer relationships, and reputation that we have built over the past several decades have created a tremendous foundation for the future. While I'm honored to step into the CEO role at year-end, I'm equally pleased that Curtis will remain Chairman. I look forward to his support as Chairman as we execute our strategy of expanding our lending platform across our high-growth Texas markets while pursuing disciplined acquisition opportunities. Most importantly, the bank is in an excellent position today and I'm excited to build upon the strong foundation that our team has created. Turning to slide 4, I'm very pleased with our third quarter results. Net income increased to $20.8 million compared to $19 million in the second quarter. We also delivered diluted earnings per share of $1.06 as compared to $0.96 in a linked quarter. Return on average assets improved to 1.53% while our efficiency ratio improved to 58.1%. Importantly, we generated these results while maintaining our disciplined approach to credit and risk management as we continue to build the long-term of the bank. Turning to slide 6, loans held for investment increased by approximately $60 million as compared to the linked quarter, representing 6.3% annualized organic loan growth, and ended the period at $3.83 billion. The increase was driven by healthy loan production across our markets and was achieved despite the early payoff of a $25 million loan that was fully secured by the borrower's deposit account, as well as an anticipated payoff of a large relationship during the quarter. The fact that we were able to deliver this level of growth despite these payoffs reflects the strength of our underlying loan pipeline and customer demand. As we've discussed throughout the year, we expected loan production to accelerate as we move through 2026, and we believe the second half is developing largely as anticipated. While loan payoffs continue to occur in the normal course of business, we believe our loan pipeline remains healthy and customer demand remains strong across both our metropolitan and community markets. Based on current production trends and pipeline activity, we remain confident in delivering our full-year loan growth guidance in the mid-single digits. Our loan yield was 6.75% during the quarter compared to 6.81% in the second quarter. Although the market interest rate environment remains volatile, we remain focused on balancing prudent growth with profitability as we continue to expand relationships throughout our footprint. Turning to slide 7, our major metropolitan markets remain an important growth driver for the bank. Loans in Dallas, Houston, and El Paso increased by approximately $23 million during the quarter to $1.71 billion and represented 44.6% of our total loan portfolio as of September 30th. We continue to see attractive opportunities across these markets and remain encouraged by the activity levels, loan pipelines, and long-term growth prospects in each of these regions. In Houston specifically, we continue to be pleased with our progress following the Bank of Houston acquisition. It's important to note that much of our team's focus has been on the integration, the system conversion process, and employee training since we closed on April 1st. With those efforts now largely behind us, our Houston bankers are now able to focus more fully on business development and growth opportunities available in one of the most attractive banking markets in Texas. We are also beginning to see the benefits of combining the two organizations, including enhanced lending capacity, additional liquidity, and the ability to pursue opportunities that may have been previously constrained. More broadly, expanding our lending platform remains one of our top priorities. We continue to benefit from the disruption across the Texas banking industry, particularly as competitor mergers create opportunities to recruit experienced bankers and deepen customer relationships. During the quarter, we added experienced bankers in Lubbock and in College Station, and we remain active in identifying talent that fits our culture and relationship-based approach to banking. Given the ongoing consolidation across our markets, we believe there will continue to be opportunities to grow our team and drive future organic loan growth. As we continue to execute our organic growth initiatives, M&A remains an important component of our long-term strategy. We continue to evaluate opportunities that have the potential to strengthen our franchise, expand our presence in attractive markets and create long-term shareholder value. Importantly, we will remain disciplined in our approach if any potential transaction must align with our culture, community banking model, credit standards, and financial objectives. We're not interested in growth for growth's sake, and any acquisition must create long-term value for shareholders. Given our strong capital position and the scale of our platform, we believe we are well positioned to pursue the right opportunities should one emerge. Skipping to slides 11 and 12, non-interest income totaled $13.8 million during the quarter compared to $14.1 million in the second quarter. The modest decline was primarily driven by lower bank card services and interchange revenue as the prior quarter benefited from incentive income that did not repeat in the third quarter. Mortgage banking revenues totaled $4.9 million and benefited from a $1.6 million increase in the value of our mortgage servicing rights asset as market interest rates moved higher during the period. While higher interest rates have created additional pressure on mortgage origination activity across the industry, our mortgage operation has not been a drag on earnings during this challenging environment and should be positioned to benefit when the activity eventually improves. Outside of mortgage banking, our diversified fee income businesses continue to perform well and remain an important contributor to the bank's overall profitability. For the third quarter, non-interest income was 21% of bank revenues, essentially flat with the linked quarter. Now I'd like to turn the call to Steve to discuss our third quarter results in more detail. Steve?

Thanks, Corey. For the third quarter, diluted earnings per share, $1.06 compared to $0.96 from the linked quarter. The increase was driven by strong organic loan growth prior to the two large payoffs and stable margin performance, and the reduction of acquisition-related expenses in connection with our BOH acquisition. Importantly, these results were achieved while absorbing approximately $875,000 of accrued expense associated with Curtis's retirement, which, combined with what was recognized during the second quarter, are now largely behind us. This expense was mostly offset by the benefit of higher mortgage servicing rights valuation adjustment as interest rates moved higher during the quarter. Turning to slide 14, net interest income was $51.5 million for the third quarter, up $1.1 million from the linked quarter. The increase was primarily driven by a $53 million increase in average interest earning assets during the quarter. Our net interest margin (NIM) on a tax-equivalent basis remained stable at 4% during the third quarter. As we've noted previously, reported margins in certain prior periods benefited from problem loan interest recoveries. Excluding those items, we have maintained a stable margin profile despite continued volatility in interest rates. Looking ahead, our focus remained on maintaining our NIM at current levels while growing our balance sheet as we execute our organic loan growth strategy, which we believe will drive earnings growth and improving returns over time. As outlined on slide 15, deposits increased by $20 million from the linked quarter at $4.66 billion. As Corey noted, we had a $25 million CD secured loan that paid off during the third quarter by liquidating the collateral. This was not unexpected and will be additive to our net interest margin. During the quarter, we also allowed certain higher cost and non-core funding sources to leave the bank while continuing to generate growth in core customer deposits. This reflects our efforts to optimize our funding base following the Bank of Houston acquisition. Non-interest-bearing deposits increased to $1.18 billion and represented 25.3% of total deposits at quarter end as compared to 24.8% at June 30th. Our cost of deposits improved slightly during the quarter, declining 1 basis point to 207 basis points as compared to the linked quarter. Looking ahead, we continue to see opportunities to manage select higher-cost funding sources, which remains an important lever in maintaining our profitability at current levels. Turning to slide 17, our ratio of allowance for credit losses to total loans was 1.38% at September 30th, from 1.41% in the prior quarter. During the quarter, we recorded a provision for credit losses for loans of $1 million, primarily driven by organic loan growth and net charge-off activity. We continue to believe our reserve levels appropriately reflect the risk profile of the portfolio and position us well for a range of economic conditions. We did experience a modest increase in non-performing loans during the quarter, primarily related to Bank of Houston acquired loans. While non-performing loans increased to 40 basis points of total loans, overall levels remain low, and subsequent to quarter end, we have already seen the largest of these credits return to performing status. As we've discussed previously, we anticipated some migration within the acquired portfolio, and our credit team continues to actively work these loans to help ensure a proper resolution. Next on slide 19, non-interest expense decreased by $1.8 million to $38.1 million in the third quarter as compared to the linked quarter. The decrease was primarily driven by lower personnel costs, a reduction in mortgage commissions, and the absence of acquisition-related expenses associated with the Bank of Houston transaction, which were largely behind us following the second quarter. Taken together, our efficiency ratio improved to 58.1% in the third quarter from 61.6% in the linked quarter, reflecting both continued revenue growth and our ongoing focus on expense discipline. Looking ahead, we remain focused on investing in growth opportunities while maintaining strong operating leverage across the organization. Moving to slide 21, we remain well capitalized with tangible common equity to tangible assets of 10.32% and a common equity tier 1 ratio of 14.2% at quarter end. Our strong capital position provides flexibility to support both our organic growth initiatives and disciplined acquisition strategy. Our tangible book value per share was $29.23 as of September 30, 2026, compared to $29.60 at June 30. The modest decline was primarily driven by a decrease in accumulated other comprehensive income of $25.5 million, given the large rise in interest rates during the quarter, partially offset by $17.4 million of net income after dividends paid in the third quarter. We remain focused on returning capital to shareholders, having announced today that we will pay our 30th consecutive quarterly dividend during the fourth quarter. We continue to view capital allocation through the lens of balancing growth, profitability, and shareholder returns. This concludes our prepared remarks. I will now turn the call back to the operator to open the line for any questions. Operator?

Thank you. We'll now be conducting a question and answer session. [Operator Instructions] Thank you. Our first question is from Brett Rabatin with StoneX Group.

Hey guys, good afternoon. It was good to see the margin stability and the management of the cost of funds. I was just curious, wanted to talk, I know there's a lot of variables that go into it, but just your thoughts on the margin from here and if there's additional hot money that you might be letting go and then just you know any thoughts on where you're seeing new loan production relative to the current portfolio yield?

I'll start. I'll let Brent or somebody else talk about loan rates, but we were very glad to see margin where it's at. You know, we did have loan growth in the quarter, which definitely helped, you know, with the excess liquidity we've been carrying. That helps boost up the net interest margin. Loan yields were down just a little bit, but still fairly close to where we were last quarter on the deposit side. We did, we saw a little bit. We tried to move a few things, but overall, you know, the cost was down just slightly, but we continue to try to manage overall deposits, some of the non-core stuff and push out some of that that we don't need. Just really want to try to keep the NIM in a fairly close range of where we're at. It could always go up a couple basis points or down a couple basis points. Somebody else want to talk about new loan rates?

Yes, I mean, this is Brent on new production. We're seeing those rates come up a little bit there toward the end of the quarter. You know, typically seeing upper 6s on new loan origination volume.

And I think as far as continue to maintain it, this is Corey. Brett, we've got a lot of our internal challenges that we were facing with conversions and new loan operating system. A lot of that stuff is kind of getting put to the wayside. And so there's really been a focus back on trying to push things through the pipeline and get it done. And the pipeline is still really good. So I think that's going to continue to enhance that a bit.

Okay, that's helpful. And then one of the – to talk about expenses, the hires, I didn't hear the number on the number of hires for Lubbock College Station, but a lot of – you know, I don't call it noise, but a lot of things going into the expense run right from here, maybe. So the $850,000 is probably – coming off from Curtis's retirement. But, you know, any thoughts on, I know there's $4.6 million of expense savings from Bank of Houston. Any thoughts on the pace of the expense base from here? And then, you know, a lot of banks have been telling me that there's been numerous opportunities to hire from two particular banks. And just wanted to see if that lending pipe, pipeline might still be running pretty strong.

Brett, this is Corey. Let me take off and talk about the new hires. So we picked up a couple new hires during this quarter. We were staying very, very focused. This is something that's very, very important to us. So we're pretty thoughtful about the way we go about bringing new talent on, and we're trying to make sure that they're good fits in the process of doing this. I think we're as focused as we've ever been on continuing to hire talent. And opportunities exist, and, I mean, we're in the midst of it as we speak. So I think that part's going to keep going. Steve, I mean, the expense side.

Yes, I mean, overall expenses, I mean, generally, we're down a little bit. All things being equal, just through some true up of accruals and different things. So I wouldn't be surprised. We definitely should be down based off of what you talked about, the $875,000 number. But outside of that, we're generally down a little bit. But, you know, when we click over into the next year, I mean, there's always new things that come on. Some of that, as Corey said, will depend on new hires that we get in, just all the things that come around. So dollars of non-interest expense after we get to next year, again, I would think those do start going up, you know, percentage-wise, definitely. I wouldn't like to see non-interest expense percent increase.

This is Tyler. I think we're always looking for new hires that are the right fit. But sometimes it's just the long game, too, and I think that was some of our success this quarter. You've got somebody that you keep an eye on and keep relationships with, you just drip on them and stay with them and wait for it to be the right time for them to join your team. And so we'll continue to do that as well as looking for more opportunistic ways to bring new members on our team.

Okay. If I'm reading the comments correctly, it sounds like the expense base could be a little lower in the fourth quarter, but then have some build back over '27 as you continue to grow the franchise and all those types of things. Yes, I would agree with that. Okay. Great. Appreciate the call. Thanks, guys.

Thanks, Brett.

Thanks, Brett.

Thank you. Our next question is from Joe Yanchunis with Raymond James.

Good afternoon, guys. So, thank you for taking my questions. I was kind of hoping to start with loan growth a little bit. You talked about how you added a couple more lenders. You have some past hires that are continuing to ramp. Can you talk a little bit about how the pipeline's developed over the past few months? And do you think you'll be able to sustain this momentum, you know, into '27 with that kind of mid-single-digit loan growth or potentially accelerate beyond that?

Yes, Joe, I'll start off. I mean, our pipeline over the second half of the year has been much stronger than the first, and we continue to have a very, very healthy pipeline of both new originations as well as construction funding that we're still continuing to expect to have and So, no, I feel very good about hitting our year projection for growth for sure. All right. And then, I'm sorry, go ahead. No, I just kind of talked about how the it's my grade how the metro markets have continued to improve. Yeah, so our metro markets now are really nearly half or more of our pipeline in total. And in prior years, that was probably more close to a third. So you're just seeing that really take – take root and, uh, you know, and give us a good backlog of new production to come on the books.

Joe, I think that's a reflection, and this is Corey, I think that's a reflection of not only the talent that we already had in place, but the talent that we've been able to bring across and the things that are coming under fruition with the Bank of Houston acquisition.

And, um, you know, you talked about some of the payoffs you had earlier in this quarter. As you look at the portfolio today, are there any other sizable payoffs that you're anticipating over the next couple quarters that we should be thinking about?

This is Brent. I mean, I think it's kind of become, I don't want to say the norm, but we've kind of baked that into our thought process here. I mean, you're always going to have things that are coming down the pipe, and we will have more likely in the fourth quarter. And we've kind of, in my mind, factored that in to being confident we can hit where we think we'll hit by the end of the year.

These two that just got called out on this call, there was nothing surprising about those. The thing that I would like to go back and kind of reiterate, and we've mentioned this. We have, over the last 18 months, been in a position trying to exit some relationships. We're not there anymore. We feel really good about the quality of the portfolio as it exists today, and we're not in any kind of a position where we're trying to exit some stuff that we think doesn't really fit. We do like what we have. We think we've kind of accomplished all those things that we were trying to do.

Well, you know, if you were to just kind of focus on the credit of the portfolio, I mean, it looks like non-performing loans ticked up a little bit, not to an alarming rate or anything. But can you give us some color on what drove those those increases? You know, any sort of industry concentration or, you know, perhaps a potential those were originated Bank of Houston?

Yes, those were both. We had a few migrate to non-performing, and those were acquired. That really drove that number. We were actively involved and have been actively involved in remediation plans on those. In fact, the largest of the two have already been resolved to the point of being back to performing. So we're running our normal process and the the the ones that migrated during the quarter were, it wasn't new. We knew the risk was there. Uh, at the time of the merger and have been working those plans since then.

Yes, they were already classified loans. They just moved a step just so we could we can work on.

I think we missed one by a week from when just from a timing perspective. The largest one of them. So that's why you saw a little tick up there.

Okay, that's helpful. And then last one for me here. So we've recently seen mechanics bank sell with indirect auto loans near book value. While Truist exited, it's near prime auto business. I know we've talked about the auto portfolio over the past few years and just kind of given it strong credit performance, but have you ever considered selling some of that portfolio today to redeploy capital into some other commercial lending vehicles?

No, not really. I mean, we like this piece of business for us. I understand how there's some of that business out there inside the industry that is a little bit challenged. We're just so careful about what we put on our books. I mean, if you look at where we are from a liquidity standpoint, we still have plenty of liquidity to loan out. We're in a good capital position. I just don't think that's something that we're pressured with at this point.