South Plains Financial, Inc.

Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial Inc. Fourth Quarter 2022 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. 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. I would now like to turn the call over to Mr. Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead, sir.

Thank you, Operator, and good afternoon, everyone. We appreciate your participation in our fourth quarter 2022 earnings conference call. With me here today are Curtis Griffith, our chairman and chief executive officer, and Corey Newsom, our president. A replay of this call will be available on our website within two hours of the conclusion of the call until February 2nd, 2023. Additionally, a slide deck presentation to complement today's discussion is available on the news and events section of our website. Before we begin, Let me remind everyone that this call may contain forward-looking statements and are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those anticipated future results. Please see our safe harbor statement in our earnings press release that was issued this afternoon and on slide two of the slide deck presentation available on our website. All comments made during today's call are subject to those safe harbor statements. Any forward-looking statements presented herein are made only as of today's date, and we do not undertake any duty to update such forward-looking statements, except as required by law. Additionally, during today's call, we may discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can also be found in our earnings release and on slide 22 of the slide deck presentation. At this point, I'll turn the call over to Curtis.

Thank you, Steve, and good afternoon. On today's call, I will briefly review the highlights of our fourth quarter and full year 2022 results, as well as our outlook for the year ahead. Corey will discuss our loan growth and the credit profile of our loan portfolio in more detail, as well as review our strategic initiatives for 2023. Steve will then conclude with a more detailed review of our Q4 results. To start, I am very proud of our execution over the last year as we successfully navigated a challenging economic environment, and while the economic outlook remains uncertain, we believe we have positioned South Plains for continued success in the future. Central to our success has been the expansion of our commercial lending platform, which has driven the acceleration in our organic loan growth and contributed to an improvement to our run rate net interest income. As our net interest income improved through the year, it began to offset the expected decline in our mortgage banking revenues as the Federal Reserve aggressively raised their benchmark interest rate to combat inflation. Looking forward, we believe we are well positioned to continue to deliver returns in line with or better than our peers. Given that backdrop, there are five key points that I hope you will take away from our results and today's call. First, we delivered 8.6% annualized loan growth in our seasonally slower fourth quarter, driven by strength in both our community markets as well as our major metropolitan markets of Dallas, Houston, and El Paso. Second, our major metropolitan markets experienced 13.9% annualized loan growth to $879 million, which now represents 32% of our total loan portfolio. at year end as our new lenders continue to successfully grow their portfolios. Third, the credit quality of our portfolio remains stable through the fourth quarter, and we believe we are well positioned for the uncertain economic outlook. Fourth, we have diligently managed our expenses to drive profitability as our mortgage banking revenues have declined and wage pressure has increased across the bank. Lastly, we remain focused on returning capital to our shareholders. During 2022, we repurchased 4.8% of the company's shares of common stock that were outstanding as of December 31, 2021. We also distributed 46 cents per share in quarterly cash dividends in 2022, representing a 53% increase as compared to 2021. Turning to our results in more detail on slide four of our earnings presentation, we delivered net income of $12.6 million or 71 cents per diluted common share for the fourth quarter of 2022. This compares to net income of $15.5 million or 86 cents per diluted common share in the third quarter of 2022 and $14.6 million or 79 cents per diluted common share in the year-ago fourth quarter. As we discussed on last quarter's earnings call, our third quarter 2022 results benefited from 10 cents per share of legal settlements, net of increased legal expense, and a negative provision for loan loss, net of tax. As a result, our fourth quarter earnings per share experienced their more typical seasonal decline like we have experienced in prior years. we recorded a provision for loan losses of $248,000 in the fourth quarter of 2022 as compared to a negative provision of $782,000 in the third quarter of 2022 and no provision in the year-ago fourth quarter. The provision was mainly due to our loan growth in the fourth quarter. Looking forward, we believe we are well-reserved for an uncertain economic environment given that our allowance for loan loss ratio is 30 basis points higher than our pre-pandemic levels. Our base case outlook is for the national economy to experience a mild recession in 2023, with the Texas economy seeing a slowdown but avoiding recession, given the continued strong in-migration and low unemployment that we have been experiencing. As a result, provisions for loan losses may be necessary in future periods. While we expect economic growth to slow in Texas as the Federal Reserve continues to raise their target benchmark interest rate, loan demand remains strong through our seasonally slower fourth quarter as we grew our loan portfolio 8.6% annualized from the third quarter of 2022. Our loan growth was driven by gains in both our community markets as well as our major metropolitan markets. For the full year 2022, we grew our loan portfolio 12.7% to $2.75 billion, which exceeded our expected mid-to-high single-digit loan growth. This strong loan growth contributed to net interest income growth of 13.7% to $138.5 million as compared to 2021, and which helped offset the 47.5% decline in mortgage banking income that we experienced through 2022. As a result, we were able to modestly grow diluted earnings per share to $3.23 in 2022 as compared to $3.17 per share in 2021, which is quite an achievement. Overall, I am very proud of our accomplishments in 2022 as we've grown our lending team taken share across our markets, and delivered results above our expectations. That said, our share price has not fully reflected this improvement, as we believe our shares have continued to trade below intrinsic value. As a result, we utilized the remaining capacity on our share repurchase authorization to buy back 130,000 shares during the fourth quarter. For the full year 2022, we repurchased 860,000 shares representing approximately 4.8% of our shares outstanding at December 31, 2021. Our Board of Directors is currently analyzing our prior buybacks and evaluating the merits of another share repurchase program. We also understand that liquidity in our shares is important, and we need to balance our liquidity with the benefits of our share repurchase programs. Additionally, as was disclosed earlier this month, our Board of Directors adopted resolutions to terminate our employee stock ownership plan on December 30, 2022. This plan was created in 1994 and no longer served its intended purpose. The plan will be distributing the shares to the plan's participants, which may improve our stock liquidity over time and will also reduce the expense required to maintain the plan. We believe this will benefit the company, our employees, and our shareholders. Returning a steady stream of capital to our shareholders through our share repurchases and quarterly dividends remains a priority for our management team. Along those lines, our Board of Directors authorized a 13 cents per share quarterly dividend as announced last week. This will be our 16th consecutive quarterly dividend to be paid on February 13, 2023, for shareholders of record on January 30, 2023. For the full year 2022, we distributed 46 cents per share to quarterly cash dividends, representing a 53% increase as compared to 2021. To conclude, we remain cautiously optimistic that the Texas economy can deliver moderate growth in 2023 and avoid a recession, but we do expect a mild recession in the national economy. That said, we will remain vigilant and will not sacrifice credit quality for growth. We have been underwriting the more conservative assumptions and remain confident in the credit quality of our portfolio. Looking forward, we also believe that more challenging economic environments can lead to opportunities for those with strong balance sheets and sound loan portfolios. While we expect M&A to remain subdued through 2023, We look to further expand the bank and remain in contact with potential sellers as we believe there could be a resurgence in 2024. Now, let me turn the call over to Corey.