Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial First Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Steven Crockett, Chief Financial Officer of South Plains Financial. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. We appreciate your participation in our first quarter 2020 earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer; Cory Newsom, our President; and Brent Bates, City Bank's Chief Credit Officer. As a reminder, a telephonic replay of this call will be available through May 14, 2020. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements about our future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated future results, performance or achievements expressed in or implied by the forward-looking statements. Factors that could cause such differences include, but are not limited to, general economic conditions, the impact of the COVID-19 pandemic, changes in interest rates, regulatory considerations, competition and market expansion opportunities, changes in noninterest expenditures or in the anticipated benefits of such expenditures and changes in applicable laws and regulations. Therefore, the company can give no assurance that the results contemplated in the forward-looking statements will be realized. Such risks and other factors are set forth in our annual report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission on March 25, 2020. We urge listeners and readers of our earnings release to review the Risk Factors section of that annual report on Form 10-K and the Risk Factors section of other documents South Plains Financial files with the SEC from time to time. Listeners and readers of our earnings release are cautioned not to place undue reliance on forward-looking statements contained in this earnings call or in our earnings release. 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. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. At this point, I'll turn the call over to Curtis.

Thank you, Steve, and good afternoon. On today's call, I will provide an update on our operations in light of the ongoing COVID-19 pandemic that is impacting our nation and the world. I will then briefly review the highlights of our first quarter 2020 results, including an update on the integration of the West Texas State Bank or WTSB. Cory will discuss the steps we are taking to manage our loan portfolio and Steve will then conclude with a more detailed review of our first quarter 2020 financial results. We will then open the call for your questions, and we have City Bank's Chief Credit Officer, Brent Bates, here to help. Over my nearly 50-year 10-year in banking, I have seen many tumultuous periods, each of which have their own unique challenges. Ultimately, it has been the experience and talent of our people, combined with a well-capitalized balance sheet, which has consistently positioned City Bank to not just weather the storm but thrive. And we believe this time of crisis is no different, and we expect City Bank will continue to drive through our dedication and support to our customers and communities. So without their success, ours would not be possible. It is this philosophy and experience, which guides our company, and I would like to thank our employees for their hard work and dedication to ensure that our operations continue to run smoothly, and the services and support to our customers are uninterrupted during these difficult times. I am very proud of our oversight committee for our business continuity and incident response here at the bank. They have been monitoring the spread of the coronavirus in the communities we serve for several weeks and have been continuously escalating our response as well as our employee and customer communications as…

Thank you, Curtis, and good afternoon, everyone. As Curtis discussed, we've invested in our infrastructure and technology in order to transform our operations and build a foundation for future growth. As part of this investment, we've implemented a rigorous enterprise risk management system, or ERM, that delivers a systematic approach to risk measurement and enhances the effectiveness of risk management across the bank. Integrating this ERM system into our culture and strategic decision-making has improved all functional areas of business. For example, our asset quality improved significantly by enhancing our underwriting process and establishing a specific credit appetite that aligns to the broader enterprise risk management framework. Importantly, our credit culture is a key differentiator of the bank as we consistently and aggressively review our portfolio for signs of potential issues and act to remove those loans from our balance sheet before they become a real problem. Our ERM system has only improved our ability to manage credit and has positioned our portfolio and the bank to successfully weather the uncertain economic environment, which we currently face. This is a significant change from our position in the last downturn as our underwriting and our team are much stronger today than when we entered the Great Recession. We are also utilizing tremendous data and have a much better handle on our portfolio which will aid in our decision-making processes. Additionally, our new Chief Credit Officer, Brent Bates, is providing critical leadership as we work to proactively manage our loan portfolio. Looking at our loan portfolio in more detail. Loans held for investment at the end of the first quarter of 2020 were $2.11 billion, which is a modest decline as compared to loans of $2.14 billion at year-end 2019. As a reminder, there is seasonality in our business as we experienced…

Thank you, Cory. This afternoon, I will briefly review the remainder of our first quarter 2020 results as Curtis and Cory have touched on many aspects of our results before turning the line back over to Curtis for concluding remarks. Net interest income was $30.2 million for the first quarter of 2020 as compared to $24.5 million for the first quarter of 2019. The increase was largely attributable to a rise in our average loans of $211 million, primarily from the WTSB acquisition and a decrease of 56 basis points in the rate paid on non-maturity interest-bearing deposits. In the first quarter of 2020, deposits decreased $31 million to $2.67 billion as compared to $2.7 billion in the fourth quarter of 2019. The decrease in deposits during the first quarter of 2020 was largely a result of some outflows or balances acquired from WTSB, which had temporarily increased in the fourth quarter of 2019. We ended the first quarter of 2020 with total noninterest-bearing deposits of $741 million or 27.8% of total deposits. $189 million of our noninterest-bearing deposits are attributed to the WTSB acquisition. Cory touched on our loan portfolio and the steps that we are taking to work with our borrowers to manage our credit. Overall, we believe our strict underwriting and strong credit culture has our loan portfolio well positioned as we endure in this uncertain environment. This can be seen as our nonperforming assets to total assets ratio only slightly increased 4 basis points to 28 basis points in the first quarter of 2020 as compared to the fourth quarter of 2019. As Curtis mentioned, we did add to our reserves in the first quarter of 2020, given the headwinds that we are seeing and expecting from the pandemic and the drop in oil prices. We…

Thank you, Steve. To conclude, I would once again like to thank our employees for their hard work during such a challenging time. They have kept our operations running with minimum disruptions as we have adapted to our new normal as a result of the pandemic. While we will certainly see a contraction in the economy for some period of time, I am confident in our underwriting, the credit worthiness of our portfolio and our capital. We stand ready to support our customers and our communities and look forward to further growing the bank as opportunities present themselves. With that, I'd like the operator to open the line for any questions. Operator?

[Operator Instructions] We'll first go with Brad Milsaps from Piper Sandler.

I was writing quickly. I just want to confirm a few numbers. Cory, I think you said hotel, 3.9% of the loan portfolio; restaurant, 5.4%; and energy 4.3%. Is that correct?

Yes. That's correct.

Okay. I was just curious on those categories, maybe which of the 3 maybe gives you the most concern at this point? And just curious if you have specific reserve levels for each of those 3 categories?

I'll let Brent take that one.

Yes. This is Brent. As we look at kind of our higher risk segments, we feel like the hospitality and energy sectors were hit kind of early on, and we feel like those may be the longer to recover. So that's kind of how we've looked at it. We've taken hands-on approach to the modification process to those sectors. And when you look at hospitality, we've got a lot of limited service hospitality. So we feel good about that. That's really the vast majority of our portfolio there. And to your question on reserves, our reserves on energy book is about 4.3%; on hospitality, it's 3.3%. So that was really where we focused our reserves for the quarter or on provision, I should say. We're on those higher risk segments.

Got it. In the restaurant reserves, is there a specific reserve there?

Yes. Our retail restaurant reserves are closer to 2%.

Okay.

If you look at our restaurant -- when we look at our restaurant portfolio, I mean, it's really centered in QSRs that have maintained operations. That's 2/3 of our portfolio there. And they're well-known brand. So far, we're not hearing the level of stress there at the -- at least in our smaller portfolio of restaurant.

Got it. That's helpful. And then within the energy portfolio, can you remind me kind of the breakdown kind of between service and E&P in that book? I mean, I think you inherited most of that from the most recent acquisitions. Is that right?

Yes. Some of it. When you look at our energy book, really 92% of that are service related. I would caveat -- I'd say, there's 1/3 or more of that, that isn't something that you might categorize as I mentioned, almost like a midstream. So that's been kind of a conservative call on service. But about 1/4 of that came through the acquisition. So 3/4 of our energy book is legacy and about 1/4 is acquired. But again, we've -- the largest credit of the bank represents over 1/3 of the portfolio is backed by really strong guarantor and we feel good about that. The guarantor has strength beyond the energy industry and cash flow ability there. So we take comfort there at least.

This is Curtis. Yes, this is Curtis. Brad, if you're still on there, we're not trying to gloss over anything. It's going to be some tough times in the energy sector. The oil patch is going to be in, we think, a fairly extended period of downturn. We're just fortunate that it's not a huge piece of our overall portfolio. And as Brent indicated, some of the larger credits we have really strong guarantor support with lots of on-hand liquidity. They're not really dependent on revenue coming in from the energy side to continue to be able to make some payments, it came down to that. So it doesn't mean we won't have some hiccups, but we're not losing too much sleep over that one.

Right. Right. And then -- that's helpful, Curt. That's helpful. And maybe just switching gears quickly to the margin. I know, Steve, you mentioned that you do expect some compression near term. Sort of excluding the impact of the PPP program, could you sort of frame that up for us a little bit, kind of what your expectations are in terms of magnitude? It looks like you guys are continue to make some progress on the deposit side of things, but just kind of curious kind of how you're feeling about kind of total magnitude of the compression based on what we see in the rate environment?

Yes. That's a good question. And as you said, the PPP will definitely, over the next quarter or 2, will skew those numbers somewhat with the low rate plus the fee. But excluding that, we did make good headway with -- on the deposit side. So -- and we've still -- we've seen that maintain so far. But just one aside to the Q1 numbers, we had about 4 -- 3 to 4 basis points of income related to payments on purchased impaired loans. So it was up 3 to 4 basis points due to that. Looking forward, we've got -- we'll continue to fight for the margin that we've got. But you could see it drop 5 to 7 basis points or so.

We'll next go with Brady Gailey from KBW.

So 4.3% of loans in energy, that's the direct exposure. Is there any way to quantify what the indirect energy exposure would be?

Well, when you're thinking about direct being inclusive of service, that's the 4.3%. We have taken -- look, obviously, we have majority of the assets down through the acquisition are going to be centered in those markets down there so. And we've also kind of gone through the portfolio and looked for other segments within the bank that's going to be tied at least indirectly to the energy book. And we're not finding a great deal. I mean, I would say in the 2% is what we found direct outside of the acquisition. And so that's kind of where we're seeing it right now, what we've identified as the largest credits that we don't have in this book that may be somewhat tied in with that industry.

As an illustration, looking at our hospitality book, we've got about 16% of that are related to hotels that are located down in the Permian. And certainly, they're going to be impacted possibly over a longer period of time than hotel properties in other markets in Texas so. But again, it's still a pretty manageable number. There were quite a few loans that we'd acquired that because of the particular lender that was involved in making them, were not, in fact, located in the Permian region. So it's not like the entire loan book was all tied down there to the activity in the Permian. It's -- all of those down there will have some struggles. I was comforted to find out when we did a little looking on our indirect portfolio that only a very small portion of our indirect auto lending is to ZIP codes that are down in the Midland, Odessa area. So I was concerned we might have some impact there, but it's going to be pretty minimal.

All right. And then so $170 million of PPP loans, I think most banks have seen a gain of around -- or a fee of around 3%. Is that the right way to think about it for you guys? And as you look round 2 of the PPP, what's the -- how active do you think you'll be in the second round?

So we've calculated the first round. The first round, we came in $173 million. That fee is going to be somewhere -- we anticipate close to around $6 million. So at 3.5%.

All right. And then $173 million in the first round, any idea how much you'll potentially do in the second round?

We've not been able to fund any -- to any great extent yet. But from an approval standpoint, we're $35 million into it.

Okay. And then looking at the expense base, there's $34 million this quarter. I heard Steve say that will be coming down next quarter. Any idea of the magnitude of how much reduction you could see on the expense side?

So we definitely had -- I think we showed $630,000 in Q1, that would be nonrecurring, although we do still have a little bit of conversion expense, I think that will tail off in Q2. So we should see the majority of that number coming out over the next couple of quarters. And then in addition to that, we have begun implementing some new cost saving strategies on our own as well.

If you look back and what we had projected on cost savings, I think we're very much on track, and we're staying the course of what we had originally projected. However, we think there'll be some additional ones that just like Steve alluded to. I mean, we've just got through reworking our health plan that renews in July. We've been able to adapt that plan into some significant cost savings for the company. I mean, those -- that's the kind of stuff we're consistently staying after trying to find improvement.

That concludes our question-and-answer session for today. I'm handing the floor back to the speakers for closing remarks.

Well, let me close the call out by thanking everyone. Thank you, operator, for your help. Thanks, everybody, that joined our call today. We hope you and your families are continuing to stay safe through this. We are definitely in uncertain times and unprecedented times. Our approach is that it is going to take several months before the economy returns to some sense of normalcy. And the way we're working with our portfolio is driven by that thought. We do hope we will be back in great condition by sometime during 2021, but we've still got some rocky times ahead of us, I believe, before we're back to anything that resemble like what we had been accustomed to prior to the pandemic. I am very proud of our employees. They have worked so hard to support our customers and our local communities through all of this, and have gone above and beyond with extended hours, working in difficult environments and are still doing their best every day, and I do appreciate every one of them. Our investments in technology and infrastructure and our people has really positioned us to succeed through a time like this. We've got some challenging headwinds, certainly. But with all of that working together, we feel pretty confident that we'll come out strong. And our local economies are still continuing to function. They're all diminished. Everyone is, but we're really optimistic. Many of our industries are trying to continue to perform during this environment. As we've mentioned, clearly, the energy industry has been very hard hit that will affect certain areas in which we maintain bank locations. But our locations in many of the other parts of the state have been somewhat -- not hit nearly as hard. Let me just phrase it that way. All…

This concludes today's call. Thank you for participating. You may now disconnect.