Good morning, ladies and gentlemen. Welcome to the South Plains Financial Incorporated Third 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 opened 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 conference over to Mr. Steven Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead, sir.

Thank you, operator. And good morning, everyone. We appreciate your participation in our third quarter 2022 earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer and Cory Newsom, our President. A replay of this call will be available on our website within two hours of the conclusion of this call until November 4, 2022. 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 morning 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 morning. On today's call, I will briefly review the highlights of our third quarter 2022 results, which we believe are a clear validation of our ongoing strategy to grow the bank. Cory will discuss our loan growth in more detail and well as review the credit profile of our portfolio, which remains strong. Steve will then conclude with a more detailed review of our Q3 results. To start, there are five key points that I hope you will take away from today's call. First, we spoke to our business being at an inflection point on last quarter's call, and I'm proud to say that our results this quarter validate that view. Second, we delivered 17% annualized loan growth in the third quarter, driven by strength in both our community markets and our major markets of Dallas, Houston and El Paso. Third, this strong loan growth is building the earnings power of the bank and we continue to have liquidity to fund further loan growth. Fourth, the credit quality of our portfolio continued to improve through the third quarter and we believe we are well positioned for an uncertain economy. Lastly, we continue to believe that our shares have been trading below intrinsic value and remained active with our share repurchase program having bought back approximately 366,000 shares in the third quarter. Looking at our results on slide four of our earnings presentation, we delivered net income of $15.5 million or $0.86 per diluted common share for the third quarter of 2022. This compares to net income of $15.9 million or $0.88 per diluted common share in the second quarter of 2022 and $15.2 million or $0.82 per diluted common share in the year ago third quarter. It's important to highlight that our results over the…

Thank you, Curtis, and good morning, everyone. As Curtis touched on, loans held for investment increased during the third quarter of 2022 by $109.9 million or 17% annualized, compared to the second quarter of 2022 as outlined on slide five. Our loan demand remained primarily in the commercial real estate market, residential mortgage and in consumer auto. Overall, loan demand was strong despite the noted paydowns in our hotel segment, which is not a growth sector for us. Our loan yield in the third quarter of 2022 was 5.12%, which compares to 5.57% in the second quarter of 2022. That said, it is important to adjust our second quarter loan yield for the $4.4 million of large recoveries and prepayment penalties that we experienced. When adjusting for those items, our second quarter 2022 loan yield was 4.88%. A Curtis touched on, the improving trends and our results over the last three quarters have been obscured and we believe it is important to adjust for these benefits in order to properly model to growing earnings power of the bank. The rise in our loan yields in the third quarter also reflects our concerted effort to proactively price new loans to account for a higher interest rate environment, combined with the rise in funding costs, which we have started to see through the third quarter. We are working hard to stay ahead of the market, while also maintaining our competitive position, which remain a focus as the Federal Reserve continues their aggressive interest rate increases and tightening policies. As we discussed in our second quarter 2022 call, we are a community retail bank in our smaller markets and primarily a commercial bank in our major markets of Dallas, Huston and El Paso as outlined on slide six. Our strategy is to redeploy…

Thank you, Cory. Starting on slide 13. Net interest income was $35.1 million for the third quarter of 2022 as compared to $37.1 million for the second quarter of 2022. This comparison to the second quarter is skewed by the $4.4 million of large loan recoveries and prepayment penalties that were recognized during the second quarter. Excluding these one-time benefits, net interest income increased by $2.4 million, primarily as a result of the increase of $122 million in average loans outstanding combined with higher interest income received on securities and other interest earning assets in our portfolio as a result of the rising market interest rate environment. Looking forward, we continue to believe that we are well positioned for our net interest income to benefit as we grow our loan portfolio and benefit from the anticipated rise in interest rates through the fourth quarter and potentially into the year ahead. Our net interest margin calculated on a tax equivalent basis was 3.7% in the third quarter of 2022 as compared to 4.02% in the second quarter of 2022. Excluding the $4.4 million of large loan recoveries and prepayment penalties that we recognized in the second quarter, our net interest margin was 3.54% which is a better comparison to the 3.7% in the third quarter of 2022. The improvement in our net interest margin as compared to the second quarter was driven by our strong organic loan growth combined with the rising market interest rate environment. Our average cost of deposits was 52 basis points, an increase from 27 basis points in Q2. During the third quarter, we made the decision to proactively raise our deposit interest rates as we started to see increased competition for deposits in our markets. We are being strategic in how we raise interest rates in…

Thank you, Steve. To conclude, our third quarter results validate our view that our business has reached an inflection point and the bank is now positioned for additional growth. Our strategy to expand our lending platform and our metro markets is driving improved loan growth as we quickly build scale in Dallas, Houston and El Paso, while our community bankers continue to increase our share in those markets. Importantly, we have liquidity to put to work in higher yielding loans, which will serve to further improve the earnings power of the bank. As we grow, we will see our returns improve, which we believe will increase the value of South Plains. While the economic outlook remains uncertain, the Texas economy remains healthy and we have maintained our disciplined approach to underwriting. The credit profile of our loan portfolio has continued to improve and we remain in an advantageous position for whatever the future may hold. I would like to thank our employees for their hard work and commitment to our customers and communities once again this quarter. None of our success is possible without them. Thank you again for your time today. Operator, please open the line for any questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Brady Gailey with KBW. Please proceed with your question.

Thank you. Good morning, guys.

Good morning, Brady.

Good morning, Brady.

It's good to hear that expenses will be down a little bit linked quarter in the fourth quarter, but I heard the comment on wage inflation, which I know everybody is seeing. So how do you all think about the level of expense creep that we could see into 2023?

I’ll let Steve talk about that when he's been running the numbers for us?

Yes. So, Brady, as far as what we're showing, Q4, we definitely expect to see that lower than where we were in Q3 as we get into 2023. We still think that we'll be flat to slightly better than the run rate there that we were showing in Q3, that we'd be able to offset some of that personnel expense due to inflation with other cost saves that we've got, also including the reduced legal that we spoke to.

All right. And then it was great to see the share repurchases. I know year to date you repurchased about 4% of the company. How do you think about kind of continuing at this pace of buybacks? I mean, you still have excess capital, but we are potentially headed into a recession. So how do you think about buybacks into 2023?

Well, our Board is going to have some good discussion on that at our next meeting. We will likely reauthorize repurchase program, but I also would think that given the potential recessionary fears issues out there and frankly where our stock price improved as well that the level, the speed of repurchase might be slowing a little bit. But I think we'll still stay in the market as long as we feel like we have slightly undervalued stock.

All right. And then finally for me, I know Lubbock can be a fairly competitive market when it comes to deposit rates. Deposit rates moved up in the quarter, so what should we expect on how much those deposit rates should continue to go up next quarter and into next year?

This is Cory. So I mean, there's no question that we're going to see some increase in rates with everything that's going on. We're not seeing stuff really crazy locally. I mean, there was a little bit of movement early on, but it's not getting out of hand, which is a good thing, which kind of makes you feel kind of good about the market and the competitors that we've got. We know that some of the stuff going to increase some, I mean, if you look at the expectations that where we kind of thought it was -- its right in line. And we talked about last quarter, I mean, we're offering some additional products that we've got in other markets that we haven't been active in the past and we're seeing some results out of that. So yes, we'll see some increase, but I don't think it's going to get out of hand.

Everything we're seeing, we still think we can hold that beta that we've talked about being 50% or better on it. But there's other thing here locally, I don't know, you're aware of it. Obviously, we talk about more from the loan side, but the recent M&A activity in our markets year that prosperity has done, we think that may also tend to lessen some deposit pressure -- deposit pricing pressure out here as well. As those transactions move forward. So reduction in the number of competitors, fighting over the limited pool of deposit is probably a good thing for us.

Yes, that makes sense. All right. Thank you, guys.

Thanks, Brady.

Our next question is from Brad Milsaps with Piper Stanley. Please proceed with your question.

Hey, good morning, guys.

Hi, Brad.

God morning, Brad.

You guys addressed a few of my questions already, but just did want to follow-up on the deposit beta discussion. [indiscernible] I hear you say correctly that you think 50% or less, would that be total deposits or interest bearing deposits? How do you think about that 50% beta number that you just put out there?

That's on interest bearing.

Okay.

And we do have, like our last DDA numbers, but some of those are somewhat seasonal for various reasons, including public funds and others. So that's one thing that DDA numbers will move up and down for us, but we're also trying to just add customer relationships and bring the DDA accounts in as we go with that. We still are big believers in what we're doing in treasury management and are reaching out not only here locally, but also in our metro markets with those. So over time, I think you'll see the average of the DDA piece continue to grow. But don't be surprised if you see it bounce up and down a little bit quarter to quarter.

Sure. And on the flip side, it looked like your loan beta on a core basis was somewhere around 25%. It does look like you're putting on a lot of CRE with your new lenders. Just curious, is that kind of the right number to think you know, as the Fed continues to increase, you'll see that type of lift in your loan yield going forward?

Yes. We're all set here, cautiously wanting to answer that. We're getting good yields on the loans that we're putting on. That's the beauty of it. I mean, from a pipeline standpoint, when we look at that to bring it together, pipeline is still strong, it's moderating some. I mean, there's no question, but we're -- probably where we're seeing some of the biggest challenges is on our own underwriting, making sure that we're comfortable with what we're bringing in here and the way we're stress testing this step. So we're getting good yield on the step that we're putting on.

Great. And then just finally on -- or maybe a couple. On insurance revenue, I know the third quarter is always a big one for you guys, but you're tracking for growth over 20% year over year which is a pretty big number. I know it's a good insurance market and yours is just focused on ag. Anything else that would be driving that? Or do you think you kind of pulled back to some kind of more typical high single digit 9%, 10% kind of growth rate in 2023? Or is there something out there that makes this more sustainable?

Well, I'll start and then I'll let Curtis or Cory jumped in as well. I know some of that just had to do with the timing. There was a little bit of revenue that might have typically come in in the fourth quarter, that came in in the third quarter that pushed that number up a little bit. I mean, they did have -- overall I think they have better revenues than last year, but I don't know that that's anything that we're projecting to show increases in the upcoming year from what we've seen now.

Part of that is we do a really good job of diversification across a number of states. So a lot of that growth comes back on how -- what the year looks like as far as loss rates and things like that. We don't take any underwriting risk, we never have, we're not going to. But you're still from a profit sharing position, you kind of look back at how the year turned out. It kind of depends -- we got to look back at how the overall year turns out if you're going to look at that kind of increase next year. But if you look at the footprint of how we're expanding with the number of agents and stuff guys, it's good. We're pleased with it.

It is a good business and please remember that virtually all of what we report as insurance income is tied to the federal crop insurance program. And as Cory was mentioning, we do get some nice profit sharing on that, but those are -- that's related to underwriting gains at the companies that we ride for. And while 2021 was a very good year for those companies and therefore we got a nice check coming in this time. 2022 hasn't been good in many areas, not entirely across the country, but they definitely had some underwriting losses. So right now, our own forecast is we'll probably be down at least slightly for the 2023 same period, whenever those profit sharing checks do come in.

That’s on the profit sharing side, not on the overall banks revenue.

Not on overall base revenue side. We continue to grow that.

Right. Okay. And then maybe final question, kind of more housekeeping. Curtis, you mentioned the kind of $0.10 this quarter of what you might consider non run rate items. Can you tell me kind of what encompasses that? I'm curious, was there any type of MSR right up this quarter. I mean, I saw the $2.1 million of litigation proceeds, but just making sure I didn't miss anything else that should be pulled out either positively or negatively in your mind?

Steve indicated and he confirmed it, but $400,000 in MSR gains for this quarter. So not a big number, but it was some in there. So yes, that's in there.

Yes. So Brad, on the legal settlement, we did net off some of the increased legal expense that we had in the quarter related to that. So that kind of lowered that number just a little bit and coming up with the $0.10 number.

And we did have a couple of loss recoveries, not on the level that we did in Q2 on one loss recoveries, but we did have some in Q3 as well.

Got it. So those, as you mentioned in response to Brady's question, some of those legal expenses are going to come out in the fourth quarter, which kind of drives your guidance for lower expenses in the fourth?

Yes, sure.

Okay, great. Thanks for the color. Appreciate it.

Thank you, Brad.

Thank you.

We have reached the end of the question and answer session. I'd now like to turn the call back over to Curtis Griffith for closing comments.

Thank you, operator, and thanks to all of you on the call today for your time. I am proud of our results again this quarter. We are delivering on our strategy to organically grow the bank and here with disruptions from M&A and our community markets are really adding some great opportunities for our lenders to increase our market share. And as we just discussed, probably pick up and deposits as well. Our lenders in our metro markets are continuing to grow their portfolios, bringing on strong customer relationships to the bank. Our mortgage is still profitable, but now down at a level that it won't meaningfully impact results, positively or negatively going forward. The earning power of our core business really does continue to grow and so we are optimistic about the future. Our markets do remain healthy, but I think our activity will moderate as the Federal Reserve continues to raise rates. We'll remain focused on the credit profile of our loan portfolio, which continues to be very strong. So thanks again today for everybody for your time and for your interest in South Plains Financial.

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.