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 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 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 Cory 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 2 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. Cory 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 continued to successfully grow their portfolios. Third, the credit quality of our portfolio…

Thank you, Curtis, and good afternoon, everyone. As Curtis touched on, long held for investment increased during the fourth quarter of 2022 by $57.7 million or 8.6% annualized compared to the third quarter of 2022 is outlined on Slide 5. Our loan demand remained primarily in commercial real estate, residential mortgage, and consumer auto. Overall loan demand remains strong despite the fourth quarter being a seasonally slower quarter for the bank combined with principle payments in a hotel segment, which is not a growth sector for us. Our loan yield in the fourth quarter of 2022 was 5.59%, which compares to 5.12% in a third quarter of 2022. The rise in our loan yields in the fourth quarter reflects our efforts to proactively price new loans to account for a higher market interest rate environment. Our funding costs did accelerate in the fourth quarter as the Fed Reserve continued their aggressive interest rate increases and quantitative tightening policy. As we will discuss managing our funding costs and deposit growth is a focus for our team in 2023. As we have discussed on prior calls, we are a community retail bank in our smaller markets and primarily a commercial bank in our major metropolitan markets of Dallas, Houston and El Paso as outlined on Slide 6. Our strategy has been to redeploy our excess liquidity consisting of lower cost deposits from our community-oriented markets into major metro markets. To accomplish this, we have added experienced commercial lenders who share our culture and values and who focus on developing long-term customer relationships done the right way. Our expansion and growing scale in our metropolitan markets is a key factor to the accelerating loan growth that we delivered in 2022 combined with a market share gain that our community bankers continue to deliver.…

Thank you, Cory. Starting on Slide 13, net interest income was $36.3 million for the fourth quarter of 2022 as compared to $35.1 million for the third quarter of 2022. The increase was primarily a result of an additional $74.4 million in average loans outstanding combined with higher interest income received on other interest earning assets in our portfolio as a result of the continued rising interest rate environment. We also benefited from $900,000 in a purchase loan recovery in Q4. Looking forward, we continue to believe that we are 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 first quarter of 2023. Our net interest margin calculated on a tax equivalent basis was 3.88% in the fourth quarter of 2022 as compared to 3.70% in the third quarter of 2022. This improvement in our net interest margin was driven by our organic loan growth combined with the corresponding increase in loan yields due to the rising interest rate environment, which outpaced increases in our funding cost. Our average cost of deposits was 97 basis points in the fourth quarter of 2022, an increase from 52 basis points in the third quarter of 2022. As we discussed on last quarter’s call, competition for deposits started to increase through the third quarter and we made the decision to proactively raise our deposit interest rates to maintain relationships. Through the fourth quarter, we have seen a further increase in the competitive landscape, which has necessitated a more aggressive response to keep our deposits in-house. As Cory discussed, this is a focus of the bank in 2023 as we strive to manage our cost of funds as well as grow the bank’s deposits in a more competitive…

Thank you, Steve. To conclude, I’m very proud of our results this year as we successfully expanded our lending platform in our major metropolitan markets. While our bankers in West Texas continued to take advantage of the bank ownership changes in our local community markets. This led to better than expected loan growth and a sizable increase to our net interest income, which effectively offset the decline in our mortgage banking revenues. As I look to the year ahead, we believe that we’re an excellent position. We believe our markets will slow, but remain resilient in the face of what will likely be a national recession, positioning our team to deliver moderate loan growth. Additionally, we will maintain our expense discipline and our conservative underwriting standards and risk management as we strive to deliver on our long-term goal of achieving superior returns for our shareholders. I would like to thank our employees for their hard work and commitment to our customers and our communities over the last year. Thank you, again, for your time today. Operator, please open the line for any questions.

And at this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed with your question.

Hey, good afternoon.

Hi, Brad.

Hey, Brad.

Good afternoon, Brad.

Appreciate you guys taking my questions. Steve, maybe I’ll start with expenses. I appreciate the color around kind of what you think is going to happen in the first quarter, obviously, some great expense control on the fourth quarter, but as you think about the entire year, I think maybe last quarter you said maybe flat to down slightly. Is that still possible from where you sit today given how great the fourth quarter was? Just kind of curious how to think about the full year.

Yes. I mean, we will definitely have some fluctuations. I mean, again, insurance and mortgage those do have a little bit of cycles. So I mean, we’ll be down Q1 may be a little bit lower, and then some of that will increase over Q2, Q3, and then come back down. We do still feel good about the overall projection, yes, that we’ll be able to keep expenses fairly in that flat to slightly in an increase range.

Brad, this is Cory. I’ll just add color to that. I mean, obviously, we’ve got expense save [ph] on the mortgage side. But here’s the thing that I’m really proud of. We have expense save outside the mortgage. And if you look at everything people are facing on – I mean on a salary expense and everything else. We were able to really handle on those and keep it pretty flat and find a way to take care of our team to do some other savings.

Yes, no, great. It was really impressive work this year. Maybe just shifting gears a bit to the net interest margin. Steve, it sounds like, you saw additional pressure late in the quarter and in year-to-date on deposits. Do you think kind of with everything you have going, the NIM may have likely peaked and it probably starts to contract from here? Just kind of curious, kind of what your thoughts are sort of around a NIM trajectory as you move through 2023?

Yes, that’s a great question. I mean, we’ve looked at it a lot of different ways. We really think we’re – I won’t say it’s peaked, but it’s probably a pretty close to that. I mean, we’re – would say, we would continue to see increase on the interest cost, but we should see increases still on the income side. So again, would be hopeful. We would see NIM while it’s not going to, may not grow like we did in Q4 either maybe strive to keep it flat, maybe slightly grow. But it’s going to be right around, we believe it’ll be right around that area. I mean, you – I guess you could see a slight downward. But I mean, we don’t think at this point that it’s going to contract.

And then just to follow up on that, can you remind me, is there a certain percentage of your taxable securities portfolio that’s floating or variable? The yield there has improved really nicely for kind of several quarters in a row, just kind of wanted to get a handle on kind of what kind of the key drivers are there?

Yes, so on the taxable side, we’ve got, I think it’s around 80 million or so that’s in some CMOs that do reprice every month. And so those have helped that yield. They obviously didn’t look very good at the beginning of the year, but as the rates have gone up, those do reprice. So that’s what’s helping us out there.

Okay. I guess that’d only be about a little over 10% – 15% of it or something, and then the rest of it’s just kind of regular repricing, I guess.

Yes.

Okay. Okay. Great. Thank you very much. I’ll hop back in the queue.

Thanks, Brad.

Thanks, Brad.

Thanks, Brad.

And then our next question comes from the line of Brady Gailey with KBW. Please proceed with your question.

Hey, thanks. Good afternoon, guys.

Good afternoon.

Hey Brady.

Good afternoon.

So I want to make sure I heard something correctly. Steve, I think you mentioned a $900,000 benefit from a purchase loan recovery. Did that happen in the fourth quarter and did that flow through spread income and the margin?

Yes, it did. That was – I think it was about eight basis points or nine basis points that it improved NIM.

Okay. So that could be a modest, at least from a percentage point of view, that could be a modest headwind into 1Q on the margin?

Yes.

Okay. All right. And then, so I mean, you guys were pretty active in the buyback in 2022. I understand you want to increase the liquidity of the stock, I know canceling the ESOP will help with that. But do you think you will be active, as you said, the stock is still inexpensive? So do you think you will be active with the buyback potentially in 2023?

This is Curtis. We’re really looking at it. We’re in a good position. We’ve got plenty of cash available at the holding company level. But our Board is going to really analyze things over probably the next month or two and make a decision on that, on – whether we do get back in. And if so, really at kind of what level we want to go after it. I think there’s still some value to be had right there. But it’s going to be a Board decision on that as we look at everything. We’ve got several moving parts kind of happening right now and as we look at all of those we just didn’t feel like it’s a good time to make a decision right here in January.

And then, do I remember correctly that CECL is now in play for you guys beginning in 2023?

Oh, yes. CECL, yes sir. Yes, we adopted in January. Yes, Steve can give you more color on that if you – he can give you a whole lot of color on that if you [indiscernible] too, but yes sir, we were supporting…

Yes. Maybe just a thought on, do you think it’ll have a material impact on the reserve ratio, just given adoption?

Yes, so at this point and as Curtis said, we are adopting it. We’re still finishing up some validation in a few other things before we’ll have to disclose that number in the 10-K. But as of now, there’s not a material impact to where we are in our current model.

I think a lot of that goes back. If you look how conservative we’ve been at this point. I think it’s been our numbers have been pretty high anyway.

Okay. And then finally for me, I know historically you guys have guided to mid to high single digit loan growth. I think I heard you say, but what’s the expectation for 2023 loan growth?

Well, I’d like to still think we could achieve high single, but I’m a little cautious in this environment. Of course, we can’t – we keep working with a bigger number there as well. So that affects it. But I think if we can hit and hit, it’s going to be doing pretty good. And we will have some payoffs. And a lot of projects are kind of on pause, but we are still seeing some customers come in, including some new customers coming that are interested. So we’re getting to look at some really great deals. So I think we can still achieve some growth during 2023. But I do think we’ll probably be more in low to mid single digit range, just my opinion.

Okay.

Yes, I agree with. I think low single’s not unrealistic for us. I mean, look, you can’t base it all on January, but January has been a good month. But if you look at what some of the projections for the economy, we think Texas is a great place to be. We’re really glad that’s where we are, but reasonably and conservatively low single digits.

Okay. All right. Great. Thanks for the color guys.

Thanks, Brady.

Thanks, Brady.

And we have reached the end of the answer session, and I’ll now turn the call back over to Mr. Curtis Griffith for closing remarks.

Thank you, operator. As you heard, we’ve had a good quarter. We’ve had a good year. Very proud of what we did achieve in 2022. This economic outlook is very uncertain. We don’t expect significant credit problems in our markets, and we are dealing with many of the same funding and deposit cost issues as most other banks. We’re going to handle that just as we do our other issues, and that’s through strong relationships. We will be incentivizing our people to have good growth in deposits, and we’re going to focus on controlling expenses while achieving, we believe good, reasonable organic growth in both deposits and loans. We have an incredible team. We’re confident that they will keep delivering excellent results for our customers and for our shareholders. Thank all of you for being on the call today, and please reach out to us if you have any questions.

And ladies and gentlemen, this concludes today’s conference. And you may disconnect your line at this time. Thank you for your participation.