SPFI

Good morning, ladies and gentlemen, welcome to the South Plains Financial, Inc. second quarter 2026 earnings conference call. During today's presentation, all parties will be in 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. Now let's turn the call over to Steven Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead.

Thank you, operator, good morning, everyone. We appreciate you joining our earnings conference call. The related earnings press release and earnings slide deck presentation issued today are available on the SEC's website, as well as on the news and events section of our website, spfi.bank. Please refer to slide two of the presentation for our safe harbor statements regarding forward-looking statements. All comments expressed or implied 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. Please refer to slide two of the presentation for our 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.

I'm joined here today by Curtis Griffith, our Chairman and CEO, Cory Newsom, our President, and Brent Bates, City Bank's Chief Credit Officer. Curtis, let me hand it over to you.

Thank you, Steven, good morning, everyone. Before we get into the second quarter's results, I want to take a moment to touch on the leadership transition that we have been planning for many years. As we announced in June, I will retire as the company's Chief Executive Officer at the end of this year, Cory will then take over as CEO on January 1st, 2027. I will continue to serve as the company's Chairman of the Board, but in a non-executive capacity. I am so grateful to have been a part of City Bank's transformation from a small institution to one of the largest banks in West Texas, with a brand recognized across the entire state. I joined the First State Bank's board of directors in 1972 and was elected chairman in 1984 when it was a small-town institution with just $30 million in assets.

At that time, we saw an opportunity to grow the bank through both organic growth and accretive acquisitions. I'm very proud to report that we now have approximately $5.4 billion in assets at the end of the second quarter. Our growth and success are an incredible accomplishment that was only made possible through the hard work and commitment of our employees. I would like to thank each and every one of them for their hard work and dedication to the bank and our customers over the years. You are the reason for our success. I am most proud of the culture that we've created, one centered on relationships and a shared commitment to helping people succeed. Our customers and the communities that we serve have always been the key to our success.

We have maintained a strong brand which continues to be well-recognized for the best-in-class service that we provide, the high-quality products that we deliver, and the relationships that we build. These attributes have continued to differentiate our bank from the competition and allow us to hold a leading deposit market share across our core rural markets. The bank is in a strong position. The time is right for me to retire from the management team. As I noted, we've been planning this transition for many years. Cory has been instrumental throughout this process. He has been leading our day-to-day operations and driving our growth strategy with a clear focus on disciplined organic loan growth and strategic M&A, most notably the recent successful acquisition and integration of the Bank of Houston. With Cory's expertise and dedication, we've set ourselves up for a seamless leadership transition at year-end.

I'm confident that he is the right leader to oversee the company as we continue to execute our growth strategy and create long-term shareholder value. I'm also going to stay engaged with the bank and with Cory as I continue to be the City Bank's chairman of the board, as well as work as a consultant to the company. Before I turn the call over to Cory, I want to address my recent stock sale as disclosed in our press release and related 8-K filing in June. Similar to our leadership transition, this sale has been a part of our long-term plan and is representative of a longstanding estate planning strategy that I've had in place.

Additionally, my family has several agricultural businesses that we've made investments into over the years. A portion of the proceeds from my share sale will also help fund investments into those businesses over the medium term. Importantly, my family and I continue to be significant shareholders of South Plains and remain confident in the company's outlook. I absolutely believe that the future is very bright for our company. I'm very pleased to see Cory officially take over at year-end. Let me now turn the call over to him. Cory?

Thank you, Curtis, and thank you for all your support and guidance over the years. I'm very proud of the bank that we've built together and excited to transition into the role of CEO. As you mentioned, the bank is performing at a high level as we execute our strategy focused on maximizing our lending team across our high-growth Texas markets while also pursuing accretive M&A. We look to continue this execution as we work to grow the earnings power of the bank. Importantly, we are pleased with our talented lending team and the meaningful organic growth opportunities we believe are in front of us.

Looking ahead, a major focus will remain squarely on the organic growth while maximizing the efficiency of our operations and delivering improved returns over time. I'm also pleased with our second quarter results as we delivered another solid quarter, as can be seen on slide four. Our profitability remained resilient, supported by a stable net interest margin and continued balance sheet management. Our conservative credit culture remains unchanged as we proactively identify and address risk. Specifically, we believe the overall credit quality of our loan portfolio remains a strength of the bank. Additionally, economic activity in our Texas markets remains healthy, as demonstrated by our strong loan pipeline and higher than expected deposit performance in the quarter. That said, we are maintaining our cautious and conservative approach, especially given the elevated interest rate environment and lingering inflationary pressures, while remaining optimistic with the opportunities that we see ahead.

Now let me get into some of the second quarter financial results. Turning to slide six, our loans held for investment increased by $677.3 million to $3.77 billion as compared to the linked quarter. The increase was primarily a result of $632 million in loans from our Bank of Houston acquisition and $35 million of organic loan growth during the quarter. Of note, we continue to experience elevated levels of payoffs as two loans totaling $37.5 million paid off. Looking to future periods, we expect paydowns to continue to be a headwind to overall loan growth. However, underlying loan demand is healthy, and we remain confident in delivering our full year loan growth guidance in the mid-single digits. Our yield on loans was 6.81% in the second quarter, down slightly from 6.83% in the first quarter.

Excluding problem loan interest and fee recoveries noted on slide six, our yield on loans was held relatively steady over the last five quarters. Though there are still economic uncertainties in forecasted interest rates, we will remain focused on maintaining our margin as we look to grow our balance sheet. Turning to slide seven, our loans held for investment in our major metropolitan markets of Dallas, Houston, and El Paso increased $682 million to $1.69 billion as compared to the linked quarter. This increase was due to the $632 million of loans for the Bank of Houston acquisition and $50 million in organic loan growth. I'm pleased to report that three months after the transaction closing, the integration of Bank of Houston has been largely completed with the conversion occurring in May.

We continue to be impressed with the new Houston team, the dedication they have to delivering strong results from their market, and the similarities in our cultures. The success of the acquisition and integration reflects the planning, preparation, and operational capabilities of both our teams, and I would like to thank our employees for their efforts. Looking forward, we see further opportunities to optimize the acquired balance sheet as we continue to evaluate higher-cost funding sources and certain relationships to ensure they align with our long-term strategic and profitability objectives. Overall, the acquired loan portfolio has performed in line with our expectations. As we've discussed on prior calls, M&A is part of our strategic growth plan, and we have the capacity and ability to execute another acquisition, though we've not yet identified a potential transaction partner that meets our strict criteria.

We will remain highly disciplined as we are not interested in growth for growth's sake, continue to believe that any potential partner must align with our culture, credit discipline, and community banking focus, and be in the best strategic and financial interest of our shareholders. Additionally, we have ample organic growth opportunities ahead to further expand the bank, which is our primary focus today. Moving to slide 11, we generated $14.1 million of non-interest income for the second quarter of 2026, compared to $11.3 million in the linked quarter. The increase from the first quarter was primarily due to an increase of $929,000 in mortgage banking revenues as mortgage originations approved during the quarter, and an increase of $894,000 in bank card services and interchange revenue, mainly due to continued growth in customer card usage and incentives received during the period.

As it can be seen on Slide 12, the increase in mortgage banking revenues was mainly due to improved mortgage originations during the quarter given the spring selling season, though volumes remained subdued given the higher level of interest rates. That said, our mortgage business continues to perform well despite the low transactional environment and remains poised for the eventual upturn as rates normalize lower. For the second quarter, non-interest income was 22% of bank revenues, essentially flat with the linked quarter. Continuing to grow our non-interest income remains a focus of our team. To conclude, we believe that we are in a strong capital position that will allow us to execute our growth strategy and benefit from the many opportunities that we have in front of us.

Given our capital position, we also remain focused on both growing City Bank while returning a steady stream of income to our shareholders through our quarterly dividend and keeping a share buyback program in place. To that end, our board of directors authorized a 6% increase to our quarterly dividend to $0.18 per share on July the 15th, which will be our 29th consecutive dividend. I'm also pleased that we were able to buy back a portion of Curtis's shares as we focus on creating value for our shareholders. With that, I'd like to turn the call over to Steve.

Thanks, Cory. For the second quarter, diluted earnings per share were $0.96, compared to $0.85 from the linked quarter. The increase was primarily due to the BOH acquisition, combined with improved non-interest income, which Cory discussed. Starting on Slide 14, net interest income was $50.3 million for the second quarter, up $7.4 million from the first quarter, largely due to the increase of BOH's $667 million of interest-earning assets. Our net interest margin on a tax-equivalent basis was 4% in the second quarter as compared to 4.04% in the linked quarter. Our first quarter NIM was positively impacted by 5 basis points due to $545,000 of non-accrual loan interest recovery. Excluding the problem loan interest and fee recoveries noted on this slide, we have held our NIM steady over the last four quarters.

Our goal is to maintain our profitability 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 $613 million for the linked quarter, $4.64 billion. Acquired BOH deposits were $596 million, while we organically grew deposits by $17 million. Delivering organic deposit growth in the second quarter is a strong result, given that we typically see deposits flow into the bank in the first quarter and then seasonally flow out in the second quarter as our customers make tax payments and a portion of our public funds exit. Looking to the second half of the year, we expect moderate deposit growth to continue, though we are starting from a relatively higher base than in previous years, which is encouraging.

Non-interest-bearing deposits represent 24.8% of total deposits at the end of the second quarter, compared to 25.7% at the end of the linked quarter, largely due to BOH's ratio at acquisition being approximately 16%. Our cost of deposits increased by 11 basis points, which was in line with the expectations that we outlined on the first quarter's earnings call. Looking forward, we continue to see an opportunity to reduce higher cost broker deposits and non-core funding sources as they mature, which is 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 1.41% at the end of the second quarter, stable from the prior quarter end. We recorded a $350,000 provision for credit losses, which related to our organic loan growth and net charge-off activity in the quarter.

We continue to believe that we are appropriately reserved for varying economic conditions. We did see an uptick in classified and non-performing loans, primarily from BOH acquired loans, which we have expected. Our credit team is actively working these loans and will continue to help ensure a proper resolution. Next on slide 19, our non-interest expense increased by $4.3 million to $39.9 million in the second quarter as compared to the linked quarter. The increase from the first quarter of 2026 primarily resulted from an increase of $2.7 million in core operating expenses related to the BOH acquisition and higher incentive-based compensation expense. There was approximately $1.1 million of acquisition-related expenses in the second quarter of 2026, of which $710,000 was for personnel expenses. Looking to the third quarter, we would expect the acquisition expense to be largely behind us.

Moving to slide 21, we remain well capitalized with tangible common equity to tangible assets of 10.47% at the end of the second quarter and in line with the first quarter. Tangible book value per share was $29.57 as of June 30, 2026, in line with $29.65 as of March 31, 2026. 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. To ask a question at this time, you may press star one from your telephone keypad, and a confirmation tone will indicate your line's in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please for our first question. Thank you. Our first question is from the line of Brett Rabatin with StoneX Group. Please proceed with your questions.

Hey, guys. Good morning, congratulations, Curtis and Cory, on your new gigs.

Thanks, Brett.

Thanks.

Wanted to start on just the forward margin and just thinking about, we've talked in the past and you mentioned the opportunities to continue or to work on the brokered CDs of Bank of Houston and their cost of funds. Was any of that work done during the quarter? My guess is most of it's ahead of it as opposed to during 2Q, and just if you can reduce their cost of funds, would seem like the margin could continue to hold around 4%. Just wanted to get some outlook on the margin and just how much Bank of Houston cost of funds management might impact the overall number.

Yeah, Brett. This is Steven. I'll start on that. We did do a little bit in the quarter. As you can tell, we still have opportunities in front of us that we're working on right now. That will continue. We got the conversion done midway through the quarter. We've now got them all on our system. We're able to see things a little bit better, have better understanding. We are working on that. Again, with the brokerage stuff, definitely the CDs, as they come due, we have not gone back on those. We'll just continue to optimize what we've got on their side. I would expect to see that a little bit better in the third quarter versus what we saw in Q2.

Brett, this is Curtis. We did pay off their borrowings to Federal Home Loan Bank. That's already done. Like Steven said, we've got maturities on some of these others that we'll be dealing with as they come due. Yeah, we do believe there's still a good opportunity there to get their cost of funds more in line with what our historical costs are.

Hey, Brett, this is Cory. There's a lot of different ways you could approach this. In one fell swoop it could be pretty easy, and you could see a pretty good move in what's there. We also are in the process. We're negotiating rate differences on a lot of this stuff and taking them in a very measured pace. We think there's opportunities to improve that and do it in a very effective manner. If you couple that with, we still think our loan demand is strong, and we just want to be very smart about how we approach it.

Okay. Specifically, guys, do you think the cost of funds can be managed much lower from here in the face of people talking about increased deposit competition? Just any thoughts on the forward margin?

Yeah, rate outlook has been a little bit of a moving target here with what's gone on at a macro level. Yeah, I think we're in a good spot. Some of that will depend on, again, what competition does. Some of it obviously depends on what our loan fundings look like and where we want liquidity to be. We can, again, optimize some of what we brought over. Outside of that, overall cost of funds, given where rate outlook is, there's probably not a whole lot that we would want to do. Again, really want to be able to fund the loans that we anticipate being able to fund. Overall, we still want to try to manage NIM in the same range that we're at.

Okay. Appreciate the color on that. The other question I had was just around, you've done the conversion in May. I think that the total expense savings from the deal was 25%, or like $4.6 million. Do expenses in 3Q come down a little bit? Maybe just any thoughts on the progression on the expense side from here?

Yeah, we should start seeing that decline a little bit since we had some of the acquisition related expenses in there, the cost saves on top of that. We should see that drop back down a little bit to hopefully Q1, Q2. Well, Q2 really being the high mark. The conversion expenses and those types should be largely behind us.

No, Brett. We were able to do the conversion-

Okay

with the conversion being as early as it was after the close, it allowed us to start trying to cut some of those expenses faster than we really anticipated that we would be able to. I agree with Steve, I think there's room for some improvement there.

Okay, great. Appreciate the color. Congrats on the quarter, guys.

Thanks, Brett.

Thanks, Brett.

Our next question is from the line of Joe Yanchunis with Raymond James. Please just your questions.

Good morning.

Hi, Joe.

Morning.

You talked about your prepared remarks about paydowns likely being a partial headwind to future loan growth. Should we think about that starting to moderate in the back half of the year? In a similar vein, has the commercial pipeline continued to build since quarter end? Are you seeing any meaningful change in customer demand or utilization rates?

Joe, this is Brent. I kind of addressed that on our growth expectations. I feel really good about it. You got to think about the increase in the number of bankers, both from the acquisition and through hiring, along with just our overall increase in our pipeline quarter-over-quarter. We feel pretty good about our growth prospects for the second half of the year. Despite whether or not we have kind of this level of payoffs going forward, I feel like we can continue the path we're on.

Joe, think about this with us for this quarter. We had some paydowns, and we still maintained a decent position on our loans. We did that all the while going through a conversion. The amount of training and that we've had to have. There's been a ton of noise inside this organization for this quarter, trying to get everything put in place like it's supposed to, and we still were able to manage the loans where we were.

We're getting all that stuff behind us. I would venture to say that there was probably several weeks in there that kind of Bank of Houston really probably came to a little bit of a screeching halt on putting fundings on and getting stuff done because as we went through that, not only did we come in and do conversions, but all the training and everything that went with that. There was a fair amount of noise that we mixed in with this and still had the benefits that we did. I think that will help start offsetting some of the paydowns that you actually see in the future, and while we still feel good about our growth position on loans.

No, I appreciate that. That was helpful. As you addressed one of Brett's questions about potentially pulling forward some of the expense savings from the deal, if we were to pivot just to think about kind of the revenue side and any cross-sell ability there from, say, treasury management or other services to the legacy Bank of Houston customer base. Have those cross-sell efforts begun? If so, when should we expect to see an uptick in the P&L?

Joe, I want to be a little bit realistic about that because it takes a little while to get some of that stuff booked. As far as the cross-sell aspect of it's very much we've already started that. Our team, they've been very focused on it and in deploying those practices that we have. We're really excited about it. Look, Bank of Houston always had good offerings, but they were limited based on size, on their ability to have the right kind of staffing and things like that to be able to go out and do what we've been fortunate enough to be successful with on our treasury and things like that. Yeah, I think you'll start seeing that. I think maybe fourth quarter, you might see a little bit more uptick.

You're already seeing some positive things if you look at non-interest income improvements on this quarter. It continues to become more of our DNA on how we go about and approach treasury on each and every loan customer and relationship we have inside the bank.

Okay. Maybe stepping back here, if we look beyond the integration of Bank of Houston, what do you view as the biggest driver of earnings growth over, call it, the next two to three years? Is that Houston expansion, lender hires, improvement operating leverage, maybe another deal? What do you think the best way is to think about that?

I think you've pretty much checked the boxes of kind of what we're focused on. We've been very open about the fact that we're open to another acquisition. At the same time, organic growth is the strong driver for where we think that we can really make some strong impacts. Lender hires, yes. We're not trying to put out too high of expectations on that, but our focus is really driven back to that right now. We're seeing some improvement that's coming with that. I don't know. I just think we have a lot of momentum going in each one of those different directions, and we feel really good about it.

Well, that was great. That's happy to hear. Thank you for taking the questions.

Thanks, Joe.

Thank you.

Our next question is in the line of Woody Lay, KBW. Please proceed with your question.

Hey, good morning, guys.

Good morning, Woody.

Wanted to start on the loan-to-deposit ratio. It feels like there's an opportunity to have some deposit remix just on the Bank of Houston side. At the same time, it feels like we might see loan growth picking up pretty nicely here in the back half of the year. Just wanted to get your thoughts on where you're comfortable running that loan-to-deposit ratio longer term.

This is Steven. I would just say we've been kind of in the middle of our loan-to-deposit range that we like to be at. We definitely have room to run that up a little bit, but 85%, I don't know that anybody wants to get up much higher than that. It's just moved around in our desired range for a little bit, kind of with the ceiling, kind of what's happened over the last number of quarters and even year or so. We can run that up a little bit, but that's also part of why we have some room to let some deposits run off. Again, it all plays into what does our loan growth look like. I don't feel comfortable if we would try to make too big of a move on any one side.

We've got a little bit of room to run on that, but we don't want to let loan-to-deposit get too high on the end of the range.

Woody, this is Curtis. Like Steven said, let me just ditto there that I think what you'll see is we'll probably move both sides of the fraction a little bit. Hopefully, the bulk of it will be through loan growth because we do have a great pipeline, quite a few things that are likely to come on in the latter half of the year. We knew going in, and we talked about it, that we are fortunate right now to have a lot of on-balance sheet liquidity at City Bank, and that gives us the flexibility to just let some of those higher cost deposits that were at BOH go away. You could see, I don't know that we will, because we've had really higher deposit growth than we thought we would have.

If that slows some, you might actually see the deposit number drop off just a little. It's a matter of still maintaining good customer relationships with those legacy customers coming out of BOH, and being sure the people we want to keep and do business with. A lot of the brokered funds and other things that are not core deposits, you could see those go away. We'll do that definitely with maintaining or improving NIM as our target.

That's a really helpful color. I appreciate you breaking it down. On the payoffs, you saw some elevated payoffs this quarter, which I think you had previously messaged we would see that on the last earnings call. Was just curious on what was driving that. Is it just normal course of business? I know in the past you've run off some credits that maybe didn't fit the credit profile of your company. Was just curious on what drove the payoffs this quarter.

This is Brent, Woody. No, it was normal course of business. None of this was kind of pushed out. It was just events. What we're seeing in a lot of cases are sales of assets and our clients are getting gains off of those sales and taking advantage of that, and plan to redeploy it. We think there's opportunity there as well. There's not one single thing driving it at this stage that we've picked up on in the portfolio. It was up a little bit this quarter, like I said, our production is picking up as well nicely, and the pipeline's picking up. I feel good about overcoming those.

Got it. Then maybe just last for me, I think as you've mentioned, you remain interested in M&A. Just any updated thoughts on what an ideal target would look like to South Plains following the Bank of Houston acquisition?

No, Woody, we want to be in Texas, we've been pretty open about that. We're trying to look at something that we think is accretive, that makes sense, that we think would be a culture fit. One of the things that we were very focused on how we've handled this last transaction because we feel like that's going to be a pretty good example of how someone else is going to look at us and be comfortable going into a merger acquisition type with us. It all really came together quite well. Our team performed very, very good. Yeah, we've got some areas that we'll probably be a little bit more cautious about.

Overall, the state of Texas is kind of where we're looking, and we're just looking for something that we think makes sense and it fits our culture and would be a nice complement to what we're trying to do.

Got it. All right. Well, that's all for me. Thanks for taking my questions.

Thanks, Woody.

Thanks, Woody.

Thank you. At this time, I'll turn the floor back to Curtis Griffith for closing remarks.

Thank you, operator. Thanks, everyone, who joined us on our call today. To conclude, I'm very pleased with our second quarter results. We delivered strong profitability, maintained the credit quality of our loan portfolio, successfully completed the integration of Bank of Houston, and continued to execute on the growth strategy that has driven our success for many years. Just as importantly, we remain well-positioned for the future with a strong balance sheet, a talented team, and meaningful opportunities across our markets. Having spent more than four decades helping lead this organization, I'm incredibly proud of what we've built together. What began as a small community bank has grown into a premier banking franchise, serving customers across some of the most attractive markets in Texas.

I would like to especially thank our employees, both past and present, whose dedication, hard work, and commitment to our customers have made South Plains what it is today. I would also like to thank our board of directors for their support and guidance over the years, our customers for the trust they place in us every day, and our shareholders for their continued confidence in the company. Most importantly, I'm extremely confident in the future of South Plains. We have a strong leadership team in place. I firmly believe Cory is the right person to lead the company into its next chapter of growth and success. While my role will be changing, I look forward to remaining actively involved as chairman and supporting the team as we continue building on the foundation we've created together.

Thanks to all of you for joining us today and for your continued interest in South Plains Financial.

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