Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial Fourth Quarter and Year-End 2020 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. 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 fourth quarter and year-end 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 replay of this call will be available through February 10, 2021. Additionally, a slide deck to complement today's discussion is available on the Investors section of our website.

Thank you, Steve and good afternoon. On today's call, I will provide a high level review of our results and the success that we achieved growing the bank over the past year. Cory will discuss the continued improvement that we have experienced in our loan portfolio, as our proactive approach to managing credit cycle is yielding positive results. Cory will also touch upon the investments that we have made to drive organic growth and our outlook for the year ahead. Steve will conclude with a more detailed review of our fourth quarter and year-end 2020 financial results, and we will then open the call for your questions. While this past year presented our company with unprecedented challenges as a result of the global COVID-19 pandemic; I could not be more pleased with the performance of our employees and their commitment to both, the bank and our customers. Our strong financial results for the fourth quarter and full year 2020 would not have been possible without their tireless efforts. We believe our results are also a reflection of the determined steps that our management team has taken over many years to transform the bank with a goal of delivering returns in line with or better than our peers. This transformation has included the implementation of our enterprise risk management system designed to improve the risk management of the bank and the credit profile of our loan portfolio. A key aspect of our enterprise risk management system is the extensive and ongoing reviews of our loan portfolio, which led to the exit of a number of relationships prior to the downturn caused by the COVID-19 pandemic. We believe this better positioned our portfolio for the cycle and will ultimately serve to mitigate losses. We have also worked to instill a strict expense discipline as we strive to improve our profitability as we grow the bank, both organically, and through strategic acquisitions.

Thank you, Curtis. And good afternoon everyone. Starting with our loan portfolio on Slide 6; loans held for investment at the end of the fourth quarter of 2020 were point $2.22 billion, which is a $67 million decrease from the third quarter of 2020, and a $78 million increase from the fourth quarter of 2019. The decline from the third quarter of 2020 was largely driven by $42 million in forgiveness and pay downs of PPP loans, $28 million in paydowns on seasonal agricultural loans, and an early payoff of a $16 million state and municipality loan.

Thank you, Cory. Starting on Slide 13, net interest income was $30.4 million for the fourth quarter of 2020 as compared to $31.3 million for the third quarter of 2020, and $28.6 million for the fourth quarter of 2019. The increase in the fourth quarter of 2019 was due to a rise in our average interest earning assets of $523 million, primarily from the West Texas State Bank or WTSB acquisition, as well as our participation in the PPP, partially offset by a decrease of 68 basis points in non-PPP loan rates due to the sharp decline in the rate environment experienced in the first quarter of 2020.

Thank you, Steve. Over the last six years, we have been preparing for the next downturn based upon the lessons that we learned from the Great Recession. We improved our risk management through the implementation of our ERM system, improved our operations through investments in technology, and took a cautious approach to growth where we would not sacrifice our credit standards to grow our loan portfolio. While we did not expect the COVID-19 pandemic, nor the challenges that arose, we were ready. At the onset of the COVID-19 pandemic, our team moved rapidly to move many of our employees to a remote work environment to ensure their safety. We accelerated the migration of our customers to our digital platforms, which has gone smoothly and with improved customer satisfaction. Lastly, our senior management team, rapidly put a plan in place to help our borrowers preserve their cash flow during the depth of the crisis. We believe our preparedness paved the way for our success this past year, and has provided the foundation for success in the years to come. We're excited with the opportunities that we see ahead and grateful to be in a position to capitalize on them. Thank you, again, for your time today. Operator, please open the line for any questions.

And our first question is from Brady Gailey with KBW. Please proceed with your question.

Thank you. Good afternoon, guys. I saw the press release in early November about the resumption of the buyback. I mean I know you guys had about $10 million -- about $10 million left authorized; but it doesn't appear that you repurchased any stock in the fourth quarter, which I found a little surprised. I know, especially in November, the stock was still trading at a discount to the tangible book value, maybe just confirm that you didn't buy any stock back in the fourth quarter? And maybe selling stock is still relatively inexpensive as it's pretty much as tangible book value now; so should we think about you guys as being repurchasers of your stock this year?

Hey Brady, this is Steve. As you said, we did start that back up in early November. We actually did buy some stock back but that had just kind of gotten started; so there is some activity there. I'll let Curtis touch on any of the future plans.

Now, we do -- we are intending to keep it open, and we're going to have some more discussions I think. We were seeing a pretty rapid increase across the sector on bank stock pricing, and so we kind of slowed in to see how fast and how far the move was going. As you say, I think we're still very conservatively priced, say at least; so I think our board will have some additional discussions and we certainly intended to keep the program in place well into 2021.

Okay. But how much stock did you repurchase in the quarter? It looks like the period in share account actually went up linked-quarter.

Yes, it didn't actually; we had stock options that were exercised at the end of December. So, there was nominal amount -- I mean, less than -- probably less than 20,000 shares maybe.

All right. And then, how should we think about the margin from here? I know some of the margin slippage was related to the sub-debt, which is what it is, but some was related to lower loan yields. So how should we think about the market over here? Do you think there is more downward pressure from the margin or do you think we're stabilizing here?

We expect to see some additional pressure but we think that that -- you know, we -- hopefully that we saw the larger decline in the fourth quarter, and that it moderates from there but definitely still see some pressure in the loan portfolio for pricing. We are on the positive side and we didn't continue to look at those rates; you see those big drop again in the fourth quarter, and we'll look to see where we can drop those a little bit more to help offset anything we see on the loan side.

I think what we're seeing across our loan committees right now, definitely still some pressure to cut some rates, and right now we're focused very heavily on credit quality, and we'd rather be sure we're maintaining high quality in that portfolio, even if we do take it at a little bit lower rate. And competitive pressures are certainly strong for that type of loan. Steve indicated, I think we will have some additional opportunities as we move into 2021 to reduce more rights on the deposit side. So I do think that as he said, we're probably going to have a little more compression in the main . But I think that rate of compression is definitely slowing.

All right. And then finally, for me, it's just a question on your bank M&A strategy. You know, it's tough to be a bank buyer, when you have a currency that's trading at one times tangible. And even if you look at your PE, I think you guys are trading under 10 times earnings. It's tough to have a currency like that to use to buy somebody. So maybe just talk about that dynamic. And if you really think you're going to be active, near term effect currently. And then just remind us kind of what size target would you be interested in from an asset size point of view here and then what type of company Would you like to buy. Looking for high quality? Lower quality that you've kind of picked up? Like what what's the ideal candidate looks like there?

Well, the first part of the question, right now, that's one reason we did build some pretty good amount of cash, including that $50 million of sub debt, that, I certainly agree with you that it's difficult to be an acquirer with stock as the currency with our current multiples. We're hoping to see that improve as we move into '21. But we do have a hefty amount of cash and certainly access to more. So for the rights situation, we'd be glad to do cash deals that will put us looking at smaller banks, certainly. We would look at, I think things above $200 million, and that have strong deposit base, low cost deposit base, and relatively solid, long portfolio. I don't think we are in a mood to try to solve somebody else's problems right now and go in and do fix ups on things. It would have to be a real bargain situation; I think to get us interested in that. Frankly, we just don't seem to have a whole lot of banks that are struggling matching our part of the world. We may see more of that as we move later into '21. But currently, I just don't see a lot of trouble assets popping up out there.

Okay, thanks.

And our next question is from Brad Milsaps with Piper Sandler. Please proceed with your question.

Hey, good afternoon. Curtis, just to kind of follow-up on your last comment. I mean, it sounds like you're not seeing a lot of stress in your markets, you know, other folks portfolios or your own? Should we read that, as you know, you kind of expect maybe continue to record almost a zero provision over the near term or do you think you're sort of at that inflection point where you might see a negative provision and release reserves in a bigger way?

Our Chief Credit Officer talk about that a little bit. Brent's been right in the middle of that so I will let him take this one.

Yes. With us not being a CECL bank, really, the reserve increases that you saw over the over the last year are really driven by just the uncertainty we've seen or felt in the economic environment. But while right now we're real confident in our reserve level and comfortable with our portfolio, credit quality. You know we're still not seeing the loss rate come into the portfolio. So it's just something we're going to have to monitor on a quarter by quarter basis. And logic would indicate that the reserve percentages are at the historic highs. So Absa, you know additional credit advance or greater uncertainty, you probably expect those ratios to come down.

I think in our way of looking at it. A lot of what would have been difficulties out in segments of our market have to some degree been papered over by the federal dollars. And maybe those are going to continue, but maybe they won't. And I think right now, we'd rather be sure that we are appropriately reserved for the uncertainty that we're facing right now. And we're probably going to stay pretty strong with that. And we'll look at it each quarter and look at the appropriateness at that time, given what we're seeing in the overall economy and our specific local economies as well.

Okay, great. And then just kind of a housekeeping item as it relates to the margin. Steve was there any big impact from loan discount accretion this quarter, I think it was maybe $0.5 million last quarter. So just kind of curious if there's any impact?

No, it was slightly less than last quarter, but it was around the same amount.

Okay. And so that core loan yield is maybe just north of 5%, of where do you guys seeing, you know, to the extent you're seeing new production come on the books?

Brent, do you want to take that one?

Yes. I mean, depending on asset type, but I'd say on average, probably in the 4%, range, 4% to 4.25%, maybe at the high end, but I'd say on average is probably, the new productions in the 4% range.

You know, that even mentioned earlier, you know, our big thing is, I mean, we're going to give up right before we'll get up on credit quality, it's just not going to happen.

Sure, understood. And then maybe kind of final question around kind of expenses in the mortgage business, you know, you guys grew mortgage revenue, some $40 million in 2020. Just kind of wanted to think about, if we do see a bit of a backup in revenue, how should we be thinking about sort of your expense trajectory? Do you think that, you can sort of back off with the 4Q run rate? Or is it situations where you might be spending some of those lower mortgage commissions elsewhere, just want to get a sense of -- kind of expense trajectory in 2021?

Well, I think on that, the non-interest expense chart, that you did see that increased through all the quarters; what we didn't really explain on that is, all of that increase was driven by increased expenses going out in the mortgage division. So as that slows back we were actually getting some savings in the non-interest expense as the year moved along, and we think we'll have some opportunities for some additional savings on that, as well. Cory, you want to address the mortgage outlook a little further?

If you look at the margins that we're going to be seeing moving forward, we think they're going to get tighter. I mean, there is no question, we're not -- really not seeing much coming in through the retail side of it; so we're staying very focused on what we do on the origination side on new purchases and things such as that. So, we think it's going to slow down in time, we're starting out, we think it could be a pretty good quarter with what we've seen so far with the launch that we've had, but the margins are definitely going to be tighter.

Okay. And then away from mortgage, I mean, is it still kind of the same story on the expense side still; looking for ways to kind of push the overall expense dollars down? Or are there any other plans for more aggressive branch consolidation or anything else we should be thinking about in 2021?

Well, I mean -- I think -- I think we're just like everybody else, we figured out that we could do more with less still with COVID impact. So, I mean, we're seeing opportunities where we continue to -- I mean, let attrition take hold and not have to replace some of these roles. And then the other side that is; we made some changes this year when it came to our technology leadership and we're seeing more and more ways where we can let technology step-up and help us cut expenses with outside of traditional overhead that we had in the past.

Okay, great. Thank you, guys.

And we have reached the end of the question-and-answer session. And I will now turn the call over to management for closing remarks.

Thank you, operator. I'd like to close by thanking our employees for all their hard work this past year. Together, we've accomplished much more in what has been one of the most challenging environments I've ever experienced in almost 50 years in banking. Our success is a direct result of your efforts combined with the initiatives that we've put in place to instill a conservative credit culture and improve the operations of the bank. It's rewarding to see the bank perform so well in a real affirmation of our efforts. Looking to the year ahead, we are well positioned to take advantage of opportunities to grow the bank. I'm excited at what the future holds for South Plains. I hope everyone on the call today remains safe and healthy. Thank you, again.

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