South Plains Financial - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered a clean beat operationally: diluted EPS rose to $0.96 versus $0.66 in Q3 and $0.61 in Q4 2023, with NIM expanding 10 bps to 3.75% on lower deposit costs; net income increased to $16.5M, and efficiency improved to 57.5%.
• Deposit cost relief and disciplined liquidity drove margin gains; average cost of deposits fell 18 bps sequentially to 229 bps, while loan yields held at 6.69% despite rate cuts and payoff mix shifting away from low-rate loans.
• Credit metrics remained stable: ACL/Loans at 1.42%, NPA/Assets at 0.58%, and annualized NCOs at 0.11%; loans HFI grew $17.7M in the quarter as CRE owner-occupied growth offset payoffs.
• Management guides to low–mid single-digit loan growth for FY2025 and expects NIM to stabilize with potential incremental improvement; near-term (Q1 2025) noninterest expense to normalize toward Q3 levels; dividend maintained at $0.15/share and buyback capacity in place.
• Catalysts: continued deposit repricing, pipeline conversion in major metros (Dallas/Houston/El Paso), mortgage servicing rights fair value tailwinds (+$0.07 EPS in Q4), and potential selective M&A optionality given robust capital ratios (CET1 13.53%, TCE/TA 9.92%).

What Went Well and What Went Wrong

What Went Well

• Margin expansion and earnings leverage: NIM rose to 3.75% on lower deposit costs (2.29% total cost of deposits; 3.12% cost on interest-bearing), driving net interest income to $38.5M; “rate cuts in our case will likely help our NIM… we should still see minor improvements in the NIM”.
• Pipeline strength and loan growth: loans HFI increased $17.7M q/q, with $9M growth in major metros to $1.06B; “underlying loan demand has been strong… pipeline at the highest levels since mid-2022”.
• Noninterest income mix pivot: mortgage MSR fair value adjustment added ~$3.5M to mortgage revenues and ~$0.07 EPS after-tax; disciplined expense management improved efficiency to 57.5%.

What Went Wrong

• Elevated payoffs constrained loan growth: Q4 growth was modest as several clients experienced liquidity events leading to asset sales and debt reduction; management expects payoffs may persist into Q1/Q2.
• Deposit balances declined: total deposits fell $94.8M q/q due to seasonal escrow declines (~$35M) and planned ~$50M sweep reductions, lowering NIB balances and NIB mix to 25.8%.
• AOCI pressure and TBV per share: book value fell to $26.67 on AOCI declines from higher long-term rates; TBV per share decreased to $25.40 q/q despite stronger earnings.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome, welcome to the South Plains Financial Inc fourth quarter 2024 earnings conference call. During today's presentation, all parties will be in a 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. I would now like to turn the call over to Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead.

Steve Crockett (CFO and Treasurer)

Thank you, Operator, and good morning, everyone. We appreciate you joining our earnings conference call. With me here today are Curtis Griffith, our Chairman and CEO, Cory Newsom, our President, and Brent Bates, the bank's Chief Credit Officer. The related earnings press release and earnings presentation are available on the News and Events section of our website, spfi.bank. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements and are subject to a variety of risk, uncertainties, and other factors that could cause actual results to differ materially from those anticipated future results. Please see our Safe Harbor Statements in our Earnings Press Release and in our Earnings Presentation. All comments, expressed or implied, 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 financial measures, which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures can also be found in our Earnings Release and in the Earnings Presentation. Curtis, let me hand it over to you.

Curtis Griffith (Chairman and CEO)

Thank you, Steve, and good morning. On today's call, I will briefly review the highlights of our full year 2024 results, as well as provide an update on our capital allocation priorities. Cory will discuss our loan portfolio and the strong underlying demand that we are seeing, which is being partially offset by the continued headwinds of unexpected payoffs. Steve will then conclude with a more detailed review of our fourth quarter financial results. To start, I am very proud of our performance this past year as we successfully managed through a challenging environment and delivered solid financial results. We managed our liquidity to optimize our profitability and return metrics while maintaining a conservative approach to underwriting and risk management.

We believe that we are well-positioned to take advantage of the opportunities that we see in the year ahead as we expect the pace of economic growth to improve while the headwinds that we all experienced in 2024 appear to be diminishing. Turning to slide four of our presentation, we delivered diluted earnings per share of $2.92 for the full year as compared to $3.62 in 2023. As a reminder, we sold Windmark, the bank's wholly-owned insurance subsidiary, in the second quarter of 2023, which resulted in a $22.9 million one-time gain net of charges and taxes, our diluted earnings per share of $1.32. Excluding this one-time gain, we outperformed 2023 by $0.62 per diluted share.

We grew our loan portfolio 1.4% for the full year as the loan production that built through the year helped us effectively manage the decline in our indirect auto portfolio, as well as a heightened level of loan payoffs and paydowns. As we discussed on our third quarter call, we are seeing real optimism across our customer base that is translating into the strongest new business production pipeline that we've seen in more than two years. This bodes positively for the year ahead, where we expect to deliver low to mid-single-digit loan growth for the full year 2025. We take pride in conservatively managing the bank as we strive to always under-promise and over-deliver as we did this past year. Turning to the other side of our balance sheet, our community-based deposit franchise held steady at $3.6 billion in 2024 as compared to December 31, 2023.

Through the year, we carefully controlled our liquidity to optimize our margin and returns, as can be seen in the fourth quarter, where we managed our deposits down by approximately $50 million, while also experiencing our typical seasonal declines in our escrow accounts, which decreased by approximately $35 million. Our core customer deposit accounts held steady through the quarter, and we expect to see deposit balances rebuild as loan growth occurs through the year ahead. We will carefully add liquidity to match the pace of loan growth through the year. Our community-based deposit franchise remains a competitive advantage for South Plains, with 79% of our deposits in our rural markets and 21% in our major metropolitan markets of Dallas, Houston, and El Paso.

Given the makeup of our deposit franchise, we were able to reprice some of our deposits lower in the fourth quarter, which was a primary factor in driving our NIM higher by 10 basis points, and which Steve will discuss more in a moment. As we have said many times, we will never sacrifice credit quality for loan growth, and I'm very pleased with the continued strong credit quality of our loan portfolio as we enter 2025. We believe that we are well positioned for varying economic conditions. For the full year, we delivered return on average assets of 1.17% and an efficiency ratio of 65.1%. Looking ahead, we also believe that we continue to be in a strong position to capitalize on opportunities to drive growth as the bank and the company each significantly exceed the minimum regulatory capital levels necessary to be deemed well capitalized.

At December 31, 2024, our consolidated common equity Tier 1 risk-based capital ratio was 13.53%, and our Tier 1 leverage ratio was 12.04%. Additionally, our loans held for investment to deposit ratio stood at 84% at year-end. Given our capital position, we remain focused both growing the bank while also returning a steady stream of income to our shareholders through our quarterly dividend. As previously announced this week, our Board of Directors authorized a $0.15 per share quarterly dividend, which will be our 23rd consecutive quarterly dividend. We also have a $10 million stock repurchase program in place, which will expire no later than February 26, 2025. Our Board will consider authorizing another share repurchase plan next month, as we generally believe it's important to have a buyback in place to have flexibility during volatile market environments.

As we commented last quarter, we expect our buyback activity to remain more muted as we balance liquidity for growth, as well as being mindful of the continued economic uncertainty that exists. Looking forward, we still expect community bank M&A activity to pick up in the coming quarters, with the growing optimism that deals can now be completed much quicker under the new presidential administration and despite unrealized securities losses on bank balance sheets growing. We expect to be even more diligent looking at potential acquisitions in this environment, though we have not yet seen an opportunity that meets our high hurdle for our team to pursue. Our acquisition criteria remains focused on having a strong cultural fit with minimal dilution to our shareholders, a reasonable earnback, while making real sense for the bank and our shareholders.

As activity picks up, we will remain disciplined while also weighing any deal against the economics of buying back our own shares. We see substantial organic growth ahead and are comfortable staying on the sidelines and benefiting from any disruption that does occur in our markets from competitor transactions, much like what we have experienced over the last few years. Now, let me turn the call over to Cory.

Cory Newsom (President)

Thank you, Curtis. Good morning, everyone. Starting on slide six, our loan portfolio increased $17.7 million to $3.06 billion in the fourth quarter as compared to the linked quarter. We experienced loan growth in commercial owner-occupied real estate, which more than offset the payoffs and paydowns that we continue to experience through the fourth quarter, combined with the typical seasonal decline in agricultural balances. The yield on our loan portfolio was 6.69% in the fourth quarter and was essentially unchanged from the prior quarter. We were able to keep the yield constant despite the decline in short-term rates that occurred in September through December. Looking forward, we could experience a slight decline in the yield on our loan portfolio as we continue to have maturities and repayments across a wide range of interest rate segments.

Skipping to slide eight, loans in our major metropolitan markets of Dallas, Houston, and El Paso increased by $9 million in the fourth quarter to $1.06 billion. Our major metro markets also experienced elevated loan payoffs again this quarter, which impacted growth. That said, underlying loan demand has been strong across El Paso and Houston, as well as in our Permian markets of Midland and Odessa. At quarter end, our major metro loan portfolio represented 34.6% of our total loan portfolio, continuing to demonstrate not only the scale that our lenders have achieved, but also the opportunity that lays ahead for organic loan growth. Skipping to slide 10, our indirect auto portfolio held relatively steady at $236 million at the end of the fourth quarter as compared to $235 million at the end of the linked quarter.

We've carefully managed the portfolio through the year with a focus on maintaining its credit quality as competitors have been more aggressive at the higher or better end of the credit spectrum while volumes have declined. This has resulted in a $15 million decline in loan balances through 2024, and while we anticipated this decline, it has been a significant headwind to loan growth. Importantly, we are confident that the portfolio can stabilize at current levels given the recent decline in rates combined with improved volumes and more rational pricing. This stabilization will allow our strong underlying CRE and C&I loan demand that we are seeing to begin to translate to growing loan balances.

I would also add that the credit quality of our indirect auto portfolio has remained strong through the cycle with 30+ days past due at 47 basis points, a modest rise from the 34 basis points in the third quarter. Looking ahead to the first quarter, we expect our loan growth to be relatively flat as we typically see agricultural loans continue to pay off seasonally early in the year, while loan payoffs could be continued at an elevated pace. Importantly, the underlying momentum in our business continues to build as our customers are becoming more optimistic and activity is accelerating. This can also be seen in our new business pipeline, which continues to be at the highest level since the middle of 2022. Turning to slide 11, we generated $13.3 million of non-interest income in the fourth quarter as compared to $10.6 million in the linked quarter.

This was primarily due to an increase of $3.1 million in mortgage banking revenues, resulting mainly from an increase of $3.5 million in the fair value adjustment of mortgage servicing rights as interest rates that affected the value increased in the fourth quarter. The growth in the mortgage income was partially offset by approximately $700,000 of non-recurring insurance proceeds received for the property damage in the third quarter of 2024. Overall, we have effectively managed the decline in mortgage volumes, having kept the business profitable at the trough of the cycle through disciplined expense management. We believe our mortgage business is well positioned to take advantage of the eventual pickup in residential purchase volumes when rates gradually decline, and we're optimistic looking to the spring selling season. For the fourth quarter, non-interest income was 26% of bank revenues as compared to 22% in the third quarter.

Continuing to grow our non-interest income remains a focus of our team. I'd now like to turn the call over to Steve.

Steve Crockett (CFO and Treasurer)

Thanks, Cory. For the fourth quarter, diluted earnings per share was $0.96 compared to $0.66 from the linked quarter. Of note, our fourth quarter earnings were positively impacted by $0.07 per share after tax for the fair value adjustment of the mortgage servicing rights assets as mortgage interest rates rose in the fourth quarter. Turning to slide 13, net interest income was $38.5 million for the fourth quarter as compared to $37.3 million for the linked quarter. The rise in net interest income was largely due to a $1.6 million decline in interest expense, partially offset by a decrease of $243,000 in loan interest income. Our net interest margin, calculated on a tax-equivalent basis, was 3.75% in the fourth quarter as compared to 3.65% in the linked quarter.

The 10 basis point increase to our NIM was primarily due to an 18 basis point decline in our cost of deposits in the quarter as compared to the prior quarter, as we effectively repriced our interest-bearing deposits as the Fed reduced their short-term interest rate. At year-end, our non-interest-bearing deposits decreased to 25.8% of total deposits as compared to 26.9% in the linked quarter, largely due to the seasonal decline in mortgage escrow balances. As outlined on slide 14, deposits decreased by $94.8 million to $3.62 billion at December 31st. Our cost of deposits was 229 basis points in the fourth quarter, a decrease of 18 basis points from the linked quarter. Turning to slide 15, our ratio of allowance for credit losses to total loans held for investment was 1.42% at December 31st, 2024, an increase of one basis point from the end of the prior quarter.

We recorded a $1.2 million provision for credit losses in the fourth quarter, which was largely attributable to net charge-off activity and by increased loan balances during the quarter. Our non-performing loans totaled $24 million at the end of the fourth quarter, a slight decrease from $24.7 million in the third quarter. Skipping ahead to slide 18, our non-interest expense was $29.9 million in the fourth quarter as compared to $33.1 million in the linked quarter. The $3.2 million decrease from the third quarter of 2024 was largely a result of a decline of $1.4 million in personnel expenses, primarily from decreased health insurance costs of approximately $675,000 as annual rebates were received in the current quarter. Additionally, we had a $400,000 reduction in mortgage commissions as mortgage activity slowed in the current quarter, given the rise in mortgage interest rates.

Looking ahead to the first quarter of 2025, we expect non-interest expense to be more in line with the third quarter's level, given the number of one-time benefits that we experienced in the fourth quarter and including annual salary adjustments. Moving to slide 21, we remain well capitalized with tangible common equity to tangible assets of 9.92% at the end of the fourth quarter, an increase of 15 basis points from the end of the third quarter. Tangible book value per share decreased to $25.40 as of December 31st, 2024, compared to $25.75 as of September 30th, 2024. The decrease was primarily driven by an $18.2 million decrease in accumulated other comprehensive income as the fair value of available for sale securities decreased, partially offset by $14 million of net income after dividends paid. I'll give the call back to Curtis for concluding remarks.

Curtis Griffith (Chairman and CEO)

Thank you, Steve. To conclude, and as I said, I am very proud of our financial results. We have effectively managed our liquidity to optimize our profitability and returns while taking proactive steps to ensure that we maintain the credit quality of our loan portfolio. Importantly, we are experiencing strong underlying loan demand, which we believe will begin to come through as our payoffs begin to return to more normal levels. We remain optimistic that economic growth is set to accelerate under the new administration and are well positioned to drive organic growth across both our community and metropolitan markets as we focus on expanding the bank and delivering value to all of our stakeholders. I would also like to thank our employees for their hard work over the last year.

They are the key to our success, and I am grateful for their continued commitment to our bank and our customers. Thank you again for your time today. Operator, please open the line for any questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove 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, while we pull for questions. Thank you. Our first question comes from a line of Woody Lay with KBW. Please proceed with your question.

Woody Lay (Managing Director)

Hey, good morning, guys.

Curtis Griffith (Chairman and CEO)

Hey, Woody. Good morning.

Woody Lay (Managing Director)

Wanted to start with the loan yield in the fourth quarter. I mean, it was pretty impressive to see that the relatively flat quarter-over-quarter given the rate cuts. Any color on what allowed the loan yield to remain stable? There wasn't any sort of one-time interest benefit, was there?

Steve Crockett (CFO and Treasurer)

Hey, Woody, this is Steve. There was a little bit less than $200,000 of non-accrued interest that we got, not necessarily out of line with what we see in other quarters. Really, between that and just having loans pay off, we had some loans paying off that were at lower rates, quite frankly, which we were glad to see, even some of the 4%, 5% loans pay off, and then some of the new loans being booked that are at rates higher than what the average is. So overall, again, we were very pleased with where that ended up, but no real one big-time non-recurring item.

Woody Lay (Managing Director)

Got it. That's helpful. And then any expectations near-term for the margin? Do you think it can remain stable around the 375 level, or is there a chance that it could even move higher?

Steve Crockett (CFO and Treasurer)

We've had a lot of discussion about that. We're going to be more conservative, as you know, in what we would say. I mean, I would hope we could keep it where it's at and hopefully incrementally improve, but a lot of that's really going to depend on loan growth and where that kind of ends up. I mean, you'll see our deposit costs will still come down just a little bit as we flush out the rate cuts that were done midway through the quarter and things like that. And loan yields may trend down slightly just depending on how all that ends up for a full quarter after those cuts. But overall, with the right loan growth, I think we could see it stabilize and maybe grow incrementally.

Cory Newsom (President)

Woody, this is Cory. I think the one thing that's going to help us do that is the fact that our liquidity position is where it is. It just gives us some opportunities to make sure we're not overpricing on the cost side.

Woody Lay (Managing Director)

Yeah.

Curtis Griffith (Chairman and CEO)

Yeah. And like for everybody, you know this, a lot's going to depend on what the Fed decides to do. If they move forward with more rate cuts, and the current president indicated he'd sure like to see that, we'll see where we go. But certainly, rate cuts in our case will likely help our NIM. It may not be, again, one for one, but I think we would continue to gain by lower short-term rates. But we'll just have to see where that goes. But I kind of agree with Cory and Steve. We've got a lot of things in place that we should still see minor improvements in the NIM, but may not be quite as strong as what we saw in the fourth quarter. But I think we'll continue to get some improvements through the year.

Woody Lay (Managing Director)

Right. Well, y'all have consistently been beating the NIM guide, so we'll see how it turns out. Lastly, on the loan pipeline, I mean, it's great to hear all the color around the new customer activity. Just is that concentrated in any one segment? And then is it a reflection of new hires, or is it just a reflection of hard work?

Brent Bates (Chief Credit Officer)

Yeah, Woody, this is Brent. It's a combination, I think, of all those factors. We have good production from new hires, but really, I think we've got a lot of optimism we're seeing from our clients and capital outlays that they're planning to make, and our pipeline is much better than it was this time last year, so we feel optimistic about it too.

Woody Lay (Managing Director)

All right. That's all for me. Thanks for taking my questions.

Cory Newsom (President)

Thanks, Woody.

Curtis Griffith (Chairman and CEO)

Thanks, Woody.

Brent Bates (Chief Credit Officer)

Thanks.

Operator (participant)

Our next question comes from a line of Brett Rabatin with Hovde Group. Please proceed with your question.

Brett Rabatin (Director of Research)

Hey, guys. Good morning.

Cory Newsom (President)

Hey, Brett.

Curtis Griffith (Chairman and CEO)

Hi, Brett.

Brett Rabatin (Director of Research)

Wanted to start on the payoffs. You talked about it quite a bit, but if you gave it, I missed a number, but the number of or dollar amount of payoffs that you guys had in the quarter. And then it sounds like the pipeline continues to build. I guess I'm a little surprised you're being a little conservative and saying low- to mid-single-digit loan growth. I thought that number might be more mid- to high-single-digit, so I was just hoping for some additional color on that.

Cory Newsom (President)

Hey, Brett, you're surprised we're being conservative?

Brett Rabatin (Director of Research)

Well.

Cory Newsom (President)

That was how we're going to.

Brent Bates (Chief Credit Officer)

Yeah. Brett, I mean, we are striving to overdeliver on that, but payments were higher in the fourth quarter. And frankly, some of that's nothing to apologize for. Our clients had experienced some liquidity events. We had several that had liquidity events, either decided to sell their real estate or had significant excess liquidity and decided to reduce debt. And that's good for them, and we're fine with that. I mean, we want to see our clients succeed in what they do. So we may see a little bit more of that with customers selling assets, and that could be, I think we're thinking that could be repeated in the first, maybe second quarter. But we still feel confident in our pipeline and ability to, that production will outpace those, if that makes sense.

Cory Newsom (President)

Brett, one of the things that I was kind of pleased to see on a number of the payoffs that we had. I mean, you're going to have the seasonal stuff that comes along. You're going to have the stuff that we have no control over. But what was really nice is to see some of the transactions we had that were life events that actually happened to people that converted into investment opportunities for us on the other side that stayed here. And it goes back to the relationship aspect of what we fight for daily.

Brett Rabatin (Director of Research)

Okay. And then the other thing I wanted to ask about was just M&A, and your capital ratio has gotten pretty healthy. I don't know if you're thinking about using the buyback more at some point, but just you briefly mentioned M&A and talking about that. Can you talk maybe a little bit more about what you're seeing from maybe potential partners? And is there a lot of interest from community banks at this point? What's your outlook for the potential acquisition market?

Curtis Griffith (Chairman and CEO)

This is Curtis. We continue to see an increase, I think, in the number of ideas that are pitched to us by the investment bankers. They're looking at this as a real opportunity. They, as you well know, have had a couple of pretty lean years. So far, we haven't really seen anything that we liked quite well enough to get down to really trying to negotiate pricing on it. Indications are that you've got a lot of sellers of good banks that are still expecting probably a higher multiple than the market's ready to give right now. And as we keep saying, we want the right deal. We'd rather not do anything at all rather than do one that's not going to benefit our shareholders long-term.

And something that there's, and that's not just banking, but if you look at it, so many businesses out there make a larger acquisition, and their stock suffers for quite a while. And so we see no point in doing that. We want to do something that everybody's going to like and see the real value of, and that the acquired institution would be very happy to be joining our fold. So we're going to keep our eyes out, and we do continue to see more and more opportunities out there, both in our part of the state and other parts of Texas as well. So my guesstimation is we'll probably have something to talk about maybe later in the year, but we don't know until we really see it. The environment for doing something is certainly better than what it's been.

Cory Newsom (President)

Brett, this is Cory. I think the one thing that I would tell you, though, is if you look at us, I don't think we've ever been as well-positioned as we are today to do an acquisition. And we just got to find the right one. And we are very, very much focused on it.

Brett Rabatin (Director of Research)

Okay. Appreciate all the color, guys.

Cory Newsom (President)

Thanks, Brent.

Curtis Griffith (Chairman and CEO)

Thanks, Brett.

Operator (participant)

Our next question comes from a line of Stephen Scouten with Piper Sandler. Please proceed with your question.

Stephen Scouten (Managing Director)

Hey, good morning, everyone. Thanks. I'm not sure, Steve, if you gave this data earlier to one of the questions. I might have missed it, but can you give us a feel for where new loan yields are coming on versus maybe some of the portfolio yields are rolling off at?

Steve Crockett (CFO and Treasurer)

Yeah. I would say they're in the 7 range. It could be all over in the 7s, but generally, probably in the low to mid. There'd be some in the high, but that lower end probably.

Stephen Scouten (Managing Director)

Gotcha. And that's coming off the books where some of these fixed-rate loans reprice on the average?

Cory Newsom (President)

Yeah, I think so. I mean, help me understand your question again.

Stephen Scouten (Managing Director)

Yeah. So I mean, what is it? Your total average yield is like 669, but I imagine some of the fixed-rate loans that are coming off the books and repricing in that 7% range are probably more in the, I don't know, 4%-5% range, I would guess. There's probably some five-year-old loans that are in that range, but just trying to get a feel for that kind of on-off yield dynamic.

Steve Crockett (CFO and Treasurer)

Yes. We've got some there, but quite frankly, we've had some payoffs of loans at the higher yields as well. But yeah, the fixed-rate stuff generally is going to be in the upper 4s and 5s that have been coming off.

Stephen Scouten (Managing Director)

Okay, so still potentially getting a 150-200 basis point pickup on some of that fixed-rate loan book as it reprices?

Steve Crockett (CFO and Treasurer)

Yes.

Cory Newsom (President)

And I think one thing, Stephen, keep in mind, if you look at the quality of our portfolio, it's never going to be the highest portfolio out there because the credit quality is good, and so, I mean, we really try to stay competitive. We try to price it to market, and I really do feel good about the stuff that we're seeing coming in, whether it's the spreads around prime. That's what we really price a lot of our stuff off of.

Stephen Scouten (Managing Director)

Yeah, no, for sure. And I'm just kind of thinking about the NIM dynamic. I know, obviously, I think your NIM would respond best with some lower rates given slight liability sensitivity. But with the fixed-rate loan book, I would think you could still see some NIM expansion throughout the year in a stable rate environment. Would you agree with that?

Curtis Griffith (Chairman and CEO)

Yeah. This is Curtis. I absolutely would. That's the reason I still feel confident we'll get some NIM expansion moving through 2025 because, again, just keep rates exactly where they are. And if our business pipeline moves as we think it will, you'll see a moderate increase in NIM. Nothing dramatic, but we'll continue to move up, probably not down. And if we got slightly lower short-term rates, it should move a little more in our favor, I think.

Stephen Scouten (Managing Director)

Yeah. Yeah. No, that's great. Okay. And maybe just for me, in full honesty, I've been getting most of my Texas economic information from the show, Landman. So I'd love to get kind of your thoughts on what the potential drilling activity down in the Gulf of America could do for, in your view, your economies. I mean, how that price of oil could affect your economies and overall loan demand, how you're thinking about that.

Cory Newsom (President)

Everybody's having to buy more insurance for these well blowouts that are happening apparently now, so that's probably going to impact it. We're pricing oil right now. Our service guys are, I mean, they're very optimistic about what their future is right now. Brent, you?

Brent Bates (Chief Credit Officer)

Yeah. I would 100% agree with that. I think there's a lot of optimism in the Permian and in our markets, just in part because of just energy prices. This region is probably the lowest cost-to-produce area in the country and, obviously, the highest volume. So there is a lot of activity, and you see it when you drive down there. So I think we'll have opportunities around that. And frankly, that's a part of the reason why our pipeline has expanded so much, I think, is just optimism around general economies.

Cory Newsom (President)

I think—I mean, if you look at the size of the bank, you look at the size of the customers that we actually bank in those markets, there are a lot of times the lower-cost provider, and they're seeing good opportunities in those markets right now. I mean, we're continuing to see good lending opportunities as a result of it as well.

Curtis Griffith (Chairman and CEO)

On a more macro scale, again, now, nobody wants to see oil price down in the 50s, at least in our parts of Texas. So I don't think we'll see that. But as we know, one of Mr. Trump's new good friends apparently is going to get arm-twisted to push the world rate down some. We'll see where it goes. But realistically, if oil prices stay about where they are, the somewhat relaxed regulations, we'll see more drilling than what we've seen. And you make a good point. While we don't lend into that market as such, you could really see offshore drilling pick up for the next two to four years. And for places like Houston, generally, that's a good macro event for that economy. It will really help drive overall business in the Houston market.

Cory Newsom (President)

Stephen, just one last thing. Just know that we underwrite to a much cheaper oil.

Stephen Scouten (Managing Director)

Got it. Got it. Yeah. That's helpful, and that's kind of what I was hoping to hear is, and that's helpful that it sounds like the Permian maybe in and of itself as an area could do a little bit better given its lower cost to produce, so let's say drilling activity, it hasn't happened yet, but it does take down the price per barrel in the $60s or whatever. The Permian should be more insulated from any negative impacts in other parts of the country is what I hear you saying?

Curtis Griffith (Chairman and CEO)

Yes. Absolutely.

Cory Newsom (President)

For sure.

Stephen Scouten (Managing Director)

Got it. That's super helpful. Thank you, guys, for the color. Congrats on a great 2024.

Cory Newsom (President)

Thank you.

Curtis Griffith (Chairman and CEO)

Thanks.

Operator (participant)

As a reminder, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from a line of Joe Yanchunis with Raymond James. Please proceed with your question.

Joe Yanchunis (Senior Equity Research Associate)

Good morning.

Cory Newsom (President)

Joe, how are you doing?

Joe Yanchunis (Senior Equity Research Associate)

I'm good. Well, I'm doing great. So kind of want to start on loans here for a moment. I appreciate the detail in the deck on the loans coming up for renewal. But as they come up for renewal, do you have a sense, kind of historically speaking, for how much of these loans you typically retain versus what's being rolled off? Just trying to get a little deeper sense into that repricing opportunity with how much stays with the bank.

Cory Newsom (President)

Brent, before you, I mean, the good thing for us, though, is we have a lot that come up for repricing that are not up for renewal, which plays a big role in what we do. But Brent, all that.

Brent Bates (Chief Credit Officer)

That's right. Yeah. So that's repricing. Those aren't all maturing. I mean, we've so far been pretty successful at retention of repriced loans. Of course, there are times, and that's part of the payoff experience we've had in the fourth quarter where customers have just decided to take advantage of gains and recapture equity and projects. And that's okay too. I mean, we retain those relationships that may have lost the loan but retain the relationship. So it's kind of tough to predict who's going to decide to do that. But as far as the ones that we wanted to retain, we've retained them.

Cory Newsom (President)

Yeah. And Joe, one thing that helps us is the ones that are up for repricing and not necessarily maturity. The refi penalty still stays. So that's always on the table. So we at least have that try to help us from a negotiation standpoint. If we don't wait till these things are right at maturity, we're working them way early.

Joe Yanchunis (Senior Equity Research Associate)

Got it. No, that's very helpful. And then just kind of shifting over to credit, in the prior quarters, you've discussed optimism around resolving a rather chunky multifamily problem loan. Can you provide an update on how that process is progressing?

Brent Bates (Chief Credit Officer)

Yeah. It's paying, and we're working the plan just like we'd expected. So I mean, I still feel really good about our credit quality and the trends and direction. I mean, we're not unique in the fact that I mean, we'll see other challenges, I'm sure, and we'll work through those as we get them. But as far as where we're at today, I'm optimistic with not only what we've done, but what I expect we'll do in the future.

Cory Newsom (President)

I think we've done a good job of trying to identify what challenges we think we're going to have and start working them early.

Joe Yanchunis (Senior Equity Research Associate)

Understood. That's all for me. Thank you for taking my questions.

Steve Crockett (CFO and Treasurer)

Thanks, Joe.

Curtis Griffith (Chairman and CEO)

Thanks, Joe.

Operator (participant)

Thank you. Mr. Griffith, we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

Curtis Griffith (Chairman and CEO)

Thank you, Operator. As we've said today, South Plains Financial is well-positioned for many opportunities and for what we believe multiple economic scenarios. Our customer optimism is the best in a long time. I've seen some material. I'll give credit to Mr. Tom Brown's newsletter a bit last week. National survey data shows that small business optimism is at its highest since 2018. We do think that's going to translate into some loan growth for us and just better economic conditions all over. Our credit quality remains strong. We're always aware of the risks out there. We're going to continue to work on that. We'll continue to focus on controlling expenses and increasing NIM, and we'll be ready if the right M&A deal comes along. We'll continue to be looking for opportunities in all those sectors.

We thank you for your time today and look forward to visiting with you if you ever have any questions for us. Thank you.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.