Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial second quarter 2023 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 second quarter 2023 earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer, Cory Newsom, our President, and Brent Bates, our Chief Credit Officer. Slide deck presentation to complement today's discussion is 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 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 two of the slide deck presentation. 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 at the end of our earnings release and beginning on slide 23 of the slide deck presentation. Curtis, let me hand it over to you.
Thank you, Steve, and good afternoon. On today's call, I will briefly review the highlights of our second quarter 2023 results, as well as provide an update on our capital allocation priorities following the sale of Windmark, which closed in April. Cory will discuss our loan portfolio in more detail and how we continue to benefit from competitor mergers in our key markets. Steve will then conclude with a more detailed review of our financial results. To start, I'm very pleased with our second quarter results as they highlight the strength of our culture and the commitment that our employees have to our customers and to our company, especially in such a challenging environment for our industry.
We've exited the second quarter in a strong financial position, and I'd like to thank our employees for their hard work, which can clearly be seen in our results once again this quarter. Turning to today's call, there are six key points that I hope you will take away. First, our deposits remained stable through the second quarter, further demonstrating the strength of our community-based deposit franchise. Second, despite the continued rising market interest rate environment, our net interest margin held steady from March's level as higher loan yields are offsetting the rise in our cost of funds. Third, our organic loan growth was very strong in the second quarter as we benefited from a robust loan pipeline combined with lower competition across our markets. That said, we continue to be selected in the new loans that we fund as we maintain our underwriting discipline.
Fourth, the credit profile of our loan portfolio improved through the second quarter, though we did have one nonaccrual addition, which I will touch on in more detail in a moment. Fifth, we further built capital this quarter through our earnings and the sale of Windmark, as our tier one capital to average assets ratio increased to 11.7%. Lastly, we strategically sold a portion of our investment securities portfolio in the quarter, which we believe to be advantageous given the gain we recorded from the Windmark sale, combined with the yield improvement that we were able to achieve as we reinvested the securities sale proceeds into new loans.
Turning to our results in more detail on slide four of our earnings presentation, we delivered net income of $29.7 million, or $1.71 diluted earnings per share, as compared to $9.2 million, or $0.53 diluted earnings per share for the first quarter of 2023. This compares to net income of $15.9 million, or $0.88 per diluted common share in the year ago second quarter. As we discussed on our first quarter call, we completed the sale of Windmark, City Bank's wholly owned insurance subsidiary, for $35.5 million in April in an all-cash transaction.
The after-tax sale proceeds, less transaction expenses, the incentive compensation triggered by the transaction, and the realized loss on the sale of our investment securities during the second quarter, resulted in a $1.16 per share of one-time net income in the second quarter. Excluding these items, we earned $0.55 per share. Given the large gain that we recorded, we made the strategic decision to sell $56 million of investment securities from our portfolio, which resulted in a realized loss of $3.4 million. We believe this was a tax-efficient transaction and will boost our earnings in future periods, given that the securities we sold were yielding approximately 2.7%, and we reinvested the proceeds in loans that are yielding more than 7% in the second quarter.
The incremental income will help replace the loss of future net income from the Windmark operations. Turning to our loan portfolio, we grew loans 6.8% in the second quarter as we continued to experience healthy economic growth combined with customer dislocation in many of our markets from recent competitive mergers. Additionally, we are seeing larger competitors pull back in some markets, which allowing our team to bring new relationships to the bank, as Cory Newsom will touch on in more detail. We recorded a provision for credit losses of $3.7 million in the second quarter, as compared to $1 million in the first quarter of 2023.
The provision was primarily for the strong loan growth that we delivered in the quarter and a $1.3 million increase in specific reserves related to one previously classified credit relationship, totaling $13.3 million, that was placed on nonaccrual in May of 2023. This credit was for a business that is currently in borrower-directed liquidation and from which we expect to see larger repayments starting in the third quarter of 2023. While there continues to be payment performance, we placed the relationship on nonaccrual and recorded the specific reserve, given that the business is no longer a going concern. As Steve will touch on in more detail, the overall credit quality of our portfolio continued to improve through the second quarter. Of note, our budget and consensus estimates were for $1.25 million of provision expense in the second quarter.
Our recorded provision expense was approximately $0.14 per share above these expectations. We believe the run rate earnings of the bank, excluding all one-time items and the increased provision, was $0.69 per share in the second quarter, which bodes well for the second half of the year, as we will fully benefit from the second quarter's loan growth and improved loan yields. We grew deposits $66.5 million, or 1.9%, to $3.57 billion at June 30, 2023, as compared to the end of the first quarter of 2023. Our deposit growth was primarily due to an $81 million increase in brokered deposits, partially offset by a $67 million reduction in public funds, which had grown $118 million during the prior quarter.
We are making a concerted effort to manage overall deposit levels and related interest costs. Ultimately, we will continue to build out our deposit-gathering capabilities as we strive to grow core deposits and manage our cost of funds. The stability of our deposit franchise and strong liquidity position can further be seen on slide five, which also highlights the competitive position that South Plains holds. At quarter end, 81% of our deposits were in our rural markets, with only 19% in our major metropolitan markets of Dallas, Houston, and El Paso. Additionally, our average deposit account balance is approximately $36,000, and only an estimated 16% of our total deposits are uninsured or uncollateralized. We believe we also ended the second quarter in a strong liquidity position, with $1.82 billion of untapped borrowing capacity.
We have $1.01 billion of availability from the Federal Home Loan Bank of Dallas, $612 million of availability from the Federal Reserve's discount window, and $200 million of capacity from the Federal Reserve's Bank Term Funding Program. We have ample capital to take advantage of growth opportunities, both organic and otherwise, as they present themselves. Given our strong capital and liquidity position, our board of directors authorized a $15 million stock repurchase program in May. We bought back approximately 113,000 shares during the second quarter for $2.6 million. We continue to believe that our shares are trading below intrinsic value and do not reflect our strong results and the opportunities that we see to further grow the bank.
That said, we will be cautious with our capital, given the uncertain economic environment, combined with the dislocation of the banking sector. We will be patient and continue to review a broad range of options to determine the best uses for the capital generated from the Windmark sale. As part of our capital allocation, returning a steady stream of income to our shareholders through our quarterly dividend has been a focus since going public over four years ago, and our board of directors again authorized a $0.13 per share quarterly dividend, as announced last week. This will be our 17th consecutive quarterly dividend to be paid on August 14, 2023, for shareholders of record on July 31st, 2023. To conclude, we are successfully navigating what is a challenging environment and remain cautiously optimistic looking into the second half of the year.
Economic growth is holding remarkably steady in our markets, while unemployment remains low. We will maintain our capital as we look to take advantage of opportunities in the market and continue to conservatively grow the bank. Let me turn the call over to Cory.
Thanks, Curtis. Good afternoon, everyone. Starting on slide six, loans held for investment increased during the second quarter by $190.4 million, or 6.8% compared to the first quarter of 2023. Demand was broad-based across both our markets and industry sectors, highlighted by organic loan growth in residential mortgage, commercial real estate, and energy. We were fortunate to end the second quarter with a strong loan pipeline, which contributed to this growth. Additionally, the competitive environment continued to ease as we benefited from the customer dislocation created by competitor mergers, as well as from a reduction in credit availability from several competitors through the quarter. We believe this is an opportunity to bring high-quality, long-term customer relationships to South Plains.
While the competitive environment has improved, we are maintaining our underwriting standards as we will not sacrifice credit quality for growth. We remain focused on funding high-quality loans with good risk and return profiles. Our loan yield was 5.94% in the second quarter, which compares to 5.78% in the first quarter of 2023. We continued to proactively price new loans to account for a higher market interest rate environment, which is contributing to rising funding costs. We continue to believe that loan yields are beginning to peak and remain focused on managing our deposit growth and funding costs to mitigate margin pressure as we look to the second half of the year.
Skipping to Slide eight, we grew our loan portfolio by $65 million or 7.3% in our major metropolitan markets of Dallas, Houston, and El Paso as compared to the first quarter of 2023. The commercial lenders that we have added in these markets continue to grow their loan portfolios by bringing new customer relationships to the bank. We are watching the Texas economy closely and will be cautious as we grow with a focus on expenses. Permian Basin is another market that we are pleased with this quarter as we experienced an increase in loan demand. Since completing our acquisition with West Texas State Bank in 2019, we've been investing in our facilities, people, and technology in order to tap into the strong potential that exists in this region from both a lending and deposit gathering perspective.
It has taken time, and the pandemic certainly set us back, but our operations are running well, and we are beginning to take share. We believe that we are in the early stages of our growth in the Permian. Taken together, we are pleased with our loan growth for the first six months of the year, but expect loan growth to moderate given the impact of higher interest rates on loan demand. We expect full year loan growth to be in the high single-digit to low double-digit range, which is meaningfully above our prior guidance of low single-digit growth for the full year of 2023. Skipping ahead to Slide 10, we have approximately $1.1 billion of commercial real estate exposure in our loan portfolio at quarter end, which represented 36.5% of our total loan portfolio.
Our office exposure represented 16.8% of our CRE portfolio and 6.1% of our total loan portfolio at the end of the second quarter. Of note, 29% of our office exposure is owner-occupied, and medical offices comprise 11% of our office exposure. Our office portfolio is performing well, and our largest credits have strong guarantors. We continue to stress test the individual credits in our portfolio for challenges. As Steve will discuss, the overall credit quality of our loan portfolio improved through the second quarter, which provides confidence if the economy were to slow. As I discussed on our first quarter's earnings call, we are strategically enhancing our treasury management and liquidity team as we focus on growing deposits. The focus is on how we deliver, not just adding expense.
This includes enhancing the level of education for our team on all aspects of treasury products. If we want to win the business, we have to be better than our competition in providing solutions and identifying needs. We look to further build our core deposit franchise as we focus on relationships for the long term. We believe this initiative can have a meaningful impact on our deposit base and, to a lesser degree, our fee income over the medium term. Turning to Slide 11, our indirect auto loan portfolio decreased by $2.4 million to $297.9 million in the second quarter as compared to the end of the first quarter of 2023.
Our strategy this year has been to level out or modestly reduce the indirect auto loan portfolio over time, while replacing some of the runoff with higher yielding loans with strong credit profiles. We're also maintaining a disciplined approach to underwriting, as 62% of the indirect auto loan portfolio was originated with a credit score of 719 or better, which is super prime, and 28% of the portfolio was originated with a credit score of 660-719, which is prime. The strong credit profile positions the portfolio for resilience across varying economic cycles. Turning to Slide 12, we generated $47.1 million of non-interest income in the second quarter, which included $33.5 million gain from the sale of Windmark.
Excluding this gain, we generated $13.6 million of non-interest income, which compares to $10.7 million in the first quarter of 2023. The increase was primarily due to a $3 million increase in mortgage banking activities revenue, partially offset by a reduction of $1.4 million in income from insurance activities due to the sale of Windmark. During the second quarter, mortgage loan originations increased $46 million to $132 million as compared to $86 million in the first quarter of 2023, given the normal pickup from the spring selling season. Additionally, there was a write-up of $400,000 in the fair value of our mortgage servicing rights portfolio in the second quarter, as compared to a $2 million write-down in the first quarter of 2023, given the rise in market interest rates.
Our secondary mortgage origination division, which excludes mortgage servicing activities, was break even in the second quarter. Looking forward, we will remain in the mortgage business as long as it is profitable and drives incremental business through cross-selling. For the second quarter, non-interest income, excluding the one-time gain for Windmark, was 28% of bank revenues as compared to 24% in the first quarter of 2023. To conclude, we delivered strong results through the second quarter, and we believe we remain well positioned for the current environment. We are strategically taking market share, given the customer dislocation that is occurring in our markets, and are always looking to add talented lenders where it makes sense. We will continue to focus on driving organic deposit growth while mitigating margin pressure as we strive to grow the earnings power of the bank.
I will now turn the call over to Steve.
Thanks, Cory. Starting on Slide 14, net interest income was $34.6 million for the second quarter, as compared to $34.3 million for the first quarter of 2023. The modest increase was primarily the result of a $3.4 million increase in interest income due to higher average loan balances and loan yields, largely offset by a $3.1 million increase in interest expense due to the rise in short-term interest rates. Our net interest margin, calculated on a tax equivalent basis, was 3.65% in the second quarter, as compared to 3.75% in the first quarter of 2023. Our NIM was impacted by a 33 basis point increase in our cost of deposits in the second quarter as compared to the first quarter of 2023.
This was partially offset by our organic loan growth, combined with the corresponding increase in our loan yields of 16 basis points as compared to the first quarter of 2023. Importantly, our NIM dropped 15 basis points in the month of March 2023 to 3.65% and has held steady through the second quarter. We remain focused on managing our profitability in this more challenging environment. Our average cost of deposits was 169 basis points in the second quarter, an increase from 136 basis points in the first quarter of 2023. Given the rising interest rate environment through the year, we have had to be proactive in maintaining deposit relationships, which has led to the rise in our funding cost.
Importantly, we have continued to see organic core deposit growth while not having to rely on time deposits, as outlined on slide 15. During the second quarter, our deposit mix was relatively stable as non-interest-bearing deposits decreased slightly to 30.8% of total deposits, as compared to 31.7% of total deposits in the first quarter of 2023. Turning to slide 16, we continue to believe that our loan portfolio remains appropriately reserved as our ratio of allowance for credit losses to total loans was 1.45% at June 30, 2023, as compared to 1.42% at March 31, 2023. As Curtis touched on earlier, we recorded a provision for credit losses of $3.7 million in the second quarter.
The larger provision was largely due to our organic loan growth in the quarter and $1.3 million in specific reserves attributable to one previously classified credit relationship, totaling $13.3 million that was placed on nonaccrual in May 2023. Due to the relationship being placed on nonaccrual, our nonperforming assets to total assets ratio increased to 51 basis points in the second quarter from 19 basis points in the first quarter of 2023. That said, classified loans declined approximately $3 million during the second quarter to $68 million from $71 million at March 31, 2023. Further, a classified relationship with $3.2 million in nonperforming loans paid off in full the first week of July 2023.
Nevertheless, future economic conditions remain uncertain due to the continued rising market interest rate environment, persistent inflation levels that are impacting consumers and businesses in the United States, and the recent dislocations in the banking sector, which may make additional provision for credit losses necessary in future periods. Skipping ahead to slide 18, our non-interest expense was $40.5 million in the second quarter, as compared to $32.4 million in the first quarter of 2023. The increase was primarily due to $4.5 million of transaction expenses and related incentive-based compensation from the Windmark transaction and the $3.4 million loss on the sale of securities. As a result, we see our core non-interest expense as $32.6 million for the second quarter, and we do not expect additional expenses related to the transaction in future quarters.
Importantly, we continue to manage our personnel expense by implementing efficiencies and closely managing personnel based on the activity in our operations, which has allowed us to manage wage inflation across the bank as we adapt to the current market. Looking to the third quarter of 2023 and the year ahead, we expect non-interest expense to be flat or slightly increased based on continued rising costs. That said, we will keep looking for offsets to manage non-interest expense as we continue to selectively add talent to our team. Moving ahead to slide 20, we remain well capitalized with tangible common equity to tangible assets of 8.96% at the end of the second quarter, an increase from 8.54% at the end of the first quarter of 2023.
The increase was driven by $27.5 million in net income after dividends paid, partially offset by $2.6 million in share repurchases. Tangible book value per share increased by $1.63 to $21.82 during the second quarter. Let me turn the call back to Curtis for concluding remarks.
Thank you, Steve. To conclude, I am very proud of our results through the second quarter as we continue to successfully navigate a challenging environment and position South Plains for the future. Through the quarter, we grew loans and deposits while maintaining our profitability in spite of turmoil in the banking industry in March, which is a testament to the franchise value of South Plains. Additionally, the sale of Windmark added capital to our balance sheet for growth, while also enabling us to strategically sell a portion of our investment securities portfolio in a tax-advantaged way, which we believe has further improved the earnings power of the bank....We will continue to look for opportunities to deploy capital to further enhance the earnings power of the bank as we strive to create value for our shareholders. Thank you again for your time today. Operator, please open the line for any questions.
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. Your first question comes from Brady Gailey with KBW. Please go ahead.
Hey, thanks. Good afternoon, guys.
[cross talk] Hi, Brady.
Maybe just a little more color on the $13 million, NPA. What type of business is that and what happened there?
This is Cory Brady. That's a C&I business. A little color, and one of the things that I kind of hoped you would pick up is when we talked about this in our script about it being borrower-directed liquidation. You got a guy that's got in a lot of different businesses and a lot of different industries. He expanded into kind of a related type business, didn't really work out like he wanted it to. He's, at his own discretion, made the decision to self-liquidate, kind of shut it down, self-liquidate. We're always going to account for our stuff appropriately, but this guy is very strong net worth, strong balance sheets, a lot of income from other businesses, and we even have those other businesses that actually guarantee this debt.
We kind of got caught in a window that we needed to account for it appropriately, but feel pretty good about it.
Okay, all right. When you talk about expenses being flat to slightly up, are you basing that off of kind of the second quarter core run rate of that $32.6 million? Is that what you're basing that off of?
This is Steve. That's correct. That's what we're looking at after we kind of normalize that for those for the transaction cost and additional expenses. Right around that 32 and a half million.
All right. I mean, loan growth was, you know, incredible this quarter. I mean, it's 27% linked quarter annualized. Maybe just a little more color on, you know, kind of what drove that level of loan growth?
I'll kick it off and let Brent kind of clean it up on this one. You know, we went into the quarter with a good pipeline. I mean, you know, we've talked about this for a long time, that, you know, with our team in place the way we have it and opportunities to pick up good relationships. I mean, if you look at some of the different markets we're in and some of the disruption that's happened, I mean, it just really worked. I mean, we've been very conservative, and, I mean, we walked away from a lot of stuff that we could have done, just didn't want to. We really cherry-picked it. Brent?
Yeah, we pulled a lot through the pipeline the second quarter. You know, growth centered in industrial storage. You have some multifamily, and some single-family, owner-occupied, non-owner-occupied growth there, as well as energy. It was a mix between the South Plains side of the company and the more metro markets. We had a pretty good blend of a mix, and we still have, you know, a pipeline of fundings on our construction book that we anticipate to continue. Near term, that's kind of going to be a tailwind to that growth and added to it for sure in the second quarter.
I think our paydowns were a little lighter than what we thought they were going to be in the second quarter, so that kind of attributed to it, too. I know we talked about that last quarter. Overall, feel really good about it. We pulled a lot through this quarter.
All right. Finally, for me, you know, the margin was down about 10 basis points one quarter. Maybe your outlook on how the margin should trend in the back half of this year?
Yeah, I mean, we're NIM held steady through the quarter. We kind of looked at where we not for the quarter of March, but the month of March, we were right about that same level, 3.65. We were fortunate and stayed pretty consistent during the second quarter at that level. I mean, it's a challenge every day, so, you know, there's still competitive issues on pricing on deposits. We've got to face that. You know, some compression in NIM, I think is out there. We just hope to minimize that as much as we can.
This is Cory. I think our new pricing on our loans, the funding, the stuff that we're getting, will continue to help hopefully keep that as flat as possible.
Brady, this is Curtis, and you know, I agree with what they said, that we are going to get some benefit from the loans that we're putting on the books now. You're going to have a full quarter of a lot of those. We did, as we noted, sell off some of the low-yielding securities, and those are now largely funded back up in some of the loans we're putting on the books. With the other stuff still in the pipeline, still in the stage of construction, where we're going to be providing funding now that the customers basically put in their equity. We're going to continue to push up the yield on loans. It's just a question of can we stay up with the increase in deposit costs?
We do know deposit costs are moving up some more. We're going to do all we can to keep it down. We think the deposit mix we have is one that lends itself to maybe not reacting as fast as some types of deposits do, but it's going to be a challenge, and I would say that we'll see a little more NIM compression. We're going to hold it as firm as we can, but I expect it tightening up a little in both third and fourth quarter.
Okay, got it. Thank you, guys.
Thanks, Brady.
Thanks, Brady.
Your next question comes from Brett Rabatin with Hovde Group. Please go ahead.
Hey, good afternoon, everybody. Thanks for the question. Wanted to go back just to the deposits and the cost of deposits, you know, only 1.69%, you know, on average in 2Q. Is there not [this is for Cory] is there not any concern that there might be a catch-up order in terms of betas? Could you just give us any color around what rate you added those brokered deposits on during 2Q?
I mean, I really don't unless you see some big movement in rate, I don't see a catch-up quarter coming at all. I do think that we've had to we made some moves early in the year and late last year to try to take care of some of our some of the interest-bearing accounts that we felt like they were a little bit below where they should be for market. No, I feel pretty good about the mix and what we're actually doing. I mean, I think a lot of it goes back to the type of deposits we have, especially in some of the rural markets, and that's what we're so proud of. I don't really see a catch-up quarter coming. See the pricing on the-
Yeah, I mean, I'll just add to that just a little bit. I mean, as far as brokered, you know, that was added toward the end of the quarter. You know, there wasn't necessarily a full, definitely not a full quarter of that in. I mean, it is at the upper end of the cost range there, you know, tied Fed funds, and so it is a costlier deposit, so that will, you know, that will increase our deposit costs during the quarter.
As Curtis said, you know, on the flip side, we've got the loans that those loans were not funded for the entire quarter, so we'll have a full quarter's worth of earnings on those new loans that have been, you know, that are being put on at, you know, +7% , 8% in different cases, so to help offset that cost.
You know, as Brett, I doubt we're much different than anybody else, but I mean, we are using the brokered as a way to manage our overall cost.
Okay.
We think it's working.
What we've been able to do with that, while as we've indicated, it's not inexpensive, but we think it's better than trying to run a whole bunch of CD specials out there, and that's going to take, in our markets, that's going to take something north of 5% if you're really going after new money, to get that in. So we're trying to do all we can to still hold ours, more in line at a little lower levels. If you see our deposit mix, we just don't have that much in CDs, so we're not having to deal with a bunch of CDs, particularly jumbo CDs, maturing, that we've got to be, you know, really up there with high rates or they're going to walk out the door.
A lot of ours are in transaction accounts and money market accounts, and we're able to adjust those rates and, you know, kind of do things competitively and keep the customer relationship there. Also still have that flexibility that when, and it is a when, not an if, rates go back down at some point, we'd be able to quickly pull rates back down on those type accounts.
Okay, that's helpful. You know, I know your DDA has been fairly stable the past year. I was really impressed it was only down end of period, $10 million, 1Q- 2Q. Are you guys opening up a bunch of new accounts that's helping keep that fairly stable, or are you just not seeing mix shift change away from non-interest-bearing to interest-bearing?
Well, I think and we've talked about this the last couple of quarters. I mean, deposits are such a focus when we're approving loans of the relationships that are actually coming in. I mean, it's real. I mean, literally, we sit down and have a conversation over loan approvals, and we start out what the deposit relationship looks like. We're, we're making that much more of a, of a focus when we're doing it, and it's helped us keep those demands pretty stable.
Yeah, I mean, we are seeing some move out, but those new ones coming in are helping to mitigate that.
Okay. Just last quick one for me on the loans. You had talked about a strong loan pipeline and, obviously, the really strong growth in 2Q. Would you attribute the growth in 2Q to, you know, any kind of market share movement or just people getting stuff done, you know, in front of any additional rate hikes or any additional color on the strong growth, you know, relative to the pipeline?
Yeah, go ahead, Brent. I'll let you start off that one.
This is Brent. I'll start off. The majority of our new loan funding that we had during the quarter was expansions of existing relationships. These are long relationships that had an opportunity to either acquire, but most of the time acquire, in some cases, they had a maturing credit that they wanted to move from one place to another, to raise maybe capital for another venture. The majority of our business we book as new fundings. Outside of the construction fundings, are existing clients that came to us for expansion of their relationship. That was both in the metro markets and in the South Plains side of the company.
Yeah, Brett, I would probably catch on to that with part of your question of the fundings, people trying to beat the rate for a movement. I don't think at all, because, I mean, so much of what we're doing is going in with a floating rate. They're gonna catch it anyway. You know, we all saw some of that a year and a half ago, people trying to get some stuff done. We saw that movie. Nah, it's most of this stuff coming in is floating and knowing that they're gonna face whatever rate increases come.
We definitely saw that back in second quarter of 2022. It was pretty obvious what was happening then, that ship's already sailed, I think. Right now, as Cory Newsom said, I think we're booking things at rates that look pretty favorable, and a lot of them are floating. Yes, we are picking up some business related to some of the institution sales and consolidations that we've seen, particularly out in our West Texas markets. I think we're going to continue to see that over the next couple of quarters.
People are not terribly happy with some of the new ownership in some cases. They're looking to, you know, either move entire relationships or, as Brett indicated, maybe they've already got a relationship with us. Now they're going to take what they had over at the, you know, Bank X and move that over to us as well. We've got room. We're glad to bring them on. We already have the underwriting and to look at the credits, and it's a fairly easy transition for them. I think that was a key trend in Q2, and I think we'll see more of it in Q3 and Q4. Overall, we are going to see a slowdown.
The pipeline has already shrunk some, I think the rate of increase is definitely going to slow, but I don't see us actually going backwards. I think we'll continue to grow loans out through the balance of the year.
Brett, I'll just add one more to it. I mean, you know, over time, we've spent time making sure that we've really done a good job with some of our metro markets, making sure the right teams, leaderships, everything's in place. We're still just as focused in taking care of that in our rural markets, and we're seeing opportunities to take share in those areas and picking up good leadership in some of the rural markets that where some of those good deposits and good loan opportunities are. We want to take care of both sides of our balance sheet, meaning metro and rural, knowing that they're both beneficial.
Okay, great. Appreciate all the color.
Thanks, Brett.
Thank you.
Thanks, Brett.
Next question, Graham Dick with Piper Sandler. Please go ahead.
Hey, good evening, guys.
Hi, Graham.
[cross tallk] Good evening.
I kind of just wanted to stick with, I guess, that last point there about, you know, customers maybe being unhappy with their bank and, you know, looking to move over to you guys, you know, banks that have been impacted by M&A, and kind of look at the other side of that and say, you know, are there lenders out there that you guys are looking at right now that, you know, maybe at a bank that has done M&A recently, and they're not happy with it, or the bank isn't, you know, doesn't have the capital or liquidity to make loans like you guys have in this current environment? I know you guys made, you know, a handful of hires or a lot of hires over the last couple of years, and it's kind of slowed down a bit.
Just wondering with your all's capital position now and the deposit base you have, if you're looking at all, for, you know, hires or inorganic opportunities?
I mean, just go with what I was just saying. I mean, we've just picked up market leader and different ones at a rural market that fit everything you just described, and it's going to bring a lot of opportunity with it. We're excited about that. It'll bring deposits and loans, that's what we like. I mean, I mean, we said it, we're going to make selective hires, strategic hires. I mean, I will tell you that we interview frequently. We don't hire frequently. We're very careful about who gets to come on and be a part of the team and make sure that it's going to be a long-term fit that can bring relationships that fit what we're looking for. That's what we've done.
We've been very consistent with this for years, and it's why we've built the caliber team that we truly have. We're not backing down from it, but we're making very selective, strategic hires.
Okay, I hear you. All right. Then I guess just shifting more to the margin. I just wanted to touch on loan yields a little bit. I know I think you said they might be, you feel as if they're topping out a bit, I guess maybe on new loan yields, if you know, assume the Fed's pretty much done after this month or maybe 1 more hike after that. What sort of loan yield do you have baked into your assumptions that NIM is going to contract a little bit in the back half of the year? What kind of, I guess, loan yield expansion do you have through the end of the year, do you expect?
As far as loans go, I mean, again, we're putting on loans, and I'll get Brent to help me out. We're putting loans on when they're fixed. I mean, they've been in the upper 7s, mid to upper 7s, I would say, even some maybe slightly higher than that. You know, a good thing is, you know, we've got our indirect portfolio that while that's at some lower rates, that stuff amortizes a lot faster off and. Those lower yields are paying off and coming back in. I mean, we're still, you know, we should show, you know, expansion in the overall loan yield.
I mean, we went up roughly, I guess, around 15, 16 basis points. In the quarter, you know, we should see a decent size. I'll say hopefully in that range for Q3, especially given the growth that we had in Q2.
If you look at those rates, though, I mean, some of the ones I think what Steve was trying to explain was a little, some of the little fixed stuff that we put on the books. We're putting a lot of prime plus on the books, too, that's floating, that I think will be very beneficial to it as well.
Right. This is Brent. You've got draws on construction loans that, for the most part, are variable rate. To what Steve was alluding to, you have a really short duration on indirect portfolio, about a little over $300 million indirect portfolio, that those lower rates have rolled off of that portfolio and been replaced by much higher rates. You're seeing lift in that segment. You know, same with ag. Ag is going to be a variable rate funding for the second half of the year. You know, you should see some lift in that yield.
Here's the other thing that's kind of interesting. I mean, we're not missing opportunities over rate right now. I mean, for a while, that was kind of a challenge. I mean, I don't believe that you can go out there and charge all you can get. I think you still have to stay competitive, but I think our rates are competitive. I think, though, that we're not sitting around losing them over that. It gets down to a credit quality. Do we want it? Is this a relationship that we want to, I mean, tie onto?
Okay. I guess, that's a perfect segue to what I have last for you guys, is just talking about the provision. I know you guys said that you budgeted for one and a quarter million this quarter. Obviously, it's a little bit higher with the growth and that specific reserve you talked about. I mean, are you guys looking at the rest of the year saying one and a quarter is good for the provision line going forward, or is there anything in there that might take that higher or lower?
I mean, this is Steve Crockett. I'll start, I'll definitely let Brent Bates pipe in. I mean, at this point, I mean, that would be our hope of where we want to be. You know, we do typically, I mean, we always have some net charge-offs during the quarter along with net loan growth. I think we've got a healthy reserve out there currently. Given the view of the economy, I don't think there's any view that needs to ramp up at this point.
Yeah, this is Brent. We feel really good about the reserve level and, you know, we're not seeing broad risk trends in the portfolio, I think provision is going to be largely just like this quarter, most likely going to be driven by growth. What does the total portfolio look like or the mix of the portfolio? that's likely going to be the driver, at least in the, in the near term.
Graham, this is Curtis. You know, we've worked pretty hard on our CECL model, and we are cautious. You know that. You've watched us. We're probably going to run higher reserve than peer. It's not because we think we have more credit problems than peer. It's just that we're trying to be cautious, and we're taking into account a lot of uncertainty still out there in the overall economy. It looks more and more like if we have a recession, it may be a fairly short-lived and soft one, but today, frankly, we don't know. We're just going to try to be well prepared for what comes. There will be some one-offs that happen just like the one we've been describing today.
We think we're pretty well underwritten and don't look for big losses out there, in even if we do have some credits that move on to a nonperforming status. We just don't see the trends building right now in that direction. We're still going to be real cautious and be sure that reserve level stays up where we think we can withstand whatever ills may befall us.
All right. I appreciate it. Thanks, guys.
[cross talk] Thank you.
Thank you.
Once again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from Joe Yanchunis with Raymond James. Please go ahead.
Good afternoon.
Hi, Joe.
Hey, Joe.
You touched on your strategy to modestly reduce the size of the indirect auto portfolio, and I was curious, what is the time horizon of this reduction, and how low would you like to take it?
This is Brent. Sorry if I may have caused some confusion. Right now, we're keeping a pretty stable portfolio in that segment. We like it, but the duration there is so short that, you know, we're routinely replacing cheap rate. I think that was the point I was trying to make is the production we have in that unit isn't necessarily producing growth or contracting, but it's churning that portfolio into higher rate, into higher rate allowance. Yeah, the percentage has come down a little bit, but I think that's really just because we're driving, you know, the rates in that portfolio up, and frankly, the industry itself has kind of contracted a little bit.
I don't see a significant contraction unless the industry continues to contract some, I think we're still getting our fair share of volume out of that, and meanwhile, increasing our yield pretty good.
Yeah, we were only down $2.4 million, I think, quarter-over-quarter. You know, part of that is we're not going to be the cheapest around. If you look how we stack up on our, the way we view them as compared to, like, CFPB, I mean, we want top-end credit. I mean, we want the really good stuff for the majority of our portfolio, we don't have to be the cheapest to do it. I mean, we're strategically placed where we don't have to be.
Understood. Moving over to deposits, you previously kind of guided to a cumulative interest-bearing deposit beta of about 50% by year-end. Do you still think that holds?
I'll let Steve jump in here. This is Curtis. I kind of said that when we started into this. We've managed to stay a little below that up to now. I still think that's probably kind of the upper end for us, unless we see some real anomaly pop up on something out there. That currently, in being based as we are, with a fairly high percentage of rural market deposits, they're just not as volatile as what we see in some of the larger communities. As long as we can keep those relationships in place, I think we can hold to that 50% or lower level. Steve, what do you think?
I agree with what you said. I mean, we have been able to maintain it below that level. We said earlier, there's pressure every day on deposit costs, and we're monitoring it every day. As of now, we still feel that we can just come in right at that level or slightly below.
Perfect. I appreciate it. Then kind of the last one for me here is, you talked a lot about the opportunity in the Permian, and I was curious to know, what was deposit and loan growth like in that market in the recent quarter? If you have that handy.
Let me pull that and see what I can grab real quick.
Well, while Steve's looking that up, we definitely are getting some decent loan growth there. The good news in that market, loans down there quite often do come with strong deposit relationships. That's an area where there's still a lot of liquidity, given the nature of the oil and gas business and the ancillary industries. As we're getting opportunities to move those families and those companies in, it doesn't happen real fast, but the whole idea is the length, the relationships stay with us a long time as well. We are seeing those opportunities pop up more and more.
That's a combination, I think, of having the kind of leadership that we've been looking for in those markets, as well as in that market, as well as we've seen here in Lubbock and some of the others, a little dissatisfaction with some of the changes that they've seen in the banks they've been at. Steve, did you get something?
I mean, I think about 10%, excuse me, about 10% of our loan growth was in the Permian-
Permian
Region during the quarter. Deposits were up slightly, but not a significant amount.
Understood. Thank you for taking my questions.
Thanks, Joe.
Yes, sir. Thank you.
Thank you. I would like to turn the floor over to Curtis for closing remarks.
Thank you, operator. Thank you to all of you who participated in today's call, and a very sincere thank you to our outstanding employees who make all this possible. As I said at the beginning, we had a very good quarter. We exited in a strong financial position. Our deposits and deposit costs remained stable through the quarter as we work to maintain profitability in this higher rate environment. We also delivered excellent loan growth in the quarter, but we do expect it to moderate through the balance of the year. The higher yields from these loans will help mitigate the expected continuing rise in deposit costs. Very importantly, we continue to improve the credit profile of our loan portfolio and are maintaining our strict credit underwriting standards as we conservatively grow the bank.
Finally, we do remain well capitalized with strong liquidity, take advantage of opportunities to improve shareholder returns as they present themselves. I'm truly excited about what I see in our future for City Bank and South Plains Financial. Thank you all again. Have a good day.
This concludes today's teleconference. You may disconnect your lines, and thank you for your participation.