SPFI: Capital Strength and Strategic Growth Drive Long-Term Value (NASDAQ:SPFI) - SPFI Stock Research Report

## Executive Summary / Key Takeaways * Robust Q2 2025 Performance: South Plains Financial delivered strong second-quarter results, with diluted EPS of $0.86 and a net interest margin (NIM) of 4.07%, significantly boosted by a one-time loan interest recovery. Core NIM, excluding this benefit, still expanded to 3.90%, driven by declining deposit costs. * Disciplined Organic Growth & Strategic Hiring: The company is actively expanding its lending capabilities and recruiting experienced lenders, particularly in the Dallas market, to accelerate loan and deposit growth. Despite elevated loan payoffs, a healthy pipeline and stabilizing indirect auto and homebuilder portfolios underpin optimism for future growth. * Fortified Credit Quality: SPFI maintains a conservative underwriting culture and proactive credit management, evidenced by a low non-performing assets to total assets ratio of 0.25% at June 30, 2025, and successful resolution of problem loans, positioning it to weather economic uncertainties. * Strong Capital and Shareholder Returns: With a consolidated Common Equity Tier 1 ratio of 13.86% and a Tier 1 leverage ratio of 12.12%, SPFI is well-capitalized, supporting both strategic growth initiatives and consistent shareholder returns, including a recently increased quarterly dividend of $0.16 per share. * Opportunistic M&A Stance: While prioritizing organic growth, SPFI remains open to accretive acquisitions that align with its strict cultural and financial criteria, leveraging a perceived improved regulatory climate and market dislocation from competitor mergers. ## A Foundation of Community and Prudent Growth South Plains Financial, Inc. (NASDAQ:SPFI), established in 1941 and headquartered in Lubbock, Texas, has cultivated a deep-rooted presence across Texas and Eastern New Mexico. Operating primarily through its wholly-owned subsidiary, City Bank, SPFI provides a comprehensive suite of commercial and consumer financial services, including lending, deposit products, and specialized mortgage, investment, and trust services. This community-centric model has been a cornerstone of its strategy, fostering strong local ties and customer loyalty. The company's strategic journey includes significant milestones such as the 2019 acquisition of West Texas State Bank, which expanded its footprint into the Permian Basin and reinforced its presence in key metropolitan areas like Dallas, Houston, and El Paso. This expansion has been instrumental in diversifying its market exposure within the economically resilient state of Texas. While the broader economic landscape presents uncertainties, including potential national recession risks from new tariff announcements, Texas continues to demonstrate healthy economic growth. SPFI's lending focus on commercial real estate rather than C&I loans dependent on manufacturing and industrial production provides a degree of insulation from these tariff-related headwinds. In a competitive banking landscape, SPFI distinguishes itself through its localized execution and strong community ties. Larger regional players like Texas Capital Bancshares (TICKER:TCBI), Cullen/Frost Bankers (TICKER:CFR), and Comerica (TICKER:CMA) often boast greater scale and broader geographic reach, potentially leading to economies of scale and more robust revenue streams from specialized commercial lending. However, SPFI's community-focused approach allows for more personalized service and faster response times for smaller businesses and individuals in its core regions. This has translated into tangible market leadership, such as holding the number one deposit share in the Lubbock market at 18% as of June 30, 2024, a significant lead over its nearest competitors. SPFI also benefits from market dislocation caused by competitor mergers, which often create customer dissatisfaction and opportunities for SPFI to attract new relationships. SPFI's technological approach centers on enhancing its core banking operations and risk management. The company utilizes a computer-based credit scoring analysis for consumer loans and employs regression models based on macroeconomic variables (MEVs) to project net charge-off rates for its Allowance for Credit Losses (ACL). Recent investments include consulting services for its lending platform and cloud migration for non-core products. While not a developer of market-disrupting proprietary technology, these operational technologies are critical enablers of SPFI's conservative credit culture and drive internal efficiencies. For investors, this means technology is leveraged to strengthen the company's foundational banking practices, improve risk assessment, and streamline operations, rather relevant than being a direct revenue generator through product innovation. This focus on robust internal systems supports its ability to maintain asset quality and manage costs effectively, contributing to its competitive moat of prudent management. ## Operational Momentum and Financial Strength SPFI's operational strategy is geared towards disciplined growth, balancing loan expansion with robust deposit gathering and meticulous credit management. In the second quarter of 2025, loans held for investment increased by $23.1 million, or 3% annualized, reaching $3.10 billion. This growth was broad-based, driven by relationship-focused lending, though partially offset by payoffs of multi-family property and hospitality loans. The Permian market, in particular, demonstrated strong loan growth in Q1 2025, its best single quarter since 2019, reflecting SPFI's ability to attract high-quality customer relationships amidst competitor acquisitions. The company's deposit franchise remains a key competitive advantage. Total deposits grew by $118.1 million, or 3.3%, to $3.74 billion at June 30, 2025, compared to December 31, 2024. This increase included a notable $63.3 million rise in noninterest-bearing deposits, which now constitute 26.7% of total deposits. This favorable mix shift, combined with declining CD rates, contributed to a 5 basis point reduction in the cost of deposits in Q2 2025. Management's strategic focus on treasury management initiatives and requiring deposit relationships with new loans has been instrumental in driving this core deposit growth.

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Financial performance in Q2 2025 underscored this operational effectiveness. Net income reached $14.6 million, or $0.86 per diluted share, a significant increase from $11.1 million, or $0.66 per diluted share, in Q2 2024. Return on average assets (ROAA) annualized stood at 1.34%, and return on average equity (ROAE) annualized was 13.05%. Net interest income surged to $42.5 million, up from $35.9 million in the prior year quarter. The net interest margin (NIM) expanded to 4.07% in Q2 2025, compared to 3.63% in Q2 2024. This expansion was notably aided by a $1.7 million interest recovery on a fully repaid nonaccrual loan, which contributed 17 basis points to NIM. Excluding this one-time gain, the core NIM still improved to 3.90%, reflecting effective deposit cost management.

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Noninterest income, while experiencing some fluctuations, remains a focus. Mortgage banking income increased by $209 thousand in Q2 2025, primarily due to a smaller negative fair value adjustment to mortgage servicing rights ($156 thousand vs. $680 thousand in Q2 2024) as interest rates stabilized. The company continues to maintain its mortgage infrastructure, positioning for an eventual housing market recovery. Noninterest expense saw a modest increase, with salaries and employee benefits rising 2.7% due to annual adjustments and professional services increasing 7.8% due to consulting on the lending platform. Management views these as strategic investments to support future growth. ## Asset Quality and Capital Strength SPFI's commitment to credit quality is a distinguishing feature. The allowance for credit losses (ACL) on loans stood at $45.0 million at June 30, 2025, representing 1.45% of loans held for investment, up from 1.42% at December 31, 2024. The provision for credit losses in Q2 2025 was $2.5 million, largely attributable to an increase in specific reserves and credit quality downgrades. However, nonaccrual loans significantly decreased to $7.8 million, or 0.25% of total loans, at June 30, 2025, from $22.1 million, or 0.72%, at December 31, 2024. This improvement was predominantly due to the full repayment of a $19 million credit that had previously been on nonaccrual status. While classified loans increased due to a $32 million multi-family property loan downgrade, this was partially offset by another $19 million multi-family loan payoff, demonstrating active portfolio management. The company's capital position is exceptionally strong, providing a solid foundation for future growth and resilience. At June 30, 2025, the consolidated Common Equity Tier 1 risk-based capital ratio was 13.86%, and the Tier 1 leverage ratio was 12.12%. Both the company and its bank subsidiary, City Bank, significantly exceed the minimum regulatory requirements to be deemed "well-capitalized." This robust capital base enables SPFI to support its customers' expansion and pursue strategic initiatives without undue constraint. Shareholder returns are a consistent priority. Total stockholders' equity increased by $15.1 million to $454.1 million at June 30, 2025, driven by net income and an increase in accumulated other comprehensive income (AOCI). The Board of Directors recently declared a quarterly cash dividend of $0.16 per share, a 7% increase, marking its 24th consecutive quarterly dividend.

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Furthermore, the company maintains a stock repurchase program, having repurchased 259,046 shares for $8.5 million in the first six months of 2025, balancing liquidity needs with shareholder value creation.

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## Outlook and Strategic Positioning Looking ahead, SPFI maintains a cautiously optimistic outlook, balancing strong underlying business momentum with ongoing economic uncertainties. Management projects loan growth to be flat to up low single digits in Q3 2025, and to trend towards the lower end of its low-to-mid single-digit range for the full year 2025. This guidance accounts for continued elevated loan payoffs, though many of these are "cheap price loans" that, once repaid, improve the overall portfolio yield. The new business pipeline is robust, described as the strongest in over two years, suggesting an acceleration of loan growth in 2026 as headwinds from indirect auto and homebuilder portfolio declines stabilize. Net interest margin is expected to stabilize near current levels, with potential for further expansion. This is supported by anticipated continued declines in deposit costs and the repricing of older, lower-rate fixed loans. Management explicitly aims for a more favorable deposit beta on the downside. Loan yields are expected to stabilize, with new loan production coming on at attractive rates, generally in the 7% range. Noninterest expense is projected to maintain a relatively flat run rate, with strategic hiring viewed as an investment with a short breakeven timeline. SPFI's competitive positioning is further enhanced by its disciplined M&A strategy. While actively evaluating opportunities, the company maintains strict criteria, prioritizing cultural fit, a stable deposit base, and accretive valuation. The recent acceleration of industry transactions and a perceived loosening of the regulatory environment could lead to more realistic seller expectations, creating potential opportunities for SPFI to grow through acquisition without sacrificing its conservative principles. This patient, opportunistic approach allows SPFI to benefit from market disruption while focusing on organic expansion. ## Conclusion South Plains Financial stands as a testament to disciplined banking, leveraging its deep community ties and strategic operational enhancements to deliver consistent value. The company's strong Q2 2025 results, marked by expanding margins and robust earnings, underscore its ability to perform effectively amidst a dynamic economic backdrop. SPFI's unwavering commitment to credit quality, proactive risk management, and strategic investments in organic growth through targeted hiring and an improving lending platform position it favorably for the future. With a fortified capital base and a clear strategy for managing its deposit franchise and loan portfolio, SPFI is well-equipped to capitalize on opportunities in its resilient Texas markets. While economic uncertainties persist, the company's conservative culture and opportunistic M&A stance provide a balanced approach to long-term value creation. For discerning investors, SPFI represents a compelling opportunity in a regional bank that prioritizes stability, disciplined growth, and consistent shareholder returns, underpinned by a clear vision for navigating the evolving financial landscape.