Executive Summary / Key Takeaways

• South Plains Financial is a conservatively-run Texas community bank at a strategic inflection point, where aggressive organic growth initiatives and the pending Bank of Houston acquisition are set to accelerate loan growth after a period of headwinds from elevated payoffs.
• Third quarter 2025 results demonstrated the bank's resilience: net interest margin expanded to 4.05% (up 40 basis points year-over-year), credit quality improved materially (nonaccrual loans fell to 0.28% from 0.72% at year-end), and the Permian market delivered its strongest loan growth since the 2019 market entry.
• Management expects loan growth to accelerate to mid-to-high single digits in 2026, driven by a 20% expansion of the lending team (already more than halfway complete) and moderating payoff activity, while the mortgage division is positioned for cyclical recovery through selective hiring.
• The $105.9 million all-stock acquisition of Bank of Houston deepens the company's commitment to the Houston market and adds approximately $772 million in assets, representing a critical test of management's ability to execute on its stated M&A criteria while simultaneously scaling organic initiatives.
• Trading at 11.7 times earnings and 1.4 times book value, SPFI offers a reasonable valuation for a bank with strong capital ratios (CET1 at 14.41%), improving asset quality, and multiple growth catalysts, though execution risk on both hiring and integration remains the primary variable to monitor.

Setting the Scene: The Texas Community Bank Advantage

South Plains Financial, founded in 1941 and headquartered in Lubbock, Texas, operates as the bank holding company for City Bank, serving commercial and retail customers across Texas and Eastern New Mexico. The company makes money through traditional community banking: gathering deposits at a relatively low cost and lending to small and medium-sized businesses, commercial real estate owners, and consumers while generating fee income from mortgage banking, trust services, and treasury management. This straightforward model thrives on deep local relationships, conservative underwriting, and a stable, lower-cost deposit franchise that larger banks struggle to replicate in smaller markets.

The Texas banking landscape pits SPFI against larger regional competitors like First Financial Bankshares , Prosperity Bancshares , and Texas Capital Bancshares , each with asset bases multiple times larger and more extensive branch networks. Yet SPFI's 80-year history in West Texas creates a relationship moat that national banks cannot easily penetrate. The company's 2019 acquisition of West Texas State Bank strategically expanded its reach into the Permian Basin, a move that is now bearing fruit as the region experiences its strongest loan growth since entry. This historical pattern of opportunistic, disciplined expansion explains today's positioning: a bank with deep rural roots that is now pushing into metropolitan markets like Dallas and Houston through both organic hiring and the pending Bank of Houston acquisition.

Industry trends favor SPFI's model in key respects. Texas's pro-business, low-tax environment continues to drive population in-migration and economic growth that outpaces the national average, supporting loan demand even as national uncertainty persists. Meanwhile, competitor acquisitions across the state are creating customer dissatisfaction and dislocation, particularly in the Permian Basin, where SPFI is actively attracting high-quality relationships from larger institutions that have lost their local touch. This dynamic provides a tailwind for the bank's aggressive lender recruitment strategy, as experienced bankers seek platforms where they can maintain relationship-based banking rather than pushing corporate products.

Technology, Products, and Strategic Differentiation

SPFI's product suite spans commercial and retail banking, mortgage origination and servicing, investment services, and trust administration. The bank's differentiation does not lie in cutting-edge technology but in its integrated service model and conservative risk culture. Treasury management services have become a particular focus, driving growth in noninterest-bearing deposits and service charge income. This matters because noninterest-bearing deposits represent 27.1% of the total deposit base, providing a stable, low-cost funding source that supports net interest margin expansion even as interest rates fluctuate.

The mortgage division exemplifies the bank's disciplined approach to cyclical businesses. Rather than chasing volume during the recent market trough, management maintained infrastructure and controlled expenses to preserve profitability. This positions the bank to capture upside as rates decline and housing supply improves, with selective hiring already underway. The mortgage servicing rights portfolio, while subject to fair value volatility, generates recurring fee income and deepens customer relationships. The bank's ability to manage this business through the cycle demonstrates operational discipline that larger, more transaction-focused competitors often lack.

Technology investment remains modest and targeted, focused on digital banking upgrades that meet customer expectations without pursuing innovation for its own sake. This conservative approach to tech spending keeps costs contained while ensuring the bank can compete on basic functionality. The real moat is cultural: a core pillar of never sacrificing credit quality for growth, as management repeatedly emphasizes. This philosophy translates into tangible financial metrics, with the allowance for credit losses at 1.45% and nonaccrual loans at just 0.28%—levels that provide substantial cushion against economic downturns.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

Third quarter 2025 results validate the bank's resilient model. Net income of $16.3 million ($0.96 per diluted share) increased 46% year-over-year, driven by a $5.7 million increase in net interest income and a reduction in provision for credit losses. The net interest margin expanded to 4.05%, up 40 basis points year-over-year and 9 basis points sequentially (excluding one-time credit workout gains). This expansion occurred despite a challenging rate environment, demonstrating the bank's ability to reprice deposits faster than loans. The cost of deposits declined to 2.10%, down 4 basis points sequentially and 19 basis points from the fourth quarter of 2024, as management leveraged strong liquidity to avoid aggressive deposit bidding wars.

The loan portfolio tells a more nuanced story. Total loans held for investment declined slightly by $1.6 million year-to-date to $3.05 billion, masking significant underlying dynamics. Commercial real estate loans fell 7.4% due to a $105.4 million decrease in multifamily loans and a $30.3 million decline in hospitality loans, reflecting elevated payoffs in metropolitan markets. However, commercial general loans increased 12.9% and consumer residential loans grew, partially offsetting these headwinds. The Permian market delivered its strongest quarterly loan growth since 2019, attracting high-quality relationships as competitor acquisitions create dislocation. This geographic diversification within Texas reduces concentration risk and positions the bank to capitalize on the energy sector's long-term viability, particularly given that the company underwrites energy loans to much lower oil prices than current levels.

Credit quality improvement provides the clearest evidence of disciplined underwriting. Nonaccrual loans fell to $8.5 million (0.28% of loans) from $22.1 million (0.72%) at year-end 2024. Net charge-offs of 0.16% annualized remain well-controlled, and the indirect auto portfolio—while shrinking due to credit concerns—shows improving delinquencies (30+ days past due at 24 basis points versus 47 basis points at year-end). Management's proactive tightening of loan-to-value requirements in auto lending demonstrates risk management that protects the bank during economic uncertainty.

The deposit franchise continues to strengthen. Total deposits grew 7.2% year-to-date to $3.88 billion through organic growth in both commercial and retail accounts. The mix remains favorable, with interest-bearing non-maturity accounts representing 62% of deposits and time deposits just 10.9%. This structure provides pricing flexibility as rates decline and reduces reliance on higher-cost funding. The bank's estimated uninsured deposits of 34% (27% excluding collateralized public funds) are manageable given $1.3 billion in unused FHLB borrowing capacity and $689 million in Federal Reserve Bank capacity, both fully available as of September 30, 2025.

Capital management reflects both strength and discipline. The common equity Tier 1 ratio of 14.41% and Tier 1 leverage ratio of 12.37% significantly exceed regulatory requirements, providing ample capacity for growth. The redemption of $50 million in subordinated notes in September 2025 eliminated higher-cost debt just as it was set to float at increased rates, demonstrating proactive liability management. The $15 million stock repurchase program, with $8.3 million executed in the first quarter, signals management's view that shares trade below intrinsic value while maintaining flexibility for growth investments.

Outlook, Management Guidance, and Execution Risk

Management's guidance frames a clear path to accelerated growth. The bank expects loan growth to reach mid-to-high single digits in 2026, a meaningful improvement from the flat to low-single-digit trajectory of 2025. This acceleration depends on two key factors: the 20% expansion of the lending platform and moderation of loan payoff activity. The lender hiring initiative appears credible, with management reporting they are "more than halfway to our 20% growth goal" after adding experienced bankers in Dallas, Houston, and Midland during the second and third quarters. The company models new hires to reach breakeven within six months, suggesting rapid contribution to production.

Loan payoff moderation represents the more uncertain variable. Management expects paydowns to diminish as we look to 2026, but acknowledges that scheduled payoffs of completed and stabilized projects will continue into the first half of next year. The third quarter saw $46.5 million in multifamily loan payoffs, including two loans totaling $39.6 million that management was "okay" with because they carried below-market rates. This discipline—allowing quality credits to refinance elsewhere while protecting margin—demonstrates the bank's conservative culture but also highlights the external headwind to growth.

The net interest margin outlook reflects a managed decline. While the Federal Reserve's September rate reduction was not material, management expects loan yields to moderate as new production typically prices in the low-7% to high-6% range. However, the bank's ability to continue repricing deposits provides a natural hedge. The cost of deposits declined 4 basis points sequentially in Q3 and has room to fall further as higher-rate time deposits mature. This dynamic should allow the bank to maintain a relatively stable net interest margin even in a declining rate environment, though expansion from current levels is unlikely.

The mortgage business stands positioned for cyclical recovery. Management is "pleased with the business's performance in this low transaction environment" and has begun selectively hiring in anticipation of a housing market recovery. With infrastructure maintained and expenses controlled through the trough, the division can scale quickly when volumes return. Pent-up demand from in-migration and demographic trends in Texas supports the eventual recovery, though timing remains uncertain and dependent on interest rate trajectories.

The Bank of Houston acquisition, announced December 1, 2025, represents the most significant strategic development. The $105.9 million all-stock transaction adds approximately $772 million in assets, $633 million in loans, and $629 million in deposits, deepening SPFI's commitment to the Houston market. Management emphasizes strict M&A criteria: cultural fit, sound asset-liability profile, stable deposit base, and sensible valuation with minimal dilution. The all-stock structure preserves capital while the timing between Q1 and Q2 2026 suggests integration planning is already underway. Success here would validate the bank's ability to execute on both organic and inorganic growth simultaneously.

Risks and Asymmetries: What Could Break the Thesis

The investment thesis faces three primary execution risks. First, the lender hiring initiative could fail to deliver expected production. While management's six-month breakeven model appears aggressive but achievable, new hires must not only generate loans but also fit the bank's conservative culture. If production falls short or credit quality deteriorates, the growth acceleration will not materialize. Monitoring early performance metrics from the Dallas, Houston, and Midland hires will be critical.

Second, the Bank of Houston integration carries operational and cultural risks. The acquisition nearly doubles the bank's Houston presence and increases total assets by roughly 17%. Integration costs, systems conversion, and customer retention challenges could pressure expenses and distract management from organic initiatives. While management's strict criteria suggest thorough due diligence, the simultaneous execution of major organic and inorganic growth is inherently complex.

Third, loan payoff trends may prove more persistent than anticipated. The bank has experienced elevated paydowns throughout 2025, driven by multifamily and hospitality loans refinancing in a more competitive market. If this behavior continues into 2026, it could offset new production and delay the anticipated growth acceleration. The risk is particularly acute in metropolitan markets where larger competitors aggressively price loans to gain market share.

Credit concentration, while well-managed, remains a structural consideration. Commercial real estate loans represent 37.2% of the portfolio, with significant exposure to Texas markets. While management has established concentration limits and underwrites to conservative standards, a regional economic downturn or energy sector weakness could pressure asset quality. The bank's practice of underwriting energy loans to much lower commodity prices provides a cushion, but sustained weakness would eventually impact borrower cash flows.

On the positive side, meaningful asymmetries exist. A faster-than-expected mortgage market recovery could drive significant noninterest income gains with minimal incremental investment. The Permian Basin could continue delivering above-market growth if energy prices remain supportive and competitor dislocation persists. Most importantly, successful execution of both the hiring initiative and BOH integration could create a flywheel effect, where expanded capacity and market presence drive accelerating growth that exceeds management's already optimistic targets.

Valuation Context: Reasonable Pricing for Quality and Growth

At $41.17 per share, South Plains Financial trades at 11.7 times trailing earnings and 1.4 times tangible book value of $28.14. The price-to-free-cash-flow ratio of 10.5 and price-to-operating-cash-flow ratio of 9.7 suggest the market is not fully pricing in the bank's growth potential. With a dividend yield of 1.55% and a conservative payout ratio of 17.4%, the stock offers current income with substantial retained earnings to fund expansion.

Peer comparisons provide useful context. First Financial Bankshares (FFIN) trades at 18.7 times earnings and 2.5 times book value, reflecting its larger scale and broader branch network, but SPFI's 46% year-over-year net income growth in Q3 significantly outpaced FFIN's more modest gains. Prosperity Bancshares (PB) trades at 13.0 times earnings but with a lower return on equity (7.1% versus SPFI's 13.0%), suggesting SPFI's more efficient deployment of capital. Texas Capital Bancshares (TCBI) and Veritex (VBTX) trade at similar earnings multiples but with lower returns on assets, highlighting SPFI's superior profitability metrics.

The valuation appears particularly reasonable given the bank's fortress balance sheet. The CET1 ratio of 14.41% and Tier 1 leverage of 12.37% provide substantial capital cushions that exceed regulatory minimums by wide margins. This strength enabled the redemption of $50 million in subordinated debt and supports the $15 million share repurchase program while funding the lender expansion. In an environment where many banks face capital constraints, SPFI's excess capital represents a strategic asset that can be deployed for growth or returned to shareholders.

Historical multiple ranges for regional banks of similar size and geography typically span 1.2 to 1.8 times book value and 10 to 15 times earnings, depending on growth and credit quality. SPFI's current multiples sit at the lower end of this range despite improving fundamentals and clear growth catalysts. The discount likely reflects concerns about execution risk and the recent period of flat loan growth, creating potential upside if management delivers on its 2026 acceleration targets.

Conclusion: A Quality Bank at a Turning Point

South Plains Financial represents a high-quality community bank navigating a strategic inflection. The company's 80-year history in Texas has forged a conservative culture that shines through in its 0.28% nonaccrual ratio and 14.41% CET1 capital ratio—metrics that place it among the strongest in its peer group. This resilience provides the foundation for an ambitious growth push that combines a 20% expansion of the lending platform with the transformative Bank of Houston acquisition.

The central thesis hinges on execution. Management must deliver on its promise that new lenders will reach breakeven within six months and contribute to mid-to-high single digit loan growth in 2026. Simultaneously, the BOH integration must proceed smoothly, preserving the cultural fit and stable deposit base that justified the acquisition. If both initiatives succeed, SPFI will emerge as a larger, more diversified bank with enhanced presence in Texas's most dynamic markets.

The primary risk is that elevated loan payoffs persist or that execution falters, leaving the bank in a prolonged period of flat growth despite its investments. However, the valuation at 11.7 times earnings and 1.4 times book appears to discount this risk while offering limited downside given the fortress balance sheet and improving credit trends. For investors who value quality, capital discipline, and patient growth, SPFI offers an attractive risk-reward profile at a moment when its strategic gears are just beginning to turn.