KBRA Affirms Ratings for South Plains Financial, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Lubbock, Texas-based South Plains Financial, Inc. (NASDAQ: SPFI) (“the company” or “South Plains”). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for the lead subsidiary, City Bank ("the bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by a strong senior management team and solid earnings performance that has been better than peers (ROA 1.91% or near 1.00% on a core basis in 1H23, when excluding the gain on sale from Windmark Insurance), driven by a diverse earnings profile. Recent earnings have benefited from a solid NIM, earning asset growth, and robust levels of noninterest income. Recently, the company has enhanced its focus on building the commercial loan book by hiring new relationship managers throughout economically robust MSAs in Texas. However, SPFI’s legacy markets have allowed for lower funding costs, which have been relatively contained compared to many similarly rated peers as the company has not utilized any borrowings, sustaining ample access to secondary sources of liquidity (~40% of total assets in availability). Noninterest income has typically been a more meaningful earnings contributor than peers (~35% of revenue), while reported and risk-adjusted profitability (RORWA) historically have been in line with rated peers. In addition, regulatory capital ratios have trended higher over time largely from a combination of the equity contribution from the IPO in 2019, a subordinated debt issuance completed in September 2020, and traditional retained earnings. Balance sheet growth has also been modest in recent years and KBRA expects the company to maintain comparatively strong capital levels due, in part, to the company’s solid earnings capabilities. The company’s credit performance has been historically sound, supported by the underlying strength of the regional Texas economy, as well as management’s stringent credit underwriting standards. Due to management’s proactive response to managing credit exposures, loan quality has remained stable despite a minimal uptick in NPA levels, reaching 5-year highs at 0.68% of total loans as of 2Q23. Furthermore, no material charge-off activity has occurred in the last several years. KBRA views SPFI’s loss absorption capacity as strong, which is comprised of a LLR/loans ratio of 1.45% combined with the relatively conservative regulatory capital levels, further strengthening its credit profile. The ratings also reflect the company’s highly experienced and long tenured management team with a deep understanding of underlying economic variables throughout their footprint that has implemented a sound enterprise risk culture.

Rating Sensitivities

Positive rating momentum could result over time with continued scaling in economically diverse MSAs combined with strong earnings performance that exceeds that of rated peers, credit outperformance, and strong capitalization. The ratings are well positioned in the current rating category and are unlikely to be downgraded in the intermediate term. A substantial change in regulatory capital management or deterioration in loan quality such that earnings performance trails peer levels could warrant a downgrade.

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