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 Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings and Outlook are supported by the company's historically solid earnings profile with ROA averaging 1.37% over a five-year period, while more recently remaining above 1% despite the challenging interest rate environment experienced by the industry. The company’s diverse, durable revenue stream of noninterest income (ranges 35%-45% of total revenue) has been a key source of consistent earnings performance through the interest rate cycle. SPFI's sound community banking fundamentals also contribute to the credit profile, which also reflects a strong deposit funding base with a loan-to-core deposit ratio of 96% at 2Q24 as well as deposit growth (~2%) from 2Q23 to 2Q24, a period where the broader industry experienced declines. However, like other banks, the higher for longer interest rate environment has caused meaningful increase to the cost of interest-bearing deposits (2.63% 2Q24 vs 0.38% YE21), though NIM has remained stronger than the peer group at 3.63% vs 3.11% at 2Q24. We also acknowledge the company's long standing and granular core deposit base, as core deposits remained relatively flat in 2023 and into 1H2024, all while maintaining a strong noninterest bearing to total deposits ratio of 26% at 2Q24. The liquidity profile remains healthy, including a loan-to-deposit ratio of 86% and 21% of cash and securities to total assets at 2Q24. Historically, the company’s credit performance has been sound, supported by the underlying strength of the regional Texas economy, as well as management’s stringent credit underwriting and review standards. However, credit quality did have a modest uptick in 2Q24 with a $21 million multi-family property which migrated to nonaccrual status after the maturity date was accelerated. There was very little movement in charge-off activity, and the company is well reserved for any potential losses as the LLR to total loans was 1.40% at 2Q24. SPFI continues to maintain capital levels above that of the peer group as TCE and CET1 were 9.4% and 12.6%, respectively, as of 2Q24. The diverse lines of revenue, solid NIM, and strong credit discipline continue to be the drivers of core earnings and capital accretion. The capital levels and the additional loss absorption capacity of 1.40% should be sufficient cushion against a potential credit cycle, and we expect the company to continue its modest capital build. The ratings also reflect the company’s highly experienced and long tenured management team, which has implemented a sound enterprise risk culture, in our view.

Rating Sensitivities

A rating upgrade in the near term is not likely. 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. Conversely, a rating downgrade in the near term is not expected. However, negative earnings trends, or a material deterioration in asset quality or capital metrics could pressure the ratings.

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