South Plains Financial, Inc. 10-K Analysis: A Deep Dive into Investment Potential

South Plains Financial, Inc. (SPFI) is a regional bank holding company with its core operations concentrated in Texas and New Mexico. Through its wholly-owned subsidiary, City Bank, SPFI positions itself as one of the largest independent banks in West Texas. In our analysis of the recent 10-K filing for the fiscal year ended December 31, 2024, we conducted a thorough review of the business description, financial statements, liquidity, and risk factors that outline the company’s current performance and future potential.

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This post provides an in-depth review of the key elements that an investor should consider when evaluating SPFI’s 10-K filing.

Business Overview

SPFI has a long, storied history stretching back more than 80 years. It has evolved from a modest community bank into a diversified financial entity that offers a wide range of banking services. The company’s operations are primarily focused on commercial and consumer banking, mortgage banking, investment, trust services, and related financial activities. Its physical footprint spans 25 full-service branches across multiple Texas markets (e.g., Lubbock/South Plains, Dallas, El Paso, Greater Houston, College Station, and the Permian Basin) as well as two branches in Ruidoso, New Mexico.

This exposure to diverse geographic areas and customer segments has allowed the company to develop strong local relationships. However, it also means that much of its performance is tied closely to the economic conditions in these areas. In a competitive banking landscape, where large national players and local institutions vie for market share, SPFI focuses on a relationship-based, community-centric business model.

Financial Highlights

Net Income and Profitability

One of the fundamental figures in SPFI’s 10-K is the net income. For the fiscal year ending December 31, 2024, SPFI reported a net income of approximately $49.7 million, or $2.92 per diluted share. This figure, however, represents a decline compared to the $62.7 million, or $3.62 per diluted share, recorded in 2023.

The decline in net income is largely attributable to a significant drop in noninterest income – a reduction of roughly $31.2 million – which partially offsets growth in net interest income which rose by approximately $7.4 million, representing a 5.3% increase. The decrease in noninterest income was primarily linked to the sale of the company’s insurance subsidiary, a transaction that generated a one-time gain in the 2023 results but resulted in lower recurring income in 2024.

Net Interest Income and Margins

Net interest income is the lifeblood of any banking institution, reflecting the bank’s ability to earn more on its assets than it pays on its liabilities. SPFI’s net interest income increased from 139.7 million in 2023 to 147.1 million in 2024. The net interest margin stood at 3.65% in 2024, slightly up from 3.61% in the previous year. Although these increases are modest, they signal that the bank’s core lending activities remain robust, even as deposit rates and funding costs see upward pressure.

The increase in loan balances, coupled with an improved yield on loans, contributed significantly to this performance. However, the same dynamics that enhanced interest income – such as rising rates on deposits – also led to increased interest expense, which climbed by $21.5 million. This dual-edged effect underlines the delicate balancing act that banks face in managing both sides of their interest margin.

Operating Efficiency

Operating costs invariably have a major impact on the profitability of banks. SPFI’s noninterest expenses decreased by about $7.4 million from 2023 to 2024, moving from $134.9 million down to $127.6 million. This reduction was driven by a combination of lower expenses related to salaries, employee benefits, and a decrease in certain operating costs following the sale of the insurance subsidiary in 2023. When compared with its revenues, the efficiency ratio of approximately 65% suggests that the bank is managing its costs reasonably well, though there is still room for improvement compared to more leanly operated institutions.

Balance Sheet Strength

At December 31, 2024, SPFI reported a total asset base of roughly $4.23 billion along with total deposits of about $3.62 billion. The growth in assets was modest, increasing by only $27.4 million (or 0.7%) from 2023, while deposits have remained relatively stable. The loan portfolio experienced positive growth and reached approximately $3.06 billion in loans held for investment, an increase of 1.4% from the previous year.

Stockholders’ equity stood at $438.9 million, which is essential in not only indicating the company’s financial backing but also determining its ability to absorb losses and invest in growth. Regulatory capital ratios, including a common equity Tier 1 capital ratio of around 13.53% and a total risk-based capital ratio of approximately 17.86%, are above the minimum requirements. These figures demonstrate that the bank holds sufficient capital buffers to safeguard against economic shocks, even though there is pressure from ongoing market conditions.

Key Risk Factors

The 10-K filing lays out a comprehensive set of risk factors that provide insight into potential headwinds the company may face:

1. Interest Rate Risk: A major risk for SPFI is the volatility in market interest rates, which directly influences net interest spread and margins. The bank must balance the rising costs of deposits with the income earned on loans and other assets. In the current inflationary environment, the effects of rising rates can be mixed – they may boost interest income but also reduce loan demand and increase funding costs.
2. Credit Risk and Concentration Risk: As with any lender, there is inherent credit risk from borrowers defaulting on their loans. SPFI’s lending portfolio is largely concentrated in commercial and residential real estate, with nearly 73.7% secured by real property. While diversification across property types and geographic areas helps, any significant downturn in the local economies or real estate markets could lead to increased delinquencies and losses. The company uses established methodologies to assess credit risk, yet inherent uncertainties remain.
3. Regulatory and Compliance Risks: Operating as a bank holding company subjects SPFI to stringent regulatory standards, both at the federal and state levels. The 10-K details the extensive framework of regulations—from Basel III capital rules to consumer protection laws and anti-money laundering requirements. Compliance with these laws not only incurs costs but also exposes the bank to the risk of sanctions should they be violated.
4. Operational and Cybersecurity Risks: Given the increasing sophistication of cyber threats, SPFI outlines its comprehensive information security and risk management program. Despite these efforts, the risk of disruption from a cyber-attack or operational failure cannot be discounted. Any breach or significant operational error could have both financial and reputational damages.
5. Economic and Market Conditions: SPFI’s business is closely linked to local economic conditions in Texas and New Mexico. Macroeconomic pressures, such as a recession, downturn in the oil and gas sector, uncertain trade policies, and the impacts of inflation, can lead to lower loan origination volumes and impair borrower credit quality. These factors may further pressure net interest income and overall profitability.
6. Competitive Environment: The banking and financial services industry is highly competitive. SPFI competes with a range of institutions, from large national banks and credit unions to specialized non-bank financial service providers and fintech companies. This competitive pressure affects pricing strategies on loans and deposits, potentially squeezing margins further.

Outlook and Investment Considerations

Given the analysis, SPFI demonstrates both strengths and challenges. The company’s stable deposit base, disciplined underwriting, and modest growth in net interest income are positive indicators. Its capital ratios are above regulatory minimums, suggesting a buffer to absorb shocks. However, the decline in net income from 2023 to 2024 is a concern, driven largely by the drop in noninterest income following the divestiture of its insurance operations.

Looking ahead, investors should be aware that while the bank continues to effectively manage its core lending operations, it remains vulnerable to external risks. The macroeconomic environment with ongoing inflationary pressures and potential interest rate hikes could impact the loan and deposit dynamics. Moreover, the highly competitive and regulated industry means that any misstep in risk management or compliance could have outsized effects.

From an investment perspective, SPFI presents a mixed picture. On one hand, its community-focused banking model and strong regional presence suggest that it is well-positioned within its niche. On the other hand, with declining noninterest income, modest asset growth, and an environment of rising costs, the upside potential may be limited compared to banks that are expanding rapidly or offering more innovative products.

Overall, based on our review, we assign an investment score of 6.0 out of 10. This score reflects moderate potential for investment, acknowledging the company’s solid core operations and stable funding base while also weighing the risks posed by a challenging macroeconomic environment, competitive pressures, and significant regulatory demands. Investors looking at SPFI should consider whether they are comfortable with these challenges in exchange for potential modest returns over the medium term.

Detailed Discussion

Net Income and Earnings Pressures

The net income for 2024 slowed compared to the prior year. Although this decrease was partially offset by an improved cost structure (as seen in the reduced noninterest expenses), the significant drop in noninterest income indicates a structural change in the revenue mix. For investors, it is important to consider whether the loss of recurring revenue from insurance activities is a permanent shift, or if it might be offset by stronger performance in other segments over time. The overall earnings pressure is an area that calls for continuous monitoring, especially as macroeconomic and regulatory conditions continue to evolve.

Interest Rate Environment and Margin Management

For banks, managing the interest rate environment is a perpetual challenge. The analysis shows a modest improvement in both net interest spread and margin. However, the bank is caught in a balancing act—while rising rates can lift interest income, they also drive up interest expenses on deposits and other borrowings. With average deposit balances having grown modestly and rates on deposits rising, the increase in interest expenses remains a concern. SPFI’s management appears to be actively monitoring these trends, but future rate environments will play a critical role in determining overall profitability.

Credit Quality and Asset Portfolio

Credit risk management is at the heart of banking operations. SPFI has a diversified loan portfolio with a significant emphasis on real estate (both owner-occupied and non-owner-occupied commercial properties) and consumer loans. The analysis of the 10-K reveals that while the company has maintained its credit loss allowance ratios at historical levels, any dramatic downturn in real estate markets or regional economic conditions could increase defaults and impairments. Investors should consider the bank’s exposure to local markets in Texas and New Mexico, as regional economic headwinds have the potential to adversely affect loan performance.

Regulatory and Operational Challenges

The 10-K dedicates extensive coverage to the regulatory environment and the inherent risks associated with being a bank holding company. With evolving regulations under Basel III, adherence to anti-money laundering laws, and consumer protection requirements, SPFI is under constant pressure to invest in compliance and risk management. This inevitably affects operating expenses, but more importantly, these factors introduce operational risks if not managed scrupulously. The bank’s proactive focus on cybersecurity and operational resilience highlights the challenges faced in digitizing banking services in an era of increasing cyber threats.

Competitive Position and Growth Strategy

In a competitive marketplace, regional banks such as SPFI must continually innovate to retain and grow customer bases. The competitive pressures from larger national banks and nimble fintech companies force SPFI to maintain competitive rates on both loans and deposits. Although the bank benefits from long-standing relationships in its communities, its relatively modest scale might limit its ability to capture new market share in the face of more aggressive competitors. Moreover, the bank’s growth strategy involves acquisitions and new branch openings; however, these strategies are subject to both regulatory approval and economic conditions, adding another layer of uncertainty.

Liquidity and Funding

The bank’s liquidity position is vital for sustaining operations and funding growth. The 10-K indicates a stable deposit base and modest reliance on external borrowings. Despite modest growth in total assets and deposits, maintaining adequate liquidity in a rising rate environment remains a perpetual challenge. The risk that deposit outflows could force reliance on more expensive funding sources is real, particularly if market conditions deteriorate or if customer confidence wanes. Fortunately, the bank’s conservative liquidity management practices and robust deposit base help mitigate this risk to some degree.

Conclusion

South Plains Financial, Inc. exhibits many of the traits of a well-organized community bank with a strong regional presence and disciplined operational practices. The 2024 10-K filing demonstrates that while its core lending operations remain sound and its regulatory capital metrics are healthy, the company faces headwinds in the form of reduced noninterest income, rising interest expense pressures, and a challenging macroeconomic environment.

These factors have collectively resulted in a moderate investment potential. Hence, we have assigned an overall investment score of 6.0 out of 10. This score indicates that while there is potential for steady, modest income, the company does not currently offer the explosive growth or robust returns that some investors might be seeking. Prospective investors should carefully consider these risks – particularly the potential volatility in interest rates, regional economic vulnerability, and the regulatory landscape – in balance with the bank's stable deposit base, disciplined underwriting, and consistent net interest income growth.

In summary, South Plains Financial, Inc. represents a moderately attractive investment opportunity with a fair balance of risk and reward for those willing to invest in a well-established, community-focused regional bank operating in a challenging economic environment.

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Disclaimer: The analysis provided in this post is based on the information from the company’s 10-K filing and is for informational purposes only. It is not intended as financial advice. Investors should conduct their own due diligence and consult with a financial advisor before making any investment decisions.