South Plains Financial (SPFI) Q1 2025: Deposit Growth Adds $172M, Margin Flexibility in Focus

April 24, 2025 | By EarningsIQ Research

South Plains Financial’s first quarter highlighted resilient deposit inflows and disciplined credit quality, positioning the bank to capitalize on volatility-driven opportunities. Management’s focus on margin preservation and selective hiring signals a cautious but opportunistic approach as macro uncertainty lingers. Near-term, investors should watch for further margin expansion and shifts in loan growth pace amid evolving regional and national headwinds.

Summary

• Deposit Inflows Bolster Liquidity: Elevated deposit growth provides margin and lending flexibility in a volatile rate environment.
• Credit Quality Tightens Further: Conservative credit posture and low nonperforming assets underpin resilience as economic risks rise.
• Margin Expansion Remains a Priority: Leadership is actively managing deposit costs and loan yields to defend and potentially grow net interest margin.

Performance Analysis

South Plains Financial delivered a quarter defined by robust deposit growth and stable core profitability, as total deposits increased by $171.6 million to $3.79 billion, driven by inflows from public funds and organic commercial and retail growth. The net interest margin (NIM), a key measure of lending profitability, expanded six basis points sequentially to 3.81%, largely due to a ten basis point decline in deposit costs as the bank repriced interest-bearing accounts following late 2024 Fed rate reductions.

Loan growth was modest, with loans held for investment rising $20.8 million (2.7% annualized), reflecting strength in commercial real estate and goods and services lending, offset by seasonal declines in agricultural production. The yield on loans held steady at 6.67%. Noninterest income retreated to $10.6 million from $13.3 million, primarily due to a lower fair value adjustment on mortgage servicing rights as rates softened. Credit quality improved sharply, with nonperforming assets dropping to 16 basis points of total assets, down from 58 basis points, reflecting both proactive credit management and the resolution of a large multifamily credit.

• Deposit Mix Shift: Public fund inflows and organic deposit growth drove a 4.7% sequential increase in total deposits, supporting strong liquidity.
• Margin Leverage: Deposit cost declines outpaced loan yield compression, enabling NIM expansion despite a flat net interest income base.
• Credit Outperformance: Nonperforming loans fell by $17.5 million, with credit losses contained and allowance coverage at 1.40% of loans.

Expense levels normalized after one-time fourth quarter benefits, with noninterest expense at $33 million, and are expected to remain steady. Tangible book value per share increased to $26.05, as capital deployment balanced buybacks, dividends, and organic growth.

Executive Commentary

Strategic Positioning

1. Margin Management and Deposit Cost Discipline

Leadership is laser-focused on sustaining and potentially expanding net interest margin through active deposit repricing and selective rate management, leveraging recent deposit inflows to reduce funding costs. Management sees further, if incremental, room to lower deposit costs, especially on exception-priced accounts, given current liquidity levels.

2. Credit Quality as a Strategic Anchor

SPFI’s conservative credit culture is a deliberate differentiator, with management emphasizing that growth will never come at the expense of credit quality. The sharp reduction in nonperforming assets and the return of a major multifamily credit to accrual status underscore the effectiveness of their proactive approach. The indirect auto portfolio, a key consumer lending segment, is being tightly managed with stricter loan-to-value standards and a focus on credit resilience amid macro and tariff-driven uncertainty.

3. Selective Growth and Talent Acquisition

Organic expansion remains the core strategy, with targeted hiring in both lending and mortgage operations, especially in markets like the Permian, El Paso, and Houston. Management is opportunistic but disciplined, only adding talent that fits the bank’s risk and relationship culture. The bank’s capital position enables it to absorb talent and loan growth without compromising stability.

4. Capital Deployment and Shareholder Returns

SPFI is balancing capital between growth and return, maintaining a quarterly dividend (24th consecutive) and executing on an active $15 million share repurchase program ($8.3 million spent in Q1). Leadership continues to view shares as undervalued, using buybacks as a flexible tool amid market volatility.

5. M&A and Market Opportunity

M&A remains on the radar but is not a current priority, as market uncertainty has kept both buyers and sellers on the sidelines. Management sees potential for more attractive deals if a downturn lowers seller expectations, but organic growth and market share gains are the near-term focus.

Key Considerations

This quarter’s results reflect a bank that is navigating macro uncertainty with a focus on resilience, margin preservation, and selective opportunity capture. Investors should weigh the following:

Key Considerations:

• Deposit Inflow Sustainability: Public fund deposits contributed significantly to Q1 growth; potential outflows and seasonality in Q2 will test core deposit strength.
• Loan Growth Moderation: Management expects loan growth to track at the low end of guidance amid elevated payoffs and macro caution, especially in metro markets.
• Noninterest Income Volatility: Mortgage banking income remains a swing factor, with fair value adjustments and housing market trends impacting fee revenue mix.
• Expense Run-Rate Stability: First quarter expenses are expected to set the baseline for the rest of the year, with tight cost control in mortgage and other business lines.

Risks

Key risks include potential deposit outflows as public funds normalize, continued pressure on noninterest income from mortgage market volatility, and economic headwinds from tariffs or a broader recession. SPFI’s loan growth outlook is cautious, and any unexpected deterioration in credit quality or higher-than-expected payoffs could pressure earnings. Management’s ability to defend margin will be tested if rate volatility persists or competitive dynamics intensify.

Forward Outlook

For Q2 2025, SPFI guided to:

• Deposit levels likely to moderate as public fund balances partially reverse and tax payments flow out.
• Loan growth expected at the lower end of low to mid-single-digit range for the full year, with elevated early payoffs persisting through Q2 before moderating.

For full-year 2025, management maintained a cautious stance:

• Expense run-rate set by Q1 levels, with ongoing vigilance in mortgage and fee income management.

Management highlighted several factors that will shape the outlook:

• Resilience of Texas markets and pro-business environment as a buffer against national recession risk
• Continued focus on credit quality and margin management as key levers for performance

Takeaways

South Plains Financial’s Q1 performance underscores a disciplined approach to growth, margin, and risk, with liquidity and credit quality providing strategic optionality as the cycle evolves.

• Margin Defense Remains Central: Active deposit pricing and stable loan yields create a path for modest further NIM expansion, though upside is likely incremental given already elevated levels.
• Credit Strength Is a Differentiator: Conservative underwriting and proactive credit actions have insulated the bank from asset quality shocks, supporting capital deployment flexibility.
• Watch for Shifts in Loan and Deposit Mix: Investors should monitor core deposit trends, loan pipeline momentum, and the sustainability of noninterest income as macro conditions evolve.

Conclusion

SPFI enters the remainder of 2025 well-capitalized and operationally disciplined, with management prioritizing margin, credit quality, and selective growth. While economic uncertainty persists, the bank’s flexible capital and liquidity position it to capitalize on opportunities and defend shareholder value through the cycle.

Industry Read-Through

SPFI’s results highlight several broader banking sector themes: regional banks with strong deposit franchises and disciplined credit cultures are better positioned to withstand macro volatility and margin compression. The competitive environment for deposits remains intense, but banks that can grow organically without bidding up rates will defend profitability. Mortgage banking volatility and fee income concentration remain sector-wide challenges, especially as housing cycles and rate movements remain unpredictable. Capital deployment flexibility—balancing buybacks, dividends, and selective hiring— is increasingly a differentiator as M&A markets remain subdued. Investors should look for similar margin and credit dynamics across other Texas and Sun Belt banks in coming quarters.

SPFI Financials Regional banking Margin management Credit quality Deposit growth Mortgage banking