South Plains Financial (SPFI) Q2 2025: NIM Expands 26bps as Deposit Mix and Loan Repricing Drive Margin Upside
Margin expansion and disciplined credit management defined South Plains Financial’s second quarter, with a notable improvement in net interest margin and a stable credit profile despite persistent loan payoffs. Leadership’s dual focus on organic growth and selective M&A positions the bank to capitalize on Texas market resilience, while new lender recruitment and a rebalanced deposit base support future earnings power.
Summary
- Margin Expansion Anchored by Deposit Mix Shift: Lower cost of funds and repricing loans boosted net interest margin.
- Organic Growth and Talent Acquisition Remain Priority: Experienced lender hires aim to accelerate loan and deposit growth.
- M&A Discipline and Capital Strength Underpin Strategic Flexibility: Management signals patience and selectivity amid improving deal climate.
Performance Analysis
South Plains Financial delivered a quarter marked by margin expansion, with net interest margin (NIM) rising to 4.07% from 3.81% in the prior quarter, aided by a one-time interest recovery but also by a sustained decline in deposit costs. Excluding the special gain, core NIM improved nine basis points to 3.90%, reflecting a more favorable deposit mix and repricing of legacy loans. Loan yields also benefited from new production coming on at higher rates, with new loans in the high sixes to low sevens percent range, supporting yield stability even as paydowns remained elevated.
Loan growth was modest at 3% annualized, constrained by $49 million in multifamily paydowns, particularly in major metro markets where balances declined. Non-interest income rose to $12.2 million, largely on mortgage banking and servicing rights stabilization, while non-interest expense ticked up due to personnel and professional service investments. Deposit balances fell due to seasonal public fund outflows, but non-interest bearing deposits increased, improving funding mix and further lowering cost of funds.
- Deposit Mix Shift: Non-interest bearing deposits rose, now 26.7% of total, supporting margin and funding stability.
- Credit Quality Steady: Allowance for credit losses increased to 1.45% of loans, with only minor new non-accruals and conservative reserving.
- Capital Levels Strong: CET1 at 13.86% and leverage at 12.12% provide ample room for growth and shareholder returns.
Despite loan headwinds, South Plains’ core earnings power and capital strength improved, positioning the bank for both organic growth and opportunistic M&A as Texas markets remain resilient.
Executive Commentary
"Our second quarter results are a testament to the hard work of our dedicated employees... we continued to achieve margin expansion through the second quarter as our cost of funds declined once again. Additionally, we believe the credit quality of our loan portfolio remains solid as we aggressively manage the portfolio and proactively address challenges with our customers."
Curtis Griffith, Chairman and CEO
"Our net interest margin calculated on a tax equivalent basis was 4.07% in the second quarter as compared to 3.81% in the linked quarter. The rise in our NIM in the second quarter was positively impacted by 17 basis points due to the one-time interest recovery... Excluding this one-time gain, our NIM rose nine basis points to 3.90%, primarily due to a five basis point decline in our cost of deposits."
Steve Crockett, Chief Financial Officer and Treasurer
Strategic Positioning
1. Deposit Franchise and Funding Cost Management
South Plains’ community-based deposit franchise, or branch-driven local deposit gathering, remains a core differentiator. The bank increased its ratio of non-interest bearing deposits, lowering overall funding costs and insulating margin against rate volatility. The team’s focus on treasury management solutions and cross-selling deposits with every loan is driving incremental growth without new product launches, emphasizing relationship banking as a competitive moat.
2. Organic Growth Through Talent Acquisition
Leadership is executing a multi-market lender recruitment strategy, particularly in Dallas, to accelerate loan and deposit growth. The hiring of experienced bankers with established relationships is expected to lift origination capacity and diversify the loan book. While this will drive near-term expense growth, management views it as essential to sustaining market share gains and supporting future balance sheet expansion.
3. Selective M&A as a Growth Lever
M&A remains a strategic option but with strict discipline, as management seeks only accretive deals with compatible culture, attractive asset-liability profiles, and realistic seller price expectations. The improving regulatory climate and recent Texas bank transactions are seen as catalysts for more actionable opportunities, but leadership is clear that organic growth takes precedence over forced deal-making.
4. Credit and Portfolio Management
Proactive credit management has kept asset quality stable, even as paydowns in multifamily and metro markets have created near-term headwinds. The tightening of indirect auto loan standards and focus on repricing legacy credits support a cautious but constructive credit outlook, with allowance levels rising to reflect a conservative stance.
5. Capital Allocation and Shareholder Returns
Capital levels remain robust, enabling continued dividend payments and a share buyback program alongside organic and inorganic growth ambitions. The tangible book value per share increased, reflecting retained earnings and prudent risk management.
Key Considerations
South Plains’ second quarter highlights the interplay between margin management, credit discipline, and strategic growth levers in a dynamic Texas banking landscape.
Key Considerations:
- Margin Upside from Funding Mix: The shift toward non-interest bearing deposits is a durable margin tailwind and reduces sensitivity to Fed rate moves.
- Loan Growth Constrained by Paydowns: Elevated multifamily and metro market paydowns remain a drag on net loan growth, though new production rates are healthy.
- Talent Acquisition as a Growth Engine: Aggressive lender hiring aims to accelerate both loan and deposit growth, but will increase expenses in the near term.
- M&A Optionality but High Bar: Management is patient, prioritizing organic growth and only pursuing acquisitions that meet strict cultural and financial criteria.
- Credit Quality Vigilance: Conservative reserving and proactive credit actions maintain stable asset quality amid uncertain economic signals.
Risks
Elevated loan paydowns, especially in metro and multifamily, could suppress loan growth and dilute operating leverage if not offset by new production. Consumer behavior shifts tied to tariffs may pressure indirect auto and broader loan demand. Competition for talent and deposits remains intense, which could drive up costs. Finally, M&A carries integration and valuation risks, particularly if seller price expectations remain unrealistic.
Forward Outlook
For Q3 2025, South Plains guided to:
- Flat to low single digit loan growth, as paydowns are expected to moderate but remain a headwind.
- Stable to modestly expanding NIM, contingent on deposit mix and any Fed rate movement.
For full-year 2025, management maintained guidance:
- Loan growth at the lower end of low to mid-single digit range.
Management highlighted several factors that will influence results:
- Continued hiring of experienced lenders to drive future growth.
- Ongoing discipline in deposit pricing and credit standards to protect margin and asset quality.
Takeaways
South Plains’ earnings power is underpinned by margin expansion and a resilient funding base, but sustained loan growth will require continued success in lender recruitment and relationship banking. The bank’s capital strength and disciplined approach to M&A provide strategic flexibility as the Texas banking environment evolves.
- Margin and Funding Leverage: Deposit mix improvements and loan repricing support core earnings, even as loan growth lags headline targets.
- Growth Hinges on Talent and Relationships: The ability to attract and integrate high-performing bankers will determine the pace of organic expansion and deposit gathering.
- Watch for Deal Activity and Credit Signals: Investors should monitor the pace of M&A, the impact of paydown moderation, and any early signs of credit deterioration as macro conditions shift.
Conclusion
South Plains Financial’s second quarter demonstrates the value of disciplined margin management and relationship-driven deposit gathering in a challenging growth environment. With strong capital, improving NIM, and a clear-eyed approach to both hiring and M&A, the bank is positioned to navigate evolving market dynamics while protecting shareholder value.
Industry Read-Through
South Plains’ deposit mix-driven margin expansion and selective M&A posture offer a template for regional banks navigating similar growth and funding challenges. The Texas banking market’s resilience, paired with a more accommodative regulatory climate, could spur increased consolidation, but only those with robust capital and disciplined underwriting are likely to benefit. Talent-driven organic growth and relationship banking remain critical differentiators, as competition for both clients and bankers intensifies. Other regionals should note the importance of deposit franchise quality and proactive credit management in sustaining profitability as interest rate and economic cycles turn.