South Plains Financial, Inc. (SPFI) Q3 2026 earnings review
South Plains cuts merger costs, but problem loans jump 61%
South Plains Financial, the Texas parent of City Bank, cut overhead after its spring merger while problem loans rose again. Third-quarter profit reached $21 million as one-time costs from buying Bank of Houston rolled off and the lending spread held at 4%. Outgoing chief executive Curtis Griffith and incoming chief Cory Newsom pointed to faster lending, though a $25 million early payoff held back net additions.
| Loans from businesses owned a year ago | +4.8% +6.3% annualized from last quarter |
|---|---|
| Profit per share | $1.06 +10% from a year ago |
| Net interest margin | 4.00% unchanged from last quarter |
| Full-year loan growth outlook | Unchanged middle of the range: ~5% underlying growth |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because lower merger expenses and steady deposit costs were offset by a second straight jump in nonperforming loans. Lending picked up from the spring, but by our math third-quarter additions of $60 million still fell short of the pace needed to hit the full-year target.
The question now is whether newly hired Texas bankers can outrun early loan payoffs and reach the full-year lending plan without further credit slip-ups. By our math, hitting the middle of the plan requires fourth-quarter loan additions to nearly double to $103 million. Fourth-quarter loan balances and nonperforming loan totals will settle both debates.
🐂 Bull Case
Operating Expenses Fell After the Merger
South Plains bought Bank of Houston in April and converted its computer systems in May. That integration pushed operating costs up in the second quarter, so the third quarter was the first clean test of the combined bank's cost structure. Noninterest expense — overhead such as pay, branches and software — fell 4.5% from last quarter to $38.1 million.
Pay and benefits dropped by 2.2 percentage points of revenue to 34.3% because $710 thousand of one-time merger pay did not repeat and mortgage commissions fell $326 thousand. Other overhead fell by $596 thousand as another $343 thousand of deal costs rolled off. Because revenue grew while overhead shrank, the efficiency ratio — noninterest expense as a share of revenue — improved by 3.5 percentage points to 58.12%.
What to watch: fourth-quarter noninterest expense. Another reading near $38 million would confirm that the $2.5 million of ongoing quarterly costs from Bank of Houston are fully absorbed without extra overhead creep.
Deposit Costs Kept the Margin at 4%
Net interest margin — the profit spread between what the bank earns on loans and pays on deposits — held steady at 4.00% from last quarter. On the surface, the spread slipped 5 basis points from 4.05% a year ago, when the bank collected $640 thousand in one-time problem-loan workout fees. Excluding those fees, the underlying spread widened by 1 basis point from 3.99% a year ago by our math.
The parent of City Bank defended its spread by trimming the average cost of deposits by 1 basis point from last quarter to 2.07%, even after absorbing Bank of Houston's higher-cost funding. That cheaper funding offset a 6-basis-point dip in average loan yields to 6.75%, lifting net interest income 2.2% from last quarter to $51.5 million.
What to watch: the cost of interest-bearing deposits next quarter, now at 2.73%. A further drop would show the bank is replacing Bank of Houston's expensive certificates of deposit with cheaper core accounts.
🐻 Bear Case
Loan Growth Trails the Full-Year Target
Total loans rose 25.5% from a year ago to $3.83 billion, mostly because the Bank of Houston purchase added $631.9 million at close. Stripping out that purchase, loans from businesses owned a year ago grew 4.8% by our math. President Cory Newsom highlighted "annualized loan growth accelerating to 6.3% during the quarter, consistent with our expectations", and pointed to "opportunities to recruit experienced bankers as industry consolidation creates disruption across our markets".
- Third-quarter underlying loan additions: $59.7 million, up from $35.4 million in the second quarter
- Pace needed in the second half to hit the full-year mid-single-digit plan: $66 million to $97 million per quarter by our math
- Fourth-quarter loan additions implied by the middle of the full-year plan: $103 million, or 10.8% annualized by our math
The $59.7 million gain shows the hiring push is working, but it still fell short of the pace needed to reach the full-year outlook. Early repayments remain a drag, including "one early loan payoff of $25 million during the quarter, which was fully secured by the borrower’s deposit account". Because underlying loans shrank by $5.6 million across the first half, hitting the middle of the full-year target now requires fourth-quarter additions to nearly double.
What to watch: fourth-quarter underlying loan additions. A figure below $73 million would leave full-year growth under 4% and miss the mid-single-digit plan.
Problem Loans Rose for a Second Quarter
Credit quality weakened for a second straight quarter after the Bank of Houston acquisition closed in April. Nonperforming loans — loans that are past due or no longer paying interest — jumped 61.1% from last quarter to $15.3 million, lifting their share of total loans from 0.25% to 0.40%. Nonperforming assets rose 12 basis points to 0.31% of total assets.
The bank set aside $830 thousand for credit losses, more than double the $350 thousand provision in the second quarter. South Plains said the higher charge came from "higher net charge-offs and increased loan balances", as annualized net charge-offs — loans written off as uncollectible — more than doubled from 0.06% to 0.13% of average loans. Even with the bigger provision, the allowance for credit losses slipped 3 basis points to 1.38% of total loans.
What to watch: nonperforming loans and the allowance ratio in the fourth quarter. Another rise in problem loans would force larger credit provisions to rebuild the reserve buffer.
Rate Swings Cut Book Value and Inflated Fees
Changes in long-term interest rates cut both ways this quarter, flattering the income statement while hurting the balance sheet. Noninterest income rose 23.7% from a year ago to $13.8 million, driven by a $1.6 million upward accounting adjustment to mortgage servicing rights — the value of contracts to collect mortgage payments — against a $925 thousand write-down a year ago. Excluding those adjustments, fee income grew 1.0% from a year ago by our math, and mortgage loan commissions fell $326 thousand from last quarter.
Those same "increases in long-term market interest rates during the period" lowered the market value of the bank's bond portfolio. That pushed accumulated other comprehensive income — unrealized gains and losses on bonds — down by $25.5 million, reducing tangible book value per share (net asset value excluding goodwill) by 1.3% from last quarter to $29.23.
What to watch: mortgage banking revenue excluding servicing write-ups next quarter. A drop would show that higher mortgage rates are still holding back home-loan demand.
Risks this quarter didn't answer
Four standing concerns from last quarter depend on tables that only appear in the quarterly filing with regulators, not the earnings release.
- Classified loans (loans showing early signs of financial weakness): nearly doubled to $80.3 million in the second quarter after the Bank of Houston deal; the third-quarter filing's credit footnote will show whether they stabilized.
- Interest-rate sensitivity: flipped in the second quarter so that a 100-basis-point rate cut would reduce net interest income by 1.6%; the filing's market-risk table will update that exposure.
- Uninsured deposits: rose to 29% of total deposits in the second quarter; the filing's deposit section will provide the third-quarter share.
- Insider share buybacks and leadership hand-off: chief executive Curtis Griffith retires at year-end, and the filing's equity footnote will show whether the bank bought more shares from him.
💲 Other KPIs
Total deposits rose 20.1% from a year ago, or 4.7% by our math when stripping out the $595.6 million acquired with Bank of Houston. From last quarter, deposits added $20.1 million. Noninterest-bearing accounts — checking accounts that pay no interest — grew $27.5 million to 25.3% of total deposits, up from 24.8% in the second quarter.
Diluted shares fell 1.1% from last quarter following the second quarter's share buybacks, but remain 15.4% higher than a year ago because the Texas lender issued 2.8 million shares in April to buy Bank of Houston. That extra stock explains why third-quarter net income rose 27.3% from a year ago while profit per share grew 10.4% to $1.06.
The common equity tier 1 ratio — core bank capital as a share of risk-weighted assets — rose 9 basis points from last quarter after dipping from 14.80% in the first quarter when the Bank of Houston deal closed. Retained profit of $17.4 million after paying the $0.18 per share dividend rebuilt the regulatory capital buffer.
🔮 Guidance
Unchanged. President Cory Newsom said third-quarter annualized loan growth of 6.3% matched the bank's plan. By our math, hitting the 5% middle of the full-year range on last December's $3.14 billion loan base requires $103 million of additions in the fourth quarter, or 10.8% annualized. Management has already trimmed this target twice from its initial 5% to 9% range.
❓ Key Questions
Did classified loans from Bank of Houston stop rising?
Classified loans nearly doubled to $80.3 million in the second quarter after the merger, and nonperforming loans rose another 61% this quarter to $15.3 million. Investors need the third-quarter classified loan total to see if problem credits are still migrating toward default.
How much early loan payoff volume is expected in Q4?
Reaching the middle of the full-year loan plan requires $103 million of net additions in the fourth quarter, up from $59.7 million in the third. Management has flagged payoffs as a headwind for seven straight quarters, including a $25 million payoff this period.
Did the bank buy more shares from the retiring CEO?
In the second quarter South Plains bought back 310,965 shares, including a private purchase from retiring chief executive Curtis Griffith, without disclosing the related-party size or price. Period-end shares barely moved in the third quarter, leaving open whether insider repurchases continued.
How much high-cost Bank of Houston funding is left?
Bank of Houston brought $595.6 million of deposits with an interest-bearing cost of 3.42%. Total deposit costs edged down 1 basis point to 2.07% this quarter, and the remaining maturity schedule of acquired certificates of deposit will determine how much funding relief is left.