South Plains Financial: A Value Investor's Look at Tangible Book Growth and Margin of Safety

South Plains Financial's value proposition is built on a classic, durable model: cultivating deep local relationships with small and medium-sized businesses. This focus forms the core of its competitive moat-a community-based deposit franchise that provides a stable, low-cost funding base. The bank's expansion into the Greater Houston market through the acquisition of BOH Holdings, announced in December, is a disciplined execution of this strategy. It aims to replicate its proven West Texas model in a larger, dynamic market, seeking to deepen its deposit franchise in a new region.

The quality of its earnings foundation is evident in its funding management. The average cost of deposits has fallen significantly, dropping to 210 basis points in the third quarter of 2025 from 247 basis points a year ago. This decline is a direct result of the bank's community focus, where long-standing customer relationships translate into sticky, low-cost deposits. This advantage directly feeds the bottom line, as seen in the 4.05% net interest margin reported for the same quarter. A wide, stable NIM is the hallmark of a bank with pricing power and a strong funding moat.

The bank's financial results underscore this foundation. Net income grew to $16.3 million in the third quarter, with diluted earnings per share reaching $0.96. More importantly, the bank is compounding its equity base, with tangible book value per share rising to $28.14 by September 30. This growth in intrinsic value per share, driven by retained earnings and accretive growth, is the ultimate measure of a bank's success for a value investor.

The bottom line is that South Plains possesses a tangible, relationship-driven moat. Its ability to fund itself cheaply and grow its loan book in a disciplined manner provides a clear path to compounding. The recent Houston acquisition is a calculated bet on extending that moat. For the thesis to work, however, the market must believe this expansion will be accretive and that the bank can maintain its superior funding costs and credit quality. The current valuation will demand a high degree of confidence in sustained execution.

Financial Performance and the Path to Intrinsic Value

The numbers for the third quarter paint a picture of a bank successfully compounding its core value. Net income surged 45% year-over-year to $16.3 million, a powerful demonstration of earnings power. This growth was fueled by a 34% increase in average deposits, which directly lowered the cost of funds to 210 basis points and supported a robust 4.05% net interest margin. The bottom line is that the bank's relationship-driven moat is translating into tangible profit expansion.

More critical for a value investor is the growth in intrinsic value per share. Tangible book value per share climbed to $28.14 as of September 30, 2025, up from $26.70 at the end of June and $25.75 a year earlier. This represents a 9.3% sequential increase and a 13.5% annualized growth rate. This compounding is the engine of long-term shareholder returns, as it reflects the accumulation of retained earnings and the accretive nature of new capital deployed into the business.

The efficiency of this capital deployment is also improving. Return on average assets (ROAA) rose to 1.47% in the third quarter of 2025, up from 1.05% a year ago. This widening margin shows the bank is getting more earnings out of each dollar of assets, a sign of better asset utilization and operational leverage. It suggests the growth is not just in scale, but in profitability per unit of capital.

The path forward hinges on sustaining this momentum. The bank has acknowledged higher-than-normal loan paydowns as a near-term headwind, but management expects an acceleration in growth next year, aided by an expanded lending team. The upcoming fourth-quarter results, scheduled for release on January 26, will be a key test of whether this trajectory holds. For now, the financials show a clear and disciplined path to increasing intrinsic value, driven by a low-cost deposit base and improving asset returns.

Valuation and the Margin of Safety: Price vs. Intrinsic Value

The numbers tell a clear story, but the market's verdict is a different matter. The bank's tangible book value per share stands at $28.14, a figure that represents the net asset value available to common shareholders after accounting for intangible assets like goodwill. Yet the stock trades at a price-to-book ratio of 3.1344. This is not a discount; it is a substantial premium. For a value investor, this premium is the central question. It implies the market is pricing in far more than the current net asset value.

Analyst expectations reflect this optimism. Price targets from firms like Keefe, Bruyette & Woods, Raymond James, and Piper Sandler cluster between $41 and $46. These targets imply a premium to recent trading levels and, more importantly, a belief in significant future earnings growth. The market is paying for the promise of the Houston acquisition's accretion and the continuation of the bank's strong compounding trajectory. This is the classic trade-off: paying up for quality and growth.

From a classic value perspective, this setup demands a wide margin of safety. The principle is to buy when the price is well below intrinsic value, creating a buffer against error or misfortune. Here, the price is well above tangible book value. The margin of safety, in this case, is not in the purchase price but in the execution of the growth plan. The investor is betting that the bank's moat will widen, its earnings will accelerate, and its tangible book value will grow at a rate that justifies the current multiple.

The upcoming fourth-quarter results, scheduled for release on January 26, will be a critical test. They will provide the first concrete data on whether the growth acceleration is materializing and whether the bank can maintain its superior funding costs and credit quality in a new market. If the results meet or exceed expectations, the premium may be validated. If they disappoint, the stock could face pressure as the market re-evaluates the growth narrative priced into the share price.

The bottom line is that South Plains Financial is not a bargain at its current valuation. It is a growth story trading at a growth premium. For the patient investor, the margin of safety is not in the current price but in the bank's proven ability to compound intrinsic value. The investment thesis hinges on the belief that management will successfully extend its relationship-driven moat in Houston and that the market will eventually recognize the full extent of that compounding power. Until then, the stock offers no traditional margin of safety.

Catalysts, Risks, and What to Watch for the Patient Investor

The path to validating South Plains Financial's growth premium is now clear. The primary near-term catalyst is the Q4 2025 earnings release and conference call scheduled for January 26, 2026. This event will provide the first hard data on whether the bank's anticipated growth acceleration is materializing. Investors should listen for updates on loan growth, the trajectory of the average cost of deposits, and any commentary on the integration of the newly acquired BOH Holdings in Houston. The call will also be the platform for management to offer guidance, which is critical for assessing the sustainability of the current earnings trajectory.

A key risk to monitor is the sustainability of the net interest margin. The bank's 4.05% NIM in the third quarter was a standout, but it operates in a dynamic rate environment. The market will be watching to see if this margin holds or begins to compress as the Federal Reserve's policy stance evolves. Any significant pressure on the NIM would directly challenge the earnings power that justifies the current premium valuation.

The integration of the BOH Holdings acquisition is the central strategic risk. The bank's thesis relies on replicating its successful West Texas model in the larger Houston market. The coming quarters will reveal whether this expansion is accretive to earnings and whether the bank can maintain its low-cost deposit base in a more competitive environment. A misstep in integration or a failure to grow the deposit franchise in Houston would undermine the growth narrative priced into the stock.

For the patient investor, the checklist is straightforward. Watch the January 26 results for confirmation of the growth acceleration. Monitor the NIM for resilience. And track the Houston integration for signs of successful moat extension. The investment thesis is not about a single quarter, but about the bank's ability to compound intrinsic value over the long cycle. The upcoming earnings report is the first major test of that long-term plan.