KBRA Assigns Ratings to South Plains Financial, Inc.

Kroll Bond Rating Agency (KBRA) assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 for Lubbock, Texas-based South Plains Financial, Inc. (NASDAQ: SPFI or the “company”). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for City Bank (the “bank”), the company’s wholly owned banking subsidiary. The Outlook for all long-term ratings is Stable.

The ratings reflect the company’s highly experienced and long tenured management team, which has implemented a sound risk culture that is reflected in the bank’s history of solid asset quality. SPFI’s vastly improved deposit base, materially enhanced by the recent acquisition of West Texas State Bank (WTSB), has led to more cost-effective funding, further supporting earnings as well as strengthening its liquidity position. Furthermore, SPFI has ample available liquidity and has employed a prudent use of noncore funding. The total cost of deposits for 2Q20 was 0.39%, which is enhanced by its noninterest-bearing deposits accounting for ~32% of total deposits. Ratings are also supported by the bank’s well diversified revenues with noninterest income generally comprising ~35% of total operating income in recent years. The bank’s capital position is considered sound especially in the context of risk appetite and recent loss history, with a TCE ratio consistently in the 8%-10% range in recent years. Constraining the ratings are the company’s above average personnel and operating expenses, which are largely due to its significant mortgage operation and risk management technology investments. However, this is partially mitigated by strong noninterest income generated from the mortgage operation. COVID-19 at-risk exposures are above peer, totaling 152% of RBC (20% of loans), largely categorized as restaurant, retail, hospitality (mostly flagged hotels), and energy. Other phase 1 direct exposures are limited. Profitability metrics have moderately lagged the regulatory peer group, due in part to the higher expense base, but less so from a risk-adjusted standpoint.

KBRA continues to monitor the potential direct and indirect effects of the coronavirus on the banking and other sectors. Please refer to our publication U.S. Bank 2Q 2020 Ratings Compendium for our latest thoughts.

The ratings are based on KBRA’s Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019.

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Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the U.S. Information Disclosure Form located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe is registered with ESMA as a CRA.

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