SPFI 10-Q Quarterly Report Sept. 30, 2024 | Alphaminr
SOUTH PLAINS FINANCIAL, INC.
ALPHAMINR

SPFI 10-Q Quarter ended Sept. 30, 2024

Balance Sheet
Cash Flow
Income Statement
Debt
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


FORM 10-Q


(Mark One)

☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

OR

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 001-38895


South Plains Financial, Inc.
(Exact name of registrant as specified in its charter)

Texas
75-2453320
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
5219 City Bank Parkway
Lubbock , Texas
79407
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: ( 806 ) 792-7101

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 par value per share
SPFI
The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 1, 2024, the registrant had 16,389,659 shares of common stock, par value $1.00 per share, outstanding.

TABLE OF CONTENTS

Page
PART I.
3
Item 1.
3
3
4
6
7
8
Item 2.
28
Item 3.
51
Item 4.
51
PART II.
52
Item 1.
52
Item 1A.
52
Item 2.
52
Item 3.
52
Item 4.
52
Item 5.
52
Item 6.
54
55

PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

September 30,
2024
December 31,
2023
(Unaudited)
ASSETS
Cash and due from banks
$
60,863
$
62,821
Interest-bearing deposits in banks
410,304
267,337
Cash and cash equivalents
471,167
330,158
Securities available for sale
606,889
622,762
Loans held for sale ($ 9,490 and $ 6,615 at fair value at September 30, 2024 and December 31, 2023, respectively)
11,389
14,499
Loans held for investment
3,037,375
3,014,153
Allowance for credit losses on loans
( 42,886
)
( 42,356
)
Loans held for investment, net
2,994,489 2,971,797
Accrued interest receivable
19,155
20,881
Premises and equipment, net
53,323
55,070
Bank-owned life insurance
75,649
74,504
Goodwill
19,315
19,315
Intangible assets, net
1,882
2,429
Mortgage servicing rights
24,573
26,569
Deferred tax asset, net
18,889
19,413
Other assets
40,939
47,396
Total assets
$
4,337,659
$
4,204,793
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing
$
998,480
$
974,201
Interest-bearing
2,720,880
2,651,952
Total deposits
3,719,360
3,626,153
Accrued expenses and other liabilities
64,870
61,358
Subordinated debt
63,914
63,775
Junior subordinated deferrable interest debentures
46,393
46,393
Total liabilities
3,894,537
3,797,679
Stockholders’ equity:
Common stock, $ 1.00 par value per share, 30,000,000 shares authorized; 16,386,627 and 16,417,099 issued and outstanding at September 30, 2024 and December 31, 2023 , respectively
16,386
16,417
Additional paid-in capital
97,367
97,107
Retained earnings
371,782
345,264
Accumulated other comprehensive loss
( 42,413
)
( 51,674
)
Total stockholders’ equity
443,122
407,114
Total liabilities and stockholders’ equity
$
4,337,659
$
4,204,793

The accompanying notes are an integral part of these consolidated financial statements.

3
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands, except per share data)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2024
2023
2024
2023
Interest income:
Loans, including fees
$
51,505
$
46,242
$
151,008
$
128,703
Securities:
Taxable
5,300
5,422
16,096
16,027
Non-taxable
803
833
2,419
3,057
Federal funds sold and interest-bearing deposits in banks
4,032
4,031
10,052
7,010
Total interest income
61,640
56,528
179,575
154,797
Interest expense:
Deposits
22,653
18,965
65,945
44,768
Notes payable & other borrowings
— — — 5
Subordinated debt
835
1,012
2,505
3,037
Junior subordinated deferrable interest debentures
858
862
2,575
2,402
Total interest expense
24,346
20,839
71,025
50,212
Net interest income
37,294
35,689
108,550
104,585
Provision for credit losses
495
( 700
)
3,100
4,010
Net interest income, after provision for credit losses
36,799
36,389
105,450
100,575
Noninterest income:
Service charges on deposit accounts
2,023
1,840
5,785
5,286
Income from insurance activities
28
30
92
1,478
Net gain on sales of loans
2,715
2,631
8,157
9,077
Bank card services and interchange fees
3,302
3,157
10,415
10,156
Other mortgage banking income (loss)
( 825
)
1,971
1,075 3,069
Investment commissions
391
430
1,275
1,239
Fiduciary fees
613
582
2,087
1,779
Gain on sale of subsidiary
— 290 — 33,778
Other
2,388
1,346
5,867
4,218
Total noninterest income
10,635
12,277
34,753
70,080
Noninterest expense:
Salaries and employee benefits
18,767
18,709
56,954
61,400
Occupancy and equipment, net
4,255
4,111
12,204
12,246
Professional services
1,807
1,560
5,028
4,924
Marketing and development
1,015
853
2,629
2,573
IT and data services
1,092
818
3,168
2,570
Bank card expenses
1,500
1,451
4,413
4,119
Appraisal expenses
246
283
702
862
Realized loss on sale of securities
— — — 3,409
Other
4,446
3,704
12,532
12,246
Total noninterest expense
33,128
31,489
97,630
104,349
Income before income taxes
14,306
17,177
42,573
66,306
Income tax expense
3,094
3,683
9,353
13,885
Net income
$
11,212
$
13,494
$
33,220
$
52,421

The accompanying notes are an integral part of these consolidated financial statements.

4
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (CONTINUED)
(Unaudited)
(Dollars in thousands, except per share data)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2024
2023
2024
2023
Earnings per share:
Basic
$
0.68
$
0.80
$
2.02
$
3.09
Diluted
$
0.66
$
0.78
$
1.96
$
3.01
Net income
$
11,212
$
13,494
$
33,220
$
52,421
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale
25,268
( 30,907
)
14,997
( 29,393
)
Less: Change in fair value on hedged state and municipal securities
( 4,196
)
2,091
( 3,274
)
1,320
Reclassification adjustment for loss on sale of securities
— — — 3,409
Tax effect
( 4,425
)
6,051
( 2,462
)
5,179
Other comprehensive income (loss)
16,647
( 22,765
)
9,261
( 19,485
)
Comprehensive income (loss)
$
27,859
$
( 9,271
)
$
42,481
$
32,936

The accompanying notes are an integral part of these consolidated financial statements.

5
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share data)

Common Stock
Additional
Paid-in
Retained
Accumulated
Other
Comprehensive
Shares
Amount
Capital
Earnings
Income (Loss)
Total
Nine Months Ended September 30 , 2023
Balance at beginning of period
17,027,197
$
17,027
$
112,834
$
292,261
$
( 65,108
)
$
357,014
Net income
—
—
—
52,421
—
52,421
Cash dividends declared  - $ 0.39 per share
—
—
—
( 6,609
)
—
( 6,609
)
Other comprehensive loss
—
—
—
—
( 19,485
)
( 19,485
)
Impact of adoption of ASU 2016-13 - CECL
— — — ( 997 ) — ( 997 )
Issuance of stock related to stock-based awards, net of 26,872 shares for cashless exercise and net of 15,769 shares for taxes
40,720
40
( 433
)
—
—
( 393
)
Repurchases of common stock
( 467,475
)
( 467
)
( 11,393
)
—
—
( 11,860
)
Stock-based compensation
—
—
1,625
—
—
1,625
Balance at end of period
16,600,442
$
16,600
$
102,633
$
337,076
$
( 84,593
)
$
371,716
Nine Months Ended September 30, 2024
Balance at beginning of period
16,417,099
$
16,417
$
97,107
$
345,264
$
( 51,674
)
$
407,114
Net income
—
—
—
33,220
—
33,220
Cash dividends declared  - $ 0.41 per share
—
—
—
( 6,702
)
—
( 6,702
)
Other comprehensive income
—
—
—
—
9,261
9,261
Issuance of stock related to stock-based awards, net of 7,213 shares for cashless exercise and net of 4,675 shares for taxes
23,327
23
( 155
)
—
—
( 132
)
Repurchases of common stock
( 53,799
)
( 54
)
( 1,286
)
—
—
( 1,340
)
Stock-based compensation
—
—
1,701
—
—
1,701
Balance at end of period
16,386,627
$
16,386
$
97,367
$
371,782
$
( 42,413
)
$
443,122
Three Months Ended September 30 , 2023
Balance at beginning of period
16,952,072
$
16,952
$
111,133
$
325,772
$
( 61,828
)
$
392,029
Net income
—
—
—
13,494
—
13,494
Cash dividends declared  - $ 0.13 per share
—
—
—
( 2,190
)
—
( 2,190
)
Other comprehensive loss
—
—
—
—
( 22,765
)
( 22,765
)
Issuance of stock related to stock-based awards, net of 2,732 shares for cashless exercise and net of 1,877 shares for taxes
2,891 2 ( 53 ) — — ( 51 )
Repurchases of common stock
( 354,521 ) ( 354 ) ( 8,958 ) — — ( 9,312 )
Stock-based compensation
—
—
511
—
—
511
Balance at end of period
16,600,442
$
16,600
$
102,633
$
337,076
$
( 84,593
)
$
371,716
Three Months Ended September 30, 2024
Balance at beginning of period
16,424,021
$
16,424
$
97,766
$
362,855
$
( 59,060
)
$
417,985
Net income
—
—
—
11,212
—
11,212
Cash dividends declared  - $ 0.14 per share
—
—
—
( 2,285
)
—
( 2,285
)
Other comprehensive income
—
—
—
—
16,647
16,647
Issuance of stock related to stock-based awards, net of 3,162 shares for cashless exercise
2,606 2 ( 2 ) — — —
Repurchases of common stock
( 40,000 ) ( 40 ) ( 960 ) — — ( 1,000 )
Stock-based compensation
—
—
563
—
—
563
Balance at end of period
16,386,627
$
16,386
$
97,367
$
371,782
$
( 42,413
)
$
443,122

The accompanying notes are an integral part of these consolidated financial statements.

6
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

Nine Months Ended
September 30,
2024
2023
Cash flows from operating activities:
Net income
$
33,220
$
52,421
Adjustments to reconcile net income to net cash from operating activities:
Provision for credit losses
3,100
4,010
Provision for foreclosed asset losses
— 97
Depreciation and amortization
4,913
4,784
Accretion and amortization
2,095
2,731
Other gains, net
( 2
)
( 248
)
Gain on sale of subsidiary
— ( 33,778 )
Loss on sale of securities
— 3,409
Net gain on sales of loans
( 8,157
)
( 9,077
)
Proceeds from sales of loans held for sale
235,525
279,993
Loans originated for sale
( 224,947
)
( 261,936
)
Deferred income tax expense
( 1,938 ) 128
Earnings on bank-owned life insurance
( 1,145
)
( 930
)
Stock-based compensation
1,701
1,625
Change in valuation of mortgage servicing rights
2,685
875
Net change in:
Accrued interest receivable and other assets
4,607
( 4,744
)
Accrued expenses and other liabilities
3,552
12,619
Net cash provided by operating activities
55,209
51,979
Cash flows from investing activities:
Activity in securities available for sale:
Purchases
( 299,849
)
—
Sales
— 52,828
Maturities, prepayments, and calls
328,763
31,930
Loan originations and principal collections, net
( 27,239
)
( 247,869
)
Purchases of premises and equipment
( 2,325
)
( 4,682
)
Proceeds from sales of premises and equipment
69
939
Proceeds from sale of subsidiary
— 36,080
Proceeds from sales of foreclosed assets
1,348
1,014
Net cash provided by (used in) investing activities
767
( 129,760
)
Cash flows from financing activities:
Net change in deposits
93,207
214,184
Payments to tax authorities for stock-based compensation
( 132
)
( 393
)
Cash dividends paid on common stock
( 6,702
)
( 6,609
)
Payments to repurchase common stock
( 1,340
)
( 11,860
)
Net cash provided by financing activities
85,033
195,322
Net change in cash and cash equivalents
141,009
117,541
Beginning cash and cash equivalents
330,158
234,883
Ending cash and cash equivalents
$
471,167
$
352,424

Supplemental disclosures of cash flow information:
Interest paid on deposits and borrowed funds
$
71,479
$
49,406
Income taxes paid
8,321 16,231
Supplemental schedule of noncash activities:
Loans transferred to foreclosed assets
$
1,407
$
1,012
Premises and equipment transferred to other real estate owned
— 172
Additions to mortgage servicing rights
689
1,150

The accompanying notes are an integral part of these consolidated financial statements.

7
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Nature of Operations – South Plains Financial, Inc. (“SPFI”) is a Texas corporation and registered bank holding company that conducts its principal activities through its subsidiaries from offices located throughout Texas and Eastern New Mexico. Principal activities include commercial and retail banking, along with investment, trust, and mortgage services. The following were subsidiaries of SPFI as of September 30, 2024:

Wholly-Owned, Consolidated Subsidiaries:
City Bank
Bank subsidiary
Ruidoso Retail, Inc.
Non-bank subsidiary
CB Provence, LLC
Non-bank subsidiary
CBT Brushy Creek, LLC
Non-bank subsidiary
CBT Properties, LLC
Non-bank subsidiary
Wholly-Owned, Equity Method Subsidiaries:
South Plains Financial Capital Trusts (“SPFCT”) III-V
Non-bank subsidiaries

On April 1, 2023, SPFI entered into a Securities Purchase Agreement (“Agreement”) with Alliant Insurance Services, Inc. (“Alliant”), providing for the sale of Windmark Insurance Agency, Inc. (“Windmark”), City Bank’s wholly-owned subsidiary, through a sale of all of the outstanding shares of capital stock of Windmark to Alliant. The transaction was consummated on April 1, 2023. Pursuant to the terms and subject to the conditions of the Agreement, SPFI received an aggregate purchase price of $ 36.1 million in exchange for Windmark’s common shares, representing a pre-tax gain of $ 33.8 million through the nine months ended September 30, 2023. This transaction did not meet the criteria for discontinued operations reporting.

Basis of Presentation and Consolidation –
The consolidated financial statements in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2024 (this “Form 10-Q”) include the accounts of SPFI and its wholly-owned consolidated subsidiaries (collectively referred to as the “Company”) identified above. All significant intercompany balances and transactions have been eliminated in consolidation.

The interim consolidated financial statements in this Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements, and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the SEC on March 15, 2024 (the “2023 Annual Report on Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Determination of the adequacy of the allowance for credit losses (“ACL”) is a material estimate that is particularly susceptible to significant change in the near term; the assumptions used in stock-based compensation, derivatives, mortgage servicing rights, and fair values of financial instruments can also involve significant management estimates.

Recent Accounting Pronouncements – Updates to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) are prescribed in Accounting Standards Updates (“ASUs”), which are not authoritative until incorporated into the ASC.

ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The amendments in this ASU modify the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to, or technical corrections of the current requirements. Each amendment in the ASU will only become effective if the SEC removes the related disclosure or presentation requirement from its existing regulations by June 30, 2027. The amendments in this ASU are not expected to have a material impact on the results of operations or financial position.

8
ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this ASU require public entities to disclose information about reportable segments’ significant expenses on an interim and annual basis. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The adoption of ASU 2023-07 is not expected to have a material effect on the Company’s financial statements.



ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this ASU are intended to improve the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. It also includes certain other amendments intended to improve the effectiveness of income tax disclosures. This ASU is effective for fiscal years beginning after December 15, 2024. The adoption of ASU 2023-09 is not expected to have a material effect on the Company’s financial statements.

Subsequent Events – The Company has evaluated subsequent events and transactions from September 30, 2024 through the date this Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP.

2.  SECURITIES

The amortized cost, related gross unrealized gains and losses, allowance for credit losses, and estimated fair value of securities available for sale at the dates indicated follows (dollars in thousands) :

Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance
for Credit
Losses
Fair
Value
September 30 , 2024
Available for sale:
State and municipal
$
200,215
$
2
$
( 19,293
)
$ —
$
180,924
Residential mortgage -backed securities
328,928 — ( 41,183 ) — 287,745
Commercial mortgage-backed securities
46,932 — ( 4,637 ) — 42,295
Commercial collateralized mortgage obligations
69,027
—
( 142
)
—
68,885
Asset-backed and other amortizing securities
16,858
—
( 1,003
)
—
15,855
Other securities
12,000
—
( 815
)
—
11,185
$
673,960
$
2
$
( 67,073
)
$ —
$
606,889

December 31 , 2023
Available for sale:
State and municipal
$
202,814
$
2
$
( 22,241
)
$ —
$
180,575
Residential mortgage -backed securities
351,251 — ( 50,547 ) — 300,704
Commercial mortgage-backed securities
47,898 — ( 6,150 ) — 41,748
Commercial collateralized mortgage obligations
72,391
—
( 461
)
—
71,930
Asset-backed and other amortizing securities
18,476
—
( 1,436
)
—
17,040
Other securities
12,000
—
( 1,235
)
—
10,765
$
704,830
$
2
$
( 82,070
)
$ —
$
622,762

The amortized cost and estimated fair value of securities at September 30, 2024 are presented below by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Declining-balance securities are shown separately since they are not due at a single maturity date.

Available for Sale
Amortized
Cost
Fair Value
Within 1 year
$
2,541
$
2,521
After 1 year through 5 years
4,521
4,427
After 5 years through 10 years
15,801
14,963
After 10 years
189,352
170,198
Declining-balance securities
461,745
414,780
$
673,960
$
606,889

At both September 30, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. government, its agencies, or its sponsored enterprises, in an amount greater than 10% of stockholders’ equity.

Securities with a carrying value of approximately $ 282.9 million and $ 438.9 million at September 30, 2024 and December 31, 2023, respectively, were pledged to collateralize public deposits and for other purposes as required or permitted by law.

9
The following table segregates securities with unrealized losses at the periods indicated, by the duration they have been in a loss position for which an allowance for credit losses has not been recorded (dollars in thousands):

Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
September 30 , 2024
State and municipal
$
283
$
3
$
178,648
$
19,290
$
178,931
$
19,293
Residential mortgage-backed securities
— — 287,736 41,183 287,736 41,183
Commercial mortgage-backed securities
— — 42,296 4,637 42,296 4,637
Commercial collateralized mortgage obligations
30,337
28
38,548
114
68,885
142
Asset-backed and other amortizing securities
—
—
15,855
1,003
15,855
1,003
Other securities
—
—
11,185
815
11,185
815
$
30,620
$
31
$
574,268
$
67,042
$
604,888
$
67,073
December 31 , 2023
State and municipal
$
207
$
—
$
177,908
$
22,241
$
178,115
$
22,241
Residential mortgage-backed securities
9 — 300,695 50,547 300,704 50,547
Commercial mortgage-backed securities
— — 41,748 6,150 41,748 6,150
Commercial collateralized mortgage obligations
—
—
71,930
461
71,930
461
Asset-backed and other amortizing securities
—
—
17,040
1,436
17,040
1,436
Other securities
3,286
214
7,479
1,021
10,765
1,235
$
3,502
$
214
$
616,800
$
81,856
$
620,302
$
82,070

There were 141 securities with an unrealized loss at September 30, 2024, generally due to increases in market rates. Management evaluates AFS securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or non-credit related factors. Consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for the anticipated recovery in fair value. Management does not have the intent to sell any of the securities in an unrealized loss position as there are adequate liquidity sources to meet expected and unexpected funding needs. The fair value of these securities is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of September 30, 2024, management believes the unrealized loss positions detailed in the previous table are due to non-credit related factors, including changes in interest rates and other market conditions, and therefore no ACL or losses have been recognized or realized in the consolidated financial statements.

3.  LOANS HELD FOR INVESTMENT

Loans held for investment are summarized by category as of the dates presented below (dollars in thousands):

September 30,
2024
December 31,
2023
Commercial real estate
$
1,120,447
$
1,081,056
Commercial - specialized
406,255
372,376
Commercial - general
526,448
517,361
Consumer:
1-4 family residential
562,401
534,731
Auto loans
253,509
305,271
Other consumer
65,789
74,168
Construction
102,526
129,190
3,037,375
3,014,153
Allowance for credit losses on loans
( 42,886
)
( 42,356
)
Loans, net
$
2,994,489
$
2,971,797

The Company has certain lending policies, underwriting standards, and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies, underwriting standards, and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing, and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

10
Commercial Real Estate – Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed and ensure appropriate collateral is obtained to secure the loan. Commercial real estate loans are underwritten primarily based on projected cash flows for income-producing properties and collateral values for non-income-producing properties. The repayment of these loans is generally dependent on the successful operation of the property securing the loans or the sale or refinancing of the property. Real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are diversified by type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

Commercial – General and Specialized – Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations, as agreed and ensure appropriate collateral is obtained to secure the loan. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and typically include personal guarantees. Owner-occupied real estate is included in commercial loans, as the repayment of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties. Commercial loans are grouped into two distinct sub-categories: specialized and general. Commercial related segments that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related segments that contain a broader diversity of borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries. Performance of these loans is subject to operating and cash flow results of the borrower, with risk in the volatility of operating results for particular industries.

Consumer – Loans to consumers include 1-4 family residential loans, auto loans, and other loans for recreational vehicles or other purposes. The Company utilizes a computer-based credit scoring analysis to supplement its policies and procedures in underwriting consumer loans. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes the Company’s risk. The Company generally requires mortgage title insurance and hazard insurance on 1-4 family residential loans. All consumer loans are generally dependent on the risk characteristics of the borrower’s ability to repay the loan, a consideration of the debt to income ratio, employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral.

Construction – Loans for residential construction are for single-family properties to developers, builders, or end-users. These loans are underwritten based on estimates of costs and completed value of the project. Funds are advanced based on estimated percentage of completion for the project. Performance of these loans is affected by economic conditions as well as the ability to control costs of the projects.

The commercial real estate and construction categories comprise the Company’s nonowner-occupied real estate loans. Total nonowner-occupied real estate loans were $ 1.22 billion at September 30, 2024, and $ 1.21 billion at December 31, 2023.

The ACL for loans was $ 42.9 million at September 30, 2024, compared to $ 42.4 million at December 31, 2023. The ratio of ACL for loans to loans held for investment was 1.41 % at September 30, 2024 and 1.41 % at December 31, 2023.

11
The following tables detail the activity in the ACL for loans  for the periods indicated (dollars in thousands). Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Beginning
Balance
Provision for
Credit Losses (1)
Charge-offs
Recoveries
Ending
Balance
For the three months ended September 30 , 2024
Commercial real estate
$
15,593
$
290
$
—
$
41
$
15,924
Commercial - specialized
4,736
149
—
22
4,907
Commercial - general
6,841
( 373
)
( 78
)
10
6,400
Consumer:
1-4 family residential
9,702
( 143
)
( 3
)
2
9,558
Auto loans
3,287
30
( 296
)
39
3,060
Other consumer
974
294
( 364
)
55
959
Construction
2,040
353
( 315
)
—
2,078

$
43,173
$
600
$
( 1,056
)
$
169
$
42,886
For the three months ended September 30 , 2023
Commercial real estate
$
14,501
$
444
$
—
$
—
$
14,945
Commercial - specialized
4,154
( 270
)
( 11
)
70
3,943
Commercial - general
7,637
( 1,255
)
( 44
)
32
6,370
Consumer:
1-4 family residential
8,851
138
( 1
)
2
8,990
Auto loans
3,900
( 3
)
( 173
)
62
3,786
Other consumer
1,107
214
( 335
)
36
1,022
Construction
2,987
32
—
—
3,019

$
43,137
$
( 700
)
$
( 564
)
$
202
$
42,075

For the nine months ended September 30 , 2024
Commercial real estate
$
15,808
$
160
$
( 86
)
$
42
$
15,924
Commercial - specialized
4,020
821
—
66
4,907
Commercial - general
6,391
747
( 798
)
60
6,400
Consumer:
1-4 family residential
9,177
551
( 175
)
5
9,558
Auto loans
3,601
129
( 786
)
116
3,060
Other consumer
968
730
( 895
)
156
959
Construction
2,391
2
( 315
)
—
2,078

$
42,356
$
3,140
$
( 3,055
)
$
445
$
42,886

(1) For the three and nine months ended September 30, 2024 the provision for credit loss of $ 495 thousand and $ 3.1 million, respectively, on the Consolidated Statement of Comprehensive Income (Loss) includes a provision for credit losses on loans of $ 600 thousand and $ 3.1 million, respectively, and a provision for off-balance sheet credit exposures of $( 105 ) thousand and $( 40 ) thousand, respectively. For the three months ended September 30, 2023, the $( 700 ) thousand provision for credit loss on the Consolidated Statement of Comprehensive Income (Loss) includes a $( 700 ) thousand provision for credit losses on loans and no provision for off-balance sheet credit exposures.

Beginning
Balance
Impact of
CECL
Adoption
Provision for
Credit Losses (1)
Charge-offs Recoveries
Ending
Balance
For the nine months ended September 30 , 2023
Commercial real estate
$
13,029
$ 827
$
1,089
$
—
$
—
$
14,945
Commercial - specialized
3,425
33
346
( 11
)
150
3,943
Commercial - general
9,215
( 2,574 )
( 12
)
( 413
)
154
6,370
Consumer:
1-4 family residential
6,194
1,700
1,092
( 1
)
5
8,990
Auto loans
3,926
( 332 )
629
( 586
)
149
3,786
Other consumer
1,376
( 235 )
431
( 776
)
226
1,022
Construction
2,123
683
485
( 272
)
—
3,019
$
39,288
$ 102
$
4,060
$
( 2,059
)
$
684
$
42,075

(1) The $ 4.0 million provision for credit loss on the Consolidated Statement of Comprehensive Income (Loss) includes a $ 4.1 million provision for credit losses on loans and a $( 50 ) thousand provision for off-balance sheet credit exposures for the nine months ended September 30, 2023.

The increase in the provision for credit losses during the three months ended September 30, 2024, compared to the same period in 2023, was primarily due to a decrease of $ 1.3 million in specific reserves during the three months ended September 30, 2023. The provision increased during the nine months ended September 30, 2024, compared to the same period in 2023, mainly due to a larger growth in loans during the 2023 period compared to the 2024 period.

12
The following tables show the Company’s amortized cost in loans and related ACL for collateral dependent loans by class using the fair value of collateral loss estimation methodology of evaluating expected credit losses at the dates indicated (dollars in thousands).


Equipment Real Estate
Other
Total Loans
Individually
Evaluated
Total ACL
for
Individually
Evaluated
Loans
September 30 , 2024

Commercial real estate
$ — $ 20,029 $ —
$
20,029
$
565
Commercial - specialized
— — —
—
—
Commercial - general
— — —
—
—
Consumer:
1-4 family residential
— — —
—
—
Auto loans
— — —
—
—
Other consumer
— — —
—
—
Construction
— 1,441 —
1,441
—
$ — $ 21,470 $ —
$
21,470
$
565

December 31, 2023
Commercial real estate
$
—
$
—
$
—
$
—
$
—
Commercial - specialized
—
—
—
—
—
Commercial - general
353
691
—
1,044
142
Consumer:
1-4 family residential
—
362
—
362
—
Auto loans
—
—
—
—
—
Other consumer
—
—
—
—
—
Construction
—
218
—
218
—
$
353
$
1,271
$
—
$
1,624
$
142

The tables below provide an age analysis on accruing past-due loans and nonaccrual loans at the dates indicated (dollars in thousands):

30-89 Days
Past Due
90 Days or
More Past Due
Nonaccrual
Nonaccrual
with no ACL
September 30 , 2024
Commercial real estate
$
199
$
43
$
20,029
$ —
Commercial - specialized
240
39
119
—
Commercial - general
401
143
266
—
Consumer:
1-4 Family residential
2,727
1,569
693
—
Auto loans
651
110
—
—
Other consumer
1,100
216
25
—
Construction
96
—
1,442
1,442

$
5,414
$
2,120
$
22,574
$
1,442

December 31 , 2023
Commercial real estate
$
499
$
86
$
—
$
—
Commercial - specialized
521
—
213
—
Commercial - general
1,316
296
953
—
Consumer:
1-4 Family residential
793
1,390
1,828
362
Auto loans
1,208
60
—
—
Other consumer
1,134
103
30
—
Construction
759
—
218
218

$
6,230
$
1,935
$
3,242
$
580

Credit Quality Indicators
The Company grades its loans on a thirteen -point grading scale. These grades fit in one of the following categories: (i) pass, (ii) special mention, (iii) substandard, (iv) doubtful, or (v) loss. Loans categorized as loss are charged-off immediately. The grading of loans reflect a judgment by the Company about the risks of default associated with the loan. The Company reviews the grades on loans as part of the Company’s on-going monitoring of the credit quality of the loan portfolio.  These risk ratings are assigned based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.

Pass loans have financial factors or nature of collateral that are considered reasonable credit risks in the normal course of lending and encompass several grades that are assigned based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring.

Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loans at some future date.

13
Substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize collection and present the distinct possibility that some loss will be sustained if the deficiencies are not corrected. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. Substandard loans can be accruing or can be nonaccrual depending on the circumstances of the individual loans.

Doubtful loans have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. All doubtful loans are on nonaccrual.

In connection with the review of the Company’s loan portfolio, management considers risk elements attributable to particular loan type or categories in assessing the quality of individual loans. The list of loans to be analyzed for individual evaluation consists of non-accrual loans over $ 250 thousand with direct exposure. Interest income recognized using a cash-basis method on non-accrual loans for the three and nine months ended September 30, 2024 and 2023 was not significant.  In addition, the Company closely monitors substandard accruing loans over $ 1 million with direct exposure, and past due accruing loans over $ 100 thousand for possible individual evaluation.  All other loans will be evaluated collectively in designated pools unless a loss exposure has been identified. Additional funds committed to be advanced on individually analyzed loans are not significant.

The following tables reflect the amortized cost basis in loans held for investment by credit quality indicator and origination year at the dates indicated, and related year-to-date gross charge-offs. Loans acquired are shown in the table by origination year, not merger date. The Company had an immaterial amount of revolving loans converted to term loans at September 30, 2024 and December 31, 2023.

Term Loans
Amortized Cost Basis by Origination Year
September 30, 2024
(Dollars in thousands)

2024
2023
2022
2021
2020
Prior
Revolving
Loans
Total

Commercial real estate
Pass
$
86,699
$
258,236
$
329,367
$
129,343
$
46,957
$
191,480
$
8,575
$
1,050,657
Special mention
—
—
—
32,444
445
5,522
483
38,894
Substandard
—
—
76
28,837
1,663
320
—
30,896
Total commercial real estate loans
$
86,699
$
258,236
$
329,443
$
190,624
$
49,065
$
197,322
$
9,058
$
1,120,447
Year-to-date gross charge-offs
$
—
$
—
$
64
$
—
$
—
$
22
$
—
$
86
Commercial - specialized
Pass
$
109,932
$
61,117
$
44,466
$
45,753
$
18,114
$
29,493
$
94,890
$
403,765
Special mention
213
—
1,699
—
—
—
—
1,912
Substandard
95
—
25
4
310
144
—
578
Total commercial - specialized loans
$
110,240
$
61,117
$
46,190
$
45,757
$
18,424
$
29,637
$
94,890
$
406,255
Year-to-date gross charge-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Commercial - general
Pass
$
66,836
$
81,786
$
110,723
$
70,953
$
30,296
$
83,441
$
72,030
$
516,065
Special mention
—
—
966
808
—
—
—
1,774
Substandard
—
183
2,460
4,545
49
1,119
253
8,609
Total commercial - general loans
$
66,836
$
81,969
$
114,149
$
76,306
$
30,345
$
84,560
$
72,283
$
526,448
Year-to-date gross charge-offs
$
—
$
186
$
564
$
10
$
—
$
38
$
—
$
798

Consumer 1-4 family residential
Pass
$
67,699
$
100,414
$
157,031
$
98,989
$
46,582
$
74,939
$
5,520
$
551,174
Special mention
—
—
—
—
—
—
—
—
Substandard
—
722
928
793
433
8,351
—
11,227
Total consumer 1-4 family residential loans
$
67,699
$
101,136
$
157,959
$
99,782
$
47,015
$
83,290
$
5,520
$
562,401
Year-to-date gross charge-offs
$
—
$
—
$
121
$
51
$
—
$
3
$
—
$
175
Consumer auto loans
Pass
$
43,319
$
79,897
$
86,894
$
30,819
$
9,211
$
2,918
$
—
$
253,058
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
142
245
27
37
—
451
Total consumer auto loans
$
43,319
$
79,897
$
87,036
$
31,064
$
9,238
$
2,955
$
—
$
253,509
Year-to-date gross charge-offs
$
17
$
292
$
303
$
125
$
25
$
24
$
—
$
786
Consumer other consumer
Pass
$
17,271
$
15,455
$
17,224
$
6,353
$
1,774
$
6,051
$
1,525
$
65,653
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
50
36
5
43
2
136
Total consumer other consumer loans
$
17,271
$
15,455
$
17,274
$
6,389
$
1,779
$
6,094
$
1,527
$
65,789
Year-to-date gross charge-offs (1)
$
308
$
215
$
187
$
43
$
29
$
113
$
—
$
895
Construction
Pass
$
49,387
$
38,961
$
7,553
$
960
$
—
$
—
$
3,307
$
100,168
Special mention
—
—
—
—
—
—
—
—
Substandard
—
1,056
481
821
—
—
—
2,358
Total construction loans
$
49,387
$
40,017
$
8,034
$
1,781
$
—
$
—
$
3,307
$
102,526
Year-to-date gross charge-offs
$
— $
315 $
— $
— $
— $
— $
— $
315

(1)
Includes $ 306 thousand in charged-off demand deposit overdrafts reported as 2024 originations.

14
Term Loans
Amortized Cost Basis by Origination Year
December 31, 2023
(Dollars in thousands)

2023
2022
2021
2020
2019
Prior
Revolving
Loans
Total
Commercial real estate
Pass
$
254,766
$
324,601
$
189,211
$
50,660
$
47,988
$
174,859
$
3,842
$
1,045,927
Special mention
—
—
—
11,677
—
—
—
11,677
Substandard
—
82
21,152
1,699
149
370
—
23,452
Total commercial real estate loans
$
254,766
$
324,683
$
210,363
$
64,036
$
48,137
$
175,229
$
3,842
$
1,081,056
Year-to-date gross charge-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Commercial - specialized
Pass
$
117,912
$
56,152
$
57,839
$
19,883
$
10,376
$
22,758
$
83,368
$
368,288
Special mention
—
2,938
—
—
—
—
300
3,238
Substandard
—
105
196
393
19
137
—
850
Total commercial - specialized loans
$
117,912
$
59,195
$
58,035
$
20,276
$
10,395
$
22,895
$
83,668
$
372,376
Year-to-date gross charge-offs
$
—
$
—
$
—
$
11
$
—
$
—
$
—
$
11
Commercial - general
Pass
$
88,911
$
128,627
$
90,957
$
35,794
$
45,660
$
68,990
$
44,131
$
503,070
Special mention
—
—
—
—
—
1,565
250
1,815
Substandard
201
2,930
4,676
227
2,749
1,442
251
12,476
Total commercial - general loans
$
89,112
$
131,557
$
95,633
$
36,021
$
48,409
$
71,997
$
44,632
$
517,361
Year-to-date gross charge-offs
$
—
$
47
$
50
$
33
$
18
$
321
$
—
$
469
Consumer 1-4 family residential
Pass
$
113,897
$
156,549
$
106,619
$
51,940
$
31,345
$
56,666
$
3,770
$
520,786
Special mention
—
—
—
—
—
—
—
—
Substandard
376
382
4,238
708
3,758
4,483
—
13,945
Total consumer 1-4 family residential loans
$
114,273
$
156,931
$
110,857
$
52,648
$
35,103
$
61,149
$
3,770
$
534,731
Year-to-date gross charge-offs
$
—
$
—
$
1
$
—
$
—
$
—
$
—
$
1
Consumer auto loans
Pass
$
106,149
$
124,588
$
48,686
$
16,524
$
6,812
$
1,935
$
—
$
304,694
Special mention
—
—
—
—
—
—
—
—
Substandard
16
189
199
60
81
32
—
577
Total consumer auto loans
$
106,165
$
124,777
$
48,885
$
16,584
$
6,893
$
1,967
$
—
$
305,271
Year-to-date gross charge-offs
$
113
$
377
$
254
$
14
$
49
$
81
$
—
$
888
Consumer other consumer
Pass
$
23,719
$
26,899
$
10,198
$
3,190
$
2,539
$
6,107
$
1,364
$
74,016
Special mention
—
—
—
—
—
—
—
—
Substandard
—
13
44
10
—
84
1
152
Total consumer other consumer loans
$
23,719
$
26,912
$
10,242
$
3,200
$
2,539
$
6,191
$
1,365
$
74,168
Year-to-date gross charge-offs (1)
$
624
$
244
$
88
$
32
$
72
$
80
$
—
$
1,140
Construction
Pass
$
61,903
$
53,930
$
5,511
$
331
$
—
$
—
$
6,250
$
127,925
Special mention
131
—
820
—
—
—
—
951
Substandard
—
314
—
—
—
—
—
314
Total construction loans
$
62,034
$
54,244
$
6,331
$
331
$
—
$
—
$
6,250
$
129,190
Year-to-date gross charge-offs
$
48
$
—
$
271
$
—
$
—
$
—
$
—
$
319

(1)
Includes $ 574 thousand in charged-off demand deposit overdrafts reported as 2023 originations.

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extensions, an other than insignificant payment delay, or interest rate reduction.  When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses. Typically, one type of concession, such as term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. In some cases, the Company provides multiple types of concessions on one loan. For the loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period.

15
The following tables present the amortized cost basis of loans at September 30, 2024 and 2023 that were both experiencing financial difficulty and modified during the periods indicated, by class and by type of modification.  The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below (dollars in thousands):

Payment
Delay
Term
Extension
Rate
Reduction
Term
Extension
and
Payment
Delay
Term
Extension
and Interest Rate
Reduction
Payment
Delay and
Interest Rate
Reduction
Payment
Delay, Term
Extension,
and Interest
Rate
Reduction
Total Class
of Financing
Receivable
Three Months Ended September 30, 2024
Commercial real estate
$
74
$
—
$
—
$
—
$
—
$
—
$
—
0.01
%
Commercial - specialized
—
—
—
—
—
—
—
0.00
%
Commercial - general
—
—
—
11
—
—
—
0.00
%
Consumer:
1-4 family
263
—
—
—
—
—
—
0.05
%
Auto loans
—
—
—
—
—
—
—
0.00
%
Other consumer
—
—
—
—
—
—
—
0.00
%
Construction
—
—
820
1,538
—
—
—
2.30
%
$
337
$
—
$
820
$
1,549
$
—
$
—
$
—
0.09
%
Three Months Ended September 30, 2023
Commercial real estate
$
—
$
2,112
$
—
$
36
$
—
$
—
$
—
0.21
%
Commercial - specialized
—
—
—
—
692
—
—
0.19
%
Commercial - general
33
327
—
5
—
—
—
0.07
%
Consumer:
1-4 family
183
—
—
—
251
—
8
0.08
%
Auto loans
79
—
—
—
—
—
—
0.02
%
Other consumer
—
—
—
—
—
—
—
0.00
%
Construction
—
1,816
—
306
—
—
—
1.53
%
$
295
$
4,255
$
—
$
347
$
943
$
—
$
8
0.20
%
Nine Months Ended September 30, 2024
Commercial real estate
$
74
$
67
$
—
$
—
$
—
$
—
$
—
0.01
%
Commercial - specialized
15
—
—
—
—
—
—
0.00
%
Commercial - general
—
441
—
11
35
—
—
0.09
%
Consumer:
1-4 family
263
—
—
—
—
—
—
0.05
%
Auto loans
—
—
—
—
—
—
—
0.00
%
Other consumer
—
—
—
—
—
—
—
0.00
%
Construction
—
—
820
1,538
—
—
—
2.30
%
$
352
$
508
$
820
$
1,549
$
35
$
—
$
—
0.11
%
Nine Months Ended September 30, 2023
Commercial real estate
$
—
$
2,112
$
—
$
132
$
—
$
—
$
—
0.21
%
Commercial - specialized
118
690
—
82
692
—
—
0.43
%
Commercial - general
33
5,053
—
458
113
—
39
1.11
%
Consumer:
1-4 family
190
391
—
—
251
—
21
0.16
%
Auto loans
79
39
—
—
—
—
—
0.04
%
Other consumer
—
—
—
—
—
13
—
0.02
%
Construction
—
3,002
—
306
—
—
—
2.39
%
$
420
$
11,287
$
—
$
978
$
1,056
$
13
$
60
0.46
%

16
The following table presents the financial effects of the loan modifications presented above to borrowers experiencing financial difficulty during the periods indicated below (dollars in thousands):

Principal
Forgiveness
Weighted-
Average
Interest Rate
Reduction
Weighted-
Average
Term
Extension
(Months)
Three Months Ended September 30, 2024
Commercial real estate
$
—
0.00
%
—
Commercial - specialized
—
0.00
%
—
Commercial - general
—
0.00
%
3
Consumer:
1-4 Family residential
—
0.00
%
—
Auto loans
—
0.00
%
—
Other consumer
—
0.00
%
—
Construction
—
4.25
%
6
$
—
4.25
%
6
Three Months Ended September 30, 2023
Commercial real estate
$
—
0.00
%
4
Commercial - specialized
—
0.86
%
61
Commercial - general
—
0.00
%
7
Consumer:
1-4 Family residential
—
0.64
%
5
Auto loans
—
0.00
%
—
Other consumer
—
0.00
%
—
Construction
—
0.00
%
6
$
—
0.80
%
12
Nine Months Ended September 30, 2024
Commercial real estate
$
—
0.00
%
12
Commercial - specialized
—
0.00
%
—
Commercial - general
—
1.75
%
15
Consumer:
1-4 Family residential
—
0.00
%
—
Auto loans
—
0.00
%
—
Other consumer
—
0.00
%
—
Construction
—
4.25
%
6
$
—
4.15
%
8
Nine Months Ended September 30, 2023
Commercial real estate
$
—
0.00
%
5
Commercial - specialized
—
0.86
%
31
Commercial - general
—
1.81
%
66
Consumer:
1-4 Family residential
—
0.62
%
5
Auto loans
—
0.00
%
6
Other consumer
—
4.75
%
—
Construction
—
0.00
%
5
$
—
0.98
%
34

17
The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following presents the performance of such loans that have been modified in the last twelve months (dollars in thousands):

Current
30-89 Days
Past Due
90 Days or
More Past Due
Nonaccrual
September 30, 2024
Commercial real estate
$ 2,220
$
—
$
—
$
—
Commercial - specialized
—
—
—
14
Commercial - general
969
—
—
80
Consumer:
1-4 Family residential
762
—
21
—
Auto loans
49
—
—
—
Other consumer
—
—
—
—
Construction
1,240
96
—
1,442
$ 5,240
$
96
$
21
$
1,536

During the three and nine months ended September 30, 2023, the Company had no loans made to borrowers experiencing financial difficulty that were modified during the last twelve months that subsequently defaulted.

During the three and nine months ended September 30, 2024, the Company had $ 32 thousand in loans made to borrowers experiencing financial difficulty that were modified during the last twelve months that subsequently defaulted.  Payment default is defined as movement to nonperforming status, foreclosure, or charge-off .

4.  GOODWILL AND INTANGIBLES

The Company had goodwill of $ 19.3 million at September 30, 2024 and December 31, 2023, respectively.

Other intangible assets, which consisted of core deposit intangibles at the dates indicated are summarized below (dollars in thousands):

September 30,
2024
December 31,
2023
Amortized intangible assets
Core deposit intangible
$
6,679
$
6,679
Less: Accumulated amortization
( 4,797
)
( 4,250
)
Other intangible assets, net
$
1,882
$
2,429

5.  MORTGAGE SERVICING RIGHTS

The following table reflects the changes in fair value of the Company’s mortgage servicing rights asset included in the Consolidated Balance Sheets, and other information related to the serviced portfolio, for the periods or dates presented (dollars in thousands):

Three Months Ended
September 30,
Nine Months Ended
September 30,
2024
2023
2024
2023
Beginning balance
$
26,426
$
26,658
$
26,569
$
27,474
Additions
207
416
689
1,150
Valuation adjustment
( 2,060
)
675
( 2,685
)
( 875
)
Ending balance
$
24,573
$
27,749
$
24,573
$
27,749

September 30,
December 31,
2024
2023
Mortgage loans serviced for others
$
1,928,087
$
2,001,476
Mortgage servicing rights assets as a percentage of serviced mortgage loans
1.27
%
1.33
%

The following table reflects the key assumptions used in measuring the fair value of the Company’s mortgage servicing rights as of the dates indicated:

September 30,
December 31,
2024
2023
Weighted average constant prepayment rate
8.60
%
7.46
%
Weighted average discount rate
10.17
%
10.66
%
Weighted average life in years
7.70
8.09

6.  BORROWING ARRANGEMENTS

Subordinated Debt
In December 2018, the Company issued $ 14.1 million of subordinated notes that have a maturity date of December 2030 and a weighted average fixed rate of 6.41 % for the first seven years . After the fixed rate periods, these notes will float at the Wall Street Journal prime rate, with a floor of 4.0 % and a ceiling of 7.5 %. These notes pay interest quarterly, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally, these notes are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.

On September 29, 2020, the Company issued $ 50.0 million in subordinated debt notes. Pr oceeds were reduced by approximately $ 926 thousand in debt issuance costs. These notes have a maturity date of September 2030 with a fixed rate of 4.50 % for the first five years . After the expiration of the fixed rate period, the se notes will reset quarterly at a variable rate equal to the then current three-month Secured Overnight Financing Rate (“ SOFR ”), as published by the Federal Reserve Bank of New York, plus 438 basis points. These notes pay interest semi-annually, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally, these notes are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.

As of September 30, 2024, the total amount of subordinated notes outstanding was $ 64.1 million less approximately $ 186 thousand of remaining debt issuance costs for a total balance of $ 63.9 million. As of December 31, 2023 , the total amount of subordinated notes outstanding was $ 64.1 million less approximately $ 325 thousand of remaining debt issuance costs for a total balance of $ 63.8 million.

Notes Payable and Other Borrowings
As of September 30, 2024 and December 31, 2023, City Bank had no outstanding advances from the Federal Home Loan Bank of Dallas (“FHLB”).

7.  STOCK-BASED COMPENSATION

Equity Incentive Plan
The 2019 Equity Incentive Plan (“Plan”) was approved by the Company’s Board of Directors on January 16, 2019 and by its shareholders on March 6, 2019. The purpose of the Plan is to: (i) attract and retain the best available personnel for positions of substantial responsibility, (ii) provide additional incentive to employees, directors and consultants, and (iii) promote the success of the Company’s business. The Plan permits the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, and other stock-based awards. The maximum aggregate number of shares of common stock that may be issued pursuant to all awards under the Plan was 4,919,509 at September 30, 2024. The maximum aggregate number of shares that may be issued under the Plan may be increased annually by up to 3 % of the total issued and outstanding common shares of the Company at the beginning of each fiscal year.

19
The fair value of each option award is estimated on the date of grant using the Black-Scholes model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock and similar peer company averages. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes in to account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

Options
A summary of activity in the Plan during the period indicated is presented in the table below (dollars in thousands, except per share data):


Number
of Shares
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual
Life in Years
Aggregate
Intrinsic Value
Nine Months Ended September 30 , 2024
Outstanding at beginning of year:
1,280,858
$
16.91
$
21,786
Granted
32,465
29.32
149
Exercised
( 11,737
)
17.79
( 189
)
Forfeited
—
—
—
Expired
—
—
—
Balance at end of period
1,301,586
$
17.21
4.48
$
21,746
Exercisable at end of period
1,182,975
$
16.37
4.14
$
20,761
Vested at end of period
1,182,975
$
16.37
4.14
$
20,761

A summary of assumptions used to calculate the fair values of the awards granted during the periods noted is presented below:


Nine Months Ended
September 30,
2024
2023
Expected volatility
40.45 %

39.13 % to 39.68 %
Expected dividend yield
1.80 %

1.74 % to 1.90 %

Expected term (years)
6.1
6.1 to 6.3
Risk-free interest rate
3.94 %
3.91 % to 3.98 %
Weighted average grant date fair value
$
11.10
$
10.26

The total intrinsic value of options exercised during the nine months ended September 30, 2024 and 2023 was $ 134 thousand and $ 439 thousand, respectively.

Restricted Stock Awards and Units
A summary of activity in the Plan during the period indicated is presented in the table below:

Number
of Shares
Weighted-Average
Grant Date
Fair Value
Nine Months Ended September 30 , 2024
Outstanding at beginning of year:
125,917
$
26.58
Granted
89,103
26.56
Vested
( 23,478
)
27.38
Forfeited
( 3,647
)
24.54
Balance at end of period
187,895
$
26.51

Restricted stock units granted under the Plan typically vest from one to four years , but vesting periods may vary. Compensation expense for these grants will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The total fair value of restricted stock units vested during each of the nine months ended September 30, 2024 and 2023 was $ 643 thousand and $ 931 thousand, respectively.

20
For the three months ended September 30, 2024 and 2023 the Company recorded stock-based compensation expense related to the Plan of $ 563 thousand and $ 511 thousand, respectively. The Company recorded stock-based compensation expense related to the Plan of $ 1.7 million and $ 1.6 million for the nine months ended September 30, 2024 and 2023, respectively. The total unrecognized compensation cost for the awards outstanding under the Plan at September 30, 2024 was $ 3.8 million and will be recognized over a weighted average remaining period of 1.67 years.

8.  OFF-BALANCE-SHEET ACTIVITIES, COMMITMENTS AND CONTINGENCIES

Financial instruments with off-balance-sheet risk - The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Company’s consolidated financial statements. The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for recorded instruments.

Financial instruments whose contract amounts represent credit risk outstanding at the dates indicated follow (dollars in thousands):

September 30,
2024
December 31,
2023
Commitments to grant loans and unfunded commitments under lines of credit
$
545,480
$
598,800
Standby letters of credit
16,309
11,503

Commitments to grant loans and extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company requires collateral supporting those commitments if deemed necessary.

FHLB Letters of Credit - The Company may use FHLB letters of credit to pledge to certain public deposits. At September 30, 2024 there were FHLB letters of credit outstanding of $ 75.0 million. There were no FHLB letters of credit outstanding at December 31, 2023.

Litigation – The Company is a defendant in legal actions arising from time to time in the normal course of business. Management believes that the ultimate liability, if any, arising from these matters will not materially affect the consolidated financial statements, based on information known as of the date the consolidated financial statements were issued.

9.  CAPITAL AND REGULATORY MATTERS

The Company and its bank subsidiary are subject to various regulatory capital requirements administered by its banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and its bank subsidiary’s financial statements. Under capital guidelines and the regulatory framework for prompt corrective action, the Company and its bank subsidiary must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and its bank subsidiary to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2024 and December 31, 2023, that the Company and its bank subsidiary met all capital adequacy requirements to which they are subject.

21
As of September 30, 2024 and December 31, 2023, the Company met the definition of “well-capitalized” under the applicable regulations of the Board of Governors of the Federal Reserve System and the bank subsidiary was “well capitalized” under the FDIC’s regulatory framework for prompt corrective action and the Basel III capital guidelines. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since September 30, 2024 that management believes have changed the bank subsidiary’s category.

The Company and its bank subsidiary’s actual capital amounts and ratios at the dates indicated follows (dollars in thousands):

Actual
Minimum Required
Under BASEL III
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
September 30 , 2024
Total Capital to Risk Weighted Assets:
Consolidated
$
617,052
17.61
%
$
367,876
10.50
%
N/A
N/A
City Bank
511,744
14.61
%
367,822
10.50
%
$
350,307
10.00
%
Tier 1 Capital to Risk Weighted Assets:
Consolidated
509,338
14.54
%
297,804
8.50
%
N/A
N/A
City Bank
467,956
13.36
%
297,761
8.50
%
280,245
8.00
%
Common Equity Tier 1 to Risk Weighted Assets:
Consolidated
464,338
13.25
%
245,251
7.00
%
N/A
N/A
City Bank
467,956
13.36
%
245,215
7.00
%
227,699
6.50
%
Tier 1 Capital to Average Assets:
Consolidated
509,338
11.76
%
174,049
4.00
%
N/A
N/A
City Bank
467,956
10.81
%
174,015
4.00
%
216,459
5.00
%
December 31 , 2023
Total Capital to Risk Weighted Assets:
Consolidated
$
589,565
16.74
%
$
369,753
10.50
%
N/A
N/A
City Bank
494,353
14.04
%
369,635
10.50
%
$
352,033
10.00
%
Tier 1 Capital to Risk Weighted Assets:
Consolidated
482,044
13.69
%
299,324
8.50
%
N/A
N/A
City Bank
450,607
12.80
%
299,228
8.50
%
281,627
8.00
%
Common Equity Tier 1 to Risk Weighted Assets:
Consolidated
437,044
12.41
%
246,502
7.00
%
N/A
N/A
City Bank
450,607
12.80
%
246,423
7.00
%
228,822
6.50
%
Tier 1 Capital to Average Assets:
Consolidated
482,044
11.33
%
171,037
4.00
%
N/A
N/A
City Bank
450,607
10.60
%
170,945
4.00
%
212,594
5.00
%

The Company is subject to the Basel III capital ratio requirements which include a “capital conservation buffer” of 2.50% above the regulatory minimum risk-based capital adequacy requirements. This 2.50% capital conservation buffer is reflected in the table above. Both the Company’s and the Bank’s actual ratios, as outlined in the table above, exceeded the Basel III risk-based capital requirement with the capital conservation buffer as of September 30, 2024.

State banking regulations place certain restrictions on dividends paid by banks to their shareholders. Dividends paid by the Company’s bank subsidiary would be prohibited if the effect thereof would cause the bank subsidiary’s capital to be reduced below applicable minimum capital requirements.

10.  DERIVATIVES

The Company utilizes interest rate swap agreements as part of its asset-liability management strategy to help manage its interest rate risk position. These interest rate swaps are designated and qualify as fair value hedges and are entered into to reduce exposure to changes in fair value of fixed rate financial instruments. The notional amounts of the interest rate swaps do not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amounts and the other terms of the individual interest rate swap agreements.
22

The following table reflects the changes in fair value hedges included in the Consolidated Statements of Comprehensive Income (Loss) for the periods indicated (dollars in thousands):



Three Months Ended
September 30 ,
Interest Rate Contracts
Location
2024
2023
Change in fair value of interest rate swaps hedging investment securities
Other noninterest expense
$
( 4,409
)
$
2,265
Change in fair value of hedged investment securities
Other noninterest expense
4,196
( 2,091
)
Change in fair value of interest rate swaps hedging fixed rate loans
Interest income - Loans
$ ( 179 ) $ 23
Change in fair value of hedged fixed rate loans
Interest income - Loans
168 ( 22 )

Nine Months Ended
September 30 ,
Interest Rate Contracts
Location
2024
2023
Change in fair value of interest rate swaps hedging investment securities
Other noninterest expense
$
( 3,545
)
$
1,455
Change in fair value of hedged investment securities
Other noninterest expense
3,274
( 1,320
)
Change in fair value of interest rate swaps hedging fixed rate loans
Interest income - Loans $ 26 $ 49
Change in fair value of hedged fixed rate loans
Interest income - Loans 52 ( 47 )

The following table reflects the fair value hedges included in the Consolidated Balance Sheets at the dates indicated (dollars in thousands):

September 30, 2024
December 31, 2023
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Included in other liabilities:
Interest rate swaps related to fixed rate loans
$
—
$
—
$
987
$
10
Interest rate swaps related to state and municipal securities
—
—
—
—
Included in other assets:
Interest rate swaps related to fixed rate loans
$
11,803
$
174
$
7,796
$
158
Interest rate swaps related to state and municipal securities
123,760
13,083
123,760
16,628

Mortgage banking derivatives

The net gains (losses) relating to free standing derivative instruments used for risk management are summarized below for the periods indicated (dollars in thousands):
Three Months Ended
September 30,

Location
2024 2023
Gain (loss) on mortgage banking derivatives
Net gain (loss) on sales of loans
$
( 25
)
$
( 137
)

Nine Months Ended
September 30,

Location
2024
2023
Gain (loss) on mortgage banking derivatives
Net gain (loss) on sales of loans
$
219
$
( 48
)
The following table reflects the amount and fair value of mortgage banking derivatives in the Consolidated Balance Sheets at the dates indicated (dollars in thousands):


September 30, 2024
December 31, 2023
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Included in other assets :
Forward contracts related to mortgage loans held for sale
$
—
$
—
$
—
$
—
Interest rate lock commitments
21,865
343
16,887
444




Included in other liabilities :
Forward contracts related to mortgage loans held for sale
$
22,166
$
102
$
19,021
$
422

The Company had received cash collateral of $ 13.7 million and $ 18.3 million to offset asset derivative positions on its interest rate swaps at September 30, 2024 and December 31, 2023, respectively. This amount is reported in other liabilities in the Consolidated Balance Sheets. The Company had advanced $ 1.1 million to offset liability derivative positions on its interest rate swaps at September 30, 2024 and December 31, 2023, respectively. Additionally, the Company had advanced $ 440 thousand on its mortgage forward contracts at September 30, 2024 and December 31, 2023, respectively. The advanced cash collateral amounts are reported in cash and due from banks in the Consolidated Balance Sheets.

11.  EARNINGS PER SHARE

The factors used in the earnings per share computation for the periods indicated follow (dollars in thousands, except per share data):

Three Months Ended
September 30,
Nine Months Ended
September 30,
2024
2023
2024
2023
Net income
$
11,212
$
13,494
$
33,220
$
52,421
Weighted average common shares outstanding - basic
16,386,079
16,842,594
16,413,685
16,978,499
Effect of dilutive securities:
Stock-based compensation awards
670,880
511,588
565,753
462,402
Weighted average common shares outstanding - diluted
17,056,959
17,354,182
16,979,438
17,440,901
Basic earnings per share
$
0.68
$
0.80
$
2.02
$
3.09
Diluted earnings per share
$
0.66
$
0.78
$
1.96
$
3.01

12.  FAIR VALUE DISCLOSURES

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are: (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

Valuation techniques that are consistent with the market approach, the income approach and/or the cost approach are required by GAAP. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset. Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

●
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
●
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
●
Level 3 Inputs - Significant unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

24
The following table summarizes fair value measurements as of the dates indicated below (dollars in thousands):

Level 1
Level 2
Level 3
Total
September 30 , 2024
Assets (liabilities) measured at fair value on a recurring basis:
Securities available for sale:
State and municipal
$
—
$
180,924
$
—
$
180,924
Residential mortgage-backed securities
—
287,745
—
287,745
Commercial mortgage-backed securities
— 42,295 — 42,295
Commercial collateralized mortgage obligations
—
68,885
—
68,885
Asset-backed and other amortizing securities
—
15,855
—
15,855
Other securities
—
11,185
—
11,185
Loans held for sale (mandatory)
—
9,490
—
9,490
Mortgage servicing rights
—
—
24,573
24,573
Asset derivatives
—
13,600
—
13,600
Liability derivatives
—
( 102
)
—
( 102
)
Assets measured at fair value on a non-recurring basis:
Loans held for investment
—
—
20,905
20,905
December 31, 2023
Assets (liabilities) measured at fair value on a recurring basis:
Securities available for sale:
State and municipal
$
—
$
180,575
$
—
$
180,575
Residential mortgage-backed securities
—
300,704
—
300,704
Commercial mortgage-backed securities
— 41,748 — 41,748
Commercial collateralized mortgage obligations
—
71,930
—
71,930
Asset-backed and other amortizing securities
—
17,040
—
17,040
Other securities
—
10,765
—
10,765
Loans held for sale (mandatory)
—
6,615
—
6,615
Mortgage servicing rights
—
—
26,569
26,569
Asset derivatives
—
17,230
—
17,230
Liability derivatives
—
( 432
)
—
( 432
)
Assets measured at fair value on a non-recurring basis:
Loans held for investment
—
—
1,482
1,482

Securities – Fair value is calculated based on market prices of similar securities using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded.

Mortgage servicing rights – Mortgage servicing rights are reported at fair value using Level 3 inputs. The mortgage servicing rights asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the mortgage servicing rights asset is impacted by a variety of factors, including prepayment speeds, default rates, and discount rates, which are significant unobservable inputs . Mortgage servicing rights are the only Level 3 asset measured at fair value on a recurring basis, see Note 5 for the Level 3 change activity for the three and nine months ended September 30, 2024 and 2023 .

Derivatives – Fair value of derivatives is based on valuation models using observable market data as of the measurement date.

Loans held for investment – Includes certain collateral-dependent loans which are reported at fair value, for which a specific allocation of the allowance for credit losses is based off of the underlying collateral, less estimated disposal costs, if repayment is expected solely from the sale of the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

25
Fair Values of Assets Recorded on a Recurring Basis for which the Fair Value Option has been Elected

Loans held for sale (mandatory) – Loans held for sale originated for mandatory delivery are reported at fair value on a recurring basis due to the Company’s election to adopt fair value accounting treatment for these assets. This election allows for a more effective offset of the changes in fair values of the assets and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC Topic 815, Derivatives and Hedging. For assets for which the fair value option has been elected, the earned current contractual interest payment is recognized in interest income, loan origination costs and fees on fair value option loans are recognized in earnings as incurred and not deferred. At September 30, 2024, and December 31, 2023, there were no gains or losses recorded attributable to changes in instrument-specific credit risk. Fair value is determined using quoted prices for similar assets, adjusted for specific attributes of that loan. At September 30, 2024 and December 31, 2023 the aggregate fair value of loans held for sale for mandatory delivery was $ 9.5 million and $ 6.6 million, respectively. The aggregate unpaid principal balance as of the same dates was $ 9.3 million and $ 6.4 million, respectively, representing differences between fair value and unpaid principal balance of $ 216 thousand and $ 190 thousand, respectively. The Company had no loans held for sale for mandatory delivery designated as nonaccrual or 90 days or more past due at each of September 30, 2024 and December 31, 2023.

The total fair value option impact on noninterest income for loans held for sale for mandatory delivery is included in Net gain on sales of loans in the Consolidated Statements of Comprehensive Income (Loss). For the three months ended September 30, 2024 and 2023 the net (gain) loss amount totaled $ 94 thousand and $ 330 thousand, respectively. For the nine months ended September 30, 2024 and 2023 the net (gain) loss amount totaled $( 246 ) thousand and $ 78 thousand, respectively.

The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at the dates indicated (dollars in thousands):

Fair
Value
Valuation
Techniques
Unobservable
Inputs
Range of
Discounts
September 30, 2024
Non-recurring:
Loans held for investment
$
20,905
Third party appraisals or inspections
Collateral discounts and selling costs
20
%
Recurring:
Mortgage servicing rights
24,573
Discounted cash flows
Constant prepayment rate
8.60
%
Discount rate
10.17
%
December 31, 2023
Non-recurring:
Loans held for investment
$
1,482
Third party appraisals or inspections
Collateral discounts and selling costs
20 %- 100
%
Recurring:
Mortgage servicing rights
26,569
Discounted cash flows
Constant prepayment rate
7.46
%
Discount rate
10.66
%

The estimated fair values, and related carrying amounts, of the Company’s financial instruments that are not previously disclosed in the recurring fair values section are as follows (dollars in thousands):

Carrying
Amount
Level 1
Level 2
Level 3
Total
Fair Value
September 30 , 2024
Financial assets:
Cash and cash equivalents
$
471,167
$
471,167
$
—
$
—
$
471,167
Loans held for investment, net
2,994,489
—
—
2,903,905
2,903,905
Loans held for sale (best efforts)
1,899 — 1,945 — 1,945
Accrued interest receivable
19,155
—
19,155
—
19,155
Financial liabilities:
Deposits
3,719,360
—
3,719,388
—
3,719,388
Accrued interest payable
4,603
—
4,603
—
4,603
Junior subordinated deferrable interest debentures
46,393
—
33,740
—
33,740
Subordinated debt
63,914
—
59,174
—
59,174

December 31, 2023
Financial assets:
Cash and cash equivalents
$
330,158
$
330,158
$
—
$
—
$
330,158
Loans held for investment, net
2,971,797
—
—
2,848,536
2,848,536
Loans held for sale (best efforts)
7,884 — 7,977 — 7,977
Accrued interest receivable
20,881
—
20,881
—
20,881
Financial liabilities:
Deposits
3,626,153
—
3,625,321
—
3,625,321
Accrued interest payable
5,057
—
5,057
—
5,057
Junior subordinated deferrable interest debentures
46,393
—
33,098
—
33,098
Subordinated debt
63,775
—
57,497
—
57,497

26


13.  IMMATERIAL CORRECTION OF PRIOR PERIOD ERROR



The Company identified an immaterial prior period error in the Consolidated Statements of Cash Flows related to cash flow activity of certain of the Company’s portfolio mortgage loans and third-party brokered loans erroneously being included in the cash flow activity for loans held for sale. The Company assessed the materiality of this change in presentation on prior period consolidated financial statements in accordance with SEC Staff Accounting Bulletin No. 99, “Materiality,” (ASC Topic 250, Accounting Changes and Error Corrections). Based on this assessment, the Company concluded that these error corrections in its Consolidated Statements of Cash Flows are not material to any previously presented consolidated financial statements. The corrections had no impact on the Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income (Loss), or Consolidated Statements of Changes in Stockholders’ Equity, or notes to these consolidated financial statements, for any previously presented interim or annual consolidated financial statements.



The financial reporting periods affected by this error include the Company’s previously reported interim unaudited consolidated financial statements for each of the fiscal year-to-date periods ended March 31, 2023; June 30, 2023; and September 30, 2023. A summary of the immaterial corrections to the Company’s previously reported unaudited consolidated financial statements follows.



Corrected Consolidated Statement of Cash Flows for Nine Months Ended September 30, 2023 (in thousands):

As Reported
Immaterial Correction
As Corrected
Proceeds from sales of loans held for sale
$
339,220
$
( 59,227
)
$
279,993
Loans originated for sale
$
( 321,163
)
$
59,227
$
( 261,936
)


14.  SUBSEQUENT EVENTS

Dividend Declaration

On October 16, 2024 , the Company declared a cash dividend of $ 0.15 per share of common stock to be paid on November 12, 2024 to all shareholders of record as of October 28, 2024 .

27
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations for the periods covered by this Quarterly Report on Form 10-Q (this “Form 10-Q”) and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report on Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) of the Securities Act of 1933, as amended (the “Securities Act”), on March 15, 2024. Unless we state otherwise or the context otherwise requires, references in this Form 10-Q to “we,” “our,” “us” and “the Company” refer to South Plains Financial, Inc., a Texas corporation, our wholly-owned banking subsidiary, City Bank, a Texas banking association and our other consolidated subsidiaries. References in this Form 10-Q to the “Bank” refer to City Bank.

C autionary Notice Regarding Forward-Looking Statements

This Form 10-Q contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:


●
potential recession in the United States and our market areas;

●
the impacts related to or resulting from bank failures and any uncertainty in the banking industry, including the associated impact to the Company and other financial institutions of any regulatory changes or other mitigation efforts taken by government agencies in response thereto;

●
increased competition for deposits and related changes in deposit customer behavior;

●
the resurgence of elevated levels of inflation or inflationary pressures, in the United States and our market areas, and its impact on market interest rates, the economy and credit quality;

●
the adequacy of the allowance for credit losses;

●
our ability to effectively execute our expansion strategy and manage our growth, including identifying and consummating suitable acquisitions;

●
business and economic conditions, particularly those affecting our market areas, as well as the concentration of our business in such market areas;

●
high concentrations of loans secured by real estate located in our market areas;

●
risks associated with our commercial loan portfolio, including the risk of declines in commercial real estate prices or deterioration in value of the general business assets that secure such loans;

●
potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;

●
increases in unemployment rates in the United States and our market areas;

●
risks associated with our agricultural loan portfolio, including the heightened sensitivity to weather conditions, commodity prices, and other factors generally outside the borrowers and our control;

●
risks related to the significant amount of credit that we have extended to a limited number of borrowers and in a limited geographic area;

●
public funds deposits comprising a relatively high percentage of our deposits;

●
potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;

●
our ability to maintain our reputation;

●
our ability to successfully manage our credit risk and the sufficiency of our allowance for credit losses;

●
our ability to attract, hire and retain qualified management personnel;

●
our dependence on our management team, including our ability to retain executive officers and key employees and their customer and community relationships;

28

●
interest rate fluctuations, whether due to the current elevated interest rate environment or future reductions in interest rates, which could negatively impact the pricing of our loans and deposits and decrease our net interest income or net interest margin;

●
competition from banks, credit unions and other financial services providers;

●
our ability to keep pace with technological change or difficulties we may experience when implementing new technologies;

●
cybersecurity risk, including cyber incidents or other failures, disruptions or security breaches of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber-attacks;

●
our ability to maintain effective internal control over financial reporting;

●
employee error, fraudulent activity by employees or customers and inaccurate or incomplete information about our customers and counterparties;

●
increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;

●
our ability to maintain adequate liquidity and to raise necessary capital to fund our acquisition strategy and operations or to meet increased minimum regulatory capital levels;

●
costs and effects of litigation, investigations or similar matters to which we may be subject, including any effect on our reputation;

●
natural disasters, severe weather, acts of god, acts of war or terrorism, geopolitical instability, outbreaks of hostilities, public health outbreaks (such as the COVID-19 pandemic or any future pandemic), other international or domestic calamities, and other external events or matters beyond our control;

●
the impact of changes in U.S. presidential administrations or Congress;

●
uncertainty regarding United States fiscal debt, deficit, and budget matters;

●
tariffs and trade barriers;

●
compliance with governmental and regulatory requirements, including the Dodd-Frank Act Wall Street Reform and Consumer Protection Act, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), and others relating to banking, consumer protection, securities and tax matters; and

●
changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, current and future governmental monetary and fiscal policies, including the uncertain impacts of ongoing quantitative tightening and current and future policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) and as a result of initiatives of the Biden administration.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Form 10-Q and the risk factors set forth in our 2023 Annual Report on Form 10-K. Because of these risks and other uncertainties, our actual future results, performance or achievements, or industry results, may be materially different from the results indicated by the forward-looking statements in this Form 10-Q. In addition, our past results of operations are not necessarily indicative of our future results. Accordingly, you should not rely on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which such forward-looking statements were made. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law.

Available Information

The Company maintains an Internet web site at www.spfi.bank . The Company makes available, free of charge, on its web site (under www.spfi.bank/financials-filings/sec-filings ) the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The Company also makes available, free of charge, through its web site (under www.spfi.bank/corporate-governance/documents-charters ) links to the Company’s Code of Conduct and the charters for its board committees. In addition, the SEC maintains an Internet site (at www.sec.gov ) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

The Company routinely posts important information for investors on its web site (under www.spfi.bank and, more specifically, under the News & Events tab at www.spfi.bank/news-events/press-releases ). The Company intends to use its web site as a means of disclosing material non-public information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company’s web site, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts.

The information contained on, or that may be accessed through, the Company’s web site is not incorporated by reference into, and is not a part of, this Form 10-Q.

29
Overview

We are a bank holding company headquartered in Lubbock, Texas, and our wholly-owned subsidiary, City Bank is one of the largest independent banks in West Texas and has additional banking operations in the Dallas, El Paso, Greater Houston, the Permian Basin, and College Station, Texas markets, and the Ruidoso, New Mexico market. Through City Bank, we provide a wide range of commercial and consumer financial services to small and medium-sized businesses and individuals in our market areas. Our principal business activities include commercial and retail banking, along with investment, trust and mortgage services.

Results of Operations

We had net income of $11.2 million, or $0.66 per diluted common share, for the three months ended September 30, 2024, compared to net income of $13.5 million, or $0.78 per diluted common share for the three months ended September 30, 2023. Return on average equity (annualized) was 10.36% and return on average assets (annualized) was 1.05% for the three months ended September 30, 2024, compared to 14.01% and 1.27%, respectively, for the three months ended September 30, 2023.

We had net income of $33.2 million, or $1.96 per diluted common share for the nine months ended September 30, 2024, compared to net income of $52.4 million, or $3.01 per diluted common share for the nine months ended September 30, 2023. Return on average equity (annualized) was 10.63% and return on average assets (annualized) was 1.05% for the nine months ended September 30, 2024, compared to 18.70% and 1.73%, respectively, for the nine months ended September 30, 2023.

Net Interest Income

Net interest income is the principal source of the Company’s net income and represents the difference between interest income (interest and fees earned on assets, primarily loans and investment securities) and interest expense (interest paid on deposits and borrowed funds). We generate interest income from interest-earning assets that we own, including loans and investment securities. We incur interest expense from interest-bearing liabilities, including interest-bearing deposits and other borrowings, notably FHLB advances and subordinated notes. To evaluate net interest income, we measure and monitor (i) yields on our loans and other interest-earning assets, (ii) the costs of our deposits and other funding sources, (iii) our net interest spread and (iv) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as the annualized net interest income on a fully tax-equivalent basis divided by average interest-earning assets.

Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income.

The following tables present, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. For purposes of this table, interest income, net interest margin and net interest spread are shown on a fully tax-equivalent basis.

Three Months Ended September 30,
2024
2023
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (1)
$
3,069,900
$
51,513
6.68
%
$
3,005,699
$
46,250
6.10
%
Investment securities – taxable
524,641
5,300
4.02
561,068
5,422
3.83
Investment securities – non-taxable
154,806
1,016
2.61
159,577
1,054
2.62
Other interest-earning assets (2)
336,887
4,032
4.76
325,201
4,031
4.92
Total interest-earning assets
4,086,234
61,861
6.02
4,051,545
56,757
5.56
Noninterest-earning assets
172,922
177,216
Total assets
$
4,259,156
$
4,228,761
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
NOW, savings and money market deposits
$
2,247,299
$
18,143
3.21
%
$
2,223,014
$
16,061
2.87
%
Time deposits
431,307
4,510
4.16
344,395
2,904
3.35
Short-term borrowings
3
—
0.00
3
—
0.00
Notes payable & other longer-term borrowings
—
—
0.00
—
—
0.00
Subordinated debt securities
63,891
835
5.20
76,077
1,012
5.28
Junior subordinated deferrable interest debentures
46,393
858
7.36
46,393
862
7.37
Total interest-bearing liabilities
$
2,788,893
$
24,346
3.47
%
$
2,689,882
$
20,839
3.07
%
Noninterest-bearing liabilities:
Noninterest-bearing deposits
$
976,048
$
1,071,175
Other liabilities
63,661
85,713
Total noninterest-bearing liabilities
1,039,709
1,156,888
Stockholders’ equity
430,554
381,991
Total liabilities and stockholders’ equity
$
4,259,156
$
4,228,761
Net interest income
$
37,515
$
35,918
Net interest spread
2.55
%
2.48
%
Net interest margin (3)
3.65
%
3.52
%

30
Nine Months Ended September 30,
2024
2023
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (1)
$
3,055,679
$
151,031
6.60
%
$
2,892,887
$
128,724
5.95
%
Investment securities – taxable
537,425
16,096
4.00
574,159
16,027
3.73
Investment securities – non-taxable
155,489
3,062
2.63
194,492
3,870
2.66
Other interest-earning assets (2)
287,192
10,052
4.68
212,384
7,010
4.41
Total interest-earning assets
4,035,785
180,241
5.97
3,873,922
155,631
5.37
Noninterest-earning assets
176,230
183,149
Total assets
$
4,212,015
$
4,057,071
Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
NOW, savings and money market deposits
$
2,251,569
$
53,792
3.19
%
$
2,090,250
$
38,529
2.46
%
Time deposits
399,646
12,153
4.06
309,250
6,239
2.70
Short-term borrowings
3
—
0.00
111
5
6.02
Notes payable & other longer-term borrowings
—
—
0.00
—
—
0.00
Subordinated debt securities
63,845
2,505
5.24
76,031
3,037
5.34
Junior subordinated deferrable interest debentures
46,393
2,575
7.41
46,393
2,402
6.92
Total interest-bearing liabilities
$
2,761,456
$
71,025
3.44
%
$
2,522,035
$
50,212
2.66
%
Noninterest-bearing liabilities:
Noninterest-bearing deposits
$
964,829
$
1,085,345
Other liabilities
68,458
74,865
Total noninterest-bearing liabilities
1,033,287
1,160,210
Shareholders’ equity
417,272
374,826
Total liabilities and shareholders’ equity
$
4,212,015
$
4,057,071
Net interest income
$
109,216
$
105,419
Net interest spread
2.53
%
2.71
%
Net interest margin (3)
3.61
%
3.64
%

(1)
Average loan balances include nonaccrual loans and loans held for sale.
(2)
Includes income and average balances for interest-earning deposits at other banks, nonmarketable securities, federal funds sold, and other miscellaneous interest-earning assets
(3)
Net interest margin is calculated as the annualized net interest income, on a fully tax-equivalent basis, divided by average interest-earning assets.

31
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables set forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume.

Three Months Ended September 30,
2024 over 2023
Change due to:
Total
Volume
Rate
Variance
(Dollars in thousands)
Interest-earning assets:
Loans
$
988
$
4,275
$
5,263
Investment securities – taxable
(352
)
230
(122
)
Investment securities – non-taxable
(32
)
(6
)
(38
)
Other interest-earning assets
145
(144
)
1
Total increase (decrease) in interest income
749
4,355
5,104
Interest-bearing liabilities:
NOW, Savings, MMDAs
175
1,907
2,082
Time deposits
733
873
1,606
Short-term borrowings
—
—
—
Notes payable & other borrowings
—
—
—
Subordinated debt securities
(162
)
(15
)
(177
)
Junior subordinated deferrable interest debentures
—
(4
)
(4
)
Total increase (decrease) interest expense:
746
2,761
3,507
Increase (decrease) in net interest income
$
3
$
1,594
$
1,597

Nine Months Ended September 30,
2024 over 2023
Change due to:
Total
Volume
Rate
Variance
(Dollars in thousands)
Interest-earning assets:
Loan
$
7,244
$
15,063
$
22,307
Investment securities – taxable
(1,025
)
1,094
69
Investment securities – non-taxable
(776
)
(32
)
(808
)
Other interest-earning assets
2,469
573
3,042
Total increase (decrease) in interest income
7,912
16,698
24,610
Interest-bearing liabilities:
NOW, Savings, MMDAs
2,974
12,289
15,263
Time deposits
1,824
4,090
5,914
Short-term borrowings
(5
)
—
(5
)
Notes payable & other borrowings
—
—
—
Subordinated debt securities
(487
)
(45
)
(532
)
Junior subordinated deferrable interest debentures
—
173
173
Total increase (decrease) interest expense:
4,306
16,507
20,813
Increase (decrease) in net interest income
$
3,606
$
191
$
3,797

32
Net interest income for the three months ended September 30, 2024 was $37.3 million, compared to $35.7 million for the three months ended September 30, 2023, an increase of $1.6 million, or 4.5%, and was comprised of an increase of $5.1 million in interest income, partially offset by an increase of $3.5 million in interest expense. The growth in interest income was primarily attributable to an increase of $5.3 million in loan interest income from growth of $64.2 million in average loans outstanding and an increase of 58 basis points in the yield on loans. The $3.5 million increase in interest expense was primarily related to an increase of $111.2 million in average interest-bearing deposits and a 40 basis point increase in the rate paid on interest-bearing deposits over the same period in 2023. Additionally, average noninterest-bearing demand deposits decreased $95.1 million for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

For the three months ended September 30, 2024, net interest margin and net interest spread were 3.65% and 2.55%, respectively, compared to 3.52% and 2.48%, respectively, for the same period in 2023, which reflects the changes in interest income and interest expense discussed above.

Net interest income for the nine months ended September 30, 2024 was $108.6 million, compared to $104.6 million for the nine months ended September 30, 2023, an increase of $4.0 million, or 3.8%, and was comprised of an increase of $24.8 million in interest income, partially offset by an increase of $20.8 million in interest expense. The growth in interest income was attributable to increases of $22.3 million in loan interest income and $2.4 million in interest income from securities and other interest-earning assets. The increase in loan interest income was mainly due to growth of $162.8 million in average loans outstanding and an increase of 65 basis points in the yield on loans. The increase in interest income on securities and other interest-earning assets was primarily due to higher market interest rates. The $20.8 million increase in interest expense was primarily related to an increase of $251.7 million in average interest-bearing deposits and an 82 basis point increase in the rate paid on interest-bearing deposits over the same period in 2023. Additionally, average noninterest-bearing demand deposits decreased $120.5 million for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.

For the nine months ended September 30, 2024, net interest margin and net interest spread were 3.61% and 2.53%, respectively, compared to 3.64% and 2.71%, respectively, for the same period in 2023, which reflects the changes in interest income and interest expense discussed above.

Provision for Credit Losses

Credit risk is inherent in the business of making loans. We establish an allowance for credit losses (“ACL”) through charges to earnings, which are shown in the consolidated statements of comprehensive income (loss) as the provision for credit losses. Credit losses on loans are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. The provision for credit losses is determined by conducting a quarterly evaluation of the adequacy of our ACL and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to our earnings. The provision for credit losses and the amount of allowance for each period are dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market areas.

The Company recorded a provision for credit losses of $495 thousand for the three months ended September 30, 2024, compared to a negative provision of $700 thousand for the three months ended September 30, 2023. The increase in provision of $1.2 million was largely attributable to a decrease of $1.3 million in specific reserves during the three months ended September 30, 2023.

The Company recorded a provision for credit losses for the nine months ended September 30, 2024 of $3.1 million, compared to $4.0 million for the nine months ended September 30, 2023. The decline in provision of $900 thousand was largely attributable to a decrease in loan growth, partially offset by an increase in net charge-offs for the nine months ended September 30, 2024, compared to the same period in 2023.

The provision for credit losses is a significant factor in the Company’s operating results. For further discussion regarding the provision for credit losses and management’s assessment of the adequacy of the ACL for loans, see “Allowance for Credit Losses for Loans” and “Asset Quality” under “Financial Condition” in this Item 2, below.

Noninterest Income

While interest income remains the largest single component of total revenues, noninterest income is an important contributing component. The largest portion of our noninterest income is associated with our mortgage banking activities. Other sources of noninterest income include service charges on deposit accounts, bank card services and interchange fees, and income from insurance activities.

The following table sets forth the major components of our noninterest income for the periods indicated:

33
Three Months Ended
September 30,
Nine Months Ended
September 30,
2024
2023
Increase
(Decrease)
2024
2023
Increase
(Decrease)
(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts
$
2,023
$
1,840
$
183
$
5,785
$
5,286
$
499
Income from insurance activities
28
30
(2
)
92
1,478
(1,386
)
Bank card services and interchange fees
3,302
3,157
145
10,415
10,156
259
Mortgage banking activities
1,890
4,602
(2,712
)
9,232
12,146
(2,914
)
Investment commissions
391
430
(39
)
1,275
1,239
36
Fiduciary income
613
582
31
2,087
1,779
308
Gain on sale of subsidiary
—
290
(290
)
—
33,778
(33,778
)
Other income and fees (1)
2,388
1,346
1,042
5,867
4,218
1,649
Total noninterest income
$
10,635
$
12,277
$
(1,642
)
$
34,753
$
70,080
$
(35,327
)

(1)
Other income and fees includes income and fees associated with the increase in the cash surrender value of life insurance, safe deposit box rental, check printing, collections, legal settlements, wire transfer, Small Business Investment Company (“SBIC”) investments, and other miscellaneous services.

Noninterest income for the three months ended September 30, 2024 was $10.6 million, compared to $12.3 million for the three months ended September 30, 2023, a decrease of $1.6 million, or 13.4%. Significant changes in the components of noninterest income are detailed below.

Service charges on deposit accounts - Income from service charges on deposit accounts increased $183 thousand, or 9.9%, for the three months ended September 30, 2024 as compared to the same period in 2023. The increase was primarily the result of treasury management initiatives taken to drive growth.

Mortgage banking activities - Income from mortgage banking activities decreased $2.7 million, or 58.9%, to $1.9 million for the three months ended September 30, 2024 from $4.6 million for the three months ended September 30, 2023. This decrease was mainly the result of a decline of $2.7 million in the fair value adjustment of the mortgage servicing rights assets as interest rates that affect the value declined in the third quarter of 2024.

Gain on sale of subsidiary - A $33.5 million gain from the sale of Windmark Insurance Agency, Inc. (“Windmark”) was recorded in the second quarter of 2023 and an additional $290 thousand was recorded in the third quarter of 2023.

Other income and fees - The Company recognized $700 thousand in property insurance proceeds in the third quarter of 2024.

Noninterest income for the nine months ended September 30, 2024 was $34.8 million, compared to $70.1 million for the nine months ended September 30, 2023, a decrease of $35.3 million, or 50.4%. Significant changes in the components of noninterest income are detailed below.

Service charges on deposit accounts - Income from service charges on deposit accounts increased $499 thousand, or 9.4%, for the nine months ended September 30, 2024 as compared to the same period in 2023. The increase was primarily the result of treasury management initiatives taken to drive growth.

Mortgage banking activities - Income from mortgage banking activities decreased $2.9 million, or 24.0%, to $9.2 million for the nine months ended September 30, 2024 from $12.1 million for the nine months ended September 30, 2023. This decrease was mainly the result of a decline of $1.8 million in the fair value adjustment of the mortgage servicing rights assets as interest rates that affect the value declined in the third quarter of 2024. Additionally, mortgage loan originations declined $37.0 million, or 14.1%, in the current year period as compared to the prior year period.

Gain on sale of subsidiary - A $33.8 million gain from the sale of Windmark was recorded in the second and third quarters of 2023.

Income from insurance activities - Due to the sale of Windmark in the second quarter of 2023, there was a decline of $1.4 million in income from insurance activities for the nine months ended September 30, 2024 as compared to the same period in 2023.

Other income and fees - The Company recognized $700 thousand in property insurance proceeds in the third quarter of 2024.

Noninterest Expense

The following table sets forth the major components of our noninterest expense for the periods indicated:

34
Three Months Ended
September 30,
Nine Months Ended
September 30,
2024
2023
Increase
(Decrease)
2024
2023
Increase
(Decrease)
(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits
$
18,767
$
18,709
$
58
$
56,954
$
61,400
$
(4,446
)
Occupancy expense, net
4,255
4,111
144
12,204
12,246
(42
)
Professional services
1,807
1,560
247
5,028
4,924
104
Marketing and development
1,015
853
162
2,629
2,573
56
IT and data services
1,092
818
274
3,168
2,570
598
Bankcard expenses
1,500
1,451
49
4,413
4,119
294
Appraisal expenses
246
283
(37
)
702
862
(160
)
Loss on sale of securities
—
—
—
—
3,409
(3,409
)
Other expenses (1)
4,446
3,704
742
12,532
12,246
286
Total noninterest expense
$
33,128
$
31,489
$
1,639
$
97,630
$
104,349
$
(6,719
)

(1)
Other expenses include items such as banking regulatory assessments, telephone expenses, postage, courier fees, directors’ fees, supplies, and insurance.

Noninterest expense for the three months ended September 30, 2024 was $33.1 million compared to $31.5 million for the three months ended September 30, 2023, an increase of $1.6 million, or 5.2%. Significant changes in the components of noninterest expense are detailed below.

IT and data services - IT and data services increased $274 thousand, or 33.5%, from $818 thousand for the three months ended September 30, 2023 to $1.1 million for the three months ended September 30, 2024. The increase relates primarily to the Company’s cloud migration project.

Other expenses - Other expenses increased $742 thousand, or 20.0%, from $3.7 million for the three months ended September 30, 2023 to $4.4 million for the three months ended September 30, 2024. The largest increase in the compared periods was an increase of $388 thousand in the ineffective portion of fair value hedges. Additionally, there was also a $50 thousand loss on the disposal of fixed assets in the third quarter of 2024.

Noninterest expense for the nine months ended September 30, 2024 was $97.6 million, compared to $104.3 million for the nine months ended September 30, 2023, a decrease of $6.7 million, or 6.4%. Significant changes in the components of noninterest expense are detailed below.

Salaries and employee benefits - Salaries and employee benefits decreased $4.4 million, or 7.2%, from $61.4 million for the nine months ended September 30, 2023 to $57.0 million for the nine months ended September 30, 2024. This decrease was primarily driven by $4.3 million of Windmark transaction and related incentive-based compensation expenses incurred in the second quarter of 2023.

IT and data services - IT and data services increased $598 thousand, or 23.3%, from $2.6 million for the nine months ended September 30, 2023 to $3.2 million for the nine months ended September 30, 2023. The increase relates primarily to the Company’s cloud migration project.

Loss on sale of securities - The Company sold approximately $56.2 million of available for sale securities in the second quarter of 2023. This resulted in a loss on sale of $3.4 million.

Financial Condition

Our total assets increased $132.9 million, or 3.2%, to $4.34 billion at September 30, 2024, compared to $4.20 billion at December 31, 2023. Our gross loans held for investment increased $23.2 million, or 0.8%, to $3.04 billion at September 30, 2024, compared to $3.01 billion at December 31, 2023. Our securities portfolio decreased $15.9 million, or 2.5%, to $606.9 million at September 30, 2024, compared to $622.8 million at December 31, 2023. Total deposits increased $93.2 million, or 2.6%, to $3.72 billion at September 30, 2024, compared to $3.63 billion at December 31, 2023.

Loan Portfolio

Our loans represent the largest portion of earning assets, greater than our securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing the Company’s financial condition. We originate substantially all of the loans in our portfolio, except certain loan participations that are independently underwritten by the Company prior to purchase.

35
Loans held for investment increased $23.2 million, or 0.8%, to $3.04 billion at September 30, 2024, compared to $3.01 billion at December 31, 2023. The growth in loans remained relationship-focused and occurred primarily in direct-energy loans, seasonal agricultural-related loans, and single-family property loans, partially offset by decreases in consumer auto loans and residential construction loans.

The following table shows the contractual maturities of our loans held for investment portfolio at September 30, 2024:

Due in
One Year or Less
Due after One Year
Through Five Years
Due after Five
Years
Through
Fifteen Years
Due after
Fifteen Years
Total
(Dollars in thousands)
Commercial real estate
$
166,853
$
562,267
$
321,591
$
69,736
$
1,120,447
Commercial - specialized
135,099
145,207
75,653
50,296
406,255
Commercial - general
78,756
198,569
140,243
108,880
526,448
Consumer:
1-4 family residential
33,360
104,882
91,470
332,689
562,401
Auto loans
2,842
183,895
66,772
—
253,509
Other consumer
8,795
40,802
16,192
—
65,789
Construction
88,890
10,626
1,356
1,654
102,526
Total loans
$
514,595
$
1,246,248
$
713,277
$
563,255
$
3,037,375

The following table shows the distribution between fixed and adjustable interest rate loans for maturities greater than one year as of September 30, 2024:

Fixed
Rate
Adjustable
Rate
(Dollars in thousands)
Commercial real estate
$
393,240
$
560,354
Commercial - specialized
87,010
184,146
Commercial - general
162,500
285,192
Consumer:
1-4 family residential
330,520
198,521
Auto loans
250,667
—
Other consumer
56,994
—
Construction
7,528
6,108
Total loans
$
1,288,459
$
1,234,321

At September 30, 2024, there was $1.56 billion in adjustable rate loans, with $900.9 million of these loans that mature or reprice in the next twelve months. Of these loans that mature or reprice in the next twelve months, $587.6 million will reprice immediately upon changes in the underlying index rate, with the remaining $313.3 million being subject to rate floors above the current index or a future repricing date. The Wall Street Journal prime rate is the predominate index used by the Bank. Further, there is $169.9 million of fixed rate loans that mature in the next twelve months as of September 30, 2024.

The Bank is primarily involved in real estate, commercial, agricultural and consumer lending activities with customers throughout Texas and Eastern New Mexico. We have a collateral concentration, as 72.8% of our loans were secured by real property as of September 30, 2024, compared to 72.7% as of December 31, 2023. We believe that these loans are not concentrated in any one single property type and that they are geographically dispersed throughout the areas we serve. Although the Bank has diversified portfolios, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of the markets in which it operates, which consist primarily of agribusiness, wholesale/retail, oil and gas and related businesses, healthcare industries and institutions of higher education. Commercial real estate loans and residential construction loans represent 40.2% of loans held for investment as of September 30, 2024 and represented 40.1% of loans held for investment as of December 31, 2023. Further, 97% of the total dollar amount of these loans are secured by collateral located in the state of Texas.

We have established concentration limits in the loan portfolio for commercial real estate loans and unsecured lending, among other loan types. All loan types are within established limits. We use underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending to allow us to react to a borrower’s deteriorating financial condition, should that occur.

36
Commercial Real Estate . Our commercial real estate portfolio includes loans for commercial property that is owned by real estate investors, construction loans to build owner-occupied properties, and loans to developers of commercial real estate investment properties and residential developments. Commercial real estate loans are subject to underwriting standards and processes similar to our commercial loans. These loans are underwritten primarily based on projected cash flows for income-producing properties and collateral values for non-income-producing properties. The repayment of these loans is generally dependent on the successful operation of the property securing the loans or the sale or refinancing of the property. Real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing our real estate portfolio are diversified by type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

Commercial real estate loans increased $39.4 million, or 3.6%, to $1.12 billion as of September 30, 2024 from $1.08 billion as of December 31, 2023. The increase was primarily driven by an increase in multifamily property loans of $67.1 million and an increase in other commercial real estate loans of $24.0 million, partially offset by a decrease in commercial land development and construction loans of $51.9 million due to the completion of several large projects.

Commercial – General and Specialized . Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed, and to ensure appropriate collateral is obtained to secure the loan. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and typically include personal guarantees. Owner-occupied real estate is included in commercial loans, as the repayment of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties. Commercial loans are grouped into two distinct sub-categories: specialized and general. Commercial related loans that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related loans that contain a broader diversity of borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries. Performance of these loans is subject to operating and cash flow results of the borrower, with risk in the volatility of operating results for particular industries.

Commercial general loans increased $9.1 million, or 1.8%, to $526.4 million as of September 30, 2024 from $517.4 million as of December 31, 2023. The increase in commercial general loans was primarily due to increases in loans to companies in the services industry of $16.0 million, partially offset by a decrease of $4.5 million in restaurant and retail loans.

Commercial specialized loans increased $33.9 million, or 9.1%, to $406.3 million as of September 30, 2024 from $372.4 million as of December 31, 2023. This increase was primarily due to growth of $28.5 million in energy sector loans and $5.6 million in agricultural loans.

Consumer . We utilize a computer-based credit scoring analysis to supplement our policies and procedures in underwriting consumer loans. Our loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimize our risk. Residential real estate loans are included in consumer loans. We generally require mortgage title insurance and hazard insurance on these residential real estate loans. All consumer loans are generally dependent on the risk characteristics of the borrower’s ability to repay the loan, a consideration of the debt to income ratio, employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral.

Consumer and other loans decreased $32.5 million, or 3.6%, to $881.7 million as of September 30, 2024, from $914.2 million as of December 31, 2023. The decrease in these loans was a result of declines of $51.8 million in consumer auto loans and $8.4 million in other consumer loans, partially offset by an increase of $27.7 million in residential mortgage loans. As of September 30, 2024, our consumer loan portfolio was comprised of $562.4 million in 1-4 family residential loans, $253.5 million in auto loans, and $65.8 million in other consumer loans. The consumer auto and other consumer loans portfolios have experienced a decline in new originations due to higher loan rates and economic pressures from inflation on consumers.

Construction . Loans for residential construction are for single-family properties to developers, builders, or end-users. These loans are underwritten based on estimates of costs and completed value of the project. Funds are advanced based on estimated percentage of completion for the project. Performance of these loans is affected by economic conditions as well as the ability to control costs of the projects.

Construction loans decreased $26.7 million, or 20.6%, to $102.5 million as of September 30, 2024 from $129.2 million as of December 31, 2023. The decrease resulted from reduced demand for residential construction as interest rate levels remained elevated and projects were completed and sold.

37
The commercial real estate and construction categories comprise the Company’s nonowner-occupied real estate loans. Total nonowner-occupied real estate loans were $1.22 billion at September 30, 2024 and $1.21 billion at December 31, 2023. Nonowner-occupied commercial real estate loans are made up of income-producing commercial real estate property loans and construction, acquisition, and development property loans. As of September 30, 2024, total income-producing commercial real estate property loans totaled $865.9 million and was comprised of $286.6 million of multi-family property loans, $175.1 million of retail property loans, $138.6 million of office property loans, $63.5 million in hospitality loans, and $202.1 million in other property loans. Other property loans include types such as industrial, warehouse, mini-storage, and convenience stores. As of September 30, 2024, total construction, acquisition, and development property loans totaled $357.0 million and was comprised of $102.5 million in residential construction property loans and $254.5 million of commercial construction and other land development loans. The weighted average loan-to-value of income-producing nonowner-occupied commercial real estate loans was approximately 53% at September 30, 2024. The weighted average loan-to-value of nonowner-occupied office commercial real estate loans was approximately 59% at September 30, 2024.

Owner-occupied commercial real estate loans totaled $335.4 million at September 30, 2024 and $341.1 million at December 31, 2023.

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Company’s Consolidated Balance Sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit to our customers is represented by the contractual or notional amount of those instruments. Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. The amount and nature of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the potential borrower.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private short-term borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary.

The following table summarizes commitments we have made as of the dates presented.

September 30,
2024
December 31,
2023
(Dollars in thousands)
Commitments to grant loans and unfunded commitments under lines of credit
$
545,480
$
598,800
Standby letters of credit
16,309
11,503
Total
$
561,789
$
610,303

Allowance for Credit Losses for Loans

The ACL provides a reserve against which loan losses are charged for current expected credit losses. Management evaluates the appropriate level of the ACL on a quarterly basis. The analysis takes into consideration the results of an ongoing loan review process, the purpose of which is to determine the level of credit risk within the portfolio and to ensure proper adherence to underwriting and documentation standards. Additional allowances are provided to those loans which appear to represent a greater than normal exposure to risk. The quality of the loan portfolio and the adequacy of the ACL is assessed by regulatory examinations and the Company’s internal and external loan reviews. The ACL consists of two elements: (1) specific valuation allowances established for expected losses on specifically analyzed loans and (2) collective valuation allowances calculated using comparable and quantifiable information from both internal and external sources about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments.

38
To determine the adequacy of the ACL on loans, the Company applied a dual credit risk rating (“DCRR”) methodology that estimates each loan’s probability of default and loss given default to calculate the expected credit loss to non-analyzed loans. The DCRR process quantifies the expected credit loss at the loan level for the entire loan portfolio. Loan grades are assigned by a customized scorecard that risk rates each loan based on multiple probability of default and loss given default elements to measure the risk of the loan portfolio. The ACL estimate incorporates the Company’s DCRR loan level risk rating methodology and the expected default rate frequency term structure to derive loan level life of loan estimates of credit losses for every loan in the portfolio. The estimated credit loss for each loan is adjusted based on one-year through the cycle estimate of expected credit loss to a life of loan measurement that reflects current conditions and forecasts. The life of loan expected loss is determined using the contractual weighted average life of the loan adjusted for prepayments. Prepayment speeds are determined by grouping the loans into pools based on segments and risk rating. After the life of loan expected losses are determined, they are adjusted to reflect the Company’s reasonable and supportable economic forecast over a selected range of a one to two years. The Company has developed regression models to project net charge-off rates based on macroeconomic variables (“MEVs”), typically a one-year period is used. MEV’s considered in the analysis consist of data gathered from the St. Louis Federal Reserve Research Database (“FRED”), such as, federal funds rate, 10-year treasury rates, 30-year mortgage rates, crude oil prices, consumer price index, housing price index, unemployment rates, housing starts, gross domestic product, and disposable personal income. These regression models are applied to the Company’s economic forecast to determine the corresponding net charge-off rates. The projected net charge-off rates for the given economic scenario are used to adjust the through the cycle expected losses. Qualitative adjustments are also made to ACL results for additional risk factors that are relevant in assessing the expected credit losses within our loan segments. These qualitative factor (“Q-Factor”) adjustments may increase or decrease management’s estimate of the ACL by a calculated percentage based upon the estimated level of risk within a particular segment. Q-Factor risk decisions consider concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, and other factors related to credit administration, such as borrower’s risk rating and the potential effect of delayed credit score migrations. Management quantifiably identifies segment percentage Q-Factor adjustments using a scorecard risk rating system scaled to historical loss experience within a segment and management’s perceived risk for that particular segment. In addition to the loan level evaluations, nonaccrual loans with a balance of $250 thousand or more are individually analyzed based on facts and circumstances of the loan to determine if a specific allowance amount may be necessary. Specific allowances may also be established for loans whose outstanding balances are below the above threshold when it is determined that the risk associated with the loan differs significantly from the risk factor amounts established for its loan category.

The ACL for loans was $42.9 million at September 30, 2024, compared to $42.4 million at December 31, 2023, an increase of $500 thousand, or 1.3%. The increase is primarily a result of a provision for credit losses on loans of $3.1 million being recorded during the nine months ended September 30, 2024 largely attributable to growth of $23.2 million in loans held for investment, partially offset by net charge-offs of $2.6 million during the period. Uncertainty regarding forecasted economic conditions remains, due to the continued elevated interest rate environment and persistent inflation in the United States, and additional provisions for credit losses may be necessary in future periods.

The following table provides an analysis of the ACL for loans and other data during the periods indicated.

Three Months Ended
September 30,
Nine Months Ended
September 30,
2024
2023
2024
2023
(Dollars in thousands)
Average loans outstanding during the periods
Commercial real estate
$
1,112,753
$
1,029,888
$
1,105,626
$
962,767
Commercial – specialized
416,437
365,258
391,819
342,355
Commercial – general
523,393
528,668
524,348
519,375
Consumer:
1-4 family residential
569,798
528,835
558,950
503,878
Auto loans
262,769
316,895
281,409
319,617
Other consumer
67,211
78,787
70,278
79,912
Construction
104,000
139,761
109,590
143,970
Loans held for sale
13,539
17,607
13,659
21,013
Total average loans outstanding during the periods
$
3,069,900
$
3,005,699
$
3,055,679
$
2,892,887
Net charge-offs (recoveries) during the periods
Commercial real estate
$
(41
)
$
—
$
44
$
—
Commercial – specialized
(22
)
(59
)
(66
)
(139
)
Commercial – general
68
12
738
259
Consumer:
1-4 family residential
1
(1
)
170
(4
)
Auto loans
257
111
670
437
Other consumer
309
299
739
550
Construction
315
—
315
272
Total net charge-offs (recoveries) during the periods
$
887
$
362
$
2,610
$
1,375
Ratio of net charge-offs (recoveries) to average loans during the periods
Commercial real estate
0.00
%
0.00
%
0.00
%
0.00
%
Commercial – specialized
(0.01
)%
(0.02
)%
(0.02
)%
(0.04
)%
Commercial – general
0.01
%
0.00
%
0.14
%
0.05
%
Consumer:
1-4 family residential
0.00
%
0.00
%
0.03
%
0.00
%
Auto loans
0.10
%
0.04
%
0.24
%
0.14
%
Other consumer
0.46
%
0.38
%
1.05
%
0.69
%
Construction
0.30
%
0.00
%
0.29
%
0.19
%
Total ratio of net charge-offs (recoveries) to average loans during the periods
0.03
%
0.01
%
0.09
%
0.05
%

39
The following table provides other loan data as of the dates indicated.

September 30,
December 31,
2024
2023
(Dollars in thousands)
Total loans held for investment outstanding
$
3,037,375
$
3,014,153
Nonaccrual loans
$
22,574
$
3,242
Allowance for credit losses on loans
$
42,886
$
42,356
Ratio of allowance to total loans held for investment
1.41
%
1.41
%
Ratio of allowance to nonaccrual loans
189.98
%
1,306.48
%
Ratio of nonaccrual loans to total loans held for investment
0.74
%
0.11
%

Net charge-offs totaled $887 thousand and were 0.11% (annualized) of average loans outstanding for the three months ended September 30, 2024, compared to $362 thousand and 0.05% (annualized) for the three months ended September 30, 2023. There was an increase of $315 thousand in net charge-offs on residential construction loans in the third quarter of 2024 due to the charge-off of one loan and an increase in net charge-offs on consumer auto loans of $146 thousand. Net charge-offs totaled $2.6 million and were 0.11% (annualized) of average loans outstanding for the nine months ended September 30, 2024, compared to $1.4 million and 0.06% (annualized) for the nine months ended September 30, 2023. There was an increase of $479 thousand in net charge-offs on commercial-general loans during the first three quarters of 2024 due to the charge-off of several loans under $150 thousand each. There was also an increase of $596 thousand in net charge-offs on consumer loans during the first three quarters of 2024. The allowance for credit losses on loans as a percentage of loans held for investment was 1.41% at September 30, 2024 and 1.41% at December 31, 2023.

While the entire ACL for loans is available to absorb losses from any part of our loan portfolio, the following table sets forth the allocation of the ACL for loans for the periods presented and the percentage of allowance in each classification to total allowance:

September 30, 2024
December 31, 2023
Amount
% of Total
Amount
% of Total
(Dollars in thousands)
Commercial real estate
$
15,924
37.2
%
$
15,808
37.3
%
Commercial – specialized
4,907
11.4
%
4,020
9.5
%
Commercial – general
6,400
14.9
%
6,391
15.1
%
Consumer:
1-4 family residential
9,558
22.4
%
9,177
21.7
%
Auto loans
3,060
7.1
%
3,601
8.5
%
Other consumer
959
2.2
%
968
2.3
%
Construction
2,078
4.8
%
2,391
5.6
%
Total allowance for credit losses
$
42,886
100.0
%
$
42,356
100.0
%

Asset Quality

Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.

40
Loans that exhibit characteristics different from their pool characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective ACL evaluation. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we analyze loans for specific allowance based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The specific allowance amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. OREO and repossessed assets are reported as foreclosed assets.

Nonperforming loans include nonaccrual loans and loans past due 90 days or more. Nonperforming assets consist of nonperforming loans plus foreclosed assets.

At September 30, 2024, our total nonaccrual loans were $22.6 million, or 0.74% of total loans held for investment, as compared to $3.2 million, or 0.11% of total loans held for investment, at December 31, 2023. These loans within this amount that exceeded $250 thousand were specifically analyzed and specific valuation allowances were established as necessary and included in the ACL for loans as of September 30, 2024 to cover any probable loss. The previously disclosed $20.0 million multi-family property credit that was placed on nonaccrual status in the second quarter of 2024 after the maturity date was accelerated, was subsequently modified during the third quarter. The modification included more stringent credit metrics. Although the loan remains in nonaccrual status, the loan continues to pay as agreed and is showing improving credit trends. Additionally, two relationships totaling approximately $972 thousand that were on nonaccrual at December 31, 2023 were fully repaid in the first quarter of 2024.

Nonperforming loans were $24.7 million at September 30, 2024 and $5.2 million at December 31, 2023. This increase of $19.5 million is mainly due to the changes in nonaccrual loans noted above.

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extensions, an other than insignificant payment delay, or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL for loans. Typically, one type of concession, such as term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. In some cases, the Company provides multiple types of concessions on one loan. The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. Upon the Company’s determination that a modified loan has subsequently been deemed to not be fully collectible, the uncollectible amount is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL for loans is adjusted by the same amount.

If a borrower on a restructured accruing loan has demonstrated performance under the previous terms, is not experiencing financial difficulty and shows the capacity to continue to perform under the restructured terms, the loan will remain on accrual status. Otherwise, the loan will be placed on nonaccrual status until the borrower demonstrates a sustained period of performance, which generally requires six consecutive months of payments.

Securities Portfolio

The securities portfolio is the second largest component of the Company’s interest-earning assets, and the structure and composition of this portfolio is important to an analysis of the financial condition of the Company. The securities portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning asset when loan demand is weak or when deposits grow more rapidly than loans.

The securities portfolio consists of securities classified as either held-to-maturity or available-for-sale. Securities consist primarily of state and municipal securities, mortgage-backed securities and U.S. government sponsored agency securities. We determine the appropriate classification at the time of purchase. All held-to-maturity securities are reported at amortized cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. All available-for-sale securities are reported at fair value.

Our securities portfolio decreased $15.9 million, or 2.5%, to $606.9 million at September 30, 2024, compared to $622.8 million at December 31, 2023. The decrease was primarily due to $28.9 million in maturities, prepayments and calls, net of purchases, partially offset by a $15.0 million increase in the fair value of available for sale securities at September 30, 2024 as compared to December 31, 2023.

41
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At September 30, 2024, the unrealized loss on the Company’s available for sale securities was $67.1 million, down from $82.1 million at December 31, 2023. At September 30, 2024, the Company evaluated whether the decline in fair value has resulted from credit losses or other factors. Within this evaluation, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by rating agency, and adverse conditions specifically related to the security, among other factors. Based on management’s evaluation no unrealized losses on securities were determined to be due to credit loss. Additionally, we anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not probable that we will be required to sell them before recovery of the amortized cost basis, which may be at maturity, thus no ACL or losses have been recognized in the Company’s consolidated financial statements.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the date presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay an obligation with or without call or prepayment penalties.

As of September 30, 2024
Due in One
Year or Less
Due after One Year
Through Five Years
Due after Five Years
Through Ten Years
Due after
Ten Years
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
(Dollars in thousands)
Available-for-sale
State and municipal
$
2,542
1.69
%
$
4,521
2.30
%
$
3,801
2.18
%
$
189,351
2.29
%
Residential mortgage-backed securities
—
—
2,220
2.05
%
745
2.93
%
325,963
2.19
%
Commercial mortgage-backed securities
—
—
—
—
46,932
2.22
%
—
—
Commercial collateralized mortgage obligations
—
—
—
—
69,027
6.01
%
—
—
Asset-backed and other amortizing securities
—
—
—
—
2,890
3.16
%
13,968
2.75
%
Other securities
—
—
—
—
12,000
4.47
%
—
—
Total available-for-sale
$
2,542
1.69
%
$
6,741
2.21
%
$
135,395
4.38
%
$
529,282
2.24
%

As of December 31, 2023
Due in One
Year or Less
Due after One Year
Through Five Years
Due after Five Years
Through Ten Years
Due after
Ten Years
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
(Dollars in thousands)
Available-for-sale
State and municipal
$
735
3.65
%
$
6,112
1.73
%
$
4,897
2.15
%
$
191,070
2.28
%
Residential mortgage-backed securities
—
—
3,038
2.02
%
920
2.91
%
347,293
2.20
%
Commercial mortgage-backed securities
—
—
—
—
47,898
2.22
%
—
—
Commercial collateralized mortgage obligations
—
—
—
—
72,391
6.01
%
—
—
Asset-backed and other amortizing securities
—
—
—
—
2,359
3.07
%
16,117
2.79
%
Other securities
—
—
—
—
12,000
4.47
%
—
—
Total available-for-sale
$
735
3.65
%
$
9,150
1.83
%
$
140,465
4.38
%
$
554,480
2.24
%

42
Deposits

Deposits represent the Company’s primary and most vital source of funds. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits. We put continued effort into gathering noninterest-bearing demand deposit accounts through loan production, customer referrals, marketing staffs, mobile and online banking and various involvements with community networks.

Total deposits at September 30, 2024 were $3.72 billion, representing an increase of $93.2 million, or 2.6%, compared to $3.63 billion at December 31, 2023. The increase since December 31, 2023 consisted of increases of $69.0 million in interest-bearing deposits and $24.2 million in non-interest-bearing deposits. As of September 30, 2024, 26.8% of total deposits were comprised of noninterest-bearing demand accounts, 61.3% of interest-bearing non-maturity accounts and 11.9% of time deposits.

The following table shows the deposit mix as of the dates presented:

September 30, 2024
December 31, 2023
Amount
% of Total
Amount
% of Total
(Dollars in thousands)
Noninterest-bearing deposits
$
998,480
26.8
%
$
974,201
26.9
%
NOW and other transaction accounts
496,176
13.3
562,066
15.5
Money market and other savings
1,780,337
48.0
1,722,170
47.5
Time deposits
444,367
11.9
367,716
10.1
Total deposits
$
3,719,360
100.0
%
$
3,626,153
100.0
%

The following table summarizes our average deposit balances and weighted average rates paid on deposits, on an annualized basis, for the periods indicated.

Three Months Ended September 30,
2024
2023
Average
Balance
Weighted
Average Rate
Average
Balance
Weighted
Average Rate
(Dollars in thousands)
Noninterest-bearing deposits
$
976,048
0.00
%
$
1,071,175
0.00
%
Interest-bearing deposits:
NOW and interest-bearing demand accounts
463,873
3.89
%
472,180
3.51
%
Savings accounts
134,570
0.93
%
143,919
0.92
%
Money market accounts
1,648,856
3.21
%
1,606,915
2.85
%
Time deposits
431,307
4.16
%
344,395
3.35
%
Total interest-bearing deposits
2,678,606
3.36
%
2,567,409
2.93
%
Total deposits
$
3,654,654
2.47
%
$
3,638,584
2.07
%

Nine Months Ended September 30,
2024
2023
Average
Balance
Weighted
Average Rate
Average
Balance
Weighted
Average Rate
(Dollars in thousands)
Noninterest-bearing deposits
$
964,829
0.00
%
$
1,085,345
0.00
%
Interest-bearing deposits:
NOW and interest-bearing demand accounts
481,628
3.83
%
371,526
2.62
%
Savings accounts
134,784
0.92
%
147,802
0.86
%
Money market accounts
1,635,157
3.19
%
1,570,922
2.58
%
Time deposits
399,646
4.06
%
309,250
2.70
%
Total interest-bearing deposits
2,651,215
3.32
%
2,399,500
2.49
%
Total deposits
$
3,616,044
2.44
%
$
3,484,845
1.72
%

Time deposits in amounts of more than $250 thousand represent the type of deposit most likely to affect the Company’s future earnings because of interest rate sensitivity. The effective cost of these funds is generally higher than other time deposits because the funds are usually obtained at premium rates of interest.

The scheduled maturities of time deposits of more than $250 thousand as of September 30, 2024 follows:

(Dollars in thousands)
Three
Months
Three to
Six Months
Six to
12 Months
After
12 Months
Total
$
37,167
$
46,261
$
30,042
$
1,449
$
114,919

43
The estimated amount of uninsured deposits as of September 30, 2024 was $1.22 billion. This represented approximately 33% of total deposits and excludes collateralized public fund deposits.

Borrowed Funds

In addition to deposits, we may utilize advances from the FHLB and other borrowings as a supplementary funding source to finance our operations.

FHLB Advances . The FHLB allows us to borrow, both short and long-term, on a blanket floating lien status collateralized by first mortgage loans and commercial real estate loans as well as FHLB stock. At September 30, 2024 and December 31, 2023, we had total remaining borrowing capacity from the FHLB of $1.11 billion and $1.10 billion, respectively, with no outstanding balance. We had no long-term FHLB borrowings during the three and nine months ended September 30, 2024 or 2023.

Federal Reserve Bank of Dallas . The Bank has a line of credit with the Federal Reserve Bank of Dallas (the “FRB”). The amount of the line is determined on a monthly basis by the FRB. The line is collateralized by a blanket floating lien on all agriculture, commercial and consumer loans. The amount of the line was $664.2 million and $595.4 million at September 30, 2024 and December 31, 2023, respectively, with no outstanding balance. We had no long-term FRB borrowings during the nine months ended September 30, 2024 or 2023.

Lines of Credit . The Bank has uncollateralized lines of credit with multiple banks as a source of funding for liquidity management. The total amount of the lines was $140.0 million and $140.0 million as of September 30, 2024 and December 31, 2023, respectively. The lines were not used, other than testing during the three and nine months September 30, 2024 or the three and nine months September 30, 2023.

FHLB Letters of Credit - The Company may use FHLB letters of credit to pledge to certain public deposits. The outstanding balance of FHLB letters of credit was $75.0 million and $-0- at September 30, 2024 and December 31, 2023, respectively.

Subordinated Debt . In December 2018, the Company issued $14.1 million of subordinated notes that have a maturity date of December 2030 and an average fixed rate of 6.41% for the first seven years. After the fixed rate periods, these notes will float at the Wall Street Journal prime rate, with a floor of 4.0% and a ceiling of 7.5%. These notes pay interest quarterly, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally, these notes are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.

On September 29, 2020, the Company issued $50.0 million in subordinated notes. Proceeds were reduced by approximately $926 thousand in debt issuance costs. These notes have a maturity date of September 2030 with a fixed rate of 4.50% for the first five years. After the expiration of the fixed rate period, the notes will reset quarterly at a variable rate equal to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 438 basis points. These notes pay interest semi-annually, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally, these notes are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.

As of September 30, 2024, the total amount of subordinated debt securities outstanding was $64.1 million less approximately $186 thousand of remaining debt issuance costs for a total balance of $63.9 million.

Junior Subordinated Deferrable Interest Debentures and Trust Preferred Securities . Between March 2004 and June 2007, the Company formed three wholly-owned statutory business trusts solely for the purpose of issuing trust preferred securities, the proceeds of which were invested in junior subordinated deferrable interest debentures. The trusts are not consolidated and the debentures issued by the Company to the trusts are reflected in the Company’s Consolidated Balance Sheets. The Company records interest expense on the debentures in its consolidated financial statements. The amount of debentures outstanding was $46.4 million at September 30, 2024 and December 31, 2023. The Company has the right, as has been exercised in the past, to defer payments of interest on the securities for up to twenty consecutive quarters. During such time, corporate dividends may not be paid. The Company is current in its interest payments on the debentures.

The chart below indicates certain information, as of September 30, 2024, about each of the statutory trusts and the junior subordinated deferrable interest debentures, including the date the junior subordinated deferrable interest debentures were issued, outstanding amounts of trust preferred securities and junior subordinated deferrable interest debentures, the maturity date of the junior subordinated deferrable interest debentures, and the interest rates on the junior subordinated deferrable interest debentures.

44
Name of Trust
Issue
Date
Amount of
Trust Preferred
Securities
Amount of
Debentures
Stated
Maturity Date of
Trust Preferred
Securities and
Debentures (1)
Interest Rate of
Trust Preferred
Securities and
Debentures (2)(3)
(Dollars in thousands)
South Plains Financial Capital Trust III
2004
$
10,000
$
10,310
2034
3-mo. CME Term SOFR + 291 bps; 8.19%
South Plains Financial Capital Trust IV
2005
20,000
20,619
2035
3-mo. CME Term SOFR + 165 bps; 6.60%
South Plains Financial Capital Trust V
2007
15,000
15,464
2037
3-mo. CME Term SOFR + 176 bps; 6.71%
Total
$
45,000
$
46,393

(1)
May be redeemed at the Company’s option.
(2)
Interest payable quarterly with principal due at maturity.
(3)
Rate as of last reset date, prior to September 30, 2024.

Liquidity and Capital Resources

Liquidity

Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and the Federal Reserve discount window. At September 30, 2024, the Bank had the capacity to borrow additional funds from the FHLB and Federal Reserve discount window of up to approximately $1.1 billion and $664.2 million, respectively.

Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

Management believes that the Company has adequate liquidity to meet its obligations. However, if general economic conditions, potential recession in the United States and our market areas, the impacts related to or resulting from bank failures and any uncertainty in the banking industry, including the associated impact to the Company and other financial institutions of any regulatory changes or other mitigation efforts taken by government agencies in response thereto, increased competition for deposits and related changes in deposit customer behavior, changes in market interest rates, the resurgence of elevated levels of inflation or inflationary pressures in the United States and our market areas, or other events, cause these sources of external funding to become restricted or are eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or operating restrictions in order to raise the necessary funds to support the Company’s operations and growth.

Capital

Total stockholders’ equity increased to $443.1 million as of September 30, 2024, compared to $407.1 million as of December 31, 2023, an increase of $36.0 million, or 8.8%. The increase from December 31, 2023 was primarily the result of $33.2 million in net earnings for the nine months ended September 30, 2024 and an increase in accumulated other comprehensive income (“AOCI”) of $9.3 million, net of tax, partially offset by $6.7 million of dividends paid. The increase in AOCI was attributable to the increase in fair value of our available for sale securities and fair value hedges, net of tax, as a result of the decline in market interest rates experienced during the period.

We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and ratio of common equity tier 1 (“CET1”) capital, tier 1 capital and total capital to risk-weighted assets and of tier 1 capital to average consolidated assets, referred to as the “leverage ratio.”

45
The risk-based capital ratios measure the adequacy of a bank’s capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for “prompt corrective action” or other regulatory enforcement action. In assessing a bank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level of earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management’s overall ability to monitor and control risks.

At September 30, 2024 and December 31, 2023, both we and the Bank met all the capital adequacy requirements to which we and the Bank were subject. At September 30, 2024, we and the Bank were “well capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since September 30, 2024 that would materially adversely change such capital classifications. From time to time, we may need to raise additional capital to support our and the Bank’s further growth and to maintain our “well capitalized” status.

The table below summarizes the capital requirements applicable to us and the Bank in order to be considered “well capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of the dates indicated.

September 30, 2024
December 31, 2023
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
South Plains Financial, Inc. :
Total capital (to risk-weighted assets)
$
617,052
17.61
%
$
589,565
16.74
%
Tier 1 capital (to risk-weighted assets)
509,338
14.54
482,044
13.69
CET 1 capital (to risk-weighted assets)
464,338
13.25
437,044
12.41
Tier 1 capital (to average assets)
509,338
11.76
482,044
11.33
City Bank:
Total capital (to risk-weighted assets)
$
511,744
14.61
%
$
494,353
14.04
%
Tier 1 capital (to risk-weighted assets)
467,956
13.36
450,607
12.80
CET 1 capital (to risk-weighted assets)
467,956
13.36
450,607
12.80
Tier 1 capital (to average assets)
467,956
10.81
450,607
10.60

Community Bank Leverage Ratio

On September 17, 2019, the federal banking agencies jointly finalized a rule to be effective January 1, 2020 and intended to simplify the regulatory capital requirements described above for qualifying community banking organizations that opt into the Community Bank Leverage Ratio (“CBLR”) framework, as required by Section 201 of the EGRRCPA. The final rule became effective on January 1, 2020, and the CBLR framework became available for banks to use beginning with their March 31, 2020 Call Reports. Under the final rule, if a qualifying community banking organization opts into the CBLR framework and meets all requirements under the framework, it will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations described above and will not be required to report or calculate risk-based capital. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. Although the Company and the Bank are qualifying community banking organizations, the Company and the Bank have elected not to opt in to the CBLR framework at this time and will continue to follow the Basel III capital requirements as described above.

Treasury Stock

The Company repurchased stock in accordance with its previously-announced stock repurchase program during the three and nine months ended September 30, 2024. For the three months ended September 30, 2024, we repurchased 40,000 shares of common stock for a total of $1.0 million. For the nine months ended September 30, 2024, we repurchased 53,799 share of common stock for a total of $1.3 million. These shares were retired immediately upon repurchase by the Company and not included in treasury stock. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds,” of this Form 10-Q for further information.

Interest Rate Sensitivity and Market Risk

As a financial institution, our primary component of market risk is interest rate volatility. Our interest rate risk policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines.

46
Interest rate sensitivity involves the relationships between rate-sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on the Company’s net interest income. Interest rate-sensitive assets and liabilities are those with yields or rates that are subject to change within a future time period due to maturity or changes in market rates. The model is used to project future net interest income under a set of possible interest rate movements. The Company’s Investment/Asset Liability Committee (“ALCO Committee”) reviews this information to determine compliance with the limits set by the Bank’s board of directors.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

Our exposure to interest rate risk is managed by the ALCO Committee, in accordance with policies approved by the Bank’s board of directors. The ALCO Committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO Committee considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The ALCO Committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO Committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model.

We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model. The average lives of non-maturity deposit accounts are based on decay assumptions and are incorporated into the model. All of the assumptions used in our analyses are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

On a quarterly basis, we run a simulation model for a static balance sheet and other scenarios. These models test the impact on net interest income from changes in market interest rates under various scenarios. Under the static model, rates are shocked instantaneously and ramped rates change over a 12-month and 24-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Our internal policy regarding internal rate risk simulations currently specifies that for gradual parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 7.5% for a 100 basis point shift, 15% for a 200 basis point shift, and 22.5% for a 300 basis point shift.

The following table summarizes the simulated change in net interest income over a 12-month horizon as of the dates indicated:

September 30,
2024
December 31,
2023
Change in Interest Rates (Basis Points)
Percent Change in
Net Interest Income
Percent Change in
Net Interest Income
+300
(3.48
)%
(10.02
)%
+200
(2.22
)%
(6.59
)%
+100
(1.04
)%
(3.21
)%
-100
0.27
%
3.35
%
-200
0.85
%
6.86
%

Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this Form 10-Q have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

47
The Company’s asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of the Company are monetary in nature. Management believes the impact of inflation on financial results depends upon the Company’s ability to react to changes in interest rates and by such reaction, reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction, or at the same magnitude, as the prices of other goods and services. However, other operating expenses do reflect general levels of inflation. Management seeks to manage the relationship between interest rate-sensitive assets and liabilities in order to protect against wide net interest income fluctuations, including those resulting from inflation.
Various information shown elsewhere in this Report will assist in the understanding of how well the Company is positioned to react to changing interest rates and inflationary trends. In particular, additional information related to the Company’s interest rate-sensitive assets and liabilities is contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report under the heading “Interest Rate Sensitivity and Market Risk.”

Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this Report as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the U.S. in our consolidated statements of comprehensive income (loss), balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Report may differ from that of other companies reporting measures with similar names. It is important to understand how other banking organizations calculate their financial measures with names similar to the non-GAAP financial measures we have discussed in this Report when comparing such non-GAAP financial measures.

Tangible Book Value Per Common Share . Tangible book value per share is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share. We believe that the tangible book value per common share measure is important to many investors in the marketplace who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value.

Tangible Common Equity to Tangible Assets . Tangible common equity to tangible assets is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit intangibles and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common stockholders’ equity to total assets. We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period of tangible common equity to tangible assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total stockholders’ equity and assets while not increasing our tangible common equity or tangible assets.

The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and total assets to tangible assets and then presents book value per common share, tangible book value per common share, total stockholders’ equity to total assets, and tangible common equity to tangible assets:

September 30,
December 31,
2024 2023
(Dollars in thousands)
Total stockholders’ equity
$
443,122
$
407,114
Less:  Goodwill and other intangibles
(21,197
)
(21,744
)
Tangible common equity
$
421,925
$
385,370
Total assets
$
4,337,659
$
4,204,793
Less:  Goodwill and other intangibles
(21,197
)
(21,744
)
Tangible assets
$
4,316,462
$
4,183,049
Shares outstanding
16,386,627
16,417,099
Total stockholders’ equity to total assets
10.22
%
9.68
%
Tangible common equity to tangible assets
9.77
%
9.21
%
Book value per share
$
27.04
$
24.80
Tangible book value per share
$
25.75
$
23.47

48
Critical Accounting Policies and Estimates

Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare consolidated financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our consolidated financial statements.

The Jumpstart Our Business Startups Act (the “JOBS Act”) permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the consolidated financial statements included in this Form 10-Q, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.

The following is a discussion of the critical accounting policies and significant estimates that we believe require us to make the most complex or subjective decisions or assessments.

Securities. Investment securities may be classified into trading, held-to-maturity, or available-for-sale portfolios. Securities that are held principally for resale in the near term are classified as trading. Securities that management has the ability and positive intent to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities not classified as trading or held-to-maturity are available-for-sale and are reported at fair value with unrealized gains and losses excluded from earnings, but included in the determination of other comprehensive income (loss). Management uses these assets as part of its asset/liability management strategy; they may be sold in response to changes in liquidity needs, interest rates, resultant prepayment risk changes, and other factors. Management determines the appropriate classification of securities at the time of purchase. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. The cost of securities sold is based on the specific identification method.

Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the straight-line method, which is not materially different from the effective interest method required by GAAP.

Loans are placed on non-accrual status when, in management’s opinion, collection of interest is unlikely, which typically occurs when principal or interest payments are more than ninety days past due. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Credit Losses. The ACL for loans is established for future expected credit losses through a provision for credit losses charged to earnings. Expected losses are calculated using comparable and quantifiable information both internal and external about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments when appropriate. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Company’s ACL for loans consists of specific valuation allowances established for probable losses on specifically analyzed loans and collective valuation allowances calculated using comparable and quantifiable information both internal and external about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

The ACL for loans is evaluated on a quarterly basis by management and is based upon management’s review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The determination of the adequacy of the ACL for loans is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. The Bank’s loans are generally secured by specific items of collateral including real property, crops, livestock, consumer assets, and other business assets.

49
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on various factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

Loans that exhibit characteristics different from their pool characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective ACL for loans evaluation. Certain of these loans are considered to be collateral dependent with the borrower experiencing financial difficulty. For these loans, the fair value of collateral practical expedient is elected whereby the allowance is calculated as the amount by which the amortized cost exceeds the fair value of collateral, less costs to sell. All non-accrual loans $250 thousand or greater are analyzed for a specific ACL.

The Company estimates expected credit losses on off-balance sheet credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL for off-balance sheet credit exposures is adjusted through provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Utilization rates are determined based on a two-year rolling average of historical usage. Expected loss rates for all pass rated loans are used to determine the ACL for off-balance sheet credit exposures.

For AFS securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized costs basis is written down to fair value through income. For AFS securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss). Changes in the ACL are recorded as provision for credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest is excluded from the estimate of credit losses on securities.

Loans Held for Sale. Loans held for sale are comprised of residential mortgage loans. Loans that are originated for best efforts delivery are carried at the lower of aggregate cost or fair value as determined by aggregate outstanding commitments from investors or current investor yield requirements. All other loans held for sale are carried at fair value. Loans sold are typically subject to certain indemnification provisions with the investor; management does not believe these provisions will have any significant consequences.

Mortgage Servicing Rights Asset. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the consolidated statement of comprehensive income (loss) effect recorded in net gain on sale of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates present value of estimated future servicing income.

Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports change in fair value of servicing assets in earnings in the period in which the changes occur, and are included with other noninterest income in the consolidated financial statements. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Goodwill and Other Intangible Assets. Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events and circumstances exist that indicate that an impairment test should be performed. Intangible assets with definite lives are amortized over their estimated useful lives.

Recently Issued Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements included elsewhere in this Form 10-Q regarding the impact of new accounting pronouncements.

50
Item 3.
Quantitative and Qualitative Disclosure about Market Risk

The Company manages market risk, which, as a financial institution is primarily interest rate volatility, through the ALCO Committee of the Bank, in accordance with policies approved by its board of directors. The Company uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity and Market Risk” herein for a discussion of how we manage market risk.

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) were effective as of the end of the period covered by this Form 10-Q.

Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

The Company and its subsidiaries are subject to various legal actions, as described in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report on Form 10-K”) filed with the SEC on March 15, 2024. Except as described in our 2023 Annual Report on Form 10-K, we are not presently involved in any other litigation, nor to our knowledge is any litigation threatened against us, that in management’s opinion would result in any material adverse effect on our financial position or results of operations or that is not expected to be covered by insurance.

Item 1A.
Risk Factors

In evaluating an investment in any of our securities, investors should consider carefully, among other things, information under the heading “Cautionary Notice Regarding Forward-Looking Statements” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-Q and the risk factors previously disclosed under the heading “Risk Factors” in Part I, Item 1A of our 2023 Annual Report on Form 10-K. Management believes there have been no material changes in the risk factors disclosed by the Company in Part I, Item 1A, “Risk Factors,” of the 2023 Annual Report on Form 10-K. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

On February 21, 2024, the Company’s board of directors approved a new stock repurchase program pursuant to which the Company may, from time to time, purchase up to $10.0 million of its outstanding shares of common stock (the “New Program”). The shares can be repurchased from time to time in privately negotiated transactions or the open market, including pursuant to Rule 10b5-1 trading plans, and in accordance with applicable regulations of the SEC. The Company is not obligated to purchase any shares of its common stock under the New Program and the timing and exact amount of any repurchases depends on various factors including, the performance of the Company’s stock price, general market and other conditions, applicable legal requirements and other factors. The New Program may be terminated or amended by the Company’s board of directors at any time prior to the expiration date of February 26, 2025.
The following table summarizes the share repurchase activity for the three months ended September 30, 2024.

Total Shares
Repurchased
Average Price
Paid Per Share
Total Dollar Amount
Purchased Pursuant to
Publicly-Announced Plans
Maximum Dollar Amount
Remaining Available for
Repurchase Pursuant to
Publicly-Announced Plans
July 2024
40,000
$
25.00
$
1,000,000
$
8,659,477
August 2024
—
—
—
8,659,477
September 2024
—
—
—
8,659,477
Total
40,000

Item 3.
Defaults upon Senior Securities

Not applicable.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

During the three months ended September 30, 2024, none of the directors or officers of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.

Announcement of Designation of Principal Executive Officer

The Company’s Board of Directors routinely reviews and considers the roles and responsibilities of the Company’s executive officers on an annual basis. As a result of such routine annual review, effective November 5, 2024, the Company’s Board of Directors determined that it is most appropriate for Mr. Cory T. Newsom, the current President of the Company, to be designated as the principal executive officer of the Company. Previously, Mr. Curtis C. Griffith, the Chairman and Chief Executive Officer of the Company, was designated as the principal executive officer of the Company for SEC reporting purposes.

52
Mr. Griffith will continue to serve as Chairman and Chief Executive Officer of the Company and his role and responsibilities within the organization have not been diminished.

The change in designation of the Company’s principal executive officer was approved by the Company’s Board of Directors in light of Mr. Newsom’s responsibilities and role within the organization as President of the Company, as well as the Company’s upcoming loss of its status as an emerging growth company on December 31, 2024, which will require additional and more robust executive compensation disclosures of the Company’s named executive officers. Because Mr. Newsom is currently, and is expected to remain, the highest compensated executive officer of the Company, the designation of Mr. Newsom as the principal executive officer of the Company is also intended to provide a more fulsome pay ratio disclosure, as will be required under Item 402(u) of Regulation S-K following the Company’s upcoming loss of its status as an emerging growth company.

Amendment to Employment Agreement with Curtis C. Griffith.
On November 5, 2024, the Company’s Board of Directors approved an Amendment No. 2 to that certain Employment Agreement, dated December 18, 2019, by and among the Company, City Bank and Mr. Curtis C. Griffith, as previously amended by an Amendment No. 1, dated December 15, 2021 (as so amended, the “Griffith Employment Agreement”), providing for: (i) an increase in Mr. Griffith’s annual base salary to $425,000, annualized, commencing with the first pay period for January 1, 2025, and (ii) a cost-of-living adjustment of $14,200 to Mr. Griffith’s annual base salary on January 1st of each year beginning with January 1, 2026.
The foregoing description is a summary of the Griffith Employment Agreement, the Amendment No. 1 thereto, and the Amendment No. 2 thereto, and is qualified in its entirety by reference to the copy of the Griffith Employment Agreement filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 19, 2019, the copy of the Amendment No. 1 filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 21, 2021, and the copy of the Amendment No. 2 that is filed as Exhibit 10.1 to this Form 10-Q, respectively, and is hereby incorporated herein by reference.

Amendment to Employment Agreement with Cory T. Newsom
On November 5, 2024, the Company’s Board of Directors approved an Amendment No. 2 to that certain Employment Agreement, dated March 6, 2019, by and among the Company, City Bank and Mr. Cory T.  Newsom, as previously amended by an Amendment No. 1, dated December 15, 2021 (as so amended, the “Newsom Employment Agreement”), providing for: (i) an increase in Mr. Newsom’s annual base salary to $720,000, annualized, commencing with the first pay period for January 1, 2025, and (ii) a cost-of-living adjustment of $24,000 to Mr. Newsom’s annual base salary on January 1st of each year beginning with January 1, 2026.
The foregoing description is a summary of the Newsom Employment Agreement, the Amendment No. 1 thereto, and the Amendment No. 2 thereto, and is qualified in its entirety by reference to the copy of the Newsom Employment Agreement filed as Exhibit 10.4 to the Company’s Registration Statement on Form S-1/A filed with the SEC on April 29, 2018, the copy of the Amendment No. 1 filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 21, 2021, and the copy of the Amendment No. 2 that is filed as Exhibit 10.2 to this Form 10-Q, respectively, and is hereby incorporated herein by reference.
53
Item 6.
Exhibits

Exhibit
Number
Description
Amended and Restated Certificate of Formation of South Plains Financial, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on April 12, 2019) (File No. 333-230851).
Second Amended and Restated Bylaws of South Plains Financial, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 1, 2021) (File No. 001-38895).
Amendment No. 2 to Employment Agreement, by and among City Bank, Curtis C. Griffith and South Plains Financial, Inc., dated as of November 5, 2024.
Amendment No. 2 to Employment Agreement, by and among City Bank, Cory T. Newsom and South Plains Financial, Inc., dated as of November 5, 2024
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
South Plains Financial, Inc. 2023 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed with the SEC on July 15, 2024) (File No. 333-280809).
Amendment No. 1 to South Plains Financial, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.2 to the Company’s Registration Statement on Form S-8 filed with the SEC on July 15, 2024) (File No. 333-280809).
101*
The following material from South Plains Financial, Inc.’s Form 10-Q for the quarter ended September 30, 2024, formatted in XBRL (eXtensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Changes in Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Consolidated Financial Statements.

*
Filed with this Form 10-Q

**
Furnished with this Form 10-Q

54
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

South Plains Financial, Inc.
Date:
November 6, 2024
By:
/s/ Curtis C. Griffith
Curtis C. Griffith
Chairman and Chief Executive Officer
Date:
November 6, 2024
By:
/s/ Steven B. Crockett
Steven B. Crockett
Chief Financial Officer and Treasurer


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TABLE OF CONTENTS
Part I. Financial InformationItem 1. Consolidated Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosure About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits

Exhibits

3.1 Amended and Restated Certificate of Formation of South Plains Financial, Inc. (incorporated by reference to Exhibit 3.1 to the Companys Registration Statement on Form S-1 filed with the SEC on April 12, 2019) (File No. 333-230851). 3.2 Second Amended and Restated Bylaws of South Plains Financial, Inc. (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed with the SEC on November 1, 2021) (File No. 001-38895). 10.1* Amendment No. 2 to Employment Agreement, by and among City Bank, Curtis C. Griffith and South Plains Financial, Inc., dated as of November 5, 2024. 10.2* Amendment No. 2 to Employment Agreement, by and among City Bank, Cory T. Newsom and South Plains Financial, Inc., dated as of November 5, 2024 31.1* Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 South Plains Financial, Inc. 2023 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Companys Registration Statement on Form S-8 filed with the SEC on July 15, 2024) (File No. 333-280809). 99.2 Amendment No. 1 to South Plains Financial, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.2 to the Companys Registration Statement on Form S-8 filed with the SEC on July 15, 2024) (File No. 333-280809).