SEC Filing | South Plains Financial

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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, 2023

☐	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 3, 2023, the registrant had 16,482,279 shares of common stock, par value $1.00 per share, outstanding.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets (Unaudited)	3
	Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	4
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)	6
	Consolidated Statements of Cash Flows (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	55
PART II.	OTHER INFORMATION	56
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	57
Item 6.	Exhibits	58
Signatures		59

Table of Contents

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, 2023			December 31, 2022
	(Unaudited)
ASSETS
Cash and due from banks	$	44,583		$	61,613
Interest-bearing deposits in banks		307,841			173,270
Cash and cash equivalents		352,424			234,883
Securities available for sale		584,969			701,711
Loans held for sale ($14,496 and $10,038 at fair value at September 30, 2023 and December 31, 2022, respectively)		20,273			30,403
Loans held for investment		2,993,563			2,748,081
Allowance for credit losses on loans		(42,075	)		(39,288	)
Loans held for investment, net		2,951,488			2,708,793
Accrued interest receivable		17,672			16,432
Premises and equipment, net		56,391			56,337
Bank-owned life insurance		74,104			73,174
Goodwill		19,315			19,508
Intangible assets, net		2,621			4,349
Mortgage servicing rights		27,749			27,474
Deferred tax asset, net		28,135			22,818
Other assets		51,299			48,181
Total assets	$	4,186,440		$	3,944,063

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits:
Noninterest-bearing	$	1,046,253		$	1,150,488
Interest-bearing		2,574,361			2,255,942
Total deposits		3,620,614			3,406,430
Accrued expenses and other liabilities		71,617			58,265
Subordinated debt		76,100			75,961
Junior subordinated deferrable interest debentures		46,393			46,393
Total liabilities		3,814,724			3,587,049

Stockholders’ equity:
Common stock, $1.00 par value per share, 30,000,000 shares authorized; 16,600,442 and 17,027,197 issued and outstanding at September 30, 2023 and December 31, 2022, respectively		16,600			17,027
Additional paid-in capital		102,633			112,834
Retained earnings		337,076			292,261
Accumulated other comprehensive loss		(84,593	)		(65,108	)
Total stockholders’ equity		371,716			357,014
Total liabilities and stockholders’ equity	$	4,186,440		$	3,944,063

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

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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,
	2023			2022			2023		2022
Interest income:
Loans, including fees	$	46,242		$	34,463		$	128,703	$	99,260
Securities:
Taxable		5,422			4,224			16,027		10,142
Non-taxable		833			1,128			3,057		3,409
Federal funds sold and interest-bearing deposits in banks		4,031			1,293			7,010		2,129
Total interest income		56,528			41,108			154,797		114,940
Interest expense:
Deposits		18,965			4,537			44,768		8,744
Notes payable & other borrowings		—			—			5		—
Subordinated debt		1,012			1,012			3,037		3,037
Junior subordinated deferrable interest debentures		862			457			2,402		1,005
Total interest expense		20,839			6,006			50,212		12,786
Net interest income		35,689			35,102			104,585		102,154
Provision for credit losses		(700	)		(782	)		4,010		(2,867	)
Net interest income, after provision for credit losses		36,389			35,884			100,575		105,021
Noninterest income:
Service charges on deposit accounts		1,840			1,764			5,286		5,149
Income from insurance activities		30			4,856			1,478		8,003
Net gain on sales of loans		2,631			4,452			9,077		17,924
Bank card services and interchange fees		3,157			3,156			10,156		9,856
Other mortgage banking income		1,971			1,836			3,069		10,670
Investment commissions		430			391			1,239		1,403
Fiduciary fees		582			568			1,779		1,815
Gain on sale of subsidiary		290			—			33,778		—
Other		1,346			3,914			4,218		8,649
Total noninterest income		12,277			20,937			70,080		63,469
Noninterest expense:
Salaries and employee benefits		18,709			22,927			61,400		67,620
Occupancy and equipment, net		4,111			4,132			12,246		11,902
Professional services		1,560			2,523			4,924		7,795
Marketing and development		853			913			2,573		2,391
IT and data services		818			908			2,570		2,902
Bank card expenses		1,451			1,399			4,119		4,050
Appraisal expenses		283			359			862		1,432
Realized loss on sale of securities		—			—			3,409		—
Other		3,704			4,240			12,246		13,289
Total noninterest expense		31,489			37,401			104,349		111,381
Income before income taxes		17,177			19,420			66,306		57,109
Income tax expense		3,683			3,962			13,885		11,490
Net income	$	13,494		$	15,458		$	52,421	$	45,619

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

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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,
	2023			2022			2023			2022
Earnings per share:
Basic	$	0.80		$	0.89		$	3.09		$	2.61
Diluted	$	0.78		$	0.86		$	3.01		$	2.52

Net income	$	13,494		$	15,458		$	52,421		$	45,619
Other comprehensive loss:
Unrealized losses on securities available for sale		(30,907	)		(39,102	)		(29,393	)		(126,076	)
Less: Change in fair value on hedged state and municipal securities		2,091			5,332			1,320			15,681
Reclassification adjustment for loss on sale of securities		—			—			3,409			—
Tax effect		6,051			7,092			5,179			23,183
Other comprehensive loss		(22,765	)		(26,678	)		(19,485	)		(87,212	)
Comprehensive income (loss)	$	(9,271	)	$	(11,220	)	$	32,936		$	(41,593	)

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

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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,
Balance at December 31, 2021		17,760,243		$	17,760		$	133,215		$	242,750		$	13,702		$	407,427
Net income		—			—			—			45,619			—			45,619
Cash dividends declared - $0.34 per share		—			—			—			(5,973	)		—			(5,973	)
Other comprehensive loss		—			—			—			—			(87,212	)		(87,212	)
Impact of adoption of Topic 842 related to leases		—			—			—			(717	)		—			(717	)
Exercise of employee stock options and vesting of restricted stock units, net of 16,255 shares for cashless exercise and net of 11,126 shares for taxes		34,010			34			(319	)		—			—			(285	)
Repurchases of common stock		(729,613	)		(729	)		(18,197	)		—			—			(18,926	)
Stock-based compensation		—			—			1,866			—			—			1,866
Balance at September 30, 2022		17,064,640		$	17,065		$	116,565		$	281,679		$	(73,510	)	$	341,799

Balance at December 31, 2022		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	)
Exercise of employee stock options and vesting of restricted stock units, 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 September 30, 2023		16,600,442		$	16,600		$	102,633		$	337,076		$	(84,593	)	$	371,716

Three Months Ended September 30,
Balance at June 30, 2022		17,417,094		$	17,417		$	125,332		$	268,305		$	(46,832	)	$	364,222
Net income		—			—			—			15,458			—			15,458
Cash dividends declared - $0.12 per share		—			—			—			(2,084	)		—			(2,084	)
Other comprehensive loss		—			—			—			—			(26,678	)		(26,678	)
Exercise of employee stock options and vesting of restricted stock units, net of 11,431 shares for cashless exercise and net of 3,997 shares for taxes		13,673			14			(104	)		—			—			(90	)
Repurchases of common stock		(366,127	)		(366	)		(9,352	)		—			—			(9,718	)
Stock-based compensation		—			—			689			—			—			689
Balance at September 30, 2022		17,064,640		$	17,065		$	116,565		$	281,679		$	(73,510	)	$	341,799

Balance at June 30, 2023		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	)
Exercise of employee stock options and vesting of restricted stock units, 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 September 30, 2023		16,600,442		$	16,600		$	102,633		$	337,076		$	(84,593	)	$	371,716

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

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SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2023			2022
Cash flows from operating activities:
Net income	$	52,421		$	45,619
Adjustments to reconcile net income to net cash from operating activities:
Provision for credit losses		4,010			(2,867	)
Provision for foreclosed asset losses		97			—
Depreciation and amortization		4,784			5,277
Accretion and amortization		2,731			3,089
Other gains, net		(248	)		(65	)
Gain on sale of subsidiary		(33,778	)		—
Loss on sale of securities		3,409			—
Net gain on sales of loans		(9,077	)		(17,924	)
Proceeds from sales of loans held for sale		339,220			659,061
Loans originated for sale		(321,163	)		(594,246	)
Deferred income tax expense		128			2,093
Earnings on bank-owned life insurance		(930	)		(896	)
Stock-based compensation		1,625			1,866
Change in valuation of mortgage servicing rights		875			(6,030	)
Net change in:
Accrued interest receivable and other assets		(4,744	)		(2,734	)
Accrued expenses and other liabilities		12,619			26,702
Net cash provided by operating activities		51,979			118,945

Cash flows from investing activities:
Activity in securities available for sale:
Purchases		—			(176,713	)
Sales		52,828			—
Maturities, prepayments, and calls		31,930			60,772
Loan originations and principal collections, net		(247,869	)		(252,828	)
Purchases of premises and equipment		(4,682	)		(3,294	)
Proceeds from sales of premises and equipment		939			245
Proceeds from sale of subsidiary		36,080			—
Proceeds from sales of foreclosed assets		1,014			1,884
Net cash used in investing activities		(129,760	)		(369,934	)

Cash flows from financing activities:
Net change in deposits		214,184			119,314
Payments to tax authorities for stock-based compensation		(393	)		(285	)
Cash dividends paid on common stock		(6,609	)		(5,973	)
Payments to repurchase common stock		(11,860	)		(18,926	)
Net cash provided by financing activities		195,322			94,130

Net change in cash and cash equivalents		117,541			(156,859	)
Beginning cash and cash equivalents		234,883			486,821
Ending cash and cash equivalents	$	352,424		$	329,962

Supplemental disclosures of cash flow information:
Interest paid on deposits and borrowed funds	$	49,406		$	12,953
Income taxes paid		16,231			8,488
Supplemental schedule of noncash activities:
Loans transferred to foreclosed assets	$	1,012		$	465
Premises and equipment transferred to other real estate owned		172			—
Additions to mortgage servicing rights		1,150			2,694

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

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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, 2023:

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”) 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. The purchase price may be increased by the net amount of Windmark working capital as provided in the Agreement. 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, 2023 (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 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, 2022. 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.

Accounting Changes – 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 2016-13 Financial Instruments - Credit Losses (Topic 326). The FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held to maturity debt securities. The CECL model also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in sales type and direct financing leases recognized by a lessor in accordance with Topic 842 on leases. In addition, Topic 326 made changes to the accounting for securities available for sale. One such change is to require credit losses to be presented as an allowance rather than as a write-down on securities available for sale management does not intend to sell or believes that it is more likely than not they will be required to sell. The Company adopted the CECL model effective January 1, 2023 using the modified retrospective approach. As a result, the Company recognized a one-time, after tax cumulative effect debit adjustment of $997 thousand to retained earnings, increased the ACL for loans by approximately $ thousand and increased the ACL for off-balance sheet credit exposures by approximately $1.2 million. Results for reporting periods beginning after January 1, 2023 are presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

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The Company made the following policy elections related to the adoption of the CECL model. First, accrued interest will be written off against interest income when financial assets are placed into nonaccrual status. Therefore, accrued interest will be excluded from the amortized cost basis for purposes of calculating the ACL. Accrued interest receivable is presented in a separate line item in the Consolidated Balance Sheets. Second, the fair value of collateral practical expedient has been elected on certain loans in determining the ACL, for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty.

The impact on the ACL resulting from the adoption of the CECL model is shown below.

(Dollars in thousands)	January 1, 2023
	Pre-Adoption		Impact of Adoption			Post-Adoption
Commercial real estate	$	13,029	$	827		$	13,856
Commercial – specialized		3,425		33			3,458
Commercial - general		9,215		(2,574	)		6,641
Consumer:
1-4 family residential		6,194		1,700			7,894
Auto loans		3,926		(332	)		3,594
Other consumer		1,376		(235	)		1,141
Construction		2,123		683			2,806

Total allowance for credit losses on loans	$	39,288	$	102		$	39,390

Allowance for credit losses for off-balance sheet exposures	$	580	$	1,160		$	1,740

ASU 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates guidance for troubled debt restructurings by creditors and enhances disclosure requirements for certain loan modifications by creditors for borrowers experiencing financial distress. This ASU defines types of modifications as principal forgiveness, interest rate reduction, other than insignificant payment delays, or a term extension. In addition, the ASU requires disclosure of current-period gross charge-offs, by year of origination, in the vintage disclosure. The Company adopted the provisions of ASU 2022-02 as of January 1, 2023 on a prospective basis. The adoption of this amendment did not have a material impact on the consolidated financial statements.

In connection with the adoption of the CECL model, the Company revised certain accounting policies and implemented certain accounting policy elections.

Securities – Investment securities may be classified into trading, held to maturity (“HTM”) or available for sale (“AFS”) 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 HTM and recorded at amortized cost. Securities not classified as trading or HTM are AFS and are carried at fair value with unrealized gains and losses reported as a component of other comprehensive income (loss), net of tax. 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. Gains and losses on sales are recorded on the trade date, are derived from the amortized cost of the security sold and are determined using the specific identification method. A security is placed on nonaccrual status if principal or interest has been in default for a period of 90 days or more, or if full payment of principal and interest is not expected. The Company has made a policy election to exclude accrued interest receivable from the amortized cost basis of AFS securities and report the accrued interest in accrued interest receivable in the Consolidated Balance Sheets. Interest accrued but not received for a security placed on nonaccrual status is reversed against interest income.

ACL (AFS Securities) – 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 cost 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.

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Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their amortized cost. Amortized cost is the outstanding unpaid principal balances, net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and unamortized premiums or discounts on purchased loans. The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in accrued interest receivable on the Consolidated Balance Sheets. Accrued interest receivable is excluded from the estimate of credit losses. 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 nonaccrual 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.

ACL (Loans) – The ACL is a valuation account established by management as an estimate to cover expected credit losses through a provision for credit losses charged to earnings. Credit losses on loans 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. Expected losses are 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.

The ACL is evaluated on a quarterly basis by management. 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 at January 1 and September 30, 2023. 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 credit 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 its one-year through the cycle estimate of expected credit loss to a life of loan measurement that reflects current conditions and reasonable and supportable 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 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 forecast 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 life of loan 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.

While management uses available information to recognize credit 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 credit losses on loans. Such agencies may require the bank subsidiary to recognize additional credit 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 credit losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

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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. When management determines that foreclosure is probable, or if certain of these loans are considered to be collateral dependent with the borrower experiencing financial difficulty, the Company elects the fair value of collateral practical expedient, whereby the allowance is calculated as the amount by which the amortized cost exceeds the fair value of collateral, less costs to sell.

ACL (Off-Balance Sheet Credit Exposures) – The Company estimates expected credit losses 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. The ACL for off-balance sheet credit exposures is included in accrued expenses and other liabilities on the Consolidated Balance Sheets.

Acquired Loans – Loans that the Company acquires in connection with business combinations are recorded at fair value with no carryover of the acquired entity’s related ACL. The fair value of the acquired loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest, adjusted for estimated prepayments and credit losses. In accordance with Topic 326, the fair value adjustment is recorded as premium or discount to the unpaid principal balance of each acquired loan. In addition, the Company also records an ACL on each acquired loan.

Any acquired loans the Company determines have evidence of a more than insignificant deterioration in credit quality since origination, are considered to be purchase credit deteriorated (“PCD”) loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (i) non-accrual status; (ii) risk rating, (iii) watchlist credits; and (iv) delinquency status. An ACL is determined using the same methodology as other individually evaluated loans. The sum of the PCD loan’s purchase price and ACL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACL are recorded through provision for credit 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 on October 31 of each year or more frequently if events and circumstances exist that indicate that an impairment test should be performed. There was no goodwill impairment recorded for the nine months ended September 30, 2023 and the year ended December 31, 2022.

Core deposit intangible (“CDI”) is a measure of the value of checking and savings deposit relationships acquired in a business combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding relative to an alternative source of funding. CDI is amortized over the estimated useful lives of the existing deposit relationships acquired, but does not exceed 10 years. Substantially all CDI is amortized using the sum of the years’ digits method.

Earnings per Share – Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the consolidated financial statements.

Segment Information – The Company previously identified two operating segments: banking and insurance. The accounting policies for each of the segments were the same as those described in the summary of significant accounting policies. Effective January 1, 2023, operations and financial performance of the insurance segment were being performed and evaluated on a Company-wide basis based on not being significant to the operating results of the Company. Furthermore, the insurance segment was sold on April 1, 2023. As a result, segment reporting disclosures have been removed.

Subsequent Events – The Company has evaluated subsequent events and transactions from September 30,2023 through the date this Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP.

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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, 2023
Available for sale:
State and municipal	$	203,433	$	—	$	(42,860	)	$	—	$	160,573
Residential mortgage-backed securities		358,405		—		(73,054	)		—		285,351
Commercial mortgage-backed securities		48,219		—		(8,505	)		—		39,714
Commercial collateralized mortgage obligations		72,612		—		(659	)		—		71,953
Asset-backed and other amortizing securities		19,041		—		(2,278	)		—		16,763
Other securities		12,000		—		(1,385	)		—		10,615
	$	713,710	$	—	$	(128,741	)	$	—	$	584,969

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2022
Available for sale:
State and municipal	$	259,429	$	27	$	(34,401	)	$	225,055
Residential mortgage-backed securities		386,783		—		(57,938	)		328,845
Commercial mortgage-backed securities		49,161		—		(7,194	)		41,967
Commercial collateralized mortgage obligations		76,189		—		(551	)		75,638
Asset-backed and other amortizing securities		20,907		—		(1,813	)		19,094
Other securities		12,000		—		(888	)		11,112
	$	804,469	$	27	$	(102,785	)	$	701,711

The amortized cost and estimated fair value of securities at September 30, 2023 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. Other securities are shown separately since they are not due at a single maturity date.

	Available for Sale
	Amortized Cost		Fair Value
Within 1 year	$	736	$	736
After 1 year through 5 years		6,142		5,830
After 5 years through 10 years		16,918		15,402
After 10 years		191,637		149,221
Other		498,277		413,780
	$	713,710	$	584,969

At both September 30, 2023 and December 31, 2022, the Company had 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 $400.2 million and $464.1 million at September 30, 2023 and December 31, 2022, respectively, were pledged to collateralize public deposits and for other purposes as required or permitted by law.

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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, 2023
State and municipal	$	2,326	$	52	$	158,247	$	42,808	$	160,573	$	42,860
Residential mortgage-backed securities		9		—		285,342		73,054		285,351		73,054
Commercial mortgage-backed securities		—		—		39,714		8,505		39,714		8,505
Commercial collateralized mortgage obligations		—		—		71,953		659		71,953		659
Asset-backed and other amortizing securities		—		—		16,763		2,278		16,763		2,278
Other securities		3,257		244		7,358		1,141		10,615		1,385
	$	5,592	$	296	$	579,377	$	128,445	$	584,969	$	128,741

December 31, 2022
State and municipal	$	162,746	$	23,538	$	57,675	$	10,863	$	220,421	$	34,401
Residential mortgage-backed securities		220,752		27,967		108,080		29,971		328,832		57,938
Commercial mortgage-backed securities		41,966		7,194		—		—		41,966		7,194
Commercial collateralized mortgage obligations		75,638		551		—		—		75,638		551
Asset-backed and other amortizing securities		19,094		1,813		—		—		19,094		1,813
Other securities		11,112		888		—		—		11,112		888
	$	531,308	$	61,951	$	165,755	$	40,834	$	697,063	$	102,785

The Company had 149 securities with an unrealized loss at September 30, 2023, 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, 2023, 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 periods presented below (dollars in thousands):

	September 30, 2023			December 31, 2022
Commercial real estate	$	1,046,262		$	919,358
Commercial - specialized		366,405			327,513
Commercial - general		514,567			484,783
Consumer:
1-4 family residential		534,511			460,124
Auto loans		316,024			321,476
Other consumer		77,325			81,308
Construction		138,469			153,519
		2,993,563			2,748,081
Allowance for credit losses on loans		(42,075	)		(39,288	)
Loans, net	$	2,951,488		$	2,708,793

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.

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 also subject to underwriting standards and processes similar to commercial real estate loans. These loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. These 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.

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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 ACL for loans was $42.1 million at September 30, 2023, compared to $39.3 million at December 31, 2022. The ACL for loans to loans held for investment was 1.41% at September 30, 2023 and 1.43% at December 31, 2022.

The following table details 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, 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 three months ended September 30, 2022
Commercial real estate	$	13,903	$	(1,292	)	$	—		$	—	$	12,611
Commercial - specialized		3,355		(481	)		(43	)		874		3,705
Commercial - general		9,918		372			—			135		10,425
Consumer:
1-4 family residential		5,329		247			(52	)		37		5,561
Auto loans		3,958		(39	)		(77	)		50		3,892
Other consumer		1,443		282			(374	)		104		1,455
Construction		1,879		129			—			—		2,008
	$	39,785	$	(782	)	$	(546	)	$	1,200	$	39,657

(1) The $(0.7) million provision for credit loss on the Consolidated Statement of Comprehensive Income (Loss) includes a $(0.7) million provision for credit losses on loans and a $- thousand provision for off-balance sheet credit exposures for the three months ended September 30, 2023.

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	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.

	Beginning Balance		Provision for Credit Losses			Charge-offs			Recoveries		Ending Balance
For the nine months ended September 30, 2022
Commercial real estate	$	17,245	$	(5,052	)	$	—		$	418	$	12,611
Commercial - specialized		4,363		(1,494	)		(149	)		985		3,705
Commercial - general		8,466		1,883			(315	)		391		10,425
Consumer:
1-4 family residential		5,268		346			(92	)		39		5,561
Auto loans		3,653		344			(233	)		128		3,892
Other consumer		1,357		678			(801	)		221		1,455
Construction		1,746		428			(166	)		—		2,008
	$	42,098	$	(2,867	)	$	(1,756	)	$	2,182	$	39,657

During the three months ended September 30, 2023, the provision for credit losses on loans of $(0.7) million reflected a reduction due to a decrease of $1.3 million for credit losses on loans individually analyzed, partially offset by an increase in the ACL for loans for office space and net charge-offs of $362 thousand. During the nine months ended September 30, 2023 the provision for credit losses of $4.1 million was driven primarily by organic loan growth experienced over the first nine months of 2023 and net charge-offs of $1.4 million during the period.

The following table shows 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 date indicated (dollars in thousands).

	Real Estate		Equipment		Accounts Receivable		Total Loans Individually Evaluated		Total ACL for Individually Evaluated Loans
September 30, 2023
Commercial real estate	$	—	$	—	$	—	$	—	$	—
Commercial - specialized		—		—		—		—		—
Commercial - general		589		53		—		642		43
Consumer:
1-4 family residential		848		—		—		848		—
Auto loans		—		—		—		—		—
Other consumer		—		—		—		—		—
Construction		—		—		—		—		—
	$	1,437	$	53	$	—	$	1,490	$	43

The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment at the date indicated (dollars in thousands):

	Recorded Investment				ACL for Loans
	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated
December 31, 2022
Commercial real estate	$	—	$	919,358	$	—	$	13,029
Commercial - specialized		—		327,513		—		3,425
Commercial - general		3,350		481,433		22		9,193
Consumer:
1-4 family residential		742		459,382		18		6,176
Auto loans		—		321,476		—		3,926
Other consumer		—		81,308		—		1,376
Construction		1,014		152,505		245		1,878
	$	5,106	$	2,742,975	$	285	$	39,003

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Impaired loan information at the date indicated follows (dollars in thousands):

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment

December 31, 2022
Commercial real estate	$	—	$	—	$	—	$	—	$	—	$	551
Commercial - specialized		—		—		—		—		—		—
Commercial - general		3,350		799		2,551		3,350		22		4,214
Consumer:
1-4 family		742		486		256		742		18		1,167
Auto loans		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—
Construction		1,014		686		328		1,014		245		507
	$	5,106	$	1,971	$	3,135	$	5,106	$	285	$	6,439

All impaired loans $250 thousand and greater were specifically evaluated for impairment at December 31, 2022. Interest income recognized using a cash-basis method on individually analyzed loans for the three and nine months ended September 30, 2022 was not significant.

The table below provides 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		Total Nonaccrual		Nonaccrual with no ACL
September 30, 2023
Commercial real estate	$	294	$	103	$	—	$	—
Commercial - specialized		129		—		228		—
Commercial - general		510		375		689		—
Consumer:
1-4 Family residential		1,999		1,033		1,807		848
Auto loans		621		106		—		—
Other consumer		813		188		32		—
Construction		489		—		222		—
	$	4,855	$	1,805	$	2,978	$	848

	30-89 Days Past Due		90 Days or More Past Due		Total Nonaccrual
December 31, 2022
Commercial real estate	$	342	$	27	$	—
Commercial - specialized		25		13		38
Commercial - general		1,451		60		3,357
Consumer:
1-4 Family residential		1,389		1,653		1,356
Auto loans		707		85		—
Other consumer		1,487		149		37
Construction		550		—		1,014
	$	5,951	$	1,987	$	5,802

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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.

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, 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.

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The following table reflects the amortized cost basis in loans by credit quality indicator and origination year at September 30, 2023, and gross charge-offs for the nine months ended September 30, 2023, excluding loans held for sale. 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, 2023.

							Term Loans
					Amortized Cost Basis by Origination Year

(Dollars in thousands)
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total

Commercial real estate:
Pass	$	207,415	$	314,061	$	192,831	$	64,117	$	50,651	$	184,936	$	6,537	$	1,020,548
Special mention		—		—		—		—		—		—		—		—
Substandard		—		2,226		21,253		1,667		167		401		—		25,714
Doubtful		—		—		—		—		—		—		—		—
Total commercial real estate loans	$	207,415	$	316,287	$	214,084	$	65,784	$	50,818	$	185,337	$	6,537	$	1,046,262
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial - specialized:
Pass	$	113,435	$	65,952	$	57,960	$	20,967	$	11,520	$	23,939	$	71,758	$	365,531
Special mention		—		—		—		—		—		—		—		—
Substandard		—		108		199		407		19		141		—		874
Doubtful		—		—		—		—		—		—		—		—
Total commercial - specialized loans	$	113,435	$	66,060	$	58,159	$	21,374	$	11,539	$	24,080	$	71,758	$	366,405
Current period gross charge-offs	$	—	$	—	$	—	$	11	$	—	$	—	$	—	$	11

Commercial - general:
Pass	$	70,911	$	133,683	$	96,004	$	36,837	$	35,822	$	69,493	$	57,508	$	500,258
Special mention		—		—		—		—		—		1,565		—		1,565
Substandard		191		541		4,514		237		2,793		4,180		288		12,744
Doubtful		—		—		—		—		—		—		—		—
Total commercial - general loans	$	71,102	$	134,224	$	100,518	$	37,074	$	38,615	$	75,238	$	57,796	$	514,567
Current period gross charge-offs	$	—	$	—	$	49	$	24	$	18	$	322	$	—	$	413
Consumer - 1-4 family residential:

Pass	$	93,653	$	159,416	$	111,528	$	54,241	$	33,020	$	62,340	$	9,868	$	524,066
Special mention		—		—		—		—		—		—		—		—
Substandard		377		311		967		513		4,063		4,199		15		10,445
Doubtful		—		—		—		—		—		—		—		—
Total consumer - 1-4 family residential loans	$	94,030	$	159,727	$	112,495	$	54,754	$	37,083	$	66,539	$	9,883	$	534,511
Current period gross charge-offs	$	—	$	—	$	1	$	—	$	—	$	—	$	—	$	1

Consumer - auto loans:
Pass	$	90,074	$	138,755	$	55,500	$	19,401	$	8,720	$	3,098	$	—	$	315,548
Special mention		—		—		—		—		—		—		—		—
Substandard		11		70		209		36		98		52		—		476
Doubtful		—		—		—		—		—		—		—		—
Total consumer - auto loans	$	90,085	$	138,825	$	55,709	$	19,437	$	8,818	$	3,150	$	—	$	316,024
Current period gross charge-offs	$	55	$	226	$	202	$	4	$	31	$	68	$	—	$	586

Consumer - other consumer:
Pass	$	20,156	$	30,514	$	11,856	$	3,759	$	2,866	$	6,585	$	1,418	$	77,154
Special mention		—		—		—		—		—		—		—		—
Substandard		—		3		29		11		36		92		—		171
Doubtful		—		—		—		—		—		—		—		—
Total consumer - other consumer loans	$	20,156	$	30,517	$	11,885	$	3,770	$	2,902	$	6,677	$	1,418	$	77,325
Current period gross charge-offs	$	386	$	224	$	31	$	31	$	40	$	64	$	—	$	776


Construction:
Pass	$	43,017	$	75,433	$	12,448	$	290	$	—	$	—	$	6,222	$	137,410
Special mention		—		—		741		—		—		—		—		741
Substandard		—		318		—		—		—		—		—		318
Doubtful		—		—		—		—		—		—		—		—
Total construction loans	$	43,017	$	75,751	$	13,189	$	290	$	—	$	—	$	6,222	$	138,469
Current period gross charge-offs	$	—	$	—	$	272	$	—	$	—	$	—	$	—	$	272

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The following table summarizes loans by credit quality indicator at December 31, 2022 (dollars in thousands):

	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate	$	893,312	$	—	$	26,046	$	—	$	919,358
Commercial - specialized		326,987		—		526		—		327,513
Commercial - general		451,639		—		33,144		—		484,783
Consumer:
1-4 family residential		450,034		—		10,090		—		460,124
Auto loans		321,158		—		318		—		321,476
Other consumer		81,109		—		199		—		81,308
Construction		151,995		—		1,524		—		153,519
	$	2,676,234	$	—	$	71,847	$	—	$	2,748,081

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.

The following tables present the amortized cost basis of loans at September 30, 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		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, 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	%

	Payment Delay		Term Extension		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

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	%

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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 nine months ended September 30, 2023 (dollars in thousands):

	30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccrual
September 30, 2023
Commercial real estate	$	—	$	—	$	—
Commercial - specialized		—		—		19
Commercial - general		26		—		—
Consumer:
1-4 Family residential		205		—		14
Auto loans		—		—		—
Other consumer		—		—		—
Construction		—		—		222
	$	231	$	—	$	255

The following tables present 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, 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

	Principal Forgiveness		Weighted- Average Interest Rate Reduction			Weighted- Average Term Extension (Months)
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

As of September 30, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the three and nine months ended September 30, 2023 that subsequently defaulted. Payment default is defined as movement to nonperforming status, foreclosure, or charge-off.

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 allowance for credit losses is adjusted by the same amount.

Prior-period troubled debt restructuring (“TDR”) disclosures

Prior to adopting the new accounting standard on loan modifications, the Company accounted for modifications of loans to borrowers experiencing financial difficulty as TDRs, when the modification resulted in a concession and specific reserves were charged to the ACL if necessary for the amount of estimated credit loss. The following reflects loans that were considered TDRs prior to January 1, 2023. For further information on the Company’s TDR accounting policies, see Note 1, “Summary of Significant Accounting Policies,” to the Company’s audited consolidated financial statements contained in the 2022 Annual Report on Form 10-K.

The Company had no loans modified as a TDR during the year ended December 31, 2022.

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4. GOODWILL AND INTANGIBLES

The Company had goodwill of $19.3 and $19.5 million at September 30, 2023 and December 31, 2022.

Other intangible assets, which consist of CDI, customer lists, and employment agreements at the dates indicated are summarized below (dollars in thousands):

	September 30, 2023			December 31, 2022
Amortized intangible assets
Core deposit intangible	$	6,679		$	6,679
Less: Accumulated amortization		(4,058	)		(3,420	)
		2,621			3,259

Other intangibles		—			2,972
Less: Accumulated amortization		—			(1,882	)
		—			1,090
Other intangible assets, net	$	2,621		$	4,349

On April 1, 2023, the sale of Windmark was completed, resulting in the removal of goodwill and other intangible assets, net of accumulated amortization, of $193 thousand and $942 thousand, respectively.

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,
	2023		2022		2023			2022
Beginning balance	$	26,658	$	27,505	$	27,474		$	19,700
Additions		416		514		1,150			2,694
Valuation adjustment		675		405		(875	)		6,030
Ending balance	$	27,749	$	28,424	$	27,749		$	28,424

	September 30,			December 31,
	2023			2022
Mortgage loans serviced for others	$	2,014,256		$	2,046,490
Mortgage servicing rights assets as a percentage of serviced mortgage loans		1.38	%		1.34	%

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,
	2023			2022
Weighted average constant prepayment rate		7.20	%		7.47	%
Weighted average discount rate		9.66	%		9.15	%
Weighted average life in years		8.00			7.91

6. BORROWING ARRANGEMENTS

Subordinated Debt

In December 2018, the Company issued $26.5 million in subordinated debt notes. Notes totaling $12.4 million have a maturity date of December 2028 and a weighted average fixed rate of 5.74% for the first five years. The remaining $14.1 million of notes 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, all 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.

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On September 29, 2020, the Company issued $50.0 million in subordinated debt notes. Proceeds were reduced by approximately $926 thousand in debt issuance costs. The 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, 2023, the total amount of subordinated notes outstanding was $76.5 million less approximately $372 thousand of remaining debt issuance costs for a total balance of $76.1 million. As of December 31, 2022, the total amount of subordinated notes outstanding was $76.5 million less approximately $511 thousand of remaining debt issuance costs for a total balance of $76.0 million.

Notes Payable and Other Borrowings

As of September 30, 2023 and December 31, 2022, 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. This 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 is 2,300,000. 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.

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 into 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, 2023
Outstanding at beginning of year:		1,354,189		$	16.11			$	14,117
Granted		47,816			27.46				—
Exercised		(45,220	)		14.24				(552	)
Forfeited		(1,125	)		20.19				(7	)
Expired		(2,730	)		17.47				(24	)

Balance, September 30, 2023		1,352,930		$	16.57		5.10	$	13,534

Exercisable at end of period		1,145,822		$	15.41		4.63	$	12,686

Vested at end of period		1,145,822		$	15.41		4.63	$	12,686

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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,
	2023		2022
Expected volatility	39.13% to 39.68%		40.20% to 40.29%
Expected dividend yield		1.74% to 1.90%		1.30%
Expected term (years)	6.1 to 6.3		6.1 to 6.3
Risk-free interest rate	3.91% to 3.98%		1.56% to 1.95%
Weighted average grant date fair value	$	10.26	$	10.54

The total intrinsic value of options exercised during the nine months ended September 30, 2023 and September 30, 2022 was $439 thousand and $516 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, 2023
Outstanding at beginning of year:		84,342		$	26.76
Granted		85,127			25.33
Vested		(38,141	)		24.40
Forfeited		(4,950	)		25.03

Balance, September 30, 2023		126,378		$	26.58

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 unrecognized compensation cost for the awards outstanding under the Plan at September 30, 2023 was $3.4 million and will be recognized over a weighted average remaining period of 1.66 years. The total fair value of restricted stock units vested during each of the nine months ended September 30, 2023 and September 30, 2022 was $931 thousand and $488 thousand, respectively.

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 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, 2023		December 31, 2022
Commitments to grant loans and unfunded commitments under lines of credit	$	669,931	$	682,296
Standby letters of credit		9,946		13,864

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. The Company had no FHLB letters of credit outstanding at September 30, 2023 or December 31, 2022.

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9. LEASES

The Company leases space, primarily for branch facilities and small equipment under operating leases. The Company’s leases often include one or more options to renew at the Company’s discretion, and some of the Company’s leases include options to terminate within one year. When it is reasonably certain that the Company will exercise the option to renew or extend the lease term, that option is included in estimating the value of the ROU asset and lease liability. The Company’s leases contain customary restrictions and covenants and do not contain any residual value guarantees. The Company has certain intercompany leases and subleases between its subsidiaries, and these transactions and balances have been eliminated in consolidation and are not reflected in the tables and information presented below. As of September 30, 2023 and December 31, 2022, the Company had no finance leases.

The balance sheet components of the Company’s leases are as follows (in thousands):

	September 30,		December 31,
	2023		2022
Operating lease right of use assets (included in Other assets)	$	8,562	$	7,938
Operating lease liabilities (included in Accrued expenses and other liabilities)		9,502		8,897

The Company does not generally enter into leases which contain variable payments, other than due to the passage of time. Operating lease costs, including short-term lease costs were $693 thousand and $2.4 million, respectively, for the three and nine months ended September 30, 2023. Operating lease costs, including short-term lease costs were $761 thousand and $2.2 million, respectively, for the three and nine months ended September 30, 2022.

Supplemental cash flow information related to leases is as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases	$	490	$	498	$	1,520	$	1,479
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	—	$	—	$	2,032	$	—

For operating leases the Company’s weighted average remaining lease terms in years and weighted average discount rate was 10.19 and 5.39%, respectively, as of September 30, 2023, and 9.83 and 4.65%, respectively, as of December 31, 2022.

Future undiscounted lease payments at September 30, 2023, under operating lease agreements, are presented below (in thousands).

2023	$	465
2024		1,656
2025		1,321
2026		1,259
2027		1,209
Thereafter		6,642
Total minimum lease payments		12,552
Less: Amount representing interest		(3,050	)
Lease liabilities	$	9,502

As of September 30, 2023, the Company had no additional operating leases that have not yet commenced.

10. 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.

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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, 2023 and December 31, 2022, that the Company and its bank subsidiary met all capital adequacy requirements to which they are subject.

As of September 30, 2023 and December 31, 2022, 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, 2023 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 Fully Phased-In					To Be Well Capitalized Under Prompt Corrective Action Framework
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2023
Total Capital to Risk Weighted Assets:
Consolidated	$	599,238		16.82	%	$	374,066		10.50	%		N/A		N/A
City Bank		502,003		14.10	%		373,957		10.50	%	$	356,150		10.00	%

Tier 1 Capital to Risk Weighted Assets:
Consolidated		479,373		13.46	%		302,815		8.50	%		N/A		N/A
City Bank		458,239		12.87	%		302,727		8.50	%		284,920		8.00	%

Common Equity Tier 1 to Risk Weighted Assets:
Consolidated		434,373		12.19	%		249,377		7.00	%		N/A		N/A
City Bank		458,239		12.87	%		249,305		7.00	%		231,497		6.50	%

Tier 1 Capital to Average Assets:
Consolidated		479,373		11.13	%		173,091		4.00	%		N/A		N/A
City Bank		458,239		10.65	%		172,992		4.00	%		215,143		5.00	%

December 31, 2022
Total Capital to Risk Weighted Assets:
Consolidated	$	559,094		16.58	%	$	354,045		10.50	%		N/A		N/A
City Bank		454,427		13.48	%		353,967		10.50	%	$	337,112		10.00	%

Tier 1 Capital to Risk Weighted Assets:
Consolidated		443,265		13.15	%		286,608		8.50	%		N/A		N/A
City Bank		414,559		12.30	%		286,545		8.50	%		269,689		8.00	%

Common Equity Tier 1 to Risk Weighted Assets:
Consolidated		398,265		11.81	%		236,030		7.00	%		N/A		N/A
City Bank		414,559		12.30	%		235,978		7.00	%		219,122		6.50	%

Tier 1 Capital to Average Assets:
Consolidated		443,265		11.03	%		161,662		4.00	%		N/A		N/A
City Bank		414,559		10.32	%		161,574		4.00	%		200,774		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, 2023.

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.

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11. 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 amount 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.

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	2023			2022
Change in fair value of interest rate swaps hedging investment securities	Other noninterest expense	$	2,265		$	5,258
Change in fair value of hedged investment securities	Other noninterest expense		(2,091	)		(5,332	)
Change in fair value of interest rate swaps hedging fixed rate loans	Interest income - Loans	$	23		$	323
Change in fair value of hedged fixed rate loans	Interest income - Loans		(22	)		(323	)

		Nine Months Ended
		September 30,
Interest Rate Contracts	Location	2023			2022
Change in fair value of interest rate swaps hedging investment securities	Other noninterest expense	$	1,455		$	15,436
Change in fair value of hedged investment securities	Other noninterest expense		(1,320	)		(15,681	)
Change in fair value of interest rate swaps hedging fixed rate loans	Interest income - Loans	$	49		$	948
Change in fair value of hedged fixed rate loans	Interest income - Loans		(47	)		(956	)

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

	September 30, 2023				December 31, 2022
	Notional Amount		Fair Value		Notional Amount		Fair Value

Included in other liabilities:
Interest rate swaps related to fixed rate loans	$	—	$	—	$	—	$	—
Interest rate swaps related to state and municipal securities		—		—		—		—

Included in other assets:
Interest rate swaps related to fixed rate loans	$	8,509	$	531	$	9,493	$	482
Interest rate swaps related to state and municipal securities		123,760		21,580		123,760		20,125

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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	2023			2022
Gain (loss) on mortgage banking derivatives	Net gain (loss) on sales of loans	$	(137	)	$	275

		Nine Months Ended
		September 30,
	Location	2023			2022
Gain (loss) on mortgage banking derivatives	Net gain (loss) on sales of loans	$	(48	)	$	(534	)

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, 2023				December 31, 2022
	Notional Amount		Fair Value		Notional Amount		Fair Value

Included in other assets:
Forward contracts related to mortgage loans held for sale	$	15,000	$	128	$	23,500	$	186
Interest rate lock commitments		25,066		368		27,348		369

Total included in other assets	$	40,066	$	496	$	50,848	$	555

Included in other liabilities:
Forward contracts related to mortgage loans held for sale	$	7,811	$	117	$	5,615	$	128
Interest rate lock commitments		—		—		—		—

Total included in other liabilities	$	7,811	$	117	$	5,615	$	128

The Company had received cash collateral of $21.7 million to offset asset derivative positions on its interest rate swaps at September 30, 2023. 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, 2023. Additionally, the Company had advanced $440 thousand on its mortgage forward contracts at September 30, 2023. The advanced cash collateral amounts are reported in cash and due from banks in the Consolidated Balance Sheets.

12. 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,
	2023		2022		2023		2022
Net income	$	13,494	$	15,458	$	52,421	$	45,619

Weighted average common shares outstanding - basic		16,842,594		17,286,531		16,978,499		17,496,217
Effect of dilutive securities:
Stock-based compensation awards		511,588		615,368		462,402		607,808
Weighted average common shares outstanding - diluted		17,354,182		17,901,899		17,440,901		18,104,025

Basic earnings per share	$	0.80	$	0.89	$	3.09	$	2.61
Diluted earnings per share	$	0.78	$	0.86	$	3.01	$	2.52

13. 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.

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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.

The following table summarizes fair value measurements at the dates indicated (dollars in thousands):

	Level 1		Level 2			Level 3		Total
September 30, 2023
Assets (liabilities) measured at fair value on a recurring basis:
Securities available for sale:
State and municipal	$	—	$	160,573		$	—	$	160,573
Residential mortgage-backed securities		—		285,351			—		285,351
Commercial mortgage-backed securities		—		39,714			—		39,714
Collateralized mortgage obligations		—		71,953			—		71,953
Asset-backed and other amortizing securities		—		16,763			—		16,763
Other securities		—		10,615			—		10,615
Loans held for sale (mandatory)		—		14,496			—		14,496
Mortgage servicing rights		—		—			27,749		27,749
Asset derivatives		—		22,607			—		22,607
Liability derivatives		—		(117	)		—		(117	)

Assets measured at fair value on a non-recurring basis:
Loans held for investment		—		—			1,447		1,447

December 31, 2022
Assets (liabilities) measured at fair value on a recurring basis:
Securities available for sale:
State and municipal	$	—	$	225,055		$	—	$	225,055
Residential mortgage-backed securities		—		328,845			—		328,845
Commercial mortgage-backed securities		—		41,967			—		41,967
Collateralized mortgage obligations		—		75,638			—		75,638
Asset-backed and other amortizing securities		—		19,094			—		19,094
Other securities		—		11,112			—		11,112
Loans held for sale (mandatory)		—		10,038			—		10,038
Mortgage servicing rights		—		—			27,474		27,474
Asset derivatives		—		21,162			—		21,162
Liability derivatives		—		(128	)		—		(128	)

Assets measured at fair value on a non-recurring basis:
Loans held for investment		—		—			4,821		4,821

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.

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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, 2023 and 2022.

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 the 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.

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, 2023, and December 31, 2022, the Company had 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, 2023 and December 31, 2022 the aggregate fair value of loans held for sale for mandatory delivery was $14.5 million and $10.0 million, respectively. The aggregate unpaid principal balance as of the same dates was $14.3 million and $9.9 million, respectively, representing differences between fair value and unpaid principal balance of $180 thousand and $163 thousand, respectively. The Company had no loans held for sale for mandatory delivery designated as nonaccrual or 90 days or more past due at September 30, 2023 and December 31, 2022.

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, 2023 and 2022 the net loss amount totaled $330 thousand and $284 thousand, respectively. For the nine months ended September 30, 2023 and 2022 the net loss amount totaled $78 thousand and $1.9 million, 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, 2023
Non-recurring:
Loans held for investment	$	1,447	Third party appraisals or inspections	Collateral discounts and selling costs		20%-100	%
Recurring:
Mortgage servicing rights		27,749	Discounted cash flows	Conditional prepayment rate		7.20	%
				Discount rate		9.66	%

December 31, 2022
Non-recurring:
Loans held for investment	$	4,821	Third party appraisals or inspections	Collateral discounts and selling costs		20%-100	%
Recurring:
Mortgage servicing rights		27,474	Discounted cash flows	Conditional prepayment rate		7.47	%
				Discount rate		9.15	%

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

	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value

September 30, 2023
Financial assets:
Cash and cash equivalents	$	352,424	$	352,424	$	—	$	—	$	352,424
Loans held for investment, net		2,951,488		—		—		2,893,974		2,893,974
Loans held for sale (best efforts)		5,777		—		5,913		—		5,913
Accrued interest receivable		17,672		—		17,672		—		17,672

Financial liabilities:
Deposits	$	3,620,614	$	—	$	3,619,724	$	—	$	3,619,724
Accrued interest payable		3,922		—		3,922		—		3,922
Junior subordinated deferrable interest debentures		46,393		—		33,321		—		33,321
Subordinated debt securities		76,100		—		67,262		—		67,262

	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value

December 31, 2022
Financial assets:
Cash and cash equivalents	$	234,883	$	234,883	$	—	$	—	$	234,883
Loans held for investment, net		2,708,793		—		—		2,662,609		2,662,609
Loans held for sale (best efforts)		20,365		—		20,745		—		20,745
Accrued interest receivable		16,432		—		16,432		—		16,432

Financial liabilities:
Deposits	$	3,406,430	$	—	$	3,405,222	$	—	$	3,405,222
Accrued interest payable		2,836		—		2,836		—		2,836
Junior subordinated deferrable interest debentures		46,393		—		34,606		—		34,606
Subordinated debt securities		75,961		—		70,835		—		70,835

14. SUBSEQUENT EVENTS

Dividend Declaration

On October 19, 2023, the Company’s board of directors declared a cash dividend of $0.13 per share of common stock to be paid on November 13, 2023 to all shareholders of record as of the close of business on October 30, 2023.

Redemption of Subordinated Debt

On November 8, 2023, the Company will notify holders of its Subordinated Debt Securities due December 15, 2028 (the “2028 Notes”) that it has elected to redeem all the outstanding 2028 Notes effective on December 15, 2023 (the “Redemption Date”). Each of the 2028 Notes will be redeemed pursuant to the terms of the Indenture, dated as of December 14, 2018, between the Company and Ardent Trust Company, N.A., as trustee for the 2028 Notes (the “Trustee”), at the redemption price totaling approximately $12.4 million in aggregate principal amount, plus accrued and unpaid interest totaling approximately $146 thousand, which will represent a price equal to 100% of the principal amount of the 2028 Notes plus any accrued and unpaid interest thereon to the Redemption Date. As provided in the redemption notice, on the Redemption Date, the Trustee will pay the relevant Redemption Price to the holders of 2028 Notes appearing on the books and records of the Trustee on the Redemption Date. The 2028 Notes will cease to represent the right to payment of principal and interest upon the payment to the holders of 2028 Notes by the Trustee representing the Redemption Price. The Company received all necessary regulatory approvals for the redemption of the 2028 Notes.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to assist readers in understanding our financial condition as of and results of operations for the period 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, 2022 (the “2022 Annual Report on Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) of the Securities Act of 1933, as amended (the “Securities Act”), on March 13, 2023. 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.

Cautionary 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 recent bank failures and any continuation of the recent 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 persistence of the current inflationary environment 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;

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●

interest rate fluctuations, which could have an adverse effect on our profitability;

●

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;

●

risks related to cyber incidents or other system failures, such as service denials, cyber-attacks, security breaches and data breaches;

●

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, 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;

●

uncertainty regarding United States fiscal debt 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 2022 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.

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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.

Recent Developments

Economic Conditions

Our financial condition at September 30, 2023, as well as the results of operations for the three and nine months ended September 30, 2023, have been impacted by significant increases in market interest rates due to the increases in the prime lending rate since March 2022 by the Federal Reserve in response to the persistent inflationary environment in the United States. In addition, recent events in other parts of the banking industry have brought additional focus on investment securities portfolios, interest rate risk, liquidity management and capital. As a result, we are providing additional information on our deposits and liquidity position at September 30, 2023 to help illustrate the more traditional and stable nature of our banking model compared to other financial institutions who have recently experienced liquidity and capital challenges.

Deposits

Total deposits were $3.62 billion at September 30, 2023, an increase of $214.2 million during the nine months ended September 30, 2023. Total deposits were comprised of 29% of noninterest-bearing deposits, 10% of time deposits and 61% of interest-bearing nonmaturity deposits. Retail customers accounted for approximately 44% of total deposits, with commercial and public funds accounting for approximately 47% and 9%, respectively. Our average deposit account size was approximately $36 thousand. An estimated 16% of total deposits were uninsured or uncollateralized at September 30, 2023.

Liquidity

We had available borrowing capacity of up to approximately $1.89 billion through the FHLB, the FRB’s Discount Window, and access to the FRB’s Term Funding Program (“BTFP”) at September 30, 2023. The unused line with the FHLB was $1.09 billion and the unused line with the FRB was $612 million at September 30, 2023. No advances were made on these lines during the first three quarters of 2023 and there are no outstanding advances as of September 30, 2023. We have not pledged any securities for the BTFP but have approximately $179 million of available securities that can be used as collateral. Additionally, we have uncollateralized lines with multiple banks totaling $140 million at September 30, 2023. These lines are not guaranteed and we are not placing reliance on them.

Results of Operations

We had net income of $13.5 million, or $0.78 per diluted common share, for the three months ended September 30, 2023, compared to net income of $15.5 million, or $0.86 per diluted common share for the three months ended September 30, 2022. Return on average equity (annualized) was 14.01% and return on average assets (annualized) was 1.27% for the three months ended September 30, 2023, compared to 17.37% and 1.53%, respectively, for the three months ended September 30, 2022.

We had net income of $52.4 million, or $3.01 per diluted common share for the nine months ended September 30, 2023, compared to net income of $45.6 million, or $2.52 per diluted common share for the nine months ended September 30, 2022. Return on average equity (annualized) was 18.70% and return on average assets (annualized) was 1.73% for the nine months ended September 30, 2023, compared to 16.25% and 1.53%, respectively, for the nine months ended September 30, 2022.

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.

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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,
	2023							2022
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans⁽¹⁾	$	3,005,699	$	46,250		6.10	%	$	2,671,183	$	34,464		5.12	%
Investment securities – taxable		561,068		5,422		3.83			617,722		4,166		2.68
Investment securities – non-taxable		159,577		1,054		2.62			215,508		1,428		2.63
Other interest-earning assets⁽²⁾		325,201		4,031		4.92			293,636		1,351		1.83
Total interest-earning assets		4,051,545		56,757		5.56			3,798,049		41,409		4.33
Noninterest-earning assets		177,216							208,135
Total assets	$	4,228,761						$	4,006,184

Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
NOW, savings and money market deposits	$	2,223,014	$	16,061		2.87	%	$	1,873,786	$	3,514		0.74	%
Time deposits		344,395		2,904		3.35			330,133		1,023		1.23
Short-term borrowings		3		—		0.00			4		—		0.00
Notes payable & other longer-term borrowings		—		—		0.00			—		—		0.00
Subordinated debt securities		76,077		1,012		5.28			75,914		1,012		5.29
Junior subordinated deferrable interest debentures		46,393		862		7.37			46,393		457		3.91
Total interest-bearing liabilities	$	2,689,882	$	20,839		3.07	%	$	2,326,230	$	6,006		1.02	%

Noninterest-bearing liabilities:
Noninterest-bearing deposits	$	1,071,175						$	1,248,804
Other liabilities		85,713							78,139
Total noninterest-bearing liabilities		1,156,888							1,326,943
Stockholders’ equity		381,991							353,011
Total liabilities and stockholders’ equity	$	4,228,761						$	4,006,184

Net interest income			$	35,918						$	35,403
Net interest spread						2.48	%						3.30	%
Net interest margin⁽³⁾						3.52	%						3.70	%

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	Nine Months Ended September 30,
	2023							2022
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans⁽¹⁾	$	2,892,887	$	128,724		5.95	%	$	2,567,683	$	99,262		5.17	%
Investment securities – taxable		574,159		16,027		3.73			592,069		10,058		2.27
Investment securities – non-taxable		194,492		3,870		2.66			216,951		4,315		2.66
Other interest-earning assets⁽²⁾		212,384		7,010		4.41			363,659		2,213		0.81
Total interest-earning assets		3,873,922		155,631		5.37			3,740,362		115,848		4.14
Noninterest-earning assets		183,149							236,296
Total assets	$	4,057,071						$	3,976,658

Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
NOW, savings and money market deposits	$	2,090,250	$	38,529		2.46	%	$	1,905,000	$	5,782		0.41	%
Time deposits		309,250		6,239		2.70			334,686		2,962		1.18
Short-term borrowings		111		5		6.02			4		—		0.00
Notes payable & other longer-term borrowings		—		—		0.00			—		—		0.00
Subordinated debt securities		76,031		3,037		5.34			75,852		3,037		5.35
Junior subordinated deferrable interest debentures		46,393		2,402		6.92			46,393		1,005		2.90
Total interest-bearing liabilities	$	2,522,035	$	50,212		2.66	%	$	2,361,935	$	12,786		0.72	%

Noninterest-bearing liabilities:
Noninterest-bearing deposits	$	1,085,345						$	1,174,783
Other liabilities		74,865							64,639
Total noninterest-bearing liabilities		1,160,210							1,239,422
Shareholders’ equity		374,826							375,301
Total liabilities and shareholders’ equity	$	4,057,071						$	3,976,658

Net interest income			$	105,419						$	103,062
Net interest spread						2.71	%						3.42	%
Net interest margin⁽³⁾						3.64	%						3.68	%

(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, 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.

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,
	2023 over 2022
	Change due to:						Total
	Volume			Rate			Variance
	(Dollars in thousands)
Interest-earning assets:
Loans	$	4,316		$	7,470		$	11,786
Investment securities – taxable		(382	)		1,638			1,256
Investment securities – non-taxable		(371	)		(3	)		(374	)
Other interest-earning assets		145			2,535			2,680
Total increase (decrease) in interest income		3,708			11,640			15,348

Interest-bearing liabilities:
NOW, Savings, MMDAs		655			11,892			12,547
Time deposits		44			1,837			1,881
Short-term borrowings		—			—			—
Notes payable & other borrowings		—			—			—
Subordinated debt securities		2			(2	)		—
Junior subordinated deferrable interest debentures		—			405			405
Total increase (decrease) interest expense:		701			14,132			14,833

Increase (decrease) in net interest income	$	3,007		$	(2,492	)	$	515

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	Nine Months Ended September 30,
	2023 over 2022
	Change due to:						Total
	Volume			Rate			Variance
	(Dollars in thousands)
Interest-earning assets:
Loan	$	12,572		$	16,890		$	29,462
Investment securities – taxable		(304	)		6,273			5,969
Investment securities – non-taxable		(447	)		2			(445	)
Other interest-earning assets		(921	)		5,718			4,797
Total increase (decrease) in interest income		10,900			28,883			39,783

Interest-bearing liabilities:
NOW, Savings, MMDAs		562			32,185			32,747
Time deposits		(225	)		3,502			3,277
Short-term borrowings		—			5			5
Notes payable & other borrowings		—			—			—
Subordinated debt securities		7			(7	)		—
Junior subordinated deferrable interest debentures		—			1,397			1,397
Total increase (decrease) interest expense:		344			37,082			37,426

Increase (decrease) in net interest income	$	10,556		$	(8,199	)	$	2,357

Net interest income for the three months ended September 30, 2023 was $35.7 million, compared to $35.1 million for the three months ended September 30, 2022, an increase of $0.6 million, or 1.7%. This change in net interest income was primarily due to increased income on interest-earning assets, principally loans and securities, net of increased funding costs on deposits, as market interest rates continued to rise during the period. This rise in rates is attributed to the Federal Open Market Committee (“FOMC”) of the Federal Reserve repeatedly raising their target benchmark interest rate since March 2022 in response to the persistent inflationary environment in the United States. Average interest-earning assets increased $253.5 million, or 6.7%, to $4.05 billion for the three months ended September 30, 2023 compared to $3.80 billion for the three months ended September 30, 2022. The increase is due to growth in both average loans outstanding of $334.5 million, partially offset by a decrease in average investment securities of $112.6 million. The yield on average interest-earning assets increased 123 basis points from 4.33% for the three months ended September 30, 2022 to 5.56% for the three months ended September 30, 2023. The increase in asset yield from the prior year is primarily a result of increased market interest rates and from deploying excess liquidity from lower yielding interest-earning cash and investment securities to higher yielding loans. Average interest-bearing liabilities increased $363.7 million, or 15.6%, to $2.69 billion for the three months ended September 30, 2023 compared to $2.33 billion for the three months ended September 30, 2022. The increase is primarily growth in average interest-bearing deposits of $363.5 million due to funding for higher loan demand and increased focus on deposits and liquidity. The average cost of interest-bearing liabilities increased 205 basis points to 3.07% for the three months ended September 30, 2023 compared to 1.02% for the three months ended September 30, 2022. The increase is primarily a result of higher deposit funding costs as market interest rates have risen significantly since the start of the second quarter of 2022. These changes caused net interest margin to decline 18 basis points to 3.52% for the three months ended September 30, 2023 from 3.70% for the same three-month period in 2022.

Net interest income for the nine months ended September 30, 2023 was $104.6 million, compared to $102.2 million for the nine months ended September 30, 2022, an increase of $2.4 million, or 2.4%. The increase in net interest income was primarily due to increased income on interest-earning assets, principally loans and securities, net of increased funding costs on deposits, as market interest rates continued to rise during the period, which is attributed to the FOMC repeatedly raising their target benchmark interest rate since March 2022. The increase was partially offset by $4.4 million of interest income received related to four credits for the recovery of interest on previously charged-off credits, purchase discount principal recovery, and prepayment penalties during the second quarter of 2022. Average interest-earning assets increased $133.6 million or 3.6%, to $3.88 billion for the nine months ended September 30, 2023 compared to $3.74 billion for the nine months ended September 30, 2022. The increase is primarily due to growth in average loans outstanding of $325.2 million, partially offset by a decrease in average interest-bearing cash balances of $151.3 million. The yield on average interest-earning assets, excluding the $4.4 million recoveries noted above, increased 139 basis points from 3.98% for the nine months ended September 30, 2022 to 5.37% for the nine months ended September 30, 2023. The increase in asset yield from the prior year is a primarily a result of increased market interest rates and from deploying excess liquidity from lower yielding interest-earning cash to higher yielding loans. Average interest-bearing liabilities increased $160.1 million, or 6.8%, to $2.52 billion for the nine months ended September 30, 2023 compared to $2.36 billion for the nine months ended September 30, 2022. The increase is primarily growth in average interest-bearing deposits of $159.8 million due to funding for higher loan demand and increased focus on deposits and liquidity, given recent events in the banking industry. The average cost of interest-bearing liabilities increased 194 basis points to 2.66% for the nine months ended September 30, 2023 compared to 0.72% for the nine months ended September 30, 2022. The increase is primarily a result of higher deposit funding costs as market rates have risen significantly since the start of the second quarter of 2022. These changes caused net interest margin to decrease 4 basis points to 3.64% for the nine months ended September 30, 2023 from 3.68% for the same nine-month period in 2022.

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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 negative provision for credit losses of $0.7 million for the three months ended September 30, 2023, compared to a negative provision of $0.8 million for the three months ended September 30, 2022. The negative provision during the third quarter of 2023 was largely attributable to a reduction of $1.3 million in specific reserves, partially offset by organic loan growth and net charge-off activity during the period. The reduction in specific reserves was a result of the full repayment of a $13.3 million nonaccrual relationship in the period. The negative provision in the third quarter of 2022 was largely due to a loan loss recovery of $822 thousand of a direct energy credit during that quarter.

The Company recorded a provision for credit losses for the nine months ended September 30, 2023 of $4.0 million, compared to a negative provision of $2.9 million for the nine months ended September 30, 2022. The provision during the nine months ended September 30, 2023 was largely attributable to organic growth of $303.2 million in loans held for investment. The negative provision for credit losses in the same period of 2022 was based on improved credit metrics in the loan portfolio, specifically in the hotel segment, direct energy segment, and other Permian Basin-related credits during the period, as well as a decline in the amount of loans that were actively under a pandemic-related modification experienced during that period.

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:

	Three Months Ended September 30,							Nine Months Ended September 30,
	2023		2022		Increase (Decrease)			2023		2022		Increase (Decrease)
	(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	1,840	$	1,764	$	76		$	5,286	$	5,149	$	137
Income from insurance activities		30		4,856		(4,826	)		1,478		8,003		(6,525	)
Bank card services and interchange fees		3,157		3,156		1			10,156		9,856		300
Mortgage banking activities		4,602		6,287		(1,685	)		12,146		28,593		(16,447	)
Investment commissions		430		391		39			1,239		1,403		(164	)
Fiduciary income		582		568		14			1,779		1,815		(36	)
Gain on sale of subsidiary		290		—		290			33,778		—		33,778
Other income and fees⁽¹⁾		1,346		3,915		(2,569	)		4,218		8,650		(4,432	)
Total noninterest income	$	12,277	$	20,937	$	(8,660	)	$	70,080	$	63,469	$	6,611

(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, wire transfer, Small Business Investment Company (“SBIC”) investments, and other miscellaneous services.

Noninterest income for the three months ended September 30, 2023 was $12.3 million, compared to $20.9 million for the three months ended September 30, 2022, a decrease of $8.7 million, or 41.4%. Significant changes in the components of noninterest income are detailed below.

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Mortgage banking activities - Income from mortgage banking activities decreased $1.7 million, or 26.8%, to $4.6 million for the three months ended September 30, 2023 from $6.3 million for the three months ended September 30, 2022. This decrease was mainly the result of mortgage loan originations declining $50.1 million, or 32.9%, in the current year period as compared to the prior year period as mortgage interest rates have risen and overall mortgage lending has slowed.

Income from insurance activities - Due to the sale of Windmark Insurance Agency, Inc. (“Windmark”) in the second quarter of 2023, there was a decline of $4.8 million in income from insurance activities for the three months ended September 30, 2023 as compared to the same period in 2022.

Other income and fees - Other noninterest income and fees decreased for the three months ended September 30, 2023 largely as a result of $2.1 million of income related to legal settlements recorded in the third quarter of 2022.

Noninterest income for the nine months ended September 30, 2023 was $70.1 million, compared to $63.5 million for the nine months ended September 30, 2022, an increase of $6.6 million, or 10.4%. Significant changes in the components of noninterest income are detailed below.

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

Mortgage banking activities - Income from mortgage banking activities decreased $16.4 million, or 57.5%, to $12.1 million for the nine months ended September 30, 2023 from $28.6 million for the nine months ended September 30, 2022. This decrease was primarily a result of a decrease of $273.1 million, or 46.0%, in mortgage loan originations in the current year period as compared to the prior year period as mortgage interest rates have risen and refinance activity, which was still occurring in the first and second quarters of 2022, has subsided. There was also an $875 thousand decrease in the fair value of the Company’s mortgage servicing rights portfolio for the nine months ended September 30, 2023 as compared to a $6.0 million increase for the same period in 2022, given the changes in market interest rates during the periods.

Income from insurance activities - Due to the sale of Windmark, there was a decline of $6.5 million in income from insurance activities for the nine months ended September 30, 2023 as compared to the same period in 2022.

Other income and fees - Other noninterest income and fees increased in the nine months ended September 30, 2022 from earnings on SBIC investments of $2.3 million as compared to $310 thousand in the same period of 2023 and $2.1 million of income related to legal settlements recorded in the third quarter of 2022.

Noninterest Expense

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

	Three Months Ended September 30,							Nine Months Ended September 30,
	2023		2022		Increase (Decrease)			2023		2022		Increase (Decrease)
	(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits	$	18,709	$	22,927	$	(4,218	)	$	61,400	$	67,620	$	(6,220	)
Occupancy expense, net		4,111		4,132		(21	)		12,246		11,902		344
Professional services		1,560		2,523		(963	)		4,924		7,795		(2,871	)
Marketing and development		853		913		(60	)		2,573		2,391		182
IT and data services		818		908		(90	)		2,570		2,902		(332	)
Bankcard expenses		1,451		1,399		52			4,119		4,050		69
Appraisal expenses		283		359		(76	)		862		1,432		(570	)
Loss on sale of securities		—		—		—			3,409		—		3,409
Other expenses⁽¹⁾		3,704		4,240		(536	)		12,246		13,289		(1,043	)
Total noninterest expense	$	31,489	$	37,401	$	(5,912	)	$	104,349	$	111,381	$	(7,032	)

(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, 2023 was $31.5 million compared to $37.4 million for the three months ended September 30, 2022, a decrease of $5.9 million, or 15.8%. Significant changes in the components of noninterest expense are detailed below.

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Salaries and employee benefits - Salaries and employee benefits decreased $4.2 million, or 18.4%, from $22.9 million for the three months ended September 30, 2022 to $18.7 million for the three months ended September 30, 2023. This decrease was primarily driven by approximately $1.8 million in lower mortgage personnel costs, due to the reduction in mortgage loan originations and operations, and also lower core Windmark personnel costs of $2.7 million due to the sale in the second quarter of 2023.

Professional services - Professional services decreased $963 thousand during the three months ended September 30, 2023, as compared to the same period in 2022, primarily from a reduction of approximately $842 thousand in legal fees incurred largely as a result of a vendor dispute, which was resolved and accounted for by the end of 2022.

Other expenses – Other noninterest expenses declined in the current year period primarily from reduced expenses from mortgage operations, as mortgage originations declined, and Windmark expenses, due to the sale, as compared to the prior year period.

Noninterest expense for the nine months ended September 30, 2023 was $104.3 million, compared to $111.4 million for the nine months ended September 30, 2022, a decrease of $7.0 million, or 6.3%. Significant changes in the components of noninterest expense are detailed below.

Salaries and employee benefits - Salaries and employee benefits decreased $6.2 million, or 9.2%, from $67.6 million for the nine months ended September 30, 2022 to $61.4 million for the nine months ended September 30, 2023. This was primarily driven by approximately $5.9 million in lower mortgage personnel costs, due to the reduction in mortgage loan originations and operations. Also, there was lower core Windmark personnel costs due to the sale, partially offset by Windmark transaction and related incentive-based compensation expenses incurred in the first and second quarters of 2023.

Professional services - Professional services decreased $2.9 million during the nine months ended September 30, 2023, as compared to the same period in 2022, primarily from a reduction of $2.4 million in legal fees incurred largely as a result of a vendor dispute, which was resolved and accounted for by the end of 2022.

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.

Other expenses - Other variable mortgage-based expenses also declined during the nine months ended September 30, 2023, as compared to the same period in 2022, as mortgage originations declined. Additionally, the FDIC assessment increased approximately $676 thousand as the assessment rates charged by the FDIC were increased as well as growth in the assessment base for the nine months ended September 30, 2023 as compared to the same period in 2022.

Financial Condition

Our total assets increased $242.4 million, or 6.1%, to $4.19 billion at September 30, 2023, compared to $3.94 billion at December 31, 2022. Our gross loans held for investment increased $245.5 million, or 8.9%, to $2.99 billion at September 30, 2023, compared to $2.75 billion at December 31, 2022. Our securities portfolio decreased $116.7 million, or 16.6%, to $585.0 million at September 30, 2023, compared to $701.7 million at December 31, 2022. Total deposits increased $214.2 million, or 6.3%, to $3.62 billion at September 30, 2023, compared to $3.41 billion at December 31, 2022.

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.

Loans held for investment increased $245.5 million, or 8.9%, to $2.99 billion at September 30, 2023, compared to $2.75 billion at December 31, 2022. This increase in our loans was primarily the result of organic net loan growth based on strong loan demand. The organic loan growth remained relationship-focused and occurred primarily in commercial real estate loans, residential mortgage loans, and commercial loans.

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The following table shows the contractual maturities of our loans held for investment portfolio at September 30, 2023:

	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	$	94,042	$	579,187	$	286,365	$	86,668	$	1,046,262
Commercial - specialized		124,069		125,068		64,504		52,764		366,405
Commercial - general		81,376		159,153		148,345		125,693		514,567
Consumer:
1-4 family residential		48,452		100,338		75,056		310,665		534,511
Auto loans		3,036		192,234		120,754		—		316,024
Other consumer		8,354		47,850		21,121		—		77,325
Construction		124,558		4,707		791		8,413		138,469
Total loans	$	483,887	$	1,208,537	$	716,936	$	584,203	$	2,993,563

The following table shows the distribution between fixed and adjustable interest rate loans for maturities greater than one year as of September 30, 2023:

	Fixed Rate		Adjustable Rate
	(Dollars in thousands)
Commercial real estate	$	443,378	$	508,842
Commercial - specialized		89,556		152,780
Commercial - general		155,865		277,326
Consumer:
1-4 family residential		301,267		184,792
Auto loans		312,988		—
Other consumer		68,971		—
Construction		4,082		9,829
Total loans	$	1,376,107	$	1,133,569

At September 30, 2023, there was $1.45 billion in adjustable rate loans, with $704.8 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, $463.6 million will reprice immediately upon changes in the underlying index rate, with the remaining $241.2 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.

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 64.1% of our loans were secured by real property as of September 30, 2023, compared to 69.8% as of December 31, 2022. 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 represent 39.5% of loans held for investment as of September 30, 2023 and represented 38.7% of loans held for investment as of December 31, 2022. Further, these loans are geographically diversified, primarily throughout the state of Texas as well as Eastern New Mexico.

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.

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 $126.9 million, or 13.8%, to $1.05 billion as of September 30, 2023 from $919.4 million as of December 31, 2022. The increase was primarily driven by an increase of $60.7 million in multifamily property loans and growth of $56.2 million in other income-producing commercial real estate loans.

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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 $29.8 million, or 6.1%, to $514.6 million as of September 30, 2023 from $484.8 million as of December 31, 2022. The increase in commercial general loans was primarily due to organic loan growth in service-based commercial loans and more broadly throughout general commercial loans.

Commercial specialized loans increased $38.9 million, or 11.9%, to $366.4 million as of September 30, 2023 from $327.5 million as of December 31, 2022. This increase was primarily due to the funding of $36.3 million in seasonal agricultural production loans and growth of $22.7 million in direct energy loans, partially offset by a net reduction of $23.4 million in finance, investment, and insurance 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 increased $65.0 million, or 7.5%, to $927.9 million as of September 30, 2023, from $862.9 million as of December 31, 2022. The increase in these loans was primarily a result of a $74.4 million increase in residential mortgage loans, partially offset by a $5.5 million decrease in consumer auto loans. As of September 30, 2023, our consumer loan portfolio was comprised of $534.5 million in 1-4 family residential loans, $316.0 million in auto loans, and $77.3 million in other consumer loans.

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 $15.1 million, or 9.8%, to $138.5 million as of September 30, 2023 from $153.5 million as of December 31, 2022. The decrease resulted from contraction after higher demand for residential construction as a result of home shortages in many of our markets peaked in the first quarter of 2023 and the continued completion of projects.

Non-owner occupied office real estate loans are included in commercial real estate loans and totaled $130.6 million at September 30, 2023. Owner occupied office real estate loans are included in commercial loans and totaled $55.4 million at September 30, 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.

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

	September 30, 2023		December 31, 2022
	(Dollars in thousands)
Commitments to grant loans and unfunded commitments under lines of credit	$	669,931	$	682,296
Standby letters of credit		9,946		13,864
Total	$	679,877	$	696,160

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.

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.

Effective January 1, 2023, we adopted the CECL model and recognized a cumulative effect adjustment to the ACL for loans and off-balance sheet credit exposures of $1.3 million. The CECL model requires recording life-of-loan projected losses in the loan portfolio based on future economic events and related loan portfolio credit performance. The prior accounting standard recorded reserves based on incurred losses at the balance sheet date.

The ACL for loans was $42.1 million at September 30, 2023, compared to $39.3 million at December 31, 2022, an increase of $2.8 million, or 7.1%. The increase is primarily a result of a provision for credit losses of $4.0 million being recorded during the nine months ended September 30, 2023 largely attributable to growth of $245.5 million in loans held for investment. Uncertainty regarding forecasted economic conditions remains, due to the continued rising interest rate environment and persistent high inflation levels in the United States, and provisions for credit losses may be necessary in future periods.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(Dollars in thousands)
Average loans outstanding during the periods
Commercial real estate	$	1,029,888		$	839,930		$	962,767		$	796,146
Commercial – specialized		365,258			360,296			342,355			353,465
Commercial – general		528,668			475,383			519,375			475,056
Consumer:
1-4 family residential		528,835			416,546			503,878			396,460
Auto loans		316,895			303,912			319,617			275,707
Other consumer		78,787			88,736			79,912			84,400
Construction		139,761			155,393			143,970			149,011
Loans held for sale		17,607			30,987			21,013			37,438
Total average loans outstanding during the periods	$	3,005,699		$	2,671,183		$	2,892,887		$	2,567,683

Net charge-offs (recoveries) during the periods
Commercial real estate	$	—		$	—		$	—		$	(418	)
Commercial – specialized		(59	)		(831	)		(139	)		(836	)
Commercial – general		12			(135	)		259			(76	)
Consumer:
1-4 family residential		(1	)		15			(4	)		53
Auto loans		111			27			437			105
Other consumer		299			270			550			580
Construction		—			—			272			166
Total net charge-offs (recoveries) during the periods	$	362		$	(654	)	$	1,375		$	(426	)

Ratio of net charge-offs (recoveries) to average loans during the periods
Commercial real estate		0.00	%		0.00	%		0.00	%		(0.05	)%
Commercial – specialized		(0.02	)%		(0.23	)%		(0.04	)%		(0.24	)%
Commercial – general		0.00	%		(0.03	)%		0.05	%		(0.02	)%
Consumer:
1-4 family residential		0.00	%		0.00	%		0.00	%		0.01	%
Auto loans		0.04	%		0.01	%		0.14	%		0.04	%
Other consumer		0.38	%		0.30	%		0.69	%		0.69	%
Construction		0.00	%		0.00	%		0.19	%		0.11	%
Total ratio of net charge-offs (recoveries) to average loans during the periods		0.01	%		(0.02	)%		0.05	%		(0.02	)%

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

	September 30,			December 31,
	2023			2022
	(Dollars in thousands)
Total loans held for investment outstanding	$	2,993,563		$	2,748,081
Nonaccrual loans	$	2,978		$	5,802
Allowance for credit losses on loans	$	42,075		$	39,288
Ratio of allowance to total loans held for investment		1.41	%		1.43	%
Ratio of allowance to nonaccrual loans		1,412.86	%		677.15	%
Ratio of nonaccrual loans to total loans held for investment		0.10	%		0.21	%

Net charge-offs (recoveries) totaled $362 thousand and were 0.05% (annualized) of average loans outstanding for the three months ended September 30, 2023, compared to $(654) thousand and (0.10)% (annualized) for the three months ended September 30, 2022. Net charge-offs totaled $1.4 million and were 0.06% (annualized) of average loans outstanding for the nine months ended September 30, 2023, compared to $(426) thousand and (0.02)% (annualized) for the nine months ended September 30, 2022. There was an $822 thousand recovery of a direct energy credit during the third quarter of 2022 that affected both of the period comparisons. There was also a $400 thousand recovery on a commercial tenant relationship in the second quarter of 2022 that affected the nine-month period comparison. The allowance for credit losses on loans as a percentage of loans held for investment was 1.41% at September 30, 2023 and 1.43% at December 31, 2022.

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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, 2023					December 31, 2022
	Amount		% of Total			Amount		% of Total
	(Dollars in thousands)
Commercial real estate	$	14,945		35.5	%	$	13,029		33.1	%
Commercial – specialized		3,943		9.4			3,425		8.7
Commercial – general		6,370		15.1			9,215		23.5
Consumer:
1-4 family residential		8,990		21.4			6,194		15.8
Auto loans		3,786		9.0			3,926		10.0
Other consumer		1,022		2.4			1,376		3.5
Construction		3,019		7.2			2,123		5.4
Total allowance for credit losses	$	42,075		100.0	%	$	39,288		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.

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.

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

At September 30, 2023, our total nonaccrual loans were $3.0 million, or 0.10% of total loans held for investment, as compared to $5.8 million, or 0.21% of total loans held for investment, at December 31, 2022. 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, 2023 to cover any probable loss. One relationship totaling $13.3 million that was placed on nonaccrual during the second quarter of 2023 with a specific reserve of $1.3 million, was fully collected during the third quarter of 2023.

Nonperforming loans were $4.8 million at September 30, 2023 and $7.8 million at December 31, 2022. In addition to the $13.3 million collection noted above, there was a full repayment during the third quarter of 2023 of one relationship totaling $3.3 million that was nonperforming but still accruing.

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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 $116.7 million, or 16.6%, to $585.0 million at September 30, 2023, compared to $701.7 million at December 31, 2022. The decrease was primarily due to $84.8 million in sales, maturities, prepayments, and calls during the nine months ended September 30, 2023. 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. The average book yield of these securities was approximately 2.71%. The proceeds from the sale were used to help fund loan growth during that quarter.

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. During the three months ended September 30, 2023, the fair value of the Company’s available for sale securities declined by $30.9 million. At September 30, 2023, 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 losses have been recognized in the consolidated financial statements for securities in the portfolio.

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, 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	$	736		3.65	%	$	6,143		1.93	%	$	4,918		2.15	%	$	191,636		2.28	%
Residential mortgage-backed securities		14		0.93			3,344		2.04			973		2.78			354,074		2.19
Commercial mortgage-backed securities		—		—			—		—			48,219		2.22			—		—
Commercial collateralized mortgage obligations		—		—			—		—			72,612		5.98			—		—
Asset-backed and other amortizing securities		—		—			—		—			2,393		3.07			16,648		2.78
Other securities		—		—			—		—			12,000		4.47			—		—
Total available-for-sale	$	750		3.60	%	$	9,487		1.97	%	$	141,115		4.36	%	$	562,358		2.24	%

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	As of December 31, 2022
	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	$	1,898		3.43	%	$	8,663		2.17	%	$	7,508		2.22	%	$	241,360		2.24	%
Residential mortgage-backed securities		3		1.90	%		3,037		1.88			3,993		2.37			379,750		2.22
Commercial mortgage-backed securities		—		—			—		—			49,161		2.21			—		—
Commercial collateralized mortgage obligations		—		—			—		—			76,189		4.89			—		—
Asset-backed and other amortizing securities		—		—			—		—			1,689		2.93			19,218		2.81
Other securities		—		—			—		—			12,000		4.47			—		—
Total available-for-sale	$	1,901		3.43	%	$	11,700		2.09	%	$	150,540		3.76	%	$	640,328		2.24	%

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, 2023 were $3.62 billion, representing an increase of $214.2 million, or 6.3%, compared to $3.41 billion at December 31, 2022. The increase in total deposits since December 31, 2022 was largely in brokered deposits, which grew $152 million, and in public fund deposits, which grew approximately $31 million. As of September 30, 2023, 28.9% of total deposits were comprised of noninterest-bearing demand accounts, 61.4% of interest-bearing non-maturity accounts and 9.7% of time deposits.

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

	September 30, 2023					December 31, 2022
	Amount		% of Total			Amount		% of Total
	(Dollars in thousands)
Noninterest-bearing deposits	$	1,046,253		28.9	%	$	1,150,488		33.8	%
NOW and other transaction accounts		499,344		13.8			350,910		10.3
Money market and other savings		1,724,457		47.6			1,618,833		47.5
Time deposits		350,560		9.7			286,199		8.4
Total deposits	$	3,620,614		100.0	%	$	3,406,430		100.0	%

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Average deposit balances and weighted average rates paid on deposits, on an annualized basis, for the periods indicated are shown below.

	Three Months Ended September 30,
	2023					2022
	Average Balance		Weighted Average Rate			Average Balance		Weighted Average Rate
	(Dollars in thousands)
Noninterest-bearing deposits	$	1,071,175		0.00	%	$	1,248,804		0.00	%
Interest-bearing deposits:
NOW and interest-bearing demand accounts		472,180		3.51	%		345,048		0.62	%
Savings accounts		143,919		0.92	%		153,848		0.34	%
Money market accounts		1,606,915		2.85	%		1,374,890		0.82	%
Time deposits		344,395		3.35	%		330,133		1.23	%
Total interest-bearing deposits		2,567,409		2.93	%		2,203,919		0.70	%
Total deposits	$	3,638,584		2.07	%	$	3,452,723		0.52	%

	Nine Months Ended September 30,
	2023					2022
	Average Balance		Weighted Average Rate			Average Balance		Weighted Average Rate
	(Dollars in thousands)
Noninterest-bearing deposits	$	1,085,345		0.00	%	$	1,174,783		0.00	%
Interest-bearing deposits:
NOW and interest-bearing demand accounts		371,526		2.62	%		357,547		0.31	%
Savings accounts		147,802		0.86	%		150,133		0.18	%
Money market accounts		1,570,922		2.58	%		1,397,321		0.45	%
Time deposits		309,250		2.70	%		334,686		1.18	%
Total interest-bearing deposits		2,399,500		2.49	%		2,239,687		0.52	%
Total deposits	$	3,484,845		1.72	%	$	3,414,470		0.34	%

The scheduled maturities of uninsured certificates of deposits or other time deposits as of September 30, 2023 follows:

(Dollars in thousands)		Three Months				Three to Six Months				Six to 12 Months				After 12 Months				Total
		$	9,515			$	39,076			$	18,394			$	10,908			$	77,893

The estimated amount of uninsured and uncollateralized deposits as of September 30, 2023 was $590.1 million. This represented approximately 16% of total deposits and excludes $336.1 million of collateralized public fund deposits.

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. Time deposits in amounts of more than $250 thousand totaled $143.1 million at September 30, 2023.

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, 2023 and December 31, 2022, we had total available borrowing capacity from the FHLB of $1.09 billion and $920.2 million, respectively.

We had no FHLB borrowings during the nine months ended September 30, 2023 or 2022.

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 $612.4 million and $648.3 million at September 30, 2023 and December 31, 2022, respectively.

We had no long-term FRB borrowings during the nine months ended September 30, 2023 or 2022.

In addition, we have access to the FRB’s BTFP. As of September 30, 2023, the Company has not pledged any securities for the BTFP but has approximately $179 million of available securities that can be used as collateral for additional borrowings through the program.

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 $160.0 million as of September 30, 2023 and December 31, 2022, respectively. The lines of credit were not used, other than testing, during the three or nine months ended September 30, 2023 or the three or nine months ended September 30, 2022.

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Subordinated Debt. In December 2018, the Company issued $26.5 million in subordinated notes. Notes totaling $12.4 million have a maturity date of December 2028 and an average fixed rate of 5.74% for the first five years. The remaining $14.1 million of notes 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, all 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. The 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, 2023, the total amount of subordinated debt outstanding was $76.5 million less approximately $372 thousand of remaining debt issuance costs for a total balance of $76.1 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 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, 2023 and December 31, 2022. 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, 2023, 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.

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; 8.26%
South Plains Financial Capital Trust IV	2005		20,000		20,619		2035	3-mo CME Term SOFR + 165 bps; 7.06%
South Plains Financial Capital Trust V	2007		15,000		15,464		2037	3-mo CME Term SOFR + 176 bps; 7.17%
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, 2023.

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.

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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, 2023, the Bank had the capacity to borrow additional funds from the FHLB and Federal Reserve discount window of up to approximately $1.09 billion and $612.4 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 recent bank failures and any continuation of the recent 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 persistence of the current inflationary environment 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 $371.7 million as of September 30, 2023, compared to $357.0 million as of December 31, 2022, an increase of $14.7 million, or 4.1%. The increase from December 31, 2022 was primarily the result of $52.4 million in net earnings for the nine months ended September 30, 2023, partially offset by a decrease in accumulated other comprehensive income (“AOCI”) of $19.5 million, net of tax, repurchases of common stock of $11.9 million, and $6.6 million of dividends paid. The decrease in AOCI was attributed to the decrease in fair value of our available for sale securities and fair value hedges, net of tax, as a result of the continued rising interest rate environment 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.”

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, 2023 and December 31, 2022, 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 was “well capitalized” under the FDIC’s regulatory framework for prompt corrective action and the Basel III capital guidelines. Management believes that no conditions or events have occurred since September 30, 2023 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 following table presents our and the Bank’s regulatory capital ratios as of the dates indicated.

	September 30, 2023					December 31, 2022
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
South Plains Financial, Inc.:
Total capital (to risk-weighted assets)	$	599,238		16.82	%	$	559,094		16.58	%
Tier 1 capital (to risk-weighted assets)		479,373		13.46			443,265		13.15
CET 1 capital (to risk-weighted assets)		434,373		12.19			398,265		11.81
Tier 1 capital (to average assets)		479,373		11.13			443,265		11.03

City Bank:
Total capital (to risk-weighted assets)	$	502,003		14.10	%	$	454,427		13.48	%
Tier 1 capital (to risk-weighted assets)		458,239		12.87			414,559		12.30
CET 1 capital (to risk-weighted assets)		458,239		12.87			414,559		12.30
Tier 1 capital (to average assets)		458,239		10.65			414,559		10.32

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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, 2023. For the three months ended September 30, 2023, we repurchased 354,521 shares of common stock for a total of $9.3 million. For the nine months ended September 30, 2023, we repurchased 467,475 share of common stock for a total of $11.9 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.

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.

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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 tables summarize the simulated change in net interest income over a 12-month horizon as of the dates indicated:

	September 30, 2023			December 31, 2022
Change in Interest Rates (Basis Points)	Percent Change in Net Interest Income			Percent Change in Net Interest Income
+300		(8.09	)%		(1.50	)%
+200		(5.33	)%		(0.96	)%
+100		(2.59	)%		(0.61	)%
-100		2.73	%		(1.50	)%
-200		5.55	%		(2.81	)%

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.

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 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.

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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, 2023			December 31, 2022
	(Dollars in thousands)
Total stockholders’ equity	$	371,716		$	357,014
Less: Goodwill and other intangibles		(21,936	)		(23,857	)
Tangible common equity	$	349,780		$	333,157

Total assets	$	4,186,440		$	3,944,063
Less: Goodwill and other intangibles		(21,936	)		(23,857	)
Tangible assets	$	4,164,504		$	3,920,206

Shares outstanding		16,600,442			17,027,197

Total stockholders’ equity to total assets		8.88	%		9.05	%
Tangible common equity to tangible assets		8.40	%		8.50	%
Book value per share	$	22.39		$	20.97
Tangible book value per share	$	21.07		$	19.57

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 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. Additional information about these policies can be found in Note 1 of the 2022 Annual Report on Form 10-K or the Company’s consolidated financial statements as of September 30, 2023.

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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.

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.

Prior to the adoption of the CECL model, the ACL for loans was established through a provision for loan losses charged to expense, which represented management’s best estimate of inherent losses that had been incurred within the existing portfolio of loans. In addition, a loan was considered impaired when, based on current information and events, it was probable that the Company would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. All loans rated substandard or worse and greater than $250 thousand were specifically reviewed to determine if they were impaired. Loans that were determined to be impaired were then evaluated to determine estimated impairment, if any. Impairment was measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan was collateral dependent. Loans that were not individually determined to be impaired or were not subject to the specific review of impaired status were subject to the general valuation allowance portion of the ACL.

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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 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 which we have adopted.

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.

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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, 2023 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, 2022 (the “2022 Annual Report on Form 10-K”) filed with the SEC on March 13, 2023. Except as described above or in our 2022 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 2022 Annual Report on Form 10-K and under the heading “Risk Factors” in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, filed with the SEC on May 8, 2023. Other than the risk factors set forth in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, filed with the SEC on May 8, 2023, management believes there have been no material changes in the risk factors disclosed by the Company in the 2022 Annual Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

On May 5, 2023, the Company’s board of directors approved a stock repurchase program pursuant to which the Company may, from time to time, purchase up to $15.0 million of its outstanding shares of common stock (the “Program”). The shares may 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 Program and the timing and exact amount of any repurchases will depend on various factors including, the performance of the Company’s stock price, general market and other conditions, applicable legal requirements and other factors. The Program may be terminated or amended by the Company’s board of directors at any time prior to the expiration date of May 5, 2024.

The following table summarizes the Company’s share repurchase activity for the three months ended September 30, 2023.

	Total Shares Repurchased		Average Price Paid Per Share		Total Dollar Amount Purchased Pursuant to Publicly-Announced Plan		Maximum Dollar Amount Remaining Available for Repurchase Pursuant to Publicly-Announced Plan
July 2023		38,386	$	23.37	$	896,996	$	11,554,884
August 2023		164,525		26.77		4,404,344		7,150,540
September 2023		151,610		26.51		4,019,466		3,131,074
Total		354,521

Item 3.

Defaults upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

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Item 5.

Other Information

During the three months ended September 30, 2023, no 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.

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Item 6.

Exhibits

Exhibit Number		Description
2.1		Securities Purchase Agreement, dated April 1, 2023, by and among South Plains Financial, Inc., City Bank and Alliant Insurance Services, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2023) (File No. 001-38895).

3.1		Amended and Restated Certificate of Formation of South Plains Financial, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s 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 Company’s Current Report on Form 8-K filed with the SEC on November 1, 2021) (File No. 001-38895).

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.

101*		The following material from South Plains Financial, Inc.’s Form 10-Q for the quarter ended September 30, 2023, formatted in XBRL (eXtensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income (Loss), (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

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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 7, 2023	By:	/s/ Curtis C. Griffith
			Curtis C. Griffith
			Chairman and Chief Executive Officer

Date:	November 7, 2023	By:	/s/ Steven B. Crockett
			Steven B. Crockett
			Chief Financial Officer and Treasurer

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Curtis C. Griffith, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of South Plains Financial, Inc. (the “registrant”) for the quarter ended September 30, 2023 (this “report”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2023	By:	/s/ Curtis C. Griffith
		Curtis C. Griffith
		Chairman and Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven B. Crockett, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of South Plains Financial, Inc. (the “registrant”) for the quarter ended September 30, 2023 (this “report”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2023	By:	/s/ Steven B. Crockett
		Steven B. Crockett
		Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of South Plains Financial, Inc. (the “Company”) for the quarter ended September 30, 2023 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 7, 2023	By:	/s/ Curtis C. Griffith
		Curtis C. Griffith
		Chairman and Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(1)

The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 7, 2023	By:	/s/ Steven B. Crockett
		Steven B. Crockett
		Chief Financial Officer