SPFI filing — read by section

Item 2. Management’s Discussion and Analysis

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, 2021 (the “2021 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 8, 2022. Unless we state
 otherwise or the context otherwise requires, references in this Form 10-Q to “we,” “our,” “us” and “the Company” refer to South Plains Financial, Inc., a Texas corporation, our wholly-owned banking subsidiary, City Bank, a Texas banking association
 and our other consolidated subsidiaries. References in this Form 10-Q to the “Bank” refer to City Bank.

 C autionary Notice Regarding Forward-Looking Statements 

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

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

 ● 

 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;

 ● 

 the impact, duration and severity of the ongoing COVID-19 pandemic, or any current or future variants thereof, and the response of governmental authorities to the COVID-19 pandemic and our participation in
 COVID-19-related government programs such as the Paycheck Protection Program (the “PPP”) administered by the Small Business Administration (the “SBA”) and created under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
 Act”);

 ● 

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

 ● 

 risks associated with our commercial loan portfolio, including the uncertain economic consequences of the ongoing COVID-19 pandemic, or any current or future variants thereof, or any 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;

 ● 

 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 associated with the sale of crop insurance products, including termination of or substantial changes to the federal crop insurance program;

 ● 

 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 loan 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;

 ● 

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

 ● 

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

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 ● 

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

 ● 

 system failures, service denials, cyber-attacks and security 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 ongoing COVID-19 pandemic), other international or domestic calamities,
 and other matters beyond our control;

 ● 

 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, monetary and fiscal matters, including the 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 2021
 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 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.

 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 insurance, investment, trust and mortgage services.

 28 

 Table of Contents 

 Recent Developments

 COVID-19 Update 

 The ongoing COVID-19 pandemic continues to cause significant disruptions in the U.S. economy. At this time, we cannot predict the impact or how long the economy or our impacted clients will be disrupted by the
 ongoing COVID-19 pandemic and any current or future variants of COVID-19, which could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against variants, and the response by
 governmental bodies and regulators. We are closely monitoring the current environment, and are preparing to quickly make any necessary adjustments to protect our employees and customers.

 The Bank also continues to utilize a rigorous enterprise risk management (“ERM”) system that delivers a systematic approach to risk measurement and enhances the effectiveness of risk management across the Bank. The
 Bank’s ERM system has allowed management to consistently and aggressively review the Bank’s loan portfolio for signs of potential issues during the ongoing COVID-19 pandemic and the Bank continues to closely monitoring its loans to borrowers in the
 retail, hospitality and energy sectors.

 Throughout the COVID-19 pandemic, the Bank has been proactive with its borrowers in those sectors most affected by the COVID-19 pandemic and has offered loan modifications to borrowers who are or may be unable to
 meet their contractual payment obligations because of the effects of COVID-19. As part of the Bank’s efforts to support its customers and protect the Bank, the Bank offered varying forms of loan modifications including 90-day payment deferrals,
 6-month interest only terms, or in certain select cases periods of longer than 6 months of interest only, to provide borrowers relief. As of March 31, 2022, total active loan modifications attributed to COVID-19 were approximately $6.0 million. All
 active modifications are loans modified for either interest only periods longer than 6 months, primarily in the Bank’s hotel portfolio. The Bank expects that these remaining loans on deferral will return to full payment status at the end of their
 respective deferral period.

 The Paycheck Protection Program (“PPP”) was created by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and implemented by the U.S. Small Business Administration (the “SBA”) in March 2020. The
 PPP allowed entities to apply for a 1.00% interest rate loan with payments generally deferred until the date the lender receives the applicable forgiveness amount from the SBA. The PPP loans may be partially or fully forgiven by the SBA if the
 entity meets certain conditions. The maturity term for any principal portion left unforgiven is either 2 or 5 years from the funding date, depending on when the PPP loan was originated. For PPP loans that the SBA approved on or after June 5, 2020,
 the loan must have a maturity of at least 5 years. All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding. The Economic Aid Act, signed into law on December 27, 2020, authorized an additional $284.5 billion in new
 PPP loan funding and extended the authority of lenders to make PPP loans through March 31, 2021. The PPP Extension Act of 2021 was subsequently signed into law on March 30, 2021 and extended the PPP application deadline to May 31, 2021.

 The Bank assisted approximately 2,100 customers for a total of $218 million in the first round of PPP. There has been approximately $217 million in PPP loan forgiveness by the SBA and loan repayments by customers,
 leaving approximately $1 million outstanding as of March 31, 2022. The Bank began accepting new applications for PPP loans in January 2021 to assist customers with the new round of the PPP until funding for the PPP expired on May 31, 2021. The Bank
 funded approximately 1,100 PPP loans for a total of $91 million in the second round of PPP. As of March 31, 2022, the SBA has forgiven approximately $64 million of PPP loans from the second round.

 We are currently unable to fully assess or predict the extent of the effects of the COVID-19 pandemic, or any current or future variant of COVID-19, on our operations as the ultimate impact will
 depend on factors that are currently unknown and/or beyond our control. Please refer to Part II, Item 1A, “Risk Factors” in this Form 10-Q.

 Results of Operations

 We had net income of $14.3 million, or $0.78 per diluted common share, for the three months ended March 31, 2022, compared to net income of $15.2 million, or $0.82 per diluted common share for
 the three months ended March 31, 2021. Return on average equity was 14.58% and return on average assets was 1.47% for the three months ended March 31, 2022, compared to 16.51% and 1.66%, respectively, for the three months ended March 31, 2021. The
 decrease in net income of $0.9 million was primarily the result of a decrease of $2.8 million in noninterest income, partially offset by a decrease of $2.2 million in provision for loan losses.

 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.

 29 

 Table of Contents 

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

 The following table presents, 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 March 31,

 2022

 2021

 Average

 Balance

 Interest

 Yield/

 Rate

 Average

 Balance

 Interest

 Yield/

 Rate

 (Dollars in thousands)

 Assets:

 Interest-earning assets:

 Loans, excluding PPP (1) 

 $

 2,447,009

 $

 28,624

 4.74

 %

 $

 2,163,114

 $

 26,283

 4.93

 %

 Loans - PPP

 35,594

 755

 8.60

 %

 179,498

 2,998

 6.77

 %

 Investment securities – taxable

 520,672

 2,354

 1.83

 %

 545,994

 2,432

 1.81

 %

 Investment securities – non-taxable

 218,321

 1,448

 2.69

 %

 216,695

 1,481

 2.77

 %

 Other interest-earning assets (2) 

 467,471

 204

 0.18

 %

 330,233

 100

 0.12

 %

 Total interest-earning assets

 3,689,067

 33,385

 3.67

 %

 3,435,534

 33,294

 3.93

 %

 Noninterest-earning assets

 262,178

 269,612

 Total assets

 $

 3,951,245

 $

 3,705,146

 Liabilities and Stockholders’ Equity:

 Interest-bearing liabilities:

 NOW, savings and money market deposits

 $

 1,937,764

 $

 911

 0.19

 %

 $

 1,807,963

 $

 1,104

 0.25

 %

 Time deposits

 339,104

 979

 1.17

 %

 324,381

 1,053

 1.32

 %

 Short-term borrowings

 4

 —

 0.00

 %

 25,022

 4

 0.06

 %

 Notes payable & other longer-term borrowings

 —

 —

 0.00

 %

 74,444

 35

 0.19

 %

 Subordinated debt securities

 75,798

 1,012

 5.41

 %

 75,635

 1,019

 5.46

 %

 Junior subordinated deferrable interest debentures

 46,393

 231

 2.02

 %

 46,393

 223

 1.95

 %

 Total interest-bearing liabilities

 $

 2,399,063

 $

 3,133

 0.53

 %

 $

 2,353,838

 $

 3,438

 0.59

 %

 Noninterest-bearing liabilities:

 Noninterest-bearing deposits

 $

 1,104,091

 $

 935,345

 Other liabilities

 50,843

 43,604

 Total noninterest-bearing liabilities

 1,154,934

 978,949

 Stockholders’ equity

 397,248

 372,359

 Total liabilities and stockholders’ equity

 $

 3,951,245

 $

 3,705,146

 Net interest income

 $

 30,252

 $

 29,856

 Net interest spread

 3.14

 %

 3.34

 %

 Net interest margin (3) 

 3.33

 %

 3.52

 %

 (1) 

 Average loan balances include nonaccrual loans and loans held for sale.

 (2) 

 Includes income and average balances for interest-earning deposits at other banks, nonmarketable securities, federal funds sold and other miscellaneous interest-earning assets.

 (3) 

 Net interest margin is calculated as the annualized net interest income, on a fully tax-equivalent basis, divided by average interest-earning assets.

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 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 table sets 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 March 31,

 2022 over 2021

 Change due to:

 Total

 Volume

 Rate

 Variance

 (Dollars in thousands)

 Interest-earning assets:

 Loans, excluding PPP

 $

 3,449

 $

 (1,108

 )

 $

 2,341

 Loans - PPP

 (2,404

 )

 161

 (2,243

 )

 Investment securities – taxable

 (113

 )

 35

 (78

 )

 Investment securities – non-taxable

 11

 (44

 )

 (33

 )

 Other interest-earning assets

 42

 62

 104

 Total increase (decrease) in interest income

 985

 (894

 )

 91

 Interest-bearing liabilities:

 NOW, Savings, MMDAs

 79

 (272

 )

 (193

 )

 Time deposits

 48

 (122

 )

 (74

 )

 Short-term borrowings

 (4

 )

 —

 (4

 )

 Notes payable & other borrowings

 (35

 )

 —

 (35

 )

 Subordinated debt securities

 2

 (9

 )

 (7

 )

 Junior subordinated deferrable interest debentures

 —

 8

 8

 Total increase (decrease) interest expense:

 90

 (395

 )

 (305

 )

 Increase (decrease) in net interest income

 $

 895

 $

 (499

 )

 $

 396

 Net interest income for the three months ended March 31, 2022 was $29.9 million, compared to $29.5 million for the three months ended March 31, 2021, an increase of $0.4 million, or 1.4%. The
 increase in net interest income was mainly comprised of the $0.3 million, or 8.9%, decrease in interest expense. While interest income was consistent, there was a change in the amount of interest income from PPP loans and non-PPP loans. Interest
 income on non-PPP loans grew $2.3 million and was primarily attributable to a $283.9 million increase in average non-PPP loan balances, partially offset by a 19 basis point decrease in interest rates for the three months ended March 31, 2022,
 compared to the three months ended March 31, 2021. The increase in non-PPP loan balances was due to organic loan growth throughout the portfolio. Interest income on PPP loans and the related SBA fees declined $2.2 million as the average PPP loan
 balance decreased $143.9 million for the three months ended March 31, 2022, compared to the same period in 2021. These fees are deferred and then accreted into interest income over the life of the applicable loans. During the three months ended
 March 31, 2022, the Company had $88 thousand in interest income on PPP loans and recognized $667 thousand in PPP related SBA fees. At March 31, 2022, there was $1.3 million of deferred fees that have not been accreted to income. The Company expects
 that the remaining outstanding PPP loans will continue to be forgiven by the SBA over the next several quarters.

 The $0.3 million decrease in interest expense for the three months ended March 31, 2022 was primarily related to a 6 basis point decrease in the rate paid on interest-bearing liabilities,
 partially offset by an increase of $45.2 million, or 1.9%, in average interest-bearing liabilities over the same period in 2021. The increase in average interest-bearing liabilities from March 31, 2021 to March 31, 2022 was largely due to growth in
 deposits from PPP loan funding, other government stimulus payments and programs, and organic growth. Additionally, the decrease in the rate paid on interest-bearing liabilities was the result of repricing a portion of public fund deposits during
 2021. Additionally, average noninterest-bearing demand deposits increased to $1.10 billion at March 31, 2022 from $935.3 million at March 31, 2021.

 For the three months ended March 31, 2022, net interest margin and net interest spread were 3.33% and 3.14%, respectively, compared to 3.52% and 3.34%, respectively, for the same period in 2021,
 which reflects the changes in interest income and interest expense discussed above.

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 Table of Contents 

 Provision for Loan Losses

 Credit risk is inherent in the business of making loans. We establish an allowance for loan losses through charges to earnings, which are shown in the statements of income as the provision for
 loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for loan losses
 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 loan 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 provision for loan losses for the three months ended March 31, 2022 was $(2.1) million, compared to $0.1 million for the three months ended March 31, 2021. The decrease in the provision for
 loan losses in the first quarter of 2022 compared to the same quarter in 2021 is primarily due improving credit metrics in the loan portfolio, specifically in the hotel segment, direct energy segment, and other Permian Basin-related credits and a
 decline in the amount of loans that are actively under a COVID-19 pandemic-related modification. The allowance for loan losses as a percentage of loans held for investment was 1.62% at March 31, 2022 and 1.73% at December 31, 2021. Further
 discussion of the allowance for loan losses is noted below.

 Noninterest Income

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

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

 Three Months Ended

 March 31,

 2022

 2021

 Increase

 (Decrease)

 (Dollars in thousands)

 Noninterest income:

 Service charges on deposit accounts

 $

 1,773

 $

 1,573

 $

 200

 Income from insurance activities

 1,570

 1,112

 458

 Bank card services and interchange fees

 3,222

 2,642

 580

 Mortgage banking activities

 13,637

 18,816

 (5,179

 )

 Investment commissions

 546

 430

 116

 Fiduciary income

 612

 836

 (224

 )

 Other income and fees (1) 

 2,337

 1,091

 1,246

 Total noninterest income

 $

 23,697

 $

 26,500

 $

 (2,803

 )

 (1) 

 Other income and fees includes the increase in the cash surrender value of life insurance, safe deposit box rental, check printing, collections, wire transfer and other miscellaneous services.

 Noninterest income for the three months ended March 31, 2022 was $23.7 million, compared to $26.5 million for the three months ended March 31, 2021, a decrease of $2.8 million, or 10.6%. Income
 from mortgage banking activities decreased $5.2 million, or 27.5%, to $13.6 million for the three months ended March 31, 2022 from $18.8 million for the three months ended March 31, 2021. The decrease in mortgage banking activities was primarily
 due to a decrease of $201.0 million, or 46.1%, in mortgage loan originations for the three months ended March 31, 2022 compared to the same period for 2021. We experienced record volume in mortgage originations during 2020 and 2021, as the industry
 benefitted from historic low levels of interest rates. Refinance activity also played a key role in this decrease, which has begun to taper off and return to more historic levels. The decrease in mortgage loan originations was partially offset by a
 positive $4.5 million fair value adjustment to our mortgage servicing rights portfolio due to increased pricing for these assets as mortgage interest rates continue to rise. The decrease in mortgage banking activities was partially offset by
 increased income during the first quarter of 2022 from an investment in a Small Business Investment Company (“SBIC”) of $869 thousand, growth in bank card services and interchange fees, and income from insurance activities.

 32 

 Table of Contents 

 Noninterest Expense

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

 Three Months Ended

 March 31,

 2022

 2021

 Increase

 (Decrease)

 (Dollars in thousands)

 Noninterest expense:

 Salaries and employee benefits

 $

 22,703

 $

 24,318

 $

 (1,615

 )

 Occupancy expense, net

 3,737

 3,565

 172

 Professional services

 2,625

 1,573

 1,052

 Marketing and development

 720

 568

 152

 IT and data services

 1,053

 1,054

 (1

 )

 Bankcard expenses

 1,323

 1,049

 274

 Appraisal expenses

 565

 681

 (116

 )

 Other expenses (1) 

 5,198

 4,249

 949

 Total noninterest expense

 $

 37,924

 $

 37,057

 $

 867

 (1) 

 Other expenses include items such as telephone expenses, postage, courier fees, directors’ fees, and insurance.

 Noninterest expense for the three months ended March 31, 2022 was $37.9 million compared to $37.1 million for the three months ended March 31, 2021, an increase of $0.9 million, or 2.3%. Salaries
 and employee benefits decreased $1.6 million, or 6.6%, from $24.3 million for the three months ended March 31, 2021 to $22.7 million for the three months ended March 31, 2022. This decrease in salaries and employee benefits expense for the first
 quarter of 2022 compared to the first quarter of 2021 was primarily driven by decreased commissions of $2.4 million paid on the lower volume of mortgage loan origination, partially offset by a rise in salary expense due to higher costs for new
 hires in commercial lending and as a part of the data analytics and cloud projects, stock-based compensation and annual salary adjustments. Other noninterest expenses increased $1.0 million for the three months ended March 31, 2022, compared to the
 same period in 2021. This increase was primarily due to a loss on disposal of assets of $362 thousand in the first quarter of 2022. Professional services expenses increased $1.1 million for the three months ended March 31, 2022, compared to the
 same period in 2021. This increase was primarily due to a $712 thousand increase in legal fees largely as a result of the vendor dispute legal proceedings. See Part II, Item 1, “Legal Proceedings,” of this Form 10-Q for further discussion.

 Financial Condition

 Our total assets increased $97.9 million, or 2.5%, to $4.00 billion at March 31, 2022, compared to $3.90 billion at December 31, 2021. Our gross loans held for investment increased $16.1 million,
 or 0.7%, to $2.45 billion at March 31, 2022, compared to $2.44 billion at December 31, 2021. Our securities portfolio increased $68.9 million, or 9.5%, to $793.4 million at March 31, 2022, compared to $724.5 million at December 31, 2021. Total
 deposits increased $108.9 million, or 3.3%, to $3.45 billion at March 31, 2022, compared to $3.34 billion at December 31, 2021.

 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 $16.1 million, or 0.7%, to $2.45 billion at March 31, 2022, compared to $2.44 billion at December 31, 2021. This increase in our loans was primarily the result
 of organic net loan growth of $27.9 million, partially offset by a decrease due to SBA forgiveness and repayments of $11.8 million in PPP loans during the first quarter of 2022. The organic loan growth remained relationship-focused and occurred
 primarily in land development and construction loans, restaurant and retail loans, and consumer loans.

 The following table shows the contractual maturities of our loans held for investment portfolio at March 31, 2022:

 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

 $

 94,337

 $

 356,260

 $

 208,530

 $

 112,363

 $

 771,490

 Commercial - specialized

 79,831

 114,648

 109,574

 46,090

 350,143

 Commercial - general

 63,573

 166,555

 143,158

 102,307

 475,593

 Consumer:

 1-4 family residential

 40,711

 61,662

 69,771

 206,217

 378,361

 Auto loans

 2,248

 146,767

 106,688

 —

 255,703

 Other consumer

 4,977

 41,947

 26,321

 —

 73,245

 Construction

 133,870

 4,322

 968

 9,936

 149,096

 Total loans

 $

 419,547

 $

 892,161

 $

 665,010

 $

 476,913

 $

 2,453,631

 33 

 Table of Contents 

 The following table shows the distribution between fixed and adjustable interest rate loans for maturities greater than one year as of March 31, 2022:

 Fixed

 Rate

 Adjustable

 Rate

 (Dollars in thousands)

 Commercial real estate

 $

 274,449

 $

 402,704

 Commercial - specialized

 66,451

 203,861

 Commercial - general

 153,018

 259,002

 Consumer:

 1-4 family residential

 178,895

 158,755

 Auto loans

 253,455

 —

 Other consumer

 68,073

 195

 Construction

 867

 14,359

 Total loans

 $

 995,208

 $

 1,038,876

 At March 31, 2022, there is $1.24 billion in adjustable rate loans, with $648.7 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, $426.1 million will reprice immediately upon changes in the underlying index rate, with the remaining $222.6 million being subject to 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 67.8% of our loans were secured by real property as of March 31, 2022, compared to 69.4% as of December 31, 2021. 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 37.2% of loans held for investment as of March 31, 2022 and represented 36.7%
 of loans held for investment as of December 31, 2021. 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 $16.0 million, or 2.1%, to $771.5 million as of March 31, 2022 from $755.4 million as of December 31, 2021. The increase was primarily driven by an increase
 of $14.3 million in residential land development loans and an increase in commercial land development loans of $6.6 million, partially offset with a decrease of $5.6 million retail loans.

 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, 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.

 34 

 Table of Contents 

 Commercial general loans increased $15.6 million, or 3.4%, to $475.6 million as of March 31, 2022 from $460.0 million as of December 31, 2021. The increase in commercial general loans was
 primarily due to a $19.2 million of organic loan growth in restaurant and retail loans and a $4.1 million increase in construction loans, partially offset by a decrease in PPP loans of $11.8 million during the period.

 Commercial specialized loans decreased $28.6 million, or 7.5%, to $350.1 million as of March 31, 2022 from $378.7 million as of December 31, 2021. This decrease was primarily due to net
 repayments of $35.5 million in seasonal agricultural production loans, partially offset by organic loan growth of $8.7 million in finance/investment loans. A credit of approximately $46 million, in the energy sector, is expected to be paid off
 during the second quarter of 2022 as it moves to a non-bank structure.

 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.

 Consumer and other loans increased $10.8 million, or 1.5%, to $707.3 million as of March 31, 2022 from $696.5 million as of December 31, 2021. The increase in these loans was primarily a result
 of a $15.0 million increase in auto loans as a result of increased auto buyer demand. As of March 31, 2022, our consumer loan portfolio was comprised of $378.4 million in 1-4 family residential loans, $255.7 million in auto loans, and $73.2 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 increased $2.2 million, or 1.5%, to $149.1 million as of March 31, 2022 from $146.9 million as of December 31, 2021. The increase resulted from continued higher demand for
 residential construction as a result of home shortages in many of our markets.

 Paycheck Protection Program . In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA under the
 provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance
 after forgiveness of any amounts is still fully guaranteed by the SBA. Terms of the PPP loans include the following (i) maximum amount limited to the lesser of $10 million or an amount calculated using a payroll-based formula, (ii) maximum loan
 term of five years, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required for six months following the loan disbursement date and (vi) loan forgiveness up to the full principal amount of
 the loan and any accrued interest, subject to certain requirements including that no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. In return for processing and booking the loan, the SBA paid the lender a
 processing fee tiered by the size of the loan (5% for loans of not more than $350 thousand; 3% for loans more than $350 thousand and less than $2 million; and 1% for loans of at least $2 million). At March 31, 2022, outstanding PPP loans totaled
 approximately $28.4 million and are included in commercial general loans.

 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 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.

 35 

 Table of Contents 

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

 March 31,

 2022

 December 31,

 2021

 (Dollars in thousands)

 Commitments to grant loans and unfunded commitments under lines of credit

 $

 620,871

 $

 542,338

 Standby letters of credit

 13,208

 12,418

 Total

 $

 634,079

 $

 554,756

 Allowance for Loan Losses

 The allowance for loan losses provides a reserve against which loan losses are charged as those losses become evident. Management evaluates the appropriate level of the allowance for loan losses
 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 allowance for loan losses is assessed by
 regulatory examinations and the Company’s internal and external loan reviews. The allowance for loan losses consists of two elements: (1) specific valuation allowances established for probable losses on specific loans and (2) historical valuation
 allowances calculated based on historical loan loss experience for similar loans with similar characteristics and trends, judgmentally adjusted for general economic conditions and other qualitative risk factors internal and external to the Company.

 To determine the adequacy of the allowance for loan losses, the loan portfolio is broken into categories based on loan type. Historical loss experience factors by category, adjusted for changes
 in trends and conditions, are used to determine an indicated allowance for each portfolio category. These factors are evaluated and updated based on the composition of the specific loan portfolio. Other considerations include volumes and trends of
 delinquencies, nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk, and the experience
 and abilities of the Company’s lending personnel. In addition to the portfolio evaluations, impaired loans with a balance of $250 thousand or more are individually evaluated based on facts and circumstances of the loan to determine if a specific
 allowance amount may be necessary. Specific allowances may also be established for loans whose outstanding balances are below the above threshold when it is determined that the risk associated with the loan differs significantly from the risk
 factor amounts established for its loan category.

 The allowance for loan losses was $39.6 million at March 31, 2022, compared to $42.1 million at December 31, 2021, a decrease of $2.4 million, or 5.8%. The decrease is primarily the result of a
 negative provision of $2.1 million being recorded in March 2022 based on improving credit metrics in the loan portfolio, specifically in the hotel segment, direct energy segment, and other Permian Basin-related credits, and a decline in the amount
 of loans actively under a modification.

 The following table provides an analysis of the allowance for loan losses and other data at the dates indicated.

 March 31,

 December 31,

 2022

 2021

 (Dollars in thousands)

 Average loans outstanding during period (1) 

 Commercial real estate

 $

 751,017

 $

 705,516

 Commercial – specialized

 354,119

 336,754

 Commercial – general

 472,498

 490,945

 Consumer:

 1-4 family residential

 387,987

 374,609

 Auto loans

 244,097

 227,301

 Other consumer

 79,044

 68,106

 Construction

 144,928

 124,840

 Loans held for sale

 48,913

 92,130

 Total average loans outstanding during period

 $

 2,482,603

 $

 2,420,201

 Net charge-offs during the period

 Commercial real estate

 $

 (25

 )

 $

 (109

 )

 Commercial – specialized

 5

 11

 Commercial – general

 185

 459

 Consumer:

 1-4 family residential

 39

 44

 Auto loans

 40

 483

 Other consumer

 120

 653

 Construction

 —

 (4

 )

 Total net charge-offs during the period

 $

 364

 $

 1,537

 Total loans held for investment outstanding

 $

 2,453,631

 $

 2,437,577

 Nonaccrual loans

 $

 9,548

 $

 9,518

 Allowance for loan losses

 $

 39,649

 $

 42,098

 Ratio of allowance to total loans held for investment

 1.62

 %

 1.73

 %

 Ratio of allowance to nonaccrual loans

 415.26

 %

 442.30

 %

 Ratio of nonaccrual loans to total loans held for investment

 0.39

 %

 0.39

 %

 Ratio of net charge-offs to average loans during the period

 Commercial real estate

 0.00

 %

 (0.02

 )%

 Commercial – specialized

 0.00

 %

 0.00

 %

 Commercial – general

 0.04

 %

 0.09

 %

 Consumer:

 1-4 family residential

 0.01

 %

 0.01

 %

 Auto loans

 0.02

 %

 0.21

 %

 Other consumer

 0.15

 %

 0.96

 %

 Construction

 0.00

 %

 0.00

 %

 Total ratio of net charge-offs to average loans during the period

 0.01

 %

 0.06

 %

 36 

 Table of Contents 

 Net charge-offs totaled $364 thousand and were 0.06% (annualized) of average loans outstanding for the three months ended March 31, 2022, compared to $623 thousand and 0.11% for the three months
 ended March 31, 2021. The decrease in net charge-offs in the first quarter of 2022 was primarily the result of a decrease of $190 thousand in auto and other consumer net charge-offs in the first quarter of 2022 compared to the same period in 2021.
 The allowance for loan losses as a percentage of loans held for investment was 1.62% at March 31, 2022 and 1.73% at December 31, 2021.

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

 March 31, 2022

 December 31, 2021

 Amount

 % of Total

 Amount

 % of Total

 (Dollars in thousands)

 Commercial real estate

 $

 14,621

 36.9

 %

 $

 17,245

 41.0

 %

 Commercial – specialized

 3,275

 8.3

 4,363

 10.4

 Commercial – general

 9,940

 25.1

 8,466

 20.1

 Consumer:

 1-4 family residential

 4,931

 12.4

 5,268

 12.5

 Auto loans

 3,681

 9.3

 3,653

 8.7

 Other consumer

 1,384

 3.4

 1,357

 3.2

 Construction

 1,817

 4.6

 1,746

 4.1

 Total allowance for loan losses

 $

 39,649

 100.0

 %

 $

 42,098

 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.

 37 

 Table of Contents 

 A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on
 nonaccrual status and performing restructured loans. 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
 measure impairment of a loan 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 impairment 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 March 31, 2022, our total nonaccrual loans were $9.5 million, or 0.39% of total loans held for investment, as compared to $9.5 million, or 0.39% of total loans held for investment, at December
 31, 2021. These loans were reviewed for impairment and specific valuation allowances were established as necessary and included in the allowance for loan losses as of March 31, 2022 to cover any probable loss. There were not any significant changes
 in nonaccrual loans during the first quarter of 2022.

 Nonperforming loans were $12.1 million at March 31, 2022 and $10.6 million at December 31, 2021 .

 In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”).
 Included in certain loan categories of impaired loans are TDRs on which we have granted certain material concessions to the borrower as a result of the borrower experiencing financial difficulties. The concessions granted by us may include, but are
 not limited to: (1) a modification in which the maturity date, timing of payments or frequency of payments is modified, (2) an interest rate lower than the current market rate for new loans with similar risk, or (3) a combination of the first two
 factors.

 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.
 Loans identified as TDRs are evaluated for impairment using the present value of the expected cash flows or the estimated fair value of the collateral, if the loan is collateral dependent. The fair value is determined, when possible, by an
 appraisal of the property less estimated costs related to liquidation of the collateral. The appraisal amount may also be adjusted for current market conditions. Adjustments to reflect the present value of the expected cash flows or the estimated
 fair value of collateral dependent loans are a component in determining an appropriate allowance for loan losses, and as such, may result in increases or decreases to the provision for loan losses in current and future earnings.

 We had no loans restructured as TDRs during the first three months of 2022 or 2021. TDRs are excluded from our nonperforming loans unless they otherwise meet the definition of nonaccrual loans or
 are past due 90 days or more.

 COVID-19 Industry Exposures. The Company’s COVID-19 industry exposures at March 31, 2022 were:

 • 

 Restaurant and retail owner-occupied loans totaled $141.6 million (5.8% of total loans). The average loan size is $502 thousand. There was $1.8 million in classified loans, $60 thousand in loans past due 30
 days or more, and $1.2 million in nonaccrual loans. The related allowance for loan losses to total restaurant and retail owner-occupied loans is 2.65%. As of March 31, 2022, none of these loans were active modifications as a result of the
 COVID-19 pandemic.

 • 

 Hospitality and assisted living center loans totaled $116.0 million (4.7% of total loans). The average loan size is $3.0 million. There was $38.6 million in classified loans, no loans past due 30 days or
 more, and $1.1 million in nonaccrual loans. The related allowance for loan losses to total hospitality and assisted living center loans is 6.94%. As of March 31, 2022, approximately 5% of these loans were active modifications as a result of
 the COVID-19 pandemic. All of these modifications have original modified terms that extended up to 18 months. The Company expects that these remaining modified loans will return to full payment status at the end of their respective
 modification period.

 Oil and Gas Exposures. The Company’s direct energy sector loans totaled $121.6 million (5.0% of total loans) at March 31, 2022. There was $459 thousand
 in classified loans, $128 thousand in loans past due 30 days or more, and $43 thousand in nonaccrual loans. Management has expanded the monitoring of the loans in this category. The related allowance for loan losses to direct energy loans is 1.26%.
 As of March 31, 2022, none of these loans were active modifications as a result of the COVID-19 pandemic.

 38 

 Table of Contents 

 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 available-for-sale 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 increased $68.9 million, or 9.5%, to $793.4 million at March 31, 2022, compared to $724.5 million at December 31, 2021. The increase was primarily due to a $132.4 million
 in purchases, partially offset by $17.7 million in maturities, prepayments and calls and a $44.9 million decline in the unrealized gain at March 31, 2022 as compared to December 31, 2021 .

 Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. During the three months ended March 31, 2022, the fair value of the Company’s available for
 sale securities declined by $44.9 million as a result of the recent significant increase in interest rates. At March 31, 2022, we evaluated the securities which had an unrealized loss for other-than-temporary impairment and determined all declines
 in value to be temporary. 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.

 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 obligation with or without call or prepayment penalties.

 As of March 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

 U.S. government and agencies

 $

 —

 —

 %

 $

 —

 —

 %

 $

 —

 —

 %

 $

 —

 —

 %

 State and municipal

 954

 3.29

 8,480

 2.52

 10,185

 2.14

 243,699

 2.24

 Mortgage-backed securities

 —

 —

 2,598

 1.69

 56,701

 2.20

 363,304

 2.08

 Collateralized mortgage obligations

 —

 0.00

 —

 0.00

 103,976

 0.56

 —

 0.00

 Asset-backed and other amortizing securities

 —

 —

 —

 —

 2,072

 2.91

 22,703

 2.81

 Other securities

 —

 0.00

 —

 0.00

 12,000

 4.47

 —

 0.00

 Total available-for-sale

 $

 954

 3.29

 %

 $

 11,078

 2.32

 %

 $

 184,934

 1.43

 %

 $

 629,706

 2.17

 %

 39 

 Table of Contents 

 As of December 31, 2021

 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

 U.S. government and agencies

 $

 —

 —

 %

 $

 —

 —

 %

 $

 —

 —

 %

 $

 —

 —

 %

 State and municipal

 1,939

 2.74

 7,563

 2.58

 10,502

 2.11

 245,139

 2.24

 Mortgage-backed securities

 —

 —

 1,476

 1.43

 59,116

 2.20

 242,381

 1.86

 Collateralized mortgage obligations

 —

 0.00

 —

 0.00

 106,733

 0.56

 —

 0.00

 Asset-backed and other amortizing securities

 —

 —

 —

 —

 2,328

 2.90

 23,718

 2.82

 Other securities

 —

 0.00

 —

 0.00

 12,000

 4.47

 —

 0.00

 Total available-for-sale

 $

 1,939

 2.74

 %

 $

 9,039

 2.39

 %

 $

 190,679

 1.43

 %

 $

 511,238

 2.09

 %

 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 March 31, 2022 were $3.45 billion, representing an increase of $108.9 million, or 3.3%, compared to $3.34 billion at December 31, 2021. As of March 31, 2022, 32.8% of total
 deposits were comprised of noninterest-bearing demand accounts, 57.5% of interest-bearing non-maturity accounts and 9.7% of time deposits.

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

 March 31, 2022

 December 31, 2021

 Amount

 % of Total

 Amount

 % of Total

 (Dollars in thousands)

 Noninterest-bearing deposits

 $

 1,131,215

 32.8

 %

 $

 1,071,367

 32.1

 %

 NOW and other transaction accounts

 373,634

 10.8

 395,322

 11.8

 Money market and other savings

 1,610,735

 46.7

 1,534,795

 45.9

 Time deposits

 334,573

 9.7

 339,738

 10.2

 Total deposits

 $

 3,450,157

 100.0

 %

 $

 3,341,222

 100.0

 %

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

 Three Months Ended

 Year Ended

 March 31, 2022

 December 31, 2021

 Average

 Balance

 Weighted

 Average Rate

 Average

 Balance

 Weighted

 Average Rate

 (Dollars in thousands)

 Noninterest-bearing deposits

 $

 1,104,091

 —

 %

 $

 1,016,835

 —

 %

 Interest-bearing deposits:

 NOW and interest-bearing demand accounts

 375,242

 0.09

 %

 355,274

 0.03

 %

 Savings accounts

 149,016

 0.09

 %

 132,426

 0.09

 %

 Money market accounts

 1,413,506

 0.23

 %

 1,353,978

 0.29

 %

 Time deposits

 339,104

 1.17

 %

 329,509

 1.25

 %

 Total interest-bearing deposits

 2,276,868

 0.34

 %

 2,171,187

 0.38

 %

 Total deposits

 $

 3,380,959

 0.23

 %

 $

 3,188,022

 0.26

 %

 The scheduled maturities of uninsured certificates of deposits or other time deposits as of March 31, 2022 follows:

 (Dollars in thousands)

 Three

 Months

 Three to

 Six Months

 Six to

 12 Months

 After

 12 Months

 Total

 $

 11,971

 $

 4,679

 $

 62,339

 $

 3,084

 $

 82,073

 The estimated amount of uninsured deposits as of March 31, 2022 was $1.08 billion.

 Time deposits issued 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.

 40 

 Table of Contents 

 Borrowed Funds

 In addition to deposits, we 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 March 31, 2022 and December 31, 2021, we had total remaining borrowing capacity from the FHLB of $908.5 million and $903.9 million, respectively.

 The following table sets forth our long-term FHLB borrowings as of and for the periods indicated:

 As of/For the

 Three Months Ended

 March 31,

 2022

 2021

 (Dollars in thousands)

 Amount outstanding at end of the period

 $

 —

 $

 25,000

 Weighted average interest rate at end of the period

 0.00

 %

 0.16

 %

 Maximum month-end balance during the period

 $

 —

 $

 75,000

 Average balance outstanding during the period

 $

 —

 $

 74,444

 Weighted average interest rate during the period

 0.00

 %

 0.19

 %

 The Company has used FHLB letters of credit to pledge to certain public deposits. These letters of credit expired in July 2021 and the Company began pledging securities to these public funds
 rather than renewing the letters of credit. As a result, there were no FHLB letters of credit outstanding at March 31, 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 $608.6 million and $593.6 million at March 31, 2022 and December 31, 2021, respectively.

 The following table sets forth our FRB borrowings as of and for the periods indicated:

 As of/For the

 Three Months Ended

 March 31,

 2022

 2021

 (Dollars in thousands)

 Amount outstanding at end of the period

 $

 —

 $

 —

 Weighted average interest rate at end of the period

 0.00

 %

 0.00

 %

 Maximum month-end balance during the period

 $

 —

 $

 —

 Average balance outstanding during the period

 $

 —

 $

 —

 Weighted average interest rate during the period

 0.00

 %

 0.00

 %

 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 $160.0 million and $160.0 million as of March 31, 2022 and December 31, 2021, respectively. The lines were not used during the three months ended March 31, 2022 or the three months ended March 31, 2021.

 Subordinated Debt Securities . In December 2018, the Company issued $26.5 million in subordinated debt securities. Subordinated debt securities 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 subordinated debt securities issued in December 2018 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 subordinated debt securities issued in December 2018 will float at the Wall Street Journal prime rate, with a floor
 of 4.5% and a ceiling of 7.5%. These subordinated debt securities 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 subordinated debt
 securities are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.

 On September 29, 2020, the Company issued $50.0 million in subordinated debt securities. Proceeds from the issuance of these subordinated debt securities were reduced by
 approximately $926 thousand in debt issuance costs. The subordinated debt securities issued in September 2020 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 subordinated debt securities 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 subordinated debt securities 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 subordinated debt securities are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations. 

 41 

 Table of Contents 

 As of March 31, 2022, the total amount of subordinated debt securities outstanding was $76.5 million less approximately $651 thousand of remaining debt issuance costs for a total balance of $75.8
 million.

 Junior Subordinated Deferrable Interest Debentures and Trust Preferred Securities . Between March 2004 and June 2007, the Company formed three wholly-owned
 statutory business trusts solely for the purpose of issuing trust preferred securities, the proceeds of which were invested in junior subordinated deferrable interest debentures. The trusts are not consolidated and the debentures issued by the
 Company to the trusts are reflected in the Company’s consolidated balance sheets. The Company records interest expense on the debentures in its consolidated financial statements. The amount of debentures outstanding was $46.4 million at March 31,
 2022 and December 31, 2021. 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 March 31, 2022, 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, the
 interest rates on the junior subordinated deferrable interest debentures and the investment banker.

 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. LIBOR + 265 bps; 2.91%

 South Plains Financial Capital Trust IV

 2005

 20,000

 20,619

 2035

 3-mo. LIBOR + 139 bps; 2.22%

 South Plains Financial Capital Trust V

 2007

 15,000

 15,464

 2037

 3-mo. LIBOR + 150 bps; 2.33%

 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 March 31, 2022.

 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.

 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 if the projected future net interest income levels would be acceptable. The Company
 attempts to stay within acceptable net interest income levels.

 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.

 42 

 Table of Contents 

 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.

 We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through
 profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.

 Capital Requirements

 Total stockholders’ equity decreased to $387.1 million as of March 31, 2022, compared to $407.4 million as of December 31, 2021, a decrease of $20.4 million, or 5.0%. The decrease from December
 31, 2021 was primarily the result of $14.3 million in net earnings for the three months ended March 31, 2022, offset by a decrease in accumulated other comprehensive income of $30.0 million related to fair value changes in available for sale
 securities and related fair value hedges, net of tax, $3.0 million in repurchases of common stock and $1.9 million of dividends paid.

 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 March 31, 2022, both we and the Bank met all the capital adequacy requirements to which we and the Bank were subject. At March 31, 2022, we and the Bank were “well capitalized” under the
 regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since March 31, 2022 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.

 March 31, 2022

 December 31, 2021

 Amount

 Ratio

 Amount

 Ratio

 (Dollars in thousands)

 South Plains Financial, Inc. : 

 Total capital (to risk-weighted assets)

 $

 535,998

 18.22

 %

 $

 524,836

 18.40

 %

 Tier 1 capital (to risk-weighted assets)

 423,358

 14.39

 413,322

 14.49

 CET 1 capital (to risk-weighted assets)

 378,358

 12.86

 368,322

 12.91

 Tier 1 capital (to average assets)

 423,358

 10.78

 413,322

 10.77

 City Bank: 

 Total capital (to risk-weighted assets)

 $

 431,140

 14.66

 %

 $

 425,748

 14.93

 %

 Tier 1 capital (to risk-weighted assets)

 394,331

 13.40

 390,015

 13.67

 CET 1 capital (to risk-weighted assets)

 394,331

 13.40

 390,015

 13.67

 Tier 1 capital (to average assets)

 394,331

 10.05

 390,015

 10.16

 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.

 43 

 Table of Contents 

 Treasury Stock

 The Company repurchased stock in accordance with its stock repurchase program during the three months ended March 31, 2022 and 2021. For the three months ended March 31, 2022, we repurchased
 106,498 shares of common stock for a total of $3.0 million. For the three months ended March 31, 2021, we repurchased 43,184 shares of common stock for a total of $786 thousand. 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.

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

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

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

 44 

 Table of Contents 

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

 March 31,

 2022

 December 31,

 2021

 Change in Interest Rates (Basis Points) 

 Percent Change in

 Net Interest Income

 Percent Change in

 Net Interest Income

 +300

 5.20

 6.89

 +200

 3.14

 4.53

 +100

 1.42

 2.02

 -100

 (2.02

 )

 (1.05

 )

 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 income,
 balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with
 GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

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

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

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

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

 45 

 Table of Contents 

 March 31,

 2022

 December 31,

 2021

 (Dollars in thousands)

 Total stockholders’ equity

 $

 387,068

 $

 407,427

 Less: Goodwill and other intangibles

 (25,011

 )

 (25,403

 )

 Tangible common equity

 $

 362,057

 $

 382,024

 Total assets

 $

 3,999,744

 $

 3,901,855

 Less: Goodwill and other intangibles

 (25,011

 )

 (25,403

 )

 Tangible assets

 $

 3,974,733

 $

 3,876,452

 Shares outstanding

 17,673,407

 17,760,243

 Total stockholders’ equity to total assets

 9.68

 %

 10.44

 %

 Tangible common equity to tangible assets

 9.11

 %

 9.85

 %

 Book value per share

 $

 21.90

 $

 22.94

 Tangible book value per share

 $

 20.49

 $

 21.51

 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 Company’s consolidated financial statements as of March 31, 2022.

 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. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain or loss
 on sale of 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 Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses
 charged to earnings. 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 allowance for loan losses
 consists of specific valuation allowances established for probable losses on specific loans and general valuation allowances calculated based on historical loan loss experience for similar loans with similar characteristics and trends, judgmentally
 adjusted for general economic conditions and other qualitative risk factors internal and external to the Company.

 46 

 Table of Contents 

 The allowance for loan losses 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 allowance for loan losses 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.

 A loan is considered impaired when, based on current information and events, it is probable that the Company will 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 are specifically reviewed to determine if they are impaired. Factors considered by management in determining whether a
 loan is impaired include payment status and the sources, amounts, and probabilities of estimated cash flow available to service debt in relation to amounts due according to contractual terms. Loans that experience insignificant payment delays and
 payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the
 borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 Loans that are determined to be impaired are then evaluated to determine estimated impairment, if any. GAAP allows impairment to be 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 is collateral dependent. Loans that are not individually determined to be impaired or
 are not subject to the specific review of impaired status are subject to the general valuation allowance portion of the allowance for loan losses.

 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
 income statement 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.

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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
SOUTH PLAINS FINANCIAL, INC. 10-Q

Item 2. Management’s Discussion and Analysis
