SOUTH PLAINS FINANCIAL, INC. 10-K

Item 8. Financial Statements and Supplementary Data SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2023 and 2022 TABLE OF CONTENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID # 686 ) 1 Report of Independent Registered Public Accounting Firm (PCAOB ID # 410 ) 2 Consolidated Financial Statements: Consolidated Balance Sheets 4 Consolidated Statements of Comprehensive Income (Loss) 5 Consolidated Statements of Changes in Stockholders’ Equity 7 Consolidated Statements of Cash Flows 8 Notes to Consolidated Financial Statements 10 64 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders, Board of Directors, and Audit Committee South Plains Financial, Inc. Lubbock, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of South Plains Financial, Inc. and Subsidiaries (the "Company") as of December 31, 2023 and 2022, and the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Notes 1 and 3 to the financial statements, the Company changed its method of accounting for the allowance for credit losses effective January 1, 2023, due to the adoption of Accounting Standards Codification Topic 326. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provides a reasonable basis for our opinion. /s/ FORVIS, LLP We have served as the Company's auditor since 2022. Houston, Texas March 15, 2024 65 Table of Contents Report of Independent Registered Public Accounting Firm The Board of Directors South Plains Financial, Inc. Lubbock, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of South Plains Financial, Inc. and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. South Plains Financial, Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ WEAVER AND TIDWELL, L.L.P. We served as South Plains Financial, Inc.’s auditor from 2018 to 2021. Fort Worth, Texas March 7, 2022 66 Table of Contents SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) December 31, 2023 2022 ASSETS Cash and due from banks $ 62,821 $ 61,613 Interest-bearing deposits in banks 267,337 173,270 Cash and cash equivalents 330,158 234,883 Securities available for sale 622,762 701,711 Loans held for sale ($ 6,615 and $ 10,038 at fair value at December 31, 2023 and 2022 , respectively) 14,499 30,403 Loans held for investment 3,014,153 2,748,081 Allowance for credit losses on loans ( 42,356 ) ( 39,288 ) Loans held for investment, net 2,971,797 2,708,793 Accrued interest receivable 20,881 16,432 Premises and equipment, net 55,070 56,337 Bank-owned life insurance 74,504 73,174 Goodwill 19,315 19,508 Intangible assets, net 2,429 4,349 Mortgage servicing rights 26,569 27,474 Deferred tax asset, net 19,413 22,818 Other assets 47,396 48,181 Total assets $ 4,204,793 $ 3,944,063 LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits: Noninterest-bearing $ 974,201 $ 1,150,488 Interest-bearing 2,651,952 2,255,942 Total deposits 3,626,153 3,406,430 Accrued expenses and other liabilities 61,358 58,265 Subordinated debt 63,775 75,961 Junior subordinated deferrable interest debentures 46,393 46,393 Total liabilities 3,797,679 3,587,049 Stockholders’ equity: Common stock, $ 1 par value, 30,000,000 shares authorized; 16,417,099 issued in 2023 and 17,027,197 issued in 2022 16,417 17,027 Additional paid-in capital 97,107 112,834 Retained earnings 345,264 292,261 Accumulated other comprehensive loss ( 51,674 ) ( 65,108 ) Total stockholders’ equity 407,114 357,014 Total liabilities and stockholders’ equity $ 4,204,793 $ 3,944,063 The accompanying notes are an integral part of these consolidated financial statements. 67 Table of Contents SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in thousands, except per share data) Year Ended December 31, 2023 2022 2021 Interest income: Loans, including fees $ 176,598 $ 137,954 $ 120,540 Securities: Taxable 21,590 15,010 9,445 Non taxable 3,872 4,529 4,639 Federal funds sold and interest-bearing deposits in banks 9,973 3,675 412 Total interest income 212,033 161,168 135,036 Interest expense: Deposits 64,987 17,002 8,293 Notes payable & other borrowings 5 — 43 Subordinated debt 4,018 4,050 4,056 Junior subordinated deferrable interest debentures 3,276 1,640 880 Total interest expense 72,286 22,692 13,272 Net interest income 139,747 138,476 121,764 Provision for credit losses 4,610 ( 2,619 ) ( 1,918 ) Net interest income, after provision for credit losses 135,137 141,095 123,682 Noninterest income: Service charges on deposit accounts 7,130 6,829 6,963 Income from insurance activities 1,515 10,826 8,314 Net gain on sales of loans 11,027 20,764 51,184 Bank card services and interchange fees 13,323 12,946 12,239 Other mortgage banking income 2,790 10,606 8,542 Investment commissions 1,698 1,825 1,934 Fiduciary fees 2,433 2,390 2,917 Gain on sale of subsidiary 33,778 — — Other 5,532 9,959 5,376 Total noninterest income 79,226 76,145 97,469 Noninterest expense: Salaries and employee benefits 79,377 86,323 93,360 Occupancy and equipment, net 16,102 15,987 14,560 Professional services 6,433 9,740 6,752 Marketing and development 3,453 3,614 3,225 IT and data services 3,410 3,780 4,007 Bank card expenses 5,557 5,376 4,995 Appraisal expenses 1,087 1,747 3,248 Realized loss on sale of securities 3,409 — — Other 16,118 17,522 17,883 Total noninterest expense 134,946 144,089 148,030 Income before income taxes 79,417 73,151 73,121 Income tax expense 16,672 14,911 14,507 Net income $ 62,745 $ 58,240 $ 58,614 The accompanying notes are an integral part of these consolidated financial statements. 68 Table of Contents SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (CONTINUED) (Dollars in thousands, except per share data) Year Ended December 31, 2023 2022 2021 Earnings per share: Basic $ 3.73 $ 3.35 $ 3.26 Diluted $ 3.62 $ 3.23 $ 3.17 Net income $ 62,745 $ 58,240 $ 58,614 Other comprehensive income (loss): Unrealized gains (losses) on securities available for sale 17,282 ( 114,367 ) ( 15,479 ) Less: Change in fair value on hedged state and municipal securities ( 3,686 ) 14,607 5,812 Reclassification adjustment for loss on sale of securities 3,409 — — Tax effect ( 3,571 ) 20,950 2,030 Other comprehensive income (loss) 13,434 ( 78,810 ) ( 7,637 ) Comprehensive income (loss) $ 76,179 $ ( 20,570 ) $ 50,977 The accompanying notes are an integral part of these consolidated financial statements. 69 Table of Contents SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Dollars in thousands, except per share data) Common Stock Additional Paid-in Retained Accumulated Other Comprehensive Shares Amount Capital Earnings Income (Loss) Total Balance at December 31, 2020 18,076,364 $ 18,076 $ 141,112 $ 189,521 $ 21,339 $ 370,048 Net income — — — 58,614 — 58,614 Cash dividends declared - $ 0.30 per share — — — ( 5,385 ) — ( 5,385 ) Other comprehensive loss — — — — ( 7,637 ) ( 7,637 ) Issuance of stock related to stock-based awards, net of 82,004 shares for cashless exercise and net of 23,559 shares for taxes 77,408 77 ( 702 ) — — ( 625 ) Repurchases of common stock ( 393,529 ) ( 393 ) ( 8,834 ) — — ( 9,227 ) Stock based compensation — — 1,639 — — 1,639 Balance at December 31, 2021 17,760,243 17,760 133,215 242,750 13,702 407,427 Net income — — — 58,240 — 58,240 Cash dividends declared - $ 0.46 per share — — — ( 8,012 ) — ( 8,012 ) Other comprehensive loss — — — — ( 78,810 ) ( 78,810 ) Impact of adoption of Topic 842 related to leases — — — ( 717 ) — ( 717 ) Issuance of stock related to stock-based awards, net of 141,762 shares for cashless exercise and net of 42,386 shares for taxes 126,756 127 ( 1,295 ) — — ( 1,168 ) Repurchases of common stock ( 859,802 ) ( 860 ) ( 21,839 ) — — ( 22,699 ) Stock-based compensation — — 2,753 — — 2,753 Balance at December 31, 2022 17,027,197 17,027 112,834 292,261 ( 65,108 ) 357,014 Net income — — — 62,745 — 62,745 Cash dividends declared - $ 0.52 per share — — — ( 8,745 ) — ( 8,745 ) Other comprehensive income — — — — 13,434 13,434 Impact of adoption of ASU 2016-13 - CECL — — — ( 997 ) — ( 997 ) Issuance of stock related to stock-based awards, net of 52,631 shares for cashless exercise and net of 27,262 shares for taxes 75,540 76 ( 807 ) — — ( 731 ) Repurchases of common stock ( 685,638 ) ( 686 ) ( 17,077 ) — — ( 17,763 ) Stock-based compensation — — 2,157 — — 2,157 Balance at December 31, 2023 16,417,099 $ 16,417 $ 97,107 $ 345,264 $ ( 51,674 ) $ 407,114 The accompanying notes are an integral part of these consolidated financial statements. 70 Table of Contents SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands, except per share data) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net income $ 62,745 $ 58,240 $ 58,614 Adjustments to reconcile net income to net cash from operating activities: Provision for credit losses 4,610 ( 2,619 ) ( 1,918 ) Provision for foreclosed asset losses 142 — — Depreciation and amortization 6,412 6,965 6,436 Accretion and amortization 3,381 4,072 4,513 Other gains, net ( 275 ) ( 166 ) ( 729 ) Gain on sale of subsidiary ( 33,778 ) — — Loss on sale of securities 3,409 — — Net gain on sales of loans ( 11,027 ) ( 20,764 ) ( 51,184 ) Proceeds from sales of loans held for sale 347,583 662,294 1,513,961 Loans originated for sale ( 322,122 ) ( 598,495 ) ( 1,437,003 ) Deferred income tax expense 99 1,359 1,453 Earnings on bank-owned life insurance ( 1,330 ) ( 1,196 ) ( 1,247 ) Stock-based compensation 2,157 2,753 1,639 Change in valuation of mortgage servicing rights 2,375 ( 4,705 ) ( 1,455 ) Net change in: Accrued interest receivable and other assets ( 8,502 ) ( 1,067 ) 3,382 Accrued expenses and other liabilities 2,660 16,919 ( 191 ) Net cash provided by operating activities 58,539 123,590 96,271 Cash flows from investing activities: Activity in securities available for sale: Purchases ( 199,898 ) ( 176,713 ) ( 61,548 ) Sales 52,828 — — Maturities, prepayments, and calls 240,106 81,253 120,325 Loan originations and principal collections, net ( 270,196 ) ( 311,459 ) ( 218,458 ) Purchases of premises and equipment ( 4,681 ) ( 4,469 ) ( 2,920 ) Proceeds from sales of premises and equipment 968 480 1,458 Proceeds from sale of subsidiary 36,080 — — Proceeds from sales of foreclosed assets 1,417 2,051 1,302 Net cash used in investing activities ( 143,376 ) ( 408,857 ) ( 159,841 ) Cash flows from financing activities: Net change in deposits 219,723 65,208 366,871 Net change in short-term borrowings — — ( 26,550 ) Payments to tax authorities for stock-based compensation ( 731 ) ( 1,168 ) ( 625 ) Payments made on notes payable and other borrowings — — ( 75,000 ) Payments made on subordinated debt ( 12,372 ) — — Cash dividends paid on common stock ( 8,745 ) ( 8,012 ) ( 5,385 ) Payments to repurchase common stock ( 17,763 ) ( 22,699 ) ( 9,227 ) Net cash provided by financing activities 180,112 33,329 250,084 Net change in cash and cash equivalents $ 95,275 $ ( 251,938 ) $ 186,514 Beginning cash and cash equivalents 234,883 486,821 300,307 Ending cash and cash equivalents $ 330,158 $ 234,883 $ 486,821 Supplemental disclosures of cash flow information: Interest paid on deposits and borrowed funds $ 70,065 $ 21,770 $ 13,471 Income taxes paid 19,388 13,835 12,400 Supplemental schedule of noncash activities: Loans transferred to foreclosed assets 2,130 764 927 Premises and equipment transferred to foreclosed assets 172 — — Additions to mortgage servicing rights 1,470 3,069 9,196 The accompanying notes are an integral part of these consolidated financial statements. 71 Table of Contents SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations – South Plains Financial, Inc. (“SPFI”) is a Texas corporation and registered bank holding company that conducts its principal activities through its subsidiaries from offices located throughout Texas and Eastern New Mexico. Principal activities include commercial and retail banking, along with insurance, investment, trust, and mortgage services. The following were subsidiaries of SPFI as of December 31, 2023: Wholly-Owned, Consolidated Subsidiaries: City Bank Bank subsidiary Ruidoso Retail, Inc. Non-bank subsidiary CB Provence, LLC Non-bank subsidiary CBT Brushy Creek, LLC Non-bank subsidiary CBT Properties, LLC Non-bank subsidiary Wholly-Owned, Equity Method Subsidiaries: South Plains Financial Capital Trusts (“SPFCT”) III-V Non-bank subsidiaries On April 1, 2023, SPFI entered into a Securities Purchase Agreement (“Agreement”) with Alliant Insurance Services, Inc. (“Alliant”), providing for the sale of Windmark Insurance Agency, Inc. (“Windmark”), City Bank’s wholly-owned subsidiary, through a sale of all of the outstanding shares of capital stock of Windmark to Alliant. The transaction was consummated on April 1, 2023. Pursuant to the terms and subject to the conditions of the Agreement, SPFI received an aggregate purchase price of $ 36.1 million in exchange for Windmark’s common shares, representing a pre-tax gain of $ 33.8 million. This transaction did not meet the criteria for discontinued operations reporting. Basis of Presentation and Consolidation – The consolidated financial statements include the accounts of SPFI and its wholly-owned consolidated subsidiaries (collectively referred to as the “Company”) identified above. All significant intercompany balances and transactions have been eliminated in consolidation. The Company’s consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles (“GAAP”) in the U.S. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) constitutes GAAP for nongovernmental entities. Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Determination of the adequacy of the allowance for credit losses (“ACL”) is a material estimate that is particularly susceptible to significant change in the near term; the assumptions used in stock-based compensation, derivatives, mortgage servicing rights, and fair values of financial instruments can also involve significant management estimates. Accounting Changes and Recent Accounting Pronouncements – Updates to the FASB ASC are prescribed in Accounting Standards Updates (“ASUs”), which are not authoritative until incorporated into the ASC. ASU 2016-13 Financial Instruments - Credit Losses (Topic 326). The FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held to maturity debt securities. The CECL model also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in sales type and direct financing leases recognized by a lessor in accordance with Topic 842 on leases. In addition, Topic 326 made changes to the accounting for securities available for sale. One such change is to require credit losses to be presented as an allowance rather than as a write-down on securities available for sale management does not intend to sell or believes that it is more likely than not they will be required to sell. The Company adopted the CECL model effective January 1, 2023 using the modified retrospective approach. As a result, the Company recognized a one-time, after tax cumulative effect adjustment of $ 997 thousand that reduced retained earnings, increased the ACL for loans by approximately $ 1 00 thousand and increased the ACL for off-balance sheet credit exposures by approximately $ 1.2 million. 72 Table of Contents The Company made the following policy elections related to the adoption of the CECL model. First, accrued interest will be written off against interest income when financial assets are placed into nonaccrual status. Therefore, accrued interest will be excluded from the amortized cost basis for purposes of calculating the ACL. Accrued interest receivable is presented in a separate line item in the Consolidated Balance Sheets. Second, the fair value of collateral practical expedient has been elected on certain loans in determining the ACL, for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty. The impact on the ACL resulting from the adoption of the CECL model is shown below. (Dollars in thousands) January 1, 2023 Pre-Adoption Impact of Adoption Post-Adoption Commercial real estate $ 13,029 $ 827 $ 13,856 Commercial – specialized 3,425 33 3,458 Commercial - general 9,215 ( 2,574 ) 6,641 Consumer: 1-4 family residential 6,194 1,700 7,894 Auto loans 3,926 ( 332 ) 3,594 Other consumer 1,376 ( 235 ) 1,141 Construction 2,123 683 2,806 Total allowance for credit losses on loans $ 39,288 $ 102 $ 39,390 Allowance for credit losses for off-balance sheet exposures $ 580 $ 1,160 $ 1,740 ASU 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates guidance for troubled debt restructurings by creditors and enhances disclosure requirements for certain loan modifications by creditors for borrowers experiencing financial distress. This ASU defines types of modifications as principal forgiveness, interest rate reduction, other than insignificant payment delays, or a term extension. In addition, the ASU requires disclosure of current-period gross charge-offs, by year of origination, in the vintage disclosure. The Company adopted the provisions of ASU 2022-02 as of January 1, 2023 on a prospective basis. The adoption of this amendment did not have a material impact on the consolidated financial statements. ASU 2019-12, Income Taxes, Simplifying the Accounting for Income Taxes (Topic 740). In December 2019, the FASB issued ASU 2019-12 to simplify the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material effect on the Company’s financial statements. ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 . ASU 2022-06 extended the period of time preparers can utilize the reference rate reform relief guidance provided by ASU 2020-04 and ASU 2021-01. ASU 2022-06, which was effective upon issuance, deferred the sunset date of this prior guidance from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief guidance in Topic 848. The adoption of ASU 2022-06 did not significantly impact the financial statements and the Company has fully transitioned all products tied to LIBOR. ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The amendments in this Update modify the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to, or technical corrections of the current requirements. Each amendment in the ASU will only become effective if the SEC removes the related disclosure or presentation requirement from its existing regulations by June 30, 2027. The amendments in this ASU are not expected to have a material impact on the results of operations or financial position. ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this Update require public entities to disclose information about reportable segments’ significant expenses on an interim and annual basis. This update is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The adoption of ASU 2023-07 is not expected to have a material effect on the Company’s financial statements. ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this Update are intended to improve the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. It also includes certain other amendments intended to improve the effectiveness of income tax disclosures. This update is effective for fiscal years beginning after December 15, 2024. The adoption of ASU 2023-09 is not expected to have a material effect on the Company’s financial statements. 73 Table of Contents Concentration of Credit Risk – The bank subsidiary is primarily involved in real estate, commercial, agricultural, and consumer lending activities with customers throughout Texas and Eastern New Mexico. Although the bank subsidiary has a diversified portfolio, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of the region which consist primarily of agribusiness, wholesale/retail, oil and gas and related business, healthcare industries, and institutions of higher education. Comprehensive Income (Loss) – C o mprehensive income (loss) is comprised of net income or loss and other comprehensive income or loss (“OCI”). Relevant examples of OCI items are unrealized holding gains and losses on securities available for sale and net gains and losses on fair value hedges. Cash and Cash Equivalents – The Company includes all cash on hand, balances due from other banks, and federal funds sold, all of which have original maturities within three months, as cash and cash equivalents in the accompanying consolidated financial statements. On March 15, 2020, the Federal Reserve Bank announced that it had reduced regulatory reserve requirements to zero percent effective on March 26, 2020; therefore, no cash is required to be maintained to satisfy regulatory reserve requirements. Securities – Investment securities may be classified into trading, held to maturity (“HTM”) or available for sale (“AFS”) portfolios. Securities that are held principally for resale in the near term are classified as trading. Securities that management has the ability and positive intent to hold to maturity are classified as HTM and recorded at amortized cost. Securities not classified as trading or HTM are AFS and are carried at fair value with unrealized gains and losses reported as a component of OCI, net of tax. Management uses these assets as part of its asset/liability management strategy; they may be sold in response to changes in liquidity needs, interest rates, resultant prepayment risk changes, and other factors. Management determines the appropriate classification of securities at the time of purchase. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on sales are recorded on the trade date, are derived from the amortized cost of the security sold and are determined using the specific identification method. A security is placed on nonaccrual status if principal or interest has been in default for a period of 90 days or more, or if full payment of principal and interest is not expected. The Company has made a policy election to exclude accrued interest receivable from the amortized cost basis of AFS securities and report the accrued interest in accrued interest receivable in the Consolidated Balance Sheets. Interest accrued but not received for a security placed on nonaccrual status is reversed against interest income. ACL (AFS Securities) – For AFS securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in OCI. Changes in the ACL are recorded as provision for credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest is excluded from the estimate of credit losses Prior to the adoption of ASU 2016-13, declines in the fair value of available-for-sale securities below their cost that were deemed to be other than temporary were reflected in earnings as realized losses. In estimating other-than-temporary impairment losses prior to January 1, 2023, management considered, among other things, (i) the length of time and the extent to which the fair value had been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Nonmarketable Equity Securities – Securities with limited marketability, such as stock in the Federal Home Loan Bank of Dallas (“FHLB”), are carried at cost and are reported in other assets. The Company monitors its investment in FHLB stock for impairment through a review of recent financial results of the FHLB including reviewing the capital adequacy and liquidity position. The Company has not identified any indicators of impairment of FHLB stock. Small Business Investment Company (“SBIC”) investments are equity interests in limited partnerships. The SBIC investments do not have readily determinable fair values and are recorded under the equity method of accounting at cost minus impairment, if any, plus or minus adjustments to the cost basis. Adjustments to the cost basis occur as a result of capital contributions, distributions, the Company’s share of earnings, or changes in the value of the Company’s equity position. The Company’s share of earnings is included in noninterest income with a one-quarter lag period. 74 Table of Contents Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their amortized cost. Amortized cost is the outstanding unpaid principal balances, net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and unamortized premiums or discounts on purchased loans. The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in accrued interest receivable on the Consolidated Balance Sheets. Accrued interest receivable is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the straight-line method, which is not materially different from the effective interest method required by GAAP. Loans are placed on nonaccrual status when, in management’s opinion, collection of interest is unlikely, which typically occurs when principal or interest payments are more than ninety days past due. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. ACL (Loans) – The ACL is a valuation account established by management as an estimate to cover expected credit losses through a provision for credit losses charged to earnings. Credit losses on loans are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Expected losses are calculated using comparable and quantifiable information from both internal and external sources about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments. The ACL is evaluated on a quarterly basis by management. The Company applied a dual credit risk rating (“DCRR”) methodology that estimates each loan’s probability of default and loss given default to calculate the expected credit loss to non-analyzed loans at January 1 and December 31, 2023. The DCRR process quantifies the expected credit loss at the loan level for the entire loan portfolio. Loan grades are assigned by a customized scorecard that risk rates each loan based on multiple probability of default and loss given default elements to measure the credit risk of the loan portfolio. The ACL estimate incorporates the Company’s DCRR loan level risk rating methodology and the expected default rate frequency term structure to derive loan level life of loan estimates of credit losses for every loan in the portfolio. The estimated credit loss for each loan is adjusted based on its one-year through the cycle estimate of expected credit loss to a life of loan measurement that reflects current conditions and reasonable and supportable forecasts. The life of loan expected loss is determined using the contractual weighted average life of the loan adjusted for prepayments. Prepayment speeds are determined by grouping the loans into pools based on segments and risk rating. After the life of loan expected losses are determined, they are adjusted to reflect the Company’s reasonable and supportable economic forecast over a selected range of one to two years . The Company has developed regression models to project net charge-off rates based on macroeconomic variables (“MEVs”), typically a one-year forecast period is used. MEV’s considered in the analysis consist of data gathered from the St. Louis Federal Reserve Research Database (“FRED”), such as, federal funds rate, 10-year treasury rates, 30-year mortgage rates, crude oil prices, consumer price index, housing price index, unemployment rates, housing starts, gross domestic product, and disposable personal income. These regression models are applied to the Company’s economic forecast to determine the corresponding net charge-off rates. The projected net charge-off rates for the given economic scenario are used to adjust the life of loan expected losses. Qualitative adjustments are also made to ACL results for additional risk factors that are relevant in assessing the expected credit losses within our loan segments. These qualitative factor (“Q-Factor”) adjustments may increase or decrease management’s estimate of the ACL by a calculated percentage based upon the estimated level of risk within a particular segment. Q-Factor risk decisions consider concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, and other factors related to credit administration, such as borrower’s risk rating and the potential effect of delayed credit score migrations. Management quantifiably identifies segment percentage Q-Factor adjustments using a scorecard risk rating system scaled to historical loss experience within a segment and management’s perceived risk for that particular segment. While management uses available information to recognize credit losses on loans, further reductions in the carrying amounts of loans may be necessary based on various factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated credit losses on loans. Such agencies may require the bank subsidiary to recognize additional credit losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated credit losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated. Loans that exhibit characteristics different from their pool characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective ACL evaluation. When management determines that foreclosure is probable, or if certain of these loans are considered to be collateral dependent with the borrower experiencing financial difficulty, the Company elects the fair value of collateral practical expedient, whereby the allowance is calculated as the amount by which the amortized cost exceeds the fair value of collateral, less estimated costs to sell. Prior to the adoption of ASU 2016-13, the allowance for credit losses on loans was a contra-asset valuation account established through a provision for loan losses charged to expense, which represented management’s best estimate of inherent losses that had been incurred within the existing portfolio of loans. The allowance for credit losses on loans included allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” 75 Table of Contents ACL (Off-Balance Sheet Credit Exposures) – The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL for off-balance sheet credit exposures is adjusted through provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The likelihood of funding is based on utilization rates, which are determined based on a two-year rolling average of historical usage. Expected loss rates for all pass rated loans are used to determine the ACL for off-balance sheet credit exposures. The ACL for off-balance sheet credit exposures is included in accrued expenses and other liabilities on the Consolidated Balance Sheets. Acquired Loans – Loans that the Company acquires in connection with business combinations are recorded at fair value with no carryover of the acquired entity’s related ACL. The fair value of the acquired loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest, adjusted for estimated prepayments and credit losses. In accordance with Topic 326, the fair value adjustment is recorded as premium or discount to the unpaid principal balance of each acquired loan. In addition, the Company also records an ACL on each acquired loan. Any acquired loans the Company determines have evidence of a more than insignificant deterioration in credit quality since origination, are considered to be purchase credit deteriorated (“PCD”) loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (i) non-accrual status; (ii) risk rating, (iii) watchlist credits; and (iv) delinquency status. An ACL is determined using the same methodology as other individually evaluated loans. The sum of the PCD loan’s purchase price and ACL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACL are recorded through provision for credit losses. Mortgage Servicing Rights – 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 changes in the fair value of servicing rights in earnings in the period in which the changes occur, and are included with Other mortgage banking income in the consolidated financial statements. The fair value of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Servicing fee income, which is reported in the consolidated financial statements as Other mortgage banking income , is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and recorded when income is earned. Servicing income was $ 4.2 million, $ 4.1 million, and $ 3.1 million for the years ended December 31, 2023, 2022, and 2021, respectively. Transfers of Financial Assets – Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity. 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 under the fair value option . Loans sold are typically subject to certain indemnification provisions with the investor; management does not believe these provisions will have any significant consequences. Premises and Equipment – Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on the straight-line method. Buildings and improvements are depreciated on a useful life up to 40 years. Furniture and equipment are depreciated on a useful life between 3 to 10 years. Foreclosed Assets – Assets acquired through, or in lieu of, loan foreclosure or repossession are held for sale and are initially recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the cost basis or fair value less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense. Bank-Owned Life Insurance – The bank subsidiary has purchased life insurance policies on various officers and also is the beneficiary. These policies are issued by third party insurance companies. Assets are carried at the cash surrender value and changes in the cash surrender values are recognized in other noninterest income in the accompanyi ng consolidated financial statements . 76 Table of Contents Goodwill and Other Intangible Assets – Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized, but is tested for impairment on October 31 of each year or more frequently if events and circumstances exist that indicate that an impairment test should be performed. There was no impairment recorded for the years ended December 31, 2023, 2022 and 2021, respectively. Core deposit intangible (“CDI”) is a measure of the value of checking and savings deposit relationships acquired in a business combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding relative to an alternative source of funding. CDI is amortized over the estimated useful lives of the existing deposit relationships acquired, but does not exceed 10 years. Substantially all CDI is amortized using the sum of the years’ digits method. Mortgage Banking Derivatives – Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market, forward commitments for the future delivery of these mortgage loans, and forward sales of mortgage-backed securities are accounted for as free standing derivatives. At the time of the interest rate lock, the Company determines whether the loan will be sold through a best efforts contract or a mandatory delivery contract. These mortgage banking derivatives are not designated in hedge relationships. In order to hedge the change in interest rates resulting from the commitments to fund the loans that will be sold through a best efforts contract, the Company enters into forward loans sales commitments for the future delivery of mortgage loans when interest rate locks are entered. At inception, these interest rate locks and the related forward loan sales commitments, adjusted for the expected exercise of the commitment before the loan is funded, are recorded with a zero value. Subsequent changes in fair value are estimated based on changes in mortgage interest rates from the date the interest rate on the loan is locked. In order to hedge the change in interest rates resulting from all other mortgage commitments to fund loans, the Company enters into forward sales of mortgage-backed securities contracts. At inception, these interest rate locks are recorded at fair value and are adjusted for the expected exercise of the commitment before the loan is funded. Subsequent changes in fair value are estimated based on changes in mortgage interest rates from the date the interest rate on the loan is locked. Changes in the fair values of these derivatives are included in net gain on sales of loans in the consolidated financial statements . Derivatives – At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in OCI and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged. The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in OCI are amortized into earnings over the same periods which the hedged transactions will affect earnings. 77 Table of Contents Leases – During the second quarter of 2022, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02 — Leases (Topic 842), effective as of January 1, 2022, using the alternative transition method under the option to apply the lease standard at its effective date without adjusting the prior period comparative financial statements. The Company elected the package of practical expedients to not reassess: (i) whether any existing contracts are or contain a lease, (ii) the lease classification of any existing leases, and (iii) initial direct costs related to existing leases. The Company also elected to apply additional practical expedients to include both the lease and nonlease components of all leases as a single component and account for it as a lease and to use hindsight for leases existing at the adoption date. The Company recorded a $ 9.4 million right-of-use (“ROU”) asset, offset by a $ 10.3 million lease liability, and a $ 717 thousand, net of tax, cumulative effect adjustment that reduced retained earnings. Th e Company determines if an arrangement is a lease at inception. Operating leases with a term of greater than one year are included in other assets and other liabilities on the Company’s Consolidated Balance Sheets. Finance leases, if any, are included in premises and equipment and other liabilities on the Company’s Consolidated Balance Sheets. The Company has lease agreements with lease and nonlease components, which are generally accounted for as a single lease component. The Company has made an accounting policy election not to recognize short-term lease assets and liabilities (less than a 12-month term) or equipment leases (deemed not significant) on its Consolidated Balance Sheets; instead, the Company recognizes the lease expense for these leases on a straight-line basis over the life of the lease. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an estimated incremental collateralized borrowing rate at lease inception, on a collateralized basis, over a similar term, when determining the present value of lease payments. No significant judgments or assumptions were involved in developing the estimated operating lease liabilities as the Company’s operating lease liabilities largely represent the future rental expenses associated with operating leases, and the incremental borrowing rates are based on publicly available interest rates. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease. These options to extend or terminate are assessed on a lease-by-lease basis, and the ROU assets and lease liabilities are adjusted when it is reasonably certain that an option will be exercised. Rental expense for lease payments is recognized on a straight-line basis over the lease term and is included in occupancy and equipment, net within our Consolidated Statements of Comprehensive Income (Loss). Revenue Recognition – The majority of the Company’s revenues come from interest income and other sources, including loans, securities and derivatives, that are outside the scope of Topic 606. The Company’s services that fall within the scope of Topic 606 are presented within Noninterest Income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of Topic 606 include service charges on deposit accounts, bank card services and interchange fees, investment commissions, fiduciary fees, and the sale of other real estate owned (“OREO”). Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest income streams within the scope of Topic 606 are discussed below. Service Charges on Deposit Accounts The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance. Bank Card Services and Interchange Fees The Company earns bank card service and interchange fees from debit and credit cardholder transactions conducted through card payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Bank card services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees and service fees such as ATM use fees and are recognized at the time the transaction is executed. Investment Commissions and Fiduciary Trust Fees The Company earns investment commissions and fiduciary trust fees from its contracts with trust customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e., the trade date. Other related services provided include financial planning services and the fees the Company earns, which are based on a fixed fee schedule, are recognized when the services are rendered. 78 Table of Contents In addition, certain trust customers have contracted with the Company to provide trust dissolution services, which are based on a unitary management fee treated as a single performance obligation. The Company’s performance obligation is satisfied over time based on the customer simultaneously receiving and consuming the benefits of the Company’s service. The unitary management fee is treated as variable consideration and is evaluated and included in the transaction price at the end of each reporting period (quarterly). Revenue is recognized based on a reasonable time based measure of progress towards the Company’s complete satisfaction of the performance obligation at the end of each respective reporting period, with the unearned amount based on progress measure being included in deferred contract liability. This variable consideration and the amount of revenue recognized is evaluated quarterly until the Company has entirely fulfilled its performance obligation, at which time the remaining unearned revenue is recognized. Gains/Losses on Sales of OREO The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. Contract Balances A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. The Company did not have any significant contract balances at December 31, 2023 and 2022. Contract Acquisition Costs In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost. Insurance Activities The Company’s revenue from insurance activities ceased subsequent to the sale of Windmark. The primary source of revenues for insurance activities were commissions from underwriting enterprises, based on a percentage of premiums paid by clients. These commissions and fees revenues were substantially recognized at a point in time on the effective date of the associated policies when control of the policy transferred to the client. Commissions were fixed at the contract effective date and generally were based on a percentage of premiums for insurance coverage. Commissions depended upon a large number of factors, including the type of risk being placed, the particular underwriting enterprise’s demand, the expected loss experience of the particular risk of coverage, and historical benchmarks surrounding the level of effort necessary for us to place and service the insurance contract. Stock-Based Compensation – The Company sponsors an equity incentive plan under which options to acquire shares of the Company’s common stock may be granted periodically to all full-time employees and directors of the Company or its affiliates at a specific exercise price. Shares are issued out of authorized and unissued common shares that have been reserved for issuance under such plan. Compensation cost is measured based on the estimated fair value of the award at the grant date and is recognized in earnings on a straight-line basis over the requisite service period. The fair value of stock options is estimated at the date of grant using a closed form option valuation (“Black-Scholes”) option pricing model. This model requires assumptions as to the expected stock volatility, dividends, terms and risk-free rates. The expected volatility is based on the combination of the Company’s historical volatility and the volatility of comparable peer banks. The expected term represents the period of time that options are expected to be outstanding from the grant date. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the appropriate life of each stock option. Advertising – Advertising costs are recognized when incurred. Advertising costs during 2023, 2022, and 2021 were approximately $ 2.9 million, $ 3.1 million, and $ 2.6 million, respectively. Income Taxes – The Company files a consolidated federal income tax return including the results of its wholly owned subsidiary, the Bank. The Company estimates income taxes payable based on the amount it expects to owe. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to components of OCI). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. Interest and/or penalties related to income taxes are reported as a component of income tax expense. 79 Table of Contents A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The State of Texas franchise tax is an income tax for financial reporting purposes under GAAP and the Company and its subsidiaries are subject to the modified tax as a combined group. Earnings per Share – Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the consolidated financial statements. Fair Values of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully described in Note 21. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect estimates. Trust Assets – Custodial assets of City Bank’s trust department, other than cash on deposit at City Bank, if any, are not included in the accompanying consolidated financial statements because they are not assets of City Bank. Segment Information – The Company previously identified two operating segments: banking and insurance. The accounting policies for each of the segments were the same as those described in the summary of significant accounting policies. Effective January 1, 2023, operations and financial performance of the insurance segment were being performed and evaluated on a Company-wide basis based on not being significant to the operating results of the Company. Furthermore, the insurance segment was sold on April 1, 2023. As a result, segment reporting disclosures have been removed. Subsequent Events – The Company has evaluated subsequent events from December 31, 2023 through the time the consolidated financial statements were filed with the SEC. 2. SECURITIES The amortized cost, related gross unrealized gains and losses, allowance for credit losses, and estimated fair value of securities available for sale at year-end follows (dollars in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value December 31 , 2023 Available for sale: State and municipal $ 202,814 $ 2 $ ( 22,241 ) $ — $ 180,575 Residential mortgage-backed securities 351,251 — ( 50,547 ) — 300,704 Commercial mortgage-backed securities 47,898 — ( 6,150 ) — 41,748 Commercial collateralized mortgage obligations 72,391 — ( 461 ) — 71,930 Asset-backed and other amortizing securities 18,476 — ( 1,436 ) — 17,040 Other securities 12,000 — ( 1,235 ) — 10,765 $ 704,830 $ 2 $ ( 82,070 ) $ — $ 622,762 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2022 Available for sale: State and municipal $ 259,429 $ 27 $ ( 34,401 ) $ 225,055 Residential mortgage-backed securities 386,783 — ( 57,938 ) 328,845 Commercial mortgage-backed securities 49,161 — ( 7,194 ) 41,967 Commercial collateralized mortgage obligations 76,189 — ( 551 ) 75,638 Asset-backed and other amortizing securities 20,907 — ( 1,813 ) 19,094 Other securities 12,000 — ( 888 ) 11,112 $ 804,469 $ 27 $ ( 102,785 ) $ 701,711 80 Table of Contents The amortized cost and fair value of securities at December 31, 2023 are presented below by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Declining-balance securities are shown separately since they are not due at a single maturity date. Available for Sale Amortized Cost Fair Value Within 1 year $ 735 $ 735 After 1 year through 5 years 6,112 5,940 After 5 years through 10 years 16,897 15,640 After 10 years 191,070 169,024 Declining-balance securities 490,016 431,423 $ 704,830 $ 622,762 At December 31, 2023 and 2022, there were no holdings of securities of any one issuer, other than the U.S. government, its agencies, or its sponsored enterprises, in an amount greater than 10% of stockholders’ equity. Securities with a carrying value of approximately $ 438.9 million and $ 464.1 million at December 31, 2023 and 2022, respectively, were pledged to collateralize public deposits and for other purposes as required or permitted by law. The Company sold $ 56.2 million of available for sale securities in the second quarter of 2023. This resulted in realized losses on sale of $ 3.4 million. The following table segregates securities with unrealized losses at year-end, by the duration they have been in a loss position for which an allowance for credit losses has not been recorded (dollars in thousands): Less than 12 Months 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2023 State and municipal $ 207 $ — $ 177,908 $ 22,241 $ 178,115 $ 22,241 Mortgage-backed securities - residential 9 — 300,695 50,547 300,704 50,547 Mortgage-backed securities - commercial — — 41,748 6,150 41,748 6,150 Collateralized mortgage obligations — — 71,930 461 71,930 461 Asset-backed and other amortizing securities — — 17,040 1,436 17,040 1,436 Other securities 3,286 214 7,479 1,021 10,765 1,235 $ 3,502 $ 214 $ 616,800 $ 81,856 $ 620,302 $ 82,070 December 31, 2022 State and municipal $ 162,746 $ 23,538 $ 57,675 $ 10,863 $ 220,421 $ 34,401 Mortgage-backed securities - residential 220,752 27,967 108,080 29,971 328,832 57,938 Mortgage-backed securities - commercial 41,966 7,194 — — 41,966 7,194 Collateralized mortgage obligations 75,638 551 — — 75,638 551 Asset-backed and other amortizing securities 19,094 1,813 — — 19,094 1,813 Other securities 11,112 888 — — 11,112 888 $ 531,308 $ 61,951 $ 165,755 $ 40,834 $ 697,063 $ 102,785 There were 144 securities with an unrealized loss at December 31, 2023, generally due to increases in market rates. Management evaluates AFS securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or non-credit related factors. Consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for the anticipated recovery in fair value. Management does not have the intent to sell any of the securities in an unrealized loss position as there are adequate liquidity sources to meet expected and unexpected funding needs. The fair value of these securities is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of December 31, 2023, management believes the unrealized loss positions detailed in the previous table are due to non-credit related factors, including changes in interest rates and other market conditions, and therefore no ACL or losses have been recognized or realized in the consolidated financial statements. 81 Table of Contents 3. LOANS HELD FOR INVESTMENT Loans held for investment are summarized by category at year-end as follows (dollars in thousands): December 31, 2023 December 31, 2022 Commercial real estate $ 1,081,056 $ 919,358 Commercial - specialized 372,376 327,513 Commercial - general 517,361 484,783 Consumer: 1-4 family residential 534,731 460,124 Auto loans 305,271 321,476 Other consumer 74,168 81,308 Construction 129,190 153,519 3,014,153 2,748,081 Allowance for credit losses on loans ( 42,356 ) ( 39,288 ) Loans, net $ 2,971,797 $ 2,708,793 The Company has certain lending policies, underwriting standards, and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies, underwriting standards, and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing, and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography. Commercial Real Estate – Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed and ensure appropriate collateral is obtained to secure the loan. Commercial real estate loans are underwritten primarily based on projected cash flows for income-producing properties and collateral values for non-income-producing properties. The repayment of these loans is generally dependent on the successful operation of the property securing the loans or the sale or refinancing of the property. Real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are diversified by type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry. Commercial – General and Specialized – Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations, as agreed and ensure appropriate collateral is obtained to secure the loan. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and typically include personal guarantees. Owner-occupied real estate is included in commercial loans, as the repayment of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties. Commercial loans are grouped into two distinct sub-categories: specialized and general. Commercial related segments that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related segments that contain a broader diversity of borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries. Performance of these loans is subject to operating and cash flow results of the borrower, with risk in the volatility of operating results for particular industries. Consumer – Loans to consumers include 1-4 family residential loans, auto loans, and other loans for recreational vehicles or other purposes. The Company utilizes a computer-based credit scoring analysis to supplement its policies and procedures in underwriting consumer loans. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes the Company’s risk. The Company generally requires mortgage title insurance and hazard insurance on 1-4 family residential loans. All consumer loans are generally dependent on the risk characteristics of the borrower’s ability to repay the loan, a consideration of the debt to income ratio, employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral. Construction – Loans for residential construction are for single-family properties to developers, builders, or end-users. These loans are underwritten based on estimates of costs and completed value of the project. Funds are advanced based on estimated percentage of completion for the project. Performance of these loans is affected by economic conditions as well as the ability to control costs of the projects. 82 Table of Contents The ACL for loans was $ 42.4 million at December 31, 2023, compared to $ 39.3 million at December 31, 2022. The ACL for loans to loans held for investment was 1.41 % at December 31, 2023 and 1.43 % at December 31, 2022. The following table details the activity in the ACL for the years ended December 31, 2023, 2022, and 2021 (dollars in thousands). Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. Beginning Balance Impact of CECL Adoption Provision for Credit Losses (1) Charge-offs Recoveries Ending Balance For the year ended December 31, 2023 Commercial real estate $ 13,029 $ 827 $ 1,952 $ — $ — $ 15,808 Commercial - specialized 3,425 33 398 ( 11 ) 175 4,020 Commercial - general 9,215 ( 2,574 ) 42 ( 469 ) 177 6,391 Consumer: 1-4 family residential 6,194 1,700 1,278 ( 1 ) 6 9,177 Auto loans 3,926 ( 332 ) 698 ( 888 ) 197 3,601 Other consumer 1,376 ( 235 ) 688 ( 1,140 ) 279 968 Construction 2,123 683 ( 96 ) ( 319 ) — 2,391 $ 39,288 $ 102 $ 4,960 $ ( 2,828 ) $ 834 $ 42,356 (1) The $ 4.6 million provision for credit loss on the consolidated statement of comprehensive income (loss) includes a $ 5.0 million provision for credit losses on loans and a $( 350 ) thousand provision for off-balance sheet credit exposures for the year ended December 31, 2023. Beginning Balance Provision for Credit Losses Charge-offs Recoveries Ending Balance For the year ended December 31, 2022 Commercial real estate $ 17,245 $ ( 4,634 ) $ — $ 418 $ 13,029 Commercial - specialized 4,363 ( 1,745 ) ( 199 ) 1,006 3,425 Commercial - general 8,466 627 ( 328 ) 450 9,215 Consumer: 1-4 family residential 5,268 1,026 ( 140 ) 40 6,194 Auto loans 3,653 637 ( 508 ) 144 3,926 Other consumer 1,357 932 ( 1,167 ) 254 1,376 Construction 1,746 538 ( 166 ) 5 2,123 $ 42,098 $ ( 2,619 ) $ ( 2,508 ) $ 2,317 $ 39,288 Beginning Balance Provision for Credit Losses Charge-offs Recoveries Ending Balance For the year ended December 31, 2021 Commercial real estate $ 18,962 $ ( 1,826 ) $ — $ 109 $ 17,245 Commercial - specialized 5,760 ( 1,386 ) ( 172 ) 161 4,363 Commercial - general 9,227 ( 302 ) ( 677 ) 218 8,466 Consumer: 1-4 family residential 4,646 666 ( 52 ) 8 5,268 Auto loans 4,226 ( 90 ) ( 598 ) 115 3,653 Other consumer 1,671 339 ( 903 ) 250 1,357 Construction 1,061 681 — 4 1,746 $ 45,553 $ ( 1,918 ) $ ( 2,402 ) $ 865 $ 42,098 During the year ended December 31, 2023, the provision for credit losses on loans of $ 5.0 million was driven primarily by organic loan growth experienced during 2023 and net charge-offs of $ 2.0 million during the year. 83 Table of Contents The following table shows the Company’s amortized cost in loans and related ACL for collateral dependent loans by class using the fair value of collateral loss estimation methodology of evaluating expected credit losses at the date indicated (dollars in thousands). Equipment Real Estate Accounts Receivable Total Loans Individually Evaluated Total ACL for Individually Evaluated Loans December 31, 2023 Commercial real estate $ — $ — $ — $ — $ — Commercial - specialized — — — — — Commercial - general 353 691 — 1,044 142 Consumer: 1-4 family residential — 362 — 362 — Auto loans — — — — — Other consumer — — — — — Construction — 218 — 218 — $ 353 $ 1,271 $ — $ 1,624 $ 142 The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment at the date indicated (dollars in thousands): Recorded Investment ACL for Loans Individually Evaluated Collectively Evaluated Individually Evaluated Collectively Evaluated December 31, 2022 Commercial real estate $ — $ 919,358 $ — $ 13,029 Commercial - specialized — 327,513 — 3,425 Commercial - general 3,350 481,433 22 9,193 Consumer: 1-4 family residential 742 459,382 18 6,176 Auto loans — 321,476 — 3,926 Other consumer — 81,308 — 1,376 Construction 1,014 152,505 245 1,878 $ 5,106 $ 2,742,975 $ 285 $ 39,003 Prior to the adoption of ASC 326 on January 1, 2023, loan was reported as impaired when, based on current information and events, it was probable that the Company would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. All loans rated substandard or worse and greater than $ 250 thousand were specifically reviewed to determine if they were impaired. Loans that were determined to be impaired were then evaluated to determine estimated impairment, if any. Impairment could 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 were not individually determined to be impaired or were not subject to the specific review of impaired status were subject to the general valuation allowance portion of the allowance for loan losses. Impaired loans, or portions thereof, were charged off when deemed uncollectible. Impaired loan information at the date indicated follows (dollars in thousands): Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Total Recorded Investment Related Allowance Average Recorded Investment December 31, 2022 Commercial real estate $ — $ — $ — $ — $ — $ 551 Commercial - specialized — — — — — — Commercial - general 3,350 799 2,551 3,350 22 4,214 Consumer: 1-4 family 742 486 256 742 18 1,167 Auto loans — — — — — — Other consumer — — — — — — Construction 1,014 686 328 1,014 245 507 $ 5,106 $ 1,971 $ 3,135 $ 5,106 $ 285 $ 6,439 84 Table of Contents All impaired loans $ 250 thousand and greater were specifically evaluated for impairment at December 31, 2022 . Interest income recognized using a cash-basis method on impaired loans for the years ended December 31, 2022 and 2021 was not significant. The table below provides an age analysis on accruing past-due loans and nonaccrual loans at year-end (dollars in thousands): 30-89 Days Past Due 90 Days or More Past Due Total Nonaccrual Nonaccrual with no ACL December 31, 2023 Commercial real estate $ 499 $ 86 $ — $ — Commercial - specialized 521 — 213 — Commercial - general 1,316 296 953 — Consumer: 1-4 Family residential 793 1,390 1,828 362 Auto loans 1,208 60 — — Other consumer 1,134 103 30 — Construction 759 — 218 218 $ 6,230 $ 1,935 $ 3,242 $ 580 30-89 Days Past Due 90 Days or More Past Due Total Nonaccrual December 31, 2022 Commercial real estate $ 342 $ 27 $ — Commercial - specialized 25 13 38 Commercial - general 1,451 60 3,357 Consumer: 1-4 Family residential 1,389 1,653 1,356 Auto loans 707 85 — Other consumer 1,487 149 37 Construction 550 — 1,014 $ 5,951 $ 1,987 $ 5,802 Credit Quality Indicators The Company grades its loans on a thirteen -point grading scale. These grades fit in one of the following categories: (i) pass, (ii) special mention, (iii) substandard, (iv) doubtful, or (v) loss. Loans categorized as loss are charged-off immediately. The grading of loans reflect a judgment by the Company about the risks of default associated with the loan. The Company reviews the grades on loans as part of the Company’s on-going monitoring of the credit quality of the loan portfolio. These risk ratings are assigned based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Pass loans have financial factors or nature of collateral that are considered reasonable credit risks in the normal course of lending and encompass several grades that are assigned based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loans at some future date. Substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize collection and present the distinct possibility that some loss will be sustained if the deficiencies are not corrected. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. Substandard loans can be accruing or can be nonaccrual depending on the circumstances of the individual loans. Doubtful loans have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. All doubtful loans are on nonaccrual. 85 Table of Contents In connection with the review of the Company’s loan portfolio, management considers risk elements attributable to particular loan type or categories in assessing the quality of individual loans. The list of loans to be analyzed for individual evaluation consists of non-accrual loans over $ 250 thousand with direct exposure. Interest income recognized using a cash-basis method on non-accrual loans for the year ended December 31, 2023 was not significant. In addition, the Company closely monitors substandard accruing loans over $ 1 million with direct exposure, and past due accruing loans over $ 100 thousand for possible individual evaluation. All other loans will be evaluated collectively in designated pools unless a loss exposure has been identified. Additional funds committed to be advanced on individually analyzed loans are not significant. The following table reflects the amortized cost basis in loans by credit quality indicator and origination year at December 31, 2023, and gross charge-offs for the year ended December 31, 2023, excluding loans held for sale. Loans acquired are shown in the table by origination year, not merger date. The Company had an immaterial amount of revolving loans converted to term loans at December 31, 2023. Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Total Commercial real estate: Pass $ 254,766 $ 324,601 $ 189,211 $ 50,660 $ 47,988 $ 174,859 $ 3,842 $ 1,045,927 Special mention — — — 11,677 — — — 11,677 Substandard — 82 21,152 1,699 149 370 — 23,452 Total commercial real estate loans $ 254,766 $ 324,683 $ 210,363 $ 64,036 $ 48,137 $ 175,229 $ 3,842 $ 1,081,056 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial - specialized: Pass $ 117,912 $ 56,152 $ 57,839 $ 19,883 $ 10,376 $ 22,758 $ 83,368 $ 368,288 Special mention — 2,938 — — — — 300 3,238 Substandard — 105 196 393 19 137 — 850 Total commercial - specialized loans $ 117,912 $ 59,195 $ 58,035 $ 20,276 $ 10,395 $ 22,895 $ 83,668 $ 372,376 Current period gross charge-offs $ — $ — $ — $ 11 $ — $ — $ — $ 11 Commercial - general: Pass $ 88,911 $ 128,627 $ 90,957 $ 35,794 $ 45,660 $ 68,990 $ 44,131 $ 503,070 Special mention — — — — — 1,565 250 1,815 Substandard 201 2,930 4,676 227 2,749 1,442 251 12,476 Total commercial - general loans $ 89,112 $ 131,557 $ 95,633 $ 36,021 $ 48,409 $ 71,997 $ 44,632 $ 517,361 Current period gross charge-offs $ — $ 47 $ 50 $ 33 $ 18 $ 321 $ — $ 469 Consumer: 1-4 family residential: Pass $ 113,897 $ 156,549 $ 106,619 $ 51,940 $ 31,345 $ 56,666 $ 3,770 $ 520,786 Special mention — — — — — — — — Substandard 376 382 4,238 708 3,758 4,483 — 13,945 Total consumer: 1-4 family residential loans $ 114,273 $ 156,931 $ 110,857 $ 52,648 $ 35,103 $ 61,149 $ 3,770 $ 534,731 Current period gross charge-offs $ — $ — $ 1 $ — $ — $ — $ — $ 1 Consumer: auto loans: Pass $ 106,149 124,588 48,686 16,524 6,812 1,935 — 304,694 Special mention — — — — — — — — Substandard 16 189 199 60 81 32 — 577 Total consumer: auto loans $ 106,165 $ 124,777 $ 48,885 $ 16,584 $ 6,893 $ 1,967 $ — $ 305,271 Current period gross charge-offs $ 113 $ 377 $ 254 $ 14 $ 49 $ 81 $ — $ 888 Consumer: other consumer: Pass $ 23,719 $ 26,899 $ 10,198 $ 3,190 $ 2,539 $ 6,107 $ 1,364 $ 74,016 Special mention — — — — — — — — Substandard — 13 44 10 — 84 1 152 Total consumer: other consumer loans $ 23,719 $ 26,912 $ 10,242 $ 3,200 $ 2,539 $ 6,191 $ 1,365 $ 74,168 Current period gross charge-offs (1) $ 624 $ 244 $ 88 $ 32 $ 72 $ 80 $ — $ 1,140 Construction: Pass $ 61,903 $ 53,930 $ 5,511 $ 331 $ — $ — $ 6,250 $ 127,925 Special mention 131 — 820 — — — — 951 Substandard — 314 — — — — — 314 Total construction loans $ 62,034 $ 54,244 $ 6,331 $ 331 $ — $ — $ 6,250 $ 129,190 Current period gross charge-offs $ 48 $ — $ 271 $ — $ — $ — $ — $ 319 (1) Includes $ 574 thousand in charged-off demand deposit overdrafts reported as 2023 originations. 86 Table of Contents The following table summarizes loans by credit quality indicator at December 31, 2022 (dollars in thousands): Pass Special Mention Substandard Doubtful Total Commercial real estate $ 893,312 $ — $ 26,046 $ — $ 919,358 Commercial - specialized 326,987 — 526 — 327,513 Commercial - general 451,639 — 33,144 — 484,783 Consumer: 1-4 family residential 450,034 — 10,090 — 460,124 Auto loans 321,158 — 318 — 321,476 Other consumer 81,109 — 199 — 81,308 Construction 151,995 — 1,524 — 153,519 $ 2,676,234 $ — $ 71,847 $ — $ 2,748,081 Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extensions, an other than insignificant payment delay, or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses. Typically, one type of concession, such as term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. In some cases, the Company provides multiple types of concessions on one loan. For the loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The following table presents the amortized cost basis of loans at December 31, 2023 that were both experiencing financial difficulty and modified during the year ended December 31, 2023, by class and by type of modification . The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below (dollars in thousands): Payment Delay Term Extension Term Extension and Payment Delay Term Extension and Interest Rate Reduction Payment Delay and Interest Rate Reduction Payment Delay, Term Extension, and Interest Rate Reduction Total Class of Financing Receivable December 31, 2023 Commercial real estate $ — $ 2,118 $ 127 $ — $ — $ — 0.21 % Commercial - specialized 103 — 81 686 — — 0.23 % Commercial - general 266 6,995 598 109 — 28 1.55 % Consumer: 1-4 family 187 390 87 — — 7 0.13 % Auto loans 34 35 17 — 42 — 0.04 % Other consumer — — — — 7 — 0.01 % Construction — 2,315 302 — — — 2.03 % $ 590 $ 11,853 $ 1,212 $ 795 $ 49 $ 35 0.48 % 87 Table of Contents The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following presents the performance of such loans that have been modified in the year ended December 31, 2023 (dollars in thousands): 30-89 Days Past Due 90 Days or More Past Due and Still Accruing Nonaccrual December 31, 2023 Commercial real estate $ — $ — $ — Commercial - specialized — — 265 Commercial - general 69 33 63 Consumer: 1-4 Family residential — — — Auto loans 69 — — Other consumer — — — Construction — — 272 $ 138 $ 33 $ 600 The following table presents the financial effects of the loan modifications presented above to borrowers experiencing financial difficulty for the year ended December 31, 2023 (dollars in thousands): Principal Forgiveness Weighted- Average Interest Rate Reduction Weighted- Average Term Extension (Months) December 31, 2023 Commercial real estate $ — — 5 Commercial - specialized — 0.86 % 56 Commercial - general — 1.97 % 16 Consumer: 1-4 Family residential — 1.75 % 16 Auto loans — 0.86 % 11 Other consumer — 4.75 % — Construction — — 6 $ — 1.07 % 15 As of December 31, 2023, the Company had one loan relationship made to borrowers experiencing financial difficulty that was modified during the year ended December 31, 2023 that subsequently defaulted, totaling $ 297 thousand. Payment default is defined as movement to nonperforming status, foreclosure, or charge-off. Upon the Company’s determination that a modified loan has subsequently been deemed to not be fully collectible, the uncollectible amount is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. Prior-period troubled debt restructuring (“TDR”) disclosures Prior to adopting the new accounting standard on loan modifications, the Company accounted for modifications of loans to borrowers experiencing financial difficulty as TDRs, when the modification resulted in a concession and specific reserves were charged to the ACL, if necessary, for the amount of estimated credit loss. The Company had no loans modified as a TDR during the years ended December 31, 2022 and 2021. 88 Table of Contents 4. FORECLOSED ASSETS Foreclosed assets activity was as follows for the periods presented below (dollars in thousands): For the Year Ended December 31, 2023 2022 2021 Beginning balance $ 169 $ 1,032 $ 1,353 Additions 2,302 764 927 Sales, net ( 1,417 ) ( 1,627 ) ( 1,248 ) Current year valuation write-down ( 142 ) — — Ending balance $ 912 $ 169 $ 1,032 There was no activity in the valuation allowance for the years ended December 31, 2022 and 2021. Net expenses related to foreclosed assets include the following for the periods presented below (dollars in thousands): For the Year Ended December 31, 2023 2022 2021 Net gain on sales $ — $ ( 424 ) $ ( 44 ) Current year valuation write-down 142 — — Operating expenses, net of rental income 42 65 57 Foreclosed assets expense, net $ 184 $ ( 359 ) $ 13 5. PREMISES AND EQUIPMENT Detail of premises and equipment at year-end follows (dollars in thousands): December 31, 2023 2022 Land $ 9,530 $ 10,065 Buildings and improvements 66,558 63,995 Furniture and equipment 51,225 47,967 Construction in process 396 2,378 127,709 124,405 Less accumulated depreciation ( 72,639 ) ( 68,068 ) Premises and equipment, net $ 55,070 $ 56,337 Depreciation expense for the years ended December 31, 2023, 2022 and 2021 was approximately $ 5.1 million, $ 5.1 million, and $ 4.8 million, respectively. 6. LEASES Lessee Arrangements The Company leases space, primarily for branch facilities and small equipment under operating leases. The Company’s leases often include one or more options to renew at the Company’s discretion, and some of the Company’s leases include options to terminate within one year . When it is reasonably certain that the Company will exercise the option to renew or extend the lease term, that option is included in estimating the value of the ROU asset and lease liability. The Company’s leases contain customary restrictions and covenants and do not contain any residual value guarantees. The Company has certain intercompany leases and subleases between its subsidiaries, and these transactions and balances have been eliminated in consolidation and are not reflected in the tables and information presented below. As of December 31, 2023 and 2022, the Company had no finance leases. The balance sheet components of the Company’s leases at year-end are as follows (in thousands): December 31, 2023 December 31, 2022 Operating lease right of use assets (included in Other assets ) $ 8,681 $ 7,938 Operating lease liabilities (included in Accrued expenses and other liabilities ) 9,630 8,897 The Company does not generally enter into leases which contain variable payments, other than due to the passage of time. Operating lease costs, including short-term lease costs were $ 2.9 million, $ 2.9 million and $ 2.5 million, respectively , for the years ended December 31, 2023,2022 and 2021, respectively . 89 Table of Contents Supplemental cash flow information related to leases is as follows (in thousands): Year Ended December 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used in operating leases $ 2,004 $ 1,976 Right-of-use assets obtained in exchange for new lease obligations: Operating leases $ 2,515 $ — For operating leases, the Company’s weighted average remaining lease terms and weighted average discount rate was 9.90 years and 5.51 %, respectively, as of December 31, 2023, and 9.83 years and 4.65 %, respectively, as of December 31, 2022. Future undiscounted lease payments at December 31, 2023, under operating lease agreements, are presented below (in thousands). 2024 $ 1,772 2025 1,437 2026 1,375 2027 1,324 2028 1,169 Thereafter 5,570 Total minimum lease payments 12,647 Less: Amount representing interest 3,017 Lease liabilities $ 9,630 As of December 31, 2023, the Company had no significant additional operating leases that have not yet commenced. Lessor Arrangements The Company leases certain facilities and office space under operating lease agreements to outside parties. Operating lease income for the years ended December 31, 2023, 2022, and 2021 was $ 839 thousand, $ 800 thousand, and $ 890 thousand, respectively, and is included in occupancy and equipment, net in the consolidated statements of comprehensive income (loss). 7. GOODWILL AND INTANGIBLES The Company had goodwill of $ 19.3 million and $ 19.5 million at December 31, 2023 and 2022, respectively . Other intangible assets, which consisted of CDI, customer lists, and employment agreements at the dates indicated are summarized below (dollars in thousands): December 31, 2023 2022 Amortized intangible assets: Core deposit intangible $ 6,679 $ 6,679 Less: Accumulated amortization ( 4,250 ) ( 3,420 ) 2,429 3,259 Other intangibles — 2,972 Less: Accumulated amortization — ( 1,882 ) — 1,090 Other intangible assets, net $ 2,429 $ 4,349 On April 1, 2023, the sale of Windmark was completed, resulting in the removal of goodwill and other intangible assets, net of accumulated amortization, of $ 193 thousand and $ 942 thousand, respectively. Amortization expense for other intangibles for the years ended December 31, 2023, 2022, and 2021 totaled $ 1.0 million, $ 1.5 million, and $ 1.7 million, respectively. The estimated amount of amortization expense for core deposit intangibles to be recognized over the next five years is as follows (dollars in thousands): 2024 $ 708 2025 587 2026 466 2027 344 2028 223 90 Table of Contents 8. MORTGAGE SERVICING RIGHTS The following table reflects the changes in fair value of the Company’s mortgage servicing rights asset included in the Consolidated Balance Sheets, and other information related to the serviced portfolio for the periods or dates presented (dollars in thousands): Year Ended December 31, 2023 2022 2021 Beginning balance $ 27,474 $ 19,700 $ 9,049 Additions 1,470 3,069 9,196 Valuation adjustment ( 2,375 ) 4,705 1,455 Ending balance $ 26,569 $ 27,474 $ 19,700 December 31, 2023 2022 Mortgage loans serviced for others $ 2,001,476 $ 2,046,490 Mortgage servicing rights assets as a percentage of serviced mortgage loans 1.33 % 1.34 % The following table reflects the key assumptions used in measuring the fair value of the Company’s mortgage servicing rights as of the dates indicated: December 31, 2023 2022 Weighted average constant prepayment rate 7.46 % 7.47 % Weighted average discount rate 10.66 % 9.15 % Weighted average life in years 8.09 7.91 9. DEPOSITS Time deposits that met or exceeded the Federal Deposit Insurance Corporation (“FDIC”) Insurance limit of $250,000 were $ 170.4 million and $ 131.0 million at December 31, 2023 and 2022, respectively. The scheduled maturities of time deposits at December 31, 2023 follows (dollars in thousands): 2024 $ 339,979 2025 19,665 2026 3,864 2027 1,728 2028 2,272 Thereafter 207 $ 367,715 10. BORROWING ARRANGEMENTS Short-term borrowings There were no balances as of December 31, 2023 and 2022 related to federal funds purchased or FHLB short-term advances. Federal funds purchased are short-term borrowings that generally have one-day maturities. Lines of credit The bank subsidiary has a line of credit with FHLB. The amount of the line is determined by FHLB on a quarterly basis. The line is primarily used to purchase Federal funds or to secure letters of credit to pledge as collateral against certain public deposits. The line is collateralized by a blanket floating lien on all first mortgage loans and commercial real estate loans as well as all FHLB stock, which has a carrying amount of $ 3.0 million and $ 2.8 million at December 31, 2023 and 2022. The available capacity of the line was $ 1.1 billion and $ 920.2 million with no outstanding borrowings at December 31, 2023 and 2022, respectively. The bank subsidiary also has a line of credit with the Federal Reserve Bank of Dallas (“FRB”). The amount of the line is determined on a monthly basis by FRB. The line is collateralized by a blanket floating lien on all agriculture, commercial, and consumer loans. The amount of the line was $ 595.4 million and $ 648.3 million at December 31, 2023 and 2022, respectively. This line was not used at December 31, 2023 or 2022. 91 Table of Contents In addition, the bank subsidiary also has access to the Bank Term Funding Program (“BTFP”) established by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As of December 31, 2023, the Company has not pledged any securities for the BTFP but has approximately $ 134 million of available securities that can be used as collateral for additional borrowings through the program. The bank subsidiary also has uncollateralized lines of credit with multiple banks. The total amount of the lines was $ 140.0 million and $ 160.0 million as of December 31, 2023 and 2022, respectively. These lines were not used at December 31, 2023 or 2022. Notes payable and other borrowings The bank had no FHLB advances outstanding at December 31, 2023 or 2022 . Junior subordinated deferrable interest debentures and trust preferred securities The Company established grantor trusts (“trusts”) that issued obligated mandatorily redeemable preferred securities (“TPS”); the Company issued junior subordinated deferrable interest debentures (debentures) to the trusts. 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 common capital securities issued by the trusts ($ 1.4 million) are included in other assets in the Company’s consolidated balance sheets under the equity method of accounting. The amount of the capital securities represents the Company’s maximum exposure to loss. The Company is required by the Federal Reserve to maintain certain levels of capital for bank regulatory purposes. The debentures issued by the trusts to the Company, less the common capital securities of the trusts, continue to qualify as Tier 1 capital, subject to limitation to 25% of Tier 1 capital, under guidance issued by the Federal Reserve. Although the trusts are not consolidated in these consolidated financial statements, the TPS remain outstanding with terms substantially the same as the debentures. The Company’s interest payments on its debentures are the sole source of repayment for the TPS. Additionally, the Company guarantees payment of interest and principal on the TPS. The terms of the debentures and TPS allow for interest to be deferred for up to five years consecutively. During this time, shareholder dividends are not allowed to be paid. The following table is a detail of the debentures and TPS at December 31, 2023 (dollars in thousands): Issue Date Amount of TPS Amount of Debentures Stated Maturity Date of TPS and Debentures (1) Interest Rate of TPS and Debentures (2)(3) SPFCT III 2004 $ 10,000 $ 10,310 2034 3 -mo. CME Term SOFR + 291 bps; 8.32 % SPFCT IV 2005 20,000 20,619 2035 3 -mo. CME Term SOFR + 165 bps; 7.04 % SPFCT V 2007 15,000 15,464 2037 3 -mo. CME Term SOFR + 176 bps; 7.15 % Total $ 45,000 $ 46,393 (1) May be redeemed five years from the issue date, the Company has no current plans to redeem; (2) Interest payable quarterly with principal due at maturity; (3) Rate as of last reset date. Subordinated debt In December 2018, the Company issued $ 26.5 million in subordinated notes. Notes totaling $ 12.4 million (the “2028 Notes”) have a maturity date of December 2028 and a weighted average fixed rate of 5.74 % for the first five years . The remaining $ 14.1 million of notes have a maturity date of December 2030 and a weighted average fixed rate of 6.41 % for the first seven years . After the fixed rate periods, all notes will float at the Wall Street Journal prime rate, with a floor of 4.0 % and a ceiling of 7.5 %. These notes pay interest quarterly, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally, these notes qualify for Tier 2 capital treatment, subject to regulatory limitations. On November 8, 2023, the Company notified holders of its 2028 Notes that it had elected to redeem all the outstanding 2028 Notes effective on December 15, 2023 (the “Redemption Date”). Each of the 2028 Notes were redeemed pursuant to the terms of the Indenture, dated as of December 14, 2018, between the Company and Argent Trust Company, N.A., as trustee for the 2028 Notes (the “Trustee”), at the redemption price totaling approximately $ 12.4 million in aggregate principal amount, plus accrued and unpaid interest. As provided in the redemption notice, on the Redemption Date, the Trustee paid the relevant Redemption Price to the holders of 2028 Notes appearing on the books and records of the Trustee on the Redemption Date. The 2028 Notes ceased to represent the right to payment of principal and interest upon the payment to the holders of 2028 Notes by the Trustee representing the Redemption Price. The Company received all necessary regulatory approvals for the redemption of the 2028 Notes. 92 Table of Contents On September 29, 2020, the Company issued $ 50.0 million in subordinated notes. Proceeds were reduced by approximately $ 926 thousand in debt issuance costs. The notes have a maturity date of September 2030 with a fixed rate of 4.50 % for the first five years . After the expiration of the fixed rate period, the notes will reset quarterly at a variable rate equal to the then current three-month Secured Overnight Financing Rate (“SOFR”) , as published by the Federal Reserve Bank of New York, plus 438 basis points. These notes pay interest semi-annually, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally, these notes qualify for Tier 2 capital treatment, subject to regulatory limitations. As of December 31, 2023, the total amount of subordinated notes outstanding was $ 64.1 million less approximately $ 325 thousand of remaining debt issuance costs for a total balance of $ 63.8 million. As of December 31, 2022, the total amount of subordinated notes outstanding was $ 76.5 million less approximately $ 511 thousand of remaining debt issuance costs for a total balance of $ 76 million. 11. EMPLOYEE BENEFITS The Company sponsored the South Plains Financial, Inc. Employee Stock Ownership Plan (“ESOP”). Effective May 9, 2019, the ESOP was restated and amended. The 401(k) related assets, which consisted of participants’ elective and rollover accounts, were transferred to the newly formed City Bank 401(k) Plan (the “401(k) Plan”). The ESOP covered all employees who have completed one month of service. On December 30, 2022, the board of directors of the Company adopted resolutions to terminate the ESOP, effective as of December 31, 2022. Upon termination of the ESOP, all ESOP participants became fully vested in their ESOP benefits without regard to whether they were fully vested in such benefits as of the effective date of the termination. As a result of the ESOP termination, all ESOP assets were distributed to the ESOP participants in a lump sum distribution of cash and Company stock, without consideration as to whether the participant consented to such distribution. However, in the event that an ESOP participant’s account exceeded $ 1,000 and the participant failed to consent to the distribution, the participant’s account balance was distributed to an individual retirement account for the participant’s benefit. Furthermore, if an ESOP participant’s account balance was $ 10,000 or less and the participant elected to receive a cash distribution, then the account balance was distributed to the ESOP participant in a lump sum cash payment. All ESOP participant account balances were distributed by April 30, 2023. As of December 31, 2022 , the number of shares held by the ESOP was 2,574,100 and all were allocated to participants. Under the provisions of the 401(k) Plan, participants may elect to contribute pre-tax salary deferrals and direct investment of those salary deferrals among investments offered in the 401(k) Plan. The Company may elect to contribute a safe harbor match equal to 100 % of the first 5 % of the participants’ compensation contributed. The expense for Company contributions to the 401(k) Plan was $ 1.8 million in 2023, $ 1.9 million in 2022, and $ 1.8 million in 2021 . Employee Health Benefits – The Company has a self-insured welfare benefit plan which provides health and dental benefits. For officers of the Company, there is no waiting period to be eligible, while there is a 60 -day waiting period for all other employees. In addition, to be eligible, an employee must be scheduled to work on a full-time basis (at least 30 hours per week). The Company periodically evaluates the costs of the plan and determines the amount to be contributed by the Company and the amount, if any, to be contributed by the employee. Welfare benefit expense was approximately $ 4.4 million, $ 4.2 million, and $ 4.5 million for the years ended December 31, 2023, 2022, and 2021, respectively. In addition, benefit obligations have been accrued and include reported claims payable and claims incurred but not reported, for approximately $ 742 thousand and $ 653 thousand as of December 31, 2023 and 2022, respectively. The Company has limited its risk exposure for these benefits through a stop-loss policy with an independent third party insurer which reimburses benefits paid that exceed $ 150 thousand per participant per year. Non-Qualified Plans – Certain Company executives, as determined by the Company’s Board from time-to-time, have post-retirement salary continuation agreements under an Executive Salary Continuation Plan. Retirement ages and retirement salary amounts are specified in each agreement. The Company accrues actuarial estimates of the costs of these benefits over the respective service periods; approximately $ 13.3 million and $ 12.9 million was accrued at December 31, 2023 and 2022, respectively. This plan is nonqualified , noncontributory, and unfunded . The charge to income for this plan during 2023, 2022, and 2021 was approximately $ 1.1 million, $ 1.0 million and, $ 1.0 million, respectively. 12. STOCK-BASED COMPENSATION Equity Incentive Plan The 2019 Equity Incentive Plan (“Plan”) was approved by the Company’s Board of Directors on January 16, 2019 and by its shareholders on March 6, 2019. The purpose of the Plan is to: (i) attract and retain the best available personnel for positions of substantial responsibility, (ii) provide additional incentive to employees, directors and consultants, and (iii) promote the success of the Company’s business. This Plan permits the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, and other stock-based awards. The maximum aggregate number of shares of common stock that may be issued pursuant to all awards under the Plan was 4,426,996 at December 31, 2023. The maximum aggregate number of shares that may be issued under the Plan may be increased annually by up to 3 % of the total issued and outstanding common shares of the Company at the beginning of each fiscal year. 93 Table of Contents The fair value of each option award is estimated on the date of grant using the Black-Scholes model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock and similar peer company averages. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes in to account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on U.S. Treasury yield curve in effect at the time of the grant. Options A summary of activity in the Plan during the year ended December 31, 2023 is presented in the table below (dollars in thousands, except per share data): Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life in Years Aggregate Intrinsic Value Year Ended December 31, 2023 Outstanding at beginning of year: 1,354,189 $ 16.11 $ 17,416 Granted 47,816 27.46 72 Exercised ( 117,292 ) 11.96 ( 1,994 ) Forfeited ( 1,125 ) 20.19 ( 10 ) Expired ( 2,730 ) 17.47 ( 31 ) Balance, December 31, 2023 1,280,858 $ 16.91 5.11 $ 15,453 Exercisable at end of period 1,082,939 $ 15.80 4.68 $ 14,265 Vested at end of period 1,082,939 $ 15.80 4.68 $ 14,265 A summary of assumptions used to calculate the fair values of the awards granted during the periods noted is presented below: Year Ended December 31, 2023 2022 2021 Expected volatility 39.13 % to 39.68 % 40.20 % to 40.29 % 41.20 % to 41.32 % Expected dividend yield 1.74 % to 1.90 % 1.30 % 1.00 % Expected term (years) 6.1 to 6.3 6.1 to 6.3 6.1 to 6.2 Risk-free interest rate 3.91 % to 3.98 % 1.56 % to 1.95 % 0.52 % to 0.83 % Weighted average grant date fair value $ 10.26 $ 10.54 $ 7.07 The total intrinsic value of options exercised during the years ended December 31, 2023, 2022, and 2021 was $ 1.8 million, $ 3.9 million, and $ 2.1 million, respectively. Restricted Stock Awards and Units A summary of activity in the Plan during the year ended December 31, 2023 is presented in the table below: Number of Shares Weighted-Average Grant Date Fair Value Year Ended December 31, 2023 Outstanding at beginning of year: 84,342 $ 26.76 Granted 85,127 25.33 Exercised ( 38,141 ) 24.40 Forfeited ( 5,411 ) 25.22 Balance, December 31, 2023 125,917 $ 26.58 94 Table of Contents Restricted stock units granted under the Plan typically vest from one to four years , but vesting periods may vary. Compensation expense for these grants will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The total fair value of restricted stock units vested during the years ended December 31, 2023, 2022, and 2021 was $ 931 thousand, $ 601 thousand, and $ 489 thousand, respectively. For the years ended December 31, 2023, 2022, and 2021 the Company recorded stock-based compensation expense related to the Plan of $ 2.2 million, $ 2.8 million and $ 1.6 million, respectively. The total unrecognized compensation cost for the awards outstanding under the Plan at December 31, 2023 was $ 2.9 million and will be recognized over a weighted average remaining period of 1.66 years. 13. INCOME TAXES The components of income tax expense (benefit) was as follows for the periods indicated (dollars in thousands): Year Ended December 31, 2023 2022 2021 Current expense Federal $ 16,192 $ 13,250 $ 12,834 State 381 302 220 Deferred expense Federal 99 1,359 1,453 Total $ 16,672 $ 14,911 $ 14,507 Effective tax rates differ from the federal statutory rate of 21 % applied to income before income taxes due to the following for the periods indicated (dollars in thousands): Year Ended December 31, 2023 2022 2021 Federal statutory rate times financial statement income $ 16,678 $ 15,362 $ 15,355 Effect of: Tax-exempt income ( 836 ) ( 953 ) ( 978 ) State taxes, net of federal benefit 301 239 174 Earnings from bank owned life insurance ( 279 ) ( 251 ) ( 262 ) Non-deductible expenses 675 409 281 Other, net 133 105 ( 63 ) Total $ 16,672 $ 14,911 $ 14,507 Effective tax rate 20.99 % 20.38 % 19.84 % Year-end deferred tax assets and liabilities were due to the following at year-end (dollars in thousands): December 31, 2023 2022 Deferred tax assets Allowance for credit losses $ 8,895 $ 8,251 Deferred compensation 5,640 6,118 Leases 200 201 Other real estate owned 30 — Nonaccrual loans 78 71 Unrealized gain on available-for-sale securities 17,234 21,579 Other 456 286 Total deferred tax assets 32,533 36,506 Deferred tax liabilities Depreciation ( 2,800 ) ( 2,672 ) Intangibles ( 626 ) ( 505 ) Prepaid expenses ( 564 ) ( 355 ) Mortgage servicing rights ( 5,580 ) ( 5,770 ) Other ( 3,550 ) ( 4,386 ) Total deferred tax liabilities ( 13,120 ) ( 13,688 ) Net deferred tax asset $ 19,413 $ 22,818 95 Table of Contents 14. RELATED-PARTY TRANSACTIONS Direct and indirect loans to executive officers, directors, significant stockholders and their related affiliates as of December 31, 2023 and 2022 aggregated approximately $ 10.7 million and $ 9.7 million, respectively. There were no charge-offs related to these loans in 2023 or 2022 and any advance and repayment activity was routine. Deposits from these related parties in the consolidated financial statements were not significant. 15. OFF-BALANCE-SHEET ACTIVITIES, COMMITMENTS AND CONTINGENCIES Financial instruments with off-balance-sheet risk – The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Company’s consolidated financial statements. The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for recorded instruments. Financial instruments whose contract amounts represent credit risk outstanding at year-end follow (dollars in thousands): December 31, 2023 2022 Commitments to grant loans and unfunded commitments under lines of credit $ 598,800 $ 682,296 Standby letters-of-credit 11,503 13,864 Commitments to grant loans and extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company requires collateral supporting those commitments if deemed necessary. Litigation – In July 2020, a vendor claimed that City Bank had breached a contract by failing to timely pay amounts allegedly due and owing. City Bank vigorously rejected any such non-payment contentions and filed suit against the vendor. With the lawsuit, City Bank sought, among other claims and relief, an injunction against the vendor. After an evidentiary hearing, the court entered a temporary injunction against the vendor expressly prohibiting it from, among other things, terminating the contract pending trial. Based upon discovery in the lawsuit, City Bank also filed a breach of contract claim against the vendor alleging that the vendor violated City Bank’s contractual exclusivity rights. The vendor has filed counterclaims, including for declaratory relief that the contracts should be declared unenforceable. In October 2021, the vendor filed a counterclaim alleging that City Bank’s attempted enforcement of its exclusivity rights contravenes the Texas Free Enterprise and Antitrust Act. On or about September 23, 2022, the parties entered into a Settlement Agreement and Mutual Release, pursuant to which the parties agreed to the settlement and release of all claims and counterclaims in the lawsuit. Thereafter, the parties filed a joint motion to dismiss with prejudice and the court formally dismissed the case by order dated October 7, 2022. A gain contingency was recorded at settlement and that consideration was received on October 3, 2022. The Company is a defendant in legal actions arising from time to time in the normal course of business. Management believes that the ultimate liability, if any, arising from these matters will not materially affect the consolidated financial statements, based on information known as of the date the consolidated financial statements were available to be issued. FHLB Letters of Credit – The Company has used FHLB letters of credit to pledge to certain public deposits. There were no FHLB letters of credit outstanding at December 31, 2023 or 2022. 96 Table of Contents 16. CAPITAL AND REGULATORY MATTERS The Company and its bank subsidiary are subject to various regulatory capital requirements administered by its banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and its bank subsidiary’s financial statements. Under capital guidelines and the regulatory framework for prompt corrective action, the Company and its bank subsidiary must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and its bank subsidiary to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2023 and 2022, that the Company and its bank subsidiary met all capital adequacy requirements to which they are subject. As of December 31, 2023 and 2022, the Company met the definition of “well-capitalized” under the applicable regulations of the Board of Governors of the Federal Reserve System and the bank subsidiary was “well capitalized” under the FDIC’s regulatory framework for prompt corrective action and the Basel III capital guidelines. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since December 31, 2023 that management believes have changed the bank subsidiary’s category. The Company and its bank subsidiary’s actual capital amounts and ratios at the dates indicated follows (dollars in thousands): Actual Minimum Required Under BASEL III Fully Phased-In To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2023: Total Capital to Risk Weighted Assets: Consolidated $ 589,565 16.74 % $ 369,753 10.50 % N/A N/A City Bank 494,353 14.04 % 369,635 10.50 % $ 352,033 10.00 % Tier I Capital to Risk Weighted Assets: Consolidated 482,044 13.69 % 299,324 8.50 % N/A N/A City Bank 450,607 12.80 % 299,228 8.50 % 281,627 8.00 % Common Equity Tier 1 to Risk Weighted Assets: Consolidated 437,044 12.41 % 246,502 7.00 % N/A N/A City Bank 450,607 12.80 % 246,423 7.00 % 228,822 6.50 % Tier I Capital to Average Assets: Consolidated 482,044 11.33 % 171,037 4.00 % N/A N/A City Bank 450,607 10.60 % 170,945 4.00 % 212,594 5.00 % December 31, 2022 : Total Capital to Risk Weighted Assets: Consolidated $ 559,094 16.58 % $ 354,045 10.50 % N/A N/A City Bank 454,427 13.48 % 353,967 10.50 % $ 337,112 10.00 % Tier I Capital to Risk Weighted Assets: Consolidated 443,265 13.15 % 286,608 8.50 % N/A N/A City Bank 414,559 12.30 % 286,545 8.50 % 269,689 8.00 % Common Equity Tier 1 to Risk Weighted Assets: Consolidated 398,265 11.81 % 236,030 7.00 % N/A N/A City Bank 414,559 12.30 % 235,978 7.00 % 219,122 6.50 % Tier I Capital to Average Assets: Consolidated 443,265 11.03 % 161,662 4.00 % N/A N/A City Bank 414,559 10.32 % 161,574 4.00 % 200,774 5.00 % The Company is subject to the Basel III capital ratio requirements which include a “capital conservation buffer” of 2.50% above the regulatory minimum risk-based capital adequacy requirements. This 2.50% capital conservation buffer is reflected in the table above. Both the Company’s and the Bank’s actual ratios, as outlined in the table above, exceeded the Basel III risk-based capital requirement with the capital conservation buffer as of December 31, 2023. State banking regulations place certain restrictions on dividends paid by banks to their shareholders. Dividends paid by the Company’s bank subsidiary would be prohibited if the effect thereof would cause the bank subsidiary’s capital to be reduced below applicable minimum capital requirements. 97 Table of Contents 17. DERIVATIVES The Company utilizes interest rate swap agreements as part of its asset-liability management strategy to help manage its interest rate risk position. These interest rate swaps are designated and qualify as fair value hedges and are entered into to reduce exposure to changes in fair value of fixed rate financial instruments. The notional amount of the interest rate swaps do not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amounts and the other terms of the individual interest rate swap agreements. The following table reflects the changes in fair value hedges included in the Consolidated Statements of Comprehensive Income (Loss) for the periods indicated (dollars in thousands): Year Ended December 31, Interest Rate Contracts Location 2023 2022 2021 Change in fair value of interest rate swaps hedging investment securities Other noninterest expense $ ( 3,497 ) $ 14,439 $ 5,710 Change in fair value of hedged investment securities Other noninterest expense 3,685 ( 14,607 ) ( 5,812 ) Change in fair value of interest rate swaps hedging fixed rate loans Interest income - Loans ( 334 ) 911 498 Change in fair value of hedged fixed rate loans Interest income - Loans 335 ( 918 ) ( 512 ) The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of December 31: 2023 2022 Notional Amount Fair Value Notional Amount Fair Value Included in other liabilities : Interest rate swaps related to fixed rate loans $ 987 $ 10 $ — $ — Interest rate swaps related to state and municipal securities — — — — Included in other assets : Interest rate swaps related to fixed rate loans 7,796 158 9,493 482 Interest rate swaps related to state and municipal securities 123,760 16,628 123,760 20,125 Mortgage banking derivatives The net gains (losses) relating to free standing derivative instruments used for risk management are summarized below for the periods indicated (dollars in thousands): For the Year Ended December 31, Location 2023 2022 2021 Gain (loss) on mortgage banking derivatives Net gain (loss) on sales of loans $ ( 405 ) $ ( 1,109 ) $ ( 1,792 ) The following table reflects the amount and fair value of mortgage banking derivatives in the Consolidated Balance Sheets as of December 31 (dollars in thousands): December 31, 2023 December 31, 2022 Notional Amount Fair Value Notional Amount Fair Value Included in other assets: Forward contracts related to mortgage loans held for sale $ — $ — $ 23,500 $ 186 Interest rate lock commitments 16,887 444 27,348 369 Total included in other assets $ 16,887 $ 444 $ 50,848 $ 555 Included in other liabilities: Forward contracts related to mortgage loans held for sale $ 19,021 $ 422 $ 5,615 $ 128 Interest rate lock commitments — — — — Total included in other liabilities $ 19,021 $ 422 $ 5,615 $ 128 The Company had received cash collateral of $ 18.3 million and $ 18.9 million to offset asset derivative positions on its interest rate swaps at December 31, 2023 and 2022, respectively. This amount is reported in other liabilities in the Consolidated Balance Sheets. The Company had advanced $ 1.1 million and $ 1.1 million to offset liability derivative positions on its interest rate swaps at December 31, 2023 and 2022, respectively. Additionally, the Company had advanced $ 440 thousand and $ 440 thousand on its mortgage forward contracts at December 31, 2023 and 2022, respectively. The advanced cash collateral amounts are reported in cash and due from banks in the Consolidated Balance Sheets. 98 Table of Contents 18. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed financial information of South Plains Financial, Inc. follows (dollars in thousands): CONDENSED BALANCE SHEETS December 31, 2023 2022 ASSETS Cash and cash equivalents $ 87,167 $ 98,996 Investment in banking subsidiary 420,677 373,308 Investment in other subsidiary 51 51 Other assets 12,592 9,214 Total assets $ 520,487 $ 481,569 LIABILITIES AND STOCKHOLDERS’ EQUITY Debt $ 110,168 $ 122,354 Accrued expenses and other liabilities 3,205 2,201 Stockholders’ equity 407,114 357,014 Total liabilities and stockholders’ equity $ 520,487 $ 481,569 CONDENSED STATEMENTS OF INCOME Year Ended December 31, 2023 2022 2021 Dividends $ 35,000 $ 40,375 $ 48,250 Other income 100 52 26 Interest expense ( 7,294 ) ( 5,689 ) ( 4,936 ) Other expense ( 1,897 ) ( 1,768 ) ( 1,466 ) Income before income tax and undistributed subsidiary income 25,909 32,970 41,874 Income tax benefit ( 1,904 ) ( 1,555 ) ( 1,339 ) Equity in undistributed subsidiary income 34,932 23,715 15,401 Net income $ 62,745 $ 58,240 $ 58,614 99 Table of Contents CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net income $ 62,745 $ 58,240 $ 58,614 Adjustments: Equity in undistributed subsidiary income ( 34,932 ) ( 23,715 ) ( 15,401 ) Amortization of debt issuance costs 186 186 186 Stock based compensation 2,157 2,753 1,639 Change in other assets ( 3,378 ) ( 3,201 ) ( 1,765 ) Change in other liabilities 1,004 369 317 Net cash provided by operating activities 27,782 34,632 43,590 Cash flows from financing activities: Repayments of long-term borrowings ( 12,372 ) — — Payments to tax authorities for stock-based compensation ( 731 ) ( 1,168 ) ( 625 ) Payments to repurchase common stock ( 17,763 ) ( 22,699 ) ( 9,227 ) Cash dividends paid on common stock ( 8,745 ) ( 8,012 ) ( 5,385 ) Net cash provided by (used in) financing activities ( 39,611 ) ( 31,879 ) ( 15,237 ) Net change in cash and cash equivalents ( 11,829 ) 2,753 28,353 Beginning cash and cash equivalents 98,996 96,243 67,890 Ending cash and cash equivalents $ 87,167 $ 98,996 $ 96,243 19. EARNINGS PER SHARE The factors used in the earnings per share computation follow (dollars in thousands, except per share data): December 31, 2023 2022 2021 Net income $ 62,745 $ 58,240 $ 58,614 Weighted average common shares outstanding - basic 16,843,753 17,373,138 17,953,624 Effect of dilutive securities: Stock based compensation awards 489,459 646,690 538,594 Weighted average common shares outstanding - diluted 17,333,212 18,019,828 18,492,218 Basic earnings per share $ 3.73 $ 3.35 $ 3.26 Diluted earnings per share $ 3.62 $ 3.23 $ 3.17 20. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table details the changes in accumulated other comprehensive income (loss) by component, net of tax for the periods indicated (dollars in thousands): Gains and (Losses) on Fair Value Hedges Unrealized Gains and (Losses) on Securities Available for Sale Total For the Year Ended December 31, 2023 Beginning balance $ 16,072 $ ( 81,180 ) $ ( 65,108 ) Other comprehensive income (loss) before reclassification ( 2,912 ) 13,653 10,741 Amounts reclassified from other comprehensive — 2,693 2,693 Net current period other comprehensive income (loss) ( 2,912 ) 16,346 13,434 Ending balance $ 13,160 $ ( 64,834 ) $ ( 51,674 ) For the Year Ended December 31, 2022 Beginning balance $ 4,532 $ 9,170 $ 13,702 Other comprehensive income (loss) before reclassification 11,540 ( 90,350 ) ( 78,810 ) Amounts reclassified from other comprehensive — — — Net current period other comprehensive income (loss) 11,540 ( 90,350 ) ( 78,810 ) Ending balance $ 16,072 $ ( 81,180 ) $ ( 65,108 ) For the Year Ended December 31, 2021 Beginning balance $ ( 60 ) $ 21,399 $ 21,339 Other comprehensive income (loss) before reclassification 4,592 ( 12,229 ) ( 7,637 ) Amounts reclassified from other comprehensive — — — Net current period other comprehensive income (loss) 4,592 ( 12,229 ) ( 7,637 ) Ending balance $ 4,532 $ 9,170 $ 13,702 Amounts reclassified are shown on the Consolidated Statements of Comprehensive Income (Loss). 100 Table of Contents 21. FAIR VALUE DISCLOSURES Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. Valuation techniques that are consistent with the market approach, the income approach and/or the cost approach are required by GAAP. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset. Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: ● Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. ● Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. ● Level 3 Inputs - Significant unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. The following table summarizes fair value measurements as of the dates indicated below (dollars in thousands): Level 1 Level 2 Level 3 Total December 31, 2023 Assets (liabilities) measured at fair value on a recurring basis: Securities available for sale: State and municipal $ — $ 180,575 $ — $ 180,575 Residential mortgage-backed securities — 300,704 — 300,704 Commercial mortgage-backed securities — 41,748 — 41,748 Commercial collateralized mortgage obligations — 71,930 — 71,930 Asset-backed and other amortizing securities — 17,040 — 17,040 Other securities — 10,765 — 10,765 Loans held for sale (mandatory) — 6,615 — 6,615 Mortgage servicing rights — — 26,569 26,569 Asset derivatives — 17,230 — 17,230 Liability derivatives — ( 432 ) — ( 432 ) Assets measured at fair value on a non-recurring basis: Loans held for investment — — 1,482 1,482 101 Table of Contents Level 1 Level 2 Level 3 Total December 31, 2022 Assets (liabilities) measured at fair value on a recurring basis: Securities available for sale: State and municipal $ — $ 225,055 $ — $ 225,055 Residential mortgage-backed securities — 328,845 — 328,845 Commercial mortgage-backed securities — 41,967 — 41,967 Commercial collateralized mortgage obligations — 75,638 — 75,638 Asset-backed and other amortizing securities — 19,094 — 19,094 Other securities — 11,112 — 11,112 Loans held for sale (mandatory) — 10,038 — 10,038 Mortgage servicing rights — — 27,474 27,474 Asset derivatives — 21,162 — 21,162 Liability derivatives — ( 128 ) — ( 128 ) Assets measured at fair value on a non-recurring basis: Loans held for investment — — 4,821 4,821 Securities – Fair value is calculated based on market prices of similar securities using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded. Mortgage servicing rights – Mortgage servicing rights are reported at fair value using Level 3 inputs. The mortgage servicing rights asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the mortgage servicing rights asset is impacted by a variety of factors, including prepayment speeds, default rates, and discount rates, which are significant unobservable inputs. Mortgage servicing rights are the only Level 3 asset measured at fair value on a recurring basis, see Note 8 for the Level 3 change activity for the years ended December 31, 2023,2022 and 2021. Derivatives – Fair value of derivatives is based on valuation models using observable market data as of the measurement date. Loans held for investment – Includes certain collateral-dependent loans which are reported at fair value, for which a specific allocation of the allowance for credit losses is based off of the underlying collateral, less estimated disposal costs, if repayment is expected solely from the sale of the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Fair Values of Assets Recorded on a Recurring Basis for which the Fair Value Option has been Elected Loans held for sale (mandatory) – Loans held for sale originated for mandatory delivery are reported at fair value on a recurring basis due to the Company’s election to adopt fair value accounting treatment for these assets. This election allows for a more effective offset of the changes in fair values of the assets and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC Topic 815, Derivatives and Hedging . For assets for which the fair value option has been elected, the earned current contractual interest payment is recognized in interest income, loan origination costs and fees on fair value option loans are recognized in earnings as incurred and not deferred. At December 31, 2023, and 2022, there were no gains or losses recorded attributable to changes in instrument-specific credit risk. Fair value is determined using quoted prices for similar assets, adjusted for specific attributes of that loan. At December 31,2023 and 2022 the aggregate fair value of loans held for sale for mandatory delivery was $ 6.6 million and $ 10.0 million, respectively. The aggregate unpaid principal balance as of the same dates was $ 6.4 million and $ 9.9 million, respectively, representing differences between fair value and unpaid principal balance of $ 190 thousand and $ 163 thousand, respectively. The Company had no loans held for sale for mandatory delivery designated as nonaccrual or 90 days or more past due at December 31, 2023 and 2022. The total fair value option impact on noninterest income for loans held for sale for mandatory delivery is included in Net gain on sales of loans in the consolidated statements of comprehensive income (loss). For the years ended December 31, 2023, 2022, and 2021 this amount totaled $( 424 ) thousand, $( 2.1 ) million, and $( 3.4 ) million, respectively. 102 Table of Contents The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at December 31 (dollars in thousands): Fair Value Valuation Techniques Unobservable Inputs Range of Discounts December 31, 2023 Non-recurring Loans held for investment $ 1,482 Third party appraisals or inspections Collateral discounts and selling costs 20 %- 100 % Recurring: Mortgage servicing rights 26,569 Discounted cash flows Constant prepayment rate 7.46 % Discount rate 10.66 % December 31, 2022 Non-recurring Loans held for investment $ 4,821 Third party appraisals or inspections Collateral discounts and selling costs 20 %- 100 % Recurring: Mortgage servicing rights 27,474 Discounted cash flows Constant prepayment rate 7.47 % Discount rate 9.15 % The estimated fair values, and related carrying amounts, of the Company’s financial instruments that are not previously disclosed in the recurring fair values section are as follows as of December 31 (dollars in thousands): Carrying Amount Level 1 Level 2 Level 3 Total December 31, 2023 Financial assets: Cash and cash equivalents $ 330,158 $ 330,158 $ — $ — $ 330,158 Loans held for investment, net 2,971,797 — — 2,848,536 2,848,536 Loans held for sale (best efforts) 7,884 — 7,977 — 7,977 Accrued interest receivable 20,881 — 20,881 — 20,881 Financial liabilities: Deposits 3,626,153 — 3,625,321 — 3,625,321 Accrued interest payable 5,057 — 5,057 — 5,057 Junior subordinated deferrable interest debentures 46,393 — 33,098 — 33,098 Subordinated debt 63,775 — 57,497 — 57,497 Carrying Amount Level 1 Level 2 Level 3 Total December 31, 2022 Financial assets: Cash and cash equivalents $ 234,883 $ 234,883 $ — $ — $ 234,883 Loans held for investment, net 2,708,793 — — 2,662,609 2,662,609 Loans held for sale (best efforts) 20,365 — 20,745 — 20,745 Accrued interest receivable 16,432 — 16,432 — 16,432 Financial liabilities: Deposits 3,406,430 — 3,405,222 — 3,405,222 Accrued interest payable 2,836 — 2,836 — 2,836 Junior subordinated deferrable interest debentures 46,393 — 34,606 — 34,606 Subordinated debt 75,961 — 70,835 — 70,835 22. IMMATERIAL CORRECTION OF PRIOR PERIOD ERROR The Company identified an immaterial prior period error in the Consolidated Statements of Cash Flows related to cash flow activity of certain of the Company’s portfolio mortgage loans and third-party brokered loans erroneously being included in the cash flow activity for loans held for sale. The Company assessed the materiality of this change in presentation on prior period consolidated financial statements in accordance with SEC Staff Accounting Bulletin No. 99, “Materiality,” (ASC Topic 250, Accounting Changes and Error Corrections). Based on this assessment, the Company concluded that these error corrections in its Consolidated Statements of Cash Flows are not material to any previously presented consolidated financial statements. The corrections had no impact on the Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income (Loss), or Consolidated Statements of Changes in Stockholders’ Equity, or notes to these consolidated financial statements, for any previously presented interim or annual consolidated financial statements. Accordingly, the Company corrected the previously reported immaterial errors for the years ended December 31, 2022 and 2021 in this Annual Report on Form 10-K. The financial reporting periods affected by this error include the Company’s previously reported audited consolidated financial statements for the fiscal years ended December 31, 2021 and 2022, and the Company’s previously reported interim unaudited consolidated financial statements for each of the fiscal year-to-date periods ended March 31, 2023; June 30, 2023; and September 30, 2023. In addition, the Company expects to present the corrected interim 2023 amounts in its 2024 consolidated interim financial statements upon the filing of each of its Quarterly Reports on Form 10-Q on a year-to-date basis as a correction to applicable 2023 periods. A summary of the immaterial corrections to the Company’s previously reported audited consolidated financial statements follows. Corrected Consolidated Statement of Cash Flows for the Year Ended December 31, 2022 (in thousands): Year Ended December 31, 2022 As Reported Immaterial Correction As Corrected Proceeds from sales of loans held for sale $ 783,212 $ ( 120,918 ) $ 662,294 Loans originated for sale $ ( 719,413 ) $ 120,918 $ ( 598,495 ) Corrected Consolidated Statement of Cash Flows for the Year Ended December 31, 2021 (in thousands): Year Ended December 31, 2021 As Reported Immaterial Correction As Corrected Proceeds from sales of loans held for sale $ 1,577,953 $ ( 63,992 ) $ 1,513,961 Loans originated for sale $ ( 1,500,995 ) $ 63,992 $ ( 1,437,003 ) 103 Table of Contents 23. SUBSEQUENT EVENTS Dividend Declaration On January 18, 2024 , the Company declared a cash dividend of $ 0.13 per share of common stock to be paid on February 12, 2024 to all shareholders of record as of January 29, 2024 . Stock Repurchase Program On February 21, 2024, the Company’s board of directors approved a stock repurchase program authorizing the repurchase of up to $ 10.0 million shares of the Company’s outstanding common stock. 104 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.