# SOUTH PLAINS FINANCIAL, INC. (SPFI) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from SOUTH PLAINS FINANCIAL, INC.'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1163668/000114036124013519/ef20015269_10k.htm Accession: 0001140361-24-013519 Filing date: 2024-03-15 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/SPFI/ All MD&A years: /company/SPFI/mda/ Previous year: /company/SPFI/mda/fy2022/ (FY 2022) Next year: /company/SPFI/mda/fy2024/ (FY 2024) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included in Item 8. Financial Statements and Supplementary Data. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this Report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Except as required by law, we assume no obligation to update any of these forward-looking statements. Overview We are a bank holding company headquartered in Lubbock, Texas, and our wholly-owned subsidiary, City Bank is one of the largest independent banks in West Texas and has additional banking operations in the Dallas, El Paso, Greater Houston, the Permian Basin, and College Station, Texas markets, and the Ruidoso, New Mexico market. Through City Bank, we provide a wide range of commercial and consumer financial services to small and medium-sized businesses and individuals in our market areas. Our principal business activities include commercial and retail banking, along with investment, trust and mortgage services. On April 1, 2023, SPFI entered into a Securities Purchase Agreement (“Agreement”) with Alliant Insurance Services, Inc. (“Alliant”), providing for the sale of Windmark Insurance Agency, Inc. (“Windmark”) through a sale of all of the outstanding shares of capital stock of Windmark to Alliant. The transaction was consummated on April 1, 2023. Pursuant to the terms and subject to the conditions of the Agreement, SPFI received an aggregate purchase price of $36.1 million in exchange for Windmark’s common shares, representing a pre-tax gain of $33.8 million. This transaction did not meet the criteria for discontinued operations reporting. Selected Financial Data The following table sets forth certain of our selected financial data for, and as of the end of, each of the periods indicated (dollars in thousands, except per share data). [[GREPCENT_TABLE]] [["","","As of or for the Year Ended December 31,"],["","","2023","","","2022","","","2021"],["Selected Income Statement Data:"],["Net interest income","","$","139,747","","","$","138,476","","","$","121,764"],["Provision for credit losses","","","4,610","","","","(2,619",")","","","(1,918",")"],["Noninterest income","","","79,226","","","","76,145","","","","97,469"],["Noninterest expense","","","134,946","","","","144,089","","","","148,030"],["Income tax expense","","","16,672","","","","14,911","","","","14,507"],["Net income","","","62,745","","","","58,240","","","","58,614"],["Share and Per Share Data:"],["Earnings per share (basic)","","$","3.73","","","$","3.35","","","$","3.26"],["Earnings per share (diluted)","","","3.62","","","","3.23","","","","3.17"],["Dividends per share","","","0.52","","","","0.46","","","","0.30"],["Tangible book value per share(1)","","","23.47","","","","19.57","","","","21.51"],["Selected Period End Balance Sheet Data:"],["Cash and cash equivalents","","$","330,158","","","$","234,883","","","$","486,821"],["Investment securities","","","622,762","","","","701,711","","","","724,504"],["Gross loans held for investment","","","3,014,153","","","","2,748,081","","","","2,437,577"],["Allowance for credit losses on loans","","","42,356","","","","39,288","","","","42,098"],["Total assets","","","4,204,793","","","","3,944,063","","","","3,901,855"],["Total deposits","","","3,626,153","","","","3,406,430","","","","3,341,222"],["Borrowings","","","110,168","","","","122,354","","","","122,168"],["Total stockholders\u2019 equity","","","407,114","","","","357,014","","","","407,427"],["Performance Ratios:"],["Return on average assets","","","1.54","%","","","1.47","%","","","1.56","%"],["Return on average stockholders\u2019 equity","","","16.58","%","","","15.79","%","","","15.08","%"],["Net interest margin(2)","","","3.61","%","","","3.73","%","","","3.51","%"],["Efficiency ratio(3)","","","61.33","%","","","66.76","%","","","67.14","%"],["Credit Quality Ratios:"],["Nonperforming assets to total assets(4)","","","0.14","%","","","0.20","%","","","0.30","%"],["Nonperforming loans to total loans held for investment(5)","","","0.17","%","","","0.28","%","","","0.43","%"],["Allowance for credit losses on loans to nonperforming loans(5)","","","818.00","%","","","504.34","%","","","397.23","%"],["Allowance for credit losses on loans to total loans held for investment","","","1.41","%","","","1.43","%","","","1.73","%"],["Net loan charge-offs to average loans","","","0.07","%","","","0.01","%","","","0.06","%"],["Capital Ratios:"],["Total stockholders\u2019 equity to total assets","","","9.68","%","","","9.05","%","","","10.44","%"],["Tangible common equity to tangible assets(1)","","","9.21","%","","","8.50","%","","","9.85","%"],["Common equity tier 1 capital ratio","","","12.41","%","","","11.81","%","","","12.91","%"],["Tier 1 leverage ratio","","","11.33","%","","","11.03","%","","","10.77","%"],["Tier 1 risk-based capital ratio","","","13.69","%","","","13.15","%","","","14.49","%"],["Total risk-based capital ratio","","","16.74","%","","","16.58","%","","","18.40","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Represents a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption \u201cManagement\u2019s Discussion and Analysis of Financial Condition and Results of Operations \u2014 Non-GAAP Financial Measures.\u201d"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Net interest margin is calculated as the annual net interest income, on a fully tax-equivalent basis, divided by average interest-earning assets."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(3)","The efficiency ratio is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent basis and noninterest income."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(4)","Nonperforming assets consist of nonperforming loans plus foreclosed assets."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(5)","Nonperforming loans include nonaccrual loans and loans past due 90 days or more."]] [[/GREPCENT_TABLE]] 41 Table of Contents Results of Operations Net income for the year ended December 31, 2023 was $62.7 million, or $3.62 per diluted share, compared to $58.2 million, or $3.23 per diluted share, for the year ended December 31, 2022. The increase in net income was primarily the result of an increase of $3.1 million in noninterest income, an increase of $1.3 million in net interest income, and a decrease of $9.1 million in noninterest expense, partially offset by an increase of $7.2 million in provision for credit losses. Return on average assets was 1.54% and return on average equity was 16.58% for the year ended December 31, 2023, compared to 1.47% and 15.79%, respectively, for the year ended December 31, 2022. The increase in return on average assets was primarily due to the increase in net income of 7.7%, relative to a smaller increase of 2.9% in total average assets. Net income for the year ended December 31, 2022 was $58.2 million, or $3.23 per diluted share, compared to $58.6 million, or $3.17 per diluted share, for the year ended December 31, 2021. The decrease in net income was primarily the result of a decrease of $21.3 million in noninterest income, offset by an increase of $16.7 million in net interest income and a decrease of $3.9 million in noninterest expense. Return on average assets was 1.47% and return on average equity was 15.79% for the year ended December 31, 2022, compared to 1.56% and 15.08%, respectively, for the year ended December 31, 2021. The decrease in return on average assets was primarily due to the decrease in net income of 0.6%, relative to a larger increase of 5.2% in total average assets. Net Interest Income Net interest income is the principal source of the Company’s net income and represents the difference between interest income (interest and fees earned on assets, primarily loans and investment securities) and interest expense (interest paid on deposits and borrowed funds). We generate interest income from interest-earning assets that we own, including loans and investment securities. We incur interest expense from interest-bearing liabilities, including interest-bearing deposits and other borrowings, notably FHLB advances and subordinated notes. To evaluate net interest income, we measure and monitor (i) yields on our loans and other interest-earning assets, (ii) the costs of our deposits and other funding sources, (iii) our net interest spread and (iv) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as the annualized net interest income on a fully tax-equivalent basis divided by average interest-earning assets. Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. 42 Table of Contents The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. For purposes of this table, interest income, net interest margin and net interest spread are shown on a fully tax-equivalent basis. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","","2022","","","2021"],["","","Average Balance","","","Interest","","","Yield/Rate","","","Average Balance","","","Interest","","","Yield/Rate","","","Average Balance","","","Interest","","","Yield/Rate"],["","","(Dollars in thousands)"],["Assets:"],["Interest-earning assets:"],["Loans(1)","","$","2,924,473","","","$","176,627","","","","6.04","%","","$","2,612,161","","","$","137,957","","","","5.28","%","","$","2,420,201","","","$","120,545","","","","4.98","%"],["Investment securities \u2013 taxable","","","570,655","","","","21,590","","","","3.78","%","","","594,405","","","","15,010","","","","2.53","%","","","532,272","","","","9,292","","","","1.75","%"],["Investment securities \u2013 non-taxable","","","185,205","","","","4,901","","","","2.65","%","","","216,216","","","","5,733","","","","2.65","%","","","219,385","","","","5,872","","","","2.68","%"],["Other interest-earning assets (2)","","","223,152","","","","9,973","","","","4.47","%","","","318,862","","","","3,675","","","","1.15","%","","","336,081","","","","565","","","","0.17","%"],["Total interest-earning assets","","","3,903,485","","","","213,091","","","","5.46","%","","","3,741,644","","","","162,375","","","","4.34","%","","","3,507,939","","","","136,274","","","","3.88","%"],["Noninterest-earning assets","","","176,495","","","","","","","","","","","","222,544","","","","","","","","","","","","261,140"],["Total assets","","$","4,079,980","","","","","","","","","","","$","3,964,188","","","","","","","","","","","$","3,769,079"],["Liabilities and Stockholders\u2019 Equity:"],["Interest-bearing liabilities:"],["NOW, savings and money market deposits","","","2,117,985","","","","55,423","","","","2.62","%","","","1,889,888","","","","13,013","","","","0.69","%","","","1,841,678","","","","4,163","","","","0.23","%"],["Time deposits","","","321,205","","","","9,564","","","","2.98","%","","","327,289","","","","3,989","","","","1.22","%","","","329,509","","","","4,130","","","","1.25","%"],["Short-term borrowings","","","84","","","","5","","","","5.95","%","","","4","","","","\u2014","","","","0.00","%","","","8,045","","","","5","","","","0.06","%"],["Notes payable & other longer-term borrowings","","","\u2014","","","","\u2014","","","","0.00","%","","","\u2014","","","","\u2014","","","","0.00","%","","","19,641","","","","38","","","","0.19","%"],["Subordinated debt","","","75,458","","","","4,018","","","","5.32","%","","","75,874","","","","4,050","","","","5.34","%","","","75,699","","","","4,056","","","","5.36","%"],["Junior subordinated deferrable interest debentures","","","46,393","","","","3,276","","","","7.06","%","","","46,393","","","","1,640","","","","3.54","%","","","46,393","","","","880","","","","1.90","%"],["Total interest-bearing liabilities","","","2,561,125","","","","72,286","","","","2.82","%","","","2,339,448","","","","22,692","","","","0.97","%","","","2,320,965","","","","13,272","","","","0.57","%"],["Noninterest-bearing liabilities:"],["Noninterest-bearing deposits","","","1,069,280","","","","","","","","","","","","1,189,730","","","","","","","","","","","","1,016,835"],["Other liabilities","","","71,102","","","","","","","","","","","","66,182","","","","","","","","","","","","42,654"],["Total noninterest-bearing liabilities","","","1,140,382","","","","","","","","","","","","1,255,912","","","","","","","","","","","","1,059,489"],["Stockholders\u2019 equity","","","378,473","","","","","","","","","","","","368,828","","","","","","","","","","","","388,625"],["Total liabilities and stockholders\u2019 equity","","$","4,079,980","","","","","","","","","","","$","3,964,188","","","","","","","","","","","$","3,769,079"],["Net interest income","","","","","","$","140,805","","","","","","","","","","","$","139,683","","","","","","","","","","","$","123,002"],["Net interest spread","","","","","","","","","","","2.64","%","","","","","","","","","","","3.37","%","","","","","","","","","","","3.31","%"],["Net interest margin(3)","","","","","","","","","","","3.61","%","","","","","","","","","","","3.73","%","","","","","","","","","","","3.51","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Average loan balances include nonaccrual loans and loans held for sale."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Includes income and average balances for interest-earning deposits at other banks, nonmarketable securities, federal funds sold and other miscellaneous interest-earning assets."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(3)","Net interest margin is calculated as the annualized net interest income, on a fully tax-equivalent basis, divided by average interest-earning assets."]] [[/GREPCENT_TABLE]] 43 Table of Contents Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables set forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume. [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2023 over 2022","","","Year Ended December 31, 2022 over 2021"],["","","Change due to:","","","","","","Change due to:"],["","","Volume","","","Rate","","","Total Variance","","","Volume","","","Rate","","","Total Variance"],["","","(Dollars in thousands)"],["Interest-earning assets:"],["Loans","","$","16,494","","","$","22,176","","","$","38,670","","","$","7,134","","","$","10,278","","","$","17,412"],["Investment securities \u2013 taxable","","","(600",")","","","7,180","","","","6,580","","","","1,085","","","","4,633","","","","5,718"],["Investment securities \u2013 non-taxable","","","(822",")","","","(10",")","","","(832",")","","","(85",")","","","(54",")","","","(139",")"],["Other interest-earning assets","","","(1,103",")","","","7,401","","","","6,298","","","","(29",")","","","3,139","","","","3,110"],["Total increase (decrease) in interest income","","","13,969","","","","36,747","","","","50,716","","","","8,105","","","","17,996","","","","26,101"],["Interest-bearing liabilities:"],["NOW, Savings, MMDAs","","","1,571","","","","40,839","","","","42,410","","","","109","","","","8,741","","","","8,850"],["Time deposits","","","(74",")","","","5,649","","","","5,575","","","","(28",")","","","(113",")","","","(141",")"],["Short-term borrowings","","","\u2014","","","","5","","","","5","","","","(5",")","","","\u2014","","","","(5",")"],["Notes payable & other borrowings","","","\u2014","","","","\u2014","","","","\u2014","","","","(38",")","","","\u2014","","","","(38",")"],["Subordinated debt","","","(22",")","","","(10",")","","","(32",")","","","9","","","","(15",")","","","(6",")"],["Junior subordinated deferrable interest debentures","","","\u2014","","","","1,636","","","","1,636","","","","\u2014","","","","760","","","","760"],["Total increase (decrease) interest expense:","","","1,475","","","","48,119","","","","49,594","","","","47","","","","9,373","","","","9,420"],["Increase (decrease) in net interest income","","$","12,494","","","$","(11,372",")","","$","1,122","","","$","8,058","","","$","8,623","","","$","16,681"]] [[/GREPCENT_TABLE]] Year Ended December 31, 2023 compared to Year Ended December 31, 2022 Net interest income for the year ended December 31, 2023 was $139.7 million compared to $138.5 million for the year ended December 31, 2022, an increase of $1.3 million, or 0.9%. The increase in net interest income in 2023 was comprised of a $50.9 million, or 31.6%, increase in interest income, partially offset by a $49.6 million, or 218.6%, increase in interest expense. The growth in interest income was primarily attributable to increases of $38.6 million in loan interest income and $12.2 million in interest income from securities and other interest-earning assets. The increase in loan interest income was primarily due to growth of $312.3 million in average loans outstanding and the rising interest rate environment. The increase in interest income on securities and other interest-earning assets was primarily due to rising market interest rates. The $49.6 million increase in interest expense for the year ended December 31, 2023 was primarily related to a 185 basis points increase in the rate paid on interest-bearing liabilities and an increase of $221.7 million in average interest-bearing liabilities over the same period in 2022. The rise in rates was largely attributed to the Federal Open Market Committee (“FOMC”) of the Board of Governors of the Federal Reserve repeatedly raising their target benchmark interest rate, resulting in federal funds rate increases of 525 basis points between March of 2022 and July of 2023. 44 Table of Contents For the year ended December 31, 2023, net interest margin and net interest spread were 3.61% and 2.64%, respectively, compared to 3.73% and 3.37% for the same period in 2022, respectively, which reflects the changes in interest income and interest expense discussed above. Year Ended December 31, 2022 compared to Year Ended December 31, 2021 Net interest income for the year ended December 31, 2022 was $138.5 million compared to $121.8 million for the year ended December 31, 2021, an increase of $16.7 million, or 13.7%. The increase in net interest income in 2022 was comprised of a $26.1 million, or 19.4%, increase in interest income, partially offset by a $9.4 million, or 71.0%, increase in interest expense. The increase in interest income was primarily attributable to increases of $17.4 million in loan interest income and $8.7 million in interest income from securities and other interest-earning assets. The increase in loan interest income was primarily due to growth of $192.0 million in average loans outstanding and the rising interest rate environment, partially offset by decreases of $102.9 million in average Paycheck Protection Program (“PPP”) loans and $6.3 million in the PPP-related interest and fees. The increase in interest income on securities and other interest-earning assets was primarily due to securities purchases and rising market interest rates. During the years ended December 31, 2022 and 2021, the Company recognized $2.0 million and $8.3 million, respectively, in PPP-related interest and fees. The $9.4 million increase in interest expense for the year ended December 31, 2022 was primarily related to a 40 basis points increase in the rate paid on interest-bearing liabilities and an increase of $18.5 million in average interest-bearing liabilities over the same period in 2021. The rise in rates was largely attributed to the FOMC repeatedly raising their target benchmark interest rate, resulting in federal funds rate increases of 425 basis points between March and December of 2022. For the year ended December 31, 2022, net interest margin and net interest spread were 3.73% and 3.37%, respectively, compared to 3.51% and 3.31% for the same period in 2021, respectively, which reflects the changes in interest income and interest expense discussed above. Provision for Credit losses Credit risk is inherent in the business of making loans. We establish an allowance for credit losses (“ACL”) through charges to earnings, which are shown in the consolidated statements of comprehensive income (loss) as the provision for credit losses. Credit losses on loans are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. The provision for credit losses is determined by conducting a quarterly evaluation of the adequacy of our ACL and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to our earnings. The provision for credit losses and the amount of allowance for each period are dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market areas. See “Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies” in the notes to our consolidated financial statements included elsewhere in this Report for more detailed discussion. Year Ended December 31, 2023 compared to Year Ended December 31, 2022 The provision for credit losses for the year ended December 31, 2023 was $4.6 million compared to ($2.6) million for the year ended December 31, 2022. The provision during the year ended December 31, 2023 was largely attributable to organic growth of $266.1 million in loans held for investment and net charge-offs of $2.0 million. Net charge-offs increased $1.8 million during 2023 as compared to 2022. The allowance for credit losses as a percentage of loans held for investment was 1.41% at December 31, 2023 and 1.43% at December 31, 2022. Further discussion of the allowance for credit losses is noted below. Year Ended December 31, 2022 compared to Year Ended December 31, 2021 The provision for credit losses for the year ended December 31, 2022 was ($2.6) million compared to ($1.9) million for the year ended December 31, 2021. The decrease in the provision for credit losses for the year ended December 31, 2022 compared to the same period in 2021 was primarily due to improved credit metrics in the loan portfolio, specifically in the hotel segment, direct energy segment, and other Permian Basin-related credits, and a decline in the amount of loans that were actively under a pandemic-related modification, partially offset by growth of $310.5 million in loans held for investment. Net charge-offs decreased $1.3 million during 2022 as compared to 2021. The allowance for credit losses as a percentage of loans held for investment was 1.43% at December 31, 2022 and 1.73% at December 31, 2021. Further discussion of the allowance for credit losses is noted below. 45 Table of Contents Noninterest Income While interest income remains the largest single component of total revenues, noninterest income is an important contributing component. The largest portion of our noninterest income is associated with our mortgage banking activities. Other sources of noninterest income include service charges on deposit accounts, bank card services and interchange fees. Prior to the sale of Windmark in 2023, income from insurance activities also comprised a large portion of noninterest income. The following table sets forth the major components of our noninterest income for the periods indicated: [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2023 over 2022","","","Year Ended December 31, 2022 over 2021"],["","","2023","","","2022","","","Increase (decrease)","","","2022","","","2021","","","Increase (decrease)"],["","","(Dollars in thousands)"],["Noninterest income:"],["Service charges on deposit accounts","","$","7,130","","","$","6,829","","","$","301","","","$","6,829","","","$","6,963","","","$","(134",")"],["Income from insurance activities","","","1,515","","","","10,826","","","","(9,311",")","","","10,826","","","","8,314","","","","2,512"],["Bank card services and interchange fees","","","13,323","","","","12,946","","","","377","","","","12,946","","","","12,239","","","","707"],["Mortgage banking activities","","","13,817","","","","31,370","","","","(17,553",")","","","31,370","","","","59,726","","","","(28,356",")"],["Investment commissions","","","1,698","","","","1,825","","","","(127",")","","","1,825","","","","1,934","","","","(109",")"],["Fiduciary income","","","2,433","","","","2,390","","","","43","","","","2,390","","","","2,917","","","","(527",")"],["Gain on sale of subsidiary","","","33,778","","","","\u2014","","","","33,778","","","","\u2014","","","","\u2014","","","","\u2014"],["Other income and fees(1)","","","5,532","","","","9,959","","","","(4,427",")","","","9,959","","","","5,376","","","","4,583"],["Total noninterest income","","$","79,226","","","$","76,145","","","$","3,081","","","$","76,145","","","$","97,469","","","$","(21,324",")"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Other income and fees includes income and fees associated with the increase in the cash surrender value of life insurance, safe deposit box rental, check printing, collections, legal settlements, wire transfer, Small Business Investment Company (\u201cSBIC\u201d) investments, and other miscellaneous services."]] [[/GREPCENT_TABLE]] Year Ended December 31, 2023 compared to Year Ended December 31, 2022 Noninterest income for the year ended December 31, 2023 was $79.2 million compared to $76.1 million for the year ended December 31, 2022, an increase of $3.1 million, or 4.0%. Significant changes in the components of noninterest income are detailed below. Mortgage banking activities - Income from mortgage banking activities decreased $17.6 million, or 56.0%, to $13.8 million for the year ended December 31, 2023 from $31.4 million for the year ended December 31, 2022. This decrease was primarily a result of a decrease of $276.4 million, or 46.2%, in mortgage loan originations in the current year as compared to the prior year as mortgage interest rates were at higher levels during 2023. There was also a $2.4 million decrease in the fair value of the Company’s mortgage servicing rights portfolio for the year ended December 31, 2023 as compared to a $4.7 million increase for the same period in 2022, given the changes in market interest rates during the periods. Income from insurance activities - Due to the sale of Windmark in the second quarter of 2023, there was a decline of $9.3 million in income from insurance activities for year ended December 31, 2023 as compared to the same period in 2022. Other income and fees - Other noninterest income and fees decreased $4.4 million for the year ended December 31, 2023 compared to the same period in 2022 largely as a result of earnings on SBIC investments of $310 thousand during 2023 as compared to $2.3 million during 2022, and $2.1 million of income related to legal settlements recorded in the third quarter of 2022. Gain on sale of subsidiary - A $33.8 million gain from the sale of Windmark was recorded in 2023. Year Ended December 31, 2022 compared to Year Ended December 31, 2021 Noninterest income for the year ended December 31, 2022 was $76.1 million compared to $97.5 million for the year ended December 31, 2021, a decrease of $21.3 million, or 21.9%. Significant changes in the components of noninterest income are detailed below. Mortgage banking activities - Income from mortgage banking activities decreased $28.4 million, or 47.5%, to $31.4 million for the year ended December 31, 2022 from $59.7 million for the year ended December 31, 2021. The decrease was primarily the result of a reduction of $838.6 million, or 58.4%, in mortgage loan originations for the year ended December 31, 2022, compared to the year ended December 31, 2021, driven by rising mortgage interest rates during 2022 and the departure of several mortgage loan originators during the first quarter of 2022 and a decline in gain on sale margins. This decrease was partially offset by increases of $3.2 million in the fair value adjustment and $1.0 million in servicing income for the Company’s mortgage servicing rights portfolio. Income from insurance activities - Income from insurance activities grew $2.5 million during 2022 compared to 2021. This was a result of both an increase in base premiums and profit-sharing bonuses. 46 Table of Contents Other income and fees - Other noninterest income and fees increased $4.6 million for the year ended December 31, 2022 compared to the same period in 2021, largely as a result of increased earnings from SBIC investments of $2.3 million and $2.1 million in legal settlements during 2022. Noninterest Expense The following table sets forth the major components of our noninterest expense for the periods indicated: [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2023 over 2022","","","Year Ended December 31, 2022 over 2021"],["","","2023","","","2022","","","Increase (decrease)","","","2022","","","2021","","","Increase (decrease)"],["","","(Dollars in thousands)"],["Noninterest expense:"],["Salaries and employee benefits","","$","79,377","","","$","86,323","","","$","(6,946",")","","$","86,323","","","$","93,360","","","$","(7,037",")"],["Occupancy expense, net","","","16,102","","","","15,987","","","","115","","","","15,987","","","","14,560","","","","1,427"],["Professional services","","","6,433","","","","9,740","","","","(3,307",")","","","9,740","","","","6,752","","","","2,988"],["Marketing and development","","","3,453","","","","3,614","","","","(161",")","","","3,614","","","","3,225","","","","389"],["IT and data services","","","3,410","","","","3,780","","","","(370",")","","","3,780","","","","4,007","","","","(227",")"],["Bankcard expenses","","","5,557","","","","5,376","","","","181","","","","5,376","","","","4,995","","","","381"],["Appraisal expenses","","","1,087","","","","1,747","","","","(660",")","","","1,747","","","","3,248","","","","(1,501",")"],["Realized loss on sale of securities","","","3,409","","","","\u2014","","","","3,409","","","","\u2014","","","","\u2014","","","","\u2014"],["Other expenses(1)","","","16,118","","","","17,522","","","","(1,404",")","","","17,522","","","","17,883","","","","(361",")"],["Total noninterest expense","","$","134,946","","","$","144,089","","","$","(9,143",")","","$","144,089","","","$","148,030","","","$","(3,941",")"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Other expenses include items such as banking regulatory assessments, telephone expenses, postage, courier fees, directors\u2019 fees, and insurance."]] [[/GREPCENT_TABLE]] Year Ended December 31, 2023 compared to Year Ended December 31, 2022 Noninterest expense for the year ended December 31, 2023 was $134.9 million compared to $144.1 million for the year ended December 31, 2022, a decrease of $9.1 million, or 6.3%. Significant changes in the components of noninterest expense are detailed below. Salaries and employee benefits - Salaries and employee benefits decreased $6.9 million, or 8.0%, from $86.3 million for the year ended December 31, 2022 to $79.4 million for the year ended December 31, 2023. This was primarily driven by approximately $6.7 million in lower mortgage personnel costs, due to the reduction in mortgage loan originations and operations. Also, there was lower core Windmark personnel costs of $4.5 million due to the sale, partially offset by Windmark transaction and related incentive-based compensation expenses incurred in the first and second quarters of 2023. Professional services - Professional services decreased $3.3 million for the year ended December 31, 2023, as compared to the same period in 2022, primarily from a reduction of $2.7 million in legal fees incurred largely as a result of a vendor dispute, which was resolved and accounted for by the end of 2022. Loss on sale of securities - The Company sold approximately $56.2 million of available for sale securities in the second quarter of 2023. This resulted in a loss on sale of $3.4 million. Other expenses – Other noninterest expenses declined $1.4 million in the current year primarily from reduced expenses from mortgage operations, as mortgage originations declined, and Windmark expenses, due to the sale. Additionally, the FDIC assessment increased approximately $636 thousand as the assessment rates charged by the FDIC were increased as well as growth in the assessment base for the year ended December 31, 2023 as compared to the same period in 2022. Year Ended December 31, 2022 compared to Year Ended December 31, 2021 Noninterest expense for the year ended December 31, 2022 was $144.1 million compared to $148.0 million for the year ended December 31, 2021, a decrease of $3.9 million, or 2.7%. Salaries and employee benefits - Salaries and employee benefits decreased $7.0 million, or 7.5%, from $93.4 million for the December 31, 2021 to $86.3 million for the year ended December 31, 2022. This decrease in salaries and employee benefits expense was primarily driven by lower mortgage commissions of $10.3 million and reduced related supporting personnel expenses due to the contraction in mortgage loan originations, partially offset by an increase of $1.0 million in variable insurance commission expense and additional expense for commercial lenders hired as part of a planned initiative. 47 Table of Contents Occupancy expense, net - There was a rise of $1.4 million in occupancy expense primarily related to property repair and maintenance on banking house properties for the year ended December 31, 2022, compared to the same period in 2021. Professional services - Professional services increased $3.0 million for the year ended December 31, 2022, compared to the same period in 2021. The increase was largely attributable to additional legal fees of $2.6 million as a result of vendor dispute legal proceedings and other legal matters. Appraisal expenses – Appraisal expenses declined $1.5 million for the year ended December 31, 2022, compared to the same period in 2021 primarily as a result of the overall decline in new mortgage loan originations. Financial Condition Our total assets increased $260.7 million, or 6.6%, to $4.20 billion at December 31, 2023 as compared to $3.94 billion at December 31, 2022. Our loans held for investment increased $266.1 million, or 9.7%, to $3.01 billion at December 31, 2023, compared to $2.75 billion at December 31, 2022. Total deposits increased $219.7 million, or 6.5% to $3.63 billion at December 31, 2023, compared to $3.41 billion at December 31, 2022. The increase in loans was primarily the continued result of organic growth of the Company from strong loan demand. The growth in deposits came both organically and from brokered deposits. Loan Portfolio Our loans represent the largest portion of earning assets, greater than our securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing the Company’s financial condition. We originate substantially all of the loans in our portfolio, except certain loan participations that are independently underwritten by the Company prior to purchase. Loans held for investments increased $266.1 million, or 9.7%, to $3.01 billion at December 31, 2023 as compared to $2.75 billion at December 31, 2022. This increase in our loans was primarily the result of organic net loan growth based on strong loan demand. The organic loan growth remained relationship-focused and occurred primarily in commercial real estate loans, residential mortgage loans, and commercial loans, partially offset by decreases in consumer auto loans and residential construction loans. The following table shows the contractual maturities of our loans held for investment portfolio at December 31, 2023: [[GREPCENT_TABLE]] [["","","Due in One Year or Less","","","Due after One Year Through Five Years","","","Due after Five Years Through Fifteen Years","","","Due after Fifteen Years","","","Total"],["","","(Dollars in thousands)"],["Commercial real estate","","$","110,563","","","$","597,520","","","$","288,569","","","$","84,404","","","$","1,081,056"],["Commercial - specialized","","","130,836","","","","115,520","","","","74,148","","","","51,872","","","","372,376"],["Commercial - general","","","77,012","","","","166,654","","","","149,795","","","","123,900","","","","517,361"],["Consumer:"],["1-4 family residential","","","32,425","","","","92,820","","","","80,478","","","","329,008","","","","534,731"],["Auto loans","","","3,074","","","","192,825","","","","109,372","","","","\u2014","","","","305,271"],["Other consumer","","","8,487","","","","46,961","","","","18,720","","","","\u2014","","","","74,168"],["Construction","","","108,663","","","","15,072","","","","1,324","","","","4,131","","","","129,190"],["Total loans","","$","471,060","","","$","1,227,372","","","$","722,406","","","$","593,315","","","$","3,014,153"]] [[/GREPCENT_TABLE]] The following table shows the distribution between fixed and adjustable interest rate loans for maturities greater than one year as of December 31, 2023: [[GREPCENT_TABLE]] [["","","Fixed Rate","","","Adjustable Rate"],["","","(Dollars in thousands)"],["Commercial real estate","","$","438,873","","","$","531,620"],["Commercial - specialized","","","90,848","","","","150,692"],["Commercial - general","","","160,529","","","","279,820"],["Consumer:"],["1-4 family residential","","","307,699","","","","194,607"],["Auto loans","","","302,197","","","","\u2014"],["Other consumer","","","65,681","","","","\u2014"],["Construction","","","11,112","","","","9,415"],["Total loans","","$","1,376,939","","","$","1,166,154"]] [[/GREPCENT_TABLE]] 48 Table of Contents At December 31, 2023, there was $1.48 billion in adjustable rate loans, with $727.3 million of these loans that mature or reprice in the next twelve months. Of these loans that mature or reprice in the next twelve months, $484.7 million will reprice immediately upon changes in the underlying index rate, with the remaining $242.6 million being subject to rate ceilings, floors above the current index, or a future repricing date. The Wall Street Journal prime rate is the predominate index used by the Bank. The Bank is primarily involved in real estate, commercial, agricultural and consumer lending activities with customers throughout Texas and Eastern New Mexico. We have a collateral concentration as 72.7% of our loans were secured by real property as of December 31, 2023, compared to 69.8% as of December 31, 2022. We believe that these loans are not concentrated in any one single property type and that they are geographically dispersed throughout the areas we serve. Although the Bank has diversified portfolios, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of the markets in which it operates, which consist primarily of agribusiness, wholesale/retail, oil and gas and related businesses, healthcare industries and institutions of higher education. Commercial real estate loans represent 40.1% of loans held for investment as of December 31, 2023 and represented 38.7% of loans held for investment as of December 31, 2022. Further, these loans are geographically diversified, primarily throughout the state of Texas as well as Eastern New Mexico. We have established concentration limits in the loan portfolio for commercial real estate loans and unsecured lending, among other loan types. All loan types are within established limits. We use underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending to allow us to react to a borrower’s deteriorating financial condition, should that occur. Commercial Real Estate. Our commercial real estate portfolio includes loans for commercial property that is owned by real estate investors, construction loans to build owner-occupied properties, and loans to developers of commercial real estate investment properties and residential developments. Commercial real estate loans are subject to underwriting standards and processes similar to our commercial loans. These loans are underwritten primarily based on projected cash flows for income-producing properties and collateral values for non-income-producing properties. The repayment of these loans is generally dependent on the successful operation of the property securing the loans or the sale or refinancing of the property. Real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing our real estate portfolio are diversified by type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry. Commercial real estate loans increased $161.7 million, or 17.6%, to $1.08 billion as of December 31, 2023 from $919.4 million as of December 31, 2022. The increase was primarily driven by an increase of $52.0 million in commercial and residential land development loans, an increase of $57.7 million in multi-family property loans, and an increase of $66.8 million in office, commercial and retail tenant loans. Commercial – General and Specialized. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed, and to ensure appropriate collateral is obtained to secure the loan. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and typically include personal guarantees. Owner-occupied real estate is included in commercial loans, as the repayment of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties. Commercial loans are grouped into two distinct sub-categories: specialized and general. Commercial related loans that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related loans that contain a broader diversity of borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries. Performance of these loans is subject to operating and cash flow results of the borrower, with risk in the volatility of operating results for particular industries. Commercial general loans increased $32.6 million, or 6.7%, to $517.4 million as of December 31, 2023 from $484.8 million as of December 31, 2022. The increase in commercial general loans was primarily due to organic loan growth in other industry loans of $49.7 million, partially offset by a decrease of $18.6 million in construction company loans. Commercial specialized loans increased $44.9 million, or 13.7%, to $372.4 million as of December 31, 2023 from $327.5 million as of December 31, 2022. This increase was primarily due to growth of $38.3 million in seasonal agricultural production loans and farmland loans and an increase of $25.5 million in direct energy loans, partially offset by a reduction of $19.3 million in finance, investment, and insurance loans. 49 Table of Contents Consumer. We utilize a computer-based credit scoring analysis to supplement our policies and procedures in underwriting consumer loans. Our loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimize our risk. Residential real estate loans are included in consumer loans. We generally require mortgage title insurance and hazard insurance on these residential real estate loans. All consumer loans are generally dependent on the risk characteristics of the borrower’s ability to repay the loan, a consideration of the debt to income ratio, employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral. Consumer and other loans increased $51.3 million, or 5.9%, to $914.2 million as of December 31, 2023, from $862.9 million as of December 31, 2022. The increase in these loans was primarily a result of a $74.6 million increase in residential mortgage loans, partially offset by a reduction of $16.2 million in consumer auto loans. As of December 31, 2023, our consumer loan portfolio was comprised of $534.7 million in 1-4 family residential loans, $305.3 million in auto loans, and $74.2 million in other consumer loans. Construction. Loans for residential construction are for single-family properties to developers, builders, or end-users. These loans are underwritten based on estimates of costs and completed value of the project. Funds are advanced based on estimated percentage of completion for the project. Performance of these loans is affected by economic conditions as well as the ability to control costs of the projects. Construction loans decreased $24.3 million, or 15.8%, to $129.2 million as of December 31, 2023 from $153.5 million as of December 31, 2022. The decrease resulted from reduced demand for residential construction as interest rate levels remained elevated and projects were completed and sold. Non-owner occupied office real estate loans are included in commercial real estate loans and totaled $131.9 million at December 31, 2023. Owner occupied office real estate loans are included in commercial loans and totaled $56.9 million at December 31, 2023. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit to our customers is represented by the contractual or notional amount of those instruments. Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. The amount and nature of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the potential borrower. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private short-term borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary. The following table summarizes commitments we have made as of the dates presented. [[GREPCENT_TABLE]] [["","","December 31,"],["","","2023","","","2022"],["","","(Dollars in thousands)"],["Commitments to grant loans and unfunded commitments under lines of credit","","$","598,800","","","$","682,296"],["Standby letters of credit","","","11,503","","","","13,864"],["Total","","$","610,303","","","$","696,160"]] [[/GREPCENT_TABLE]] Allowance for Credit Losses As discussed in Note 1 - Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements, our policies and procedures related to accounting for credit losses changed effective January 1, 2023, as we adopted the accounting standard update as codified in Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses. The amount of allowance represents management’s best estimate of current expected credit losses (“CECL”) on these financial instruments over the contractual term of the instrument. Upon adoption, we recognized a cumulative effect adjustment to the ACL for loans and off-balance sheet credit exposures of $1.3 million. The CECL model requires recording life-of-loan projected losses in the loan portfolio based on future economic events and related loan portfolio credit performance. The prior accounting standard recorded reserves based on incurred losses at the balance sheet date. 50 Table of Contents The ACL for loans is established for future expected credit losses through a provision for credit losses charged to earnings. Management evaluates the appropriate level of the ACL on a quarterly basis. The analysis takes into consideration the results of an ongoing loan review process, the purpose of which is to determine the level of credit risk within the portfolio and to ensure proper adherence to underwriting and documentation standards. Additional allowances are provided to those loans which appear to represent a greater than normal exposure to risk. The quality of the loan portfolio and the adequacy of the ACL is assessed by regulatory examinations and the Company’s internal and external loan reviews. The ACL consists of two elements: (1) specific valuation allowances established for expected losses on specifically analyzed loans and (2) collective valuation allowances calculated using comparable and quantifiable information from both internal and external sources about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments. To determine the adequacy of the ACL on loans, the Company applied a dual credit risk rating (“DCRR”) methodology that estimates each loan’s probability of default and loss given default to calculate the expected credit loss to non-analyzed loans. The DCRR process quantifies the expected credit loss at the loan level for the entire loan portfolio. Loan grades are assigned by a customized scorecard that risk rates each loan based on multiple probability of default and loss given default elements to measure the risk of the loan portfolio. The ACL estimate incorporates the Company’s DCRR loan level risk rating methodology and the expected default rate frequency term structure to derive loan level life of loan estimates of credit losses for every loan in the portfolio. The estimated credit loss for each loan is adjusted based on one-year through the cycle estimate of expected credit loss to a life of loan measurement that reflects current conditions and forecasts. The life of loan expected loss is determined using the contractual weighted average life of the loan adjusted for prepayments. Prepayment speeds are determined by grouping the loans into pools based on segments and risk rating. After the life of loan expected losses are determined, they are adjusted to reflect the Company’s reasonable and supportable economic forecast over a selected range of a one to two years. The Company has developed regression models to project net charge-off rates based on macroeconomic variables (“MEVs”), typically a one-year period is used. MEV’s considered in the analysis consist of data gathered from the St. Louis Federal Reserve Research Database (“FRED”), such as, federal funds rate, 10-year treasury rates, 30-year mortgage rates, crude oil prices, consumer price index, housing price index, unemployment rates, housing starts, gross domestic product, and disposable personal income. These regression models are applied to the Company’s economic forecast to determine the corresponding net charge-off rates. The projected net charge-off rates for the given economic scenario are used to adjust the through the cycle expected losses. Qualitative adjustments are also made to ACL results for additional risk factors that are relevant in assessing the expected credit losses within our loan segments. These qualitative factor (“Q-Factor”) adjustments may increase or decrease management’s estimate of the ACL by a calculated percentage based upon the estimated level of perceived risk within a particular segment. Q-Factor risk decisions consider concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, and other factors related to credit administration, such as borrower’s risk rating and the potential effect of delayed credit score migrations. Management quantifiably identifies segment percentage Q-Factor adjustments using a scorecard risk rating system scaled to historical loss experience within a segment and management’s perceived risk for that particular segment. In addition to the loan level evaluations, nonaccrual loans with a balance of $250 thousand or more are individually analyzed based on facts and circumstances of the loan to determine if a specific allowance amount may be necessary. Specific allowances may also be established for loans whose outstanding balances are below the above threshold when it is determined that the risk associated with the loan differs significantly from the risk factor amounts established for its loan category. The allowance for credit losses was $42.4 million at December 31, 2023 compared to $39.3 million at December 31, 2022, an increase of $3.1 million, or 7.8%. The increase was primarily a result of a provision for credit losses of $5.0 million being recorded during 2023 based on growth in the loan portfolio and net charge-offs of $2.0 million during 2023. 51 Table of Contents The following table provides an analysis of the ACL for loans and other data during the periods indicated. [[GREPCENT_TABLE]] [["","","As of or for the Year Ended December 31,"],["","","2023","","","2022","","","2021"],["","","(Dollars in thousands)"],["Average loans outstanding during period(1)"],["Commercial real estate","","$","988,121","","","$","817,365","","","$","705,516"],["Commercial \u2013 specialized","","","350,940","","","","351,598","","","","336,754"],["Commercial \u2013 general","","","517,242","","","","476,553","","","","490,945"],["Consumer:"],["1-4 family residential","","","512,149","","","","409,023","","","","374,609"],["Auto loans","","","317,465","","","","285,493","","","","227,301"],["Other consumer","","","78,842","","","","85,881","","","","68,106"],["Construction","","","140,460","","","","150,072","","","","124,840"],["Loans held for sale","","","19,254","","","","36,176","","","","92,130"],["Total average loans outstanding during period","","$","2,924,473","","","$","2,612,161","","","$","2,420,201"],["Net charge-offs (recoveries) during the period"],["Commercial real estate","","$","\u2014","","","$","(418",")","","$","(109",")"],["Commercial \u2013 specialized","","","(164",")","","","(807",")","","","11"],["Commercial \u2013 general","","","292","","","","(122",")","","","459"],["Consumer:"],["1-4 family residential","","","(5",")","","","100","","","","44"],["Auto loans","","","691","","","","364","","","","483"],["Other consumer","","","861","","","","913","","","","653"],["Construction","","","319","","","","161","","","","(4",")"],["Total net charge-offs (recoveries) during the period","","$","1,994","","","$","191","","","$","1,537"],["Total loans held for investment outstanding","","$","3,014,153","","","$","2,748,081","","","$","2,437,577"],["Nonaccrual loans","","$","3,242","","","$","5,802","","","$","9,518"],["Allowance for credit losses","","$","42,356","","","$","39,288","","","$","42,098"],["Ratio of allowance to total loans held for investment","","","1.41","%","","","1.43","%","","","1.73","%"],["Ratio of allowance to nonaccrual loans","","","1,306.48","%","","","677.15","%","","","442.30","%"],["Ratio of nonaccrual loans to total loans held for investment","","","0.11","%","","","0.21","%","","","0.39","%"],["Ratio of net charge-offs (recoveries) to average loans during the period"],["Commercial real estate","","","\u2014","","","","(0.05",")%","","","(0.02",")%"],["Commercial \u2013 specialized","","","(0.05",")%","","","(0.23",")%","","","\u2014"],["Commercial \u2013 general","","","0.06","%","","","(0.03",")%","","","0.09","%"],["Consumer:"],["1-4 family residential","","","\u2014","","","","0.02","%","","","0.01","%"],["Auto loans","","","0.22","%","","","0.13","%","","","0.21","%"],["Other consumer","","","1.09","%","","","1.06","%","","","0.96","%"],["Construction","","","0.23","%","","","0.11","%","","","\u2014"],["Total ratio of net charge-offs (recoveries) to average loans during the period","","","0.07","%","","","0.01","%","","","0.06","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Average outstanding balances include loans held for sale."]] [[/GREPCENT_TABLE]] Net charge-offs totaled $2.0 million and were 0.07% of average loans outstanding for the year ended December 31, 2023, compared to $0.2 million and 0.01% for the year ended December 31, 2022. Gross charge-offs increased $320 thousand and recoveries decreased $1.5 million for the year ended December 31, 2023 compared to the same period in 2022. The increase in charge-offs was primarily attributable to an increase of $380 thousand in consumer auto loan charge-offs in 2023, while the decrease in recoveries was mainly due to a $822 thousand recovery on an energy relationship and a $400 thousand recovery on a commercial real estate loan during 2022. The allowance for credit losses as a percentage of loans held for investment was 1.41% at December 31, 2023 and 1.43% at December 31, 2022. While the entire ACL for loans is available to absorb losses from any part of our loan portfolio, the following table sets forth the allocation of the ACL for loans for the periods presented and the percentage of allowance in each classification to total allowance: [[GREPCENT_TABLE]] [["","","As of December, 31"],["","","2023","","","2022","","","2021"],["","","Amount","","","% of Total","","","Amount","","","% of Total","","","Amount","","","% of Total"],["","","(Dollars in thousands)"],["Commercial real estate","","$","15,808","","","","37.3","%","","$","13,029","","","","33.1","%","","$","17,245","","","","41.0","%"],["Commercial \u2013 specialized","","","4,020","","","","9.5","%","","","3,425","","","","8.7","%","","","4,363","","","","10.4","%"],["Commercial \u2013 general","","","6,391","","","","15.1","%","","","9,215","","","","23.5","%","","","8,466","","","","20.1","%"],["Consumer:"],["1-4 family residential","","","9,177","","","","21.7","%","","","6,194","","","","15.8","%","","","5,268","","","","12.5","%"],["Auto loans","","","3,601","","","","8.5","%","","","3,926","","","","10.0","%","","","3,653","","","","8.7","%"],["Other consumer","","","968","","","","2.3","%","","","1,376","","","","3.5","%","","","1,357","","","","3.2","%"],["Construction","","","2,391","","","","5.6","%","","","2,123","","","","5.4","%","","","1,746","","","","4.1","%"],["Total allowance for credit losses","","$","42,356","","","","100.0","%","","$","39,288","","","","100.0","%","","$","42,098","","","","100.0","%"]] [[/GREPCENT_TABLE]] 52 Table of Contents Asset Quality Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable. Loans that exhibit characteristics different from their pool characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective ACL evaluation. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we analyze loans for specific allowance based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The specific allowance amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve. Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. OREO and repossessed assets are reported as foreclosed assets. Nonperforming loans include nonaccrual loans and loans past due 90 days or more. Nonperforming assets consist of nonperforming loans plus foreclosed assets. At December 31, 2023, our total nonaccrual loans were $3.2 million, or 0.11% of total loans held for investment, as compared to $5.8 million, or 0.21% of total loans held for investment, at December 31, 2022. These loans within this amount that exceeded $250 thousand were specifically analyzed and specific valuation allowances were established as necessary and included in the ACL for loans as of December 31, 2023 to cover any probable loss. The decrease in the year ended December 31, 2023 was primarily due to one $2.6 million loan that was removed from nonaccrual status during the second quarter of 2023. This was a result of principal paydowns and continued sustained payment performance. Nonperforming loans were $5.2 million at December 31, 2023 and $7.8 million at December 31, 2022. This decrease of $2.6 million is due to the improvement in one nonaccrual loan noted above. Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extensions, an other than insignificant payment delay, or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL for loans. Typically, one type of concession, such as term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. In some cases, the Company provides multiple types of concessions on one loan. The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. Upon the Company’s determination that a modified loan has subsequently been deemed to not be fully collectible, the uncollectible amount is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL for loans is adjusted by the same amount. If a borrower on a restructured accruing loan has demonstrated performance under the previous terms, is not experiencing financial difficulty and shows the capacity to continue to perform under the restructured terms, the loan will remain on accrual status. Otherwise, the loan will be placed on nonaccrual status until the borrower demonstrates a sustained period of performance, which generally requires six consecutive months of payments. Securities Portfolio The securities portfolio is the second largest component of the Company’s interest-earning assets, and the structure and composition of this portfolio is important to an analysis of the financial condition of the Company. The securities portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning asset when loan demand is weak or when deposits grow more rapidly than loans. 53 Table of Contents The securities portfolio consists of securities classified as either held-to-maturity or available-for-sale. Securities consist primarily of state and municipal securities, mortgage-backed securities and U.S. government sponsored agency securities. We determine the appropriate classification at the time of purchase. All held-to-maturity securities are reported at amortized cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. All available-for-sale securities are reported at fair value. Total securities at December 31, 2023 were $622.8 million, representing a decrease of $78.9 million, or 11.3%, compared to $701.7 million at December 31, 2022. The decrease was primarily due to a $20.7 million decline in the unrealized loss on available for sale securities and the sale of $56.2 million securities during 2023. Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. During the year ended December 31, 2023, the fair value adjustment to the Company’s available for sale securities increased $20.7 million after declining by $114.4 million during 2022 as a result of the significant increase in market interest rates. At December 31, 2023, the Company evaluated whether the decline in fair value has resulted from credit losses or other factors. Within this evaluation, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by rating agency, and adverse conditions specifically related to the security, among other factors. Based on management’s evaluation no unrealized losses on securities were determined to be due to credit loss. Additionally, we anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not probable that we will be required to sell them before recovery of the amortized cost basis, which may be at maturity, thus no ACL or losses have been recognized or realized in the consolidated financial statements for securities in the portfolio. The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the date presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligation with or without call or prepayment penalties. [[GREPCENT_TABLE]] [["","","As of December 31, 2023"],["","","Due in One Year or Less","","","Due after One Year Through Five Years","","","Due after Five Years Through Ten Years","","","Due after Ten Years"],["","","Amortized Cost","","","Weighted Average Yield","","","Amortized Cost","","","Weighted Average Yield","","","Amortized Cost","","","Weighted Average Yield","","","Amortized Cost","","","Weighted Average Yield"],["","","(Dollars in thousands)"],["Available-for-sale"],["State and municipal","","$","735","","","","3.65","%","","$","6,112","","","","1.73","%","","$","4,897","","","","2.15","%","","$","191,070","","","","2.28","%"],["Residential mortgage- backed securities","","","\u2014","","","","\u2014","","","","3,038","","","","2.02","%","","","920","","","","2.91","%","","","347,293","","","","2.20","%"],["Commercial mortgage-backed securities","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","47,898","","","","2.22","%","","","\u2014","","","","\u2014"],["Collateralized mortgage obligations","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","72,391","","","","6.01","%","","","\u2014","","","","\u2014"],["Asset-backed and other amortizing securities","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","2,359","","","","3.07","%","","","16,117","","","","2.79","%"],["Other securities","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","12,000","","","","4.47","%","","","\u2014","","","","\u2014"],["Total available-for-sale","","$","735","","","","3.65","%","","$","9,150","","","","1.83","%","","$","140,465","","","","4.38","%","","$","554,480","","","","2.24","%"]] [[/GREPCENT_TABLE]] Deposits Deposits represent the Company’s primary and most vital source of funds. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits. We put continued effort into gathering noninterest-bearing demand deposit accounts through loan production, customer referrals, marketing staffs, mobile and online banking and various involvements with community networks. Total deposits at December 31, 2023 were $3.63 billion, representing an increase of $219.7 million, or 6.5%, compared to $3.41 billion at December 31, 2022. The increase in total deposits since December 31, 2022 came both organically and from brokered deposits with growth of $68.3 million and $151.4 million, respectively. As of December 31, 2023, 26.9% of total deposits were comprised of noninterest-bearing demand accounts, 63.0% of interest-bearing non-maturity accounts and 10.1% of time deposits. Interest-bearing non-maturity accounts included $206.9 million in brokered deposits, which represented 5.7% of total deposits at December 31, 2023. 54 Table of Contents The following table shows the deposit mix as of the dates presented: [[GREPCENT_TABLE]] [["","","December 31, 2023","","","December 31, 2022"],["","","Amount","","","% of Total","","","Amount","","","% of Total"],["","","","","","(Dollars in thousands)"],["Noninterest-bearing deposits","","$","974,201","","","","26.9","%","","$","1,150,488","","","","33.8","%"],["NOW and other transaction accounts","","","562,066","","","","15.5","%","","","350,910","","","","10.3","%"],["Money market and other savings","","","1,722,170","","","","47.5","%","","","1,618,833","","","","47.5","%"],["Time deposits","","","367,716","","","","10.1","%","","","286,199","","","","8.4","%"],["Total deposits","","$","3,626,153","","","","100.0","%","","$","3,406,430","","","","100.0","%"]] [[/GREPCENT_TABLE]] The following table summarizes our average deposit balances and weighted average rates for the periods indicated: [[GREPCENT_TABLE]] [["","","2023","","","2022","","","2021"],["","","Average Balance","","","Weighted Average Rate","","","Average Balance","","","Weighted Average Rate","","","Average Balance","","","Weighted Average Rate"],["","","(Dollars in thousands)"],["Noninterest-bearing deposits","","$","1,069,280","","","","\u2014","%","","$","1,189,730","","","","\u2014","%","","$","1,016,835","","","","\u2014","%"],["Interest-bearing deposits:"],["NOW and interest-bearing demand accounts","","","401,075","","","","2.93","%","","","352,791","","","","0.59","%","","","355,274","","","","0.03","%"],["Savings accounts","","","145,758","","","","0.87","%","","","151,128","","","","0.32","%","","","132,426","","","","0.09","%"],["Money market accounts","","","1,571,152","","","","2.70","%","","","1,385,969","","","","0.75","%","","","1,353,978","","","","0.29","%"],["Time deposits","","","321,205","","","","2.98","%","","","327,289","","","","1.22","%","","","329,509","","","","1.25","%"],["Total interest-bearing deposits","","","2,439,190","","","","2.66","%","","","2,217,177","","","","0.77","%","","","2,171,187","","","","0.38","%"],["Total deposits","","$","3,508,470","","","","1.85","%","","$","3,406,907","","","","0.50","%","","$","3,188,022","","","","0.26","%"]] [[/GREPCENT_TABLE]] Time deposits issued in amounts of more than $250 thousand represent the type of deposit most likely to affect the Company’s future earnings because of interest rate sensitivity. The effective cost of these funds is generally higher than other time deposits because the funds are usually obtained at premium rates of interest. The scheduled maturities of time deposits of more than $250 thousand as of December 31, 2023 follows: [[GREPCENT_TABLE]] [["(Dollars in thousands)","","Three Months","","","Three to Six Months","","","Six to 12 Months","","","After 12 Months","","","Total"],["","","$","78,777","","","$","14,934","","","$","53,727","","","$","11,694","","","$","159,132"]] [[/GREPCENT_TABLE]] The estimated amount of uninsured deposits as of December 31, 2023 was $918 million. This represented approximately 16% of total deposits and excludes $325 million of collateralized public fund deposits. Borrowed Funds In addition to deposits, we utilize advances from the FHLB and other borrowings as a supplementary funding source to finance our operations. FHLB Advances. The FHLB allows us to borrow, both short and long-term, on a blanket floating lien status collateralized by first mortgage loans and commercial real estate loans as well as FHLB stock. At December 31, 2023 and 2022, we had total remaining borrowing capacity from the FHLB of $1.10 billion and $920.2 million, respectively. We had no FHLB borrowings during the years ended December 31, 2023 or 2022. 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 and 2022. 55 Table of Contents Federal Reserve Bank of Dallas. The Bank has a line of credit with the FRB. The amount of the line is determined on a monthly basis by the Federal Reserve Bank. 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. There were no amounts outstanding on the FRB line of credit at December 31, 2023 and 2022. We had no long-term FRB borrowings during the years ended December 31, 2023 or 2022. In addition, we have access to the Federal Reserve’s Bank Term Funding Program (“BTFP”). 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. Lines of Credit. The Bank has uncollateralized lines of credit with multiple banks as a source of funding for liquidity management. The total amount of the lines was $140.0 million and $160.0 million as of December 31, 2023 and 2022. The lines were not used, other than testing during the years ended December 31, 2023 and 2022. 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. On September 29, 2020, the Company issued $50.0 million in subordinated notes. Proceeds were reduced by approximately $926 thousand in debt issuance costs. The notes have a maturity date of September 2030 with a fixed rate of 4.50% for the first five years. After the expiration of the fixed rate period, the notes will reset quarterly at a variable rate equal to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 438 basis points. These notes pay interest semi-annually, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally, these notes are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations. As of December 31, 2023, the total amount of subordinated debt outstanding was $64.1 million, less approximately $325 thousand of remaining debt issuance costs for a total balance of $63.8 million. Junior Subordinated Deferrable Interest Debentures and Trust Preferred Securities. Between March 2004 and June 2007, the Company formed three wholly-owned statutory business trusts solely for the purpose of issuing trust preferred securities, the proceeds of which were invested in junior subordinated deferrable interest debentures. The trusts are not consolidated and the debentures issued by the Company to the trusts are reflected in the Company’s consolidated balance sheets. The Company records interest expense on the debentures in its consolidated financial statements. The amount of debentures outstanding was $46.4 million at December 31, 2023 and 2022. The Company has the right, as has been exercised in the past, to defer payments of interest on the securities for up to twenty consecutive quarters. During such time, corporate dividends may not be paid. The Company is current in its interest payments on the debentures. The chart below indicates certain information, as of December 31, 2023, about each of the statutory trusts and the junior subordinated deferrable interest debentures, including the date the junior subordinated deferrable interest debentures were issued, outstanding amounts of trust preferred securities and junior subordinated deferrable interest debentures, the maturity date of the junior subordinated deferrable interest debentures, the interest rates on the junior subordinated deferrable interest debentures and the investment banker. 56 Table of Contents [[GREPCENT_TABLE]] [["Name of Trust","","Issue Date","","Amount of Trust Preferred Securities","","","Amount of Debentures","","","Stated Maturity Date of Trust Preferred Securities and Debentures(1)","","Interest Rate of Trust Preferred Securities and Debentures(2)(3)"],["","(Dollars in thousands)"],["South Plains Financial Capital Trust III","2004","","$","10,000","","","$","10,310","","","","2034","","3-mo. CME Term SOFR + 291 bps; 8.32%"],["South Plains Financial Capital Trust IV","2005","","","20,000","","","","20,619","","","","2035","","3-mo. CME Term SOFR + 165 bps; 7.04%"],["South Plains Financial Capital Trust V","2007","","","15,000","","","","15,464","","","","2037","","3-mo. CME Term SOFR + 176 bps; 7.15%"],["Total","","","$","45,000","","","$","46,393"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","May be redeemed at the Company\u2019s option."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Interest payable quarterly with principal due at maturity."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(3)","Rate as of last reset date, prior to December 31, 2023."]] [[/GREPCENT_TABLE]] Liquidity and Capital Resources Liquidity Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and the FRB discount window. We had available borrowing capacity of up to approximately $1.83 billion through the FHLB, the FRB’s discount window, and access to the BTFP at December 31, 2023, which includes the unused line with the FHLB of $1.10 billion and the unused line with the FRB of $595.4 million. We have not pledged any securities for the BTFP but have approximately $134 million of available securities that can be used as collateral. Additionally, we have uncollateralized lines with multiple banks totaling $140 million at December 31, 2023. These lines are not guaranteed and we are not placing reliance on them. Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis. Capital Total stockholders’ equity increased to $407.1 million as of December 31, 2023, compared to $357.0 million as of December 31, 2022. The increase from December 31, 2022 was primarily the result of $62.7 million in net earnings and a decrease in the accumulated other comprehensive loss of $13.4 million, partially offset by repurchases of common stock of $17.8 million, and by $8.7 million in dividends paid for the year ended December 31, 2023. We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and ratio of common equity tier 1 (“CET1”) capital, tier 1 capital and total capital to risk-weighted assets and of tier 1 capital to average consolidated assets, referred to as the “leverage ratio.” The risk-based capital ratios measure the adequacy of a bank’s capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for “prompt corrective action” or other regulatory enforcement action. In assessing a bank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level of earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management’s overall ability to monitor and control risks. 57 Table of Contents At December 31, 2023, both we and the Bank met all the capital adequacy requirements to which we and the Bank were subject. At December 31, 2023, we and the Bank were “well capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since December 31, 2023 that would materially adversely change such capital classifications. From time to time, we may need to raise additional capital to support our and the Bank’s further growth and to maintain our “well capitalized” status. The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of the dates indicated. [[GREPCENT_TABLE]] [["","","Actual","","","Minimum Capital Requirement with Capital Buffer","","","Minimum To be Considered Well Capitalized"],["","","Amount","","","Ratio","","","Amount","","","Ratio","","","Amount","","","Ratio"],["","","(Dollars in Thousands)"],["As of December 31, 2023:"],["Total capital (to risk-weighted assets)"],["Consolidated","","$","589,565","","","","16.74","%","","$","369,753","","","","10.50","%","","","N/A","","","","N/A"],["Bank","","","494,353","","","","14.04","%","","","369,635","","","","10.50","%","","$","352,033","","","","10.00","%"],["Tier 1 capital (to risk-weighted assets)"],["Consolidated","","","482,044","","","","13.69","%","","","299,324","","","","8.50","%","","","N/A","","","","N/A"],["Bank","","","450,607","","","","12.80","%","","","299,228","","","","8.50","%","","","281,627","","","","8.00","%"],["CET 1 capital (to risk-weighted assets)"],["Consolidated","","","437,044","","","","12.41","%","","","246,502","","","","7.00","%","","","N/A","","","","N/A"],["Bank","","","450,607","","","","12.80","%","","","246,423","","","","7.00","%","","","228,822","","","","6.50","%"],["Tier 1 capital (to average assets)"],["Consolidated","","","482,044","","","","11.33","%","","","171,037","","","","4.00","%","","","N/A","","","","N/A"],["Bank","","","450,607","","","","10.60","%","","","170,945","","","","4.00","%","","","212,594","","","","5.00","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Actual","","","Minimum Capital Requirement with Capital Buffer","","","Minimum To be Considered Well Capitalized"],["","","Amount","","","Ratio","","","Amount","","","Ratio","","","Amount","","","Ratio"],["","","(Dollars in Thousands)"],["As of December 31, 2022:"],["Total capital (to risk-weighted assets)"],["Consolidated","","$","559,094","","","","16.58","%","","$","354,045","","","","10.50","%","","","N/A","","","","N/A"],["Bank","","","454,427","","","","13.48","%","","","353,967","","","","10.50","%","","$","337,112","","","","10.00","%"],["Tier 1 capital (to risk-weighted assets)"],["Consolidated","","","443,265","","","","13.15","%","","","286,608","","","","8.50","%","","","N/A","","","","N/A"],["Bank","","","414,559","","","","12.30","%","","","286,545","","","","8.50","%","","","269,689","","","","8.00","%"],["CET 1 capital (to risk-weighted assets)"],["Consolidated","","","398,265","","","","11.81","%","","","236,030","","","","7.00","%","","","N/A","","","","N/A"],["Bank","","","414,559","","","","12.30","%","","","235,978","","","","7.00","%","","","219,122","","","","6.50","%"],["Tier 1 capital (to average assets)"],["Consolidated","","","443,265","","","","11.03","%","","","161,662","","","","4.00","%","","","N/A","","","","N/A"],["Bank","","","414,559","","","","10.32","%","","","161,574","","","","4.00","%","","","200,774","","","","5.00","%"]] [[/GREPCENT_TABLE]] Community Bank Leverage Ratio On September 17, 2019, the federal banking agencies jointly finalized a rule to be effective January 1, 2020 and intended to simplify the regulatory capital requirements described above for qualifying community banking organizations that opt into the Community Bank Leverage Ratio (“CBLR”) framework, as required by Section 201 of the EGRRCPA. The final rule became effective on January 1, 2020, and the CBLR framework became available for banks to use beginning with their March 31, 2020 Call Reports. Under the final rule, if a qualifying community banking organization opts into the CBLR framework and meets all requirements under the framework, it will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations described above and will not be required to report or calculate risk-based capital. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. Although the Company and the Bank are qualifying community banking organizations, the Company and the Bank have elected not to opt in to the CBLR framework at this time and will continue to follow the Basel III capital requirements as described above. 58 Table of Contents Treasury Stock The Company repurchased stock in accordance with its stock repurchase programs during 2023 and 2022. In 2023, we repurchased 685,638 shares of common stock for a total of $17.8 million. In 2022, we repurchased 859,802 shares of common stock for a total of $22.7 million See Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities”, of this Report for further information. Interest Rate Sensitivity and Market Risk As a financial institution, our primary component of market risk is interest rate volatility. Our interest rate risk policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines. Interest rate sensitivity involves the relationships between rate-sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on the Company’s net interest income. Interest rate-sensitive assets and liabilities are those with yields or rates that are subject to change within a future time period due to maturity or changes in market rates. The model is used to project future net interest income under a set of possible interest rate movements. The Company’s Investment/Asset Liability Committee (“ALCO Committee”) reviews this information to determine compliance with the limits set by the Bank’s board of directors. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets. Our exposure to interest rate risk is managed by the ALCO Committee, in accordance with policies approved by the Bank’s board of directors. The ALCO Committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO Committee considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The ALCO Committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO Committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model. We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model. The average lives of non-maturity deposit accounts are based on decay assumptions and are incorporated into the model. All of the assumptions used in our analyses are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies. On a quarterly basis, we run a simulation model for a static balance sheet and other scenarios. These models test the impact on net interest income from changes in market interest rates under various scenarios. Under the static model, rates are shocked instantaneously and ramped rates change over a 12-month and 24-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Our internal policy regarding internal rate risk simulations currently specifies that for gradual parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 7.5% for a 100 basis point shift, 15% for a 200 basis point shift, and 22.5% for a 300 basis point shift. 59 Table of Contents The following tables summarize the simulated change in net interest income over a 12-month horizon as of the dates indicated: [[GREPCENT_TABLE]] [["","","","As of December 31,"],["","","","2023","","","2022"],["Change in Interest Rates (Basis Points)","","","Percent Change in Net Interest Income","","","Percent Change in Net Interest Income"],["+300","","","","(10.02",")","","","(1.50",")"],["+200","","","","(6.59",")","","","(0.96",")"],["+100","","","","(3.21",")","","","(0.61",")"],["-100","","","","3.35","","","","(1.50",")"],["-200","","","","6.86","","","","(2.81",")"]] [[/GREPCENT_TABLE]] Impact of Inflation Our consolidated financial statements and related notes included elsewhere in this Report have been prepared in accordance with GAAP. GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession. The Company’s asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of the Company are monetary in nature. Management believes the impact of inflation on financial results depends upon the Company’s ability to react to changes in interest rates and by such reaction, reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction, or at the same magnitude, as the prices of other goods and services. However, other operating expenses do reflect general levels of inflation. Management seeks to manage the relationship between interest rate-sensitive assets and liabilities in order to protect against wide net interest income fluctuations, including those resulting from inflation. Various information shown elsewhere in this Report will assist in the understanding of how well the Company is positioned to react to changing interest rates and inflationary trends. In particular, additional information related to the Company’s interest rate-sensitive assets and liabilities is contained in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report under the heading “Interest Rate Sensitivity and Market Risk.” Non-GAAP Financial Measures Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this Report as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the U.S. in our consolidated statements of comprehensive income(loss), balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both. The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Report may differ from that of other companies reporting measures with similar names. It is important to understand how other banking organizations calculate their financial measures with names similar to the non-GAAP financial measures we have discussed in this Report when comparing such non-GAAP financial measures. Tangible Book Value Per Common Share. Tangible book value per share is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share. We believe that the tangible book value per common share measure is important to many investors in the marketplace who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value. Tangible Common Equity to Tangible Assets. Tangible common equity to tangible assets is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit intangibles and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common stockholders’ equity to total assets. We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period of tangible common equity to tangible assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total stockholders’ equity and assets while not increasing our tangible common equity or tangible assets. 60 Table of Contents The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and total assets to tangible assets and then presents book value per common share, tangible book value per common share, total stockholders’ equity to total assets, and tangible common equity to tangible assets: [[GREPCENT_TABLE]] [["","","As of December 31,"],["","","2023","","","2022","","","2021"],["","","(Dollars in thousands)"],["Total stockholders\u2019 equity","","$","407,114","","","$","357,014","","","$","407,427"],["Less: Goodwill and other intangibles","","","(21,744",")","","","(23,857",")","","","(25,403",")"],["Tangible common equity","","$","$ 385,370","","","$","333,157","","","$","382,024"],["Total assets","","$","4,204,793","","","$","3,944,063","","","$","3,901,855"],["Less: Goodwill and other intangibles","","","(21,744",")","","","(23,857",")","","","(25,403",")"],["Tangible assets","","$","4,183,049","","","$","3,920,206","","","$","3,876,452"],["Shares outstanding","","","16,417,099","","","","17,027,197","","","","17,760,243"],["Total stockholders\u2019 equity to total assets","","","9.68","%","","","9.05","%","","","10.44","%"],["Tangible common equity to tangible assets","","","9.21","%","","","8.50","%","","","9.85","%"],["Book value per share","","$","24.80","","","$","20.97","","","$","22.94"],["Tangible book value per share","","$","23.47","","","$","19.57","","","$","21.51"]] [[/GREPCENT_TABLE]] Critical Accounting Policies and Estimates Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare consolidated financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our consolidated financial statements. The Jumpstart Our Business Startups Act (the “JOBS Act”) permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the consolidated financial statements included in this Report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. The following is a discussion of the critical accounting policies and significant estimates that we believe require us to make the most complex or subjective decisions or assessments. Additional information about these policies can be found in Note 1 of the Company’s consolidated financial statements as of December 31, 2023. Securities. Investment securities may be classified into trading, held-to-maturity, or available-for-sale portfolios. Securities that are held principally for resale in the near term are classified as trading. Securities that management has the ability and positive intent to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities not classified as trading or held-to-maturity are available-for-sale and are reported at fair value with unrealized gains and losses excluded from earnings, but included in the determination of other comprehensive income (loss). Management uses these assets as part of its asset/liability management strategy; they may be sold in response to changes in liquidity needs, interest rates, resultant prepayment risk changes, and other factors. Management determines the appropriate classification of securities at the time of purchase. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. The cost of securities sold is based on the specific identification method. Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the straight-line method, which is not materially different from the effective interest method required by GAAP. Loans are placed on non-accrual status when, in management’s opinion, collection of interest is unlikely, which typically occurs when principal or interest payments are more than ninety days past due. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Credit Losses. The ACL for loans is established for future expected credit losses through a provision for credit losses charged to earnings. Expected losses are calculated using comparable and quantifiable information both internal and external about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments when appropriate. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Company’s ACL for loans consists of specific valuation allowances established for probable losses on specifically analyzed loans and collective valuation allowances calculated using comparable and quantifiable information both internal and external about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. 61 Table of Contents The ACL for loans is evaluated on a quarterly basis by management and is based upon management’s review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The determination of the adequacy of the ACL for loans is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. The Bank’s loans are generally secured by specific items of collateral including real property, crops, livestock, consumer assets, and other business assets. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on various factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated. Loans that exhibit characteristics different from their pool characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective ACL for loans evaluation. Certain of these loans are considered to be collateral dependent with the borrower experiencing financial difficulty. For these loans, the fair value of collateral practical expedient is elected whereby the allowance is calculated as the amount by which the amortized cost exceeds the fair value of collateral, less costs to sell. All non-accrual loans $250 thousand or greater are analyzed for a specific ACL. Prior to the adoption of the CECL model, the ACL for loans was established through a provision for loan losses charged to expense, which represented management’s best estimate of inherent losses that had been incurred within the existing portfolio of loans. In addition, a loan was considered impaired when, based on current information and events, it was probable that the Company would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. All loans rated substandard or worse and greater than $250 thousand were specifically reviewed to determine if they were impaired. Loans that were determined to be impaired were then evaluated to determine estimated impairment, if any. Impairment was measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan was collateral dependent. Loans that were not individually determined to be impaired or were not subject to the specific review of impaired status were subject to the general valuation allowance portion of the ACL. The Company estimates expected credit losses on off-balance sheet credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL for off-balance sheet credit exposures is adjusted through provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Utilization rates are determined based on a two-year rolling average of historical usage. Expected loss rates for all pass rated loans are used to determine the ACL for off-balance sheet credit exposures. For AFS securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized costs basis is written down to fair value through income. For AFS securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss). Changes in the ACL are recorded as provision for credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest is excluded from the estimate of credit losses on securities. 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. 62 Table of Contents Loans Held for Sale. Loans held for sale are comprised of residential mortgage loans. Loans that are originated for best efforts delivery are carried at the lower of aggregate cost or fair value as determined by aggregate outstanding commitments from investors or current investor yield requirements. All other loans held for sale are carried at fair value. Loans sold are typically subject to certain indemnification provisions with the investor; management does not believe these provisions will have any significant consequences. Mortgage Servicing Rights Asset. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the consolidated statement of comprehensive income (loss) effect recorded in net gain on sale of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates present value of estimated future servicing income. Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports change in fair value of servicing assets in earnings in the period in which the changes occur, and are included with other noninterest income in the consolidated financial statements. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Goodwill and Other Intangible Assets. Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events and circumstances exist that indicate that an impairment test should be performed. Intangible assets with definite lives are amortized over their estimated useful lives. Recently Issued Accounting Pronouncements See Note 1, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements included elsewhere in this Report regarding the impact of new accounting pronouncements which we have adopted.