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What changed in SOUTH PLAINS FINANCIAL, INC.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of SOUTH PLAINS FINANCIAL, INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+414 added−404 removedSource: 10-K (2024-03-15) vs 10-K (2023-03-13)

Top changes in SOUTH PLAINS FINANCIAL, INC.'s 2023 10-K

414 paragraphs added · 404 removed · 303 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

79 edited+16 added−21 removed235 unchanged
Biggest changeUnder the final rule, if a QCBO 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 below and will not be required to report or calculate risk-based capital. 10 Table of Contents A QCBO, is defined as a bank, savings association, bank holding company or savings and loan holding company with: ● a CBLR of greater than 9%; ● total consolidated assets of less than $10 billion; ● total off-balance sheet exposures (excluding derivatives other than credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets; ● total trading assets and trading liabilities of 5% or less of total consolidated assets; and ● non-advanced approaches institution.
Biggest changeUnder the final rule, if a QCBO 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 below and will not be required to report or calculate risk-based capital.
We acquired West Texas State Bank, Odessa, Texas, approximately $430 million in assets, in 2019 through the merger of West Texas State Bank with and into the Bank.
We acquired West Texas State Bank, Odessa, Texas, with approximately $430 million in assets, in 2019 through the merger of West Texas State Bank with and into the Bank.
Trust Services City Bank Trust, a division of City Bank, provides a range of traditional trust products and services along with several retirement services and products, including estate administration, family trust administration, revocable and irrevocable trusts (including life insurance trusts), real estate administration, charitable trusts for individuals and corporations, 401(k) plans, self-directed individual retirement accounts (“IRAs”), simplified employee pensions plans, employee stock ownership plans (“ESOPs”), defined benefit plans, profit-sharing plans, Keoghs and managed IRAs.
Trust Services City Bank Trust, a division of City Bank, provides a range of traditional trust products and services along with several retirement services and products, including estate administration, family trust administration, revocable and irrevocable trusts (including life insurance trusts), real estate administration, charitable trusts for individuals and corporations, 401(k) plans, self-directed individual retirement accounts (“IRAs”), simplified employee pensions plans, employee stock ownership plans, defined benefit plans, profit-sharing plans, Keoghs and managed IRAs.
On February 1, 2023, the Office of the Comptroller of the Currency issued OCC Bulletin 2023-5 which clarified that, following a recent court decision vacating the 2020 HMDA Final Rule as to the loan volume reporting threshold for closed-end mortgage loans, the loan origination threshold for reporting HMDA data on closed-end mortgage loans reverted to the 25 loan threshold established by the 2015 HMDA Final Rule.
On February 1, 2023, the Office of the Comptroller of the Currency issued OCC Bulletin 2023-5 which clarified that, following a recent court decision vacating the 2020 HMDA Final Rules as to the loan volume reporting threshold for closed-end mortgage loans, the loan origination threshold for reporting HMDA data on closed-end mortgage loans reverted to the 25 loan threshold established by the 2015 HMDA Final Rule.
We also compete with mortgage companies, trust companies, brokerage firms, consumer finance companies, mutual funds, securities firms, insurance companies, third-party payment processors, financial technology companies and other financial intermediaries for certain of our products and services. Some of our competitors are not subject to the regulatory restrictions and level of regulatory supervision applicable to us.
We also compete with mortgage companies, trust companies, brokerage firms, consumer finance companies, mutual funds, securities firms, third-party payment processors, financial technology companies and other financial intermediaries for certain of our products and services. Some of our competitors are not subject to the regulatory restrictions and level of regulatory supervision applicable to us.
On December 18, 2015, the federal banking agencies jointly issued a “statement on prudent risk management for commercial real estate lending”. As of December 31, 2022, the Company did not exceed the levels to be considered to have a concentration in commercial real estate lending and believes its credit administration to be consistent with the published policy statement.
On December 18, 2015, the federal banking agencies jointly issued a “statement on prudent risk management for commercial real estate lending”. As of December 31, 2023, the Company did not exceed the levels to be considered to have a concentration in commercial real estate lending and believes its credit administration to be consistent with the published policy statement.
We also operate 11 loan production offices both in our banking markets and in certain key areas in Texas that focus on mortgage loan origination. We build long-lasting relationships with our customers by delivering high quality products and services and have sought to capitalize on the opportunities presented by continued consolidation in the banking industry.
We also operate 8 loan production offices both in our banking markets and in certain key areas in Texas that focus on mortgage loan origination. We build long-lasting relationships with our customers by delivering high quality products and services and have sought to capitalize on the opportunities presented by continued consolidation in the banking industry.
The BHCA and the implementing regulations of the Federal Reserve generally prohibit the Company from controlling or engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions.
Permissible Activities . The BHCA and the implementing regulations of the Federal Reserve generally prohibit the Company from controlling or engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions.
The full scope of the current administration’s legislative and regulatory agenda is not yet fully known, but it may include further deregulatory measures for the banking industry, including the structure and powers of the CFPB and other areas under the Dodd-Frank Act. AVAILABLE INFORMATION The Company maintains an Internet web site at www.spfi.bank.
The full scope of the current administration’s legislative and regulatory agenda is not yet fully known, but it may include further deregulatory measures for the banking industry, including the structure and powers of the CFPB and other areas under the Dodd-Frank Act. 22 Table of Contents AVAILABLE INFORMATION The Company maintains an Internet web site at www.spfi.bank.
As of December 31, 2022, the Bank was eligible to accept brokered deposits without a waiver from the FDIC as the Bank was a well-capitalized institution. Deposit Insurance . As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC.
As of December 31, 2023, the Bank was eligible to accept brokered deposits without a waiver from the FDIC as the Bank was a well-capitalized institution. Deposit Insurance . As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC.
Many of the amendments, including those with respect to beneficial ownership, require the Department of Treasury and FinCEN to promulgate rules. Failure of a financial institution to maintain and implement adequate AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
Many of the amendments, including those with respect to beneficial ownership, require the Department of Treasury and FinCEN to promulgate rules. 18 Table of Contents Failure of a financial institution to maintain and implement adequate AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
As of December 31, 2022, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements under the Basel III Capital Rules on a fully phased-in basis.
As of December 31, 2023, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements under the Basel III Capital Rules on a fully phased-in basis.
An institution may borrow from the Federal Reserve “discount window” as a secondary source of funds if the institution meets the Federal Reserve’s credit standards. 15 Table of Contents Liquidity Requirements . Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures.
An institution may borrow from the Federal Reserve “discount window” as a secondary source of funds if the institution meets the Federal Reserve’s credit standards. Liquidity Requirements . Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures.
The BHCA provides that in the event of a bank holding company’s bankruptcy any commitment by a bank holding company to a federal bank regulatory agency to maintain the capital of its subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. 13 Table of Contents Imposition of Liability for Undercapitalized Subsidiaries .
The BHCA provides that in the event of a bank holding company’s bankruptcy any commitment by a bank holding company to a federal bank regulatory agency to maintain the capital of its subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. Imposition of Liability for Undercapitalized Subsidiaries .
The few loans secured by properties outside of our primary market areas were made to borrowers who are otherwise well-known to us. Credit Concentrations . In connection with the management of our credit portfolio, we actively manage the composition of our loan portfolio, including credit concentrations.
The few loans secured by properties outside of our primary market areas were made to borrowers who are otherwise well-known to us. 6 Table of Contents Credit Concentrations . In connection with the management of our credit portfolio, we actively manage the composition of our loan portfolio, including credit concentrations.
EGRRCPA amended provisions of the HMDA Rule to exempt certain insured institutions from most of the expanded data collection requirements required of the Dodd-Frank Act.
EGRRCPA amended provisions of the HMDA Rules to exempt certain insured institutions from most of the expanded data collection requirements required of the Dodd-Frank Act.
Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is required to file with the Federal Reserve periodic reports of its operations and such additional information as the Federal Reserve may require. Acquisitions, Activities and Change in Control .
Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is required to file with the Federal Reserve periodic reports of its operations and such additional information as the Federal Reserve may require. 11 Table of Contents Acquisitions, Activities and Change in Control .
A rebuttable presumption of control arises under the CIBC Act where a person (or persons acting in concert) controls 10% or more (but less than 25%) of a class of the voting securities of a bank or bank holding (i) which has registered securities under the Exchange Act, such as the Company, or (ii) no other person owns, controls, or holds the power to vote a greater percentage of any class of voting securities immediately after the transaction. 12 Table of Contents Permissible Activities.
A rebuttable presumption of control arises under the CIBC Act where a person (or persons acting in concert) controls 10% or more (but less than 25%) of a class of the voting securities of a bank or bank holding (i) which has registered securities under the Exchange Act, such as the Company, or (ii) no other person owns, controls, or holds the power to vote a greater percentage of any class of voting securities immediately after the transaction.
The fee is based on the amount of the bank’s assets at rates established by the Finance Commission of Texas. During the year ended December 31, 2022, the Bank paid examination assessments to the TDB totaling $261,000. Capital Requirements . Banks are generally required to maintain minimum capital ratios.
The fee is based on the amount of the bank’s assets at rates established by the Finance Commission of Texas. During the year ended December 31, 2023, the Bank paid examination assessments to the TDB totaling $255,000. Capital Requirements . Banks are generally required to maintain minimum capital ratios.
Our trust department had $411 million of assets under management at December 31, 2022, and contributed $2.4 million of fee income for the year ended December 31, 2022. Investment Services The Investment Center at City Bank provides a variety of investments offered through Raymond James Financial Services, Inc.
Our trust department had $437 million of assets under management at December 31, 2023, and contributed $2.4 million of fee income for the year ended December 31, 2023. Investment Services The Investment Center at City Bank provides a variety of investments offered through Raymond James Financial Services, Inc.
The Company has not elected to be a financial holding company, and we have not engaged in any activities determined by the Federal Reserve to be financial in nature or incidental or complementary to activities that are financial in nature.
The Company has not elected to be a financial holding company, and we have not engaged in any activities determined by the Federal Reserve to be financial in nature or incidental or complementary to activities that are financial in nature. Source of Strength .
The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, like the Bank, will continue to be examined by their applicable bank regulators. 20 Table of Contents Mortgage and Mortgage-Related Products, Generally .
The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, like the Bank, will continue to be examined by their applicable bank regulators. Mortgage and Mortgage-Related Products, Generally .
The HMDA Rule adopts a uniform loan volume threshold for all financial institutions, modifies the types of transactions that are subject to collection and reporting, expands the loan data information being collected and reported, and modifies procedures for annual submission and annual public disclosures.
The HMDA Rules adopted a uniform loan volume threshold for all financial institutions, modifies the types of transactions that are subject to collection and reporting, expands the loan data information being collected and reported, and modifies procedures for annual submission and annual public disclosures.
Market Area We operate in the following markets (deposit information is as of December 31, 2022): Lubbock/South Plains - We operate 10 branches holding $2.1 billion of deposits in the Lubbock metropolitan statistical area (“MSA”) and the surrounding South Plains region of Texas.
Market Area We operate in the following markets (deposit information is as of December 31, 2023): Lubbock/South Plains - We operate 10 branches holding $2.3 billion of deposits in the Lubbock metropolitan statistical area (“MSA”) and the surrounding South Plains region of Texas.
In addition, the GLBA imposed new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and non-bank affiliates. As of December 31, 2022, the Bank did not have any financial subsidiaries. 16 Table of Contents Loans to Directors, Executive Officers and Principal Shareholders .
In addition, the GLBA imposed new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and non-bank affiliates. As of December 31, 2023, the Bank did not have any financial subsidiaries. Loans to Directors, Executive Officers and Principal Shareholders .
The Bank does not receive this reporting relief based on the number of dwelling secured mortgage loans reported annually. UDAP and UDAAP .
The Bank does not receive this reporting relief based on the number of dwelling secured mortgage loans reported annually. 20 Table of Contents UDAP and UDAAP .
The Bank’s legal lending limit to any one borrower was approximately $103.6 million as of December 31, 2022. Safety and Soundness Standards / Risk Management . The federal banking agencies have adopted guidelines establishing operational and managerial standards to promote the safety and soundness of federally insured depository institutions.
The Bank’s legal lending limit to any one borrower was approximately $112.7 million as of December 31, 2023. Safety and Soundness Standards / Risk Management . The federal banking agencies have adopted guidelines establishing operational and managerial standards to promote the safety and soundness of federally insured depository institutions.
Gross revenue derived from our investment services for the year ended December 31, 2022 was $1.8 million with $509.3 million in assets under management at December 31, 2022. SUPERVISION AND REGULATION The following is a general summary of the material aspects of certain statutes and regulations that are applicable to us.
Gross revenue derived from our investment services for the year ended December 31, 2023 was $1.7 million with $598.6 million in assets under management at December 31, 2023. SUPERVISION AND REGULATION The following is a general summary of the material aspects of certain statutes and regulations that are applicable to us.
Dallas - We operate three branches with $474.1 million of deposits and five loan production offices, which we refer to as mortgage offices, in the Dallas-Fort Worth-Arlington MSA, which we refer to as the Dallas-Fort Worth metroplex. El Paso - We operate two bank branches with $199.7 million of deposits and one mortgage office in the El Paso MSA.
Dallas - We operate three branches with $424.9 million of deposits and five loan production offices, which we refer to as mortgage offices, in the Dallas-Fort Worth-Arlington MSA, which we refer to as the Dallas-Fort Worth metroplex. El Paso - We operate two bank branches with $211.9 million of deposits and one mortgage office in the El Paso MSA.
The most recently published host state loan-to-deposit ratio using data as of June 30, 2021 reflects a statewide loan-to-deposit ratio in New Mexico of 56%. As of December 31, 2022, the Bank’s statewide loan-to-deposit ratio in New Mexico was 39%.
The most recently published host state loan-to-deposit ratio using data as of June 30, 2022 reflects a statewide loan-to-deposit ratio in New Mexico of 53%. As of December 31, 2023, the Bank’s statewide loan-to-deposit ratio in New Mexico was 36%.
“Unjustified consumer injury” is the principal focus of the FTC Act. UDAP laws and regulations were expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” referred to as UDAAP, and were delegated to the CFPB for rule-making. The federal banking agencies have the authority to enforce such rules and regulations.
UDAP laws and regulations were expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” referred to as UDAAP, and were delegated to the CFPB for rule-making. The federal banking agencies have the authority to enforce such rules and regulations.
Human Capital Resources As of December 31, 2022, we had approximately 673 total employees, which included 600 full-time employees and 73 part-time employees. None of our employees are covered under a collective bargaining agreement and management considers its employee relations to be satisfactory.
Human Capital Resources As of December 31, 2023, we had approximately 618 total employees, which included 547 full-time employees and 71 part-time employees. None of our employees are covered under a collective bargaining agreement and management considers its employee relations to be satisfactory.
Houston - We operate one branch with $37.9 million of deposits in the Houston-The Woodlands-Sugarland MSA, which we refer to as Greater Houston. This branch is located in the city of Houston. Bryan/College Station - We operate one branch and one mortgage office in the city of College Station, Texas, which has $66.4 million in deposits.
Houston - We operate one branch with $53.1 million of deposits in the Houston-The Woodlands-Sugarland MSA, which we refer to as Greater Houston. This branch is located in the city of Houston. Bryan/College Station - We operate one branch and one mortgage office in the city of College Station, Texas, which has $57.0 million in deposits.
Our Board requires news loans over $5 million to relationships in excess of $20 million to be reported to the Board Credit Risk Committee. As of December 31, 2022, the Bank had a legal lending limit of approximately $103.6 million.
Our Board requires new loans over $5 million to relationships in excess of $20 million to be reported to the Board Credit Risk Committee. As of December 31, 2023, the Bank had a legal lending limit of approximately $112.7 million.
The new assessment rate schedules will remain in effect unless and until the DIF reserve ratio meets or exceeds 2.0% in order to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2.0% designated reserve ratio for the DIF. FDIC staff may in the future recommend additional assessment rate adjustments if deemed necessary.
The new assessment rate schedules will remain in effect unless and until the DIF reserve ratio meets or exceeds 2.0% in order to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2.0% designated reserve ratio for the DIF.
Financial institutions are also required to comply with various reporting and recordkeeping requirements. The Federal Reserve and the FDIC consider an applicant’s effectiveness in combating money laundering, among other factors, in connection with an application to approve a bank merger or acquisition of control of a bank or bank holding company.
The Federal Reserve and the FDIC consider an applicant’s effectiveness in combating money laundering, among other factors, in connection with an application to approve a bank merger or acquisition of control of a bank or bank holding company.
Among other requirements, federal laws, including the Bank Secrecy Act (“BSA”), as amended by the USA PATRIOT Act and as further amended by the National Defense Authorization Act for Fiscal Year 2021 (the “National Defense Authorization Act”), and implementing regulations, require banks to establish and maintain AML programs that include, at a minimum: ● internal policies, procedures and controls designed to implement and maintain the bank’s compliance with all of the requirements of the BSA, the USA PATRIOT Act, the National Defense Authorization Act and related laws and regulations; ● systems and procedures for monitoring and reporting suspicious transactions and activities; ● a designated compliance officer; ● employee training; ● an independent audit function to test the AML program; ● procedures to verify the identity of each customer upon the opening of accounts; and ● heightened due diligence policies, procedures and controls applicable to certain foreign accounts and relationships. 18 Table of Contents Additionally, the USA PATRIOT Act requires each financial institution to develop a customer identification program (“CIP”) as part of its AML program.
Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be in violation of these obligations. 17 Table of Contents Among other requirements, federal laws, including the Bank Secrecy Act (“BSA”), as amended by the USA PATRIOT Act and as further amended by the National Defense Authorization Act for Fiscal Year 2021 (the “National Defense Authorization Act”), and implementing regulations, require banks to establish and maintain AML programs that include, at a minimum: ● internal policies, procedures and controls designed to implement and maintain the bank’s compliance with all of the requirements of the BSA, the USA PATRIOT Act, the National Defense Authorization Act and related laws and regulations; ● systems and procedures for monitoring and reporting suspicious transactions and activities; ● a designated compliance officer; ● employee training; ● an independent audit function to test the AML program; ● procedures to verify the identity of each customer upon the opening of accounts; and ● heightened due diligence policies, procedures and controls applicable to certain foreign accounts and relationships.
Through City Bank, we provide a wide range of commercial and consumer financial services to small and medium-sized businesses and individuals in our market areas. Our principal business activities include commercial and retail banking, along with insurance, investment, trust and mortgage services.
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.
The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” The Bank had a CRA rating of “satisfactory” as of its most recent CRA assessment.
The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” The Bank had a CRA rating of “satisfactory” as of its most recent CRA assessment. Bank Secrecy Act, Anti-Money Laundering and the Office of Foreign Assets Control Regulation .
The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act, referred to as the FTC Act, which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce.
Section 5 of the Federal Trade Commission Act, referred to as the FTC Act, is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce. “Unjustified consumer injury” is the principal focus of the FTC Act.
We had total assets of $3.94 billion, gross loans held for investment of $2.75 billion, total deposits of $3.41 billion, and total shareholders’ equity of $357.0 million as of December 31, 2022. Our history dates back over 80 years.
We had total assets of $4.20 billion, gross loans held for investment of $3.01 billion, total deposits of $3.63 billion, and total shareholders’ equity of $407.1 million as of December 31, 2023. Our history dates back over 80 years.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of non-banking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.
As the consolidated assets of the Company are less than $10 billion and the Company does not currently exceed the 5% threshold, this aspect of the Volcker Rule does not have any impact on the Company’s consolidated financial statements at this time. 12 Table of Contents Additionally, bank holding companies that qualify and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of non-banking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.
In addition, the Bank’s deposit accounts are insured by the DIF to the maximum extent provided under federal law and FDIC regulations, and the FDIC has certain enforcement powers over the Bank. 14 Table of Contents Depositor Preference .
The FDIC is the Bank’s primary federal regulatory agency and periodically examines the Bank’s operations and financial condition and compliance with federal law. In addition, the Bank’s deposit accounts are insured by the DIF to the maximum extent provided under federal law and FDIC regulations, and the FDIC has certain enforcement powers over the Bank. Depositor Preference .
Further, the Basel III capital rules limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. 21 Table of Contents The Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1 billion, regardless of whether the company is publicly traded or not.
The Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1 billion, regardless of whether the company is publicly traded or not.
It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.
Dividends may be declared and paid in a corporation’s own authorized but unissued shares out of the surplus of the corporation upon the satisfaction of certain conditions. 13 Table of Contents It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.
Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan, which costs often substantially exceed the value of the property. 22 Table of Contents New Banking Reform Legislation Other key provisions of the EGRRCPA as it relates to community banks and bank holding companies include, but are not limited to: (i) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (ii) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; and (iii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets.
New Banking Reform Legislation Other key provisions of the EGRRCPA as it relates to community banks and bank holding companies include, but are not limited to: (i) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (ii) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; and (iii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets.
Competition The banking and financial services industry is highly competitive, and we compete with a wide range of financial institutions within our markets, including local, regional and national commercial banks and credit unions.
We believe our exposure to these dynamic and complementary markets provides us with economic diversification and the opportunity for expansion across Texas and New Mexico. Competition The banking and financial services industry is highly competitive, and we compete with a wide range of financial institutions within our markets, including local, regional and national commercial banks and credit unions.
While the statutory language of the Dodd-Frank Act sets forth the standards for acts and practices that violate the prohibition on UDAAP, certain aspects of these standards are untested, and thus it is currently not possible to predict how the CFPB will exercise this authority.
While the statutory language of the Dodd-Frank Act sets forth the standards for acts and practices that violate the prohibition on UDAAP, certain aspects of these standards are untested, and thus it is currently not possible to predict how the CFPB will exercise this authority. 19 Table of Contents The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation.
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. 7 Table of Contents Borrowings In addition to deposits, we may utilize advances from the Federal Home Loan Bank of Dallas (the “FHLB”), and other borrowings, such as a line of credit with the Federal Reserve Bank of Dallas (the “FRB”), uncollateralized lines of credit with multiple banks, subordinated debt, and junior subordinated deferrable interest debentures as supplementary funding sources to finance our operations.
Borrowings In addition to deposits, we may utilize advances from the Federal Home Loan Bank of Dallas (the “FHLB”), and other borrowings, such as a line of credit with the Federal Reserve Bank of Dallas (the “FRB”), uncollateralized lines of credit with multiple banks, subordinated debt, and junior subordinated deferrable interest debentures as supplementary funding sources to finance our operations.
Within our mortgage origination portfolio, refinances of existing mortgages represented 31% of total mortgage originations in the year ended December 31, 2022. We retain mortgage servicing rights from time to time when we sell mortgages to third parties. As of December 31, 2022, we serviced $2.0 billion of mortgages that we originated and sold to third parties.
We retain mortgage servicing rights from time to time when we sell mortgages to third parties. As of December 31, 2023, we serviced $2.0 billion of mortgages that we originated and sold to third parties.
We refer to the Bryan-College Station MSA as Bryan/College Station. The Permian Basin - We operate six branches with $358.7 million of deposits in the Permian Basin region of Texas.
We refer to the Bryan-College Station MSA as Bryan/College Station. 5 Table of Contents The Permian Basin - We operate six branches with $367.5 million of deposits in the Permian Basin region of Texas. Ruidoso, New Mexico - We operate two branches with $176.3 million of deposits in the village of Ruidoso, New Mexico.
At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, may increase or decrease the assessment rates following notice and comment on proposed rulemaking. As a result, the Bank’s FDIC deposit insurance premiums could increase. During the year ended December 31, 2022, the Bank paid $1,199,000 in FDIC deposit insurance premiums.
FDIC staff may in the future recommend additional assessment rate adjustments if deemed necessary. 14 Table of Contents At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, may increase or decrease the assessment rates following notice and comment on proposed rulemaking. As a result, the Bank’s FDIC deposit insurance premiums could increase.
Other Banking Services Mortgage Banking Our mortgage originations totaled $719.4 million for the year ended December 31, 2022 and sold approximately 89% of those mortgages. We originate mortgages primarily from our branches or loan production offices in Lubbock, El Paso, College Station, Abilene, Arlington, Austin, Dallas, Dripping Springs, Forney, Fort Worth, Grand Prairie, Houston, Midland, Southlake, and Waco, Texas.
We originate mortgages primarily from our branches or loan production offices in Lubbock, El Paso, College Station, Abilene, Arlington, Austin, Dallas, Dripping Springs, Forney, Fort Worth, Grand Prairie, Houston, Midland, Southlake, and Waco, Texas. We refer to our loan production offices as mortgage offices.
In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization.
In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. Further, the Basel III capital rules limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds.
An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. Accordingly, transactions between the Company, the Bank and any non-bank subsidiaries will be subject to a number of restrictions.
Accordingly, transactions between the Company, the Bank and any non-bank subsidiaries will be subject to a number of restrictions.
We believe a major contributor to our historical success has been our focus on becoming the community bank of choice in the markets that we serve. We operate in two reportable segments of business: community banking, which includes City Bank, our sole banking subsidiary, and insurance, which includes Windmark Insurance Agency, Inc. (“Windmark”).
We believe a major contributor to our historical success has been our focus on becoming the community bank of choice in the markets that we serve.
As a Texas banking association, the Bank is subject to limits on the amount of loans it can make to one borrower.
As of December 31, 2023, the Bank’s total amount of lines of credit for loans to insiders and loans outstanding to insiders was $10.7 million. Limits on Loans to One Borrower . As a Texas banking association, the Bank is subject to limits on the amount of loans it can make to one borrower.
As of the date of this Form 10-K, the federal banking regulators have not yet implemented a final rule with respect to excessive compensation paid to executives of depository institutions and their holding companies.
As of the date of this Report, the federal banking regulators have not yet implemented a final rule with respect to excessive compensation paid to executives of depository institutions and their holding companies. The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future.
We refer to our loan production offices as mortgage offices. While our mortgage operation represents a sizable component of our total noninterest income, comprising 41%, or $31.4 million, for the year ended December 31, 2022, we view the mortgage business as an ancillary part of our operations.
While our mortgage operation represents a sizable component of our total noninterest income, comprising 17%, or $13.8 million, for the year ended December 31, 2023, we view the mortgage business as an ancillary part of our operations. Within our mortgage origination portfolio, refinances of existing mortgages represented 19% of total mortgage originations in the year ended December 31, 2023.
To make this determination, among other things, the financial institution must collect certain information from customers at the time they enter into the customer relationship with the financial institution. This information must be verified within a reasonable time through documentary and non-documentary methods. Furthermore, all customers must be screened against any CIP-related government lists of known or suspected terrorists.
This information must be verified within a reasonable time through documentary and non-documentary methods. Furthermore, all customers must be screened against any CIP-related government lists of known or suspected terrorists. Financial institutions are also required to comply with various reporting and recordkeeping requirements.
Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.
Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments. 16 Table of Contents During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the financial institutions they supervise.
We believe that our credit approval process provides for thorough underwriting and efficient decision-making. Credit Risk Management . Credit risk management involves a partnership between our loan officers and our credit approval, credit administration and collections personnel. Loan delinquencies and exceptions are constantly monitored by credit personnel and consultations with loan officers occur as often as daily.
Loan relationships over $3 million are approved by our Executive Loan Committee. These limits are reviewed periodically by the Bank’s Board. We believe that our credit approval process provides for thorough underwriting and efficient decision-making. Credit Risk Management . Credit risk management involves a partnership between our loan officers and our credit approval, credit administration and collections personnel.
The capital classification of a bank affects the frequency of regulatory examinations, the bank’s ability to engage in certain activities and the deposit insurance premium paid by the bank.
The capital classification of a bank affects the frequency of regulatory examinations, the bank’s ability to engage in certain activities and the deposit insurance premium paid by the bank. A bank’s capital category is determined solely for the purpose of applying prompt correct action regulations and the capital category may not accurately reflect the bank’s overall financial condition or prospects.
Our investment policy is reviewed annually by the Bank’s Board. Overall investment goals are established by the Bank’s Board and the Bank’s Investment/Asset Liability Committee. The Bank’s Board has delegated the responsibility of monitoring our investment activities to the Investment/Asset Liability Committee. Sources of Funds Deposits Deposits represent the Company’s primary and most vital source of funds.
Our investment policy is reviewed annually by the Bank’s Board. Overall investment goals are established by the Bank’s Board and the Bank’s Investment/Asset Liability Committee.
The Dodd-Frank Act mandated additional loan data collection points in addition to authorizing the Bureau to require other data collection points under implementing Regulation C. Most of the provisions of the HMDA Rule went into effect on January 1, 2018 and apply to data collected in 2018 and reporting in 2019 and later years.
The Dodd-Frank Act mandated additional loan data collection points in addition to authorizing the Bureau to require other data collection points under implementing Regulation C.
The CRA and the regulations issued thereunder are intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities.
Accordingly, management believes that the Bank is in compliance with Section 109 in New Mexico after application of the first step of the two-step test. Community Reinvestment Act . The CRA and the regulations issued thereunder are intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities.
We believe our ability to attract and retain employees is a key to our success. Accordingly, we strive to offer competitive salaries and employee benefits to all employees and monitor salaries in our market areas.
We believe our ability to attract and retain employees is a key to our success.
Although the Company and the Bank are QCBOs, the Company and the Bank have currently not elected to opt in to the CBLR framework at this time and will continue to follow the capital requirements under the Basel III Capital Rules as described above.
In order to qualify for the CBLR framework, a QCBO 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. 10 Table of Contents Although the Company and the Bank are QCBOs, the Company and the Bank have currently not elected to opt in to the CBLR framework at this time and will continue to follow the capital requirements under the Basel III Capital Rules as described above.
Loans in excess of an individual officer’s lending limit up to $3 million may be approved with joint authorities of a market president and a senior credit officer. Loan relationships over $3 million are approved by our Executive Loan Committee. These limits are reviewed periodically by the Bank’s Board.
Our credit approval policies provide for various levels of officer and senior management lending authority for new credits and renewals, which are based on position, capability and experience. Loans in excess of an individual officer’s lending limit up to $3 million may be approved with joint authorities of a market president and a senior credit officer.
In addition to competitive base salaries and benefits, additional employee programs include annual bonus opportunities, Company matched 401(k) Plan contributions, healthcare and insurance benefits, health savings and flexible spending accounts, long-term care and long-term disability benefits, life insurance benefits, a robust wellness program, and paid-time off. Lending Activities General .
We strive to offer a well-rounded salary package through competitive salaries with the opportunity for an employee annual bonus program, a robust benefit package (including a company matched 401(k) Plan contribution, healthcare and insurance benefits, health savings and flexible spending accounts, long-term care and long-term disability benefits, life insurance benefits, a robust wellness program, and paid-time off), and a commitment to supporting career goals, employee development and recognition, and employee community involvement.
The key components of the CIP are identification, verification, government list comparison, notice and record retention. The purpose of the CIP is to enable the financial institution to determine the true identity and anticipated account activity of each customer.
Additionally, the USA PATRIOT Act requires each financial institution to develop a customer identification program (“CIP”) as part of its AML program. The key components of the CIP are identification, verification, government list comparison, notice and record retention.
As described above, the Bank exceeded its minimum capital requirements under applicable regulatory guidelines as of December 31, 2022. Transactions with Affiliates . The Bank is subject to sections 23A and 23B of the Federal Reserve Act, or the Affiliates Act, and the Federal Reserve’s implementing Regulation W.
The Bank is subject to sections 23A and 23B of the Federal Reserve Act, or the Affiliates Act, and the Federal Reserve’s implementing Regulation W. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank.
As of that date, our 20 largest borrowing relationships ranged from approximately $22.2 million to $50.9 million (including unfunded commitments) and totaled approximately $622.0 million in total commitments (representing, in the aggregate, 18.1% of our total outstanding commitments). 6 Table of Contents Our credit approval policies provide for various levels of officer and senior management lending authority for new credits and renewals, which are based on position, capability and experience.
As of that date, our 20 largest borrowing relationships ranged from approximately $25.0 million to $54.4 million (including unfunded commitments) and totaled approximately $676.0 million in total commitments (representing, in the aggregate, 18.7% of our total outstanding commitments).
A bank’s capital category is determined solely for the purpose of applying prompt correct action regulations and the capital category may not accurately reflect the bank’s overall financial condition or prospects. 11 Table of Contents As of December 31, 2022, the Bank met the requirements for being deemed “well-capitalized” for purposes of the prompt corrective action regulations.
As of December 31, 2023, the Bank met the requirements for being deemed “well-capitalized” for purposes of the prompt corrective action regulations.
The final rule requires the Company to adopt a clawback policy within 60 days after such listing standard becomes effective. Financial Privacy The federal bank regulatory agencies have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties.
In accordance with Rule 10D-1 promulgated by the SEC under the Exchange Act and Nasdaq Listing Rule 5608, the Board of Directors adopted and implemented an Incentive Award Recoupment Policy, effective as of October 2, 2023. 21 Table of Contents Financial Privacy Under Section 501 of the Gramm-Leach-Bliley Act, and its implementing regulations, the federal bank regulatory agencies have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties.
We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits.
The Bank’s Board has delegated the responsibility of monitoring our investment activities to the Investment/Asset Liability Committee. 7 Table of Contents Sources of Funds 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.
Furthermore, the Bank must periodically report all loans made to directors and other insiders to the bank regulators. As of December 31, 2022, the Bank’s total amount of lines of credit for loans to insiders and loans outstanding to insiders was $9.7 million. Limits on Loans to One Borrower .
Any extension of credit to insiders above specified amounts must receive the prior approval of the Bank’s board of directors and the Bank must periodically report all loans made to directors and other insiders to the bank regulators.
Additionally, existing markets are monitored for profitability and efficiencies to determine if we would need to exit any locations. Insurance Windmark Insurance, a wholly-owned subsidiary of the Bank, offers a variety of crop insurance products through offices in Texas, Oklahoma, Nebraska, and Colorado and by acting as the general agency for independent agents in 17 states.
Additionally, existing markets are monitored for profitability and efficiencies to determine if we would need to exit any locations.
This final rule became effective on April 1, 2020 and did not have a material impact on the Banks’ Consolidated Report of Condition and Income. 19 Table of Contents Consumer Financial Services We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers.
As of December 31, 2023, we had $442.5 million in ADC loans and $666 million in HVCRE loans. Consumer Financial Services We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers.
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Ruidoso, New Mexico - We operate two branches with $180.8 million of deposits in the village of Ruidoso, New Mexico. 5 Table of Contents We believe our exposure to these dynamic and complementary markets provides us with economic diversification and the opportunity for expansion across Texas and New Mexico.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIn addition, higher interest rates could slow economic growth and lead to a recessionary environment, which could negatively impact the Company’s growth, credit quality, net interest margin and its financial results. The risks to our business from inflation depends on the durability of the current inflationary pressures in our markets.
Biggest changeInflation has been reported at high levels and could result in higher interest rates for a prolonged period of time, which may expose the Company to interest rate risk. In addition, higher interest rates could slow economic growth and lead to a recessionary environment, which could negatively impact the Company’s growth, credit quality, net interest margin and its financial results.
The level of the allowance for loan losses reflects our management’s continuing evaluation of specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; industry concentrations; and other unidentified losses inherent in the Bank’s current loan portfolio.
The level of the allowance for credit losses reflects our management’s continuing evaluation of specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; industry concentrations; and other unidentified losses inherent in the Bank’s current loan portfolio.
Further, if real estate markets or the economy in general deteriorate, the Bank may experience increased delinquencies and credit losses. The allowance for loan losses may not be sufficient to cover actual loan-related losses.
Further, if real estate markets or the economy in general deteriorate, the Bank may experience increased delinquencies and credit losses. The allowance for credit losses may not be sufficient to cover actual loan-related losses.
For example, any increases in our risk-weighted assets will require a corresponding increase in our capital to maintain the applicable ratios. In addition, recognized loan losses in excess of amounts reserved for such losses, loan impairments, impairment losses on securities and other factors will decrease our capital, thereby reducing the level of the applicable ratios.
For example, any increases in our risk-weighted assets will require a corresponding increase in our capital to maintain the applicable ratios. In addition, recognized credit losses in excess of amounts reserved for such losses, loan impairments, impairment losses on securities and other factors will decrease our capital, thereby reducing the level of the applicable ratios.
If market interest rates continue to rise, the market value of the fixed income bond portfolio will decrease, resulting in unrealized losses, and depending on the extent of the rise in interest rates, the increase in unrealized losses could be significant over the short-term.
If market interest rates continue to rise, the market value of the fixed income bond portfolio will decrease, resulting in further unrealized losses, and depending on the extent of the rise in interest rates, the increase in unrealized losses could be significant over the short-term.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires the Bank to make significant estimates of current credit risks and future trends.
The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and judgment and requires the Bank to make significant estimates of current credit risks and future trends.
Because most of our business activities are conducted in Texas and New Mexico and most of our credit exposure is there, we are at risk to adverse economic, political or business developments, including a downturn in real estate values, agricultural activities, the oil and gas industry and natural hazards such as floods, ice storms and tornadoes that affect Texas and New Mexico.
Because most of our business activities are conducted in Texas and New Mexico and most of our credit exposure is there, we are at risk to adverse economic, political or business developments, including a downturn in real estate values, agricultural activities, the oil and gas industry and natural hazards such as floods, ice storms, tornadoes, droughts, and fires that affect Texas and New Mexico.
Further increases in market interest rates may have an adverse effect on our business, financial condition and results of operations as it could reduce the demand for loans and affect the ability of our borrowers to repay their indebtedness subjecting us to potential loan losses. Changes in any of these policies are beyond our control.
Further increases in market interest rates may have an adverse effect on our business, financial condition and results of operations as it could reduce the demand for loans and affect the ability of our borrowers to repay their indebtedness subjecting us to potential credit losses. Changes in any of these policies are beyond our control.
Accordingly, we maintain an allowance for loan losses that represents management’s judgment of probable losses and risks inherent in our loan portfolio.
Accordingly, we maintain an allowance for credit losses that represents management’s judgment of probable losses and risks inherent in our loan portfolio.
Changes in economic conditions affecting borrowers, increases in our nonperforming loans, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Bank’s control, may require an increase in the allowance for loan losses.
Changes in economic conditions affecting borrowers, increases in our nonperforming loans, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Bank’s control, may require an increase in the allowance for credit losses.
Due to our geographic concentration, specifically in Texas, we may be less able than other larger regional or national financial institutions to diversify our credit risk across multiple markets. 27 Table of Contents Changes in U.S. trade policies and other factors beyond the Company’s control, including the imposition of tariffs and retaliatory tariffs, may adversely impact our business, financial condition and results of operations.
Due to our geographic concentration, specifically in Texas, we may be less able than other larger regional or national financial institutions to diversify our credit risk across multiple markets. Changes in U.S. trade policies and other factors beyond the Company’s control, including the imposition of tariffs and retaliatory tariffs, may adversely impact our business, financial condition and results of operations.
Furthermore, the Bank is not obligated to pay dividends to us, and any dividends paid to us would depend on the earnings or financial condition of the Bank and various business and regulatory considerations. 37 Table of Contents We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.
Furthermore, the Bank is not obligated to pay dividends to us, and any dividends paid to us would depend on the earnings or financial condition of the Bank and various business and regulatory considerations. We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.
There is no precise method of predicting loan losses, and therefore, we always face the risk that charge offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required.
There is no precise method of predicting credit losses, and therefore, we always face the risk that charge offs in future periods will exceed our allowance for credit losses and that additional increases in the allowance for credit losses will be required.
We may not be able to retain our current personnel or attract additional qualified key persons as needed. Our ability to develop, retain and recruit additional successful bankers is critical to the success of our business strategy, and any failure to do so could adversely affect our business, financial condition, results of operations and future prospects.
We may not be able to retain our current personnel or attract additional qualified key persons as needed. 31 Table of Contents Our ability to develop, retain and recruit additional successful bankers is critical to the success of our business strategy, and any failure to do so could adversely affect our business, financial condition, results of operations and future prospects.
Securities litigation could result in substantial costs and divert management’s attention and resources from our normal business, which could adversely affect our results of operation and financial condition. 36 Table of Contents Future equity issuances, including through our current or any future equity compensation plans, could result in dilution, which could cause the price of our shares of common stock to decline.
Securities litigation could result in substantial costs and divert management’s attention and resources from our normal business, which could adversely affect our results of operation and financial condition. Future equity issuances, including through our current or any future equity compensation plans, could result in dilution, which could cause the price of our shares of common stock to decline.
Unexpected deterioration in the credit quality of our commercial real estate loan portfolio would require us to increase our provision for loan losses, which would reduce our profitability, and could materially adversely affect our business, financial condition and results of operations. 26 Table of Contents Our portfolio of indirect dealer lending exposes us to increased credit risks.
Unexpected deterioration in the credit quality of our commercial real estate loan portfolio would require us to increase our provision for credit losses, which would reduce our profitability, and could materially adversely affect our business, financial condition and results of operations. Our portfolio of indirect dealer lending exposes us to increased credit risks.
The failure to successfully evaluate and execute mergers, acquisitions or investments or otherwise adequately address these risks could materially harm our business, financial condition and results of operations. We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
The failure to successfully evaluate and execute mergers, acquisitions or investments or otherwise adequately address these risks could materially harm our business, financial condition and results of operations. 24 Table of Contents We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
As a result, a prolonged period of secondary market illiquidity may result in a reduction in our mortgage origination volumes which, in turn, could have a material adverse effect on our financial condition and results of operation from our mortgage operations. 30 Table of Contents The value of our mortgage servicing rights can be volatile.
As a result, a prolonged period of secondary market illiquidity may result in a reduction in our mortgage origination volumes which, in turn, could have a material adverse effect on our financial condition and results of operation from our mortgage operations. The value of our mortgage servicing rights can be volatile.
These problems, losses or defaults could have an adverse effect on our business, financial condition and results of operations. 33 Table of Contents Until May 31, 2018, our Company was an S Corporation, and claims of taxing authorities related to our prior status as an S Corporation could harm us. Until May 31, 2018, our Company was an S Corporation.
These problems, losses or defaults could have an adverse effect on our business, financial condition and results of operations. Until May 31, 2018, our Company was an S Corporation, and claims of taxing authorities related to our prior status as an S Corporation could harm us. Until May 31, 2018, our Company was an S Corporation.
At December 31, 2022, approximately 10.5% of our total loan portfolio, consisted of indirect dealer loans, originated through automobile dealers for the purchase of new or used automobiles, as well as recreational vehicles, boats, and personal watercraft. We serve customers that cover a range of creditworthiness and the required terms and rates are reflective of those risk profiles.
At December 31, 2023, approximately 9.5% of our total loan portfolio, consisted of indirect dealer loans, originated through automobile dealers for the purchase of new or used automobiles, as well as recreational vehicles, boats, and personal watercraft. We serve customers that cover a range of creditworthiness and the required terms and rates are reflective of those risk profiles.
If real estate values decline, it is also more likely that we would be required to increase our allowance for loan losses, which could adversely affect our business, financial condition and results of operations. Our commercial real estate loan portfolio exposes us to risks that may be greater than the risks related to other mortgage loans.
If real estate values decline, it is also more likely that we would be required to increase our allowance for credit losses, which could adversely affect our business, financial condition and results of operations. 25 Table of Contents Our commercial real estate loan portfolio exposes us to risks that may be greater than the risks related to other mortgage loans.
Because of our geographic concentration, we may be less able than other financial institutions to diversify our credit risks across multiple markets. Mortgage originations have decreased due to declines in refinance activity, and this trend may continue.
Because of our geographic concentration, we may be less able than other financial institutions to diversify our credit risks across multiple markets. Mortgage originations have decreased due to higher interest rates and declines in refinance activity, and this trend may continue.
In the current environment of increasing interest rates, loan originations may decline, and our borrowers may experience greater difficulties meeting their obligations, depending on the performance of the overall economy, which may adversely affect income from these lending activities. This could result in decreased interest income, decreased mortgage revenues and corresponding decreases in noninterest income from projected levels.
In the current environment of elevated interest rates, demand for loan originations may decline, and our borrowers may experience greater difficulties meeting their obligations, depending on the performance of the overall economy, which may adversely affect income from these lending activities. This could result in decreased interest income, decreased mortgage revenues and corresponding decreases in noninterest income from projected levels.
Risks Related to Our Common Stock An active public trading market may not be sustained. We completed the initial public offering, and the Company’s common stock began trading on the NASDAQ Global Select Market, in May 2019. An active trading market for shares of our common stock may not be sustained.
We completed the initial public offering, and the Company’s common stock began trading on the NASDAQ Global Select Market, in May 2019. An active trading market for shares of our common stock may not be sustained.
We may experience significant loan losses, which could have a material adverse effect on our operating results and financial condition.
We may experience significant credit losses, which could have a material adverse effect on our operating results and financial condition.
Additionally, we may incur significant expenses and expend significant time and resources on training, integration and business development before it is able to determine whether a new banker will be profitable or effective.
Additionally, we may incur significant expenses and expend significant time and resources on training, integration and business development before being able to determine whether a new banker will be profitable or effective.
As discussed above, the FOMC repeatedly raised their target benchmark interest rate in 2022, resulting in subsequent prime rate increases of 425 basis points between March and December of 2022, and further resulting in a significant increase in market interest rates during the year ended December 31, 2022.
As discussed above, the FOMC repeatedly raised their target benchmark interest rate in 2022 and 2023, resulting in subsequent prime rate increases of 525 basis points between March of 2022 and July of 2023, and further resulting in a significant increase in market interest rates during the year ended December 31, 2023.
This competition may limit our future growth and earnings prospects. 32 Table of Contents If we fail to maintain effective internal control over financial reporting, we may not be able to accurately report its financial results or prevent fraud.
This competition may limit our future growth and earnings prospects. If we fail to maintain effective internal control over financial reporting, we may not be able to accurately report its financial results or prevent fraud.
Agricultural lending and volatility in commodity prices may adversely affect our financial condition and results of operations. At December 31, 2022, agricultural loans were approximately 2.4% of our total loan portfolio. Agricultural lending involves a greater degree of risk and typically involves higher principal amounts than many other types of loans.
Agricultural lending and volatility in commodity prices may adversely affect our financial condition and results of operations. At December 31, 2023, agricultural loans were approximately 3.0% of our total loan portfolio. Agricultural lending involves a greater degree of risk and typically involves higher principal amounts than many other types of loans.
Mortgage revenues, which are primarily recognized from the sale in the secondary market of mortgage loans, are a source of noninterest income for the Bank and a contributor to the Bank’s net income. Mortgage revenues for the year ended December 31, 2022 were $31.4 million.
Mortgage revenues, which are primarily recognized from the sale of mortgage loans in the secondary market, are a source of noninterest income for the Bank and a contributor to the Bank’s net income. Mortgage revenues for the year ended December 31, 2023 were $13.8 million.
Our largest deposit relationships currently make up a material percentage of our deposits and the withdrawal of deposits by our largest depositors could force us to fund our business through more expensive and less stable sources. At December 31, 2022, our 20 largest deposit relationships accounted for approximately 16.7% of our total deposits.
Our largest deposit relationships currently make up a material percentage of our deposits and the withdrawal of deposits by our largest depositors could force us to fund our business through more expensive and less stable sources. At December 31, 2023, our 20 largest deposit relationships accounted for approximately 25.1% of our total deposits.
Our loan portfolio includes non-owner-occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties, as well as real estate construction and development loans. As of December 31, 2022, our non-owner-occupied commercial real estate loans totaled approximately 38.7% of our total loan portfolio.
Our loan portfolio includes non-owner-occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties, as well as real estate construction and development loans. As of December 31, 2023, our non-owner-occupied commercial real estate loans totaled approximately 40.1% of our total loan portfolio.
As of December 31, 2022, approximately 69.8% of our loan portfolio was comprised of loans with real estate as a primary component of collateral. Adverse developments affecting real estate values, particularly in our markets, could increase the credit risk associated with our real estate loan portfolio.
As of December 31, 2023, approximately 72.7% of our loan portfolio was comprised of loans with real estate as a primary component of collateral. Adverse developments affecting real estate values, particularly in our markets, could increase the credit risk associated with our real estate loan portfolio.
In addition, we may further experience increased delinquencies, credit losses, and corresponding charges to capital, which could require us to increase our provision for loan losses associated with impacts related to the coronavirus outbreak due to inflationary pressures, quarantines, market downturns, increased unemployment rates, changes in consumer behavior related to pandemic fears, and related emergency response legislation, including the Families First Coronavirus Response Act.
In addition, we may further experience increased delinquencies, credit losses, and corresponding charges to capital, which could require us to increase our provision for credit losses associated with impacts related to the coronavirus outbreak due to inflationary pressures, market downturns, increased unemployment rates, and changes in consumer behavior related to pandemic fears.
We had $27.5 million of mortgage servicing rights as of December 31, 2022. Our risk management framework may not be effective in mitigating risks or losses to us.
We had $26.6 million of mortgage servicing rights as of December 31, 2023. Our risk management framework may not be effective in mitigating risks or losses to us.
In addition, an economic downturn could result in losses, as determined under our accounting methodologies that may materially and adversely affect our business, financial condition, results of operations and future prospects. Our largest loan relationships make up a material percentage of our total loan portfolio.
In addition, an economic downturn could result in losses, as determined under our accounting methodologies that may materially and adversely affect our business, financial condition, results of operations and future prospects. Our largest loan relationships make up a material percentage of our total loan portfolio. We have extended significant amounts of credit to a limited number of borrowers.
In addition, we participate in loans originated by other institutions, and we participate in syndicated transactions (including shared national credits) in which other lenders serve as the lead bank.
In addition, we participate in loans originated by other institutions, and we may participate in syndicated transactions in which other lenders serve as the lead bank.
During the year ended December 31, 2022, the Federal Open Market Committee (“FOMC”) of the Federal Reserve repeatedly raised their target benchmark interest rate in response to the ongoing inflationary environment in the United States, resulting in subsequent prime rate increases of 425 basis points between March and December of 2022.
In 2022 and 2023, the Federal Open Market Committee (“FOMC”) of the Federal Reserve repeatedly raised their target benchmark interest rate in response to the ongoing inflationary environment in the United States, resulting in subsequent prime rate increases of 525 basis points between March of 2022 and July of 2023.
Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition, results of operations and growth prospects. In that case, you could experience a partial or complete loss of your investment.
Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside of our control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets.
Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside of our control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets. 23 Table of Contents Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally.
A deterioration in economic conditions in the United States and our markets could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations. 24 Table of Contents The Company’s Investment Portfolio Could Incur Additional Losses or Fair Value Could Deteriorate.
A deterioration in economic conditions in the United States and our markets could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations.
Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. 36 Table of Contents Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions.
As a general matter, deposits are typically a lower cost source of funds than external wholesale funding (brokered deposits and borrowed funds), because interest rates paid for deposits are typically less than interest rates charged for wholesale funding.
We have traditionally funded asset growth principally through deposits and borrowings. As a general matter, deposits are typically a lower cost source of funds than external wholesale funding (brokered deposits and borrowed funds), because interest rates paid for deposits are typically less than interest rates charged for wholesale funding.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. Many of our competitors have substantially greater resources to invest in technological improvements.
We continually encounter technological changes which could result in us having fewer resources than many of our competitors to continue to invest in technological improvements. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. Many of our competitors have substantially greater resources to invest in technological improvements.
If we fail to maintain sufficient capital under regulatory requirements, whether due to losses, an inability to raise additional capital or otherwise, that failure could adversely affect our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance. We must meet regulatory capital requirements and maintain sufficient liquidity.
Any regulatory action against us could have an adverse effect on our business, financial condition and results of operations. 34 Table of Contents If we fail to maintain sufficient capital under regulatory requirements, whether due to losses, an inability to raise additional capital or otherwise, that failure could adversely affect our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance.
As a result, despite the education, compliance training, supervision and oversight we exercise in these areas, failure to comply with applicable laws and regulations, even if noncompliance is inadvertent or unintentional, could result in the Bank being strictly liable for restitution or damages to individual borrowers and could expose the Bank to other regulatory enforcement activity.
As a result, despite the education, compliance training, supervision and oversight we exercise in these areas, failure to comply with applicable laws and regulations, even if noncompliance is inadvertent or unintentional, could result in the Bank being strictly liable for restitution or damages to individual borrowers and could expose the Bank to other regulatory enforcement activity. 35 Table of Contents Risks Related to Our Common Stock An active public trading market may not be sustained.
The failure to obtain these regulatory approvals for potential future strategic acquisitions and de novo banking locations could impact our business plans and restrict our growth. 34 Table of Contents The Federal Reserve may require the Company to commit capital resources to support the Bank.
De novo branching and acquisitions carry with them numerous risks, including the inability to obtain all required regulatory approvals. The failure to obtain these regulatory approvals for potential future strategic acquisitions and de novo banking locations could impact our business plans and restrict our growth. The Federal Reserve may require the Company to commit capital resources to support the Bank.
In that case, you could experience a partial or complete loss of your investment. 23 Table of Contents Risks Related to Our Business The Company is subject to interest rate risk and changes in market interest rates or capital markets could affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital or liquidity.
Risks Related to Our Business The Company is subject to interest rate risk and changes in market interest rates or capital markets could affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital or liquidity.
Furthermore, if the Company is unable to raise adequate funds through external sources, the Company may need to sell assets with unrealized losses in order to generate additional liquidity, which could decrease the capital of the Company and have an adverse effect on our business, financial condition and results of operations.
Furthermore, if the Company is unable to raise adequate funds through external sources, the Company may need to sell assets with unrealized losses in order to generate additional liquidity, which could decrease the capital of the Company and have an adverse effect on our business, financial condition and results of operations. 28 Table of Contents Recent bank failures and the related negative impact on customer confidence in the safety and soundness of the banking industry may adversely affect our business, earnings and financial condition.
Second, issuances of our common stock and other equity-based awards are expensed by us over their vesting period at the fair market value of the shares on the date they are awarded. Accordingly, grants made under the equity compensation plan will increase our costs, which will reduce our net income.
Second, issuances of our common stock and other equity-based awards are expensed by us over their vesting period at the fair market value of the shares on the date they are awarded.
Customers could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding. Technology has made it more convenient for bank customers to transfer funds into alternative investments or other deposit accounts, including products offered by other financial institutions or non-bank service providers.
Technology has made it more convenient for bank customers to transfer funds into alternative investments or other deposit accounts, including products offered by other financial institutions or non-bank service providers.
In addition, the resolution of nonperforming assets requires significant commitments of time from management, which may materially and adversely impact their ability to perform their other responsibilities. There can be no assurance that we will not experience future increases in nonperforming assets.
In addition, the resolution of nonperforming assets requires significant commitments of time from management, which may materially and adversely impact their ability to perform their other responsibilities.
Additionally, banking regulators may require the Bank to increase its allowance for loan losses in the future, which could have a negative effect on the Bank’s financial condition and results of operations.
Additionally, banking regulators may require the Bank to increase its allowance for credit losses in the future, which could have a negative effect on the Bank’s financial condition and results of operations. Additions to the allowance for credit losses will result in a decrease in net earnings and capital and could hinder our ability to grow our assets.
As a result, you could lose some or all of your investment.
As a result, you could lose some or all of your investment. Item 1B. Unresolved Staff Comments None.
Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions. Holders of our common stock are entitled to receive only such cash dividends as our Board may declare out of funds legally available for such payments.
Holders of our common stock are entitled to receive only such cash dividends as our Board may declare out of funds legally available for such payments.
Any such increased reliance on wholesale funding, or increases in funding rates in general, could have a negative impact on the Company’s net interest income and, consequently, on its results of operations and financial condition. We may be adversely impacted by an economic downturn or a natural disaster affecting one or more of our market areas.
Any such increased reliance on wholesale funding, or increases in funding rates in general, could have a negative impact on the Company’s net interest income and, consequently, on its results of operations and financial condition.
Currently, we are not, and the Company is not, a party to any pending legal proceeding under any environmental statute, nor are we aware of any instances that may give rise to such liability. 28 Table of Contents Our accounting policies and methods are fundamental to how we report our financial condition and results of operations and we use estimates in determining the fair value of certain of our assets, which estimates may prove to be imprecise and result in significant changes in valuation which could affect our, and thus the Company’s, shareholders’ equity.
Our accounting policies and methods are fundamental to how we report our financial condition and results of operations and we use estimates in determining the fair value of certain of our assets, which estimates may prove to be imprecise and result in significant changes in valuation which could affect our, and thus the Company’s, shareholders’ equity.
This guidance suggests that institutions whose commercial real estate loans exceed these guidelines should implement heightened risk management practices appropriate to their concentration risk and may be required to maintain higher capital ratios than institutions with lower concentrations in commercial real estate lending.
This guidance suggests that institutions whose commercial real estate loans exceed these guidelines should implement heightened risk management practices appropriate to their concentration risk and may be required to maintain higher capital ratios than institutions with lower concentrations in commercial real estate lending. 33 Table of Contents Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.
As of December 31, 2022, loans to commercial borrowers represent approximately 68.6% of total loans. Loans to commercial borrowers are often larger and involve greater risks than other types of lending.
Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans. As of December 31, 2023, loans to commercial borrowers represent approximately 69.7% of total loans. Loans to commercial borrowers are often larger and involve greater risks than other types of lending.
Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations. 31 Table of Contents We depend on a number of relationships with third-party service providers.
In addition, a security breach could also subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability. Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations. We depend on a number of relationships with third-party service providers.
The properties that we own and certain foreclosed real estate assets could subject us to environmental risks and associated costs. There is a risk that hazardous substances or wastes, contaminants, pollutants or other environmentally restricted substances could be discovered on our properties or our foreclosed assets (particularly with real estate loans).
There is a risk that hazardous substances or wastes, contaminants, pollutants or other environmentally restricted substances could be discovered on our properties or our foreclosed assets (particularly with real estate loans). In this event, we might be required to remove the substances from the affected properties or to engage in abatement procedures at our cost.
In such cases, any repossessed collateral for a defaulted agricultural operating loan my not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation or because the assessed value of the collateral exceeds the eventual realization value.
In such cases, any repossessed collateral for a defaulted agricultural operating loan my not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation or because the assessed value of the collateral exceeds the eventual realization value. 26 Table of Contents Sustained volatility in oil prices and the energy industry, including in Texas, could lead to increased credit losses in our energy portfolio, weaker demand for energy lending, and adversely affect our business, results of operations and financial condition.
Furthermore, our customers could terminate their accounts with us because of a cyber-incident which occurred on their own system or with that of an unrelated third party, which is outside of our control. In addition, a security breach could also subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability.
In addition, as a result of any breach, we could incur higher costs to conduct our business, to increase protection or related to remediation. Furthermore, our customers could terminate their accounts with us because of a cyber-incident which occurred on their own system or with that of an unrelated third party, which is outside of our control.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities. 35 Table of Contents We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively impacted by these laws.
We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively impacted by these laws.
Negative public opinion could damage our reputation and adversely impact our earnings. Reputation risk, or the risk to our business, earnings and capital from negative public opinion is inherent in our business.
Accordingly, grants made under the equity compensation plan will increase our costs, which will reduce our net income. 32 Table of Contents Negative public opinion could damage our reputation and adversely impact our earnings. Reputation risk, or the risk to our business, earnings and capital from negative public opinion is inherent in our business.
As market interest rates have increased from the prior low rate environment, there may be fewer opportunities for financial institutions to originate loans to refinance existing mortgages. If mortgage originations continue to decrease, projected mortgage revenues and noninterest income will decrease. Market conditions could have a material impact on our ability to sell originated mortgages in the secondary market.
As market interest rates have increased from the prior low rate environment, there may be fewer opportunities for financial institutions to originate loans to refinance existing mortgages.
There are inherent risks associated with the Company’s investment activities.
The Company’s Investment Portfolio Could Incur Additional Losses or Fair Value Could Deteriorate. There are inherent risks associated with the Company’s investment activities.
Transitory increases in inflation are unlikely to have a material impact on our business or earnings. However, more persistent inflation could lead to tighter-than-expected monetary policy which could, in turn, increase the borrowings costs of our customers, making it more difficult for them to repay their loans or other obligations.
However, more persistent inflation could lead to tighter-than-expected monetary policy which could, in turn, increase the borrowings costs of our customers, making it more difficult for them to repay their loans or other obligations. High interest rates may be needed to tame persistent inflationary price pressures, which could also push down asset prices and weaken economic activity.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs.
Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. As our assets grow, we may face increasing pressure to seek new deposits through expanded channels from new customers at favorable pricing, further increasing our costs.
We have extended significant amounts of credit to a limited number of borrowers As of December 31, 2022, our 20 largest borrowing relationships ranged from approximately $22.2 million to $50.9 million (including unfunded commitments) and totaled approximately 18.1% of our outstanding commitments.
As of December 31, 2023, our 20 largest borrowing relationships ranged from approximately $25.0 million to $54.4 million (including unfunded commitments), totaling approximately 18.7% of our outstanding commitments.
We are exposed to cybersecurity risks associated with our internet-based systems and online commerce security. Third party or internal systems and networks may fail to operate properly or become disabled due to deliberate attacks or unintentional events.
We are exposed to cybersecurity risks associated with our internet-based systems and online commerce security, and our i nformation systems could experience an interruption, failure, breach in security, or cyber-attack .
Any regulatory action against us could have an adverse effect on our business, financial condition and results of operations.
A failure to maintain adequate liquidity could have a material adverse effect on our business, financial condition and results of operations. Customers could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding.
Removed
Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally.
Added
The risks to our business from inflation depends on the durability of the current inflationary pressures in our markets. Transitory increases in inflation are unlikely to have a material impact on our business or earnings.
Removed
Inflation, which at December 31, 2022, has been reported at the highest level in nearly 40 years, and could result in higher interest rates, which expose the Company to interest rate risk.
Added
However, if the Company were required to sell investment securities with an unrealized loss for any reason, including liquidity needs, the unrealized loss would become realized and reduce both net income for the reported period and regulatory capital, which as currently reported, excludes unrealized losses on investment securities.
Removed
High interest rates may be needed to tame persistent inflationary price pressures, which could also push down asset prices and weaken economic activity.
Added
There can be no assurance that we will not experience future increases in nonperforming assets. 27 Table of Contents The properties that we own and certain foreclosed real estate assets could subject us to environmental risks and associated costs.
Removed
Additions to the allowance for loan losses will result in a decrease in net earnings and capital and could hinder our ability to grow our assets. 25 Table of Contents In addition, effective January 1, 2023, our methodology for determining our allowance for loan losses changed due to the implementation of the Current Expected Credit Losses, or CECL, accounting standard.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWorth LPO Lubbock University Branch Grand Prairie LPO Morton Branch Southlake LPO Idalou Branch Levelland Branch El Paso Houston Location Branch or LPO Location Branch or LPO El Paso East Branch Houston Branch El Paso West Branch El Paso Mesa Hills LPO Bryan/College Station Ruidoso, New Mexico Location Branch or LPO Location Branch or LPO College Station Branch Ruidoso Gateway Branch College Station LPO Ruidoso River Crossing Branch The Permian Basin Other Markets Location Branch or LPO Location Branch or LPO Odessa University Branch Abilene, Texas LPO Odessa Grandview Branch Austin, Texas LPO Midland Branch Dripping Springs, Texas LPO Kermit Branch Waco, Texas LPO Fort Stockton Branch Monahans Branch We lease certain of our banking facilities and believe that the leases to which we are subject are generally on terms consistent with prevailing market terms, and none of the leases are with our directors, officers, beneficial owners of more than 5% of our voting securities or any affiliates of the foregoing.
Biggest changeWorth LPO Lubbock University Branch Grand Prairie LPO Morton Branch Southlake LPO Idalou Branch Levelland Branch El Paso Houston Location Branch or LPO Location Branch or LPO El Paso East Branch Houston Branch El Paso West Branch El Paso Mesa Hills LPO Bryan/College Station Ruidoso, New Mexico Location Branch or LPO Location Branch or LPO College Station Branch Ruidoso Gateway Branch College Station LPO Ruidoso River Crossing Branch The Permian Basin Other Markets Location Branch or LPO Location Branch or LPO Odessa University Branch Abilene, Texas LPO Odessa Grandview Branch Midland Branch Kermit Branch Fort Stockton Branch Monahans Branch 38 Table of Contents We lease certain of our banking facilities and believe that the leases to which we are subject are generally on terms consistent with prevailing market terms, and none of the leases are with our directors, officers, beneficial owners of more than 5% of our voting securities or any affiliates of the foregoing.
We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future. 38 Table of Contents
We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeThereafter, the parties filed a joint motion to dismiss with prejudice and the court formally dismissed the case by order dated October 7, 2022. From time to time, the Company or the Bank is a party to claims and legal proceedings arising in the ordinary course of business.
Biggest changeItem 3. Legal Proceedings From time to time, the Company or the Bank is a party to claims and legal proceedings arising in the ordinary course of business.
Except as described above, we are not presently involved in any other litigation, nor to our knowledge is any litigation threatened against us, that in management’s opinion would result in any material adverse effect on our financial position or results of operations or that is not expected to be covered by insurance. Item 4. Mine Safety Disclosures Not applicable.
We are not presently involved in any litigation, nor to our knowledge is any litigation threatened against us, that in management’s opinion would result in any material adverse effect on our financial position or results of operations or that is not expected to be covered by insurance. Item 4. Mine Safety Disclosures Not applicable. Part II
Removed
Item 3. Legal Proceedings As previously disclosed, in response to a Notice of Termination received from Kasasa, Ltd. f/k/a Moneyvue Financial, Inc., Bankvue Financial, Inc., and BancVue, Ltd.
Removed
(“Kasasa”) purporting to terminate a Software License and Maintenance Agreement (the “Software License Agreement”), Trademark License Agreement (the “Trademark License Agreement”), and Addendum to Software License Agreement (“Addendum”) between the Company’s wholly-owned banking subsidiary City Bank (the “Bank”) and Kasasa, the Bank filed suit against Kasasa in Travis County, Texas, styled City Bank v. Kasasa, Ltd., Cause No.
Removed
D-1-GN-20-003630, 53rd Judicial District, Travis County, Texas. On or about September 23, 2022, the parties entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”), pursuant to which the parties agreed to the settlement and release of all claims related to the Software License Agreement, Trademark License Agreement, and Addendum, including all claims and counterclaims in the lawsuit.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

12 edited+1 added−2 removed4 unchanged
Biggest changeTotal Shares Repurchased Average Price Paid Per Share Total Dollar Amount Purchased Pursuant to Publicly-Announced Plans Maximum Dollar Amount Remaining Available for Repurchase Pursuant to Publicly-Announced Plans October 2022 64,799 $ 28.79 $ 1,865,289 $ 1,929,500 November 2022 2,457 30.29 74,416 1,855,084 December 2022 62,933 29.48 1,855,084 — Total 130,189 Stock Performance Graph The following performance graph compares total stockholders’ return on the Company’s common stock for the period beginning at the close of trading on May 9, 2019 and for the last trading date of each year from 2019 to 2022, with the cumulative total return of the S&P 500 and the S&P United States BMI Banks Index for the same periods.
Biggest changeStock Performance Graph The following performance graph compares total stockholders’ return on the Company’s common stock for the period beginning at the close of trading on May 9, 2019 and for the last trading date of each year from 2019 to 2023, with the cumulative total return of the S&P 500 and the S&P United States BMI Banks Index for the same periods.
Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth information at December 31, 2022 with respect to compensation plans under which shares of our common stock may be issued.
Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth information at December 31, 2023 with respect to compensation plans under which shares of our common stock may be issued.
The shares could be repurchased from time to time in privately negotiated transactions or the open market, including pursuant to Rule 10b5-1 trading plans, and in accordance with applicable regulations of the SEC.
The shares can be repurchased from time to time in privately negotiated transactions or the open market, including pursuant to Rule 10b5-1 trading plans, and in accordance with applicable regulations of the SEC.
This performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act of 1934, or incorporated by reference into any future SEC filing, except as shall be expressly set forth by specific reference in such filing. 40 Table of Contents Dollars 5/9/19 12/31/19 12/31/20 12/31/21 12/31/22 South Plains Financial, Inc. 100.0 118.25 108.42 161.21 162.27 S&P United States BMI Banks Index 100.0 117.22 102.26 139.04 115.32 S&P 500 100.0 114.03 135.01 173.77 142.30 Source: S&P Global Market Intelligence © 2022 Item 6. [Reserved]
This performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act of 1934, or incorporated by reference into any future SEC filing, except as shall be expressly set forth by specific reference in such filing. 40 Table of Contents Dollars 5/9/19 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 South Plains Financial, Inc. $ 100.0 $ 118.25 $ 108.42 $ 161.21 $ 162.27 $ 174.28 S&P United States BMI Banks Index 100.0 117.22 102.26 139.04 115.32 179.71 S&P 500 100.0 114.03 135.01 173.77 142.30 125.80 Source: S&P Global Market Intelligence © 2024 Item 6. [Reserved]
Plan Category Number of Shares to be Issued Upon Exercise of Outstanding Awards Weighted-Average Exercise Price of Outstanding Awards Number of Shares Available for Future Grants Equity compensation plans approved by shareholders (1) 1,438,531 $ 15.17 1,649,373 Equity compensation plans not approved by shareholders — — — Total 1,438,531 $ 15.17 1,649,373 (1) The number of shares available for future issuance includes 1,649,373 shares available under the Company’s 2019 Equity Incentive Plan (which allows for the issuance of options, as well as various other stock-based awards).
Plan Category Number of Shares to be Issued Upon Exercise of Outstanding Awards Weighted-Average Exercise Price of Outstanding Awards Number of Shares Available for Future Grants Equity compensation plans approved by shareholders (1) 1,406,775 $ 15.40 2,036,512 Equity compensation plans not approved by shareholders — — — Total 1,406,775 $ 15.40 2,036,512 (1) The number of shares available for future issuance includes 2,036,512 shares available under the Company’s 2019 Equity Incentive Plan (which allows for the issuance of options, as well as various other stock-based awards).
Management’s Discussion and Analysis of the Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital Requirements” of this Report for restrictions on our present or future ability to pay dividends, particularly those restrictions arising under federal and state banking laws.
Business – Supervision and Regulation – Dividend Payments, Stock Redemptions and Repurchases” and “Item 7. Management’s Discussion and Analysis of the Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital Requirements” of this Report for restrictions on our present or future ability to pay dividends, particularly those restrictions arising under federal and state banking laws.
Issuer Purchases of Securities On October 29, 2021, the Company approved a stock repurchase program pursuant to which the Company may, from time to time, purchase up to $10.0 million of its outstanding shares of common stock (the “Program”).
Issuer Purchases of Securities On May 5, 2023, the Company’s board of directors approved a stock repurchase program pursuant to which the Company may, from time to time, purchase up to $15.0 million of its outstanding shares of common stock (the “Program”).
The timing and exact amount of any repurchases depended on various factors including, the performance of the Company’s stock price, general market and other conditions, applicable legal requirements and other factors.
The Company was not obligated to purchase any shares of its common stock under the Program and the timing and exact amount of any repurchases would depend on various factors including, the performance of the Company’s stock price, general market and other conditions, applicable legal requirements and other factors.
The timing and exact amount of any repurchases depended on various factors including, the performance of the Company’s stock price, general market and other conditions, applicable legal requirements and other factors. The New Repurchase Program terminated in December 2022 after all allocated funds had been spent.
The Company is not obligated to purchase any shares of its common stock under the New Program and the timing and exact amount of any repurchases depends on various factors including, the performance of the Company’s stock price, general market and other conditions, applicable legal requirements and other factors.
Holders of Record As of March 8, 2023, there were approximately 179 holders of record of the Company’s common stock. Dividends The Company paid dividends of $0.11, $0.11, $0.12, and $0.12 per common share in the first, second, third, and fourth quarters of 2022, respectively.
Holders of Record As of March 13, 2024, there were approximately 170 holders of record of the Company’s common stock. Dividends The Company paid a dividend of $0.13 per common share in each of the four quarters of 2023. Additionally, the Company paid a dividend of $0.13 per common share in the first quarter of 2024. Also, see “Item 1.
The following table summarizes the share repurchase activity for the three months ended December 31, 2022.
The Program terminated in December 2023 after all allocated funds had been spent. 39 Table of Contents The following table summarizes the share repurchase activity for the three months ended December 31, 2023.
The Program had an expiration date of November 6, 2022. 39 Table of Contents On May 18, 2022, the Company’s board of directors approved a new stock repurchase program for up to $15.0 million of the outstanding shares of the Company’s common stock (the “New Repurchase Program”).
Griffith, the Chairman and Chief Executive Officer of the Company, on November 7, 2023, at a price of $26.30 per share, in a privately negotiated transaction outside of the Program On February 21, 2024, the Company’s board of directors approved a new stock repurchase program pursuant to which the Company may, from time to time, purchase up to $10.0 million of its outstanding shares of common stock (the “New Program”).
Removed
Additionally, the Company paid a dividend of $0.13 per common share in the first quarter of 2023. Also, see “Item 1. Business – Supervision and Regulation – Dividend Payments, Stock Redemptions and Repurchases” and “Item 7.
Added
Total Shares Repurchased (1) Average Price Paid Per Share Total Dollar Amount Purchased Pursuant to Publicly-Announced Plans Maximum Dollar Amount Remaining Available for Repurchase Pursuant to Publicly-Announced Plans October 2023 107,803 $ 26.47 $ 2,853,822 $ 277,330 November 2023 10,360 26.77 277,330 — December 2023 — — — — Total 130,189 (1) Includes 100,000 shares that the Company repurchased from Curtis C.
Removed
The New Repurchase Program began on the date on which the existing stock repurchase program expired due to depletion of funds previously allocated to it and has an expiration date of May 21, 2023, subject to earlier termination or extension of the New Repurchase Program by the Board.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

134 edited+75 added−50 removed101 unchanged
Biggest changeThe following table shows the deposit mix as of the dates presented: December 31, 2022 December 31, 2021 Amount % of Total Amount % of Total (Dollars in thousands) Noninterest-bearing deposits $ 1,150,488 33.8 % $ 1,071,367 32.1 % NOW and other transaction accounts 350,910 10.3 % 395,322 11.8 % Money market and other savings 1,618,833 47.5 % 1,534,795 45.9 % Time deposits 286,199 8.4 % 339,738 10.2 % Total deposits $ 3,406,430 100.0 % $ 3,341,222 100.0 % The following table summarizes our average deposit balances and weighted average rates for the periods indicated: 2022 2021 2020 Average Balance Weighted Average Rate Average Balance Weighted Average Rate Average Balance Weighted Average Rate (Dollars in thousands) Noninterest-bearing deposits $ 1,189,730 — % $ 1,016,835 — % $ 888,653 — % Interest-bearing deposits: NOW and interest-bearing demand accounts 352,791 0.59 % 355,274 0.03 % 329,431 0.13 % Savings accounts 151,128 0.32 % 132,426 0.09 % 113,681 0.09 % Money market accounts 1,385,969 0.75 % 1,353,978 0.29 % 1,209,976 0.48 % Time deposits 327,289 1.22 % 329,509 1.25 % 331,623 1.68 % Total interest-bearing deposits 2,217,177 0.77 % 2,171,187 0.38 % 1,984,711 0.60 % Total deposits $ 3,406,907 0.50 % $ 3,188,022 0.26 % $ 2,873,364 0.41 % The scheduled maturities of uninsured certificates of deposits or other time deposits as of December 31, 2022 follows: 54 Table of Contents (Dollars in thousands) Three Months Three to Six Months Six to 12 Months After 12 Months Total $ 30,752 $ 5,572 $ 13,606 $ 15,770 $ 65,700 The estimated amount of uninsured deposits as of December 31, 2022 was $1.04 billion.
Biggest changeInterest-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: 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 % The following table summarizes our average deposit balances and weighted average rates for the periods indicated: 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 — % $ 1,189,730 — % $ 1,016,835 — % 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 % 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.
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.
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.
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.
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.
The impairment amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.
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.
The decrease in the provision for loan 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 COVID-19 pandemic-related modification, partially offset by growth of $310.5 million in loans held for investment.
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.
Our exposure to interest rate risk is managed by the ALCO Committee, in accordance with policies approved by the Bank’s Board. The ALCO Committee formulates strategies based on appropriate levels of interest rate risk.
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.
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, 2022. Securities.
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.
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 stockholders.
We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.
Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and the Federal Reserve discount window.
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.
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, 2022 and 2021. The Company has the right, as has been exercised in the past, to defer payments of interest on the securities for up to twenty consecutive quarters.
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.
The increase in interest income on securities and other interest-earning assets was primarily due to securities purchases and rising market interest rates.
The increase in interest income on securities and other interest-earning assets was primarily due to rising market interest rates.
Loans sold are typically subject to certain indemnification provisions with the investor; management does not believe these provisions will have any significant consequences. Mortgage Servicing Rights Asset. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in net gain on sale of loans.
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.
(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. (4) Nonperforming assets consist of nonperforming loans plus OREO.
(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. (4) Nonperforming assets consist of nonperforming loans plus foreclosed assets.
The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market areas.
The provision for 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.
Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and ratio of 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.
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.
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. 61 Table of Contents Goodwill and Other Intangible Assets.
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.
The securities portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning asset when loan demand is weak or when deposits grow more rapidly than loans.
The securities portfolio 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.
The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for loan losses and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to our earnings.
The provision for 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 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 PPP loans and $6.3 million in the PPP-related interest and fees.
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 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 69.8% of our loans were secured by real property as of December 31, 2022, compared to 69.4% as of December 31, 2021.
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.
The decrease was primarily the result of a reduction of $781.6 million, or 52.1%, 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.
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 evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.
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.
Loans that are originated for best efforts delivery are carried at the lower of aggregate cost or fair value as determined by aggregate outstanding commitments from investors or current investor yield requirements. All other loans held for sale are carried at fair value under the fair value option.
Loans 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.
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. 58 Table of Contents The following tables summarize the simulated change in net interest income over a 12-month horizon as of the dates indicated: As of December 31, 2022 2021 Change in Interest Rates (Basis Points) Percent Change in Net Interest Income Percent Change in Net Interest Income +300 (1.50 ) 6.89 +200 (0.96 ) 4.53 +100 (0.61 ) 2.02 -100 (1.50 ) (1.05 ) -200 (2.81 ) (1.92 ) Impact of Inflation Our consolidated financial statements and related notes included elsewhere in this Report have been prepared in accordance with GAAP.
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: 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 ) Impact of Inflation Our consolidated financial statements and related notes included elsewhere in this Report have been prepared in accordance with GAAP.
(5) Nonperforming loans include nonaccrual loans and loans past due 90 days or more. 41 Table of Contents Results of Operations 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.
(5) Nonperforming loans include nonaccrual loans and loans past due 90 days or more. 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.
Commercial real estate loans represent 38.7% of loans held for investment as of December 31, 2022 and represented 36.7% of loans held for investment as of December 31, 2021. Further, these loans are geographically diversified, primarily throughout the State of Texas as well as Eastern New Mexico.
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.
Financial and performance covenants are used in commercial lending to allow us to react to a borrower’s deteriorating financial condition, should that occur. 48 Table of Contents Commercial Real Estate .
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 .
For the year ended December 31, 2021, net interest margin and net interest spread were 3.51% and 3.31%, respectively, compared to 3.84% and 3.61% for the same period in 2020, respectively, which reflects the changes in interest income and interest expense discussed above. Provision for Loan Losses Credit risk is inherent in the business of making loans.
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.
Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent.
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.
Of these loans that mature or reprice in the next twelve months, $416.4 million will reprice immediately upon changes in the underlying index rate, with the remaining $228.8 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.
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.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.
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.
In addition to the portfolio evaluations, impaired loans with a balance of $250 thousand or more are individually evaluated based on facts and circumstances of the loan to determine if a specific allowance amount may be necessary.
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.
GAAP allows impairment to be measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
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.
Year Ended December 31, 2022 compared to Year Ended December 31, 2021 The provision for loan losses for the year ended December 31, 2022 was a negative $2.6 million compared to a negative $1.9 million for the year ended December 31, 2021.
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.
Net charge-offs decreased $1.3 million during 2022 as compared to 2021. The allowance for loan 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 loan losses is noted below.
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.
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 elsewhere in this Report.
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.
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.
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.
Net income for the year ended December 31, 2021 was $58.6 million, or $3.17 per diluted share, compared to $45.4 million, or $2.47 per diluted share, for the year ended December 31, 2020.
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.
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%.
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.
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 $310.5 million, or 12.7%, to $2.75 billion at December 31, 2022 as compared to $2.44 billion at December 31, 2021.
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.
In 2022, we repurchased 859,802 shares of common stock for a total of $22.7 million. In 2021, we repurchased 393,529 shares of common stock for a total of $9.2 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.
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.
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. 59 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: As of December 31, 2022 2021 2020 (Dollars in thousands) Total stockholders’ equity $ 357,014 $ 407,427 $ 370,048 Less: Goodwill and other intangibles (23,857 ) (25,403 ) (27,070 ) Tangible common equity $ $ 333,157 $ 382,024 $ 342,978 Total assets $ 3,944,063 $ 3,901,855 $ 3,599,160 Less: Goodwill and other intangibles (23,857 ) (25,403 ) (27,070 ) Tangible assets $ 3,920,206 $ 3,876,452 $ 3,572,090 Shares outstanding 17,027,197 17,760,243 18,076,364 Total stockholders’ equity to total assets 9.05 % 10.44 % 10.28 % Tangible common equity to tangible assets 8.50 % 9.85 % 9.60 % Book value per share $ 20.97 $ 22.94 $ 20.47 Tangible book value per share $ 19.57 $ 21.51 $ 18.97 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.
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: As of December 31, 2023 2022 2021 (Dollars in thousands) Total stockholders’ 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’ 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 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.
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 $648.3 million and $593.6 million at December 31, 2022 and 2021, respectively.
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.
The rise in rates was largely attributed to the Federal Open Market Committee of the Board of Governors of the Federal Reserve System repeatedly raising their target benchmark interest rate during, resulting in federal funds rate increases of 425 basis points between March and December of 2022.
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.
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 consolidated financial statements.
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.
The allowance for loan losses as a percentage of loans held for investment was 1.43% at December 31, 2022 and 1.73% at December 31, 2021. 51 Table of Contents While the entire allowance is available to absorb losses from any part of our loan portfolio, the following table sets forth the allocation of the allowance for loan losses for the years presented and the percentage of allowance in each classification to total allowance: As of December, 31 2022 2021 2020 Amount % of Total Amount % of Total Amount % of Total (Dollars in thousands) Commercial real estate $ 13,029 33.1 % $ 17,245 41.0 % $ 18,962 41.6 % Commercial – specialized 3,425 8.7 % 4,363 10.4 % 5,760 12.6 % Commercial – general 9,215 23.5 % 8,466 20.1 % 9,227 20.3 % Consumer: 1-4 family residential 6,194 15.8 % 5,268 12.5 % 4,646 10.2 % Auto loans 3,926 10.0 % 3,653 8.7 % 4,226 9.3 % Other consumer 1,376 3.5 % 1,357 3.2 % 1,671 3.7 % Construction 2,123 5.4 % 1,746 4.1 % 1,061 2.3 % Total allowance for loan losses $ 39,288 100.0 % $ 42,098 100.0 % $ 45,553 100.0 % Asset Quality Loans are considered delinquent when principal or interest payments are past due 30 days or more.
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: 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 – specialized 4,020 9.5 % 3,425 8.7 % 4,363 10.4 % Commercial – 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 % 52 Table of Contents Asset Quality Loans are considered delinquent when principal or interest payments are past due 30 days or more.
As of December 31, 2022, our consumer loan portfolio was comprised of $460.1 million in 1-4 family residential loans, $321.5 million in auto loans, and $81.3 million in other consumer loans. Construction . Loans for residential construction are for single-family properties to developers, builders, or end-users.
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.
(3) Rate as of last reset date, prior to December 31, 2022. Liquidity and Capital Resources Liquidity Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost.
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.
As of or for the Year Ended December 31, 2022 2021 2020 Selected Income Statement Data: Net interest income $ 138,476 $ 121,764 $ 122,285 Provision for loan losses (2,619 ) (1,918 ) 25,570 Noninterest income 76,145 97,469 101,603 Noninterest expense 144,089 148,030 141,715 Income tax expense 14,911 14,507 11,250 Net income 58,240 58,614 45,353 Share and Per Share Data: Earnings per share (basic) $ 3.35 $ 3.26 $ 2.51 Earnings per share (diluted) 3.23 3.17 2.47 Dividends per share 0.46 0.30 0.14 Tangible book value per share (1) 19.57 21.51 18.97 Selected Period End Balance Sheet Data: Cash and cash equivalents $ 234,883 $ 486,821 $ 300,307 Investment securities 701,711 724,504 803,087 Gross loans held for investment 2,748,081 2,437,577 2,221,583 Allowance for loan losses 39,288 42,098 45,553 Total assets 3,944,063 3,901,855 3,599,160 Total deposits 3,406,430 3,341,222 2,974,351 Borrowings 122,354 122,168 223,532 Total stockholders’ equity 357,014 407,427 370,048 Performance Ratios: Return on average assets 1.47 % 1.56 % 1.31 % Return on average stockholders’ equity 15.79 % 15.08 % 13.40 % Net interest margin (2) 3.73 % 3.51 % 3.84 % Efficiency ratio (3) 66.76 % 67.14 % 62.99 % Credit Quality Ratios: Nonperforming assets to total assets (4) 0.20 % 0.30 % 0.45 % Nonperforming loans to total loans held for investment (5) 0.28 % 0.43 % 0.67 % Allowance for loan losses to nonperforming loans (5) 504.34 % 397.23 % 304.40 % Allowance for loan losses to total loans held for investment 1.43 % 1.73 % 2.05 % Net loan charge-offs to average loans 0.01 % 0.06 % 0.18 % Capital Ratios: Total stockholders’ equity to total assets 9.05 % 10.44 % 10.28 % Tangible common equity to tangible assets (1) 8.50 % 9.85 % 9.60 % Common equity tier 1 capital ratio 11.81 % 12.91 % 12.96 % Tier 1 leverage ratio 11.03 % 10.77 % 10.24 % Tier 1 risk-based capital ratio 13.15 % 14.49 % 14.78 % Total risk-based capital ratio 16.58 % 18.40 % 19.08 % (1) Represents a non-GAAP financial measure.
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’ equity 407,114 357,014 407,427 Performance Ratios: Return on average assets 1.54 % 1.47 % 1.56 % Return on average stockholders’ 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’ 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 % (1) Represents a non-GAAP financial measure.
Through City Bank, we provide a wide range of commercial and consumer financial services to small and medium-sized businesses and individuals in our market areas. Our principal business activities include commercial and retail banking, along with insurance, investment, trust and mortgage services.
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.
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. 44 Table of Contents 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 $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.
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.
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.
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.
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.
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Nonperforming loans include nonaccrual loans and loans past due 90 days or more.
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.
At December 31, 2022, PPP loans totaled approximately $482 thousand and are included in commercial general loans. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit.
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.
The following table sets forth the major components of our noninterest income for the periods indicated: Year Ended December 31, 2022 over 2021 Year Ended December 31, 2021 over 2020 2022 2021 Increase (decrease) 2021 2020 Increase (decrease) (Dollars in thousands) Noninterest income: Service charges on deposit accounts $ 6,829 $ 6,963 $ (134 ) $ 6,963 $ 7,032 $ (69 ) Income from insurance activities 10,826 8,314 2,512 8,314 7,644 670 Bank card services and interchange fees 12,946 12,239 707 12,239 10,035 2,204 Mortgage banking activities 31,370 59,726 (28,356 ) 59,726 65,042 (5,316 ) Investment commissions 1,825 1,934 (109 ) 1,934 1,698 236 Fiduciary income 2,390 2,917 (527 ) 2,917 3,185 (268 ) Gain on sale of securities — — — — 2,318 (2,318 ) Other income and fees (1) 9,959 5,376 4,583 5,376 4,649 727 Total noninterest income $ 76,145 $ 97,469 $ (21,324 ) $ 97,469 $ 101,603 $ (4,134 ) (1) Other income and fees includes income and fees associated with the increase in the cash surrender value of life insurance, safe deposit box rental, check printing, collections, wire transfer and other miscellaneous services and income.
The following table sets forth the major components of our noninterest income for the periods indicated: 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 — 33,778 — — — 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 ) (1) Other income and fees includes income and fees associated with the increase in the cash surrender value of life insurance, safe deposit box rental, check printing, collections, legal settlements, wire transfer, Small Business Investment Company (“SBIC”) investments, and other miscellaneous services.
As of December 31, 2022, the total amount of subordinated debt outstanding was $76.5 million, less approximately $511 thousand of remaining debt issuance costs for a total balance of $76.0 million. 55 Table of Contents Junior Subordinated Deferrable Interest Debentures and Trust Preferred Securities .
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 .
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.
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.
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.
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.
The decrease from December 31, 2021 was primarily the result of a decline in the accumulated other comprehensive income (“AOCI”) of $78.8 million, repurchases of common stock of $22.7 million, and by $8.0 million in dividends paid, partially offset by $58.2 million in net earnings for the year ended 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.
Further, there was a $2.3 million gain on sale of securities in the first quarter of 2020. 46 Table of Contents Noninterest Expense The following table sets forth the major components of our noninterest expense for the periods indicated: Year Ended December 31, 2022 over 2021 Year Ended December 31, 2021 over 2020 2022 2021 Increase (decrease) 2021 2020 Increase (decrease) (Dollars in thousands) Noninterest expense: Salaries and employee benefits $ 86,323 $ 93,360 $ (7,037 ) $ 93,360 $ 89,220 $ 4,140 Occupancy expense, net 15,987 14,560 1,427 14,560 14,658 (98 ) Professional services 9,740 6,752 2,988 6,752 6,322 430 Marketing and development 3,614 3,225 389 3,225 3,088 137 IT and data services 3,780 4,007 (227 ) 4,007 3,574 433 Bankcard expenses 5,376 4,995 381 4,995 4,253 742 Appraisal expenses 1,747 3,248 (1,501 ) 3,248 2,782 466 Other expenses (1) 17,522 17,883 (361 ) 17,883 17,818 65 Total noninterest expense $ 144,089 $ 148,030 $ (3,941 ) $ 148,030 $ 141,715 $ 6,315 (1) Other expenses include items such as banking regulatory assessments, telephone expenses, postage, courier fees, directors’ fees, and insurance.
Noninterest Expense The following table sets forth the major components of our noninterest expense for the periods indicated: 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 — 3,409 — — — 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 ) (1) Other expenses include items such as banking regulatory assessments, telephone expenses, postage, courier fees, directors’ fees, and insurance.
Net charge-offs totaled $0.2 million and were 0.01% of average loans outstanding for the year ended December 31, 2022, compared to $1.5 million and 0.06% for the year ended December 31, 2021.
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 net income was primarily the result of a decrease of $27.5 million in provision for loan losses, offset by a decrease of $4.1 million in noninterest income, an increase of $6.3 million in noninterest expense and an increase of $3.3 million in income tax expense.
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.
Financial Condition Our total assets increased $42.2 million, or 1.1%, to $3.94 billion at December 31, 2022 as compared to $3.90 billion at December 31, 2021. Our loans held for investment increased $310.5 million, or 12.7%, to $2.75 billion at December 31, 2022, compared to $2.44 billion at December 31, 2021.
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.
Loans that are not individually determined to be impaired or are not subject to the specific review of impaired status are subject to the general valuation allowance portion of the allowance for loan losses. Loans Held for Sale. Loans held for sale are comprised of residential mortgage loans.
Loans that 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.
As of December 31, 2022 2021 2020 (Dollars in thousands) Average loans outstanding during period (1) Commercial real estate $ 817,365 $ 705,516 $ 654,923 Commercial – specialized 351,598 336,754 318,141 Commercial – general 476,553 490,945 545,391 Consumer: 1-4 family residential 409,023 374,609 362,415 Auto loans 285,493 227,301 205,849 Other consumer 85,881 68,106 70,478 Construction 150,072 124,840 90,277 Loans held for sale 36,176 92,130 78,158 Total average loans outstanding during period $ 2,612,161 $ 2,420,201 $ 2,325,632 Net charge-offs (recoveries) during the period Commercial real estate $ (418 ) $ (109 ) $ (295 ) Commercial – specialized (807 ) 11 1,041 Commercial – general (122 ) 459 1,601 Consumer: 1-4 family residential 100 44 (75 ) Auto loans 364 483 973 Other consumer 913 653 970 Construction 161 (4 ) (1 ) Total net charge-offs (recoveries) during the period $ 191 $ 1,537 $ 4,214 Total loans held for investment outstanding $ 2,748,081 $ 2,437,577 $ 2,221,583 Nonaccrual loans $ 5,802 $ 9,518 $ 13,718 Allowance for loan losses $ 39,288 $ 42,098 $ 45,553 Ratio of allowance to total loans held for investment 1.43 % 1.73 % 2.05 % Ratio of allowance to nonaccrual loans 677.15 % 442.30 % 332.07 % Ratio of nonaccrual loans to total loans held for investment 0.21 % 0.39 % 0.62 % Ratio of net charge-offs (recoveries) to average loans during the period Commercial real estate (0.05 )% (0.02 )% (0.05 )% Commercial – specialized (0.23 )% — 0.33 % Commercial – general (0.03 )% 0.09 % 0.29 % Consumer: 1-4 family residential 0.02 % 0.01 % (0.02 )% Auto loans 0.13 % 0.21 % 0.47 % Other consumer 1.06 % 0.96 % 1.38 % Construction 0.11 % — — Total ratio of net charge-offs (recoveries) to average loans during the period 0.01 % 0.06 % 0.18 % (1) Average outstanding balances include loans held for sale.
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 – specialized 350,940 351,598 336,754 Commercial – 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 $ — $ (418 ) $ (109 ) Commercial – specialized (164 ) (807 ) 11 Commercial – 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 — (0.05 )% (0.02 )% Commercial – specialized (0.05 )% (0.23 )% — Commercial – general 0.06 % (0.03 )% 0.09 % Consumer: 1-4 family residential — 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 % — Total ratio of net charge-offs (recoveries) to average loans during the period 0.07 % 0.01 % 0.06 % (1) Average outstanding balances include loans held for sale.
The decrease in the year ended December 31, 2022 was primarily due to eleven loans totaling $4.3 million that were removed from nonaccrual status during the second and third quarters of 2022. This was a result of principal paydowns, improved cash flow, and continued sustained payment performance.
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.
The model is used to project future net interest income under a set of possible interest rate movements. The Company’s Investment/Asset Liability Committee (“ALCO Committee”) reviews this information to determine if the projected future net interest income levels would be acceptable. The Company attempts to stay within acceptable net interest income levels.
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.
Nonperforming assets consist of nonperforming loans plus OREO. At December 31, 2022, our total nonaccrual loans were $5.8 million, or 0.21% of total loans held for investment, as compared to $9.5 million, or 0.39% of total loans held for investment, at December 31, 2021.
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.
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. This information should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” included elsewhere in this Report (dollars in thousands, except per share data).
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).
Year Ended December 31, 2022 2021 2020 Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate (Dollars in thousands) Assets: Interest-earning assets: Loans, excluding PPP (1) $ 2,597,274 $ 135,927 5.23 % $ 2,302,413 $ 112,255 4.88 % $ 2,181,118 $ 116,753 5.35 % Loans - PPP 14,887 2,030 13.64 % 117,788 8,290 7.04 % 144,514 5,130 3.55 % Investment securities – taxable 594,405 15,010 2.53 % 532,272 9,292 1.75 % 547,107 11,852 2.17 % Investment securities – non-taxable 216,216 5,733 2.65 % 219,385 5,872 2.68 % 158,482 4,489 2.83 % Other interest-earning assets (2) 318,862 3,675 1.15 % 336,081 565 0.17 % 184,262 1,100 0.60 % Total interest-earning assets 3,741,644 162,375 4.34 % 3,507,939 136,274 3.88 % 3,215,483 139,324 4.33 % Noninterest-earning assets 222,544 261,140 249,536 Total assets $ 3,964,188 $ 3,769,079 $ 3,465,019 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: NOW, savings and money market deposits 1,889,888 13,013 0.69 % 1,841,678 4,163 0.23 % 1,653,088 6,337 0.38 % Time deposits 327,289 3,989 1.22 % 329,509 4,130 1.25 % 331,623 5,557 1.68 % Short-term borrowings 4 — 0.00 % 8,045 5 0.06 % 19,404 104 0.54 % Notes payable & other longer-term borrowings — — 0.00 % 19,641 38 0.19 % 107,045 558 0.52 % Subordinated debt 75,874 4,050 5.34 % 75,699 4,056 5.36 % 38,747 2,223 5.74 % Junior subordinated deferrable interest debentures 46,393 1,640 3.54 % 46,393 880 1.90 % 46,393 1,167 2.52 % Total interest-bearing liabilities 2,339,448 22,692 0.97 % 2,320,965 13,272 0.57 % 2,196,300 15,946 0.73 % Noninterest-bearing liabilities: Noninterest-bearing deposits 1,189,730 1,016,835 888,653 Other liabilities 66,182 42,654 41,573 Total noninterest-bearing liabilities 1,255,912 1,059,489 930,226 Stockholders’ equity 368,828 388,625 338,493 Total liabilities and stockholders’ equity $ 3,964,188 $ 3,769,079 $ 3,465,019 Net interest income $ 139,683 $ 123,002 $ 123,378 Net interest spread 3.37 % 3.31 % 3.61 % Net interest margin (3) 3.73 % 3.51 % 3.84 % (1) Average loan balances include nonaccrual loans and loans held for sale.
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 – taxable 570,655 21,590 3.78 % 594,405 15,010 2.53 % 532,272 9,292 1.75 % Investment securities – 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’ 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 — 0.00 % 8,045 5 0.06 % Notes payable & other longer-term borrowings — — 0.00 % — — 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’ equity 378,473 368,828 388,625 Total liabilities and stockholders’ 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 % (1) Average loan balances include nonaccrual loans and loans held for sale.
The $2.7 million decrease in interest expense for the year ended December 31, 2021 was primarily related to a 16 basis points decrease in the rate paid on interest-bearing liabilities, partially offset by an increase of $124.7 million in average interest-bearing liabilities.
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.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain or loss on sale of securities. The cost of securities sold is based on the specific identification method. Loans.
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.
The organic loan growth remained relationship-focused and occurred primarily in commercial real estate loans, residential mortgage loans, and consumer auto loans, partially offset by decreases in ag production, energy and hotel loans.
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.
Management evaluates the appropriate level of the allowance for loan losses on a quarterly basis. The analysis takes into consideration the results of an ongoing loan review process, the purpose of which is to determine the level of credit risk within the portfolio and to ensure proper adherence to underwriting and documentation standards.
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.
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.
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.
Commercial real estate loans increased $163.9 million, or 21.7%, to $919.4 million as of December 31, 2022 from $755.4 million as of December 31, 2021.
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.
As of December 31, 2022, 33.8% of total deposits were comprised of noninterest-bearing demand accounts, 57.8% of interest-bearing non-maturity accounts and 8.4% of time deposits.
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.
Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
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.
Return on average assets was 1.56% and return on average equity was 15.08% for the year ended December 31, 2021, compared to 1.31% and 13.40%, respectively, for the year ended December 31, 2020.
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.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeItem 7A. Quantitative and Qualitative Disclosures About Market Risk See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity and Market Risk” of this Report for discussion on how the Company manages market risk. 62 Table of Contents
Biggest changeItem 7A. Quantitative and Qualitative Disclosures About Market Risk See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity and Market Risk” of this Report for discussion on how the Company manages market risk. 63 Table of Contents

Other SPFI 10-K year-over-year comparisons