South Plains Financial (SPFI) Risk Analysis

Investing in our common stock involves a high degree of risk. Before you decide to invest, you should carefully consider the risks described below, together with all other information included in this Report. We believe the risks described below are the risks that are material to us. 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.

Employee error or misconduct by our employees or customers could result in financial losses or regulatory sanctions and damage our reputation. Potential misconduct might include concealing unauthorized activities, improper conduct on behalf of customers, or misuse of confidential information. Given the high volume of transactions we process, errors or misconduct could be repeated or compounded before detection and mitigation. Our reliance on automated processing systems further elevates the risk that errors or manipulations may go undetected, leading to losses that are difficult to trace. Moreover, if our internal control systems fail to prevent or promptly detect such occurrences—and if resulting losses are uninsured, exceed coverage limits, or are otherwise not recoverable—the adverse impact on our business, financial condition and operating results could be significant. Additionally, our business is highly dependent on our management team. The unexpected loss of key executive officers or challenges in retaining qualified talent could adversely affect our operations. Our success depends on our ability to recruit, develop and retain highly skilled bankers. Failure to do so could hinder our growth strategy, cause valuable customer relationships to be lost to competitors, and negatively impact our future prospects.

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. Given our business mix, and the fact that most of our assets and liabilities are financial in nature, we tend to be sensitive to market interest rate movements and the performance of the financial markets. Our primary source of income is net interest income, meaning the difference or spread between interest income earned and interest expense paid. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market interest rates could adversely affect net interest income. Conversely, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Prevailing economic conditions, fiscal and monetary policies and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which, in turn, significantly affect financial institutions’ net interest income. If the interest we pay on deposits and other borrowings increases at a faster rate than increases in the interest we receive on loans and investments, net interest income, and, therefore, our earnings, could be affected. Earnings could also be affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including competition, the monetary policy of the Federal Reserve, inflation and deflation, and volatility of domestic and global financial and credit markets, due in part to the persistence of the ongoing inflationary environment in the United States and in our market areas and current geopolitical tensions. 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. During periods of reduced loan demand, results of operations may be adversely affected to the extent that we would be unable to reduce mortgage-related noninterest expenses commensurate with the decline in mortgage loan origination activity. Increases in interest rates could also adversely affect the market value of our fixed income assets. Conversely, in periods of decreasing interest rates, our borrowers may experience difficulties meeting their obligations or seek to refinance their loans for lower rates, which may adversely affect income from these lending activities and negatively impact our net interest margin. A prolonged period of volatile and unstable financial market conditions could increase our funding costs and negatively affect our asset–liability management strategies. Higher volatility in interest rates and spreads to benchmark indices could cause decreases in the fair market values of our investment portfolio and of assets the Company manages for others, and may impair our ability to attract and retain funds from current and prospective customers, which could lower fee income. Fluctuations in interest rates could impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, any of which could have a material adverse effect on our liquidity and ability to fund future growth, operating results and financial condition. Although our asset–liability management strategy is designed to control and mitigate exposure to risks related to changes in market interest rates, those rates are affected by many factors outside our control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, and international disorder and instability in domestic and foreign financial markets.

Our business and operations, which primarily consist of lending money to customers in the form of loans, borrowing money from customers in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the U.S. Uncertainty about the federal fiscal policymaking process, and the medium- and long-term fiscal outlook of the federal government and U.S. economy, is a concern for businesses, consumers and investors in the U.S. Our business is also significantly affected by monetary and related policies of the U.S. government and its agencies. In 2022 and 2023, the Federal Open Market Committee (“FOMC”) of the Federal Reserve repeatedly raised its 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 2022 and July 2023. While the target benchmark rate and the prime rate were decreased by 75 basis points in 2024, sustained levels or future increases in market interest rates may adversely affect our business, financial condition and results of operations by reducing the demand for loans and affecting borrowers’ ability to repay their indebtedness, thereby subjecting us to potential credit losses. Changes in any of these policies, along with adverse economic conditions and government responses, could have a material adverse effect on our business, financial condition, results of operations and prospects, and the interplay between these factors can be complex and unpredictable. In addition, the inflationary outlook in the United States remains uncertain. Inflationary pressures remain at relatively elevated levels and a persistent inflationary environment could result in sustained higher interest rates for a prolonged period, which may expose the Company to interest rate risk. Furthermore, 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 financial results. The risks to our business from inflation depend on the durability of current inflationary pressures. 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 in turn could increase borrowing costs for our customers, making it more difficult for them to repay their loans or other obligations. Higher interest rates may be needed to tame persistent inflationary price pressures, potentially pushing down asset prices and weakening economic activity. A deterioration in economic conditions in the United States and our markets could result in increased loan delinquencies and nonperforming assets, decreases in loan collateral values and a decline in demand for our products and services, all of which would adversely affect our business, financial condition and results of operations. In addition, the inflationary outlook in the United States remains uncertain. Inflationary pressures remain at relatively elevated levels and a persistent inflationary environment could result in sustained higher interest rates for a prolonged period, 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 financial results. The risks to our business from inflation depend on the durability of current inflationary pressures. 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 in turn could increase borrowing costs for our customers, making it more difficult for them to repay their loans or other obligations. Higher interest rates may be needed to tame persistent inflationary price pressures, potentially pushing down asset prices and weakening economic activity. A deterioration in economic conditions in the United States and our markets could result in increased loan delinquencies and nonperforming assets, decreases in loan collateral values and a decline in demand for our products and services, all of which would adversely affect our business, financial condition and results of operations. In addition, the inflationary outlook in the United States remains uncertain. Inflationary pressures remain at relatively elevated levels and a persistent inflationary environment could result in sustained higher interest rates for a prolonged period, 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 financial results. The risks to our business from inflation depend on the durability of current inflationary pressures. 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 in turn could increase borrowing costs for our customers, making it more difficult for them to repay their loans or other obligations. Higher interest rates may be needed to tame persistent inflationary price pressures, potentially pushing down asset prices and weakening economic activity. A deterioration in economic conditions in the United States and our markets could result in increased loan delinquencies and nonperforming assets, decreases in loan collateral values and a decline in demand for our products and services, all of which would adversely affect our business, financial condition and results of operations.