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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-15 · 257 added, 160 removed, 396 unchanged (51% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included

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We are focused on serving business owners and entrepreneurs by delivering fast, consistent and well-designed loan and deposit products to meet their financing needs.

We intend to grow organically by selectively opening

additional branches in our target markets and pursuing strategic acquisitions.

We intend to grow organically by selectively opening additional

branches in our target markets and pursuing strategic acquisitions.

As a bank holding company, we generate most of our revenue from interest income on loans and from short-term investments.

The primary source of funding for

our loans and short-term investments are deposits held by our subsidiary, Bank7.

We measure our performance by our return on average equity, earnings per share, capital ratios, efficiency ratio (calculated by dividing noninterest expense by the

sum of net interest income on a tax equivalent basis) and noninterest income.

As of March 31, 2023, we had total assets of $1.66 billion, gross loans of $1.28 billion, total deposits of $1.49 billion and total shareholders’ equity of

$154.0 million.

The primary source of funding

for our loans and short-term investments are deposits held by our subsidiary, Bank7.

We measure our performance by our return on average equity, earnings per share, capital ratios, efficiency ratio (calculated by dividing noninterest expense by

the sum of net interest income on a tax equivalent basis) and noninterest income.

As of June 30, 2023, we had total assets of $1.68 billion, gross loans of $1.28 billion, total deposits of $1.51 billion and total shareholders’ equity

of $161.8 million.

Results of Operations

Performance Summary.

For the first quarter of 2023, we reported a pre-tax income of $12.6 million, compared to pre-tax income of $8.2 million for the first quarter of

For the first quarter of 2023, interest income increased by $12.5 million, or 83.5%, compared to the first quarter of 2022.

For the first quarter of 2023, average total loans were $1.27 billion with loan yields of 8.09% as compared to

average total loans of $1.00 billion with loan yields of 5.81% for the first quarter of 2022.

Our provision for credit losses for the first quarter of 2023 was $475,000, compared to $276,000 for the same period of 2022.

Return on average equity was 26.15% for the first quarter of 2023, as compared to 19.26% for the first quarter of 2022.

For the second quarter of 2023, we reported a pre-tax income of $12.9 million, compared to pre-tax income of $9.3 million for the second quarter of

For the first six months of 2023, we reported a pre-tax income of $25.5 million, compared to pre-tax income of $17.5 million for the same period in 2022.

For the second quarter of 2023, interest income increased by $13.4 million, or

80.2%, compared to the second quarter of 2022.

For the first six months of 2023, interest income increased by $25.8 million, or 81.7%, compared to the same period in 2022.

For the second quarter of 2023, average total loans were $1.28 billion

with loan yields of 8.40% as compared to average total loans of $1.09 billion with loan yields of 5.80% for the second quarter of 2022.

For the first six months of 2023, average total loans were $1.28 billion with loan yields of 8.25% as

compared to average total loans of $1.05 billion with loan yields of 5.80% for the same period in 2022.

Our provision for credit losses for the second quarter of 2023 was $1.0 million, compared to $219,000 for the second period of 2022.

Our provision for credit losses for the first six months of 2023 was $1.5

million, compared to $495,000 for the same period in 2022.

Return on average equity was 25.02% for the second quarter of 2023, as compared to 21.67% for the second quarter of 2022.

Return on average equity was 25.42% for first six months of 2023, as compared to 20.52%

for the same period in 2022.

Net Interest Income and Net Interest Margin.

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and (iv) the net interest margin.

Net Interest Margin Including Loan Fee Income

For the Three Months Ended March 31,

Net Interest Margin

For the Three Months Ended June 30,

(Dollars in thousands)

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Short-term investments

Investment securities, taxable-equivalent (1)

Investment securities, tax exempt

Debt securities, taxable

Debt securities, tax exempt (1)

Loans held for sale

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Total liabilities and shareholders' equity

Net interest income including loan fee income

Net interest spread including loan fee income

Net interest margin including loan fee income

Taxable-equivalent yield of 2.27% as of March 31, 2023, applying a 23.5% effective tax rate

Non-accrual loans of $7.8 million and $9.5 million as of March 31, 2023 and March 31, 2022, respectively, are included in loans.

For the first quarter of 2023 compared to the first quarter of 2022:

Net interest income

Net interest spread

Net interest margin

Taxable-equivalent yield of 2.29% as of June 30, 2023, applying a 24.5% effective tax rate

Non-accrual loans of $7.3 million and $9.5 million as of June 30, 2023 and June 30, 2022, respectively, are included in loans.

For the second quarter of 2023 compared to the second quarter of 2022:

Interest income on total loans totaled $26.9 million, an increase of $11.1 million or 70.7%, due to an increase in average loans of $193.3 million, or 17.7%, and increased loan yields;

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Interest income on debt securities totaled $786,000, an increase of $130,000 or 19.8%, as a result of debt securities purchased during the first quarter of 2022;

Net interest margin for the first quarter of 2023 was 5.14% compared to 4.42% for the first quarter of 2022.

Net interest margin for the second quarter of 2023 was 5.04% compared to 4.47% for the second quarter of 2022.

Net Interest Margin

For the Six Months Ended June 30,

(Dollars in thousands)

Interest-Earning Assets:

Short-term investments

Debt securities, taxable

Debt securities, tax exempt (1)

Loans held for sale

Total loans (2)

Total interest-earning assets

Noninterest-earning assets

Funding sources:

Interest-bearing liabilities:

Transaction accounts

Time deposits

Total interest-bearing deposits

Total interest-bearing liabilities

Noninterest-bearing liabilities:

Noninterest-bearing deposits

Other noninterest-bearing liabilities

Total noninterest-bearing liabilities

Shareholders' equity

Total liabilities and shareholders' equity

Net interest income

Net interest spread

Net interest margin

Taxable-equivalent yield of 2.27% as of June 30, 2023, applying a 24.0% effective tax rate

Non-accrual loans of $7.3 million and $9.5 million as of June 30, 2023 and June 30, 2022, respectively, are included in loans.

For the first six months of 2023 compared to the same period in 2022:

Interest income on total loans totaled $52.2 million, an increase of $22.1 million or 73.4%, due to an increase in average loans of $230 million, or 22.0%, and increased loan yields;

Loan yields totaled 8.25% compared to 5.80% for the same period in 2022, primarily due to the continued fed rate hikes;

Interest income on debt securities totaled $1.6 million an increase of $461,000 or 41.2%, as a result of debt securities purchased during the first quarter of 2022;

Net interest margin for the first six months of 2023 was 5.09% compared to 4.44% for the same period in 2022.

Increases and decreases in interest income and interest expense result from changes in average balances, or volume, of interest-earning assets and interest-bearing liabilities, as well as changes in average

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The following tables set forth the effects of changing rates and volumes on our net interest income during the period shown.

Information is provided with respect to (i) effects on interest income attributable to changes in

volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume).

Information is provided with respect to (i) effects on interest income attributable to changes in volume

(change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume).

Analysis of Changes in Interest Income and Expenses

For the Three Months Ended

March 31, 2023 vs 2022

June 30, 2023 vs 2022

Change due to:

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Increase (Decrease) in net interest income

Analysis of Changes in Interest Income and Expenses

For the Six Months Ended

June 30, 2023 vs 2022

Change due to:

(Dollars in thousands)

Increase (decrease) in interest income:

Short-term investments

Debt securities

Total increase (decrease) in interest income

Increase (decrease) in interest expense:

Transaction accounts

Time deposits

Total interest-bearing deposits

Total increase (decrease) in interest expense

Increase (Decrease) in net interest income

(1) Variances attributable to both volume and rate are allocated on a consistent basis between rate and volume based on the absolute value of the variances in each category.

Our investment portfolio consists entirely of securities classified as available for sale.

As a result, the carrying values of our investment securities are adjusted for unrealized gain or loss, and any gain or loss is reported on an

after-tax basis as a component of other comprehensive income in shareholders’ equity.

As a result, the carrying values of our investment securities are adjusted for unrealized gain or loss, and any gain or

loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity.

We evaluate our available for sale securities portfolio on a quarterly basis for potential credit-related impairment.

We assess potential credit impairment by comparing the fair value of a debt security to its amortized cost basis.

fair value of a debt security is greater than the amortized cost basis, no impairment is recognized.

If the fair value is less than the amortized cost basis, we review the factors to determine if the impairment is credit-related or

noncredit-related.

For debt securities we intend to sell or are more likely than not required to sell, before the recovery of their amortized cost basis, the difference between fair value and amortized cost is impaired and is recognized

through earnings.

For debt securities we do not intend to sell or are more likely than not required to sell, prior to expected recovery of amortized cost basis, the credit portion of the impairment is recognized through earnings, with a

corresponding entry to an allowance for credit losses, and the noncredit portion is recognized through accumulated other comprehensive income.

The following table summarizes the maturity distribution schedule with corresponding weighted average taxable equivalent yields of the debt securities portfolio at March

We assess potential credit impairment by comparing the fair value of a debt security to its

amortized cost basis.

If the fair value of a debt security is greater than the amortized cost basis, no impairment is recognized.

If the fair value is less than the amortized cost basis, we review the factors to determine if the impairment is

credit-related or noncredit-related.

recognized through earnings.

a corresponding entry to an allowance for credit losses, and the noncredit portion is recognized through accumulated other comprehensive income.

The following table summarizes the maturity distribution schedule with corresponding weighted average taxable equivalent yields of the debt securities portfolio at June 30,

The following table presents securities at their expected maturities, which may differ from contractual maturities.

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strategy, and for pledging requirements for public funds:

As of March 31, 2023

After One Year But

After Five Years But

As of June 30, 2023

Within One Year

After One Year But

Within Five Years

After Five Years But

Within Ten Years

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variability in the amount and frequency of charges to our earnings.

The provision for credit 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 Allowance as a percentage of loans was 1.21% at March 31, 2023 and 1.16% at December 31, 2022.

The provision for credit 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 Allowance as a percentage of loans was 1.28% at June 30, 2023 and 1.16% at December 31, 2022.

Noninterest Income

Noninterest income for the three months ended March 31, 2023 was $672,000 compared to $675,000 for the same period in 2022, a decrease of $3,000, or 0.4%.

Noninterest income for the three months ended June 30, 2023 was $794,000 compared to $692,000 for the same period in 2022, an increase of $102,000, or 14.7%.

The following table sets forth the major components of

our noninterest income for the three months ended March 31, 2023 and 2022:

our noninterest income for the three months ended June 30, 2023 and 2022:

For the Three Months Ended

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Total noninterest income

Noninterest income for the six months ended June 30, 2023 was $1.5 million compared to $1.4 million for the same period in 2022, an increase of $99,000, or 7.2%.

The following table sets forth the major components

of our noninterest income for the six months ended June 30, 2023 and 2022:

For the Six Months Ended

(Dollars in thousands)

Noninterest income:

Mortgage lending income

Gain (Loss) on sales of available-for-sale debt securities

Service charges on deposit accounts

Other income and fees

Total noninterest income

Noninterest Expense

Noninterest expense for the three months ended March 31, 2023 was $7.6 million compared to $6.4 million for the same period in 2022, an increase of $1.2 million, or 19.1%.

The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2023 and 2022:

Noninterest expense for the three months ended June 30, 2023 was $7.4 million compared to $7.0 million for the same period in 2022, an increase of $414,000, or 6.0%.

following table sets forth the major components of our noninterest expense for the three months ended June 30, 2023 and 2022:

For the Three Months Ended

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Total noninterest expense

Salaries and employee benefits totaled $4.7 million for the first quarter of 2023 compared to $4.0 million for the same period in 2022, an increase of $654,000 or 16.2%.

Salaries and employee benefits totaled $4.7 million for the second quarter of 2023 compared to $4.1 million for the same period in 2022, an increase of $583,000 or 14.1%.

This increase was attributable to overall

increases in compensation to remain competitive.

Noninterest expense for the six months ended June 30, 2023 was $15.0 million compared to $13.4 million for the same period in 2022, an increase of $1.6 million, or 12.3%.

The following table sets forth the major

components of our noninterest expense for the six months ended June 30, 2023 and 2022:

For the Six Months Ended

(Dollars in thousands)

Noninterest expense:

Salaries and employee benefits

Furniture and equipment

Data and item processing

Accounting, marketing, and legal fees

Regulatory assessments

Advertising and public relations

Travel, lodging and entertainment

Other expense

Total noninterest expense

Salaries and employee benefits totaled $9.4 million for the first six months of 2023 compared to $8.2 million for the same period in 2022, an increase of $1.2 million or 15.2%.

This increase was attributable to

overall increases in compensation to remain competitive.

Financial Condition

The following discussion of our financial condition compares March 31, 2023 and December 31, 2022.

Total assets increased $76.4 million, or 4.8%, to $1.66 billion as of March 31, 2023, compared to $1.58 billion as of December 31, 2022.

The increase in total assets is primarily attributable to continued

organic growth within our major metropolitan markets in Oklahoma City, Tulsa, and Texas.

The following discussion of our financial condition compares June 30, 2023 and December 31, 2022.

Total assets increased $97.1 million, or 6.1%, to $1.68 billion as of June 30, 2023, compared to $1.58 billion as of December 31, 2022.

The increase in total assets is primarily attributable to continued organic

growth within our major metropolitan markets in Oklahoma City, Tulsa, and Texas.

Loan Portfolio

The following table presents the balance and associated percentage of each major category in our loan portfolio as of March 31, 2023 and December 31, 2022:

As of March 31,

The following table presents the balance and associated percentage of each major category in our loan portfolio as of June 30, 2023 and December 31, 2022:

As of June 30,

As of December 31

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financial condition.

As of March 31, 2023 and December 31, 2022, our gross loans were $1.28 billion and $1.27 billion, respectively.

Included in the commercial & industrial loan balances at March 31, 2023 and December 31, 2022,

respectively, are $2.6 million and $2.6 million of loans that were originated under the SBA PPP program.

As of June 30, 2023 and December 31, 2022, our gross loans were $1.28 billion and $1.27 billion, respectively.

Included in the commercial & industrial loan balances at June 30, 2023 and December 31, 2022, respectively,

are $2.0 million and $2.6 million of loans that were originated under the SBA PPP program.

We have established internal concentration limits in the loan portfolio for Commercial Real Estate (CRE) loans, hospitality loans, energy loans, and construction loans, among others.

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The following tables show the contractual maturities of our gross loans as of the periods below:

As of March 31, 2023

Due after One Year

Due after Five Years

As of June 30, 2023

Due in One Year or Less

Due after One Year

Through Five Years

Due after Five Years

Through Fifteen Years

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As of December 31, 2022

Due after One Year

Due after Five Years

Due in One Year or Less

Due after One Year

Through Five Years

Due after Five Years

Through Fifteen Years

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While management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.

In addition, various regulatory agencies, as an integral

part of their examination process, periodically review the Company’s allowance.

In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk potential in loans is utilized together with the results of

internal credit reviews.

In addition, various regulatory agencies, as an integral part

of their examination process, periodically review the Company’s allowance.

In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk potential in loans is utilized together with the results of internal

credit reviews.

To determine the adequacy of the allowance, the loan portfolio is broken into segments based on loan type.

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These factors are evaluated and updated based on the composition of the specific loan segment.

Other considerations include volumes and trends of delinquencies, nonaccrual loans,

levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk and the experience and abilities of our lending

Other considerations include volumes and trends of delinquencies, nonaccrual loans, levels

of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk and the experience and abilities of our lending personnel.

See Note (1) for discussion of methodology changes to the allowance related to implementation of ASC 326.

The allowance was $15.5 million at March 31, 2023, compared to $14.7 million at December 31, 2022.

The allowance was $16.4 million at June 30, 2023, compared to $14.7 million at December 31, 2022.

The following table provides an analysis of the activity in our allowance for the periods indicated:

For the Three Months Ended

For the Six Months Ended

(Dollars in thousands)

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Impact of CECL adoption

Provision for credit losses

Provision for credit losses for loans

Construction & development

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category, for the periods indicated:

As of March 31,

As of June 30,

As of December 31,

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When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income.

Income on a nonaccrual loan is subsequently

recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible.

Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and

interest is probable.

Income on a nonaccrual loan is subsequently recognized

only to the extent that cash is received and the loan’s principal balance is deemed collectible.

Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is

A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.

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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.

is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral.

considered collateral dependent when repayment of the loan is based solely on the liquidation or operation of the collateral.

Fair value, where possible, is determined by independent appraisals, typically on an annual basis.

Between appraisal periods,

the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the

last appraised value no longer reflects the actual market for the collateral.

Between appraisal

periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe

the last appraised value no longer reflects the actual market for the collateral.

The impairment amount on a collateral dependent loan is charged off to the allowance if deemed not collectible and the impairment amount on a loan that is not

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The following tables present an aging analysis of loans as of the dates indicated.

As of March 31, 2023

Total past due

As of June 30, 2023

Total past due loans

(Dollars in thousands)

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As of December 31, 2022

Total Past Due

Total Past Due Loans

(Dollars in thousands)

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Loans are segregated between pass, watch, special mention, and substandard categories.

The definitions of those categories are as follows:

definitions of those categories are as follows:

These loans generally conform to Bank policies, are characterized by policy-conforming advance rates on collateral, and have well-defined repayment sources.

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not remediated.

Subsequent to the close of the quarter, a borrower filed for bankruptcy with the intention of liquidating.

The borrow remains current and management continues to monitor it closely.

Outstanding loan balances categorized by internal risk grades as of the periods indicated are summarized as follows:

As of March 31, 2023

As of June 30, 2023

(Dollars in thousands)

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As of December 31, 2022

Special mention

(Dollars in thousands)

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insurance maximum of $250,000, and placed at a network of banks across the United States.

Total deposits as of March 31, 2023 and December 31, 2022 were $1.49 billion and $1.43 billion, respectively.

The following table sets forth deposit balances by certain categories as of the dates indicated and

the percentage of each deposit category to total deposits.

As of March 31,

Percentage of

Total deposits as of June 30, 2023 and December 31, 2022 were $1.51 billion and $1.43 billion, respectively.

The following table sets forth deposit balances by certain categories as of the dates indicated and the

percentage of each deposit category to total deposits.

As of June 30,

Percentage of Total

(Dollars in thousands)

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The following tables set forth the maturity of time deposits as of the dates indicated below:

As of March 31, 2023 Maturity Within:

As of June 30, 2023 Maturity Within:

Three to Six Months

Six to 12 Months

After 12 Months

(Dollars in thousands)

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As of December 31, 2022 Maturity Within:

Three to Six Months

Six to 12 Months

After 12 Months

(Dollars in thousands)

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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.

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 the management of liquid assets and access to alternative sources of funds.

Our liquid assets include cash, interest-bearing deposits in correspondent banks and fed funds sold.

Other available sources

of liquidity include wholesale deposits and borrowings from correspondent banks and FHLB advances.

Other available sources of

liquidity include wholesale deposits and borrowings from correspondent banks and FHLB advances.

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 portfolios, and increases in customer deposits.

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funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

As of March 31, 2023, we had no unsecured fed funds lines with correspondent depository institutions with no amounts advanced.

As of June 30, 2023, we had no unsecured fed funds lines with correspondent depository institutions with no amounts advanced.

In addition, based on the values of loans pledged as collateral, we had borrowing availability with the FHLB of

$143.3 million as of March 31, 2023 and $129.2 million as of December 31, 2022.

$159.0 million as of June 30, 2023 and $129.2 million as of December 31, 2022.

Capital Requirements

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capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies.

The capital amounts and classifications are subject to qualitative

judgments by the federal banking regulators about components, risk weightings and other factors.

Qualitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of Common Equity Tier 1

(“CET1”) capital, Tier 1 capital, total capital to risk-weighted assets, and Tier 1 capital to average consolidated assets, referred to as the “leverage ratio.”

As of March 31, 2023, the Bank was in compliance with all applicable regulatory requirements and categorized as “well-capitalized” under the prompt corrective action frame work.

been no conditions or events since March 31, 2023 that management believes would change this classification.

The table below presents our applicable capital requirements, as well as our capital ratios as of March 31, 2023 and December 31, 2022.

The Company exceeded all regulatory capital requirements and the Bank was considered to be “well-capitalized” as of the dates reflected in the tables below.

The capital amounts and classifications are subject to qualitative judgments

by the federal banking regulators about components, risk weightings and other factors.

Qualitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of Common Equity Tier 1 (“CET1”)

capital, Tier 1 capital, total capital to risk-weighted assets, and Tier 1 capital to average consolidated assets, referred to as the “leverage ratio.”

As of June 30, 2023, the Bank was in compliance with all applicable regulatory requirements and categorized as “well-capitalized” under the prompt corrective action frame work.

There have been

no conditions or events since June 30, 2023 that management believes would change this classification.

The table below presents our applicable capital requirements, as well as our capital ratios as of June 30, 2023 and December 31, 2022.

Company exceeded all regulatory capital requirements and the Bank was considered to be “well-capitalized” as of the dates reflected in the tables below.

Basel III Capital Rules

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organization must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements.

As of March 31, 2023, the Company and the Bank met all capital adequacy requirements under the Basel III Capital

As of June 30, 2023, the Company and the Bank met all capital adequacy requirements under the Basel III Capital

Conservation Buffer

Minimum to be "Well-

Capitalized" Under Prompt

Corrective Action

Minimum to be "Well-Capitalized" Under Prompt Corrective Action

(Dollars in thousands)

As of March 31, 2023

As of June 30, 2023

Total capital (to risk-weighted assets)

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Conservation Buffer

Minimum to be "Well-

Capitalized" Under Prompt

Corrective Action

Minimum to be "Well-Capitalized" Under Prompt Corrective Action

(Dollars in thousands)

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Total shareholders’ equity increased

$9.9 million as of March 31, 2023 to $154.0 million, compared to $144.1 million as of December 31, 2022.

$17.7 million as of June 30, 2023 to $161.8 million, compared to $144.1 million as of December 31, 2022.

Contractual Obligations

The following tables contain supplemental information regarding our total contractual obligations as of March 31, 2023, and December 31, 2022:

Payments Due as of March 31, 2023

Three to Five

The following tables contain supplemental information regarding our total contractual obligations as of June 30, 2023, and December 31, 2022:

Payments Due as of June 30, 2023

Within One Year

One to Three Years

Three to Five Years

After Five Years

(Dollars in thousands)

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Payments Due as of December 31, 2022

Three to Five

Within One Year

One to Three Years

Three to Five Years

After Five Years

(Dollars in thousands)

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We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels.

We expect to maintain adequate cash levels through profitability, loan

repayment and maturity activity and continued deposit gathering activities.

We expect to maintain adequate cash levels through profitability, loan repayment

and maturity activity and continued deposit gathering activities.

We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.

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Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.

The contractual or notional amounts of those

instruments reflect the extent of involvement we have in particular classes of financial instruments.

The contractual or notional amounts of those instruments

reflect the extent of involvement we have in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

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Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

We evaluate each

customer’s creditworthiness on a case-by-case basis.

We evaluate each customer’s

creditworthiness on a case-by-case basis.

The amount of collateral obtained, if we deemed necessary upon extension of credit, is based on management’s credit evaluation of the counterparty.

The Company also estimates a reserve for

potential losses associated with off-balance sheet commitments and letters of credit.

It is included in other liabilities in the Company’s consolidated statements of condition, with any related provisions to the reserve included in non-interest

expense in the consolidated statement of income.

The Company also estimates a reserve for potential

losses associated with off-balance sheet commitments and letters of credit.

It is included in other liabilities in the Company’s consolidated statements of condition, with any related provisions to the reserve included in non-interest expense in

the consolidated statement of income.

In determining the reserve for unfunded lending commitments, a process similar to the one used for the allowance is employed.

Based on historical experience, loss factors, adjusted for expected funding, are

applied to the Company’s off-balance sheet commitments and letters of credit to estimate the potential for losses.

Based on historical experience, loss factors, adjusted for expected funding, are applied

to the Company’s off-balance sheet commitments and letters of credit to estimate the potential for losses.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of the customer to a third party.

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Losses on Financial Instruments related to the impairment of financial instruments.

This guidance, commonly referred to as Current Expected Credit Loss (“CECL”), changes impairment recognition to a model that is based on expected

losses rather than incurred losses.

This guidance, commonly referred to as Current Expected Credit Loss (“CECL”), changes impairment recognition to a model that is based on expected losses

rather than incurred losses.

The allowance for credit losses is considered a critical accounting policy and a critical accounting estimate.

The allowance for credit losses is established for current expected credit losses on the

Company’s loan portfolio, including unfunded credit commitments.

The allowance for credit losses is established for current expected credit losses on the Company’s loan

portfolio, including unfunded credit commitments.

Prior to January 1, 2023, the allowance for credit losses was established based on an incurred loss model.

Upon the adoption of CECL, certain loan classification and segmentation

categories were changed to align with the requirements of the standard and more effectively model the CECL estimate.

The updated CECL segmentation is reflected in the disclosures beginning January 1, 2023, and prior period classifications have

been adjusted to reflect CECL segmentations.

Upon the adoption of CECL, certain loan classification and segmentation categories were

changed to align with the requirements of the standard and more effectively model the CECL estimate.

The updated CECL segmentation is reflected in the disclosures beginning January 1, 2023, and prior period classifications have been adjusted to

reflect CECL segmentations.

Results from periods prior to January 1, 2023, are presented using the previously applicable GAAP.

For more information see Note 1 and Note 6 to the consolidated financial statements contained in

For more information see Note 1 and Note 6 to the consolidated financial statements contained in this report.

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 our unaudited condensed consolidated financial statements as of March 31, 2023.

these policies can be found in Note 1 of our unaudited condensed consolidated financial statements as of June 30, 2023.

Allowance for Credit and Lease Losses

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To determine the adequacy of the allowance, the loan portfolio is broken into segments based on loan type and risk characteristics.

Historical loss experience factors by segment, adjusted for changes in trends

and conditions, are used to determine an indicated allowance for each portfolio segment.

Historical loss experience factors by segment, adjusted for changes in trends and

conditions, are used to determine an indicated allowance for each portfolio segment.

These factors are evaluated and updated based on the composition of the specific loan segment.

Other considerations include volumes and trends of

delinquencies, nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk and the

experience and abilities of our lending personnel.

In addition to the segment evaluations, impaired loans with a balance of $250,000 or more are individually evaluated based on facts and circumstances of the loan to determine if a specific

allowance amount may be necessary.

Specific allowances may also be established for loans whose outstanding balances are below the $250,000 threshold when it is determined that the risk associated with the loan differs significantly from the

risk factor amounts established for its loan segment.

Other considerations include volumes and trends of delinquencies,

nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk and the experience and abilities

of our lending personnel.

In addition to the segment evaluations, impaired loans with a balance of $250,000 or more are individually evaluated based on facts and circumstances of the loan to determine if a specific allowance amount may be

established for its loan segment.

Goodwill and Intangibles

Intangible assets totaled $1.3 million and goodwill, net of accumulated amortization, totaled $8.5 million for the three months ended March 31, 2023, compared to intangible assets of $1.3 million

Intangible assets totaled $1.2 million and goodwill, net of accumulated amortization, totaled $8.5 million for the six months ended June 30, 2023, compared to intangible assets of $1.3 million

and goodwill of $8.6 million for the year ended December 31, 2022.

Goodwill resulting from a business combination represents the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of

the acquisition date.

Goodwill resulting from a business combination represents the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as

of the acquisition date.

Goodwill is tested annually for impairment or more frequently if other impairment indicators are present.

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Other intangible assets consist of core deposit intangible assets and are amortized on a straight-line basis based on an estimated useful life of 10 years.

Such assets are periodically evaluated

as to the recoverability of their carrying values.

Such assets are periodically

evaluated as to the recoverability of their carrying values.

We file a consolidated income tax return.

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expense, and involve estimates of the various components included in determining taxable income, tax credits, other taxes and temporary differences.

Changes periodically occur in the estimates due to changes in tax rates, tax laws and

regulations and implementation of new tax planning strategies.

Changes periodically occur in the estimates due to changes in tax rates, tax laws and regulations

and implementation of new tax planning strategies.

The process of determining the accruals for income taxes necessarily involves the exercise of considerable judgment and consideration of numerous subjective factors.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis