What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-09 · 115 added, 99 removed, 554 unchanged (28% of the section changed)

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

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 related notes included

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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.

As of September 30, 2023, we had total assets of $1.77 billion, gross loans of $1.39 billion, total deposits of $1.59 billion and total shareholders’

equity of $167.9 million.

Results of Operations

Performance Summary.

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

For the third quarter of 2023, we reported a pre-tax income of $10.2 million, compared to pre-tax income of $10.4 million for the third quarter of

For the first nine months of 2023, we reported a pre-tax income of $35.7 million, compared to pre-tax income of $27.9 million for the same period in 2022.

For the third quarter of 2023, interest income increased by $10.0 million, or

46.2%, compared to the third quarter of 2022.

For the first nine months of 2023, interest income increased by $35.9 million, or 67.3%, compared to the same period in 2022.

For the third quarter of 2023, average total loans were $1.34 billion

with loan yields of 8.52% as compared to average total loans of $1.21 billion with loan yields of 6.69% for the third quarter of 2022.

For the first nine months of 2023, average total loans were $1.30 billion with loan yields of 8.34% as

compared to average total loans of $1.10 billion with loan yields of 6.13% 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.

Our provision for credit losses for the third quarter of 2023 was $4.2 million, compared to $2.4 million for the same period of 2022.

Our provision for credit losses for the first nine months of 2023 was $5.7

million, compared to $2.8 million for the same period in 2022.

During the third quarter 2023, we had a single loan customer file for bankruptcy, and as a result, we increased nonaccrual loans by $40.1 million and recorded an additional allowance for credit losses and provision

for loan losses of $3.0 million.

See Note (6) and (13) for further disclosure and discussion.

Return on average equity was 18.89% for the third quarter of 2023, as compared to 23.72% for the third quarter of 2022.

Return on average equity was 23.29% for first nine months of 2023, as compared to 21.54% for

the same period in 2022.

Net Interest Income and Net Interest Margin.

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Net Interest Margin

For the Three Months Ended June 30,

For the Three Months Ended September 30,

(Dollars in thousands)

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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:

Taxable-equivalent yield of 2.15% as of September 30, 2023, applying a 23.0% effective tax rate

Non-accrual loans of $41.2 million and $8.2 million as of September 30, 2023 and September 30, 2022, respectively, are included in loans.

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

Interest income on total loans totaled $28.9 million, an increase of $8.4 million or 41.1%, due to an increase in average loans of $131.0 million, or 10.8%, and increased loan yields;

Loan yields totaled 8.52% compared to 6.69% for the same period in 2022, primarily due to the continued fed rate hikes;

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

Net interest margin for the third quarter of 2023 was 4.87% compared to 5.04% for the third quarter of 2022.

Net Interest Margin

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

(Dollars in thousands)

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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:

Taxable-equivalent yield of 2.24% as of September 30, 2023, applying a 23.7% effective tax rate

Non-accrual loans of $41.2 million and $8.2 million as of September 30, 2023 and September 30, 2022, respectively, are included in loans.

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

Interest income on total loans totaled $81.2 million, an increase of $30.5 million or 60.3%, due to an increase in average loans of $196.6 million, or 17.8%, and increased loan yields;

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Interest income on debt securities totaled $2.4 million an increase of $461,000 or 24.3%, 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.

Net interest margin for the first nine months of 2023 was 5.01% compared to 4.66% 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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For the Three Months Ended

June 30, 2023 vs 2022

September 30, 2023 vs 2022

Change due to:

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Analysis of Changes in Interest Income and Expenses

For the Six Months Ended

June 30, 2023 vs 2022

For the Nine Months Ended

September 30, 2023 vs 2022

Change due to:

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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 summarizes the maturity distribution schedule with corresponding weighted average taxable equivalent yields of the debt securities portfolio at September

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 June 30, 2023

As of September 30, 2023

Within One Year

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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.

The Allowance as a percentage of loans was 1.48% at September 30, 2023 and 1.16% at December 31, 2022.

Noninterest Income

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 June 30, 2023 and 2022:

Noninterest income for the three months ended September 30, 2023 was $1.0 million compared to $840,000 for the same period in 2022, an increase of $167,000, or 19.9%.

The following table sets forth the major

components of our noninterest income for the three months ended September 30, 2023 and 2022:

For the Three Months Ended

September 30,

(Dollars in thousands)

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Mortgage lending income

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

Loss on sales of available-for-sale debt securities

Service charges on deposit accounts

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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

Noninterest income for the nine months ended September 30, 2023 was $2.5 million compared to $2.2 million for the same period in 2022, an increase of $265,000, or 12.0%.

The following table sets forth the major

components of our noninterest income for the nine months ended September 30, 2023 and 2022:

For the Nine Months Ended

September 30,

(Dollars in thousands)

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Mortgage lending income

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

Loss on sales of available-for-sale debt securities

Service charges on deposit accounts

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Noninterest Expense

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:

Noninterest expense for the three months ended September 30, 2023 was $7.4 million compared to $7.1 million for the same period in 2022, an increase of $257,000, or 3.6%.

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

For the Three Months Ended

September 30,

(Dollars in thousands)

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Total noninterest expense

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%.

Salaries and employee benefits totaled $4.9 million for the third quarter of 2023 compared to $4.0 million for the same period in 2022, an increase of $914,000 or 22.9%.

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

Noninterest expense for the nine months ended September 30, 2023 was $22.4 million compared to $20.5 million for the same period in 2022, an increase of $1.9 million, or 9.3%.

The following table sets forth the

major components of our noninterest expense for the nine months ended September 30, 2023 and 2022:

For the Nine Months Ended

September 30,

(Dollars in thousands)

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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%.

Salaries and employee benefits totaled $14.3 million for the first nine months of 2023 compared to $12.1 million for the same period in 2022, an increase of $2.2 million or 17.7%.

This increase was attributable to

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Financial Condition

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.

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

Total assets increased $188.2 million, or 11.9%, to $1.77 billion as of September 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 June 30, 2023 and December 31, 2022:

As of June 30,

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

As of September 30,

As of December 31

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financial condition.

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.

As of September 30, 2023 and December 31, 2022, our gross loans were $1.40 billion and $1.27 billion, respectively.

Included in the commercial & industrial loan balances at September 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 June 30, 2023

As of September 30, 2023

Due in One Year or Less

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Commercial real estate - other

Total commerical real estate

Total commercial real estate

Commercial & industrial

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

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

The allowance was $20.6 million at September 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 Six Months Ended

For the Nine Months Ended

September 30,

(Dollars in thousands)

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category, for the periods indicated:

As of June 30,

As of September 30,

As of December 31,

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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.

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

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

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

Between appraisal

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

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

The 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.

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 collateral

dependent is set up as a specific reserve.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned, or OREO, until sold, and is initially recorded at fair value less costs to sell when

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The following table presents information regarding nonperforming assets as of the dates indicated.

September 30,

(Dollars in thousands)

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Ratio of nonaccrual loans to total loans

Ratio of allowance for loan losses to total loans

Ratio of allowance for loan losses to nonaccrual loans

Ratio of allowance for credit losses to total loans

Ratio of allowance for credit losses to nonaccrual loans

Ratio of nonperforming assets to total assets

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

As of June 30, 2023

As of September 30, 2023

Loans 30-59 days past due

Loans 60-89 days past due

Loans 90+ days past due

Loans 90+ days past due and accruing

Total past due loans

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As of December 31, 2022

Loans 30-59 days past due

Loans 60-89 days past due

Loans 90+ days past due

Loans 90+ days past due and accruing

Total Past Due Loans

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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 June 30, 2023

As of September 30, 2023

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 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,

Total deposits as of September 30, 2023 and December 31, 2022 were $1.59 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 September 30,

Percentage of Total

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

As of June 30, 2023 Maturity Within:

As of September 30, 2023 Maturity Within:

Three to Six Months

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

As of September 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

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

$146.6 million as of September 30, 2023 and $129.2 million as of December 31, 2022.

Capital Requirements

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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.

As of September 30, 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 September 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 September 30, 2023 and December 31,

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.

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

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

Conservation Buffer

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(Dollars in thousands)

As of June 30, 2023

As of September 30, 2023

Total capital (to risk-weighted assets)

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Tier 1 capital (to average assets)

Conservation Buffer

With Capital Conservation Buffer

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

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Total shareholders’ equity increased

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

$23.8 million as of September 30, 2023 to $167.9 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 June 30, 2023, and December 31, 2022:

Payments Due as of June 30, 2023

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

Payments Due as of September 30, 2023

Within One Year

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The following table summarizes commitments as of the dates presented.

September 30,

(Dollars in thousands)

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Additional information about

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

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

Allowance for Credit Losses

The allowance is based on management’s estimate of probable losses inherent in the loan portfolio.

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Goodwill and Intangibles

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.

Intangible assets totaled $1.1 million and goodwill, net of accumulated amortization, totaled $8.5 million for the nine months ended September 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

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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