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Item 2. Management’s Discussion and Analysis

2024-05-15 compared with 2023-11-09 · 234 added, 367 removed, 302 unchanged (67% 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 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

elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2023.

Unless the context indicates otherwise, references in this management’s discussion and analysis to “we”, “our”, and “us,” refer to

Unless the context indicates otherwise, references in this management’s discussion and analysis to “we”, “our”, and “us,” refer to Bank7

and its consolidated subsidiaries.

7 unchanged sentences

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 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.

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.

Q1 2024 Overview

We reported total loans of $1.37 billion as of March 31, 2024, an increase of $94.5 million, or 7.4%, from March 31, 2023.

Total deposits were $1.58 billion as of March 31, 2024, an increase of $88.6 million, or

5.9%, as compared to March 31, 2023.

Pre-tax net income was $14.9 million, an increase of $2.3 million, or 18.6%, for the three months ended March 31, 2024 as compared to pre-tax net income of $12.6 million for the same period in 2023.

Pre-tax return on average assets and return on average equity was 3.40% and 33.97%, respectively for the three months ended March 31, 2024, as compared to 3.18% and 34.17%, respectively, for the same period in

Tax-adjusted return on average assets and return on average equity was 2.58% and 25.77%, respectively for the three months ended March 31, 2024, as compared to 2.43% and 26.15%, respectively, for the same period in 2023.

Our efficiency

ratio for the three months ended March 31, 2024 was 38.29% as compared to 36.62% for the same period in 2023.

The provision for credit losses for the three months ended March 31, 2024 decreased $475,000, or 100.0%, as compared to the same period in 2023.

Results of Operations

Performance Summary.

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 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.

Three Months Ended March 31, 2024 and March 31, 2023

Net Interest Income and Net Interest Margin.

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;

(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

and (iv) the net interest margin.

Net Interest Margin

For the Three Months Ended September 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 2.15% 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;

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

(iii) net interest income;

and (iv) the net interest

Net Interest Margin

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

(Dollars in thousands)

22 unchanged sentences

Net interest margin

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;

Loan yields totaled 8.3% compared to 6.1% for the same period in 2022, primarily due to the continued fed rate hikes;

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 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

interest rates.

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

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

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

Taxable-equivalent yield of 2.11% as of March 31, 2024, applying a 24.2% effective tax rate

Average loan balances include monthly average nonaccrual loans of $22.5 million and $7.8 million as of March 31, 2024 and March 31, 2023, respectively, are included in loans.

For the first quarter of 2024 compared to the first quarter of 2023:

Interest income on total loans totaled $30.1 million, an increase of $4.8 million or 18.8%, due to an increase in average loans of $98.6 million, or 7.8%, and increased loan yields as discussed below;

Yields on our interest-earning assets totaled 7.77%, an increase of 74 basis points which was attributable to higher loan rates of 73 basis points, an increase in yield on short term investments of 103 basis points, and an increase

in yield on taxable debt securities of 78 basis points;

Net interest margin remained consistent at 5.14%.

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).

Analysis of Changes in Interest Income and Expenses

For the Three Months Ended

September 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

Analysis of Changes in Interest Income and Expenses

For the Nine Months Ended

September 30, 2023 vs 2022

March 31, 2024 vs 2023

Change due to:

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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.

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.

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.

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 September

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

The Company manages its debt securities portfolio for liquidity, as a tool to execute its asset/liability management

strategy, and for pledging requirements for public funds:

As of September 30, 2023

Within One Year

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 losses.

We assess potential credit losses 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 allowance for credit losses 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.

through earnings.

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 31, 2024.

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

The Company manages its debt securities portfolio for liquidity, as a tool to execute its asset/liability management strategy, and

for pledging requirements for public funds:

As of March 31, 2024

After One Year But

Within Five Years

After Five Years But

Within One Year

Within Five Years

Within Ten Years

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Credit risk is inherent in the business of making loans.

We establish an Allowance for credit losses (“Allowance”) through charges to earnings, which are shown in the statements of income as the provision for

credit losses.

Specifically identifiable and quantifiable known losses are charged off against the Allowance.

The provision for credit losses is determined by conducting a quarterly evaluation of the adequacy of our Allowance and applying the

shortfall or excess, if any, to the current quarter’s expense.

Any shortfall between the liquidation value of the underlying collateral and the recorded investment value of the loan is considered the required specific reserve amount.

discussion under “—Critical Accounting Policies and Estimates—Allowance for Credit and Lease Losses” and see Note (1) for discussion of methodology changes in the allowance related to implementation of ASC 326.

This has the effect of creating

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 1.48% at September 30, 2023 and 1.16% at December 31, 2022.

We establish an Allowance for credit losses (“Allowance”) through charges to earnings, which are shown in the statements of comprehensive income as the

provision for credit losses.

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, and the valuation of problems and the general economic conditions in our market areas.

For the three months ended March 31, 2024 compared to the three months ended March 31, 2023:

The provision for credit losses decreased from $475,000 to $0;

The allowance as a percentage of gross loans increased by 22 basis points to 1.43%.

Noninterest Income

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:

The following table sets forth the major components of our noninterest income for the three months ended March 31, 2024 and 2023:

For the Three Months Ended

September 30,

(Dollars in thousands)

5 unchanged sentences

Total noninterest income

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)

Noninterest income:

Mortgage lending income

Loss on sales of available-for-sale debt securities

Service charges on deposit accounts

Other income and fees

Total noninterest income

Noninterest income for the three months ended March 31, 2024 was $2.0 million compared to $672,000 for the same period in 2023, an increase of $1.3 million, or 198.81%.

The increase was primarily attributable to income related to the

operation of oil and gas assets acquired during the fourth quarter of 2023, see Note 2 of the financial statements.

Noninterest Expense

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:

The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2024 and 2023:

For the Three Months Ended

September 30,

(Dollars in thousands)

9 unchanged sentences

Total noninterest expense

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 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)

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 $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

overall increases in compensation to remain competitive.

Noninterest expense for the three months ended March 31, 2024 was $9.1 million compared to $7.6 million for the same period in 2023, an increase of $1.5 million, or 19.4%.

The increase was primarily attributable to expense related to the

operation of oil and gas assets acquired during the fourth quarter of 2023, see Note 2 of the financial statements.

Financial Condition

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.

The following discussion of our financial condition compares March 31, 2024 and December 31, 2023.

Total assets increased $3.3 million, or 0.2%, to $1.77 billion as of March 31, 2024, compared to $1.77 billion as of December 31, 2023.

Loan Portfolio

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,

The following table presents the balance and associated percentage of each major category in our loan portfolio as of March 31, 2024 and December 31, 2023:

As of March 31,

As of December 31,

9 unchanged sentences

Our loans represent the largest portion of our earning assets.

The quality and diversification of the loan portfolio is an important consideration when reviewing our

financial condition.

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.

The quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition.

March 31, 2024 and December 31, 2023, our gross loans were $1.38 billion and $1.36 billion, respectively.

Included in the commercial & industrial loan balances at March 31, 2024 and December 31, 2023, respectively, are $2.0 million and

$2.0 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.

All loan types are within our

established limits.

We use underwriting guidelines to assess each borrower’s historical cash flow to determine debt service capabilities, and we further stress test the customer’s debt service capability under higher interest rate scenarios as

well as other underlying macro-economic factors.

All loan types are within our established limits.

underwriting guidelines to assess each borrower’s historical cash flow to determine debt service capabilities, and we further stress test the customer’s debt service capability under higher interest rate scenarios as well as other underlying

macro-economic factors.

Financial and performance covenants are used in commercial lending to allow us to react to a borrower’s deteriorating financial condition, should that occur.

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

As of September 30, 2023

Due in One Year or Less

As of March 31, 2024

Due after One Year

Through Five Years

Due after Five Years

Due in One Year or Less

Through Five Years

Through Fifteen Years

7 unchanged sentences

As of December 31, 2023

Due in One Year or Less

Due after One Year

Through Five Years

Due after Five Years

Due in One Year or Less

Through Five Years

Through Fifteen Years

4 unchanged sentences

Commercial real estate - other

Total commercial real estate

Total commerical real estate

Commercial & industrial

1 unchanged sentence

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

In the opinion of management, the allowance is adequate to absorb estimated losses in the portfolio as of each

balance sheet date.

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 the opinion of management, the allowance is adequate to absorb estimated losses in the portfolio as of each balance sheet date.

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.

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

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.

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

The allowance was $20.6 million at September 30, 2023, compared to $14.7 million at December 31, 2022.

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.

The allowance was $19.7 million at March 31, 2024 and December 31, 2023.

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

For the Nine Months Ended

September 30,

For the Three Months Ended

(Dollars in thousands)

15 unchanged sentences

Net recoveries (charge-offs) to average loans

While the entire allowance is available to absorb losses from any and all loans, the following table represents management’s allocation of the allowance by loan category, and the percentage of allowance in each

category, for the periods indicated:

As of September 30,

As of March 31,

As of December 31,

7 unchanged sentences

Delinquent loans may remain on accrual status between 30 days and 90 days past due.

Loans on which the accrual of

interest has been discontinued are designated as nonaccrual loans.

Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable

doubt as to collectability of the obligation.

Loans on which the accrual of interest has been

discontinued are designated as nonaccrual loans.

Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to

collectability of the obligation.

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

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.

Impaired loans include loans on nonaccrual status.

Income from a loan on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible.

Depending on a particular loan’s circumstances, we 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.

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.

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

acquired, establishing a new cost basis.

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.

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

September 30,

As of March 31,

As of December

(Dollars in thousands)

7 unchanged sentences

Ratio of nonperforming assets to total assets

(1) Includes $10.11 million of loans modified to borrowers experiencing financial difficulty,

see Note 6 of the financial statements.

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

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

As of March 31, 2024

Total past due

(Dollars in thousands)

4 unchanged sentences

As of December 31, 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

Total Past Due

(Dollars in thousands)

5 unchanged sentences

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

definitions of those categories are as follows:

The 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.

addition, these credits are extended to borrowers and guarantors with a strong balance sheet and either substantial liquidity or a reliable income history.

In addition, these credits are

extended to borrowers and guarantors with a strong balance sheet and either substantial liquidity or a reliable income history.

These loans are still considered “Pass” credits;

however, various factors such as industry stress, material changes in cash flow or financial conditions, or

deficiencies in loan documentation, or other risk issues determined by the lending officer, Commercial Loan Committee or Credit Quality Committee warrant a heightened sense and frequency of monitoring.

however, various factors such as industry stress, material changes in cash flow or financial conditions, or deficiencies in loan documentation,

or other risk issues determined by the lending officer, Commercial Loan Committee or Credit Quality Committee warrant a heightened sense and frequency of monitoring.

Special mention :

These loans have observable weaknesses or evidence of imprudent handling or structural issues.

The weaknesses require close attention, and the remediation

of those weaknesses is necessary.

The weaknesses require close attention, and the remediation of those weaknesses is

No risk of probable loss exists.

2 unchanged sentences

These loans are not adequately protected by the sound worth and debt service capacity of the borrower, but may be well-secured.

The loans have defined

weaknesses relative to cash flow, collateral, financial condition or other factors that might jeopardize repayment of all of the principal and interest on a timely basis.

There is the possibility that a future loss will occur if weaknesses are

not remediated.

The loans have defined weaknesses relative to cash flow,

collateral, financial condition or other factors that might jeopardize repayment of all of the principal and interest on a timely basis.

There is the possibility that a future loss will occur if weaknesses are not remediated.

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

As of September 30, 2023

Special mention

As of March 31, 2024

(Dollars in thousands)

4 unchanged sentences

As of December 31, 2023

Special mention

(Dollars in thousands)

4 unchanged sentences

We gather deposits primarily through our twelve branch locations and online through our website.

We offer a variety of deposit products including demand deposit accounts and interest-bearing products, such as

savings accounts and certificates of deposit.

We put continued effort into gathering noninterest-bearing demand deposit accounts through loan production cross-selling, customer referrals, marketing efforts and various involvement with community

Some of our interest-bearing deposits are obtained through brokered transactions.

We participate in the CDARS and ICS programs, where customer funds are placed into multiple deposit accounts, each in an amount under the standard FDIC

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

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

We offer a variety of deposit products including demand deposit accounts and interest-bearing products, such as savings accounts and

certificates of deposit.

We put continued effort into gathering noninterest-bearing demand deposit accounts through loan production cross-selling, customer referrals, marketing efforts and various involvement with community networks.

our interest-bearing deposits are obtained through brokered transactions.

We participate in the CDARS and ICS programs, where customer funds are placed into multiple deposit accounts, each in an amount under the standard FDIC insurance maximum

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

Total deposits as of March 30, 2024 and December 31, 2023 were $1.58 billion and $1.59 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,

As of December 31,

Percentage of

(Dollars in thousands)

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Savings deposits

Time deposits ($250,000 or less)

Time deposits (more than $250,000)

Time deposits (less than $250,000)

Time deposits ($250,000 or more)

Total interest-bearing deposits

1 unchanged sentence

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

As of September 30, 2023 Maturity Within:

Three to Six Months

Six to 12 Months

After 12 Months

As of March 31, 2024 Maturity Within:

(Dollars in thousands)

Time deposits ($250,000 or less)

Time deposits (more than $250,000)

Time deposits (less than $250,000)

Time deposits ($250,000 or more)

Total time deposits

As of December 31, 2023 Maturity Within:

Three to Six Months

Six to 12 Months

After 12 Months

(Dollars in thousands)

Time deposits ($250,000 or less)

Time deposits (more than $250,000)

Time deposits (less than $250,000)

Time deposits ($250,000 or more)

Total time deposits

Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost.

We continuously monitor our

liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements.

We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an

appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

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 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.

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.

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

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

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.

As of March 31, 2024, we had no unsecured fed funds lines with correspondent depository institutions, with no corresponding amounts advanced.

In addition, based on the values of loans pledged as collateral, we had

borrowing availability with the FHLB of $166.2 million as of March 31, 2024 and $159.2 million as of December 31, 2023.

Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators.

Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary

actions by regulators that, if undertaken, could have a direct material effect on our financial statements.

Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below), We must meet specific

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

The capital amounts and classifications are subject to qualitative judgments

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

Qualitative measures established by regulation to ensure capital adequacy 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 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,

Failure to meet regulatory capital requirements may result in certain mandatory and possible

additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.

Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described

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

The capital amounts and classifications are

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

Qualitative measures established by regulation to ensure capital adequacy 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, 2024, the Bank was in compliance with all applicable regulatory requirements and categorized as “well-capitalized” under the prompt corrective action frame

There have been no conditions or events since March 31, 2024 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, 2024 and

December 31, 2023.

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

Under the Basel III Capital Rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking

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

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

Under the Basel III Capital Rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a

capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements.

As of March 31, 2024, the Company and the Bank met all capital adequacy requirements under the Basel III Capital Rules.

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 September 30, 2023

As of March 31, 2024

Total capital (to risk-weighted assets)

2 unchanged sentences

Tier 1 capital (to average assets)

With Capital Conservation Buffer

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

Conservation Buffer

Minimum to be "Well-

Capitalized" Under Prompt

Corrective Action

(Dollars in thousands)

5 unchanged sentences

Shareholders’ equity provides a source of permanent funding, allows for future growth and provides a cushion to withstand unforeseen adverse developments.

Total shareholders’ equity increased

$23.8 million as of September 30, 2023 to $167.9 million, compared to $144.1 million as of December 31, 2022.

Total shareholders’ equity increased $10.1 million as of

March 31, 2024 to $180.4 million, compared to $170.3 million as of December 31, 2023.

Contractual Obligations

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

One to Three Years

Three to Five Years

After Five Years

The following tables contain supplemental information regarding our total contractual obligations as of March 31, 2024, and December 31, 2023:

Payments Due as of March 31, 2024

Three to Five

(Dollars in thousands)

4 unchanged sentences

Payments Due as of December 31, 2023

Within One Year

One to Three Years

Three to Five Years

After Five Years

Three to Five

(Dollars in thousands)

4 unchanged sentences

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.

1 unchanged sentence

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.

These financial instruments include commitments to extend credit and standby letters of

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.

Commitments generally have fixed expiration dates or other

termination clauses and may require payment of a fee.

Commitments generally have fixed expiration dates or other termination clauses and may require

payment of a fee.

Since many of the commitments are expected to expire without being drawn upon, the total commitment 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

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

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.

They are intended to be disbursed, subject to certain conditions, upon

request of the borrower.

They are intended to be disbursed, subject to certain conditions, upon request of the borrower.

The following table summarizes commitments as of the dates presented.

September 30,

(Dollars in thousands)

10 unchanged sentences

identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.

The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies.

We have elected to take advantage of this extended transition period, which

means that the financial statements included in this Form 10-Q, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the

transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.

Effective January 1, 2023, the Company adopted ASU 2016-13, Financial Instrument – Credit Losses (Topic 326), Measurement of Credit

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.

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.

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.

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 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 September 30, 2023.

Allowance for Credit Losses

6 unchanged sentences

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 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.

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

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

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

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

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

Other considerations include volumes and trends of delinquencies,

1 unchanged sentence

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

In addition to the pool evaluations, classified 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

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.

established for its loan pool.

Goodwill and Intangibles

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

of the acquisition date.

Intangible assets totaled $1.0 million and goodwill, net of accumulated amortization, totaled $8.5 million for the three months ended March 31, 2024, compared to intangible assets of $1.0 million

and goodwill of $8.5 million for the year ended December 31, 2023.

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.

3 unchanged sentences

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.

8 unchanged sentences

Management performs an analysis of our tax positions annually and believes it is more likely than not that all of its tax positions will be utilized in future years.

Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurement, defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market

participants at the measurement date.

The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters.

For financial

instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value.

When observable market prices and parameters are not available, management judgment is

necessary to estimate fair value.

In addition, changes in market conditions may reduce the availability of quoted prices or the observable date.

Debt securities that are being held for indefinite periods of time and are not intended to sell, are

classified as available for sale and are stated at estimated fair value.

Unrealized gains or losses on debt securities available for sale are reported as a component of stockholders’ equity and comprehensive income, net of income tax.

The Company reviews its portfolio of debt securities in an unrealized loss position at least quarterly.

The Company first assesses whether it intends to sell, or it is more-likely-than-not that it will be required

to sell, the securities before recovery of the amortized cost basis.

If either of these criteria is met, the securities amortized cost basis is written down to fair value as a current period expense.

If either of the above criteria is not met,

the Company evaluates whether the decline in fair value is the result of credit losses or other factors.

In making this assessment, the Company considers, among other things, the period of time the security has been in an unrealized loss

position, and performance of any underlying collateral and adverse conditions specifically related to the security.

The estimates of fair values of debt securities and other financial instruments are based on a variety of factors.

In some cases, fair values represent quoted market prices for identical or comparable instruments.

In other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk.

Accordingly, the fair values may not represent

actual values of the financial instruments that could have been realized as of year-end or that will be realized in the future.

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