What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-08 compared with 2022-11-08 · 547 added, 576 removed, 524 unchanged (68% of the section changed)

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C autionary Notice Regarding Forward-Looking Statements

This Form 10-Q contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as

amended (the “Exchange Act”).

This Form 10-Q contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934,

as amended (the “Exchange Act”).

These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance.

These statements are often, but not always, made through the use of words or

phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,”

These statements are often, but not always, made through the use of words

or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,”

“annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature.

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There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

potential recession in the United States and our market areas;

the impacts related to or resulting from recent bank failures and any continuation of the recent uncertainty in the banking industry, including the associated impact to the Company and other financial

institutions of any regulatory changes or other mitigation efforts taken by government agencies in response thereto;

increased competition for deposits and related changes in deposit customer behavior;

the persistence of the current inflationary environment in the United States and our market areas, and its impact on market interest rates, the economy and credit quality;

the adequacy of the allowance for credit losses;

our ability to effectively execute our expansion strategy and manage our growth, including identifying and consummating suitable acquisitions;

business and economic conditions, particularly those affecting our market areas, as well as the concentration of our business in such market areas;

the impact, duration and severity of the ongoing COVID-19 pandemic, or any current or future variants thereof, and the response of governmental authorities to the COVID-19 pandemic and our participation in

COVID-19-related government programs such as the Paycheck Protection Program (the “PPP”) administered by the Small Business Administration (the “SBA”) and created under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES

the uncertain inflationary outlook in the United States and our market areas, and its impact on market interest rates, the economy and credit quality;

high concentrations of loans secured by real estate located in our market areas;

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risks associated with our agricultural loan portfolio, including the heightened sensitivity to weather conditions, commodity prices, and other factors generally outside the borrowers and our control;

risks associated with the sale of crop insurance products, including termination of or substantial changes to the federal crop insurance program;

risks associated with the sale of our insurance subsidiary, Windmark Insurance Agency, Inc.

d/b/a Windmark Corp Division (“Windmark”) to Alliant Insurance Services, Inc., a California corporation (“Alliant”)

and certain post-closing obligations related to such sale;

risks related to the significant amount of credit that we have extended to a limited number of borrowers and in a limited geographic area;

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our ability to maintain our reputation;

our ability to successfully manage our credit risk and the sufficiency of our allowance for loan losses;

our ability to successfully manage our credit risk and the sufficiency of our allowance for credit losses;

our ability to attract, hire and retain qualified management personnel;

our dependence on our management team, including our ability to retain executive officers and key employees and their customer and community relationships;

market interest rate fluctuations, which could have an adverse effect on our profitability;

increases in market interest rates, which could negatively impact bond market values and result in a lower net book value;

our ability to successfully manage the current rising market interest rate environment, our credit risk and the level of future non-performing assets and charge-offs;

interest rate fluctuations, which could have an adverse effect on our profitability;

competition from banks, credit unions and other financial services providers;

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(“EGRRCPA”), and others relating to banking, consumer protection, securities and tax matters;

changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters, including our ability to navigate the uncertain

impacts of quantitative tightening and current and future governmental monetary and fiscal policies, including the policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) and as a result of initiatives of the

Biden administration.

changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, current and future governmental monetary and fiscal policies, including the

uncertain impacts of quantitative tightening and current and future policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) and as a result of initiatives of the Biden administration.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Form 10-Q and the risk factors set forth in our 2022

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The Company maintains an Internet web site at www.spfi.bank .

The Company makes available, free of charge, on its web site (under www.spfi.bank/financials-filings/sec-filings ) the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished

pursuant to Section 13(a) or Section 15(d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC.

The Company also makes available, free of charge, through its web site (under

www.spfi.bank/corporate-governance/documents-charters ) links to the Company’s Code of Conduct and the charters for its board committees.

In addition, the SEC maintains an Internet site (at www.sec.gov ) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

The Company routinely posts important information for investors on its web site (under www.spfi.bank and, more specifically, under the News &

Events tab at www.spfi.bank/news-events/press-releases ).

The Company intends to use its web site as a means of disclosing material non-public information and for complying with its disclosure

obligations under SEC Regulation FD (Fair Disclosure).

Accordingly, investors should monitor the Company’s web site, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts.

The Company makes available,

free of charge, on its web site (under www.spfi.bank/financials-filings/sec-filings ) the Company’s annual reports on Form 10-K, quarterly reports on Form

10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to,

The Company also makes available, free of charge, through its web site (under www.spfi.bank/corporate-governance/documents-charters ) links to the

Company’s Code of Conduct and the charters for its board committees.

In addition, the SEC maintains an Internet site (at www.sec.gov ) that contains

reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

The Company routinely posts important information for investors on its web site (under www.spfi.bank and, more specifically, under the News & Events tab at www.spfi.bank/news-events/press-releases ).

The Company intends to use its web

site as a means of disclosing material non-public information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure).

Accordingly, investors should monitor the Company’s web site, in addition to following the

Company’s press releases, SEC filings, public conference calls, presentations and webcasts.

The information contained on, or that may be accessed through, the Company’s web site is not incorporated by reference into, and is not a part of, this Form 10-Q.

We are a bank holding company headquartered in Lubbock, Texas, and our wholly-owned subsidiary, City Bank is one of the largest independent banks in West Texas and has additional banking operations in

the Dallas, El Paso, Greater Houston, the Permian Basin, and College Station, Texas markets, and the Ruidoso, New Mexico market.

Through City Bank, we provide a wide range of commercial and consumer financial services to small and medium-sized

businesses and individuals in our market areas.

Our principal business activities include commercial and retail banking, along with insurance, investment, trust and mortgage services.

We are a bank holding company headquartered in Lubbock, Texas, and our wholly-owned subsidiary, City Bank is one of the largest independent banks in West Texas and has additional banking

operations in the Dallas, El Paso, Greater Houston, the Permian Basin, and College Station, Texas markets, and the Ruidoso, New Mexico market.

Through City Bank, we provide a wide range of commercial and consumer financial services to small and

medium-sized businesses and individuals in our market areas.

Our principal business activities include commercial and retail banking, along with investment, trust and mortgage services.

Recent Developments

COVID-19 Update

The COVID-19 pandemic has caused significant disruptions in the U.S.

At this time, we cannot predict the impact or how long the economy or our impacted clients will be disrupted by the ongoing COVID-19

pandemic and any current or future variants of COVID-19.

Throughout the COVID-19 pandemic, the Bank has been proactive with its borrowers in those sectors most affected by the COVID-19 pandemic and has offered loan modifications to borrowers who are or may be unable to

meet their contractual payment obligations because of the effects of COVID-19.

As part of the Bank’s efforts to support its customers and protect the Bank, the Bank offered varying forms of loan modifications including 90-day payment deferrals,

6-month interest only terms, or in certain select cases periods of longer than 6 months of interest only, to provide borrowers relief.

As of September 30, 2022, there were no remaining active loan modifications attributed to COVID-19.

The Paycheck Protection Program (“PPP”) was created by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and implemented by the U.S.

Small Business Administration (the “SBA”) in March 2020.

Funding for the PPP expired on May 31, 2021.

The PPP allowed entities to apply for a 1.00% interest rate loan with payments generally deferred until the date the lender receives the applicable forgiveness amount from the SBA.

The Bank originated

approximately 3,200 for a total of $309.2 million of PPP loans.

As of September 30, 2022, the Company had approximately $2.0 million of PPP loans outstanding.

The Company expects that the remaining PPP loans will be forgiven by the SBA or otherwise

repaid over the next several quarters.

We are currently unable to fully assess or predict the extent of the effects of the COVID-19 pandemic, or any current or future variant of COVID-19, on our operations as the ultimate impact will depend on factors

that are currently unknown and/or beyond our control.

Please refer to Part II, Item 1A, “Risk Factors” in this Form 10-Q.

Economic Conditions

Our financial condition at March 31, 2023, as well as the results of operations for the three months ended March 31, 2023, have been impacted by significant market increases in market interest rates due to the

increases in the prime lending rate since March 2022 by the Federal Reserve in response to the persistent inflationary environment in the United States.

In addition, recent events in other parts of the banking industry have brought additional focus

on investment securities portfolios, interest rate risk, liquidity management and capital.

As a result, we are providing additional information on our deposits and liquidity position at March 31, 2023 to help illustrate the more traditional and

stable nature of our banking model compared to other financial institutions who have recently experienced liquidity and capital challenges.

Total deposits were $3.51 billion at March 31, 2023, an increase of $101.6 million during the first quarter.

Total deposits were comprised of 32% of noninterest-bearing deposits, 8% of time deposits and 60% of

interest-bearing nonmaturity deposits.

Retail customers accounted for approximately 45% of total deposits, with commercial and public funds accounting for approximately 43% and 12%, respectively.

Our average deposit account size was approximately

$35 thousand.

An estimated 17% of total deposits were uninsured or uncollateralized at March 31, 2023.

We had available borrowing capacity of approximately $1.75 billion through the FHLB, the FRB’s Discount Window, and access to the FRB’s Term Funding Program (“BTFP”) at March 31, 2023.

The unused line with the FHLB

was $988 million and the unused line with the FRB was $586 million at March 31, 2023.

There were no advances made on these lines during the first quarter of 2023.

We have not pledged any securities for the BTFP but have approximately $179 million

of available securities that can be used as collateral.

Additionally, we have uncollateralized lines with multiple banks totaling $160 million at March 31, 2023.

These lines are not guaranteed and we are not placing reliance on them.

As previously announced, on April 1, 2023, the Company completed the sale of City Bank’s wholly owned subsidiary, Windmark , to Alliant Insurance Services in an all cash transaction.

New Stock Repurchase Program

As previously announced, on May 5, 2023, SPFI’s board of directors (the “Board”) approved a new stock repurchase program for up to $15.0 million of the outstanding shares of the Company’s common

stock (the “Stock Repurchase Program”).

The Stock Repurchase Program began on May 5, 2023 and has an expiration date of May 5, 2024, subject to earlier termination or extension of the Stock Repurchase Program by the Board.

Results of Operations

We had net income of $15.5 million, or $0.86 per diluted common share, for the three months ended September 30, 2022, compared to net income of $15.2 million, or $0.82 per diluted common share for the

three months ended September 30, 2021.

Return on average equity (annualized) was 17.37% and return on average assets (annualized) was 1.53% for the three months ended September 30, 2022, compared to 15.24% and 1.61%, respectively, for the three

months ended September 30, 2021.

We had net income of $45.6 million, or $2.52 per diluted common share for the nine months ended September 30, 2022, compared to net income of $44.0 million, or $2.38 per diluted common share for the

nine months ended September 30, 2021.

Return on average equity (annualized) was 16.25% and return on average assets (annualized) was 1.53% for the nine months ended September 30, 2022, compared to 15.32% and 1.57%, respectively, for the nine months

ended September 30, 2021.

We had net income of $9.2 million, or $0.53 per diluted common share, for the three months ended March 31, 2023, compared to net income of $14.3 million, or $0.78 per diluted common share for the

three months ended March 31, 2022.

Return on average equity (annualized) was 10.34% and return on average assets (annualized) was 0.95% for the three months ended March 31, 2023, compared to 14.58% and 1.47%, respectively, for the three months

ended March 31, 2022.

The decrease in net income of $5.0 million was primarily the result of a decrease of $13.0 million in noninterest income and an increase of $3.1 million in the provision for credit losses, partially offset by an increase of

$4.4 million in net interest income and a decrease of $5.6 million in noninterest expense.

Net Interest Income

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interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income.

The following tables present, 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;

The following table presents, for the periods indicated, information about:

(i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the

resultant average yields;

(ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates;

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and (v) the net interest margin.

purposes of this table, interest income, net interest margin and net interest spread are shown on a fully tax-equivalent basis.

Three Months Ended September 30,

For purposes of this table, interest income, net interest margin and net interest spread are shown on a fully tax-equivalent basis.

Three Months Ended March 31,

(Dollars in thousands)

Interest-earning assets:

Loans, excluding PPP (1)

Investment securities – taxable

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Net interest margin (3)

Nine Months Ended September 30,

(Dollars in thousands)

Interest-earning assets:

Loans, excluding PPP (1)

Investment securities – taxable

Investment securities – non-taxable

Other interest-earning assets (2)

Total interest-earning assets

Noninterest-earning assets

Liabilities and Shareholders’ Equity:

Interest-bearing liabilities:

NOW, savings and money market deposits

Time deposits

Short-term borrowings

Notes payable & other longer-term borrowings

Subordinated debt securities

Junior subordinated deferrable interest debentures

Total interest-bearing liabilities

Noninterest-bearing liabilities:

Noninterest-bearing deposits

Other liabilities

Total noninterest-bearing liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest income

Net interest spread

Net interest margin (3)

Average loan balances include nonaccrual loans and loans held for sale.

Includes income and average balances for interest-earning deposits at other banks, nonmarketable securities, federal funds sold and other miscellaneous interest-earning assets.

Includes income and average balances for interest-earning deposits at other banks, federal funds sold and other miscellaneous interest-earning assets.

Net interest margin is calculated as the annualized net interest income, on a fully tax-equivalent basis, divided by average interest-earning assets.

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average interest rates.

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

The following table sets 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

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Change applicable to both volume and rate have been allocated to volume.

Three Months Ended September 30,

2022 over 2021

Change due to:

(Dollars in thousands)

Interest-earning assets:

Loans, excluding PPP

Investment securities – taxable

Investment securities – non-taxable

Other interest-earning assets

Total increase (decrease) in interest income

Interest-bearing liabilities:

NOW, Savings, MMDAs

Time deposits

Short-term borrowings

Notes payable & other borrowings

Subordinated debt securities

Junior subordinated deferrable interest debentures

Total increase (decrease) interest expense:

Increase (decrease) in net interest income

Nine Months Ended September 30,

Three Months Ended March 31,

2023 over 2022

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Interest-earning assets:

Loans, excluding PPP

Investment securities – taxable

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Increase (decrease) in net interest income

Net interest income for the three months ended September 30, 2022 was $35.1 million, compared to $31.2 million for the three months ended September 30, 2021, an increase of $3.9 million, or 12.6%.

increase in net interest income was primarily due to increased interest income on loans, securities, and other interest-earning assets increase in interest income, partially offset by increased interest expense on deposits.

Market interest rates

continued to rise during the period, which is attributed to the Federal Open Market Committee (“FOMC”) of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) raising their target benchmark interest rate in the third quarter

of 2022, resulting in subsequent prime rate increases of 150 basis points, after increases of 150 basis points between March and June of 2022.

Interest income for the three months ended September 30, 2022 was $41.1 million, compared to $34.4 million for the three months ended September 30, 2021, an increase of $6.7 million, or 19.4%.

increase was comprised of increases of $3.6 million in loan interest income and $3.1 million in interest income from securities and other interest-earning assets.

The increase in loan interest income was primarily due to an increase of $219.5

million in average loans outstanding and the rising interest rate environment.

The increase in interest income on securities and other interest-earning assets was primarily due to securities purchases and rising market interest rates.

third quarter of 2022, the Company recognized $277 thousand in deferred PPP-related SBA fees.

At September 30, 2022, the Company had $124 thousand of deferred PPP fees that have not been accreted to income, the majority of which are expected to be

recognized as PPP loans continue to be forgiven by the SBA over the next several quarters.

Interest expense for the three months ended September 30, 2022 increased $2.7 million, or 84.2%, compared to the three months ended September 30, 2021.

The increase was principally due to growth in

the average balances of interest-bearing deposits of $53.1 million during the third quarter of 2022 and an increase of 45 basis points on interest rates paid on these deposits as market interest rates continue to rise.

For the three months ended September 30, 2022, net interest margin and net interest spread were 3.70% and 3.30%, respectively, compared to 3.58% and 3.38% for the same three-month period in 2021,

Net interest income for the three months ended March 31, 2023 was $34.3 million, compared to $29.9 million for the three months ended March 31, 2022, an increase of $4.4 million, or 14.6%.

increase in net interest income was comprised of an increase of $14.4 million, or 43.4%, in interest income, partially offset by a $10.0 million, or 319.2%, increase in interest expense.

Since March 1, 2022, the Federal Open Market Committee

(“FOMC”) of the Federal Reserve repeatedly raised their target benchmark interest rate in response to the ongoing inflationary environment in the United States, resulting in subsequent prime rate increases of 475 basis points as of March 31, 2023.

Interest income on loans grew $10.2 million and was primarily attributable to a $296.3 million increase in average loan balances and a 98 basis point increase in interest rates for the three months ended March 31, 2023, compared to the three months

ended March 31, 2022.

The increase in loan balances was due to organic loan growth throughout the portfolio.

Interest income on securities and other interest-earning assets grew $4.1 million during the first quarter of 2023, compared to the first

quarter of 2022, largely due to securities purchases in the first half of 2022 and rising market interest rates.

The $10.0 million increase in interest expense for the three months ended March 31, 2023 was primarily related to a 169 basis point increase in the rate paid on interest-bearing liabilities over

the same period in 2022.

The increase in the rate paid on interest-bearing liabilities was primarily as a result of the significantly rising short-term interest rates on interest-bearing liabilities, with the increase being mainly comprised of

interest expense on deposits.

Additionally, average noninterest-bearing demand deposits and average interest-bearing deposits were flat at March 31, 2023 as compared to March 31, 2022.

For the three months ended March 31, 2023, net interest margin and net interest spread were 3.75% and 2.95%, respectively, compared to 3.33% and 3.14%, respectively, for the same period in 2022,

which reflects the changes in interest income and interest expense discussed above.

Net interest income for the nine months ended September 30, 2022 was $102.2 million, compared to $90.3 million for the nine months ended September 30, 2021, an increase of $11.8 million, or 13.1%.

There was continued

rising market interest rates during the period, which is attributed to the Federal Reserve, as noted above.

Interest income for the nine months ended September 30, 2022 was $114.9 million, compared to $100.4 million for the nine months ended September 30, 2021, an increase of $14.5 million, or 14.4%.

increase was primarily attributable to an increase of $180.0 million in average loans outstanding, an increase of 16 basis points in the yield on loans, and $4.4 million of interest income received related to four credits for the recovery of

interest on previously charged-off credits, purchase discount principal recovery, and prepayment penalties during the second quarter of 2022, partially offset by an decrease of $5.2 million in PPP-related SBA interest and fees recognized as PPP

loans were forgiven by the SBA or repaid.

Interest expense for the nine months ended September 30, 2022 increased $2.7 million, or 26.3%, compared to the nine months ended September 30, 2021.

The increase was the primarily the result of

growth in the average balances of interest-bearing deposits of $78.7 million during the period and an increase of 45 basis points on interest rates paid on these deposits as market interest rates continue to rise.

For the nine months ended September 30, 2022, net interest margin and net interest spread were 3.68% and 3.42%, respectively, compared to 3.51% and 3.32%, respectively, for the same nine-month period

in 2021, which reflects the changes in interest income and interest expense discussed above.

Provision for Loan Losses

Provision for Credit Losses

Credit risk is inherent in the business of making loans.

We establish an allowance for loan losses through charges to earnings, which are shown in the consolidated statements of income as the

provision for loan losses.

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

The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for

loan losses and charging the shortfall or excess, if any, to the current quarter’s expense.

This has the effect of creating variability in the amount and frequency of charges to our earnings.

The provision for loan losses and the amount of

allowance for each period are dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of

problem loans and the general economic conditions in our market areas.

The Company recorded a negative provision for loan losses of $782 thousand for the three months ended September 30, 2022, compared to no provision being recorded for the three months ended September

There was a loan loss recovery of $822 thousand of a direct energy credit during the third quarter of 2022.

The Company continued to experience improving credit metrics in the loan portfolio during the third quarter of 2022, specifically

in the hotel segment, offset with organic loan growth, which resulted in the negative provision expense in the third quarter of 2022.

The Company recorded a negative provision for loan losses for the nine months ended September 30, 2022 of $2.9 million, compared to a negative provision of $1.9 million for the nine months ended

September 30, 2021.

The decrease in the provision for loan losses for the nine months ended September 30, 2022 compared to the nine months ended in 2021 is primarily due to improving credit metrics in the loan portfolio, specifically in the hotel

segment, direct energy segment, and other Permian Basin-related credits, and a decline in the amount of loans that were actively under a COVID-19 pandemic-related modification.

Nevertheless, there is continued uncertainty in the forecasted economic

conditions due to the rising interest rate environment and persistent high inflation levels, and provisions for loan losses may be necessary in future periods.

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

(loss) as the provision for credit losses.

Credit losses on loans are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

The provision for credit losses is determined by conducting a

quarterly evaluation of the adequacy of our allowance for credit losses and charging the shortfall or excess, if any, to the current quarter’s expense.

This has the effect of creating variability in the amount and frequency of charges to our

The provision for credit losses and the amount of allowance for each period are dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment

of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market areas.

The provision for credit losses for the three months ended March 31, 2023 was $1.0 million, compared to a negative $2.1 million for the three months ended March 31, 2022.

During the first quarter

of 2023, the provision for credit losses for loans was $0.8 million and the provision for credit losses on off-balance sheet credit exposures was $0.2 million, both primarily as a result of organic growth during the quarter.

The negative provision

in the first quarter of 2022 was primarily due to the improved credit metrics in the loan portfolio, specifically in the hotel segment, direct energy segment, and other Permian Basin-related credits.

Forecasted economic conditions continue to

remain uncertain due to the interest rate environment and persistent high inflation levels in the United States, and provisions for credit losses may be necessary in future periods.

The allowance for credit losses as a percentage of loans held for

investment was 1.42% at March 31, 2023 and 1.43% at December 31, 2022.

Further discussion of the allowance for credit losses is noted below.

Noninterest Income

While interest income remains the largest single component of total revenues, noninterest income is an important contributing component.

The largest portion of our noninterest income is associated

with our mortgage banking activities.

The largest portion of our noninterest income is

associated with our mortgage banking activities.

Other sources of noninterest income include service charges on deposit accounts, bank card services and interchange fees, and income from insurance activities.

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Three Months Ended

September 30,

Nine Months Ended

September 30,

(Dollars in thousands)

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Total noninterest income

Other income and fees includes the increase in the cash surrender value of life insurance, safe deposit box rental, check printing, collections, legal settlements, wire transfer and other miscellaneous

Noninterest income for the three months ended September 30, 2022 was $20.9 million, compared to $25.8 million for the three months ended September 30, 2021, a decrease of $4.9 million,

Income from mortgage banking activities decreased $8.5 million, or 57.5%, to $6.3 million for the three months ended September 30, 2022 from $14.8 million for the three months ended September 30, 2021.

This decrease in mortgage banking revenues was mainly the result of refinance activity slowing as mortgage rates have risen and overall mortgage activity has returned to a more historical level, as mortgage loan

originations declined $222.2 million, or 59.4%.

This decrease in noninterest income was partially offset by an increase of $1.1 million in income from insurance activities due to premium growth and $2.1 million of income related to legal

settlements in the third quarter of 2022.

Noninterest income for the nine months ended September 30, 2022 was $63.5 million, compared to $74.5 million for the nine months ended September 30, 2021, a decrease of $11.1 million, or 14.9%.

from mortgage banking activities decreased $18.7 million, or 39.6%, to $28.6 million for the nine months ended September 30, 2022 from $47.3 million for the nine months ended September 30, 2021.

This decrease was primarily a result of a decrease of

$595.5 million, or 50.1%, in mortgage loan originations, partially offset by an increase of $5.0 million in the fair value adjustment and an increase of $993 thousand in servicing income for the Company’s mortgage servicing rights portfolio.

noninterest income increased during the nine months ended September 30, 2022 primarily due to increased income from investments in a Small Business Investment Company (“SBIC”) of $2.3 million, $2.1 million in legal settlements, and growth in income

from insurance activities and bank card services and interchange fees, partially offset by a decrease of $419 thousand in fiduciary income.

Management is continuing to monitor and assess the industry changes related to the consumer overdraft fees, and changes already made or any future changes could negatively impact overdraft fee income.

Other income and fees includes income and fees associated with the increase in the cash surrender value of life insurance, safe deposit box rental, check printing, collections, wire transfer and other

miscellaneous services.

Noninterest income for the three months ended March 31, 2023 was $10.7 million, compared to $23.7 million for the three months ended March 31, 2022, a decrease of $13.0 million, or 54.9%.

from mortgage banking activities decreased $11.4 million, or 83.2%, to $2.3 million for the three months ended March 31, 2023 from $13.6 million for the three months ended March 31, 2022.

The decrease in mortgage banking activities was primarily

due to a decrease of $148.5 million, or 63.1%, in mortgage loan originations for the three months ended March 31, 2023 compared to the same period for 2022.

The decrease in mortgage loan originations was a result of higher market interest rates and

a reduction in the number of mortgage loan originators.

Additionally, there was a negative fair value adjustment of $2.0 million in the first quarter of 2023 to our mortgage servicing rights portfolio, compared to a positive fair value adjustment

of $4.5 million in the first quarter of 2022, due to volatility in pricing for these assets as mortgage interest rates rose in the 2022 period and then began to fall at the end of the 2023 period.

Other income and fees decreased $1.0 million during

the first quarter of 2023 primarily as a result of decreased income from investments in Small Business Investment Company (“SBIC”) of $0.7 million, as compared to the first quarter of 2022.

Noninterest Expense

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Three Months Ended

September 30,

Nine Months Ended

September 30,

(Dollars in thousands)

9 unchanged sentences

Total noninterest expense

Other expenses include items such as telephone expenses, postage, courier fees, directors’ fees, and insurance.

Noninterest expense for the three months ended September 30, 2022 was $37.4 million compared to $38.1 million for the three months ended September 30, 2021, a decrease of $0.7 million, or 1.7%.

Salaries and employee benefits decreased $1.2 million, or 4.9%, from $24.1 million for the three months ended September 30, 2021 to $22.9 million for the three months ended September 30, 2022.

This decrease in salaries and employee benefits expense

was primarily driven by lower mortgage commissions due to the reduction in mortgage loan originations, partially offset by additional commercial lenders hired as part of a planned initiative.

Professional services increased $1.1 million during the

third quarter of 2022 primarily as the result of legal expenses as result of vendor dispute legal proceedings.

Other variable mortgage-based expenses also declined during the period.

Noninterest expense for the nine months ended September 30, 2022 was $111.4 million, compared to $111.9 million for the nine months ended September 30, 2021, a decrease of $0.5 million, or 0.5%.

Salaries and employee benefits decreased $4.2 million, or 5.8%, from $71.8 million for the nine months ended September 30, 2021 to $67.6 million for the nine months ended September 30, 2022.

This decrease in salaries and employee benefits expense

was primarily driven by lower mortgage commissions and other variable mortgage-based expenses due to the reduction in mortgage loan originations, partially offset by additional commercial lenders hired as part of a planned initiative.

increase in professional services expense of $3.3 million during the nine months ended September 30, 2022, primarily related to an increase of $2.6 million in legal fees as a result of vendor dispute legal proceedings and other legal matters.

Other expenses include items such as banking regulatory assessments, telephone expenses, postage, courier fees, directors’ fees, and insurance.

Noninterest expense for the three months ended March 31, 2023 was $32.4 million compared to $37.9 million for the three months ended March 31, 2022, a decrease of $5.6 million, or 14.7%.

and employee benefits decreased $3.4 million, or 15.2%, from $22.7 million for the three months ended March 31, 2022 to $19.3 million for the three months ended March 31, 2023.

This decrease in salaries and employee benefits expense for the first

quarter of 2023 compared to the first quarter of 2022 was primarily driven by decreased mortgage salaries and commissions paid of $2.7 million due to the lower volume of mortgage loan originations as well as lower incentive-based compensation.

Other noninterest expenses decreased $1.0 million for the three months ended March 31, 2023, compared to the same period in 2022.

This decrease was primarily due to a loss on disposal of assets of $362 thousand in the first quarter of 2022 and

lower variable mortgage-based expenses.

Professional services expenses decreased $1.0 million for the three months ended March 31, 2023, compared to the same period in 2022.

This decrease was primarily due to a $0.8 million decrease in legal fees

incurred largely as a result of a vendor dispute, which was resolved and accounted for by the end of 2022.

Financial Condition

Our total assets increased $90.8 million, or 2.3%, to $3.99 billion at September 30, 2022, compared to $3.90 billion at December 31, 2021.

Our gross loans held for investment increased $252.8 million,

or 10.4%, to $2.69 billion at September 30, 2022, compared to $2.44 billion at December 31, 2021.

Our securities portfolio decreased $13.1 million, or 1.8%, to $711.4 million at September 30, 2022, compared to $724.5 million at December 31, 2021.

Total deposits increased $119.3 million, or 3.6%, to $3.46 billion at September 30, 2022, compared to $3.34 billion at December 31, 2021.

Our total assets increased $114.0 million, or 2.9%, to $4.06 billion at March 31, 2023, compared to $3.94 billion at December 31, 2022.

Our loans held for investment increased $40.6 million, or

1.5%, to $2.79 billion at March 31, 2023, compared to $2.75 billion at December 31, 2022.

Our securities portfolio decreased $3.1 million, or 0.4%, to $698.6 million at March 31, 2023, compared to $701.7 million at December 31, 2022.

Total deposits

increased $101.6 million, or 3.0%, to $3.51 billion at March 31, 2023, compared to $3.41 billion at December 31, 2022.

Loan Portfolio

Our loans represent the largest portion of earning assets, greater than our securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important

consideration when reviewing the Company’s financial condition.

Our loans represent the largest portion of earning assets, greater than our securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an

important consideration when reviewing the Company’s financial condition.

We originate substantially all of the loans in our portfolio, except certain loan participations that are independently underwritten by the Company prior to purchase.

Loans held for investment increased $252.8 million, or 10.4%, to $2.69 billion at September 30, 2022, compared to $2.44 billion at December 31, 2021.

This increase in our loans was primarily the

result of organic net loan growth of $291.0 million, partially offset by a decrease due to SBA forgiveness and repayments of $38.2 million in PPP loans during the first nine months of 2022.

The organic loan growth remained relationship-focused and

occurred primarily in commercial real estate loans, residential mortgage loans, and consumer auto loans, partially offset by a decrease in hotel loans.

The following table shows the contractual maturities of our loans held for investment portfolio at September 30, 2022:

Loans held for investment increased $40.6 million, or 1.5%, to $2.79 billion at March 31, 2023, compared to $2.75 billion at December 31, 2022.

The organic loan growth remained

relationship-focused and occurred primarily in commercial real estate loans and residential mortgage loans, partially offset by a decrease in residential construction loans.

The following table shows the contractual maturities of our loans held for investment portfolio at March 31, 2023:

One Year or Less

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Other consumer

The following table shows the distribution between fixed and adjustable interest rate loans for maturities greater than one year as of September 30, 2022:

The following table shows the distribution between fixed and adjustable interest rate loans for maturities greater than one year as of March 31, 2023:

(Dollars in thousands)

4 unchanged sentences

Other consumer

At September 30, 2022, there was $1.34 billion in adjustable rate loans, with $699.2 million of these loans that mature or reprice in the next twelve months.

At March 31, 2023, there was $1.32 billion in adjustable rate loans, with $623.1 million of these loans that mature or reprice in the next twelve months.

Of these loans that mature or reprice in

the next twelve months, $486.2 million will reprice immediately upon changes in the underlying index rate, with the remaining $213.0 million being subject to floors above the current index or a future repricing date.

the next twelve months, $433.5 million will reprice immediately upon changes in the underlying index rate, with the remaining $189.7 million being subject to rate ceilings, floors above the current index, or a future repricing date.

The Wall Street Journal prime rate is the predominate index used by the Bank.

The Bank is primarily involved in real estate, commercial, agricultural and consumer lending activities with customers throughout Texas and Eastern New Mexico.

We have a collateral concentration, as

68.4% of our loans were secured by real property as of September 30, 2022, compared to 69.4% as of December 31, 2021.

We have a collateral concentration,

as 68.8% of our loans were secured by real property as of March 31, 2023, compared to 69.8% as of December 31, 2022.

We believe that these loans are not concentrated in any one single property type and that they are geographically dispersed

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of agribusiness, wholesale/retail, oil and gas and related businesses, healthcare industries and institutions of higher education.

Commercial real estate loans represent 37.9% of loans held for investment as of September 30, 2022 and represented

Commercial real estate loans represent 37.2% of loans held for investment as of March 31, 2023 and represented 36.7%

of loans held for investment as of December 31, 2022.

16 unchanged sentences

This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

Commercial real estate loans increased $113.8 million, or 15.1%, to $869.2 million as of September 30, 2022 from $755.4 million as of December 31, 2021.

The increase was primarily driven by an

increase of $69.8 million in commercial and residential land development loans and an increase of $64.2 million in retail loans, partially offset by a decrease of $20.4 million in hotel loans.

Commercial real estate loans increased $6.7 million, or 0.7%, to $926.0 million as of March 31, 2023 from $919.4 million as of December 31, 2022.

The increase was primarily driven by increases in

multifamily property loans and commercial land development loans.

Commercial – General and Specialized .

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably.

Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations, and to

ensure appropriate collateral is obtained to secure the loan.

and to ensure appropriate collateral is obtained to secure the loan.

Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower.

Most commercial loans are

secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and typically include personal guarantees.

Owner-occupied real estate is included in commercial loans, as the repayment of these

loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties.

Most commercial

loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and typically include personal guarantees.

Owner-occupied real estate is included in commercial loans, as the repayment

of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties.

Commercial loans are grouped into two distinct sub-categories:

specialized and general.

specialized and

Commercial related loans that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans.

Commercial related loans that contain a broader diversity of borrowers,

sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries.

Commercial general loans increased $17.2 million, or 3.7%, to $477.2 million as of September 30, 2022 from $460.0 million as of December 31, 2021.

Commercial related loans that contain a broader diversity of

borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries.

Performance of these loans is subject to operating and cash flow

results of the borrower, with risk in the volatility of operating results for particular industries.

Commercial general loans increased $26.1 million, or 5.4%, to $510.9 million as of March 31, 2023 from $484.8 million as of December 31, 2022.

The increase in commercial general loans was

primarily due to organic loan growth in restaurant & retail loans and construction company loans, partially offset by a decrease in PPP loans of $38.2 million.

Commercial specialized loans decreased $10.5 million, or 2.8%, to $368.2 million as of September 30, 2022 from $378.7 million as of December 31, 2021.

This decrease was primarily due to an early

payoff of an approximately $46 million of one energy sector loan and net repayments of $8.9 million in seasonal agricultural production loans, partially offset by organic loan growth of $40.4 million in finance, investment, and insurance loans.

primarily due to increases in loans to construction companies, state and municipal entities, and other commercial loans.

Commercial specialized loans decreased $12.0 million, or 3.7%, to $315.5 million as of March 31, 2023 from $327.5 million as of December 31, 2022.

This decrease was primarily due to net

repayments of $10.5 million in finance/investment loans.

We utilize a computer-based credit scoring analysis to supplement our policies and procedures in underwriting consumer loans.

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We generally require mortgage title insurance and hazard insurance on these residential real estate loans.

Consumer and other loans increased $117.9 million, or 16.9%, to $814.4 million as of September 30, 2022, from $696.5 million as of December 31, 2021.

All consumer loans are generally dependent on the risk

characteristics of the borrower’s ability to repay the loan, a consideration of the debt to income ratio, employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral.

Consumer and other loans increased $25.2 million, or 2.9%, to $888.1 million as of March 31, 2023 from $862.9 million as of December 31, 2022.

The increase in these loans was primarily a result

of a $68.4 million increase in consumer auto loans as a result of increased demand for autos, along with adding several high-quality auto dealerships, and a $37.1 million increase in residential mortgage loans.

As of September 30, 2022, our

consumer loan portfolio was comprised of $424.8 million in 1-4 family residential loans, $309.1 million in auto loans, and $80.5 million in other consumer loans.

of a $25.3 million increase in 1-4 family residential loans.

As of March 31, 2023, our consumer loan portfolio was comprised of $485.4 million in 1-4 family residential loans, $321.3 million in auto loans, and $81.4 million in other consumer loans.

Construction .

Loans for residential construction are for single-family properties to developers, builders, or end-users.

These loans are underwritten based on estimates of costs

and completed value of the project.

These loans are underwritten based on

estimates of costs and completed value of the project.

Funds are advanced based on estimated percentage of completion for the project.

Performance of these loans is affected by economic conditions as well as the ability to control costs of the projects.

Construction loans increased $14.4 million, or 9.8%, to $161.3 million as of September 30, 2022 from $146.9 million as of December 31, 2021.

The increase resulted from continued higher demand for

residential construction as a result of home shortages in many of our markets.

Paycheck Protection Program .

Beginning in April 2020 and until funding expired on May 31, 2021, we originated loans to qualified small businesses under the PPP

administered by the SBA under the provisions of the CARES Act.

Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility

The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA.

Terms of the PPP loans include the following (i) maximum amount limited to the lesser of $10 million or an amount calculated using a

payroll-based formula, (ii) maximum loan term of five years, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required for six months following the loan disbursement date and (vi) loan

forgiveness up to the full principal amount of the loan and any accrued interest, subject to certain requirements including that no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.

In return for processing and

booking the loan, the SBA paid the lender a processing fee tiered by the size of the loan (5% for loans of not more than $350 thousand;

3% for loans more than $350 thousand and less than $2 million;

and 1% for loans of at least $2 million).

September 30, 2022, outstanding PPP loans totaled approximately $2.0 million and are included in commercial general loans.

Performance of these loans is affected by economic conditions as well as the ability to control costs of the

Construction loans decreased $5.4 million, or 3.5%, to $148.1 million as of March 31, 2023 from $153.5 million as of December 31, 2022.

The decrease resulted from the completion of several

projects after continued higher demand for residential construction as a result of home shortages in many of our markets.

Non-owner occupied office real estate loans are included in commercial real estate loans and totaled $109.5 million at March 31, 2023.

Owner occupied office real estate loans are included in

commercial loans and totaled $52.0 million at March 31, 2023.

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.

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

The Company’s exposure to credit loss in

the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit to our customers is represented by the contractual or notional amount of those instruments.

Commitments to

extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised.

The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular

classes of financial instruments.

These financial instruments include commitments

to extend credit and standby letters of credit.

Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Company’s Consolidated Balance Sheets.

The Company’s exposure to

credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit to our customers is represented by the contractual or notional amount of those instruments.

Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised.

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 amounts do not necessarily represent future cash requirements.

The Company uses the same

credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments.

The Company uses the

same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments.

The amount and nature of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s

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

Those guarantees are primarily issued to support public and

private short-term borrowing arrangements.

Those guarantees are primarily issued to support public

and private short-term borrowing arrangements.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The Company holds collateral supporting those commitments for which

collateral is deemed necessary.

The Company holds collateral supporting those commitments for

which collateral is deemed necessary.

The following table summarizes commitments we have made as of the dates presented.

September 30,

(Dollars in thousands)

1 unchanged sentence

Standby letters of credit

Allowance for Loan Losses

The allowance for loan losses provides a reserve against which loan losses are charged as those losses become evident.

Management evaluates the appropriate level of the allowance for loan losses on a

quarterly basis.

The analysis takes into consideration the results of an ongoing loan review process, the purpose of which is to determine the level of credit risk within the portfolio and to ensure proper adherence to underwriting and

documentation standards.

Allowance for Credit Losses for Loans

The ACL provides a reserve against which loan losses are charged for current expected credit losses.

Management evaluates the appropriate level of the allowance for credit losses on a quarterly

Additional allowances are provided to those loans which appear to represent a greater than normal exposure to risk.

The quality of the loan portfolio and the adequacy of the allowance for loan losses is assessed by

regulatory examinations and the Company’s internal and external loan reviews.

The allowance for loan losses consists of two elements:

(1) specific valuation allowances established for probable losses on specific loans and (2) historical valuation

allowances calculated based on historical loan loss experience for similar loans with similar characteristics and trends, judgmentally adjusted for general economic conditions and other qualitative risk factors internal and external to the Company.

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

Historical loss experience factors by category, adjusted for changes in

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

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

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 the Company’s lending personnel.

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

allowance amount may be necessary.

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

factor amounts established for its loan category.

The allowance for loan losses was $39.7 million at September 30, 2022, compared to $42.1 million at December 31, 2021, a decrease of $2.4 million, or 5.8%.

The decrease is primarily a result of a

negative provision for loan losses of $2.9 million being recorded during the first nine months of 2022 based on general improvement in the Company’s credit metrics, a decline in the amount of loans that were actively under a modification, and a

decrease in nonperforming loans, partially offset by the growth in the loan portfolio.

Nevertheless, concerns regarding forecasted economic conditions continue to worsen due to the rising interest rate environment and persistent high inflation

levels in the United States, and provisions for loan losses may be necessary in future periods.

The following tables provide an analysis of the allowance for loan losses and other data at the dates indicated.

Three Months Ended

September 30,

Nine Months Ended

September 30,

The quality of the loan portfolio and the adequacy of the allowance for credit losses is assessed by regulatory

examinations and the Company’s internal and external loan reviews.

The allowance for credit losses consists of two elements:

(1) specific valuation allowances established for expected losses on specifically analyzed loans and (2) collective

valuation allowances calculated using comparable and quantifiable information from both internal and external sources about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the

collectability of the reported amount.

Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments.

To determine the adequacy of the allowance for credit losses on loans, the Company applied a dual credit risk rating (“DCRR”) methodology

that estimates each loan’s probability of default and loss given default to calculate the expected credit loss to non-analyzed loans.

The DCRR process quantifies the expected credit loss at the loan level for the entire loan portfolio.

grades are assigned by a customized scorecard that risk rates each loan based on multiple probability of default and loss given default elements to measure the risk of the loan portfolio.

The ACL estimate incorporates the Company’s DCRR loan

level risk rating methodology and the expected default rate frequency term structure to derive loan level life of loan estimates of credit losses for every loan in the portfolio.

The estimated credit loss for each loan is adjusted based on

one-year through the cycle estimate of expected credit loss to a life of loan measurement that reflects current conditions and forecasts.

The life of loan expected loss is determined using the contractual weighted average life of the loan

adjusted for prepayments.

Prepayment speeds are determined by grouping the loans into pools based on segments and risk rating.

After the life of loan expected losses are determined, they are adjusted to reflect the Company’s reasonable and

supportable economic forecast over a selected range of a one to two years.

The Company has developed regression models to project net charge-off rates based on macroeconomic variables (“MEVs”), typically a one-year period is used.

considered in the analysis consist of data gathered from the St.

Louis Federal Reserve Research Database (“FRED”), such as, federal funds rate, 10-year treasury rates, 30-year mortgage rates, crude oil prices, consumer price index, housing price

index, unemployment rates, housing starts, gross domestic product, and disposable personal income.

These regression models are applied to the Company’s economic forecast to determine the corresponding net

charge-off rates.

The projected net charge-off rates for the given economic scenario are used to adjust the through the cycle expected losses.

Qualitative adjustments are also made to ACL results for additional risk factors that are relevant in

assessing the expected credit losses within our loan segments.

These qualitative factor (“Q-Factor”) adjustments may increase or decrease management’s estimate of the ACL by a calculated percentage based upon the estimated level of risk within a

particular segment.

Q-Factor risk decisions consider concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, and other factors related to credit administration, such as borrower’s risk rating and the

potential effect of delayed credit score migrations.

Management quantifiably identifies segment percentage Q-Factor adjustments using a scorecard risk rating system scaled to historical loss experience within a segment and management’s perceived

risk for that particular segment.

In addition to the loan level evaluations, nonaccrual loans with a balance of $250 thousand or more are individually analyzed based on facts and circumstances of the loan to determine if a specific allowance

amount may be necessary.

amounts established for its loan category.

Effective January 1, 2023, we adopted the CECL model and recognized a cumulative effect adjustment to the allowance for credit losses for loans and off-balance sheet credit exposures of $1.3

The CECL model requires recording life-of-loan projected losses in the loan portfolio based on future economic events and related loan portfolio credit performance.

The prior accounting standard recorded reserves based on incurred losses

at the balance sheet date.

The allowance for credit losses for loans was $39.6 million at March 31, 2023, compared to $39.3 million at December 31, 2022, an increase of $0.3 million, or 0.7%.

The increase is primarily the

result of a $0.8 million provision for credit losses on loans recorded in March 2023 due to loan growth experienced during the quarter.

The following table provides an analysis of the allowance for credit losses and other data during the periods indicated.

Three Months Ended March 31,

(Dollars in thousands)

Average loans outstanding during the period

Commercial real estate

Commercial – specialized

Commercial – general

1-4 family residential

Other consumer

Loans held for sale

Total average loans outstanding during the period

Net charge-offs (recoveries) during the period

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Total net charge-offs (recoveries) during the period

Total average loans outstanding during period

Total ratio of net charge-offs (recoveries) to average loans during the period (annualized)

September 30,

Ratio of net charge-offs (recoveries) to average loans during the period

Commercial real estate

Commercial – specialized

Commercial – general

1-4 family residential

Other consumer

Total ratio of net charge-offs (recoveries) to average loans during the period

The following table provides other loan data as of the dates indicated.

(Dollars in thousands)

1 unchanged sentence

Nonaccrual loans

Allowance for loan losses

Allowance for credit losses

Ratio of allowance to total loans held for investment

1 unchanged sentence

Ratio of nonaccrual loans to total loans held for investment

Net charge-offs (recoveries) totaled $(654) thousand and were (0.10)% (annualized) of average loans outstanding for the three months ended September 30, 2022, compared to $195 thousand and 0.03% (annualized) for the

three months ended September 30, 2021.

Net charge-offs totaled $(426) thousand and were (0.02)% (annualized) of average loans outstanding for the nine months ended September 30, 2022, compared to $867 thousand and 0.05% (annualized) for the nine

months ended September 30, 2021.

There was a $400 thousand recovery on a commercial tenant relationship in the second quarter of 2022 and an $822 thousand recovery on an energy relationship in the third quarter of 2022 that affected both of the

period comparisons.

The allowance for loan losses as a percentage of loans held for investment was 1.47% at September 30, 2022 and 1.73% at December 31, 2021.

While the entire allowance for loan losses is available to absorb losses from any part of our loan portfolio, the following table sets forth the allocation of the allowance for loan losses for the

periods presented and the percentage of allowance in each classification to total allowance:

September 30, 2022

Net charge-offs totaled $630 thousand and were 0.09% (annualized) of average loans outstanding for the three months ended March 31, 2023, compared to $364 thousand and 0.06% for the three months

ended March 31, 2022.

The increase in net charge-offs in the first quarter of 2023 was primarily the result of an increase of $272 thousand in residential construction net charge-offs in the first quarter of 2023 compared to the same period in

The allowance for credit losses as a percentage of loans held for investment was 1.42% at March 31, 2023 and 1.43% at December 31, 2022.

While the entire allowance for credit losses is available to absorb losses from any part of our loan portfolio, the following table sets forth the allocation of the allowance for credit losses

for the periods presented and the percentage of allowance in each classification to total allowance:

March 31, 2023

December 31, 2022

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Other consumer

Total allowance for loan losses

Total allowance for credit losses

Asset Quality

1 unchanged sentence

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 in the normal course of business.

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 in the normal course of business.

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

Income on nonaccrual loans 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.

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 and performing restructured loans.

nonaccrual loans 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.

Loans that exhibit characteristics different from their pool characteristics are evaluated on an individual basis.

Loans evaluated individually are not included in the collective ACL evaluation.

Income from loans 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.

A loan is 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

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 (“OREO”) until sold and is initially recorded at fair value less costs to

sell when acquired, establishing a new cost basis.

Depending on a particular loan’s circumstances, we analyze loans for specific allowance based upon

either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent.

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

collateral-dependent is set up as a specific reserve.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold and is initially recorded at fair value less costs

to sell when acquired, establishing a new cost basis.

Nonperforming loans include nonaccrual loans and loans past due 90 days or more.

Nonperforming assets consist of nonperforming loans plus OREO.

At September 30, 2022, our total nonaccrual loans were $4.9 million, or 0.18% of total loans held for investment, as compared to $9.5 million, or 0.39% of total loans held for investment, at December

These loans were reviewed for impairment and specific valuation allowances were established as necessary and included in the allowance for loan losses as of September 30, 2022 to cover any probable loss.

There were eleven loans totaling

$4.3 million that were removed from nonaccrual status during the second and third quarters of 2022.

This was a result of principal paydowns, improved cash flow, and continued sustained payment performance.

Nonperforming loans were $7.8 million at September 30, 2022 and $10.6 million at December 31, 2021.

In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”).

Included in certain loan categories of impaired loans are TDRs on which we have granted certain material concessions to the borrower as a result of the borrower experiencing financial difficulties.

The concessions granted by us may include, but are

not limited to:

(1) a modification in which the maturity date, timing of payments or frequency of payments is modified, (2) an interest rate lower than the current market rate for new loans with similar risk, or (3) a combination of the first two

If a borrower on a restructured accruing loan has demonstrated performance under the previous terms, is not experiencing financial difficulty and shows the capacity to continue to perform under the

restructured terms, the loan will remain on accrual status.

At March 31, 2023, our total nonaccrual loans were $5.1 million, or 0.18% of total loans held for investment, as compared to $5.8 million, or 0.21% of total loans held for investment, at December

These loans within this amount that exceeded $250 thousand were specifically analyzed and specific valuation allowances were established as necessary and included in the allowance for credit losses as of March 31, 2023 to cover any

probable loss.

There were not any significant changes in nonaccrual loans during the first quarter of 2022.

Nonperforming loans were $7.6 million at March 31, 2023 and $7.8 million at December 31, 2022.

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extensions, an other than insignificant payment delay, or interest rate

When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

Typically, one type of concession, such as term extension, is granted initially.

If the borrower continues to

experience financial difficulty, another concession, such as principal forgiveness, may be granted.

In some cases, the Company provides multiple types of concessions on one loan.

The Company closely monitors the performance of loans that are

modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

Upon the Company’s determination that a modified loan has subsequently been deemed to not be fully collectible, the uncollectible

amount is written off.

Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

If a borrower on a restructured accruing loan has demonstrated performance under the previous terms, is not experiencing financial difficulty and shows the capacity to continue to perform under

the restructured terms, the loan will remain on accrual status.

Otherwise, the loan will be placed on nonaccrual status until the borrower demonstrates a sustained period of performance, which generally requires six consecutive months of payments.

Loans identified as TDRs are evaluated for impairment using the present value of the expected cash flows or the estimated fair value of the collateral, if the loan is collateral dependent.

The fair value is determined, when possible, by an

appraisal of the property less estimated costs related to liquidation of the collateral.

The appraisal amount may also be adjusted for current market conditions.

Adjustments to reflect the present value of the expected cash flows or the estimated

fair value of collateral dependent loans are a component in determining an appropriate allowance for loan losses, and as such, may result in increases or decreases to the provision for loan losses in current and future earnings.

We had no loans restructured as TDRs during the first nine months of 2022 or 2021.

TDRs are excluded from our nonperforming loans unless they otherwise meet the definition of nonaccrual loans or past

due 90 days or more.

Securities Portfolio

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The securities portfolio consists of securities classified as either held-to-maturity or available-for-sale.

Securities available-for-sale consist primarily of state and municipal securities,

mortgage-backed securities and U.S.

Securities consist primarily of state and municipal securities, mortgage-backed

securities and U.S.

government sponsored agency securities.

We determine the appropriate classification at the time of purchase.

All held-to-maturity securities are reported at amortized cost, adjusted for premiums and discounts

that are recognized in interest income using the interest method over the period to maturity.

All held-to-maturity securities are reported at amortized cost, adjusted for premiums and discounts that are recognized

in interest income using the interest method over the period to maturity.

All available-for-sale securities are reported at fair value.

Our securities portfolio decreased $13.1 million, or 1.8%, to $711.4 million at September 30, 2022, compared to $724.5 million at December 31, 2021.

The increase was primarily

due to $176.7 million in purchases, partially offset by $60.8 million in maturities, prepayments, and calls and a $126.1 million decline in the unrealized gain at September 30, 2022 as compared to December 31, 2021.

Total securities at March 31, 2023 were $698.6 million, representing a decrease of $3.1 million, or 0.4%, compared to $701.7 million at December 31, 2022.

The decrease was primarily due to $10.8

million in maturities, prepayments and calls, partially offset by an $8.6 million increase in the unrealized gain/loss at March 31, 2023 as compared to December 31, 2022.

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses.

During the three months ended September 30, 2022, the fair value of the Company’s available for

sale securities declined by $39.1 million, as a result of the significant increase in market interest rates during first nine months of 2022, which was attributed to the FOMC repeatedly raising their target benchmark interest rate in the first nine

months of 2022, resulting in subsequent prime rate increases of 300 basis points between March and September of 2022.

At September 30, 2022, we evaluated the securities which had an unrealized loss for other-than-temporary impairment and determined

all declines in value to be temporary.

We anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment.

We do not intend to sell these

securities and it is not probable that we will be required to sell them before recovery of the amortized cost basis, which may be at maturity.

During the first quarter of 2023, the fair value of the Company’s available for sale

securities increased by $8.6 million after declining $114.4 million during 2022.

The decline was a result of the significant increase in interest rates noted during 2022.

At March 31, 2023, the Company evaluated whether the decline in fair value

has resulted from credit losses or other factors.

Within this evaluation, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by rating agency, and adverse conditions

specifically related to the security, among other factors.

Based on management’s evaluation no unrealized losses on securities were determined to be due to credit loss.

Additionally, we anticipate full recovery of amortized cost with respect to

these securities by maturity, or sooner in the event of a more favorable market interest rate environment.

We do not intend to sell these securities and it is not probable that we will be required to sell them before recovery of the amortized cost

basis, which may be at maturity, thus no losses have been recognized in the Company’s consolidated financial statements.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the date presented.

Expected maturities may

differ from contractual maturities if borrowers have the right to call or prepay obligation with or without call or prepayment penalties.

As of September 30, 2022

differ from contractual maturities if borrowers have the right to call or prepay an obligation with or without call or prepayment penalties.

As of March 31, 2023

Due after One Year

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Available-for-sale

government and agencies

State and municipal

Mortgage-backed securities

Collateralized mortgage obligations

Residential mortgage-backed securities

Commercial mortgage-backed securities

Commercial collateralized mortgage obligations

Asset-backed and other amortizing securities

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Available-for-sale

government and agencies

State and municipal

Mortgage-backed securities

Collateralized mortgage obligations

Residential mortgage-backed securities

Commercial mortgage-backed securities

Commercial collateralized mortgage obligations

Asset-backed and other amortizing securities

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We put continued effort into gathering noninterest-bearing demand deposit accounts through loan production, customer referrals, marketing staffs, mobile and online banking and various involvements with community networks.

Total deposits at September 30, 2022 were $3.46 billion, representing an increase of $119.3 million, or 3.6%, compared to $3.34 billion at December 31, 2021.

The increase in total deposits since

December 31, 2021 is primarily due to organic growth and customers maintaining higher balances.

As of September 30, 2022, 36.5% of total deposits were comprised of noninterest-bearing demand accounts, 54.1% of interest-bearing non-maturity accounts

and 9.4% of time deposits.

Total deposits at March 31, 2023 were $3.51 billion, representing an increase of $101.6 million, or 3.0%, compared to $3.41 billion at December 31, 2022.

As of March 31, 2023, 31.7% of total

deposits were comprised of noninterest-bearing demand accounts, 60.1% of interest-bearing non-maturity accounts and 8.2% of time deposits.

The following table shows the deposit mix as of the dates presented:

September 30, 2022

March 31, 2023

December 31, 2022

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Average deposit balances and weighted average rates paid on deposits, on an annualized basis, for the periods indicated are shown below.

Three Months Ended September 30,

(Dollars in thousands)

Noninterest-bearing deposits

Interest-bearing deposits:

NOW and interest-bearing demand accounts

Savings accounts

Money market accounts

Time deposits

Total interest-bearing deposits

Total deposits

Nine Months Ended September 30,

Three Months Ended

March 31, 2023

March 31, 2022

(Dollars in thousands)

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Total deposits

The scheduled maturities of uninsured certificates of deposits or other time deposits as of September 30, 2022 follows:

The scheduled maturities of uninsured certificates of deposits or other time deposits as of March 31, 2023 follows:

(Dollars in thousands)

The estimated amount of uninsured deposits as of September 30, 2022 was $1.15 billion.

Time deposits issued in amounts of more than $250 thousand represent the type of deposit most likely to affect the Company’s future earnings because of interest rate sensitivity.

The estimated amount of uninsured deposits as of March 31, 2023 was $600.2 million.

This represented approximately 17% of total deposits and excludes collateralized public fund deposits.

Time deposits in amounts of more than $250 thousand represent the type of deposit most likely to affect the Company’s future earnings because of interest rate sensitivity.

The effective cost of

these funds is generally higher than other time deposits because the funds are usually obtained at premium rates of interest.

Time deposits in amounts of more than $250 thousand totaled $120.5 million at March 31, 2023.

Borrowed Funds

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real estate loans as well as FHLB stock.

At September 30, 2022 and December 31, 2021, we had total remaining borrowing capacity from the FHLB of $902.7 million and $903.9 million, respectively.

The following table sets forth our long-term FHLB borrowings as of and for the periods indicated:

As of/For the

Three Months Ended

September 30,

As of/For the

Nine Months Ended

September 30,

(Dollars in thousands)

Amount outstanding at end of the period

Weighted average interest rate at end of the period

Maximum month-end balance during the period

Average balance outstanding during the period

Weighted average interest rate during the period

The Company has used FHLB letters of credit to pledge to certain public deposits.

These letters of credit expired in July 2021 and the Company began pledging securities to these public funds rather

than renewing the letters of credit.

As a result, there were no FHLB letters of credit outstanding at September 30, 2022.

At March 31, 2023 and December 31, 2022, we had total remaining borrowing capacity from the FHLB of $987.8 million and $920.2 million, respectively.

We had no long-term FHLB borrowings during the three months ended March 31, 2023 or 2022.

Federal Reserve Bank of Dallas .

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The line is collateralized by a blanket floating lien on all agriculture, commercial and consumer loans.

The amount of the line was $646.5 million and $593.6 million at September 30, 2022 and December 31, 2021,

respectively.

This line of credit was not used during the three or nine months ended September 30, 2022 or the same periods in 2021.

The amount of the line was $585.6 million and $648.3 million at March 31, 2023 and December 31, 2022, respectively.

We had no long-term FRB borrowings during the three months ended March 31, 2023 or 2022.

In addition, we have access to the FRB’s BTFP.

As of March 31, 2023, the Company has not pledged any securities for the BTFP but has approximately $179 million of available securities that can be used as collateral

for additional borrowings through the program.

Lines of Credit .

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The total amount of the

lines was $160.0 million as of September 30, 2022 and December 31, 2021, respectively.

The lines of credit were not used during the three or nine months ended September 30, 2022 or the three or nine months ended September 30, 2021.

Subordinated Debt Securities .

The Company has subordinated debt securities that are intended to qualify for tier 2 capital treatment, subject to regulatory

As of September 30, 2022, the total amount of subordinated debt securities outstanding was $76.5 million less approximately $604 thousand of remaining debt issuance costs for a total balance of $75.9 million.

lines was $160.0 million and $160.0 million as of March 31, 2023 and December 31, 2022, respectively.

The lines were not used during the three months ended March 31, 2023 or the three months ended March 31, 2022.

Subordinated Debt .

In December 2018, the Company issued $26.5 million in subordinated notes.

Notes totaling $12.4 million have a maturity date of December 2028

and an average fixed rate of 5.74% for the first five years.

The remaining $14.1 million of notes have a maturity date of December 2030 and an average fixed rate of 6.41% for the first seven years.

After the fixed rate periods, all notes will float

at the Wall Street Journal prime rate, with a floor of 4.0% and a ceiling of 7.5%.

These notes pay interest quarterly, are unsecured, and may be called by the Company at any time after the remaining

maturity is five years or less.

Additionally, these notes are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.

On September 29, 2020, the Company issued $50.0 million in subordinated notes.

Proceeds were reduced by approximately $926 thousand in debt issuance costs.

The notes have a maturity

date of September 2030 with a fixed rate of 4.50% for the first five years.

After the expiration of the fixed rate period, the notes will reset quarterly at a variable rate equal to the then current three-month Secured Overnight Financing

Rate, as published by the Federal Reserve Bank of New York, plus 438 basis points.

These notes pay interest semi-annually, are unsecured, and may be called by the Company at any time after the remaining maturity

is five years or less.

Additionally, these notes are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.

As of March 31, 2023, the total amount of subordinated debt securities outstanding was $76.5 million less approximately $465 thousand of remaining debt issuance costs for a total balance of $76.0

Junior Subordinated Deferrable Interest Debentures and Trust Preferred Securities .

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The Company records interest expense on the debentures in its consolidated financial statements.

The amount of debentures outstanding was $46.4 million at September

The amount of debentures outstanding was $46.4 million at March 31,

2023 and December 31, 2022.

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During such time, corporate dividends may not be paid.

is current in its interest payments on the debentures.

The chart below indicates certain information, as of September 30, 2022, about each of the statutory trusts and the junior subordinated deferrable interest debentures, including the date the junior

subordinated deferrable interest debentures were issued, outstanding amounts of trust preferred securities and junior subordinated deferrable interest debentures, the maturity date of the junior subordinated deferrable interest debentures, the

interest rates on the junior subordinated deferrable interest debentures and the investment banker.

The Company is

current in its interest payments on the debentures.

The chart below indicates certain information, as of March 31, 2023, about each of the statutory trusts and the junior subordinated deferrable interest debentures, including the date the junior

interest rates on the junior subordinated deferrable interest debentures.

Name of Trust

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Interest payable quarterly with principal due at maturity.

Rate as of last reset date, prior to September 30, 2022.

Rate as of last reset date, prior to March 31, 2023.

Liquidity and Capital Resources

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

at a reasonable cost.

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

all at a reasonable cost.

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.

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cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

Interest rate sensitivity involves the relationships between rate-sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on the Company’s net

interest income.

Interest rate-sensitive assets and liabilities are those with yields or rates that are subject to change within a future time period due to maturity or changes in market rates.

The model is used to project future net interest

income under a set of possible interest rate movements.

The Company’s Investment/Asset Liability Committee (“ALCO Committee”) reviews this information to determine if the projected future net interest income levels would be acceptable.

attempts to stay within acceptable net interest income levels.

Our liquidity position is supported by management of liquid assets and access to alternative sources of funds.

Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal

funds sold, and fair value of unpledged investment securities.

Our liquid assets include cash, interest-bearing deposits in correspondent banks,

federal funds sold, and fair value of unpledged investment securities.

Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and the Federal Reserve discount window.

March 31, 2023, the Bank had the capacity to borrow additional funds from the FHLB and Federal Reserve discount window of up to approximately $987.8 million and $585.6 million, respectively.

Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and

1 unchanged sentence

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.

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 and securities 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.

Capital Requirements

Total stockholders’ equity decreased to $341.8 million as of September 30, 2022, compared to $407.4 million as of December 31, 2021, a decrease of $65.6 million, or 16.1%.

decrease from December 31, 2021 was primarily the result of a decrease in accumulated other comprehensive income (“AOCI”) of $87.2 million, net of tax, repurchases of common stock of $18.9 million and $6.0 million of dividends paid, partially

offset by $45.6 million in net earnings, for the nine months ended September 30, 2022 .

The decrease in AOCI was attributed to the decline in fair value of our available for sale securities and fair value hedges, net of tax, as a result of the

rising interest rate environment.

Management believes that the Company has adequate liquidity to meet its obligations.

However, if general economic conditions, potential recession in the United States and our market areas, the

impacts related to or resulting from recent bank failures and any continuation of the recent uncertainty in the banking industry, including the associated impact to the Company and other financial institutions of any regulatory changes or other

mitigation efforts taken by government agencies in response thereto, increased competition for deposits and related changes in deposit customer behavior, changes in market interest rates, the persistence of the current inflationary environment in

the United States and our market areas, or other events, cause these sources of external funding to become restricted or are eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or

operating restrictions in order to raise the necessary funds to support the Company’s operations and growth.

Total stockholders’ equity increased to $368.0 million as of March 31, 2023, compared to $357.0 million as of December 31, 2022, an increase of $10.9 million, or 3.1%.

The increase from December

31, 2022 was primarily the result of $9.2 million in net earnings for the three months ended March 31, 2023 and an increase in accumulated other comprehensive income of $4.7 million related to fair value changes in available for sale securities and

related fair value hedges, net of tax, partially offset by $2.0 million of dividends paid.

We are subject to various regulatory capital requirements administered by the federal and state banking regulators.

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

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

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 required us to maintain minimum amounts and ratio of

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

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 required us to maintain minimum

amounts and ratio of common equity tier 1 (“CET1”) capital, tier 1 capital and total capital to risk-weighted assets and of tier 1 capital to average consolidated assets, referred to as the “leverage ratio.”

The risk-based capital ratios measure the adequacy of a bank’s capital against the riskiness of its assets and off-balance sheet activities.

Failure to maintain adequate capital is a basis for “prompt

corrective action” or other regulatory enforcement action.

Failure to maintain adequate capital is a basis for

“prompt corrective action” or other regulatory enforcement action.

In assessing a bank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure;

liquidity, funding and market risks;

quality and level of earnings;

quality and level of

concentrations of credit, quality of loans and investments;

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and management’s overall ability to monitor and control risks.

At September 30, 2022, both we and the Bank met all the capital adequacy requirements to which we and the Bank were subject.

At September 30, 2022, we and the Bank were “well capitalized” under the

regulatory framework for prompt corrective action.

Management believes that no conditions or events have occurred since September 30, 2022 that would materially adversely change such capital classifications.

From time to time, we may need to raise

additional capital to support our and the Bank’s further growth and to maintain our “well capitalized” status.

As of March 31, 2023 and December 31, 2022, the Company met the definition of “well-capitalized” under the applicable regulations of the Board of Governors of the Federal Reserve System and the

Bank was “well capitalized” under the FDIC’s regulatory framework for prompt corrective action and the Basel III capital guidelines.

Management believes that no conditions or events have occurred since March 31, 2023 that would materially adversely

change such capital classifications.

From time to time, we may need to raise additional capital to support our and the Bank’s further growth and to maintain our “well capitalized” status.

The following table presents our and the Bank’s regulatory capital ratios as of the dates indicated.

September 30, 2022

March 31, 2023

December 31, 2022

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Community Bank Leverage Ratio

On September 17, 2019, the federal banking agencies jointly finalized a rule to be effective January 1, 2020 and intended to simplify the regulatory capital requirements described above for qualifying

community banking organizations that opt into the Community Bank Leverage Ratio (“CBLR”) framework, as required by Section 201 of the EGRRCPA.

The final rule became effective on January 1, 2020, and the CBLR framework became available for banks to

use beginning with their March 31, 2020 Call Reports.

Under the final rule, if a qualifying community banking organization opts into the CBLR framework and meets all requirements under the framework, it will be considered to have met the

well-capitalized ratio requirements under the “prompt corrective action” regulations described above and will not be required to report or calculate risk-based capital.

In order to qualify for the CBLR framework, a community banking organization

must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities.

Although the Company and the Bank are qualifying

community banking organizations, the Company and the Bank have elected not to opt in to the CBLR framework at this time and will continue to follow the Basel III capital requirements as described above.

On September 17, 2019, the federal banking agencies jointly finalized a rule to be effective January 1, 2020 and intended to simplify the regulatory capital requirements described above for

qualifying community banking organizations that opt into the Community Bank Leverage Ratio (“CBLR”) framework, as required by Section 201 of the EGRRCPA.

The final rule became effective on January 1, 2020, and the CBLR framework became available

for banks to use beginning with their March 31, 2020 Call Reports.

Under the final rule, if a qualifying community banking organization opts into the CBLR framework and meets all requirements under the framework, it will be considered to have met

the well-capitalized ratio requirements under the “prompt corrective action” regulations described above and will not be required to report or calculate risk-based capital.

In order to qualify for the CBLR framework, a community banking

organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities.

Although the Company and the Bank are

qualifying community banking organizations, the Company and the Bank have elected not to opt in to the CBLR framework at this time and will continue to follow the Basel III capital requirements as described above.

Treasury Stock

The Company repurchased stock in accordance with its stock repurchase program during the three and nine months ended September 30, 2022 and 2021.

For the three months ended September 30, 2022, we

repurchased 366,127 shares of common stock for a total of $9.7 million.

For the nine months ended September 30, 2022, we repurchased 729,613 shares of common stock for a total of $18.9 million.

These shares were retired immediately upon repurchase

and not included in treasury stock.

The Company did not repurchase stock during the three months ended March 31, 2023.

For the three months ended March 31, 2022, we repurchased 106,498 shares of common stock for a total of $3.0 million.

See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds,” of this Form 10-Q for further information.

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As a financial institution, our primary component of market risk is interest rate volatility.

Our interest rate risk policy provides management with the guidelines for effective funds management, and

we have established a measurement system for monitoring our net interest rate sensitivity position.

Our interest rate risk policy provides management with the guidelines for effective funds management,

and we have established a measurement system for monitoring our net interest rate sensitivity position.

We have historically managed our sensitivity position within our established guidelines.

Interest rate sensitivity involves the relationships between rate-sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on the Company’s net

interest income.

Interest rate-sensitive assets and liabilities are those with yields or rates that are subject to change within a future time period due to maturity or changes in market rates.

The model is used to project future net interest

income under a set of possible interest rate movements.

The Company’s Investment/Asset Liability Committee (“ALCO Committee”) reviews this information to determine compliance with the limits set by the Bank’s board of directors.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and

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We do not own any trading assets.

Our exposure to interest rate risk is managed by the ALCO Committee, in accordance with policies approved by the Bank’s Board.

The ALCO Committee formulates strategies based on appropriate levels of

interest rate risk.

In determining the appropriate level of interest rate risk, the ALCO Committee considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies,

liquidity, business strategies and other factors.

The ALCO Committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities,

commitments to originate loans and the maturities of investments and borrowings.

Our exposure to interest rate risk is managed by the ALCO Committee, in accordance with policies approved by the Bank’s board of directors.

The ALCO Committee formulates strategies based on

appropriate levels of interest rate risk.

regional economies, liquidity, business strategies and other factors.

The ALCO Committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and

liabilities, commitments to originate loans and the maturities of investments and borrowings.

Additionally, the ALCO Committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity.

Management employs

methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model.

We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on

other financial metrics.

employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model.

We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates

on other financial metrics.

Contractual maturities and re-pricing opportunities of loans are incorporated in the model.

The average lives of non-maturity deposit accounts are based on decay assumptions and are incorporated into the model.

assumptions used in our analyses are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income.

the assumptions used in our analyses are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income.

results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

On a quarterly basis, we run a simulation model for a static balance sheet and other scenarios.

These models test the impact on net interest income from changes in market interest rates under various

These models test the impact on net interest income from changes in market interest rates under

various scenarios.

Under the static model, rates are shocked instantaneously and ramped rates change over a 12-month and 24-month horizon based upon parallel and non-parallel yield curve shifts.

Parallel shock scenarios assume instantaneous parallel

movements in the yield curve compared to a flat yield curve scenario.

Parallel shock scenarios assume instantaneous

parallel movements in the yield curve compared to a flat yield curve scenario.

Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve.

Our internal policy regarding internal rate risk

simulations currently specifies that for gradual parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 7.5% for a 100 basis point shift, 15% for a 200 basis

point shift, and 22.5% for a 300 basis point shift.

Our internal policy regarding internal

rate risk simulations currently specifies that for gradual parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 7.5% for a 100 basis point shift, 15% for a 200

basis point shift, and 22.5% for a 300 basis point shift.

The following tables summarize the simulated change in net interest income over a 12-month horizon as of the dates indicated:

September 30,

Change in Interest Rates (Basis Points)

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generally accepted accounting principles (“GAAP”).

GAAP requires

the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

The Company’s asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of the Company are monetary in nature.

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Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry.

However, we also evaluate our performance based on certain additional financial measures

discussed in this Report as being non-GAAP financial measures.

We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of

excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the U.S.

in our statements of income,

balance sheets or statements of cash flows.

Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with

GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

However, we also evaluate our performance based on certain additional financial

measures discussed in this Report as being non-GAAP financial measures.

We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect

of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the U.S.

in our statements of

comprehensive income (loss), balance sheets or statements of cash flows.

Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures

calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in

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equity and assets while not increasing our tangible common equity or tangible assets.

The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and total assets to tangible assets and then presents book value per common share,

tangible book value per common share, total stockholders’ equity to total assets, and tangible common equity to tangible assets:

September 30,

The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and total assets to tangible assets and then presents book value per common

share, tangible book value per common share, total stockholders’ equity to total assets, and tangible common equity to tangible assets:

(Dollars in thousands)

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The Jumpstart Our Business Startups Act (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 consolidated 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.

elected to take advantage of this extended transition period, which means that the consolidated 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

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.

information about these policies can be found in Note 1 of the Company’s consolidated financial statements as of September 30, 2022.

information about these policies can be found in Note 1 of the Company’s consolidated financial statements as of March 31, 2023.

Investment securities may be classified into trading, held-to-maturity, or available-for-sale portfolios.

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Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Realized gains and losses and declines in value judged to be other-than-temporary are included in gain or loss

on sale of securities.

The cost of securities sold is based on the specific identification method.

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net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the straight-line method, which is not materially different from the effective interest method required by GAAP.

Loans are placed on non-accrual status when, in management’s opinion, collection of interest is unlikely, which typically occurs when principal or interest payments are more than ninety days past due.

Loans are placed on non-accrual status when, in management’s opinion, collection of interest is unlikely, which typically occurs when principal or interest payments are more than ninety days past

When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income.

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returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to

Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Allowance for Credit Losses.

The ACL for loans is established for future expected credit losses through a provision for credit losses charged to earnings.

Expected losses are calculated using comparable and quantifiable information both internal and external about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability

of the reported amount.

Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments when appropriate.

Loan losses are charged against the allowance when management believes the uncollectibility

of a loan balance is confirmed.

Subsequent recoveries, if any, are credited to the allowance.

The Company’s allowance for loan losses consists of

specific valuation allowances established for probable losses on specific loans and general valuation allowances calculated based on historical loan loss experience for similar loans with similar characteristics and trends, judgmentally adjusted

for general economic conditions and other qualitative risk factors internal and external to the Company.

The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s review of the collectability of the loans in light of historical experience, the nature and

volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.

This evaluation is inherently subjective, as it requires estimates

that are susceptible to significant revision as more information becomes available.

The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic

environment and market conditions.

The Company’s ACL for loans consists of specific valuation allowances established for probable losses on specifically analyzed loans and collective

valuation allowances calculated using comparable and quantifiable information both internal and external about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability

of the reported amount.

The ACL for loans is evaluated on a quarterly basis by management and is based upon management’s review of the collectability of the loans in light of historical experience, the nature and volume

of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.

This evaluation is inherently subjective, as it requires estimates that are

susceptible to significant revision as more information becomes available.

The determination of the adequacy of the ACL for loans is based on estimates that are particularly susceptible to significant changes in the economic environment and market

In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.

The Bank’s loans are generally secured by specific items of collateral

including real property, crops, livestock, consumer assets, and other business assets.

The Bank’s loans are generally secured by specific items of collateral including real property,

crops, livestock, consumer assets, and other business assets.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on various factors.

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However, the amount of the change that is reasonably possible cannot be estimated.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due

according to the contractual terms of the loan agreement.

All loans rated substandard or worse and greater than $250 thousand are specifically reviewed to determine if they are impaired.

Factors considered by management in determining whether a

loan is impaired include payment status and the sources, amounts, and probabilities of estimated cash flow available to service debt in relation to amounts due according to contractual terms.

Loans that experience insignificant payment delays and

payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the

borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Loans that are determined to be impaired are then evaluated to determine estimated impairment, if any.

GAAP allows impairment to be measured on a loan-by-loan basis by either the present value of

expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Loans that are not individually determined to be impaired or

are not subject to the specific review of impaired status are subject to the general valuation allowance portion of the allowance for loan losses.

Loans that exhibit characteristics different from their pool characteristics are evaluated on an individual basis.

Loans evaluated individually are not included in the collective ACL for loans

Certain of these loans are considered to be collateral dependent with the borrower experiencing financial difficulty.

For these loans, the fair value of collateral practical expedient is elected whereby the allowance is calculated as

the amount by which the amortized cost exceeds the fair value of collateral, less costs to sell.

All non-accrual loans $250 thousand or greater are analyzed for a specific ACL.

Prior to the adoption of the CECL model, the ACL for loans was established through a provision for loan losses charged to expense, which represented management’s best estimate of inherent losses

that had been incurred within the existing portfolio of loans.

In addition, a loan was considered impaired when, based on current information and events, it was probable that the Company would be unable to collect the scheduled payments of

principal or interest when due according to the contractual terms of the loan agreement.

All loans rated substandard or worse and greater than $250 thousand were specifically reviewed to determine if they were impaired.

Loans that were determined

to be impaired were then evaluated to determine estimated impairment, if any.

Impairment was measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s

obtainable market price, or the fair value of the collateral if the loan was collateral dependent.

Loans that were not individually determined to be impaired or were not subject to the specific review of impaired status were subject to the general

valuation allowance portion of the ACL.

The Company estimates expected credit losses on off balance-sheet credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to

extend credit, unless that obligation is unconditionally cancellable by the Company.

The ACL for off-balance sheet credit exposures is adjusted through provision for credit losses.

The estimate includes consideration of the likelihood that funding

will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

Utilization rates are determined based on a two-year rolling average of historical usage.

Expected loss rates for all pass rated

loans are used to determine the ACL for off-balance sheet credit exposures.

For securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery

of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized costs basis is written down to fair value through income.

For AFS securities that do not meet the aforementioned

criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the

rating of the security by rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the

security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the

amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss).

Changes in the ACL are recorded as provision for credit losses.

are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest is excluded from the estimate of credit

losses on securities.

Loans Held for Sale.

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Mortgage Servicing Rights Asset.

When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income

statement effect recorded in net gain on sale of loans.

Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates present value of estimated

future servicing income.

Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports change in fair value of servicing assets in earnings in the period in

which the changes occur, and are included with other noninterest income in the consolidated financial statements.

The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment

speeds and default rates and losses.

When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the statement

of comprehensive income (loss) effect recorded in net gain on sale of loans.

Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates present

value of estimated future servicing income.

Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports change in fair value of servicing assets in earnings in the period

in which the changes occur, and are included with other noninterest income in the consolidated financial statements.

The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual

prepayment speeds and default rates and losses.

Goodwill and Other Intangible Assets.

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Recently Issued Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements included elsewhere in this Form 10-Q regarding the impact of new accounting pronouncements

which we have adopted.

See Note 1, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements included elsewhere in this Form 10-Q regarding the impact of new accounting

pronouncements which we have adopted.

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