What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-08 · 545 added, 410 removed, 661 unchanged (59% 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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high concentrations of loans secured by real estate located in our market areas;

risks associated with our commercial loan portfolio, including the uncertain economic consequences of the ongoing COVID-19 pandemic, or any current or future variants thereof, or any deterioration in value of

the general business assets that secure such loans;

risks associated with our commercial loan portfolio, including the risk of declines in commercial real estate prices or deterioration in value of the general business assets that secure such loans;

potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;

increases in unemployment rates in the United States and our market areas;

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;

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our ability to keep pace with technological change or difficulties we may experience when implementing new technologies;

system failures, service denials, cyber-attacks and security breaches;

risks related to system failures, service denials, cyber-attacks, security breaches and data breaches;

our ability to maintain effective internal control over financial reporting;

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costs and effects of litigation, investigations or similar matters to which we may be subject, including any effect on our reputation;

natural disasters, severe weather, acts of god, acts of war or terrorism, outbreaks of hostilities, public health outbreaks (such as the ongoing COVID-19 pandemic), other international or domestic calamities,

and other matters beyond our control;

natural disasters, severe weather, acts of god, acts of war or terrorism, outbreaks of hostilities, public health outbreaks (such as the COVID-19 pandemic or any future pandemic), other international or

domestic calamities, and other external events or matters beyond our control;

uncertainty regarding United States fiscal debt and budget matters;

tariffs and trade barriers;

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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.

uncertain impacts of ongoing 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 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

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

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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 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.

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.

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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.

Our financial condition at June 30, 2023, as well as the results of operations for the three and six months ended June 30, 2023, have been impacted by significant 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 June 30, 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 $3.57 billion at June 30, 2023, an increase of $168.1 million during the six months ended June 30, 2023.

Total deposits were comprised of 31% of noninterest-bearing deposits, 9% 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 45% and 10%, 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.

Our average deposit account

size was approximately $36 thousand.

An estimated 16% of total deposits were uninsured or uncollateralized at June 30, 2023.

We had available borrowing capacity of $1.82 billion through the FHLB, the FRB’s Discount Window, and access to the FRB’s Term Funding Program (“BTFP”) at June 30, 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.

was $1.01 billion and the unused line with the FRB was $612 thousand at June 30, 2023.

No advances were made on these lines during the first two quarters of 2023.

We have not pledged any securities for the BTFP but have approximately $200 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.

Additionally, we have uncollateralized lines with multiple banks totaling $140 million at June 30, 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.

As previously announced, the Company sold City Bank’s wholly-owned subsidiary, Windmark, to Alliant in an all cash transaction on April 1, 2023.

The Company received an aggregate purchase price of

$35.5 million in exchange for Windmark’s shares, representing a pre-tax gain of $33.5 million, before approximately $4.5 million in transaction and related incentive-based compensation expenses.

Results of Operations

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.

We had net income of $29.7 million, or $1.71 per diluted common share, for the three months ended June 30, 2023, compared to net income of $15.9 million, or $0.88 per diluted common share for the

three months ended June 30, 2022.

Return on average equity (annualized) was 31.33% and return on average assets (annualized) was 2.97% for the three months ended June 30, 2023, compared to 16.96% and 1.60%, respectively, for the three months ended

June 30, 2022.

We had net income of $38.9 million, or $2.23 per diluted common share for the six months ended June 30, 2023, compared to net income of $30.2 million, or $1.66 per diluted common share for the six

months ended June 30, 2022.

Return on average equity (annualized) was 21.14% and return on average assets (annualized) was 1.98% for the six months ended June 30, 2023, compared to 15.74% and 1.54%, respectively, for the six months ended June 30,

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 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;

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;

(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.

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,

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

Three Months Ended June 30,

(Dollars in thousands)

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Net interest margin (3)

Six Months Ended June 30,

(Dollars in thousands)

Interest-earning assets:

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.

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average interest rates.

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

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

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

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

Three Months Ended March 31,

Three Months Ended June 30,

2023 over 2022

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Increase (decrease) in net interest income

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.

Six Months Ended June 30,

2023 over 2022

Change due to:

(Dollars in thousands)

Interest-earning assets:

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

Net interest income for the three months ended June 30, 2023 was $34.6 million, compared to $37.1 million for the three months ended June 30, 2022, a decrease of $2.5 million, or 6.8%.

The decrease in

net interest income was primarily due to $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.

The decrease was partially offset by increased income on interest-earning assets, primarily loans and securities, net of increased funding costs on deposits, as market interest rates continued to rise during the period.

rise in rates is attributed to the Federal Open Market Committee (“FOMC”) of the Federal Reserve repeatedly raising their target benchmark interest rate since March 2022 in response to the ongoing inflationary environment in the United States.

Average interest-earning assets increased $96.8 million, or 2.6%, to $3.83 billion for the three months ended June 30, 2023 compared to $3.73 billion for the three months ended June 30, 2022.

The increase is primarily due to growth in average loans

outstanding of $344.8 million, partially offset by a decrease in average interest-bearing cash balances of $179.9 million.

The yield on average interest-earning assets, excluding the $4.4 million recoveries noted above, increased 141 basis points

from 3.94% for the three months ended June 30, 2022 to 5.35% for the three months ended June 30, 2023.

The increase in asset yield from the prior year is primarily a result of increased market interest rates and from deploying excess liquidity from

lower yielding interest-earning cash to higher yielding loans.

Average interest-bearing liabilities increased $120.8 million, or 5.1%, to $2.48 billion for the three months ended June 30, 2023 compared to $2.36 billion for the three months ended

June 30, 2022.

The increase is primarily growth in average interest-bearing deposits of $120.3 million due to increased focus on deposits and liquidity.

The average cost of interest-bearing liabilities increased 201 basis points to 2.63% for the

three months ended June 30, 2023 compared to 0.62% for the three months ended June 30, 2022.

The increase is primarily a result of higher deposit funding costs as market interest rates have risen significantly since the start of the second quarter

These changes caused net interest margin to decline 37 basis points to 3.65% for the three months ended June 30, 2023 from 4.02% for the same three-month period in 2022.

Net interest income for the six months ended June 30, 2023 was $68.9 million, compared to $67.1 million for the six months ended June 30, 2022, an increase of $1.8 million, or 2.8%.

The increase in

net interest income was primarily due to increased income on interest-earning assets, primarily loans and securities, net of increased funding costs on deposits, as market interest rates continued to rise during the period, which is attributed to

the FOMC repeatedly raising their target benchmark interest rate since March 2022.

The increase was partially offset by the $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.

Average interest-earning assets increased $73.6 million or 2.0%, to $3.79 billion for the six months ended June 30, 2023 compared to $3.71

billion for the six months ended June 30, 2022.

The increase is primarily due to growth in average loans outstanding of $320.5 million, partially offset by a decrease in average interest-bearing cash balances of $242.7 million.

The yield on average

interest-earning assets, excluding the $4.4 million recoveries noted above, increased 146 basis points from 3.81% for the six months ended June 30, 2022 to 5.27% for the six months ended June 30, 2023.

The increase in asset yield from the prior

year is a primarily a result of increased market interest rates and from deploying excess liquidity from lower yielding interest-earning cash to higher yielding loans.

Average interest-bearing liabilities increased $58.3 million, or 2.5%, to $2.44

billion for the six months ended June 30, 2023 compared to $2.38 billion for the six months ended June 30, 2022.

The increase is primarily growth in average interest-bearing deposits of $58.0 million due to increased focus on deposits and

liquidity, given recent events in the banking industry.

The average cost of interest-bearing liabilities increased 186 basis points to 2.43% for the six months ended June 30, 2023 compared to 0.57% for the six months ended June 30, 2022.

increase is primarily a result of higher deposit funding costs as market rates have risen significantly since the start of the second quarter of 2022.

These changes caused net interest margin to increase 2 basis points to 3.70% for the six months

ended June 30, 2023 from 3.68% for the same six-month period in 2022.

Provision for Credit Losses

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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.

quarterly evaluation of the adequacy of our ACL 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

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 Company recorded provision for credit losses of $3.7 million for the three months ended June 30, 2023, compared to no provision being recorded for the three months ended June 30, 2022.

provision during the second quarter of 2023 was largely attributable to growth of $190.4 million in loans held for investment and an increase of $1.3 million in specific reserves.

The change in specific reserves was primarily related to a

previously-classified relationship totaling $13.3 million that was placed on nonaccrual in May 2023.

No provision for credit losses were recorded in the second quarter of 2022 based on improved credit metrics in the loan portfolio, specifically in

the hotel segment, offset by the organic loan growth experienced during the period.

The Company recorded a provision for credit losses for the six months ended June 30, 2023 of $4.7 million, compared to a negative provision of $2.1 million for the six months ended June 30, 2022.

provision during the six months ended June 30, 2023 was largely attributable to growth of $231.0 million in loans held for investment and the increase of $1.3 million in specific reserves noted above.

The negative provision for credit losses in the

same period of 2022 was based on improved credit metrics in the loan portfolio, specifically in the hotel segment, direct energy segment, and other Permian Basin-related credits during the period, as well as a decline in the amount of loans that

were actively under a pandemic-related modification experienced during the period.

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

Six Months Ended

(Dollars in thousands)

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Fiduciary income

Gain on sale of subsidiary

Other income and fees (1)

Total noninterest 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.

Investment Company (“SBIC”) investments, and other miscellaneous services.

Noninterest income for the three months ended June 30, 2023 was $47.1 million, compared to $18.8 million for the three months ended June 30, 2022, an increase of $28.3 million, or 150.1%.

changes in the components of noninterest income are detailed below.

Gain on sale of subsidiary - A $33.5 million gain from the sale of Windmark was recorded in the second quarter of 2023.

Mortgage banking activities - Income from mortgage banking activities decreased $3.4 million, or 39.3%, to $5.3 million for the

three months ended June 30, 2023 from $8.7 million for the three months ended June 30, 2022.

This decrease was mainly the result of mortgage loan originations declining

$74.5 million, or 36.0%, in the current year period as compared to the prior year period as mortgage interest rates have risen and refinance activity, which was still occurring in the second quarter of 2022, has subsided.

Income from insurance activities - Due to the sale of Windmark, there was a decline of $1.5 million in income from insurance activities for the three months

ended June 30, 2023 as compared to the same period in 2022.

Other income and fees - Other noninterest income and fees were increased for the three months ended June 30, 2022 from earnings on an SBIC investment of $940

Noninterest income for the six months ended June 30, 2023 was $57.8 million, compared to $42.5 million for the six months ended June 30, 2022, an increase of $15.3 million, or 35.9%.

changes in the components of noninterest income are detailed below.

Gain on sale of subsidiary - A $33.5 million gain from the sale of Windmark was recorded in the second quarter of 2023.

Mortgage banking activities - Income from mortgage banking activities decreased $14.8 million, or 66.2%, to $7.5 million for the six months ended June 30, 2023

from $22.3 million for the six months ended June 30, 2022.

This decrease was primarily a result of a decrease of $223.0 million, or 50.4%, in mortgage loan originations in the current year period as compared to the prior year period as mortgage

interest rates have risen and refinance activity, which was still occurring in the first and second quarters of 2022, has subsided.

There was also a $1.6 million decrease in the fair value of the Company’s mortgage servicing rights portfolio for

the six months ended June 30, 2023 as compared to a $5.6 million increase for the same period in 2022, given the increase in market interest rates during the period.

Income from insurance activities - Due to the sale of Windmark, there was a decline of $1.7 million in income from insurance activities for the six months ended

June 30, 2023 as compared to the same period in 2022.

Other income and fees - Other noninterest income and fees were increased in the six months ended June 30, 2022 from earnings on SBIC investments of $1.8

Noninterest Expense

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Three Months Ended

Six Months Ended

(Dollars in thousands)

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Appraisal expenses

Loss on sale of securities

Other expenses (1)

Total noninterest expense

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.

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

Noninterest expense for the three months ended June 30, 2023 was $40.5 million compared to $36.1 million for the three months ended June 30, 2022, an increase of $4.4 million, or 12.3%.

changes in the components of noninterest expense are detailed below.

Salaries and employee benefits - Salaries and employee benefits increased $1.4 million, or 6.6%, from $22.0 million for the three months ended June 30, 2022 to

$23.4 million for the three months ended June 30, 2023.

This increase was primarily driven by $4.3 million of Windmark transaction and related incentive-based compensation expenses incurred in the second quarter of 2023.

The increase was offset to

an extent by approximately $1.1 million in lower mortgage personnel costs, due to the reduction in mortgage loan originations and operations, and also lower core Windmark personnel costs of $876 thousand due to the sale.

Professional services - Professional services decreased $931 thousand during the three months ended June 30, 2023, as compared to the same period in 2022,

primarily from a reduction of approximately $800 thousand in legal fees incurred largely as a result of a vendor dispute, which was resolved and accounted for by the end of 2022.

This decrease was partially offset by $188 thousand in Windmark

transaction expenses.

Loss on sale of securities - The Company sold approximately $56.2 million of available for sale securities in the second quarter of 2023.

This resulted in a

loss on sale of $3.4 million.

Other expenses - The FDIC assessment increased $414 thousand for the three months ended June 30, 2023 compared to the same period in 2022.

The increase was due

to an increase in assessment rates charged by the FDIC and growth in the Company’s assessment base.

Noninterest expense for the six months ended June 30, 2023 was $72.9 million, compared to $74.0 million for the six months ended June 30, 2022, a decrease of $1.1 million, or 1.5%.

Significant changes

in the components of noninterest expense are detailed below.

Salaries and employee benefits - Salaries and employee benefits decreased $2.0 million, or 4.5%, from $44.7 million for the six months ended June 30, 2022 to

$42.7 million for the six months ended June 30, 2023.

This was primarily driven by approximately $4.1 million in lower mortgage personnel costs, due to the reduction in mortgage loan originations and operations, and also lower core Windmark

personnel costs of $876 thousand due to the sale.

This decrease was offset to an extent by $4.3 million of Windmark transaction and related incentive-based compensation expenses incurred in the second quarter of 2023.

Professional services - Professional services decreased $1.9 million during the six months ended June 30, 2023, as compared to the same period in 2022,

primarily from a reduction of $1.5 million in legal fees incurred largely as a result of a vendor dispute, which was resolved and accounted for by the end of 2022.

This decrease was partially offset by $200 thousand in Windmark transaction

Loss on sale of securities - The Company sold approximately $56.2 million of available for sale securities in the second quarter of 2023.

This resulted in a

loss on sale of $3.4 million.

Other expenses - Other variable mortgage-based expenses also declined during the six months ended June 30, 2023, as compared to the same period in 2022, as

mortgage originations declined.

Additionally, the FDIC assessment increased $527 thousand as the assessment rates charged by the FDIC were increased and growth in the assessment base for the six months ended June 30, 2023 as compared to the same

period in 2022.

Financial Condition

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.

Our total assets increased $206.1 million, or 5.2%, to $4.15 billion at June 30, 2023, compared to $3.94 billion at December 31, 2022.

Our gross loans held for investment increased $231.0 million, or

8.4%, to $2.98 billion at June 30, 2023, compared to $2.75 billion at December 31, 2022.

Our securities portfolio decreased $73.6 million, or 10.5%, to $628.1 million at June 30, 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.

increased $168.1 million, or 4.9%, to $3.57 billion at June 30, 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 $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

Loans held for investment increased $231.0 million, or 8.4%, to $2.98 billion at June 30, 2023, compared to $2.75 billion at December 31, 2022.

This increase in our loans was primarily the result of

organic net loan growth based on strong loan demand.

The organic loan growth remained relationship-focused and occurred primarily in commercial real estate loans, residential mortgage loans, and commercial loans.

The following table shows the contractual maturities of our loans held for investment portfolio at June 30, 2023:

Due after One Year

Through Five Years

Due after Five Years

Through Fifteen Years

Due after Five

Fifteen Years

(Dollars in thousands)

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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 March 31, 2023:

The following table shows the distribution between fixed and adjustable interest rate loans for maturities greater than one year as of June 30, 2023:

(Dollars in thousands)

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Other consumer

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, $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.

At June 30, 2023, there was $1.42 billion in adjustable rate loans, with $669.5 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, $466.6 million will reprice immediately upon changes in the underlying index rate, with the remaining $202.9 million being subject to rate 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 68.8% 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

throughout the areas we serve.

Although the Bank has diversified portfolios, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of the markets in which it operates, which consist primarily

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

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.

We have a collateral concentration, as

64.4% of our loans were secured by real property as of June 30, 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 throughout

the areas we serve.

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

Commercial real estate loans represent 38.7% of loans held for investment as of June 30, 2023 and represented 38.7% of

loans held for investment as of December 31, 2022.

Further, these loans are geographically diversified, primarily throughout the State of Texas as well as Eastern New Mexico.

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

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 real estate loans increased $87.6 million, or 9.5%, to $1.0 billion as of June 30, 2023 from $919.4 million as of December 31, 2022.

The increase was primarily driven by an increase of

$52.4 million in multifamily property loans and a growth of $49.8 million in other income-producing commercial real estate loans.

Commercial – General and Specialized .

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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 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.

Commercial general loans increased $66.3 million, or 13.7%, to $551.1 million as of June 30, 2023 from $484.8 million as of December 31, 2022.

The increase in commercial general loans was primarily

due to organic loan growth in service-based commercial loans and more broadly throughout general commercial loans.

Commercial specialized loans increased $27.7 million, or 8.5%, to $355.3 million as of June 30, 2023 from $327.5 million as of December 31, 2022.

This increase was primarily due to the funding of

$18.1 million in seasonal agricultural production loans and growth of $15.6 million in direct energy loans, partially offset by a net reduction of $$9.4 million in finance, investment, and insurance loans.

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

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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 $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.

Consumer and other loans increased $57.5 million, or 6.7%, to $920.4 million as of June 30, 2023, from $862.9 million as of December 31, 2022.

The increase in these loans was primarily a result of a

$62.3 million increase in residential mortgage loans, partially offset by a $3.4 million decrease in consumer auto loans.

As of June 30, 2023, our consumer loan portfolio was comprised of $522.5 million in 1-4 family residential loans, $318.1

million in auto loans, and $79.8 million in other consumer loans.

Construction .

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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.

Construction loans decreased $8.1 million, or 5.3%, to $145.4 million as of June 30, 2023 from $153.5 million as of December 31, 2022.

The decrease resulted from contraction after higher demand for

residential construction as a result of home shortages in many of our markets peaked in the first quarter of 2023.

Non-owner occupied office real estate loans are included in commercial real estate loans and totaled $129.2 million at June 30, 2023.

Owner occupied office real estate loans are included in commercial

loans and totaled $53.0 million at June 30, 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.

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.

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.

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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.

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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

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

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 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.

Management evaluates the appropriate level of the ACL 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.

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 ACL is assessed by regulatory examinations and the Company’s internal and external loan reviews.

ACL 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 ACL 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.

Loan 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.

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.

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

MEV’s 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

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.

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.

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

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

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 ACL for loans was $43.1 million at June 30, 2023, compared to $39.3 million at December 31, 2022, an increase of $3.8 million, or 9.8%.

The increase is primarily a result of a provision for loan

losses of $4.7 million being recorded during the six months ended June 30, 2023 largely attributable to growth of $231.0 million in loans held for investment and the increase of $1.3 million in specific reserves noted previously.

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 table provides an analysis of the ACL for loans during the periods indicated.

Three Months Ended

Six Months Ended

Average loans outstanding during the periods

Commercial real estate

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Loans held for sale

Total average loans outstanding during the period

Net charge-offs (recoveries) during the period

Total average loans outstanding during the periods

Net charge-offs (recoveries) during the periods

Commercial real estate

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Other consumer

Total net charge-offs (recoveries) during the period

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

Total net charge-offs (recoveries) during the periods

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

Commercial real estate

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Other consumer

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

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

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

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Ratio of nonaccrual loans to total loans held for investment

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

Net charge-offs (recoveries) totaled $383 thousand and were 0.05% (annualized) of average loans outstanding for the three months ended June 30, 2023, compared to $(136) thousand and (0.02)% (annualized) for the three

months ended June 30, 2022.

Net charge-offs totaled $1.0 million and were 0.07% (annualized) of average loans outstanding for the six months ended June 30, 2023, compared to $228 thousand and 0.02% (annualized) for the six months ended June 30,

There was a $400 thousand recovery on a commercial tenant relationship in the second quarter of 2022 that affected both of the period comparisons.

The allowance for loan losses as a percentage of loans held for investment was 1.45% at June

30, 2023 and 1.43% at December 31, 2022.

While the entire ACL for loans is available to absorb losses from any part of our loan portfolio, the following table sets forth the allocation of the ACL for loans for the periods presented and the

percentage of allowance in each classification to total allowance:

June 30, 2023

December 31, 2022

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

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.

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.

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

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.

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.

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

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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.

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 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.

At June 30, 2023, our total nonaccrual loans were $16.6 million, or 0.56% of total loans held for investment, as compared to $5.8 million, or 0.21% of total loans held for investment, at December 31,

These loans within this amount that exceeded $250 thousand were specifically analyzed and specific valuation allowances were established as necessary and included in the ACL for loans as of June 30, 2023 to cover any probable loss.

relationship totaling $13.3 million was placed on nonaccrual during the second quarter of 2023 with a specific reserve of $1.3 million based on the borrower beginning asset liquidation.

The borrower has continued with payment performance and we

expect material reductions of principal in the third quarter 2023.

Additionally, the Company had two credits totaling $2.9 million that were removed from nonaccrual status during the second quarter of 2023 as a result of principal paydowns,

improved cash flow, and continued sustained payment performance.

Nonperforming loans were $21.0 million at June 30, 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 reduction.

When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL for loans.

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.

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.

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 ACL for loans 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.

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

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

securities and U.S.

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

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.

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.

Our securities portfolio decreased $73.6 million, or 10.5%, to $628.1 million at June 30, 2023, compared to $701.7 million at December 31, 2022.

The decrease was primarily due to

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.

$76.6 million in sales, maturities, prepayments, and calls at June 30, 2023 as compared to December 31, 2022.

The Company sold approximately $56.2 million of available for sale securities in the second quarter of

This resulted in a loss on sale of $3.4 million.

The average book yield of these securities was approximately 2.71%.

The proceeds from the sale were used to help fund loan growth during the quarter.

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

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.

During the three months ended June 30, 2023, the fair value of the Company’s available for sale

securities declined by $3.7 million.

At June 30, 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 consolidated financial statements for securities in the

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

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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

As of June 30, 2023

Due after One Year

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Available-for-sale

government and agencies

State and municipal

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Available-for-sale

government and agencies

State and municipal

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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 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.

Total deposits at June 30, 2023 were $3.57 billion, representing an increase of $168.1 million, or 4.9%, compared to $3.41 billion at December 31, 2022.

The increase in total deposits since December

31, 2022 is primarily due to organic growth.

The growth was largely in brokered deposits, which grew $81 million, and in public fund deposits, which grew approximately $45 million.

As of June 30, 2023, 30.8% of total deposits were comprised of

noninterest-bearing demand accounts, 60.2% of interest-bearing non-maturity accounts and 9.0% of time deposits.

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

March 31, 2023

June 30, 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

March 31, 2023

March 31, 2022

Three Months Ended June 30,

(Dollars in thousands)

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Total deposits

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

Six Months Ended June 30,

(Dollars in thousands)

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.

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

The scheduled maturities of time deposits as of June 30, 2023 follows:

(Dollars in thousands)

The estimated amount of uninsured and uncollateralized deposits as of June 30, 2023 was $576.9 million.

This represented approximately 16% of total deposits and excludes collateralized public fund

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.

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 $130.4 million at June 30, 2023.

Borrowed Funds

In addition to deposits, we utilize advances from the FHLB and other borrowings as a supplementary funding source to finance our operations.

In addition to deposits, we may utilize advances from the FHLB and other borrowings as a supplementary funding source to finance our operations.

FHLB Advances .

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real estate loans as well as FHLB stock.

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.

At June 30, 2023 and December 31, 2022, we had total remaining borrowing capacity from the FHLB of $1.01 billion and $920.2 million, respectively.

We had no FHLB borrowings during the six months ended June 30, 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 $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.

The amount of the line was $611.7 million and $648.3 million at June 30, 2023 and December 31, 2022, respectively.

We had no long-term FRB borrowings during the six months ended June 30, 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

As of June 30, 2023, the Company has not pledged any securities for the BTFP but has approximately $200 million of available securities that can be used as collateral

for additional borrowings through the program.

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The total amount of the

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.

lines was $140.0 million and 160.0 million as of June 30, 2023 and December 31, 2022, respectively.

The lines of credit were not used, other than testing, during the three or six months ended June 30, 2023 or the three or six months ended June 30,

Subordinated Debt .

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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.

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

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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

As of June 30, 2023, the total amount of subordinated debt outstanding was $76.5 million less approximately $418 thousand of remaining debt issuance costs for a total balance of $76.1 million.

Junior Subordinated Deferrable Interest Debentures and Trust Preferred Securities .

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The trusts are not consolidated and the debentures issued by the

Company to the trusts are reflected in the Company’s Consolidated Balance Sheets.

Company to the trusts are reflected in the Consolidated Balance Sheets.

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

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

2023 and December 31, 2022.

The amount of debentures outstanding was $46.4 million at June 30, 2023 and

December 31, 2022.

The Company has the right, as has been exercised in the past, to defer payments of interest on the securities for up to twenty consecutive quarters.

During such time, corporate dividends may not be paid.

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

The Company is current in

its interest payments on the debentures.

The chart below indicates certain information, as of June 30, 2023, 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, and the

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Interest payable quarterly with principal due at maturity.

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

Rate as of last reset date, prior to June 30, 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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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.

2023, the Bank had the capacity to borrow additional funds from the FHLB and Federal Reserve discount window of up to approximately $1.01 billion and $611.7 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

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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.

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 $392.0 million as of June 30, 2023, compared to $357.0 million as of December 31, 2022, an increase of $35.0 million, or 9.8%.

increase from December 31, 2022 was primarily the result of $38.9 million in net earnings for the six months ended June 30, 2023 and an increase in accumulated other comprehensive income (“AOCI”) of $3.3 million, net of tax, partially offset by

repurchases of common stock of $2.5 million and $4.4 million of dividends paid.

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

in the rising interest rate environment during the period.

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

quality and level of earnings;

concentrations of credit, quality of loans and investments;

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

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.

At June 30, 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 June 30, 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.

March 31, 2023

June 30, 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 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.

The Company repurchased stock in accordance with its previously-announced stock repurchase program during the three and six months ended June 30, 2023 and 2022.

For the three and six months ended June

30, 2023, we repurchased 112,954 shares of common stock for a total of $2.5 million.

These shares were retired immediately upon repurchase by the Company and not included in treasury stock.

See Part II, Item 2, “Unregistered Sales of Equity

Securities and Use of Proceeds,” of this Form 10-Q for further information.

Interest Rate Sensitivity and Market Risk

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.

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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.

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.

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.

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 scenarios.

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

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:

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generally accepted accounting principles (“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.

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.

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.

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

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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:

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:

December 31, 2022

(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.

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

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.

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 March 31, 2023.

information about these policies can be found in Note 1 of the 2022 Annual Report on Form 10-K or the Company’s consolidated financial statements as of June 30, 2023.

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

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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

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.

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

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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.

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

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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.

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.

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.

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.

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.

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.

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

Loans Held for Sale.

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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.

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