SOUTH PLAINS FINANCIAL, INC. (SPFI) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the
accompanying notes included elsewhere in this Report. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may
prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this Report, may cause actual results to differ
materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Except as required by law, we assume no obligation to update any of these forward-looking statements.

Overview

We are a bank holding company headquartered in Lubbock, Texas, and our wholly-owned subsidiary, City Bank is one of the largest independent banks in West Texas and has additional banking operations
in the Dallas, El Paso, Greater Houston, the Permian Basin, and College Station, Texas markets, and the Ruidoso, New Mexico market. Through City Bank, we provide a wide range of commercial and consumer financial services to small and medium-sized
businesses and individuals in our market areas. Our principal business activities include commercial and retail banking, along with insurance, investment, trust and mortgage services.

Selected Financial Data

The following table sets forth certain of our selected financial data for, and as of the end of, each of the periods indicated. This information should be read in conjunction with “Item 8. Financial
Statements and Supplementary Data” included elsewhere in this Report (dollars in thousands, except per share data).

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Results of Operations

Net income for the year ended December 31, 2022 was $58.2 million, or $3.23 per diluted share, compared to $58.6 million, or $3.17 per diluted share, for the year ended December 31, 2021. The
decrease in net income was primarily the result of a decrease of $21.3 million in noninterest income, offset by an increase of $16.7 million in net interest income and a decrease of $3.9 million in noninterest expense.

Return on average assets was 1.47% and return on average equity was 15.79% for the year ended December 31, 2022, compared to 1.56% and 15.08%, respectively, for the year ended December 31, 2021. The
decrease in return on average assets was primarily due to the decrease in net income of 0.6%, relative to a larger increase of 5.2% in total average assets.

Net income for the year ended December 31, 2021 was $58.6 million, or $3.17 per diluted share, compared to $45.4 million, or $2.47 per diluted share, for the year ended December 31, 2020. The
increase in net income was primarily the result of a decrease of $27.5 million in provision for loan losses, offset by a decrease of $4.1 million in noninterest income, an increase of $6.3 million in noninterest expense and an increase of $3.3
million in income tax expense.

Return on average assets was 1.56% and return on average equity was 15.08% for the year ended December 31, 2021, compared to 1.31% and 13.40%, respectively, for the year ended December 31, 2020. The
increase in return on average assets was primarily due to the increase in net income of 29.2%, relative to a smaller increase of 8.8% in total average assets.

The Paycheck Protection Program (“PPP”) was created by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and implemented by the U.S. Small Business Administration (the “SBA”) in March 2020.
Funding for the PPP expired May 31, 2021. The PPP allowed entities to apply for a 1.00% interest rate loan with payments generally deferred until the date the lender receives the applicable forgiveness amount from the SBA. The Bank originated
approximately 3,200 PPP loans for a total of $309.2 million. As of December 31, 2022, there was approximately $482 thousand still outstanding. The Company recorded PPP-related SBA interest and fee income of $2.1 million, $8.3 million, and $5.1
million during the years of 2022, 2021, and 2020, respectively.

Net Interest Income

Net interest income is the principal source of the Company’s net income and represents the difference between interest income (interest and fees earned on assets, primarily loans and investment
securities) and interest expense (interest paid on deposits and borrowed funds). We generate interest income from interest-earning assets that we own, including loans and investment securities. We incur interest expense from interest-bearing
liabilities, including interest-bearing deposits and other borrowings, notably FHLB advances and subordinated notes. To evaluate net interest income, we measure and monitor (i) yields on our loans and other interest-earning assets, (ii) the costs
of our deposits and other funding sources, (iii) our net interest spread and (iv) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net
interest margin is calculated as the annualized net interest income on a fully tax-equivalent basis divided by average interest-earning assets.

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Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets,
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; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; 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.

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Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in
average interest rates. The following tables set forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in
volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume.

Year Ended December 31, 2022 compared to Year Ended December 31, 2021

Net interest income for the year ended December 31, 2022 was $138.5 million compared to $121.8 million for the year ended December 31, 2021, an increase of $16.7 million, or 13.7%. The increase in
net interest income in 2022 was comprised of a $26.1 million, or 19.4%, increase in interest income, partially offset by a $9.4 million, or 71.0%, increase in interest expense. The increase in interest income was primarily attributable to
increases of $17.4 million in loan interest income and $8.7 million in interest income from securities and other interest-earning assets. The increase in loan interest income was primarily due to growth of $192.0 million in average loans
outstanding and the rising interest rate environment, partially offset by decreases of $102.9 million in average PPP loans and $6.3 million in the PPP-related interest and fees. The increase in interest income on securities and other
interest-earning assets was primarily due to securities purchases and rising market interest rates. During the years ended December 31, 2022 and 2021, the Company recognized $2.0 million and $8.3 million, respectively, in PPP-related interest and
fees.

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The $9.4 million increase in interest expense for the year ended December 31, 2022 was primarily related to a 40 basis points increase in the rate paid on interest-bearing liabilities and an
increase of $18.5 million in average interest-bearing liabilities over the same period in 2021. The rise in rates was largely attributed to the Federal Open Market Committee of the Board of Governors of the Federal Reserve System repeatedly
raising their target benchmark interest rate during, resulting in federal funds rate increases of 425 basis points between March and December of 2022.

For the year ended December 31, 2022, net interest margin and net interest spread were 3.73% and 3.37%, respectively, compared to 3.51% and 3.31% for the same period in 2021, respectively, which
reflects the changes in interest income and interest expense discussed above.

Year Ended December 31, 2021 compared to Year Ended December 31, 2020

Net interest income for the year ended December 31, 2021 was $121.8 million compared to $122.3 million for the year ended December 31, 2020, a decrease of $0.5 million, or 0.4%. The
decrease in net interest income was comprised of a $3.2 million, or 2.3%, decrease in interest income and a $2.7 million, or 16.8%, decrease in interest expense. The
decrease in interest income was primarily attributable to a decrease in the yield on average interest-earning assets of 45 basis points offset by the growth of $292.5 million in these assets during the year ended December 31, 2021. During the
years ended December 31, 2021 and 2020, the Company recognized $8.3 and $5.1 million, respectively, in PPP-related interest and fees. When received, the PPP-related SBA fees are deferred and then accreted into interest income over the life of
the applicable PPP loans. At the time of PPP loan forgiveness by the SBA, any remaining deferred fees are recognized immediately. At December 31, 2021 and 2020, there was $1.9 million and $4.1 million, respectively, of deferred PPP-related SBA
fees that had not been accreted to income.

The $2.7 million decrease in interest expense for the year ended December 31, 2021 was primarily related to a 16 basis points decrease in the rate paid on interest-bearing liabilities, partially
offset by an increase of $124.7 million in average interest-bearing liabilities. The increase in average interest-bearing liabilities was mainly due to increased deposits from PPP loan funding, other government stimulus payments and programs
during the period as well as organic growth, partially offset by the repayment of $75.0 million in long-term advances during 2021.

For the year ended December 31, 2021, net interest margin and net interest spread were 3.51% and 3.31%, respectively, compared to 3.84% and 3.61% for the same period in 2020, respectively, which
reflects the changes in interest income and interest expense discussed above.

Provision for Loan Losses

Credit risk is inherent in the business of making loans. We establish an allowance for loan losses through charges to earnings, which are shown in the consolidated statements of comprehensive income
(loss) as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of
our allowance for loan losses and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to our earnings. The provision for loan losses and
level of allowance for each period are dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the
valuation of problem loans and the general economic conditions in our market areas. See “Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies” in the notes to our consolidated financial statements
included elsewhere in this Report for more detailed discussion.

Year Ended December 31, 2022 compared to Year Ended December 31, 2021

The provision for loan losses for the year ended December 31, 2022 was a negative $2.6 million compared to a negative $1.9 million for the year ended December 31, 2021. The decrease in the provision
for loan losses for the year ended December 31, 2022 compared to the same period in 2021 was primarily due to improved credit metrics in the loan portfolio, specifically in the hotel segment, direct energy segment, and other Permian Basin-related
credits, and a decline in the amount of loans that were actively under a COVID-19 pandemic-related modification, partially offset by growth of $310.5 million in loans held for investment. Net charge-offs decreased $1.3 million during 2022 as
compared to 2021. The allowance for loan losses as a percentage of loans held for investment was 1.43% at December 31, 2022 and 1.73% at December 31, 2021. Further discussion of the allowance for loan losses is noted below.

Year Ended December 31, 2021 compared to Year Ended December 31, 2020

The provision for loan losses for the year ended December 31, 2021 was a negative $1.9 million compared to $25.6 million for the year ended December 31, 2020. The decrease in the provision for loan
losses for the year ended December 31, 2021 compared to the same period in 2020 was primarily a result of general improvement in the economy, a decline in the amount of loans actively under a modification, and a decrease in nonperforming loans.
Net charge-offs decreased $2.7 million during 2021 as compared to 2020. The allowance for loan losses as a percentage of loans held for investment was 1.73% at December 31, 2021 and 2.05% at December 31, 2020. Further discussion of the allowance
for loan losses is noted below.

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

The following table sets forth the major components of our noninterest income for the periods indicated:

Year Ended December 31, 2022 compared to Year Ended December 31, 2021

Noninterest income for the year ended December 31, 2022 was $76.1 million compared to $97.5 million for the year ended December 31, 2021, a decrease of $21.3 million, or 21.9%. Income from mortgage
banking activities decreased $28.4 million, or 47.5%, to $31.4 million for the year ended December 31, 2022 from $59.7 million for the year ended December 31, 2021. The decrease was primarily the result of a reduction of $781.6 million, or 52.1%,
in mortgage loan originations for the year ended December 31, 2022, compared to the year ended December 31, 2021, driven by rising mortgage interest rates during 2022 and the departure of several mortgage loan originators during the first quarter
of 2022 and a decline in gain on sale margins. This decrease was partially offset by increases of $3.2 million in the fair value adjustment and $1.0 million in servicing income for the Company’s mortgage servicing rights portfolio. The remaining
noninterest income increased $7.0 million in 2022, compared to 2021, primarily due to increased income from Small Business Investment Company (“SBIC”) investments of $2.3 million, $2.1 million in legal settlements, and growth in income from both
insurance activities of $2.5 million and bank card services and interchange fees of $707 thousand, partially offset by a decrease of $527 thousand in fiduciary income.

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

Year Ended December 31, 2021 compared to Year Ended December 31, 2020

Noninterest income for the year ended December 31, 2021 was $97.5 million compared to $101.6 million for the year ended December 31, 2020, a decrease of $4.1 million, or 4.1%. Income from mortgage
banking activities decreased $5.3 million, or 8.2%, to $59.7 million for the December 31, 2021 from $65.0 million for the year ended December 31, 2020. The decrease was primarily the result of a reduction of $106.3 million in interest rate lock
commitments and a decline in gain on sale margins, partially offset by an increase of $58.1 million in mortgage loan originations for the year ended December 31, 2021 compared to the year ended December 31, 2020. Our mortgage originations
experienced another high level of volume in 2021 as the industry continued to benefit from historic low levels of interest rates through a majority of 2021. Refinance activity represented 54% of the 2021 originations as compared to 53% in 2020.
Additionally, bank card services and interchange fee income increased $2.2 million and income from insurance activities increased $670 thousand for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in
bank card services and interchange fee income was primarily tied to the growth in deposits, increased consumer spending, and the expansion of credit card services. The increase in income from insurance activities was primarily related to
increased premiums paid in 2021. Further, there was a $2.3 million gain on sale of securities in the first quarter of 2020.

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Noninterest Expense

The following table sets forth the major components of our noninterest expense for the periods indicated:

Year Ended December 31, 2022 compared to Year Ended December 31, 2021

Noninterest expense for the year ended December 31, 2022 was $144.1 million compared to $148.0 million for the year ended December 31, 2021, a decrease of $3.9 million, or 2.7%. Salaries and
employee benefits decreased $7.0 million, or 7.5%, from $93.4 million for the December 31, 2021 to $86.3 million for the year ended December 31, 2022. This decrease in salaries and employee benefits expense was primarily driven by lower mortgage
commissions of $10.3 million and reduced related supporting personnel expenses due to the contraction in mortgage loan originations, partially offset by an increase of $1.0 million in variable insurance commission expense and additional expense
for commercial lenders hired as part of a planned initiative. All other noninterest expenses increased $3.1 million for the year ended December 31, 2022, compared to the same period in 2021. The increase was largely attributable to additional
legal fees of $2.6 million as a result of vendor dispute legal proceedings and other legal matters and a rise of $1.4 million in occupancy expense related to property repair and maintenance on banking house properties, partially offset by a
reduction in appraisal expenses of $1.5 million and other variable mortgage-related expenses.

Year Ended December 31, 2021 compared to Year Ended December 31, 2020

Noninterest expense for the year ended December 31, 2021 was $148.0 million compared to $141.7 million for the year ended December 31, 2020, an increase of $6.3 million, or 4.5%. Salaries and
employee benefits increased $4.1 million, or 4.6%, from $89.2 million for the December 31, 2020 to $93.4 million for the year ended December 31, 2021. This increase in salaries and employee benefits expense was predominately driven by increased
commissions paid on the higher volume of mortgage loan originations and other personnel expenses to support mortgage activities. Additionally, salary expense increased due to expenses for incentive-based compensation related to the growth in
loans held for investment in 2021 and for newly-hired commercial loan officers as part of our stated initiative. All other noninterest expenses increased $2.2 million for the year ended December 31, 2021, compared to the same period in 2020. This
increase was primarily related to additional expenses incurred in 2021 for bankcard expenses as a result of increased consumer spending, growth in deposits, and credit card program expenses. Additionally, there were increases in appraisal
expenses due to the high mortgage volume noted above and increased technology costs as part of the investment in planning our transition of computing and data storage to the cloud as well as further development of the new customer lead generation
initiative.

Financial Condition

Our total assets increased $42.2 million, or 1.1%, to $3.94 billion at December 31, 2022 as compared to $3.90 billion at December 31, 2021. Our loans held for investment increased $310.5 million, or
12.7%, to $2.75 billion at December 31, 2022, compared to $2.44 billion at December 31, 2021. Total deposits increased $65.2 million, or 2.0% to $3.41 billion at December 31, 2022, compared to $3.34 billion at December 31, 2021. The increase in
total assets, loans, and deposits was primarily the continued result of organic growth of the Company, which included hiring new commercial lenders as part of a stated growth initiative.

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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. 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 investments increased $310.5 million, or 12.7%, to $2.75 billion at December 31, 2022 as compared to $2.44 billion at December 31, 2021. We had net organic growth in
non-PPP loans of $350.2 million during the year ended December 31, 2022, partially offset by a decrease due to SBA forgiveness and repayments of $39.7 million in PPP loans during 2022. The organic loan growth remained relationship-focused and occurred primarily in commercial real estate loans, residential mortgage loans, and consumer auto loans, partially offset by decreases in ag production, energy
and hotel loans.

The following table shows the contractual maturities of our loans held for investment portfolio at December 31, 2022:

The following table shows the distribution between fixed and adjustable interest rate loans for maturities greater than one year as of December 31, 2022:

At December 31, 2022, there was $1.32 billion in adjustable rate loans, with $645.2 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, $416.4 million will reprice immediately upon changes in the underlying index rate, with the remaining $228.8 million being subject to rate ceilings, floors above the current index, or a future repricing date. The Wall Street Journal prime rate is the predominate index used by the Bank.

The Bank is primarily involved in real estate, commercial, agricultural and consumer lending activities with customers throughout Texas and Eastern New Mexico. We have a collateral concentration as
69.8% of our loans were secured by real property as of December 31, 2022, compared to 69.4% as of December 31, 2021. 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 38.7% of loans held for investment as of December 31, 2022 and
represented 36.7% of loans held for investment as of December 31, 2021. Further, these loans are geographically diversified, primarily throughout the State of Texas as well as Eastern New Mexico.

We have established concentration limits in the loan portfolio for commercial real estate loans and unsecured lending, among other loan types. All loan types are within established limits. We use
underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending
to allow us to react to a borrower’s deteriorating financial condition, should that occur.

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Commercial Real Estate. Our commercial real estate portfolio includes loans for commercial property that is owned by real estate investors, construction
loans to build owner-occupied properties, and loans to developers of commercial real estate investment properties and residential developments. Commercial real estate loans are subject to underwriting standards and processes similar to our
commercial loans. These loans are underwritten primarily based on projected cash flows for income-producing properties and collateral values for non-income-producing properties. The repayment of these loans is generally dependent on the
successful operation of the property securing the loans or the sale or refinancing of the property. Real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing our real
estate portfolio are diversified by type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

Commercial real estate loans increased $163.9 million, or 21.7%, to $919.4 million as of December 31, 2022 from $755.4 million as of December 31, 2021. The increase was primarily driven by an
increase of $90.6 million in commercial and residential land development loans, an increase of $71.0 million in retail loans, and an increase of $41.4 million in office, commercial and retail tenant loans, partially offset by a decrease of $37.2
million in hotel loans.

Commercial – General and Specialized. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably.
Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed,
and to ensure appropriate collateral is obtained to secure the loan. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial
loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and typically include personal guarantees. Owner-occupied real estate is included in commercial loans, as the
repayment of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties. Commercial loans are grouped into two distinct sub-categories:
specialized and general. Commercial related loans that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related loans that contain a broader
diversity of borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries.

Commercial general loans increased $24.8 million, or 5.4%, to $484.8 million as of December 31, 2022 from $460.0 million as of December 31, 2021. The increase in commercial general loans was
primarily due to organic loan growth in restaurant & retail loans, goods and services loans, and construction company loans, partially offset by a decrease of $39.7 million in PPP loans.

Commercial specialized loans decreased $51.2 million, or 13.5%, to $327.5 million as of December 31, 2022 from $378.7 million as of December 31, 2021. This decrease was primarily due to an early
payoff of an approximately $46 million on one energy sector loan and a net reduction of $36.5 million in seasonal agricultural production loans, partially offset by organic loan growth of $26.1 million in finance, investment, and insurance loans.

Consumer. We utilize a computer-based credit scoring analysis to supplement our policies and procedures in underwriting consumer loans. Our loan policy
addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimize
our risk. Residential real estate loans are included in consumer loans. We generally require mortgage title insurance and hazard insurance on these residential real estate loans.

Consumer and other loans increased $166.4 million, or 23.9%, to $862.9 million as of December 31, 2022, from $696.5 million as of December 31, 2021. The increase in these loans was primarily a
result of an $80.8 million growth in consumer auto loans as a result of higher demand for autos during 2022, along with adding several high-quality auto dealerships, and a $72.4 million increase in residential mortgage loans. As of December 31,
2022, our consumer loan portfolio was comprised of $460.1 million in 1-4 family residential loans, $321.5 million in auto loans, and $81.3 million in other consumer loans.

Construction. Loans for residential construction are for single-family properties to developers, builders, or end-users. These loans are underwritten based
on estimates of costs and completed value of the project. Funds are advanced based on estimated percentage of completion for the project. Performance of these loans is affected by economic conditions as well as the ability to control costs of the
projects.

Construction loans increased $6.7 million, or 4.5%, to $153.5 million as of December 31, 2022 from $146.9 million as of December 31, 2021. The increase resulted from continued higher demand for
residential construction as a result of home shortages in many of our markets.

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Paycheck Protection Program. Beginning in April 2020 and until funding expired on May 31, 2021, we originated loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care
benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. Terms of the PPP loans include the following (i) maximum amount limited to the
lesser of $10 million or an amount calculated using a payroll-based formula, (ii) maximum loan term of five years, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required for six months
following the loan disbursement date and (vi) loan forgiveness up to the full principal amount of the loan and any accrued interest, subject to certain requirements including that no more than 25% of the loan forgiveness amount may be
attributable to non-payroll costs. In return for processing and booking the loan, the SBA paid the lender a processing fee tiered by the size of the loan (5% for loans of not more than $350 thousand; 3% for loans more than $350 thousand and less
than $2 million; and 1% for loans of at least $2 million). At December 31, 2022, PPP loans totaled approximately $482 thousand and are included in commercial general loans.

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit to our customers is represented by the contractual or notional amount of those instruments. Commitments to
extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised. The contractual or notional amounts of those instruments reflect the extent of involvement we have in
particular classes of financial instruments.

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

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

Allowance for Loan Losses

The allowance for loan losses provides a reserve against which loan losses are charged as those losses become evident. Management evaluates the appropriate level of the allowance for loan losses on
a quarterly basis. The analysis takes into consideration the results of an ongoing loan review process, the purpose of which is to determine the level of credit risk within the portfolio and to ensure proper adherence to underwriting and
documentation standards. Additional allowances are provided to those loans which appear to represent a greater than normal exposure to risk. The quality of the loan portfolio and the adequacy of the allowance for loan losses is assessed by
regulatory examinations and the Company’s internal and external loan reviews. The allowance for loan losses consists of two elements: (1) specific valuation allowances established for probable losses on specific loans and (2) historical valuation
allowances calculated based on historical loan loss experience for similar loans with similar characteristics and trends, judgmentally adjusted for general economic conditions and other qualitative risk factors internal and external to the
Company.

To determine the adequacy of the allowance for loan losses, the loan portfolio is broken into categories based on loan type. Historical loss experience factors by category, adjusted for changes in
trends and conditions, are used to determine an indicated allowance for each portfolio category. These factors are evaluated and updated based on the composition of the specific loan portfolio. Other considerations include volumes and trends of
delinquencies, nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk, and the experience
and abilities of the Company’s lending personnel. In addition to the portfolio evaluations, impaired loans with a balance of $250 thousand or more are individually evaluated based on facts and circumstances of the loan to determine if a specific
allowance amount may be necessary. Specific allowances may also be established for loans whose outstanding balances are below the above threshold when it is determined that the risk associated with the loan differs significantly from the risk
factor amounts established for its loan category.

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The allowance for loan losses was $39.3 million at December 31, 2022 compared to $42.1 million at December 31, 2021, an decrease of $2.8 million, or 6.7%. The decrease was primarily a result of a
negative provision for loan losses of $2.6 million being recorded during 2022 based on general improvement in the Company’s credit metrics, a decline in the amount of loans that were actively under a modification, and a decrease in nonperforming
loans, partially offset by the growth in the loan portfolio. Nevertheless, forecasted economic conditions continue to remain uncertain due to the continued 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 allowance for loan losses and other data at the dates indicated.

Net charge-offs totaled $0.2 million and were 0.01% of average loans outstanding for the year ended December 31, 2022, compared to $1.5 million and 0.06% for the year ended December 31, 2021. There was $621
thousand in consumer credit program net charge-offs, $364 thousand in auto loan net charge-offs, and a charge-off of $215 thousand on a restaurant & retail relationship during 2022, partially offset by a $822 thousand recovery on an energy
relationship and a $400 thousand recovery on a commercial real estate loan during 2022. The allowance for loan losses as a percentage of loans held for investment was 1.43% at December 31, 2022 and 1.73% at December 31, 2021.

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While the entire allowance is available to absorb losses from any part of our loan portfolio, the following table sets forth the allocation of the allowance for loan losses for the years presented
and the percentage of allowance in each classification to total allowance:

Asset Quality

Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which
the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is
a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans
is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of
principal and interest is probable.

A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on
nonaccrual status and performing restructured loans. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances,
we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to
sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on
an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions
with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The impairment amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the
impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“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 December 31, 2022, our total nonaccrual loans were $5.8 million, or 0.21% of total loans held for investment, as compared to $9.5 million, or 0.39% of total loans held for investment, at December
31, 2021. These loans were reviewed for impairment and specific valuation allowances were established as necessary and included in the allowance for loan losses as of December 31, 2022 to cover any probable loss. The decrease in the year ended
December 31, 2022 was primarily due to eleven loans totaling $4.3 million that were removed from nonaccrual status during the second and third quarters of 2022. This was a result of principal paydowns, improved cash flow, and continued sustained
payment performance.

Loans past due 90 days or more were $2.0 million at December 31, 2022 and $1.1 million at December 31, 2021. The increase of $0.9 million at year-end 2022 was primarily comprised of an additional
$750 thousand of delinquent residential mortgage loans. Total nonperforming loans were $7.8 million at December 31, 2022 and $10.6 million at December 31, 2021.

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In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring, or TDR.
Included in certain loan categories of impaired loans are TDRs on which we have granted certain material concessions to the borrower as a result of the borrower experiencing financial difficulties. The concessions granted by us may include, but
are not limited to: (1) a modification in which the maturity date, timing of payments or frequency of payments is modified, (2) an interest rate lower than the current market rate for new loans with similar risk, or (3) a combination of the first
two factors.

If a borrower on a restructured accruing loan has demonstrated performance under the previous terms, is not experiencing financial difficulty and shows the capacity to continue to perform under the
restructured terms, the loan will remain on accrual status. Otherwise, the loan will be placed on nonaccrual status until the borrower demonstrates a sustained period of performance, which generally requires six consecutive months of payments.
Loans identified as TDRs are evaluated for impairment using the present value of the expected cash flows or the estimated fair value of the collateral, if the loan is collateral dependent. The fair value is determined, when possible, by an
appraisal of the property less estimated costs related to liquidation of the collateral. The appraisal amount may also be adjusted for current market conditions. Adjustments to reflect the present value of the expected cash flows or the estimated
fair value of collateral dependent loans are a component in determining an appropriate allowance for loan losses, and as such, may result in increases or decreases to the provision for loan losses in current and future earnings.

We had no loans restructured as TDRs during 2022, 2021, or 2020. TDRs are excluded from our nonperforming loans unless they otherwise meet the definition of nonaccrual loans or past due 90 days or
more.

Securities Portfolio

The securities portfolio is the second largest component of the Company’s interest-earning assets, and the structure and composition of this portfolio is important to an analysis of the financial
condition of the Company. The securities portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or
lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate
characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning asset when loan demand is weak or
when deposits grow more rapidly than loans.

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

Total securities at December 31, 2022 were $701.7 million, representing an decrease of $22.8 million, or 3.1%, compared to $724.5 million at December 31, 2021. The decrease was
primarily due to a $114.4 million decline in the unrealized gain on available for sale securities and $81.3 million in maturities, prepayments, and calls, partially offset by $176.7 million in purchases at December 31, 2022 compared to December
31, 2021.

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. During the year ended December 31, 2022, the fair value of the Company’s available for sale
securities declined by $114.4 million as a result of the significant increase in market interest rates during 2022, which was attributed to the FOMC repeatedly raising their target benchmark interest rate, as previously noted. At December 31,
2022, we evaluated the securities which had an unrealized loss for other-than-temporary impairment and determined all declines in value to be temporary. We anticipate full recovery of amortized cost with respect to these securities by maturity,
or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not probable that we will be required to sell them before recovery of the amortized cost basis, which may be at
maturity.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the date presented. Expected maturities may
differ from contractual maturities if borrowers have the right to call or prepay obligation with or without call or prepayment penalties.

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Deposits

Deposits represent the Company’s primary and most vital source of funds. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and
certificate of deposits. 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 December 31, 2022 were $3.41 billion, representing an increase of $65.2 million, or 2.0%, compared to $3.34 billion at December 31, 2021. The increase in total deposits since
December 31, 2021 was primarily due to organic growth and customers maintaining higher balances. Deposit balances peaked in the third quarter of 2022 and then declined $54.1 million in the fourth quarter of 2022 principally as the result of
increased competition for deposits amid overall deposit outflows in the United States banking system. As of December 31, 2022, 33.8% of total deposits were comprised of noninterest-bearing demand accounts, 57.8% of interest-bearing non-maturity
accounts and 8.4% of time deposits.

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

The following table summarizes our average deposit balances and weighted average rates for the periods indicated:

The scheduled maturities of uninsured certificates of deposits or other time deposits as of December 31, 2022 follows:

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The estimated amount of uninsured deposits as of December 31, 2022 was $1.04 billion.

Time deposits issued in amounts of more than $250 thousand represent the type of deposit most likely to affect the Company’s future earnings because of interest rate sensitivity. The effective cost
of these funds is generally higher than other time deposits because the funds are usually obtained at premium rates of interest.

Borrowed Funds

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

FHLB Advances. The FHLB allows us to borrow, both short and long-term, on a blanket floating lien status collateralized by first mortgage loans and
commercial real estate loans as well as FHLB stock. At December 31, 2022 and December 31, 2021 we had total remaining borrowing capacity from the FHLB of $920.2 million and $903.9 million, respectively.

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

The Company has used FHLB letters of credit to pledge to certain public deposits. These letters of credit expired in July 2021 and the Company began pledging securities to these public funds rather
than renewing the letters of credit. As a result, there were no FHLB letters of credit outstanding at December 31, 2022 and 2021.

Federal Reserve Bank of Dallas. The Bank has a line of credit with the FRB. The amount of the line is determined on a monthly basis by the Federal Reserve
Bank. The line is collateralized by a blanket floating lien on all agriculture, commercial and consumer loans. The amount of the line was $648.3 million and $593.6 million at December 31, 2022 and 2021, respectively. There were no amounts
outstanding on the FRB line of credit at December 31, 2022 and 2021.

Lines of Credit. The Bank has uncollateralized lines of credit with multiple banks as a source of funding for liquidity management. The total amount of the
lines was $160.0 million and $160.0 million as of December 31, 2022 and 2021. The lines were not used at December 31, 2022 and 2021.

Subordinated Debt

In December 2018, the Company issued $26.5 million in subordinated notes. Notes totaling $12.4 million have a maturity date of December 2028 and an average fixed rate of 5.74% for the first five
years. The remaining $14.1 million of notes have a maturity date of December 2030 and an average fixed rate of 6.41% for the first seven years. After the fixed rate periods, all notes will float at the Wall
Street Journal prime rate, with a floor of 4.0% and a ceiling of 7.5%. These notes pay interest quarterly, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally,
these notes are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.

On September 29, 2020, the Company issued $50.0 million in subordinated notes. Proceeds were reduced by approximately $926 thousand in debt issuance costs. The notes have a maturity
date of September 2030 with a fixed rate of 4.50% for the first five years. After the expiration of the fixed rate period, the notes will reset quarterly at a variable rate equal to the then current three-month Secured Overnight
Financing Rate, as published by the Federal Reserve Bank of New York, plus 438 basis points. These notes pay interest semi-annually, are unsecured, and may be called by the Company at any time after the remaining
maturity is five years or less. Additionally, these notes are intended to qualify for Tier 2 capital treatment, subject to regulatory limitations.

As of December 31, 2022, the total amount of subordinated debt outstanding was $76.5 million, less approximately $511 thousand of remaining debt issuance costs for a total balance of $76.0 million.

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Junior Subordinated Deferrable Interest Debentures and Trust Preferred Securities. Between March 2004 and June 2007, the Company formed three wholly-owned
statutory business trusts solely for the purpose of issuing trust preferred securities, the proceeds of which were invested in junior subordinated deferrable interest debentures. The trusts are not consolidated and the debentures issued by the
Company to the trusts are reflected in the Company’s 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 December
31, 2022 and 2021. 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 December 31, 2022, about each of the statutory trusts and the junior subordinated deferrable interest debentures, including the date the junior
subordinated deferrable interest debentures were issued, outstanding amounts of trust preferred securities and junior subordinated deferrable interest debentures, the maturity date of the junior subordinated deferrable interest debentures, the
interest rates on the junior subordinated deferrable interest debentures and the investment banker.

Liquidity and Capital Resources

Liquidity

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. We manage our liquidity position to meet the
daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our stockholders.

Interest rate sensitivity involves the relationships between rate-sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on the Company’s net
interest income. Interest rate-sensitive assets and liabilities are those with yields or rates that are subject to change within a future time period due to maturity or changes in market rates. The model is used to project future net interest
income under a set of possible interest rate movements. The Company’s Investment/Asset Liability Committee (“ALCO Committee”) reviews this information to determine if the projected future net interest income levels would be acceptable. The
Company attempts to stay within acceptable net interest income levels.

Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks,
federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and the Federal Reserve discount window.

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
increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

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We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through
profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.

Capital Requirements

Total stockholders’ equity decreased to $357.0 million as of December 31, 2022, compared to $407.4 million as of December 31, 2021. The decrease from December 31, 2021 was primarily the result of a
decline in the accumulated other comprehensive income (“AOCI”) of $78.8 million, repurchases of common stock of $22.7 million, and by $8.0 million in dividends paid, partially offset by $58.2 million in net earnings for the year ended December
31, 2022. The decrease in AOCI was attributed to the decline in fair value of our available for sale securities, partially offset by an increase in fair value of our fair value hedges, as a result of the rising interest rate environment.

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 consolidated 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 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. In assessing a bank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level of
earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management’s overall ability to monitor and control risks.

At December 31, 2022, both we and the Bank met all the capital adequacy requirements to which we and the Bank were subject. At December 31, 2022, we and the Bank were “well capitalized” under the
regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since December 31, 2022 that would materially adversely change such capital classifications. From time to time, we may need to raise
additional capital to support our and the Bank’s further growth and to maintain our “well capitalized” status.

The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s
capital ratios as of the dates indicated.

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Treasury Stock

The Company repurchased stock in accordance with its stock repurchase programs during 2022 and 2021. In 2022, we repurchased 859,802 shares of common stock for a total of $22.7 million. In 2021, we
repurchased 393,529 shares of common stock for a total of $9.2 million. See Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities”, of this Report 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. We have historically managed our sensitivity position within our established guidelines.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net
interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. Based upon the nature of our operations, we are not subject to foreign exchange or
commodity price risk. We do not own any trading assets.

Our exposure to interest rate risk is managed by the ALCO Committee, in accordance with policies approved by the Bank’s Board. The ALCO Committee formulates strategies based on appropriate levels of
interest rate risk. In determining the appropriate level of interest rate risk, the ALCO Committee considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies,
liquidity, business strategies and other factors. The ALCO Committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities,
commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO Committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs
methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model.

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

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

Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this Report have been prepared in accordance with GAAP. GAAP requires the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

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. Management believes the
impact of inflation on financial results depends upon the Company’s ability to react to changes in interest rates and by such reaction, reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction,
or at the same magnitude, as the prices of other goods and services. However, other operating expenses do reflect general levels of inflation. Management seeks to manage the relationship between interest rate-sensitive assets and liabilities in
order to protect against wide net interest income fluctuations, including those resulting from inflation.

Various information shown elsewhere in this Report will assist in the understanding of how well the Company is positioned to react to changing interest rates and inflationary trends. In particular, additional
information related to the Company’s interest rate-sensitive assets and liabilities is contained in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report under the heading “Interest
Rate Sensitivity and Market Risk.”

Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures
discussed in this Report as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of
excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the U.S. in our consolidated statements
of comprehensive income(loss), balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial
measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in
accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Report may differ from that of other companies reporting measures with similar names. It is important to understand how other
banking organizations calculate their financial measures with names similar to the non-GAAP financial measures we have discussed in this Report when comparing such non-GAAP financial measures.

Tangible Book Value Per Common Share. Tangible book value per share is a non-GAAP measure generally used by investors, financial analysts and investment
bankers to evaluate financial institutions. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share. We believe that the tangible book value per common share measure is important
to many investors in the marketplace who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value
while not increasing our tangible book value.

Tangible Common Equity to Tangible Assets. Tangible common equity to tangible assets is a non-GAAP measure generally used by investors, financial analysts
and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit intangibles and other intangible assets, net of accumulated
amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common stockholders’ equity to total assets. We believe that this measure is important to many investors in the marketplace
who are interested in the relative changes from period to period of tangible common equity to tangible assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total
stockholders’ equity and assets while not increasing our tangible common equity or tangible assets.

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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:

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare consolidated financial statements in conformity with GAAP,
management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates,
assumptions and judgments are based on information available as of the date of the consolidated financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the
consolidated financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our consolidated financial
statements.

The Jumpstart Our Business Startups Act (the “JOBS Act”) permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected
to take advantage of this extended transition period, which means that the consolidated financial statements included in this Report, 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. Additional
information about these policies can be found in Note 1 of the Company’s consolidated financial statements as of December 31, 2022.

Securities. Investment securities may be classified into trading, held-to-maturity, or available-for-sale portfolios. Securities that are held principally
for resale in the near term are classified as trading. Securities that management has the ability and positive intent to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities not classified as trading or
held-to-maturity are available-for-sale and are reported at fair value with unrealized gains and losses excluded from earnings, but included in the determination of other comprehensive income (loss). Management uses these assets as part of its
asset/liability management strategy; they may be sold in response to changes in liquidity needs, interest rates, resultant prepayment risk changes, and other factors. Management determines the appropriate classification of securities at the time
of purchase. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain or
loss on sale of securities. The cost of securities sold is based on the specific identification method.

Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding
principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees,
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.

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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. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged
to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Company’s allowance for loan losses
consists of specific valuation allowances established for probable losses on specific loans and general valuation allowances calculated based on historical loan loss experience for similar loans with similar characteristics and trends,
judgmentally adjusted for general economic conditions and other qualitative risk factors internal and external to the Company.

The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s review of the collectability of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires
estimates that are susceptible to significant revision as more information becomes available. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. The Bank’s loans are generally secured by specific items of
collateral including real property, crops, livestock, consumer assets, and other business assets.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on various factors. In addition, regulatory
agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the
time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. All loans rated substandard or worse and greater than $250 thousand are specifically reviewed to determine if they are impaired. Factors considered by management in determining whether a
loan is impaired include payment status and the sources, amounts, and probabilities of estimated cash flow available to service debt in relation to amounts due according to contractual terms. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Loans that are determined to be impaired are then evaluated to determine estimated impairment, if any. GAAP allows impairment to be measured on a loan-by-loan basis by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Loans that are not individually determined to be impaired or
are not subject to the specific review of impaired status are subject to the general valuation allowance portion of the allowance for loan losses.

Loans Held for Sale. Loans held for sale are comprised of residential mortgage loans. Loans that are originated for best efforts delivery are carried at the
lower of aggregate cost or fair value as determined by aggregate outstanding commitments from investors or current investor yield requirements. All other loans held for sale are carried at fair value under the fair value option. Loans sold are
typically subject to certain indemnification provisions with the investor; management does not believe these provisions will have any significant consequences.

Mortgage Servicing Rights Asset. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income
statement effect recorded in net gain on sale of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates present value of estimated
future servicing income.

Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports change in fair value of servicing assets in earnings in the period in
which the changes occur, and are included with other noninterest income in the consolidated financial statements. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual
prepayment speeds and default rates and losses.

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Goodwill and Other Intangible Assets. Goodwill resulting from business combinations is generally determined as the excess of the fair value of the
consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events and circumstances
exist that indicate that an impairment test should be performed. Intangible assets with definite lives are amortized over their estimated useful lives.

Recently Issued Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements included elsewhere in this Report regarding the impact of new accounting pronouncements
which we have adopted.