Item 7. Management’s Discussion and Analysis
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
related notes included elsewhere in this report.
Unless the context indicates otherwise, references in this management’s discussion and analysis to “we”, “our”, and “us,” refer to Bank7 Corp. and its consolidated
subsidiaries. All references to “the Bank” refer to Bank7, our wholly owned subsidiary.
General
We are Bank7 Corp., a bank holding company headquartered in Oklahoma City, Oklahoma. Through our wholly-owned subsidiary, Bank7, we operate twelve full-service branches in Oklahoma, the
Dallas/Fort Worth, Texas metropolitan area and Kansas. We are focused on serving business owners and entrepreneurs by delivering fast, consistent and well-designed loan and deposit products to meet their financing needs. We intend to grow
organically by selectively opening additional branches in our target markets and we will also pursue strategic acquisitions.
As a bank holding company, we generate most of our revenue from interest income on loans and from short-term investments. The primary source of funding for our loans and short-term investments
are deposits held by our subsidiary, Bank7. We measure our performance by our return on average assets, return on average equity, earnings per share, capital ratios, and our efficiency ratio, which is calculated by dividing noninterest expense
by the sum of net interest income on a tax equivalent basis and noninterest income.
As of December 31, 2022, we had total assets of $1.58 billion, total loans of $1.26 billion, total deposits of $1.43 billion and total shareholders’ equity of $144.1 million.
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The U.S. economy experienced widespread volatility throughout 2020 and 2021 as a result of the COVID-19 pandemic and government responses to the pandemic. Economic condition declined rapidly
and significantly following the initial widespread U.S. outbreak in March and April of 2020. Federal stimulus was quickly passed in the form of the CARES Act and the economy rebounded significantly in the second half of 2020. In an emergency
measure aimed at dampening the economic impact of COVID-19, the Federal Reserve lowered the target for the federal funds rate to a range of between zero to 0.25% effective on March 16, 2020 where it remained through the end of 2020. This action
by the Federal Reserve followed a prior reduction of the targeted federal funds rates to a range of 1.0% to 1.25% effective March 4, 2020. As the pandemic eased through 2021 and inflation increased, the Federal Reserve aggressively raised the
federal funds target rate to 4.25-4.50% by the end of 2022. These actions positively impacted growth in net interest income in 2022 but the higher rates could negatively impact loan customers in a slowing economy.
2022 Highlights
For the year ended December 31, 2022, we reported pre-tax net income of $39.3 million, an increase of $8.3 million, or 27.0% compared to pre-tax net income of $30.9 million for the year ended
December 31, 2021. The increase was primarily related to an increase in interest earning assets. For the year ended December 31, 2022, average loans totaled $1.14 billion, an increase of $237.6 million or 26.2%, from December 31, 2021.
Pre-tax return on average assets and return on average equity was 2.68% and 29.32%, respectively for the year ended December 31, 2022, as compared to 2.96% and 26.41%, respectively, for the
same period in 2021. Tax-adjusted return on average assets and return on average equity was 2.02% and 23.92%, respectively for the year ended December 31, 2022, as compared to 2.21% and 20.13%, respectively, for the same period in 2021. Our
efficiency ratio for the year ended December 31, 2022 was 39.29% as compared to 36.76% for the year ended December 31, 2021.
As of December 31, 2022, total loans were $1.27 billion, an increase of $242.1 million, or 23.5%, from December 31, 2021. Total deposits were $1.43 billion as of December 31, 2022, an increase
of $211.8 million, or 17.4%, from December 31, 2021.
Results of Operations
Years Ended December 31, 2022, December 31, 2021, and December 31, 2020
Net Interest Income and Net Interest Margin
The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets, and the
resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities, and the resultant average rates; (iii) net interest income; and (iv) the net interest margin.
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Net Interest Margin
For the Year Ended December 31,
2022
2021
2020
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
(Dollars in thousands)
Interest-Earning Assets:
Short-term investments
$
129,624
$
1,673
1.29
%
$
126,136
$
178
0.25
%
$
116,295
$
828
0.71
%
Debt securities, taxable
145,915
2,313
1.59
4,663
312
3.84
1,123
36
3.21
Debt securities, tax exempt (1)
21,635
360
1.66
1,852
31
1.62
-
-
-
Loans held for sale
586
-
-
318
-
-
244
-
-
Total loans (2)
1,143,380
74,403
6.51
905,804
55,768
6.16
823,228
52,450
6.37
Total interest-earning assets
1,441,140
78,749
5.46
1,038,773
56,289
5.42
940,890
53,314
5.67
Noninterest-earning assets
23,532
7,361
8,067
Total assets
$
1,464,672
$
1,046,134
$
948,957
Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts
$
724,617
7,842
1.08
%
$
430,268
1,396
0.32
%
$
377,519
2,729
0.72
%
Time deposits
165,735
1,480
0.89
205,437
1,657
0.81
207,442
3,424
1.65
Total interest-bearing deposits
890,352
9,322
1.05
635,705
3,053
0.48
584,961
6,153
1.05
Total interest-bearing liabilities
890,352
9,322
1.05
635,705
3,053
0.48
584,961
6,153
1.05
Noninterest-bearing liabilities:
Noninterest-bearing deposits
432,901
288,446
256,431
Other noninterest-bearing liabilities
7,520
4,930
5,206
Total noninterest-bearing liabilities
440,421
293,376
261,637
Shareholders’ equity
133,899
117,053
102,359
Total liabilities and shareholders’ equity
$
1,464,672
$
1,046,134
$
948,957
Net interest income
$
69,427
$
53,236
$
47,161
Net interest spread
4.42
%
4.94
%
4.61
%
Net interest margin
4.82
%
5.12
%
5.01
%
(1)
Taxable-equivalent yield of 2.20% as of December 31, 2022, applying a 24.5% effective tax rate
(2)
Average loan balances include monthly average nonaccrual loans of $8.8 million, $12.6 million and $11.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.
We continued to experience strong asset growth for the year ended December 31, 2022 compared to the year ended December 31, 2021:
-
Total interest income on loans increased $18.6 million, or 33.4%, to $74.4 million, which was attributable to a $237.6 million increase in the average balance of loans to $1.14 billion during the year ended
2022 as compared with the average balance of $905.8 million for the year ended 2021;
-
Yields on our interest-earning assets totaled 5.46%, an increase of 4 basis points which was attributable to higher loan rates of 35 basis points, an increase in yield on short term investments of 104 basis
points, and a decrease in yield on taxable debt securities of 225 basis points; and
-
Net interest margin for the years ended 2022 and 2021 was 4.82% and 5.12%, respectively.
For the year ended December 31, 2021 compared to the year ended December 31, 2020:
-
Total interest income on loans increased $3.3 million, or 6.3%, to $55.8 million, which was attributable to a $82.6 million increase in the average balance of loans to $905.8 million during the year ended
2021 as compared with the average balance of $823.2 million for the year ended 2020;
-
Loan fees totaled $7.8 million, an increase of $2.8 million or 54.7%. $949,000 of the increase was due to PPP fee income recognized;
-
Yields on our interest-earning assets totaled 5.42%, a decrease of 25 basis points which was attributable to lower loan rates and a decrease in yield on short term investments of 46 basis points, both were
primarily impacted by the aforementioned changes in market interest rates related to the pandemic; and
-
Net interest margin for the years ended 2021 and 2020 was 5.12% and 5.01%, respectively.
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The FED influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is significantly affected by changes in
the prime interest rate. For the three year period between January 1, 2020 and December 31, 2022, the prime rate fluctuated between a high of 7.50%, and a low of 3.25%.
Interest income on short-term investments increased $1.5 million, or 839.9%, to $1.7 million for year ended December 31, 2022 compared to 2021, due to an increase in the average balances of
$3.5 million, or 2.8% and a yield increase of 104 basis points. Interest income on short-term investments decreased $515,000, or 62.2%, to $313,000 for year ended December 31, 2021
compared to 2020, due to yield decrease of 46 basis points.
Interest expense on interest-bearing deposits totaled $9.3 million for the year ended December 31, 2022, compared to $3.1 million for 2021, an increase of $6.2 million, or 205.3%. The increase
was related to the cost of interest-bearing deposits increasing to 1.05% for the year ended December 31, 2022 from 0.48% for the year ended December 31, 2021. Interest expense on interest-bearing deposits totaled $3.1 million for the year ended
December 31, 2021, compared to $6.2 million for 2020, a decrease of $3.1 million, or 50.4%. The decrease was related to the cost of interest-bearing deposits decreasing to 0.48% for the year ended December 31, 2021 from 1.05% for the year ended
December 31, 2020, which was related to the aforementioned changes in market interest rates related to the pandemic.
Net interest margin for the years ended December 31, 2022, 2021 and 2020 was 4.82%, 5.12% and 5.01%, respectively.
The following table sets forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest
income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume).
Analysis of Changes in Interest Income and Expenses
For the Year Ended
December 31, 2022 vs 2021
For the Year Ended
December 31, 2021 vs 2020
Change due to:
Change due to:
Volume (1)
Rate (1)
Interest
Variance
Volume (1)
Rate (1)
Interest
Variance
(Dollars in thousands)
(Dollars in thousands)
Increase (decrease) in interest income:
Short-term investments
$
10
$
1,485
$
1,495
$
70
$
(585
)
$
(515
)
Debt securities
7,633
(5,303
)
2,330
354
(211
)
143
Total loans
14,635
4,000
18,635
5,260
(1,943
)
3,317
Total increase (decrease) in interest income
22,278
182
22,460
5,684
(2,739
)
2,945
Increase (decrease) in interest expense:
Deposits:
Transaction accounts
942
5,504
6,446
380
(1,713
)
(1,333
)
Time deposits
(322
)
145
(177
)
(33
)
(1,734
)
(1,767
)
Total interest-bearing deposits
620
5,649
6,269
347
(3,447
)
(3,100
)
Total increase (decrease) in interest expense
620
5,649
6,269
347
(3,447
)
(3,100
)
Increase (Decrease) in net interest income
$
21,657
$
(5,466
)
$
16,191
$
5,337
$
708
$
6,045
(1) Variances attributable to both volume and rate are allocated on a consistent basis between rate and volume based on the absolute
value of the variances in each category.
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Weighted Average Yield of Debt Securities
The following table summarizes the maturity distribution schedule with corresponding weighted average taxable equivalent yields of the debt securities portfolio at December 31, 2022. The
following table presents securities at their expected maturities, which may differ from contractual maturities. The Company manages its debt securities portfolio for liquidity, as a tool to execute its asset/liability management strategy, and for
pledging requirements for public funds:
As of December 31, 2022
Within One Year
After One Year But
Within Five Years
After Five Years But
Within Ten Years
After Ten Years
Total
Amount
Yield *
Amount
Yield *
Amount
Yield *
Amount
Yield *
Amount
Yield *
Available-for-sale
(Dollars in thousands)
U.S. Federal agencies
$
11
2.62
%
$
176
1.83
%
$
955
1
%
$
-
0
%
$
1,142
1.21
%
Mortgage-backed securities
500
1.17
9,599
0.96
3,541
1.30
24,434
1.66
38,074
1.45
State and political subdivisions
2,104
1.61
15,070
1.24
10,650
1.44
531
1.48
28,356
1.35
U.S. Treasuries
-
-
98,168
1.18
2,492
1.11
-
-
100,660
1.18
Corporate debt securities
-
-
-
-
4,934
3.36
-
-
4,933
3.36
Total
$
2,615
1.53
%
$
123,014
1.17
%
$
22,571
1.78
%
$
24,965
1.66
%
$
173,165
1.34
%
Percentage of total
1.51
%
71.04
%
13.03
%
14.42
%
100.00
%
*Yield is on a taxable-equivalent basis using 21% tax rate
Provision for Loan Losses
For the year ended December 31, 2022 compared to the year ended December 31, 2021:
-
The provision for loan losses increased from $4.2 million to $4.5 million; and
-
The allowance as a percentage of loans increased by 16 basis points to 1.16%.
For the year ended December 31, 2021 compared to the year ended December 31, 2020:
-
The provision for loan losses decreased from $5.4 million to $4.2 million; and
-
The allowance as a percentage of loans decreased by 15 basis points to 1.00%.
Noninterest Income
The following table sets forth the major components of our noninterest income for the years ended December 31, 2022, 2021 and 2020:
For the Years Ended
For the Years Ended
December 31,
December 31,
2022
2021
$ Increase
(Decrease)
% Increase
(Decrease)
2021
2020
$ Increase
(Decrease)
% Increase
(Decrease)
(Dollars in thousands)
(Dollars in thousands)
Noninterest income:
Mortgage lending income
$
486
$
435
$
51
11.72
%
$
435
$
175
$
260
148.57
%
Gain (Loss) on sales of available-for-sale debt securities
(127
)
-
(127
)
-100.00
%
-
Service charges on deposit accounts
900
550
350
63.64
%
550
442
108
24.43
%
Other income and fees
1,680
1,265
415
32.81
%
1,265
1,048
217
20.71
%
Total noninterest income
$
2,939
$
2,250
$
689
30.62
%
$
2,250
$
1,665
$
585
35.14
%
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Noninterest Expense
Noninterest expense for the year ended December 31, 2022 was $28.6 million compared to $20.4 million for the year ended December 31, 2021, an increase of $8.2 million or 40.4%. Noninterest
expense for the year ended December 31, 2021 was $20.4 million compared to $17.6 million for the year ended December 31, 2020, an increase of $2.8 million or 15.9%. The following table sets forth the major components of our noninterest expense
for the years ended December 31, 2022, 2021 and 2020:
For the Years Ended
For the Years Ended
December 31,
December 31,
2022
2021
$ Increase
(Decrease)
% Increase
(Decrease)
2021
2020
$ Increase
(Decrease)
% Increase
(Decrease)
(Dollars in thousands)
(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits
$
17,040
$
11,983
$
5,057
42.20
%
$
11,983
$
10,130
$
1,853
18.29
%
Furniture and equipment
1,468
883
585
66.25
%
883
868
15
1.73
%
Occupancy
2,329
1,899
430
22.64
%
1,899
1,957
(58
)
-2.96
%
Data and item processing
2,068
1,237
831
67.18
%
1,237
1,091
146
13.38
%
Accounting, marketing, and legal fees
984
800
184
23.00
%
800
536
264
49.25
%
Regulatory assessments
1,344
604
740
122.52
%
604
506
98
19.37
%
Advertising and public relations
477
282
195
69.15
%
282
400
(118
)
-29.50
%
Travel, lodging and entertainment
363
409
(46
)
-11.25
%
409
241
168
69.71
%
Other expense
2,568
2,300
268
11.65
%
2,300
1,863
437
23.46
%
Total noninterest expense
$
28,641
$
20,397
$
8,244
40.42
%
$
20,397
$
17,592
$
2,805
15.94
%
For the year ended December 31, 2022 compared to the year ended December 31, 2021:
-
Salaries and employee benefits expense was $17.0 million compared to $12.0 million, an increase of $5.1 million, or 42.2%. The increase was attributable to overall increases in compensation to remain
competitive, and due to our acquisition of Cornerstone Bank in late 2021, which increased employee headcount.
For the year ended December 31, 2021 compared to the year ended December 31, 2020:
-
Salaries and employee benefits expense was $12.0 million compared to $10.1 million, an increase of $1.9 million, or 18.3%. The increase was attributable to overall increases in compensation to remain
competitive, and partially due to our acquisition of Cornerstone Bank in late 2021, which increased employee headcount.
Financial Condition
The following discussion of our financial condition compares December 31, 2022, 2021, and 2020.
Total Assets
Total assets increased $233.6 million, or 17.3%, to $1.58 billion as of December 31, 2022, as compared to $1.35 billion as of December 31, 2021 and $1.02 billion as of December 31, 2020.
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Table of Contents
Loan Portfolio
Our loans represent the largest portion of our earning assets. The quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition. As of
December 31, 2022, 2021 and 2020, our gross loans were $1.27 billion, $1.03 billion and $839.1 million, respectively.
The following table presents the balance and associated percentage of each major category in our loan portfolio as of December 31, 2022, December 31, 2021 and December 31, 2020:
As of December 31,
2022
2021
2020
Amount
% of Total
Amount
% of Total
Amount
% of Total
(Dollars in thousands)
Construction & development
$
163,203
12.8
%
$
169,322
16.4
%
$
107,855
12.8
%
1-4 family real estate
76,928
6.0
%
62,971
6.1
%
29,079
3.5
%
Commercial real estate - other
439,001
34.5
%
339,655
32.9
%
290,489
34.6
%
Total commercial real estate
679,132
53.3
%
571,948
55.5
%
427,423
50.9
%
Commercial & industrial
513,011
40.3
%
361,974
35.1
%
351,248
41.9
%
Agricultural
66,145
5.2
%
73,010
7.1
%
50,519
6.0
%
Consumer
14,949
1.2
%
24,046
2.3
%
9,898
1.2
%
Gross loans
1,273,237
100.0
%
1,030,978
100.0
%
839,088
100.0
%
Less: unearned income, net
(2,781
)
(2,577
)
(2,475
)
Total Loans, net of unearned income
1,270,456
1,028,401
836,613
Less: Allowance for loan losses
(14,734
)
(10,316
)
(9,639
)
Net loans
$
1,255,722
$
1,018,085
$
826,974
During the second quarter of 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Included in our
commercial & industrial balance at December 31, 2022 and 2021, are $2.6 million and $18.7 million of PPP loans, respectively.
We have established internal concentration limits in the loan portfolio for CRE loans, hospitality loans, energy loans, and construction loans, among others. All loan types are within our
established limits. We use underwriting guidelines to assess each borrower’s historical cash flow to determine debt service, 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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Table of Contents
The following tables show the contractual maturities of our gross loans as of the periods below:
As of December 31, 2022
Due in One Year or Less
Due after One Year
Through Five Years
Due after Five Years
Through Fifteen Years
Due after Fifteen Years
Fixed
Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
Total
(Dollars in thousands)
Construction & development
$
11,749
$
81,002
$
7,556
$
57,439
$
-
$
1,160
$
-
$
4,297
$
163,203
1-4 family real estate
10,550
12,664
24,741
15,782
314
6,606
-
6,271
76,928
Commercial real estate - other
2,680
59,870
131,105
207,819
6,635
17,146
-
13,746
439,001
Total commercial real estate
24,979
153,536
163,402
281,040
6,949
24,912
-
24,314
679,132
Commercial & industrial
43,823
234,573
60,275
159,571
3,745
10,390
-
634
513,011
Agricultural
1,798
17,514
8,767
33,270
469
980
140
3,207
66,145
Consumer
1,683
22
6,310
156
587
2,860
82
3,249
14,949
Gross loans
$
72,283
$
405,645
$
238,754
$
474,037
$
11,750
$
39,142
$
222
$
31,404
$
1,273,237
As of December 31, 2021
Due in One Year or Less
Due after One Year
Through Five Years
Due after Five Years
Through Fifteen Years
Due after Fifteen Years
Fixed
Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
Total
(Dollars in thousands)
Construction & development
$
7,283
$
71,551
$
10,148
$
74,052
$
-
$
2,243
$
-
$
4,045
$
169,322
1-4 family real estate
3,259
21,322
11,979
11,674
926
7,375
-
6,436
62,971
Commercial real estate - other
5,156
97,309
59,227
143,906
413
19,230
-
14,414
339,655
Total commerical real estate
15,698
190,182
81,354
229,632
1,339
28,848
-
24,895
571,948
Commercial & industrial
24,249
142,553
16,346
145,654
20,474
12,047
-
651
361,974
Agricultural
2,529
17,441
5,156
39,305
623
1,587
-
6,369
73,010
Consumer
4,870
29
10,825
172
1,554
2,458
84
4,054
24,046
Gross loans
$
47,346
$
350,205
$
113,681
$
414,763
$
23,990
$
44,940
$
84
$
35,969
$
1,030,978
As of December 31, 2020
Due in One Year or Less
Due after One Year
Through Five Years
Due after Five Years
Through Fifteen Years
Due after Fifteen Years
Fixed
Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
Total
(Dollars in thousands)
Construction & development
$
14
$
47,649
$
885
$
58,387
$
-
$
920
$
-
$
-
$
107,855
1-4 family real estate
273
13,394
4,712
9,959
39
702
-
-
29,079
Commercial real estate - other
2,377
55,307
45,880
180,721
294
4,288
-
1,622
290,489
Total real estate
2,664
116,350
51,477
249,067
333
5,910
-
1,622
427,423
Commercial & industrial
16,914
194,520
39,593
93,707
11
6,503
-
-
351,248
Agricultural
5,141
27,215
2,534
14,420
60
541
-
608
50,519
Consumer
1,544
150
6,570
65
1,057
425
87
-
9,898
Gross loans
$
26,263
$
338,235
$
100,174
$
357,259
$
1,461
$
13,379
$
87
$
2,230
$
839,088
33
Table of Contents
Allowance for Loan and Lease Losses
The allowance is based on management’s estimate of probable losses inherent in the loan portfolio. In the opinion of management, the allowance is adequate to absorb estimated losses in the
portfolio as of each balance sheet date. While management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the Company’s allowance. In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk potential in loans is utilized together with the
results of internal credit reviews.
To determine the adequacy of the allowance, the loan portfolio is broken into segments based on loan type. Historical loss experience factors by segment, adjusted for changes in trends and
conditions, are used to determine an indicated allowance for each portfolio segment. These factors are evaluated and updated based on the composition of the specific loan segment. Other considerations include volumes and trends of delinquencies,
nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk and the experience and abilities
of our lending personnel. In addition to the segment evaluations, impaired loans with a balance of $250,000 or more are individually evaluated based on facts and circumstances of the loan to determine if a specific allowance amount may be
necessary. Specific allowances may also be established for loans whose outstanding balances are below the $250,000 threshold when it is determined that the risk associated with the loan differs significantly from the risk factor amounts
established for its loan segment.
The allowance was $14.7 million at December 31, 2022, $10.3 million at December 31, 2021 and $9.6 million at December 31, 2020. The increasing trend was related to loan growth.
The following table provides an analysis of the activity in our allowance for the periods indicated:
For the Year Ended
December 31,
2022
2021
2020
(Dollars in thousands)
Balance at beginning of the period
$
10,316
$
9,639
$
7,846
Provision for loan losses
4,468
4,175
5,350
Charge-offs:
Construction & development
-
-
-
1-4 family real estate
-
-
-
Commercial real estate - other
-
-
-
Commercial & industrial
(2
)
(3,750
)
(3,289
)
Agricultural
(50
)
-
(300
)
Consumer
(22
)
(68
)
(1
)
Total charge-offs
(74
)
(3,818
)
(3,590
)
Recoveries:
Construction & development
-
-
-
1-4 family real estate
-
-
2
Commercial real estate - other
-
-
-
Commercial & industrial
10
16
18
Agricultural
4
300
10
Consumer
10
4
3
Total recoveries
24
320
33
Net recoveries (charge-offs)
(50
)
(3,498
)
(3,557
)
Balance at end of the period
$
14,734
$
10,316
$
9,639
Net recoveries (charge-offs) to average loans
0.00
%
0.39
%
0.43
%
34
Table of Contents
While the entire allowance is available to absorb losses from any and all loans, the following table represents management’s allocation of the allowance by loan category, and the percentage of
allowance in each category, for the periods indicated:
As of December 31,
2022
2021
2020
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
Construction & development
$
1,889
12.8
%
$
1,695
16.4
%
$
1,239
12.8
%
1-4 family real estate
890
6.0
%
630
6.1
%
334
3.5
%
Commercial real estate - Other
5,080
34.5
%
3,399
32.9
%
3,337
34.6
%
Commercial & industrial
5,937
40.3
%
3,621
35.2
%
4,035
41.9
%
Agricultural
765
5.2
%
730
7.1
%
580
6.0
%
Consumer
173
1.2
%
241
2.3
%
114
1.2
%
Total
$
14,734
100.0
%
$
10,316
100.0
%
$
9,639
100.0
%
Nonperforming Assets
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 of the obligation. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on a nonaccrual loan is
subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal
and interest is 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 loans modified in a troubled debt restructuring, or TDR. Income from a loan on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a
particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the
collateral less estimated costs to sell if the loan is collateral dependent. 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.
35
Table of Contents
In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a 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 concessions.
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, and as such, may result in increases or decreases to the provision for loan losses in current and future earnings.
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned, or OREO, until sold, and is initially recorded at fair value less
costs to sell when acquired, establishing a new cost basis.
Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under TDRs that are not performing in accordance with their modified
terms. Nonperforming assets consist of nonperforming loans plus OREO. Loans accounted for on a nonaccrual basis were $8.0 million as of December 31, 2022, $9.9 million as of December 31, 2021 and $14.6 million as of December 31, 2020. OREO was $0
as of December 31, 2022, December 31, 2021 and December 31, 2020.
The following table presents information regarding nonperforming assets as of the dates indicated.
As of
December 31,
2022
2021
2020
(Dollars in thousands)
Nonaccrual loans
$
8,039
$
9,885
$
14,575
Troubled-debt restructurings (1)
-
-
-
Accruing loans 90 or more days past due
9,941
496
1,960
Total nonperforming loans
17,980
10,381
16,535
Other real estate owned
-
-
-
Total nonperforming assets
$
17,980
$
10,381
$
16,535
Ratio of nonperforming loans to total loans
1.42
%
1.01
%
1.98
%
Ratio of nonaccrual loans to total loans
0.63
%
0.96
%
1.74
%
Ratio of allowance for loan losses to total loans
1.16
%
1.00
%
1.15
%
Ratio of allowance for loan losses to nonaccrual loans
183.28
%
104.36
%
66.13
%
Ratio of nonperforming assets to total assets
1.13
%
0.77
%
1.63
%
(1) $1.2 million, $1.4 million and $12.98 million of TDRs as of December 31, 2022, 2021 and 2020, respectively.
36
Table of Contents
The following tables present an aging analysis of loans as of the dates indicated.
As of December 31, 2022
Loans 30-59
days past
due
Loans 60-89
days past
due
Loans 90+
days past
due
Loans 90+
days past
due and
accruing
Total Past
Due Loans
Current
Total loans
(Dollars in thousands)
Construction & development
$
-
$
-
$
-
$
-
$
-
$
163,203
$
163,203
1-4 family real estate
-
-
-
-
-
76,928
76,928
Commercial real estate - other
-
617
-
-
617
438,384
439,001
Commercial & industrial
21
-
9,923
9,923
9,944
503,067
513,011
Agricultural
4
-
-
-
4
66,141
66,145
Consumer
291
82
22
18
395
14,554
14,949
Total
$
316
$
699
$
9,945
$
9,941
$
10,960
$
1,262,277
$
1,273,237
As of December 31, 2021
Loans 30-59
days past
due
Loans 60-89
days past
due
Loans 90+
days past
due
Loans 90+
days past
due and
accruing
Total Past
Due Loans
Current
Total loans
(Dollars in thousands)
Construction & development
$
-
$
-
$
-
$
-
$
-
$
169,322
$
169,322
1-4 family real estate
-
-
-
-
-
62,971
62,971
Commercial real estate - other
-
174
-
-
174
339,481
339,655
Commercial & industrial
-
19
501
401
520
361,454
361,974
Agricultural
-
-
77
77
77
72,933
73,010
Consumer
48
15
18
18
81
23,965
24,046
Total
$
48
$
208
$
596
$
496
$
852
$
1,030,126
$
1,030,978
As of December 31, 2020
Loans 30-59
days past
due
Loans 60-89
days past
due
Loans 90+
days past
due
Loans 90+
days past
due and
accruing
Total Past
Due Loans
Current
Total loans
(Dollars in thousands)
Construction & development
$
714
$
-
$
-
$
-
$
714
$
107,141
$
107,855
1-4 family commerical
-
-
-
-
-
29,079
29,079
Commercial real estate - Other
1,444
-
1,960
1,960
3,404
287,085
290,489
Commercial & industrial
-
-
-
-
-
351,248
351,248
Agricultural
-
-
-
-
-
50,519
50,519
Consumer
193
-
-
-
193
9,705
9,898
Total
$
2,351
$
-
$
1,960
$
1,960
$
4,311
$
834,777
$
839,088
In addition to the past due and nonaccrual criteria, the Company also evaluates loans according to its internal risk grading system. Loans are segregated between pass, watch, special mention,
and substandard categories. The definitions of those categories are as follows:
Pass : These loans generally conform to Bank policies, are characterized by policy-conforming advance rates on collateral, and have well-defined repayment
sources. In addition, these credits are extended to borrowers and guarantors with a strong balance sheet and either substantial liquidity or a reliable income history.
Watch : These loans are still considered “Pass” credits; however, various factors such as industry stress, material changes in cash flow or financial
conditions, or deficiencies in loan documentation, or other risk issues determined by the lending officer, Commercial Loan Committee or CQC warrant a heightened sense and frequency of monitoring.
Special mention : These loans have observable weaknesses or evidence imprudent handling or structural issues. The weaknesses require close attention, and the
remediation of those weaknesses is necessary. No risk of probable loss exists. Credits in this category are expected to quickly migrate to “Watch” or “Substandard” as this is viewed as a transitory loan grade.
37
Table of Contents
Substandard : These loans are not adequately protected by the sound worth and debt service capacity of the borrower, but may be well-secured. The loans have
defined weaknesses relative to cash flow, collateral, financial condition or other factors that might jeopardize repayment of all of the principal and interest on a timely basis. There is the possibility that a future loss will occur if
weaknesses are not remediated.
Substandard loans totaled $21.0 million as of December 31, 2022, a decrease of $3.7 million compared to December 31, 2021. Substandard loans totaled $24.7 million as of December 31, 2021, an
increase of $1.6 million compared to December 31, 2020. The total net decrease in 2022 as compared to 2021, is comprised of a net increase in commercial and industrial substandard loans primarily related to an increase in two relationships
comprised of four notes totaling $16.4 million with a $133,306 specific reserve and a decrease in one relationship comprised of one note totaling $2.1 million with no specific reserve, and a net decrease in commercial real estate substandard
loans primarily related to two relationships comprised of one note each totaling $13.8 million with no specific reserves.
Outstanding loan balances categorized by internal risk grades as of the periods indicated are summarized as follows:
As of December 31, 2022
Pass
Watch
Special
mention
Substandard
Total
(Dollars in thousands)
Construction & development
$
163,203
$
-
$
-
$
-
$
163,203
1-4 family real estate
76,928
-
-
-
76,928
Commercial real estate - Other
397,295
14,976
24,747
1,983
439,001
Commercial & industrial
493,412
-
584
19,015
513,011
Agricultural
65,857
288
-
-
66,145
Consumer
14,927
-
-
22
14,949
Total
$
1,211,622
$
15,264
$
25,331
$
21,020
$
1,273,237
As of December 31, 2021
Pass
Watch
Special
mention
Substandard
Total
(Dollars in thousands)
Construction & development
$
169,322
$
-
$
-
$
-
$
169,322
1-4 family real estate
62,971
-
-
-
62,971
Commercial real estate - Other
282,268
14,976
27,112
15,299
339,655
Commercial & industrial
341,661
4,658
6,300
9,355
361,974
Agricultural
72,295
255
460
-
73,010
Consumer
24,000
-
-
46
24,046
Total
$
952,517
$
19,889
$
33,872
$
24,700
$
1,030,978
As of December 31, 2020
Pass
Watch
Special
mention
Substandard
Total
(Dollars in thousands)
Construction & development
$
107,855
$
-
$
-
$
-
$
107,855
1-4 family real estate
28,711
368
-
-
29,079
Commercial real estate - Other
248,194
24,155
10,086
8,054
290,489
Commercial & industrial
328,656
7,691
300
14,601
351,248
Agricultural
50,051
-
-
468
50,519
Consumer
9,898
-
-
-
9,898
Total
$
773,365
$
32,214
$
10,386
$
23,123
$
839,088
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Table of Contents
Troubled Debt Restructurings
TDRs are defined as those loans in which a bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise
consider. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with original contractual terms of the loan. Loans
with insignificant delays or insignificant short-falls in the amount of payments expected to be collected are not considered to be impaired. Loans defined as individually impaired, based on applicable accounting guidance, include larger balance
nonperforming loans and TDRs.
The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances
(“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the
earlier of (A) 60 days after the date of termination of the National Emergency or (B) January 1, 2022. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in
consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are
not troubled debt restructurings under ASC Subtopic 310-40. As of December 31, 2022, one loan totaling $2.6 million was modified, related to COVID-19, which was not considered a troubled debt restructuring.
The following table presents loans restructured as TDRs as of December 31, 2022, December 31, 2021 and December 31, 2020.
As of December 31, 2022
Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Specific Reserves
Allocated
(Dollars in thousands)
Commercial real estate
1
$
1,198
$
1,198
$
-
Total
1
$
1,198
$
1,198
$
-
As of December 31, 2021
Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Specific Reserves
Allocated
(Dollars in thousands)
Commercial real estate
1
$
1,402
$
1,402
$
-
Total
1
$
1,402
$
1,402
$
-
As of December 31, 2020
Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Specific reserves
allocated
(Dollars in thousands)
Commercial & industrial
1
$
10,886
$
10,886
$
-
Agricultural
1
469
469
-
Commercial real estate
1
1,622
1,622
-
Total
3
$
12,977
$
12,977
$
-
39
Table of Contents
There were no payment defaults with respect to loans modified as TDRs as of December 31, 2022, 2021, and 2020.
Impairment analyses are prepared on TDRs in conjunction with the normal allowance process. TDRs restructured during the years ended December 31, 2022, 2021, and 2020 required $0, $0 and $0 in
specific reserves, respectively.
The following table presents total TDRs, both in accrual and nonaccrual status as of the periods indicated:
As of December 31
2022
2021
2020
Number of
contracts
Amount
Number of
contracts
Amount
Number of
contracts
Amount
(Dollars in thousands)
Accrual
-
$
-
-
$
-
-
$
-
Nonaccrual
1
1,198
1
1,402
3
12,977
Total
1
$
1,198
1
$
1,402
3
$
12,977
Deposits
We gather deposits primarily through our twelve branch locations and online though our website. We offer a variety of deposit products including demand deposit accounts and interest-bearing
products, such as savings accounts and certificates of deposit. We put continued effort into gathering noninterest-bearing demand deposit accounts through loan production cross-selling, customer referrals, marketing efforts and various
involvement with community networks. Some of our interest-bearing deposits were obtained through brokered transactions. We participate in the CDARS program, where customer funds are placed into multiple certificates of deposit, each in an amount
under the standard FDIC insurance maximum of $250,000, and placed at a network of banks across the United States.
As of December 31, 2022, 2021, and 2020 brokered deposits were $261.3 million, $273.8 million, and $427.0 million, respectively, of these $261.3
million, $273.8 million, and $427.0 million, respectively, were reciprocal deposits.
Total deposits as of December 31, 2022, 2021, and 2020 were $1.43 billion, $1.22 billion and $905.5 million, respectively. The increase was primarily due to acquired deposits and organic
deposit growth. The following table sets forth deposit balances by certain categories as of the dates indicated and the percentage of each deposit category to total deposits.
As of December 31
2022
2021
2020
Amount
Percentage of
Total
Amount
Percentage of
Total
Amount
Percentage of
Total
(Dollars in thousands)
Noninterest-bearing demand
$
439,409
30.8
%
$
366,705
30.1
%
$
246,569
27.2
%
Interest-bearing transaction deposits
669,852
46.7
%
583,389
47.9
%
392,784
43.4
%
Savings deposits
136,537
9.6
%
89,778
7.4
%
54,008
6.0
%
Time deposits ($250,000 or less)
140,929
9.9
%
132,690
10.9
%
135,811
15.0
%
Time deposits (more than $250,000)
42,573
3.0
%
44,909
3.7
%
76,342
8.4
%
Total interest-bearing deposits
989,891
69.2
%
850,766
69.9
%
658,945
72.8
%
Total deposits
$
1,429,300
100.0
%
$
1,217,471
100.0
%
$
905,514
100.0
%
40
Table of Contents
The following table summarizes our average deposit balances and weighted average rates for the years ended December 31, 2022, 2021, and 2020:
For the Year Ended December 31,
2022
2021
2020
Average
Balance
Weighted
Average Rate
Average
Balance
Weighted
Average Rate
Average
Balance
Weighted
Average Rate
(Dollars in thousands)
Non interest-bearing demand
$
432,901
0.00
%
$
288,446
0.00
%
$
256,431
0.00
%
Interest-bearing transaction deposits
613,798
1.11
%
375,048
0.34
%
318,713
1.50
%
Savings deposits
110,818
0.92
%
55,220
0.23
%
58,806
0.56
%
Time deposits
165,735
0.89
%
205,437
0.81
%
207,442
1.65
%
Total interest-bearing deposits
890,351
1.05
%
635,705
0.48
%
584,961
1.05
%
Total deposits
$
1,323,252
0.70
%
$
924,151
0.33
%
$
841,392
0.73
%
The following tables set forth the maturity of time deposits as of the dates indicated below:
As of December 31, 2022 Maturity Within:
Three Months
Three to Six
Months
Six to 12
Months
After 12
Months
Total
(Dollars in thousands)
Time deposits ($250,000 or less)
$
58,184
$
25,333
$
38,844
$
18,568
$
140,929
Time deposits (more than $250,000)
12,292
5,579
17,001
7,701
42,573
Total time deposits
$
70,476
$
30,912
$
55,845
$
26,269
$
183,502
As of December 31, 2021 Maturity Within:
Three Months
Three to Six
Months
Six to 12
Months
After 12
Months
Total
(Dollars in thousands)
Time deposits ($250,000 or less)
$
32,680
$
37,016
$
31,197
$
31,797
$
132,690
Time deposits (more than $250,000)
18,234
5,932
10,729
10,014
44,909
Total time deposits
$
50,914
$
42,948
$
41,926
$
41,811
$
177,599
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 shareholders.
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
and fed funds sold. Other available sources of liquidity include wholesale deposits and borrowings from correspondent banks and FHLB advances.
Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan portfolios, and increases in
customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.
As of December 31, 2022, we had no unsecured fed funds lines with correspondent depository institutions with no amounts advanced. In addition, based on the values of loans pledged as
collateral, we had borrowing availability with the FHLB of $129.2 million as of December 31, 2022 and $78.1 million as of December 31, 2021.
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Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain
mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective
action” (described below), the Bank 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 the Bank to
maintain minimum amounts and ratios of Common Equity Tier 1, or 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.” For further
information, see “Supervision and Regulation – Regulatory Capital Requirements” and “Supervision and Regulation – Prompt Corrective Action Framework.”
In the wake of the global financial crisis of 2008 and 2009, the role of capital has become fundamentally more important, as banking regulators have concluded that the amount and quality of
capital held by banking organizations was insufficient to absorb losses during periods of severely distressed economic conditions. The Dodd-Frank Act and banking regulations promulgated by the U.S. federal banking regulators to implement Basel
III have established strengthened capital standards for banks and bank holding companies and require more capital to be held in the form of common stock. In addition, the Basel III regulations implement a concept known as the “capital
conservation buffer.” In general, banks, bank holding companies with more than $3.0 billion in assets and bank holding companies with publicly-traded equity are required to hold a buffer of CET1 capital equal to 2.5% of risk-weighted assets over
each minimum capital ratio in order to avoid being subject to limits on capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive officers.
As of December 31, 2022, the FDIC categorized the Bank as “well-capitalized” under the prompt corrective action framework. There have been no conditions or events since December 31, 2022 that
management believes would change this classification.
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The table below also summarizes the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios
as of December 31, 2022, 2021, and 2020. The Bank exceeded all regulatory capital requirements under Basel III and the Bank was considered to be “well-capitalized” as of the dates reflected in the tables below.
Actual
With Capital
Conservation Buffer
Minimum to be “Well-
Capitalized” Under Prompt
Corrective Action
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of December 31, 2022
Total capital (to risk-weighted assets)
Company
$
158,158
12.41
%
$
133,862
10.50
%
N/A
N/A
Bank
158,158
12.42
%
133,756
10.50
%
$
127,387
10.00
%
Tier 1 capital (to risk-weighted assets)
Company
143,424
11.25
%
108,365
8.50
%
N/A
N/A
Bank
143,424
11.26
%
108,279
8.50
%
101,909
8.00
%
CET 1 capital (to risk-weighted assets)
Company
143,424
11.25
%
89,241
7.00
%
N/A
N/A
Bank
143,424
11.26
%
89,171
7.00
%
82,801
6.50
%
Tier 1 capital (to average assets)
Company
143,424
9.19
%
N/A
N/A
N/A
N/A
Bank
143,424
9.18
%
N/A
N/A
78,111
5.00
%
Actual
With Capital
Conservation Buffer
Minimum to be “Well-
Capitalized” Under Prompt
Corrective Action
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of December 31, 2021
Total capital (to risk-weighted assets)
Company
$
127,946
12.54
%
$
107,126
10.50
%
N/A
N/A
Bank
127,844
12.54
%
107,020
10.50
%
$
101,924
10.00
%
Tier 1 capital (to risk-weighted assets)
Company
117,631
11.53
%
86,721
8.50
%
N/A
N/A
Bank
117,528
11.53
%
86,635
8.50
%
81,539
8.00
%
CET 1 capital (to risk-weighted assets)
Company
117,631
11.53
%
71,417
7.00
%
N/A
N/A
Bank
117,528
11.53
%
71,347
7.00
%
66,250
6.50
%
Tier 1 capital (to average assets)
Company
117,631
10.56
%
N/A
N/A
N/A
N/A
Bank
117,528
10.55
%
N/A
N/A
55,714
5.00
%
Actual
With Capital
Conservation Buffer
Minimum to be “Well-
Capitalized” Under Prompt
Corrective Action
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of December 31, 2020:
Total capital (to risk-weighted assets)
Bank7 Corp.
$
115,375
14.73
%
$
82,216
10.50
%
N/A
N/A
Bank
115,335
14.75
%
82,114
10.50
%
$
78,204
10.00
%
Tier 1 capital (to risk-weighted assets)
Bank7 Corp.
105,736
13.50
%
66,556
8.50
%
N/A
N/A
Bank
105,696
13.51
%
66,473
8.50
%
62,563
8.00
%
CET 1 capital (to risk-weighted assets)
Bank7 Corp.
105,736
13.50
%
54,811
7.00
%
N/A
N/A
Bank
105,696
13.51
%
54,743
7.00
%
50,832
6.50
%
Tier 1 capital (to average assets)
Bank7 Corp.
105,736
10.78
%
N/A
N/A
N/A
N/A
Bank
105,696
10.78
%
N/A
N/A
49,041
5.00
%
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Shareholders’ equity provides a source of permanent funding, allows for future growth and provides a cushion to withstand unforeseen adverse developments. Total shareholders’ equity increased
to $144.1 million as of December 31, 2022, compared to $127.4 million as of December 31, 2021 and $107.3 million as of December 31, 2020. The increases were driven by retained capital from net income during the periods.
Contractual Obligations
The following tables contain supplemental information regarding our total contractual obligations as of December 31, 2022:
Payments Due as of December 31, 2022
Within One Year
One to Three Years
Three to Five Years
After Five Years
Total
(Dollars in thousands)
Deposits without a stated maturity
$
1,245,798
$
-
$
-
$
-
$
1,245,798
Time deposits
157,233
26,002
267
-
183,502
Operating lease commitments
532
815
453
530
2,330
Total contractual obligations
$
1,403,563
$
26,817
$
720
$
530
$
1,431,630
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through
profitability, loan repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Off-Balance Sheet Arrangements
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 sheet. The contractual or notional
amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. To control this credit risk, the Company uses the same underwriting standards as it uses for loans recorded on the balance
sheet.
Loan commitments are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of the customer to a third party. They are intended to be disbursed, subject to certain conditions, upon request of the borrower.
The following table summarizes commitments as of the dates presented.
As of December 31,
2022
2021
2020
(Dollars in thousands)
Commitments to extend credit
$
198,027
$
200,393
$
206,520
Standby letters of credit
1,043
5,809
2,366
Total
$
199,070
$
206,202
$
208,886
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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 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 financial statements and accompanying notes. These estimates, assumptions and
judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statement. 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 financial statements.
The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended
transition period, which means that the financial statements included in this 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 included in the Annual Report on the Form 10-K.
Allowance for Loan and Lease Losses
The allowance is based on management’s estimate of probable losses inherent in the loan portfolio. In the opinion of management, the allowance is adequate to absorb estimated losses in the
portfolio as of each balance sheet date. While management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and changes in the composition of the loan
portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk
potential in loans is utilized together with the results of internal credit reviews.
To determine the adequacy of the allowance, the loan portfolio is broken into segments based on loan type. Historical loss experience factors by segment, adjusted for changes in trends and
conditions, are used to determine an indicated allowance for each portfolio segment. These factors are evaluated and updated based on the composition of the specific loan segment. Other considerations include volumes and trends of delinquencies,
nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk and the experience and abilities
of our lending personnel. In addition to the segment evaluations, impaired loans with a balance of $250,000 or more are individually evaluated based on facts and circumstances of the loan to determine if a specific allowance amount may be
necessary. Specific allowances may also be established for loans whose outstanding balances are below the $250,000 threshold when it is determined that the risk associated with the loan differs significantly from the risk factor amounts
established for its loan segment.
Goodwill and Intangibles
Intangible assets totaled $1.3 million and goodwill, net of accumulated amortization totaled $8.6 million for the year ended December 31, 2022, compared to intangible assets of $1.6 million and
goodwill, net of accumulated amortization of $8.5 million for the year ended December 31, 2021.
Goodwill resulting from a business combination represents the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as
of the acquisition date. Goodwill is tested annually for impairment or more frequently if other impairment indicators are present. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and
goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the accompanying consolidated financial statements.
Other intangible assets consist of core deposit intangible assets and are amortized on a straight-line basis based on an estimated useful life of 10 years. Such assets are periodically
evaluated as to the recoverability of their carrying values.
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Income Taxes
The Company files a consolidated income tax return. Deferred taxes are recognized under the balance sheet method based upon the future tax consequences of temporary differences between the
carrying amounts and tax basis of assets and liabilities, using the tax rates expected to apply to taxable income in the periods when the related temporary differences are expected to be realized.
The amount of accrued current and deferred income taxes is based on estimates of taxes due or receivable from taxing authorities either currently or in the future. Changes in these accruals are
reported as tax expense, and involve estimates of the various components included in determining taxable income, tax credits, other taxes and temporary differences. Changes periodically occur in the estimates due to changes in tax rates, tax laws
and regulations and implementation of new tax planning strategies. The process of determining the accruals for income taxes necessarily involves the exercise of considerable judgment and consideration of numerous subjective factors.
Management performs an analysis of the Company’s tax positions annually and believes it is more likely than not that all of its tax positions will be utilized in future years.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurement, defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction
between market participants at the measurement date. The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters.
For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not available,
management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or the observable date.
Debt securities that are being held for indefinite periods of time and are not intended to sell, are classified as available for sale and are stated at estimated fair value. Unrealized gains or
losses on debt securities available for sale are reported as a component of stockholders’ equity and comprehensive income, net of income tax.
The Company reviews its portfolio of debt securities in an unrealized loss position at least quarterly. The Company first assesses whether it intends to sell, or it is more-likely-than-not
that it will be required to sell, the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities amortized cost basis is written down to fair value as a current period expense. If either of the
above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making this assessment, the Company considers, among other things, the period of time the security has been in
an unrealized loss position, and performance of any underlying collateral and adverse conditions specifically related to the security.
The estimates of fair values of debt securities and other financial instruments are based on a variety of factors. In some cases, fair values represent quoted market prices for identical or
comparable instruments. In other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. Accordingly, the fair
values may not represent actual values of the financial instruments that could have been realized as of year-end or that will be realized in the future.
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