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Item 7. Management’s Discussion and Analysis

2024-03-25 compared with 2023-03-24 · 241 added, 304 removed, 407 unchanged (57% of the section changed)

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.

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.

and its consolidated subsidiaries.

All references to “the Bank” refer to Bank7, our wholly owned subsidiary.

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.

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.

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.

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 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, 2023, we had total assets of $1.77 billion, total loans of $1.36 billion, total deposits of $1.59 billion and total shareholders’ equity of $170.3 million.

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.

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.

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.

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.

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 and to 5.25%-5.50% by the end of 2023.

These actions positively impacted growth in net interest income in for 2023 and 2022, but the higher rates could negatively impact loan customers in a

slowing economy.

2023 Overview

We reported total loans of $1.36 billion as of December 31, 2023, an increase of $90.4 million, or 7.1%, from December 31, 2022.

Total deposits were $1.59 billion as of December 31, 2023, an increase

of $160.0 million, or 11.2%, from December 31, 2022.

Pre-tax net income was $37.2 million, a decrease of $2.0 million, or 5.2%, for the year ended December 31, 2023 as compared to pre-tax net income of $39.3 million for the same period in 2022.

Pre-tax return on average assets and return on average equity was 2.21% and 23.47%, respectively for the year ended December 31, 2023, as compared to 2.68% and 29.32%, respectively, for the same

period in 2022.

Tax-adjusted return on average assets and return on average equity was 1.68% and 17.83%, respectively for the year ended December 31, 2023, as compared to 2.02% and 23.92%, respectively, for the same period in 2022.

Our efficiency

ratio for the year ended December 31, 2023 was 36.07% as compared to 39.29% for the same period in 2022.

The provision for credit losses for the year ended December 31, 2023 increased $16.7 million, or 373.5%, from $4.5 million compared to the same period in 2022.

During the year ended December 31, 2023, we had a single loan customer file for bankruptcy, and as a result, we recorded a charge-off of $16.5 million, increased nonaccrual loans by $18.4 million, and

recorded an additional specific reserve to the allowance for credit losses and provision for loan losses of $2.0 million.

See Note (6) of the financial statements for further disclosure and discussion.

Results of Operations

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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;

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

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

(iii) net interest income;

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Total interest income on loans increased $35.4 million, or 47.6%, to $109.8 million, which was attributable to a $172.2 million increase in the average balance of loans to $1.32 billion during the year ended

2023 as compared with the average balance of loans of $1.14 billion for the year ended 2022, and increased loan yields as discussed below;

Yields on our interest-earning assets totaled 7.31%, an increase of 185 basis points which was attributable to higher loan rates of 184 basis points, an increase in yield on short term investments of 362

basis points, and an increase in yield on taxable debt securities of 25 basis points;

Net interest margin for the years ended 2023 and 2022 was 4.97% and 4.82%, respectively.

We experienced 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;

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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;

Net interest margin for the years ended 2021 and 2020 was 5.12% and 5.01%, respectively.

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.

Our loan portfolio is significantly affected by changes in the

prime interest rate.

For the three-year period between January 1, 2021 and December 31, 2023, the prime rate fluctuated between a high of 8.50%, and a low of 3.25%.

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million, or 34.7% and a yield increase of 362 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 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 yield increase of 104 basis points.

Interest expense on interest-bearing deposits totaled $39.0 million for the year ended December 31, 2023, compared to $9.3 million for 2022, an increase of $29.7 million, or 318.3%.

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.

The increase was

related to the cost of interest-bearing deposits increasing to 3.60% for the year ended December 31, 2023 from 1.05% for the year ended December 31, 2022.

Interest expense on interest-bearing deposits totaled $9.3 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.

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.

Net interest margin for the years ended December 31, 2023, 2022 and 2021 was 4.97%, 4.82% and 5.12%, 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).

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

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Increase (Decrease) in net interest income

(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.

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.

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, 2023.

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:

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, 2023

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*Yield is on a taxable-equivalent basis using 21% tax rate

Provision for Loan Losses

Provision for Credit Losses

For the year ended December 31, 2023 compared to the year ended December 31, 2022:

The provision for loan losses increased from $4.2 million to $4.5 million;

The provision for credit losses increased from $4.5 million to $21.1 million;

The allowance as a percentage of loans increased by 29 basis points to 1.44%.

Increases are related to the single loan customer discussed in the 2023 Overview.

For the year ended December 31, 2022 compared to the year ended December 31, 2021:

The provision for loan losses decreased from $5.4 million to $4.2 million;

The allowance as a percentage of loans decreased by 15 basis points to 1.00%.

The provision for credit losses increased from $4.2 million to $4.5 million;

The allowance as a percentage of loans increased by 16 basis points to 1.16%.

Noninterest Income

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Mortgage lending income

Gain (Loss) on sales of available-for-sale debt securities

Gain (Loss) on sales, prepayments, and calls

of available-for-sale debt securities

Service charges on deposit accounts

Other income and fees

Total noninterest income

For the year ended December 31, 2023 compared to the year ended December 31, 2022:

Other noninterest income was $8.1 million compared to $1.7 million, an increase of $6.4 million, or 380%.

The increase was primarily attributable to income related to the operation of oil and gas assets

acquired during the fourth quarter of 2023, see Note 2 of the financial statements.

Noninterest Expense

Noninterest expense for the year ended December 31, 2023 was $33.4 million compared to $28.6 million for the year ended December 31, 2022, an increase of $4.8 million or 16.7%.

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:

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%.

The following table sets forth the major components of our noninterest expense for the years

ended December 31, 2023, 2022 and 2021:

For the Years Ended

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For the year ended December 31, 2023 compared to the year ended December 31, 2022:

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.

Other expense was $7.7 million compared to $2.6 million, an increase of $5.2 million, or 200%.

The increase was primarily attributable to expenses related to the operation of oil and gas assets acquired

during the fourth quarter of 2023, see Note 2 of the financial statements.

For the year ended December 31, 2022 compared to the year ended December 31, 2021:

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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.

competitive, and due to our acquisition of Cornerstone Bank in late 2021, which increased employee headcount.

Financial Condition

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

December 31, 2022, 2021 and 2020, our gross loans were $1.27 billion, $1.03 billion and $839.1 million, respectively.

December 31, 2023, 2022 and 2021, our gross loans were $1.36 billion, $1.27 billion and $1.03 billion, respectively.

The following table presents the balance and associated percentage of each major category in our loan portfolio as of December 31, 2023, December 31, 2022 and December 31, 2021:

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Total Loans, net of unearned income

Allowance for loan losses

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.

Allowance for credit losses

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.

All loan types are within our established

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.

Financial and performance covenants are used in

commercial lending to allow us to react to a borrower’s deteriorating financial condition, should that occur.

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

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Commercial & industrial

Allowance for Loan and Lease Losses

Allowance for Credit 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.

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

as of each balance sheet date.

While management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.

In addition, various regulatory agencies,

as an integral part of their examination process, periodically review the Company’s allowance.

In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk potential in loans is utilized together with the

results of internal credit reviews.

In addition, various regulatory agencies, as an

integral part of their examination process, periodically review the Company’s allowance.

In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk potential in loans is utilized together with the results of

internal credit reviews.

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

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

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

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

are used to determine an indicated allowance for each portfolio segment.

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

Other considerations include volumes and trends of delinquencies,

nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk and the experience and abilities

of our lending personnel.

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

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.

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

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

The allowance was $19.7 million at December 31, 2023, $14.7 million at December 31, 2022 and $10.3 million at December 31, 2021.

The increasing trend was related to loan growth.

The increasing trend was related to loan growth and the single loan

customer discussed in the 2023 Overview.

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

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Balance at beginning of the period

Provision for loan losses

Impact of CECL adoption

Provision for credit losses for loans

Construction & development

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

which the accrual of interest has been discontinued are designated as nonaccrual loans.

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

there is a reasonable doubt as to collectability of the obligation.

Loans on which the

accrual of interest has been discontinued are designated as nonaccrual loans.

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

reasonable doubt as to collectability of the obligation.

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

Income on a nonaccrual loan is

subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible.

Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal

and interest is probable.

Income on a nonaccrual loan is subsequently

recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible.

Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is

A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Impaired loans include loans on

nonaccrual status and loans modified in a troubled debt restructuring, or TDR.

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.

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.

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:

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

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

Fair value, where possible, is determined by independent

appraisals, typically on an annual basis.

Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring

process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral.

The impairment amount on a collateral dependent loan is charged off to the allowance if deemed not

collectible and the impairment amount on a loan that is not collateral dependent is set up as a specific reserve.

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

sell when acquired, establishing a new cost basis.

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

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.

as of December 31, 2022, December 31, 2021 and December 31, 2020.

Loans accounted for on a

nonaccrual basis were $21.2 million as of December 31, 2023, $8.0 million as of December 31, 2022 and $9.9 million as of December 31, 2021.

OREO was $0 as of December 31, 2023, December 31, 2022 and December 31, 2021.

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

As of December 31,

(Dollars in thousands)

Nonaccrual loans (1)

Troubled-debt restructurings (1)

Accruing loans 90 or more days past due

Total nonperforming loans

Other real estate owned

Total nonperforming assets

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Ratio of nonaccrual loans to total loans

Ratio of allowance for loan losses to total loans

Ratio of allowance for loan losses to nonaccrual loans

Ratio of allowance for credit losses to total loans

Ratio of allowance for credit losses to nonaccrual loans

Ratio of nonperforming assets to total assets

(1) $1.2 million, $1.4 million and $12.98 million of TDRs as of December 31, 2022, 2021 and 2020, respectively.

(1) Includes $10.12 million of loans modified to borrowers experiencing financial difficulty, see Note 6 of the financial statements.

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

As of December 31, 2023

Total past due

(Dollars in thousands)

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1-4 family real estate

Commercial real estate - other

Commercial real estate

Commercial & industrial

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1-4 family real estate

Commercial real estate - other

Commercial real estate

Commercial & industrial

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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.

Loans are segregated between pass, watch, special mention, and

substandard categories.

The definitions of those categories are as follows:

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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.

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

Special mention :

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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.

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

are not remediated.

Substandard loans totaled $31.1 million as of December 31, 2023, an increase of $10.1 million compared to December 31, 2022.

Substandard loans totaled $21.0 million as of December 31, 2022, a decrease

of $3.7 million compared to December 31, 2021.

The total net increase in 2023 as compared to 2022, is comprised of a net increase in commercial and industrial substandard loans primarily related to an increase in one relationship comprised of three

notes totaling $18.4 million with a $2.0 million specific reserve and a decrease in one relationship comprised of one note totaling $6.6 million with no specific reserve, and a net decrease in commercial real estate substandard loans primarily

related to one relationship comprised of one note totaling $1.2 million with no specific reserves.

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

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Commercial & industrial

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

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.

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

Pre-Modification

Post-Modification

Specific Reserves

(Dollars in thousands)

Commercial real estate

As of December 31, 2021

Pre-Modification

Post-Modification

Specific Reserves

(Dollars in thousands)

Commercial real estate

As of December 31, 2020

Pre-Modification

Post-Modification

Specific reserves

(Dollars in thousands)

Commercial & industrial

Commercial real estate

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

(Dollars in thousands)

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.

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.

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.

We also participate in the One-Way Buy Insured Cash Sweep service and similar services, which provide for one-way buy transactions among banks for the

purpose of purchasing cost-effective floating-rate funding without collateralization or stock purchase requirements.

As of December 31, 2023, 2022, and 2021 brokered deposits were $273.5 million, $249.9 million, and $71.7 million, respectively.

Total deposits as of December 31, 2023, 2022, and 2021 were $1.59 billion, $1.43 billion and $1.22 billion, respectively.

The increase was primarily due to acquired deposits and organic deposit

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

For the Year Ended December 31,

Percentage of

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Savings deposits

Time deposits ($250,000 or less)

Time deposits (more than $250,000)

Time deposits (less than $250,000)

Time deposits ($250,000 or more)

Total interest-bearing deposits

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For the Year Ended December 31,

Average Balance

(Dollars in thousands)

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(Dollars in thousands)

Time deposits ($250,000 or less)

Time deposits (more than $250,000)

Time deposits (less than $250,000)

Time deposits ($250,000 or more)

Total time deposits

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(Dollars in thousands)

Time deposits ($250,000 or less)

Time deposits (more than $250,000)

Time deposits (less than $250,000)

Time deposits ($250,000 or more)

Total time deposits

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

needs, all at a reasonable cost.

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

at a reasonable cost.

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

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.

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.

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

Other available sources of liquidity include wholesale deposits and borrowings from correspondent banks and FHLB advances.

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As of December 31, 2023, we had no unsecured fed funds lines with correspondent depository institutions with no amounts advanced.

In addition, based on the values of loans pledged as

collateral, we had borrowing availability with the FHLB of $129.2 million as of December 31, 2022 and $78.1 million as of December 31, 2021.

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

had borrowing availability with the FHLB of $159.2 million as of December 31, 2023 and $129.2 million as of December 31, 2022.

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.

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.

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, 2023, the FDIC categorized the Bank as “well-capitalized” under the prompt corrective action framework.

1 unchanged sentence

management believes would change this classification.

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 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, 2023, 2022, and 2021.

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.

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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.

Total shareholders’ equity increased to

$170.3 million as of December 31, 2023, compared to $144.1 million as of December 31, 2022 and $127.4 million as of December 31, 2021.

The increases were driven by retained capital from net income during the periods.

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Payments Due as of December 31, 2023

Within One Year

One to Three Years

Three to Five Years

After Five Years

Three to Five

(Dollars in thousands)

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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 repayment and maturity activity and continued deposit gathering activities.

We expect to maintain adequate cash levels through profitability,

loan repayment and maturity activity and continued deposit gathering activities.

We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.

1 unchanged sentence

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers.

These financial instruments include

commitments to extend credit and standby letters of credit.

These financial instruments include commitments to

extend credit and standby letters of 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

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.

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.

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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.

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.

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.

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 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

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 Credit 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

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

as of each balance sheet date.

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.

In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk potential in

loans is utilized together with the results of internal credit reviews.

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

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

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

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

are used to determine an indicated allowance for each portfolio segment.

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

Other considerations include volumes and trends of delinquencies,

of our lending personnel.

established for its loan segment.

Other considerations include volumes and trends of delinquencies, nonaccrual

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.

Intangible assets totaled $1.0 million and goodwill, net of accumulated amortization totaled $8.5 million for the year ended December 31, 2023, compared to intangible assets of $1.3 million and goodwill, net of

accumulated amortization of $8.6 million for the year ended December 31, 2022.

Goodwill resulting from a business combination represents the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

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.

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.

Such assets are periodically evaluated as to the recoverability

of their carrying values.

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.

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.

6 unchanged sentences

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.

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.

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.

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.

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.

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

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.

Accordingly, the fair values may not

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis