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 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.
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 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.
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Results of Operations
Years Ended December 31, 2023, December 31, 2022, and December 31, 2021
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.
Net Interest Margin
For the Year Ended December 31,
2023
2022
2021
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
$
174,600
$
8,580
4.91
%
$
129,624
$
1,673
1.29
%
$
126,136
$
178
0.25
%
Debt securities, taxable
152,094
2,791
1.84
145,915
2,313
1.59
4,663
312
3.84
Debt securities, tax exempt (1)
19,430
330
1.70
21,635
360
1.66
1,852
31
1.62
Loans held for sale
158
-
-
586
-
-
318
-
-
Total loans (2)
1,315,578
109,843
8.35
1,143,380
74,403
6.51
905,804
55,768
6.16
Total interest-earning assets
1,661,860
121,544
7.31
1,441,140
78,749
5.46
1,038,773
56,289
5.42
Noninterest-earning assets
25,943
23,532
7,361
Total assets
$
1,687,803
$
1,464,672
$
1,046,134
Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts
$
825,169
28,582
3.46
%
$
724,617
7,842
1.08
%
$
430,268
1,396
0.32
%
Time deposits
256,672
10,416
4.06
165,735
1,480
0.89
205,437
1,657
0.81
Total interest-bearing deposits
1,081,841
38,998
3.60
890,352
9,322
1.05
635,705
3,053
0.48
Total interest-bearing liabilities
1,081,841
38,998
3.60
890,352
9,322
1.05
635,705
3,053
0.48
Noninterest-bearing liabilities:
Noninterest-bearing deposits
433,603
432,901
288,446
Other noninterest-bearing liabilities
10,423
7,520
4,930
Total noninterest-bearing liabilities
444,026
440,421
293,376
Shareholders' equity
161,936
133,899
117,053
Total liabilities and shareholders' equity
$
1,687,803
$
1,464,672
$
1,046,134
Net interest income
$
82,546
$
69,427
$
53,236
Net interest spread
3.71
%
4.42
%
4.94
%
Net interest margin
4.97
%
4.82
%
5.12
%
(1)
Taxable-equivalent yield of 2.24% as of December 31, 2023, applying a 24.0% effective tax rate
(2)
Average loan balances include monthly average nonaccrual loans of $18.8 million, $8.8 million and $12.6 million for the years ended December 31, 2023, 2022 and 2021, respectively.
We continued to experience strong asset growth for the year ended December 31, 2023 compared to the year ended December 31, 2022:
-
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; and
-
Net interest margin for the years ended 2023 and 2022 was 4.97% and 4.82%, respectively.
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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;
-
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.
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, 2021 and December 31, 2023, the prime rate fluctuated between a high of 8.50%, and a low of 3.25%.
Interest income on short-term investments increased $6.9 million, or 412.9%, to $8.6 million for year ended December 31, 2023 compared to 2022, due to an increase in the average balances of $45.0
million, or 34.7% and a yield increase of 362 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%. 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, 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).
Analysis of Changes in Interest Income and Expenses
For the Year Ended
December 31, 2023 vs 2022
For the Year Ended
December 31, 2022 vs 2021
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
$
580
$
6,327
$
6,907
$
10
$
1,485
$
1,495
Debt securities
61
387
448
7,633
(5,303
)
2,330
Total loans
11,210
24,230
35,440
14,635
4,000
18,635
Total increase (decrease) in interest income
11,851
30,944
42,795
22,278
182
22,460
Increase (decrease) in interest expense:
Deposits:
Transaction accounts
1,086
19,654
20,740
942
5,504
6,446
Time deposits
809
8,127
8,936
(322
)
145
(177
)
Total interest-bearing deposits
1,895
27,781
29,676
620
5,649
6,269
Total increase (decrease) in interest expense
1,895
27,781
29,676
620
5,649
6,269
Increase (Decrease) in net interest income
$
9,956
$
3,163
$
13,119
$
21,658
$
(5,467
)
$
16,191
(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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Table of Contents
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. 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
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
$
33
2.29
%
$
102
2.89
%
$
-
0
%
$
-
0
%
$
135
2.74
%
Mortgage-backed securities
483
1.03
9,685
1.32
2,470
1.54
21,864
1.71
34,502
1.59
State and political subdivisions
5,828
1.08
11,793
1.32
8,091
1.52
144
1.66
25,856
1.34
U.S. Treasuries
99,325
1.19
2,780
1.04
2,552
1.12
-
-
104,657
1.18
Corporate debt securities
-
-
-
-
4,337
3.36
-
-
4,337
3.36
Total
$
105,669
1.18
%
$
24,360
1.29
%
$
17,450
1.97
%
$
22,008
1.71
%
$
169,487
1.36
%
Percentage of total
62.35
%
14.36
%
10.30
%
12.99
%
100.00
%
*Yield is on a taxable-equivalent basis using 21% tax rate
Provision for Credit Losses
For the year ended December 31, 2023 compared to the year ended December 31, 2022:
-
The provision for credit losses increased from $4.5 million to $21.1 million; and
-
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 credit 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%.
Noninterest Income
The following table sets forth the major components of our noninterest income for the years ended December 31, 2023, 2022 and 2021:
For the Years Ended
For the Years Ended
December 31,
December 31,
2023
2022
$ Increase
(Decrease)
% Increase
(Decrease)
2022
2021
$ Increase
(Decrease)
% Increase
(Decrease)
(Dollars in thousands)
(Dollars in thousands)
Noninterest income:
Mortgage lending income
$
331
$
486
$
(155
)
-31.89
%
$
486
$
435
$
51
11.72
%
Gain (Loss) on sales, prepayments, and calls
of available-for-sale debt securities
(16
)
(127
)
111
-87.40
%
(127
)
-
(127
)
-100.00
%
Service charges on deposit accounts
869
900
(31
)
-3.44
%
900
550
350
63.64
%
Other
8,058
1,680
6,378
379.64
%
1,680
1,265
415
32.81
%
Total noninterest income
$
9,242
$
2,939
$
6,303
214.46
%
$
2,939
$
2,250
$
689
30.62
%
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.
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Table of Contents
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%. 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
For the Years Ended
December 31,
December 31,
2023
2022
$ Increase
(Decrease)
% Increase
(Decrease)
2022
2021
$ Increase
(Decrease)
% Increase
(Decrease)
(Dollars in thousands)
(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits
$
17,385
$
17,040
$
345
2.02
%
$
17,040
$
11,983
$
5,057
42.20
%
Furniture and equipment
995
1,468
(473
)
-32.22
%
1,468
883
585
66.25
%
Occupancy
2,689
2,329
360
15.46
%
2,329
1,899
430
22.64
%
Data and item processing
1,730
2,068
(338
)
-16.34
%
2,068
1,237
831
67.18
%
Accounting, marketing, and legal fees
543
984
(441
)
-44.82
%
984
800
184
23.00
%
Regulatory assessments
1,537
1,344
193
14.36
%
1,344
604
740
122.52
%
Advertising and public relations
427
477
(50
)
-10.48
%
477
282
195
69.15
%
Travel, lodging and entertainment
374
363
11
3.03
%
363
409
(46
)
-11.25
%
Other expense
7,740
2,568
5,172
201.40
%
2,568
2,300
268
11.65
%
Total noninterest expense
$
33,420
$
28,641
$
4,779
16.69
%
$
28,641
$
20,397
$
8,244
40.42
%
For the year ended December 31, 2023 compared to the year ended December 31, 2022:
-
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:
-
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.
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Table of Contents
Financial Condition
The following discussion of our financial condition compares December 31, 2023, 2022, and 2021.
Total Assets
Total assets increased $187.5 million, or 11.8%, to $1.77 billion as of December 31, 2023, as compared to $1.58 billion as of December 31, 2022 and $1.35 billion as of December 31, 2021.
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, 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:
As of December 31
2023
2022
2021
Amount
% of Total
Amount
% of Total
Amount
% of Total
(Dollars in thousands)
Construction & development
$
137,206
10.1
%
$
163,203
12.8
%
$
169,322
16.4
%
1-4 family real estate
100,576
7.4
%
76,928
6.0
%
62,971
6.1
%
Commercial real estate - other
518,622
38.0
%
439,001
34.5
%
339,655
32.9
%
Total commercial real estate
756,404
55.5
%
679,132
53.3
%
571,948
55.5
%
Commercial & industrial
526,185
38.5
%
513,011
40.3
%
361,974
35.1
%
Agricultural
66,495
4.9
%
66,145
5.2
%
73,010
7.1
%
Consumer
14,517
1.1
%
14,949
1.2
%
24,046
2.3
%
Gross loans
1,363,601
100.0
%
1,273,237
100.0
%
1,030,978
100.0
%
Less: unearned income, net
(2,762
)
(2,781
)
(2,577
)
Total Loans, net of unearned income
1,360,839
1,270,456
1,028,401
Less: Allowance for credit losses
(19,691
)
(14,734
)
(10,316
)
Net loans
$
1,341,148
$
1,255,722
$
1,018,085
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.
28
Table of Contents
The following tables show the contractual maturities of our gross loans as of the periods below:
As of December 31, 2023
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
$
11,431
$
70,040
$
8,970
$
44,935
$
-
$
1,438
$
392
$
-
$
137,206
1-4 family real estate
13,628
13,015
41,602
21,451
26
5,443
5,411
-
100,576
Commercial real estate - other
50,251
65,120
152,250
219,260
129
21,283
10,329
-
518,622
Total commercial real estate
75,310
148,175
202,822
285,646
155
28,164
16,132
-
756,404
Commercial & industrial
20,389
263,564
41,520
186,776
3,276
10,041
619
-
526,185
Agricultural
13,250
22,615
13,935
13,032
-
810
2,853
-
66,495
Consumer
2,170
14
5,490
121
595
3,604
2,523
-
14,517
Gross loans
$
111,119
$
434,368
$
263,767
$
485,575
$
4,026
$
42,619
$
22,127
$
-
$
1,363,601
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 commerical 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 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
29
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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. 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 $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 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:
For the Year Ended
December 31,
2023
2022
2021
(Dollars in thousands)
Balance at beginning of the period
$
14,734
$
10,316
$
9,639
Impact of CECL adoption
250
-
-
Provision for credit losses for loans
21,181
4,468
4,175
Charge-offs:
Construction & development
-
-
-
1-4 family real estate
-
-
-
Commercial real estate - other
-
-
-
Commercial & industrial
(16,500
)
(2
)
(3,750
)
Agricultural
(7
)
(50
)
-
Consumer
(17
)
(22
)
(68
)
Total charge-offs
(16,524
)
(74
)
(3,818
)
Recoveries:
Construction & development
-
-
-
1-4 family real estate
-
-
-
Commercial real estate - other
-
-
-
Commercial & industrial
40
10
16
Agricultural
2
4
300
Consumer
8
10
4
Total recoveries
50
24
320
Net recoveries (charge-offs)
(16,474
)
(50
)
(3,498
)
Balance at end of the period
$
19,691
$
14,734
$
10,316
Net recoveries (charge-offs) to average loans
1.25
%
0.00
%
0.39
%
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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,
2023
2022
2021
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
Construction & development
$
1,417
7.2
%
$
1,889
12.8
%
$
1,695
16.4
%
1-4 family real estate
1,271
6.5
%
890
6.0
%
630
6.1
%
Commercial real estate - Other
6,889
35.0
%
5,080
34.5
%
3,399
32.9
%
Commercial & industrial
9,237
46.8
%
5,937
40.3
%
3,621
35.2
%
Agricultural
628
3.2
%
765
5.2
%
730
7.1
%
Consumer
249
1.3
%
173
1.2
%
241
2.3
%
Total
$
19,691
100.0
%
$
14,734
100.0
%
$
10,316
100.0
%
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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.
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 $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,
2023
2022
2021
(Dollars in thousands)
Nonaccrual loans (1)
$
18,941
$
8,039
$
9,885
Accruing loans 90 or more days past due
10,026
9,941
496
Total nonperforming assets
$
28,967
$
17,980
$
10,381
Ratio of nonperforming loans to total loans
2.13
%
1.42
%
1.01
%
Ratio of nonaccrual loans to total loans
1.39
%
0.63
%
0.96
%
Ratio of allowance for credit losses to total loans
1.45
%
1.16
%
1.00
%
Ratio of allowance for credit losses to nonaccrual loans
103.96
%
183.28
%
104.36
%
Ratio of nonperforming assets to total assets
1.64
%
1.13
%
0.77
%
(1) Includes $10.12 million of loans modified to borrowers experiencing financial difficulty, see Note 6 of the financial statements.
32
Table of Contents
The following tables present an aging analysis of loans as of the dates indicated.
As of December 31, 2023
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
$
-
$
-
$
-
$
-
$
-
$
137,206
$
137,206
1-4 family real estate
-
-
-
-
-
100,576
100,576
Commercial real estate
-
-
-
-
-
518,622
518,622
Commercial & industrial
472
10,969
9,946
9,946
21,387
504,798
526,185
Agricultural
-
-
-
-
-
66,495
66,495
Consumer
-
27
80
80
107
14,410
14,517
Total
$
472
$
10,996
$
10,026
$
10,026
$
21,494
$
1,342,107
$
1,363,601
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
-
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 commerical
-
-
-
-
-
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
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 Credit Quality Committee 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.
33
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 $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:
As of December 31, 2023
Pass
Watch
Special
mention
Substandard
Total
(Dollars in thousands)
Construction & development
$
136,417
$
-
$
789
$
-
$
137,206
1-4 family real estate
100,576
-
-
-
100,576
Commercial real estate - Other
502,795
-
15,701
126
518,622
Commercial & industrial
485,433
4,094
5,767
30,891
526,185
Agricultural
66,495
-
-
-
66,495
Consumer
14,437
-
-
80
14,517
Total
$
1,306,153
$
4,094
$
22,257
$
31,097
$
1,363,601
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
34
Table of Contents
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. 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
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.
For the Year Ended December 31,
2023
2022
2021
Amount
Percentage of
Total
Amount
Percentage of
Total
Amount
Percentage of
Total
(Dollars in thousands)
Noninterest-bearing demand
$
482,349
30.4
%
$
441,509
30.9
%
$
366,705
30.1
%
Interest-bearing transaction deposits
702,150
44.1
%
669,852
46.8
%
583,389
47.9
%
Savings deposits
150,116
9.4
%
136,537
9.5
%
89,778
7.4
%
Time deposits (less than $250,000)
168,690
10.6
%
140,929
9.8
%
132,690
10.9
%
Time deposits ($250,000 or more)
88,086
5.5
%
42,573
3.0
%
44,909
3.7
%
Total interest-bearing deposits
1,109,042
69.6
%
989,891
69.1
%
850,766
69.9
%
Total deposits
$
1,591,391
100.0
%
$
1,431,400
100.0
%
$
1,217,471
100.0
%
The following table summarizes our average deposit balances and weighted average rates for the years ended December 31, 2023, 2022, and 2021:
For the Year Ended December 31,
2023
2022
2021
Average Balance
Weighted
Average Rate
Average Balance
Weighted
Average Rate
Average Balance
Weighted
Average Rate
(Dollars in thousands)
Non interest-bearing demand
$
433,603
0.00
%
$
432,901
0.00
%
$
288,446
0.00
%
Interest-bearing transaction deposits
705,891
3.42
%
613,799
1.11
%
375,048
0.34
%
Savings deposits
119,278
3.74
%
110,818
0.92
%
55,220
0.23
%
Time deposits
256,672
4.06
%
165,735
0.89
%
205,437
0.81
%
Total interest-bearing deposits
1,081,841
3.60
%
890,352
1.05
%
635,705
0.48
%
Total deposits
$
1,515,444
2.57
%
$
1,323,253
0.70
%
$
924,151
0.33
%
35
Table of Contents
The following tables set forth the maturity of time deposits as of the dates indicated below:
As of December 31, 2023 Maturity Within:
Three Months
Three to Six
Months
Six to 12
Months
After 12
Months
Total
(Dollars in thousands)
Time deposits (less than $250,000)
$
52,423
$
55,570
$
50,047
$
10,650
$
168,690
Time deposits ($250,000 or more)
30,807
18,472
17,492
21,315
88,086
Total time deposits
$
83,230
$
74,042
$
67,539
$
31,965
$
256,776
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 (less than $250,000)
$
58,184
$
25,333
$
38,844
$
18,568
$
140,929
Time deposits ($250,000 or more)
12,292
5,579
17,001
7,701
42,573
Total time deposits
$
70,476
$
30,912
$
55,845
$
26,269
$
183,502
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, 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 $159.2 million as of December 31, 2023 and $129.2 million as of December 31, 2022.
36
Table of Contents
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, 2023, the FDIC categorized the Bank as “well-capitalized” under the prompt corrective action framework. There have been no conditions or events since December 31, 2023 that
management believes would change this classification.
37
Table of Contents
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.
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, 2023
Total capital (to risk-weighted assets)
Company
$
185,171
12.74
%
$
152,579
10.50
%
N/A
N/A
Bank
185,118
12.75
%
152,472
10.50
%
$
145,211
10.00
%
Tier 1 capital (to risk-weighted assets)
Company
166,982
11.49
%
123,516
8.50
%
N/A
N/A
Bank
166,942
11.50
%
123,429
8.50
%
116,169
8.00
%
CET 1 capital (to risk-weighted assets)
Company
166,982
11.49
%
101,719
7.00
%
N/A
N/A
Bank
166,942
11.50
%
101,648
7.00
%
94,387
6.50
%
Tier 1 capital (to average assets)
Company
166,982
9.50
%
N/A
N/A
N/A
N/A
Bank
166,942
9.50
%
N/A
N/A
87,897
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, 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)
Bank7 Corp.
$
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)
Bank7 Corp.
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)
Bank7 Corp.
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)
Bank7 Corp.
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
%
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
$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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Table of Contents
Contractual Obligations
The following tables contain supplemental information regarding our total contractual obligations as of December 31, 2023:
Payments Due as of December 31, 2023
Within One
Year
One to Three
Years
Three to Five
Years
After Five
Years
Total
(Dollars in thousands)
Deposits without a stated maturity
$
1,334,615
$
-
$
-
$
-
$
1,334,615
Time deposits
224,811
31,345
620
-
256,776
Operating lease commitments
553
627
308
850
2,338
Total contractual obligations
$
1,559,979
$
31,972
$
928
$
850
$
1,593,729
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,
2023
2022
2021
(Dollars in thousands)
Commitments to extend credit
$
256,888
$
198,027
$
200,393
Standby letters of credit
4,247
1,043
5,809
Total
$
261,135
$
199,070
$
206,202
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Table of Contents
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 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 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 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 $1.0 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. 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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Table of Contents
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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