Bank7 Corp. (BSVN) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this report.
Unless the context indicates otherwise, references in this management’s discussion and analysis to “we”, “our”, and “us,” refer
to Bank7 Corp. and its consolidated subsidiaries. All references to “the Bank” refer to Bank7, our wholly owned subsidiary.
General
We are Bank7 Corp., a bank holding company headquartered in Oklahoma City, Oklahoma. Through our wholly-owned subsidiary, Bank7, we operate twelve
full-service branches in Oklahoma, the Dallas/Fort Worth, Texas metropolitan area and Kansas. We are focused on serving business owners and entrepreneurs by delivering fast, consistent and well-designed loan and deposit products to meet their
financing needs. We intend to grow organically by selectively opening additional branches in our target markets and we will also pursue strategic acquisitions.
As a bank holding company, we generate most of our revenue from interest income on loans and from short-term investments. The primary source of
funding for our loans and short-term investments are deposits held by our subsidiary, Bank7. We measure our performance by our return on average assets, return on average equity, earnings per share, capital ratios, and our efficiency ratio,
which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income.
As of December 31, 2021, we had total assets of $1.4 billion, total loans of $1.0 billion, total deposits of $1.2 billion and total shareholders’
equity of $127.4 million.
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The U.S. economy experienced widespread volatility throughout 2020 and 2021 as a result of the COVID-19 pandemic and government responses to the
pandemic. Economic condition declined rapidly and significantly following the initial widespread U.S. outbreak in March and April of 2020. Federal stimulus was quickly passed in the form of the CARES Act and the economy rebounded significantly in
the second half of 2020. In an emergency measure aimed at dampening the economic impact of COVID-19, the Federal Reserve lowered the target for the federal funds rate to a range of between zero to 0.25% effective on March 16, 2020 where it
remained through the end of 2021. 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. This decline in interest rates led to new all-time low
yields across the U.S. Treasury maturity curve. On March 16, 2022 the Federal Reserve revised its target for short term interest rates by 0.25% to a range of 0.25% to 0.50%. The Federal Reserve signaled that it expects the rate to be 1.9% by the
end of 2022, implying a total of seven rate hikes this year.
2021 Highlights
On December 9, 2021, the Company acquired 100% of the outstanding equity of Watonga Bancshares, Inc. (“Watonga”), the bank holding company for
Cornerstone Bank, for $29.3 million in cash. Immediately following the acquisition, Watonga was dissolved and Cornerstone Bank merged with and into Bank7. The Company acquired total assets of $267.3 million, including $117.3 million in total
loans. The Company assumed liabilities of $245.5 million, including $243.5 million in deposits. Further, the Company benefitted from 23 days of revenue of $477,000 from the acquired entity, and incurred total one time acquisition-related expenses
of $712,000.
For the year ended December 31, 2021, we reported pre-tax net income of $30.9 million, an increase of $5.0 million, or 16.2% compared to pre-tax net
income of $25.9 million for the year ended December 31, 2020. The increase was primarily related to an increase in interest earning assets, decreased interest expense due to the lower rate environment and lower ALLL provision expense. For the
year ended December 31, 2021, average loans totaled $905.8 million, an increase of $82.6 million or 10.0%, from December 31, 2020.
Pre-tax return on average assets and return on average equity was 2.96% and 26.41%, respectively for the year ended December 31, 2021, as compared to
2.73% and 25.29%, respectively, for the same period in 2020. Tax-adjusted return on average assets and return on average equity was 2.21% and 20.13%, respectively for the year ended December 31, 2021, as compared to 2.03% and 19.14%,
respectively, for the same period in 2020. Our efficiency ratio for the year ended December 31, 2021 was 36.76% as compared to 36.03% for the year ended December 31, 2020.
As of December 31, 2021, total loans were $1.03 billion, an increase of $191.8 million, or 22.9%, from December 31, 2020. Total deposits were $1.22
billion as of December 31, 2021, an increase of $312.0 million, or 34.5%, from December 31, 2020.
Results of Operations
Years Ended December 31, 2021, December 31, 2020, and December 31, 2019
Net Interest Income and Net Interest Margin
The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income
from interest-earning assets, and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities, and the resultant average rates; (iii) net interest income; and (iv) the net
interest margin.
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| Net Interest Margin | ||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 126,136 | $ | 178 | 0.25 | % | $ | 116,295 | $ | 828 | 0.71 | % | $ | 151,434 | $ | 3,459 | 2.28 | % | ||||||||||||||||||
| Investment securities, taxable | 4,663 | 312 | 3.84 | 1,123 | 36 | 3.21 | 1,065 | 50 | 4.69 | |||||||||||||||||||||||||||
| Debt securities, tax exempt | 1,852 | 31 | 1.62 | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Loans held for sale | 318 | - | - | 244 | - | - | 236 | - | - | |||||||||||||||||||||||||||
| Total loans(1) | 905,804 | 55,768 | 6.16 | 823,228 | 52,450 | 6.37 | 636,274 | 48,200 | 7.58 | |||||||||||||||||||||||||||
| Total interest-earning assets | 1,038,773 | 56,289 | 5.42 | 940,890 | 53,314 | 5.67 | 789,009 | 51,709 | 6.55 | |||||||||||||||||||||||||||
| Noninterest-earning assets | 7,361 | 8,067 | 9,519 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 1,046,134 | $ | 948,957 | $ | 798,528 | ||||||||||||||||||||||||||||||
| Funding sources: | ||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||||||||||
| Transaction accounts | $ | 430,268 | 1,396 | 0.32 | % | $ | 377,519 | 2,729 | 0.72 | % | $ | 295,576 | 5,057 | 1.71 | % | |||||||||||||||||||||
| Time deposits | 205,437 | 1,657 | 0.81 | 207,442 | 3,424 | 1.65 | 208,375 | 4,459 | 2.14 | |||||||||||||||||||||||||||
| Total interest-bearing deposits | 635,705 | 3,053 | 0.48 | 584,961 | 6,153 | 1.05 | 503,951 | 9,516 | 1.89 | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 635,705 | 3,053 | 0.48 | 584,961 | 6,153 | 1.05 | 503,951 | 9,516 | 1.89 | |||||||||||||||||||||||||||
| Noninterest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | 288,446 | 256,431 | 192,562 | |||||||||||||||||||||||||||||||||
| Other noninterest-bearing liabilities | 4,930 | 5,206 | 4,585 | |||||||||||||||||||||||||||||||||
| Total noninterest-bearing liabilities | 293,376 | 261,637 | 197,147 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 117,053 | 102,359 | 97,430 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,046,134 | $ | 948,957 | $ | 798,528 | ||||||||||||||||||||||||||||||
| Net interest income | $ | 53,236 | $ | 47,161 | $ | 42,193 | ||||||||||||||||||||||||||||||
| Net interest spread | 4.94 | % | 4.61 | % | 4.67 | % | ||||||||||||||||||||||||||||||
| Net interest margin | 5.12 | % | 5.01 | % | 5.35 | % |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (1) | Average loan balances include monthly average nonaccrual loans of $12.6 million, $11.3 million and $2.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. |
We continued to experience strong asset growth for the year ended December 31, 2021 compared to the year ended December 31, 2020:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | 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; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | 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; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | Yields on our interest-earning assets totaled 5.42%, a decrease of 25 basis points which was attributable to lower loan rates and a decrease in yield on short term investments of 46 basis points, both were primarily impacted by the aforementioned changes in market interest rates related to the pandemic; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | Net interest margin for the years ended 2021 and 2020 was 5.12% and 5.01%, respectively. |
For the year ended December 31, 2020 compared to the year ended December 31, 2019:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | Total interest income on loans increased $4.3 million, or 8.8%, to $52.5 million which was attributable to a $187.0 million increase in the average balance of loans to $823.2 million during the year ended 2020 as compared with the average balance of $636.3 million for the year ended 2019; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | Loan fees totaled $5.0 million, an increase of $592,000 or 13.3%. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | Yields on our interest-earning assets totaled 5.67%, a decrease of 88 basis points which was attributable to lower loan rates and a decrease in yield on short term investments of 157 basis points, both were primarily impacted by the aforementioned changes in market interest rates related to the pandemic; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | Net interest margin for the year ended 2020 and 2019 was 5.01% and 5.35 %, respectively. |
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The FED influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan
portfolio is significantly affected by changes in the prime interest rate. For the three year period between January 1, 2019 and December 31, 2021, the prime rate fluctuated between a high of 5.5%, and a low of 3.25%. The FED raised its target
for short term interest rates in March 2022, the first such raise since 2018 and has signaled that it expects the rate to be 1.9% at the end of 2022 and 2.8% at the end of 2023, implying multiple rate hikes over that period.
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 decreased $2.6 million, or 76.1%, to $828,000 for year ended December 31, 2020 compared to 2019, due to a decrease in the average balances of $35.1 million, or 23.2% and a
yield decrease of 157 basis points related to the aforementioned changes in market interest rates related to the pandemic.
Interest expense on interest-bearing deposits totaled $3.1 million for the year ended December 31, 2021, compared to $6.2 million for 2020, a
decrease of $3.1 million, or 50.4%. The decrease was related to the cost of interest-bearing deposits decreasing to 0.48% for the year ended December 31, 2021 from 1.05% for the year ended December 31, 2020, which was related to the
aforementioned changes in market interest rates related to the pandemic. Interest expense on interest-bearing deposits totaled $6.2 million for the year ended December 31, 2020, compared to $9.5 million for 2019, a decrease of $3.4 million, or
35.3%. The decrease was related to the cost of interest-bearing deposits decreasing to 1.05% for the year ended December 31, 2020 from 1.89% for the year ended December 31, 2019, which was related to the aforementioned changes in market interest
rates related to the pandemic.
Net interest margin for the years ended December 31, 2021, 2020 and 2019 was 5.12%, 5.01% and 5.35%, 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, 2021 vs 2020 | For the Year Ended December 31, 2020 vs 2019 | |||||||||||||||||||||||
| Change due to: | Change due to: | |||||||||||||||||||||||
| Volume(1) | Rate(1) | Interest | Volume(1) | Rate(1) | Interest | |||||||||||||||||||
| Variance | Variance | |||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
| Increase (decrease) in interest income: | ||||||||||||||||||||||||
| Short-term investments | $ | 70 | $ | (585 | ) | $ | (515 | ) | $ | (803 | ) | $ | (1,828 | ) | $ | (2,631 | ) | |||||||
| Investment securities | 354 | (211 | ) | 143 | 3 | (17 | ) | (14 | ) | |||||||||||||||
| Total loans | 5,260 | (1,943 | ) | 3,317 | 14,163 | (9,913 | ) | 4,250 | ||||||||||||||||
| Total increase (decrease) in interest income | 5,684 | (2,739 | ) | 2,945 | 13,363 | (11,758 | ) | 1,605 | ||||||||||||||||
| Increase (decrease) in interest expense: | ||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||
| Transaction accounts | 380 | (1,713 | ) | (1,333 | ) | 1,402 | (3,730 | ) | (2,328 | ) | ||||||||||||||
| Time deposits | (33 | ) | (1,734 | ) | (1,767 | ) | (20 | ) | (1,015 | ) | (1,035 | ) | ||||||||||||
| Total interest-bearing deposits | 347 | (3,447 | ) | (3,100 | ) | 1,382 | (4,745 | ) | (3,363 | ) | ||||||||||||||
| Total increase (decrease) in interest expense | 347 | (3,447 | ) | (3,100 | ) | 1,382 | (4,745 | ) | (3,363 | ) | ||||||||||||||
| Increase (Decrease) in net interest income | $ | 5,337 | $ | 708 | $ | 6,045 | $ | 11,981 | $ | (7,013 | ) | $ | 4,968 |
(1) Variances attributable to both volume and rate are allocated on a
consistent basis between rate and volume based on the absolute value of the variances in each category.
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Weighted Average Yield of Debt Securities
The following table summarizes the maturity distribution schedule with corresponding weighted average taxable equivalent yields of the debt securities portfolio at December
31, 2021. 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, 2021 | ||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 | $ | 10 | 6.86 | % | $ | 303 | 3.56 | % | $ | - | 0 | % | $ | - | 0 | % | $ | 313 | 3.66 | % | ||||||||||||||||||||
| Mortgage-backed securities | 1,397 | 3.82 | 10,211 | 2.00 | 13,834 | 2.46 | 7,712 | 2.32 | 33,154 | 2.34 | ||||||||||||||||||||||||||||||
| State and political subdivisions | 3,618 | 2.82 | 20,750 | 1.94 | 17,792 | 2.15 | 3,134 | 2.22 | 45,294 | 2.11 | ||||||||||||||||||||||||||||||
| U.S. Treasury | - | - | 1,018 | 1.56 | 5,029 | 1.76 | - | - | 6,047 | 1.73 | ||||||||||||||||||||||||||||||
| Total | $ | 5,025 | 3.11 | % | $ | 32,282 | 1.96 | % | $ | 36,655 | 2.21 | % | $ | 10,846 | 2.29 | % | $ | 84,808 | 2.18 | % | ||||||||||||||||||||
| Percentage of total | 5.93 | % | 38.06 | % | 43.22 | % | 12.79 | % | 100.00 | % |
*Yield is on a taxable-equivalent basis using 21% tax rate
Provision for Loan Losses
For the year ended December 31, 2021 compared to the year ended December 31, 2020:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | The provision for loan losses decreased from $5.4 to $4.2 million |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | The allowance as a percentage of loans decreased by 15 basis points to 1.00%. |
For the year ended December 31, 2020 compared to the year ended December 31, 2019:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | The provision for loan losses increased from zero to $5.4 million related to loan growth, uncertainty in the economy caused by the COVID-19 pandemic and $3.6 million in net charge offs; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | The allowance as a percentage of loans increased by 4 basis points to 1.15%. |
Noninterest Income
The following table sets forth the major components of our noninterest income for the years ended December 31, 2021, 2020 and 2019:
| For the Years Ended | For the Years Ended | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | |||||||||||||||||||||||||||||||
| 2021 | 2020 | $ Increase (Decrease) | % Increase (Decrease) | 2020 | 2019 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
| Noninterest income: | ||||||||||||||||||||||||||||||||
| Secondary market income | $ | 435 | $ | 175 | $ | 260 | 148.57 | % | $ | 175 | $ | 164 | $ | 11 | 6.71 | % | ||||||||||||||||
| Service charges on deposit accounts | 550 | 442 | 108 | 24.43 | % | 442 | 392 | 50 | 12.76 | % | ||||||||||||||||||||||
| Other income and fees | 1,265 | 1,048 | 217 | 20.71 | % | 1,048 | 752 | 296 | 39.36 | % | ||||||||||||||||||||||
| Total noninterest income | $ | 2,250 | $ | 1,665 | $ | 585 | 35.14 | % | $ | 1,665 | $ | 1,308 | $ | 357 | 27.29 | % |
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Noninterest Expense
Noninterest expense for the year ended December 31, 2021 was $20.4 million compared to $17.6 million for the year ended December 31, 2020, an
increase of $2.8 million or 15.9%. Noninterest expense for the year ended December 31, 2020 was $17.6 compared to $28.4 million for the year ended December 31, 2019, a decrease of $10.8 million, or 38.1%. The following table sets forth the major
components of our noninterest expense for the years ended December 31, 2021, 2020 and 2019:
| For the Years Ended | For the Years Ended | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | |||||||||||||||||||||||||||||||
| 2021 | 2020 | $ Increase (Decrease) | % Increase (Decrease) | 2020 | 2019 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
| Noninterest expense: | ||||||||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 11,983 | $ | 10,130 | $ | 1,853 | 18.29 | % | $ | 10,130 | $ | 21,265 | $ | (11,135 | ) | -52.36 | % | |||||||||||||||
| Furniture and equipment | 883 | 868 | 15 | 1.73 | % | 868 | 829 | 39 | 4.70 | % | ||||||||||||||||||||||
| Occupancy | 1,899 | 1,957 | (58 | ) | -2.96 | % | 1,957 | 1,677 | 280 | 16.70 | % | |||||||||||||||||||||
| Data and item processing | 1,237 | 1,091 | 146 | 13.38 | % | 1,091 | 1,078 | 13 | 1.21 | % | ||||||||||||||||||||||
| Accounting, marketing, and legal fees | 800 | 536 | 264 | 49.25 | % | 536 | 757 | (221 | ) | -29.19 | % | |||||||||||||||||||||
| Regulatory assessments | 604 | 506 | 98 | 19.37 | % | 506 | 126 | 380 | 301.59 | % | ||||||||||||||||||||||
| Advertising and public relations | 282 | 400 | (118 | ) | -29.50 | % | 400 | 588 | (188 | ) | -31.97 | % | ||||||||||||||||||||
| Travel, lodging and entertainment | 409 | 241 | 168 | 69.71 | % | 241 | 368 | (127 | ) | -34.51 | % | |||||||||||||||||||||
| Other expense | 2,300 | 1,863 | 437 | 23.46 | % | 1,863 | 1,744 | 119 | 6.82 | % | ||||||||||||||||||||||
| Total noninterest expense | $ | 20,397 | $ | 17,592 | $ | 2,805 | 15.94 | % | $ | 17,592 | $ | 28,432 | $ | (10,840 | ) | -38.13 | % |
For the year ended December 31, 2021 compared to the year ended December 31, 2020:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | Salaries and employee benefits expense was $12.0 million compared to $10.1 million, an increase of $1.9 million, or 18.3%. The increase was attributable to overall increases in compensation to remain competitive, and partially due to our acquisition of Cornerstone Bank, which increased employee headcount. |
For the year ended December 31, 2020 compared to the year ended December 31, 2019:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | Salaries and employee benefits expense was $10.1 million compared to $21.3 million, an decrease of $11.1 million, or 52.4%. The decrease in 2020 was attributable to our one-time non-cash executive stock transaction. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| - | Occupancy expense was $2.0 million compared to $1.7 million, an increase of $280,000, or 16.7%. The increase in 2020 was primarily due to 2020 being the first full year of depreciation for the renovation of our main branch and headquarters and increased rent at our full-service Tulsa location. |
Financial Condition
The following discussion of our financial condition compares December 31, 2021, 2020, and 2019.
Total Assets
The increasing trend in total assets is primarily attributable to strong organic loan and retail deposit growth within the Oklahoma City market and
expansion into the Dallas/Fort Worth metropolitan area, as well as the addition of loans as a result of the acquisition of Watonga Bancshares on December 9, 2021. Total assets increased $334.2 million, or 32.87%, to $1.4 billion as of December
31, 2021, as compared to $1.0 billion as of December 31, 2020 and $866.4 million as of December 31, 2019.
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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, 2021, 2020 and 2019, our gross loans were $1.0 billion, $839.1 million and $708.7 million, respectively.
The following table presents the balance and associated percentage of each major category in our loan portfolio as of December 31, 2021, December 31,
2020 and December 31, 2019:
| As of December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Construction & development | $ | 169,322 | 16.4 | % | $ | 107,855 | 12.8 | % | $ | 70,628 | 10.0 | % | ||||||||||||
| 1-4 family real estate | 62,971 | 6.1 | % | 29,079 | 3.5 | % | 34,160 | 4.8 | % | |||||||||||||||
| Commercial real estate - Other | 339,655 | 32.9 | % | 290,489 | 34.6 | % | 273,278 | 38.5 | % | |||||||||||||||
| Total commercial real estate | 571,948 | 55.5 | % | 427,423 | 50.9 | % | 378,066 | 53.3 | % | |||||||||||||||
| Commercial & industrial | 361,974 | 35.1 | % | 351,248 | 41.9 | % | 260,762 | 36.8 | % | |||||||||||||||
| Agricultural | 73,010 | 7.1 | % | 50,519 | 6.0 | % | 57,945 | 8.2 | % | |||||||||||||||
| Consumer | 24,046 | 2.3 | % | 9,898 | 1.2 | % | 11,895 | 1.7 | % | |||||||||||||||
| Gross Loans | 1,030,978 | 100.0 | % | 839,088 | 100.0 | % | 708,668 | 100.0 | % | |||||||||||||||
| Less unearned income, net | (2,577 | ) | (2,475 | ) | (1,364 | ) | ||||||||||||||||||
| Total Loans, net of unearned income | 1,028,401 | 836,613 | 707,304 | |||||||||||||||||||||
| Allowance for loan and lease losses | (10,316 | ) | (9,639 | ) | (7,846 | ) | ||||||||||||||||||
| Net loans | $ | 1,018,085 | $ | 826,974 | $ | 699,458 |
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, 2021 and 2020, are $18.7 million and $44.9 million of PPP loans, respectively.
We have established internal concentration limits in the loan portfolio for CRE loans, hospitality loans, energy loans, and construction loans, among
others. All loan types are within our established limits. We use underwriting guidelines to assess each borrower’s historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios.
Financial and performance covenants are used in commercial lending to allow us to react to a borrower’s deteriorating financial condition, should that occur.
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The following tables show the contractual maturities of our gross loans as of the periods below:
| 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 commercial real estate | 15,698 | 190,182 | 81,354 | 229,632 | 1,339 | 28,848 | - | 24,895 | 571,948 | ||||||||||||||||||||||||||
| Commercial & industrial | 24,249 | 142,553 | 16,346 | 145,654 | 20,474 | 12,047 | - | 651 | 361,974 | ||||||||||||||||||||||||||
| Agricultural | 2,529 | 17,441 | 5,156 | 39,305 | 623 | 1,587 | - | 6,369 | 73,010 | ||||||||||||||||||||||||||
| Consumer | 4,870 | 29 | 10,825 | 172 | 1,554 | 2,458 | 84 | 4,054 | 24,046 | ||||||||||||||||||||||||||
| Gross loans | $ | 47,346 | $ | 350,205 | $ | 113,681 | $ | 414,763 | $ | 23,990 | $ | 44,940 | $ | 84 | $ | 35,969 | $ | 1,030,978 |
| As of December 31, 2020 | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Due in One Year or Less | Due after One Year Through Five Years | Due after Five Years Through Fifteen Years | Due after Fifteen Years | ||||||||||||||||||||||||||||||||
| Fixed Rate | Adjustable Rate | Fixed Rate | Adjustable Rate | Fixed Rate | Adjustable Rate | Fixed Rate | Adjustable Rate | Total | |||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Construction & development | $ | 14 | $ | 47,649 | $ | 885 | $ | 58,387 | $ | - | $ | 920 | $ | - | $ | - | $ | 107,855 | |||||||||||||||||
| 1-4 family real estate | 273 | 13,394 | 4,712 | 9,959 | 39 | 702 | - | - | 29,079 | ||||||||||||||||||||||||||
| Commercial real estate - other | 2,377 | 55,307 | 45,880 | 180,721 | 294 | 4,288 | - | 1,622 | 290,489 | ||||||||||||||||||||||||||
| Total real estate | 2,664 | 116,350 | 51,477 | 249,067 | 333 | 5,910 | - | 1,622 | 427,423 | ||||||||||||||||||||||||||
| Commercial & industrial | 16,914 | 194,520 | 39,593 | 93,707 | 11 | 6,503 | - | - | 351,248 | ||||||||||||||||||||||||||
| Agricultural | 5,141 | 27,215 | 2,534 | 14,420 | 60 | 541 | - | 608 | 50,519 | ||||||||||||||||||||||||||
| Consumer | 1,544 | 150 | 6,570 | 65 | 1,057 | 425 | 87 | - | 9,898 | ||||||||||||||||||||||||||
| Gross loans | $ | 26,263 | $ | 338,235 | $ | 100,174 | $ | 357,259 | $ | 1,461 | $ | 13,379 | $ | 87 | $ | 2,230 | $ | 839,088 |
| As of December 31, 2019 | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 | $ | - | $ | 31,860 | $ | 833 | $ | 37,483 | $ | - | $ | 452 | $ | - | $ | - | $ | 70,628 | |||||||||||||||||
| 1-4 family real estate | 282 | 9,598 | 3,843 | 19,676 | 43 | 718 | - | - | 34,160 | ||||||||||||||||||||||||||
| Commercial real estate - other | 1,849 | 23,533 | 23,194 | 219,390 | 335 | 3,168 | - | 1,809 | 273,278 | ||||||||||||||||||||||||||
| Total real estate | 2,131 | 64,991 | 27,870 | 276,549 | 378 | 4,338 | - | 1,809 | 378,066 | ||||||||||||||||||||||||||
| Commercial & industrial | 11,677 | 176,329 | 9,973 | 54,233 | 12 | 7,195 | - | 1,343 | 260,762 | ||||||||||||||||||||||||||
| Agricultural | 3,947 | 34,875 | 2,786 | 13,055 | 1,319 | 1,355 | - | 608 | 57,945 | ||||||||||||||||||||||||||
| Consumer | 2,042 | - | 4,824 | 159 | 3,958 | 511 | 89 | 312 | 11,895 | ||||||||||||||||||||||||||
| Gross loans | $ | 19,797 | $ | 276,195 | $ | 45,453 | $ | 343,996 | $ | 5,667 | $ | 13,399 | $ | 89 | $ | 4,072 | $ | 708,668 |
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Allowance for Loan and Lease Losses
The allowance is based on management’s estimate of probable losses inherent in the loan portfolio. In the opinion of management, the allowance is
adequate to absorb estimated losses in the portfolio as of each balance sheet date. While management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance. In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk
potential in loans is utilized together with the results of internal credit reviews.
To determine the adequacy of the allowance, the loan portfolio is broken into segments based on loan type. Historical loss experience factors by
segment, adjusted for changes in trends and conditions, are used to determine an indicated allowance for each portfolio segment. These factors are evaluated and updated based on the composition of the specific loan segment. Other considerations
include volumes and trends of delinquencies, nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of
credit risk and the experience and abilities of our lending personnel. In addition to the segment evaluations, impaired loans with a balance of $250,000 or more are individually evaluated based on facts and circumstances of the loan to determine
if a specific allowance amount may be necessary. Specific allowances may also be established for loans whose outstanding balances are below the $250,000 threshold when it is determined that the risk associated with the loan differs significantly
from the risk factor amounts established for its loan segment.
The allowance was $10.3 million at December 31, 2021, $9.6 million at December 31, 2020 and $7.8 million at December 31, 2019. The increasing trend
was related to loan growth.
The following table provides an analysis of the activity in our allowance for the periods indicated:
| For the Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Balance at beginning of the period | $ | 9,639 | $ | 7,846 | $ | 7,832 | ||||||
| Provision for loan losses | 4,175 | 5,350 | - | |||||||||
| Charge-offs: | ||||||||||||
| Construction & development | - | - | - | |||||||||
| 1-4 family real estate | - | - | (2 | ) | ||||||||
| Commercial real estate - Other | - | - | - | |||||||||
| Commercial & industrial | (3,750 | ) | (3,289 | ) | (4 | ) | ||||||
| Agricultural | - | (300 | ) | (11 | ) | |||||||
| Consumer | (68 | ) | (1 | ) | (1 | ) | ||||||
| Total charge-offs | (3,818 | ) | (3,590 | ) | (18 | ) | ||||||
| Recoveries: | ||||||||||||
| Construction & development | - | - | - | |||||||||
| 1-4 family real estate | - | 2 | 5 | |||||||||
| Commercial real estate - Other | - | - | - | |||||||||
| Commercial & industrial | 16 | 18 | 24 | |||||||||
| Agricultural | 300 | 10 | 3 | |||||||||
| Consumer | 4 | 3 | - | |||||||||
| Total recoveries | 320 | 33 | 32 | |||||||||
| Net charge-offs | (3,498 | ) | (3,557 | ) | 14 | |||||||
| Balance at end of the period | $ | 10,316 | $ | 9,639 | $ | 7,846 | ||||||
| Net charge-offs to average loans | 0.39 | % | 0.43 | % | 0.00 | % |
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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, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Construction & development | $ | 1,695 | 16.4 | % | $ | 1,239 | 12.8 | % | $ | 782 | 10.0 | % | ||||||||||||
| 1-4 family real estate | 630 | 6.1 | % | 334 | 3.5 | % | 378 | 4.8 | % | |||||||||||||||
| Commercial real estate - Other | 3,399 | 32.9 | % | 3,337 | 34.6 | % | 3,025 | 38.5 | % | |||||||||||||||
| Commercial & industrial | 3,621 | 35.1 | % | 4,035 | 41.9 | % | 2,887 | 36.8 | % | |||||||||||||||
| Agricultural | 730 | 7.1 | % | 580 | 6.0 | % | 642 | 8.2 | % | |||||||||||||||
| Consumer | 241 | 2.3 | % | 114 | 1.2 | % | 132 | 1.7 | % | |||||||||||||||
| Total | $ | 10,316 | 100.0 | % | $ | 9,639 | 100.0 | % | $ | 7,846 | 100.0 | % |
Nonperforming Assets
Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status
between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90
days or when, in the opinion of management, there is a reasonable doubt as to collectability of the obligation. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period
interest income. Income on a nonaccrual loan is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and
management believes full collectability of principal and interest is probable.
A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan
agreement. Impaired loans include loans on nonaccrual status and loans modified in a troubled debt restructuring, or TDR. Income from a loan on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance
is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable
market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair
value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our
attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The impairment amount on a collateral dependent
loan is charged off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral dependent is set up as a specific reserve.
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In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is
classified as a TDR. Included in certain loan categories of impaired loans are TDRs on which we have granted certain material concessions to the borrower as a result of the borrower experiencing financial difficulties. The concessions granted by
us may include, but are not limited to: (1) a modification in which the maturity date, timing of payments or frequency of payments is modified, (2) an interest rate lower than the current market rate for new loans with similar risk, or (3) a
combination of the first two concessions.
If a borrower on a restructured accruing loan has demonstrated performance under the previous terms, is not experiencing financial difficulty and
shows the capacity to continue to perform under the restructured terms, the loan will remain on accrual status. Otherwise, the loan will be placed on nonaccrual status until the borrower demonstrates a sustained period of performance, which
generally requires six consecutive months of payments. Loans identified as TDRs are evaluated for impairment using the present value of the expected cash flows or the estimated fair value of the collateral, if the loan is collateral dependent.
The fair value is determined, when possible, by an appraisal of the property less estimated costs related to liquidation of the collateral. The appraisal amount may also be adjusted for current market conditions. Adjustments to reflect the
present value of the expected cash flows or the estimated fair value of collateral dependent loans are a component in determining an appropriate allowance, and as such, may result in increases or decreases to the provision for loan losses in
current and future earnings.
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned, or OREO, until sold,
and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.
Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under TDRs that are not
performing in accordance with their modified terms. Nonperforming assets consist of nonperforming loans plus OREO. Loans accounted for on a nonaccrual basis were $9.9 million as of December 31, 2021, $14.6 million as of December 31, 2020 and $1.8
million as of December 31, 2019. OREO was $0 as of December 31, 2021, December 31, 2020 and December 31, 2019.
The following table presents information regarding nonperforming assets as of the dates indicated.
| As of December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Nonaccrual loans | $ | 9,885 | $ | 14,575 | $ | 1,809 | ||||||
| Troubled-debt restructurings (1) | - | - | 912 | |||||||||
| Accruing loans 90 or more days past due | 496 | 1,960 | 612 | |||||||||
| Total nonperforming loans | 10,381 | 16,535 | 3,333 | |||||||||
| Other real estate owned | - | - | - | |||||||||
| Total nonperforming assets | $ | 10,381 | $ | 16,535 | $ | 3,333 | ||||||
| Ratio of nonperforming loans to total loans | 1.01 | % | 1.98 | % | 0.47 | % | ||||||
| Ratio of nonaccrual loans to total loans | 0.96 | % | 1.74 | % | 0.26 | % | ||||||
| Ratio of allowance for loan losses to total loans | 1.00 | % | 1.15 | % | 1.11 | % | ||||||
| Ratio of allowance for loan losses to nonaccrual loans | 104.36 | % | 66.13 | % | 433.72 | % | ||||||
| Ratio of nonperforming assets to total assets | 0.77 | % | 1.63 | % | 0.38 | % |
(1) $1.4 million, $12.98 million and $1.81 million of TDRs as of December 31, 2021, December 31, 2020 and December 31, 2019, respectively
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The following tables present an aging analysis of loans as of the dates indicated.
| As of December 31, 2021 | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loans 30-59 days past due | Loans 60-89 days past due | Loans 90+ days past due | Loans 90+ days past due and accruing | Total Past Due Loans | Current | Total loans | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||
| Construction & development | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 169,322 | $ | 169,322 | |||||||||||||
| 1-4 family real estate | - | - | - | - | - | 62,971 | 62,971 | ||||||||||||||||||||
| Commercial real estate - Other | - | 174 | - | - | 174 | 339,481 | 339,655 | ||||||||||||||||||||
| Commercial & industrial | - | 19 | 501 | 401 | 520 | 361,454 | 361,974 | ||||||||||||||||||||
| Agricultural | - | - | 77 | 77 | 77 | 72,933 | 73,010 | ||||||||||||||||||||
| Consumer | 48 | 15 | 18 | 18 | 81 | 23,965 | 24,046 | ||||||||||||||||||||
| Total | $ | 48 | $ | 208 | $ | 596 | $ | 496 | $ | 852 | $ | 1,030,126 | $ | 1,030,978 |
| As of December 31, 2020 | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loans 30-59 days past due | Loans 60-89 days past due | Loans 90+ days past due | Loans 90+ days past due and accruing | Total Past Due Loans | Current | Total loans | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||
| Construction & development | $ | 714 | $ | - | $ | - | $ | - | $ | 714 | $ | 107,141 | $ | 107,855 | |||||||||||||
| 1-4 family real estate | - | - | - | - | - | 29,079 | 29,079 | ||||||||||||||||||||
| Commercial real estate - Other | 1,444 | - | 1,960 | 1,960 | 3,404 | 287,085 | 290,489 | ||||||||||||||||||||
| Commercial & industrial | - | - | - | - | - | 351,248 | 351,248 | ||||||||||||||||||||
| Agricultural | - | - | - | - | - | 50,519 | 50,519 | ||||||||||||||||||||
| Consumer | 193 | - | - | - | 193 | 9,705 | 9,898 | ||||||||||||||||||||
| Total | $ | 2,351 | $ | - | $ | 1,960 | $ | 1,960 | $ | 4,311 | $ | 834,777 | $ | 839,088 |
| As of December 31, 2019 | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 | |||||||||||||||||||||
| Construction & development | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 70,628 | $ | 70,628 | |||||||||||||
| 1-4 family commerical | - | - | - | - | - | 34,160 | 34,160 | ||||||||||||||||||||
| Commercial real estate - Other | - | - | - | - | - | 273,278 | 273,278 | ||||||||||||||||||||
| Commercial & industrial | - | - | 14 | 14 | 14 | 260,748 | 260,762 | ||||||||||||||||||||
| Agricultural | - | - | 598 | 598 | 598 | 57,347 | 57,945 | ||||||||||||||||||||
| Consumer | 90 | - | - | - | 90 | 11,805 | 11,895 | ||||||||||||||||||||
| Total | $ | 90 | $ | - | $ | 612 | $ | 612 | $ | 702 | $ | 707,966 | $ | 708,668 |
In addition to the past due and nonaccrual criteria, the Company also evaluates loans according to its internal risk grading system. Loans are
segregated between pass, watch, special mention, and substandard categories. The definitions of those categories are as follows:
Pass: These loans generally conform to Bank policies, are characterized by policy-conforming advance rates
on collateral, and have well-defined repayment sources. In addition, these credits are extended to borrowers and guarantors with a strong balance sheet and either substantial liquidity or a reliable income history.
Watch: These loans are still considered “Pass” credits; however, various factors such as industry stress,
material changes in cash flow or financial conditions, or deficiencies in loan documentation, or other risk issues determined by the lending officer, Commercial Loan Committee or CQC warrant a heightened sense and frequency of monitoring.
Special mention: These loans have observable weaknesses or evidence imprudent handling or structural issues.
The weaknesses require close attention, and the remediation of those weaknesses is necessary. No risk of probable loss exists. Credits in this category are expected to quickly migrate to “Watch” or “Substandard” as this is viewed as a transitory
loan grade.
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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 $24.7 million as of December 31, 2021, an increase of $1.6 million compared to December 31, 2020. Substandard loans totaled
$23.1 million as of December 31, 2020, an increase of $12.0 million compared to December 31, 2019. The increase primarily related to two commercial and industrial relationships comprised of one note each totaling $14.4 million with no specific
reserves and two commercial real estate relationships comprised one note each totaling $5.0 million with no specific reserves.
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Table of Contents
Outstanding loan balances categorized by internal risk grades as of the periods indicated are summarized as follows:
| As of December 31, 2021 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pass | Watch | Special mention | Substandard | Total | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Construction & development | $ | 169,322 | $ | - | $ | - | $ | - | $ | 169,322 | |||||||||
| 1-4 family real estate | 62,971 | - | - | - | 62,971 | ||||||||||||||
| Commercial real estate - Other | 282,268 | 14,976 | 27,112 | 15,299 | 339,655 | ||||||||||||||
| Commercial & industrial | 341,661 | 4,658 | 6,300 | 9,355 | 361,974 | ||||||||||||||
| Agricultural | 72,295 | 255 | 460 | - | 73,010 | ||||||||||||||
| Consumer | 24,000 | - | - | 46 | 24,046 | ||||||||||||||
| Total | $ | 952,517 | $ | 19,889 | $ | 33,872 | $ | 24,700 | $ | 1,030,978 |
| As of December 31, 2020 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pass | Watch | Special mention | Substandard | Total | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Construction & development | $ | 107,855 | $ | - | $ | - | $ | - | $ | 107,855 | |||||||||
| 1-4 family real estate | 28,711 | 368 | - | - | 29,079 | ||||||||||||||
| Commercial real estate - Other | 248,194 | 24,155 | 10,086 | 8,054 | 290,489 | ||||||||||||||
| Commercial & industrial | 328,656 | 7,691 | 300 | 14,601 | 351,248 | ||||||||||||||
| Agricultural | 50,051 | - | - | 468 | 50,519 | ||||||||||||||
| Consumer | 9,898 | - | - | - | 9,898 | ||||||||||||||
| Total | $ | 773,365 | $ | 32,214 | $ | 10,386 | $ | 23,123 | $ | 839,088 |
| As of December 31, 2019 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pass | Watch | Special mention | Substandard | Total | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Construction & development | $ | 70,628 | $ | - | $ | - | $ | - | $ | 70,628 | |||||||||
| 1-4 family real estate | 33,622 | 538 | - | - | 34,160 | ||||||||||||||
| Commercial real estate - Other | 267,437 | - | - | 5,841 | 273,278 | ||||||||||||||
| Commercial & industrial | 241,176 | 5,312 | 11,524 | 2,750 | 260,762 | ||||||||||||||
| Agricultural | 53,290 | - | 2,128 | 2,527 | 57,945 | ||||||||||||||
| Consumer | 11,895 | - | - | - | 11,895 | ||||||||||||||
| Total | $ | 678,048 | $ | 5,850 | $ | 13,652 | $ | 11,118 | $ | 708,668 |
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Troubled Debt Restructurings
TDRs are defined as those loans in which a bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to
the borrower that it would not otherwise consider. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with
original contractual terms of the loan. Loans with insignificant delays or insignificant short-falls in the amount of payments expected to be collected are not considered to be impaired. Loans defined as individually impaired, based on applicable
accounting guidance, include larger balance nonperforming loans and TDRs.
The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under
ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3)
executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) January 1, 2022. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency
statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who
were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. As of December 31, 2021, one loan totaling $3.1 million was modified, related to COVID-19, which was not considered a troubled debt restructuring.
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The following table presents loans restructured as TDRs as of December 31, 2021, December 31, 2020 and December 31, 2019.
| As of December 31, 2021 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | Specific reserves allocated | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Commercial real estate | 1 | $ | 1,402 | $ | 1,402 | - | |||||||||
| Total | 1 | $ | 1,402 | $ | 1,402 | $ | - |
| As of December 31, 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | Specific reserves allocated | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Commercial & industrial | 1 | $ | 10,886 | $ | 10,886 | $ | - | ||||||||
| Agricultural | 1 | 469 | 469 | - | |||||||||||
| Commercial real estate | 1 | 1,622 | 1,622 | - | |||||||||||
| Total | 3 | $ | 12,977 | $ | 12,977 | $ | - |
| As of December 31, 2019 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | Specific reserves allocated | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Commercial & industrial | 1 | $ | 1,809 | $ | 1,809 | $ | 26 | ||||||||
| Agricultural | 2 | 912 | 912 | - | |||||||||||
| Total | 3 | $ | 2,721 | $ | 2,721 | $ | 26 |
There were no payment defaults with respect to loans modified as TDRs as of December 31, 2021, 2020, and 2019.
Impairment analyses are prepared on TDRs in conjunction with the normal allowance process. TDRs restructured during the years ended December 31,
2021, 2020, and 2019 required $0, $0 and $26,000 in specific reserves, respectively.
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The following table presents total TDRs, both in accrual and nonaccrual status as of the periods indicated:
| As of December 31, 2021 | As of December 31, 2020 | As of December 31, 2019 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of contracts | Amount | Number of contracts | Amount | Number of contracts | Amount | ||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||
| Accrual | - | $ | - | - | $ | - | 2 | $ | 912 | ||||||||||||||
| Nonaccrual | 1 | 1,402 | 3 | 12,977 | 1 | 1,809 | |||||||||||||||||
| Total | 1 | $ | 1,402 | 3 | $ | 12,977 | 3 | $ | 2,721 |
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.
Total deposits as of December 31, 2021, 2020, and 2019 were $1.2 billion, $905.5 million and $757.5 million, respectively. The increase was primarily
due to acquired deposits and organic deposit growth. The following table sets forth deposit balances by certain categories as of the dates indicated and the percentage of each deposit category to total deposits.
| December 31, | December 31, | December 31, | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Amount | Percentage of Total | Amount | Percentage of Total | Amount | Percentage of Total | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Demand deposits | $ | 366,705 | 30.1 | % | $ | 246,569 | 27.2 | % | $ | 219,221 | 29.0 | % | ||||||||||||
| Interest-bearing transaction deposits | 583,389 | 47.9 | % | 392,784 | 43.4 | % | 262,974 | 34.7 | % | |||||||||||||||
| Savings deposits | 89,778 | 7.4 | % | 54,008 | 6.0 | % | 72,750 | 9.6 | % | |||||||||||||||
| Time deposits ($250,000 or less) | 132,690 | 10.9 | % | 135,811 | 15.0 | % | 146,834 | 19.4 | % | |||||||||||||||
| Time deposits (more than $250,000) | 44,909 | 3.7 | % | 76,342 | 8.4 | % | 55,704 | 7.3 | % | |||||||||||||||
| Total interest-bearing | 850,766 | 69.9 | % | 658,945 | 72.8 | % | 538,262 | 71.0 | % | |||||||||||||||
| Total deposits | $ | 1,217,471 | 100.0 | % | $ | 905,514 | 100.0 | % | $ | 757,483 | 100.0 | % |
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The following table summarizes our average deposit balances and weighted average rates for the years ended December 31, 2021, 2020, and 2019:
| For the Year Ended December 31, | For the Year Ended December 31, | For the Year Ended December 31, | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Average Balance | Weighted Average Rate | Average Balance | Weighted Average Rate | Average Balance | Weighted Average Rate | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Demand deposits | $ | 288,446 | 0.00 | % | $ | 256,431 | 0.00 | % | $ | 192,562 | 0.00 | % | ||||||||||||
| Interest-bearing transaction deposits | 375,048 | 0.34 | % | 318,713 | 1.50 | % | 227,959 | 3.66 | % | |||||||||||||||
| Savings deposits | 55,220 | 0.23 | % | 58,806 | 0.56 | % | 67,617 | 1.30 | % | |||||||||||||||
| Time deposits | 205,437 | 0.81 | % | 207,442 | 1.65 | % | 208,375 | 2.14 | % | |||||||||||||||
| Total interest-bearing | 635,705 | 0.48 | % | 584,961 | 1.05 | % | 503,951 | 1.89 | % | |||||||||||||||
| Total deposits | $ | 924,151 | 0.33 | % | $ | 841,392 | 0.73 | % | $ | 696,513 | 1.37 | % |
The following tables set forth the maturity of time deposits as of the dates indicated below:
| As of December 31, 2021 Maturity Within: | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months | Three to Six Months | Six to 12 Months | After 12 Months | Total | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Time deposits ($250,000 or less) | $ | 32,680 | $ | 37,016 | $ | 31,197 | $ | 31,797 | $ | 132,690 | |||||||||
| Time deposits (more than $250,000) | 18,234 | 5,932 | 10,729 | 10,014 | 44,909 | ||||||||||||||
| Total time deposits | $ | 50,914 | $ | 42,948 | $ | 41,926 | $ | 41,811 | $ | 177,599 |
| As of December 31, 2020 Maturity Within: | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months | Three to Six Months | Six to 12 Months | After 12 Months | Total | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Time deposits ($250,000 or less) | $ | 29,730 | $ | 25,894 | $ | 54,410 | $ | 25,777 | $ | 135,811 | |||||||||
| Time deposits (more than $250,000) | 11,119 | 7,845 | 35,770 | 21,608 | 76,342 | ||||||||||||||
| Total time deposits | $ | 40,849 | $ | 33,739 | $ | 90,180 | $ | 47,385 | $ | 212,153 |
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, 2021, 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 $78.1 million as of December 31, 2021 and $64.8 million as of December 31, 2020.
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Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory
capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the
regulatory framework for “prompt corrective action” (described below), the Bank must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory
accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Qualitative measures established by regulation to ensure
capital adequacy required the Bank to maintain minimum amounts and ratios of Common Equity Tier 1, or CET1, capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, referred to as the
“leverage ratio.” For further information, see “Supervision and Regulation – Regulatory Capital Requirements” and “Supervision and Regulation – Prompt Corrective Action Framework.”
In the wake of the global financial crisis of 2008 and 2009, the role of capital has become fundamentally more important, as banking regulators have
concluded that the amount and quality of capital held by banking organizations was insufficient to absorb losses during periods of severely distressed economic conditions. The Dodd-Frank Act and banking regulations promulgated by the U.S. federal
banking regulators to implement Basel III have established strengthened capital standards for banks and bank holding companies and require more capital to be held in the form of common stock. In addition, the Basel III regulations implement a
concept known as the “capital conservation buffer.” In general, banks, bank holding companies with more than $3.0 billion in assets and bank holding companies with publicly-traded equity are required to hold a buffer of CET1 capital equal to 2.5%
of risk-weighted assets over each minimum capital ratio in order to avoid being subject to limits on capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive officers.
As of December 31, 2021, the FDIC categorized the Bank as “well-capitalized” under the prompt corrective action framework. There have been no
conditions or events since December 31, 2021 that management believes would change this classification.
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The table below also summarizes the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory
perspective, as well as the Bank’s capital ratios as of December 31, 2021, 2020, and 2019. 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, 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 | % |
| Actual | With Capital Conservation Buffer | Minimum to be “Well- Capitalized” Under Prompt Corrective Action | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||||||
| Total capital (to risk-weighted assets) | ||||||||||||||||||||||||
| Bank7 Corp. | $ | 115,375 | 14.73 | % | $ | 82,216 | 10.50 | % | N/A | N/A | ||||||||||||||
| Bank | 115,335 | 14.75 | % | 82,114 | 10.50 | % | $ | 78,204 | 10.00 | % | ||||||||||||||
| Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||
| Bank7 Corp. | 105,736 | 13.50 | % | 66,556 | 8.50 | % | N/A | N/A | ||||||||||||||||
| Bank | 105,696 | 13.51 | % | 66,473 | 8.50 | % | 62,563 | 8.00 | % | |||||||||||||||
| CET 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||
| Bank7 Corp. | 105,736 | 13.50 | % | 54,811 | 7.00 | % | N/A | N/A | ||||||||||||||||
| Bank | 105,696 | 13.51 | % | 54,743 | 7.00 | % | 50,832 | 6.50 | % | |||||||||||||||
| Tier 1 capital (to average assets) | ||||||||||||||||||||||||
| Bank7 Corp. | 105,736 | 10.78 | % | N/A | N/A | N/A | N/A | |||||||||||||||||
| Bank | 105,696 | 10.78 | % | N/A | N/A | 49,041 | 5.00 | % |
| Actual | With Capital Conservation Buffer | Minimum to be “Well- Capitalized” Under Prompt Corrective Action | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| As of December 31, 2019: | ||||||||||||||||||||||||
| Total capital (to risk-weighted assets) | ||||||||||||||||||||||||
| Bank7 Corp. | $ | 105,137 | 15.25 | % | $ | 72,393 | 10.50 | % | N/A | N/A | ||||||||||||||
| Bank | 106,148 | 15.42 | % | 72,287 | 10.50 | % | $ | 68,845 | 10.00 | % | ||||||||||||||
| Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||
| Bank7 Corp. | 97,291 | 14.11 | % | 58,604 | 8.50 | % | N/A | N/A | ||||||||||||||||
| Bank | 98,302 | 14.28 | % | 58,518 | 8.50 | % | 55,076 | 8.00 | % | |||||||||||||||
| CET 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||
| Bank7 Corp. | 97,291 | 14.11 | % | 48,262 | 7.00 | % | N/A | N/A | ||||||||||||||||
| Bank | 98,302 | 14.28 | % | 48,192 | 7.00 | % | 44,749 | 6.50 | % | |||||||||||||||
| Tier 1 capital (to average assets) | ||||||||||||||||||||||||
| Bank7 Corp. | 97,291 | 11.53 | % | N/A | N/A | N/A | N/A | |||||||||||||||||
| Bank | 98,302 | 11.65 | % | N/A | N/A | 42,241 | 5.00 | % |
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Shareholders’ equity provides a source of permanent funding, allows for future growth and provides a cushion to withstand unforeseen adverse
developments. Total shareholders’ equity increased to $127.4 million as of December 31, 2021, compared to $107.3 million as of December 31, 2020 and $100.1 million as of December 31, 2019. The increases were driven by retained capital from net
income during the periods.
Contractual Obligations
The following tables contain supplemental information regarding our total contractual obligations as of December 31, 2021:
| Payments Due as of December 31, 2021 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Within One Year | One to Three Years | Three to Five Years | After Five Years | Total | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Deposits without a stated maturity | $ | 1,039,872 | $ | - | $ | - | $ | - | $ | 1,039,872 | |||||||||
| Time deposits | 135,788 | 39,904 | 1,907 | - | 177,599 | ||||||||||||||
| Securities sold under agreements to repurchase | - | - | - | - | - | ||||||||||||||
| Operating lease commitments | 611 | 782 | 241 | - | 1,634 | ||||||||||||||
| Total contractual obligations | $ | 1,176,271 | $ | 40,686 | $ | 2,148 | $ | - | $ | 1,219,105 |
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, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | |||||||||
| (Dollars in thousands) | |||||||||||
| Commitments to extend credit | $ | 200,393 | $ | 206,520 | $ | 191,459 | |||||
| Standby letters of credit | 5,809 | 2,366 | 3,338 | ||||||||
| Total | $ | 206,202 | $ | 208,886 | $ | 194,797 |
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Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial
statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes.
These estimates, assumptions and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the
financial statement. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.
The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have
elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting
standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.
The following is a discussion of the critical accounting policies and significant estimates that we believe require us to make the most complex or
subjective decisions or assessments. Additional information about these policies can be found in Note 1 of the Company’s consolidated financial statements as of December 31, 2021.
Allowance for Loan and Lease Losses
The allowance is based on management’s estimate of probable losses inherent in the loan portfolio. In the opinion of management, the allowance is
adequate to absorb estimated losses in the portfolio as of each balance sheet date. While management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on changes in economic conditions
and changes in the composition of the loan portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. In analyzing the adequacy of the allowance, a
comprehensive loan grading system to determine risk potential in loans is utilized together with the results of internal credit reviews.
To determine the adequacy of the allowance, the loan portfolio is broken into segments based on loan type. Historical loss experience factors by
segment, adjusted for changes in trends and conditions, are used to determine an indicated allowance for each portfolio segment. These factors are evaluated and updated based on the composition of the specific loan segment. Other considerations
include volumes and trends of delinquencies, nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of
credit risk and the experience and abilities of our lending personnel. In addition to the segment evaluations, impaired loans with a balance of $250,000 or more are individually evaluated based on facts and circumstances of the loan to determine
if a specific allowance amount may be necessary. Specific allowances may also be established for loans whose outstanding balances are below the $250,000 threshold when it is determined that the risk associated with the loan differs significantly
from the risk factor amounts established for its loan segment.
Goodwill and Intangibles
Intangible assets totaled $1.6 million and goodwill, net of accumulated amortization totaled $8.5 million for the year ended December 31, 2021, compared to intangible
assets of $572,000 and goodwill, net of accumulated amortization of $1.0 million for the year ended December 31, 2020. The increase is due to core deposit intangible acquired and goodwill recognized as a result of the acquisition of Watonga
Bancshares, Inc. on December 9, 2021.
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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.
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.
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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.