BANK7 CORP. 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 Quarterly Report and in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Unless the context indicates otherwise, references in this management's discussion and analysis to "we", "our", and "us," refer toBank7 Corp. and its consolidated subsidiaries. All references to "the Bank" refer toBank7 , our wholly owned subsidiary. General We areBank7 Corp. , a bank holding company headquartered inOklahoma City, Oklahoma . Through our wholly-owned subsidiary,Bank7 , we operate nine locations inOklahoma , theDallas/Fort Worth, Texas metropolitan area andKansas . 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 pursuing 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, efficiency ratio (calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis) and noninterest income. As ofSeptember 30, 2021 , we had total assets of$1.1 billion , total loans of$924.7 million , total deposits of$1.0 billion and total shareholders' equity of$122.4 million . Results of Operations Performance Summary. For the third quarter of 2021, we reported a pre-tax income of$8.3 million , compared to pre-tax income of$6.1 million for the third quarter of 2020. For the first nine months of 2021 we reported pre-tax income of$23.2 million , compared to$19.6 million for the same period in 2020. For the third quarter of 2021, interest income increased by$1.1 million , or 8.4%, compared to the third quarter of 2020. For the first nine months of 2021, interest income increased by$1.6 million , or 4.1% compared to the same period in 2020. For the third quarter of 2021, average total loans were$924.4 million with loan yields of 5.98% as compared to$847.1 million with loan yields of 6.00% for the third quarter of 2020. For the first nine months of 2021, average total loans were$887.4 million with loan yields of 6.23% as compared to average total loans of$807.1 million with loan yields of 6.50% for the same period in 2020.
Our provision for loan losses for the third quarter of 2021 was
Return on average assets was 2.36% for the third quarter of 2021, as compared to 1.83% for the same period in 2020. For the first nine months of 2021, return on average assets was 2.29%, compared to 2.07% for the same period in 2020. The return on average equity was 20.86% for the third quarter of 2021, as compared to 17.16% for the same period in 2020. For the first nine months of 2021, return on average equity was 20.53%, compared to 19.14% for the same period in 2020. The efficiency ratio was 34.49% for the three months endedSeptember 30, 2021 , as compared to 38.40% for the same period in 2020. The efficiency ratio was 34.84% for the nine months endedSeptember 30, 2021 , as compared to 36.35% for the same period in 2020. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act created a$349 billion loan program called the Paycheck Protection Program (the "PPP") for loans to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. PPP loans are fully guaranteed by theSmall Business Administration (SBA). As ofSeptember 30, 2021 , we had 73 PPP loans with balances totaling$27.3 million compared to 166 PPP loans with balances totaling$44.9 million as ofDecember 31, 2020 . We recognized$297,000 and$133,000 in PPP origination fees during the three month periods endedSeptember 30, 2021 and 2020, respectively. We recognized$2.0 million and$1.8 million in PPP origination fees during the nine month periods endedSeptember 30, 2021 and 2020, respectively. Deferred PPP origination fees totaled$533,000 and$442,000 as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. 27 -------------------------------------------------------------------------------- Table of Contents Net Interest Income and Net Interest Margin. Net interest income, representing interest income less interest expense, was the primary contributor to income and earnings for the periods shown. Interest income is generated from interest earned on loans, dividends, and interest earned on deposits at other institutions. Interest expense is incurred on interest-bearing liabilities including deposits and other borrowings. Net interest income is evaluated by measuring (i) yield on loans and other interest-earning assets, (ii) the costs of deposits and other funding sources and (iii) net interest margin. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Changes in market interest rates and interest rates earned on interest-earning assets or paid on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest margin and net interest income. The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) weighted 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 Including Loan Fee Income
For the
Three Months Ended
2021 2020
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
(Dollars in thousands)
Interest-Earning Assets:
Short-term investments(1) $ 120,078 $ 79 0.26 % $ 111,019 $ 147 0.53 %
Investment securities(2) 1,187 2 0.67 1,138 2 0.70
Loans held for sale 610 - - 425 - -
Total loans(3) 924,391 13,927 5.98 847,076 12,777 6.00 Total interest-earning assets
1,046,266 14,008 5.31 959,658 12,926 5.36
Noninterest-earning assets 5,607 7,386
Total assets $ 1,051,873 $ 967,044
Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts $ 401,843 332 0.33 % $ 381,572 545 0.57 %
Time deposits 220,189 397 0.72 200,961 780 1.54
Total interest-bearing deposits 622,032 729 0.46 582,533 1,325 0.90 Total interest-bearing liabilities
622,032 729 0.46 582,533 1,325 0.90
Noninterest-bearing liabilities: Noninterest-bearing deposits$ 304,063 276,219 Other noninterest-bearing liabilities 6,633 5,363 Total noninterest-bearing liabilities 310,696 281,582 Shareholders' equity 119,145 102,929 Total liabilities and shareholders' equity$ 1,051,873 $ 967,044 Net interest income including loan fee income$ 13,279 $ 11,601 Net interest spread including loan fee income(4) 4.85 % 4.45 % Net interest margin including loan fee income 5.04 % 4.81 %
(1) Includes income and average balances for fed funds sold, interest-earning
deposits in banks and other miscellaneous interest-earning assets.
(2) Includes income and average balances for
(3) Non-accrual loans of
(4) Net interest spread is the average yield on interest-earning assets minus the
average rate on interest-bearing liabilities For the third quarter of 2021
compared to the third quarter of 2020:
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- Interest income on short term investments totaled
in yield on short term investments of 27 basis points, or 50.9%;
- Loan fees totaled
attributable to loan growth during the period as well as increased PPP fees;
and
- Net interest margin for the third quarter of 2021 was 5.04% compared to 4.81%
for the third quarter of 2020.
NetInterest Margin With Loan Fee Income
For
the Nine Months Ended
2021 2020
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
(Dollars in thousands)
Interest-Earning Assets:
Short-term investments(1) $ 124,801 $ 236 0.25 % $ 120,909 $ 701 0.77 %
Investment securities(2) 1,182 19 2.15 1,109 21 2.53
Loans held for sale 501 - - 258 - -
Total loans(3) 887,353 41,377 6.23 807,134 39,268 6.50 Total interest-earning assets
1,013,837 41,632 5.49 929,410 39,990 5.75
Noninterest-earning assets 5,927 8,439
Total assets $ 1,019,764 $ 937,849
Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts $ 410,299 1,024 0.33 % $ 366,162 2,259 0.82 %
Time deposits 212,706 1,352 0.85 208,650 2,769 1.77 Total interest-bearing deposits
623,005 2,376 0.51 574,812 5,028 1.17 Total interest-bearing liabilities
623,005 2,376 0.51 574,812 5,028 1.17
Noninterest-bearing liabilities: Noninterest-bearing deposits 277,308 256,429 Other noninterest-bearing liabilities 5,634 5,231 Total noninterest-bearing liabilities 282,942 261,660 Shareholders' equity 113,817 101,377 Total liabilities and shareholders' equity$ 1,019,764 $ 937,849 Net interest income including loan fee income$ 39,256 $ 34,962 Net interest spread including loan fee income(4) 4.98 % 4.58 % Net interest margin including loan fee income 5.18 % 5.02 %
(1) Includes income and average balances for fed funds sold, interest-earning
deposits in banks and other miscellaneous interest-earning assets.
(2) Includes income and average balances for FHLB and FRB stock.
(3) Non-accrual loans of
(4) Net interest spread is the average yield on interest-earning assets minus the
average rate on interest-bearing liabilities.
For the first nine months of 2021 compared to the same period in 2020:
- Interest income on short term investments totaled
in yield of 52 basis points;
- Loan fees totaled
attributable to loan growth during the period;
- Net interest margin for the first nine months of 2021 was 5.18% compared to
5.02% for the same period in 2020.
29
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Increases and decreases in interest income and interest expense result from
changes in average balances, or volume, of interest-earning assets and
interest-bearing liabilities, as well as changes in average interest rates. The
following tables set forth the effects of changing rates and volumes on our net
interest income during the period shown. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (change in
volume multiplied by prior rate) and (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume).
Analysis of Changes in Interest Income and
Expenses
For the Three Months Ended
September 30, 2021 over 2020
Change due to:
Volume(1) Rate(1) Interest
Variance
(Dollars in thousands)
Increase (decrease) in interest income:
Short-term investments $ 12 $ (80 ) $ (68 )
Investment securities 9 (9 ) -
Total loans 1,182 (32 ) 1,150
Total increase (decrease) in interest income 1,203 (121 ) 1,082
Increase (decrease) in interest expense:
Deposits:
Transaction accounts 29 (242 ) (213 )
Time deposits 75 (458 ) (383 )
Total interest-bearing deposits 104 (700 ) (596 )
Total increase (decrease) in interest expense 104 (700 ) (596 )
Increase (Decrease) in net interest income
30
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Analysis of Changes in Interest Income and
Expenses
For the Nine Months Ended
September 30, 2021 over 2020
Change due to:
Volume(1) Rate(1) Interest
Variance
(Dollars in thousands)
Increase (decrease) in interest income:
Short-term investments $ 22 $ (487 ) $ (465 )
Investment securities 1 (3 ) (2 )
Total loans 3,900 (1,791 ) 2,109
Total increase (decrease) in interest income 3,923 (2,281 ) 1,642
Increase (decrease) in interest expense:
Deposits:
Transaction accounts 271 (1,506 ) (1,235 )
Time deposits 54 (1,471 ) (1,417 )
Total interest-bearing deposits 325 (2,977 ) (2,652 )
Total increase (decrease) in interest expense 325 (2,977 ) (2,652 )
Increase (Decrease) in net interest income
696
(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.
Provision for Loan Losses
Credit risk is inherent in the business of making loans. We establish an
Allowance for loan losses ("Allowance") through charges to earnings, which are
shown in the statements of income as the provision for loan losses. Specifically
identifiable and quantifiable known losses are charged off against the
Allowance. The provision for loan losses is determined by conducting a quarterly
evaluation of the adequacy of our Allowance and applying the shortfall or
excess, if any, to the current quarter's expense. Any shortfall between the
liquidation value of the underlying collateral and the recorded investment value
of the loan is considered the required specific reserve amount. See the
discussion under "-Critical Accounting Policies and Estimates-Allowance for Loan
and Lease Losses." This has the effect of creating variability in the amount and
frequency of charges to our earnings. The provision for loan losses and level of
Allowance for each period are dependent upon many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
valuation of problem loans and the general economic conditions in our market
areas.
The Allowance as a percentage of loans was 1.01% at September 30, 2021 as
compared to 1.15% at December 31, 2020 . The overall decrease in Allowance for
loan loss was driven by a charge-off of $3.8 million related to one relationship
consisting of one substandard loan with a previous specific reserve of $3.0
million .
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Noninterest Income
Noninterest income for the three months ended September 30, 2021 was $577,000
compared to $334,000 for the same period in 2020, an increase of $243,000 , or
72.8%. The following table sets forth the major components of our noninterest
income for the three months ended September 30, 2021 and 2020:
For the Three Months Ended
September 30,
2021 2020 $ Increase % Increase
(Decrease) (Decrease)
(Dollars in thousands)
Noninterest income:
Secondary market income $ 161 $ 57 $ 104 182.46 %
Service charges on deposit accounts 141 104 37 35.58 %
Other income and fees 275 173 102 58.96 %
Total noninterest income $ 577 $ 334 $ 243 72.75 %
Noninterest income for the nine months ended September 30, 2021 was $1.5 million
compared to $965,000 for the same period in 2020, an increase of $528,000 , or
54.7%. The following table sets forth the major components of our noninterest
income for the nine months ended September 30, 2021 and 2020:
For the Nine Months Ended
September 30,
2021 2020 $ Increase % Increase
(Decrease) (Decrease)
(Dollars in thousands)
Noninterest income:
Secondary market income $ 253 $ 134 $ 119 88.81 %
Service charges on deposit accounts 380 318 62 19.50 %
Other income and fees 860 513 347 67.64 %
Total noninterest income $ 1,493 $ 965 $ 528 54.72 %
32-------------------------------------------------------------------------------- Table of Contents Noninterest Expense
The following table sets forth the major components of our noninterest expense
for the three months ended
For the Three Months Ended
September 30,
2021 2020 $ Increase % Increase
(Decrease) (Decrease)
(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits $ 2,946 $ 2,505 $ 441 17.60 %
Furniture and equipment 218 224 (6 ) -2.68 %
Occupancy 461 543 (82 ) -15.10 %
Data and item processing 292 276 16 5.80 %
Accounting, marketing, and legal fees 150 135 15 11.11 %
Regulatory assessments 162 164 (2 ) -1.22 %
Advertising and public relations 76 62 14 22.58 %
Travel, lodging and entertainment 102 50 52 104.00 %
Other expense 372 625 (253 ) -40.48 %
Total noninterest expense $ 4,779 $ 4,584 $ 195 4.25 %
The following table sets forth the major components of our noninterest expense
for the nine months ended
For the Nine Months Ended
September 30,
2021 2020 $ Increase % Increase
(Decrease) (Decrease)
(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits $ 8,685 $ 7,576 $ 1,109 14.64 %
Furniture and equipment 651 658 (7 ) -1.06 %
Occupancy 1,391 1,417 (26 ) -1.83 %
Data and item processing 857 821 36 4.38 %
Accounting, marketing, and legal fees 447 338 109 32.25 %
Regulatory assessments 464 281 183 65.12 %
Advertising and public relations 181 360 (179 ) -49.72 %
Travel, lodging and entertainment 309 146 163 111.64 %
Other expense 1,213 1,463 (250 ) -17.09 %
Total noninterest expense $ 14,198 $ 13,060 $ 1,138 8.71 %
33-------------------------------------------------------------------------------- Table of Contents Financial Condition
The following discussion of our financial condition compares
Total Assets Total assets increased$129.6 million , or 12.7%, to$1.1 billion as ofSeptember 30, 2021 , compared to$1.0 billion as ofDecember 31, 2020 . The increasing trend in total assets is primarily attributable to strong organic loan and deposit growth within theOklahoma City andDallas/Fort Worth metropolitan areas and our expansion into theTulsa market.
Loan Portfolio
The following table presents the balance and associated percentage of each major category in our loan portfolio as ofSeptember 30, 2021 andDecember 31, 2020 : As of September 30, As of December 31, 2021 2020 Amount % of Total Amount % of Total (Dollars in thousands) Construction & development$ 133,732 14.4 %$ 107,855 12.8 % 1-4 family real estate 38,633 4.2 % 29,079 3.5 % Commercial real estate - Other 291,583 31.4 % 290,489 34.6 % Total commercial real estate 463,948 50.0 % 427,423 50.9 % Commercial & industrial 396,974 42.8 % 351,248 41.9 % Agricultural 59,343 6.4 % 50,519 6.0 % Consumer 7,783 0.8 % 9,898 1.2 % Gross Loans 928,048 100.0 % 839,088 100.0 % Less unearned income, net (3,349 ) (2,475 ) Total Loans, net of unearned income 924,699
836,613
Allowance for loan and lease losses (9,306 ) (9,639 ) Net loans$ 915,393 $ 826,974 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 ofSeptember 30, 2021 andDecember 31, 2020 , our gross loans were$928.0 million and$839.1 million , respectively. Included in the commercial & industrial loan balance atSeptember 30, 2021 andDecember 31, 2020 , respectively, are$27.3 million and$44.9 million of loans that were originated under the SBA PPP program. We have established internal concentration limits in the loan portfolio forCommercial Real Estate (CRE) loans, hospitality loans, energy loans, and construction loans, among others. All loan types are within our established limits. We use underwriting guidelines to assess each borrower's historical cash flow to determine debt service capabilities, and we further stress test the customer's debt service capability under higher interest rate scenarios as well as other underlying macro-economic factors. Financial and performance covenants are used in commercial lending to allow us to react to a borrower's deteriorating financial condition, should that occur. 34 -------------------------------------------------------------------------------- Table of Contents The following tables show the contractual maturities of our gross loans as of the periods below: As of September 30, 2021 Due after One Year Due after Five Years Due in One Year or Less Through Five Years Through Fifteen Years Due after Fifteen Years Fixed Adjustable Fixed Adjustable Fixed Adjustable Fixed Adjustable Total Rate Rate Rate Rate Rate Rate Rate Rate (Dollars in thousands) Construction & development$ 1,334 $ 58,283 $ 3,287 $ 69,033 $ -$ 802 $ - $ 993$ 133,732 1-4 family real estate 1,901 10,928 7,715 16,488 775 826 - - 38,633 Commercial real estate - other 8,850 89,054 50,151 135,141 - 4,369 - 4,018 291,583 Total commercial real estate 12,085 158,265 61,153 220,662 775 5,997 - 5,011 463,948 Commercial & industrial 35,061 164,865 13,071 158,133 16,731 8,457 - 656 396,974 Agricultural 2,002 19,322 2,521 32,504 1,298 1,095 - 601 59,343 Consumer 1,110 29 5,304 37 804 414 85 - 7,783 Gross loans$ 50,258 $ 342,481 $ 82,049 $ 411,336 $ 19,608 $ 15,963 $ 85 $ 6,268$ 928,048 As of December 31, 2020 Due after One Year Due after Five Years Due in One Year or Less Through Five Years Through Fifteen Years Due after Fifteen Years Fixed Adjustable Fixed Adjustable Fixed Adjustable Fixed Adjustable Total Rate Rate Rate Rate Rate Rate Rate Rate (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
Allowance for Loan and Lease Losses
The allowance is based on management's estimate of potential 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. The allowance was$9.3 million atSeptember 30, 2021 , compared to$9.6 million atDecember 31, 2020 . As shown below, the decrease primarily related to a$3.8 million charge-off related to one known relationship consisting of one substandard loan with a previous specific reserve of$3.0 million . 35 -------------------------------------------------------------------------------- Table of Contents The following table provides an analysis of the activity in our allowance for the periods indicated: For the Nine Months Ended For the Nine Months Ended September 30, September 30, 2021 2020 (Dollars in thousands) Balance at beginning of the period $ 9,639 $ 7,846 Provision for loan losses 3,325 3,300 Charge-offs: Construction & development - - 1-4 family real estate - - Commercial real estate - Other - - Commercial & industrial (3,750 ) (39 ) Agricultural - - Consumer (63 ) (1 ) Total charge-offs (3,813 ) (40 ) Recoveries: Construction & development - - 1-4 family real estate - 2 Commercial real estate - Other - - Commercial & industrial 15 13 Agricultural 138 10 Consumer 2 - Total recoveries 155 25 Net charge-offs (3,658 ) (15 ) Balance at end of the period $ 9,306 $ 11,131 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 September 30, As of December 31, 2021 2020 Amount Percent Amount Percent (Dollars in thousands) Construction & development$ 1,341 14.4 %$ 1,239 12.8 % 1-4 family real estate 387 4.2 % 334 3.5 % Commercial real estate - Other 2,924 31.4 % 3,337 34.6 % Commercial & industrial 3,981 42.8 % 4,035 41.9 % Agricultural 595 6.4 % 580 6.0 % Consumer 78 0.8 % 114 1.2 % Total$ 9,306 100.0 %$ 9,639 100.0 % 36
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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 (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.
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 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.
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 September 30, 2021 , one loan
totaling $3.1 million was modified, related to COVID-19, which was not
considered a troubled debt restructuring.
If a borrower on a restructured TDR 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.
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The following table presents information regarding nonperforming assets as of
the dates indicated.
As of As of
September 30, December 31,
2021 2020
(Dollars in thousands)
Nonaccrual loans $ 9,819 $ 14,575
Troubled-debt restructurings (1) - -
Accruing loans 90 or more days past due 102 1,960 Total nonperforming loans 9,921 16,535 Other real estate owned - - Total nonperforming assets $ 9,921$ 16,535 Ratio of nonperforming loans to total loans 1.07 % 1.98 % Ratio of nonperforming assets to total assets 0.87 %
1.63 %
(1)
in the line above
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Table of Contents The following tables present an aging analysis of loans as of the dates indicated.
As of September 30, 2021
Loans 90+
Loans 30-59 Loans 60-89 Loans 90+ days past
days past days past days past due and Total Past
due due due accruing Due Loans Current Total loans
(Dollars in thousands)
Construction & development $ - $ - $
- $ - $ -
- - - - - 38,633 38,633
Commercial real estate - Other - - - - - 291,583 291,583
Commercial & industrial - - 6,910 - 6,910 390,064 396,974
Agricultural - - 102 102 102 59,241 59,343
Consumer 100 - - - 100 7,683 7,783
$ 100 $ - $ 7,012 $ 102 $ 7,112 $ 920,936 $ 928,048
As of December 31, 2020
Loans 90+
Loans 30-59 Loans 60-89 Loans 90+ days past
days past days past days past due and Total Past
due due due accruing 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
$ 2,351 $ - $ 1,960 $ 1,960 $ 4,311 $ 834,777 $ 839,088 In addition to the past due and nonaccrual criteria, we also evaluate loans according to our 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 of 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. 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
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Outstanding loan balances categorized by internal risk grades as of the periods
indicated are summarized as follows:
As of September 30, 2021
Special
Pass Watch mention Substandard Total
(Dollars in thousands)
Construction & development $ 133,732 $ - $ - $ - $ 133,732
1-4 family real estate 38,633 - - - 38,633
Commercial real estate - Other 237,826 14,976 24,134 14,647 291,583
Commercial & industrial 375,851 5,618 5,870 9,635 396,974
Agricultural 59,025 - 318 - 59,343
Consumer 7,783 - - - 7,783
Total $ 852,850 $ 20,594 $ 30,322 $ 24,282 $ 928,048
As of December 31, 2020
Special
Pass Watch 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
40-------------------------------------------------------------------------------- Table of Contents Troubled Debt Restructurings TDRs are defined as those loans in which a bank, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with original contractual terms of the loan. Loans with insignificant delays or insignificant short-falls in the amount of payments expected to be collected are not considered to be impaired. Loans defined as individually impaired, based on applicable accounting guidance, include larger balance nonperforming loans and TDRs. The following table presents loans restructured as TDRs as ofSeptember 30, 2021 andDecember 31, 2020 : As of September 30, 2021 Post- Pre-Modification Modification Outstanding Outstanding Specific Number of Recorded Recorded
reserves
Contracts Investment Investment allocated
(Dollars in thousands)
Commercial & industrial 1 $ 6,910 $ 6,910 $ -
Commercial real estate 1 1,453 1,453 -
Total 2 $ 8,363 $ 8,363 $ -
As of December 31, 2020
Post-
Pre-Modification Modification
Outstanding Outstanding Specific
Number of Recorded Recorded reserves
Contracts Investment Investment 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 $ -
There were no payment defaults with respect to loans modified as TDRs as of
September 30, 2021 and December 31, 2020 . Impairment analyses are prepared on
TDRs in conjunction with the normal allowance process. There were no TDRs
restructured during the nine months ended September 30, 2021 and TDR's
restructured during the twelve months ended December 31, 2020 required $0 in
specific reserves.
The following table presents total TDRs, both in accrual and nonaccrual status as of the periods indicated:
As of September 30, 2021 As of December 31, 2020
Number of Number of
contracts Amount contracts Amount
(Dollars in thousands)
Accrual - $ - - $ -
Nonaccrual 2 8,362 3 12,977
Total 2 $ 8,362 3 $ 12,977
41-------------------------------------------------------------------------------- Table of Contents Deposits We gather deposits primarily through our nine branch locations and online through 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 are obtained through brokered transactions. We participate in the CDARS and ICS programs, where customer funds are placed into multiple deposit accounts, each in an amount under the standardFDIC insurance maximum of$250,000 , and placed at a network of banks acrossthe United States . Total deposits as ofSeptember 30, 2021 andDecember 31, 2020 were$1.0 billion and$905.5 million , respectively. The following table sets forth deposit balances by certain categories as of the dates indicated and the percentage of each deposit category to total deposits. September 30, December 31, 2021 2020 Percentage of Percentage of Amount Total Amount Total (Dollars in thousands) Noninterest-bearing demand$ 335,633 32.7 %$ 246,569 27.2 % Interest-bearing: NOW deposits 233,352 22.8 % 232,676 25.6 % Money market 181,633 17.7 % 160,108 17.7 % Savings deposits 53,746 5.2 % 54,008 6.0 % Time Deposits ($250,000 or less) 71,447 7.1 % 135,811 20.8 % Time Deposits (more than$250,000 ) 149,906 14.6 % 76,342 2.7 % Total interest-bearing 690,084 67.4 % 658,945 72.8 % Total deposits$ 1,025,717 100.1 %$ 905,514 100.0 % The following table summarizes our average deposit balances and weighted average rates for the nine-month period endingSeptember 30, 2021 and year endedDecember 31, 2020 : September 30, December 31, 2021 2020 Percentage of Percentage of Amount Total Amount Total (Dollars in thousands) Noninterest-bearing demand$ 335,316 32.9 %$ 246,569 27.2 % Interest-bearing: NOW deposits 233,352 22.9 % 232,676 25.6 % Money market 181,633 17.8 % 160,108 17.7 % Savings deposits 53,746 5.3 % 54,008 6.0 % Time Deposits ($250,000 or less) 140,951 13.9 % 135,811 20.8 % Time Deposits (more than$250,000 ) 73,376 7.2 % 76,342 2.7 % Total interest-bearing 683,058 67.1 % 658,945 72.8 % Total deposits$ 1,018,374 100.0 %$ 905,514 100.0 % 42
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The following tables set forth the maturity of time deposits as of the dates
indicated below:
As of September 30, 2021
Three to Six Six to 12 After 12
Three Months Months Months Months Total
(Dollars in thousands)
Time deposits ($250,000 or less) $ 42,093 $ 28,463 $ 42,204 $ 28,191 $ 140,951
Time deposits (more than $250,000 ) 30,674 18,204 7,026 17,472 73,376
Total time deposits $ 72,767 $ 46,667 $ 49,230 $ 45,663 $ 214,327
As of December 31, 2020
Three to Six Six to 12 After 12
Three Months Months Months 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 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 September 30, 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 $76.1 million as of September 30, 2021 and $64.8 million as of December
31, 2020 .
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),
We must meet specific capital guidelines that involve quantitative measures of
our assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting policies. The capital amounts and classifications are
subject to qualitative judgments by the federal banking regulators about
components, risk weightings and other factors. Qualitative measures established
by regulation to ensure capital adequacy require us to maintain minimum amounts
and ratios of Common Equity Tier 1 ("CET1") capital, Tier 1 capital, total
capital to risk-weighted assets, and Tier 1 capital to average consolidated
assets, referred to as the "leverage ratio."
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As of September 30, 2021 , the Bank was in compliance with all applicable
regulatory requirements and categorized as "well-capitalized" under the prompt
corrective action frame work. There have been no conditions or events since
September 30, 2021 that management believes would change this classification.
The table below presents our applicable capital requirements, as well as our
capital ratios as of September 30, 2021 and December 31, 2020 . The Company
exceeded all regulatory capital requirements and the Bank was considered to be
"well-capitalized" as of the dates reflected in the tables below.
Basel III Capital Rules
Under the Basel III Capital Rules, in order to avoid limitations on capital
distributions, including dividend payments and certain discretionary bonus
payments to executive officers, a banking organization must hold a capital
conservation buffer composed of CET1 capital above its minimum risk-based
capital requirements. As of
Minimum to be "Well-
With Capital Capitalized" Under
Actual Conservation Buffer Prompt Corrective Action
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
As of September 30, 2021
Total capital (to risk-weighted assets)
Bank7 Corp. $ 130,228 14.80 % $ 92,386 10.50 % N/A N/A
Bank 130,228 14.82 % 92,280 10.50 % $ 87,886 10.00 %
Tier 1 capital (to risk-weighted assets)
Bank7 Corp. 120,922 13.74 % 74,789 8.50 % N/A N/A
Bank 120,922 13.76 % 74,703 8.50 % 70,308 8.00 %
CET 1 capital (to risk-weighted assets)
Bank7 Corp. 120,922 13.74 % 61,591 7.00 % N/A N/A
Bank 120,922 13.76 % 61,520 7.00 % 57,126 6.50 %
Tier 1 capital (to average assets)
Bank7 Corp. 120,922 11.50 % N/A N/A N/A N/A
Bank 120,922 11.51 % N/A N/A 52,538 5.00 %
Minimum to be "Well-
With Capital Capitalized" Under
Actual Conservation Buffer 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 %
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 $122.4 million as of September 30, 2021 ,
compared to $107.3 million as of December 31, 2020 , an increase of $15.1
million , or 14.1%. The increases were driven by retained capital from net income
during the period.
44
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Contractual Obligations
The following tables contain supplemental information regarding our total
contractual obligations as of
Payments Due as of
Within One One to Three Three to Five After Five
Year Years Years Years Total
(Dollars in thousands)
Deposits without a stated maturity $ 804,364 $ - $ - $ - $ 804,364
Time deposits 168,664 45,108 555 - 214,327
Securities sold under agreements to repurchase - - - - -
Operating lease commitments 456 552 274 - 1,282
Total contractual obligations $ 973,484 $ 45,660 $ 829 $ - $ 1,019,973 Payments Due as of
Within One One to Three Three to Five After Five
Year Years Years Years Total
(Dollars in thousands)
Deposits without a stated maturity $ 693,361 $ - $ - $ - $ 693,361
Time deposits 164,753 46,563 822 - 212,138
Securities sold under agreements to repurchase - - - - -
Operating lease commitments 470 390 49 - 909
Total contractual obligations $ 858,584 $ 46,953 $ 871 $ - $ 906,408
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.
45
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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.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amount does not necessarily
represent future cash requirements. We evaluate each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if we deemed
necessary upon extension of credit, is based on management's credit evaluation
of the counterparty. The Company also estimates a reserve for potential losses
associated with off-balance sheet commitments and letters of credit. It is
included in other liabilities in the Company's consolidated statements of
condition, with any related provisions to the reserve included in non-interest
expense in the consolidated statement of income.
In determining the reserve for unfunded lending commitments, a process similar
to the one used for the allowance is employed. Based on historical experience,
loss factors, adjusted for expected funding, are applied to the Company's
off-balance sheet commitments and letters of credit to estimate the potential
for losses.
Standby letters of credit are conditional commitments issued by the Company 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 As of
September 30, December 31,
2021 2020
(Dollars in thousands)
Commitments to extend credit $ 184,217 $ 206,520
Standby letters of credit 6,198 2,366
Total $ 190,415 $ 208,886 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 Form 10-Q, 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 our consolidated unaudited financial statements as ofSeptember 30, 2021 . 46 -------------------------------------------------------------------------------- Table of Contents Allowance for Loan and Lease Losses The allowance is based on management's estimate of probable losses inherent in the loan portfolio. In the opinion of management, the allowance is adequate to absorb estimated losses in the portfolio as of each balance sheet date. While management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on changes in economic conditions 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 and risk characteristics. 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 from an acquisition is the value attributable to unidentifiable intangible elements acquired. At a minimum, annual evaluation of the value of goodwill is required. Management evaluated the carrying value of our goodwill as ofSeptember 30, 2021 andDecember 31, 2020 and determined that no impairment existed. An entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Factors assessed include all relevant events and circumstances including macroeconomic conditions, industry and market conditions, cost factors that have a negative effect on earnings and cash flows, overall financial performance, other relevant entity or reporting unit specific events and, if applicable, a sustained decrease in share price.
Other intangible assets consist of core deposit intangible assets and are amortized on a straight-line basis based on the estimated useful life of 10 years. Such assets are periodically evaluated as to the recoverability of their carrying values.
Income Taxes
We file 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 our tax positions annually and believes it is
more likely than not that all of its tax positions will be utilized in future
years.
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