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 report.
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 twelve full-service branches 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 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 ofDecember 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 . 26
--------------------------------------------------------------------------------
Table of Contents
TheU.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 widespreadU.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, theFederal Reserve lowered the target for the federal funds rate to a range of between zero to 0.25% effective onMarch 16, 2020 where it remained through the end of 2021. This action by theFederal Reserve followed a prior reduction of the targeted federal funds rates to a range of 1.0% to 1.25% effectiveMarch 4, 2020 . This decline in interest rates led to new all-time low yields across theU.S. Treasury maturity curve. OnMarch 16, 2022 theFederal Reserve revised its target for short term interest rates by 0.25% to a range of 0.25% to 0.50%. TheFederal 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 OnDecember 9, 2021 , the Company acquired 100% of the outstanding equity ofWatonga Bancshares, Inc. ("Watonga"), the bank holding company forCornerstone Bank , for$29.3 million in cash. Immediately following the acquisition, Watonga was dissolved andCornerstone Bank merged with and intoBank7 . 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 endedDecember 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 endedDecember 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 endedDecember 31, 2021 , average loans totaled$905.8 million , an increase of$82.6 million or 10.0%, fromDecember 31, 2020 . Pre-tax return on average assets and return on average equity was 2.96% and 26.41%, respectively for the year endedDecember 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 endedDecember 31, 2021 , as compared to 2.03% and 19.14%, respectively, for the same period in 2020. Our efficiency ratio for the year endedDecember 31, 2021 was 36.76% as compared to 36.03% for the year endedDecember 31, 2020 . As ofDecember 31, 2021 , total loans were$1.03 billion , an increase of$191.8 million , or 22.9%, fromDecember 31, 2020 . Total deposits were$1.22 billion as ofDecember 31, 2021 , an increase of$312.0 million , or 34.5%, fromDecember 31, 2020 . Results of Operations
Years Ended
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.
27--------------------------------------------------------------------------------
Table of Contents
Net Interest Margin
For the Year Ended December 31,
2021 2020 2019
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
(Dollars in thousands)
Interest-Earning Assets:
Short-term investments $ 126,136 $ 178 0.25 %
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 %
(1) Average loan balances include monthly average nonaccrual loans of
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
- Total interest income on loans increased
million which was attributable to a
balance of loans to
the average balance of
- Loan fees totaled
of the increase was due to PPP fee income recognized;
- Yields on our interest-earning assets totaled 5.42%, a decrease of 25 basis
points which was attributable to lower loan rates and a decrease in yield on
short term investments of 46 basis points, both were primarily impacted by the
aforementioned changes in market interest rates related to the pandemic; and
- Net interest margin for the years ended 2021 and 2020 was 5.12% and 5.01%,
respectively.
For the year ended
- Total interest income on loans increased
million which was attributable to a
balance of loans to
the average balance of
- Loan fees totaled
- 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
- Net interest margin for the year ended 2020 and 2019 was 5.01% and 5.35 %,
respectively.
28--------------------------------------------------------------------------------
Table of Contents
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 betweenJanuary 1, 2019 andDecember 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 inMarch 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2021 from 1.05% for the year endedDecember 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 endedDecember 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 endedDecember 31, 2020 from 1.89% for the year endedDecember 31, 2019 , which was related to the aforementioned changes in market interest rates related to the pandemic.
Net interest margin for the years ended
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 For the Year Ended
December 31, 2021 vs 2020 December 31, 2020 vs 2019
Change due to: Change due to:
Interest Interest
Volume(1) Rate(1) Variance Volume(1) Rate(1) 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
$ 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.
29--------------------------------------------------------------------------------
Table of Contents
Weighted Average Yield of
The following table summarizes the maturity distribution schedule with corresponding weighted average taxable equivalent yields of the debt securities portfolio atDecember 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 After One Year But After Five Years But Within One Year Within Five Years 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
- The provision for loan losses decreased from
- The allowance as a percentage of loans decreased by 15 basis points to 1.00%.
For the year ended
- The provision for loan losses increased from zero to
loan growth, uncertainty in the economy caused by the COVID-19 pandemic and
- 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
For the Years Ended For the Years Ended
December 31, December 31,
$ Increase % Increase $ Increase % Increase
2021 2020 (Decrease) (Decrease) 2020 2019 (Decrease) (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 %
30--------------------------------------------------------------------------------
Table of Contents
Noninterest Expense
Noninterest expense for the year endedDecember 31, 2021 was$20.4 million compared to$17.6 million for the year endedDecember 31, 2020 , an increase of$2.8 million or 15.9%. Noninterest expense for the year endedDecember 31, 2020 was$17.6 compared to$28.4 million for the year endedDecember 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 endedDecember 31, 2021 , 2020 and 2019: For the Years Ended For the Years Ended December 31, December 31, $ Increase % Increase $ Increase % Increase 2021 2020 (Decrease) (Decrease) 2020 2019 (Decrease) (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
- Salaries and employee benefits expense was
million, an increase of
to overall increases in compensation to remain competitive, and partially due
to our acquisition of
For the year ended
- Salaries and employee benefits expense was
million, an decrease of
attributable to our one-time non-cash executive stock transaction.
- Occupancy expense was
first full year of depreciation for the renovation of our main branch and
headquarters and increased rent at our full-service
Financial Condition
The following discussion of our financial condition compares
Total Assets The increasing trend in total assets is primarily attributable to strong organic loan and retail deposit growth within theOklahoma City market and expansion into theDallas/Fort Worth metropolitan area, as well as the addition of loans as a result of the acquisition of Watonga Bancshares onDecember 9, 2021 . Total assets increased$334.2 million , or 32.87%, to$1.4 billion as ofDecember 31, 2021 , as compared to$1.0 billion as ofDecember 31, 2020 and$866.4 million as ofDecember 31, 2019 . 31
--------------------------------------------------------------------------------
Table of Contents
Loan Portfolio
Our loans represent the largest portion of our earning assets. The quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition. As ofDecember 31, 2021 , 2020 and 2019, our gross loans were$1.0 billion ,$839.1 million and$708.7 million , respectively. The following table presents the balance and associated percentage of each major category in our loan portfolio as ofDecember 31, 2021 ,December 31, 2020 andDecember 31, 2019 : As of December 31, 2021 2020 2019 Amount % of Total Amount % of Total Amount % of Total (Dollars in thousands) Construction & development$ 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 atDecember 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. 32
--------------------------------------------------------------------------------
Table of Contents
The following tables show the contractual maturities of our gross loans as of the periods below:
As of December 31, 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
Rate Rate Rate Rate Rate Rate Rate Rate Total
(Dollars in thousands)
Construction & development
$ 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 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 Rate Rate Rate Rate Rate Rate Rate Rate Total (Dollars in thousands)
Construction & development $ 14
$ - $ 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 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
Rate Rate Rate Rate Rate Rate Rate Rate Total
(Dollars in thousands)
Construction & development $ -
$ - $ 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
33--------------------------------------------------------------------------------
Table of Contents
Allowance for Loan and Lease Losses
The allowance is based on management's estimate of probable losses inherent in the loan portfolio. In the opinion of management, the allowance is adequate to absorb estimated losses in the portfolio as of each balance sheet date. While management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance. In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk potential in loans is utilized together with the results of internal credit reviews. To determine the adequacy of the allowance, the loan portfolio is broken into segments based on loan type. Historical loss experience factors by segment, adjusted for changes in trends and conditions, are used to determine an indicated allowance for each portfolio segment. These factors are evaluated and updated based on the composition of the specific loan segment. Other considerations include volumes and trends of delinquencies, nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk and the experience and abilities of our lending personnel. In addition to the segment evaluations, impaired loans with a balance of$250,000 or more are individually evaluated based on facts and circumstances of the loan to determine if a specific allowance amount may be necessary. Specific allowances may also be established for loans whose outstanding balances are below the$250,000 threshold when it is determined that the risk associated with the loan differs significantly from the risk factor amounts established for its loan segment.
The allowance was
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
0.39 % 0.43 % 0.00 %
34--------------------------------------------------------------------------------
Table of Contents
While the entire allowance is available to absorb losses from any and all loans,
the following table represents management's allocation of the allowance by loan
category, and the percentage of allowance in each category, for the periods
indicated:
As of December 31,
2021 2020 2019
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Construction & development
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.
35--------------------------------------------------------------------------------
Table of Contents
In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a TDR. Included in certain loan categories of impaired loans are TDRs on which we have granted certain material concessions to the borrower as a result of the borrower experiencing financial difficulties. The concessions granted by us may include, but are not limited to: (1) a modification in which the maturity date, timing of payments or frequency of payments is modified, (2) an interest rate lower than the current market rate for new loans with similar risk, or (3) a combination of the first two concessions. If a borrower on a restructured accruing loan has demonstrated performance under the previous terms, is not experiencing financial difficulty and shows the capacity to continue to perform under the restructured terms, the loan will remain on accrual status. Otherwise, the loan will be placed on nonaccrual status until the borrower demonstrates a sustained period of performance, which generally requires six consecutive months of payments. Loans identified as TDRs are evaluated for impairment using the present value of the expected cash flows or the estimated fair value of the collateral, if the loan is collateral dependent. The fair value is determined, when possible, by an appraisal of the property less estimated costs related to liquidation of the collateral. The appraisal amount may also be adjusted for current market conditions. Adjustments to reflect the present value of the expected cash flows or the estimated fair value of collateral dependent loans are a component in determining an appropriate allowance, and as such, may result in increases or decreases to the provision for loan losses in current and future earnings.
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned, or OREO, until sold, and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.
Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under TDRs that are not performing in accordance with their modified terms. Nonperforming assets consist of nonperforming loans plus OREO. Loans accounted for on a nonaccrual basis were$9.9 million as ofDecember 31, 2021 ,$14.6 million as ofDecember 31, 2020 and$1.8 million as ofDecember 31, 2019 . OREO was$0 as ofDecember 31, 2021 ,December 31, 2020 andDecember 31, 2019 . The following table presents information regarding nonperforming assets as of the dates indicated. As of December 31, 2021 2020 2019 (Dollars in thousands) Nonaccrual loans$ 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)
36--------------------------------------------------------------------------------
Table of Contents
The following tables present an aging analysis of loans as of the dates indicated.
As of December 31, 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 $ - $ - $ - $ - $ - $ 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 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 Total$ 2,351 $ -$ 1,960 $ 1,960 $ 4,311 $ 834,777 $ 839,088 As of December 31, 2019 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 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.
37--------------------------------------------------------------------------------
Table of Contents
Substandard: These loans are not adequately protected by the sound worth and debt service capacity of the borrower, but may be well-secured. The loans have defined weaknesses relative to cash flow, collateral, financial condition or other factors that might jeopardize repayment of all of the principal and interest on a timely basis. There is the possibility that a future loss will occur if weaknesses are not remediated. Substandard loans totaled$24.7 million as ofDecember 31, 2021 , an increase of$1.6 million compared toDecember 31, 2020 . Substandard loans totaled$23.1 million as ofDecember 31, 2020 , an increase of$12.0 million compared toDecember 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. 38
--------------------------------------------------------------------------------
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
Special
Pass Watch 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
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
As of December 31, 2019
Special
Pass Watch 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
39--------------------------------------------------------------------------------
Table of Contents
Troubled Debt Restructurings
TDRs are defined as those loans in which a bank, for economic or legal reasons
related to a borrower's financial difficulties, grants a concession to the
borrower that it would not otherwise consider. A loan is considered impaired
when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due from the borrower in accordance with
original contractual terms of the loan. Loans with insignificant delays or
insignificant short-falls in the amount of payments expected to be collected are
not considered to be impaired. Loans defined as individually impaired, based on
applicable accounting guidance, include larger balance nonperforming loans and
TDRs.
The CARES Act includes a provision that permits a financial institution to elect
to suspend temporarily troubled debt restructuring accounting under ASC Subtopic
310-40 in certain circumstances ("section 4013"). To be eligible under section
4013, a loan modification must be (1) related to COVID-19; (2) executed on a
loan that was not more than 30 days past due as of December 31, 2019 ; and (3)
executed between March 1, 2020 , and the earlier of (A) 60 days after the date of
termination of the National Emergency or (B) January 1, 2022 . In response to
this section of the CARES Act, the federal banking agencies issued a revised
interagency statement on April 7, 2020 that, in consultation with the Financial
Accounting Standards Board , confirmed that for loans not subject to section
4013, short-term modifications made on a good faith basis in response to
COVID-19 to borrowers who were current prior to any relief are not troubled debt
restructurings under ASC Subtopic 310-40. As of December 31, 2021 , one loan
totaling $3.1 million was modified, related to COVID-19, which was not
considered a troubled debt restructuring.
40--------------------------------------------------------------------------------
Table of Contents
The following table presents loans restructured as TDRs as of
As of December 31, 2021
Post-
Pre-Modification Modification
Outstanding Outstanding Specific
Number of Recorded Recorded reserves
Contracts Investment Investment allocated
(Dollars in thousands)
Commercial real estate 1 $ 1,402 $ 1,402 -
Total 1 $ 1,402 $ 1,402 $ -
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 $ -
As of December 31, 2019
Post-
Pre-Modification Modification
Outstanding Outstanding Specific
Number of Recorded Recorded reserves
Contracts Investment Investment 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
Impairment analyses are prepared on TDRs in conjunction with the normal
allowance process. TDRs restructured during the years ended
41--------------------------------------------------------------------------------
Table of Contents
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 Number of Number of
contracts Amount contracts Amount 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
Percentage of Percentage of Percentage of
Amount Total Amount Total Amount 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 %
42--------------------------------------------------------------------------------
Table of Contents
The following table summarizes our average deposit balances and weighted average
rates for the years ended
For the Year Ended For the Year Ended For the Year Ended
December 31, December 31, December 31,
2021 2020 2019
Weighted Weighted Weighted
Average Balance Average Rate Average Balance Average Rate Average Balance 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 to Six Six to 12 After 12
Three Months Months Months 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 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 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 .
43--------------------------------------------------------------------------------
Table of Contents
Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for "prompt corrective action" (described below), the Bank must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required the Bank to maintain minimum amounts and ratios of Common Equity Tier 1, or CET1, capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, referred to as the "leverage ratio." For further information, see "Supervision and Regulation -Regulatory Capital Requirements" and "Supervision and Regulation - Prompt Corrective Action Framework." In the wake of the global financial crisis of 2008 and 2009, the role of capital has become fundamentally more important, as banking regulators have concluded that the amount and quality of capital held by banking organizations was insufficient to absorb losses during periods of severely distressed economic conditions. The Dodd-Frank Act and banking regulations promulgated by theU.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$3.0 billion in assets and bank holding companies with publicly-traded equity are required to hold a buffer of CET1 capital equal to 2.5% of risk-weighted assets over each minimum capital ratio in order to avoid being subject to limits on capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive officers. As ofDecember 31, 2021 , theFDIC categorized the Bank as "well-capitalized" under the prompt corrective action framework. There have been no conditions or events sinceDecember 31, 2021 that management believes would change this classification. 44
--------------------------------------------------------------------------------
Table of Contents
The table below also summarizes the capital requirements applicable to the Bank in order to be considered "well-capitalized" from a regulatory perspective, as well as the Bank's capital ratios as ofDecember 31, 2021 , 2020, and 2019. The Bank exceeded all regulatory capital requirements under Basel III and the Bank was considered to be "well-capitalized" as of the dates reflected in the tables below. Minimum to be "Well- With Capital Capitalized" Under Actual Conservation Buffer Prompt Corrective Action Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) As ofDecember 31, 2021 Total capital (to risk-weighted assets) Bank7 Corp.$ 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 % Minimum to be "Well- With Capital Capitalized" Under Actual Conservation Buffer Prompt Corrective Action Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) As ofDecember 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 % Minimum to be "Well- With Capital Capitalized" Under Actual Conservation Buffer Prompt Corrective Action Amount Ratio Amount Ratio Amount Ratio As ofDecember 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 % 45
--------------------------------------------------------------------------------
Table of Contents
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 ofDecember 31, 2021 , compared to$107.3 million as ofDecember 31, 2020 and$100.1 million as ofDecember 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
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 $ 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
46--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statement. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements. The 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 ofDecember 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.
Intangible assets totaled$1.6 million and goodwill, net of accumulated amortization totaled$8.5 million for the year endedDecember 31, 2021 , compared to intangible assets of$572,000 and goodwill, net of accumulated amortization of$1.0 million for the year endedDecember 31, 2020 . The increase is due to core deposit intangible acquired and goodwill recognized as a result of the acquisition ofWatonga Bancshares, Inc. onDecember 9, 2021 . 47
--------------------------------------------------------------------------------
Table of Contents
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.
48--------------------------------------------------------------------------------
Table of Contents
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.
© Edgar Online, source
