DISCUSSION AND ANALYSIS OF MANAGEMENT’S FINANCIAL POSITION AND RESULTS
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 ended
December 31, 2021. Unless the context indicates otherwise, references in this management's discussion and analysis to "we", "our", and "us," refer to Bank7 Corp.and its consolidated subsidiaries. All references to "the Bank" refer to Bank7, our wholly owned subsidiary. General
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 of March 31, 2022, we had total assets of $1.4 billion, total loans of $1.1 billion, total deposits of $1.3 billionand total shareholders' equity of $128.6 million. Results of Operations Performance Summary. For the first quarter of 2022, we reported a pre-tax income of $8.2 million, compared to pre-tax income of $6.8 millionfor the first quarter of 2021. For the first quarter of 2022, interest income increased by $1.7 million, or 13.2%, compared to the first quarter of 2021. For the first quarter of 2022, average total loans were $1.0 billionwith loan yields of 5.82% as compared to average total loans of $847.5 millionwith loan yields of 6.27% for the first quarter of 2021.
Our provision for loan losses for the first quarter of 2022 was
The return on average equity was 19.26% for the first quarter of 2022, compared to 19.02% for the same period in 2021.
Net Interest Income and Net Interest Margin. The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets, and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities, and the resultant average rates; (iii) net interest income; and (iv) the net interest margin. Net Interest Margin For the Three Months Ended March 31, 2022 2021 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
$ 187,672 $ 86
87,886 364 1.68 1,172 2 0.69 Debt securities, tax exempt(1) 23,969 98 1.66 - - - Loans held for sale 487 - - 378 - - Total loans(2) 1,003,890 14,377
5.81 847,498 13,094 6.27 Total interest-bearing assets
1,303,904 14,925 4.64 974,787 13,188 5.49 Noninterest-earning assets 24,342 7,103 Total assets
$ 1,328,246 $ 981,890Funding sources: Interest-bearing liabilities: Deposits: Transaction accounts $ 636,446458 0.29 % $ 419,991362 0.35 % Time deposits 169,602 259 0.62 205,557 513 1.01 Total interest-bearing deposits 806,048 717 0.36 625,548 875 0.57 Total interest-bearing liabilities $ 806,048717 0.36 $ 625,548875 0.57 Noninterest-bearing liabilities: Noninterest-bearing deposits $ 385,664 $ 243,290Other noninterest-bearing liabilities 6,301 4,193 Total noninterest-bearing liabilities 391,965 247,483 Shareholders' equity 130,233 108,859 Total liabilities and shareholders' equity $ 1,328,246 $ 981,890Net interest income $ 14,208 $ 12,313Net interest spread 4.40 % 4.92 % Net interest margin 4.42 % 5.12 %
(1) Tax-equivalent rate of return deducted from 2.10%
effective tax rate
(2) Interest-free loans from
March 31, 2021, respectively, are included in loans. 31
For the first quarter of 2022 compared to the first quarter of 2021:
– Interest income from debt securities of
– Interest income summed up on all loans
million, or 9.8%, due to an increase in average loans of
18.5%, despite a decline in loan yields of 46 basis points, or 7.4%;
– Total loan fees
one-off PPP loan fee revenue decreasing and
– Net interest margin for the first quarter of 2022 was 4.42% compared to 5.12%
for the first quarter of 2021.
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 March 31, 2022 vs 2021 Change due to: Volume(1) Rate(1) Interest Variance (in thousands) (Dollars in thousands) Increase (decrease) in interest income: Short-term investments $ 186
$ (192 ) $ (6 )Investment securities 772 (312 ) 460 Total loans 9,806 (8,523 ) 1,283 Total increase (decrease) in interest income 10,764
Increase (decrease) in interest expense: Deposits: Transaction accounts 758 (662 ) 96 Time deposits (363 ) 109 (254 ) Total interest-bearing deposits 395 (553 ) (158 ) Total increase (decrease) in interest expense 395 (553 ) (158 )
Increase (decrease) in net interest income
(1) Deviations attributable to both volume and rate are consistently attributed
Basis between rate and volume based on the absolute value of the deviations in
each category. 32
Weighted average return of
The following table summarizes the maturity distribution schedule with corresponding weighted average taxable equivalent yields of the debt securities portfolio at
March 31, 2022. 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 March 31, 2022 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 $ 413.15 % $ 2103.51 % $ - 0 % $ - 0 % $ 2513.45 % Mortgage-backed securities 1,832 2.88 10,999 2.03 10,779 2.49 32,066 2.57 55,676 2.46 State and political subdivisions 3,680 2.18 15,368 1.98 12,535 2.39 1,380 2.39 32,963 2.18 U.S. Treasuries - - 99,390 1.73 4,665 1.76 - - 104,055 1.73 Corporate debt securities - - - - 3,911 4.85 1,500 6.96 5,411 5.44 Total $ 5,5532.42 % $ 125,9671.79 % $ 31,8902.63 % $ 34,9462.75 % $ 198,3562.11 % Percentage of total 2.80 % 63.50 % 16.08 % 17.62 % 100.00 %
*Return is based on taxable equivalent using a tax rate of 21%
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 1.00%
Noninterest income for the three months ended
March 31, 2022was $675,000compared to $337,000for the same period in 2021, an increase of $338,000, or 100.3%. The following table sets forth the major components of our noninterest income for the three months ended March 31, 2022and 2021: For the Three Months Ended March 31, 2022 2021 $ Increase % Increase (Decrease) (Decrease) (Dollars in thousands) Noninterest income: Secondary market income $ 166 $ 14 $ 1521085.71 % Loss on sales of available-for-sale debt securities (127 ) - (127 ) -100.00 % Service charges on deposit accounts 249 120 129 107.50 % Other income and fees 387 203 184 90.64 % Total noninterest income $ 675 $ 337 $ 338100.30 % Secondary market income totaled $166,000for the first quarter of 2022, compared to $14,000for the same period in 2021, an increase of $152,000, or 1085.7%. The increase was attributable to an increase in mortgage lending activity. Other income and fees totaled $387,000for the first quarter of 2022, an increase of $184,000or 90.64% compared to the first quarter of 2021. The increase is due to an overall increase in other income due to the acquisition of Watongain December 2021.
Noninterest expense for the three months ended
March 31, 2022was $6.4 millioncompared to $4.5 millionfor the same period in 2021, an increase of $1.9 million, or 41.3%. The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2022and 2021: For the Three Months Ended March 31, 2022 2021 $ Increase % Increase (Decrease) (Decrease) (Dollars in thousands) Noninterest expense: Salaries and employee benefits $ 4,026 $ 2,790 $ 1,23644.30 % Furniture and equipment 358 202 156 77.23 % Occupancy 551 472 79 16.74 % Data and item processing 387 279 108 38.71 % Accounting, marketing, and legal fees 233 148 85 57.43 % Regulatory assessments 196 141 55 39.01 % Advertising and public relations 110 34 76 223.53 % Travel, lodging and entertainment 48 89 (41 ) -46.07 % Other expense 511 390 121 31.03 % Total noninterest expense $ 6,420 $ 4,545 $ 1,87541.25 % Salaries and employee benefits totaled $4.0 millionfor the first quarter of 2022 compared to $2.8 millionfor the same period in 2021, an increase of $1.2 millionor 44.3%. This increase was attributable to an increase in employee base due to bank-wide organic growth and the acquisition of Watongain December 2021. Furniture and equipment expense totaled $358,000for the first quarter of 2022 compared to $202,000for the same period in 2021, an increase of $156,000or 77.2%. The increase is largely due to depreciation expense on assets acquired from Watonga. 34
The following discussion of our financial condition is comparable
Total Assets Total assets increased
$70.7 million, or 5.2%, to $1.4 billionas of March 31, 2022, compared to $1.4 billionas of December 31, 2021. The increasing trend in total assets is primarily attributable to strong organic loan and deposit growth within the Oklahoma Cityand Dallas/Fort Worthmetropolitan areas and our acquisition of Watongain December 2021.
The table below shows the balance and associated percentage of each major category in our loan portfolio as of today
As of March 31, As of December 31, 2022 2021 Amount % of Total Amount % of Total (Dollars in thousands) Construction & development
$ 172,38116.2 % $ 169,32216.4 % 1-4 family real estate 58,184 5.5 % 62,971 6.1 % Commercial real estate - other 334,835 31.5 % 339,655 33.0 % Total commercial real estate 565,400 53.2 % 571,948 55.5 % Commercial & industrial 416,676 39.1 % 361,974 35.1 % Agricultural 62,984 5.9 % 73,010 7.1 % Consumer 19,439 1.8 % 24,046 2.3 % Gross loans 1,064,499 100.0 % 1,030,978 100.0 % Less: unearned income, net (2,678 ) (2,577 ) Total Loans, net of unearned income 1,061,821
Less: Allowance for loan losses (10,599 ) (10,316 ) Net loans
$ 1,051,222 $ 1,018,085Our loans represent the largest portion of our earning assets. The quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition. As of March 31, 2022and December 31, 2021, our gross loans were $1.1 billionand $1.0 billion, respectively. Included in the commercial & industrial loan balances at March 31, 2022and December 31, 2021, respectively, are $14.2 millionand $18.7 millionof loans that were originated under the SBA PPP program. We have established internal concentration limits in the loan portfolio for Commercial 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. 35
The following tables show the contractual maturities of our gross loans as of the periods below: As of March 31, 2022 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)
$ 172,3811-4 family real estate 3,367 8,995 15,182 16,393 1,150 6,548 - 6,549 58,184 Commercial real estate - other 3,333 62,376 68,431 161,348 7,433 18,079 - 13,835 334,835 Total commercial real estate 15,279 142,558 93,730 253,400 8,694 26,940 -
Commercial & industrial 25,108 154,302 16,466 187,623 19,781 12,749 - 647 416,676 Agricultural 354 14,063 5,376 34,978 543 1,353 - 6,317 62,984 Consumer 1,713 34 10,326 148 931 2,299 84 3,904 19,439 Gross loans
$ 42,454 $ 310,957 $ 125,898 $ 476,149 $ 29,949 $ 43,341 $ 84 $ 35,667 $ 1,064,499As 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 Total Rate Rate Rate Rate Rate Rate Rate Rate (Dollars in thousands)
$ 169,3221-4 family real estate 3,259 21,322 11,979 11,674 926 7,375 - 6,436 62,971 Commercial real estate - other 5,156 97,309 59,227 143,906 413 19,230 - 14,414 339,655 Total real estate 15,698 190,182 81,354 229,632 1,339 28,848 -
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
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
The following table provides an analysis of the activity in our allowance for the periods indicated: For the Three Months Ended March 31, 2022 2021 (Dollars in thousands) Balance at beginning of the period $ 10,316 $ 9,639 Provision for loan losses 276 1,275 Charge-offs: Construction & development - - 1-4 family real estate - - Commercial real estate - other - - Commercial & industrial - - Agricultural - - Consumer (2 ) (50 ) Total charge-offs (2 ) (50 ) Recoveries: Construction & development - - 1-4 family real estate - - Commercial real estate - other - - Commercial & industrial - - Agricultural - - Consumer 9 - Total recoveries 9 - Net recoveries (charge-offs) 7 (50 ) Balance at end of the period $ 10,599 $ 10,864 Net recoveries (charge-offs) to average loans 0.00 % 0.01 % 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 March 31, As of December 31, 2022 2021 Amount Percent Amount Percent (Dollars in thousands) Construction & development
$ 1,71716.2 % $ 1,69516.4 % 1-4 family real estate 579 5.5 % 630 6.1 % Commercial real estate - Other 3,334 31.5 % 3,399 33.0 % Commercial & industrial 4,148 39.1 % 3,621 35.1 % Agricultural 627 5.9 % 730 7.1 % Consumer 194 1.8 % 241 2.3 % Total $ 10,599100.0 % $ 10,316100.0 % 37
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. 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.
Properties that we acquire as a result of foreclosure or by deed in lieu of foreclosure are classified as other real estate holdings or OREO until sold and are initially recognized at fair value less costs of sale upon acquisition, creating a new cost basis.
The following table presents information regarding nonperforming assets as of the dates indicated. As of As of March 31, December 31, 2022 2021 (Dollars in thousands) Nonaccrual loans
$ 9,539 $ 9,885Troubled-debt restructurings (1) -
Accruing loans 90 or more days past due 91 496 Total nonperforming loans 9,630 10,381 Other real estate owned - - Total nonperforming assets
$ 9,630 $ 10,381Ratio of nonperforming loans to total loans 0.91 % 1.01 % Ratio of nonaccrual loans to total loans 0.90 % 0.96 % Ratio of allowance for loan losses to total loans 1.00 % 1.00 % Ratio of allowance for loan losses to nonaccrual loans 111.12 % 104.36 % Ratio of nonperforming assets to total assets 0.68 %
The following tables show a maturity analysis of the loans on the given dates.
As of March 31, 2022 Loans 90+ Loans 30- Loans 60- Loans 90+ days past 59 days past 89 days past days past due and Total past due due due accruing due loans Current Total loans (Dollars in thousands) Construction & development $ - $ - $ - $ - $ -
$ 172,381 $ 172,3811-4 family real estate 26 - - - 26 58,158 58,184 Commercial real estate - other - 167 - - 167 334,668 334,835 Commercial & industrial 27 3 119 19 149 416,527 416,676 Agricultural 443 - 59 59 502 62,482 62,984 Consumer 426 1 13 13 440 18,999 19,439 Total $ 922 $ 171 $ 191 $ 91 $ 1,284 $ 1,063,215 $ 1,064,499As of December 31, 2021 Loans 90+ Loans 30- Loans 60- Loans 90+ days past 59 days past 89 days past days past due and Total Past due due due accruing Due Loans Current Total loans (Dollars in thousands) Construction & development $ - $ - $ - $ - $ - $ 169,322 $ 169,3221-4 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
In addition to past due and non-accrual criteria, we also rate loans using our internal risk rating system. The loans are divided into the categories “Pass”, “Watch”, “Special Mention” and “Substandard”. The definitions of these 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. 40
Outstanding loan balances categorized by internal risk class for the periods indicated are summarized as follows:
As of March 31, 2022 Special Pass Watch mention Substandard Total (Dollars in thousands) Construction & development
$ 172,381$ - $ - $ - $ 172,3811-4 family real estate 58,184 - - - 58,184
Commercial real estate – other 288,783 15,000 17,009
14,043 334,835 Commercial & industrial 402,072 116 386 14,102 416,676 Agricultural 62,513 327 144 - 62,984 Consumer 19,397 18 - 24 19,439 Total
$ 1,003,330 $ 15,461 $ 17,539 $ 28,169 $ 1,064,499As of December 31, 2021 Special Pass Watch mention Substandard Total (Dollars in thousands)
$ 169,3221-4 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 $ 1,030,97841
Problematic debt restructuring
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 of
March 31, 2022and December 31, 2021: As of March 31, 2022Post- Modification
Pre-Modification Outstanding Specific
Number of Outstanding Recorded Recorded Reserves Contracts Investment Investment Allocated (Dollars in thousands) Commercial real estate 1 $ 1,351
$ 1,351- Total 1 $ 1,351 $ 1,351$ - As of December 31, 2021 Post- Modification
Pre-Modification Outstanding Specific
Number of Outstanding Recorded Recorded Reserves Contracts Investment Investment Allocated (Dollars in thousands) Commercial real estate 1 $ 1,402
$ 1,402- Total 1 $ 1,402 $ 1,402$ - There were no payment defaults with respect to loans modified as TDRs as of March 31, 2022and December 31, 2021. Impairment analyses are prepared on TDRs in conjunction with the normal allowance process. There were no TDRs restructured during the three months ended March 31, 2022and TDR's restructured during the twelve months ended December 31, 2021required no specific reserves.
The following table shows the total TDRs, in both cumulative and non-cumulative status, for the specified time periods:
As of March 31, 2022 As of December 31, 2021 Number of contracts Amount Number of contracts Amount (Dollars in thousands) Accrual - $ - - $ - Nonaccrual 1 1,351 1 1,402 Total 1
$ 1,3511 $ 1,40242
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 standard
FDICinsurance maximum of $250,000, and placed at a network of banks across the United States. Total deposits as of March 31, 2022and December 31, 2021were $1.3 billionand $1.2 billion, 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. March 31, December 31, 2022 2021 Percentage of Percentage of Amount Total Amount Total (Dollars in thousands) Demand deposits $ 420,97232.8 % $ 366,70530.1 % Interest-bearing transaction deposits 606,246 47.2 % 583,389 47.9 % Savings deposits 97,520 7.6 % 89,778 7.4 % Time deposits ( $250,000or less) 115,483 9.0 % 132,690 10.9 % Time deposits (more than $250,000) 43,058 3.4 % 44,909 3.7 % Total interest-bearing deposits 862,307 67.2 % 850,766 69.9 % Total deposits $ 1,283,279100.0 % $ 1,217,471100.0 % The following table summarizes our average deposit balances and weighted average rates for the three-month period ending March 31, 2022and year ended December 31, 2021: For the Three Months Ended For the Year Ended December March 31, 31, 2022 2021 Average Weighted A Average Weighted Balance verage Rate Balance Average Rate (Dollars in thousands) Demand deposits $ 385,664 0.00 % $ 288,4460.00 % Interest-bearing transaction deposits 543,611 0.30 % 375,048 0.34 % Savings deposits 92,835 0.21 % 55,220 0.23 % Time deposits 169,602 0.62 % 205,437 0.81 % Total interest-bearing deposits 806,048 0.36 % 635,705 0.48 % Total deposits $ 1,191,7120.24 % $ 924,1510.33 % 43
The following tables set forth the maturity of time deposits as of the dates indicated below: As of March 31, 2022 Maturity Within: Three to Six Six to 12 After 12 Three Months Months Months Months Total (Dollars in thousands) Time deposits (
$250,000or less) $ 37,375 $ 19,006 $ 29,628 $ 29,474 $ 115,483Time deposits (more than $250,000) 5,584 6,663 24,617 6,194 43,058 Total time deposits $ 42,959 $ 25,669 $ 54,245 $ 35,668 $ 158,541As 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 ( $250,000or less) $ 32,680 $ 37,016 $ 31,197 $ 31,797 $ 132,690Time 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 $ 177,599Liquidity 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 cash management and access to alternative funding sources. Our liquid assets include cash on hand, interest-bearing deposits with correspondent banks and sold fed funds. Other available sources of liquidity are wholesale deposits and correspondent bank loans and advances from FHLB.
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
March 31, 2022, 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 $86.2 millionas of March 31, 2022and $78.1 millionas of December 31, 2021. 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." 44
March 31, 2022, 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 March 31, 2022that management believes would change this classification. The table below presents our applicable capital requirements, as well as our capital ratios as of March 31, 2022and December 31, 2021. 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, to avoid restrictions on capital distributions, including dividend payments and certain discretionary bonus payments to senior executives, a banking organization must hold a capital conservation buffer composed of CET1 capital in excess of its minimum risk-based capital requirements. away
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
March 31, 2022Total capital (to risk-weighted assets) Company $ 133,37412.54 % $ 111,70810.50 % N/A N/A Bank 133,488 12.56 %
122,776 11.54 % 90,431 8.50 % N/A N/A Bank 122,889 11.56 % 90,345 8.50 % 85,030 8.00 % CET 1 capital (to risk-weighted assets) Company 122,776 11.54 % 74,472 7.00 % N/A N/A Bank 122,889 11.56 % 74,401 7.00 % 69,087 6.50 % Tier 1 capital (to average assets) Company 122,776 9.27 % N/A N/A N/A N/A Bank 122,889 9.28 % N/A N/A 66,176 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, 2021Total capital (to risk-weighted assets) Company $ 127,94612.54 % $ 107,12610.50 % N/A N/A Bank 127,844 12.54 %
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) Company 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) Company 117,631 10.56 % N/A N/A N/A N/A Bank 117,528 10.55 % N/A N/A 55,714 5.00 % Shareholders' equity provides a source of permanent funding, allows for future growth and provides a cushion to withstand unforeseen adverse developments. Total shareholders' equity increased to
$128.6 millionas of March 31, 2022, compared to $127.4 millionas of December 31, 2021. 45
The tables below provide supplemental information on our overall contractual commitments as of today
Within One One to Three Three to Five After Five Year Years Years Years Total (Dollars in thousands) Deposits without a stated maturity
$ 1,124,738$ - $ - $ - $ 1,124,738Time deposits 122,872 33,723 1,946 - 158,541 Operating lease commitments 606 689 181 - 1,476 Total contractual obligations $ 1,248,216 $ 34,412$ 2,127 $ - $ 1,284,755Payments Due as of December 31, 2021 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$ - $ - $ - $ 1,039,872Time deposits 135,788 39,904 1,907 - 177,599 Operating lease commitments 611 782 241 - 1,634 Total contractual obligations $ 1,176,271 $ 40,686$ 2,148 $ - $ 1,219,105We 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. 46
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 table below summarizes the commitments on the given dates.
March 31, December 31, 2022 2021 (Dollars in thousands) Commitments to extend credit
$ 215,268 $ 200,393Standby letters of credit 4,243 5,809 Total $ 219,511 $ 206,202
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 unaudited condensed consolidated financial statements as of
March 31, 2022. 47
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
$250,000or 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 $250,000threshold 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 millionand goodwill, net of accumulated amortization, totaled $8.8 millionfor the three months ended March 31, 2022, compared to intangible assets of $1.6 millionand goodwill of $8.5 millionfor the year ended December 31, 2021. Goodwillresulting 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. Goodwillis 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 intangible assets from core deposits and are amortized on a straight-line basis based on an estimated useful life of 10 years. Such assets are regularly evaluated with regard to the recoverability of their book 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. 48
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