Bank7 Corp. - Annual Report: 2019 (Form 10-K)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

​

(Mark One)

​

For the fiscal year ended December 31, 2019.

or

​

For the transition period from          to

Commission file number: 001-38656

​

BANK7 CORP.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (405) 810-8600

Securities registered pursuant to Section 12(b) of the Act:

​

Securities registered pursuant to Section 12(g) of the Act: None

​

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐   NO ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐  NO ☒

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒   NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES ☒   NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an “emerging growth company”. See definitions of  “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐ ​	Accelerated filer ☐ ​
Non-accelerated filer ☒ ​	Smaller reporting company ☐ ​
	Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐   NO ☒

 

As of March 27, 2020, the registrant had 9,264,412 shares of common stock, par value $0.01, outstanding.

 

DOCUMENTS INCOPORATED BY REFERENCE

 

Portions of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders (Part III).

---

TABLE OF CONTENTS

PART I	​
Item 1  Business	1
Item 1A  Risk Factors	11
Item 1B  Unresolved Staff Comments	26
Item 2  Properties	26
Item 3  Legal Proceedings	26
Item 4  Mine Safety Disclosures	26
PART II	​
Item 5  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
Item 6  Selected Financial Data	27
Item 7  Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 7A  Quantitative and Qualitative Disclosures about Market Risk	57
Item 8  Financial Statements and Supplementary Data	59
Item 9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	97
Item 9A  Controls and Procedures	97
Item 9B  Other Information	98
PART III	​
Item 10  Directors, Executive Officers and Corporate Governance	98
Item 11  Executive Compensation	98
Item 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	98
Item 13  Certain Relationships and Related Transactions, and Director Independence	98
Item 14  Principal Accountant Fees and Services	98
PART IV	​
Item 15  Exhibits and Financial Statement Schedules	98
SIGNATURES	101
EXHIBIT INDEX	98

 

Company Overview

 

We are Bank7 Corp., a bank holding company headquartered in Oklahoma City, Oklahoma. Through our wholly-owned subsidiary, Bank7, we operate nine full-service branches in Oklahoma, the Dallas/Fort Worth metropolitan area and Kansas. We were formed in 2004 in connection with our acquisition of First National Bank of Medford, which was renamed Bank7 (the “Bank”).  We are focused on serving business owners and entrepreneurs by delivering fast, consistent and well-designed banking solutions. As of December 31, 2019, we had total assets of $866.4 million, total loans of $707.3 million, total deposits of $757.5 million and total shareholders’ equity of $100.1 million.

 

Our website is: www.bank7.com. We make available free of charge through our website, our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after they have been electronically filed or furnished with the Securities and Exchange Commission. Information included on our website is not incorporated into this filing.

 

Products and Services

 

We are a full-service commercial bank.  We focus on the development of deep business relationships with our commercial customers and their principals.  We also focus on providing customers with exceptional service and meeting their banking needs through a wide variety of commercial and retail financial services.

 

We have a particular focus in the following loan categories (i) commercial real estate lending, (ii) hospitality lending, (iii) energy lending, and (iv) commercial and industrial.  We also provide consumer lending services to individuals for personal and household purposes, including secured and unsecured term loans and home improvement loans.  Consumer lending services include (i) residential real estate loans and mortgage banking services, (ii) personal lines of credit, (iii) loans for the purchase of automobiles, and (iv) other installment loans.

We also offer deposit banking products, including (i) commercial deposit services, commercial checking, money market, and other deposit accounts, and (ii) retail deposit services such as certificates of deposit, money market accounts, checking accounts, negotiable order of withdrawal accounts, savings accounts, and automated teller machine access.

Strategic Focus

We will continue to focus on daily execution, making sound credit decisions and maintaining cost discipline, which have been the hallmark of our success. Our customers will remain our top priority as we focus on efficiently providing tailored banking products and services to business owners and entrepreneurs, with a goal of generating robust growth and delivering exceptional returns to our shareholders.  Additionally, our bank will continue to position itself for future growth both organically and through strategic acquisitions.

 

Cost Discipline and Efficiency

 

We constantly monitor expenditures, and, when appropriate, we use automation, technology and repeatable processes to drive profitability through industry leading efficiencies. We operate as few branches as practical, and the branches we do operate are smaller and more cost efficient than many of our peers’ branches. As we continue to grow, we expect our utilization of automation, technology, and repeatable processes will continue to drive efficiencies throughout the Bank. Combining talented people with process automation will enable us to scale even further, and will also enable us to deliver consistently superior customer service.

 

Organic Growth

 

Much of our historic asset growth has been driven organically and within our current markets, in particular the Dallas/Fort Worth metropolitan area, Oklahoma City, and Tulsa, where we recently opened a full-service branch, contain ample opportunities for us to grow our customer base and increase our loans and deposits. Although our expansion with brick and mortar branches will be limited, we believe operating strategically placed branches will be important, and therefore we will continue to selectively build our presence in key markets. We also intend to continually enhance our internet and mobile banking products to remain competitive in the marketplace.

 

Acquisitions

 

We have experience with and have benefited from acquisitions, and we intend to pursue acquisitive growth as a public company. In 2011, we acquired First State Bank in Camargo, Oklahoma from the Federal Deposit Insurance Corporation, or FDIC, and in 2014, we acquired Montezuma State Bank, a bank with $107 million in assets. Our acquisition focus will initially be on banks within communities along the I-35 corridor, which is a natural business connector between Oklahoma City and the Dallas/Fort Worth metropolitan area. However, we may pursue opportunities in other Oklahoma and Texas markets if there is a strategic and cultural fit. We plan to focus on banks with stable, low-cost core deposits that would maintain or enhance our current funding mix.

 

Markets

 

We are headquartered in Oklahoma City, Oklahoma, and we operate four additional branches in Oklahoma, including our newest branch in Tulsa. We also operate two branches in the Dallas/Fort Worth metropolitan area and two branches in southwest Kansas.

 

Competition

 

The banking and financial services industry is highly competitive, and we compete with a wide range of financial institutions within our markets, including local, regional and national commercial banks and credit unions. We also compete with mortgage companies, trust companies, brokerage firms, consumer finance companies, mutual funds, securities firms, insurance companies, third-party payment processors, financial technology, or Fintech, companies and other financial intermediaries for certain of our products and services. Some of our competitors are not subject to the regulatory restrictions and level of regulatory supervision applicable to us.

 

Interest rates on loans and deposits, as well as prices on fee-based services, are typically significant competitive factors within the banking and financial services industry. Many of our competitors are much larger financial institutions that have greater financial resources than we do and compete aggressively for market share. These competitors attempt to gain market share through their financial product mix, pricing strategies and banking center locations. Other important competitive factors in our industry and markets include office locations and hours, quality of customer service, community reputation, continuity of personnel and services, capacity and willingness to extend credit, and ability to offer excellent banking products and services. While we seek to remain competitive with respect to fees charged, interest rates and pricing, we believe that our broad suite of financial solutions, our high-quality customer service culture, our positive reputation and our long-standing community relationships enable us to compete successfully within our markets and enhance our ability to attract and retain customers.

 

Employees

 

As of December 31, 2019, we had approximately 78 full-time equivalent employees. None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.

 

Supervision and Regulation

 

The following is a general summary of the material aspects of certain statutes and regulations that are applicable to us. These summary descriptions are not complete.  Please refer to the full text of the statutes, regulations, and corresponding guidance for more information. These statutes and regulations are subject to change, and additional statutes, regulations, and corresponding guidance may be adopted. We are unable to predict future changes or the effects, if any, that these changes could have on our business or our revenues.

 

General

 

We are extensively regulated under U.S. federal and state law. As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Oklahoma Banking Department (“OBD”), the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”) and the Consumer Financial Protection Bureau (“CFPB”). Furthermore, tax laws administered by the Internal Revenue Service (“IRS”) and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (“FASB”), securities laws administered by the Securities and Exchange Commission (“SEC”) and state securities authorities and Anti-Money Laundering (“AML”) laws enforced by the U.S. Department of the Treasury, or Treasury, also impact our business.

 

Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of banks, their holding companies and their affiliates. These laws are intended primarily for the protection of depositors, customers and the Depositor Insurance Fund of the FDIC (“DIF”) rather than for shareholders. Federal and state laws, and the related regulations of the bank regulatory agencies, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends.

 

This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management’s ability and performance, earnings, liquidity and various other factors. These regulatory agencies have broad discretion to impose restrictions and limitations on the operations of a regulated entity and exercise enforcement powers over a regulated entity (including terminating deposit insurance, imposing orders, fines and other civil and criminal penalties, removing officers and directors and appointing supervisors and conservators) where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

 

Regulatory Capital Requirements

 

The federal banking agencies require that banking organizations meet several risk-based capital adequacy requirements. These risk-based capital adequacy requirements are intended to provide a measure of capital adequacy that reflects the perceived degree of risk associated with a banking organization’s operations, both for transactions reported on the banking organization’s balance sheet as assets and for transactions that are recorded as off-balance sheet items, such as letters of credit and recourse arrangements. In 2013, the federal bank regulatory agencies issued final rules, or the Basel III Capital Rules, establishing a new comprehensive capital framework for banking organizations. The Basel III Capital Rules implement the Basel Committee’s December 2010 framework for strengthening international capital standards and certain provisions of the Dodd-Frank Act. The Basel III Capital Rules became effective on January 1, 2015.

 

The Basel III Capital Rules require the Bank and the Company to comply with four minimum capital standards: a Tier 1 leverage ratio of at least 4.0%; a CET1 to risk-weighted assets of 4.5%; a Tier 1 capital to risk-weighted assets of at least 6.0%; and a total capital to risk-weighted assets of at least 8.0%. The calculation of all types of regulatory capital is subject to definitions, deductions and adjustments specified in the regulations.

 

The Basel III Capital Rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital requirements. An institution is subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers, if its capital level is below the capital conservation buffer ratio.

 

The Basel III minimum capital ratios as applicable to the Bank and to the Company in 2019, after the full phase-in period of the capital conservation buffer, are summarized in the table below.

 

As of December 31, 2019, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements under the Basel III Capital Rules on a fully phased-in basis.

 

Prompt Corrective Action

 

The Federal Deposit Insurance Act requires federal banking agencies to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. For purposes of prompt corrective action, the law establishes five capital tiers: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier depends on its capital levels and certain other factors established by regulation. Under the applicable FDIC regulations, an institution is deemed to be “well-capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a CET1 ratio of 6.5% or greater and a leverage ratio of 5.0% or greater.

 

At each lower capital category, a bank is subject to increased restrictions on its operations. For example, a bank is generally prohibited from making capital distributions and paying management fees to its holding company if doing so would make the bank “undercapitalized.” Asset growth and branching restrictions apply to undercapitalized banks, which are required to submit written capital restoration plans meeting specified requirements (including a guarantee by the parent holding company, if any). “Significantly undercapitalized” banks are subject to broad regulatory restrictions, including among other things, capital directives, forced mergers, restrictions on the rates of interest they may pay on deposits, restrictions on asset growth and activities, and prohibitions on paying bonuses or increasing compensation to senior executive officers without FDIC approval. “Critically undercapitalized” are subject to even more severe restrictions, including, subject to a narrow exception, the appointment of a conservator or receiver within 90 days after becoming critically undercapitalized.

 

The appropriate federal banking agency may determine (after notice and opportunity for a hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

 

The capital classification of a bank affects the frequency of regulatory examinations, the bank’s ability to engage in certain activities and the deposit insurance premium paid by the bank. A bank’s capital category is determined solely for the purpose of applying prompt correct action regulations and the capital category may not accurately reflect the bank’s overall financial condition or prospects.

 

As of December 31, 2019, the Bank met the requirements for being deemed “well-capitalized” for purposes of the prompt corrective action regulations.

 

The Company

 

General. As a bank holding company, the Company is subject to regulation and supervision by the Federal Reserve under the Bank Holding Company Act of 1956, as amended, or the BHCA. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is required to file with the Federal Reserve periodic reports of its operations and such additional information as the Federal Reserve may require.

 

Acquisitions, Activities and Change in Control. The BHCA generally requires the prior approval by the Federal Reserve for any merger involving a bank holding company or a bank holding company’s acquisition of more than 5% of a class of voting securities of any additional bank or bank holding company or to acquire all or substantially all of the assets of any additional bank or bank holding company.

 

Subject to certain conditions (including deposit concentration limits established by the BHCA and the Dodd-Frank Act), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator.

 

Permitted Activities.  The BHCA generally prohibits the Company from controlling or engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking as to be a proper incident thereto.” This authority would permit the Company to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies. The Federal Reserve has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuing such activity, ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.

 

Source of Strength. Federal Reserve policy historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide it. The Company must stand ready to use its available resources to provide adequate capital to the Bank during periods of financial stress or adversity. The Company must also maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting the Bank. The Company’s failure to meet its source of strength obligations may constitute an unsafe and unsound practice or a violation of the Federal Reserve’s regulations or both. The source of strength obligation most directly affects bank holding companies where a bank holding company’s subsidiary bank fails to maintain adequate capital levels. Any capital loans by a bank holding company to the subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. The BHCA provides that in the event of a bank holding company’s bankruptcy any commitment by a bank holding company to a federal bank regulatory agency to maintain the capital of its subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

 

Safe and Sound Banking Practices. Bank holding companies and their non-banking subsidiaries are prohibited from engaging in activities that represent unsafe and unsound banking practices or that constitute a violation of law or regulations. Under certain conditions the Federal Reserve may conclude that certain actions of a bank holding company, such as a payment of a cash dividend, would constitute an unsafe and unsound banking practice. The Federal Reserve also has the authority to regulate the debt of bank holding companies, including the authority to impose interest rate ceilings and reserve requirements on such debt. Under certain circumstances the Federal Reserve may require a bank holding company to file written notice and obtain its approval prior to purchasing or redeeming its equity securities, unless certain conditions are met.

 

Dividend Payments, Stock Redemptions and Repurchases. The Company’s ability to pay dividends to its shareholders is affected by both general corporate law considerations and the regulations and policies of the Federal Reserve applicable to bank holding companies, including the Basel III Capital Rules. Generally, an Oklahoma corporation may not make distributions to its shareholders if (i) after giving effect to the dividend, the corporation would be insolvent, or (ii) the amount of the dividend exceeds the surplus of the corporation. Dividends may be declared and paid in a corporation’s own treasury shares that have been reacquired by the corporation out of surplus. Dividends may be declared and paid in a corporation’s own authorized but unissued shares out of the surplus of the corporation upon the satisfaction of certain conditions.

 

It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

 

Bank holding companies must consult with the Federal Reserve before redeeming any equity or other capital instrument included in Tier 1 or Tier 2 capital prior to stated maturity, if such redemption could have a material effect on the level or composition of the organization’s capital base. In addition, bank holding companies are unable to repurchase shares equal to 10% or more of its net worth if it would not be well-capitalized (as defined by the Federal Reserve) after giving effect to such repurchase. Bank holding companies experiencing financial weaknesses, or that are at significant risk of developing financial weaknesses, must consult with the Federal Reserve before redeeming or repurchasing common stock or other regulatory capital instruments.

 

The Bank

 

General. The Bank is an Oklahoma-chartered member bank and is subject to examination, supervision and regulation by the OBD and the Federal Reserve. The Bank is also subject to certain regulations of the FDIC and the CFPB.

 

The OBD supervises and regulates all areas of the Bank’s operations including, without limitation, the making of loans, the issuance of securities, the conduct of the Bank’s corporate affairs, the satisfaction of capital adequacy requirements, the payment of dividends, and the establishment or closing of banking offices. The Federal Reserve is the Bank’s primary federal regulatory agency, and periodically examines the Bank’s operations and financial condition and compliance with federal law. In addition, the Bank’s deposit accounts are insured by the DIF to the maximum extent provided under federal law and FDIC regulations, and the FDIC has certain enforcement powers over the Bank.

 

Depositor Preference. In the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors including the parent bank holding company with respect to any extensions of credit they have made to that insured depository institution.

 

Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC. The amount of such premiums is determined by multiplying the institution’s assessment rate by its assessment base. The assessment base is based on the institution’s risk classification which is assigned based on the institution’s capital levels and the level of supervisory concern the institution poses to the regulators. The assessment base is calculated as the institution’s average consolidated total assets minus average tangible equity.

 

Additionally, the Dodd-Frank Act altered the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, may increase or decrease the assessment rates, following notice and comment on proposed rulemaking. As a result, the Bank’s FDIC deposit insurance premiums could increase.

 

FICO Assessments. In addition to paying basic deposit insurance assessments, insured depository institutions must pay Financing Corporation, or FICO, assessments. FICO is a mixed-ownership governmental corporation chartered by the former Federal Home Loan Bank Board to recapitalize the former Federal Savings and Loan Insurance Corporation. Since 1996, federal legislation requires that all FDIC-insured depository institutions pay assessments to cover interest payments on FICO’s outstanding obligations. During the year ended December 31, 2019, the Bank did not pay any FICO assessments.

 

Examination Assessments. Oklahoma-chartered banks are required to pay an annual fee of $1,000 to the OBD to fund its operations. In addition, Oklahoma-chartered banks are charged an examination assessment calculated based on the amount of the Bank’s assets at rates established by the Oklahoma Banking Board. During the year ended December 31, 2019, the Bank paid examination assessments to the OBD totaling $127,000.

 

Capital Requirements. Banks are generally required to maintain minimum capital ratios. For a discussion of the capital requirements applicable to the Bank, see “—Regulatory Capital Requirements” above.

 

Bank Reserves. The Federal Reserve requires all depository institutions to maintain reserves against some transaction accounts (primarily NOW and Super NOW checking accounts). The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements. An institution may borrow from the Federal Reserve “discount window” as a secondary source of funds if the institution meets the Federal Reserve’s credit standards.

 

Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Unless the approval of the Federal Reserve is obtained, the Bank may not declare or pay a dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the Bank’s net income during the current calendar year and the retained net income of the prior two calendar years. Oklahoma law also places restrictions on the declaration of dividends by Oklahoma state-chartered banks, including the Bank, to their shareholders. Before any dividend may be declared by the Bank, not less than 10% of the net profits of the Bank must be transferred to a surplus fund until the surplus equals 100% of the Bank’s capital stock. This may decrease any amount available for the payment of dividends in a particular period if the surplus funds for the Bank fail to comply with this limitation. Furthermore, the approval of the Commissioner of the OBD is required if the total of all dividends declared by the Bank in any calendar year exceed the total of its net profits of that year combined with its retained net profits of the preceding two years, less any required transfers to surplus or a fund for the retirement of any preferred stock. The Federal Reserve and the OBD also may, under certain circumstances, prohibit the payment of dividends to us from the Bank. Oklahoma corporate law also requires that dividends can only be paid out of funds legally available therefor.

 

The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable regulatory guidelines as of December 31, 2019.

 

Transactions with Affiliates. The Bank is subject to sections 23A and 23B of the Federal Reserve Act, or the Affiliates Act, and the Federal Reserve’s implementing Regulation W. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. Accordingly, transactions between the Company, the Bank and any non-bank subsidiaries will be subject to a number of restrictions. The Affiliates Act imposes restrictions and limitations on the Bank from making extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates, the purchase of, or investment in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of the Company or other affiliates. Such restrictions and limitations prevent the Company or other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Furthermore, such secured loans and investments by the Bank to or in the Company or to or in any other non-banking affiliate are limited, individually, to 10% of the Bank’s capital and surplus, and such transactions are limited in the aggregate to 20% of the Bank’s capital and surplus. All such transactions, as well as contracts entered into between the Bank and affiliates, must be on terms that are no less favorable to the Bank than those that would be available from non-affiliated third parties. Federal Reserve policies also forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market value of the services rendered or, if no market exists, actual costs plus a reasonable profit.

 

Loans to Directors, Executive Officers and Principal Shareholders. The authority of the Bank to extend credit to its directors, executive officers and principal shareholders, including their immediate family members and corporations and other entities that they control, is subject to substantial restrictions and requirements under the Federal Reserve’s Regulation O, as well as the Sarbanes-Oxley Act. These statutes and regulations impose limits the amount of loans the Bank may make to directors and other insiders and require that the loans must be made on substantially the same terms, including interest rates and collateral, as prevailing at the time for comparable transactions with persons not affiliated with the Company or the Bank, that the Bank must follow credit underwriting procedures at least as stringent as those applicable to comparable transactions with persons who are not affiliated with the Company or the Bank; and that the loans must not involve a greater than normal risk of non-payment or include other features not favorable to the Bank. Furthermore, the Bank must periodically report all loans made to directors and other insiders to the bank regulators. As of December 31, 2019, the Bank had lines of credit for loans to insiders of $8.0 million and loans outstanding to insiders of $1.1 million.

 

Limits on Loans to One Borrower. As an Oklahoma state-chartered bank, the Bank is subject to limits on the amount of loans it can make to one borrower. With certain limited exceptions, loans and extensions of credit from Oklahoma state-chartered banks outstanding to any borrower (including certain related entities of the borrower) at any one time may not exceed 30% of the capital, less intangible assets, of the bank. An Oklahoma state-chartered bank may lend an additional amount if the loan is fully secured by certain types of collateral, like bonds or notes of the United States. Certain types of loans are exempted from the lending limits, including loans secured by segregated deposits held by the bank. The Bank’s legal lending limit to any one borrower was $31.8 million as of December 31, 2019.

 

Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted guidelines establishing operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

 

If an institution fails to comply with any of the standards set forth in the guidelines, the financial institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If a financial institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of growth, require the financial institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

 

Branching Authority. Deposit-taking banking offices must be approved by the Federal Reserve and, if such office is established within the State of Oklahoma, the OBD, which consider a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate power. The Dodd-Frank Act permits insured state banks to engage in interstate branching if the laws of the state where the new banking office is to be established would permit the establishment of the banking office if it were chartered by a bank in such state. Finally, we may also establish banking offices in other states by merging with banks or by purchasing banking offices of other banks in other states, subject to certain restrictions.

 

Interstate Deposit Restrictions. The Interstate Act, together with the Dodd-Frank Act, relaxed prior branching restrictions under federal law by permitting, subject to regulatory approval, banks to establish branches in states where the laws permit banks chartered in such states to establish branches.

 

Section 109 of the Interstate Act prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production.

 

Community Reinvestment Act. The CRA directs the federal bank regulatory agencies, in examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low- and moderate- income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions or holding company formations.

 

The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a performance-based evaluation system. This system bases CRA ratings on an institution’s actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” The Bank had a CRA rating of “satisfactory” as of its most recent CRA assessment.

 

Anti-Money Laundering and the Office of Foreign Assets Control Regulation. The USA PATRIOT Act is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The USA PATRIOT Act substantially broadened the scope of United States AML laws and regulations by imposing significant compliance and due diligence obligations, created new crimes and penalties and expanded the extra territorial jurisdiction of the United States. Financial institutions are also prohibited from entering into specified financial transactions and account relationships, must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and must implement a written customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions for compliance with these obligations and have imposed cease and desist orders and civil money penalties against institutions found to be in violation of these obligations.

 

Likewise, OFAC administers and enforces economic and trade sanctions against targeted foreign countries and regimes under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. Financial institutions are responsible for, among other things, blocking accounts of and transactions with such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence.

 

Failure of a financial institution to maintain and implement adequate AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

 

Consumer Financial Services

 

We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers. These laws include the ECOA, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, the Military Lending Act, and these laws’ respective state law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices and subject us to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we operate and civil money penalties. Failure to comply with consumer protection requirements may also result in failure to obtain any required bank regulatory approval for mergers or acquisitions or prohibition from engaging in such transactions even if approval is not required.

 

Rulemaking authority for most federal consumer protection laws was transferred from the prudential regulators to the CFPB on July 21, 2011. In some cases, regulators such as the Federal Trade Commission and the DOJ also retain certain rulemaking or enforcement authority. The CFPB also has broad authority to prohibit unfair, deceptive and abusive acts and practices, or UDAAP, and to investigate and penalize financial institutions that violate this prohibition. While the statutory language of the Dodd-Frank Act sets forth the standards for acts and practices that violate the prohibition on UDAAP, certain aspects of these standards are untested, and thus it is currently not possible to predict how the CFPB will exercise this authority.

 

The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The CFPB has significant authority to implement and enforce federal consumer protection laws and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and prohibit UDAAP. The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties. In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.

 

The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, like the Bank, will continue to be examined by their applicable bank regulators.

 

Federal Banking Agency Incentive Compensation Guidance

 

The federal bank regulatory agencies have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes. The incentive compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles: (1) balanced risk-taking incentives; (2) compatibility with effective controls and risk management; and (3) strong corporate governance. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or take other actions. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. Further, the Basel III capital rules limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. Although the federal bank regulatory agencies proposed additional rules in 2016 related to incentive compensation for all banks with more than $1.0 billion in assets, those rules would not be applicable to the Company or the Bank. The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future.

 

Financial Privacy

 

The federal bank regulatory agencies have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through financial services companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services.

 

Impact of Monetary Policy

 

The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These tools are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

 

Changes in Laws, Regulations or Policies

 

Other legislative and regulatory initiatives which could affect the Company, the Bank and the banking industry in general may be pending, proposed or introduced before the U.S. Congress, the Oklahoma Legislature and other governmental bodies from time to time. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject the Company or the Bank to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulations may be enacted or the extent to which the business of the Company or the Bank would be affected thereby.

 

 

We believe the risks described below are the risks that are material to us. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

Risks Relating to Our Business and Market

 

The acquisition of banks, bank branches, and other businesses involves risks.

As part of our growth strategy, we may pursue mergers and acquisitions of other banks, branches or other financial services companies within or outside of our principal market areas.  We cannot assure you that we will be able to adequately or profitably manage any such future acquisitions.  The acquisition of banks, bank branches, and other businesses involves risk, including exposure to unknown or contingent liabilities, the uncertainties of asset quality assessment, the difficulty and expense of integrating the operations and personnel of the acquired companies with ours, the potential negative effects on our other operations of the diversion of management’s time and attention, and the possible loss of key employees and customers of the banks, businesses, or branches we acquire.  Our failure to execute our internal growth strategy or our acquisition strategy could adversely affect our business, results of operations, financial condition, and future prospects.  In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing shareholders may be diluted, which could affect the market price of our common stock.

 

Our business is concentrated in, and largely dependent upon, the continued growth and welfare of our markets, and adverse economic conditions in these markets could negatively impact our operations and customers.

 

Our business is affected by the economy of Oklahoma, the Dallas/Fort Worth metropolitan area and Kansas, our primary markets. Our success depends to a significant extent upon the business activity, population, income levels, employment trends, deposits and real estate activity in these markets. The Oklahoma economy has been generally steady, if not increasing, in the past few years. The housing market remains strong with prices having increased through 2019. Vacancy rates for commercial properties remain low and small business owners are increasingly considering bank borrowings in order to grow.  However, in early March 2020, the economic outlook changed dramatically due to multiple events, including:  the COVID-19 virus, possible supply chain disruption, an increasing risk of recession, and in some cases, fear of the unknown.

In addition, market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which could impact our charge-offs and provision for credit losses. Adverse changes in economic conditions in these markets could reduce our growth in loans and deposits, impair our ability to collect our loans, increase our problem loans and charge-offs and otherwise negatively affect our performance and financial condition.

 

We have credit exposure to the energy industry.

 

The energy industry is a significant sector in our Oklahoma market, and to a lesser extent, Kansas and the Dallas/Fort Worth metropolitan area. A downturn or lack of growth in the energy industry and energy-related business, including sustained low oil or gas prices or the failure of oil or gas prices to rise in the future, could adversely affect our business, financial condition and results of operations. As of December 31, 2019, our energy loans, which include loans to exploration and production companies, midstream companies, purchasers of mineral and royalty interests and service providers totaled $102.1 million, or 14.4% of total loans, as compared to $110.0 million, or 18.4% of total loans as of December 31, 2018. In addition to our direct exposure to energy loans, we also have indirect exposure to energy prices, as some of our non-energy customers' businesses are directly affected by volatility with the oil and gas industry and energy prices and otherwise are dependent on energy-related businesses. As of December 31, 2019, we had $28.9 million in unfunded commitments to borrowers in the oil and gas industry. On March 9, 2020, global oil prices dropped precipitously by approximately 20%. Since that time, through March 27, 2020, global oil prices have continued to drop including an approximately 26% drop on March 18, 2020. As of March 27, 2020, West Texas Intermediate Crude was near its lowest point in 18 years. We expect prolonged depressed pricing pressure on oil and gas to lead to increased credit stress in our energy portfolio, increased losses associated with our energy portfolio, increased utilization of our contractual obligations to extend credit and weaker demand for energy lending. General uncertainty resulting from continued volatility could have other adverse impacts, such as job losses in industries tied to energy, decreased spending habits, lower borrowing needs, higher transaction deposit balances or a number of other effects that are difficult to isolate or quantify, particularly in markets with significant dependence on the energy industry like Oklahoma, and to a lesser extent Kansas and the Dallas/Fort Worth metropolitan area, all of which could have an adverse effect on our business, financial condition and results of operations.

 

We have credit exposure to the hospitality industry.

 

The Company has loan exposure to the hospitality industry, primarily through loans made to construct or finance the operation of hotels. At December 31, 2019, this exposure was approximately $167.0 million, or 23.6%, of the total loan portfolio, along with an additional $39.4 million in unfunded debt, as compared to $123 million, or 20.5%, of the total loan portfolio, along with an additional $28.3 million in unfunded debt as of December 31, 2018. The hospitality industry is subject to changes in the travel patterns of business and leisure travelers, both of which are affected by the strength of the economy, as well as other factors. The performance of the hospitality industry has traditionally been closely linked with the performance of the general economy and, specifically, growth in gross domestic product. Changes in travel patterns of both business and leisure travelers, particularly during periods of economic contraction or low levels of economic growth, may create difficulties for the industry over the long-term. Although we have made a large portion of our hospitality loans to long-term, well-established hotel operators in strategic locations, a general downturn in the supply growth of such markets or hotel occupancy or room rates could negatively impact the borrowers’ ability to repay. A significant loss in this portfolio could materially and adversely affect the Company’s financial condition and results of operations.  Our customers in the hospitality industry may be particularly susceptible to a material decline in revenues resulting from decreased travel and leisure activities following the outbreak of COVID-19.

 

The outbreak of the recent coronavirus ("COVID-19"), or an outbreak of another highly infectious or contagious disease, could adversely affect our business activities, financial condition and results of operations.

Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of a highly infectious or contagious disease, such as COVID-19, could cause severe disruptions in the U.S. economy, which could in turn disrupt the business, activities, and operations of our customers, as well as our business and operations. Moreover, since the beginning of January 2020, the coronavirus outbreak has caused significant disruption in the financial markets both globally and in the United States. The spread of COVID-19, or an outbreak of another highly infectious or contagious disease, may result in a significant decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a spread of COVID-19 or an outbreak of an infectious disease in our market area. Although we maintain contingency plans for pandemic outbreaks, a spread of COVID-19, or an outbreak of another contagious disease, could also negatively impact the availability of key personnel necessary to conduct our business activities. Such a spread or outbreak could also negatively impact the business and operations of third-party service providers who perform critical services for us. If COVID-19, or another highly infectious or contagious disease, spreads or the response to contain COVID-19 is unsuccessful, we could experience a material adverse effect to our business, financial condition, and results of operations.

There continue to be broad concerns related to the potential effects of the coronavirus or COVID-19 outbreak. If the coronavirus has an adverse effect on (i) customer deposits, (ii) the ability of our borrowers to satisfy their obligations to us, (iii) the demand for our loans or our other products and services, (iv) other aspects of our business operations, or (v) on financial markets, real estate markets, or economic growth, this could, depending on the extent of the decline in customer deposits or loan defaults, materially and adversely affect our liquidity and financial condition and the results of operations could be materially and adversely affected.

Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of Federal Reserve actions. Market interest rates have declined significantly. On March 3, 2020, the 10-year Treasury yield fell below 1.00% for the first time, and the Federal Reserve reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. On March 15, 2020, the Federal Reserve further reduced the target federal funds rate by 100 basis points to 0.00% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. The Federal Reserve reduced the interest that it pays on excess reserves from 1.60% to 1.10% on March 3, 2020, and then to 0.10% on March 15, 2020. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and margins and our profitability.

We have a concentration in commercial real estate lending that could cause our regulators to restrict our ability to grow.

 

As a part of their regulatory oversight, the federal regulators have issued guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, or the CRE Concentration Guidance, with respect to a financial institution’s concentrations in CRE lending activities. The CRE Concentration Guidance identifies certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE concentration risk. The CRE Concentration Guidance is designed to promote appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE loans. In general, the CRE Concentration Guidance establishes the following supervisory criteria as preliminary indications of possible CRE concentration risk: (1) the institution’s total construction, land development and other land loans represent 100% or more of total capital; or (2) total CRE loans as defined in this guidance, or Regulatory CRE, represent 300% or more of total capital, and the institution’s Regulatory CRE has increased by 50% or more during the prior 36-month period. Pursuant to the CRE Concentration Guidance, loans secured by owner occupied CRE are not included for purposes of the CRE concentration calculation. As of December 31, 2019, our Regulatory CRE represented 322.6% of our total Bank capital and our construction, land development and other land loans represented 66.3% of our total Bank capital, as compared to 263.8% and 93.1% as of December 31, 2018, respectively. During the prior 36-month period, our Regulatory CRE has decreased 111.6%. We are actively working to manage our Regulatory CRE concentration, and we believe that our underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address the CRE Concentration Guidance. We have implemented enhanced CRE monitoring techniques as expected by banking regulators as our concentrations have approached or exceeded the regulatory guidance. Nevertheless, the Federal Reserve could become concerned about our CRE loan concentrations, and it could limit our ability to grow by restricting its approvals for the establishment or acquisition of branches, or approvals of mergers or other acquisition opportunities, or by requiring us to raise additional capital, reduce our loan concentrations or undertake other remedial actions.

 

Because a portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.

 

Adverse developments affecting real estate values, particularly in Oklahoma City and the Dallas/Fort Worth metropolitan area, could increase the credit risk associated with our real estate loan portfolio. Real estate values may experience periods of fluctuation, and the market value of real estate can fluctuate significantly in a short period of time. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, and could result in losses that adversely affect credit quality, financial condition and results of operation. Negative changes in the economy affecting real estate values and liquidity in our market areas could significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans. Such declines and losses could have a material adverse impact on our business, results of operations and growth prospects. If real estate values decline, it is also more likely that we would be required to increase our allowance, which could adversely affect our business, financial condition and results of operations.

 

Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.

 

As of December 31, 2019, we had approximately $696.8 million of commercial purpose loans, which include general commercial, energy, agricultural, and CRE loans, representing approximately 98.3% of our gross loan portfolio. Commercial purpose loans are often larger and involve greater risks than other types of lending. Because payments on these loans are often dependent on the successful operation or development of the property or business involved, their repayment is more sensitive than other types of loans to adverse conditions in the real estate market or the general economy.

 

Accordingly, a downturn in the real estate market or the general economy could heighten our risk related to commercial purpose loans, particularly energy and CRE loans. Unlike residential mortgage loans, which generally are made on the basis of the borrowers’ ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial purpose loans typically are made on the basis of the borrowers’ ability to make repayment from the cash flow of the commercial venture. If the cash flow from business operations is reduced, the borrowers’ ability to repay the loan may be impaired. As a result of the larger average size of each commercial purpose loan as compared with other loans such as residential loans, as well as the collateral which is generally less readily marketable, losses incurred on a small number of commercial purpose loans could have a material adverse impact on our financial condition and results of operations.

 

Our largest loan relationships make up a material percentage of our total loan portfolio.

 

As of December 31, 2019, our 20 largest borrowing relationships ranged from approximately $10.4  million to $31.0 million (including unfunded commitments) and totaled approximately $348.1 million in total commitments (representing, in the aggregate, 38.5% of our total outstanding commitments as of December 31, 2019). Of these 20 relationships, $196.3 million were originated from the Oklahoma market, with the remaining $151.8 million extended to borrowers located in the Dallas/Fort Worth metropolitan area. Each of the loans associated with these relationships has been underwritten in accordance with our underwriting policies and limits. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or property securing these loans, this concentration of borrowers presents a risk that, if one or more of these relationships were to become delinquent or suffer default, we could be exposed to material losses. The allowance for loan losses may not be adequate to cover losses associated with any of these relationships, and any loss or increase in the allowance would negatively affect our earnings and capital. Even if these loans are adequately collateralized, an increase in classified assets could harm our reputation with our regulators and inhibit our ability to execute our business plan.

 

Our largest deposit relationships currently make up a material percentage of our deposits and the withdrawal of deposits by our largest depositors could force us to fund our business through more expensive and less stable sources.

 

At December 31, 2019, our 20 largest deposit relationships accounted for 24.6% of our total deposits. Withdrawals of deposits by any one of our largest depositors or by one of our related customer groups could force us to rely more heavily on borrowings and other sources of funding for our business and withdrawal demands, adversely affecting our net interest margin and results of operations. We may also be forced, as a result of withdrawals of deposits, to rely more heavily on other, potentially more expensive and less stable funding sources. Additionally, such circumstances could require us to raise deposit rates in an attempt to attract new deposits, which would adversely affect our results of operations. Under applicable regulations, if the Bank were no longer “well capitalized,” the Bank would not be able to accept brokered deposits without the approval of the FDIC.

 

A substantial portion of our loan portfolio consists of loans maturing within one year, and there is no guarantee that these loans will be replaced upon maturity or renewed on the same terms or at all.

 

As of December 31, 2019, approximately 41.7% of our gross loans were maturing within one year, compared to approximately 45.3% of our gross loans that were maturing within one year as of December 31, 2018. As a result, we will either need to renew or replace these loans during the course of the year. There is no guarantee that these loans will be originated or renewed by borrowers on the same terms or at all, as demand for such loans may decrease. Furthermore, there is no guarantee that borrowers will qualify for new loans or that existing loans will be renewed by us on the same terms or at all, as collateral values may be insufficient or the borrowers’ cash flow may be materially less than when the loan was initially originated. This could result in a significant decline in the size of our loan portfolio.

 

Our allowance for loan losses may not be adequate to cover our actual loan losses, which could adversely affect our earnings.

 

          We maintain an allowance for loan losses in an amount that we believe is appropriate to provide for losses inherent in the portfolio.  While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses but that have not been identified as nonperforming or potential problem loans.  We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets or that we will be able to limit losses on those loans that are identified.  As a result, future additions to the allowance may be necessary.  Additionally, future additions may be required based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions or as a result of incorrect assumptions by management in determining the allowance.  Federal banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses.  These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours.  Any increase in the allowance for loan losses could have a negative effect on our financial condition and results of operations.  Commercial and commercial real estate loans comprise a significant portion of our total loan portfolio.  These types of loans typically are larger than residential real estate loans and other consumer loans.  Because our loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming assets.  An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the allowance for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.

We rely on our senior management team and may have difficulty identifying, attracting and retaining necessary personnel, which may divert resources and limit our ability to execute our business strategy and successfully expand our operations.

 

Our business plan includes, and is dependent upon, our hiring and retaining highly qualified and motivated personnel at every level. Our senior management team has significant industry experience, and their knowledge and relationships would be difficult to replace. The loss of senior management without qualified successors who can execute our strategy could have an adverse impact on our business, financial condition and results of operations. For example, since joining the Bank in August 2015, one senior loan officer in the Dallas/Fort Worth metropolitan area, has originated 25.3% of our total loan portfolio as of December 31, 2019.  The senior loan officer is subject to a noncompetition agreement but the loss of his expertise and ability, could have an adverse impact on our business, financial condition and results of operations.

 

Competition for senior executives and skilled personnel in the financial services and banking industry is intense, which means the cost of hiring, incenting and retaining skilled personnel may continue to increase. We need to continue to identify, attract and retain key personnel and to recruit qualified individuals to succeed existing key personnel to ensure the continued growth and successful operation of our business. In addition, as a provider of relationship-based commercial banking services, we must identify, attract and retain qualified banking personnel to continue to grow our business. Our ability to effectively compete for senior executives and other qualified personnel by offering competitive compensation and benefit arrangements may be restricted by applicable banking laws and regulations. If we are unable to hire and retain qualified personnel we may be unable to successfully execute our business strategy and manage our growth. In addition, to attract and retain personnel with appropriate skills and knowledge to support our business, we may offer a variety of benefits, which could reduce our earnings or have a material adverse effect on our business, financial condition or results of operations.

 

Our profitability depends on interest rates generally, and we may be adversely affected by changes in market interest rates.

 

Our profitability depends in substantial part on our net interest income. Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. Our net interest income depends on many factors that are partly or completely outside of our control, including competition, federal economic, monetary and fiscal policies and economic conditions generally. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments.

 

Changes in interest rates could affect our ability to originate loans and deposits. Historically, there has been an inverse correlation between the demand for loans and interest rates. Loan origination volume usually declines during periods of rising or high interest rates and increases during periods of declining or low interest rates. Changes in interest rates also have a significant impact on the carrying value of certain of our assets, including loans and other assets, on our balance sheet.

 

Interest rate increases often result in larger payment requirements for our borrowers, which increase the potential for default. At the same time, the marketability of any underlying property that serves as collateral for such loans may be adversely affected by any reduced demand resulting from higher interest rates. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonaccrual loans would have an adverse impact on net interest income.

 

As short-term interest rates have remained at low levels, and as longer term interest rates have fallen, we expect to experience net interest margin compression as our interest-earning assets will continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. This could have a material adverse effect on our net interest income and our results of operations.

 

The ratio of variable- to fixed-rate loans in our loan portfolio, the ratio of short-term (maturing at a given time within 12 months) to long-term loans, and the ratio of our demand, money market and savings deposits to certificates of deposit (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates. The composition of our rate-sensitive assets or liabilities is subject to change and could result in a more unbalanced position that would cause market rate changes to have a greater impact on our earnings. Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may adversely affect our financial condition and earnings.

 

We rely on short-term funding, which can be adversely affected by local and general economic conditions.

 

As of December 31, 2019, approximately $554.9 million, or 73.3%, of our deposits consisted of demand, savings, money market and negotiable order of withdrawal, or NOW, accounts. Approximately $202.5 million of the remaining balance of deposits consists of certificates of deposit, of which approximately $156.3 million, or 20.6% of our total deposits, was due to mature within one year. Based on our experience, we believe that our savings, money market and non-interest-bearing accounts are relatively stable sources of funds. Historically, a majority of non-brokered certificates of deposit are renewed upon maturity as long as we pay competitive interest rates. Many of these customers are, however, interest-rate conscious and may be willing to move funds into higher-yielding investment alternatives. Our ability to attract and maintain deposits, as well as our cost of funds, has been, and will continue to be significantly affected by general economic conditions. In addition, as market interest rates rise, we will have competitive pressure to increase the rates we pay on deposits. If we increase interest rates paid to retain deposits, our earnings may be adversely affected.

 

Liquidity risk could impair our ability to fund operations and meet our obligations as they become due and could jeopardize our financial condition.

 

Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of an inability to liquidate assets or obtain adequate funding. The Bank’s primary funding source is customer deposits. In addition, the Bank has historically had access to advances from the Federal Home Loan Bank of Topeka, or the FHLB, the Federal Reserve Bank of Kansas City, or the FRB, discount window and other wholesale sources, such as internet-sourced deposits to fund operations. We participate in the Certificate of Deposit Account Registry Service, or CDARS, 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. Although the Bank has historically been able to replace maturing deposits and advances as necessary, it might not be able to replace such funds in the future. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on liquidity.

 

Our access to funding sources in amounts adequate to finance our activities or on acceptable terms could be impaired by factors that affect our organization specifically or the financial services industry or economy in general. Factors that could detrimentally impact access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory actions against us. The Bank’s ability to borrow or attract and retain deposits in the future could be adversely affected by the Bank’s financial condition or regulatory restrictions, or impaired by factors that are not specific to it, such as FDIC insurance changes, disruption in the financial markets or negative views and expectations about the prospects for the banking industry. Borrowing capacity from the FHLB or FRB may fluctuate based upon the condition of the Bank or the acceptability and risk rating of loan collateral and counterparties could adjust discount rates applied to such collateral at the lender’s discretion.

 

The FRB or FHLB could restrict or limit the Bank’s access to secured borrowings. Correspondent banks can withdraw unsecured lines of credit or require collateralization for the purchase of fed funds. Liquidity also may be affected by the Bank’s routine commitments to extend credit. Market conditions or other events could also negatively affect the level or cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations and fund asset growth and new business transactions at a reasonable cost, in a timely manner and without adverse consequences.

 

Any substantial, unexpected or prolonged change in the level or cost of liquidity could have a material adverse effect on our financial condition and results of operations, and could impair our ability to fund operations and meet our obligations as they become due and could jeopardize our financial condition.

 

We face strong competition from banks, credit unions and other financial services providers that offer banking services, which may limit our ability to attract and retain banking customers.

 

Competition in the banking industry generally, and in our primary markets specifically, is intense. Competitors include banks as well as other financial services providers, such as savings and loan institutions, consumer finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors include several larger national and regional financial institutions whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs, achieve larger economies of scale, offer a wider array of banking services, make larger investments in technologies needed to attract and retain customers and conduct extensive promotional and advertising campaigns. If we are unable to offer competitive products and services as quickly as our larger competitors, our business may be negatively affected. Additionally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations. Banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of a broader customer base than us. Larger competitors may also be able to offer better lending and deposit rates to customers, and could increase their competition as we become a public company and our growth becomes more visible. If our competitors extend credit on terms we find to pose excessive risks, or at interest rates which we believe do not warrant the credit exposure, we may not be able to maintain our business volume and could experience deteriorating financial performance. Moreover, larger competitors may not be as vulnerable as us to downturns in the local economy and real estate markets since they often have a broader geographic area and their loan portfolio is often more diversified.

 

Additionally, we face growing competition from so-called “online businesses” with few or no physical locations, including financial technology companies, online banks, lenders and consumer and commercial lending platforms, as well as automated retirement and investment service providers. New technology and other changes are allowing parties to effectuate financial transactions that previously required the involvement of banks. For example, consumers can maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and access to lower cost deposits as a source of funds could have a material adverse effect on our business, results of operations and financial condition.

 

We also compete against community banks, credit unions and non-bank financial services companies that have strong local ties. These smaller institutions are likely to cater to the same small- to medium-sized businesses that we target. If we are unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios and our results of operations and financial condition may be adversely affected. Ultimately, we may be unable to compete successfully against current and future competitors.

 

Our risk management framework may not be effective in mitigating risks or losses to us.

 

Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including credit, market, liquidity, interest rate, operational, reputation, business and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances and may not adequately mitigate risk or loss to us. If our risk management framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.

 

Failure to keep pace with technological change could adversely affect our business.

 

Advances and changes in technology could significantly affect our business, financial condition, results of operations and future prospects. We face many challenges, including the increased demand for providing customers access to their accounts and the systems to perform banking transactions electronically. Our ability to compete depends on our ability to continue to adapt technology on a timely and cost-effective basis to meet these demands.

 

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively or timely implement new technology-driven products and services or be successful in marketing these products and services to our customers and clients. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business, financial condition, results of operations or cash flows.

 

We are exposed to cybersecurity risks associated with our internet-based systems and online commerce security, including “hacking” and “identify theft.”

 

We conduct a portion of our business over the internet. We rely heavily upon data processing, including loan servicing and deposit processing, software, communications and information systems from a number of third parties to conduct our business.  As a bank, we are more likely to be targeted by cyber attacks in an effort to unlawfully access customer funds or customer personally identifiable information.

 

Third-party or internal systems and networks may fail to operate properly or become disabled due to deliberate attacks or unintentional events. Our operations are vulnerable to disruptions from human error, natural disasters, power loss, computer viruses, spam attacks, denial of service attacks, unauthorized access and other unforeseen events. Undiscovered data corruption could render our customer information inaccurate. These events may obstruct our ability to provide services and process transactions. While we believe we are in compliance with all applicable privacy and data security laws, an incident could put our customer confidential information at risk.

 

Although we have not experienced a cyber-incident which has been successful in compromising our data or systems, we can never be certain that all of our systems are entirely free from vulnerability to breaches of security or other technological difficulties or failures. We monitor and modify, as necessary, our protective measures in response to the perpetual evolution of known cyber-threats.

 

A breach in the security of any of our information systems, or other cyber-incident, could have an adverse impact on, among other things, our revenue, ability to attract and maintain customers and our reputation. In addition, as a result of any breach, we could incur higher costs to conduct our business, to increase protection, or related to remediation. Furthermore, our customers could incorrectly blame us and terminate their account with us for a cyber-incident which occurred on their own system or with that of an unrelated third party. In addition, a security breach could also subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability.

 

Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.

 

We depend to a significant extent on a number of relationships with third-party service providers. Specifically, we receive core systems processing, essential web hosting and other internet systems, loan and deposit processing and other processing services from third-party service providers. If these third-party service providers experience financial, operational or technological difficulties or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be materially adversely affected. Even if we are able to replace our service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.

 

We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.

 

Our business strategy calls for continued growth. We may need to raise additional capital in the future to support our continued growth and to maintain our required regulatory capital levels. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Any occurrence that may limit our access to the capital markets may adversely affect our capital costs and our ability to raise capital. Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital, and we would have to compete with those institutions for investors. Accordingly, there are no assurances that we will be able to raise additional capital if needed or on terms acceptable to us. Our growth may be constrained if we are unable to raise additional capital as needed. Furthermore, if we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.

 

We may be exposed to risk of environmental liabilities with respect to properties to which we take title.

 

In the course of our business, we may foreclose and take title to real estate, and we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

 

Risks Relating to Our Regulatory Environment

 

We are subject to extensive regulation, which increases the cost and expense of compliance and could limit or restrict our activities, which in turn may adversely impact our earnings and ability to grow.

 

We operate in a highly regulated environment and are subject to regulation, supervision and examination by a number of governmental regulatory agencies, including the Federal Reserve, the OBD, and the FDIC. Regulations adopted by these agencies, which are generally intended to provide protection for depositors, customers and the DIF, rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels, dividend payments and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. Following examinations, we may be required, among other things, to change our asset valuations or the amounts of required loan loss allowances or to restrict our operations, as well as increase our capital levels, which could adversely affect our results of operations. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business, profitability or growth strategy. Increased regulation could increase our cost of compliance and adversely affect profitability. Moreover, certain of these regulations contain significant punitive sanctions for violations, including monetary penalties and limitations on a bank’s ability to implement components of its business plan, such as expansion through mergers and acquisitions or the opening of new branch offices. In addition, changes in regulatory requirements may add costs associated with compliance efforts. Furthermore, government policy and regulation, particularly as implemented through the Federal Reserve, significantly affect credit conditions. Negative developments in the financial industry and the impact of new legislation and regulation in response to those developments could negatively impact our business operations and adversely impact our financial performance.

 

Monetary policy and other economic factors could affect our profitability adversely.

 

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

 

The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

 

Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.

 

We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively impacted by these laws. For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share non-public personal information about our customers with non-affiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with non-affiliated third parties (with certain exceptions) and (iii) requires we develop, implement and maintain a written comprehensive information security program containing safeguards appropriate based on our size and complexity, the nature and scope of our activities and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information, and some of our current or planned business activities. This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at the federal level by the Federal Trade Commission, as well as at the state level.

 

We rely on third parties, and in some cases subcontractors, to provide information technology and data services. Although we provide for appropriate protections through our contracts and perform information security risk assessments of its third-party service providers and business associates, we still have limited control over their actions and practices. In addition, despite the security measures that we have in place to ensure compliance with applicable laws and rules, our facilities and systems, and those of our third-party providers may be vulnerable to security breaches, acts of vandalism or theft, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. In such cases, notification to affected individuals, state and federal regulators, state attorneys general and media may be required, depending upon the number of affected individuals and whether personal information including financial data was subject to unauthorized access.

 

Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial conditions or results of operations. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition or results of operations.

 

Risks Related to Our Common Stock

 

There are no assurances that an active public trading market will develop or persist for our common stock; and, even if it does, our share price may be subject to substantial volatility.

 

We cannot predict the extent to which investor interest in our Company will lead to the development and persistence of an active trading market on the NASDAQ Global Select Market or otherwise, or how liquid that market may be, especially if few stock analysts follow our stock or issue research reports concerning our business. If an active trading market does not develop or persist, it may be difficult to sell our shares. No market maker in our common stock is obligated to make a market in our shares, and any such market making may be discontinued at any time in the sole discretion of each market maker.

 

The price of our common stock could be volatile.

 

The market price of our common stock may be volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include, among other things:

 

In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and be a distraction to management.

 

Shares of certain shareholders may be sold into the public market. This could cause the market price of our common stock to drop significantly.

 

Our principal shareholders (collectively, the “Haines Family Trusts”) have the benefit of certain registration rights covering all of their shares of our common stock pursuant to the registration rights agreement that we entered into with the Haines Family Trusts in connection with our initial public offering. Sales of a substantial number of these shares in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline or to be lower than it might otherwise be. In addition, as of December 31, 2019 approximately 63.7% of our outstanding common stock is beneficially owned by our principal shareholders, executive officers and directors. The substantial amount of common stock that is owned by and issuable to our principal shareholders, executive officers and directors may adversely affect our share price, our share price volatility and the development and persistence of an active and liquid trading market. The sale of these shares could impair our ability to raise capital through the sale of additional equity securities.

 

Oklahoma law and the provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding companies.

 

Oklahoma corporate law and provisions of our amended and restated certificate of incorporation, or certificate of incorporation, and our amended and restated bylaws, or bylaws, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial by our shareholders. Furthermore, with certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our Company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. Collectively, provisions of our certificate of incorporation and bylaws and other statutory and regulatory provisions may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our shareholders receiving a premium over the market price for their common stock. Moreover, the combination of these provisions effectively inhibits certain business combinations, which, in turn, could adversely affect the market price of our common stock.

 

We are controlled by trusts established for the benefit of members of the Haines family, whose interests may not coincide with our other shareholders.

 

As of December 31, 2019, the Haines Family Trusts control approximately 57.3% of our common stock. So long as the Haines Family Trusts continue to control more than 50% of our outstanding shares of common stock, they will have the ability, if they vote in the same manner, to determine the outcome of all matters requiring shareholder approval, including the election of directors, the approval of mergers, material acquisitions and dispositions and other extraordinary transactions, and amendments to our certificate of incorporation, bylaws and other corporate governance documents. In addition, this concentration of ownership may delay or prevent a change in control of our Company and make some transactions more difficult or impossible without the support of the Haines Family Trusts. The Haines Family Trusts also have certain rights, such as registration rights, that our other shareholders do not have. In any of these matters, the interests of the Haines Family Trusts may differ from or conflict with our interests as a company or the interests of other shareholders. Accordingly, the Haines Family Trusts could influence us to enter into transactions or agreements that other shareholders would not approve or make decisions with which other shareholders may disagree.

 

We are a “controlled company” within the meaning of the rules of NASDAQ, and qualify for exemptions from certain corporate governance requirements. As a result, our shareholders do not have the same protections afforded to shareholders of companies that are subject to such requirements.

 

We are a “controlled company” under NASDAQ’s corporate governance listing standards, meaning that more than 50% of the voting power for the election of our board of directors will be held by a single person, entity or group. As a controlled company, we are exempt from the obligation to comply with certain corporate governance requirements, including the requirements:

 

•          that a majority of our board of directors consists of “independent directors,” as defined under NASDAQ rules;

 

•          that director nominations are selected, or recommended for the board of directors’ selection, by either (i) the independent directors constituting a majority of the board of directors’ independent directors in a vote in which only independent directors participate, or (ii) a nominating and corporate governance committee that is composed entirely of independent directors; and

 

•          that we have a compensation committee that is composed entirely of independent directors.

 

Even though we are a “controlled company,” we currently intend to comply with each of these requirements. However, we may avail ourselves of certain of these other exemptions for as long as we remain a “controlled company.” Accordingly, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all of NASDAQ’s corporate governance requirements, which could make our stock less attractive to investors or otherwise harm our stock price.

 

Our bylaws have an exclusive forum provision, which could limit a shareholder's ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

 

Our bylaws have an exclusive forum provision providing that, unless we consent in writing to an alternative forum, the state or federal courts for the Western District of Oklahoma are the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim for breach of a fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or the Company’s shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Oklahoma General Corporation Act, or OGCA, the certificate of incorporation or the bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case subject to said courts having personal jurisdiction over the indispensable parties named as defendants therein. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock will be deemed to have notice of and to have consented to this provision of our certificate of incorporation. The exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions.

 

Holders of our common stock are entitled to receive only such cash dividends as our board of directors may declare out of funds legally available for such payments. Any declaration and payment of dividends on our common stock will depend upon our earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common stock and other factors deemed relevant by our board of directors. Furthermore, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely affect the amount of dividends, if any, paid to our common shareholders.

 

The Federal Reserve has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, current and prospective earnings and level, composition and quality of capital. The guidance provides that we inform and consult with the Federal Reserve prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to our capital structure, including interest on any debt obligations. If required payments on our debt obligations are not made, or dividends on any preferred stock we may issue are not paid, we will be prohibited from paying dividends on our common stock.

 

We are a bank holding company and our only source of cash, other than further issuances of securities, is distributions from the Bank.

 

We are a bank holding company with no material activities other than activities incidental to holding the common stock of the Bank. Our principal source of funds to pay distributions on our common stock and service any of our obligations, other than further issuances of securities, would be dividends received from the Bank. Furthermore, the Bank is not obligated to pay dividends to us, and any dividends paid to us would depend on the earnings or financial condition of the Bank and various business considerations. As is the case with all financial institutions, the profitability of the Bank is subject to the fluctuating cost and availability of money, changes in interest rates and in economic conditions in general. In addition, various federal and state statutes limit the amount of dividends that the Bank may pay to the Company without regulatory approval.

 

Prior to our initial public offering, we were treated as an S Corporation, and claims of taxing authorities related to our prior status as an S Corporation could harm us. 

 

Upon consummation of our initial public offering, our status as an S Corporation terminated and we became taxed as a C Corporation under the provisions of Sections 301 to 385 of the Code, which treat the corporation as an entity that is subject to an entity level U.S. federal income tax. If the unaudited, open tax years in which we were an S Corporation are audited by the IRS, and we are determined not to have qualified for, or to have violated, our S Corporation status, we likely would be obligated to pay corporate level tax, plus interest and possible penalties. This could result in tax with respect to all of the income we reported for periods when we believed we properly were treated as an S Corporation not subject to entity level taxation. Under the terms of a tax sharing agreement entered into by the Company and the Haines Family Trusts, the Haines Family Trusts will indemnify us with respect to our unpaid tax liabilities (including interest and penalties) to the extent that such unpaid tax liabilities are attributable to a decrease in the shareholders’ taxable income for any tax period and a corresponding increase in the Company’s taxable income for any period. This indemnity includes any additional taxes resulting from the Company not being a valid S Corporation. Any such claims, however, could result in additional costs to us and could have a material adverse effect on our results of operations and financial condition.

 

We have entered into a tax sharing agreement with the Haines Family Trusts, and we could become obligated to make payments to the Haines Family Trusts for any additional federal, state or local income taxes assessed against them for tax periods prior to the completion of our initial public offering.

 

Prior to our initial public offering, we were treated as an S Corporation for U.S. federal income tax purposes. As a result, the Haines Family Trusts, as our shareholders, were taxed on our income. Therefore, the Haines Family Trusts have received certain distributions from us that were generally intended to equal the amount of tax such trusts were required to pay with respect to our income. In connection with our initial public offering, our S Corporation status terminated.  As a result of such termination, we are subject to federal and state income taxes. In the event an adjustment to our taxable income for any taxable period (or portion thereof) beginning after the date of the termination of our S Corporation status results in any increase in taxable income of the Haines Family Trusts for any taxable period (or portion thereof) ending prior to termination of our S Corporation status, it is possible that the Haines Family Trusts would be liable for additional income taxes for such prior periods. Therefore, we have entered into an agreement with the Haines Family Trusts. Pursuant to this agreement, in the event of any restatement of our taxable income for any taxable period (or portion thereof) beginning after the date of termination of our S Corporation status pursuant to a determination by, or a settlement with, a taxing authority, then, depending on the nature of the adjustment, we may be required to make a payment to the Haines Family Trusts in an amount equal to their incremental tax liability, which amount may be material. In addition, we will indemnify the Haines Family Trusts with respect to unpaid income tax liabilities to the extent that such unpaid income tax liabilities are attributable to our taxable income for any period after our S Corporation status terminates. In both cases, the amount of the payment will be based on the assumption that the Haines Family Trusts are taxed at the highest rate applicable to individuals for the relevant periods. We will also indemnify the Haines Family Trusts for any interest, penalties, losses, costs or expenses arising out of any claim under the agreement. However, the Haines Family Trusts will indemnify us with respect to our unpaid tax liabilities (including interest and penalties) to the extent that such unpaid tax liabilities are attributable to a decrease in the shareholders’ taxable income for any for tax period and a corresponding increase in the Company’s taxable income for any period. The Haines Family Trusts will also indemnify the Company with respect to any additional taxes attributable to our final S Corporation tax year that ends with the termination of our S Corporation status.

 

 

Not applicable.

 

 

The Company’s corporate offices are located at 1039 N.W. 63^rd Street, Oklahoma City, Oklahoma 73116. The Company’s corporate office space is owned by the Bank’s wholly-owned subsidiary, 1039 NW 63^rd, LLC, and consists of approximately 6,600 square feet, an annex of approximately 4,400 square feet, and a 10,000 square foot operations building. The Bank operates from our corporate office, five full-service branch offices located in Oklahoma, two full-service branch offices located in southwest Kansas and two full-service branch offices located in the Dallas/Fort Worth metropolitan area. Of these nine locations, four are leased and five are owned by the Bank. All branches are equipped with ATMs and all Oklahoma branches provide for drive-up access. Additionally, we maintain an administrative office located in the Dallas/Fort Worth metropolitan area, which is leased by the Bank.

 

 

From time to time, the Company or the Bank is a party to claims and legal proceedings arising in the ordinary course of business. Management does not believe any present litigation or the resolution thereof will have a material adverse effect on the business, consolidated financial condition or results of operations of the Company.

 

 

Not applicable.

 

PART II

 

 

The Company’s shares of common stock are traded on The NASDAQ Global Select Market under the symbol “BSVN”. The approximate number of holders of record of the Company’s common stock as of March 11, 2020 was 4. The Company’s common stock began trading on The NASDAQ Global Select Market on September 20, 2018.

 

The Company began paying quarterly dividends in the second half of 2019, with $0.10 per share dividends declared and paid with respect to each of the third and fourth quarters of 2019. The Company currently expects to continue quarterly dividends of $0.10 per share in the future. Any future determination to pay dividends and the amount of such dividends on the Company’s common stock will be made by its Board of Directors and will depend on a number of factors, including

 

 

​

 

​

 

Set forth below is information as of December 31, 2019 regarding equity compensation plans. The plan that has been approved by the shareholders is the 2018 Equity Incentive Plan.

 

 

The following table sets forth selected historical consolidated financial and operating data as of and for the years ended December 31, 2019, 2018, and 2017. Selected financial data as of and for the years ended December 31, 2019, 2018 and 2017 has been derived from our audited consolidated financial statements included elsewhere in this report.

 

		As of or for the Year Ended December 31,
		2019				2018				2017
		(Dollars in thousands, except per share data)
Income Statement Data:
Total interest income		$	51,709			$	46,800			$	42,870
Total interest expense			9,516				7,169				4,739
Net interest income			42,193				39,631				38,131
Provision for loan losses			-				200				1,246
Total noninterest income			1,308				1,331				1,435
Total noninterest expense			28,432				14,965				14,531
Provision for income taxes			6,844				797				—
Net income			8,225				25,000				23,789
Balance Sheet Data:
Cash and due from banks		$	117,128			$	128,090			$	100,054
Total loans			707,304				599,910				563,001
Allowance for loan losses			7,846				7,832				7,654
Total assets			866,392				770,511				703,594
Interest-bearing deposits			538,262				474,744				459,920
Noninterest-bearing deposits			219,221				201,159				165,911
Total deposits			757,483				675,903				625,831
Total shareholders’ equity			100,126				88,466				69,176

		As of or for the Year Ended December 31,
		2019				2018				2017
		(Dollars in thousands, except per share data)
Share and Per Share Data:
Earnings per share (basic)		$	0.81			$	3.08			$	3.26
Earnings per share (diluted)			0.81				3.03				3.26
Dividends per share			0.60				7.71				1.34
Book value per share			9.96				8.68				9.49
Tangible book value per share(1)			9.78				8.49				9.19
Weighted average common shares outstanding–basic			10,145,032				8,105,856				7,287,500
Weighted average common shares outstanding–diluted			10,147,311				8,237,638				7,287,500
Shares outstanding at end of period			10,057,506				10,187,500				7,287,500
Selected Ratios:
Return on average:
Assets			1.03	%			3.53	%			3.62	%
Shareholders’ equity			8.42				33.01				37.43
Yield on earnings assets			6.55				6.48				6.60
Yield on loans			7.58				7.58				7.69
Yield on loans (excluding loan fee income)(1)			6.88				6.71				6.14
Cost of funds			1.37				1.11				0.80
Cost of interest-bearing deposits			1.89				1.52				1.02
Cost of total deposits			1.37				1.08				0.77
Net interest margin			5.35				5.49				5.87
Net interest margin (excluding loan fee income)(1)			4.78				4.78				4.59
Noninterest expense to average assets			3.56				2.05				2.21
Efficiency ratio			65.39				37.04				37.24
Loans to deposits			93.38				88.76				89.96
Credit Quality Ratios:
Nonperforming assets to total assets			0.38	%			0.35	%			0.28	%
Nonperforming assets to total loans and OREO			0.47				0.45				0.35
Nonperforming loans to total loans			0.47				0.44				0.34
Allowance for loan losses to nonperforming loans			235.40				299.50				404.55
Allowance for loan losses to total loans			1.11				1.31				1.36
Net charge-offs to average loans			-0.002				0.004				0.09
Capital Ratios (Bank) (2):
Tangible equity to tangible assets			11.37				11.25				9.55
Common equity tier 1 capital ratio			14.28				14.78				12.58
Tier 1 leverage ratio			11.65				11.26				10.53
Tier 1 risk-based capital ratio			14.28				14.78				12.58
Total risk-based capital ratio			15.42				16.03				13.83
Capital Ratios (Company):
Total shareholders’ equity to total assets			11.56	%			11.48	%			9.83	%
Common equity tier 1 capital ratio			14.11				14.61				11.61
Tier 1 leverage ratio			11.53				11.13				9.72
Tier 1 risk-based capital ratio			14.11				14.61				11.61
Total risk-based capital ratio			15.25				15.86				12.86

		As of or for the Year Ended December 31,
		2019				2018				2017
		(Dollars in thousands, except per share data)
Share and Per Share Data:
Earnings per share (basic) – S Corp		$	1.48			$	3.18			$	3.26
Earnings per share (basic) – C Corp(1)			0.81				2.48				1.96
Earnings per share (diluted) – S Corp			1.48				3.13				3.26
Earnings per share (diluted) – C Corp(1)			0.81				2.44				1.96
Dividends per share			0.60				7.71				1.34
Book value per share			9.96				8.68				9.49
Tangible book value per share(2)			9.78				8.49				9.19
Weighted average common shares outstanding–basic			10,145,032				8,105,856				7,287,500
Weighted average common shares outstanding–diluted			10,147,311				8,238,753				7,287,500
Shares outstanding at end of period			10,057,506				10,187,500				7,287,500
Selected Ratios:
Return on average:
Assets – S Corp			1.88	%			3.53	%			3.62	%
Assets – C Corp(1)			1.03				2.75				2.17
Shareholders’ equity – S Corp			15.44				33.01				37.43
Shareholders’ equity – C Corp(1)			8.42				25.69				22.46
Yield on earnings assets			6.55				6.48				6.60
Yield on loans			7.58				7.58				7.69
Yield on loans (excluding loan fee income)(2)			6.88				6.71				6.14
Cost of funds			1.37				1.11				0.80
Cost of interest-bearing deposits			1.89				1.52				1.02
Cost of total deposits			1.37				1.08				0.77
Net interest margin			5.35				5.49				5.87
Net interest margin (excluding loan fee income)(2)			4.78				4.78				4.59
Noninterest expense to average assets			3.56				2.05				2.21
Efficiency ratio			65.39				37.04				37.24
Loans to deposits			93.38				88.76				89.96
Credit Quality Ratios:
Nonperforming assets to total assets			0.38	%			0.35	%			0.28	%
Nonperforming assets to total loans and OREO			0.47				0.45				0.35
Nonperforming loans to total loans			0.47				0.43				0.34
Allowance for loan losses to nonperforming loans			235.40				299.50				404.55
Allowance for loan losses to total loans			1.11				1.31				1.36
Net charge-offs to average loans			-0.002				-0.004				0.09
Capital Ratios:
Total shareholders’ equity to total assets			11.56	%			11.48	%			9.83	%
Tangible equity to tangible assets(2)			11.37				11.25				9.55
Common equity tier 1 capital ratio(3)			14.28				14.78				12.58
Tier 1 leverage ratio(3)			11.65				11.26				10.53
Tier 1 risk-based capital ratio(3)			14.28				14.78				12.58
Total risk-based capital ratio(3)			15.42				16.03				13.83

		As of December 31,
		2019				2018				2017
		(Dollars in thousands, except per share data)
Tangible Shareholders’ Equity:
Total shareholders’ equity		$	100,126			$	88,466			$	69,176
Adjustments:
Goodwill and other intangibles			(1,789	)			(1,995	)			(2,201	)
Tangible shareholders’ equity		$	98,337			$	86,471			$	66,975
Tangible Assets:
Total assets		$	866,392			$	770,511			$	703,594
Adjustments:
Goodwill and other intangibles		$	(1,789	)		$	(1,995	)			(2,201	)
Tangible assets		$	864,603			$	768,516			$	701,393
End of period common shares outstanding			10,057,506				10,187,500				7,287,500
Book value per share		$	9.96			$	8.68			$	9.49
Tangible book value per share		$	9.78			$	8.49			$	9.19
Total shareholders’ equity to total assets			11.56	%			11.48	%			9.83	%
Tangible shareholders’ equity to tangible assets			11.37	%			11.25	%			9.55	%

		As of or for the Year Ended December 31,
		2019				2018				2017
		(Dollars in thousands)
Loan interest income (excluding loan fee income):
Interest income on loans, including loan fee income		$	48,200			$	44,279			$	41,450
Adjustments:
Loan fee income			(4,443	)			(5,121	)			(8,331	)
Interest income on loans (excluding loan fee income)		$	43,757			$	39,158			$	33,119
Average total loans		$	636,274			$	584,003			$	539,302
Yield on loans			7.58	%			7.58	%			7.69	%
Yield on loans (excluding loan fee income)			6.88	%			6.71	%			6.14	%
Net interest margin (excluding loan fee income):
Net interest income		$	42,193			$	39,631			$	38,131
Adjustments:
Loan fee income			(4,443	)			(5,121	)			(8,331	)
Net interest income (excluding loan fee income)		$	37,750			$	34,510			$	29,800
Average interest-earning assets		$	789,009			$	721,935			$	649,757
Net interest margin			5.35	%			5.49	%			5.87	%
Net interest margin (excluding loan fee income)			4.78	%			4.78	%			4.59	%

		For the Year Ended December 31,
		2019				2018				$ Change				% Change
(Dollars in thousands)
Pro Forma Net Income
Total Interest Income		$	51,709			$	46,800			$	4,909				10.49	%
Total Interest Expense			9,516				7,169				2,347				32.73	%
Net Interest Margin			42,193				39,631				2,562				6.47	%
Provision for Loan Losses		$	-			$	200			$	-
Total Noninterest Income		$	1,308			$	1,331			$	(23	)			(1.71	%)
Total Noninterest Expense		$	28,432			$	14,966			$	13,466				89.98	%
Stock Transfer Compensation Expense (1)			(11,796	)			-				(11,796	)
Pro Forma Noninterest Expense			16,636				14,966				1,670				11.16	%
Pro Forma Pre-Tax Income		$	26,866			$	25,796			$	1,070				4.15	%
Pro Forma Income Tax Expense		$	6,836			$	5,719			$	1,117				19.53	%
Pro Forma Net After-Tax Income		$	20,030			$	20,077			$	(47	)			(0.24	%)

		As of or for the year ended December 31,
		2019				2018				2017
		(Dollars in thousands)
Before Taxes
Net income(1)		$	15,069			$	25,797			$	23,789
Pro forma C Corporation
Combined effective income tax rate(2)			45.42	%			22.19	%			39.97	%
Income tax provision		$	6,844			$	5,720			$	9,509
Net income			8,225				20,077				14,280
Total shareholders’ equity			100,126				88,466				69,176
Earnings per share (basic)			0.81				2.48				1.96
Earnings per share (diluted)			0.81				2.44				1.96
Return on average:
Assets			1.03				2.75				2.17
Shareholders’ equity			8.42				25.69				22.46

		For the Years Ended December 31,
		2019												2018												2017
		Average Balance				Interest Income/ Expense				Average Yield/ Rate				Average Balance				Interest Income/ Expense				Average Yield/ Rate				Average Balance				Interest Income/ Expense				Average Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
Short-term investments(1)		$	151,434			$	3,459				2.28	%		$	136,880			$	2,521				1.84	%		$	109,410			$	1,420				1.30	%
Investment securities(2)		$	1,065				50				4.69	%		$	1,052				—				0.00	%		$	1,045				—				0.00	%
Loans held for sale		$	236				—				0.00	%		$	182				—				0.00	%		$	224				—				0.00	%
Total loans(3)		$	636,274			$	48,200				7.58	%		$	583,821			$	44,279				7.58	%		$	539,078			$	41,450				7.69	%
Total interest-earning assets		$	789,009			$	51,709				6.55	%		$	721,935			$	46,800				6.48	%		$	649,757			$	42,870				6.60	%
Noninterest-earning assets		$	9,519											$	8,629											$	7,811
Total assets		$	798,528											$	730,564											$	657,568
Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts		$	295,576			$	5,057				1.71	%		$	240,881			$	3,584				1.49	%		$	242,790			$	2,214				0.91	%
Time deposits		$	208,375			$	4,459				2.14	%		$	220,023			$	3,410				1.55	%		$	200,513			$	2,288				1.14	%
Total interest-bearing deposits		$	503,951			$	9,516				1.89	%		$	460,904			$	6,994				1.52	%		$	443,303			$	4,502				1.02	%
Other borrowings		$	—			$	—				0.00	%		$	3,652			$	175				4.79	%		$	5,740			$	237				4.13	%
Total interest-bearing liabilities		$	503,951			$	9,516				1.89	%		$	464,556			$	7,169				1.54	%		$	449,043			$	4,739				1.06	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		$	192,562											$	183,750											$	142,035
Other noninterest-bearing liabilities		$	4,585											$	4,110											$	2,932
Total noninterest-bearing liabilities		$	197,147											$	187,860											$	144,967
Shareholders’ equity		$	97,430											$	78,148											$	63,558
Total liabilities and shareholders’ equity		$	798,528											$	730,564											$	657,568
Net interest income						$	42,193											$	39,631											$	38,131
Net interest spread(4)											4.67	%											4.94	%											5.54	%
Net interest margin											5.35	%											5.49	%											5.87	%

		For the Year Ended December 31, 2019 vs. 2018												For the Year Ended December 31, 2018 vs. 2017
		Change due to:												Change due to:
		Volume(1)				Rate(1)				Interest Variance				Volume(1)				Rate(1)				Interest Variance
		(Dollars in thousands)
Increase (decrease) in interest income:
Short-term investments		$	268			$	670			$	938			$	357			$	744			$	1,101
Investment securities		$	---			$	50			$	50			$	---			$	---			$	---
Total loans		$	3,978			$	(57	)		$	3,921			$	3,440			$	(611	)		$	2,829
Total increase in interest income		$	4,246			$	663			$	4,909			$	3,797			$	133			$	3,930
Increase (decrease) in interest expense:
Deposits:
Transaction accounts		$	814			$	659			$	1,473			$	(17	)		$	1,387			$	1,370
Time deposits		$	(181	)		$	1,230			$	1,049			$	223			$	899			$	1,122
Total interest-bearing deposits		$	633			$	1,889			$	2,522			$	205			$	2,287			$	2,492
Other borrowings			---				(175	)			(175	)			(86	)			24				(62	)
Total interest-bearing liabilities		$	633			$	1,714			$	2,347			$	119			$	2,311			$	2,430
Increase in net interest income		$	3,613			$	(1,051	)		$	2,562			$	3,678			$	(2,178	)		$	1,500

		For the Years Ended December 31,																For the Years Ended December 31,
		2019				2018				$ Increase (Decrease)				% Increase (Decrease)				2018				2017				$ Increase (Decrease)				% Increase (Decrease)
		(Dollars in thousands)																(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts		$	392			$	347			$	(48	)			(22.64	%)		$	347			$	336			$	11				3.27	%
Gain on sale of loans		$	164			$	212			$	45				12.97	%		$	212			$	183			$	29				15.85	%
Other income and fees		$	752			$	772			$	(20	)			(2.59	%)		$	772			$	916			$	(144	)			(15.72	%)
Total noninterest income		$	1,308			$	1,331			$	(23	)			(1.73	%)		$	1,331			$	1,435			$	(104	)			(7.25	%)

		For the Years Ended December 31,																For the Years Ended December 31,
		2019				2018				$ Increase (Decrease)				% Increase (Decrease)				2018				2017				$ Increase (Decrease)				% Increase (Decrease)
		(Dollars in thousands)																(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits		$	21,265			$	8,113			$	13,152				162.11	%		$	8,113			$	7,611			$	502				6.60	%
Furniture and equipment			829				684				145				21.20	%			684				831				(147	)			(17.69	%)
Occupancy			1,677				1,105				572				51.76	%			1,105				1,049				56				5.34	%
Data and item processing			1,078				966				112				11.59	%			966				891				75				8.42	%
Accounting, legal and professional fees			757				305				452				148.20	%			305				284				21				7.39	%
Regulatory assessments			126				542				(416	)			(76.75	%)			542				450				92				20.44	%
Advertising and public relations			588				553				35				6.33	%			553				433				120				27.71	%
Travel, lodging and entertainment			368				699				(331	)			(47.35	%)			699				1,041				(342	)			(32.85	%)
Other expense			1,744				1,998				(254	)			(12.71	%)			1,998				1,941				57				2.94	%
Total noninterest expense		$	28,432			$	14,965			$	13,467				89.99	%		$	14,965			$	14,531			$	434				2.99	%

		As of December 31,								As of December 31,								As of December 31,
		2019								2018								2017
		Amount				% of Total				Amount				% of Total				Amount				% of Total
		(Dollars in thousands)
Construction & development		$	70,628				10.0	%		$	87,267				14.5	%		$	103,787				18.4	%
1-4 family real estate			34,160				4.8				33,278				5.5				31,778				5.6
Commercial real estate - other			273,278				38.5				156,396				26.0				137,534				24.4
Total real estate			378,066				53.3				276,941				46.0				273,099				48.4
Commercial & industrial			260,762				36.8				248,394				41.3				204,976				36.3
Agricultural			57,945				8.2				62,844				10.4				74,871				13.3
Consumer			11,895				1.7				13,723				2.3				11,631				2.1
Gross loans			708,668				100.0	%			601,902				100.0	%			564,577				100.0	%
Less deferred loan fees, net			(1,364	)							(1,992	)							(1,576	)
Total loans			707,304								599,910								563,001
Allowance for loan and lease losses			(7,846	)							(7,832	)							(7,654	)
Net loans		$	699,458							$	592,078							$	555,347

		As of December 31, 2019
		Due in One Year or Less								Due after One Year Through Five Years								Due after Five Years
		Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Total
		(Dollars in thousands)
Construction & development		$	—			$	31,860			$	833			$	37,483			$	—			$	452			$	70,628
1-4 family real estate			282				9,598				3,843				19,676				43				718				34,160
Commercial real estate - other			1,849				23.533				23,194				219,390				335				4,977				273,278
Total real estate			2,131				64,991				27,870				276,549				378				6,147				378,066
Commercial & industrial			11,677				176,329				9,973				54,233				12				8,538				260,762
Agricultural			3,947				34,875				2,786				13,055				1,319				1,963				57,945
Consumer			2,042				—				4,824				159				4,047				823				11,895
Gross loans		$	19,797			$	276,195			$	45,453			$	343,996			$	5,756			$	17,471			$	708,668

		As of December 31, 2018
		Due in One Year or Less								Due after One Year Through Five Years								Due after Five Years
		Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Total
		(Dollars in thousands)
Construction & development		$	741			$	29,412			$	617			$	56,497			$	---			$	---			$	87,267
1-4 family real estate			682				19,866				1,643			$	10,934				---				153				33,278
Commercial real estate - other			457				14,280				283			$	134,090				2,197				5,089				156,396
Total real estate			1,880				63,558				2,543				201,521				2,197				5,242				276,941
Commercial & industrial			13,725				153,891				7,878				66,631				14				6,255				248,394
Agricultural			4,474				32,496				4,084				17,669				1,374				2,747				62,844
Consumer			2,688				---				5,443				50				4,453				1,089				13,723
Gross loans		$	22,767			$	249,945			$	19,948			$	285,871			$	8,038			$	15,333			$	601,902

		As of December 31, 2017
		Due in One Year or Less								Due after One Year Through Five Years								Due after Five Years
		Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Total
		(Dollars in thousands)
Construction & development		$	1,699			$	45,186			$	3,006			$	53,850			$	—			$	46			$	103,787
1-4 family real estate			1,877				14,671				1,734				13,235				43				218				31,778
Commercial real estate - other			5,619				13,505				1,221				108,832				2,445				5,912				137,534
Total real estate			9,195				73,362				5,961				175,917				2,488				6,176				273,099
Commercial & industrial			45,182				108,921				5,895				27,169				704				17,105				204,976
Agricultural			3,495				37,335				6,956				20,927				2,743				3,415				74,871
Consumer			2,608				126				6,221				665				1,391				620				11,631
Gross loans		$	60,480			$	219,744			$	25,033			$	224,678			$	7,326			$	27,316			$	564,577

		For the Year Ended December 31,
		2019				2018				2017
		(Dollars in thousands)
Balance at beginning of the period		$	7,832			$	7,654			$	6,873
Provision for loan losses			—				200				1,246
Charge-offs:
Construction & development			—				—				—
1-4 family real estate			(2	)			(25	)			—
Commercial real estate - other			—				—				(224	)
Commercial & industrial			(4	)			(73	)			(242	)
Agricultural			(11	)			—				—
Consumer			(1	)			—				(46	)
Total charge-offs			(18	)			(98	)			(512	)
Recoveries:
Construction & development			—				—				—
1-4 family real estate			5				3				23
Commercial real estate - other			—				—				6
Commercial & industrial			24				71				6
Agricultural			3				1				—
Consumer			—				1				12
Total recoveries			32				76				47
Net charge-offs			14				(22	)			(465	)
Balance at end of the period		$	7,846			$	7,832			$	7,654

		As of December 31,
		2019								2018								2017
		Amount				Percent				Amount				Percent				Amount				Percent
		(Dollars in thousands)
Construction & development		$	782				9.97	%		$	1,136				14.50	%		$	1,407				18.38	%
1-4 family real estate			378				4.82	%			433				5.53	%			431				5.63	%
Commercial real estate - other			3,025				38.55	%			2,035				25.98	%			1,865				24.37	%
Commercial & industrial			2,887				36.80	%			3,231				41.26	%			2,779				36.31	%
Agricultural			642				8.18	%			818				10.44	%			1,015				13.26	%
Consumer			132				1.68	%			179				2.29	%			157				2.05	%
Total		$	7,846				100.0	%		$	7,832				100.0	%		$	7,654				100.0	%

		As of December 31,
		2019				2018				2017
		(Dollars in thousands)
Nonaccrual loans		$	1,809			$	2,615			$	1,217
Troubled debt restructurings			912				-				675
Accruing loans 90 or more days past due			612				-				—
Total nonperforming loans			3,333				2,615				1,892
Other real estate owned			—				110				100
Total nonperforming assets		$	3,333			$	2,725			$	1,992
Ratio of nonperforming loans to total loans			0.47	%			0.44	%			0.34	%
Ratio of nonperforming assets to total assets			0.38	%			0.35	%			0.28	%

		As of December 31, 2019
		Loans 30-59 days past due				Loans 60-89 days past due				Loans 90+ days past due				Total Loans 90+ days and accruing				Total past due Loans				Current Loans				Gross Loans
		(Dollars in thousands)
Construction & development		$	—			$	—			$	—			$	—			$	—			$	70,628			$	70,628
1-4 family real estate			—				—				—				—				—				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			$	0			$	612			$	612			$	702			$	707,966			$	708,668

		As of December 31, 2018
		Loans 30-59 days past due				Loans 60-89 days past due				Loans 90+ days past due				Total Loans 90+ days and accruing				Total past due Loans				Current Loans				Gross Loans
		(Dollars in thousands)
Construction & development		$	-			$	-			$	-			$	-			$	-			$	87,267			$	87,267
1-4 family real estate			8				-				-				-				8				33,270				33,278
Commercial real estate - other			-				-				-				-				-				156,396				156,396
Commercial & industrial			-				5				-				-				5				248,389				248,394
Agricultural			-				-				-				-				-				62,844				62,844
Consumer			41				-				-				-				41				13,682				13,723
Total		$	49			$	5			$	0			$	0			$	54			$	601,848			$	601,902

		As of December 31, 2017
		Loans 30-59 days past due				Loans 60-89 days past due				Loans 90+ days past due				Total Loans 90+ days and accruing				Total past due Loans				Current Loans				Gross Loans
		(Dollars in thousands)
Construction & development		$	—			$	—			$	—			$	—			$	—			$	103,787			$	103,787
1-4 family real estate			—				—				111				—				111				31,667				31,778
Commercial real estate - other			—				—				—				—				—				137,534				137,534
Commercial & industrial			2				—				—				—				2				204,974				204,976
Agricultural			—				—				—				—				—				74,871				74,871
Consumer			54				—				—				—				54				11,577				11,631
Total		$	56			$	—			$	111			$	—			$	167			$	564,410			$	564,577

		As of December 31, 2019
		Pass				Watch				Special mention				Substandard				Total
		(Dollars in thousands)
Construction & development		$	70,628			$	—			$	—			$	—			$	70,628
1-4 family real estate			33,622				538				—				—				34,160
Commercial real estate - other			267,437				—				—				5,841				273,278
Commercial & industrial			241,176				5,312				11,524				2,750				260,762
Agricultural			53,290				—				2,128				2,527				57,945
Consumer			11,895				—				—				—				11,895
Total		$	678,048			$	5,850			$	13,652			$	11,118			$	708,668

		As of December 31, 2018
		Pass				Watch				Special mention				Substandard				Total
		(Dollars in thousands)
Construction & development		$	84,485			$	2,782			$	—			$	—			$	87,267
1-4 family real estate			29,942				3,221				—				115				33,278
Commercial real estate - other			154,353				1,559				—				484				156,396
Commercial & industrial			204,671				36,342				—				7,381				248,394
Agricultural			57,782				758				3,207				1,097				62,844
Consumer			13,723				—				—				—				13,723
Total		$	544,956			$	44,662			$	3,207			$	9,077			$	601,902

		As of December 31, 2017
		Pass				Watch				Special mention				Substandard				Total
		(Dollars in thousands)
Construction & development		$	103,787			$	—			$	—			$	—			$	103,787
1-4 family real estate			23,011				8,656				—				111				31,778
Commercial real estate - other			127,771				9,088				—				675				137,534
Commercial & industrial			192,035				7,764				4,146				1,031				204,976
Agricultural			64,990				90				7,228				2,563				74,871
Consumer			11,555				—				—				76				11,631
Total		$	523,149			$	25,598			$	11,374			$	4,456			$	564,577

		As of December 31, 2019
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Specific Reserves Allocated
		(Dollars in thousands)
Commercial real estate - other			1			$	1,809			$	1,809			$	26
Agricultural			2				912				912				-
Total			3			$	2,721			$	2,721			$	26

		As of December 31, 2018
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Specific Reserves Allocated
		(Dollars in thousands)
Commercial & industrial			1			$	501			$	501			$	-
Total			1			$	501			$	501			$	-

		As of December 31, 2017
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Specific Reserves Allocated
		(Dollars in thousands)
Commercial real estate - other			1			$	675			$	675			$	300
Commercial & industrial			1				861				861				-
Total			2			$	1,536			$	1,536			$	300

		As of December 31, 2019								As of December 31, 2018								As of December 31, 2017
		Number of Contracts				Amount				Number of Contracts				Amount				Number of Contracts				Amount
		(Dollars in thousands)
Accrual			2			$	912				-			$	-				1			$	675
Nonaccrual			1				1,809				1				501				1				861
Total			3			$	2,721				1			$	501				2			$	1,536

		As of December 31,
		2019								2018								2017
		Amount				Percentage of Total				Amount				Percentage of Total				Amount				Percentage of Total
		(Dollars in thousands)
Noninterest-bearing demand		$	219,221				29.0	%		$	201,159				29.8	%		$	165,911				26.5	%
Interest-bearing:
NOW deposits			112,420				14.8				91,896				13.6				74,870				12.0
Money market			150,554				19.9				118,150				17.5				56,671				9.1
Savings deposits			72,750				9.6				69,548				10.3				85,000				13.6
Time deposits (more than $100,000)			176,998				23.3				167,304				24.8				213,575				34.1
Time deposits ($100,000 or less)			25,540				3.4				27,846				4.1				29,804				4.8
Total interest-bearing			538,262				71.0				474,744				70.2				459,920				73.5
Total deposits		$	757,483				100.0	%			675,903				100.0	%		$	625,831				100.0	%

		As of the Year Ended December 31,
		2019								2018								2017
		Average Balance				Weighted Average Rate				Average Balance				Weighted Average Rate				Average Balance				Weighted Average Rate
		(Dollars in thousands)
Noninterest-bearing demand		$	192,562				0.00	%		$	183,750				0.00	%		$	142,035				0.00	%
Interest-bearing:
NOW			95,694				1.83				71,384				1.56				134,351				1.02
Money market			132,265				1.83				90,230				1.65				29,961				0.90
Savings			67,617				1.30				79,267				1.23				78,477				0.73
Time			208,375				2.14				220,023				1.55				200,513				1.14
Total interest-bearing			503,951				1.89				460,904				1.52				443,302				1.02
Total deposits		$	696,513				1.37	%		$	644,654				1.08	%		$	585,337				0.77	%

		As of December 31, 2019 Maturity Within:
(Dollars in thousands)		Three Months				Three to Six Months				Six to 12 Months				After 12 Months				Total
		(Dollars in thousands)
Time deposits ($100,000 or less)		$	6,998			$	5,024			$	8,387			$	8,231			$	28,640
Time deposits (more than $100,000)			52,048				34,126				49,700				38,024				173,898
Total time deposits		$	59,046			$	39,150			$	58,087			$	46,255			$	202,538

		As of December 31, 2018 Maturity Within:
		Three Months				Three to Six Months				Six to 12 Months				After 12 Months				Total
		(Dollars in thousands)
Time deposits ($100,000 or less)		$	6,229			$	4,791			$	10,342			$	6,484			$	27,846
Time deposits (more than $100,000)			33,308				41,193				71,827				20,976				167,304
Total time deposits		$	39,537			$	45,984			$	82,169			$	27,460			$	195,150

		As of December 31, 2017 Maturity Within:
(Dollars in thousands)		Three Months				Three to Six Months				Six to 12 Months				After 12 Months				Total
		(Dollars in thousands)
Time deposits ($100,000 or less)		$	7,615			$	4,710			$	8,243			$	9,236			$	29,804
Time deposits (more than $100,000)			25,436				46,661				94,473				47,005				213,575
Total time deposits		$	33,051			$	51,371			$	102,716			$	56,241			$	243,379

		Actual								With Capital Conservation Buffer								Minimum To be Considered “Well-Capitalized”
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
As of December 31, 2019:
Total capital to risk-weighted assets
Company		$	105,137				15.25	%		$	72,393				10.500	%			N/A				N/A
Bank			106,148				15.42				72,287				10.500				68,845				10.00
Tier 1 capital to risk-weighted assets
Company			97,291				14.11				58,604				8.500				N/A				N/A
Bank			98,302				14.28				58,518				8.500				55,076				8.00
CET 1 capital to risk-weighted assets
Company			97,291				14.11				48,262				7.000				N/A				N/A
Bank			98,302				14.28				48,192				7.000				44,749				6.50
Tier 1 leverage ratio
Company			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

		Actual								With Capital Conservation Buffer								Minimum To be Considered “Well-Capitalized”
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
As of December 31, 2018:
Total capital to risk-weighted assets
Company		$	92,693				15.86	%		$	57,709				9.875	%			N/A				N/A
Bank			93,704				16.03				57,709				9.875				58,439				10.00
Tier 1 capital to risk-weighted assets
Company			85,382				14.61				46,021				7.875				N/A				N/A
Bank			86,393				14.78				46,021				7.875				46,751				8.00
CET 1 capital to risk-weighted assets
Company			85,382				14.61				37,255				6.375				N/A				N/A
Bank			86,393				14.78				37,255				6.375				37,985				6.50
Tier 1 leverage ratio
Company			85,382				11.13				N/A				N/A				N/A				N/A
Bank			86,393				11.26				N/A				N/A				38,355				5.00

		Actual								With Capital Conservation Buffer								Minimum To be Considered “Well-Capitalized”
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
As of December 31, 2017:
Total capital to risk-weighted assets
Company		$	74,140				12.86	%		$	53,331				9.250	%			N/A				N/A
Bank			79,740				13.83				53,330				9.250				57,654				10.00
Tier 1 capital to risk-weighted assets
Company			66,928				11.61				41,800				7.250				N/A				N/A
Bank			75,528				12.58				41,799				7.250				46,123				8.00
CET 1 capital to risk-weighted assets
Company			66,928				11.61				33,152				5.750				N/A				N/A
Bank			75,528				12.58				33,151				5.750				37,475				6.50
Tier 1 leverage ratio
Company			66,928				9.72				N/A				N/A				N/A				N/A
Bank			75,528				10.53				N/A				N/A				36,436				5.00

		Payments Due as of December 31, 2019
		Within One Year				One to Three Years				Three to Five Years				After Five Years				Total
		(Dollars in thousands)
Deposits without a stated maturity		$	554,945			$	-			$	-			$	-			$	554,945
Time deposits			156,283				44,310				1,945				-				202,538
Borrowings			-				-				-				-				-
Operating lease commitments			623				845				49				-				1,517
Total contractual obligations		$	711,851			$	45,155			$	1,994			$	-			$	759,000

		As of December 31,
		2019				2018				2017
		(Dollars in thousands)
Commitments to extend credit		$	191,459			$	135,015			$	145,888
Standby letters of credit			3,338				1,078				1,544
Total		$	194,797			$	136,093			$	147,432

			As of December 31,								As of December 31,
			2019								2018
Change in Interest Rates (Basis Points)			Percent Change in Net Interest Income				Percent Change in Fair Value of Equity				Percent Change in Net Interest Income				Percent Change in Fair Value of Equity
+400				69.65	%			21.41	%			48.28	%			22.97	%
+300				51.57				19.84				35.66				21.50
+200				33.39				18.15				22.99				19.95
+100				14.91				16.34				10.17				18.29
Base				(3.81	)			14.39				(3.07	)			16.50
-100				(13.68	)			12.34				(15.30	)			14.58

	Page
Report of Independent Registered Public Accounting Firm	60
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2019 and 2018	61
Consolidated Statements of Income for each of the three years in the period ended December 31, 2019	62
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2019	63
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2019	64
Notes to Consolidated Financial Statements	65

Assets		December 31, 2019				December 31, 2018
Cash and due from banks		$	117,128			$	128,090
Interest-bearing time deposits in other banks			30,147				31,759
Loans, net of allowance for loan losses of $7,846 and
$7,832 at December 31, 2019 and 2018, respectively			699,458				592,078
Loans held for sale			1,031				512
Premises and equipment, net			9,624				7,753
Nonmarketable equity securities			1,100				1,055
Foreclosed assets held for sale			-				110
Goodwill and intangibles			1,789				1,995
Interest receivable and other assets			6,115				7,159
Total assets		$	866,392			$	770,511
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing		$	219,221			$	201,159
Interest-bearing			538,262				474,744
Total deposits			757,483				675,903
Income taxes payable			357				1,913
Interest payable and other liabilities			8,426				4,229
Total liabilities			766,266				682,045
Shareholders’ equity
Preferred stock, par value $0.01 per share, 1,000,000
shares authorized; none issued or outstanding			-				-
Common stock, non-voting, par value $0.01 per share,
20,000,000 shares authorized; none issued or outstanding			-				-
Common stock, $0.01 par value; 50,000,000 shares authorized; shares
issued and outstanding: 10,057,506 and 10,187,500, respectively			101				102
Additional paid-in capital			92,391				80,275
Retained earnings			7,634				8,089
Total shareholders’ equity			100,126				88,466
Total liabilities and shareholders’ equity		$	866,392			$	770,511

		For the Years Ended December 31,
		2019				2018				2017
Interest Income
Loans, including fees		$	48,200			$	44,279			$	41,450
Interest-bearing time deposits in other banks			1,709				588				592
Interest-bearing deposits in other banks			1,800				1,933				828
Total interest income			51,709				46,800				42,870
Interest Expense
Deposits			9,516				6,994				4,502
Other borrowings			-				175				237
Total interest expense			9,516				7,169				4,739
Net Interest Income			42,193				39,631				38,131
Provision for Loan Losses			-				200				1,246
Net Interest Income After Provision for Loan Losses			42,193				39,431				36,885
Noninterest Income
Secondary market income			164				212				183
Service charges on deposit accounts			392				347				336
Other			752				772				916
Total noninterest income			1,308				1,331				1,435
Noninterest Expense
Salaries and employee benefits			21,265				8,113				7,611
Furniture and equipment			829				684				831
Occupancy			1,677				1,310				1,049
Data and item processing			1,078				966				891
Accounting, marketing and legal fees			757				305				284
Regulatory assessments			126				542				450
Advertising and public relations			588				553				433
Travel, lodging and entertainment			368				699				1,041
Other			1,744				1,793				1,941
Total noninterest expense			28,432				14,965				14,531
Income Before Taxes			15,069				25,797				23,789
Income tax expense			6,844				797				-
Net Income		$	8,225			$	25,000			$	23,789
Earnings per common share - basic		$	0.81			$	3.08			$	3.26
Earnings per common share - diluted			0.81				3.03				3.26
Weighted average common shares outstanding - basic			10,145,032				8,105,856				7,287,500
Weighted average common shares outstanding - diluted			10,147,311				8,237,638				7,287,500

		Year Ended December 31,
		2019				2018				2017
Common Stock  (Shares)
Balance at beginning of period			10,187,500				7,287,500				7,287,500
Common stock issued			-				2,900,000				-
Shares issued for restricted stock units			19,431				-				-
Shares acquired and canceled			(149,425	)			-				-
Balance at end of period			10,057,506				10,187,500				7,287,500
Common Stock (Amount)
Balance at beginning of period		$	102			$	73			$	73
Shares issued, net of offering costs			-				29				-
Shares acquired and canceled			(1	)			-				-
Balance at end of period		$	101			$	102			$	73
Additional Paid-in Capital
Balance at beginning of period		$	80,275			$	6,987			$	6,987
Capital contribution			-				137				-
Shares issued, net of offering costs			-				50,125				-
Reclassification of undistributed S Corporation earnings			-				22,872				-
Stock-based compensation expense			12,116				154				-
Balance at end of period		$	92,391			$	80,275			$	6,987
Retained Earnings
Balance at beginning of period		$	8,089			$	62,116			$	48,076
Net income			8,225				25,000				23,789
Reclassification of undistributed S Corporation earnings			-				(22,872	)			-
Common stock acquired and canceled			(2,645	)			-				-
Cash dividends declared ($0.60, $7.71, $1.34 per share)			(6,035	)			(56,155	)			(9,749	)
Balance at end of period		$	7,634			$	8,089			$	62,116
Total shareholders' equity		$	100,126			$	88,466			$	69,176

		For the Years Ended December 31,
		2019				2018				2017
Operating Activities
Net income		$	8,225			$	25,000			$	23,789
Items not requiring (providing) cash
Depreciation and amortization			849				1,097				1,088
Provision for loan losses			-				200				1,246
Net increase on other real estate owned			-				(10	)			-
Gain on sales of loans			(164	)			(212	)			(183	)
Stock-based compensation expense			12,116				154				-
Loss on sale of premises and equipment			183				-				-
Cash receipts from the sale of loans originated for sale			7,697				8,185				9,060
Cash disbursements for loans originated for sale			(8,052	)			(8,097	)			(9,108	)
(Gain) loss on sale of other real estate owned			(330	)			3				92
Deferred income tax benefit			(20	)			(1,069	)			-
Changes in
Interest receivable and other assets			1,064				(1,405	)			(415	)
Interest payable and other liabilities			(2,388	)			3,155				308
Net cash provided by operating activities			19,180				27,001				25,877
Investing Activities
Maturities of interest-bearing time deposits in other banks			18,583				3,884				1,743
Purchases of interest-bearing time deposits in other banks			(16,971	)			(5,475	)			(2,490	)
Net change in loans			(107,458	)			(36,981	)			(61,668	)
Purchases of premises and equipment			(3,100	)			(378	)			(3,969	)
Proceeds from sale of premises and equipment			403				1,336				-
Purchase of nonmarketable equity securities			(45	)			(6	)			(6	)
Proceeds from sale of foreclosed assets			518				47				597
Net cash used in investing activities			(108,070	)			(37,573	)			(65,793	)
Financing Activities
Net change in deposits			81,580				50,072				76,275
Repayment of borrowed funds			-				(5,600	)			(800	)
Cash distributions			(1,006	)			(56,155	)			(9,749	)
Capital injection			-				137				-
Common stock acquired and canceled			(2,646	)			-				-
Net change in common stock			-				50,154				-
Net cash provided by financing activities			77,928				38,608				65,726
(Decrease) Increase in Cash and Due from Banks			(10,962	)			28,036				25,810
Cash and Due from Banks, Beginning of Year			128,090				100,054				74,244
Cash and Due from Banks, End of Year		$	117,128			$	128,090			$	100,054
Supplemental Disclosure of Cash Flows Information
Interest paid		$	9,342			$	7,304			$	4,739
Income taxes paid		$	6,779			$	-			$	-
Dividends declared and not paid		$	5,029			$	-			$	-
Non-cash stock contribution		$	11,627			$	-			$	-
Foreclosed assets acquired in settlement of loans		$	78			$	50			$	684