Bank7 Corp. - Annual Report: 2021 (Form 10-K)

 

 

Company Overview

 

We are Bank7 Corp., a bank holding company headquartered in Oklahoma City, Oklahoma. Through our wholly-owned subsidiary, Bank7, we operate twelve full-service branches in Oklahoma, the Dallas/Fort Worth 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. On December 9, 2021, we acquired Watonga Bancshares, Inc. adding branches in Watonga, Geary and Mustang, Oklahoma. As of December 31, 2021, we had total assets of $1.4 billion, total loans of $1.0 billion, total deposits of $1.2 billion and total shareholders’ equity of $127.4 million.

 

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

 

The Bank is 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.

 

The Bank has a particular focus in the following loan categories (i) commercial real estate lending, (ii) hospitality lending, (iii) energy lending, and (iv) commercial and industrial lending.  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.

The Bank offers 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

 

Our success is driven by:

 

 

 

 

 

 

We focus on our 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, we will continue to position ourselves 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. The Bank operates as few branches as practical, and the branches we do operate are smaller and more cost efficient than many other banks. 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. We acquired three new branches in Watonga, Geary, and Mustang, Oklahoma on December 9, 2021. 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 currently operate twelve branches. We also intend to continually enhance our internet and mobile banking products to remain competitive in the marketplace.

 

Markets

 

We are headquartered in Oklahoma City, Oklahoma, and we operate seven additional branches in Oklahoma. We also operate two branches in the Dallas/Fort Worth metropolitan area and two branches in 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.

 

Human Capital

 

Our corporate culture is defined by core values which include integrity, accountability, professionalism, community-focused and efficiency. As of December 31, 2021, we had 122 full time employees. We value our employees by investing in competitive compensation and benefit packages and fostering a team environment centered on professional service and open communication. Attracting, retaining and developing qualified, engaged employees who embody these values are crucial our success. We offer all of our employees a comprehensive benefits package that includes medical, dental and vision insurance, a flexible spending plan, group life insurance, short-term and long-term disability insurance, a traditional 401(k) Plan, competitive paid time off/paid holidays, and competitive incentives.

 

We are committed and focused on the health and safety of our employees, customers, and communities and are committed to providing a safe and secure work environment in accordance with applicable labor, safety, health, anti-discrimination and other workplace laws. We strive for all of our employees to feel safe at work. To that end, we maintain a whistleblower hotline that allows associates and others to anonymously voice concerns. We prohibit retaliation against an individual who reported a concern or assisted with an inquiry or investigation.

 

The COVID-19 pandemic presented challenges to maintain employee and customer safety while continuing to be open for business. Accordingly, we launched a proactive response to the escalating COVID-19 outbreak that included securing and distributing the necessary PPE to all locations, enacting all applicable government-mandated/CDC-recommended guidelines for safe social distancing (including the installation of plexiglass barriers, floor spacing markers and hand-sanitizer stations), and increasing emphasis on facility cleaning.

 

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. The current risk-based capital standards applicable to the Company and the Bank are based on the Basel III Capital Rules established by the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. The requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments.

 

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 ratio of 4.5%; a Tier 1 capital to risk-weighted assets ratio of at least 6.0%; and a total capital to risk-weighted assets ratio 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 require a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital requirements. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios.  Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) is subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers based on the amount of the shortfall.

 

As of December 31, 2021, 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, 2021, the Bank met the requirements for being deemed “well-capitalized” for purposes of the prompt corrective action regulations.

 

The 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.

 

 

 

 

 

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 (or, for small bank holding companies like the Company, before redeeming any instruments included in equity as defined under GAAP) 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

 

 

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.

 

 

 

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.

 

 

 

 

 

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, 2021.

 

 

 

 

 

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.

 

 

 

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.

 

 

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.

 

 

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, which would include the Company and the Bank, those rules have not been finalized and 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.

 

Cybersecurity

 

Banking institutions are required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures for the protection of confidential and personal information are in effect across our lines of business. Furthermore, the federal banking regulators regularly issue guidance regarding cybersecurity intended to enhance cyber risk management. A financial institution is expected to implement multiple lines of defense against cyber-attacks and ensure that their risk management procedures address the risk posed by potential cyber threats. A financial institution is further expected to maintain procedures to effectively respond to a cyber-attack and resume operations following any such attack. The Bank has adopted and implemented policies and procedures to comply with privacy, information security, and cybersecurity requirements. On November 18, 2021, the federal banking agencies issued a new rule effective in 2022 that requires banks to notify their regulators within 36 hours of a “computer-security incident” that rises to the level of a “notification incident.”

 

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

 

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 primarily affected by the economy of Oklahoma, and the Dallas/Fort Worth metropolitan area and to a smaller degree the State of Kansas. Our success depends to a significant extent upon the business activity, population, income levels, employment trends, deposits and real estate activity in these markets. In spite of the COVID-19 pandemic, 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 2021. Vacancy rates for commercial properties remain low and small business owners are increasingly considering bank borrowings in order to grow.

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, 2021, our energy loans, which include loans to exploration and production companies, midstream companies, purchasers of mineral and royalty interests and service providers totaled $98.5 million, or 9.6% of total loans, as compared to $101.9 million, or 12.1% of total loans as of December 31, 2020. 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, 2021, we had $9.4 million in unfunded commitments to borrowers in the oil and gas industry.

 

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, 2021, this exposure was approximately $198.4 million, or 19.2%, of the total loan portfolio, along with an additional $41.5 million in unfunded debt, as compared to $194.3 million, or 23.2%, of the total loan portfolio, along with an additional $65 million in unfunded debt as of December 31, 2020. 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.

 

The COVID pandemic, including variants of the coronavirus, has adversely affected the U.S. economy and our customers, which has had, and may continue to have, a material and adverse effect on our business, financial condition, results of operations and growth prospects.

The COVID pandemic, including variants of the coronavirus, continues to negatively impact the United States and the world. The spread of COVID and the responses of federal, state and local governments have negatively impacted the U.S. economy and our customers, including through periods of economic recession, volatile levels of unemployment, increased inflation, supply chain and labor shortages, and other trends, all of which have had and may continue to have an adverse effect on our business and operations.

In particular, these trends have, among other things, negatively impacted loan demand and our growth strategy, and increased the risk of delinquencies, defaults, foreclosures, and losses on our loans, particularly for our customers with exposure to the hospitality industry

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The ultimate impact of the pandemic is highly uncertain and subject to change, and even if after the pandemic subsides, we may continue to experience material adverse impacts to our business as a result of the global economic impact of the pandemic and related governmental and social responses.

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, 2021, our Regulatory CRE represented 302.47% of our total Bank capital and our construction, land development and other land loans represented 129.02% of our total Bank capital, as compared to 343.8% and 93.5% as of December 31, 2020, respectively. During the prior 36-month period, our Regulatory CRE has decreased 32.8%. 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, 2021, we had approximately $1.0 billion of commercial purpose loans, which include general commercial, energy, agricultural, and CRE loans, representing approximately 97.7% 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.

 

 

As of December 31, 2021, our 20 largest borrowing relationships ranged from approximately $13.4 million to $33.6 million (including unfunded commitments) and totaled approximately $405 million in total commitments (representing, in the aggregate, 32.7% of our total outstanding commitments as of December 31, 2021). 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, 2021, our 20 largest deposit relationships accounted for 23.2% 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, 2021, approximately 38.4% of our gross loans were maturing within one year, compared to approximately 43.2% of our gross loans that were maturing within one year as of December 31, 2020. 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 may be adversely impacted by the transition from the use of the LIBOR interest rate index in the future.

 

We have certain loans, investment securities and subordinated debt securities indexed to LIBOR to calculate the interest rate. The continued availability of the LIBOR index is not guaranteed after the United Kingdom administrators of LIBOR have announced that the publication of the most commonly used U.S. dollar LIBOR settings will cease to be published after June 2023. We cannot predict, in the interim, whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. With respect to our loan assets, at this time, there is some industry guidance regarding acceptable alternatives to LIBOR. After review and analysis from the Federal Reserve Board’s Alternative Reference Rates Committee, the Consumer Financial Protection Bureau published its final rule recommending the Secured Overnight Financing Rate, or SOFR, as a compliant replacement index to LIBOR that would not trigger a refinance under existing regulations for certain consumer loans. Loan contracts may also contain alternate rate language permitting transfer to SOFR, Wall Street Journal Prime or another index when LIBOR is no longer available. The timing and manner in which each customer’s contract transitions to a new index will vary on a case-by-case basis. There continues to be some uncertainty related to the LIBOR transition. New index rates and payments will differ from LIBOR, which may lead to increased volatility. The transition has impacted our market risk profiles and required changes to our risk and pricing models, valuation tools, and product design. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. With respect to investment securities and subordinated debt securities, we expect similar transition issues. Failure to adequately manage the transition could have a material adverse effect on our business, financial condition and 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.

 

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, 2021, approximately $1.0 billion, or 85.4%, of our deposits consisted of demand, savings, money market and negotiable order of withdrawal, or NOW, accounts. Approximately $177.6 million of the remaining balance of deposits consists of certificates of deposit, of which approximately $135.8 million, or 76.5% of remaining 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 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. Cybersecurity concerns are further heightened by Russia’s recent invasion of Ukraine.

 

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 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. On November 18, 2021, the federal banking agencies issued a new rule effective in 2022 that requires banks to notify their regulators within 36 hours of a “computer-security incident” that rises to the level of a “notification incident.” 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

 

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, 2021 approximately 59.3% 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.

 

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, 2021, the Haines Family Trusts control approximately 51.2% 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

 

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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.

 

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.

 

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, effective September 24, 2018 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, eight 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 twelve 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.

•

historical and projected financial condition, liquidity and results of operations;

•

the Company’s capital levels and requirements;

•

statutory and regulatory prohibitions and other limitations;

•

any contractual restriction on the Company’s ability to pay cash dividends, including pursuant to the terms of any of its credit agreements or other borrowing arrangements;

•

business strategy;

•

tax considerations;

•

any acquisitions or potential acquisitions;

•

general economic conditions; and

•

other factors deemed relevant by the Board of Directors.

Plan			Number of securities to be issued upon exercise of outstanding options and rights				Weighted average exercise price				Number of securities remaining available for issuance under plan
Equity compensation plans approved by shareholders				436,993			$	17.41				615,873
Equity compensation plans not approved by shareholders				-				-				-

		Net Interest Margin
		For the Year Ended December 31,
		2021												2020												2019
		Average Balance				Interest Income/ Expense				Average Yield/ Rate				Average Balance				Interest Income/ Expense				Average Yield/ Rate				Average Balance				Interest Income/ Expense				Average Yield/ Rate
		(Dollars in thousands)
Interest-Earning Assets:
Short-term investments		$	126,136			$	178				0.25	%		$	116,295			$	828				0.71	%		$	151,434			$	3,459				2.28	%
Investment securities, taxable			4,663				312				3.84				1,123				36				3.21				1,065				50				4.69
Debt securities, tax exempt			1,852				31				1.62				-				-				-				-				-				-
Loans held for sale			318				-				-				244				-				-				236				-				-
Total loans(1)			905,804				55,768				6.16				823,228				52,450				6.37				636,274				48,200				7.58
Total interest-earning assets			1,038,773				56,289				5.42				940,890				53,314				5.67				789,009				51,709				6.55
Noninterest-earning assets			7,361												8,067												9,519
Total assets		$	1,046,134											$	948,957											$	798,528
Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts		$	430,268				1,396				0.32	%		$	377,519				2,729				0.72	%		$	295,576				5,057				1.71	%
Time deposits			205,437				1,657				0.81				207,442				3,424				1.65				208,375				4,459				2.14
Total interest-bearing deposits			635,705				3,053				0.48				584,961				6,153				1.05				503,951				9,516				1.89
Total interest-bearing liabilities			635,705				3,053				0.48				584,961				6,153				1.05				503,951				9,516				1.89
Noninterest-bearing liabilities:
Noninterest-bearing deposits			288,446												256,431												192,562
Other noninterest-bearing liabilities			4,930												5,206												4,585
Total noninterest-bearing liabilities			293,376												261,637												197,147
Shareholders’ equity			117,053												102,359												97,430
Total liabilities and shareholders’ equity		$	1,046,134											$	948,957											$	798,528
Net interest income						$	53,236											$	47,161											$	42,193
Net interest spread											4.94	%											4.61	%											4.67	%
Net interest margin											5.12	%											5.01	%											5.35	%

(1)

Average loan balances include monthly average nonaccrual loans of $12.6 million, $11.3 million and $2.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.

-

Total interest income on loans increased $3.3 million, or 6.3%, to $55.8 million which was attributable to a $82.6 million increase in the average balance of loans to $905.8 million during the year ended 2021 as compared with the average balance of $823.2 million for the year ended 2020;

-

Loan fees totaled $7.8 million, an increase of $2.8 million or 54.7%. $949,000 of the increase was due to PPP fee income recognized;

-

Yields on our interest-earning assets totaled 5.42%, a decrease of 25 basis points which was attributable to lower loan rates and a decrease in yield on short term investments of 46 basis points, both were primarily impacted by the aforementioned changes in market interest rates related to the pandemic; and

-

Net interest margin for the years ended 2021 and 2020 was 5.12% and 5.01%, respectively.

-

Total interest income on loans increased $4.3 million, or 8.8%, to $52.5 million which was attributable to a $187.0 million increase in the average balance of loans to $823.2 million during the year ended 2020 as compared with the average balance of $636.3 million for the year ended 2019;

-

Loan fees totaled $5.0 million, an increase of $592,000 or 13.3%.

-

Yields on our interest-earning assets totaled 5.67%, a decrease of 88 basis points which was attributable to lower loan rates and a decrease in yield on short term investments of 157 basis points, both were primarily impacted by the aforementioned changes in market interest rates related to the pandemic; and

		Analysis of Changes in Interest Income and Expenses
		For the Year Ended December 31, 2021 vs 2020												For the Year Ended December 31, 2020 vs 2019
		Change due to:												Change due to:
		Volume(1)				Rate(1)				Interest				Volume(1)				Rate(1)				Interest
										Variance												Variance
		(Dollars in thousands)												(Dollars in thousands)
Increase (decrease) in interest income:
Short-term investments		$	70			$	(585	)		$	(515	)		$	(803	)		$	(1,828	)		$	(2,631	)
Investment securities			354				(211	)			143				3				(17	)			(14	)
Total loans			5,260				(1,943	)			3,317				14,163				(9,913	)			4,250
Total increase (decrease) in interest income			5,684				(2,739	)			2,945				13,363				(11,758	)			1,605
Increase (decrease) in interest expense:
Deposits:
Transaction accounts			380				(1,713	)			(1,333	)			1,402				(3,730	)			(2,328	)
Time deposits			(33	)			(1,734	)			(1,767	)			(20	)			(1,015	)			(1,035	)
Total interest-bearing deposits			347				(3,447	)			(3,100	)			1,382				(4,745	)			(3,363	)
Total increase (decrease) in interest expense			347				(3,447	)			(3,100	)			1,382				(4,745	)			(3,363	)
Increase (Decrease) in net interest income		$	5,337			$	708			$	6,045			$	11,981			$	(7,013	)		$	4,968

		As of December 31, 2021
		Within One Year								After One Year But Within Five Years								After Five Years But Within Ten Years								After Ten Years								Total
		Amount				Yield *				Amount				Yield *				Amount				Yield *				Amount				Yield *				Amount				Yield *
Available-for-sale		(Dollars in thousands)
U.S. Federal agencies		$	10				6.86	%		$	303				3.56	%		$	-				0	%		$	-				0	%		$	313				3.66	%
Mortgage-backed securities			1,397				3.82				10,211				2.00				13,834				2.46				7,712				2.32				33,154				2.34
State and political subdivisions			3,618				2.82				20,750				1.94				17,792				2.15				3,134				2.22				45,294				2.11
U.S. Treasury			-				-				1,018				1.56				5,029				1.76				-				-				6,047				1.73
Total		$	5,025				3.11	%		$	32,282				1.96	%		$	36,655				2.21	%		$	10,846				2.29	%		$	84,808				2.18	%
Percentage of total			5.93	%							38.06	%							43.22	%							12.79	%							100.00	%

-

The provision for loan losses decreased from $5.4 to $4.2 million

-

The allowance as a percentage of loans decreased by 15 basis points to 1.00%.

-

The provision for loan losses increased from zero to $5.4 million related to loan growth, uncertainty in the economy caused by the COVID-19 pandemic and $3.6 million in net charge offs; and

-

The allowance as a percentage of loans increased by 4 basis points to 1.15%.

		For the Years Ended																For the Years Ended
		December 31,																December 31,
		2021				2020				$ Increase (Decrease)				% Increase (Decrease)				2020				2019				$ Increase (Decrease)				% Increase (Decrease)
		(Dollars in thousands)																(Dollars in thousands)
Noninterest income:
Secondary market income		$	435			$	175			$	260				148.57	%		$	175			$	164			$	11				6.71	%
Service charges on deposit accounts			550				442				108				24.43	%			442				392				50				12.76	%
Other income and fees			1,265				1,048				217				20.71	%			1,048				752				296				39.36	%
Total noninterest income		$	2,250			$	1,665			$	585				35.14	%		$	1,665			$	1,308			$	357				27.29	%

		For the Years Ended																For the Years Ended
		December 31,																December 31,
		2021				2020				$ Increase (Decrease)				% Increase (Decrease)				2020				2019				$ Increase (Decrease)				% Increase (Decrease)
		(Dollars in thousands)																(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits		$	11,983			$	10,130			$	1,853				18.29	%		$	10,130			$	21,265			$	(11,135	)			-52.36	%
Furniture and equipment			883				868				15				1.73	%			868				829				39				4.70	%
Occupancy			1,899				1,957				(58	)			-2.96	%			1,957				1,677				280				16.70	%
Data and item processing			1,237				1,091				146				13.38	%			1,091				1,078				13				1.21	%
Accounting, marketing, and legal fees			800				536				264				49.25	%			536				757				(221	)			-29.19	%
Regulatory assessments			604				506				98				19.37	%			506				126				380				301.59	%
Advertising and public relations			282				400				(118	)			-29.50	%			400				588				(188	)			-31.97	%
Travel, lodging and entertainment			409				241				168				69.71	%			241				368				(127	)			-34.51	%
Other expense			2,300				1,863				437				23.46	%			1,863				1,744				119				6.82	%
Total noninterest expense		$	20,397			$	17,592			$	2,805				15.94	%		$	17,592			$	28,432			$	(10,840	)			-38.13	%

-

Salaries and employee benefits expense was $12.0 million compared to $10.1 million, an increase of $1.9 million, or 18.3%.  The increase was attributable to overall increases in compensation to remain competitive, and partially due to our acquisition of Cornerstone Bank, which increased employee headcount.

-

Salaries and employee benefits expense was $10.1 million compared to $21.3 million, an decrease of $11.1 million, or 52.4%.  The decrease in 2020 was attributable to our one-time non-cash executive stock transaction.

-

Occupancy expense was $2.0 million compared to $1.7 million, an increase of $280,000, or 16.7%.  The increase in 2020 was primarily due to 2020 being the first full year of depreciation for the renovation of our main branch and headquarters and increased rent at our full-service Tulsa location.

		As of December 31,
		2021								2020								2019
		Amount				% of Total				Amount				% of Total				Amount				% of Total
		(Dollars in thousands)
Construction & development		$	169,322				16.4	%		$	107,855				12.8	%		$	70,628				10.0	%
1-4 family real estate			62,971				6.1	%			29,079				3.5	%			34,160				4.8	%
Commercial real estate - Other			339,655				32.9	%			290,489				34.6	%			273,278				38.5	%
Total commercial real estate			571,948				55.5	%			427,423				50.9	%			378,066				53.3	%
Commercial & industrial			361,974				35.1	%			351,248				41.9	%			260,762				36.8	%
Agricultural			73,010				7.1	%			50,519				6.0	%			57,945				8.2	%
Consumer			24,046				2.3	%			9,898				1.2	%			11,895				1.7	%
Gross Loans			1,030,978				100.0	%			839,088				100.0	%			708,668				100.0	%
Less unearned income, net			(2,577	)							(2,475	)							(1,364	)
Total Loans, net of unearned income			1,028,401								836,613								707,304
Allowance for loan and lease losses			(10,316	)							(9,639	)							(7,846	)
Net loans		$	1,018,085							$	826,974							$	699,458

		As of December 31, 2021
		Due in One Year or Less								Due after One Year Through Five Years								Due after Five Years Through Fifteen Years								Due after Fifteen Years
		Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Total
		(Dollars in thousands)
Construction & development		$	7,283			$	71,551			$	10,148			$	74,052			$	-			$	2,243			$	-			$	4,045			$	169,322
1-4 family real estate			3,259				21,322				11,979				11,674				926				7,375				-				6,436				62,971
Commercial real estate - other			5,156				97,309				59,227				143,906				413				19,230				-				14,414				339,655
Total commercial real estate			15,698				190,182				81,354				229,632				1,339				28,848				-				24,895				571,948
Commercial & industrial			24,249				142,553				16,346				145,654				20,474				12,047				-				651				361,974
Agricultural			2,529				17,441				5,156				39,305				623				1,587				-				6,369				73,010
Consumer			4,870				29				10,825				172				1,554				2,458				84				4,054				24,046
Gross loans		$	47,346			$	350,205			$	113,681			$	414,763			$	23,990			$	44,940			$	84			$	35,969			$	1,030,978

		As of December 31, 2020
		Due in One Year or Less								Due after One Year Through Five Years								Due after Five Years Through Fifteen Years								Due after Fifteen Years
		Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Total
		(Dollars in thousands)
Construction & development		$	14			$	47,649			$	885			$	58,387			$	-			$	920			$	-			$	-			$	107,855
1-4 family real estate			273				13,394				4,712				9,959				39				702				-				-				29,079
Commercial real estate - other			2,377				55,307				45,880				180,721				294				4,288				-				1,622				290,489
Total real estate			2,664				116,350				51,477				249,067				333				5,910				-				1,622				427,423
Commercial & industrial			16,914				194,520				39,593				93,707				11				6,503				-				-				351,248
Agricultural			5,141				27,215				2,534				14,420				60				541				-				608				50,519
Consumer			1,544				150				6,570				65				1,057				425				87				-				9,898
Gross loans		$	26,263			$	338,235			$	100,174			$	357,259			$	1,461			$	13,379			$	87			$	2,230			$	839,088

		As of December 31, 2019
		Due in One Year or Less								Due after One Year Through Five Years								Due after Five Years Through Fifteen Years								Due after Fifteen Years
		Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Fixed Rate				Adjustable Rate				Total
		(Dollars in thousands)
Construction & development		$	-			$	31,860			$	833			$	37,483			$	-			$	452			$	-			$	-			$	70,628
1-4 family real estate			282				9,598				3,843				19,676				43				718				-				-				34,160
Commercial real estate - other			1,849				23,533				23,194				219,390				335				3,168				-				1,809				273,278
Total real estate			2,131				64,991				27,870				276,549				378				4,338				-				1,809				378,066
Commercial & industrial			11,677				176,329				9,973				54,233				12				7,195				-				1,343				260,762
Agricultural			3,947				34,875				2,786				13,055				1,319				1,355				-				608				57,945
Consumer			2,042				-				4,824				159				3,958				511				89				312				11,895
Gross loans		$	19,797			$	276,195			$	45,453			$	343,996			$	5,667			$	13,399			$	89			$	4,072			$	708,668

		For the Year Ended December 31,
		2021				2020				2019
		(Dollars in thousands)
Balance at beginning of the period		$	9,639			$	7,846			$	7,832
Provision for loan losses			4,175				5,350				-
Charge-offs:
Construction & development			-				-				-
1-4 family real estate			-				-				(2	)
Commercial real estate - Other			-				-				-
Commercial & industrial			(3,750	)			(3,289	)			(4	)
Agricultural			-				(300	)			(11	)
Consumer			(68	)			(1	)			(1	)
Total charge-offs			(3,818	)			(3,590	)			(18	)
Recoveries:
Construction & development			-				-				-
1-4 family real estate			-				2				5
Commercial real estate - Other			-				-				-
Commercial & industrial			16				18				24
Agricultural			300				10				3
Consumer			4				3				-
Total recoveries			320				33				32
Net charge-offs			(3,498	)			(3,557	)			14
Balance at end of the period		$	10,316			$	9,639			$	7,846
Net charge-offs to average loans			0.39	%			0.43	%			0.00	%

		As of December 31,
		2021								2020								2019
		Amount				Percent				Amount				Percent				Amount				Percent
		(Dollars in thousands)
Construction & development		$	1,695				16.4	%		$	1,239				12.8	%		$	782				10.0	%
1-4 family real estate			630				6.1	%			334				3.5	%			378				4.8	%
Commercial real estate - Other			3,399				32.9	%			3,337				34.6	%			3,025				38.5	%
Commercial & industrial			3,621				35.1	%			4,035				41.9	%			2,887				36.8	%
Agricultural			730				7.1	%			580				6.0	%			642				8.2	%
Consumer			241				2.3	%			114				1.2	%			132				1.7	%
Total		$	10,316				100.0	%		$	9,639				100.0	%		$	7,846				100.0	%

		As of December 31,
		2021				2020				2019
		(Dollars in thousands)
Nonaccrual loans		$	9,885			$	14,575			$	1,809
Troubled-debt restructurings (1)			-				-				912
Accruing loans 90 or more days past due			496				1,960				612
Total nonperforming loans			10,381				16,535				3,333
Other real estate owned			-				-				-
Total nonperforming assets		$	10,381			$	16,535			$	3,333
Ratio of nonperforming loans to total loans			1.01	%			1.98	%			0.47	%
Ratio of nonaccrual loans to total loans			0.96	%			1.74	%			0.26	%
Ratio of allowance for loan losses to total loans			1.00	%			1.15	%			1.11	%
Ratio of allowance for loan losses to nonaccrual loans			104.36	%			66.13	%			433.72	%
Ratio of nonperforming assets to total assets			0.77	%			1.63	%			0.38	%

		As of December 31, 2021
		Loans 30-59 days past due				Loans 60-89 days past due				Loans 90+ days past due				Loans 90+ days past due and accruing				Total Past Due Loans				Current				Total loans
		(Dollars in thousands)
Construction & development		$	-			$	-			$	-			$	-			$	-			$	169,322			$	169,322
1-4 family real estate			-				-				-				-				-				62,971				62,971
Commercial real estate - Other			-				174				-				-				174				339,481				339,655
Commercial & industrial			-				19				501				401				520				361,454				361,974
Agricultural			-				-				77				77				77				72,933				73,010
Consumer			48				15				18				18				81				23,965				24,046
Total		$	48			$	208			$	596			$	496			$	852			$	1,030,126			$	1,030,978

		As of December 31, 2020
		Loans 30-59 days past due				Loans 60-89 days past due				Loans 90+ days past due				Loans 90+ days past due and accruing				Total Past Due Loans				Current				Total loans
		(Dollars in thousands)
Construction & development		$	714			$	-			$	-			$	-			$	714			$	107,141			$	107,855
1-4 family real estate			-				-				-				-				-				29,079				29,079
Commercial real estate - Other			1,444				-				1,960				1,960				3,404				287,085				290,489
Commercial & industrial			-				-				-				-				-				351,248				351,248
Agricultural			-				-				-				-				-				50,519				50,519
Consumer			193				-				-				-				193				9,705				9,898
Total		$	2,351			$	-			$	1,960			$	1,960			$	4,311			$	834,777			$	839,088

		As of December 31, 2019
		Loans 30-59 days past  due				Loans 60-89  days past due				Loans 90+ days past due				Loans 90+ days past due and accruing				Total Past Due Loans				Current				Total loans
Construction & development		$	-			$	-			$	-			$	-			$	-			$	70,628			$	70,628
1-4 family commerical			-				-				-				-				-				34,160				34,160
Commercial real estate - Other			-				-				-				-				-				273,278				273,278
Commercial & industrial			-				-				14				14				14				260,748				260,762
Agricultural			-				-				598				598				598				57,347				57,945
Consumer			90				-				-				-				90				11,805				11,895
Total		$	90			$	-			$	612			$	612			$	702			$	707,966			$	708,668

		As of December 31, 2021
		Pass				Watch				Special mention				Substandard				Total
		(Dollars in thousands)
Construction & development		$	169,322			$	-			$	-			$	-			$	169,322
1-4 family real estate			62,971				-				-				-				62,971
Commercial real estate - Other			282,268				14,976				27,112				15,299				339,655
Commercial & industrial			341,661				4,658				6,300				9,355				361,974
Agricultural			72,295				255				460				-				73,010
Consumer			24,000				-				-				46				24,046
Total		$	952,517			$	19,889			$	33,872			$	24,700			$	1,030,978

		As of December 31, 2020
		Pass				Watch				Special mention				Substandard				Total
		(Dollars in thousands)
Construction & development		$	107,855			$	-			$	-			$	-			$	107,855
1-4 family real estate			28,711				368				-				-				29,079
Commercial real estate - Other			248,194				24,155				10,086				8,054				290,489
Commercial & industrial			328,656				7,691				300				14,601				351,248
Agricultural			50,051				-				-				468				50,519
Consumer			9,898				-				-				-				9,898
Total		$	773,365			$	32,214			$	10,386			$	23,123			$	839,088

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

		As of December 31, 2021
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment				Specific reserves allocated
		(Dollars in thousands)
Commercial real estate			1			$	1,402			$	1,402				-
Total			1			$	1,402			$	1,402			$	-

		As of December 31, 2020
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment				Specific reserves allocated
		(Dollars in thousands)
Commercial & industrial			1			$	10,886			$	10,886			$	-
Agricultural			1				469				469				-
Commercial real estate			1				1,622				1,622				-
Total			3			$	12,977			$	12,977			$	-

		As of December 31, 2019
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment				Specific reserves allocated
		(Dollars in thousands)
Commercial & industrial			1			$	1,809			$	1,809			$	26
Agricultural			2				912				912				-
Total			3			$	2,721			$	2,721			$	26

		As of December 31, 2021								As of December 31, 2020								As of December 31, 2019
		Number of contracts				Amount				Number of contracts				Amount				Number of contracts				Amount
		(Dollars in thousands)																(Dollars in thousands)
Accrual			-			$	-				-			$	-				2			$	912
Nonaccrual			1				1,402				3				12,977				1				1,809
Total			1			$	1,402				3			$	12,977				3			$	2,721

		December 31,								December 31,								December 31,
		2021								2020								2019
		Amount				Percentage of Total				Amount				Percentage of Total				Amount				Percentage of Total
		(Dollars in thousands)
Demand deposits		$	366,705				30.1	%		$	246,569				27.2	%		$	219,221				29.0	%
Interest-bearing transaction deposits			583,389				47.9	%			392,784				43.4	%			262,974				34.7	%
Savings deposits			89,778				7.4	%			54,008				6.0	%			72,750				9.6	%
Time deposits ($250,000 or less)			132,690				10.9	%			135,811				15.0	%			146,834				19.4	%
Time deposits (more than $250,000)			44,909				3.7	%			76,342				8.4	%			55,704				7.3	%
Total interest-bearing			850,766				69.9	%			658,945				72.8	%			538,262				71.0	%
Total deposits		$	1,217,471				100.0	%		$	905,514				100.0	%		$	757,483				100.0	%

		For the Year Ended December 31,								For the Year Ended December 31,								For the Year Ended December 31,
		2021								2020								2019
		Average Balance				Weighted Average Rate				Average Balance				Weighted Average Rate				Average Balance				Weighted Average Rate
		(Dollars in thousands)
Demand deposits		$	288,446				0.00	%		$	256,431				0.00	%		$	192,562				0.00	%
Interest-bearing transaction deposits			375,048				0.34	%			318,713				1.50	%			227,959				3.66	%
Savings deposits			55,220				0.23	%			58,806				0.56	%			67,617				1.30	%
Time deposits			205,437				0.81	%			207,442				1.65	%			208,375				2.14	%
Total interest-bearing			635,705				0.48	%			584,961				1.05	%			503,951				1.89	%
Total deposits		$	924,151				0.33	%		$	841,392				0.73	%		$	696,513				1.37	%

		As of December 31, 2021 Maturity Within:
		Three Months				Three to Six Months				Six to 12 Months				After 12 Months				Total
		(Dollars in thousands)
Time deposits ($250,000 or less)		$	32,680			$	37,016			$	31,197			$	31,797			$	132,690
Time deposits (more than $250,000)			18,234				5,932				10,729				10,014				44,909
Total time deposits		$	50,914			$	42,948			$	41,926			$	41,811			$	177,599

		As of December 31, 2020 Maturity Within:
		Three Months				Three to Six Months				Six to 12 Months				After 12 Months				Total
		(Dollars in thousands)
Time deposits ($250,000 or less)		$	29,730			$	25,894			$	54,410			$	25,777			$	135,811
Time deposits (more than $250,000)			11,119				7,845				35,770				21,608				76,342
Total time deposits		$	40,849			$	33,739			$	90,180			$	47,385			$	212,153

		Actual								With Capital Conservation Buffer								Minimum to be “Well- Capitalized” Under Prompt Corrective Action
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
As of December 31, 2021
Total capital (to risk-weighted assets)
Bank7 Corp.		$	127,946				12.54	%		$	107,126				10.50	%			N/A				N/A
Bank			127,844				12.54	%			107,020				10.50	%		$	101,924				10.00	%
Tier 1 capital (to risk-weighted assets)
Bank7 Corp.			117,631				11.53	%			86,721				8.50	%			N/A				N/A
Bank			117,528				11.53	%			86,635				8.50	%			81,539				8.00	%
CET 1 capital (to risk-weighted assets)
Bank7 Corp.			117,631				11.53	%			71,417				7.00	%			N/A				N/A
Bank			117,528				11.53	%			71,347				7.00	%			66,250				6.50	%
Tier 1 capital (to average assets)
Bank7 Corp.			117,631				10.56	%			N/A				N/A				N/A				N/A
Bank			117,528				10.55	%			N/A				N/A				55,714				5.00	%

		Actual								With Capital Conservation Buffer								Minimum to be “Well- Capitalized” Under Prompt Corrective Action
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
As of December 31, 2020
Total capital (to risk-weighted assets)
Bank7 Corp.		$	115,375				14.73	%		$	82,216				10.50	%			N/A				N/A
Bank			115,335				14.75	%			82,114				10.50	%		$	78,204				10.00	%
Tier 1 capital (to risk-weighted assets)
Bank7 Corp.			105,736				13.50	%			66,556				8.50	%			N/A				N/A
Bank			105,696				13.51	%			66,473				8.50	%			62,563				8.00	%
CET 1 capital (to risk-weighted assets)
Bank7 Corp.			105,736				13.50	%			54,811				7.00	%			N/A				N/A
Bank			105,696				13.51	%			54,743				7.00	%			50,832				6.50	%
Tier 1 capital (to average assets)
Bank7 Corp.			105,736				10.78	%			N/A				N/A				N/A				N/A
Bank			105,696				10.78	%			N/A				N/A				49,041				5.00	%

		Actual								With Capital Conservation Buffer								Minimum to be “Well- Capitalized” Under Prompt Corrective Action
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of December 31, 2019:
Total capital (to risk-weighted assets)
Bank7 Corp.		$	105,137				15.25	%		$	72,393				10.50	%			N/A				N/A
Bank			106,148				15.42	%			72,287				10.50	%		$	68,845				10.00	%
Tier 1 capital (to risk-weighted assets)
Bank7 Corp.			97,291				14.11	%			58,604				8.50	%			N/A				N/A
Bank			98,302				14.28	%			58,518				8.50	%			55,076				8.00	%
CET 1 capital (to risk-weighted assets)
Bank7 Corp.			97,291				14.11	%			48,262				7.00	%			N/A				N/A
Bank			98,302				14.28	%			48,192				7.00	%			44,749				6.50	%
Tier 1 capital (to average assets)
Bank7 Corp.			97,291				11.53	%			N/A				N/A				N/A				N/A
Bank			98,302				11.65	%			N/A				N/A				42,241				5.00	%

		Payments Due as of December 31, 2021
		Within One Year				One to Three Years				Three to Five Years				After Five Years				Total
		(Dollars in thousands)
Deposits without a stated maturity		$	1,039,872			$	-			$	-			$	-			$	1,039,872
Time deposits			135,788				39,904				1,907				-				177,599
Securities sold under agreements to repurchase			-				-				-				-				-
Operating lease commitments			611				782				241				-				1,634
Total contractual obligations		$	1,176,271			$	40,686			$	2,148			$	-			$	1,219,105

		As of December 31,
		2021				2020				2019
		(Dollars in thousands)
Commitments to extend credit		$	200,393			$	206,520			$	191,459
Standby letters of credit			5,809				2,366				3,338
Total		$	206,202			$	208,886			$	194,797

			As of December 31,							As of December 31,								As of December 31,
			2021							2020								2019
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				Percent Change in Net Interest Income				Percent Change in Fair Value of Equity
+400			32.34	%			23.35	%			39.57	%			19.41	%			33.21	%			21.41	%
+300			23.63	%			21.37	%			29.73	%			17.53	%			24.59	%			19.84	%
+200			14.88	%			19.21	%			19.87	%			15.51	%			15.92	%			18.15	%
+100			6.07	%			16.86	%			9.90	%			13.36	%			7.11	%			16.34	%
Base			-2.80	%			14.33	%			-0.14	%			11.06	%			-1.82	%			14.39	%
-100			-5.38	%			11.30	%			-3.11	%			10.35	%			-6.52	%			12.34	%