Recent Events, Including Mergers and Acquisitions

12 Months Ended

Dec. 31, 2021

Recent Events, Including Mergers and Acquisitions [Abstract]

Recent Events, Including Mergers and Acquisitions

Note 2: Recent Events, Including Mergers and Acquisitions

On December 9, 2021, the Company’s largest shareholder sold approximately 1.1 million shares of stock pursuant to an S-3 registered secondary offering. The Company incurred $163,000 in non-recurring expenses associated with the offering, which are included in noninterest expenses. The effect of this purchase and related expenses was included in the consolidated financial statement of the Company as of December 31, 2021.

Business Combinations

On December 9, 2021, the Company acquired 100% of the outstanding equity of Watonga Bancshares, Inc. (“Watonga”), the bank holding company for Cornerstone Bank, for $29.3 million in cash. Immediately following the acquisition, Watonga was dissolved and Cornerstone Bank merged with and into Bank7.

A preliminary summary of the fair value of assets acquired and liabilities assumed from Watonga are as follows:

(in thousands)	Estimated Fair Value
Assets Acquired
Cash and cash equivalents	$	41,747
Investment securities available-for-sale		86,166
Federal funds sold		7,941
Loans		117,335
Premises and equipment		8,372
Core deposit intangible		1,254
Prepaid expenses and other assets		4,512
Total assets acquiried		267,327
Liabilities Assumed
Deposits	$	243,487
Accounts payable and accrued expenses		2,041
Total liabilities assumed		245,528
Net assets acquired	$	21,799
Consideration transferred		29,266
Goodwill	$	7,467

With the acquisition of the Watonga, the Company continues to expand in the Oklahoma market and increases the Company’s core funding. None of the goodwill associated with the acquisition is expected to be deductible for income tax purposes. All goodwill was allocated to the Company’s only reporting unit, which is the Company as a whole.

The Company engaged a third-party specialist to develop the fair value estimate of Watonga’s loan portfolio as of the acquisition date in accordance with ASC 820. Inputs and assumptions used in the fair value estimate of the loan portfolio, includes interest rate, servicing, credit and liquidity risk, and required equity return. The fair value of loans was calculated using a discounted cash flow analysis based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. There was no carryover of Watonga’s allowance for loan losses associated with the loans that were acquired, as the loans were initially recorded at fair value as of the acquisition date. None of the acquired loans were deemed purchased-credit impaired as of the acquisition date.

The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years. The fair value of retail demand and interest-bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.

The Company has determined the above noted acquisition constitutes a business combination as defined by ASC Topic 805, which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. The Company has recorded the assets purchased and liabilities assumed at their estimated fair value in accordance with ASC Topic 805.

As of the acquisition date, the Company evaluated $117.3 million of net loans ($118.5 million gross loans less $1.2 million discount) purchased in conjunction with the acquisition of Watonga Bancshares, Inc. in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs. As of December 31, 2021, the net loan balance of the ASC Topic 310-20 purchased loans is $114.6 million ($115.8 million gross loans less $1.2 million discount). The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method.

The Company acquired $86.2 million in available-for-sale debt securities ($86.6 less $375,000 discount) valued at fair value as of the acquisition date.

As of the acquisition date, the Company acquired $8.4 million ($6.9 million, plus $1.5 million premium) of premises and equipment evaluated at appraised value

The fair values of assets acquired and liabilities assumed are preliminary and based on valuation estimates and assumptions. The accounting for business combinations require estimates and judgments regarding expectations of future cash flows of the acquired business, and the allocations of those cash flows to identifiable tangible and intangible assets. The estimates and assumptions underlying the preliminary valuations are subject to collection of information necessary to complete the valuations (specifically related to projected financial information) within the measurement periods, which are up to one year from the acquisition date. Although the Company does not currently expect material changes to the initial value of net assets acquired, the Company continues to evaluate assumptions related to the valuation of the assets acquired and liabilities assumed. Any adjustments to our estimates of purchase price allocation will be made in the periods in which the adjustments are determined, and the cumulative effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date.

Summary of Unaudited Pro Forma Information

The following table presents unaudited pro-forma information as if the acquisition of Watonga had occurred on January 1, 2020. This pro-forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects and is based on our historical results for the periods presented. Transaction-related costs related to each acquisition are not reflected in the pro-forma amounts. The pro-forma information does not necessarily reflect the results of operations that would have occurred had the Company acquired Watonga at the beginning of fiscal year 2020. Cost savings are also not reflected in the unaudited pro-forma amounts.

	Actual from Acquisition Date through December 31, 2021		Pro-Forma for Year Ended December 31,
				2021		2020
Net interest income	$	411	$	60,420	$	54,690
Non-interest income		67		3,261		3,721
Net income		124		21,935		17,433
Pro-forma earnings per share:
Basic			$	2.42	$	1.86
Diluted			$	2.41	$	1.86

Acquisition costs, which primarily consists of professional services, are expensed as incurred as a component of non-interest expense. The Company incurred total acquisition costs of $712,000 during the year ended December 31, 2021.

Subsequent Events

Subsequent to year-end, the Company completed the sale of a bank building acquired in the acquisition of Watonga Bancshares on March 17, 2022 for the amount of $3.73 million.