UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to

Commission File Number: 001-38656

Bank7 Corp.

(Exact name of registrant as specified in its charter)

Oklahoma	20-0763496
( State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1039 N.W. 63rd Street	73116-7361
(Address of principal executive offices)	(Zip Code)

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 Par Value Per Share	BSVN	NASDAQ Global Select Market System

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒  (Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of NOVEMBER 14, 2019, the registrant had 10,057,506shares of common stock, par value $0.01, outstanding.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets	3
	Unaudited Consolidated Statements of Operations	4
	Unaudited Consolidated Statements of Shareholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	52
PART II.	OTHER INFORMATION	52
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 6.	Exhibits	53
	Signatures	54

Forward-Looking Statements

This Form 10-Q contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. Any or all of the forward-looking statements in (or conveyed orally regarding) this presentation may turn out to be inaccurate. The inclusion of or reference to forward-looking information in this presentation should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on its current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of risks, uncertainties and assumptions that are difficult to predict. Factors that could cause such differences are discussed in the section titled “Risk Factors” in our most recent Annual Report on Form 10-K, and may be discussed from time to time in our other SEC filings, including our Quarterly Reports.  If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. You are cautioned not to place undue reliance on forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as may be required by law. All forward-looking statements herein are qualified by these cautionary statements.

 

Item 1. Financial Statements

Bank7 Corp.

Consolidated Balance Sheets

(Dollar amounts in thousands)

 

Assets	September 30, 2019 (Unaudited)		December 31, 2018
Cash and due from banks	$	110,594	$	128,090
Interest-bearing time deposits in other banks		31,890		31,759
Loans, net of allowance for loan losses of $7,841 and $7,832 at September 30, 2019 and December 31, 2018, respectively		666,755		592,078
Loans held for sale		-		512
Premises and equipment, net		8,395		7,753
Nonmarketable equity securities		1,072		1,055
Foreclosed assets held for sale		77		110
Goodwill and intangibles		1,840		1,995
Interest receivable and other assets		6,198		7,159
Total assets	$	826,821	$	770,511
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing	$	202,989	$	201,159
Interest-bearing		519,145		474,744
Total deposits		722,134		675,903
Income taxes payable		-		1,913
Interest payable and other liabilities		4,072		4,229
Total liabilities		726,206		682,045
Shareholders’ equity
Preferred stock, par value $0.01 per share, 1,000,000 shares authorized; none issued or outstanding		-		-
Common stock, non-voting, par value $0.01 per share, 20,000,000 shares authorized; none issued or outstanding		-		-
Common stock, $0.01 par value; 50,000,000 shares authorized; 10,057,506 shares issued and outstanding		101		102
Additional paid-in capital		92,353		80,275
Retained earnings		8,161		8,089
Total shareholders’ equity		100,615		88,466
Total liabilities and shareholders’ equity	$	826,821	$	770,511

See Notes to Unaudited Consolidated Financial Statements

3

Bank7 Corp.

 Unaudited Consolidated Statements of Operations

(Dollar amounts in thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019		2018
Interest Income
Loans, including fees	$	12,179		$	11,082		$	35,902	$	32,490
Interest-bearing time deposits in other banks		500			147			1,414		438
Interest-bearing deposits in other banks		392			510			1,398		1,288
Total interest income		13,071			11,739			38,714		34,216
Interest Expense
Deposits		2,471			1,881			7,178		4,940
Other borrowings		-			57			-		175
Total interest expense		2,471			1,938			7,178		5,115
Net Interest Income		10,600			9,801			31,536		29,101
Provision for Loan Losses		-			-			-		100
Net Interest Income After Provision for Loan Losses		10,600			9,801			31,536		29,001
Noninterest Income
Secondary market income		69			95			146		173
Service charges on deposit accounts		110			88			279		261
Other		330			136			602		635
Total noninterest income		509			319			1,027		1,069
Noninterest Expense
Salaries and employee benefits		14,256			2,082			18,792		6,077
Furniture and equipment		229			182			606		491
Occupancy		436			319			1,157		898
Data and item processing		276			248			814		716
Accounting, marketing and legal fees		218			74			507		218
Regulatory assessments		31			145			94		396
Advertising and public relations		71			63			349		413
Travel, lodging and entertainment		153			260			287		618
Other		402			432			1,269		1,200
Total noninterest expense		16,072			3,805			23,875		11,027
Income (Loss) Before Taxes		(4,963	)		6,315			8,688		19,043
Income tax expense (benefit)		1,556			(395	)		4,965		(395	)
Net Income (Loss)	$	(6,519	)	$	6,710		$	3,723	$	19,438
Earnings per common share - basic	$	(0.64	)	$	0.88		$	0.37	$	2.63
Earnings per common share - diluted		(0.64	)		0.87			0.37		2.62
Weighted average common shares outstanding - basic		10,149,007			7,634,239			10,174,528		7,404,350
Weighted average common shares outstanding - diluted		10,161,778			7,669,348			10,176,360		7,416,182

See Notes to Unaudited Consolidated Financial Statements

4

Bank7 Corp.

Unaudited Consolidated Statements of Shareholders’ Equity

(Dollar Amounts in thousands, except share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Common Stock  (Shares)
Balance at beginning of period		10,187,500			7,287,500			10,187,500			7,287,500
Common stock issued		-			2,900,000			-			2,900,000
Shares issued for restricted stock units		19,431			-			19,431			-
Shares acquired and canceled		(149,425	)		-			(149,425	)		-
Balance at end of period	$	10,057,506		$	10,187,500		$	10,057,506		$	10,187,500
Common Stock (Amount)
Balance at beginning of period	$	102		$	73		$	102		$	73
Shares issued, net of offering costs		-			29			-			29
Shares acquired and canceled		(1	)		-			(1	)		-
Balance at end of period	$	101		$	102		$	101		$	102
Additional Paid-in Capital
Balance at beginning of period	$	80,604		$	6,987		$	80,275		$	6,987
Capital contribution		-			137			-			137
Shares issued, net of offering costs		-			50,125			-			50,125
Reclassification of undistributed S Corporation earnings		-			22,872			-			22,872
Stock-based compensation expense		11,749			15			12,078			15
Balance at end of period	$	92,353		$	80,136		$	92,353		$	80,136
Retained Earnings
Balance at beginning of period	$	18,331		$	70,493		$	8,089		$	62,116
Net income (loss)		(6,519	)		6,710			3,723			19,438
Reclassification of undistributed S Corporation earnings		-			(22,872	)		-			(22,872	)
Common stock acquired and canceled		(2,645	)		-			(2,645	)		-
Cash dividends declared ($0.10, $0.60, $0.10, $7.71 per share)		(1,006	)		(51,804	)		(1,006	)		(56,155	)
Balance at end of period	$	8,161		$	2,527		$	8,161		$	2,527
Total shareholders' equity	$	100,615		$	82,765		$	100,615		$	82,765

See Notes to Unaudited Consolidated Financial Statements

5

Bank7 Corp.

Unaudited Consolidated Statements of Cash Flows

(Dollar Amounts in thousands)

	Nine months ended September 30,
	2019			2018
Operating Activities
Net income	$	3,723		$	19,438
Items not requiring (providing) cash
Depreciation and amortization		651			602
Provision for loan losses		-			100
Net increase on other real estate owned		-			(10	)
Gain on sales of loans		(146	)		(173	)
Stock-based compensation expense		12,078			15
(Gain) loss on sale of premises and equipment		182			(138	)
Cash receipts from the sale of loans originated for sale		6,767			6,111
Cash disbursements for loans originated for sale		(6,109	)		(5,550	)
(Gain) loss on sale of other real estate owned		(362	)		3
Deferred income tax benefit (expense)		176			(731	)
Changes in
Interest receivable and other assets		785			(653	)
Interest payable and other liabilities		(3,076	)		1,108
Net cash provided by operating activities		14,669			20,122
Investing Activities
Maturities of interest-bearing time deposits in other banks		12,606			1,393
Purchases of interest-bearing time deposits in other banks		(12,737	)		(992	)
Net change in loans		(74,755	)		(21,914	)
Purchases of premises and equipment		(1,697	)		-
Proceeds from sale of premises and equipment		377			1,526
Purchase of nonmarketable equity securities		(17	)		(6	)
Proceeds from sale of foreclosed assets		473			47
Net cash used in investing activities		(75,750	)		(19,946	)
Financing Activities
Net change in deposits		46,231			38,482
Repayment of borrowed funds		-			(5,600	)
Cash distributions		-			(56,155	)
Capital injection		-			137
Common stock acquired and canceled		(2,646	)		-
Net change in common stock		-			50,154
Net cash provided by financing activities		43,585			27,018
(Decrease) Increase in Cash and Due from Banks		(17,496	)		27,194
Cash and Due from Banks, Beginning of Period		128,090			100,054
Cash and Due from Banks, End of Period	$	110,594		$	127,248
Supplemental Disclosure of Cash Flows Information
Interest paid	$	6,912		$	2,954
Income taxes paid	$	5,458		$	-
Dividends declared and not paid	$	1,006		$	-
Non-cash stock contribution	$	11,627
Supplemental Disclosures of Non-Cash Investing Activities
Foreclosed assets acquired in settlement of loans	$	78		$	50

See Notes to Unaudited Consolidated Financial Statements

6

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Bank7 Corp. (the “Company”), formerly known as Haines Financial Corp, is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Bank 7 (the “Bank”).  The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers located in Oklahoma, Kansas, and Texas.  The Bank is subject to competition from other financial institutions.  The Company is subject to the regulation of certain federal agencies and undergoes periodic examinations by those regulatory authorities.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements contained herein reflect all adjustments which are, in the opinion of management, necessary to provide a fair statement of the financial position, results of operations, and cash flows of the Company for the interim periods presented. All such adjustments are of a normal and recurring nature. There have been no significant changes in the accounting policies of the Company since December 31, 2018, the date of the most recent annual report.  The consolidated balance sheet of the Company as of December 31, 2018 has been derived from the audited consolidated balance sheet of the Company as of that date.  The information contained in the financial statements and footnotes included in Company’s annual report for the year ended December 31, 2018, should be referred to in connection with these unaudited interim consolidated financial statements. Certain information and notes normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Form 10-K annual report for 2018 filed with the Securities and Exchange Commission. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company, the Bank and its subsidiary, 1039 NW 63^rd, LLC, which holds real estate utilized by the Bank.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

7

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of other real estate owned, other-than-temporary impairments, income taxes, goodwill and intangibles and fair values of financial instruments.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized over the respective term of the loan.

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay and estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

8

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral-dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The ASU supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, and establishes a new control-based revenue recognition model for revenue from contracts with customers.  The revenue line items in scope of this ASU have been identified and final assessment is pending; however, the majority of the Company’s financial instruments are not within the scope of Topic 606.  Material revenue streams within the scope of Topic 606 include service charges on deposits.  The guidance in the ASU is effective for annual reporting periods beginning after December 15, 2018.  Based on the revenue streams impacted, this ASU will not have a material impact on the Company’s financial condition or results of operation.  The Company will adopt this ASU for the annual period ending December 31, 2019.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  The ASU requires certain equity investments to be measured at fair value with changes recognized in net income.  It also requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purpose and eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value disclosed for financial instruments measured at amortized cost.  The guidance in the ASU is effective for annual reporting periods beginning after December 15, 2018. The Company will adopt this ASU for the annual period ending December 31, 2019.

9

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The ASU requires lessees to recognize a lease liability and a right-of-use asset for all leases, excluding short-term leases, at the commencement date.  The guidance in the ASU is effective for reporting periods beginning after December 15, 2019.  Additionally, a modified retrospective transition approach is required for a leases existing at the earliest comparative period presented.  Management is assessing the impact of this ASU; however, it is not expected to have a material impact on the Company’s financial condition, results of operation, or capital position, but will impact the presentation on the balance sheet of the Company’s current operating leases.  The Company will adopt this ASU in the first quarter of 2021.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326).  The ASU requires the replacement of the current incurred loss model with an expected loss model, referred to as the current expected credit loss (CECL) model.  The guidance in the ASU is effective for reporting periods beginning after December 15, 2021 with a cumulative-effect adjustment to retained earnings required for the first reporting period.  Management is still assessing the impact of this ASU.  The Company will adopt this ASU in the first quarter of 2023.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350):  Simplifying the Test for Goodwill Impairment.  The ASU amends existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  The guidance in the ASU is effective for reporting periods beginning after December 15, 2021 with prospective application.  Management is still assessing the impact of this ASU; however, it is expected that it will not have a significant impact on the Company’s financial condition and results of operations.  The Company will adopt this ASU in the first quarter of 2022.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). ASU 2018-13 removes, modifies and adds disclosure requirements on fair value measurements. ASU 2018-13 will be effective for the Company on January 1, 2020. Early adoption is permitted. In addition, early adoption of any removed or modified disclosures and delayed adoption of the additional disclosures until the effective date is also permitted. It is expected that adoption will not have a significant impact on the Company's financial condition and results of operations. The Company expects to adopt the standard in the first quarter of 2020.

Note 2: Change in Capital Structure

On June 26, 2018, the Company amended and restated its Certificate of Incorporation.  The original Certificate of Incorporation was amended to change the name of the Company from Haines Financial Corp to Bank7 Corp.  In addition, the amendment changed the capital structure to authorize the issuance of 50,000,000 shares of common stock, par value $0.01 per share (the “Common Stock”), 20,000,000 shares of non-voting common stock, par value $0.01 per share (the “Non-voting Common Stock”), and 1,000,000 shares of preferred stock, par value $0.01 per share (the “Preferred Stock”).

The Company completed a 24-to-1 stock split of the Company’s outstanding shares of common stock for shareholders on record as of July 6, 2018.  The stock was payable in the form of a dividend on or about July 9, 2018.  Shareholders received 24 additional shares for each share held.  All share and per share amounts in the consolidated financial statements and related notes have been retroactively adjusted to reflect this stock split for all periods presented.

10

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

Initial Public Offering

On September 20, 2018, the Company completed the initial public offering of its common stock.  In connection with the Company’s initial public offering, the Company sold and issued 2,900,000 shares of common stock at $19 per share.  After deducting the underwriting discounts and offering expenses, the Company received total net proceeds of $50.1 million from the initial public offering.

In connection with the initial public offering, the Company terminated its S Corporation status and became a taxable entity (“C Corporation”) on September 24, 2018. As such, any periods prior to September 24, 2018 will only reflect an effective state income tax rate. As a result of the termination of S Corporation status, we increased our deferred tax asset and recorded an initial tax benefit of $863,000. The deferred tax asset is the result of timing differences in the recognition of income/deductions for generally accepted accounting principles (“GAAP”) and tax purposes.  Net deferred tax assets are included in other assets and no valuation allowance is considered necessary.

We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  We are no longer subject to U.S. federal or state tax examinations for years before 2015.

Note 3: Restriction on Cash and Due from Banks

The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank.  The reserve required at September 30, 2019 was $17.5 million.

Note 4: Earnings Per Share

Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the year.

Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income dividend by the weighted average number of commons shares outstanding during each period, adjusted for the effect of dilutive potential common shares, such as restricted stock awards and nonqualified stock options, calculated using the treasury stock method.

11

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

The following table shows the computation of basic and diluted earnings per share:

	For the three months ended September 30,					For the nine months ended September 30,
	2019			2018		2019		2018
(Dollars in thousands, except per share amounts)
Numerator
Net income (loss)	$	(6,519	)	$	6,710	$	3,723	$	19,438
Denominator
Denominator for basic earnings per common share		10,149,007			7,634,239		10,174,528		7,404,350
Dilutive effect of stock compensation (1)		12,771			35,109		1,832		11,832
Denominator for diluted earnings per share		10,161,778			7,669,348		10,176,360		7,416,182
Earnings per common share
Basic	$	(0.64	)	$	0.88	$	0.37	$	2.63
Diluted	$	(0.64	)	$	0.87	$	0.37	$	2.62

(1) Nonqualified stock options outstanding of 163,000 and 130,000 have not been included in diluted earnings per share for the three and nine month periods ended September 30, 2019, respectively, because to do so would have been antidilutive for those periods.

Note 5: Loans and Allowance for Loan Losses

A summary of loans at September 30, 2019 and December 31, 2018, are as follows (dollars in thousands):

	September 30, 2019			December 31, 2018
Construction & development	$	68,714		$	87,267
1-4 family commercial		30,037			33,278
Commercial real estate - other		253,986			156,396
Total commercial real estate		352,737			276,941
Commercial & industrial		252,516			248,394
Agricultural		58,583			62,844
Consumer		12,194			13,723
Gross loans		676,030			601,902
Less allowance for loan losses		(7,841	)		(7,832	)
Less deferred loan fees		(1,434	)		(1,992	)
Net loans	$	666,755		$	592,078

12

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three months ended September 30, 2019 and 2018 (dollars in thousands):

	Construction & Development			1 - 4 Family Commercial			Commercial Real Estate - Other		Commercial & Industrial			Agricultural			Consumer			Total
September 30, 2019
Balance, beginning of period	$	1,031		$	448		$	2,329	$	3,171		$	695		$	162		$	7,836
Charge-offs		-			(2	)		-		-			-			-			(2	)
Recoveries		-			1			-		6			-			-			7
Net recoveries		-			(1	)				6			-			-			5
Provision (credit) for loan losses		(234	)		(99	)		618		(248	)		(16	)		(21	)		-
Balance, end of period	$	797		$	348		$	2,947	$	2,929		$	679		$	141		$	7,841

	Construction & Development		1 - 4 Family Commercial			Commercial Real Estate - Other			Commercial & Industrial			Agricultural			Consumer			Total
September 30, 2018
Balance, beginning of period	$	1,283	$	435		$	1,972		$	3,013		$	808		$	191		$	7,702
Charge-offs		-		(1	)		-			(13	)		-			-			(14	)
Recoveries		-		1			-			38			1			-			40
Net recoveries		-		-			-			25			1			-			26
Provision (credit) for loan losses		98		3			(67	)		(14	)		(17	)		(3	)		-
Balance, end of period	$	1,381	$	438		$	1,905		$	3,024		$	792		$	188		$	7,728

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the nine months ended September 30, 2019 and 2018 (dollars in thousands):

	Construction & Development			1 - 4 Family Commercial			Commercial Real Estate - Other		Commercial & Industrial			Agricultural			Consumer			Total
September 30, 2019
Balance, beginning of period	$	1,136		$	433		$	2,035	$	3,231		$	818		$	179		$	7,832
Charge-offs		-			(2	)		-		(4	)		(11	)		-			(17	)
Recoveries		-			3			-		20			3			-			26
Net charge-offs		-			1			-		16			(8	)		-			9
Provision (credit) for loan losses		(339	)		(86	)		912		(318	)		(131	)		(38	)		-
Balance, end of period	$	797		$	348		$	2,947	$	2,929		$	679		$	141		$	7,841

	Construction & Development			1 - 4 Family Commercial			Commercial Real Estate - Other		Commercial & Industrial			Agricultural			Consumer		Total
September 30, 2018
Balance, beginning of period	$	1,407		$	431		$	1,865	$	2,779		$	1,015		$	157	$	7,654
Charge-offs		-			(25	)		-		(74	)		-			-		(99	)
Recoveries		-			3			2		66			1			1		73
Net charge-offs		-			(22	)		2		(8	)		1			1		(26	)
Provision (credit) for loan losses		(26	)		29			38		253			(224	)		30		100
Balance, end of period	$	1,381		$	438		$	1,905	$	3,024		$	792		$	188	$	7,728

13

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

The following table presents, by portfolio segment, the balance in allowance for loan losses and the gross loans based upon portfolio segment and impairment method as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	Construction & Development		1 - 4 Family Commercial		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total
September 30, 2019
Allowance Balance
Ending balance Individually evaluated for impairment	$	-	$	-	$	32	$	-	$	-	$	-	$	32
Collectively evaluated for impairment		797		348		2,915		2,929		679		141		7,809
Total	$	797	$	348	$	2,947	$	2,929	$	679	$	141	$	7,841
Gross Loans
Ending balance Individually evaluated for impairment	$	-	$	-	$	4,075	$	4,143	$	3,518	$	-	$	11,736
Collectively evaluated for impairment		68,714		30,037		249,911		248,373		55,065		12,194		664,294
Total	$	68,714	$	30,037	$	253,986	$	252,516	$	58,583	$	12,194	$	676,030

December 31, 2018
Allowance Balance
Ending balance Individually evaluated for impairment	$	-	$	-	$	32	$	14	$	-	$	-	$	46
Collectively evaluated for impairment		1,136		433		2,003		3,217		818		179		7,786
Total	$	1,136	$	433	$	2,035	$	3,231	$	818	$	179	$	7,832
Gross Loans
Ending balance Individually evaluated for impairment	$	-	$	115	$	484	$	7,381	$	1,097	$	-	$	9,077
Collectively evaluated for impairment		87,267		33,163		155,912		241,013		61,747		13,723		592,825
Total	$	87,267	$	33,278	$	156,396	$	248,394	$	62,844	$	13,723	$	601,902

14

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

Internal Risk Categories

Certain loan segments were reclassified during 2018.  Each loan segment is made up of loan categories possessing similar risk characteristics.  The Company’s re-alignment of the segments primarily consisted of reclassifying consumer-related and agricultural-related real estate loans from the real estate category to the consumer and agricultural categories, respectively.  Management believes this accurately represents the risk profile of each loan segment.  In addition, the real estate segment was renamed to commercial real estate, and the commercial segment was renamed to commercial & industrial. The prior period amounts have been revised to conform to the current period presentation.  These reclassifications did not have a significant impact on the allowance for loan losses.

Risk characteristics applicable to each segment of the loan portfolio are described as follows:

Real Estate – The real estate portfolio consists of residential and commercial properties.  Residential loans are generally secured by owner occupied 1–4 family residences.  Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers.  Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact either property values or a borrower’s personal income.  Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.  Commercial real estate loans in this category typically involve larger principal amounts and are repaid primarily from the cash flow of a borrower’s principal business operation, the sale of the real estate or income independent of the loan purpose.  Credit risk in these loans is driven by the creditworthiness of a borrower, property values, the local economy and other economic conditions impacting a borrower’s business or personal income.

Commercial & Industrial – The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions.  The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation.  Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Agricultural – Loans secured by agricultural assets are generally made for the purpose of acquiring land devoted to crop production, cattle or poultry or the operation of a similar type of business on the secured property.  Sources of repayment for these loans generally include income generated from operations of a business on the property, rental income or sales of the property.  Credit risk in these loans may be impacted by crop and commodity prices, the creditworthiness of a borrower, and changes in economic conditions which might affect underlying property values and the local economies in the Company’s market areas.

Consumer – The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes.  Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose.  Credit risk is driven by consumer economic factors, such as unemployment and general economic conditions in the Company’s market area and the creditworthiness of a borrower.

Loan grades are numbered 1 through 4.  Grade 1 is considered satisfactory.  The grades of 2 and 3, or Watch and Special Mention, respectively, represent loans of lower quality and are considered criticized.  Grade of 4, or Substandard, refers to loans that are classified.

15

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

• Grade 1 (Pass) – These loans generally conform to Bank policies, and are characterized by policy conforming advance rates on collateral, and have well-defined repayment sources. In addition, these credits are extended to Borrowers and/or Guarantors with a strong balance sheet and either substantial liquidity or a reliable income history.

• Grade 2 (Watch) – These loans are still considered “Pass” credits; however, various factors such as industry stress, material changes in cash flow or financial conditions, or deficiencies in loan documentation, or other risk issues determined by the Lending Officer, Commercial Loan Committee (CLC), or Credit Quality Committee (CQC) warrant a heightened sense and frequency of monitoring.

• Grade 3 (Special Mention) – These loans must have observable weaknesses or evidence imprudent handling or structural issues. The weaknesses require close attention and the remediation of those weaknesses is necessary. No risk of probable loss exists. Credits in this category are expected to quickly migrate to a “2” or a “4” as this is viewed as a transitory loan grade.

• Grade 4 (Substandard) – These loans are not adequately protected by the sound worth and debt service capacity of the Borrower, but may be well secured. They have defined weaknesses relative to cash flow, collateral, financial condition, or other factors that might jeopardize repayment of all of the principal and interest on a timely basis. There is the possibility that a future loss will occur if weaknesses are not remediated.

The Company evaluates the definitions of loan grades and the allowance for loan losses methodology on an ongoing basis.  No changes were made to either during period ended September 30, 2019.

The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	Construction & Development		1 - 4 Family Commercial		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total
September 30, 2019
Grade
1 (Pass)	$	66,939	$	29,426	$	244,096	$	227,650	$	52,841	$	12,194	$	633,146
2 (Watch)		1,775		611		3,769		7,592		95		-		13,842
3 (Special Mention)		-		-		2,046		13,131		2,129		-		17,306
4 (Substandard)		-		-		4,075		4,143		3,518		-		11,736
Total	$	68,714	$	30,037	$	253,986	$	252,516	$	58,583	$	12,194	$	676,030

	Construction & Development		1 - 4 Family Commercial		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total
December 31, 2018
Grade
1 (Pass)	$	84,485	$	29,942	$	154,353	$	204,671	$	57,782	$	13,723	$	544,956
2 (Watch)		2,782		3,221		1,559		36,342		758		-		44,662
3 (Special Mention)		-		-		-		-		3,207		-		3,207
4 (Substandard)		-		115		484		7,381		1,097		-		9,077
Total	$	87,267	$	33,278	$	156,396	$	248,394	$	62,844	$	13,723	$	601,902

16

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of  September 30, 2019 and December 31, 2018 (dollars in thousands):

	Past Due												Total Loans
	30–59 Days		60–89 Days		Greater than 90 Days		Total		Current		Total Loans		> 90 Days & Accruing
September 30, 2019
Construction & development	$	-	$	-	$	-	$	-	$	68,714	$	68,714	$	-
1 - 4 Family Real Estate		-		-		-		-		30,037		30,037		-
Commercial Real Estate - other		-		-		-		-		253,986		253,986		-
Commercial & industrial		-		-		14		14		252,502		252,516		14
Agricultural		62		-		1,625		1,687		56,896		58,583		598
Consumer		39		21		-		60		12,134		12,194		-
Total	$	101	$	21	$	1,639	$	1,761	$	674,269	$	676,030	$	612

December 31, 2018
Construction & development	$	-	$	-	$	-	$	-	$	87,267	$	87,267	$	-
1 - 4 Family Real Estate		8		-		-		8		33,270		33,278		-
Commercial Real Estate - other		-		-		-		-		156,396		156,396		-
Commercial & industrial		-		5		-		5		248,389		248,394		-
Agricultural		-		-		-		-		62,844		62,844		-
Consumer		41		-		-		41		13,682		13,723		-
Total	$	49	$	5	$	-	$	54	$	601,848	$	601,902	$	-

The following table presents impaired loans as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	Unpaid Principal Balance		Recorded Investment with No Allowance		Recorded Investment with an Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized
											Three Months Ended September 30, 2019					Nine Months Ended September 30, 2019
September 30, 2019
Construction & development	$	-	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
1 - 4 Family Real Estate		-		-		-		-		-		3		-			277		-
Commercial Real Estate - other		4,075		2,215		1,860		4,075		32		3,354		131			1,883		197
Commercial & industrial		4,143		4,143		-		4,143		-		6,612		91			6,164		49
Agricultural		3,518		3,518		-		3,518		-		2,421		(56	)		2,267		269
Consumer		-		-		-		-		-		-		-			128		-
Total	$	11,736	$	9,876	$	1,860	$	11,736	$	32	$	12,390	$	166		$	10,719	$	515

											Three Months Ended September 30, 2018				Nine Months Ended September 30, 2018
December 31, 2018
Construction & development	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
1 - 4 Family Real Estate		115		115		-		115		-		71		-		60		-
Commercial Real Estate - other		1,990		1,506		484		1,990		32		436		11		470		29
Commercial & industrial		7,614		7,359		22		7,381		14		8,678		140		6,882		424
Agricultural		1,097		1,097		-		1,097		-		1,497		21		1,385		60
Consumer		5		-		-		-		-		7		-		37		1
Total	$	10,821	$	10,077	$	506	$	10,583	$	46	$	10,689	$	172	$	8,834	$	514

Impaired loans include nonperforming loans and also include loans modified in troubled-debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

17

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired.  At September 30, 2019, the Company had $1,860,000 of commercial real estate loans, and $749,000 of agricultural loans that were modified in troubled-debt restructurings and impaired and $501,000 in commercial loan modifications as of December 31, 2018.  There were $2.6 million in newly modified troubled-debt restructurings during thenine month period ended September 30, 2019, consisting of $1.9 million of commercial real estate loans, and $749,000 of agricultural loans, and no newly modified troubled-debt restructurings during the three month period ended September 30, 2019. There were no newly modified TDRs during the year ended December 31, 2018. The modification of the terms of the TDR loans included one or a combination of the following: a reduction of the stated interest rate of the loan; or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.  These modifications did not result in any increase or decrease to the allowance for loan losses for the period ending September 30, 2019. These TDRs resulted in no charge offs during the period ended September 30, 2019.

There were no troubled-debt restructurings modified in the past three months that subsequently defaulted for the period ended September 30, 2019.

The following table represents information regarding nonperforming assets at September 30, 2019 and December 31, 2018 (dollars in thousands):

	As of
	September 30, 2019		December 31, 2018
Nonaccrual loans	$	2,887	$	2,615
Troubled-debt restructurings (1)		749		-
Accruing loans 90 or more days past due		612		-
Total nonperforming loans	$	4,248	$	2,615

(1) $1.9 million and $501,000 of TDRs as of September 30, 2019 and December 31, 2018, respectively, are included in the nonaccrual loans balance in the line above

Note 6: Shareholders’ Equity

On September 5, 2019, the Company adopted a Repurchase Plan (the “RP”). The RP authorizes the repurchase of up to 500,000 shares of the Company’s common stock.  To date the Company has made no repurchases under the RP.  Stock repurchases under the RP will take place pursuant to a Rule 10b5-1 Plan with pricing and purchasing parameters established by management.

	Nine Months Ended September 30,
	2019		2018
Number of shares repurchased		-		-
Average price of shares repurchased	$	-	$	-
Shares remaining to be repurchased		500,000		-

18

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

The Company and Bank are subject to risk-based capital guidelines issued by the federal banking agencies.  These guidelines are used to evaluate capital adequacy and involve both quantitative and qualitative evaluations of the Company’s and Bank’s assets, liabilities, and certain off-balance-sheet items calculated under regulatory practices.  Failure to meet the minimum capital requirements can initiate certain mandatory or discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.  Management believes, as of September 30, 2019, that the Company and Bank met all capital adequacy requirements to which they are subject and maintains capital conservation buffers that allow the Company and Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to certain executive officers.

The Company’s and Bank’s actual capital amounts and ratios are presented in the following table (dollars in thousands):

	Actual					Minimum Capital Requirements					With Capital Conservation Buffer					Minimum To Be Well Capitalized Under Prompt Corrective Action
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2019
Total capital to risk-weighted assets
Company	$	106,615		16.24	%	$	52,535		8.00	%	$	68,952		10.50	%		N/A		N/A
Bank	$	106,580		16.25	%	$	52,455		8.00	%	$	68,847		10.50	%	$	65,568		10.00	%
Tier I capital to risk-weighted assets
Company	$	98,774		15.04	%	$	39,401		6.00	%	$	55,818		8.50	%		N/A		N/A
Bank	$	98,739		15.06	%	$	39,341		6.00	%	$	55,733		8.50	%	$	52,455		8.00	%
CET I capital to risk-weighted assets
Company	$	98,774		15.04	%	$	29,551		4.50	%	$	45,968		7.00	%		N/A		N/A
Bank	$	98,739		15.06	%	$	29,506		4.50	%	$	45,898		7.00	%	$	42,619		6.50	%
Tier I capital to average assets
Company	$	98,774		12.25	%	$	32,240		4.00	%		N/A		N/A			N/A		N/A
Bank	$	98,739		12.27	%	$	32,229		4.00	%		N/A		N/A		$	40,286		5.00	%

As of December 31, 2018
Total capital to risk-weighted assets
Company	$	92,693	15.86	%	$	46,751	8.00	%	$	57,709	9.875	%		N/A	N/A
Bank	$	93,704	16.03	%	$	46,751	8.00	%	$	57,709	9.875	%	$	58,439	10.00	%
Tier I capital to risk-weighted assets
Company	$	85,382	14.61	%	$	35,063	6.00	%	$	46,021	7.875	%		N/A	N/A
Bank	$	86,393	14.78	%	$	35,063	6.00	%	$	46,021	7.875	%	$	46,751	8.00	%
CET I capital to risk-weighted assets
Company	$	85,382	14.61	%	$	26,298	4.50	%	$	37,255	6.375	%		N/A	N/A
Bank	$	86,393	14.78	%	$	26,298	4.50	%	$	37,255	6.375	%	$	37,985	6.50	%
Tier I capital to average assets
Company	$	85,382	11.13	%	$	30,684	4.00	%		N/A	N/A			N/A	N/A
Bank	$	86,393	11.26	%	$	30,684	4.00	%		N/A	N/A		$	38,355	5.00	%

In July 2013, the federal regulatory authorities issued a new capital rule based, in part, on revisions developed by the Basel Committee on Banking Supervision to the Basel capital framework (Basel III).  The Bank became subject to the new rule effective January 1, 2015.  Generally, the new rule implements higher minimum capital requirements, revises the definition of regulatory capital components and related calculations, adds a new common equity tier 1 capital ratio, implements a new capital conservation buffer, increases the risk weighting for past due loans and provides a transition period for several aspects of the new rule.  In addition, banks with less than $250 billion in assets were given a one-time opt-out election under Basel III Capital Rules to filter from regulatory capital certain accumulated other comprehensive income (AOCI) components.  The Bank made the opt-out election and excludes the AOCI components from the capital ratio computations.

The current (new) capital rule provides that, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements.  The buffer is measured relative to risk-weighted assets.

19

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

As fully phased in, a banking organization with a buffer greater than 2.5% would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero.  The new rule also prohibits a banking organization from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income.  A summary of payout restrictions based on the capital conservation buffer is as follows:

Capital Conservation Buffer (as a % of risk-weighted assets)	Maximum Payout (as a % of eligible retained income)
Greater than 2.5%	No payout limitations applies
≤2.5% and >1.875%	60%
≤1.875% and >1.25%	40%
≤1.25% and >0.625%	20%
≤0.625%	0%

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.  At September 30, 2019, approximately $35.1 million of retained earnings was available for dividend declaration from the Bank without prior regulatory approval.

Note 7: Related-Party Transactions

At September 30, 2019 and December 31, 2018, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties) approximating $4.9 million and $6.9 million, respectively.  A summary of these loans is as follows (dollars in thousands):

	Balance Beginning of the Period		Additions		Collections/ Terminations			Balance End of the Period
For the nine months ended September 30, 2019	$	6,897	$	2,613	$	(4,585	)	$	4,925
Year ended December 31, 2018	$	6,684	$	7,319	$	(7,106	)	$	6,897

In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons.  Further, in management’s opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features.

The Bank leases office and retail banking space in Woodward, Oklahoma from Haines Realty Investments Company, LLC, a related party of the Company.  Lease expense totaled $46,000 for the three months ended September 30, 2019 and 2018, and $138,000 for the nine months ended September 30, 2019 and 2018.  In addition, payroll and office sharing arrangements were in place between the Company and certain of its affiliates.

20

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

Note 8: Employee Benefits

401(k) Savings Plan

The Company has a retirement savings 401(k) plan covering substantially all employees.  Employees may contribute up to the maximum legal limit with the Bank matching up to 5% of the employee’s salary. Employer contributions charged to expense for the three months ended September 30, 2019 and 2018 totaled $58,000 and $61,000, respectively.   Employer contributions charged to expense for the nine months ended September 30, 2019 and 2018 totaled $178,000 and $154,000, respectively.

Stock-Based Compensation

The Company adopted a nonqualified incentive stock option plan (the “Bank7 Corp. 2018 Equity Incentive Plan”) in September 2018. The Bank7 Corp. 2018 Equity Incentive Plan will terminate in September 2028, if not extended. Compensation expense related to the Plan for the three and nine month periods ended September 30, 2019 totaled $121,000 and $450,000, respectively.

On September 5, 2019, our largest shareholders, the Haines Family Trusts, contributed approximately 6.5% of their shares (656,925 shares) to the Company.  Subsequently, the Company immediately issued those shares to certain executive officers, which was charged as compensation expense of $11.8 million, including payroll taxes, through the income statement of the Company. Additionally, at the discretion of the employees receiving shares to assist in paying tax withholdings, 149,425 shares were withheld and subsequently canceled, resulting in a charge to retained earnings of $2.6 million.

In connection with its IPO in September 2018, the Company granted to employees restricted stock units (RSUs) which vest ratably over five years and stock options which vest ratably over four years.  All RSUs and stock options were granted at the fair value of the common stock at the time of the award.  The RSUs are considered fixed awards as the number of shares and fair value are known at the date of grant and the fair value at the grant date is amortized over the vesting and/or service period.

The Company uses newly issued shares for granting RSUs and stock options.

21

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

The following table is a summary of the stock option activity under the Bank7 Corp. 2018 Equity Incentive Plan (dollar amounts in thousands, except per share data):

	Options			Wgtd. Avg. Exercise Price		Wgtd. Avg. Remaining Contractual Term		Aggregate Intrinsic Value
Nine Months Ended September 30, 2019
Outstanding at December 31, 2018		150,000		$	19.00
Options Granted		20,500			16.98
Options Exercised		-			-
Options Forfeited		(7,500	)		19.00
Outstanding at September 30, 2019		163,000		$	18.75		9.04	$	37
Exercisable at September 30, 2019		35,625					-		-

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and is based on certain assumptions including risk-free rate of return, dividend yield, stock price volatility and the expected term.  The fair value of each option is expensed over its vesting period.

The following table shows the assumptions used for computing stock-based compensation expense under the fair value method on options granted during the periods presented:

	Nine Months Ended September 30, 2019
Risk-free interest rate		2.48	%
Dividend yield		2.20	%
Stock price volatility		31.14	%
Expected term	7.01 yrs

The following table summarizes share information about RSUs for the nine months ended September 30, 2019:

	Number of Shares		Wgtd. Avg. Grant Date Fair Value
Outstanding at December 31, 2018		130,000	$	19.09
Shares granted		-		-
Shares settled		26,000		-
Shares forfeited		-		-
End of the period balance		104,000	$	19.09

As of September 30, 2019, there was approximately $1.9 million of unrecognized compensation expense related to 104,000 unvested RSUs and $417,000 of unrecognized compensation expense related to 163,000 unvested and/or unexercised stock options.  The stock option expense is expected to be recognized over a weighted average period of four years, and the RSU expense is expected to be recognized over a weighted average period of five years.  As of September 30, 2019, no RSUs or stock options were vested.

Note 9: Disclosures About Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs.  There is a hierarchy of three levels of inputs that may be used to measure fair value:

22

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs supported by little or no market activity and significant to the fair value of the assets or liabilities

Recurring Measurements

There were no assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018.

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2019 and December 31, 2018 (dollars in thousands):

	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2019
Impaired loans (collateral- dependent)	$	1,828	$	-	$	-	$	1,828
Foreclosed assets held for sale	$	77	$	-	$	-	$	77
December 31, 2018
Impaired loans (collateral- dependent)	$	506	$	-	$	-	$	506
Foreclosed assets held for sale	$	110	$	-	$	-	$	110

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.  For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Collateral-Dependent Impaired Loans, Net of Allowance for Loan Losses

The estimated fair value of collateral-dependent impaired loans is based on fair value, less estimated cost to sell.  Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

23

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

The Company considers evaluation analysis as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value.  Values of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by executive management and loan administration.  Values are reviewed for accuracy and consistency by executive management and loan administration.  The ultimate collateral values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.

Foreclosed Assets Held for Sale

Foreclosed assets held for sale are carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the asset is acquired.  Estimated fair value of foreclosed assets is based on appraisals or evaluations.  Foreclosed assets held for sale are classified within Level 3 of the fair value hierarchy.

Appraisals of foreclosed assets held for sale are obtained when the asset is acquired and subsequently as deemed necessary by the Company.  Appraisals are reviewed for accuracy and consistency by executive management and loan administration.

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

	Fair Value		Valuation Technique	Unobservable Inputs	Weighted- Average
September 30, 2019
Collateral-dependent impaired loans	$	1,828	Appraisals from comparable properties	Estimated cost to sell		3-5	%
Foreclosed assets held for sale	$	77	Appraisals from comparable properties	Estimated cost to sell		7-10	%

December 31, 2018
Collateral-dependent impaired loans	$	506	Appraisals from comparable properties	Estimated cost to sell	7-10	%
Foreclosed assets held for sale	$	110	Appraisals from comparable properties	Estimated cost to sell	7-10	%

24

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

The following tables presents estimated fair values of the Company’s financial instruments not     recorded at fair value at September 30, 2019 and December 31, 2018 (dollars in thousands):

	Carrying		Fair Value Measurements
	Amount		Level 1		Level 2		Level 3		Total
September 30, 2019
Financial Assets
Cash and due from banks	$	110,594	$	110,594	$	-	$	-	$	110,594
Interest-bearing time deposits in other banks	$	31,890	$	-	$	31,891	$	-	$	31,891
Loans, net of allowance	$	666,755	$	-	$	664,763	$	1,860	$	666,623
Nonmarketable equity securities	$	1,072	$	-	$	1,072	$	-	$	1,072
Interest receivable	$	3,862	$	-	$	3,862	$	-	$	3,862
Financial Liabilities
Deposits	$	722,134	$	-	$	721,976	$	-	$	721,976
Interest payable	$	727	$	-	$	727	$	-	$	727

December 31, 2018
Financial Assets
Cash and due from banks	$	128,090	$	128,090	$	-	$	-	$	128,090
Interest-bearing time deposits in other banks	$	31,759	$	-	$	31,758	$	-	$	31,758
Loans, net of allowance	$	592,078	$	-	$	591,893	$	506	$	592,399
Mortgage loans held for sale	$	512	$	-	$	512	$	-	$	512
Nonmarketable equity securities	$	1,055	$	-	$	1,055	$	-	$	1,055
Interest receivable	$	4,538	$	-	$	4,538	$	-	$	4,538
Financial Liabilities
Deposits	$	675,903	$	-	$	675,017	$	-	$	675,017
Interest payable	$	461	$	-	$	461	$	-	$	461

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value:

Cash and Due from Banks, Interest-Bearing Time Deposits in Other Banks, Nonmarketable Equity Securities, Interest Receivable and Interest Payable

The carrying amount approximates fair value.

Loans and Mortgage Loans Held for Sale

The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

25

Bank7 Corp.

Notes to Unaudited Consolidated Financial Statements

Commitments to Extend Credit, Lines of Credit and Standby Letters of Credit

The fair values of unfunded commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair values of standby letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The estimated fair values of the Company’s commitments to extend credit, lines of credit and standby letters of credit were not material at September 30, 2019 or December 31, 2018.

Note 10: Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying consolidated balance sheets.  The following summarizes those financial instruments with contract amounts representing credit risk as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019		December 31, 2018
Commitments to extend credit	$	197,460	$	135,015
Financial and performance standby letters of credit		2,559		1,078
	$	200,019	$	136,093

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Each instrument generally has fixed expiration dates or other termination clauses.  Since many of the instruments are expected to expire without being drawn upon, total commitments to extend credit amounts do not necessarily represent future cash requirements.  The Company evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, by the Company upon extension of credit is based on management’s credit evaluation of the customer.  Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Note 11: Significant Estimates and Concentrations

GAAP requires disclosure of certain significant estimates and current vulnerabilities due to certain concentrations.  Estimates related to the allowance for loan losses are reflected in Note 5 regarding loans.  Current vulnerabilities due to off-balance sheet credit risk are discussed in Note 10.

As of September 30, 2019, hospitality loans were 23% of gross total loans with outstanding balances of $153.7 million and unfunded commitments of $26.3 million; energy loans were 17% of gross total loans with outstanding balances of $116.7 million and unfunded commitments of $29.4 million.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2018.

Unless the context indicates otherwise, references in this management’s discussion and analysis to “we”, “our”, and “us,” refer to Bank7 Corp. and its consolidated subsidiaries.  All references to “the Bank” refer to Bank7, our wholly owned subsidiary.

General

We are Bank7 Corp., a bank holding company headquartered in Oklahoma City, Oklahoma. Through our wholly-owned subsidiary, Bank7, we operate nine locations in Oklahoma, the Dallas/Fort Worth, Texas metropolitan area and Kansas. We are focused on serving business owners and entrepreneurs by delivering fast, consistent and well-designed loan and deposit products to meet their financing needs. We intend to grow organically by selectively opening additional branches in our target markets and pursuing strategic acquisitions.

As a bank holding company, we generate most of our revenue from interest income on loans and from short-term investments. The primary source of funding for our loans and short-term investments are deposits held by our subsidiary, Bank7. We measure our performance by our return on average assets, return on average equity, earnings per share, capital ratios, and our efficiency ratio (calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis) and noninterest income.

As of September 30, 2019, we had total assets of $826.8 million, total loans of $666.8 million, total deposits of $722.1 million and total shareholders’ equity of $100.6 million. In September 2018, in conjunction with our initial public offering, we terminated our status as an S Corporation and elected to be treated as a C Corporation. As this termination occurred at the end of the third quarter of 2018, we have presented information as pre-tax and pro forma numbers in the non-GAAP reconciliation below.

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Our Initial Public Offering

Our initial public offering, or IPO, closed on September 24, 2018 and a total of 2,900,000 shares of common stock were sold at $19.00 per share. After deducting underwriting discounts and offering expenses, the Company received total net proceeds of $50.1 million from the initial public offering and the exercise of the underwriter option. Upon completion of the IPO, the Company became a publicly traded company with our common stock listed on The NASDAQ Global Select Market under the symbol “BSVN”.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this Form 10-Q as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Form 10-Q should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Form 10-Q may differ from that of other companies reporting measures with similar names. It is important to understand how other banking organizations calculate their financial measures with names similar to the non-GAAP financial measures we have discussed in this communication when comparing such non-GAAP financial measures.

Exclusion of loan fee income. We calculate (1) yield on loans (excluding loan fee income) as interest income on loans less loan fee income divided by average total loans and (2) net interest margin (excluding loan fee income) as net interest income less loan fee income divided by average interest-earning assets. The most directly comparable GAAP financial measure for yield on loans (excluding loan fee income) is yield on loans and for net interest margin (excluding loan fee income) is net interest margin.  We believe that loan yields excluding loan fee income and net interest margin excluding loan fee income are measures that are important to many investors in the marketplace who are interested in changes from period to period in our loan yields and net interest margin exclusive of fluctuating levels of nonrecurring loan fee income. The following table reconciles, as of the dates set forth below, yield on loans (excluding loan fee income) to yield on loans and net interest margin (excluding loan fee income) to net interest margin:

	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands, except per share data)	2019			2018			2019			2018
Loan interest income (excluding loan fees)
Total loan interest income, including loan fee income	$	12,179		$	11,082		$	35,902		$	32,490
Loan fee income		(841	)		(943	)		(3,498	)		(3,893	)
Loan interest income excluding loan fee income	$	11,338		$	10,139		$	32,404		$	28,597
Average total loans	$	651,186		$	596,450		$	617,398		$	578,205
Yield on loans (including loan fee income)		7.42	%		7.43	%		7.77	%		7.49	%
Yield on loans (excluding loan fee income)		6.91	%		6.80	%		7.02	%		6.59	%
Net interest margin (excluding loan fees)
Net interest income	$	10,600		$	9,801		$	31,536		$	29,101
Loan fee income		(841	)		(943	)		(3,498	)		(3,893	)
Net interest income excluding loan fees	$	9,759		$	8,858		$	28,038		$	25,208
Average earning assets	$	797,667		$	731,140		$	773,752		$	708,875
Net interest margin (including loan fee income)		5.27	%		5.36	%		5.45	%		5.47	%
Net interest margin (excluding loan fee income)		4.85	%		4.85	%		4.84	%		4.74	%

We ended the quarter with a net loss of $6.5 million and net income of $3.7 million, respectively, for the three and nine month periods ending September 30, 2019. On September 5, 2019, our largest shareholders, the Haines Family Trusts, contributed 656,925 of their shares to the Company, approximately 6.5% of shares outstanding.  Subsequently, the Company immediately issued those shares to certain executive officers, which was charged as compensation expense through the income statement of the Company. As part of this transaction, the Company retired 149,425 shares, or $2.6 million, for income and payroll taxes. This previously announced transaction was a one-time, non-cash expense; however, because the shares were simultaneously contributed into the Company by the Haines Family Trusts, the transaction had a virtual net-zero impact to shareholders’ equity.

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Excluding the one-time, non-cash expense related to the stock transfer outlined above, net income would have been $5.1 million and $15.4 million, respectively, for the three and nine month periods ending September 30, 2019.  Illustrated below is a reconciliation of pro forma net income through the nine months ended September 30, 2019.

	For the Nine Months Ended September 30,
	2019			2018		$ Change			% Change
(Dollars in thousands)
Pro Forma Net Income
Total Interest Income	$	38,714		$	34,216	$	4,498			13.14	%
Total Interest Expense		7,178			5,115		2,063			40.33
Net Interest Margin		31,536			29,101		2,435			8.37
Provision for Loan Losses	$	-		$	100	$	(100	)		(100.00	%)
Total Noninterest Income	$	1,027		$	1,069	$	(42	)		(3.89	%)
Total Noninterest Expense	$	23,875		$	11,027	$	12,848			116.51	%
Stock Transfer Compensation Expense (1)		(11,796	)		-		(11,796	)		100.00
Pro Forma Noninterest Expense		12,079			11,027		1,052			11.06
Pro Forma Pre-Tax Income	$	20,485		$	19,043	$	1,442			7.57	%
Pro Forma Income Tax Expense	$	5,107		$	4,764	$	343			7.21	%
Pro Forma Net After-Tax Income	$	15,378		$	14,279	$	1,098			7.69	%

(1) Compensation expense includes $168,000 in payroll taxes.

Pre-tax, pre-provision net earnings is defined as income before taxes and provision for loan losses.  We believe the most directly comparable GAAP financial measure is income before taxes.  Disclosure of this measure enables you to compare our operations to those of other banking companies before consideration of taxes and provision expense, which some investors may consider to be a more appropriate comparison given our S Corporation status and recaptures from the allowance for loan losses.  We calculate our pro forma provision for income taxes and pro-forma net income, return on average assets, return on average equity, and per share amounts by using a combined C Corporation effective tax rate for federal and state income taxes of 25.1% in 2018.  We used an actual combined C Corporation effective tax rate of (31.4%) and 57.2% for the three and nine month periods ended September 30, 2019, due to the permanent tax and nondeductible compensation resulting from the stock award described above.  This calculation reflects only the change in our status as an S Corporation and does not give any effect to any other transaction.

29

	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands, except per share data)	2019			2018			2019			2018
Pre-tax, pre-provision net earnings
Net income before income taxes	$	(4,963	)	$	6,315		$	8,688		$	19,043
Plus: Provision (reversal of) for loan losses		-			-			-			(100	)
Pre-tax, pre-provision net earnings	$	(4,963	)	$	6,315		$	8,688		$	19,143
Adjusted provision for income tax
Net income before income taxes	$	(4,963	)	$	6,315		$	8,688		$	19,043
Total effective adjusted tax rate		-31.4	%		-6.3	%		57.2	%		-2.1	%
Adjusted provision for income taxes	$	1,556		$	(395	)	$	4,965		$	(395	)
Tax-adjusted net income
Net income before income taxes	$	(4,963	)	$	6,315		$	8,688		$	19,043
Adjusted provision for income taxes		1,556			(395	)		4,965			(395	)
Tax-adjusted net income	$	(6,519	)	$	6,710		$	3,723		$	19,438
Tax-adjusted ratios
Tax-adjusted net income (numerator)	$	(6,519	)	$	6,710		$	3,723		$	19,438
Average assets (denominator)	$	806,440		$	742,283		$	782,694		$	718,474
Tax-adjusted return on average assets		-3.21	%		3.59	%		0.64	%		3.62	%
Average shareholders' equity (denominator)	$	100,012		$	80,064		$	95,655		$	75,710
Tax-adjusted return on average shareholders' equity		-25.86	%		33.25	%		5.20	%		34.33	%
Average tangible common equity (denominator)	$	98,145		$	77,986		$	93,736		$	73,582
Tax-adjusted return on average tangible common equity		-26.35	%		34.13	%		5.31	%		35.32	%
Pro Forma tax-adjusted net income and ratios
Pro forma pre-tax income	$	6,834					$	20,485
Pro forma income tax expense		1,698						5,107
Pro forma net after-tax income	$	5,136					$	15,378
Pro forma tax-adjusted net income (numerator)	$	5,136					$	15,378
Average assets (denominator)	$	806,440					$	782,694
Pro forma tax-adjusted return on average assets		2.53	%					2.63	%
Average shareholders' equity (denominator)	$	100,012					$	95,655
Pro forma tax-adjusted return on average shareholders' equity		20.37	%					21.49	%
Average tangible common equity (denominator)	$	98,145					$	93,736
Pro forma tax-adjusted return on average tangible common equity		20.76	%					21.93	%
Per share data
Weighted average common shares outstanding basic (denominator)		10,149,007			7,634,239			10,174,528			7,404,350
Tax-adjusted net income per common share--basic	$	(0.64	)	$	0.88		$	0.37		$	2.63
Weighted average common shares outstanding diluted (denominator)		10,161,778			7,669,348			10,176,360			7,416,182
Tax-adjusted net income per common share--diluted	$	(0.64	)	$	0.87		$	0.37		$	2.62
Weighted average common shares outstanding basic		10,149,007						10,174,528
Plus: Weighted average shares retired related to stock award		40,605						13,684
Pro forma weighted average common shares outstanding basic (denominator)		10,189,612						10,188,212
Pro Forma tax-adjusted net income per common share--basic	$	0.50					$	1.50
Weighted average common shares outstanding diluted		10,161,778						10,176,360
Plus: Weighted average shares retired related to stock award including dilution		15,063						9,960
Pro forma weighted average common shares outstanding diluted (denominator)		10,176,841						10,186,320
Pro forma tax-adjusted net income per common share--diluted	$	0.50					$	1.50

30

Tangible assets
Total assets	$	826,349		$	751,173
Less: Goodwill and intangibles		(1,840	)		(2,046	)
Tangible assets	$	824,509		$	749,127
Tangible shareholders' equity
Total shareholders' equity	$	100,615		$	82,765
Less: Goodwill and intangibles		(1,840	)		(2,046	)
Tangible shareholders' equity	$	98,775		$	80,719
Tangible shareholders' equity
Tangible shareholders' equity (numerator)	$	98,775		$	80,719
Tangible assets (denominator)	$	824,509		$	749,127
Tangible common equity to tangible assets		11.98	%		10.78	%
End of period common shares outstanding		10,057,506			10,187,500
Book value per share	$	10.00		$	8.12
Tangible book value per share	$	9.82		$	7.92
Total shareholders' equity to total assets		12.18	%		11.02	%

For the three and nine month periods ended September 30, 2018, results are presented on a pro forma basis by using a combined C Corporation effective tax rate for federal and Oklahoma income taxes of 25.1%. For the three and nine month periods ended September 30, 2019, results presented are actual results, which reflect the income taxes incurred in accordance with our status as a C Corporation.

31

Tangible Common Equity and Tangible Book Value Per Share. We calculate (1) tangible equity as total shareholders’ equity less goodwill and other intangibles; and (2) tangible book value per share as tangible equity divided by our shares outstanding at the end of the relevant period. The most directly comparable GAAP financial measure for tangible book value per share is book value per share.

Tangible Shareholders’ Equity to Tangible Assets. We calculate (1) tangible assets as total assets less goodwill and other intangibles; and (2) tangible shareholders’ equity to tangible assets as tangible equity (as defined in the preceding paragraph) divided by tangible assets at the end of the relevant period. The most directly comparable GAAP financial measure for tangible shareholders’ equity to tangible assets is total shareholders’ equity to total assets.

We believe that tangible book value per share and tangible shareholders’ equity to tangible assets are measures that are important to many investors in the marketplace who are interested in changes from period to period in our shareholders’ equity exclusive of changes in intangible assets. Intangible assets have the effect of increasing total shareholders’ equity while not increasing our tangible book value per share or tangible shareholders’ equity to tangible assets. The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible shareholders’ equity, total assets to tangible assets and presents tangible book value per share compared to book value per share and tangible shareholders’ equity to tangible assets to total shareholders’ equity to total assets:

	September 30,
(Dollars in thousands, except per share data)	2019			2018
Tangible stockholders' equity
Total stockholders' equity	$	100,615		$	82,765
Less: Goodwill and other intangibles		(1,840	)		(2,046	)
Tangible stockholders' equity	$	98,775		$	80,719
Tangible assets
Total assets	$	826,349		$	751,173
Less: Goodwill and other intangibles		(1,840	)		(2,046	)
Tangible assets	$	824,509		$	749,127
Tangible stockholders' equity
Tangible stockholders' equity (numerator)	$	98,775		$	80,719
Tangible assets (denominator)	$	824,509		$	749,127
Tangible common equity to tangible assets		11.98	%		10.78	%
End of period common shares outstanding		10,057,506			10,187,500
Book value per share	$	10.00		$	8.12
Tangible book value per share	$	9.82		$	7.92
Total shareholders' equity to total assets		12.18	%		11.02	%

S Corporation Status

Since our formation in 2004, we have elected to be taxed for U.S. federal income tax purposes as an S Corporation. As a result, our net income has not been subject to, and we have not paid, U.S. federal or state income taxes, and we have not been required to make any provision or recognize any liability for U.S. federal income tax in our financial statements. The consummation of our initial public offering resulted in the termination of our status as an S Corporation and in our taxation as a C Corporation for U.S. federal and state income tax purposes. Upon the termination of our status as an S Corporation, we commenced paying U.S. federal income tax on our pre-tax net income for each year (including the short year beginning on the date our status as an S Corporation terminated), and our financial statements reflect a provision for U.S. federal income tax. As a result of this change, in order to enhance the comparability of the periods presented, we have, on a pro forma basis, tax-affected the net income and earnings per share data presented in our historical financial statements and the other financial information set forth in this report (unless otherwise specified).

32

Results of Operations

Performance Summary. For the third quarter of 2019 we reported a pre-tax loss of $5.0 million, compared to pre-tax income of $6.3 million for the third quarter of 2018.  For the first nine months of 2019 we reported pre-tax income of $8.7 million, compared to $19.0 million for the same period in 2018.  On September 5, 2019, our largest shareholders, the Haines Family Trusts, contributed approximately 6.5% of their shares to the Company.  Subsequently, the Company immediately issued those shares to certain executive officers, which was charged as compensation expense of $11.8 million, including payroll taxes, through the income statement of the Company. Additionally, at the discretion of the employees receiving shares to assit in paying tax withholdings, 149,425 shares were withheld and subsequently canceled, resulting in a charge to retained earnings of $2.6 million.

For the third quarter of 2019, interest income increased by $1.3 million, or 11.4%, compared to the third quarter of 2018. For the first nine months of 2019, interest income was $38.7 million, compared to $34.2 million for the same period in 2018. For the third quarter of 2019, average total loans were $651.2 million with loan yields of 7.4% as compared to $596.5 million and loan yields of 7.4% for the third quarter of 2018. For the first nine months of 2019, average total loans were $617.4 million with loan yields of 7.8% as compared to $578.2 million and loan yields of 7.5% for the same period in 2018.

Pre-tax return on average assets was (2.44%) for the third quarter of 2019, as compared to 3.38% for the same period in 2018.  The pre-tax return on average equity was (19.69%) for the third quarter of 2019, as compared to 31.29% for the same period in 2018.  Pre-tax return on average assets was 1.48% for the nine months ended September 30, 2019, as compared to 3.54% for the same period in 2018.  The pre-tax return on average equity was 12.14% for the nine months ended September 30, 2019, as compared to 33.63% for the same period in 2018.  The efficiency ratio was 144.7% for the three months ended September 30, 2019, as compared to 37.6% for the same period in 2018. The efficiency ratio was 73.3% for the nine months ended September 30, 2019, as compared to 37.1% for the same period in 2018.

Net Interest Income and Net Interest Margin Including Loan Fee Income. Net interest income, representing interest income less interest expense, was the primary contributor to income and earnings for the periods shown. Interest income is generated from interest earned on loans, dividends, and interest earned on deposits at other institutions.  Interest expense is incurred on interest-bearing liabilities including deposits and other borrowings. Net interest income is evaluated by measuring (i) yield on loans and other interest-earning assets, (ii) the costs of deposits and other funding sources and (iii) net interest margin. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets.

Changes in market interest rates and interest rates earned on interest-earning assets or paid on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest margin and net interest income.

The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates;(iii) net interest income; and (iv) the net interest margin.

	Net Interest Margin With Loan Fee Income
	For the Three Months Ended September 30,
	2019							2018
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Short-term investments(1)	$	145,147	$	888		2.43	%	$	133,322	$	657		1.97	%
Investment securities(2)		1,069		4		1.48			1,053		—		0.00
Loans held for sale		265		—		0.00			315		—		0.00
Total loans(3)		651,186		12,179		7.42			596,450		11,082		7.43
Total interest-earning assets		797,667		13,071		6.50			731,140		11,739		6.42
Noninterest-earning assets		8,773							11,143
Total assets	$	806,440						$	742,283
Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts	$	287,241		1,234		1.70	%	$	261,013		1,019		1.56	%
Time deposits		220,935		1,237		2.22			207,800		862		1.66
Total interest-bearing deposits		508,176		2,471		1.93			468,813		1,881		1.60
Other borrowings		—		—		0.00			4,487		57		5.08
Total interest-bearing liabilities		508,176		2,471		1.93			473,300		1,938		1.64
Noninterest-bearing liabilities:
Noninterest-bearing deposits		193,785							184,994
Other noninterest-bearing liabilities		4,467							3,925
Total noninterest-bearing liabilities		198,252							188,919
Shareholders’ equity		100,012							80,064
Total liabilities and shareholders’ equity	$	806,440						$	742,283
Net interest income including loan fee income			$	10,600						$	9,801
Net interest spread including loan fee income(4)						4.57	%						4.78	%
Net interest margin including loan fee income						5.27	%						5.36	%

33

(1) Includes income and average balances for fed funds sold, interest-earning deposits in banks and other miscellaneous interest-earning assets.

(2) Includes income and average balances for FHLB and FRB stock.

(3) Non-accrual loans are included in loans.

(4) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

For the third quarter of 2019 compared to the third quarter of 2018:

- Interest income on short term investments totaled $888,000 as compared to $657,000, an increase of $231,000 or 35.2% which was attributable to an $11.8 million increase, or 8.9%, in average balances of interest bearing deposits at other financial institutions and an increase in yield of 46 basis points, or 21.8%.

- Total interest income on loans, including loan fee income, increased $1.1 million or 9.9% to $12.2 million which was attributable to a $54.7 million increase in the average balance of loans to $651.2 million as compared with the average balance of $596.5 million for the third quarter of 2018.

- Loan fees totaled $841,000, a decrease of $102,000 or 10.8%, which was attributable to nonrecurring loan fee income earned during the third quarter of 2018.

- Yield on our interest earning assets totaled 6.50%, an increase of 8 basis points or 1.2%, compared to yield on our interest earning assets of 6.42% for the third quarter of 2018; and

- Net interest margin for the third quarter of 2019 was 5.27% compared to 5.36% for the third quarter of 2018.

	Net Interest Margin With Loan Fee Income
	For the Nine Months Ended September 30,
	2019							2018
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Short-term investments(1)	$	155,073	$	2,785		2.40	%	$	129,413	$	1,726		1.78	%
Investment securities(2)		1,062		27		3.40			1,051		—		0.00
Loans held for sale		219		—		0.00			206		—		0.00
Total loans(3)		617,398		35,902		7.77			578,205		32,490		7.49
Total interest-earning assets		773,752		38,714		6.69			708,875		34,216		6.44
Noninterest-earning assets		8,942							9,599
Total assets	$	782,694						$	718,474
Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts	$	289,306		3,924		1.81	%	$	235,088		2,425		1.38	%
Time deposits		206,575		3,254		2.11			227,885		2,515		1.47
Total interest-bearing deposits		495,881		7,178		1.94			462,973		4,940		1.42
Other borrowings		—		—		0.00			4,882		175		4.78
Total interest-bearing liabilities		495,881		7,178		1.94			467,855		5,115		1.46
Noninterest-bearing liabilities:
Noninterest-bearing deposits		186,379							171,185
Other noninterest-bearing liabilities		4,779							3,724
Total noninterest-bearing liabilities		191,158							174,909
Shareholders’ equity		95,655							75,710
Total liabilities and shareholders’ equity	$	782,694						$	718,474
Net interest income including loan fee income			$	31,536						$	29,101
Net interest spread including loan fee income(4)						4.75	%						4.98	%
Net interest margin including loan fee income						5.45	%						5.47	%

34

(1) Includes income and average balances for fed funds sold, interest-earning deposits in banks and other miscellaneous interest-earning assets.

(2) Includes income and average balances for FHLB and FRB stock.

(3) Non-accrual loans are included in loans.

(4) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

For the first nine months of 2019 compared to the same period in 2018:

- Interest income on short term investments totaled $2.8 million as compared to $1.7 million, an increase of $1.1 million or 61.3% which was attributable to a $25.7 million, or 19.8%, increase in average balances of interest bearing deposits at other financial institutions and a 62 basis point, or 35.0% increase in average yield.

- Total interest income on loans, including loan fee income, increased $3.4 million or 10.5% to $35.9 million which was attributable to a $39.2 million increase in the average balance of loans to $617.4 million as compared with the average balance of $578.2 million through the third quarter of 2018.

- Loan fees totaled $3.5 million, a decrease of $394,000 or 10.1%, which was attributable to nonrecurring loan fee income earned during the first nine months of 2018.

- Yield on our interest earning assets totaled 6.69%, an increase of 25 basis points or 3.9%, compared to yield on our interest earning assets of 6.44% through the third quarter of 2018, and

- Net interest margin through the third quarter of 2019 was 5.45% compared to 5.47% through the third quarter of 2018.

Net Interest Income and Net Interest Margin Excluding Loan Fee Income. Due to higher levels of nonrecurring loan fee income in 2018, we have illustrated our net interest margin below, excluding loan fee income.  Net interest income, representing interest income less interest expense, was the primary contributor to income and earnings for the periods shown below. Interest income is generated from interest earned on loans, dividends, and interest earned on deposits at other institutions.  Interest expense is incurred on interest-bearing liabilities including deposits and other borrowings. Net interest income is evaluated by measuring (i) the yield on loans and other interest-earning assets, (ii) the costs of deposits and other funding sources and (iii) net interest margin. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets.

Changes in market interest rates on interest-earning assets, or paid by us on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest margin and net interest income.

35

The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates;(iii) net interest income; and (iv) the net interest margin.

	Net Interest Margin Excluding Loan Fee Income
	For the Three Months Ended September 30,
	2019							2018
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Short-term investments(1)	$	145,147	$	888		2.43	%	$	133,322	$	657		1.97	%
Investment securities(2)		1,069		4		1.48			1,053		—		0.00
Loans held for sale		265		—		0.00			315		—		0.00
Total loans(3)		651,186		11,338		6.91			596,450		10,139		6.80
Total interest-earning assets		797,667		12,230		6.08			731,140		10,796		5.91
Noninterest-earning assets		8,773							11,143
Total assets	$	806,440						$	742,283
Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts	$	287,241		1,234		1.70	%	$	261,013		1,019		1.56	%
Time deposits		220,935		1,237		2.22			207,800		862		1.66
Total interest-bearing deposits		508,176		2,471		1.93			468,813		1,881		1.60
Other borrowings		—		—		0.00			4,487		57		5.08
Total interest-bearing liabilities		508,176		2,471		1.93			473,300		1,938		1.64
Noninterest-bearing liabilities:
Noninterest-bearing deposits		193,785							184,994
Other noninterest-bearing liabilities		4,467							3,925
Total noninterest-bearing liabilities		198,252							188,919
Shareholders’ equity		100,012							80,064
Total liabilities and shareholders’ equity	$	806,440						$	742,283
Net interest income excluding loan fee income			$	9,579						$	8,858
Net interest spread excluding loan fee income(4)						4.15	%						4.27	%
Net interest margin excluding loan fee income						4.85	%						4.85	%

(1) Includes income and average balances for fed funds sold, interest-earning deposits in banks and other miscellaneous interest-earning assets.

(2) Includes income and average balances for FHLB and FRB stock.

(3) Non-accrual loans are included in loans.

(4) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

For the third quarter of 2019 compared to the third quarter of 2018:

- Interest income on short term investments totaled $888,000 as compared to $657,000, an increase of $231,000 or 35.2% which was attributable to an $11.8 million, or 8.9%, increase in average balances of interest bearing deposits at other financial institutions and a 46 basis point, or 23.1% increase in average yield.

- Total interest income on loans, excluding loan fee income, increased $1.2 million or 11.8% to $11.3 million which was attributable to a $54.7 million increase in the average balance of loans to $651.2 million as compared with the average balance of $596.5 million for the third quarter of 2018.

- Yield on loans, excluding loan fee income, totaled 6.91%, an increase of 11 basis points or 1.6%, compared to yield on loans excluding fee income of 6.80% for the third quarter of 2018, and

- Net interest margin, excluding loan fee income, for the third quarter of 2019 and 2018 was 4.85%.

36

	Net Interest Margin Excluding Loan Fee Income
	For the Nine Months Ended September 30,
	2019							2018
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Short-term investments(1)	$	155,073	$	2,785		2.40	%	$	129,413	$	1,726		1.78	%
Investment securities(2)		1,062		27		3.40			1,051		—		0.00
Loans held for sale		219		—		0.00			206		—		0.00
Total loans(3)		617,398		32,404		7.02			578,205		28,597		6.59
Total interest-earning assets		773,752		35,216		6.09			708,875		30,323		5.70
Noninterest-earning assets		8,942							9,599
Total assets	$	782,694						$	718,474
Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts	$	289,306		3,924		1.81	%	$	235,088		2,425		1.38	%
Time deposits		206,575		3,254		2.11			227,885		2,515		1.47
Total interest-bearing deposits		495,881		7,178		1.94			462,973		4,940		1.42
Other borrowings		—		—		0.00			4,882		175		4.78
Total interest-bearing liabilities		495,881		7,178		1.94			467,855		5,115		1.46
Noninterest-bearing liabilities:
Noninterest-bearing deposits		186,379							171,185
Other noninterest-bearing liabilities		4,779							3,724
Total noninterest-bearing liabilities		191,158							174,909
Shareholders’ equity		95,655							75,710
Total liabilities and shareholders’ equity	$	782,694						$	718,474
Net interest income excluding loan fee income			$	28,038						$	25,208
Net interest spread excluding loan fee income(4)						4.15	%						4.25	%
Net interest margin excluding loan fee income						4.84	%						4.74	%

(1) Includes income and average balances for fed funds sold, interest-earning deposits in banks and other miscellaneous interest-earning assets.

(2) Includes income and average balances for FHLB and FRB stock.

(3) Non-accrual loans are included in loans.

(4) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

For the first nine months of 2019 compared to the same period in 2018:

- Interest income on short term investments totaled $2.8 million as compared to $1.7 million, an increase of $1.1 million or 61.3% which was attributable to a $25.7 million, or 19.8%, increase in average balances of interest bearing deposits at other financial institutions and a 62 basis point, or 35.0% increase in average yield.

- Total interest income on loans, excluding loan fee income, increased $3.8 million or 13.3% to $32.4 million which was attributable to a $39.2 million increase in the average balance of loans to $617.4 million as compared with the average balance of $578.2 million through the third quarter of 2018.

- Yield on loans, excluding loan fee income, totaled 7.02%, an increase of 42 basis points or 6.4%, compared to yield on loans excluding fee income of 6.59% for the same period in 2018, and

- Net interest margin, excluding loan fee income, through the third quarter of 2019 was 4.84% compared to 4.74% for the same period in 2018.

37

Increases and decreases in interest income and interest expense result from changes in average balances, or volume, of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables set forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume).

	Analysis of Changes in Interest Income and Expenses Including Loan Fee Income
	For the Three Months Ended September 30, 2019 over 2018
	Change due to:
	Volume(1)			Rate(1)			Interest Variance
	(Dollars in thousands)
Increase (decrease) in interest income:
Short-term investments	$	59		$	172		$	231
Investment securities		-			4			4
Total loans		1,025			72			1,097
Total increase in interest income		1,084			248			1,332
Increase (decrease) in interest expense:
Deposits
Transaction accounts		103			112			215
Time deposits		55			320			375
Total interest-bearing deposits		158			432			590
Other borrowings		(57	)		0			(57	)
Total increase in interest expense		101			432			533
Increase (Decrease) in net interest income	$	983		$	(184	)	$	799

	Analysis of Changes in Interest Income and Expenses Including Loan Fee Income
	For the Nine Months Ended September 30, 2019 over 2018
	Change due to:
	Volume(1)			Rate(1)			Interest Variance
	(Dollars in thousands)
Increase (decrease) in interest income:
Short-term investments	$	342		$	717		$	1,059
Investment Securities		-			27			27
Total loans		2,196			1,216			3,412
Total increase in interest income		2,538			1,960			4,498
Increase (decrease) in interest expense:
Deposits
Transaction accounts		558			941			1,499
Time deposits		(235	)		974			739
Total interest-bearing deposits		323			1,915			2,238
Other borrowings		(174	)		(1	)		(175	)
Total increase in interest expense		149			1,914			2,063
Increase (Decrease) in net interest income	$	2,389		$	46		$	2,435

(1) Variances attributable to both volume and rate are allocated on a consistent basis between rate and volume based on the absolute value of the variances in each category.

38

Provision for Loan Losses

Credit risk is inherent in the business of making loans. We establish an allowance for loan losses (“Allowance”) through charges to earnings, which are shown in the statements of income as the provision for loan losses. Specifically identifiable and quantifiable known losses are charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our allowance and applying the shortfall or excess, if any, to the current quarter’s expense. See the discussion under “—Critical Accounting Policies and Estimates—Allowance for Loan and Lease Losses.” This has the effect of creating variability in the amount and frequency of charges to our earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market areas.

The allowance as a percentage of loans was 1.16% at September 30, 2019 as compared to 1.31% at December 31, 2018.  This decrease is consistent with strong credit quality and low historical losses.

Noninterest Income

Noninterest income for the three months ended September 30, 2019 was $509,000 compared to $319,000 for the same period in 2018, an increase of $190,000, or 59.6%.  The following table sets forth the major components of our noninterest income for the three months ended September 30, 2019 and 2018:

	For the Three Months Ended September 30,
	2019		2018		$ Increase (Decrease)			% Increase (Decrease)
	(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	110	$	88	$	22			25.00	%
Secondary market income		69		95		(26	)		(27.37	)
Other income and fees		330		136		194			142.65
Total noninterest income	$	509	$	319	$	190			59.56	%

Noninterest income for the nine months ended September 30, 2019 was $1.0 million compared to $1.1 million for the same period in 2018, a decrease of $42,000, or 3.9%.  The following table sets forth the major components of our noninterest income for the nine months ended September 30, 2019 and 2018:

	For the Nine Months Ended September 30,
	2019		2018		$ Increase (Decrease)			% Increase (Decrease)
	(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	279	$	261	$	18			6.90	%
Secondary market income		146		173		(27	)		(15.61	)
Other income and fees		602		635		(33	)		(5.20	)
Total noninterest income	$	1,027	$	1,069	$	(42	)		(3.93	%)

39

Noninterest Expense

Noninterest expense for the three months ended September 30, 2019 was $16.1 million compared to $3.8 million for the same period in 2018, an increase of $12.3 million, or 322.4%, which is discussed below. The following table sets forth the major components of our noninterest expense for the three months ended September 30, 2019 and 2018:

	For the Three Months Ended September 30,
	2019		2018		$ Increase (Decrease)			% Increase (Decrease)
	(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits	$	14,256	$	2,082	$	12,174			584.73	%
Furniture and equipment		229		182		47			25.82
Occupancy		436		319		117			36.68
Data and item processing		276		248		28			11.29
Accounting, legal and professional fees		218		74		144			194.59
Regulatory assessments		31		145		(114	)		(78.62	)
Advertising and public relations		71		63		8			12.70
Travel, lodging and entertainment		153		260		(107	)		(41.15	)
Other expense		402		432		(30	)		(6.94	)
Total noninterest expense	$	16,072	$	3,805	$	12,267			322.39	%

Salaries and employee benefits totaled $14.3 million for the third quarter of 2019 compared to $2.1 million for the same period in 2018, an increase of $12.2 million or 584.7%.  On September 5, 2019, our largest shareholders, the Haines Family Trusts, contributed approximately 6.5% of their shares to the Company.  Subsequently, the Company immediately issued those shares to certain executive officers, which was charged as $11.8 million, including payroll taxes, compensation expense through the income statement of the Company. This previously announced transaction was a one-time, non-cash expense.

Accounting, legal and professional fees totaled $218,000 for the third quarter of 2019 compared to $74,000 for the same period in 2018, an increase of $144,000 or 194.6%.  This increase related to the additional costs associated with being a public company.

Noninterest expense for the nine months ended September 30, 2019 was $23.9 million compared to $11.0 million for the same period in 2018, an increase of $12.9 million, or 116.5%, which is discussed below. The following table sets forth the major components of our noninterest expense for the nine months ended September 30, 2019 and 2018:

	For the Nine Months Ended September 30,
	2019		2018		$ Increase (Decrease)			% Increase (Decrease)
	(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits	$	18,792	$	6,077	$	12,715			209.23	%
Furniture and equipment		606		491		115			23.42
Occupancy		1,157		898		259			28.84
Data and item processing		814		716		98			13.69
Accounting, legal and professional fees		507		218		289			132.57
Regulatory assessments		94		396		(302	)		(76.26	)
Advertising and public relations		349		413		(64	)		(15.50	)
Travel, lodging and entertainment		287		618		(331	)		(53.56	)
Other expense		1,269		1,200		69			5.75
Total noninterest expense	$	23,875	$	11,027	$	12,848			116.51	%

Salaries and employee benefits totaled $18.8 million for the nine months ended September 30, 2019 compared to $6.1 million for the same period in 2018, an increase of $12.7 million or 209.2%.  On September 5, 2019, our largest shareholders, the Haines Family Trusts, contributed approximately 6.5% of their shares to the Company.  Subsequently, the Company immediately issued those shares to certain executive officers, which was charged as $11.8 million, including payroll expense, compensation expense through the income statement of the Company. This previously announced transaction was a one-time, non-cash expense.

Accounting, legal and professional fees totaled $507,000 for the nine months ended September 30, 2019 compared to $218,000 for the same period in 2018, an increase of $289,000 or 132.6%.  This increase related to the additional costs associated with being a public company.

40

Travel, lodging and entertainment totaled $287,000 for the nine months ended September 30, 2019 compared to $618,000 for the same period in 2018, a decrease of $331,000 or 53.6%.  This decrease primarily related to the elimination of aircraft expense as the plane was sold during the third quarter of 2018.

Financial Condition

The following discussion of our financial condition compares September 30, 2019 and December 31, 2018.

Total Assets

Total assets increased $56.3 million, or 7.3%, to $826.8 million as of September 30, 2019, as compared to $770.5 million as of December 31, 2018. The increasing trend in total assets is primarily attributable to strong organic loan and deposit growth within the Oklahoma City and Dallas/Fort Worth metropolitan areas, and our expansion into the Tulsa market.

Loan Portfolio

Our loans represent the largest portion of our earning assets. The quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition. As of September 30, 2019 and December 31, 2018, our gross loans were $676.0 million and $601.9 million, respectively.

The following table presents the balance and associated percentage of each major category in our loan portfolio as of September 30, 2019, and December 31, 2018:

	As of September 30,						As of December 31,
	2019						2018
	Amount			% of Total			Amount			% of Total
	(Dollars in thousands)
Construction & development	$	68,714			10.2	%	$	87,267			14.5	%
1-4 family commercial		30,037			4.4			33,278			5.5
Commercial real estate – other		253,986			37.6			156,396			26.0
Total commercial real estate		352,737			52.2			276,941			46.0
Commercial & industrial		252,516			37.3			248,394			41.3
Agricultural		58,583			8.7			62,844			10.4
Consumer		12,194			1.8			13,723			2.3
Gross loans		676,030			100.0	%		601,902			100.0	%
Less unearned income, net		(1,434	)					(1,992	)
Total loans		674,596						599,910
Allowance for loan and lease losses		(7,841	)					(7,832	)
Net loans	$	666,755					$	592,078

We have established internal concentration limits in the loan portfolio for Commercial Real Estate (CRE) loans, hospitality loans, energy loans, and construction loans, among others. All loan types are within our established limits. We use underwriting guidelines to assess each borrower’s historical cash flow to determine debt service capabilities, and we further stress test the customer’s debt service capability under higher interest rate scenarios as well as other underlying macro-economic factors. Financial and performance covenants are used in commercial lending to allow us to react to a borrower’s deteriorating financial condition, should that occur.

The following tables show the contractual maturities of our gross loans as of the periods below:

	As of September 30, 2019
	Due in One Year or Less				Due after One Year Through Five Years				Due after Five Years
	Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Total
	(Dollars in thousands)
Construction & development	$	187	$	28,283	$	821	$	39,423	$	—	$	—	$	68,714
1-4 family commercial		357		9,893		3,949		15,066		44		727		30,036
Commercial real estate – other		1,851		18,927		12,430		215,320		353		5,105		253,986
Total commercial real estate		2,395		57,103		17,200		269,809		397		5,832		352,736
Commercial & industrial		11,596		153,277		8,751		71,849		13		7,031		252,517
Agricultural		4,313		36,108		2,898		11,852		1,443		1,968		58,582
Consumer		2,577		—		4,754		558		3,871		435		12,195
Gross loans	$	20,881	$	246,488	$	33,603	$	354,068	$	5,724	$	15,266	$	676,030

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

Allowance for Loan and Lease Losses

The allowance is based on management’s estimate of potential losses inherent in the loan portfolio. In the opinion of management, the allowance is adequate to absorb estimated losses in the portfolio as of each balance sheet date. While management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance. In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk potential in loans is utilized together with the results of internal credit reviews.

To determine the adequacy of the allowance, the loan portfolio is broken into segments based on loan type. Historical loss experience factors by segment, adjusted for changes in trends and conditions, are used to determine an indicated allowance for each portfolio segment. These factors are evaluated and updated based on the composition of the specific loan segment. Other considerations include volumes and trends of delinquencies, nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk and the experience and abilities of our lending personnel.

The allowance was $7.8 million at September 30, 2019 and December 31, 2018.

The following table provides an analysis of the activity in our allowance for the periods indicated:

	For the Nine Months Ended
	September 30, 2019			September 30, 2018
	(Dollars in thousands)
Balance at beginning of the period	$	7,832		$	7,654
Provision for loan losses		—			100
Charge-offs:
Construction & development		—			—
1-4 family commercial		(2	)		(25	)
Commercial real estate – other		—			—
Commercial & industrial		(4	)		(74	)
Agricultural		(11	)		—
Consumer		—			—
Total charge-offs		(17	)		(99	)
Recoveries:
Construction & development		—			—
1-4 family commercial		3			3
Commercial real estate – other		—			2
Commercial & industrial		20			66
Agricultural		3			1
Consumer		—			1
Total recoveries		26			73
Net recoveries (charge-offs)		9			(26	)
Balance at end of the period	$	7,841		$	7,728

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While the entire allowance is available to absorb losses from any and all loans, the following table represents management’s allocation of the allowance by loan category, and the percentage of allowance in each category, for the periods indicated:

	As of September 30,					As of December 31,
	2019					2018
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Construction & development	$	797		10.16	%	$	1,136		14.50	%
1-4 family commercial		348		4.45			433		5.53
Commercial real estate - other		2,947		37.58			2,035		25.98
Commercial & industrial		2,929		37.35			3,231		41.26
Agricultural		679		8.66			818		10.44
Consumer		141		1.80			179		2.29
Total	$	7,841		100.0	%	$	7,832		100.0	%

Nonperforming Assets

Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability of the obligation. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on a nonaccrual loan is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.

A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and loans modified in a troubled debt restructuring (TDR). Income from a loan on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The impairment amount on a collateral dependent loan is charged off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral dependent is set up as a specific reserve.

In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a TDR. Included in certain loan categories of impaired loans are TDRs on which we have granted concessions to the borrower as a result of the borrower experiencing financial difficulties. The concessions granted by us may include, but are not limited to: (1) a modification in which the maturity date, timing of payments or frequency of payments is modified, (2) an interest rate lower than the current market rate for new loans with similar risk, or (3) a combination of the first two concessions.

If a borrower on a restructured TDR has demonstrated performance under the previous terms, is not experiencing financial difficulty and shows the capacity to continue to perform under the restructured terms, the loan will remain on accrual status. Otherwise, the loan will be placed on nonaccrual status until the borrower demonstrates a sustained period of performance, which generally requires six consecutive months of payments. Loans identified as TDRs are evaluated for impairment using the present value of the expected cash flows or the estimated fair value of the collateral, if the loan is collateral dependent. The fair value is determined, when possible, by an appraisal of the property less estimated costs related to liquidation of the collateral. The appraisal amount may also be adjusted for current market conditions. Adjustments to reflect the present value of the expected cash flows or the estimated fair value of collateral dependent loans are a component in determining an appropriate allowance, and as such, may result in increases or decreases to the provision for loan losses in current and future earnings.

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Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned, or OREO, until sold, and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.

Nonperforming loans include loans 90 days past due and still accruing, TDRs still accruing and loans accounted for on a nonaccrual basis. Nonperforming assets consist of nonperforming loans plus OREO. Loans accounted for on a nonaccrual basis were $2.9 million as of September 30, 2019 and $2.6 million as of December 31, 2018. TDR’s not accounted for on a nonaccrual basis were $749,000 as of September 30, 2019 and $0 as of December 31, 2018.  Loans past due greater than 90 days and accruing were $612,000 as of September 30, 2019 and $0 as of December 31, 2018.  OREO was $77,000 as of September 30, 2019 and $110,000 as of December 31, 2018.

The following table presents information regarding nonperforming assets as of the dates indicated.

	As of September 30,			As of December 31,
	2019			2018
	(Dollars in thousands)
Nonaccrual loans	$	2,887		$	2,615
Troubled debt restructurings (1)		749			—
Accruing loans 90 or more days past due		612			—
Total nonperforming loans		4,248			2,615
Other real estate owned		77			110
Total nonperforming assets	$	4,325		$	2,725
Ratio of nonperforming loans to total loans		0.63	%		0.44	%
Ratio of nonperforming assets to total assets		0.52	%		0.35	%

(1) $1.86 million and $501,000 of TDRs as of September 30, 2019 and December 31, 2018, respectively, are included in the nonaccrual loans balance in the line above

The following tables present an aging analysis of loans as of the dates indicated.

	As of September 30, 2019
	Loans 30-59 days past due		Loans 60-89 days past due		Loans 90+ days past due		Total Loans 90+ days and accruing		Total past due Loans		Current		Gross Loans
	(Dollars in thousands)
Construction & development	$	—	$	—	$	—	$	—	$	—	$	68,714	$	68,714
1-4 family commercial		—		—		—		—		—		30,037		30,037
Commercial real estate - other		—		—		—		—		—		253,986		253,986
Commercial & industrial		—		—		14		14		14		252,502		252,516
Agricultural		62		—		1,625		598		1,687		56,986		58,583
Consumer		39		21		—		—		60		12,134		12,194
Total	$	101	$	21	$	1,639	$	612	$	1,761	$	674,269	$	676,030

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

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In addition to the past due and nonaccrual criteria, the Company also evaluates loans according to its internal risk grading system. Loans are segregated between pass, watch, special mention, and substandard categories. The definitions of those categories are as follows:

Pass: These loans generally conform to Bank policies, are characterized by policy-conforming advance rates on collateral, and have well-defined repayment sources. In addition, these credits are extended to borrowers and guarantors with a strong balance sheet and either substantial liquidity or a reliable income history.

Watch: These loans are still considered “Pass” credits; however, various factors such as industry stress, material changes in cash flow or financial conditions, or deficiencies in loan documentation, or other risk issues determined by the lending officer, Commercial Loan Committee or Credit Quality Committee warrant a heightened sense and frequency of monitoring.

Special mention: These loans have observable weaknesses or evidence of imprudent handling or structural issues. The weaknesses require close attention, and the remediation of those weaknesses is necessary. No risk of probable loss exists. Credits in this category are expected to quickly migrate to “Watch” or “Substandard” as this is viewed as a transitory loan grade.

Substandard: These loans are not adequately protected by the sound worth and debt service capacity of the borrower, but may be well-secured. The loans have defined weaknesses relative to cash flow, collateral, financial condition or other factors that might jeopardize repayment of all of the principal and interest on a timely basis. There is the possibility that a future loss will occur if weaknesses are not remediated.

Substandard loans totaled $11.7 million as of September 30, 2019, an increase of $2.7 million compared to December 31, 2018. The increase primarily related to one agricultural relationship comprised of four notes totaling $1.6 million with no specific reserve, one agricultural relationship comprised of three notes totaling $555,000 with no specific reserve, and one mixed relationship comprised of 11 notes totaling $6.6 million with no specific reserve.

Outstanding loan balances categorized by internal risk grades as of the periods indicated are summarized as follows:

	As of September 30, 2019
	Pass		Watch		Special mention		Substandard		Total
	(Dollars in thousands)
Construction & development	$	66,939	$	1,775	$	—	$	—	$	68,714
1-4 family commercial		29,426		611		—		—		30,037
Commercial real estate – other		244,096		3,769		2,046		4,075		253,986
Commercial & industrial		227,650		7,592		13,131		4,143		252,516
Agricultural		52,841		95		2,129		3,518		58,583
Consumer		12,194		—		—		—		12,194
Total	$	633,146	$	13,842	$	17,306	$	11,736	$	676,030

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

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Troubled Debt Restructurings

TDRs are defined as those loans in which a bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with original contractual terms of the loan. Loans with insignificant delays or insignificant short-falls in the amount of payments expected to be collected are not considered to be impaired. Loans defined as individually impaired, based on applicable accounting guidance, include larger balance nonperforming loans and TDRs.

The following table presents loans restructured as TDRs as of September 30, 2019 and December 31, 2018.

	As of September 30, 2019
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserves Allocated
	(Dollars in thousands)
Commercial real estate – other		1	$	1,860	$	1,860	$	32
Agricultural		2		749		749		—
Total		3	$	2,609	$	2,609	$	32

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

There were no payment defaults with respect to loans modified as TDRs as of September 30, 2019 and December 31, 2018.

Impairment analyses are prepared on TDRs in conjunction with the normal allowance process. TDRs restructured during the nine months ended September 30, 2019 and the twelve months ended December 31, 2018 required $32,000 and $0 in specific reserves, respectively. There were no charge-offs on TDRs for the nine months ended September 30, 2019 or the twelve months ended December 31, 2018.

The following table presents total TDRs, both in accrual and nonaccrual status as of the periods indicated:

	As of September 30, 2019				As of December 31, 2018
	Number of Contracts		Amount		Number of Contracts		Amount
	(Dollars in thousands)
Accrual		2	$	749		—	$	—
Nonaccrual		1		1,860		1		501
Total		3	$	2,609		1	$	501

Deposits

We gather deposits primarily through our seven branch locations and online though our website. We offer a variety of deposit products including demand deposit accounts and interest-bearing products, such as savings accounts and certificates of deposit. We put continued effort into gathering noninterest-bearing demand deposit accounts through loan production cross-selling, customer referrals, marketing efforts and various involvement with community networks. Some of our interest-bearing deposits are obtained through brokered transactions. We participate in the CDARS program, where customer funds are placed into multiple certificates of deposit, each in an amount under the standard FDIC insurance maximum of $250,000, and placed at a network of banks across the United States.

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Total deposits as of September 30, 2019 and December 31, 2018 were $722.1 million and $675.9 million, respectively. The following table sets forth deposit balances by certain categories as of the dates indicated and the percentage of each deposit category to total deposits.

	As of September 30,					As of December 31,
	2019					2018
	Amount		Percentage of Total			Amount		Percentage of Total
	(Dollars in thousands)
Noninterest-bearing demand	$	200,814		27.8	%	$	201,159		29.8	%
Interest-bearing:
NOW deposits		99,714		13.8			91,896		13.6
Money market		134,383		18.6			118,150		17.5
Savings deposits		65,979		9.1			69,548		10.3
Time deposits (more than $100,000)		194,608		27.0			167,304		24.8
Time deposits ($100,000 or less)		26,636		3.7			27,846		4.1
Total interest-bearing		521,320		72.2			474,744		70.2
Total deposits	$	722,134		100.0	%	$	675,903		100.0	%

The following table summarizes our average deposit balances and weighted average rates for the nine-month period ending September 30, 2019 and year ended December 31, 2018:

	For the Nine Months Ended September 30,					For the Year Ended December 31,
	2019					2018
	Average Balance		Weighted Average Rate			Average Balance		Weighted Average Rate
	(Dollars in thousands)
Noninterest-bearing demand	$	186,379		0.00	%	$	183,750		0.00	%
Interest-bearing:
NOW		93,650		1.87			71,384		1.56
Money market		127,871		2.00			90,230		1.65
Savings		67,785		1.37			79,267		1.23
Time		206,575		2.11			220,023		1.55
Total interest-bearing		495,881		1.94			460,904		1.52
Total deposits	$	682,260		1.41	%	$	644,654		1.08	%

The following tables set forth the maturity of time deposits as of the dates indicated below:

	As of September 30, 2019 Maturity Within:
	Three Months		Three to Six Months		Six to 12 Months		After 12 Months		Total
	(Dollars in thousands)
Time deposits ($100,000 or less)	$	6,501	$	6,883	$	9,008	$	7,245	$	29,637
Time deposits (more than $100,000)		40,301		52,467		62,379		36,460		191,607
Total time deposits	$	46,802	$	59,350	$	71,387	$	43,705	$	221,244

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

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Liquidity

Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks and fed funds sold. Other available sources of liquidity include wholesale deposits and borrowings from correspondent banks and FHLB advances.

Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

As of September 30, 2019, we had no unsecured fed funds lines with correspondent depository institutions with no amounts advanced. In addition, based on the values of loans pledged as collateral, we had borrowing availability with the FHLB of $64.1 million as of September 30, 2019 and $66.3 million as of December 31, 2018.

Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below), We must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of Common Equity Tier 1 (“CET1”) capital, Tier 1 capital, total capital to risk-weighted assets, and Tier 1 capital to average consolidated assets, referred to as the “leverage ratio.”

As of September 30, 2019, the Bank was in compliance with all applicable regulatory requirements and categorized as “well-capitalized” under the prompt corrective action frame work.  There have been no conditions or events since September 30, 2019 that management believes would change this classification.

The table below presents our applicable capital requirements, as well as our capital ratios as of September 30, 2019 and December 31, 2018. The Company exceeded all regulatory capital requirements and the Bank was considered to be “well-capitalized” as of the dates reflected in the tables below.

Basel III Capital Rules

Under the Basel III Capital Rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements. As of September 30, 2019, the Company and the Bank met all capital adequacy requirements under the Basel III Capital Rules.

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	Actual					With Capital Conservation Buffer					Minimum To be Considered “Well-Capitalized”
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of September 30, 2019:
Total capital to risk-weighted assets
Company	$	106,615		16.24	%	$	68,952		10.500	%		N/A		N/A
Bank		106,580		16.25			68,847		10.500			65,521		10.00
Tier 1 capital to risk-weighted assets
Company		98,774		15.04			55,818		8.500			N/A		N/A
Bank		98,739		15.06			55,733		8.500			52,417		8.00
CET 1 capital to risk-weighted assets
Company		98,774		15.04			45,968		7.000			N/A		N/A
Bank		98,739		15.06			45,898		7.000			42,589		6.50
Tier 1 leverage ratio
Company		98,774		12.25			N/A		N/A			N/A		N/A
Bank		98,739		12.27			N/A		N/A			40,245		5.00

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

Shareholders’ equity provides a source of permanent funding, allows for future growth and provides a cushion to withstand unforeseen adverse developments. Total shareholders’ equity increased to $100.6 million as of September 30, 2019, compared to $88.5 million as of December 31, 2018. The increases were driven by retained capital from net income during the periods.

Contractual Obligations

The following tables contain supplemental information regarding our total contractual obligations as of September 30, 2019, and December 31, 2018:

	Payments Due as of September 30, 2019
	Within One Year		One to Three Years		Three to Five Years		After Five Years		Total
	(Dollars in thousands)
Deposits without a stated maturity	$	500,890	$	—	$	—	$	—	$	500,890
Time deposits		177,539		41,565		2,140		—		221,244
Borrowings		—		—		—		—		—
Operating lease commitments		591		694		160		—		1,445
Total contractual obligations	$	679,020	$	42,259	$	2,300	$	—	$	723,579

	Payments Due as of December 31, 2018
	Within One Year		One to Three Years		Three to Five Years		After Five Years		Total
	(Dollars in thousands)
Deposits without a stated maturity	$	480,753	$	—	$	—	$	—	$	480,753
Time deposits		167,690		23,406		4,054		—		195,150
Borrowings		—		—		—		—		—
Operating lease commitments		579		802		303		—		1,684
Total contractual obligations	$	649,022	$	24,208	$	4,357	$	—	$	677,587

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We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deemed necessary upon extension of credit, is based on management’s credit evaluation of the counterparty. The Company also estimates a reserve for potential losses associated with off-balance sheet commitments and letters of credit. It is included in other liabilities in the Company’s consolidated statements of condition, with any related provisions to the reserve included in non-interest expense in the consolidated statement of operations.

In determining the reserve for unfunded lending commitments, a process similar to the one used for the allowance is employed. Based on historical experience, loss factors, adjusted for expected funding, are applied to the Company’s off-balance sheet commitments and letters of credit to estimate the potential for losses.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of the customer to a third party. They are intended to be disbursed, subject to certain conditions, upon request of the borrower.

The following table summarizes commitments as of the dates presented.

	As of September 30, 2019		As of December 31, 2018
	(Dollars in thousands)
Commitments to extend credit	$	197,460	$	135,015
Standby letters of credit		2,559		1,078
Total	$	200,019	$	136,093

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statement. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.

The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this Form 10-Q, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.

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The following is a discussion of the critical accounting policies and significant estimates that we believe require us to make the most complex or subjective decisions or assessments. Additional information about these policies can be found in Note 1 of the Company’s consolidated unaudited financial statements as of September 30, 2019.

Allowance for Loan and Lease Losses

The allowance is based on management’s estimate of probable losses inherent in the loan portfolio. In the opinion of management, the allowance is adequate to absorb estimated losses in the portfolio as of each balance sheet date. While management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and changes in the composition of the loan portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk potential in loans is utilized together with the results of internal credit reviews.

To determine the adequacy of the allowance, the loan portfolio is broken into segments based on loan type. Historical loss experience factors by segment, adjusted for changes in trends and conditions, are used to determine an indicated allowance for each portfolio segment. These factors are evaluated and updated based on the composition of the specific loan segment. Other considerations include volumes and trends of delinquencies, nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk and the experience and abilities of our lending personnel. In addition to the segment evaluations, impaired loans with a balance of $250,000 or more are individually evaluated based on facts and circumstances of the loan to determine if a specific allowance amount may be necessary. Specific allowances may also be established for loans whose outstanding balances are below the $250,000 threshold when it is determined that the risk associated with the loan differs significantly from the risk factor amounts established for its loan segment.

Certain loan segments were reclassified during 2018.  Each loan segment is made up of loan categories possessing similar risk characteristics.  The Company’s re-alignment of the segments primarily consisted of reclassifying consumer-related and agricultural-related real estate loans from the real estate category to the consumer and agricultural categories, respectively.  Management believes this accurately represents the risk profile of each loan segment.  In addition, the real estate segment was renamed to commercial real estate, and the commercial segment was renamed to commercial & industrial. The prior period amounts have been revised to conform to the current period presentation.  These reclassifications did not have a significant impact on the allowance for loan losses.

Goodwill and Intangibles

Goodwill from an acquisition is the value attributable to unidentifiable intangible elements acquired. At a minimum, annual evaluation of the value of goodwill is required. Management evaluated the carrying value of the Company’s goodwill as of September 30, 2019 and December 31, 2018, and determined that no impairment existed.

An entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Factors assessed include all relevant events and circumstances including macroeconomic conditions, industry and market conditions, cost factors that have a negative effect on earnings and cash flows, overall financial performance, other relevant entity or reporting unit specific events and, if applicable, a sustained decrease in share price.

If after assessing the totality of events or circumstances, such as those described above, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity is to perform a two-step impairment test.

The first step of the impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is to be performed to measure the amount of impairment loss, if any, when it is more likely than not that goodwill impairment exists.

Other intangible assets consist of core deposit intangible assets and are amortized on a straight-line basis based on the estimated useful life of 10 years. Such assets are periodically evaluated as to the recoverability of their carrying values.

Income Taxes

The Company files a consolidated income tax return. Deferred taxes are recognized under the balance sheet method based upon the future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, using the tax rates expected to apply to taxable income in the periods when the related temporary differences are expected to be realized.

The amount of accrued current and deferred income taxes is based on estimates of taxes due or receivable from taxing authorities either currently or in the future. Changes in these accruals are reported as tax expense, and involve estimates of the various components included in determining taxable income, tax credits, other taxes and temporary differences. Changes periodically occur in the estimates due to changes in tax rates, tax laws and regulations and implementation of new tax planning strategies. The process of determining the accruals for income taxes necessarily involves the exercise of considerable judgment and consideration of numerous subjective factors.

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Management performs an analysis of the Company’s tax positions annually and believes it is more likely than not that all of its tax positions will be utilized in future years.

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in the Registrant’s disclosures regarding market risk since December 31, 2018, the date of its most recent annual report to stockholders.

ITEM 4.

Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness as of September 30, 2019 of our disclosure controls and procedures, as defined Rules 13a-15(e) and 15d-15(e) under the Exchange Act.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this Form 10-Q.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the six months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, such controls.

PART II

ITEM 1.

Legal Proceedings

From time to time, we are a party to legal actions that are routine and incidental to our business. Given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business, including laws and regulations governing consumer protections, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws, we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk. However, based upon available information and in consultation with legal counsel, management is of the opinion that no proceedings exist, either individually or in the aggregate, which, if determined adversely, would have a material adverse effect on our financial statements.

ITEM 1A.

Risk Factors

There were no material changes from the risks disclosed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December, 31, 2018.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On September 5, 2019, we adopted a stock repurchase program to purchase up to 500,000 shares, or approximately 5%, of the Company’s currently outstanding common stock. The stock repurchase program has a term of two years. There were no repurchases of the Company’s stock during the quarter covered by the Form 10-Q.

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ITEM 6.

Exhibits

Exhibit No.	Description
10.1	Stock Award Agreement between the Company and Thomas L. Travis issued under the 2018 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on September 5, 2019)
10.2	Stock Award Agreement between the Company and John T. Phillips issued under the 2018 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on September 5, 2019)
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

* This exhibit is furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		BANK7 CORP.
DATED:	November 14, 2019	By: /s/ Thomas L. Travis
		Thomas L. Travis
		President and Chief Executive Officer
DATED:	November 14, 2019	By: /s/ Kelly J. Harris
		Kelly J. Harris
		Senior Vice President and Chief Financial Officer

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