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Bank7 Corp. - Quarter Report: 2019 September (Form 10-Q)


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 10,057,506 shares of common stock, par value $0.01, outstanding.



TABLE OF CONTENTS
 
   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
  3
  4
  5
  6
  7
Item 2.
27
Item 3.
52
Item 4.
52
     
PART II.
OTHER INFORMATION
52
   
Item 1.
52
Item 1A.
52
Item 2.
52
Item 6.
53
 
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

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

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

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

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 63rd, 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.
 
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.
 

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.
 

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.
 

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.
 
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
 

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
 

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
 

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.
 
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
 

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.

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 the nine 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
     
-
 
 
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.
 
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.
 
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.
 
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:
 
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.
 
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
%

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.

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.

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.
 
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.

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.

   
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
         

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.

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).

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
%

(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
%

(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.

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%.

   
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.

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.

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
%)

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.

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
 

   
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
 

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.

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
 

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
 

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.

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
 

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.

   
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
 

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.

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.
 
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.

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)
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
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
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.

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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