Bank7 Corp. - Quarter Report: 2020 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, 2020

☐	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. 63^rd 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 16, 2020, the registrant had 9,044,765 shares of common stock, par value $0.01, outstanding.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets	2
	Unaudited Consolidated Statements of Income	3
	Unaudited Consolidated Statements of Shareholders’ Equity	4
	Unaudited Consolidated Statements of Cash Flows	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50

PART II.	OTHER INFORMATION	50

Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 6.	Exhibits	51
	Signatures	52

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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, including uncertainties related to the expected impact of the COVID-19 outbreak on our business operations, financial results and financial condition. 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.

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Item 1.

Financial Statements

Bank7 Corp.

Unaudited Condensed Consolidated Balance Sheets

(Dollar amounts in thousands)

Assets	September 30, 2020 (unaudited)		December 31, 2019

Cash and due from banks	$	60,718	$	117,128
Interest-bearing time deposits in other banks		23,384		30,147
Loans, net of allowance for loan losses of $11,131 and $7,846 at September 30, 2020 and December 31, 2019, respectively		869,448		699,458
Loans held for sale, at fair value		315		1,031
Premises and equipment, net		9,387		9,624
Nonmarketable equity securities		1,165		1,100
Goodwill and other intangibles, net		1,634		1,789
Interest receivable and other assets		7,303		6,115

Total assets	$	973,354	$	866,392

Liabilities and Shareholders’ Equity

Deposits
Noninterest-bearing	$	272,008	$	219,221
Interest-bearing		591,661		538,262

Total deposits		863,669		757,483

Income taxes payable		565		357
Interest payable and other liabilities		3,890		8,426

Total liabilities		868,124		766,266

Shareholders’ equity
Preferred stock, par value $0.01 per share, 1,000,000 shares authorized; none issued or outstanding		-		-
Common stock, non-voting, par value $0.01 per share, 20,000,000 shares authorized; none issued or outstanding		-		-
Common stock, $0.01 par value; 50,000,000 shares authorized; shares issued and outstanding: 9,241,689 and 10,057,506, at September 30, 2020 and December 31, 2019 respectively		92		101
Additional paid-in capital		92,960		92,391
Retained earnings		12,178		7,634

Total shareholders’ equity		105,230		100,126

Total liabilities and shareholders’ equity	$	973,354	$	866,392

See Notes to Unaudited Condensed Consolidated Financial Statements

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Bank7 Corp.

Unaudited Condensed Consolidated Statements of Income

(Dollar amounts in thousands, except per share data)

	Three months ended September 30,					Nine months ended September 30,
	2020		2019			2020		2019
Interest Income
Loans, including fees	$	12,777	$	12,179		$	39,268	$	35,902
Interest-bearing time deposits in other banks		123		500			419		1,414
Interest-bearing deposits in other banks		26		392			303		1,398

Total interest income		12,926		13,071			39,990		38,714

Interest Expense
Deposits		1,325		2,471			5,028		7,178

Total interest expense		1,325		2,471			5,028		7,178

Net Interest Income		11,601		10,600			34,962		31,536

Provision for Loan Losses		1,250		-			3,300		-

Net Interest Income After Provision for Loan Losses		10,351		10,600			31,662		31,536

Noninterest Income
Secondary market income		57		69			134		146
Service charges on deposit accounts		104		110			318		279
Other		173		330			513		602

Total noninterest income		334		509			965		1,027

Noninterest Expense
Salaries and employee benefits		2,505		14,256			7,576		18,792
Furniture and equipment		224		229			658		606
Occupancy		543		436			1,417		1,157
Data and item processing		276		276			821		814
Accounting, marketing and legal fees		135		218			338		507
Regulatory assessments		164		31			281		94
Advertising and public relations		62		71			360		349
Travel, lodging and entertainment		50		153			146		287
Other		625		402			1,463		1,269

Total noninterest expense		4,584		16,072			13,060		23,875

Income (Loss) Before Taxes		6,101		(4,963	)		19,567		8,688
Income tax expense		1,661		1,556			5,040		4,965
Net Income (Loss)	$	4,440	$	(6,519	)	$	14,527	$	3,723

Earnings per common share - basic	$	0.48	$	(0.64	)	$	1.53	$	0.37
Earnings per common share - diluted		0.48		(0.64	)		1.53		0.37
Weighted average common shares outstanding - basic		9,228,128		10,149,007			9,483,540		10,174,528
Weighted average common shares outstanding - diluted		9,228,128		10,161,778			9,483,540		10,176,360

See Notes to Unaudited Condensed Consolidated Financial Statements

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Bank7 Corp.

Unaudited Condensed Consolidated Statements of Shareholders’ Equity

(Dollar Amounts in thousands, except share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Common Stock (Shares)
Balance at beginning of period		9,226,252			10,187,500			10,057,506			10,187,500
Shares issued for restricted stock units		19,437			19,431			19,437			19,431
Shares acquired and canceled		(4,000	)		(149,425	)		(835,254	)		(149,425	)
Balance at end of period		9,241,689			10,057,506			9,241,689			10,057,506

Common Stock (Amount)
Balance at beginning of period	$	92		$	102		$	101		$	102
Shares acquired and canceled		-			(1	)		(9	)		(1	)
Balance at end of period	$	92		$	101		$	92		$	101

Additional Paid-in Capital
Balance at beginning of period	$	92,762		$	80,604		$	92,391		$	80,275
Stock-based compensation expense		198			11,749			569			12,078
Balance at end of period	$	92,960		$	92,353		$	92,960		$	92,353

Retained Earnings
Balance at beginning of period	$	8,765		$	18,331		$	7,634		$	8,089
Net income (loss)		4,440			(6,519	)		14,527			3,723
Common stock acquired and canceled		(103	)		(2,645	)		(7,210	)		(2,645	)
Cash dividends declared ($0.10 per share)		(924	)		(1,006	)		(2,773	)		(1,006	)
Balance at end of period	$	12,178		$	8,161		$	12,178		$	8,161

Total shareholders’ equity	$	105,230		$	100,615		$	105,230		$	100,615

See Notes to Unaudited Condensed Consolidated Financial Statements

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Bank7 Corp.

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in thousands)

	For the Nine Months Ended September 30,
	2020			2019

Operating Activities
Net income	$	14,527		$	3,723
Items not requiring (providing) cash
Depreciation and amortization		815			651
Provision for loan losses		3,300			-
Gain on sales of loans		(134	)		(146	)
Stock-based compensation expense		569			12,078
Loss on sale of premises and equipment		-			182
Cash receipts from the sale of loans originated for sale		6,922			6,767
Cash disbursements for loans originated for sale		(6,072	)		(6,109	)
Gain on sale of other real estate owned		-			(362	)
Deferred income tax (benefit) expense		(780	)		176
Changes in
Interest receivable and other assets		(408	)		785
Interest payable and other liabilities		(223	)		(3,076	)

Net cash provided by operating activities		18,516			14,669

Investing Activities
Maturities of interest-bearing time deposits in other banks		21,190			12,606
Purchases of interest-bearing time deposits in other banks		(14,427	)		(12,737	)
Net change in loans		(173,290	)		(74,755	)
Purchases of premises and equipment		(423	)		(1,697	)
Proceeds from sale of premises and equipment		-			377
Change in nonmarketable equity securities		(65	)		(17	)
Proceeds from sale of foreclosed assets		-			473

Net cash used in investing activities		(167,015	)		(75,750	)

Financing Activities
Net change in deposits		106,186			46,231
Cash distributions		(6,878	)		-
Common stock acquired and canceled		(7,219	)		(2,646	)

Net cash provided by financing activities		92,089			43,585

Increase (Decrease) in Cash and Due from Banks		(56,410	)		(17,496	)

Cash and Due from Banks, Beginning of Period		117,128			128,090

Cash and Due from Banks, End of Period	$	60,718		$	110,594

Supplemental Disclosure of Cash Flows Information
Interest paid	$	5,301		$	6,912
Income taxes paid	$	5,498		$	5,458
Dividends declared and not paid	$	924		$	1,006
Non-cash stock contribution	$	-		$	11,627

Supplemental Disclosure of Non-Cash Investing Activities
Foreclosed assets acquired in settlement of loans	$	-		$	78

See Notes to Unaudited Condensed Consolidated Financial Statements

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Bank7 Corp.

Notes to Unaudited Condensed 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, Bank7 (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, 2019, the date of the most recent annual report. The condensed consolidated balance sheet of the Company as of December 31, 2019 has been derived from the audited consolidated balance sheet of the Company as of that date. 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. The information contained in the financial statements and footnotes included in Company’s annual report for the year ended December 31, 2019, should be referred to in connection with these unaudited interim consolidated financial statements. 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.

Share Repurchase Program

During the nine months ended September 30, 2020, 835,254 shares were repurchased under the Company’s share repurchase program at an average price of $8.70 per share and retired and returned to the status of authorized but unissued shares. There were no shares repurchased during the nine months ended September 30, 2019.

Principles of Consolidation

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

Use of Estimates

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

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Bank7 Corp.

Notes to Unaudited Condensed 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.

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Bank7 Corp.

Notes to Unaudited Condensed 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 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, 2021. 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, 2022 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. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value an entity will record an impairment charge based on that difference. The standard eliminates today’s requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. Early adoption is permitted. ASU 2017-04 was adopted as of January 1, 2020, with no significant impacts on the Company’s financial statements.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

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 was adopted on January 1, 2020, and did not have a significant impact on the Company’s financial statements.

Legislative and Regulatory Developments

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also includes a range of other provisions designed to support the U.S. economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various programs and measures that the U.S. Department of the Treasury, the Small Business Administration, the Federal Reserve Board, and other federal banking agencies may or are required to implement. Further, in response to the COVID-19 outbreak, the Federal Reserve Board has implemented or announced a number of facilities to provide emergency liquidity to various segments of the U.S. economy and financial market.

The CARES Act created a $349 billion loan program called the Paycheck Protection Program (the “PPP”) for loans to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. PPP loans are fully guaranteed by the Small Business Administration (SBA). As of September 30, 2020, the Company had originated 333 PPP loans with balances totaling $64.3 million.

The extent to which the COVID-19 pandemic impacts the Company’s business, liquidity, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Moreover, the effects of the COVID-19 pandemic may have a material adverse effect on all or a combination of valuation impairments on the Company’s intangible assets, loans, or deferred tax assets.

Note 2:

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, 2020 was $0.

Note 3:

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.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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,
	2020		2019			2020		2019
(Dollars in thousands, except per share amounts)
Numerator
Net income (loss)	$	4,440	$	(6,519	)	$	14,527	$	3,723

Denominator
Weighted-average shares outstanding for basic earnings per share		9,228,128		10,149,007			9,483,540		10,174,528
Dilutive effect of stock compensation ⁽¹⁾		-		12,771			-		1,832
Denominator for diluted earnings per share		9,228,128		10,161,778			9,483,540		10,176,360

Earnings per common share
Basic	$	0.48	$	(0.64	)	$	1.53	$	0.37
Diluted	$	0.48	$	(0.64	)	$	1.53	$	0.37

(1) The following have not been included in diluted earnings per share becuase to do so would have been antidilutive for the periods presented: Nonqualified stock options outstanding of 185,250 and 163,000 for the three month periods ended September 30, 2020 and 2019, respectively; nonqualified stock options outstanding of 185,250 and 130,000 for the nine month periods ended September 30, 2020 and 2019, respectively; restricted stock units of 108,000 for the three and nine month periods ended September 30, 2020.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4:

Loans and Allowance for Loan Losses

A summary of loans at September 30, 2020 and December 31, 2019, are as follows (dollars in thousands):

	September 30,			December 31,
	2020			2019

Construction & development	$	108,453		$	70,628
1 - 4 family real estate		31,113			34,160
Commercial real estate - other		282,447			273,278
Total commercial real estate		422,013			378,066

Commercial & industrial		400,378			260,762
Agricultural		50,578			57,945
Consumer		10,253			11,895

Gross loans		883,222			708,668

Less allowance for loan losses		(11,131	)		(7,846	)
Less deferred loan fees		(2,643	)		(1,364	)

Net loans	$	869,448		$	699,458

Included in the commercial & industrial loan balance at September 30, 2020, are $64.3 million of loans that were originated under the SBA PPP program.

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Bank7 Corp.

Notes to Unaudited Condensed 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, 2020 and 2019 (dollars in thousands):

	Construction & Development		1 - 4 Family Commercial		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer			Total

September 30, 2020
Balance, beginning of period	$	1,086	$	349	$	3,358	$	4,380	$	579	$	126		$	9,878

Charge-offs		-		-		-		-		-		(1	)		(1	)
Recoveries		-		-		-		4		-		-			4

Net recoveries		-		-		-		4		-		(1	)		3

Provision (credit) for loan losses		281		43		202		662		58		4			1,250

Balance, end of period	$	1,367	$	392	$	3,560	$	5,046	$	637	$	129		$	11,131

	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

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the nine months ended September 30, 2020 and 2019 (dollars in thousands):

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial			Agricultural			Consumer			Total

September 30, 2020
Balance, beginning of period	$	782	$	378	$	3,025	$	2,887		$	642		$	132		$	7,846

Charge-offs		-		-		-		(39	)		-			(1	)		(40	)
Recoveries		-		2		-		13			10			-			25

Net charge-offs		-		2		-		(26	)		10			(1	)		(15	)

Provision (credit) for loan losses		585		12		535		2,185			(15	)		(2	)		3,300

Balance, end of period	$	1,367	$	392	$	3,560	$	5,046		$	637		$	129		$	11,131

	Construction &			1 - 4 Family			Commercial Real Estate -		Commercial
	Development			Real Estate			Other		& 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 recoveries		-			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

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, 2020 and December 31, 2019 (dollars in thousands):

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Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total

September 30, 2020
Allowance Balance
Ending balance Individually evaluated for impairment	$	-	$	130	$	26	$	-	$	200	$	-	$	356
Collectively evaluated for impairment		1,367		262		3,534		5,046		437		129		10,775

Total	$	1,367	$	392	$	3,560	$	5,046	$	637	$	129	$	11,131

Gross Loans
Ending balance Individually evaluated for impairment	$	-	$	1,128	$	5,124	$	26,281	$	1,948	$	-	$	34,481
Collectively evaluated for impairment		108,453		29,985		277,323		374,097		48,630		10,253		848,741

Total	$	108,453	$	31,113	$	282,447	$	400,378	$	50,578	$	10,253	$	883,222

December 31, 2019
Allowance Balance
Ending balance Individually evaluated for impairment	$	-	$	-	$	26	$	-	$	-	$	-	$	26
Collectively evaluated for impairment		782		378		2,999		2,887		642		132		7,820

Total	$	782	$	378	$	3,025	$	2,887	$	642	$	132	$	7,846

Gross Loans
Ending balance Individually evaluated for impairment	$	-	$	-	$	5,841	$	2,750	$	2,527	$	-	$	11,118
Collectively evaluated for impairment		70,628		34,160		267,437		258,012		55,418		11,895		697,550

Total	$	70,628	$	34,160	$	273,278	$	260,762	$	57,945	$	11,895	$	708,668

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Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Internal Risk Categories

Each loan segment is made up of loan categories possessing similar risk characteristics.

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.

•

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.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

•

Grade 3 (Special Mention) – These loans must 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 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 the period ended September 30, 2020.

The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category as of September 30, 2020 and December 31, 2019 (dollars in thousands):

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total

September 30, 2020
Grade
1 (Pass)	$	108,453	$	29,209	$	264,337	$	352,477	$	48,630	$	10,253	$	813,359
2 (Watch)		-		776		9,988		11,662		-		-		22,426
3 (Special Mention)		-		-		2,998		9,958		-		-		12,956
4 (Substandard)		-		1,128		5,124		26,281		1,948		-		34,481

Total	$	108,453	$	31,113	$	282,447	$	400,378	$	50,578	$	10,253	$	883,222

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total

December 31, 2019
Grade
1 (Pass)	$	70,628	$	33,622	$	267,437	$	241,176	$	53,290	$	11,895	$	678,048
2 (Watch)		-		538		-		5,312		-		-		5,850
3 (Special Mention)		-		-		-		11,524		2,128		-		13,652
4 (Substandard)		-		-		5,841		2,750		2,527		-		11,118

Total	$	70,628	$	34,160	$	273,278	$	260,762	$	57,945	$	11,895	$	708,668

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Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of September 30, 2020 and December 31, 2019 (dollars in thousands):

	Past Due												Total Loans
	30–59		60–89		Greater than						Total		> 90 Days &
	Days		Days		90 Days		Total		Current		Loans		Accruing

September 30, 2020
Construction & development	$	-	$	-	$	-	$	-	$	108,453	$	108,453	$	-
1 - 4 Family Real Estate		-		-		-		-		31,113		31,113		-
Commercial Real Estate - other		-		1,957		-		1,957		280,490		282,447		-
Commercial & industrial		920		7,071		-		7,991		392,387		400,378		-
Agricultural		-		1,948		-		1,948		48,630		50,578		-
Consumer		-		-		-		-		10,253		10,253		-

Total	$	920	$	10,976	$	-	$	11,896	$	871,326	$	883,222	$	-

December 31, 2019
Construction & development	$	-	$	-	$	-	$	-	$	70,628	$	70,628	$	-
1 - 4 Family Real Estate		-		-		-		-		34,160		34,160		-
Commercial Real Estate - other		-		-		-		-		273,278		273,278		-
Commercial & industrial		-		-		14		14		260,748		260,762		14
Agricultural		-		-		598		598		57,347		57,945		598
Consumer		90		-		-		90		11,805		11,895		-

Total	$	90	$	-	$	612	$	702	$	707,966	$	708,668	$	612

The following table presents impaired loans as of September 30, 2020 and December 31, 2019 (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, 2020					Nine Months Ended September 30, 2020
											Three Months Ended September 30, 2020					Nine Months Ended September 30, 2020
September 30, 2020
Construction & development	$	-	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
1 - 4 Family Real Estate		1,128		-		1,128		1,128		130		1,133		15			3,732		47
Commercial Real Estate - other		5,124		3,468		1,656		5,124		26		5,160		144			2,121		274
Commercial & industrial		26,281		26,281		-		26,281		-		26,549		996			21,780		1,317
Agricultural		1,948		-		1,948		1,948		200		2,681		(54	)		1,483		(13	)
Consumer		-		-		-		-		-		-		-			1,590		-

Total	$	34,481	$	29,749	$	4,732	$	34,481	$	356	$	35,523	$	1,101		$	30,706	$	1,625

December 31, 2019											Three Months Ended September 30, 2019					Nine Months Ended September 30, 2019
Construction & development	$	-	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
1 - 4 Family Real Estate		-		-		-		-		-		3		-			277		-
Commercial Real Estate - other		5,841		4,032		1,809		5,841		26		3,354		131			1,883		197
Commercial & industrial		2,750		2,750		-		2,750		-		6,612		91			6,164		49
Agricultural		2,527		1,744		-		1,744		-		2,421		(56	)		2,267		269
Consumer		-		-		-		-		-		-		-			128		-

Total	$	11,118	$	8,526	$	1,809	$	10,335	$	26	$	12,390	$	166		$	10,719	$	515

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.

Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired. At September 30, 2020, the Company had $1,656,000 of commercial real estate loans that were modified in troubled-debt restructurings and impaired and $1,809,000 of commercial real estate and $912,000 of agricultural loan modifications as of December 31, 2019. There were no newly modified troubled-debt restructurings during the nine months ended September 30, 2020.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

There were no troubled-debt restructurings modified in the past nine months that subsequently defaulted for the period ended September 30, 2020.

The following table represents information regarding nonperforming assets at September 30, 2020 and December 31, 2019 (dollars in thousands):

	As of
	September 30, 2020		December 31, 2019
Nonaccrual loans	$	20,515	$	1,809
Troubled-debt restructurings (1)		-		912
Accruing loans 90 or more days past due		-		612
Total nonperforming loans	$	20,515	$	3,333

(1) $1.66 million and $1.81 million of TDRs as of September 30, 2020 and December 31, 2019, respectively, are included in the nonaccrual loans balance in the line above.

The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of September 30, 2020, 23 loans totaling $121.0 million were modified, related to COVID-19, which were not considered troubled debt restructurings.

Note 5:

Shareholders’ Equity

On September 5, 2019, the Company adopted a Repurchase Plan (the “RP”). The RP initially authorized the repurchase of up to 500,000 shares of the Company’s common stock. On March 13, 2020, the Company’s Board of Directors approved a 500,000 share expansion, and on November 2, 2020, approved a 750,000 share expansion to the existing stock repurchase program, for a total of 1,750,000 shares authorized under the program. All shares repurchased under the RP have been retired and not held as treasury stock. The timing, price and amount of stock repurchases under the RP may be determined by management. At September 30, 2020, there were 164,746 shares remaining that could be repurchased under the Company’s Repurchase Program. Stock repurchases under the RP will take place pursuant to a Rule 10b5-1 Plan with pricing and purchasing parameters established by management. A summary of the activity under the RP is as follows:

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

	Nine Months Ended September 30,				Three Months Ended September 30,
	2020		2019		2020		2019
Number of shares repurchased		835,254		-		38,160		-
Average price of shares repurchased	$	8.56	$	-	$	8.96	$	-
Shares remaining to be repurchased		164,746		-		164,746		-

The Company and Bank are subject to risk-based capital guidelines issued by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under GAAP, regulatory reporting requirements and regulatory capital standards. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company’s and the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier I, and Common Equity capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2020, that the Company and Bank meet all capital adequacy requirements to which it is 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.

As of September 30, 2020, the most recent notification from the Federal Deposit Insurance Corporation (FDIC) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain capital ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA. Federal bank regulatory agencies have issued an interim final rule that permits banks to neutralize the regulatory capital effects of participating in the Paycheck Protection Program Lending Facility (the “PPP Facility”) and clarify that PPP loans have a zero percent risk weight under applicable risk-based capital rules. Specifically, a bank may exclude all PPP loans pledged as collateral to the PPP Facility from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPP Facility will be included. The PPP loans of $64.3 million we originated are included in the calculation of our leverage ratio as of September 30, 2020 as we did not utilize the PPP Facility for funding purposes.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

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, 2020
Total capital to risk-weighted assets
Company	$	113,695		14.09	%	$	64,551		8.00	%	$	84,723		10.50	%		N/A		N/A
Bank	$	113,640		14.10	%	$	64,469		8.00	%	$	84,615		10.50	%	$	80,586		10.00	%
Tier I capital to risk-weighted assets
Company	$	103,596		12.84	%	$	48,413		6.00	%	$	68,585		8.50	%		N/A		N/A
Bank	$	103,554		12.85	%	$	48,352		6.00	%	$	68,498		8.50	%	$	64,469		8.00	%
CET I capital to risk-weighted assets
Company	$	103,596		12.84	%	$	36,310		4.50	%	$	56,482		7.00	%		N/A		N/A
Bank	$	103,554		12.85	%	$	36,264		4.50	%	$	56,410		7.00	%	$	52,381		6.50	%
Tier I capital to average assets
Company	$	103,596		10.72	%	$	38,672		4.00	%		N/A		N/A			N/A		N/A
Bank	$	103,554		10.72	%	$	38,632		4.00	%		N/A		N/A		$	48,289		5.00	%

As of December 31, 2019
Total capital to risk-weighted assets
Company	$	105,137		15.25	%	$	55,157		8.00	%	$	72,393		10.50	%		N/A		N/A
Bank	$	106,148		15.42	%	$	55,076		8.00	%	$	72,287		10.50	%	$	68,845		10.00	%
Tier I capital to risk-weighted assets
Company	$	97,291		14.11	%	$	41,368		6.00	%	$	58,604		8.50	%		N/A		N/A
Bank	$	98,302		14.28	%	$	41,307		6.00	%	$	58,518		8.50	%	$	55,076		8.00	%
CET I capital to risk-weighted assets
Company	$	97,291		14.11	%	$	31,026		4.50	%	$	48,262		7.00	%		N/A		N/A
Bank	$	98,302		14.28	%	$	30,980		4.50	%	$	48,192		7.00	%	$	44,749		6.50	%
Tier I capital to average assets
Company	$	97,291		11.53	%	$	33,833		4.00	%		N/A		N/A			N/A		N/A
Bank	$	98,302		11.65	%	$	33,793		4.00	%		N/A		N/A		$	42,241		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.

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 of 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:

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

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, 2020, approximately $33.1 million of retained earnings was available for dividend declaration from the Bank without prior regulatory approval.

Note 6:

Related-Party Transactions

At September 30, 2020 and December 31, 2019, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties) approximating $0 and $1.1 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



Nine months ended September 30, 2020	$	1,055	$	-	$	(1,055	)	$	-
Year ended December 31, 2019	$	6,897	$	2,613	$	(8,455	)	$	1,055

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, 2020 and 2019, and $138,000 for the nine months ended September 30, 2020 and 2019. In addition, payroll and office sharing arrangements were in place between the Company and certain of its affiliates.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 7:

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, 2020 and 2019 totaled $58,000. Employer contributions charged to expense for the nine months ended September 30, 2020 and 2019 totaled $173,000 and $178,000, 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 months ended September 30, 2020 and 2019 totaled $198,000 and $121,000, respectively. Employer contributions charged to expense for the nine months ended September 30, 2020 and 2019 totaled $569,000 and $450,000, respectively. There were 704,750 shares available for future grants as of September 30, 2020.

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.

The Company grants to employees and directors restricted stock units (RSUs) which vest ratably over either three or five years and stock options which vest ratably over four years. All RSUs and stock options are 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.

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, 2020
Outstanding at December 31, 2019		163,000		$	18.75
Options Granted		26,500			18.49
Options Exercised		-			-
Options Forfeited		(4,250	)		17.73
Outstanding at September 30, 2020		185,250			18.73		8.19	$	0
Exercisable at September 30, 2020		75,625			18.88		8.00	$	0

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.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

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

	Nine Months Ended
	September 30, 2020			September 30, 2019
Risk-free interest rate		1.71	%		2.48	%
Dividend yield		2.20	%		2.20	%
Stock price volatility		41.27	%		31.14	%
Expected term		7.51			7.01

The following table summarizes share information about RSUs for the nine months ended September 30, 2020:

	Number of Shares			Wgtd. Avg. Grant Date Fair Value
Outstanding at December 31, 2019		104,000		$	19.09
Shares granted		31,000			18.49
Shares settled		26,000			19.09
Shares forfeited		(1,000	)		18.49
End of the period balance		108,000		$	18.92

As of September 30, 2020, there was approximately $1.9 million of unrecognized compensation expense related to 108,000 unvested RSUs and $406,000 of unrecognized compensation expense related to 185,250 unvested and/or unexercised stock options. The stock option expense is expected to be recognized over a weighted average period of 2.46 years, and the RSU expense is expected to be recognized over a weighted average period of 3.24 years.

Note 8:

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:

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, 2020 and December 31, 2019.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

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, 2020 and December 31, 2019 (dollars in thousands):

	Fair Value		(Level 1)		(Level 2)		(Level 3)

September 30, 2020
Impaired loans (collateral- dependent)	$	4,376	$	-	$	-	$	4,376

December 31, 2019
Impaired loans (collateral- dependent)	$	1,783	$	-	$	-	$	1,783

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.

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.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

Unobservable (Level 3) Inputs

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

			Valuation	Unobservable	Weighted-
	Fair Value		Technique	Inputs	Average
September 30, 2020
Collateral-dependent impaired loans	$	4,376	Appraisals from comparable properties	Estimated cost to sell		3-5	%

December 31, 2019
Collateral-dependent impaired loans	$	1,783	Appraisals from comparable properties	Estimated cost to sell		3-5	%

The following tables presents estimated fair values of the Company’s financial instruments not recorded at fair value at September 30, 2020 and December 31, 2019 (dollars in thousands):

	Carrying		Fair Value Measurements
	Amount		Level 1		Level 2		Level 3		Total
September 30, 2020

Financial Assets
Cash and due from banks	$	60,718	$	60,718	$	-	$	-	$	60,718
Interest-bearing time deposits in other banks	$	23,384	$	-	$	23,384	$	-	$	23,384
Loans, net of allowance	$	869,448	$	-	$	864,956	$	4,376	$	869,332
Mortgage loans held for sale	$	315	$	-	$	315	$	-	$	315
Nonmarketable equity securities	$	1,165	$	-	$	1,165	$	-	$	1,165
Interest receivable	$	4,786	$	-	$	4,786	$	-	$	4,786

Financial Liabilities
Deposits	$	863,669	$	-	$	862,490	$	-	$	862,490
Interest payable	$	362	$	-	$	362	$	-	$	362

December 31, 2019

Financial Assets
Cash and due from banks	$	117,128	$	117,128	$	-	$	-	$	117,128
Interest-bearing time deposits in other banks	$	30,147	$	-	$	30,147	$	-	$	30,147
Loans, net of allowance	$	699,458	$	-	$	698,672	$	1,809	$	700,481
Mortgage loans held for sale	$	1,031	$	-	$	1,031	$	-	$	1,031
Nonmarketable equity securities	$	1,100	$	-	$	1,100	$	-	$	1,100
Interest receivable	$	3,954	$	-	$	3,954	$	-	$	3,954

Financial Liabilities
Deposits	$	757,483	$	-	$	757,520	$	-	$	757,520
Interest payable	$	636	$	-	$	636	$	-	$	636

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:

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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, 2020 or December 31, 2019.

Note 9:

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, 2020 and December 31, 2019 (dollars in thousands):

	September 30,		December 31,
	2020		2019

Commitments to extend credit	$	191,479	$	191,459
Financial and performance standby letters of credit		860		3,338

	$	192,339	$	194,797

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

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 10:

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 4 regarding loans. Current vulnerabilities due to off-balance sheet credit risk are discussed in Note 9.

As of September 30, 2020, hospitality loans were 21% of gross total loans with outstanding balances of $188.7 million and unfunded commitments of $47.1 million; energy loans were 14% of gross total loans with outstanding balances of $126.0 million and unfunded commitments of $16.6 million.

The Company evaluates goodwill for potential goodwill impairment on an annual basis or more often based on consideration if any impairment indicators have occurred. A prolonged strain on the U.S. economy impacting the Company could result in goodwill being partially or fully impaired. At September 30, 2020, goodwill of $1.0 million was recorded on the consolidated balance sheet.

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ITEM 2.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2019.

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, 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, 2020, we had total assets of $973.4 million, total loans of $869.4 million, total deposits of $863.7 million and total shareholders’ equity of $105.2 million.

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 that are non-GAAP financial measures.

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:

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	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands, except per share data)	2020			2019			2020			2019
Loan interest income (excluding loan fees)
Total loan interest income, including loan fee income	$	12,777		$	12,179		$	39,268		$	35,902
Loan fee income		(1,078	)		(841	)		(3,969	)		(3,498	)
Loan interest income excluding loan fee income	$	11,699		$	11,338		$	35,299		$	32,404

Average total loans	$	847,076		$	651,186		$	807,134		$	617,398
Yield on loans (including loan fee income)		6.00	%		7.42	%		6.50	%		7.77	%
Yield on loans (excluding loan fee income)		5.49	%		6.91	%		5.84	%		7.02	%

Net interest margin (excluding loan fees)
Net interest income	$	11,601		$	10,600		$	34,962		$	31,536
Loan fee income		(1,078	)		(841	)		(3,969	)		(3,498	)
Net interest income excluding loan fees	$	10,523		$	9,759		$	30,993		$	28,038

Average earning assets	$	959,658		$	797,667		$	929,410		$	773,752
Net interest margin (including loan fee income)		4.81	%		5.27	%		5.02	%		5.45	%
Net interest margin (excluding loan fee income)		4.36	%		4.85	%		4.45	%		4.84	%

Pre-tax, pre-provision net earnings is defined as income before taxes and provision for loan losses. 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 recaptures from the allowance for loan losses. The most directly comparable GAAP financial measure for pre-tax, pre-provision net earnings is net income.

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	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands, except per share data)	2020			2019			2020			2019

Pre-tax, pre-provision net earnings
Net income (loss) before income taxes	$	6,101		$	(4,963	)	$	19,567		$	8,688
Plus: Provision for loan losses		(1,250	)		-			(3,300	)		-
Pre-tax, pre-provision net earnings	$	7,351		$	(4,963	)	$	22,867		$	8,688

Ratios
Net income (loss) (numerator)	$	4,440		$	(6,519	)	$	14,527		$	3,723

Average assets (denominator)	$	967,044		$	806,440		$	937,849		$	782,694
Return on average assets		1.83	%		-3.21	%		2.07	%		0.64	%

Average shareholders’ equity (denominator)	$	102,929		$	100,012		$	101,377		$	95,655
Return on average shareholders’ equity		17.16	%		-25.86	%		19.14	%		5.20	%

Average tangible common equity (denominator)	$	101,269		$	98,145		$	99,667		$	93,736
Return on average tangible common equity		17.44	%		-26.35	%		19.47	%		5.31	%


Per share data
Weighted average common shares outstanding basic (denominator)		9,228,128			10,149,007			9,483,540			10,174,528
Net income per common share--basic	$	0.48		$	(0.64	)	$	1.53		$	0.37

Weighted average common shares outstanding diluted (denominator)		9,228,128			10,161,778			9,483,540			10,176,360
Net income per common share--diluted	$	0.48		$	(0.64	)	$	1.53		$	0.37

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 equity is total shareholders’ equity and 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 assets is total assets and 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:

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	September 30,
(Dollars in thousands, except per share data)	2020			2019
Tangible shareholders’ equity
Total shareholders’ equity	$	105,230		$	100,615
Less: Goodwill and other intangibles		(1,634	)		(1,840	)
Tangible shareholders’ equity	$	103,596		$	98,775

Tangible assets
Total assets	$	973,354		$	826,349
Less: Goodwill and other intangibles		(1,634	)		(1,840	)
Tangible assets	$	971,720		$	824,509

Tangible shareholders’ equity
Tangible shareholders’ equity (numerator)	$	103,596		$	98,775
Tangible assets (denominator)	$	971,720		$	824,509
Tangible common equity to tangible assets		10.66	%		11.98	%

End of period common shares outstanding		9,241,689			10,057,506
Book value per share	$	11.39		$	10.00
Tangible book value per share	$	11.21		$	9.82
Total shareholders’ equity to total assets		10.81	%		12.18	%

Results of Operations

Performance Summary. For the third quarter of 2020 we reported a pre-tax income of $6.1 million, compared to pre-tax loss of ($5.0) million for the third quarter of 2019. For the first nine months of 2020 we reported pre-tax income of $19.6 million, compared to $8.7 million for the same period in 2019. For the third quarter of 2020, interest income decreased by $145,000, or 1.1%, compared to the third quarter of 2019. For the first nine months of 2020, interest income increased by $1.3 million or 3.3% compared to the same period in 2019. For the third quarter of 2020, average total loans were $847.1 million with loan yields of 6.0% as compared to $651.2 million and loan yields of 7.4% for the third quarter of 2019. For the first nine months of 2020, average total loans were $807.1 million with loan yields of 6.5% as compared to average total loans of $617.4 million and loan yields of 7.8% for the same period in 2019.

In the third quarter of 2019, we completed a one-time, non-cash executive stock transaction, 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.

The Company’s provision for loan losses for the third quarter of 2020 was $1.25 million, compared to $0 a year ago. The increase in the provision related to reserve build up for expected loan losses stemming from the COVID-19 pandemic and uncertainty surrounding the election and economic conditions.

Pre-tax return on average assets was 2.51% for the third quarter of 2020, as compared to (2.44%) for the same period in 2019. The pre-tax return on average equity was 23.58% for the third quarter of 2020, as compared to (19.69%) for the same period in 2019. Pre-tax return on average assets was 2.79% for the nine months ended September 30, 2020, as compared to 1.48% for the same period in 2019. The pre-tax return on average equity was 25.78% for the nine months ended September 30, 2020, as compared to 12.14% for the same period in 2019. The efficiency ratio was 38.4% for the three months ended September 30, 2020, as compared to 144.7% for the same period in 2019. The efficiency ratio was 36.3% for the nine months ended September 30, 2020, as compared to 73.3% for the same period in 2019.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act created a $349 billion loan program called the Paycheck Protection Program (the “PPP”) for loans to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. PPP loans are fully guaranteed by the Small Business Administration (SBA). As of September 30, 2020, we had originated 333 PPP loans with balances totaling $64.3 million. We received $1.8 million in PPP origination fees during the nine month period ended September 30, 2020, of which $1.1 million was recognized in interest income and $731,000 was deferred.

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COVID-19 Impact. As discussed elsewhere in this report, we have been actively managing our response to the unfolding COVID-19 pandemic. We are especially mindful and grateful to our Bank7 teammates, and will continue to work together to support each other, our customers, and our communities.

Further pandemic-induced economic downturns could result in increased deterioration in credit quality, past due loans, loan charge offs and collateral value declines, which could cause our results of operations and financial condition to be negatively impacted.

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,
	2020							2019
	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⁾	$	111,019	$	147		0.53	%	$	145,147	$	888		2.43	%
Investment securities⁽²⁾		1,138		2		0.70			1,069		4		1.48
Loans held for sale		425		—		0.00			265		—		0.00
Total loans⁽³⁾		847,076		12,777		6.00			651,186		12,179		7.42
Total interest-earning assets		959,658		12,926		5.36			797,667		13,071		6.50
Noninterest-earning assets		7,386							8,773
Total assets	$	967,044						$	806,440

Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts	$	381,572		545		0.57	%	$	287,241		1,234		1.70	%
Time deposits		200,961		780		1.54			220,935		1,237		2.22
Total interest-bearing deposits		582,533		1,325		0.90			508,176		2,471		1.93
Total interest-bearing liabilities		582,533		1,325		0.90			508,176		2,471		1.93

Noninterest-bearing liabilities:
Noninterest-bearing deposits		276,219							193,785
Other noninterest-bearing liabilities		5,363							4,467
Total noninterest-bearing liabilities		281,582							198,252
Shareholders’ equity		102,929							100,012
Total liabilities and shareholders’ equity	$	967,044						$	806,440

Net interest income including loan fee income			$	11,601						$	10,600
Net interest spread including loan fee income⁽⁴⁾						4.45	%						4.57	%
Net interest margin including loan fee income						4.81	%						5.27	%

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(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 2020 compared to the third quarter of 2019:

Interest income on short term investments totaled $147,000 as compared to $888,000, a decrease of $741,000 or 83.4% which was attributable to a $34.1 million decrease, or 23.5%, in average balances of interest bearing deposits at other financial institutions and a decrease in yield of 190 basis points, or 78.2%.

Total interest income on loans, including loan fee income, increased $598,000 or 4.9% to $12.8 million which was attributable to a $195.9 million increase in average total loans to $847.1 million, as compared with average loans of $651.2 million for the third quarter of 2019.

Loan fees totaled $1.1 million, an increase of $237,000 or 28.2%.

Yield on interest earning assets totaled 5.36%, a decrease of 114 basis points or 17.5%, compared to yield on interest earning assets of 6.50% for the third quarter of 2019; and

Net interest margin for the third quarter of 2020 was 4.81% compared to 5.27% for the third quarter of 2019.

	Net Interest Margin With Loan Fee Income
	For the Nine Months Ended September 30,
	2020							2019
	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⁾	$	120,909	$	701		0.77	%	$	155,073	$	2,785		2.40	%
Investment securities⁽²⁾		1,109		21		2.53			1,062		27		3.40
Loans held for sale		258		—		0.00			219		—		0.00
Total loans⁽³⁾		807,134		39,268		6.50			617,398		35,902		7.77
Total interest-earning assets		929,410		39,990		5.75			773,752		38,714		6.69
Noninterest-earning assets		8,439							8,942
Total assets	$	937,849						$	782,694

Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts	$	366,162		2,259		0.82	%	$	289,306		3,924		1.81	%
Time deposits		208,650		2,769		1.77			206,575		3,254		2.11
Total interest-bearing deposits		574,812		5,028		1.17			495,881		7,178		1.94
Total interest-bearing liabilities		574,812		5,028		1.17			495,881		7,178		1.94

Noninterest-bearing liabilities:
Noninterest-bearing deposits		256,429							186,379
Other noninterest-bearing liabilities		5,231							4,779
Total noninterest-bearing liabilities		261,660							191,158
Shareholders’ equity		101,377							95,655
Total liabilities and shareholders’ equity	$	937,849						$	782,694

Net interest income including loan fee income			$	34,962						$	31,536
Net interest spread including loan fee income⁽⁴⁾						4.58	%						4.75	%
Net interest margin including loan fee income						5.02	%						5.45	%

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(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 2020 compared to the same period in 2019:

Interest income on short term investments totaled $701,000 as compared to $2.8 million, a decrease of $2.1 million or 74.8% which was attributable to a $34.2 million decrease, or 22.0%, in average balances of interest bearing deposits at other financial institutions and a decrease in yield of 163 basis points, or 67.9%.

Total interest income on loans, including loan fee income, increased $3.4 million or 9.4% to $39.3 million which was attributable to a $189.7 million increase in average total loans to $807.1 million, as compared with average total loans of $617.4 million for the third quarter of 2019.

Loan fees totaled $4.0 million, an increase of $471,000 or 13.5%.

Yield on interest earning assets totaled 5.75%, a decrease of 94 basis points or 14.1%, compared to yield on interest earning assets of 6.69% for the same period in 2019; and

Net interest margin for the first nine months of 2020 was 5.02% compared to 5.45% for the same period in 2019.

Net Interest Income and Net Interest Margin Excluding Loan Fee Income. Due to fluctuating levels of nonrecurring loan fee income, 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.

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			Net Interest Margin Excluding Loan Fee Income
			For the Three Months Ended September 30,
	2020							2019
	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⁾	$	111,019	$	147		0.53	%	$	145,147	$	888		2.43	%
Investment securities⁽²⁾		1,138		2		0.70			1,069		4		1.48
Loans held for sale		425		—		0.00			265		—		0.00
Total loans⁽³⁾		847,076		11,699		5.49			651,186		11,338		6.91
Total interest-earning assets		959,658		11,848		4.91			797,667		12,230		6.08
Noninterest-earning assets		7,386							8,773
Total assets	$	967,044						$	806,440

Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts	$	381,572		545		0.57	%	$	287,241		1,234		1.70	%
Time deposits		200,961		780		1.54			220,935		1,237		2.22
Total interest-bearing deposits		582,533		1,325		0.90			508,176		2,471		1.93
Total interest-bearing liabilities		582,533		1,325		0.90			508,176		2,471		1.93

Noninterest-bearing liabilities:
Noninterest-bearing deposits		276,219							193,785
Other noninterest-bearing liabilities		5,363							4,467
Total noninterest-bearing liabilities		281,582							198,252
Shareholders’ equity		102,929							100,012
Total liabilities and shareholders’ equity	$	967,044						$	806,440

Net interest income excluding loan fee income			$	10,523						$	9,579
Net interest spread excluding loan fee income⁽⁴⁾						4.01	%						4.15	%
Net interest margin excluding loan fee income						4.36	%						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 2020 compared to the third quarter of 2019:

Total interest income on loans, excluding loan fee income, increased $361,000 or 3.2% to $11.7 million which was attributable to a $195.9 million increase in average total loans to $847.1 million as compared with average total loans of $651.2 million for the third quarter of 2019.

Yield on interest-earning assets, excluding loan fee income, totaled 4.91%, a decrease of 117 basis points or 19.2%, compared to yield on interest-earning assets excluding fee income of 6.08% for the third quarter of 2019, and

Net interest margin, excluding loan fee income, totaled 4.36%, a decrease of 49 basis points or 10.1%, compared to net interest margin excluding loan fee income of 4.85% for the third quarter of 2019.

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			Net Interest Margin Excluding Loan Fee Income
			For the Nine Months Ended September 30,
	2020							2019
	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⁾	$	120,909	$	701		0.77	%	$	155,073	$	2,785		2.40	%
Investment securities⁽²⁾		1,109		21		2.53			1,062		27		3.40
Loans held for sale		258		—		0.00			219		—		0.00
Total loans⁽³⁾		807,134		35,299		5.84			617,398		32,404		7.02
Total interest-earning assets		929,410		36,021		5.18			773,752		35,216		6.09
Noninterest-earning assets		8,439							8,942
Total assets	$	937,849						$	782,694

Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts	$	366,162		2,259		0.82	%	$	289,306		3,924		1.81	%
Time deposits		208,650		2,769		1.77			206,575		3,254		2.11
Total interest-bearing deposits		574,812		5,028		1.17			495,881		7,178		1.94
Total interest-bearing liabilities		574,812		5,028		1.17			495,881		7,178		1.94

Noninterest-bearing liabilities:
Noninterest-bearing deposits		256,429							186,379
Other noninterest-bearing liabilities		5,231							4,779
Total noninterest-bearing liabilities		261,660							191,158
Shareholders’ equity		101,377							95,655
Total liabilities and shareholders’ equity	$	937,849						$	782,694

Net interest income excluding loan fee income			$	30,993						$	28,038
Net interest spread excluding loan fee income⁽⁴⁾						4.01	%						4.15	%
Net interest margin excluding loan fee income						4.45	%						4.84	%

(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 2020 compared to the same period in 2019:

Total interest income on loans, excluding loan fee income, increased $2.9 million or 8.9% to $35.3 million which was attributable to a $189.7 million increase in average total loans to $807.1 million as compared with the average total loans of $617.4 million for the third quarter of 2019.

Yield on interest-earning assets, excluding loan fee income, totaled 5.18%, a decrease of 91 basis points or 14.9%, compared to yield on interest-earning assets excluding fee income of 6.09% for the same period in 2019; and

Net interest margin, excluding loan fee income, for the first nine months of 2020 was 4.45% compared to 4.84% for the same period in 2019.

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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, 2020 over 2019
	Change due to:
	Volume⁽¹⁾			Rate⁽¹⁾			Interest Variance
	(Dollars in thousands)
Increase (decrease) in interest income:
Short-term investments	$	(208	)	$	(533	)	$	(741	)
Investment securities		-			(2	)		(2	)
Total loans		3,654			(3,056	)		598
Total increase in interest income		3,446			(3,591	)		(145	)

Increase (decrease) in interest expense:
Deposits
Transaction accounts		404			(1,093	)		(689	)
Time deposits		(112	)		(345	)		(457	)
Total interest-bearing deposits		293			(1,439	)		(1,146	)
Total increase in interest expense		293			(1,439	)		(1,146	)

Increase (Decrease) in net interest income	$	3,153		$	(2,152	)	$	1,001

	Analysis of Changes in Interest Income and Expenses Including Loan Fee Income
	For the Nine Months Ended September 30, 2020 over 2019
	Change due to:
	Volume⁽¹⁾			Rate⁽¹⁾			Interest Variance
	(Dollars in thousands)
Increase (decrease) in interest income:
Short-term investments	$	(1,096	)	$	(988	)	$	(2,084	)
Investment securities		2			(8	)		(6	)
Total loans		19,704			(16,338	)		3,366
Total increase in interest income		18,611			(17,335	)		1,276

Increase (decrease) in interest expense:
Deposits
Transaction accounts		1,862			(3,527	)		(1,665	)
Time deposits		58			(543	)		(485	)
Total interest-bearing deposits		1,920			(4,070	)		(2,150	)
Total increase in interest expense		1,920			(4,070	)		(2,150	)

Increase (Decrease) in net interest income	$	16,691		$	(13,265	)	$	3,426

(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.

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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 1.26% at September 30, 2020 as compared to 1.11% at December 31, 2019. The increase was primarily due to provision expense of $3.3 million during the nine months ended September 30, 2020.

Noninterest Income

Noninterest income for the three months ended September 30, 2020 was $334,000 compared to $509,000 for the same period in 2019, a decrease of $175,000, or 34.4%. The following table sets forth the major components of our noninterest income for the three months ended September 30, 2020 and 2019:

	For the Three Months Ended September 30,
	2020			2019			$ Increase (Decrease)				% Increase (Decrease)
	(Dollars in thousands)
Noninterest income:
Secondary market income		$	57		$	69		$	(12	)		-17.39	%
Service charges on deposit accounts			104			110			(6	)		-5.45
Other income and fees			173			330			(157	)		-47.58
Total noninterest income		$	334		$	509		$	(175	)		-34.38	%

Noninterest income for the nine months ended September 30, 2020 was $965,000 compared to $1.0 million for the same period in 2019, a decrease of $62,000 or 6.0%. The following table sets forth the major components of our noninterest income for the nine months ended September 30, 2020 and 2019:

	For the Nine Months Ended September 30,
	2020			2019			$ Increase (Decrease)				% Increase (Decrease)
	(Dollars in thousands)
Noninterest income:
Secondary market income		$	134		$	146		$	(12	)		-8.22	%
Service charges on deposit accounts			318			279			39			13.98
Other income and fees			513			602			(89	)		-14.78
Total noninterest income		$	965		$	1,027		$	(62	)		-6.04	%

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Noninterest Expense

Noninterest expense for the three months ended September 30, 2020 was $4.6 million compared to $16.1 million for the same period in 2019, a decrease of $11.5 million, or 71.5%. The following table sets forth the major components of our noninterest expense for the three months ended September 30, 2020 and 2019:

	For the Three Months Ended September 30,
	2020		2019		$ Increase (Decrease)			% Increase (Decrease)
	(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits	$	2,505	$	14,256	$	(11,751	)		(82.43	)%
Furniture and equipment		224		229		(5	)		(2.18	)
Occupancy		543		436		107			24.54
Data and item processing		276		276		-			-
Accounting, marketing, and legal fees		135		218		(83	)		(38.07	)
Regulatory assessments		164		31		133			429.03
Advertising and public relations		62		71		(9	)		(12.68	)
Travel, lodging and entertainment		50		153		(103	)		(67.32	)
Other expense		625		402		223			55.47
Total noninterest expense	$	4,584	$	16,072	$	(11,488	)		(71.48	)%

Salaries and employee benefits totaled $2.5 million for the third quarter of 2020 compared to $14.3 million for the same period in 2019, a decrease of $11.8 million or 82.4%. This decrease related to the one-time, non-cash executive stock transaction in the third quarter of 2019.

Noninterest expense for the nine months ended September 30, 2020 was $13.1 million compared to $24.0 million for the same period in 2019, a decrease of $10.9 million, or 45.5%. The following table sets forth the major components of our noninterest expense for the nine months ended September 30, 2020 and 2019:

	For the Nine Months Ended September 30,
	2020		2019		$ Increase (Decrease)			% Increase (Decrease)
	(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits	$	7,576	$	18,792	$	(11,216	)		(59.68	)%
Furniture and equipment		658		606		52			8.58
Occupancy		1,417		1,157		260			22.47
Data and item processing		821		814		7			0.86
Accounting, marketing, and legal fees		338		507		(169	)		(33.33	)
Regulatory assessments		281		94		187			198.94
Advertising and public relations		360		349		11			3.15
Travel, lodging and entertainment		146		287		(141	)		(49.13	)
Other expense		1,463		1,269		194			15.29
Total noninterest expense	$	13,060	$	23,875	$	(10,815	)		(45.30	)%

Salaries and employee benefits totaled $7.6 million for the nine months ended September 30, 2020 compared to $18.8 million for the same period in 2019, a decrease of $11.2 million or 59.7%. This decrease related to the one-time, non-cash executive stock transaction in the third quarter of 2019.

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Financial Condition

The following discussion of our financial condition compares September 30, 2020 and December 31, 2019.

Total Assets

Total assets increased $107.0 million, or 12.3%, to $973.4 million as of September 30, 2020, as compared to $866.4 million as of December 31, 2019. 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, our expansion into the Tulsa market and the addition of PPP loans.

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, 2020 and December 31, 2019, our gross loans were $883.2 million and $708.7 million, respectively. Included in the commercial & industrial loan balance at September 30, 2020, are $64.3 million of loans that were originated under the SBA PPP program.

The following table presents the balance and associated percentage of each major category in our loan portfolio as of September 30, 2020, and December 31, 2019:

	As of September 30,						As of December 31,
	2020						2019
	Amount			% of Total			Amount			% of Total
	(Dollars in thousands)
Construction & development	$	108,453			12.3	%	$	70,628			10.0	%
1-4 family real estate		31,113			3.5			34,160			4.8
Commercial real estate – other		282,447			32.0			273,278			38.5
Total commercial real estate		422,013			47.8			378,066			53.3

Commercial & industrial		400,378			45.3			260,762			36.8
Agricultural		50,578			5.7			57,945			8.2
Consumer		10,253			1.2			11,895			1.7
Gross loans		883,222			100.0	%		708,668			100.0	%
Less unearned income, net		(2,643	)					(1,364	)
Total loans		880,579						707,304
Allowance for loan and lease losses		(11,131	)					(7,846	)
Net loans	$	869,448					$	699,458

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, 2020
	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	$	29	$	52,952	$	872	$	54,173	$	—	$	427	$	108,453
1-4 family commercial		116		15,471		5,121		9,691		40		674		31,113
Commercial real estate – other		876		53,982		48,216		174,398		312		4,663		282,447
Total commercial real estate		1,021		122,405		54,209		238,262		352		5,764		422,013

Commercial & industrial		27,236		181,286		28,209		157,104		11		6,532		400,378
Agricultural		5,358		29,863		2,811		11,149		62		1,335		50,578
Consumer		2,019		153		6,524		75		1,054		428		10,253
Gross loans	$	35,634	$	333,707	$	91,753	$	406,590	$	1,479	$	14,059	$	883,222

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	As of December 31, 2019
	Due in One Year or Less				Due after One Year Through Five Years				Due after Five Years
	Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Total
	(Dollars in thousands)
Construction & development	$	—	$	31,860	$	833	$	37,483	$	—	$	452	$	70,628
1-4 family real estate		282		9,598		3,843		19,676		43		718		34,160
Commercial real estate - other		1,849		23,533		23,194		219,390		335		4,977		273,278
Total real estate		2,131		64,991		27,870		276,549		378		6,147		378,066

Commercial & industrial		11,677		176,329		9,973		54,233		12		8,538		260,762
Agricultural		3,947		34,875		2,786		13,055		1,319		1,963		57,945
Consumer		2,042		—		4,824		159		4,047		823		11,895
Gross loans	$	19,797	$	276,195	$	45,453	$	343,996	$	5,756	$	17,471	$	708,668

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 $11.1 million at September 30, 2020, compared to $7.8 million at December 31, 2019.

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

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	For the Nine Months Ended
	September 30, 2020			December 31, 2019
	(Dollars in thousands)
Balance at beginning of the period	$	7,846		$	7,832
Provision for loan losses		3,300			—
Charge-offs:
Construction & development		—			—
1-4 family commercial		—			(2	)
Commercial real estate – other		—			—
Commercial & industrial		(39	)		(4	)
Agricultural		—			(11	)
Consumer		(1	)		(1	)
Total charge-offs		(40	)		(18	)
Recoveries:
Construction & development		—			—
1-4 family commercial		2			5
Commercial real estate – other		—			—
Commercial & industrial		13			24
Agricultural		10			3
Consumer		—			—
Total recoveries		25			32
Net recoveries (charge-offs)		(15	)		14
Balance at end of the period	$	11,131		$	7,846

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,
	2020						2019
	Amount			Percent			Amount		Percent
	(Dollars in thousands)
Construction & development		$	1,367		12.28	%	$	782		9.97	%
1-4 family commercial			392		3.52			378		4.82
Commercial real estate - other			3,560		31.98			3,025		38.55
Commercial & industrial			5,046		45.33			2,887		36.80
Agricultural			637		5.73			642		8.18
Consumer			129		1.16			132		1.68
Total		$	11,131		100.0	%	$	7,846		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.

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The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. In the nine months ending September 30, 2020, 23 loans totaling $121.0 million were modified, related to COVID-19, which were not considered troubled debt restructurings.

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.

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

	As of September 30,			As of December 31,
	2020			2019
	(Dollars in thousands)
Nonaccrual loans	$	20,515		$	1,809
Troubled debt restructurings ⁽¹⁾		—			912
Accruing loans 90 or more days past due		—			612
Total nonperforming loans		20,515			3,333
Other real estate owned		—			—
Total nonperforming assets	$	20,515		$	3,333
Ratio of nonperforming loans to total loans		2.33	%		0.47	%
Ratio of nonperforming assets to total assets		2.11	%		0.38	%

(1)

$1.66 million and $1.81 million of TDRs as of September 30, 2020 and December 31, 2019, 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, 2020
	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	$	—	$	—	$	—	$	—	$	—	$	108,453	$	108,453
1-4 family commercial		—		—		—		—		—		31,113		31,113
Commercial real estate - other		—		1,957		—		—		1,957		280,490		282,447
Commercial & industrial		920		7,071		—		—		7,991		392,387		400,378
Agricultural		—		1,948		—		—		1,948		48,630		50,578
Consumer		—		—		—		—		—		10,253		10,253
Total	$	920	$	10,976	$	—	$	—	$	11,896	$	871,326	$	883,222

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	As of December 31, 2019
	Loans 30-59 days past due		Loans 60-89 days past due		Loans 90+ days past due		Total Loans 90+ days and accruing		Total past due Loans		Current		Gross Loans
	(Dollars in thousands)
Construction & development	$	—	$	—	$	—	$	—	$	—	$	70,628	$	70,628
1-4 family commercial		—		—		—		—		—		34,160		34,160
Commercial real estate – other		—		—		—		—		—		273,278		273,278
Commercial & industrial		—		—		14		14		14		260,748		260,762
Agricultural		—		—		598		598		598		57,347		57,945
Consumer		90		—		—		—		90		11,805		11,895
Total	$	90	$	—	$	612	$	612	$	702	$	707,966	$	708,668

In addition to the past due and nonaccrual criteria, we also evaluates loans according to our 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 $34.5 million as of September 30, 2020, an increase of $23.4 million compared to December 31, 2019. The increase primarily related to two commercial real estate relationships totaling $3.5 million, one agricultural relationship totaling $1.9 million, and four commercial & industrial relationships comprised of one note each, totaling $25.3 million with no specific reserves.

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

	As of September 30, 2020
	Pass		Watch		Special mention		Substandard		Total
	(Dollars in thousands)
Construction & development	$	108,453	$	—	$	—	$	—	$	108,453
1-4 family commercial		29,209		776		—		1,128		31,113
Commercial real estate – other		264,337		9,988		2,998		5,124		282,447
Commercial & industrial		352,477		11,662		9,958		26,281		400,378
Agricultural		48,630		—		—		1,948		50,578
Consumer		10,253		—		—		—		10,253
Total	$	813,359	$	22,426	$	12,956	$	34,481	$	883,222

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

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, 2020 and December 31, 2019.

	As of September 30, 2020
	Number of Contracts		Pre-Modification Outstanding Recorded Investment			Post-Modification Outstanding Recorded Investment			Specific Reserves Allocated
	(Dollars in thousands)
Commercial real estate – other		1		$	1,656		$	1,656		$	26
Total		1		$	1,656		$	1,656		$	26

	As of December 31, 2019
	(Dollars in thousands)
Commercial & industrial		1	$	1,809	$	1,809	$	26
Agricultural		2		912		912		—
Total		3	$	2,721	$	2,721	$	26

There were no payment defaults with respect to loans modified as TDRs as of September 30, 2020 and December 31, 2019. One relationship, comprised of two notes totaling $907,000 as of September 30, 2020, was removed from the TDR listing during the period, as it no longer qualified for TDR status.

Impairment analyses are prepared on TDRs in conjunction with the normal allowance process. There were no TDRs restructured during the nine months ended September 30, 2020 and TDR’s restructured during the twelve months ended December 31, 2019 required $26,000 in specific reserves. There were no charge-offs on TDRs for the nine months ended September 30, 2020 or the twelve months ended December 31, 2019.

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

	As of September 30, 2020					As of December 31, 2019
	Number of Contracts			Amount		Number of Contracts		Amount
			(Dollars in thousands)
Accrual		—		$	—		2	$	912
Nonaccrual		1			1,656		1		1,809
Total		1		$	1,656		3	$	2,721

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Deposits

We gather deposits primarily through our nine branch locations and online through 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 and ICS programs, where customer funds are placed into multiple deposit accounts, 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, 2020 and December 31, 2019 were $863.7 million and $757.5 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,
	2020					2019
	Amount		Percentage of Total			Amount		Percentage of Total
	(Dollars in thousands)
Noninterest-bearing demand	$	272,008		31.5	%	$	219,221		29.0	%
Interest-bearing:
NOW deposits		177,366		20.6			112,420		14.8
Money market		172,852		20.0			150,554		19.9
Savings deposits		57,928		6.7			72,750		9.6
Time deposits (more than $100,000)		159,079		18.4			173,898		22.9
Time deposits ($100,000 or less)		24,436		2.8			28,640		3.8
Total interest-bearing		591,661		68.5			538,262		71.0
Total deposits	$	863,669		100.0	%	$	757,483		100.0	%

The following table summarizes our average deposit balances and weighted average rates for the nine-month period ending September 30, 2020 and year ended December 31, 2019:

	For the Nine Months Ended September 30,					For the Year Ended December 31,
	2020					2019
	Average Balance		Weighted Average Rate			Average Balance		Weighted Average Rate
	(Dollars in thousands)
Noninterest-bearing demand	$	256,429		0.00	%	$	192,562		0.00	%
Interest-bearing:
NOW		153,653		0.89			95,694		1.83
Money market		152,092		0.84			132,265		1.83
Savings		60,417		0.63			67,617		1.30
Time		208,650		1.77			208,375		2.14
Total interest-bearing		574,812		1.17			503,951		1.89
Total deposits	$	831,241		0.81	%	$	696,513		1.37	%

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

	As of September 30, 2020 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)		$	4,436	$	6,791	$	8,407	$	7,902	$	27,536
Time deposits (more than $100,000)			29,764		34,022		55,497		36,696		155,979
Total time deposits		$	34,200	$	40,813	$	63,904	$	44,598	$	183,515

	As of December 31, 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)		$	6,998	$	5,024	$	8,387	$	8,231	$	28,640
Time deposits (more than $100,000)			52,048		34,126		49,700		38,024		173,898
Total time deposits		$	59,046	$	39,150	$	58,087	$	46,255	$	202,538

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, 2020, 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 $65.3 million as of September 30, 2020 and $71.7 million as of December 31, 2019.

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, 2020, 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, 2020 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, 2020 and December 31, 2019. 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.

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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, 2020, 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, 2020:
Total capital to risk-weighted assets
Company	$	113,695		14.09	%	$	84,723		10.50	%		N/A		N/A
Bank		113,640		14.10			84,615		10.50			80,586		10.00	%
Tier 1 capital to risk-weighted assets
Company		103,596		12.84			68,585		8.50			N/A		N/A
Bank		103,554		12.85			68,498		8.50			64,469		8.00
CET 1 capital to risk-weighted assets
Company		103,596		12.84			56,482		7.00			N/A		N/A
Bank		103,554		12.85			56,410		7.00			52,381		6.50
Tier 1 leverage ratio
Company		103,596		10.72			N/A		N/A			N/A		N/A
Bank		103,554		10.72			N/A		N/A			48,289		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, 2019:
Total capital to risk-weighted assets
Company	$	105,137		15.25	%	$	72,393		10.50	%		N/A		N/A
Bank		106,148		15.42			72,287		10.50			68,845		10.00	%
Tier 1 capital to risk-weighted assets
Company		97,291		14.11			58,604		8.50			N/A		N/A
Bank		98,302		14.28			58,518		8.50			55,076		8.00
CET 1 capital to risk-weighted assets
Company		97,291		14.11			48,262		7.00			N/A		N/A
Bank		98,302		14.28			48,192		7.00			44,749		6.50
Tier 1 leverage ratio
Company		97,291		11.53			N/A		N/A			N/A		N/A
Bank		98,302		11.65			N/A		N/A			42,241		5.00

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 $105.2 million as of September 30, 2020, compared to $100.1 million as of December 31, 2019. The increases were driven by retained capital from net income during the periods.

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Contractual Obligations

The following tables contain supplemental information regarding our total contractual obligations as of September 30, 2020, and December 31, 2019:

	Payments Due as of September 30, 2020
	Within One Year			One to Three Years		Three to Five Years		After Five Years		Total
	(Dollars in thousands)
Deposits without a stated maturity		$	680,154	$	—	$	—	$	—	$	680,154
Time deposits			138,917		43,633		965		—		183,515
Borrowings			—		—		—		—		—
Operating lease commitments			536		451		83		—		1,070
Total contractual obligations		$	819,607	$	44,084	$	1,048	$	—	$	864,739

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

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 income.

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, 2020			As of December 31, 2019
	(Dollars in thousands)
Commitments to extend credit		$	191,479	$	191,459
Standby letters of credit			860		3,338
Total		$	192,339	$	194,797

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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 our consolidated unaudited financial statements as of September 30, 2020.

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 and risk characteristics. 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.

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 our goodwill as of September 30, 2020 and December 31, 2019. During the period ended September 30, 2020, the economic stress and market volatility resulting from the COVID-19 pandemic resulted in a substantial decrease in our stock price and market capitalization. Management believed such decrease was a triggering indicator requiring an interim goodwill impairment qualitative analysis which resulted in no impairment charge for the period ended September 30, 2020. Refer to Note 1, Nature of Operations and Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included elsewhere in this report for additional information.

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.

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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

We file 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 our 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 our disclosures regarding market risk since December 31, 2019, the date of our most recent annual report to shareholders.

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, 2020 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 nine months ended September 30, 2020 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.

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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, 2019 and the supplemental risk factor information disclosed on Form 10-Q for the period ended March 31, 2020.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth our market repurchases of Bank7 Corp. common stock and the Bank7 common shares retained in connection with net settlement of restricted stock awards during the nine months ended September 30, 2020. On September 5, 2019, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to 500,000 shares of the Company’s common stock. On March 13, 2020, the Company’s Board of Directors approved a 500,000 share expansion to the existing stock repurchase program, for a total of 1,000,000 shares authorized under the program. The Company may repurchase shares of common stock on the open market or through privately negotiated transactions at times and prices considered appropriate, at the discretion of the Company, and subject to its assessment of alternative uses of capital, stock trading price, general market conditions and regulatory factors. The stock repurchase programs do not obligate the Company to acquire any specific number of shares and will continue in effect until terminated by the Board of Directors of the Company. Shares of common stock repurchased under these programs will be retired subsequent to acquisition. During the nine months ended September 30, 2020, there were 835,254 shares purchased under the programs with 164,746 shares remaining under the Board-authorized stock repurchase program.

	Number of Shares Purchased		Average Price Paid Per Share		Number of Shares That May Yet be Purchased Under the Program
	(Dollars in thousands, except per share data)
January 1, 2020 to January 31, 2020		—		—		—
February 1, 2020 to February 29, 2020		—		—		—
March 1, 2020 to March 31, 2020		793,094	$	8.59		206,906
April 1, 2020 to April 30, 2020		28,395	$	7.28		178,511
May 1, 2020 to May 31, 2020		9,765	$	9.69		168,746
June 1, 2020 to June 30, 2020		—		—		168,746
July 1, 2020 to July 31, 2020		—		—		168,746
August 1, 2020 to August 31, 2020		—		—		168,746
September 1, 2020 to September 30, 2020		4,000	$	8.96		164,746
For the Nine Months Ended September 30, 2020		835,254	$	8.56		164,746

ITEM 6.

Exhibits

31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema Document.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

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

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SIGNATURES

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

		BANK7 CORP.

DATED:	November 16, 2020	By: /s/ Thomas L. Travis
		Thomas L. Travis
		President and Chief Executive Officer

DATED:	November 16, 2020	By: /s/ Kelly J. Harris
		Kelly J. Harris
		Senior Vice President and Chief Financial Officer