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Bank7 Corp. - Quarter Report: 2020 March (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 March 31, 2020

OR

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

For the transition period from                 to

Commission File Number: 001-38656

Bank7 Corp.
(Exact name of registrant as specified in its charter)

Oklahoma

20-0763496
( State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)



1039 N.W. 63rd Street

73116-7361
(Address of principal executive offices)

(Zip Code)

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

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

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

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

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

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

Large accelerated filer
Accelerated filer




Non-accelerated filer
  (Do not check if a smaller reporting company)
Smaller reporting company




Emerging growth company



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

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

As of May 12, 2020, the registrant had 9,226,252 shares of common stock, par value $0.01, outstanding.



TABLE OF CONTENTS
 
    Page



PART I.
FINANCIAL INFORMATION
 


 
Item 1.
 3
  3
 
4
  5
  6
 
7
Item 2.
27
Item 3.
46
Item 4.
46


 
PART II.
46



Item 1.
46
Item 1A.
46
Item 2.
48
Item 6.
48

49

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

Item 1.
Financial Statements

Bank7 Corp.
Unaudited Condensed Consolidated Balance Sheets
(Dollar amounts in thousands)

Assets
 
March 31,
2020
(unaudited)
   
December
31, 2019
 
             
Cash and due from banks
 
$
148,626
   
$
117,128
 
Interest-bearing time deposits in other banks
   
30,102
     
30,147
 
Loans, net of allowance for loan losses of $8,513 and $7,846 at March 31, 2020 and December 31, 2019, respectively
   
777,220
     
699,458
 
Loans held for sale, at fair value
   
-
     
1,031
 
Premises and equipment, net
   
9,644
     
9,624
 
Nonmarketable equity securities
   
1,089
     
1,100
 
Goodwill and other intangibles, net
   
1,737
     
1,789
 
Interest receivable and other assets
   
5,932
     
6,115
 
                 
Total assets
 
$
974,350
   
$
866,392
 
                 
Liabilities and Shareholders’ Equity
               
                 
Deposits
               
Noninterest-bearing
 
$
254,735
   
$
219,221
 
Interest-bearing
   
616,221
     
538,262
 
                 
Total deposits
   
870,956
     
757,483
 
                 
Income taxes payable
   
1,817
     
357
 
Interest payable and other liabilities
   
3,961
     
8,426
 
                 
Total liabilities
   
876,734
     
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: 9,264,412 and 10,057,506, at March 31, 2020 and December 31, 2019 respectively
   
93
     
101
 
Additional paid-in capital
   
92,571
     
92,391
 
Retained earnings
   
4,952
     
7,634
 
                 
Total shareholders’ equity
   
97,616
     
100,126
 
Total liabilities and shareholders’ equity
 
$
974,350
   
$
866,392
 

See Notes to Unaudited Condensed Consolidated Financial Statements

Bank7 Corp.
Unaudited Condensed Consolidated Statements of Income
(Dollar amounts in thousands, except per share data)

   
Three months ended
March 31,
 
   
2020
   
2019
 
Interest Income
           
Loans, including fees
 
$
13,106
   
$
11,622
 
Interest-bearing time deposits in other banks
   
162
     
417
 
Interest-bearing deposits in other banks
   
239
     
538
 
                 
Total interest income
   
13,507
     
12,577
 
                 
Interest Expense
               
Deposits
   
2,075
     
2,224
 
                 
Total interest expense
   
2,075
     
2,224
 
                 
Net Interest Income
   
11,432
     
10,353
 
                 
Provision for Loan Losses
   
650
     
-
 
                 
Net Interest Income After Provision for Loan Losses
   
10,782
     
10,353
 
                 
Noninterest Income
               
Secondary market income
   
38
     
37
 
Service charges on deposit accounts
   
119
     
60
 
Other
   
173
     
126
 
                 
Total noninterest income
   
330
     
223
 
                 
Noninterest Expense
               
Salaries and employee benefits
   
2,474
     
2,171
 
Furniture and equipment
   
216
     
159
 
Occupancy
   
461
     
343
 
Data and item processing
   
276
     
262
 
Accounting, marketing and legal fees
   
126
     
147
 
Regulatory assessments
   
23
     
32
 
Advertising and public relations
   
269
     
186
 
Travel, lodging and entertainment
   
53
     
42
 
Other
   
455
     
413
 
                 
Total noninterest expense
   
4,353
     
3,755
 
                 
Income Before Taxes
   
6,759
     
6,821
 
Income tax expense
   
1,708
     
1,705
 
Net Income
 
$
5,051
   
$
5,116
 
                 
Earnings per common share - basic
 
$
0.51
   
$
0.50
 
Earnings per common share - diluted
   
0.51
     
0.50
 
Weighted average common shares outstanding - basic
   
9,972,899
     
10,187,500
 
Weighted average common shares outstanding - diluted
   
9,972,899
     
10,187,500
 

See Notes to Unaudited Condensed Consolidated Financial Statements

Bank7 Corp.
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
(Dollar Amounts in thousands, except share data)

   
Three Months Ended
March 31,
 
   
2020
   
2019
 
Common Stock  (Shares)
           
Balance at beginning of period
   
10,057,506
     
10,187,500
 
Shares acquired and canceled
   
(793,094
)
   
-
 
Balance at end of period
   
9,264,412
     
10,187,500
 
                 
Common Stock (Amount)
               
Balance at beginning of period
 
$
101
   
$
102
 
Shares acquired and canceled
   
(8
)
   
-
 
Balance at end of period
 
$
93
   
$
102
 
                 
Additional Paid-in Capital
               
Balance at beginning of period
 
$
92,391
   
$
80,275
 
Stock-based compensation expense
   
180
     
171
 
Balance at end of period
 
$
92,571
   
$
80,446
 
                 
Retained Earnings
               
Balance at beginning of period
 
$
7,634
   
$
8,089
 
Net income
   
5,051
     
5,116
 
Common stock acquired and canceled
   
(6,807
)
   
-
 
Cash dividends declared ($0.10 per share)
   
(926
)
   
-
 
Balance at end of period
 
$
4,952
   
$
13,205
 
                 
Total shareholders’ equity
 
$
97,616
   
$
93,753
 

See Notes to Unaudited Condensed Consolidated Financial Statements

Bank7 Corp.
Unaudited Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in thousands)

   
For the Three Months Ended
March 31,
 
   
2020
   
2019
 
Operating Activities
           
Net income
 
$
5,051
   
$
5,116
 
Items not requiring (providing) cash
               
Depreciation and amortization
   
270
     
175
 
Provision for loan losses
   
650
     
-
 
Gain on sales of loans
   
(38
)
   
(37
)
Stock-based compensation expense
   
180
     
171
 
Cash receipts from the sale of loans originated for sale
   
2,440
     
2,685
 
Cash disbursements for loans originated for sale
   
(1,371
)
   
(2,343
)
Deferred income tax benefit
   
(20
)
   
(43
)
Changes in
               
Interest receivable and other assets
   
203
     
786
 
Interest payable and other liabilities
   
1,098
     
665
 
                 
Net cash provided by operating activities
   
8,463
     
7,175
 
                 
Investing Activities
               
Maturities of interest-bearing time deposits in other banks
   
12,723
     
6,973
 
Purchases of interest-bearing time deposits in other banks
   
(12,678
)
   
(9,491
)
Net change in loans
   
(78,412
)
   
13,288
 
Purchases of premises and equipment
   
(238
)
   
(659
)
Change in nonmarketable equity securities
   
11
     
-
 
                 
Net cash (used in) provided by investing activities
   
(78,594
)
   
10,111
 
                 
Financing Activities
               
Net change in deposits
   
113,473
     
10,773
 
Cash distributions
   
(5,029
)
   
-
 
Common stock acquired and canceled
   
(6,815
)
   
-
 
                 
Net cash provided by financing activities
   
101,629
     
10,773
 
                 
Increase in Cash and Due from Banks
   
31,498
     
28,059
 
                 
Cash and Due from Banks, Beginning of Period
   
117,128
     
128,090
 
                 
Cash and Due from Banks, End of Period
 
$
148,626
   
$
156,149
 
                 
Supplemental Disclosure of Cash Flows Information
               
Interest paid
 
$
2,245
   
$
2,180
 
Dividends declared and not paid
 
$
926
   
$
-
 

See Notes to Unaudited Condensed Consolidated Financial Statements

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 three months ended March 31, 2020, 793,094 shares were repurchased under the Company’s share repurchase program at an average price of $8.59 per share and retired and returned to the status of authorized but unissued shares. There were no shares repurchased during the three months ended March 31, 2019.

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

Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Bank7 Corp.
Notes to Unaudited 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.
 
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, 2019.  Additionally, a modified retrospective transition approach is required for a leases existing at the earliest comparative period presented.  Management is assessing the impact of this ASU; however, it is not expected to have a material impact on the Company’s financial condition, results of operation, or capital position, but will impact the presentation on the balance sheet of the Company’s current operating leases.  The Company will adopt this ASU in the first quarter of 2021.
 
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326).  The ASU requires the replacement of the current incurred loss model with an expected loss model, referred to as the current expected credit loss (CECL) model.  The guidance in the ASU is effective for reporting periods beginning after December 15, 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.
 
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 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 three months ending March 31, 2020, 25 loans totaling $80.2 million were modified, related to COVID-19, that were not considered troubled debt restructurings. 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.
 
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.

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

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 March 31, 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.
 
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
March 31,
 
   
2020
   
2019
 
(Dollars in thousands, except per share amounts)
           
Numerator
           
Net income
 
$
5,051
   
$
5,116
 
                 
Denominator
               
Denominator for basic earnings per common share
   
9,972,899
     
10,187,500
 
Dilutive effect of stock compensation (1)
   
-
     
-
 
Denominator for diluted earnings per share
   
9,972,899
     
10,187,500
 
                 
Earnings per common share
               
Basic
 
$
0.51
   
$
0.50
 
Diluted
 
$
0.51
   
$
0.50
 

 
(1)
Nonqualified stock options outstanding of 186,500 and 165,000 as of March 31, 2020 and 2019, respectively, have not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented.

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 4:
Loans and Allowance for Loan Losses
 
A summary of loans at March 31, 2020 and December 31, 2019, are as follows (dollars in thousands):
 


March 31,
2020


December 31,
2019

             
Construction & development
 
$
87,324
   
$
70,628
 
1 - 4 family real estate
   
34,760
     
34,160
 
Commercial real estate - other
   
280,474
     
273,278
 
Total commercial real estate
   
402,558
     
378,066
 
                 
Commercial & industrial
   
323,273
     
260,762
 
Agricultural
   
50,993
     
57,945
 
Consumer
   
10,671
     
11,895
 
                 
Gross loans
   
787,495
     
708,668
 
                 
Less allowance for loan losses
   
(8,513
)
   
(7,846
)
Less deferred loan fees
   
(1,762
)
   
(1,364
)
                 
Net loans
 
$
777,220
   
$
699,458
 

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three months ended March 31, 2020 and 2019 (dollars in thousands):
 

 
Construction &
Development
   
1 - 4 Family
Real Estate
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
March 31, 2020
                                         
Balance, beginning of period
 
$
782
   
$
378
   
$
3,025
   
$
2,887
   
$
642
   
$
132
   
$
7,846
 
                                                         
Charge-offs
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Recoveries
   
-
     
1
     
-
     
6
     
10
     
-
     
17
 
                                                         
Net recoveries
   
-
     
1
     
-
     
6
     
10
     
-
     
17
 
                                                         
Provision (credit) for loan losses
   
162
     
(3
)
   
7
     
602
     
(101
)
   
(17
)
   
650
 
                                                         
Balance, end of period
 
$
944
   
$
376
   
$
3,032
   
$
3,495
   
$
551
   
$
115
   
$
8,513
 

   
Construction &
Development
   
1 - 4 Family
Real Estate
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
March 31, 2019
                                         
Balance, beginning of period
 
$
1,136
   
$
433
   
$
2,035
   
$
3,231
   
$
818
   
$
179
   
$
7,832
 
                                                         
Charge-offs
   
-
     
-
     
-
     
(4
)
   
-
     
-
     
(4
)
Recoveries
   
-
     
-
     
-
     
7
     
-
     
-
     
7
 
                                                         
Net recoveries
   
-
     
-
     
-
     
3
     
-
     
-
     
3
 
                                                         
Provision (credit) for loan losses
   
154
     
19
     
52
     
(166
)
   
(58
)
   
(1
)
   
-
 
                                                         
Balance, end of period
 
$
1,290
   
$
452
   
$
2,087
   
$
3,068
   
$
760
   
$
178
   
$
7,835
 

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

The following table presents, by portfolio segment, the balance in allowance for loan losses and the gross loans based upon portfolio segment and impairment method as of March 31, 2020 and December 31, 2019 (dollars in thousands):

   
Construction &
Development
   
1 - 4 Family
Real Estate
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
March 31, 2020
                                         
Allowance Balance
                                         
Ending balance Individually evaluated for impairment
 
$
-
   
$
-
   
$
26
   
$
-
   
$
-
   
$
-
   
$
26
 
Collectively evaluated for impairment
   
944
     
376
     
3,006
     
3,495
     
551
     
115
     
8,487
 
                                                         
Total
 
$
944
   
$
376
   
$
3,032
   
$
3,495
   
$
551
   
$
115
   
$
8,513
 
                                                         
Gross Loans
                                                       
Ending balance Individually evaluated for impairment
 
$
-
   
$
-
   
$
3,749
   
$
8,952
   
$
2,414
   
$
-
   
$
15,115
 
Collectively evaluated for impairment
   
87,324
     
34,760
     
276,725
     
314,321
     
48,579
     
10,671
     
772,380
 
                                                         
Total
 
$
87,324
   
$
34,760
   
$
280,474
   
$
323,273
   
$
50,993
   
$
10,671
   
$
787,495
 
                                                         
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
 

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.

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

 
Grade 3 (Special Mention) – These loans must have observable weaknesses or evidence imprudent handling or structural issues. The weaknesses require close attention and the remediation of those weaknesses is necessary. No risk of probable loss exists. Credits in this category are expected to quickly migrate to a “2” or a “4” as this is viewed as a transitory loan grade.
 
 
Grade 4 (Substandard) – These loans are not adequately protected by the sound worth and debt service capacity of the Borrower, but may be well secured. They have defined weaknesses relative to cash flow, collateral, financial condition, or other factors that might jeopardize repayment of all of the principal and interest on a timely basis. There is the possibility that a future loss will occur if weaknesses are not remediated.
 
The Company evaluates the definitions of loan grades and the allowance for loan losses methodology on an ongoing basis.  No changes were made to either during the period ended March 31, 2020.
 
The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category as of March 31, 2020 and December 31, 2019 (dollars in thousands):

   
Construction &
Development
   
1 - 4 Family
Real Estate
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
March 31, 2020
                                         
Grade
                                         
1 (Pass)
 
$
87,324
   
$
33,973
   
$
267,047
   
$
290,136
   
$
46,450
   
$
10,671
   
$
735,601
 
2 (Watch)
   
-
     
787
     
9,678
     
7,764
     
-
     
-
     
18,229
 
3 (Special Mention)
   
-
     
-
     
-
     
16,421
     
2,129
     
-
     
18,550
 
4 (Substandard)
   
-
     
-
     
3,749
     
8,952
     
2,414
     
-
     
15,115
 
                                                         
Total
 
$
87,324
   
$
34,760
   
$
280,474
   
$
323,273
   
$
50,993
   
$
10,671
   
$
787,495
 

   
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
 

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 March 31, 2020 and December 31, 2019 (dollars in thousands):
 
   
Past Due
             
Total Loans
 
   
30–59
Days
   
60–89
Days
   
Greater than
90 Days
   
Total
   
Current
   
Total
Loans
   
> 90 Days &
Accruing
 
                                           
March 31, 2020
                                         
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
87,324
   
$
87,324
   
$
-
 
1 - 4 Family Real Estate
   
142
     
93
     
-
     
235
     
34,525
     
34,760
     
-
 
Commercial Real Estate - other
   
2,920
     
-
     
-
     
2,920
     
277,554
     
280,474
     
-
 
Commercial & industrial
   
-
     
-
     
14
     
14
     
323,259
     
323,273
     
14
 
Agricultural
   
-
     
-
     
598
     
598
     
50,395
     
50,993
     
598
 
Consumer
   
298
     
-
     
-
     
298
     
10,373
     
10,671
     
-
 
                                                         
Total
 
$
3,360
   
$
93
   
$
612
   
$
4,065
   
$
783,430
   
$
787,495
   
$
612
 
                                                         
                                                         
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 March 31, 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
 
                                           
                                 
Three Months Ended March 31, 2020
 
March 31, 2020
                                         
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
1 - 4 Family Real Estate
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Commercial Real Estate - other
   
3,749
     
1,991
     
1,758
     
3,749
     
26
     
3,926
     
71
 
Commercial & industrial
   
8,952
     
8,952
     
-
     
8,952
     
-
     
4,093
     
181
 
Agricultural
   
1,630
     
1,630
     
-
     
1,630
     
-
     
2,847
     
38
 
Consumer
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
                                                         
Total
 
$
14,331
   
$
12,573
   
$
1,758
   
$
14,331
   
$
26
   
$
10,866
   
$
290
 

December 31, 2019
                                         
Three Months Ended March 31, 2019
 
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
1 - 4 Family Real Estate
   
-
     
-
     
-
     
-
     
-
     
115
     
-
 
Commercial Real Estate - other
   
5,841
     
4,032
     
1,809
     
5,841
     
26
     
959
     
33
 
Commercial & industrial
   
2,750
     
2,750
     
-
     
2,750
     
-
     
6,591
     
123
 
Agricultural
   
2,527
     
1,744
     
-
     
1,744
     
-
     
1,832
     
57
 
Consumer
   
-
     
-
     
-
     
-
     
-
     
193
     
5
 
                                                         
Total
 
$
11,118
   
$
8,526
   
$
1,809
   
$
10,335
   
$
26
   
$
9,690
   
$
218
 

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 March 31, 2020, the Company had $1,758,000 of commercial real estate loans and $946,000 of agricultural loans that were modified in troubled-debt restructurings and impaired and $1,758,000 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 three months ended March 31, 2020.

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

There were no troubled-debt restructurings modified in the past three months that subsequently defaulted for the period ended March 31, 2020.
 
The following table represents information regarding nonperforming assets at March 31, 2020 and December 31, 2019 (dollars in thousands):
 
   
As of
 
   
March 31,
2020
   
December 31,
2019
 
Nonaccrual loans
 
$
1,758
   
$
1,809
 
Troubled-debt restructurings (1)
   
946
     
912
 
Accruing loans 90 or more days past due
   
612
     
612
 
Total nonperforming loans
 
$
3,316
   
$
3,333
 

 
(1)
$1.76 million and $1.81 million of TDRs as of March 31, 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. In the first quarter ending March 31, 2020, 25 loans totaling $80.2 million were modified, related to COVID-19, that were not considered troubled debt restructurings.  Through May 12, 2020, we have modified terms on 165 loans totaling approximately $285.7 million.

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 to the existing stock repurchase program, for a total of 1,000,000 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 March 31, 2020, there were 206,906 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:
 
Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

   
Three Months Ended
March 31,
 
   
2020
   
2019
 
Number of shares repurchased
   
793,094
     
-
 
Average price of shares repurchased
 
$
8.59
   
$
-
 
Shares remaining to be repurchased
   
206,906
     
-
 

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 March 31, 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 March 31, 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.
 
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 March 31, 2020
                                               
Total capital to risk-weighted assets
                                               
Company
 
$
104,392
     
13.55
%
 
$
61,651
     
8.00
%
 
$
80,917
     
10.50
%
   
N/A
     
N/A
 
Bank
 
$
104,348
     
13.56
%
 
$
61,570
     
8.00
%
 
$
80,810
     
10.50
%
 
$
76,962
     
10.00
%
Tier I capital to risk-weighted assets
                                                               
Company
 
$
95,879
     
12.44
%
 
$
46,238
     
6.00
%
 
$
65,504
     
8.50
%
   
N/A
     
N/A
 
Bank
 
$
95,836
     
12.45
%
 
$
46,177
     
6.00
%
 
$
65,418
     
8.50
%
 
$
61,570
     
8.00
%
CET I capital to risk-weighted assets
                                                               
Company
 
$
95,879
     
12.44
%
 
$
34,679
     
4.50
%
 
$
53,944
     
7.00
%
   
N/A
     
N/A
 
Bank
 
$
95,836
     
12.45
%
 
$
34,633
     
4.50
%
 
$
53,874
     
7.00
%
 
$
50,025
     
6.50
%
Tier I capital to average assets
                                                               
Company
 
$
95,879
     
10.98
%
 
$
34,923
     
4.00
%
   
N/A
     
N/A
     
N/A
     
N/A
 
Bank
 
$
95,836
     
10.97
%
 
$
34,936
     
4.00
%
   
N/A
     
N/A
   
$
43,670
     
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
     
8.500
%
   
N/A
     
N/A
 
Bank
 
$
98,302
     
14.28
%
 
$
41,307
     
6.00
%
 
$
58,518
     
8.500
%
 
$
55,076
     
8.00
%
CET I capital to risk-weighted assets
                                                               
Company
 
$
97,291
     
14.11
%
 
$
31,026
     
4.50
%
 
$
48,262
     
7.000
%
   
N/A
     
N/A
 
Bank
 
$
98,302
     
14.28
%
 
$
30,980
     
4.50
%
 
$
48,192
     
7.000
%
 
$
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.
 
Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

As fully phased in, a banking organization with a buffer greater than 2.5% would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero.  The new rule also prohibits a banking organization from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as 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:
 
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 March 31, 2020, approximately $25.4 million of retained earnings was available for dividend declaration from the Bank without prior regulatory approval.
 
Note 6:
Related-Party Transactions
 
At March 31, 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
 
                         
Three months ended March 31, 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 March 31, 2020 and 2019.  In addition, payroll and office sharing arrangements were in place between the Company and certain of its affiliates.
 
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 March 31, 2020 and 2019 totaled $45,000 and $66,000, 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 March 31, 2020 and 2019 totaled $180,000 and $171,000 respectively.
 
On September 5, 2019, our largest shareholders, the Haines Family Trusts, contributed approximately 6.5% of their shares (656,925 shares) to the Company.  Subsequently, the Company immediately issued those shares to certain executive officers, which was charged as compensation expense of $11.8 million, including payroll taxes, through the income statement of the Company. Additionally, at the discretion of the employees receiving shares to assist in paying tax withholdings, 149,425 shares were withheld and subsequently canceled, resulting in a charge to retained earnings of $2.6 million.
 
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
 
Three Months Ended March 31, 2020
                       
Outstanding at December 31, 2019
   
163,000
   
$
18.75
             
Options Granted
   
26,500
     
18.49
             
Options Exercised
   
-
     
-
             
Options Forfeited
   
(3,000
)
   
17.42
             
Outstanding at March 31, 2020
   
186,500
   
$
18.73
     
8.70
   
$
0
 
Exercisable at March 31, 2020
   
39,375
             
8.52
   
$
-
 

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.

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:
 
   
Three Months Ended
March 31, 2020
 
Risk-free interest rate
   
1.71
%
Dividend yield
   
2.20
%
Stock price volatility
   
41.27
%
Expected term
   
7.51
 

The following table summarizes share information about RSUs for the three months ended March 31, 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
   
-
     
-
 
Shares forfeited
   
-
     
-
 
End of the period balance
   
135,000
   
$
18.95
 

As of March 31, 2020, there was approximately $2.3 million of unrecognized compensation expense related to 135,000 unvested RSUs and $501,000 of unrecognized compensation expense related to 189,500 unvested and/or unexercised stock options.  The stock option expense is expected to be recognized over a weighted average period of 2.95 years, and the RSU expense is expected to be recognized over a weighted average period of 3.74 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 March 31, 2020 and December 31, 2019.
 
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 March 31, 2020 and December 31, 2019 (dollars in thousands):
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
March 31, 2020
                       
Impaired loans (collateral- dependent)
 
$
1,732
   
$
-
   
$
-
   
$
1,732
 
                                 
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.
 
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.

   
Fair Value
 
Valuation
Technique
Unobservable
Inputs
 
Weighted-
Average
 
March 31, 2020
     
 
 
     
Collateral-dependent impaired loans
 
$
1,732
 
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 March 31, 2020 and December 31, 2019 (dollars in thousands):


  
Carrying
Amount
     
Fair Value Measurements
  
Level 1
   
Level 2
   
Level 3
   
Total
March 31, 2020
                             
                               
Financial Assets
                             
Cash and due from banks
 
$
148,626
   
$
148,626
   
$
-
   
$
-
   
$
148,626
 
Interest-bearing time
                                       
deposits in other banks
 
$
30,102
   
$
-
   
$
30,102
   
$
-
   
$
30,102
 
Loans, net of allowance
 
$
777,220
   
$
-
   
$
775,619
   
$
1,732
   
$
777,351
 
Nonmarketable equity securities
 
$
1,089
   
$
-
   
$
1,089
   
$
-
   
$
1,089
 
Interest receivable
 
$
3,857
   
$
-
   
$
3,857
   
$
-
   
$
3,857
 
                                         
Financial Liabilities
                                       
Deposits
 
$
870,956
   
$
-
   
$
870,615
   
$
-
   
$
870,615
 
Interest payable
 
$
465
   
$
-
   
$
465
   
$
-
   
$
465
 
                                         
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
 

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

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

Cash and Due from Banks, Interest-Bearing Time Deposits in Other Banks, Nonmarketable Equity Securities, Interest Receivable and Interest Payable
 
The carrying amount approximates fair value.

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

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

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

     
March 31,
2020
     
December 31,
2019
  
             
Commitments to extend credit
 
$
187,226
   
$
191,459
 
Financial and performance standby letters of credit
   
3,526
     
3,338
 
                 
   
$
190,752
   
$
194,797
 

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 March 31, 2020, hospitality loans were 22% of gross total loans with outstanding balances of $175.5 million and unfunded commitments of $55.4 million; energy loans were 12% of gross total loans with outstanding balances of $96.2 million and unfunded commitments of $15.1 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 March 31, 2020, goodwill of $1.0 million was recorded on the consolidated balance sheet.

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, and our efficiency ratio (calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis) and noninterest income.

As of March 31, 2020, we had total assets of $974.4 million, total loans of $785.7 million, total deposits of $871.0 million and total shareholders’ equity of $97.6 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 discussed in this Form 10-Q as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

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

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

   
Three months ended
March 31,
 
(Dollars in thousands, except per share data)
 
2020
   
2019
 
Loan interest income (excluding loan fees)
           
Total loan interest income, including loan fee income
 
$
13,106
   
$
11,622
 
Loan fee income
   
(1,260
)
   
(1,289
)
Loan interest income excluding loan fee income
 
$
11,846
   
$
10,333
 
                 
Average total loans
 
$
747,774
   
$
586,408
 
Yield on loans (including loan fee income)
   
7.05
%
   
8.04
%
Yield on loans (excluding loan fee income)
   
6.37
%
   
7.15
%
                 
Net interest margin (excluding loan fees)
               
Net interest income
 
$
11,432
   
$
10,353
 
Loan fee income
   
(1,260
)
   
(1,289
)
Net interest income excluding loan fees
 
$
10,172
   
$
9,064
 
                 
Average earning assets
 
$
866,047
   
$
745,739
 
Net interest margin (including loan fee income)
   
5.31
%
   
5.63
%
Net interest margin (excluding loan fee income)
   
4.72
%
   
4.93
%

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.

   
Three months ended
March 31,
 
(Dollars in thousands, except per share data)
 
2020
   
2019
 
             
Pre-tax, pre-provision net earnings
           
Net income before income taxes
 
$
6,759
   
$
6,821
 
Plus: Provision (reversal of) for loan losses
   
(650
)
   
-
 
Pre-tax, pre-provision net earnings
 
$
7,409
   
$
6,821
 
                 
Ratios
               
Net income (numerator)
 
$
5,051
   
$
5,116
 
                 
Average assets (denominator)
 
$
874,803
   
$
754,176
 
Return on average assets
   
2.32
%
   
2.75
%
                 
Average shareholders' equity (denominator)
 
$
101,718
   
$
90,813
 
Return on average shareholders' equity
   
19.97
%
   
22.85
%
                 
Average tangible common equity (denominator)
 
$
99,957
   
$
88,839
 
Return on average tangible common equity
   
20.32
%
   
23.35
%
                 
                 
Per share data
               
Weighted average common shares outstanding basic (denominator)
   
9,972,899
     
10,187,500
 
Net income per common share--basic
 
$
0.51
   
$
0.50
 
                 
Weighted average common shares outstanding diluted (denominator)
   
9,972,899
     
10,187,500
 
Net income per common share--diluted
 
$
0.51
   
$
0.50
 

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

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

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

   
March 31,
 
(Dollars in thousands, except per share data)
 
2020
   
2019
 
Tangible shareholders’ equity
           
Total shareholders’ equity
 
$
97,616
   
$
93,753
 
Less: Goodwill and other intangibles
   
(1,737
)
   
(1,943
)
Tangible shareholders’ equity
 
$
95,879
   
$
91,810
 
                 
Tangible assets
               
Total assets
 
$
974,350
   
$
787,236
 
Less: Goodwill and other intangibles
   
(1,737
)
   
(1,943
)
Tangible assets
 
$
972,613
   
$
785,293
 
                 
Tangible shareholders’ equity
               
Tangible shareholders’ equity (numerator)
 
$
95,879
   
$
91,810
 
Tangible assets (denominator)
 
$
972,613
   
$
785,293
 
Tangible common equity to tangible assets
   
9.86
%
   
11.69
%
                 
End of period common shares outstanding
   
9,264,412
     
10,187,500
 
Book value per share
 
$
10.54
   
$
9.20
 
Tangible book value per share
 
$
10.35
   
$
9.01
 
Total shareholders’ equity to total assets
   
10.02
%
   
11.91
%

Results of Operations

Performance Summary. For the first quarter of 2020 we reported a pre-tax income of $6.8 million, compared to pre-tax income of $6.8 million for the first quarter of 2019.  For the first quarter of 2020, interest income increased by $930,000, or 7.4%, compared to the first quarter of 2019. For the first quarter of 2020, average total loans were $747.8 million with loan yields of 7.1% as compared to $586.4 million and loan yields of 8.0% for the first quarter of 2019.

Pre-tax return on average assets was 3.11% for the first quarter of 2020, as compared to 3.67% for the same period in 2019.  The pre-tax return on average equity was 26.73% for the first quarter of 2020, as compared to 30.46% for the same period in 2019.  The efficiency ratio was 37.00% for the three months ended March 31, 2020, as compared to 35.99% for the same period in 2019.

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 March 31,
 
   
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)
 
$
117,046
   
$
398
     
1.37
%
 
$
158,068
   
$
955
     
2.45
%
Investment securities(2)
   
1,100
     
3
     
1.10
     
1,055
     
     
0.00
 
Loans held for sale
   
127
     
     
0.00
     
208
     
     
0.00
 
Total loans(3)
   
747,774
     
13,106
     
7.05
     
586,408
     
11,622
     
8.04
 
Total interest-earning assets
   
866,047
     
13,507
     
6.27
     
745,739
     
12,577
     
6.84
 
Noninterest-earning assets
   
8,756
                     
8,437
                 
Total assets
 
$
874,803
                   
$
754,176
                 
                                                 
Funding sources:
                                               
Interest-bearing liabilities:
                                               
Deposits:
                                               
Transaction accounts
 
$
342,406
     
1,010
     
1.19
%
 
$
285,289
     
1,299
     
1.85
%
Time deposits
   
205,085
     
1,065
     
2.09
     
192,499
     
925
     
1.95
 
Total interest-bearing deposits
   
547,491
     
2,075
     
1.52
     
477,788
     
2,224
     
1.89
 
Other borrowings
   
     
     
0.00
     
     
     
0.00
 
Total interest-bearing liabilities
   
547,491
     
2,075
     
1.52
     
477,788
     
2,224
     
1.89
 
                                                 
Noninterest-bearing liabilities:
                                               
Noninterest-bearing deposits
   
221,000
                     
179,801
                 
Other noninterest-bearing liabilities
   
4,594
                     
5,774
                 
Total noninterest-bearing liabilities
   
225,594
                     
185,577
                 
Shareholders’ equity
   
101,718
                     
90,813
                 
Total liabilities and shareholders’ equity
 
$
874,803
                   
$
754,176
                 
                                                 
Net interest income including loan fee income
         
$
11,432
                   
$
10,353
         
Net interest spread including loan fee income(4)
                   
4.75
%
                   
4.95
%
Net interest margin including loan fee income
                   
5.31
%
                   
5.63
%

(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 quarter of 2020 compared to the first quarter of 2019:

-
Interest income on short term investments totaled $398,000 as compared to $955,000, a decrease of $557,000 or 58.3% which was attributable to a $41.0 million decrease, or 26.0%, in average balances of interest bearing deposits at other financial institutions and a decrease in yield of 108 basis points, or 44.1%.

-
Total interest income on loans, including loan fee income, increased $1.5 million or 12.8% to $13.1 million which was attributable to a $161.4 million increase in the average balance of loans to $747.8 million as compared with the average balance of $586.4 million for the first quarter of 2019.

-
Loan fees totaled $1.3 million, a decrease of $29,000 or 2.2%, which was attributable to nonrecurring loan fee income earned during the first quarter of 2019.

-
Yield on our interest earning assets totaled 6.27%, a decrease of 57 basis points or 8.3%, compared to yield on our interest earning assets of 6.84% for the first quarter of 2019; and

-
Net interest margin for the first quarter of 2020 was 5.31% compared to 5.63% for the first quarter of 2019.

Net Interest Income and Net Interest Margin Excluding Loan Fee Income. Due to higher levels of nonrecurring loan fee income in 2019, we have illustrated our net interest margin below, excluding loan fee income.  Net interest income, representing interest income less interest expense, was the primary contributor to income and earnings for the periods shown below. Interest income is generated from interest earned on loans, dividends, and interest earned on deposits at other institutions.  Interest expense is incurred on interest-bearing liabilities including deposits and other borrowings. Net interest income is evaluated by measuring (i) the yield on loans and other interest-earning assets, (ii) the costs of deposits and other funding sources and (iii) net interest margin. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets.

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

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

   
Net Interest Margin Excluding Loan Fee Income
 
   
For the Three Months Ended March 31,
 
   
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)
 
$
117,046
   
$
398
     
1.37
%
 
$
158,068
   
$
955
     
2.45
%
Investment securities(2)
   
1,100
     
3
     
1.10
     
1,055
     
     
0.00
 
Loans held for sale
   
127
     
     
0.00
     
208
     
     
0.00
 
Total loans(3)
   
747,774
     
11,846
     
6.37
     
586,408
     
10,333
     
7.15
 
Total interest-earning assets
   
866,047
     
12,247
     
5.69
     
745,739
     
11,288
     
6.14
 
Noninterest-earning assets
   
8,756
                     
8,437
                 
Total assets
 
$
874,803
                   
$
754,176
                 
                                                 
Funding sources:
                                               
Interest-bearing liabilities:
                                               
Deposits:
                                               
Transaction accounts
 
$
342,406
     
1,010
     
1.19
%
 
$
285,289
     
1,299
     
1.85
%
Time deposits
   
205,085
     
1,065
     
2.09
     
192,499
     
925
     
1.95
 
Total interest-bearing deposits
   
547,491
     
2,075
     
1.52
     
477,788
     
2,224
     
1.89
 
Other borrowings
   
     
     
0.00
     
     
     
0.00
 
Total interest-bearing liabilities
   
547,491
     
2,075
     
1.52
     
477,788
     
2,224
     
1.89
 
                                                 
Noninterest-bearing liabilities:
                                               
Noninterest-bearing deposits
   
221,000
                     
179,801
                 
Other noninterest-bearing liabilities
   
4,594
                     
5,774
                 
Total noninterest-bearing liabilities
   
225,594
                     
185,575
                 
Shareholders’ equity
   
101,718
                     
90,813
                 
Total liabilities and shareholders’ equity
 
$
874,803
                   
$
754,176
                 
                                                 
Net interest income excluding loan fee income
         
$
10,172
                   
$
9,064
         
Net interest spread excluding loan fee income(4)
                   
4.16
%
                   
4.25
%
Net interest margin excluding loan fee income
                   
4.72
%
                   
4.93
%

(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 quarter of 2020 compared to the first quarter of 2019:

-
Total interest income on loans, excluding loan fee income, increased $1.5 million or 14.6% to $11.8 million which was attributable to a $161.4 million increase in the average balance of loans to $747.8 million as compared with the average balance of $586.4 million for the first quarter of 2019.

-
Yield on loans, excluding loan fee income, totaled 6.37%, a decrease of 78 basis points or 10.8%, compared to yield on loans excluding fee income of 7.15% for the first quarter of 2019, and

-
Net interest margin, excluding loan fee income, totaled 4.72%, a decrease of 21 basis points or 4.3%, compared to net interest margin excluding loan fee income of 4.93% for the first quarter of 2019.

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
March 31, 2020 over 2019
 
   
Change due to:
       
   
Volume(1)
   
Rate(1)
   
Interest
Variance
 
   
(Dollars in thousands)
 
Increase (decrease) in interest income:
                 
Short-term investments
 
$
(250
)
 
$
(307
)
 
$
(557
)
Investment securities
   
-
     
3
     
3
 
Total loans
   
3,225
     
(1,741
)
   
1,484
 
Total increase in interest income
   
2,975
     
(2,045
)
   
930
 
                         
Increase (decrease) in interest expense:
                       
Deposits
                       
Transaction accounts
   
262
     
(551
)
   
(289
)
Time deposits
   
61
     
79
     
140
 
Total interest-bearing deposits
   
323
     
(472
)
   
(149
)
Total increase in interest expense
   
323
     
(472
)
   
(149
)
                         
Increase (Decrease) in net interest income
 
$
2,652
   
$
(1,573
)
 
$
1,079
 

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

Provision for Loan Losses

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

The allowance as a percentage of loans was 1.08% at March 31, 2020 as compared to 1.11% at December 31, 2019.

Noninterest Income

Noninterest income for the three months ended March 31, 2020 was $330,000 compared to $223,000 for the same period in 2019, an increase of $107,000, or 48.0%.  The following table sets forth the major components of our noninterest income for the three months ended March 31, 2020 and 2019:

   
For the Three Months Ended
March 31,
       
   
2020
   
2019
   
$ Increase
(Decrease)
   
% Increase
(Decrease)
 
   
(Dollars in thousands)
 
Noninterest income:
                       
Service charges on deposit accounts
 
$
119
   
$
60
   
$
59
     
98.33
%
Secondary market income
   
38
     
37
     
1
     
2.70
 
Other income and fees
   
173
     
126
     
47
     
37.30
 
Total noninterest income
 
$
330
   
$
223
   
$
107
     
47.98
%

Noninterest Expense

Noninterest expense for the three months ended March 31, 2020 was $4.4 million compared to $3.8 million for the same period in 2019, an increase of $598,000, or 15.9%, which is discussed below. The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2020 and 2019:

   
For the Three Months Ended
March 31,
       
   
2020
   
2019
   
$ Increase
(Decrease)
   
% Increase
(Decrease)
 
   
(Dollars in thousands)
 
Noninterest expense:
                       
Salaries and employee benefits
 
$
2,474
   
$
2,171
   
$
303
     
13.96
%
Furniture and equipment
   
216
     
159
     
57
     
35.85
 
Occupancy
   
461
     
343
     
118
     
34.40
 
Data and item processing
   
276
     
262
     
14
     
5.34
 
Accounting, marketing, and legal fees
   
126
     
147
     
(21
)
   
(14.29
)
Regulatory assessments
   
23
     
32
     
(9
)
   
(28.13
)
Advertising and public relations
   
269
     
186
     
83
     
44.62
 
Travel, lodging and entertainment
   
53
     
42
     
11
     
26.19
 
Other expense
   
455
     
413
     
42
     
10.17
 
Total noninterest expense
 
$
4,353
   
$
3,755
   
$
598
     
15.93
%

Salaries and employee benefits totaled $2.5 million for the first quarter of 2020 compared to $2.2 million for the same period in 2019, an increase of $303,000 or 13.96%.  This increase related to additional personnel costs associated with two new branches.

Financial Condition

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

Total Assets

Total assets increased $108.0 million, or 12.46%, to $974.4 million as of March 31, 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, and our expansion into the Tulsa market.

Loan Portfolio

Our loans represent the largest portion of our earning assets. The quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition. As of March 31, 2020 and December 31, 2019, our gross loans were $787.5 million and $708.7 million, respectively.

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

   
As of March 31,
   
As of December 31,
 
   
2020
   
2019
 
   
Amount
   
% of Total
   
Amount
   
% of Total
 
   
(Dollars in thousands)
 
Construction & development
 
$
87,324
     
11.1
%
 
$
70,628
     
10.0
%
1-4 family real estate
   
34,760
     
4.4
     
34,160
     
4.8
 
Commercial real estate – other
   
280,474
     
35.6
     
273,278
     
38.5
 
Total commercial real estate
   
402,558
     
51.1
     
378,066
     
53.3
 
                                 
Commercial & industrial
   
323,273
     
41.0
     
260,762
     
36.8
 
Agricultural
   
50,993
     
6.5
     
57,945
     
8.2
 
Consumer
   
10,671
     
1.4
     
11,895
     
1.7
 
Gross loans
   
787,495
     
100.0
%
   
708,668
     
100.0
%
Less unearned income, net
   
(1,762
)
           
(1,364
)
       
Total loans
   
785,733
             
707,304
         
Allowance for loan and lease losses
   
(8,513
)
           
(7,846
)
       
Net loans
 
$
777,220
           
$
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 March 31, 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
 
$
-
   
$
46,645
   
$
845
   
$
39,834
   
$
   
$
   
$
87,324
 
1-4 family commercial
   
339
     
16,045
     
4,068
     
13,567
     
42
     
699
     
34,760
 
Commercial real estate – other
   
160
     
32,683
     
39,755
     
202,680
     
330
     
4,866
     
280,474
 
Total commercial real estate
   
499
     
95,373
     
44,668
     
256,081
     
372
     
5,565
     
402,558
 
                                                         
Commercial & industrial
   
29,676
     
188,256
     
21,477
     
62,395
     
14,598
     
6,871
     
323,273
 
Agricultural
   
4,157
     
32,373
     
3,950
     
9,484
     
66
     
963
     
50,993
 
Consumer
   
1,673
     
     
6,763
     
541
     
1,264
     
430
     
10,671
 
Gross loans
 
$
36,005
   
$
316,002
   
$
76,858
   
$
328,501
   
$
16,300
   
$
13,829
   
$
787,495
 

   
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 $8.5 million at March 31, 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:

   
For the Three Months Ended
 
   
March 31,
2020
   
December 31,
2019
 
   
(Dollars in thousands)
 
Balance at beginning of the period
 
$
7,846
   
$
7,832
 
Provision for loan losses
   
650
     
 
Charge-offs:
               
Construction & development
   
     
 
1-4 family commercial
   
     
(2
)
Commercial real estate – other
   
     
 
Commercial & industrial
   
     
(4
)
Agricultural
   
     
(11
)
Consumer
   
     
(1
)
Total charge-offs
   
     
(18
)
Recoveries:
               
Construction & development
   
     
 
1-4 family commercial
   
1
     
5
 
Commercial real estate – other
   
     
 
Commercial & industrial
   
6
     
24
 
Agricultural
   
10
     
3
 
Consumer
   
     
 
Total recoveries
   
17
     
32
 
Net recoveries (charge-offs)
   
17
     
14
 
Balance at end of the period
 
$
8,513
   
$
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 March 31,
   
As of December 31,
 
   
2020
   
2019
 
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Construction & development
 
$
944
     
11.09
%
 
$
782
     
9.97
%
1-4 family commercial
   
376
     
4.42
     
378
     
4.82
 
Commercial real estate - other
   
3,032
     
35.62
     
3,025
     
38.55
 
Commercial & industrial
   
3,495
     
41.05
     
2,887
     
36.80
 
Agricultural
   
551
     
6.47
     
642
     
8.18
 
Consumer
   
115
     
1.35
     
132
     
1.68
 
Total
 
$
8,513
     
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.

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
March 31,
   
As of
December 31,
 
   
2020
   
2019
 
   
(Dollars in thousands)
 
Nonaccrual loans
 
$
1,758
   
$
1,809
 
Troubled debt restructurings (1)
   
946
     
912
 
Accruing loans 90 or more days past due
   
612
     
612
 
Total nonperforming loans
   
3,316
     
3,333
 
Other real estate owned
   
     
 
Total nonperforming assets
 
$
3,316
   
$
3,333
 
Ratio of nonperforming loans to total loans
   
0.42
%
   
0.47
%
Ratio of nonperforming assets to total assets
   
0.34
%
   
0.38
%

(1)
$1.76 million and $1.81 million of TDRs as of March 31, 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 March 31, 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
 
$
   
$
   
$
   
$
   
$
   
$
87,324
   
$
87,324
 
1-4 family commercial
   
142
     
93
     
     
     
235
     
34,525
     
34,760
 
Commercial real estate - other
   
2,920
     
     
     
     
2,920
     
277,554
     
280,474
 
Commercial & industrial
   
     
     
14
     
14
     
14
     
323,259
     
323,273
 
Agricultural
   
     
     
598
     
598
     
598
     
50,395
     
50,993
 
Consumer
   
298
     
     
     
     
298
     
10,373
     
10,671
 
Total
 
$
3,360
   
$
93
   
$
612
   
$
612
   
$
4,065
   
$
783,430
   
$
787,495
 

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

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

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

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

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

Substandard loans totaled $15.1 million as of March 31, 2020, an increase of $4.0 million compared to December 31, 2019. The increase primarily related to two commercial & industrial relationships comprised of one note each, totaling $7.5 million with no specific reserves.

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

   
As of March 31, 2020
 
   
Pass
   
Watch
   
Special mention
   
Substandard
   
Total
 
   
(Dollars in thousands)
 
Construction & development
 
$
87,324
   
$
   
$
   
$
   
$
87,324
 
1-4 family commercial
   
33,973
     
787
     
     
     
34,760
 
Commercial real estate – other
   
267,047
     
9,678
     
     
3,749
     
280,474
 
Commercial & industrial
   
290,136
     
7,764
     
16,421
     
8,952
     
323,273
 
Agricultural
   
46,450
     
     
2,129
     
2,414
     
50,993
 
Consumer
   
10,671
     
     
     
     
10,671
 
Total
 
$
735,601
   
$
18,229
   
$
18,550
   
$
15,115
   
$
787,495
 

   
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 March 31, 2020 and December 31, 2019.

   
As of March 31, 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
   
$
1,758
   
$
1,758
   
$
26
 
Agricultural
   
2
     
946
     
946
     
 
Total
   
3
   
$
2,704
   
$
2,704
   
$
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 March 31, 2020 and December 31, 2019.

Impairment analyses are prepared on TDRs in conjunction with the normal allowance process. There were no TDRs restructured during the three months ended March 31, 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 three months ended March 31, 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 March 31, 2020
   
As of December 31, 2019
 
   
Number of
Contracts
   
Amount
   
Number of
Contracts
   
Amount
 
   
(Dollars in thousands)
 
Accrual
   
2
   
$
946
     
2
   
$
912
 
Nonaccrual
   
1
     
1,758
     
1
     
1,809
 
Total
   
3
   
$
2,704
     
3
   
$
2,721
 

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 first quarter ending March 31, 2020, 25 loans totaling $80.2 million were modified, related to COVID-19, that were not considered troubled debt restructurings.  Through May 12, 2020, we have modified terms on 165 loans totaling approximately $285.7 million.

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 March 31, 2020 and December 31, 2019 were $871.0 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 March 31,
   
As of December 31,
 
   
2020
   
2019
 
   
Amount
   
Percentage
of
Total
   
Amount
   
Percentage
of
Total
 
   
(Dollars in thousands)
 
Noninterest-bearing demand
 
$
254,735
     
29.2
%
 
$
219,221
     
29.0
%
Interest-bearing:
                               
NOW deposits
   
169,580
     
19.5
     
112,420
     
14.8
 
Money market
   
141,095
     
16.2
     
150,554
     
19.9
 
Savings deposits
   
64,906
     
7.5
     
72,750
     
9.6
 
Time deposits (more than $100,000)
   
212,466
     
24.4
     
173,898
     
22.9
 
Time deposits ($100,000 or less)
   
28,174
     
3.2
     
28,640
     
3.8
 
Total interest-bearing
   
616,221
     
70.8
     
538,262
     
71.0
 
Total deposits
 
$
870,956
     
100.0
%
 
$
757,483
     
100.0
%

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

   
For the Three Months Ended
March 31,
   
For the Year Ended
December 31,
 
   
2020
   
2019
 
   
Average
Balance
   
Weighted
Average
Rate
   
Average
Balance
   
Weighted
Average
Rate
 
   
(Dollars in thousands)
 
Noninterest-bearing demand
 
$
221,000
     
0.00
%
 
$
192,562
     
0.00
%
Interest-bearing:
                               
NOW
   
125,036
     
1.36
     
95,694
     
1.83
 
Money market
   
149,384
     
1.17
     
132,265
     
1.83
 
Savings
   
67,986
     
0.90
     
67,617
     
1.30
 
Time
   
205,085
     
2.09
     
208,375
     
2.14
 
Total interest-bearing
   
547,491
     
1.52
     
503,951
     
1.89
 
Total deposits
 
$
768,491
     
1.09
%
 
$
696,513
     
1.37
%

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

   
As of March 31, 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)
 
$
5,491
   
$
6,106
   
$
9,310
   
$
7,267
   
$
28,174
 
Time deposits (more than $100,000)
   
53,433
     
41,486
     
59,324
     
58,223
     
212,466
 
Total time deposits
 
$
58,924
   
$
47,592
   
$
66,634
   
$
65,490
   
$
240,640
 

   
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 March 31, 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 $77.8 million as of March 31, 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 March 31, 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 March 31, 2020 that management believes would change this classification.

The table below presents our applicable capital requirements, as well as our capital ratios as of March 31, 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.
 
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 March 31, 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 March 31, 2020:
                                   
Total capital to risk-weighted assets
                                   
Company
 
$
104,392
     
13.55
%
 
$
80,917
     
10.500
%
   
N/A
     
N/A
 
Bank
   
104,348
     
13.56
     
80,810
     
10.500
     
76,962
     
10.00
%
Tier 1 capital to risk-weighted assets
                                               
Company
   
95,879
     
12.44
     
65,504
     
8.500
     
N/A
     
N/A
 
Bank
   
95,836
     
12.45
     
65,418
     
8.500
     
61,570
     
8.00
 
CET 1 capital to risk-weighted assets
                                               
Company
   
95,879
     
12.44
     
53,944
     
7.000
     
N/A
     
N/A
 
Bank
   
95,836
     
12.45
     
53,874
     
7.000
     
50,025
     
6.50
 
Tier 1 leverage ratio
                                               
Company
   
95,879
     
10.98
     
N/A
     
N/A
     
N/A
     
N/A
 
Bank
   
95,836
     
10.97
     
N/A
     
N/A
     
43,670
     
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
     
10.500
%
   
N/A
     
N/A
 
Bank
   
106,148
     
15.42
     
72,287
     
10.500
     
68,845
     
10.00
%
Tier 1 capital to risk-weighted assets
                                               
Company
   
97,291
     
14.11
     
58,604
     
8.500
     
N/A
     
N/A
 
Bank
   
98,302
     
14.28
     
58,518
     
8.500
     
55,076
     
8.00
 
CET 1 capital to risk-weighted assets
                                               
Company
   
97,291
     
14.11
     
48,262
     
7.000
     
N/A
     
N/A
 
Bank
   
98,302
     
14.28
     
48,192
     
7.000
     
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 decreased to $97.6 million as of March 31, 2020, compared to $100.1 million as of December 31, 2019. The decreases were driven by stock buybacks – 793,094 shares repurchased at an average price of $8.59, for a total of $6.8 million – and related cancellation of shares.

Contractual Obligations

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

   
Payments Due as of March 31, 2020
 
   
Within
One Year
   
One to
Three Years
   
Three to
Five Years
   
After
Five Years
   
Total
 
   
(Dollars in thousands)
 
Deposits without a stated maturity
 
$
630,316
   
$
   
$
   
$
   
$
630,316
 
Time deposits
   
175,150
     
63,614
     
1,876
     
     
240,640
 
Borrowings
   
     
     
     
     
 
Operating lease commitments
   
639
     
584
     
170
     
     
1,393
 
Total contractual obligations
 
$
806,105
   
$
64,198
   
$
2,046
   
$
   
$
872,349
 

   
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
March 31,
2020
   
As of
December 31,
2019
 
   
(Dollars in thousands)
 
Commitments to extend credit
 
$
187,226
   
$
191,459
 
Standby letters of credit
   
3,526
     
3,338
 
Total
 
$
190,752
   
$
194,797
 

Critical Accounting Policies and Estimates

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

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

The following is a discussion of the critical accounting policies and significant estimates that we believe require us to make the most complex or subjective decisions or assessments. Additional information about these policies can be found in Note 1 of the Company’s consolidated unaudited financial statements as of March 31, 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 the Company’s goodwill as of March 31, 2020 and December 31, 2019.  During the period ended March 31, 2020, the economic stress and market volatility resulting from the COVID-19 pandemic resulted in a substantial decrease in the Company’s 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 March 31, 2020. Refer to Note 1, Nature of Operations and Summary of Significant Accounting Policies, in the notes to the Company’s 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.
 
The first step of the impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is to be performed to measure the amount of impairment loss, if any, when it is more likely than not that goodwill impairment exists.
 
Other intangible assets consist of core deposit intangible assets and are amortized on a straight-line basis based on the estimated useful life of 10 years. Such assets are periodically evaluated as to the recoverability of their carrying values.
 
Income Taxes
 
The Company files a consolidated income tax return. Deferred taxes are recognized under the balance sheet method based upon the future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, using the tax rates expected to apply to taxable income in the periods when the related temporary differences are expected to be realized.
 
The amount of accrued current and deferred income taxes is based on estimates of taxes due or receivable from taxing authorities either currently or in the future. Changes in these accruals are reported as tax expense, and involve estimates of the various components included in determining taxable income, tax credits, other taxes and temporary differences. Changes periodically occur in the estimates due to changes in tax rates, tax laws and regulations and implementation of new tax planning strategies. The process of determining the accruals for income taxes necessarily involves the exercise of considerable judgment and consideration of numerous subjective factors.
 
Management performs an analysis of the Company’s tax positions annually and believes it is more likely than not that all of its tax positions will be utilized in future years.

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in the Registrant’s disclosures regarding market risk since December 31, 2019, the date of its 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 March 31, 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 three months ended March 31, 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.

ITEM 1A.

Risk Factors

This section supplements and updates certain of the information found under Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020 (“Annual Report”), based on information currently known to us and recent developments since the date of the Annual Report filing. The matters discussed below should be read in conjunction with the risks described in Part I. Item 1A. “Risk Factors” of our Annual Report. However, the risks and uncertainties that we face are not limited to those described below and those set forth in the Annual Report. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our common stock, particularly in light of the fast-changing nature of the COVID-19 pandemic, containment measures and the related impacts to economic and operating conditions.
 
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition.

The effects of the COVID-19 pandemic, and federal, state and local responses, are wide-ranging, costly, disruptive and rapidly changing. In response to the COVID-19 outbreak, the Federal Reserve Board in mid-March 2020 reduced the benchmark fed funds rate 150 basis points to a target range of 0% to 0.25%, and the yields on 10-year and 30-year treasury notes have declined to historic lows. The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hotel industry, the restaurant industry and the assisted living facilities industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. Further actions may be required by government authorities or taken as determined in the best interests of our employees, customers, community, and business partners.
 
Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 on the Company are not yet known and may not emerge for some time. Risks presented by the ongoing effects of COVID-19 include the following:


demand for our products and services may decline, making it difficult to grow assets and income;

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

access to collateral for existing loans and new loan production may be difficult as a result of COVID-19 making it difficult to obtain, on a timely basis, appraisals on the collateral;

due to reduced governmental capacity to effect business transactions and property transfers, we may have more difficulty taking possession of collateral supporting our loans, which may negatively impact our ability to minimize losses, which could adversely impact our financial results;

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond payment accommodation periods, which will adversely affect our net income;

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

a material decrease in net income or a net loss could result in a decrease in the rate of any potential cash dividend;

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us;

increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity of both customers and employees; and

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in Part I, Item 1A, Risk Factors, of our 2019 Annual Report on Form 10-K.

As a participating lender in the SBA Paycheck Protection Program (“PPP”), we are subject to additional risks of litigation from our clients or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. We are a participating as a lender in the PPP, and we have the ability to fund PPP loans through the Federal Reserve’s PPP liquidity facility. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. Through May 12, 2020, we approved 298 loans totaling approximately $63.9 million. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress has approved additional funding for the PPP and President Trump signed the new legislation on April 24, 2020. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both clients and non-clients that approached us regarding PPP loans, regarding our process and procedures used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

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 quarter ended March 31, 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 quarter ended March 31, 2020, there were 793,094 shares purchased under the programs with 206,906 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
 
For the Three Months Ended March 31, 2020
   
793,094
   
$
8.59
     
206,906
 

ITEM 6.

Exhibits

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

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

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

SIGNATURES

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


BANK7 CORP.




DATED:
May 14, 2020
By: /s/ Thomas L. Travis



Thomas L. Travis



President and Chief Executive Officer





 DATED:
 May 14, 2020
By: /s/ Kelly J. Harris



Kelly J. Harris



Senior Vice President and Chief Financial Officer



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