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Bank7 Corp. - Quarter Report: 2023 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023

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, Oklahoma City, Oklahoma

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

Smaller reporting company

       
Emerging growth company

   

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

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

As of November 9, 2023, the registrant had 9,186,346 shares of common stock, par value $0.01, outstanding.



TABLE OF CONTENTS

   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
  3
  4
  5
  6
  7
Item 2.
40
Item 3.
58
Item 4.
60
   
PART II.
60
   
Item 1.
60
Item 1A.
60
Item 2.
61
Item 3.
61
Item 4.
61
Item 5.
61
Item 6.
62
  Signatures
62

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.

Bank7 Corp.
Unaudited Condensed Consolidated Balance Sheets
(Dollar amounts in thousands, except par value)
 
Assets
 
September 30,
2023
(unaudited)
   
December 31,
2022
 
             
Cash and due from banks
 
$
169,490
   
$
109,115
 
Interest-bearing time deposits in other banks
   
17,182
     
5,474
 
Available-for-sale debt securities
    167,138       173,165  
Loans, net of allowance for credit losses of $20,649 and $14,734 at September 30, 2023 and December 31, 2022, respectively
   
1,372,128
     
1,255,722
 
Loans held for sale
    1,143       -  
Premises and equipment, net
    14,963       13,106  
Nonmarketable equity securities
   
1,251
     
1,209
 
Core deposit intangibles
    1,107       1,336  
Goodwill
   
8,458
     
8,603
 
Interest receivable and other assets
   
19,539
     
16,439
 
                 
Total assets
 
$
1,772,399
   
$
1,584,169
 
                 
Liabilities and Shareholders’ Equity
               
                 
Deposits
               
Noninterest-bearing
 
$
480,827
   
$
441,509
 
Interest-bearing
   
1,112,745
     
989,891
 
                 
Total deposits
   
1,593,572
     
1,431,400
 
                 
Income taxes payable
   
419
     
1,054
 
Interest payable and other liabilities
   
10,501
     
7,615
 
                 
Total liabilities
   
1,604,492
     
1,440,069
 
                 
Shareholders’ equity
               
Common stock, $0.01 par value; 50,000,000 shares authorized; shares issued and outstanding: 9,184,975 and 9,131,973 at September 30, 2023 and December 31, 2022 respectively
   
92
     
91
 
Additional paid-in capital
   
97,068
     
95,263
 
Retained earnings
   
79,825
     
58,049
 
Accumulated other comprehensive loss
    (9,078 )     (9,303 )
 
               
Total shareholders’ equity
   
167,907
     
144,100
 
 
               
Total liabilities and shareholders’ equity
 
$
1,772,399
   
$
1,584,169
 

See accompanying notes to Consolidated Financial Statements

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

 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2023
   
2022
   
2023
   
2022
 
Interest Income
                       
Loans, including fees
 
$
28,880
   
$
20,466
   
$
81,117
   
$
50,597
 
Interest-bearing time deposits in other banks
   
159
     
10
     
270
     
39
 
Debt securities, taxable
    699       690       2,106       1,625  
Debt securities, tax-exempt
    81       90       253       273  
Other interest and dividend income
   
1,903
     
435
     
5,398
     
754
 
                                 
Total interest income
   
31,722
     
21,691
     
89,144
     
53,288
 
                                 
Interest Expense
                               
Deposits
   
10,976
     
2,646
     
27,894
     
4,241
 
                                 
Total interest expense
   
10,976
     
2,646
     
27,894
     
4,241
 
                                 
Net Interest Income
   
20,746
     
19,045
     
61,250
     
49,047
 
                                 
Provision for Credit Losses
   
4,159
     
2,348
     
5,645
     
2,843
 
                                 
Net Interest Income After Provision for Credit Losses
   
16,587
     
16,697
     
55,605
     
46,204
 
                                 
Noninterest Income
                               
Mortgage lending income
   
6
     
134
     
172
     
395
 
Loss on sales, prepayments, and calls of available-for-sale debt securities
    (7 )     (10 )     (15 )     (127 )
Service charges on deposit accounts
   
213
     
210
     
647
     
678
 
Other
   
795
     
506
     
1,668
     
1,261
 
                                 
Total noninterest income
   
1,007
     
840
     
2,472
     
2,207
 
                                 
Noninterest Expense
                               
Salaries and employee benefits
   
4,910
     
3,996
     
14,299
     
12,148
 
Furniture and equipment
   
254
     
390
     
755
     
1,134
 
Occupancy
   
662
     
614
     
1,980
     
1,736
 
Data and item processing
   
424
     
522
     
1,280
     
1,468
 
Accounting, marketing and legal fees
   
14
     
340
     
491
     
782
 
Regulatory assessments
   
279
     
551
     
1,013
     
973
 
Advertising and public relations
   
74
     
83
     
273
     
314
 
Travel, lodging and entertainment
   
85
     
94
     
255
     
216
 
Other
   
688
     
543
     
2,068
     
1,745
 
                                 
Total noninterest expense
   
7,390
     
7,133
     
22,414
     
20,516
 
                                 
Income Before Taxes
   
10,204
     
10,404
     
35,663
     
27,895
 
Income tax expense
   
2,351
     
2,363
     
8,457
     
6,646
 
Net Income
 
$
7,853
   
$
8,041
   
$
27,206
   
$
21,249
 
                                 
Earnings per common share - basic
 
$
0.86
   
$
0.88
   
$
2.97
   
$
2.34
 
Earnings per common share - diluted
   
0.85
     
0.87
     
2.94
     
2.31
 
Weighted average common shares outstanding - basic
   
9,158,027
     
9,100,789
     
9,152,788
     
9,095,724
 
Weighted average common shares outstanding - diluted
   
9,273,595
     
9,209,754
     
9,262,003
     
9,194,928
 
                                 
Other Comprehensive Income (Loss)
                               
Unrealized gains (losses) on securities, net of (tax expense) tax benefit of $485  and $1.7 million for the three months ended September 30, 2023 and 2022, respectively; ($70) and $3.2 million for the nine months ended September 30, 2023 and 2022, respectively
  $ (372 )   $ (2,674 )   $ 214     $ (10,691 )
Reclassification adjustment for realized loss included in net income net of tax of $2 and $2 for the three months ended September 30, 2023 and 2022, respectively; $4 and $29 for the nine months ended September 30, 2023 and 2022, respectively
    5       8       11       98  
Other comprehensive income (loss)
  $ (367 )   $ (2,666 )   $ 225     $ (10,593 )
Comprehensive Income
  $ 7,486     $ 5,375     $ 27,431     $ 10,656  

See accompanying notes to Consolidated Financial Statements

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

 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2023
   
2022
   
2023
   
2022
 
Common Stock  (Shares)
                       
Balance at beginning of period
   
9,154,934
     
9,098,655
     
9,131,973
     
9,071,417
 
Exercise of employee stock options
    13,124       1,250       26,986       16,062  
Shares issued for restricted stock units
   
26,625
     
26,000
     
40,734
     
41,584
 
Shares acquired and canceled
    (9,708 )     (10,166 )     (14,718 )     (13,324 )
Balance at end of period
   
9,184,975
     
9,115,739
     
9,184,975
     
9,115,739
 
                                 
Common Stock (Amount)
                               
Balance at beginning of period
 
$
92
   
$
91
   
$
91
   
$
91
 
Shares issued for restricted stock units
    -
      -
      1
     
-
 
Balance at end of period
 
$
92
   
$
91
   
$
92
   
$
91
 
                                 
Additional Paid-in Capital
                               
Balance at beginning of period
 
$
96,498
   
$
95,016
   
$
95,263
   
$
94,024
 
Shares purchased and retired for restricted stock units
    (231 )     (235 )     (367 )     (312 )
Exercise of stock options
    236       21       480       283  
Stock-based compensation expense
   
565
     
252
     
1,692
     
1,059
 
Balance at end of period
 
$
97,068
   
$
95,054
   
$
97,068
   
$
95,054
 
                                 
Retained Earnings
                               
Balance at beginning of period
 
$
73,901
   
$
44,174
   
$
58,049
   
$
33,149
 
Net income
   
7,853
     
8,041
     
27,206
     
21,249
 
Cumulative effect of change in accounting principle, net of tax of $178 (Note 1)
    -       -       (572 )     -  
Cash dividends declared ($0.21 and $0.12 per share for the three months ended September 30, 2023 and 2022, respectively; $0.53 and $0.36 per share for the nine months ended September 30, 2023 and 2022, respectively)
   
(1,929
)
   
(1,092
)
   
(4,858
)
   
(3,275
)
Balance at end of period
 
$
79,825
   
$
51,123
   
$
79,825
   
$
51,123
 
                                 
Accumulated Other Comprehensive Loss
                               
Balance at beginning of period
  $ (8,711 )   $ (7,783 )   $ (9,303 )   $ 144  
Comprehensive income (loss)
    (367 )     (2,666 )     225       (10,593 )
Balance at end of period
  $ (9,078 )   $ (10,449 )   $ (9,078 )   $ (10,449 )
                                 
Total Shareholders’ equity
 
$
167,907
   
$
135,819
   
$
167,907
   
$
135,819
 

See accompanying notes to Consolidated Financial Statements

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

   
Nine Months Ended
September 30,
 
   
2023
   
2022
 
             
Operating Activities
           
Net income
 
$
27,206
   
$
21,249
 
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation and amortization
   
973
     
1,063
 
Provision for credit losses
   
5,645
     
2,843
 
Amortization of premiums and discounts on securities
    278       657  
Gain on sales of loans
   
(172
)
   
(395
)
Net loss on sale of available-for-sale debt securities
    15       127  
Stock-based compensation expense
   
1,692
     
1,059
 
Gain on sale of premises and equipment
    (77 )     (24 )
Cash receipts from the sale of loans originated for sale
   
5,985
     
25,542
 
Cash disbursements for loans originated for sale
   
(6,956
)
   
(24,887
)
Deferred income tax benefit
   
(1,633
)
   
(236
)
Changes in
               
Interest receivable and other assets
   
(1,392
)
   
810
 
Interest payable and other liabilities
   
1,403
     
2,127
 
                 
Net cash provided by operating activities
   
32,967
     
29,935
 
                 
Investing Activities
               
Maturities of interest-bearing time deposits in other banks
   
5,228
     
2,490
 
Purchases of interest-bearing time deposits in other banks
    (16,936 )     (747 )
Proceeds from sale of available-for-sale debt securities
    -       11,820  
Maturities, prepayments and calls of available-for-sale debt securities
    6,029       17,032  
Purchases of available-for-sale debt securities
    -       (133,052 )
Net change in loans
   
(122,242
)
   
(204,756
)
Purchases of premises and equipment
   
(2,602
)
   
(273
)
Proceeds from sale of premises and equipment     78       3,370  
Change in nonmarketable equity securities
   
(42
)
   
9
 
                 
Net cash used in investing activities
   
(130,487
)
   
(304,107
)
                 
Financing Activities
               
Net change in deposits
   
162,172
     
219,865
 
Cash distributions
   
(4,391
)
   
(3,275
)
Shares purchased and retired for restricted stock units
    (367 )     (312 )
Net settlement of stock options
    480       283  
Common stock issued for restricted stock units
    1       -  
                 
Net cash provided by financing activities
   
157,895
     
216,561
 
                 
Net Increase/(Decrease) in Cash and Due from Banks
   
60,375
     
(57,611
)
                 
Cash and Due from Banks, Beginning of Period
   
109,115
     
204,852
 
                 
Cash and Due from Banks, End of Period
 
$
169,490
   
$
147,241
 
                 
Supplemental Disclosure of Cash Flows Information
               
Interest paid
 
$
26,899
   
$
4,220
 
Income taxes paid
  $ 10,612     $ 6,843  
Dividends declared and not paid
 
$
1,929
   
$
1,092
 
Measurement period goodwill adjustment
  $ (146 )   $ (411 )

See accompanying notes to 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”) 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, Texas, and Kansas. 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 condensed 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. The Company revised certain accounting policies since December 31, 2022, the date of the most recent annual report. See the significant accounting policy changes section below. The condensed consolidated balance sheet of the Company as of December 31, 2022 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, 2022, 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.

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.
 
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses, valuation of other real estate owned, income taxes, goodwill and intangibles and fair values of financial instruments.
 
7

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Recent Accounting Pronouncements
 
Standards Adopted During Current Period:

In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.”  On January 1, 2023, the Company adopted ASU 2022-02, which eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification (“ASC”) 310-40, “Receivables -Troubled Debt Restructurings by Creditors ” for entities that have adopted the current expected credit loss model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments—Credit Losses—Measured at Amortized Cost.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” On January 1, 2023 the Company adopted ASU 2016-13, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, Accounting Standards Codification (“ASC”) 326 made changes to the accounting for purchased loans and securities with credit deterioration and available-for-sale debt securities.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Operating results for periods from January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our 2022 Form 10-K. The Company recorded a net decrease to retained earnings of $572,000, gross of $750,000 net of tax of $178,000, as of January 1, 2023 for the cumulative effect of adopting ASC 326, and the impact on our results of operations and cash flows was not material.

The Company has not recorded an allowance for credit losses against its available-for-sale securities, as the credit risk is not material. The following table illustrates the impact of ASC 326 on the allowance for credit losses on the Company’s loans as of January 1, 2023 (dollars in thousands).

   
January 1, 2023
 
   
As Reported
Under ASC 326
   
Pre ASC 326
Adoption
   
Impact of ASC
326 Adoption
 
                   
Construction & development
 
$
1,933
   
$
1,889
   
$
44
 
1 - 4 family real estate
   
752
     
890
     
(138
)
Commercial real estate - other
   
4,912
     
5,080
     
(168
)
Total commercial real estate
 
$
7,597
   
$
7,859
   
$
(262
)
                         
Commercial & industrial
   
6,653
     
5,937
     
716
 
Agricultural
   
616
     
765
     
(149
)
Consumer
   
118
     
173
     
(55
)
                         
Allowance for credit losses on loans
 
$
14,984
   
$
14,734
   
$
250
 
                         
Allowance for credit losses on off-balance sheet credit exposures (unfunded commitments), see Note (6) and Note (11)
   
500
     
-
     
500
 
Total Impact
 
$
15,484
   
$
14,734
   
$
750
 

8

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Significant Accounting Policy Changes

Upon adoption of ASC 326, the Company revised certain accounting policies for Loans and the Allowance for Credit Losses as detailed below.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts. Accrued interest receivable totaled $8.3 million and $7.2 million at September 30, 2023 and December 31, 2022, respectively, and was reported in interest receivable and other assets on the consolidated balance sheets. The Company has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Interest income is accrued on the unpaid principal balance using the simple-interest method on the daily balances of the principal amounts outstanding.

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.

Loans acquired through business combinations are required to be carried at fair value as of the date of the combination. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date.

9

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Allowance for Credit Losses

The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.  The allowance for credit losses is adjusted by a credit loss provision which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Expected credit loss inherent in non-cancellable off-balance sheet credit exposures is accounted for as a separate liability included in other liabilities.

The allowance for credit 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 methodology for estimating the amount of credit losses reported in the allowance for credit losses has two basic components: an asset-specific component involving loans that do not share risk characteristics and the measurement of expected credit losses for such individual loans; and a pooled component for expected credit losses for pools of loans that share similar risk characteristics.

Loans That Do Not Share Risk Characteristics (Individually Analyzed)

Loans that do not share similar risk characteristics are evaluated on an individual basis. Loans deemed to be collateral dependent have differing risk characteristics and are individually analyzed to estimate the expected credit loss. A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is dependent on the operation or liquidation and sale of the underlying collateral. For collateral dependent loans where foreclosure is probable, the expected credit loss is measured based on the difference between the fair value of the collateral (less selling cost) and the amortized cost basis of the asset. For collateral dependent loans where foreclosure is not probable, the Company has elected the practical expedient allowed by ASC 326-20 to measure the expected credit loss under the same approach as those loans where foreclosure is probable. For loans with balances greater than $250,000, the fair value of the collateral is obtained through independent appraisal of the underlying collateral. For loans with balances less than $250,000, the Company has made a policy election to measure expected loss for these individual loans utilizing loss rates for similar loan types.

Loans That Share Similar Risk Characteristics (Pooled Loans)

The general steps in determining expected credit losses for the pooled loan component of the allowance are as follows:

Segment loans into pools according to similar risk characteristics;

Develop historical loss rates for each loan pool segment;

Incorporate the impact of forecasts;

Incorporate the impact of other qualitative factors; and

Calculate and review pool specific allowance for credit loss estimate.

10

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Methodology

The weighted-average remaining maturity method (“WARM”) methodology is utilized as the basis for the estimation of expected credit losses for consumer segment loans. The WARM method uses a historical average annual charge-off rate. This average annual charge-off rate contains loss content over a historical lookback period and is used as a foundation for estimating the credit loss reserve for the remaining outstanding balances of loans in a segment at the balance sheet date.  The average annual charge-off rate is applied to the contractual term, further adjusted for estimated prepayments, to determine the unadjusted historical charge-off rate. The calculation of the unadjusted historical charge-off rate is then adjusted for current conditions and for reasonable and supportable forecast periods. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss factors.

A discounted cash flow (“DCF”) methodology is utilized to calculate expected cash flows for the life of each individual loan, with the exception of consumer segment loans. The discounted present value of expected cash flow is then compared to the loan’s amortized cost basis to determine the credit loss estimate. Individual loan results are aggregated at the pool level in determining total reserves for each loan pool.

The primary inputs used to calculate expected cash flows include historical loss rates which reflect probability of default (“PD”) and loss given default (“LGD”), and prepayment rates. The historical look-back period is a key factor in the calculation of the PD rate and is based on management’s assessment of current and forecasted conditions and may vary by loan pool. LGD rates generally reflect the historical average net loss rate by loan pool. Expected cash flows are further adjusted to incorporate the impact of loan prepayments which will vary by loan segment and interest rate conditions. In general, prepayment rates are based on observed prepayment rates occurring in the loan portfolio and consideration of forecasted interest rates.

Forecast Factors

Adjustments are made to incorporate the impact of forecasted conditions. Certain assumptions are also applied, including the length of the forecast and reversion periods. The forecast period is the period within which management is able to make a reasonable and supportable assessment of future conditions. The reversion period is the period beyond which management believes it can develop a reasonable and supportable forecast, and bridges the gap between the forecast period and the use of historical default and loss rates. The remainder period reflects the remaining life of the loan. The length of the forecast and reversion periods are periodically evaluated and based on management’s assessment of current and forecasted conditions and may vary by loan pool.  For purposes of developing a reasonable and supportable assessment of future conditions, management utilizes established industry and economic data points and sources, with the forecasted unemployment rate being a significant factor.  PD rates for the forecast period will be adjusted accordingly based on management’s assessment of future conditions.  PD rates for the remainder period will reflect the historical mean PD rate.  Reversion period PD rates reflect the difference between forecast and remainder period PD rates closed using a straight-line adjustment over the reversion period.

11

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Qualitative Factors

Loss rates are further adjusted to account for other risk factors that impact loan defaults and losses.  These basis point adjustments are based on management’s assessment of trends and conditions that impact credit risk and resulting credit losses, more specifically internal and external factors that are independent of and not reflected in the quantitative loss rate calculations.  Risk factors management considers in this assessment include trends in underwriting standards, nature/volume/terms of loan originations, past due loans, loan review systems, collateral valuations, concentrations, legal/regulatory/political conditions, and the unforeseen impact of natural disasters.

Purchased Loans

Beginning January 1, 2023, when a loan portfolio is purchased, an allowance is established for those loans considered purchased with more-than-insignificant credit deterioration (“PCD”), and those not considered purchased with more-than-insignificant credit deterioration (“non-PCD”). The allowance established utilizes the same risk factors discussed above for our non-acquired allowance. The allowance established for non-PCD loans is recognized through provision expense upon acquisition, whereas the allowance established for loans considered PCD at acquisition is offset by an increase in the basis of the acquired loans. Any subsequent increases and decreases in the allowance related to acquired loans are recognized through provision expense, with future charge-offs recorded to the allowance.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Company estimates expected credit losses over the contractual period in which it is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.  The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense and is recorded in interest payable and other liabilities.  The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life and applies the same estimated loss rate as determined for current outstanding loan balances by segment.

Allowance for Credit Losses on Securities

In conjunction with the adoption of CECL, the Company also evaluates its securities portfolio for credit losses, as the CECL update modifies the debt security credit impairment model to recognize an allowance for estimated credit losses. Similar to the election on the loan portfolio, the Company has elected to exclude accrued interest receivable from the amortized cost basis of its investment portfolio analysis. Based on our assessments, expected credit losses on securities were negligible and therefore, no allowance for credit losses was recorded.

Beginning January 1, 2023, the Company evaluates its available-for-sale securities portfolio on a quarterly basis for potential credit-related impairment. The Company assesses potential credit impairment by comparing the fair value of a debt security to its amortized cost basis. If the fair value of a debt security is greater than the amortized cost basis, no impairment is recognized.  If the fair value is less than the amortized costs basis, the Company reviews the factors to determine if the impairment is credit-related or noncredit-related.  For debt securities the Company intends to sell or is more likely than not required to sell, before the recovery of their amortized cost basis, the difference between fair value and amortized cost is impaired and is recognized through earnings. For debt securities the Company does not intend to sell or is not more likely than not required to sell, prior to expected recovery of amortized cost basis, the credit portion of the impairment is recognized through earnings, with a corresponding entry to an allowance for credit losses, and the noncredit portion is recognized through accumulated other comprehensive loss.



Reclassifications



Certain reclassifications have been made to the 2022 consolidated financials statements to conform to classification used for September 30, 2023. These reclassifications had no impact on net income, shareholders’ equity or cash flows as previously reported.

12

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 2:
Recent Events, Including Mergers and Acquisitions

Business Combinations

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

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

   
Estimated Fair Value
 
(in thousands)
     
Assets Acquired
     
Cash and cash equivalents
 
$
41,747
 
Available-for-sale debt securities
   
86,166
 
Federal funds sold
   
7,941
 
Loans
   
117,335
 
Premises and equipment
   
8,669
 
Core deposit intangible
   
1,254
 
Prepaid expenses and other assets
   
4,512
 
Total assets acquiried
  $
267,624
 
Liabilities Assumed
       
Deposits
 
$
243,487
 
Accounts payable and accrued expenses
   
2,086
 
Total liabilities assumed
  $
245,573
 
Net assets acquired
 
$
22,051
 
Consideration transferred
   
29,498
 
Goodwill
  $
7,447
 

Goodwill decreased $0 and $146,000 for the three and nine months September 30, 2023, respectively, related to tax provision adjustments.

As of the acquisition date, the Company evaluated $117.3 million of net loans ($118.5 million gross loans less $1.2 million discount) purchased in conjunction with the acquisition of Watonga Bancshares, Inc. in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs. As of September 30, 2023, the net loan balance of the ASC Topic 310-20 purchased loans is $52.4 million.

Upon acquisition, the fair values of assets acquired and liabilities assumed were preliminary and based on valuation estimates and assumptions. The accounting for business combinations require estimates and judgments regarding expectations of future cash flows of the acquired business, and the allocations of those cash flows to identifiable tangible and intangible assets. The estimates and assumptions underlying the preliminary valuations were subject to collection of information necessary to complete the valuations (specifically related to projected financial information) within the measurement periods, which are up to one year from the acquisition date. Adjustments to our estimates of purchase price allocation were made in the periods in which the adjustments were determined, and the cumulative effect of such adjustments were calculated as if the adjustments had been completed as of the acquisition date. As we are now outside of the measurement periods, no further adjustments will be made.

13

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3:
Restriction on Cash and Due from Banks
 
On March 26, 2020, the Federal Reserve Board reduced reserve requirement ratios to zero percent, effectively eliminating reserve requirements for all depository institutions. There was no reserve requirement as of September 30, 2023.

Note 4:
Earnings per Share
 
Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the year.
 
Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income divided by the weighted average number of common 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:
 
   
As of and for the three months
ended September 30,
   
As of and for the nine months
ended September 30,
 
   
2023
   
2022
    2023
    2022
 
(Dollars in thousands, except per share amounts)
                       
Numerator
                       
Net income
  $ 7,853     $ 8,041     $ 27,206     $ 21,249  
                                 
Denominator
                               
Weighted-average shares outstanding for basic earnings per share
    9,158,027
      9,100,789
      9,152,788       9,095,724  
Dilutive effect of stock compensation (1)
    115,568
      108,965
      109,215       99,204  
Denominator for diluted earnings per share
    9,273,595
      9,209,754
      9,262,003       9,194,928  
                                 
Earnings per common share
                               
Basic
  $ 0.86     $ 0.88     $ 2.97     $ 2.34  
Diluted
  $ 0.85     $ 0.87     $ 2.94     $ 2.31  

(1) The following have not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented: Nonqualified stock options outstanding of 5,000 and 3,000 for the three month periods ended September 30, 2023 and 2022, respectively, and 5,000 and 3,000 for the nine month periods ended September 30, 2023 and 2022, respectively; Restricted stock units of 113,000 and 0 for the three month periods ended September 30, 2023 and 2022, respectively, and 156,186 and 0 for the nine month periods ended September 30, 2023 and 2022, respectively.

14

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 5: Debt Securities

The following table summarizes the amortized cost and fair value of debt securities available-for-sale at September 30, 2023 and December 31, 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):

 
(in thousands)
 
Amortized Cost
   
Gross Unrealized
Gains
   
Gross Unrealized
Losses
   
Fair Value
 
Available-for-sale as of September 30, 2023
                       
U.S. Federal agencies
 
$
146
   
$
-
   
$
(6
)
 
$
140
 
Mortgage-backed securities(1)(2)
   
39,611
     
-
     
(5,531
)
   
34,080
 
State and political subdivisions
   
27,707
     
-
     
(2,483
)
   
25,224
 
U.S. Treasuries
   
106,032
     
-
     
(2,594
)
   
103,438
 
Corporate debt securities
   
5,500
     
-
     
(1,244
)
   
4,256
 
Total available-for-sale
   
178,996
     
-
     
(11,858
)
   
167,138
 
Total debt securities
 
178,996
   
-
   
(11,858
)
 
167,138
 

 
(in thousands)
 
Amortized Cost
   
Gross Unrealized
Gains
   
Gross Unrealized
Losses
   
Fair Value
 
Available-for-sale as of December 31, 2022
                       
U.S. Federal agencies
 
$
1,292
   
$
-
   
$
(150
)
 
$
1,142
 
Mortgage-backed securities(1)(2)
   
42,953
     
-
     
(4,879
)
   
38,074
 
State and political subdivisions
   
30,632
     
-
     
(2,276
)
   
28,356
 
U.S. Treasuries
   
104,940
     
-
     
(4,280
)
   
100,660
 
Corporate debt securities
   
5,500
     
-
     
(567
)
   
4,933
 
Total available-for-sale
   
185,317
     
-
     
(12,152
)
   
173,165
 
Total debt securities
   
185,317
     
-
     
(12,152
)
   
173,165
 

(1) All of our mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored entities.
(2) Included in mortgage-backed securities is $25.37 million and $27.90 million of residential mortgage-backed securities and $14.25 million and $15.05 million of commercial mortgage-backed securities as of September 30, 2023 and December 31, 2022, respectively
15

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

The amortized cost and estimated fair value of investment securities at September 30, 2023 and December 31, 2022, by contractual maturity, are shown below. The expected life of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or without call or prepayment penalties.

(in thousands)
 
Amortized Cost
   
Fair Value
 
Available-for-sale as of September 30, 2023
           
Due in one year or less
 
$
104,150
   
$
102,416
 
Due after one year through five years
   
16,153
     
14,875
 
Due after five years through ten years
   
18,920
     
15,638
 
Due after ten years
   
162
     
129
 
Mortgage-backed securities
   
39,611
     
34,080
 
Total available-for-sale
 
178,996
   
167,138
 

(in thousands)
 
Amortized Cost
   
Fair Value
 
Available-for-sale as of December 31, 2022
           
Due in one year or less
 
$
2,133
   
$
2,115
 
Due after one year through five years
   
118,108
     
113,415
 
Due after five years through ten years
   
21,495
     
19,030
 
Due after ten years
   
628
     
531
 
Mortgage-backed securities
   
42,953
     
38,074
 
Total available-for-sale
 
185,317
   
173,165
 

There was one holding of securities of issuers in an amount greater than 10% of stockholders equity at September 30, 2023, a U.S. Treasury note with a fair value of $98.35 million.

The following table presents a summary of realized gains and losses from the sale, prepayment and call of debt securities:


 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 

 
2023
   
2022
   
2023
   
2022
 
(in thousands)
                       
Proceeds from sales, maturities, prepayments and calls
 
$
1,831
   
$
9,024
   
$
6,029
   
$
28,852
 
Gross realized gains on sales, prepayments and calls
   
-
     
-
     
-
     
10
 
Gross realized losses on sales, prepayments and calls
   
(7
)
   
(10
)
   
(15
)
   
(137
)
Total realized (losses), net
 
$
(7
)
 
$
(10
)
 
$
(15
)
 
$
(127
)

The following table details book value of pledged securities as of September 30, 2023 and December 31, 2022:

(in thousands)
 
September 30,
2023
   
December 31,
2022
 
Book value of pledged securities
 
$
21,322
   
$
85,280
 

16

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table details gross unrealized losses and fair values of investment securities aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at September 30, 2023 and December 31, 2022. As of September 30, 2023, the Company had the ability and intent to hold the debt securities classified as available-for-sale for a period of time sufficient for a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying debt securities were purchased or acquired. The fair value of those debt securities having unrealized losses is expected to recover as the securities approach their maturity date or repricing date, or if market yields for such investments decline. Management has no intent or requirement to sell before the recovery of the unrealized loss; therefore, no impairment loss was realized in the Company’s consolidated statements of comprehensive income.

   
Less than Twelve Months
   
Twelve Months or Longer
   
Total
 
   
Fair Value
   
Gross Unrealized
Losses
   
Fair Value
   
Gross Unrealized
Losses
   
Fair Value
   
Gross Unrealized
Losses
 
(in thousands)
                                   
Available-for-sale as of September 30, 2023
                                   
U.S. Federal agencies
 
$
-
   
$
-
   
$
140
   
$
(6
)
 
$
140
   
$
(6
)
Mortgage-backed securities
   
-
     
-
     
34,080
     
(5,531
)
   
34,080
     
(5,531
)
State and political subdivisions(1)
   
753
     
(7
)
   
24,471
     
(2,476
)
   
25,224
     
(2,483
)
U.S. Treasuries
   
-
     
-
     
103,438
     
(2,594
)
   
103,438
     
(2,594
)
Corporate debt securities
   
805
     
(195
)
   
3,451
     
(1,049
)
   
4,256
     
(1,244
)
Total available-for-sale
 
$
1,558
   
$
(202
)
 
$
165,580
   
$
(11,656
)
 
$
167,138
   
$
(11,858
)

   
Less than Twelve Months
   
Twelve Months or Longer
   
Total
 
   
Fair Value
   
Gross Unrealized
Losses
   
Fair Value
   
Gross Unrealized
Losses
   
Fair Value
   
Gross Unrealized
Losses
 
(in thousands)
                                   
Available-for-sale as of December 31, 2022
                                   
U.S. Federal agencies
 
$
1,142
   
$
(150
)
 
$
-
   
$
-
   
$
1,142
   
$
(150
)
Mortgage-backed securities
   
38,074
     
(4,879
)
   
-
     
-
     
38,074
     
(4,879
)
State and political subdivisions
   
28,356
     
(2,276
)
   
-
     
-
     
28,356
     
(2,276
)
U.S. Treasuries
   
100,660
     
(4,280
)
   
-
     
-
     
100,660
     
(4,280
)
Corporate debt securities
   
4,933
     
(567
)
   
-
     
-
     
4,933
     
(567
)
Total available-for-sale
 
$
173,165
   
$
(12,152
)
 
$
-
   
$
-
   
$
173,165
   
$
(12,152
)

(1) Of our state and political subdivision securities, $22.49 million are rated BBB+ or better and $2.74 million are not rated.

17

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 6:
Loans and Allowance for Credit Losses
 
A summary of loans at September 30, 2023 and December 31, 2022, are as follows (dollars in thousands):
 
   
September 30,
2023
   
December 31,
2022
 
             
Construction & development
 
$
139,053
   
$
163,203
 
1 - 4 family real estate
   
91,540
     
76,928
 
Commercial real estate - other
   
516,975
     
439,001
 
Total commercial real estate
  $
747,568
    $
679,132
 
                 
Commercial & industrial
   
568,684
     
513,011
 
Agricultural
   
64,688
     
66,145
 
Consumer
   
14,993
     
14,949
 
                 
Gross loans
   
1,395,933
     
1,273,237
 
                 
Less allowance for credit losses
   
(20,649
)
   
(14,734
)
Less deferred loan fees
   
(3,156
)
   
(2,781
)
                 
Net loans
 
$
1,372,128
   
$
1,255,722
 

Included in the commercial & industrial loan balances are $2.0 million and $2.6 million of loans that were originated under the SBA PPP program as of  September 30, 2023 and December 31, 2022, respectively.
 
18

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Allowance for Credit Losses Methodology
On January 1, 2023, the Company adopted ASU 2016-13, which replaces the incurred loss methodology for determining its provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. See Note (1) for additional information regarding the factors that influenced the Company’s current estimate of expected credit losses. Upon adoption, the allowance for credit losses was increased by $250,000 and $500,000 for loans and unfunded commitments, respectively, with no impact to the consolidated statement of income. Subsequent to the adoption of ASU 2016-13, the Company recorded a $5.7 million and ($36,000) provision for credit losses related to loans and unfunded commitments, respectively, for the first nine months of 2023 utilizing the newly adopted CECL methodology.
The following table presents, by portfolio segment, the activity in the allowance for credit losses for the three months ended September 30, 2023 and 2022 (dollars in thousands):
 
   
Construction &
Development
   
1 - 4 Family
Real Estate
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
September 30, 2023
                                         
Loans
                                         
Balance, beginning of period
 
$
1,592
   
$
1,116
   
$
6,089
   
$
6,712
   
$
601
   
$
267
   
$
16,377
 
Charge-offs
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Recoveries
   
-
     
-
     
-
     
-
     
-
     
1
     
1
 
Net (charge-offs) recoveries
   
-
     
-
     
-
     
-
     
-
     
1
     
1
 
                                                         
Provision (credit) for credit losses
   
(111
)
   
30
     
640
     
3,718
     
8
     
(14
)
   
4,271
 
Balance, end of period
 
$
1,481
   
$
1,146
   
$
6,729
   
$
10,430
   
$
609
   
$
254
   
$
20,649
 
                                                         
Unfunded Commitments
                                                       
Balance, beginning of period
  $ 227     $ 4     $ 14     $ 305     $ 24     $ 2     $ 576  
Provision (credit) for credit losses
    (69 )     -       (6 )     (25 )     (13 )     1       (112 )
Balance, end of period
  $ 158     $ 4     $ 8     $ 280     $ 11     $ 3     $ 464  
                                                         
Total Allowance for Credit Losses
  $ 1,639     $ 1,150     $ 6,737     $ 10,710     $ 620     $ 257     $ 21,113  

   
Construction &
Development
   
1 - 4 Family
Real Estate
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
September 30, 2022
                                         
Balance, beginning of period
 
$
1,792
   
$
649
   
$
3,216
   
$
4,449
   
$
558
   
$
155
   
$
10,819
 
                                                         
Charge-offs
   
-
     
-
     
-
     
-
     
-
     
(19
)
   
(19
)
Recoveries
   
-
     
-
     
-
     
-
     
-
     
5
     
5
 
                                                         
Net (charge-offs) recoveries
   
-
     
-
     
-
     
-
     
-
     
(14
)
   
(14
)
                                                         
Provision (credit) for credit losses
   
466
     
150
     
746
     
829
     
137
     
20
     
2,348
 
                                                         
Balance, end of period
 
$
2,258
   
$
799
   
$
3,962
   
$
5,278
   
$
695
   
$
161
   
$
13,153
 

19

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table presents, by portfolio segment, the activity in the allowance for credit losses for the nine months ended September 30, 2023 and 2022 (dollars in thousands):

 
 
Construction &
Development
   
1 - 4 Family
Real Estate
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
September 30, 2023
                                         
Loans
                                         
Balance, beginning of period
 
$
1,889
   
$
890
   
$
5,080
   
$
5,937
   
$
765
   
$
173
   
$
14,734
 
Impact of CECL adoption
    44       (138 )     (168 )     716       (149 )     (55 )     250  
Charge-offs
   
-
     
-
     
-
     
-
     
(7
)
   
(16
)
   
(23
)
Recoveries
   
-
     
-
     
-
     
-
     
2
     
5
     
7
 
Net (charge-offs) recoveries
   
-
     
-
     
-
     
-
     
(5
)
   
(11
)
   
(16
)
                                                         
Provision (credit) for credit losses
   
(452
)
   
394
     
1,817
     
3,777
     
(2
)
   
147
     
5,681
 
Balance, end of period
 
$
1,481
   
$
1,146
   
$
6,729
   
$
10,430
   
$
609
   
$
254
   
$
20,649
 
                                                         
Unfunded Commitments
                                                       
Balance, beginning of period
  $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Impact of CECL adoption
    171       4       24       274       25       2       500  
Provision (credit) for credit losses
    (13 )     -       (16 )     6       (14 )     1       (36 )
Balance, end of period
  $ 158     $ 4     $ 8     $ 280     $ 11     $ 3     $ 464  
                                                         
Total Allowance for Credit Losses   $ 1,639     $ 1,150     $ 6,737     $ 10,710     $ 620     $ 257     $ 21,113  

 
 
Construction &
Development
   
1 - 4 Family
Real Estate
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
September 30, 2022
                                         
Balance, beginning of period
 
$
1,695
   
$
630
   
$
3,399
   
$
3,621
   
$
730
   
$
241
   
$
10,316
 
                                                         
Charge-offs
   
-
     
-
     
-
     
-
     
-
     
(20
)
   
(20
)
Recoveries
   
-
     
-
     
-
     
-
     
-
     
14
     
14
 
                                                         
Net (charge-offs) recoveries
   
-
     
-
     
-
     
-
     
-
     
(6
)
   
(6
)
                                                         
Provision (credit) for credit losses
   
563
     
169
     
563
     
1,657
     
(35
)
   
(74
)
   
2,843
 
                                                         
Balance, end of period
 
$
2,258
   
$
799
   
$
3,962
   
$
5,278
   
$
695
   
$
161
   
$
13,153
 

20

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 EstateThe real estate loan portfolio consists of loans made to finance both residential and commercial properties.  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 ability to repay.   Commercial real estate loans 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, and in some cases from income that is independent from the real estate asset itself.

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.

AgriculturalLoans secured by agricultural assets are generally made for the purpose of acquiring land devoted to crop production, and various animals that are eventually harvested and sold, and typically housed on the underlying secured 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. Residential loans in this category are generally secured by owner occupied 1–4 family residences. 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.
 
21

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
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.
 

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

Grade 4 (Substandard) – These loans are not adequately protected by the sound worth and debt service capacity of the borrower, but may be well secured. They have defined weaknesses relative to cash flow, collateral, financial condition, or other factors that might jeopardize repayment of all of the principal and interest on a timely basis. There is the possibility that a future loss will occur if weaknesses are not remediated.
 
The Company evaluates the definitions of loan grades and the allowance for credit losses methodology on an ongoing basis. No changes were made to either during the period ended September 30, 2023.

22

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table presents the amortized cost of the Company’s loan portfolio with the gross charge-offs for the nine months ended by year of origination based on internal rating category as of September 30, 2023 (dollars in thousands):

As of September 30, 2023
 
2023
   
2022
   
2021
   
2020
   
2019
   
Prior
   
Revolving Loans Amortized Cost Basis
   
Total
 
                                                 
Construction & development
                                               
Grade
                                               
1 (Pass)
 
$
26,403
   
$
10,300
   
$
4,857
   
$
214
   
$
104
   
$
46
   
$
96,336
   
$
138,260
 
2 (Watch)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
3 (Special Mention)
   
563
     
-
     
-
     
-
     
-
     
-
     
230
     
793
 
4 (Substandard)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total construction & development
   
26,966
     
10,300
     
4,857
     
214
     
104
     
46
     
96,566
     
139,053
 
                Current-period gross charge-offs
    -       -       -       -       -       -       -       -  
1 - 4 family real estate
                                                               
Grade
                                                               
1 (Pass)
   
31,511
     
27,605
     
14,110
     
4,540
     
1,847
     
1,141
     
10,786
     
91,540
 
2 (Watch)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
3 (Special Mention)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
4 (Substandard)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total 1 - 4 family real estate
   
31,511
     
27,605
     
14,110
     
4,540
     
1,847
     
1,141
     
10,786
     
91,540
 
                Current-period gross charge-offs
    -       -       -       -       -       -       -       -  
Commercial real estate - other
                                                               
Grade
                                                               
1 (Pass)
   
147,441
     
159,184
     
36,185
     
42,601
     
3,657
     
4,139
     
107,802
     
501,009
 
2 (Watch)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
3 (Special Mention)
   
14,738
     
-
     
-
     
-
     
-
     
1,094
     
-
     
15,832
 
4 (Substandard)
   
-
     
-
     
-
     
-
     
-
     
134
     
-
     
134
 
Total commercial real estate - other
   
162,179
     
159,184
     
36,185
     
42,601
     
3,657
     
5,367
     
107,802
     
516,975
 
Current-period gross charge-offs
    -       -       -       -       -       -       -       -  
Commercial and industrial
                                                               
Grade
                                                               
1 (Pass)
   
142,077
     
68,443
     
41,428
     
3,129
     
1,849
     
4,130
     
242,714
     
503,770
 
2 (Watch)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
3 (Special Mention)
   
10,452
     
-
     
-
     
-
     
-
     
-
     
1,333
     
11,785
 
4 (Substandard)
   
42,744
     
7,963
     
112
     
12
     
-
     
-
     
2,298
     
53,129
 
Total commercial and industrial
   
195,273
     
76,406
     
41,540
     
3,141
     
1,849
     
4,130
     
246,345
     
568,684
 
Current-period gross charge-offs
    -       -       -       -       -       -       -       -  
Agriculural
                                                               
Grade
                                                               
1 (Pass)
   
5,993
     
6,291
      24,893      
4,535
     
1,109
     
1,300
     
20,460
     
64,581
 
2 (Watch)
   
56
     
51
     
-
     
-
     
-
     
-
     
-
     
107
 
3 (Special Mention)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
4 (Substandard)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total agriculural
   
6,049
     
6,342
     
24,893
     
4,535
     
1,109
     
1,300
     
20,460
     
64,688
 
Current-period gross charge-offs
    -       7       -       -       -       -       -       7  
Consumer
                                                               
Grade
                                                               
1 (Pass)
   
3,649
     
1,988
     
2,799
     
2,900
     
705
     
1,934
     
938
     
14,913
 
2 (Watch)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
3 (Special Mention)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
4 (Substandard)
   
-
     
-
     
-
     
-
     
-
     
80
     
-
     
80
 
Total consumer
   
3,649
     
1,988
     
2,799
     
2,900
     
705
     
2,014
     
938
     
14,993
 
Current-period gross charge-offs
    11       -       -       -       5       -       -       16  
Total loans held for investment
 
$
425,627
   
$
281,825
   
$
124,384
   
$
57,931
   
$
9,271
   
$
13,998
   
$
482,897
   
$
1,395,933
 
Total current-period gross charge-offs
  $ 11     $ 7     $ -     $ -     $ 5     $ -     $ -     $ 23  

23

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category, prior to the adoption of ASU 2016-13, as of December 31, 2022 (dollars in thousands):
 
 
 
 
Construction &
Development
   
 
1 - 4 Family
Real Estate
   
Commercial
Real Estate -
Other
   
 
Commercial
& Industrial
   
 
 
Agricultural
   
 
 
Consumer
   
 
 
Total
 
                                           
December 31, 2022
                                         
Grade
                                         
1 (Pass)
 
$
163,203
   
$
76,928
   
$
397,295
   
$
493,412
   
$
65,857
   
$
14,927
   
$
1,211,622
 
2 (Watch)
   
-
     
-
     
14,976
     
-
     
288
     
-
     
15,264
 
3 (Special Mention)
   
-
     
-
     
24,747
     
584
     
-
     
-
     
25,331
 
4 (Substandard)
   
-
     
-
     
1,983
     
19,015
     
-
     
22
     
21,020
 
Total
 
$
163,203
   
$
76,928
   
$
439,001
   
$
513,011
   
$
66,145
   
$
14,949
   
$
1,273,237
 

Aged Analysis of Past Due Loans Receivable

The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of September 30, 2023 and December 31, 2022 (dollars in thousands):
 

 
Past Due
                Total Loans
 
   
30–59
Days
   
60–89
Days
   
Greater than
90 Days
   
 
Total
   
 
Current
   
Total
Loans
   
> 90 Days &
Accruing
 
                                           
September 30, 2023
                                         
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
139,053
   
$
139,053
   
$
-
 
1 - 4 family real estate
   
-
     
-
     
-
     
-
     
91,540
     
91,540
     
-
 
Commercial real estate - other
   
134
     
-
     
-
     
134
     
516,841
     
516,975
     
-
 
Commercial & industrial(1)
   
58
     
-
     
9,776
     
9,834
     
558,850
     
568,684
     
9,776
 
Agricultural
   
-
     
-
     
-
     
-
     
64,688
     
64,688
     
-
 
Consumer
   
123
     
-
     
80
     
203
     
14,790
     
14,993
     
80
 
Total
 
$
315
   
$
-
   
$
9,856
   
$
10,171
   
$
1,385,762
   
$
1,395,933
   
$
9,856
 
                                                         
December 31, 2022
                                                       
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
163,203
   
$
163,203
   
$
-
 
1 - 4 family real estate
   
-
     
-
     
-
     
-
     
76,928
     
76,928
     
-
 
Commercial real estate - other
   
-
     
617
     
-
     
617
     
438,384
     
439,001
     
-
 
Commercial & industrial(1)
   
21
     
-
     
9,923
     
9,944
     
503,067
     
513,011
     
9,923
 
Agricultural
   
4
     
-
     
-
     
4
     
66,141
     
66,145
     
-
 
Consumer
   
291
     
82
     
22
     
395
     
14,554
     
14,949
     
18
 
Total
 
$
316
   
$
699
   
$
9,945
   
$
10,960
   
$
1,262,277
   
$
1,273,237
   
$
9,941
 

(1) The $9.78 million and $9.92 million that is greater than 90 days past due as of September 30, 2023 and December 31, 2022, respectively, consists of a single borrower that is well collateralized and for which collection is being diligently pursued.
24

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Nonaccrual Loans

The following table presents information regarding nonaccrual loans as of September 30, 2023 (dollars in thousands):

 
     
Recorded
 
Recorded
             
 
 
Amortized
 
Investment
 
Investment
 
Total
     
Interest
 
 
 
Cost
 
with No
 
with an
 
Recorded
 
Related
 
Income
 
 
 
Basis
 
Allowance
 
Allowance
 
Investment
 
Allowance
 
Recognized
 
September 30, 2023
                         
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
1 - 4 Family Real Estate
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial Real Estate - other
   
134
     
134
     
-
     
134
     
-
     
16
 
Commercial & industrial
   
41,109
     
14,378
     
26,731
     
41,109
     
3,115
     
2,609
 
Agricultural
   
-
     
-
     
-
     
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
41,243
   
$
14,512
   
$
26,731
   
$
41,243
   
$
3,115
   
$
2,625
 

The following table presents impaired loans, prior to the adoption of ASU 2016-13, as of December 31, 2022 (dollars in thousands):

 
     
Recorded
 
Recorded
                 
 
 
Unpaid
 
Investment
 
Investment
 
Total
     
Average
 
Interest
 
 
 
Principal
 
with No
 
with an
 
Recorded
 
Related
 
Recorded
 
Income
 
 
 
Balance
 
Allowance
 
Allowance
 
Investment
 
Allowance
 
Investment
 
Recognized
 
December 31, 2022
                             
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
21
   
$
-
 
1 - 4 Family Real Estate
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Commercial Real Estate - other
   
2,808
     
1,983
     
-
     
1,983
     
-
     
11,749
     
141
 
Commercial & industrial
   
19,882
     
18,882
     
133
     
19,015
     
133
     
11,773
     
1,214
 
Agricultural
   
-
     
-
     
-
     
-
     
-
     
14
     
-
 
Consumer
   
31
     
22
     
-
     
22
     
-
     
27
     
-
 
Total
 
$
22,721
   
$
20,887
   
$
133
   
$
21,020
   
$
133
   
$
23,584
   
$
1,355
 

25

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Collateral Dependent Loans

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. During the nine months ended September 30, 2023, no material amount of interest income was recognized on collateral-dependent loans subsequent to their classification as collateral-dependent. At a minimum, the estimated value of the collateral for loan equals the current book value.

The following table summarizes collateral-dependent gross loans held for investment by collateral type and the related specific allocation as follows (dollars in thousands):

 
 
Collateral Type
         
 
     
Business
         
Specific
 
 
 
Real Estate
 
Assets
 
Other Assets
 
Total
 
Allocation
 
September 30, 2023
                     
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
1 - 4 Family Real Estate
   
-
     
-
     
-
     
-
     
-
 
Commercial Real Estate - other
   
134
     
-
     
-
     
134
     
-
 
Commercial & industrial
   
-
     
43,237
     
9,776
     
53,013
     
3,000
 
Agricultural
   
-
     
-
     
-
     
-
     
-
 
Consumer
   
-
     
-
     
80
     
80
     
-
 
Total
 
$
134
   
$
43,237
   
$
9,856
   
$
53,227
   
$
3,000
 

Loan Modifications to Troubled Borrowers

As part of the Company’s ongoing risk management practices, the Company attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Modifications could include extension of the maturity date, reductions of the interest rate, reduction or forgiveness of accrued interest, or principal forgiveness. Combinations of these modifications may also be made for individual loans. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Principal reductions may be made in limited circumstances, typically for specific commercial loan workouts, and in the event of borrower bankruptcy. Each occurrence is unique to the borrower and is evaluated separately.

Troubled loans are considered those in which the borrower is experiencing financial difficulty. The assessment of whether a borrower is experiencing financial difficulty can be subjective in nature and management’s judgment may be required in making this determination. The Company may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future absent a modification. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty.

26

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Modifications to Borrowers Experiencing Financial Difficulty

The following tables present the amortized cost basis at the end of the reporting period of loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of modification made, as well as the financial effect of the modifications made as of September 30, 2023:

 
 
Term Extension and Payment Deferral
 
 
Amortized Cost Basis
   
% of Total Class
 
Financial Effect
 
           
             
September 30, 2023
           
         
Construction & development
 
$
-
     
-
%

1 - 4 Family Real Estate
   
-
     
-
 
 
Commercial Real Estate - other
   
-
     
-
 
 
Commercial & industrial
   
26,615
     
4.6
 
Extended the maturity of loan by four months, and payment of principal and interest deferred until the sale of collateral
Agricultural
   
-
     
-
 
 
Consumer
   
-
     
-
 
 
 
               
                
Total
 
$
26,615
     
4.6
%
 

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

The following table depicts the performance of loans that have been modified in the last 12 months:

 
 
Current
   
30-89 Days Past Due
   
90+ Days Past Due
   
Non-Accruing
 
 
                       
September 30, 2023
                       
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
 
1 - 4 Family Real Estate
   
-
     
-
     
-
     
-
 
Commercial Real Estate - other
   
-
     
-
     
-
     
-
 
Commercial & industrial
   
-
     
-
     
-
     
26,615
 
Agricultural
   
-
     
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
     
-
 
 
                               
Total
 
$
-
   
$
-
   
$
-
   
$
26,615
 

27

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Troubled Debt Restructurings (Prior to the adoption of ASU 2022-02)

Impaired loans included nonperforming loans and also included loans modified in troubled-debt restructurings where concessions had 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 were troubled debt restructurings that were classified as impaired.  At December 31, 2022, the Company had $1.2 million of commercial real estate loans. There were no newly modified troubled-debt restructurings during the year ended December 31, 2022.

As of December 31, 2022, there were no troubled-debt restructurings modified and subsequently defaulted for the year ended December 31, 2022.
 
The following table represents information regarding nonperforming assets at December 31, 2022 (dollars in thousands):
 
   
 
Construction &
Development
   
 
1 - 4 Family
Real Estate
   
Commercial
Real Estate -
Other
   
 
Commercial
& Industrial
   
 
 
Agricultural
   
 
 
Consumer
   
 
 
Total
 
                                           
December 31, 2022
                                         
Nonaccrual loans
 
$
-
   
$
-
   
$
1,348
   
$
6,686
   
$
-
   
$
5
   
$
8,039
 
Troubled-debt restructurings (1)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Accruing loans 90 or more days past due
   
-
     
-
     
-
     
9,923
     
-
     
18
     
9,941
 
                                                         
Total nonperforming loans
 
$
-
   
$
-
   
$
1,348
   
$
16,609
   
$
-
   
$
23
   
$
17,980
 

 
(1)
$1.2 million of TDRs as of December 31, 2022, are included in the nonaccrual loans balance.

28

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 7:
Shareholders’ Equity
 
On October 28, 2021, the Company adopted a Repurchase Plan (the “RP”) that authorizes the repurchase of up to 750,000 shares of the Company’s stock. 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:


   
Nine Months Ended
September 30,
 
   
2023
   
2022
 
Number of shares repurchased     -       -  
Average price of shares repurchased
 
$
-
   
$
-
 
Shares remaining to be repurchased     750,000       750,000  

The Company and Bank are subject to risk-based capital guidelines issued by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under GAAP, regulatory reporting requirements and regulatory capital standards. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company’s and the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.
 
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier I, and Common Equity capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2023, that the Company and Bank meet all capital adequacy requirements to which it is subject and maintains capital conservation buffers that allow the Company and Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to certain executive officers.
   
As of September 30, 2023, 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 below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
 
29

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 as of September 30, 2023 and December 31, 2022 (dollars in thousands):
 
   
Actual
   
Minimum
Capital Requirements
   
With Capital
Conservation Buffer
   
Minimum
To Be Well Capitalized
Under Prompt
Corrective Action
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
                                                 
As of September 30, 2023
                                               
Total capital to risk-weighted assets
                                               
Company
 
$
185,826
     
12.64
%
 
$
117,623
     
8.00
%
 
$
154,381
     
10.50
%
   
N/A
     
N/A
 
Bank
   
185,773
     
12.64
%
   
117,542
     
8.00
%
   
154,273
     
10.50
%
 

146,927
     
10.00
%
Tier I capital to risk-weighted assets
                                                               
Company
   
167,419
     
11.39
%
   
88,218
     
6.00
%
   
124,975
     
8.50
%
   
N/A
     
N/A
 
Bank
   
167,379
     
11.39
%
   
88,156
     
6.00
%
   
124,888
     
8.50
%
   
117,542
     
8.00
%
CET I capital to risk-weighted assets
                                                               
Company
   
167,419
     
11.39
%
   
66,163
     
4.50
%
   
102,921
     
7.00
%
   
N/A
     
N/A
 
Bank
   
167,379
     
11.39
%
   
66,117
     
4.50
%
   
102,849
     
7.00
%
   
95,503
     
6.50
%
Tier I capital to average assets
                                                               
Company
   
167,419
     
9.76
%
   
68,634
     
4.00
%
   
N/A
     
N/A
     
N/A
     
N/A
 
Bank
   
167,379
     
9.75
%
   
68,644
     
4.00
%
   
N/A
     
N/A
     
85,805
     
5.00
%
                                                                 
As of December 31, 2022
                                                               
Total capital to risk-weighted assets
                                                               
Company
 
$
158,158
     
12.41
%
 
$
101,990
     
8.00
%
 
$
133,862
     
10.50
%
   
N/A
     
N/A
 
Bank
   
158,158
     
12.42
%
   
101,909
     
8.00
%
   
133,756
     
10.50
%
 
$
127,387
     
10.00
%
Tier I capital to risk-weighted assets
                                                               
Company
   
143,424
     
11.25
%
   
76,493
     
6.00
%
   
108,365
     
8.50
%
   
N/A
     
N/A
 
Bank
   
143,424
     
11.26
%
   
76,432
     
6.00
%
   
108,279
     
8.50
%
   
101,909
     
8.00
%
CET I capital to risk-weighted assets
                                                               
Company
   
143,424
     
11.25
%
   
57,370
     
4.50
%
   
89,241
     
7.00
%
   
N/A
     
N/A
 
Bank
   
143,424
     
11.26
%
   
57,324
     
4.50
%
   
89,171
     
7.00
%
   
82,801
     
6.50
%
Tier I capital to average assets
                                                               
Company
   
143,424
     
9.19
%
   
62,460
     
4.00
%
   
N/A
     
N/A
     
N/A
     
N/A
 
Bank
   
143,424
     
9.18
%
   
62,489
     
4.00
%
   
N/A
     
N/A
     
78,111
     
5.00
%

30

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The federal banking agencies require that banking organizations meet several risk-based capital adequacy requirements. The current risk-based capital standards applicable to the Company and the Bank are based on the Basel III Capital Rules established by the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. The requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments.
 
The Basel III Capital Rules require the Bank and the Company to comply with four minimum capital standards: a Tier 1 leverage ratio of at least 4.0%; a CET1 to risk-weighted assets of 4.5%; a Tier 1 capital to risk-weighted assets of at least 6.0%; and a total capital to risk-weighted assets of at least 8.0%. The calculation of all types of regulatory capital is subject to definitions, deductions and adjustments specified in the regulations.
 
The Basel III Capital Rules also require a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital requirements. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios.  Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) are subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers based on the amount of the shortfall.
 
As of September 30, 2023, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements under the Basel III Capital Rules on a fully phased-in basis.

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At September 30, 2023, approximately $66.3 million of retained earnings was available for dividend declaration from the Bank without prior regulatory approval.

Note 8:
Related-Party Transactions
 
At September 30, 2023 and December 31, 2022, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties) approximating $209,000 and $132,000, respectively.
 
The Bank leases office and retail banking space in Oklahoma City and Woodward, Oklahoma from Central Park on Lincoln, LLC and Haines Realty Investments Company, LLC, respectively, both related parties of the Company.  Lease payments totaled $65,000 and $39,000 for the three months ended September 30, 2023 and 2022, respectively and $186,000 and $116,000 for the nine months ended September 30, 2023 and 2022, respectively. In addition, payroll and office sharing arrangements were in place between the Company and certain of its affiliates.

31

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 9:
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 Company matching up to 5% of the employee’s salary. Employer contributions charged to expense for the three months ended September 30, 2023 and 2022 totaled $93,000 and $74,000, respectively. Employer contributions charged to expense for the nine months ended September 30, 2023 and 2022 totaled $302,000 and $281,000, respectively.
 
Stock-Based Compensation
 
The Company adopted an equity incentive plan (the “Incentive Plan”) in September 2018. The Incentive Plan permits the grant of restricted stock units and nonqualified incentive stock options. The Incentive Plan will terminate in September 2028, if not extended. Compensation expense related to the Incentive Plan for the three months ended September 30, 2023 and 2022 totaled $565,000 and $341,000, respectively. Compensation expense related to the Incentive Plan for the nine months ended September 30, 2023 and 2022 totaled $1.7 million and $1.1 million, respectively. There were 637,371 shares available for future grants as of September 30, 2023.
 
The Company grants to employees and directors restricted stock units (RSUs) which vest ratably over one, three, four, five, or eight 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 Incentive Plan (dollar amounts in thousands, except per share data):

   
Options
   
Wgtd. Avg.
Exercise Price
   
Wgtd. Avg.
Remaining
Contractual Term
   
Aggregate
Intrinsic
Value
 
Nine Months Ended September 30, 2023
                       
Outstanding at December 31, 2022
   
251,550
   
$
17.52
             
Options Granted
   
-
     
-
             
Options Exercised
   
26,986
     
17.83
             
Options Forfeited
   
(2,188
)
   
-
             
Outstanding at September 30, 2023
   
222,376
     
17.51
     
5.90
   
$
1,119,462
 
Exercisable at September 30, 2023
   
174,621
     
18.00
     
5.52
   
$
787,299
 

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.

32

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. There were no new grants for the nine months ended September 30, 2023.
 
    For the Nine Months Ended  
   
 September 30, 2023
 
Risk-free interest rate
   
3.47
%
Dividend yield
   
1.96
%
Stock price volatility
   
34.92
%
Expected term
   
7.01
 
 
The following table summarizes share information about RSUs for the nine months ended September 30, 2023 and 2022:
 

 
Number of
Shares
   
Wgtd. Avg.
Grant Date
Fair Value
 
Nine Months Ended September 30, 2023
           
Outstanding at December 31, 2022
   
112,591
   
$
19.15
 
Shares granted
   
163,311
     
29.76
 
Shares vested
   
(40,734
)
   
19.04
 
Shares forfeited
   
(7,087
)
   
27.34
 
End of the period balance
   
228,081
   
$
26.51
 

   
Number of
Shares
   
Wgtd. Avg.
Grant Date
Fair Value
 
Nine Months Ended September 30, 2022
           
Outstanding at December 31, 2021
   
172,993
   
$
19.02
 
Shares granted
   
3,000
     
4.03
 
Shares vested
   
(41,584
)
   
17.93
 
Shares forfeited
   
(750
)
   
22.13
 
End of the period balance
   
133,659
   
$
19.01
 
 
As of September 30, 2023, there was approximately $4.9 million of unrecognized compensation expense related to 228,081 unvested RSUs and $201,000 of unrecognized compensation expense related to 222,376 unvested and/or unexercised stock options. The stock option expense is expected to be recognized over a weighted average period of 1.45 years, and the RSU expense is expected to be recognized over a weighted average period of 4.00 years.

As of September 30, 2022, there was approximately $2.1 million of unrecognized compensation expense related to 133,659 unvested RSUs and $385,000 of unrecognized compensation expense related to 250,938 unvested and/or unexercised stock options.  The stock option expense is expected to be recognized over a weighted average period of 2.17 years, and the RSU expense is expected to be recognized over a weighted average period of 2.48 years.

33

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 10:
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
 

Assets and liabilities measured at fair value on a recurring basis include the following:

 
Available-for-sale debt securities: Debt securities classified as available-for-sale, as discussed in Note 5, are reported at fair value utilizing Level 2 inputs. For those debt securities classified as Level 2, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data for similar securities, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.

34

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Nonrecurring Measurements
 
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2023 and December 31, 2022 (dollars in thousands):
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
September 30, 2023
                       
Impaired loans (collateral- dependent)
 
$
37,501
   
$
-
   
$
-
   
$
37,501
 
                                 
December 31, 2022
                               
Impaired loans (collateral- dependent)
 
$
6,553
   
$
-
   
$
-
   
$
6,553
 

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 Credit 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 engineering reports or appraisals 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.
35

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(dollars in thousands):
 
   
Fair Value
 
Valuation
Technique
 
 Unobservable
Inputs
 
Weighted-
Average
 
September 30, 2023
                 
Collateral-dependent impaired loans
 
$
37,501
 
Appraisals from comparable assets
 
Estimated cost to sell
    20
%
                       
December 31, 2022
                     
Collateral-dependent impaired loans
 
$
6,553
 
Appraisals from comparable assets
 
Estimated cost to sell
    20 %

The following table presents estimated fair values of the Company’s financial instruments not recorded at fair value at September 30, 2023 and December 31, 2022 (dollars in thousands):


  Carrying    
Fair Value Measurements
 

 
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
September 30, 2023
                             
                               
Financial Assets
                             
Cash and due from banks
 
$
169,490
   
$
169,490
   
$
-
   
$
-
   
$
169,490
 
Interest-bearing time
deposits in other banks
   
17,182
     
-
     
17,182
     
-
     
17,182
 
Loans, net of allowance
   
1,372,128
     
-
     
1,331,087
     
37,501
     
1,368,588
 
Loans held for sale
    1,143       -       1,143       -       1,143  
Nonmarketable equity securities
   
1,251
     
-
     
1,251
     
-
     
1,251
 
Interest receivable
   
8,769
     
-
     
8,769
     
-
     
8,769
 
                                         
Financial Liabilities
                                       
Deposits
 
$
1,593,572
   
$
-
   
$
1,591,894
   
$
-
   
$
1,591,894
 
Interest payable
   
1,334
     
-
     
1,334
     
-
     
1,334
 
                                         
December 31, 2022
                                       
                                         
Financial Assets
                                       
Cash and due from banks
 
$
109,115
   
$
109,115
   
$
-
   
$
-
   
$
109,115
 
Interest-bearing time
deposits in other banks
   
5,474
     
-
     
5,474
     
-
     
5,474
 
Loans, net of allowance
   
1,255,722
     
-
     
1,245,825
     
6,553
     
1,252,378
 
Nonmarketable equity securities
   
1,209
     
-
     
1,209
     
-
     
1,209
 
Interest receivable
   
8,124
     
-
     
8,124
     
-
     
8,124
 
                                         
Financial Liabilities
                                       
Deposits
 
$
1,431,400
   
$
-
   
$
1,429,565
   
$
-
   
$
1,429,565
 
Interest payable
   
339
     
-
     
339
     
-
     
339
 

36

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 Company determines fair value of loans by using exit market assumptions including factors such as liquidity, credit quality and risk of nonperformance. The fair value is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.
 
Deposits
 
Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.
 
Commitments to Extend Credit, Lines of Credit and Standby Letters of Credit
 
The fair values of unfunded commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair values of standby letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The estimated fair values of the Company’s commitments to extend credit, lines of credit and standby letters of credit were not material at September 30, 2023 and December 31, 2022.

37

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 11:
Financial Instruments with Off-Balance Sheet Risk
 
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying consolidated balance sheets. The following summarizes those financial instruments with contract amounts representing credit risk as of September 30, 2023 and December 31, 2022 (dollars in thousands):
 
   
September 30,
2023
   
December 31,
2022
 
Commitments to extend credit
 
$
245,079
   
$
198,027
 
Financial and performance standby letters of credit
   
2,148
     
1,043
 
   
$
247,227
   
$
199,070
 
 
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.

On January 1, 2023, the Company adopted ASU 2016-13, see Note (1) and Note (6). Upon adoption, the Company estimated an allowance for credit losses on off-balance sheet credit exposures, which resulted in recording a reserve for unfunded loan commitments of $500,000. The reserve for unfunded loan commitments totaled $464,000 and $0 at September 30, 2023 and December 31, 2022, respectively.
38

Bank7 Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 12:
Significant Estimates and Concentrations
 
GAAP requires disclosure of certain significant estimates and current vulnerabilities due to certain concentrations.  Estimates related to the allowance for credit losses are reflected in Note 6 regarding loans.  Current vulnerabilities due to off-balance sheet credit risk are discussed in Note 11.

As of September 30, 2023, hospitality loans were 21% of gross total loans with outstanding balances of $292.8 million and unfunded commitments of $6.4 million; energy loans were 16% of gross total loans with outstanding balances of $223.5 million and unfunded commitments of $51.2 million.
 
The Company evaluates goodwill for potential goodwill impairment on an annual basis or more often based on consideration if any impairment indicators have occurred. A prolonged strain on the U.S. economy impacting the Company could result in goodwill being partially or fully impaired. At September 30, 2023, goodwill of $8.5 million was recorded on the consolidated balance sheet.
 
Note 13:
Subsequent Events

During the quarter ended September 30, 2023, the Company recorded a $3.0 million ACL reserve related to a single loan customer that filed for bankruptcy during the quarter. Subsequent to quarter end, the Company received further information and as a result believes that an additional corresponding reserve or charge-off will be recorded in the fourth quarter ended December 31, 2023. At this time management is not able to estimate this amount.

Also, in connection with this single loan customer that filed for bankruptcy during the quarter, on October 19, 2023, the Company’s board of directors approved the creation of a bank subsidiary for the purpose of acquiring and operating certain oil and gas assets of this customer.  The Company’s management submitted a bid to purchase said assets, which was accepted on October 31, 2023.  As of the date of the financial statements, this purchase transaction is in process and management expects the transaction to close in the fourth quarter ended December 31, 2023, for an estimated purchase price of $16 million.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2022.
 
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 twelve 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 equity, earnings per share, capital ratios, efficiency ratio (calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis) and noninterest income.
 
As of September 30, 2023, we had total assets of $1.77 billion, gross loans of $1.39 billion, total deposits of $1.59 billion and total shareholders’ equity of $167.9 million.

Results of Operations

Performance Summary. For the third quarter of 2023, we reported a pre-tax income of $10.2 million, compared to pre-tax income of $10.4 million for the third quarter of 2022. For the first nine months of 2023, we reported a pre-tax income of $35.7 million, compared to pre-tax income of $27.9 million for the same period in 2022. For the third quarter of 2023, interest income increased by $10.0 million, or 46.2%, compared to the third quarter of 2022. For the first nine months of 2023, interest income increased by $35.9 million, or 67.3%, compared to the same period in 2022. For the third quarter of 2023, average total loans were $1.34 billion with loan yields of 8.52% as compared to average total loans of $1.21 billion with loan yields of 6.69% for the third quarter of 2022. For the first nine months of 2023, average total loans were $1.30 billion with loan yields of 8.34% as compared to average total loans of $1.10 billion with loan yields of 6.13% for the same period in 2022.

Our provision for credit losses for the third quarter of 2023 was $4.2 million, compared to $2.4 million for the same period of 2022. Our provision for credit losses for the first nine months of 2023 was $5.7 million, compared to $2.8 million for the same period in 2022.

During the third quarter 2023, we had a single loan customer file for bankruptcy, and as a result, we increased nonaccrual loans by $40.1 million and recorded an additional allowance for credit losses and provision for loan losses of $3.0 million.  See Note (6) and (13) for further disclosure and discussion.

Return on average equity was 18.89% for the third quarter of 2023, as compared to 23.72% for the third quarter of 2022. Return on average equity was 23.29% for first nine months of 2023, as compared to 21.54% for the same period in 2022.

Net Interest Income and Net Interest Margin. 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
 
   
For the Three Months Ended September 30,
 
   
2023
   
2022
 
   
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
 
$
176,589
   
$
2,062
     
4.63
%
 
$
99,751
   
$
445
     
1.77
%
Debt securities, taxable
   
151,174
     
699
     
1.83
     
163,699
     
690
     
1.67
 
Debt securities, tax exempt(1)
   
19,430
     
81
     
1.65
     
21,811
     
90
     
1.64
 
Loans held for sale
   
232
     
-
     
-
     
1,281
     
-
     
-
 
Total loans(2)
   
1,344,038
     
28,880
     
8.52
     
1,213,080
     
20,466
     
6.69
 
Total interest-earning assets
   
1,691,463
     
31,722
     
7.44
     
1,499,622
     
21,691
     
5.74
 
Noninterest-earning assets
   
23,407
                     
23,197
                 
Total assets
 
$
1,714,870
                   
$
1,522,819
                 
                                                 
Funding sources:
                                               
Interest-bearing liabilities:
                                               
Deposits:
                                               
Transaction accounts
 
$
823,331
     
7,733
     
3.73
%
 
$
761,927
     
2,338
     
1.22
%
Time deposits
   
292,235
     
3,243
     
4.40
     
152,910
     
308
     
0.80
 
Total interest-bearing deposits
   
1,115,566
     
10,976
     
3.90
     
914,837
     
2,646
     
1.15
 
Total interest-bearing liabilities
 
$
1,115,566
     
10,976
     
3.90
   
$
914,837
     
2,646
     
1.15
 
                                                 
Noninterest-bearing liabilities:
                                               
Noninterest-bearing deposits
 
$
422,691
                   
$
463,882
                 
Other noninterest-bearing liabilities
   
11,649
                     
8,132
                 
Total noninterest-bearing liabilities
   
434,340
                     
472,014
                 
Shareholders' equity
   
164,964
                     
135,968
                 
Total liabilities and shareholders' equity
 
$
1,714,870
                   
$
1,522,819
                 
                                                 
Net interest income
         
$
20,746
                   
$
19,045
         
Net interest spread
                   
3.54
%
                   
4.59
%
Net interest margin
                   
4.87
%
                   
5.04
%

(1)
Taxable-equivalent yield of 2.15% as of September 30, 2023, applying a 23.0% effective tax rate
(2)
Non-accrual loans of $41.2 million and $8.2 million as of September 30, 2023 and September 30, 2022, respectively, are included in loans.
 
For the third quarter of 2023 compared to the third quarter of 2022:

-
Interest income on total loans totaled $28.9 million, an increase of $8.4 million or 41.1%, due to an increase in average loans of $131.0 million, or 10.8%, and increased loan yields;

-
Loan yields totaled 8.52% compared to 6.69% for the same period in 2022, primarily due to the continued fed rate hikes; and

-
Net interest margin for the third quarter of 2023 was 4.87% compared to 5.04% for the third quarter of 2022.

   
Net Interest Margin
 
   
For the Nine Months Ended September 30,
 
   
2023
   
2022
 
   
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
 
$
162,432
   
$
5,668
     
4.67
%
 
$
139,133
   
$
793
     
0.76
%
Debt securities, taxable
   
152,702
     
2,106
     
1.84
     
142,913
     
1,625
     
1.52
 
Debt securities, tax exempt(1)
   
19,828
     
253
     
1.71
     
22,087
     
273
     
1.65
 
Loans held for sale
   
115
     
-
     
-
     
686
     
-
     
-
 
Total loans(2)
   
1,299,754
     
81,117
     
8.34
     
1,103,114
     
50,597
     
6.13
 
Total interest-earning assets
   
1,634,831
   
$
89,144
     
7.29
     
1,407,933
     
53,288
     
5.06
 
Noninterest-earning assets
   
22,560
                     
24,069
                 
Total assets
 
$
1,657,391
                   
$
1,432,002
                 
                                                 
Funding sources:
                                               
Interest-bearing liabilities:
                                               
Deposits:
                                               
Transaction accounts
 
$
812,962
     
20,346
     
3.35
%
 
$
699,670
     
3,351
     
0.64
%
Time deposits
   
257,418
     
7,548
     
3.92
     
168,608
     
890
     
0.71
 
Total interest-bearing deposits
   
1,070,380
     
27,894
     
3.48
     
868,278
     
4,241
     
0.65
 
Total interest-bearing liabilities
 
$
1,070,380
     
27,894
     
3.48
     
868,278
     
4,241
     
0.65
 
                                                 
Noninterest-bearing liabilities:
                                               
Noninterest-bearing deposits
 
$
420,356
                     
424,720
                 
Other noninterest-bearing liabilities
   
10,496
                     
7,128
                 
Total noninterest-bearing liabilities
   
430,852
                     
431,848
                 
Shareholders' equity
   
156,159
                     
131,876
                 
Total liabilities and shareholders' equity
 
$
1,657,391
                   
$
1,432,002
                 
                                                 
Net interest income
         
$
61,250
                   
$
49,047
         
Net interest spread
                   
3.81
%
                   
4.41
%
Net interest margin
                   
5.01
%
                   
4.66
%

(1)
Taxable-equivalent yield of 2.24% as of September 30, 2023, applying a 23.7% effective tax rate
(2)
Non-accrual loans of $41.2 million and $8.2 million as of September 30, 2023 and September 30, 2022, respectively, are included in loans.

For the first nine months of 2023 compared to the same period in 2022:

-
Interest income on total loans totaled $81.2 million, an increase of $30.5 million or 60.3%, due to an increase in average loans of $196.6 million, or 17.8%, and increased loan yields;

-
Loan yields totaled 8.3% compared to 6.1% for the same period in 2022, primarily due to the continued fed rate hikes;

-
Interest income on debt securities totaled $2.4 million an increase of $461,000 or 24.3%, as a result of debt securities purchased during the first quarter of 2022; and

-
Net interest margin for the first nine months of 2023 was 5.01% compared to 4.66% for the same period in 2022.

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
 
     
For the Three Months Ended
September 30, 2023 vs 2022
  
   
Change due to:
     
  
   
Volume(1)
   
Rate(1)
 
Interest
Variance
   
   
(Dollars in thousands)
 
Increase (decrease) in interest income:
                 
Short-term investments
 
$
343
   
$
1,274
   
$
1,617
 
Debt securities
   
(63
)
   
63
     
-
 
Total loans
   
2,208
     
6,206
     
8,414
 
Total increase (decrease) in interest income
   
2,488
     
7,543
     
10,031
 
                         
Increase (decrease) in interest expense:
                       
Deposits:
                       
Transaction accounts
   
189
     
5,206
     
5,395
 
Time deposits
   
281
     
2,654
     
2,935
 
Total interest-bearing deposits
   
470
     
7,860
     
8,330
 
Total increase (decrease) in interest expense
   
470
     
7,860
     
8,330
 
                         
Increase (Decrease) in net interest income
 
$
2,018
   
$
(317
)
 
$
1,701
 

   
Analysis of Changes in Interest Income and Expenses
 
     
For the Nine Months Ended
September 30, 2023 vs 2022
 
 
   
Change due to:
       
   
Volume(1)
   
Rate(1)
    
Interest
Variance
  
 
   
(Dollars in thousands)
 
Increase (decrease) in interest income:
                 
Short-term investments
 
$
45
   
$
4,830
   
$
4,875
 
Debt securities
   
29
     
432
     
461
 
Total loans
   
3,038
     
27,482
     
30,520
 
Total increase (decrease) in interest income
   
3,112
     
32,744
     
35,856
 
                         
Increase (decrease) in interest expense:
                       
Deposits:
                       
Transaction accounts
   
183
     
16,812
     
16,995
 
Time deposits
   
159
     
6,499
     
6,658
 
Total interest-bearing deposits
   
342
     
23,311
     
23,653
 
Total increase (decrease) in interest expense
   
342
     
23,311
     
23,653
 
                         
Increase (Decrease) in net interest income
 
$
2,770
   
$
9,433
   
$
12,203
 

(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.

Securities
Our investment portfolio consists entirely of securities classified as available for sale. As a result, the carrying values of our investment securities are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity.

We evaluate our available for sale securities portfolio on a quarterly basis for potential credit-related impairment. We assess potential credit impairment by comparing the fair value of a debt security to its amortized cost basis. If the fair value of a debt security is greater than the amortized cost basis, no impairment is recognized.  If the fair value is less than the amortized cost basis, we review the factors to determine if the impairment is credit-related or noncredit-related.  For debt securities we intend to sell or are more likely than not required to sell, before the recovery of their amortized cost basis, the difference between fair value and amortized cost is impaired and is recognized through earnings. For debt securities we do not intend to sell or are more likely than not required to sell, prior to expected recovery of amortized cost basis, the credit portion of the impairment is recognized through earnings, with a corresponding entry to an allowance for credit losses, and the noncredit portion is recognized through accumulated other comprehensive income.

The following table summarizes the maturity distribution schedule with corresponding weighted average taxable equivalent yields of the debt securities portfolio at September 30, 2023. The following table presents securities at their expected maturities, which may differ from contractual maturities. The Company manages its debt securities portfolio for liquidity, as a tool to execute its asset/liability management strategy, and for pledging requirements for public funds:
 
   
As of September 30, 2023
 
   
Within One Year
   
After One Year But
Within Five Years
   
After Five Years But
Within Ten Years
   
After Ten Years
   
Total
 
                                                             
 
Amount
   
Yield *
   
Amount
   
Yield *
   
Amount
   
Yield *
   
Amount
   
Yield *
   
Amount
   
Yield *
 
Available-for-sale
 
(Dollars in thousands)
 
U.S. Federal agencies
 
$
32
     
2.39
%
 
$
108
     
2.93
%
 
$
-
     
0
%
 
$
-
     
0
%
 
$
140
     
2.81
%
Mortgage-backed securities
   
-
     
1.22
     
10,403
     
1.31
     
2,359
     
1.54
     
21,318
     
1.70
     
34,080
     
1.57
 
State and political subdivisions
   
4,032
     
1.20
     
13,017
     
1.24
     
8,046
     
1.54
     
129
     
1.66
     
25,224
     
1.33
 
U.S. Treasuries
   
98,352
     
1.19
     
1,750
     
1.01
     
3,336
     
1.54
     
-
     
-
     
103,438
     
1.18
 
Corporate debt securities
   
-
     
-
     
-
     
-
     
4,256
     
1.54
     
-
     
-
     
4,256
     
3.36
 
Total
 
$
102,416
     
1.19
%
 
$
25,278
     
1.26
%
 
$
17,997
     
1.91
%
 
$
21,447
     
1.70
%
 
$
167,138
     
1.36
%
Percentage of total
   
61.28
%
           
15.12
%
           
10.77
%
           
12.83
%
           
100.00
%
       

*Yield is on a taxable-equivalent basis using 21% tax rate

Provision for Credit Losses

Credit risk is inherent in the business of making loans. We establish an Allowance for credit losses (“Allowance”) through charges to earnings, which are shown in the statements of income as the provision for credit losses. Specifically identifiable and quantifiable known losses are charged off against the Allowance. The provision for credit 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. Any shortfall between the liquidation value of the underlying collateral and the recorded investment value of the loan is considered the required specific reserve amount. See the discussion under “—Critical Accounting Policies and Estimates—Allowance for Credit and Lease Losses” and see Note (1) for discussion of methodology changes in the allowance related to implementation of ASC 326. This has the effect of creating variability in the amount and frequency of charges to our earnings. The provision for credit 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 1.48% at September 30, 2023 and 1.16% at December 31, 2022.

Noninterest Income

Noninterest income for the three months ended September 30, 2023 was $1.0 million compared to $840,000 for the same period in 2022, an increase of $167,000, or 19.9%. The following table sets forth the major components of our noninterest income for the three months ended September 30, 2023 and 2022:

   
For the Three Months Ended
 
   
September 30,
 
   
2023
   
2022
    
$ Increase
(Decrease)
     
% Increase
(Decrease)
  
 
   
(Dollars in thousands)
 
Noninterest income:
                       
Mortgage lending income
 
$
6
   
$
134
   
$
(128
)
   
-95.52
%
Loss on sales of available-for-sale debt securities
   
(7
)
   
(10
)
   
3
     
-30.00
%
Service charges on deposit accounts
   
213
     
210
     
3
     
1.43
%
Other income and fees
   
795
     
506
     
289
     
57.11
%
Total noninterest income
 
$
1,007
   
$
840
   
$
167
     
19.88
%

Noninterest income for the nine months ended September 30, 2023 was $2.5 million compared to $2.2 million for the same period in 2022, an increase of $265,000, or 12.0%. The following table sets forth the major components of our noninterest income for the nine months ended September 30, 2023 and 2022:
   
For the Nine Months Ended
 
   
September 30,
 
   
2023
   
2022
    
$ Increase
(Decrease)
     
% Increase
(Decrease)
  
 
   
(Dollars in thousands)
 
Noninterest income:
                       
Mortgage lending income
 
$
172
   
$
395
   
$
(223
)
   
-56.46
%
Loss on sales of available-for-sale debt securities
   
(15
)
   
(127
)
   
112
     
-88.19
%
Service charges on deposit accounts
   
647
     
678
     
(31
)
   
-4.57
%
Other income and fees
   
1,668
     
1,261
     
407
     
32.28
%
Total noninterest income
 
$
2,472
   
$
2,207
   
$
265
     
12.01
%

Noninterest Expense
 
Noninterest expense for the three months ended September 30, 2023 was $7.4 million compared to $7.1 million for the same period in 2022, an increase of $257,000, or 3.6%. The following table sets forth the major components of our noninterest expense for the three months ended September 30, 2023 and 2022:

   
For the Three Months Ended
 
   
September 30,
 
   
2023
   
2022
    
$ Increase
(Decrease)
     
% Increase
(Decrease)
  
 
   
(Dollars in thousands)
 
Noninterest expense:
                       
Salaries and employee benefits
 
$
4,910
   
$
3,996
   
$
914
     
22.87
%
Furniture and equipment
   
254
     
390
     
(136
)
   
-34.87
%
Occupancy
   
662
     
614
     
48
     
7.82
%
Data and item processing
   
424
     
522
     
(98
)
   
-18.77
%
Accounting, marketing, and legal fees
   
14
     
340
     
(326
)
   
-95.88
%
Regulatory assessments
   
279
     
551
     
(272
)
   
-49.36
%
Advertising and public relations
   
74
     
83
     
(9
)
   
-10.84
%
Travel, lodging and entertainment
   
85
     
94
     
(9
)
   
-9.57
%
Other expense
   
688
     
543
     
145
     
26.70
%
Total noninterest expense
 
$
7,390
   
$
7,133
   
$
257
     
3.60
%
 
Salaries and employee benefits totaled $4.9 million for the third quarter of 2023 compared to $4.0 million for the same period in 2022, an increase of $914,000 or 22.9%.  This increase was attributable to overall increases in compensation to remain competitive.

Noninterest expense for the nine months ended September 30, 2023 was $22.4 million compared to $20.5 million for the same period in 2022, an increase of $1.9 million, or 9.3%. The following table sets forth the major components of our noninterest expense for the nine months ended September 30, 2023 and 2022:

   
For the Nine Months Ended
 
   
September 30,
 
   
2023
   
2022
    
$ Increase
(Decrease)
     
% Increase
(Decrease)
  
 
   
(Dollars in thousands)
 
Noninterest expense:
                       
Salaries and employee benefits
 
$
14,299
   
$
12,148
   
$
2,151
     
17.71
%
Furniture and equipment
   
755
     
1,134
     
(379
)
   
-33.42
%
Occupancy
   
1,980
     
1,736
     
244
     
14.06
%
Data and item processing
   
1,280
     
1,468
     
(188
)
   
-12.81
%
Accounting, marketing, and legal fees
   
491
     
782
     
(291
)
   
-37.21
%
Regulatory assessments
   
1,013
     
973
     
40
     
4.11
%
Advertising and public relations
   
273
     
314
     
(41
)
   
-13.06
%
Travel, lodging and entertainment
   
255
     
216
     
39
     
18.06
%
Other expense
   
2,068
     
1,745
     
323
     
18.51
%
Total noninterest expense
 
$
22,414
   
$
20,516
   
$
1,898
     
9.25
%

Salaries and employee benefits totaled $14.3 million for the first nine months of 2023 compared to $12.1 million for the same period in 2022, an increase of $2.2 million or 17.7%.  This increase was attributable to overall increases in compensation to remain competitive.

Financial Condition

The following discussion of our financial condition compares September 30, 2023 and December 31, 2022.

Total Assets

Total assets increased $188.2 million, or 11.9%, to $1.77 billion as of September 30, 2023, compared to $1.58 billion as of December 31, 2022. The increase in total assets is primarily attributable to continued organic growth within our major metropolitan markets in Oklahoma City, Tulsa, and Texas.

Loan Portfolio

The following table presents the balance and associated percentage of each major category in our loan portfolio as of September 30, 2023 and December 31, 2022:

   
As of September 30,
   
As of December 31
 
   
2023
   
2022
 
   
Amount
   
% of Total
   
Amount
   
% of Total
 
   
(Dollars in thousands)
 
Construction & development
 
$
139,053
     
10.0
%
 
$
163,203
     
12.8
%
1-4 family real estate
   
91,540
     
6.6
%
   
76,928
     
6.0
%
Commercial real estate - other
   
516,975
     
37.0
%
   
439,001
     
34.5
%
Total commercial real estate
   
747,568
     
53.6
%
   
679,132
     
53.3
%
                                 
Commercial & industrial
   
568,684
     
40.7
%
   
513,011
     
40.3
%
Agricultural
   
64,688
     
4.6
%
   
66,145
     
5.2
%
Consumer
   
14,993
     
1.1
%
   
14,949
     
1.2
%
Gross loans
   
1,395,933
     
100.0
%
   
1,273,237
     
100.0
%
Less: unearned income, net
   
(3,156
)
           
(2,781
)
       
Total Loans, net of unearned income
   
1,392,777
             
1,270,456
         
Less: Allowance for credit losses
   
(20,649
)
           
(14,734
)
       
Net loans
 
$
1,372,128
           
$
1,255,722
         

Our loans represent the largest portion of our earning assets. The quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition. As of September 30, 2023 and December 31, 2022, our gross loans were $1.40 billion and $1.27 billion, respectively.  Included in the commercial & industrial loan balances at September 30, 2023 and December 31, 2022, respectively, are $2.0 million and $2.6 million of loans that were originated under the SBA PPP program.

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

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

   
As of September 30, 2023
 
   
Due in One Year or Less
   
Due after One Year
Through Five Years
   
Due after Five Years
Through Fifteen Years
   
Due after Fifteen Years
       
   
Fixed
Rate
   
Adjustable
Rate
   
Fixed
Rate
   
Adjustable
Rate
   
Fixed
Rate
   
Adjustable
Rate
   
Fixed
Rate
   
Adjustable
Rate
   
Total
 
   
(Dollars in thousands)
 
Construction & development
 
$
7,306
   
$
68,731
   
$
6,742
   
$
42,350
   
$
-
   
$
13,589
   
$
335
   
$
-
   
$
139,053
 
1-4 family real estate
   
10,760
     
11,164
     
39,491
     
19,148
     
28
     
5,435
     
5,514
     
-
     
91,540
 
Commercial real estate - other
   
46,278
     
77,209
     
153,640
     
206,163
     
137
     
21,946
     
11,602
     
-
     
516,975
 
Total commercial real estate
   
64,344
     
157,104
     
199,873
     
267,661
     
165
     
40,970
     
17,451
     
-
     
747,568
 
                                                                         
Commercial & industrial
   
15,460
     
331,247
     
41,492
     
166,400
     
3,452
     
10,013
     
620
     
-
     
568,684
 
Agricultural
   
13,063
     
25,091
     
9,185
     
13,165
     
59
     
1,254
     
2,871
     
-
     
64,688
 
Consumer
   
2,388
     
17
     
5,897
     
110
     
582
     
2,908
     
3,091
     
-
     
14,993
 
Gross loans
 
$
95,255
   
$
513,459
   
$
256,447
   
$
447,336
   
$
4,258
   
$
55,145
   
$
24,033
   
$
-
   
$
1,395,933
 

   
As of December 31, 2022
 
   
Due in One Year or Less
   
Due after One Year
Through Five Years
   
Due after Five Years
Through Fifteen Years
   
Due after Fifteen Years
       
   
Fixed
Rate
   
Adjustable
Rate
   
Fixed
Rate
   
Adjustable
Rate
   
Fixed
Rate
   
Adjustable
Rate
   
Fixed
Rate
   
Adjustable
Rate
   
Total
 
   
(Dollars in thousands)
 
Construction & development
 
$
11,749
   
$
81,002
   
$
7,556
   
$
57,439
   
$
-
   
$
1,160
   
$
-
   
$
4,297
   
$
163,203
 
1-4 family real estate
   
10,550
     
12,664
     
24,741
     
15,782
     
314
     
6,606
     
-
     
6,271
     
76,928
 
Commercial real estate - other
   
2,680
     
59,870
     
131,105
     
207,819
     
6,635
     
17,146
     
-
     
13,746
     
439,001
 
Total commercial real estate
   
24,979
     
153,536
     
163,402
     
281,040
     
6,949
     
24,912
     
-
     
24,314
     
679,132
 
                                                                         
Commercial & industrial
   
43,823
     
234,573
     
60,275
     
159,571
     
3,745
     
10,390
     
-
     
634
     
513,011
 
Agricultural
   
1,798
     
17,514
     
8,767
     
33,270
     
469
     
980
     
140
     
3,207
     
66,145
 
Consumer
   
1,683
     
22
     
6,310
     
156
     
587
     
2,860
     
82
     
3,249
     
14,949
 
Gross loans
 
$
72,283
   
$
405,645
   
$
238,754
   
$
474,037
   
$
11,750
   
$
39,142
   
$
222
   
$
31,404
   
$
1,273,237
 

Allowance for Credit 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.  See Note (1) for discussion of methodology changes to the allowance related to implementation of ASC 326.

The allowance was $20.6 million at September 30, 2023, compared to $14.7 million at December 31, 2022.

The following table provides an analysis of the activity in our allowance for the periods indicated:
 
   
For the Nine Months Ended
September 30,
 
   
2023
   
2022
 
   
(Dollars in thousands)
 
Balance at beginning of the period
 
$
14,734
   
$
10,316
 
Impact of CECL adoption
   
250
     
-
 
Provision for credit losses for loans
   
5,681
     
2,843
 
Charge-offs:
               
Construction & development
   
-
     
-
 
1-4 family real estate
   
-
     
-
 
Commercial real estate - other
   
-
     
-
 
Commercial & industrial
   
-
     
-
 
Agricultural
   
(7
)
   
-
 
Consumer
   
(16
)
   
(20
)
Total charge-offs
   
(23
)
   
(20
)
Recoveries:
               
Construction & development
   
-
     
-
 
1-4 family real estate
   
-
     
-
 
Commercial real estate - other
   
-
     
-
 
Commercial & industrial
   
-
     
-
 
Agricultural
   
2
     
-
 
Consumer
   
5
     
14
 
Total recoveries
   
7
     
14
 
Net recoveries (charge-offs)
   
(16
)
   
(6
)
Balance at end of the period
 
$
20,649
   
$
13,153
 
Net recoveries (charge-offs) to average loans
   
0.00
%
   
0.00
%

While the entire allowance is available to absorb losses from any and all loans, the following table represents management’s allocation of the allowance by loan category, and the percentage of allowance in each category, for the periods indicated:
 
   
As of September 30,
   
As of December 31,
 
   
2023
   
2022
 
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Construction & development
 
$
1,481
     
7.2
%
 
$
1,889
     
12.8
%
1-4 family real estate
   
1,146
     
5.5
%
   
890
     
6.0
%
Commercial real estate - Other
   
6,729
     
32.6
%
   
5,080
     
34.5
%
Commercial & industrial
   
10,430
     
50.6
%
   
5,937
     
40.3
%
Agricultural
   
609
     
2.9
%
   
765
     
5.2
%
Consumer
   
254
     
1.2
%
   
173
     
1.2
%
Total
 
$
20,649
     
100.0
%
 
$
14,734
     
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. 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.

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

The following table presents information regarding nonperforming assets as of the dates indicated.
 
   
As of
September 30,
   
As of
December 31,
 
   
2023
   
2022
 
   
(Dollars in thousands)
 
Nonaccrual loans
 
$
41,243
   
$
8,039
 
Accruing loans 90 or more days past due
   
9,856
     
9,941
 
Total nonperforming assets
 
$
51,099
   
$
17,980
 
Ratio of nonperforming loans to total loans
   
3.67
%
   
1.42
%
Ratio of nonaccrual loans to total loans
   
2.96
%
   
0.63
%
Ratio of allowance for credit losses to total loans
   
1.48
%
   
1.16
%
Ratio of allowance for credit losses to nonaccrual loans
   
50.07
%
   
183.28
%
Ratio of nonperforming assets to total assets
   
2.88
%
   
1.13
%

The following tables present an aging analysis of loans as of the dates indicated.
 
   
As of September 30, 2023
 
   
Loans 30-59 days past due
   
Loans 60-89 days past due
   
Loans 90+ days past due
   
Loans 90+ days past due and accruing
   
Total past due loans
   
Current
   
Total loans
 
 
 
   
(Dollars in thousands)
 
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
139,053
   
$
139,053
 
1-4 family real estate
   
-
     
-
     
-
     
-
     
-
     
91,540
     
91,540
 
Commercial real estate
   
134
     
-
     
-
     
-
     
134
     
516,841
     
516,975
 
Commercial & industrial
   
58
     
-
     
9,776
     
9,776
     
9,834
     
558,850
     
568,684
 
Agricultural
   
-
     
-
     
-
     
-
     
-
     
64,688
     
64,688
 
Consumer
   
123
     
-
     
80
     
80
     
203
     
14,790
     
14,993
 
Total
 
$
315
   
$
-
   
$
9,856
   
$
9,856
   
$
10,171
   
$
1,385,762
   
$
1,395,933
 

   
As of December 31, 2022
 
   
Loans 30-59 days past due
   
Loans 60-89 days past due
   
Loans 90+ days past due
   
Loans 90+ days past due and accruing
   
Total Past Due Loans
   
Current
   
Total loans
 
 
 
   
(Dollars in thousands)
 
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
163,203
   
$
163,203
 
1-4 family real estate
   
-
     
-
     
-
     
-
     
-
     
76,928
     
76,928
 
Commercial real estate
   
-
     
617
     
-
     
-
     
617
     
438,384
     
439,001
 
Commercial & industrial
   
21
     
-
     
9,923
     
9,923
     
9,944
     
503,067
     
513,011
 
Agricultural
   
4
     
-
     
-
     
-
     
4
     
66,141
     
66,145
 
Consumer
   
291
     
82
     
22
     
18
     
395
     
14,554
     
14,949
 
Total
 
$
316
   
$
699
   
$
9,945
   
$
9,941
   
$
10,960
   
$
1,262,277
   
$
1,273,237
 

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

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

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

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

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

Outstanding loan balances categorized by internal risk grades as of the periods indicated are summarized as follows:
 
 
 
As of September 30, 2023
 
 
 
Pass
   
Watch
   
Special mention
   
Substandard
   
Total
 
 
 
 
(Dollars in thousands)
 
Construction & development
 
$
138,260
   
$
-
   
$
793
   
$
-
   
$
139,053
 
1-4 family real estate
   
91,540
     
-
     
-
     
-
     
91,540
 
Commercial real estate - Other
   
501,009
     
-
     
15,832
     
134
     
516,975
 
Commercial & industrial
   
503,770
     
-
     
11,785
     
53,129
     
568,684
 
Agricultural
   
64,581
     
107
     
-
     
-
     
64,688
 
Consumer
   
14,913
     
-
     
-
     
80
     
14,993
 
Total
 
$
1,314,073
   
$
107
   
$
28,410
   
$
53,343
   
$
1,395,933
 

 
 
As of December 31, 2022
 
 
 
Pass
   
Watch
   
Special mention
   
Substandard
   
Total
 
 
 
 
(Dollars in thousands)
 
Construction & development
 
$
163,203
   
$
-
   
$
-
   
$
-
   
$
163,203
 
1-4 family real estate
   
76,928
     
-
     
-
     
-
     
76,928
 
Commercial real estate - Other
   
397,295
     
14,976
     
24,747
     
1,983
     
439,001
 
Commercial & industrial
   
493,412
     
-
     
584
     
19,015
     
513,011
 
Agricultural
   
65,857
     
288
     
-
     
-
     
66,145
 
Consumer
   
14,927
     
-
     
-
     
22
     
14,949
 
Total
 
$
1,211,622
   
$
15,264
   
$
25,331
   
$
21,020
   
$
1,273,237
 

Deposits

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

Total deposits as of September 30, 2023 and December 31, 2022 were $1.59 billion and $1.43 billion, respectively. The following table sets forth deposit balances by certain categories as of the dates indicated and the percentage of each deposit category to total deposits.

 
 
As of September 30,
   
December 31,
 
 
 
2023
   
2022
 
 
 
Amount
   
Percentage of Total
   
Amount
   
Percentage of Total
 
 
 
 
(Dollars in thousands)
 
Noninterest-bearing demand
 
$
480,827
     
30.1
%
 
$
441,509
     
30.9
%
Interest-bearing transaction deposits
   
722,301
     
45.3
%
   
669,852
     
46.8
%
Savings deposits
   
133,198
     
8.4
%
   
136,537
     
9.5
%
Time deposits ($250,000 or less)
   
168,371
     
10.6
%
   
140,929
     
9.8
%
Time deposits (more than $250,000)
   
88,875
     
5.6
%
   
42,573
     
3.0
%
Total interest-bearing deposits
   
1,112,745
     
69.9
%
   
989,891
     
69.1
%
Total deposits
 
$
1,593,572
     
100.0
%
 
$
1,431,400
     
100.0
%

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

 
 
As of September 30, 2023 Maturity Within:
 
 
 
 
Three Months
   
Three to Six Months
   
Six to 12 Months
   
After 12 Months
   
Total
 
 
 
(Dollars in thousands)
 
Time deposits ($250,000 or less)
 
$
64,130
   
$
44,202
   
$
45,618
   
$
14,421
   
$
168,371
 
Time deposits (more than $250,000)
   
26,218
     
30,753
     
10,404
     
21,500
     
88,875
 
Total time deposits
 
$
90,348
   
$
74,955
   
$
56,022
   
$
35,921
   
$
257,246
 

 
 
As of December 31, 2022 Maturity Within:
 
 
 
 
Three Months
   
Three to Six Months
   
Six to 12 Months
   
After 12 Months
   
Total
 
 
 
(Dollars in thousands)
 
Time deposits ($250,000 or less)
 
$
58,184
   
$
25,333
   
$
38,844
   
$
18,568
   
$
140,929
 
Time deposits (more than $250,000)
   
12,292
     
5,579
     
17,001
     
7,701
     
42,573
 
Total time deposits
 
$
70,476
   
$
30,912
   
$
55,845
   
$
26,269
   
$
183,502
 

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

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

As of September 30, 2023, 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 $146.6 million as of September 30, 2023 and $129.2 million as of December 31, 2022.

Capital Requirements

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

As of September 30, 2023, the Bank was in compliance with all applicable regulatory requirements and categorized as “well-capitalized” under the prompt corrective action frame work.  There have been no conditions or events since September 30, 2023 that management believes would change this classification. The table below presents our applicable capital requirements, as well as our capital ratios as of September 30, 2023 and December 31, 2022. The Company exceeded all regulatory capital requirements and the Bank was considered to be “well-capitalized” as of the dates reflected in the tables below.

Basel III Capital Rules

Under the Basel III Capital Rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements. As of September 30, 2023, the Company and the Bank met all capital adequacy requirements under the Basel III Capital Rules.

 
 
Actual
   
With Capital
Conservation Buffer
   
Minimum to be "Well-Capitalized" Under Prompt Corrective Action
 
 
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
 
 
(Dollars in thousands)
 
As of September 30, 2023
                                   
Total capital (to risk-weighted assets)
                                   
Company
 
$
185,826
     
12.64
%
 
$
154,381
     
10.50
%
   
N/A
     
N/A
 
Bank
   
185,773
     
12.64
%
   
154,273
     
10.50
%
 
$
146,927
     
10.00
%
Tier 1 capital (to risk-weighted assets)
                                               
Company
   
167,419
     
11.39
%
   
124,975
     
8.50
%
   
N/A
     
N/A
 
Bank
   
167,379
     
11.39
%
   
124,888
     
8.50
%
   
117,542
     
8.00
%
CET 1 capital (to risk-weighted assets)
                                               
Company
   
167,419
     
11.39
%
   
102,921
     
7.00
%
   
N/A
     
N/A
 
Bank
   
167,379
     
11.39
%
   
102,849
     
7.00
%
   
95,503
     
6.50
%
Tier 1 capital (to average assets)
                                               
Company
   
167,419
     
9.76
%
   
N/A
     
N/A
     
N/A
     
N/A
 
Bank
   
167,379
     
9.75
%
   
N/A
     
N/A
     
85,805
     
5.00
%

 
 
Actual
   
With Capital Conservation Buffer
   
Minimum to be "Well-Capitalized" Under Prompt Corrective Action
 
 
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
 
 
(Dollars in thousands)
 
As of December 31, 2022
                                   
Total capital (to risk-weighted assets)
                                   
Company
 
$
158,158
     
12.41
%
 
$
133,862
     
10.50
%
   
N/A
     
N/A
 
Bank
   
158,158
     
12.42
%
   
133,756
     
10.50
%
 
$
127,387
     
10.00
%
Tier 1 capital (to risk-weighted assets)
                                               
Company
   
143,424
     
11.25
%
   
108,365
     
8.50
%
   
N/A
     
N/A
 
Bank
   
143,424
     
11.26
%
   
108,279
     
8.50
%
   
101,909
     
8.00
%
CET 1 capital (to risk-weighted assets)
                                               
Company
   
143,424
     
11.25
%
   
89,241
     
7.00
%
   
N/A
     
N/A
 
Bank
   
143,424
     
11.26
%
   
89,171
     
7.00
%
   
82,801
     
6.50
%
Tier 1 capital (to average assets)
                                               
Company
   
143,424
     
9.19
%
   
N/A
     
N/A
     
N/A
     
N/A
 
Bank
   
143,424
     
9.18
%
   
N/A
     
N/A
     
78,111
     
5.00
%

Shareholders’ equity provides a source of permanent funding, allows for future growth and provides a cushion to withstand unforeseen adverse developments. Total shareholders’ equity increased $23.8 million as of September 30, 2023 to $167.9 million, compared to $144.1 million as of December 31, 2022.

Contractual Obligations

The following tables contain supplemental information regarding our total contractual obligations as of September 30, 2023, and December 31, 2022:

 
 
Payments Due as of September 30, 2023
 
 
 
 
Within One Year
   
One to Three Years
   
Three to Five Years
   
After Five Years
   
Total
 
 
 
(Dollars in thousands)
 
Deposits without a stated maturity
 
$
1,336,326
   
$
-
   
$
-
   
$
-
   
$
1,336,326
 
Time deposits
   
221,325
     
34,753
     
1,168
     
-
     
257,246
 
Operating lease commitments
   
380
     
768
     
369
     
1,088
     
2,605
 
Total contractual obligations
 
$
1,558,031
   
$
35,521
   
$
1,537
   
$
1,088
   
$
1,596,177
 

 
 
Payments Due as of December 31, 2022
 
 
 
 
Within One Year
   
One to Three Years
   
Three to Five Years
   
After Five Years
   
Total
 
 
 
(Dollars in thousands)
 
Deposits without a stated maturity
 
$
1,245,798
   
$
-
   
$
-
   
$
-
   
$
1,245,798
 
Time deposits
   
157,233
     
26,002
     
267
     
-
     
183,502
 
Operating lease commitments
   
532
     
815
     
453
     
530
     
2,330
 
Total contractual obligations
 
$
1,403,563
   
$
26,817
   
$
720
   
$
530
   
$
1,431,630
 

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.

 
 
September 30,
   
December 31,
 
 
 
2023
   
2022
 
 
 
(Dollars in thousands)
 
Commitments to extend credit
 
$
245,079
   
$
198,027
 
Standby letters of credit
   
2,148
     
1,043
 
Total
 
$
247,227
   
$
199,070
 

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.

Effective January 1, 2023, the Company adopted ASU 2016-13, Financial Instrument Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments related to the impairment of financial instruments. This guidance, commonly referred to as Current Expected Credit Loss (“CECL”), changes impairment recognition to a model that is based on expected losses rather than incurred losses. The allowance for credit losses is considered a critical accounting policy and a critical accounting estimate. The allowance for credit losses is established for current expected credit losses on the Company’s loan portfolio, including unfunded credit commitments. Prior to January 1, 2023, the allowance for credit losses was established based on an incurred loss model. Upon the adoption of CECL, certain loan classification and segmentation categories were changed to align with the requirements of the standard and more effectively model the CECL estimate. The updated CECL segmentation is reflected in the disclosures beginning January 1, 2023, and prior period classifications have been adjusted to reflect CECL segmentations. Results from periods prior to January 1, 2023, are presented using the previously applicable GAAP. For more information see Note 1 and Note 6 to the consolidated financial statements contained in this report.

The following is a discussion of the critical accounting policies and significant estimates that we believe require us to make the most complex or subjective decisions or assessments. Additional information about these policies can be found in Note 1 of our unaudited condensed consolidated financial statements as of September 30, 2023.
 
Allowance for Credit 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
 
Intangible assets totaled $1.1 million and goodwill, net of accumulated amortization, totaled $8.5 million for the nine months ended September 30, 2023, compared to intangible assets of $1.3 million and goodwill of $8.6 million for the year ended December 31, 2022.
 
Goodwill resulting from a business combination represents the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is tested annually for impairment or more frequently if other impairment indicators are present.  If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value are not recognized in the accompanying consolidated financial statements.
 
Other intangible assets consist of core deposit intangible assets and are amortized on a straight-line basis based on an estimated useful life of 10 years.  Such assets are periodically evaluated as to the recoverability of their carrying values.
 
Income Taxes
 
We file a consolidated income tax return. Deferred taxes are recognized under the balance sheet method based upon the future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, using the tax rates expected to apply to taxable income in the periods when the related temporary differences are expected to be realized.
 
The amount of accrued current and deferred income taxes is based on estimates of taxes due or receivable from taxing authorities either currently or in the future. Changes in these accruals are reported as tax expense, and involve estimates of the various components included in determining taxable income, tax credits, other taxes and temporary differences. Changes periodically occur in the estimates due to changes in tax rates, tax laws and regulations and implementation of new tax planning strategies. The process of determining the accruals for income taxes necessarily involves the exercise of considerable judgment and consideration of numerous subjective factors.
 
Management performs an analysis of our tax positions annually and believes it is more likely than not that all of its tax positions will be utilized in future years.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity and Market Risk

As a financial institution, our primary component of market risk is interest rate volatility. Our financial management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, financial options or financial future contracts to mitigate interest rate risk from specific transactions. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

Our exposure to interest rate risk is managed by the Asset/Liability Committee, or the ALCO Committee, in accordance with policies approved by the our board of directors. The ALCO Committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO Committee considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The ALCO Committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO Committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model.

We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model. The average lives of non-maturity deposit accounts are based on decay assumptions and are incorporated into the model. We utilize third-party experts to periodically evaluate the performance of our non-maturity deposit accounts to develop the decay assumptions. All of the assumptions used in our analyses are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

On a quarterly basis, we run various simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static model and dynamic growth models, rates are shocked instantaneously and ramped rates change over a 12-month and 24-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Our internal policy regarding internal rate risk simulations currently specifies that for gradual parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 10% for a -100 basis point shift, 5% for a 100 basis point shift, 10% for a 200 basis point shift, 15% for a 300 basis point shift, and 20% for a 400 basis point shift.

The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated:


     
September 30 ,
   
December 31,
 
     
2023
   
2022
 
Change in Interest Rates (Basis Points)
   
Percent Change in Net Interest Income
   
Percent Change in Fair Value of Equity
   
Percent Change in Net Interest Income
   
Percent Change in Fair Value of Equity
 
+400
     
19.59
%
   
19.89
%
   
13.41
%
   
20.90
%
+300
     
15.67
%
   
19.00
%
   
9.96
%
   
20.13
%
+200
     
11.74
%
   
18.05
%
   
6.50
%
   
19.17
%
+100
     
7.76
%
   
16.99
%
   
2.99
%
   
18.04
%
Base
     
3.53
%
   
15.86
%
   
-0.77
%
   
16.91
%
-100
     
-1.33
%
   
14.50
%
   
-4.82
%
   
15.25
%

The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and fed funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.

Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this Form 10-Q have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

ITEM 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness as of September 30, 2023 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 September 30, 2023 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

In addition to the other information set forth in this Report, we refer you to Item 1A. “Risk Factors” of our Annual Report on Form 10-K for December 31, 2022, filed with the SEC. Other than the risk factors set forth below, there have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for December 31, 2022.

We have a concentration in commercial real estate lending that could cause our regulators to restrict our ability to grow.

As a part of their regulatory oversight, the federal regulators have issued guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, or the CRE Concentration Guidance, with respect to a financial institution’s concentrations in CRE lending activities. The CRE Concentration Guidance identifies certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE concentration risk. The CRE Concentration Guidance is designed to promote appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE loans. In general, the CRE Concentration Guidance establishes the following supervisory criteria as preliminary indications of possible CRE concentration risk: (1) the institution’s total construction, land development and other land loans represent 100% or more of total capital; or (2) total CRE loans as defined in this guidance, or Regulatory CRE, represent 300% or more of total capital, and the institution’s Regulatory CRE has increased by 50% or more during the prior 36-month period. Pursuant to the CRE Concentration Guidance, loans secured by owner occupied CRE are not included for purposes of the CRE concentration calculation.

As of September 30, 2023, our Regulatory CRE represented 294.00% of our total Bank capital and our construction, land development and other land loans represented 74.85% of our total Bank capital, as compared to 304.72% and 101.20% as of December 31, 2022, respectively. During the prior 36-month period, our Regulatory CRE has decreased 48.34%. We are actively working to manage our Regulatory CRE concentration, and we believe that our underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address the CRE Concentration Guidance. We utilize enhanced CRE monitoring techniques as expected by banking regulators as our concentrations have approached or exceeded the regulatory guidance. Nevertheless, the Federal Reserve could become concerned about our CRE loan concentrations, and it could limit our ability to grow by restricting its approvals for the establishment or acquisition of branches, or approvals of mergers or other acquisition opportunities, or by requiring us to raise additional capital, reduce our loan concentrations or undertake other remedial actions.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

On October 28, 2021, the Company’s Board of Directors approved a repurchase plan that authorizes up to 750,000 shares of the Company’s common stock. Stock repurchases under the stock repurchase plan will take place pursuant to a Rule 10b5-1 Plan with pricing and purchasing parameters established by management.  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 plans 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 plans will be retired subsequent to acquisition. During the nine months ended September 30, 2023, there were no shares purchased under the Company’s repurchase plan.

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Mine Safety Disclosures

None

ITEM 5. Other Information

None

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: November 9, 2023
By: /s/ Thomas L. Travis

Thomas L. Travis

Vice Chairman and Chief Executive Officer

 
DATED: November 9, 2023
By: /s/ Kelly J. Harris

Kelly J. Harris

Executive Vice President and Chief Financial Officer


62