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

☐	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
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of Comprehensive Income	4
	Unaudited Condensed Consolidated Statements of Shareholders’ Equity	5
	Unaudited Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58
Item 4.	Controls and Procedures	60

PART II.	OTHER INFORMATION	60

Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	62
	Signatures	62

Table of Contents

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.

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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

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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

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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

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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

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1:

Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Bank7 Corp. (the “Company”) 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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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

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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.

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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.

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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

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table presents, by portfolio segment, the activity in the allowance for 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

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

Internal Risk Categories

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

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

Real Estate – The real estate 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.

Agricultural – Loans 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.

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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.

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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

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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.

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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

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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.

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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

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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.

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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.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company’s and Bank’s actual capital amounts and ratios are presented in the following table 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	%

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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.

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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.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

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

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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.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 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.

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Bank7 Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

Unobservable (Level 3) Inputs

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

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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.

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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.

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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.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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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.

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	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.

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

	Analysis of Changes in Interest Income and Expenses
	For the Three Months Ended September 30, 2023 vs 2022
	Change due to:
	Volume⁽¹⁾			Rate⁽¹⁾			Interest Variance
	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
	For the Nine Months Ended September 30, 2023 vs 2022
	Change due to:
	Volume⁽¹⁾		Rate⁽¹⁾		Interest Variance
	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.

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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.

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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)
	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)
	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	%

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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)
	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)
	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.

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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.

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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.

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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	%

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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.

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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

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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
	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
	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

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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
	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

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Liquidity

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

Our liquidity position is supported by 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.

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	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.

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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.

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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.

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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.

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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.

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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.

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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

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ITEM 6. Exhibits

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

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema Document.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

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

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