10-Q 1 form10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019

OR

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

For the transition period from                 to

Commission File Number: 001-38656
 
Bank7 Corp.
(Exact name of registrant as specified in its charter)

Oklahoma
 
20-0763496
( State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
1039 N.W. 63rd Street
 
73116-7361
(Address of principal executive offices)
 
(Zip Code)

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

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

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


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

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

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

Large accelerated filer
Accelerated filer
       
Non-accelerated filer
☒  (Do not check if a smaller reporting company)
Smaller reporting company
       
Emerging growth company
   

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

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

As of AUGUST 13, 2019, the registrant had 10,187,500 shares of common stock, par value $0.01, outstanding.



TABLE OF CONTENTS
 
   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
  3
  4
  5
  6
  7
Item 2.
27
Item 3.
51
Item 4.
52
     
PART II.
OTHER INFORMATION
53
   
Item 1.
53
Item 1A.
53
Item 2.
53
Item 6.
53
  54
 
Forward-Looking Statements
 
This Form 10-Q contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. Any or all of the forward-looking statements in (or conveyed orally regarding) this presentation may turn out to be inaccurate. The inclusion of or reference to forward-looking information in this presentation should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on its current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of risks, uncertainties and assumptions that are difficult to predict. Factors that could cause such differences are discussed in the section titled “Risk Factors” in our most recent Annual Report on Form 10-K, and may be discussed from time to time in our other SEC filings, including our Quarterly Reports.  If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. You are cautioned not to place undue reliance on forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as may be required by law. All forward-looking statements herein are qualified by these cautionary statements.

Item 1.

Financial Statements


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

Assets
 
June 30, 2019
(Unaudited)
   
December
31, 2018
 
             
Cash and due from banks
 
$
123,763
   
$
128,090
 
Interest-bearing time deposits in other banks
   
32,632
     
31,759
 
Loans, net of allowance for loan losses of $7,836 and $7,832 at June 30, 2019 and December 31, 2018, respectively
   
623,614
     
592,078
 
Loans held for sale
   
8
     
512
 
Premises and equipment, net
   
8,757
     
7,753
 
Nonmarketable equity securities
   
1,069
     
1,055
 
Foreclosed assets held for sale
   
188
     
110
 
Goodwill and intangibles
   
1,892
     
1,995
 
Interest receivable and other assets
   
6,525
     
7,159
 
                 
Total assets
 
$
798,448
   
$
770,511
 
                 
Liabilities and Shareholders’ Equity
               
                 
Deposits
               
Noninterest-bearing
 
$
190,092
   
$
201,159
 
Interest-bearing
   
505,963
     
474,744
 
                 
Total deposits
   
696,055
     
675,903
 
                 
Income taxes payable
   
20
     
1,913
 
Interest payable and other liabilities
   
3,336
     
4,229
 
                 
Total liabilities
   
699,411
     
682,045
 
                 
Shareholders’ equity
               
Preferred stock, par value $0.01 per share, 1,000,000 shares authorized; none issued or outstanding
   
-
     
-
 
Common stock, non-voting, par value $0.01 per share, 20,000,000 shares authorized; none issued or outstanding
   
-
     
-
 
Common stock, $0.01 par value; 50,000,000 shares authorized; 10,187,500 shares issued and outstanding
   
102
     
102
 
Additional paid-in capital
   
80,604
     
80,275
 
Retained earnings
   
18,331
     
8,089
 
                 
Total shareholders’ equity
   
99,037
     
88,466
 
                 
Total liabilities and shareholders’ equity
 
$
798,448
   
$
770,511
 

See Notes to Unaudited Consolidated Financial Statements

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

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Interest Income
                       
Loans, including fees
 
$
12,101
   
$
10,583
   
$
23,723
   
$
21,408
 
Interest-bearing time deposits in other banks
   
497
     
142
     
914
     
291
 
Interest-bearing deposits in other banks
   
468
     
412
     
1,006
     
778
 
                                 
Total interest income
   
13,066
     
11,137
     
25,643
     
22,477
 
                                 
Interest Expense
                               
Deposits
   
2,483
     
1,640
     
4,707
     
3,059
 
Other borrowings
   
-
     
58
     
-
     
118
 
                                 
Total interest expense
   
2,483
     
1,698
     
4,707
     
3,177
 
                                 
Net Interest Income
   
10,583
     
9,439
     
20,936
     
19,300
 
                                 
Provision for Loan Losses
   
-
     
-
     
-
     
100
 
                                 
Net Interest Income After Provision for Loan Losses
   
10,583
     
9,439
     
20,936
     
19,200
 
                                 
Noninterest Income
                               
Secondary market income
   
40
     
38
     
77
     
78
 
Service charges on deposit accounts
   
109
     
93
     
169
     
173
 
Other
   
146
     
355
     
272
     
499
 
                                 
Total noninterest income
   
295
     
486
     
518
     
750
 
                                 
Noninterest Expense
                               
Salaries and employee benefits
   
2,365
     
1,845
     
4,536
     
3,995
 
Furniture and equipment
   
218
     
152
     
377
     
309
 
Occupancy
   
378
     
288
     
721
     
579
 
Data and item processing
   
276
     
235
     
538
     
468
 
Accounting, marketing and legal fees
   
142
     
110
     
289
     
144
 
Regulatory assessments
   
31
     
125
     
63
     
251
 
Advertising and public relations
   
92
     
163
     
278
     
350
 
Travel, lodging and entertainment
   
92
     
165
     
134
     
358
 
Other
   
454
     
463
     
867
     
768
 
                                 
Total noninterest expense
   
4,048
     
3,546
     
7,803
     
7,222
 
                                 
Income Before Taxes
   
6,830
     
6,379
     
13,651
     
12,728
 
Income tax expense
   
1,704
     
-
     
3,409
     
-
 
Net Income
 
$
5,126
   
$
6,379
   
$
10,242
   
$
12,728
 
                                 
Earnings per common share - basic
 
$
0.50
   
$
0.88
   
$
1.00
   
$
1.75
 
Earnings per common share - diluted
   
0.50
     
0.88
     
1.00
     
1.75
 
Weighted average common shares outstanding - basic
   
10,187,500
     
7,287,500
     
10,187,500
     
7,287,500
 
Weighted average common shares outstanding - diluted
   
10,192,649
     
7,287,500
     
10,187,500
     
7,287,500
 

See Notes to Unaudited Consolidated Financial Statements

Bank7 Corp.
Unaudited Consolidated Statements of Shareholders’ Equity
(Dollar Amounts in thousands, except share data)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Common Stock issued at beginning and end of period (Shares)
   
10,187,500
     
7,287,500
     
10,187,500
     
7,287,500
 
                                 
Common Stock issued at beginning and end of period (Amount)
 
$
102
   
$
73
   
$
102
   
$
73
 
                                 
Additional Paid-in Capital
                               
Balance at beginning of period
 
$
80,446
   
$
6,987
   
$
80,275
   
$
6,987
 
Stock-based compensation expense
   
158
     
-
     
329
     
-
 
Balance at end of period
 
$
80,604
   
$
6,987
   
$
80,604
   
$
6,987
 
                                 
Retained Earnings
                               
Balance at beginning of period
 
$
13,205
   
$
68,464
   
$
8,089
   
$
62,115
 
Net income
   
5,126
     
6,379
     
10,242
     
12,728
 
Cash distributions declared ($0.60 per share)
   
-
     
(4,350
)
   
-
     
(4,350
)
Balance at end of period
 
$
18,331
   
$
70,493
   
$
18,331
   
$
70,493
 
                                 
Total shareholders' equity
 
$
99,037
   
$
77,553
   
$
99,037
   
$
77,553
 

See Notes to Unaudited Consolidated Financial Statements

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

 
Six months ended
June 30,
 
   
2019
   
2018
 
             
Operating Activities
           
Net income
 
$
10,242
   
$
12,728
 
Items not requiring (providing) cash
               
Depreciation and amortization
   
388
     
605
 
                 
Provision for loan losses
   
-
     
100
 
Gain on sales of loans
   
(77
)
   
(78
)
Stock-based compensation expense
   
329
     
-
 
Cash receipts from the sale of loans originated for sale
   
4,590
     
3,058
 
Cash disbursements for loans originated for sale
   
(4,009
)
   
(3,431
)
Deferred income tax benefit
   
(85
)
   
-
 
Changes in
               
Interest receivable and other assets
   
719
     
(351
)
Interest payable and other liabilities
   
(2,786
)
   
447
 
                 
Net cash provided by operating activities
   
9,311
     
13,078
 
                 
Investing Activities
               
Maturities of interest-bearing time deposits in other banks
   
10,120
     
497
 
Purchases of interest-bearing time deposits in other banks
   
(10,993
)
   
(992
)
Net change in loans
   
(31,614
)
   
(26,354
)
Purchases of premises and equipment
   
(1,289
)
   
(182
)
Purchase of nonmarketable equity securities
   
(14
)
   
(4
)
                 
Net cash used in investing activities
   
(33,790
)
   
(27,035
)
                 
Financing Activities
               
Net change in deposits
   
20,152
     
15,988
 
Repayment of borrowed funds
   
-
     
(800
)
Cash distributions paid
   
-
     
(4,350
)
                 
Net cash provided by financing activities
   
20,152
     
10,838
 
                 
Decrease in Cash and Due from Banks
   
(4,327
)
   
(3,119
)
                 
Cash and Due from Banks, Beginning of Period
   
128,090
     
100,054
 
                 
Cash and Due from Banks, End of Period
 
$
123,763
   
$
96,935
 
                 
Supplemental Disclosure of Cash Flows Information
               
Interest paid
 
$
4,561
   
$
2,954
 
Income taxes paid
 
$
3,868
   
$
-
 
                 
Supplemental Disclosures of Non-Cash Investing Activities
               
Foreclosed assets acquired in settlement of loans
 
$
78
   
$
50
 

See Notes to Unaudited Consolidated Financial Statements
 
Bank7 Corp.
Notes to Unaudited Consolidated Financial Statements
 
Note 1:
Nature of Operations and Summary of Significant Accounting Policies
 
Nature of Operations
 
Bank7 Corp. (the “Company”), formerly known as Haines Financial Corp, is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Bank 7 (the “Bank”).  The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers located in Oklahoma, Kansas, and Texas.  The Bank is subject to competition from other financial institutions.  The Company is subject to the regulation of certain federal agencies and undergoes periodic examinations by those regulatory authorities.
 
Basis of Presentation
 
The accompanying unaudited interim consolidated financial statements contained herein reflect all adjustments which are, in the opinion of management, necessary to provide a fair statement of the financial position, results of operations, and cash flows of the Company for the interim periods presented. All such adjustments are of a normal and recurring nature. There have been no significant changes in the accounting policies of the Company since December 31, 2018, the date of the most recent annual report.  The consolidated balance sheet of the Company as of December 31, 2018 has been derived from the audited consolidated balance sheet of the Company as of that date.  The information contained in the financial statements and footnotes included in Company’s annual report for the year ended December 31, 2018, should be referred to in connection with these unaudited interim consolidated financial statements. Certain information and notes normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Form 10-K annual report for 2018 filed with the Securities and Exchange Commission. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of the Company, the Bank and its subsidiary, 1039 NW 63rd, LLC, which holds real estate utilized by the Bank.  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Bank7 Corp.
Notes to Unaudited Consolidated Financial Statements
 
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of other real estate owned, other-than-temporary impairments, income taxes, goodwill and intangibles and fair values of financial instruments.
 
Loans
 
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
 
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized over the respective term of the loan.
 
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
 
All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
Allowance for Loan Losses
 
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
 
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay and estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
 
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
 
Bank7 Corp.
Notes to Unaudited Consolidated Financial Statements
 
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral-dependent.
 
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
 
Recent Accounting Pronouncements
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The ASU supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, and establishes a new control-based revenue recognition model for revenue from contracts with customers.  The revenue line items in scope of this ASU have been identified and final assessment is pending; however, the majority of the Company’s financial instruments are not within the scope of Topic 606.  Material revenue streams within the scope of Topic 606 include service charges on deposits.  The guidance in the ASU is effective for annual reporting periods beginning after December 15, 2018.  Based on the revenue streams impacted, this ASU is not expected to have a material impact on the Company’s financial condition or results of operation.  The Company will adopt this ASU for the annual period ending December 31, 2019.
 
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  The ASU requires certain equity investments to be measured at fair value with changes recognized in net income.  It also requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purpose and eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value disclosed for financial instruments measured at amortized cost.  The guidance in the ASU is effective for annual reporting periods beginning after December 15, 2018.  The Company will adopt this ASU for the annual period ending December 31, 2019.
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The ASU requires lessees to recognize a lease liability and a right-of-use asset for all leases, excluding short-term leases, at the commencement date.  The guidance in the ASU is effective for reporting periods beginning after December 15, 2019.  Additionally, a modified retrospective transition approach is required for a leases existing at the earliest comparative period presented.  Management is assessing the impact of this ASU; however, it is not expected to have a material impact on the Company’s financial condition, results of operation, or capital position, but will impact the presentation on the balance sheet of the Company’s current operating leases.  The Company will adopt this ASU in the first quarter of 2020.  A tentative board decision was reached by the FASB at its July 17, 2019 meeting to delay the effective date of Topic 842 by one year for certain entities, including the Company. Issuance of a final ASU related to this decision is expected later in 2019.
 
Bank7 Corp.
Notes to Unaudited Consolidated Financial Statements
 
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326).  The ASU requires the replacement of the current incurred loss model with an expected loss model, referred to as the current expected credit loss (CECL) model.  The guidance in the ASU is effective for reporting periods beginning after December 15, 2021 with a cumulative-effect adjustment to retained earnings required for the first reporting period.  Management is still assessing the impact of this ASU.  The Company will adopt this ASU in the first quarter of 2022.  A tentative board decision was reached by the FASB at its July 17, 2019 meeting to delay the effective date of Topic 326 by one year for certain entities, including the Company. Issuance of a final ASU related to this decision is expected later in 2019.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350):  Simplifying the Test for Goodwill Impairment.  The ASU amends existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  The guidance in the ASU is effective for reporting periods beginning after December 15, 2021 with prospective application.  Management is still assessing the impact of this ASU; however, it is expected that it will not have a significant impact on the Company’s financial condition and results of operations.  The Company will adopt this ASU in the first quarter of 2022.
 
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820).” ASU 2018-13 removes, modifies and adds disclosure requirements on fair value measurements. ASU 2018-13 will be effective for the Company on January 1, 2020. Early adoption is permitted. In addition, early adoption of any removed or modified disclosures and delayed adoption of the additional disclosures until the effective date is also permitted.  It is expected that adoption will not have a significant impact on the Company’s financial condition and results of operations.  The Company will adopt this ASU in the first quarter of 2020.
 
Note 2:
Change in Capital Structure

On June 26, 2018, the Company amended and restated its Certificate of Incorporation.  The original Certificate of Incorporation was amended to change the name of the Company from Haines Financial Corp to Bank7 Corp.  In addition, the amendment changed the capital structure to authorize the issuance of 50,000,000 shares of common stock, par value $0.01 per share (the “Common Stock”), 20,000,000 shares of non-voting common stock, par value $0.01 per share (the “Non-voting Common Stock”), and 1,000,000 shares of preferred stock, par value $0.01 per share (the “Preferred Stock”).
 
The Company completed a 24-to-1 stock split of the Company’s outstanding shares of common stock for shareholders on record as of July 6, 2018.  The stock was payable in the form of a dividend on or about July 9, 2018.  Shareholders received 24 additional shares for each share held.  All share and per share amounts in the consolidated financial statements and related notes have been retroactively adjusted to reflect this stock split for all periods presented.

Bank7 Corp.
Notes to Unaudited Consolidated Financial Statements
 
Initial Public Offering
 
On September 20, 2018, the Company completed the initial public offering of its common stock.  In connection with the Company’s initial public offering, the Company sold and issued 2,900,000 shares of common stock at $19 per share.  After deducting the underwriting discounts and offering expenses, the Company received total net proceeds of $50.1 million from the initial public offering.
 
In connection with the initial public offering, the Company terminated its S Corporation status and became a taxable entity (“C Corporation”) on September 24, 2018. As such, any periods prior to September 24, 2018 will only reflect an effective state income tax rate. As a result of the termination of S Corporation status, we increased our deferred tax asset and recorded an initial tax benefit of $863,000. The deferred tax asset is the result of timing differences in the recognition of income/deductions for generally accepted accounting principles (“GAAP”) and tax purposes.  Net deferred tax assets are included in other assets and no valuation allowance is considered necessary.
 
We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  We are no longer subject to U.S. federal or state tax examinations for years before 2015.
 
Note 3:
Restriction on Cash and Due from Banks

The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank.  The reserve required at June 30, 2019 was $15.6 million.
 
Note 4:
Earnings Per Share

Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the year.
 
Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income dividend by the weighted average number of commons shares outstanding during each period, adjusted for the effect of dilutive potential common shares, such as restricted stock awards and nonqualified stock options, calculated using the treasury stock method.
 
Bank7 Corp.
Notes to Unaudited Consolidated Financial Statements
 
The following table shows the computation of basic and diluted earnings per share:
 
   
For the three months ended
June 30,
   
For the six months ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
(Dollars in thousands, except per share amounts)
                       
Numerator
                       
Net income
 
$
5,126
   
$
6,379
   
$
10,242
   
$
12,728
 
                                 
Denominator
                               
Denominator for basic earnings per common share
   
10,187,500
     
7,287,500
     
10,187,500
     
7,287,500
 
Dilutive effect of stock compensation (1)
   
5,149
     
-
     
-
     
-
 
Denominator for diluted earnings per share
   
10,192,649
     
7,287,500
     
10,187,500
     
7,287,500
 
                                 
Earnings per common share
                               
Basic
 
$
0.50
   
$
0.88
   
$
1.00
   
$
1.75
 
Diluted
 
$
0.50
   
$
0.88
   
$
1.00
   
$
1.75
 

(1) Nonqualified stock options outstanding of 163,000 and restricted stock units of 130,000 as of June 30, 2019 have not been included in diluted earnings per share for the six months ended June 30, 2019, and restricted stock units of 130,000 have not been included in diluted earnings per share for the three months ended June 30, 2019 because to do so would have been antidilutive for those periods.

Note 5:
Loans and Allowance for Loan Losses

A summary of loans at June 30, 2019 and December 31, 2018, are as follows (dollars in thousands):
 
 
 
June 30,
2019
   
December 31,
2018
 
 
           
Construction & development
 
$
83,291
   
$
87,267
 
1-4 family commercial
   
36,165
     
33,278
 
Commercial real estate - other
   
188,142
     
156,396
 
Total commercial real estate
   
307,598
     
276,941
 
 
               
Commercial & industrial
   
256,100
     
248,394
 
Agricultural
   
56,167
     
62,844
 
Consumer
   
13,093
     
13,723
 
 
               
Gross loans
   
632,958
     
601,902
 
 
               
Less allowance for loan losses
   
(7,836
)
   
(7,832
)
Less deferred loan fees
   
(1,508
)
   
(1,992
)
 
               
Net loans
 
$
623,614
   
$
592,078
 

Bank7 Corp.
Notes to Unaudited Consolidated Financial Statements
 
The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three months ended June 30, 2019 and 2018 (dollars in thousands):
 
   
Construction &
Development
   
1 - 4 Family
Commercial
   
Commercial
Real Estate -
Other
   

Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
June 30, 2019
                                         
Balance, beginning of period
 
$
1,290
   
$
452
   
$
2,087
   
$
3,068
   
$
760
   
$
178
   
$
7,835
 
                                                         
Charge-offs
   
-
     
-
     
-
     
-
     
(10
)
   
-
     
(10
)
Recoveries
   
-
     
1
     
-
     
7
     
3
     
-
     
11
 
                                                         
Net recoveries
   
-
     
1
             
7
     
(7
)
   
-
     
1
 
                                                         
Provision (credit) for loan losses
   
(259
)
   
(5
)
   
242
     
96
     
(58
)
   
(16
)
   
-
 
                                                         
Balance, end of period
 
$
1,031
   
$
448
   
$
2,329
   
$
3,171
   
$
695
   
$
162
   
$
7,836
 

   
Construction &
Development
   
1 - 4 Family
Commercial
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
June 30, 2018
                                         
Balance, beginning of period
 
$
1,465
   
$
497
   
$
1,556
   
$
3,108
   
$
872
   
$
201
   
$
7,699
 
                                                         
Charge-offs
   
-
     
(25
)
   
-
     
(6
)
   
-
     
-
     
(31
)
Recoveries
   
-
     
2
     
2
     
29
     
-
     
1
     
34
 
                                                         
Net recoveries
   
-
     
(23
)
   
2
     
23
     
-
     
1
     
3
 
                                                         
Provision (credit) for loan losses
   
(182
)
   
(39
)
   
414
     
(118
)
   
(64
)
   
(11
)
   
-
 
                                                         
Balance, end of period
 
$
1,283
   
$
435
   
$
1,972
   
$
3,013
   
$
808
   
$
191
   
$
7,702
 

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the six months ended June 30, 2019 and 2018 (dollars in thousands):
 
   
Construction &
Development
   
1 - 4 Family
Commercial
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
June 30, 2019
                                         
Balance, beginning of period
 
$
1,136
   
$
433
   
$
2,035
   
$
3,231
   
$
818
   
$
179
   
$
7,832
 
                                                         
Charge-offs
   
-
     
-
     
-
     
(4
)
   
(10
)
   
-
     
(14
)
Recoveries
   
-
     
2
     
-
     
13
     
3
     
-
     
18
 
                                                         
Net charge-offs
   
-
     
2
     
-
     
9
     
(7
)
   
-
     
4
 
                                                         
Provision (credit) for loan losses
   
(105
)
   
13
     
294
     
(69
)
   
(116
)
   
(17
)
   
-
 
                                                         
Balance, end of period
 
$
1,031
   
$
448
   
$
2,329
   
$
3,171
   
$
695
   
$
162
   
$
7,836
 

   
Construction &
Development
   
1 - 4 Family
Commercial
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
June 30, 2018
                                         
Balance, beginning of period
 
$
1,407
   
$
431
   
$
1,865
   
$
2,779
   
$
1,015
   
$
157
   
$
7,654
 
                                                         
Charge-offs
   
-
     
(25
)
   
-
     
(61
)
   
-
     
-
     
(86
)
Recoveries
   
-
     
2
     
2
     
29
     
-
     
1
     
34
 
                                                         
Net charge-offs
   
-
     
(23
)
   
2
     
(32
)
   
-
     
1
     
(52
)
                                                         
Provision (credit) for loan losses
   
(124
)
   
27
     
105
     
266
     
(207
)
   
33
     
100
 
                                                         
Balance, end of period
 
$
1,283
   
$
435
   
$
1,972
   
$
3,013
   
$
808
   
$
191
   
$
7,702
 

Bank7 Corp.
Notes to Unaudited Consolidated Financial Statements
 
The following table presents, by portfolio segment, the balance in allowance for loan losses and the gross loans based upon portfolio segment and impairment method as of June 30, 2019 and December 31, 2018 (dollars in thousands):
 
   
Construction &
Development
   
1 - 4 Family
Commercial
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
June 30, 2019
Allowance Balance
                                         

                                         
Ending balance Individually evaluated for impairment
 
$
-
   
$
3
   
$
32
   
$
-
   
$
-
   
$
-
   
$
35
 
Collectively evaluated for impairment
   
1,031
     
445
     
2,297
     
3,171
     
695
     
162
     
7,801
 
                                                         
Total
 
$
1,031
   
$
448
   
$
2,329
   
$
3,171
   
$
695
   
$
162
   
$
7,836
 
                                                         
Gross Loans
                                                       
Ending balance Individually evaluated for impairment
 
$
-
   
$
8
   
$
1,911
   
$
5,309
   
$
2,641
   
$
-
   
$
9,869
 
Collectively evaluated for impairment
   
83,291
     
36,157
     
186,231
     
250,791
     
53,526
     
13,093
     
623,089
 
                                                         
Total
 
$
83,291
   
$
36,165
   
$
188,142
   
$
256,100
   
$
56,167
   
$
13,093
   
$
632,958
 

                                                       
December 31, 2018
Allowance Balance
                                                       
Ending balance Individually evaluated for impairment
 
$
-
   
$
-
   
$
32
   
$
14
   
$
-
   
$
-
   
$
46
 
Collectively evaluated for impairment
   
1,136
     
433
     
2,003
     
3,217
     
818
     
179
     
7,786
 
                                                         
Total
 
$
1,136
   
$
433
   
$
2,035
   
$
3,231
   
$
818
   
$
179
   
$
7,832
 
                                                         
Gross Loans
                                                       
Ending balance Individually evaluated for impairment
 
$
-
   
$
115
   
$
484
   
$
7,381
   
$
1,097
   
$
-
   
$
9,077
 
Collectively evaluated for impairment
   
87,267
     
33,163
     
155,912
     
241,013
     
61,747
     
13,723
     
592,825
 
                                                         
Total
 
$
87,267
   
$
33,278
   
$
156,396
   
$
248,394
   
$
62,844
   
$
13,723
   
$
601,902
 

Bank7 Corp.
Notes to Unaudited Consolidated Financial Statements
 
Internal Risk Categories
 
Certain loan segments were reclassified during 2018.  Each loan segment is made up of loan categories possessing similar risk characteristics.  The Company’s re-alignment of the segments primarily consisted of reclassifying consumer-related and agricultural-related real estate loans from the real estate category to the consumer and agricultural categories, respectively.  Management believes this accurately represents the risk profile of each loan segment.  In addition, the real estate segment was renamed to commercial real estate, and the commercial segment was renamed to commercial & industrial. The prior period amounts have been revised to conform to the current period presentation.  These reclassifications did not have a significant impact on the allowance for loan losses.
 
Risk characteristics applicable to each segment of the loan portfolio are described as follows:
 
Real Estate – The real estate portfolio consists of residential and commercial properties.  Residential loans are generally secured by owner occupied 1–4 family residences.  Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers.  Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact either property values or a borrower’s personal income.  Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.  Commercial real estate loans in this category typically involve larger principal amounts and are repaid primarily from the cash flow of a borrower’s principal business operation, the sale of the real estate or income independent of the loan purpose.  Credit risk in these loans is driven by the creditworthiness of a borrower, property values, the local economy and other economic conditions impacting a borrower’s business or personal income.
 
Commercial & Industrial – The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions.  The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation.  Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.
 
Agricultural – Loans secured by agricultural assets are generally made for the purpose of acquiring land devoted to crop production, cattle or poultry or the operation of a similar type of business on the secured property.  Sources of repayment for these loans generally include income generated from operations of a business on the property, rental income or sales of the property.  Credit risk in these loans may be impacted by crop and commodity prices, the creditworthiness of a borrower, and changes in economic conditions which might affect underlying property values and the local economies in the Company’s market areas.
 
Consumer – The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes.  Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose.  Credit risk is driven by consumer economic factors, such as unemployment and general economic conditions in the Company’s market area and the creditworthiness of a borrower.
 
Loan grades are numbered 1 through 4.  Grade 1 is considered satisfactory.  The grades of 2 and 3, or Watch and Special Mention, respectively, represent loans of lower quality and are considered criticized.  Grade of 4, or Substandard, refers to loans that are classified.
 
Bank7 Corp.
Notes to Unaudited Consolidated Financial Statements
 
 
Grade 1 (Pass) – These loans generally conform to Bank policies, and are characterized by policy conforming advance rates on collateral, and have well-defined repayment sources. In addition, these credits are extended to Borrowers and/or Guarantors with a strong balance sheet and either substantial liquidity or a reliable income history.

 
Grade 2 (Watch) – These loans are still considered “Pass” credits; however, various factors such as industry stress, material changes in cash flow or financial conditions, or deficiencies in loan documentation, or other risk issues determined by the Lending Officer, Commercial Loan Committee (CLC), or Credit Quality Committee (CQC) warrant a heightened sense and frequency of monitoring.

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

 
Grade 4 (Substandard) – These loans are not adequately protected by the sound worth and debt service capacity of the Borrower, but may be well secured. They have defined weaknesses relative to cash flow, collateral, financial condition, or other factors that might jeopardize repayment of all of the principal and interest on a timely basis. There is the possibility that a future loss will occur if weaknesses are not remediated.

The Company evaluates the definitions of loan grades and the allowance for loan losses methodology on an ongoing basis.  No changes were made to either during period ended June 30, 2019.
 
The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category as of June 30, 2019 and December 31, 2018 (dollars in thousands):
 
   
Construction &
Development
   
1 - 4 Family
Commercial
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
June 30, 2019
                                         
Grade
                                         
1 (Pass)
 
$
81,053
   
$
35,463
   
$
182,645
   
$
216,425
   
$
51,287
   
$
13,093
   
$
579,966
 
2 (Watch)
   
2,238
     
694
     
1,510
     
33,489
     
110
     
-
     
38,041
 
3 (Special Mention)
   
-
     
-
     
2,076
     
877
     
2,129
     
-
     
5,082
 
4 (Substandard)
   
-
     
8
     
1,911
     
5,309
     
2,641
     
-
     
9,869
 
                                                         
Total
 
$
83,291
   
$
36,165
   
$
188,142
   
$
256,100
   
$
56,167
   
$
13,093
   
$
632,958
 

   
Construction &
Development
   
1 - 4 Family
Commercial
   
Commercial
Real Estate -
Other
   
Commercial
& Industrial
   
Agricultural
   
Consumer
   
Total
 
                                           
December 31, 2018
                                         
Grade
                                         
1 (Pass)
 
$
84,485
   
$
29,942
   
$
154,353
   
$
204,671
   
$
57,782
   
$
13,723
   
$
544,956
 
2 (Watch)
   
2,782
     
3,221
     
1,559
     
36,342
     
758
     
-
     
44,662
 
3 (Special Mention)
   
-
     
-
     
-
     
-
     
3,207
     
-
     
3,207
 
4 (Substandard)
   
-
     
115
     
484
     
7,381
     
1,097
     
-
     
9,077
 
                                                         
Total
 
$
87,267
   
$
33,278
   
$
156,396
   
$
248,394
   
$
62,844
   
$
13,723
   
$
601,902
 

Bank7 Corp.
Notes to Unaudited Consolidated Financial Statements
 
The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of  June 30, 2019 and December 31, 2018 (dollars in thousands):
 
   
Past Due
               
Total Loans
 
   
30–59
Days
   
60–89
Days
   
Greater than
90 Days
   
Total
   
Current
   
Total
Loans
   
> 90 Days &
Accruing
 
                                               
June 30, 2019
                                             
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
83,291
   
$
83,291
   
$
-
 
1 - 4 Family Real Estate
   
69
     
-
     
8
     
77
     
36,088
     
36,165
     
-
 
Commercial Real Estate - other
   
-
     
-
     
-
     
-
     
188,142
     
188,142
     
-
 
Commercial & industrial
   
-
     
-
     
-
     
-
     
256,100
     
256,100
     
-
 
Agricultural
   
541
     
-
     
1,097
     
1,638
     
54,529
     
56,167
     
1,097
 
Consumer
   
99
     
-
     
-
     
99
     
12,994
     
13,093
     
-
 
                                                         
Total
 
$
709
   
$
-
   
$
1,105
   
$
1,814
   
$
631,144
   
$
632,958
   
$
1,097
 
                                                         
December 31, 2018
                                                       
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
87,267
   
$
87,267
   
$
-
 
1 - 4 Family Real Estate
   
8
     
-
     
-
     
8
     
33,270
     
33,278
     
-
 
Commercial Real Estate - other
   
-
     
-
     
-
     
-
     
156,396
     
156,396
     
-
 
Commercial & industrial
   
-
     
5
     
-
     
5
     
248,389
     
248,394
     
-
 
Agricultural
   
-
     
-
     
-
     
-
     
62,844
     
62,844
     
-
 
Consumer
   
41
     
-
     
-
     
41
     
13,682
     
13,723
     
-
 
                                                         
Total
 
$
49
   
$
5
   
$
-
   
$
54
   
$
601,848
   
$
601,902
   
$
-
 

The following table presents impaired loans as of June 30, 2019 and December 31, 2018 (dollars in thousands):
 
   
Unpaid
Principal
Balance
   
Recorded
Investment
with No
Allowance
   
Recorded
Investment
with an
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
                                 
Three Months Ended
June 30, 2019
   
Six Months Ended
June 30, 2019
 
June 30, 2019
                                                     
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
1 - 4 Family Real Estate
   
8
     
-
     
8
     
8
     
3
     
713
     
-
     
414
     
-
 
Commercial Real Estate - other
   
1,911
     
-
     
1,911
     
1,911
     
32
     
1,335
     
33
     
1,147
     
66
 
Commercial & industrial
   
5,309
     
5,309
     
-
     
5,309
     
-
     
5,290
     
55
     
5,940
     
178
 
Agricultural
   
2,641
     
2,641
     
-
     
2,641
     
-
     
2,548
     
48
     
2,190
     
105
 
Consumer
   
-
     
-
     
-
     
-
     
-
     
193
     
-
     
193
     
-
 
                                                                         
Total
 
$
9,869
   
$
7,950
   
$
1,919
   
$
9,869
   
$
35
   
$
10,079
   
$
136
   
$
9,884
   
$
349
 

                                           
Three Months Ended
June 30, 2018
   
Six Months Ended
June 30, 2018
 
December 31, 2018
                                                                       
Construction & development
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
1 - 4 Family Real Estate
   
115
     
115
     
-
     
115
     
-
     
71
     
8
     
90
     
-
 
Commercial Real Estate - other
   
1,990
     
1,506
     
484
     
1,990
     
32
     
414
     
144
     
500
     
18
 
Commercial & industrial
   
7,614
     
7,359
     
22
     
7,381
     
14
     
8,880
     
7
     
6,207
     
284
 
Agricultural
   
1,097
     
1,097
     
-
     
1,097
     
-
     
1,497
     
-
     
1,529
     
40
 
Consumer
   
5
     
-