UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
(State or other jurisdiction of incorporation or organization)
20-0764349
(I.R.S. Employer Identification Number)
1039 N.W. 63rd Street, Oklahoma City, Oklahoma
(Address of principal executive offices)
73116
(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
Common Stock, $0.01 par value
Trading
Symbol(s)
BSVN
Name of each exchange on which
registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐
NO ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐
NO ☒
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 and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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, a smaller
reporting company, or an “emerging growth company”. See definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Non-accelerated filer ☒
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 7(a)(2)(B) of the Securities
Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
As of June 30, 2019, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was
$69,001,500 based on the closing sale price as reported on the NASDAQ Global Market Select System.
As of March 27, 2020, the registrant had 9,264,412 shares of common stock, par value $0.01, outstanding.
Portions of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders (Part III).
DOCUMENTS INCOPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Item 1 Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Mine Safety Disclosures
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6 Selected Financial Data
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accountant Fees and Services
PART IV
Item 15 Exhibits and Financial Statement Schedules
SIGNATURES
EXHIBIT INDEX
i
1
11
26
26
26
26
26
27
34
57
59
97
97
98
98
98
98
98
98
98
101
98
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Item 1. Business
Company Overview
We are Bank7 Corp., a bank holding company headquartered in Oklahoma City, Oklahoma. Through our wholly-owned
subsidiary, Bank7, we operate nine full-service branches in Oklahoma, the Dallas/Fort Worth metropolitan area and Kansas. We
were formed in 2004 in connection with our acquisition of First National Bank of Medford, which was renamed Bank7 (the
“Bank”). We are focused on serving business owners and entrepreneurs by delivering fast, consistent and well-designed banking
solutions. As of December 31, 2019, we had total assets of $866.4 million, total loans of $707.3 million, total deposits of $757.5
million and total shareholders’ equity of $100.1 million.
Our website is: www.bank7.com. We make available free of charge through our website, our annual report on Form 10-K,
our quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably
practicable after they have been electronically filed or furnished with the Securities and Exchange Commission. Information
included on our website is not incorporated into this filing.
Products and Services
We are a full-service commercial bank. We focus on the development of deep business relationships with our commercial
customers and their principals. We also focus on providing customers with exceptional service and meeting their banking needs
through a wide variety of commercial and retail financial services.
We have a particular focus in the following loan categories (i) commercial real estate lending, (ii) hospitality lending, (iii)
energy lending, and (iv) commercial and industrial. We also provide consumer lending services to individuals for personal and
household purposes, including secured and unsecured term loans and home improvement loans. Consumer lending services
include (i) residential real estate loans and mortgage banking services, (ii) personal lines of credit, (iii) loans for the purchase of
automobiles, and (iv) other installment loans.
We also offer deposit banking products, including (i) commercial deposit services, commercial checking, money market,
and other deposit accounts, and (ii) retail deposit services such as certificates of deposit, money market accounts, checking
accounts, negotiable order of withdrawal accounts, savings accounts, and automated teller machine access.
Strategic Focus
Our success is driven by:
•
•
•
•
•
the development of deep business relationships with our commercial customers and their principals;
disciplined growth without compromising our asset quality or credit culture;
drawing upon years of executive level experience at multi-billion dollar banks;
efficiencies gained by adherence to automated and repeatable processes; and
investing in our people and technology.
We will continue to focus on daily execution, making sound credit decisions and maintaining cost discipline, which have
been the hallmark of our success. Our customers will remain our top priority as we focus on efficiently providing tailored
banking products and services to business owners and entrepreneurs, with a goal of generating robust growth and delivering
exceptional returns to our shareholders. Additionally, our bank will continue to position itself for future growth both organically
and through strategic acquisitions.
Table of Contents
Cost Discipline and Efficiency
We constantly monitor expenditures, and, when appropriate, we use automation, technology and repeatable processes to
drive profitability through industry leading efficiencies. We operate as few branches as practical, and the branches we do operate
are smaller and more cost efficient than many of our peers’ branches. As we continue to grow, we expect our utilization of
automation, technology, and repeatable processes will continue to drive efficiencies throughout the Bank. Combining talented
people with process automation will enable us to scale even further, and will also enable us to deliver consistently superior
customer service.
Organic Growth
Much of our historic asset growth has been driven organically and within our current markets, in particular the Dallas/Fort
Worth metropolitan area, Oklahoma City, and Tulsa, where we recently opened a full-service branch, contain ample opportunities
for us to grow our customer base and increase our loans and deposits. Although our expansion with brick and mortar branches
will be limited, we believe operating strategically placed branches will be important, and therefore we will continue to selectively
build our presence in key markets. We also intend to continually enhance our internet and mobile banking products to remain
competitive in the marketplace.
Acquisitions
We have experience with and have benefited from acquisitions, and we intend to pursue acquisitive growth as a public
company. In 2011, we acquired First State Bank in Camargo, Oklahoma from the Federal Deposit Insurance Corporation, or
FDIC, and in 2014, we acquired Montezuma State Bank, a bank with $107 million in assets. Our acquisition focus will initially
be on banks within communities along the I-35 corridor, which is a natural business connector between Oklahoma City and the
Dallas/Fort Worth metropolitan area. However, we may pursue opportunities in other Oklahoma and Texas markets if there is a
strategic and cultural fit. We plan to focus on banks with stable, low-cost core deposits that would maintain or enhance our
current funding mix.
Markets
We are headquartered in Oklahoma City, Oklahoma, and we operate four additional branches in Oklahoma, including our
newest branch in Tulsa. We also operate two branches in the Dallas/Fort Worth metropolitan area and two branches in southwest
Kansas.
Competition
The banking and financial services industry is highly competitive, and we compete with a wide range of financial
institutions within our markets, including local, regional and national commercial banks and credit unions. We also compete with
mortgage companies, trust companies, brokerage firms, consumer finance companies, mutual funds, securities firms, insurance
companies, third-party payment processors, financial technology, or Fintech, companies and other financial intermediaries for
certain of our products and services. Some of our competitors are not subject to the regulatory restrictions and level of regulatory
supervision applicable to us.
Interest rates on loans and deposits, as well as prices on fee-based services, are typically significant competitive factors
within the banking and financial services industry. Many of our competitors are much larger financial institutions that have
greater financial resources than we do and compete aggressively for market share. These competitors attempt to gain market
share through their financial product mix, pricing strategies and banking center locations. Other important competitive factors in
our industry and markets include office locations and hours, quality of customer service, community reputation, continuity of
personnel and services, capacity and willingness to extend credit, and ability to offer excellent banking products and services.
While we seek to remain competitive with respect to fees charged, interest rates and pricing, we believe that our broad suite of
financial solutions, our high-quality customer service culture, our positive reputation and our long-standing community
relationships enable us to compete successfully within our markets and enhance our ability to attract and retain customers.
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Employees
As of December 31, 2019, we had approximately 78 full-time equivalent employees. None of our employees are
represented by any collective bargaining unit or are parties to a collective bargaining agreement. We consider our relationship
with our employees to be good and have not experienced interruptions of operations due to labor disagreements.
Supervision and Regulation
The following is a general summary of the material aspects of certain statutes and regulations that are applicable to us.
These summary descriptions are not complete. Please refer to the full text of the statutes, regulations, and corresponding
guidance for more information. These statutes and regulations are subject to change, and additional statutes, regulations, and
corresponding guidance may be adopted. We are unable to predict future changes or the effects, if any, that these changes could
have on our business or our revenues.
General
We are extensively regulated under U.S. federal and state law. As a result, our growth and earnings performance may be
affected not only by management decisions and general economic conditions, but also by federal and state statutes and by the
regulations and policies of various bank regulatory agencies, including the Oklahoma Banking Department (“OBD”), the Federal
Reserve, the Federal Deposit Insurance Corporation (“FDIC”) and the Consumer Financial Protection Bureau (“CFPB”).
Furthermore, tax laws administered by the Internal Revenue Service (“IRS”) and state taxing authorities, accounting rules
developed by the Financial Accounting Standards Board (“FASB”), securities laws administered by the Securities and Exchange
Commission (“SEC”) and state securities authorities and Anti-Money Laundering (“AML”) laws enforced by the U.S.
Department of the Treasury, or Treasury, also impact our business.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the
operations of banks, their holding companies and their affiliates. These laws are intended primarily for the protection of
depositors, customers and the Depositor Insurance Fund of the FDIC (“DIF”) rather than for shareholders. Federal and state laws,
and the related regulations of the bank regulatory agencies, affect, among other things, the scope of business, the kinds and
amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of
collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and
affiliates and the payment of dividends.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their
respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can affect the
conduct and growth of their businesses. These examinations consider not only compliance with applicable laws and regulations,
but also capital levels, asset quality and risk, management’s ability and performance, earnings, liquidity and various other factors.
These regulatory agencies have broad discretion to impose restrictions and limitations on the operations of a regulated entity and
exercise enforcement powers over a regulated entity (including terminating deposit insurance, imposing orders, fines and other
civil and criminal penalties, removing officers and directors and appointing supervisors and conservators) where the agencies
determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise
inconsistent with laws and regulations or with the supervisory policies of these agencies.
Regulatory Capital Requirements
The federal banking agencies require that banking organizations meet several risk-based capital adequacy requirements.
These risk-based capital adequacy requirements are intended to provide a measure of capital adequacy that reflects the perceived
degree of risk associated with a banking organization’s operations, both for transactions reported on the banking organization’s
balance sheet as assets and for transactions that are recorded as off-balance sheet items, such as letters of credit and recourse
arrangements. In 2013, the federal bank regulatory agencies issued final rules, or the Basel III Capital Rules, establishing a new
comprehensive capital framework for banking organizations. The Basel III Capital Rules implement the Basel Committee’s
December 2010 framework for strengthening international capital standards and certain provisions of the Dodd-Frank Act. The
Basel III Capital Rules became effective on January 1, 2015.
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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 establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-
based capital requirements. An institution is subject to limitations on certain activities, including payment of dividends, share
repurchases and discretionary bonuses to executive officers, if its capital level is below the capital conservation buffer ratio.
The Basel III minimum capital ratios as applicable to the Bank and to the Company in 2019, after the full phase-in period
of the capital conservation buffer, are summarized in the table below.
Total risk based capital (total capital to risk-weighted assets)
Tier 1 risk based capital (tier 1 to risk-weighted assets)
Common equity tier 1 risk based capital (CET1 to risk-weighted assets)
Tier 1 leverage ratio (tier 1 to average assets)
Basel III
Minimum
for Capital
Adequacy
Purposes
Basel III
Additional
Capital
Conservation
Buffer
Basel III
Ratio
with Capital
Conservation
Buffer
8.00%
6.00%
4.50%
4.00%
2.50%
2.50%
2.50%
—%
10.50%
8.50%
7.00%
4.00%
As of December 31, 2019, 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.
Prompt Corrective Action
The Federal Deposit Insurance Act requires federal banking agencies to take “prompt corrective action” with respect to
depository institutions that do not meet minimum capital requirements. For purposes of prompt corrective action, the law
establishes five capital tiers: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,”
and “critically undercapitalized.” A depository institution’s capital tier depends on its capital levels and certain other factors
established by regulation. Under the applicable FDIC regulations, an institution is deemed to be “well-capitalized” if it has a total
risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a CET1 ratio of 6.5% or greater
and a leverage ratio of 5.0% or greater.
At each lower capital category, a bank is subject to increased restrictions on its operations. For example, a bank is
generally prohibited from making capital distributions and paying management fees to its holding company if doing so would
make the bank “undercapitalized.” Asset growth and branching restrictions apply to undercapitalized banks, which are required to
submit written capital restoration plans meeting specified requirements (including a guarantee by the parent holding company, if
any). “Significantly undercapitalized” banks are subject to broad regulatory restrictions, including among other things, capital
directives, forced mergers, restrictions on the rates of interest they may pay on deposits, restrictions on asset growth and
activities, and prohibitions on paying bonuses or increasing compensation to senior executive officers without FDIC approval.
“Critically undercapitalized” are subject to even more severe restrictions, including, subject to a narrow exception, the
appointment of a conservator or receiver within 90 days after becoming critically undercapitalized.
The appropriate federal banking agency may determine (after notice and opportunity for a hearing) that the institution is
in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. The appropriate
agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory
provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as
critically undercapitalized) based on supervisory information other than the capital levels of the institution.
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The capital classification of a bank affects the frequency of regulatory examinations, the bank’s ability to engage in
certain activities and the deposit insurance premium paid by the bank. A bank’s capital category is determined solely for the
purpose of applying prompt correct action regulations and the capital category may not accurately reflect the bank’s overall
financial condition or prospects.
As of December 31, 2019, the Bank met the requirements for being deemed “well-capitalized” for purposes of the prompt
corrective action regulations.
The Company
General. As a bank holding company, the Company is subject to regulation and supervision by the Federal Reserve under
the Bank Holding Company Act of 1956, as amended, or the BHCA. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is required to file with the Federal Reserve periodic reports of its operations
and such additional information as the Federal Reserve may require.
Acquisitions, Activities and Change in Control. The BHCA generally requires the prior approval by the Federal Reserve
for any merger involving a bank holding company or a bank holding company’s acquisition of more than 5% of a class of voting
securities of any additional bank or bank holding company or to acquire all or substantially all of the assets of any additional
bank or bank holding company.
Subject to certain conditions (including deposit concentration limits established by the BHCA and the Dodd-Frank Act),
the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. Federal law
also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company
without prior notice to the appropriate federal bank regulator.
Permitted Activities. The BHCA generally prohibits the Company from controlling or engaging in any business other
than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general
prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to
own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so
closely related to banking as to be a proper incident thereto.” This authority would permit the Company to engage in a variety of
banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer
finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking
and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of nonbank subsidiaries of
bank holding companies. The Federal Reserve has the power to order any bank holding company or its subsidiaries to terminate
any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to
believe that continuing such activity, ownership or control constitutes a serious risk to the financial soundness, safety or stability
of any bank subsidiary of the bank holding company.
Source of Strength. Federal Reserve policy historically required bank holding companies to act as a source of financial
and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this
requirement the Company is expected to commit resources to support the Bank, including at times when the Company may not
be in a financial position to provide it. The Company must stand ready to use its available resources to provide adequate capital
to the Bank during periods of financial stress or adversity. The Company must also maintain the financial flexibility and capital
raising capacity to obtain additional resources for assisting the Bank. The Company’s failure to meet its source of strength
obligations may constitute an unsafe and unsound practice or a violation of the Federal Reserve’s regulations or both. The source
of strength obligation most directly affects bank holding companies where a bank holding company’s subsidiary bank fails to
maintain adequate capital levels. Any capital loans by a bank holding company to the subsidiary bank are subordinate in right of
payment to deposits and to certain other indebtedness of the subsidiary bank. The BHCA provides that in the event of a bank
holding company’s bankruptcy any commitment by a bank holding company to a federal bank regulatory agency to maintain the
capital of its subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
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Safe and Sound Banking Practices. Bank holding companies and their non-banking subsidiaries are prohibited from
engaging in activities that represent unsafe and unsound banking practices or that constitute a violation of law or regulations.
Under certain conditions the Federal Reserve may conclude that certain actions of a bank holding company, such as a payment of
a cash dividend, would constitute an unsafe and unsound banking practice. The Federal Reserve also has the authority to regulate
the debt of bank holding companies, including the authority to impose interest rate ceilings and reserve requirements on such
debt. Under certain circumstances the Federal Reserve may require a bank holding company to file written notice and obtain its
approval prior to purchasing or redeeming its equity securities, unless certain conditions are met.
Dividend Payments, Stock Redemptions and Repurchases. The Company’s ability to pay dividends to its shareholders is
affected by both general corporate law considerations and the regulations and policies of the Federal Reserve applicable to bank
holding companies, including the Basel III Capital Rules. Generally, an Oklahoma corporation may not make distributions to its
shareholders if (i) after giving effect to the dividend, the corporation would be insolvent, or (ii) the amount of the dividend
exceeds the surplus of the corporation. Dividends may be declared and paid in a corporation’s own treasury shares that have been
reacquired by the corporation out of surplus. Dividends may be declared and paid in a corporation’s own authorized but unissued
shares out of the surplus of the corporation upon the satisfaction of certain conditions.
It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out
of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected
future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain
dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, the Federal
Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment
ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
Bank holding companies must consult with the Federal Reserve before redeeming any equity or other capital instrument
included in Tier 1 or Tier 2 capital prior to stated maturity, if such redemption could have a material effect on the level or
composition of the organization’s capital base. In addition, bank holding companies are unable to repurchase shares equal to 10%
or more of its net worth if it would not be well-capitalized (as defined by the Federal Reserve) after giving effect to such
repurchase. Bank holding companies experiencing financial weaknesses, or that are at significant risk of developing financial
weaknesses, must consult with the Federal Reserve before redeeming or repurchasing common stock or other regulatory capital
instruments.
The Bank
General. The Bank is an Oklahoma-chartered member bank and is subject to examination, supervision and regulation by
the OBD and the Federal Reserve. The Bank is also subject to certain regulations of the FDIC and the CFPB.
The OBD supervises and regulates all areas of the Bank’s operations including, without limitation, the making of loans,
the issuance of securities, the conduct of the Bank’s corporate affairs, the satisfaction of capital adequacy requirements, the
payment of dividends, and the establishment or closing of banking offices. The Federal Reserve is the Bank’s primary federal
regulatory agency, and periodically examines the Bank’s operations and financial condition and compliance with federal law. In
addition, the Bank’s deposit accounts are insured by the DIF to the maximum extent provided under federal law and FDIC
regulations, and the FDIC has certain enforcement powers over the Bank.
Depositor Preference. In the event of the “liquidation or other resolution” of an insured depository institution, the claims
of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for
administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution.
If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment
ahead of unsecured, non-deposit creditors including the parent bank holding company with respect to any extensions of credit
they have made to that insured depository institution.
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Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC.
The amount of such premiums is determined by multiplying the institution’s assessment rate by its assessment base. The
assessment base is based on the institution’s risk classification which is assigned based on the institution’s capital levels and the
level of supervisory concern the institution poses to the regulators. The assessment base is calculated as the institution’s average
consolidated total assets minus average tangible equity.
Additionally, the Dodd-Frank Act altered the minimum designated reserve ratio of the DIF, increasing the minimum from
1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends
to depository institutions when the reserve ratio exceeds certain thresholds. At least semi-annually, the FDIC updates its loss and
income projections for the DIF and, if needed, may increase or decrease the assessment rates, following notice and comment on
proposed rulemaking. As a result, the Bank’s FDIC deposit insurance premiums could increase.
FICO Assessments. In addition to paying basic deposit insurance assessments, insured depository institutions must pay
Financing Corporation, or FICO, assessments. FICO is a mixed-ownership governmental corporation chartered by the former
Federal Home Loan Bank Board to recapitalize the former Federal Savings and Loan Insurance Corporation. Since 1996, federal
legislation requires that all FDIC-insured depository institutions pay assessments to cover interest payments on FICO’s
outstanding obligations. During the year ended December 31, 2019, the Bank did not pay any FICO assessments.
Examination Assessments. Oklahoma-chartered banks are required to pay an annual fee of $1,000 to the OBD to fund its
operations. In addition, Oklahoma-chartered banks are charged an examination assessment calculated based on the amount of the
Bank’s assets at rates established by the Oklahoma Banking Board. During the year ended December 31, 2019, the Bank paid
examination assessments to the OBD totaling $127,000.
Capital Requirements. Banks are generally required to maintain minimum capital ratios. For a discussion of the capital
requirements applicable to the Bank, see “—Regulatory Capital Requirements” above.
Bank Reserves. The Federal Reserve requires all depository institutions to maintain reserves against some transaction
accounts (primarily NOW and Super NOW checking accounts). The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements. An institution may borrow from the Federal
Reserve “discount window” as a secondary source of funds if the institution meets the Federal Reserve’s credit standards.
Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Unless the approval of the
Federal Reserve is obtained, the Bank may not declare or pay a dividend if the total of all dividends declared during the calendar
year, including the proposed dividend, exceeds the sum of the Bank’s net income during the current calendar year and the
retained net income of the prior two calendar years. Oklahoma law also places restrictions on the declaration of dividends by
Oklahoma state-chartered banks, including the Bank, to their shareholders. Before any dividend may be declared by the Bank, not
less than 10% of the net profits of the Bank must be transferred to a surplus fund until the surplus equals 100% of the Bank’s
capital stock. This may decrease any amount available for the payment of dividends in a particular period if the surplus funds for
the Bank fail to comply with this limitation. Furthermore, the approval of the Commissioner of the OBD is required if the total of
all dividends declared by the Bank in any calendar year exceed the total of its net profits of that year combined with its retained
net profits of the preceding two years, less any required transfers to surplus or a fund for the retirement of any preferred stock.
The Federal Reserve and the OBD also may, under certain circumstances, prohibit the payment of dividends to us from the Bank.
Oklahoma corporate law also requires that dividends can only be paid out of funds legally available therefor.
The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any
dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its
minimum capital requirements under applicable regulatory guidelines as of December 31, 2019.
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Transactions with Affiliates. The Bank is subject to sections 23A and 23B of the Federal Reserve Act, or the Affiliates
Act, and the Federal Reserve’s implementing Regulation W. An affiliate of a bank is any company or entity that controls, is
controlled by or is under common control with the bank. Accordingly, transactions between the Company, the Bank and any non-
bank subsidiaries will be subject to a number of restrictions. The Affiliates Act imposes restrictions and limitations on the Bank
from making extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates,
the purchase of, or investment in, stock or other securities thereof, the taking of such securities as collateral for loans, and the
purchase of assets of the Company or other affiliates. Such restrictions and limitations prevent the Company or other affiliates
from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Furthermore, such
secured loans and investments by the Bank to or in the Company or to or in any other non-banking affiliate are limited,
individually, to 10% of the Bank’s capital and surplus, and such transactions are limited in the aggregate to 20% of the Bank’s
capital and surplus. All such transactions, as well as contracts entered into between the Bank and affiliates, must be on terms that
are no less favorable to the Bank than those that would be available from non-affiliated third parties. Federal Reserve policies
also forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market
value of the services rendered or, if no market exists, actual costs plus a reasonable profit.
Loans to Directors, Executive Officers and Principal Shareholders. The authority of the Bank to extend credit to its
directors, executive officers and principal shareholders, including their immediate family members and corporations and other
entities that they control, is subject to substantial restrictions and requirements under the Federal Reserve’s Regulation O, as well
as the Sarbanes-Oxley Act. These statutes and regulations impose limits the amount of loans the Bank may make to directors and
other insiders and require that the loans must be made on substantially the same terms, including interest rates and collateral, as
prevailing at the time for comparable transactions with persons not affiliated with the Company or the Bank, that the Bank must
follow credit underwriting procedures at least as stringent as those applicable to comparable transactions with persons who are
not affiliated with the Company or the Bank; and that the loans must not involve a greater than normal risk of non-payment or
include other features not favorable to the Bank. Furthermore, the Bank must periodically report all loans made to directors and
other insiders to the bank regulators. As of December 31, 2019, the Bank had lines of credit for loans to insiders of $8.0 million
and loans outstanding to insiders of $1.1 million.
Limits on Loans to One Borrower. As an Oklahoma state-chartered bank, the Bank is subject to limits on the amount of
loans it can make to one borrower. With certain limited exceptions, loans and extensions of credit from Oklahoma state-chartered
banks outstanding to any borrower (including certain related entities of the borrower) at any one time may not exceed 30% of the
capital, less intangible assets, of the bank. An Oklahoma state-chartered bank may lend an additional amount if the loan is fully
secured by certain types of collateral, like bonds or notes of the United States. Certain types of loans are exempted from the
lending limits, including loans secured by segregated deposits held by the bank. The Bank’s legal lending limit to any one
borrower was $31.8 million as of December 31, 2019.
Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted guidelines establishing
operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
If an institution fails to comply with any of the standards set forth in the guidelines, the financial institution’s primary
federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If a financial institution
fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been
accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of growth,
require the financial institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to
take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the
safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory
agencies, including cease and desist orders and civil money penalty assessments.
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Branching Authority. Deposit-taking banking offices must be approved by the Federal Reserve and, if such office is
established within the State of Oklahoma, the OBD, which consider a number of factors, including financial history, capital
adequacy, earnings prospects, character of management, needs of the community and consistency with corporate power. The
Dodd-Frank Act permits insured state banks to engage in interstate branching if the laws of the state where the new banking
office is to be established would permit the establishment of the banking office if it were chartered by a bank in such state.
Finally, we may also establish banking offices in other states by merging with banks or by purchasing banking offices of other
banks in other states, subject to certain restrictions.
Interstate Deposit Restrictions. The Interstate Act, together with the Dodd-Frank Act, relaxed prior branching restrictions
under federal law by permitting, subject to regulatory approval, banks to establish branches in states where the laws permit banks
chartered in such states to establish branches.
Section 109 of the Interstate Act prohibits a bank from establishing or acquiring a branch or branches outside of its home
state primarily for the purpose of deposit production.
Community Reinvestment Act. The CRA directs the federal bank regulatory agencies, in examining insured depository
institutions, to assess their record of helping to meet the credit needs of their entire community, including low- and moderate-
income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a
financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other
things, domestic branches, consummating mergers or acquisitions or holding company formations.
The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a
performance-based evaluation system. This system bases CRA ratings on an institution’s actual lending service and investment
performance rather than the extent to which the institution conducts needs assessments, documents community outreach or
complies with other procedural requirements. The ratings range from a high of “outstanding” to a low of “substantial
noncompliance.” The Bank had a CRA rating of “satisfactory” as of its most recent CRA assessment.
Anti-Money Laundering and the Office of Foreign Assets Control Regulation. The USA PATRIOT Act is designed to
deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for
depository institutions, brokers, dealers and other businesses involved in the transfer of money. The USA PATRIOT Act
substantially broadened the scope of United States AML laws and regulations by imposing significant compliance and due
diligence obligations, created new crimes and penalties and expanded the extra territorial jurisdiction of the United States.
Financial institutions are also prohibited from entering into specified financial transactions and account relationships, must use
enhanced due diligence procedures in their dealings with certain types of high-risk customers and must implement a written
customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and
preventing money laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine
financial institutions for compliance with these obligations and have imposed cease and desist orders and civil money penalties
against institutions found to be in violation of these obligations.
Likewise, OFAC administers and enforces economic and trade sanctions against targeted foreign countries and regimes
under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially
designated targets and countries. Financial institutions are responsible for, among other things, blocking accounts of and
transactions with such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting
blocked transactions after their occurrence.
Failure of a financial institution to maintain and implement adequate AML and OFAC programs, or to comply with all of
the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing
applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or
to prohibit such transactions even if approval is not required.
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Consumer Financial Services
We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with
our customers. These laws include the ECOA, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act,
the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing
Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, the
Military Lending Act, and these laws’ respective state law counterparts, as well as state usury laws and laws regarding unfair and
deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms
of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit
report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices and subject us to
substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability
from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state
attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements
and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local
attorneys general in each jurisdiction in which we operate and civil money penalties. Failure to comply with consumer protection
requirements may also result in failure to obtain any required bank regulatory approval for mergers or acquisitions or prohibition
from engaging in such transactions even if approval is not required.
Rulemaking authority for most federal consumer protection laws was transferred from the prudential regulators to the
CFPB on July 21, 2011. In some cases, regulators such as the Federal Trade Commission and the DOJ also retain certain
rulemaking or enforcement authority. The CFPB also has broad authority to prohibit unfair, deceptive and abusive acts and
practices, or UDAAP, and to investigate and penalize financial institutions that violate this prohibition. While the statutory
language of the Dodd-Frank Act sets forth the standards for acts and practices that violate the prohibition on UDAAP, certain
aspects of these standards are untested, and thus it is currently not possible to predict how the CFPB will exercise this authority.
The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those
laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance
regulation. The CFPB has significant authority to implement and enforce federal consumer protection laws and new requirements
for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and prohibit UDAAP. The
review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators
more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices,
products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination,
additional remediation efforts and possible penalties. In addition, the Dodd-Frank Act provides the CFPB with broad supervisory,
examination and enforcement authority over various consumer financial products and services, including the ability to require
reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as
injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain
cease and desist orders providing for affirmative relief or monetary penalties. The Dodd-Frank Act does not prevent states from
adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could
also adversely affect our business, financial condition or results of operations.
The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. Banks and
savings institutions with $10 billion or less in assets, like the Bank, will continue to be examined by their applicable bank
regulators.
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Federal Banking Agency Incentive Compensation Guidance
The federal bank regulatory agencies have issued comprehensive guidance intended to ensure that the incentive
compensation policies of banking organizations do not undermine the safety and soundness of those organizations by
encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations concerning
their incentive compensation arrangements and related risk-management, control and governance processes. The incentive
compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an organization,
either individually or as part of a group, is based upon three primary principles: (1) balanced risk-taking incentives; (2)
compatibility with effective controls and risk management; and (3) strong corporate governance. Any deficiencies in
compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its
ability to make acquisitions or take other actions. In addition, under the incentive compensation guidance, a banking
organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose
a risk to the safety and soundness of the organization. Further, the Basel III capital rules limit discretionary bonus payments to
bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. Although the federal bank regulatory
agencies proposed additional rules in 2016 related to incentive compensation for all banks with more than $1.0 billion in assets,
those rules would not be applicable to the Company or the Bank. The scope and content of the U.S. banking regulators’ policies
on executive compensation are continuing to develop and are likely to continue evolving in the near future.
Financial Privacy
The federal bank regulatory agencies have adopted rules that limit the ability of banks and other financial institutions to
disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy
policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a
non-affiliated third party. These regulations affect how consumer information is transmitted through financial services companies
and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated
companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit
reports and asset and income information from applications. Consumers also have the option to direct banks and other financial
institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing
products or services.
Impact of Monetary Policy
The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding
companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market
transactions in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve
requirements against member bank deposits. These tools are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.
Changes in Laws, Regulations or Policies
Other legislative and regulatory initiatives which could affect the Company, the Bank and the banking industry in general
may be pending, proposed or introduced before the U.S. Congress, the Oklahoma Legislature and other governmental bodies
from time to time. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among
financial institutions, and may subject the Company or the Bank to increased regulation, disclosure and reporting requirements.
In addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing
legislation. It cannot be predicted whether, or in what form, any such legislation or regulations may be enacted or the extent to
which the business of the Company or the Bank would be affected thereby.
Item 1A. Risk Factors
We believe the risks described below are the risks that are material to us. Any of the following risks, as well as risks that
we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition, results
of operations and growth prospects.
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Risks Relating to Our Business and Market
The acquisition of banks, bank branches, and other businesses involves risks.
As part of our growth strategy, we may pursue mergers and acquisitions of other banks, branches or other financial
services companies within or outside of our principal market areas. We cannot assure you that we will be able to adequately or
profitably manage any such future acquisitions. The acquisition of banks, bank branches, and other businesses involves risk,
including exposure to unknown or contingent liabilities, the uncertainties of asset quality assessment, the difficulty and expense
of integrating the operations and personnel of the acquired companies with ours, the potential negative effects on our other
operations of the diversion of management’s time and attention, and the possible loss of key employees and customers of the
banks, businesses, or branches we acquire. Our failure to execute our internal growth strategy or our acquisition strategy could
adversely affect our business, results of operations, financial condition, and future prospects. In addition, if we finance
acquisitions by issuing convertible debt or equity securities, our existing shareholders may be diluted, which could affect the
market price of our common stock.
Our business is concentrated in, and largely dependent upon, the continued growth and welfare of our markets, and adverse
economic conditions in these markets could negatively impact our operations and customers.
Our business is affected by the economy of Oklahoma, the Dallas/Fort Worth metropolitan area and Kansas, our primary
markets. Our success depends to a significant extent upon the business activity, population, income levels, employment trends,
deposits and real estate activity in these markets. The Oklahoma economy has been generally steady, if not increasing, in the past
few years. The housing market remains strong with prices having increased through 2019. Vacancy rates for commercial
properties remain low and small business owners are increasingly considering bank borrowings in order to grow. However, in
early March 2020, the economic outlook changed dramatically due to multiple events, including: the COVID-19 virus, possible
supply chain disruption, an increasing risk of recession, and in some cases, fear of the unknown.
In addition, market developments may affect consumer confidence levels and may cause adverse changes in payment
patterns, causing increases in delinquencies and default rates, which could impact our charge-offs and provision for credit losses.
Adverse changes in economic conditions in these markets could reduce our growth in loans and deposits, impair our ability to
collect our loans, increase our problem loans and charge-offs and otherwise negatively affect our performance and financial
condition.
We have credit exposure to the energy industry.
The energy industry is a significant sector in our Oklahoma market, and to a lesser extent, Kansas and the Dallas/Fort
Worth metropolitan area. A downturn or lack of growth in the energy industry and energy-related business, including sustained
low oil or gas prices or the failure of oil or gas prices to rise in the future, could adversely affect our business, financial condition
and results of operations. As of December 31, 2019, our energy loans, which include loans to exploration and production
companies, midstream companies, purchasers of mineral and royalty interests and service providers totaled $102.1 million, or
14.4% of total loans, as compared to $110.0 million, or 18.4% of total loans as of December 31, 2018. In addition to our direct
exposure to energy loans, we also have indirect exposure to energy prices, as some of our non-energy customers' businesses are
directly affected by volatility with the oil and gas industry and energy prices and otherwise are dependent on energy-related
businesses. As of December 31, 2019, we had $28.9 million in unfunded commitments to borrowers in the oil and gas industry.
On March 9, 2020, global oil prices dropped precipitously by approximately 20%. Since that time, through March 27, 2020,
global oil prices have continued to drop including an approximately 26% drop on March 18, 2020. As of March 27, 2020, West
Texas Intermediate Crude was near its lowest point in 18 years. We expect prolonged depressed pricing pressure on oil and gas to
lead to increased credit stress in our energy portfolio, increased losses associated with our energy portfolio, increased utilization
of our contractual obligations to extend credit and weaker demand for energy lending. General uncertainty resulting from
continued volatility could have other adverse impacts, such as job losses in industries tied to energy, decreased spending habits,
lower borrowing needs, higher transaction deposit balances or a number of other effects that are difficult to isolate or quantify,
particularly in markets with significant dependence on the energy industry like Oklahoma, and to a lesser extent Kansas and the
Dallas/Fort Worth metropolitan area, all of which could have an adverse effect on our business, financial condition and results of
operations.
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We have credit exposure to the hospitality industry.
The Company has loan exposure to the hospitality industry, primarily through loans made to construct or finance the
operation of hotels. At December 31, 2019, this exposure was approximately $167.0 million, or 23.6%, of the total loan portfolio,
along with an additional $39.4 million in unfunded debt, as compared to $123 million, or 20.5%, of the total loan portfolio, along
with an additional $28.3 million in unfunded debt as of December 31, 2018. The hospitality industry is subject to changes in the
travel patterns of business and leisure travelers, both of which are affected by the strength of the economy, as well as other
factors. The performance of the hospitality industry has traditionally been closely linked with the performance of the general
economy and, specifically, growth in gross domestic product. Changes in travel patterns of both business and leisure travelers,
particularly during periods of economic contraction or low levels of economic growth, may create difficulties for the industry
over the long-term. Although we have made a large portion of our hospitality loans to long-term, well-established hotel operators
in strategic locations, a general downturn in the supply growth of such markets or hotel occupancy or room rates could negatively
impact the borrowers’ ability to repay. A significant loss in this portfolio could materially and adversely affect the Company’s
financial condition and results of operations. Our customers in the hospitality industry may be particularly susceptible to a
material decline in revenues resulting from decreased travel and leisure activities following the outbreak of COVID-19.
The outbreak of the recent coronavirus ("COVID-19"), or an outbreak of another highly infectious or contagious disease,
could adversely affect our business activities, financial condition and results of operations.
Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial
transactions. The spread of a highly infectious or contagious disease, such as COVID-19, could cause severe disruptions in the
U.S. economy, which could in turn disrupt the business, activities, and operations of our customers, as well as our business and
operations. Moreover, since the beginning of January 2020, the coronavirus outbreak has caused significant disruption in the
financial markets both globally and in the United States. The spread of COVID-19, or an outbreak of another highly infectious or
contagious disease, may result in a significant decrease in business and/or cause our customers to be unable to meet existing
payment or other obligations to us, particularly in the event of a spread of COVID-19 or an outbreak of an infectious disease in
our market area. Although we maintain contingency plans for pandemic outbreaks, a spread of COVID-19, or an outbreak of
another contagious disease, could also negatively impact the availability of key personnel necessary to conduct our business
activities. Such a spread or outbreak could also negatively impact the business and operations of third-party service providers
who perform critical services for us. If COVID-19, or another highly infectious or contagious disease, spreads or the response to
contain COVID-19 is unsuccessful, we could experience a material adverse effect to our business, financial condition, and results
of operations.
There continue to be broad concerns related to the potential effects of the coronavirus or COVID-19 outbreak. If the
coronavirus has an adverse effect on (i) customer deposits, (ii) the ability of our borrowers to satisfy their obligations to us, (iii)
the demand for our loans or our other products and services, (iv) other aspects of our business operations, or (v) on financial
markets, real estate markets, or economic growth, this could, depending on the extent of the decline in customer deposits or loan
defaults, materially and adversely affect our liquidity and financial condition and the results of operations could be materially and
adversely affected.
Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of
Federal Reserve actions. Market interest rates have declined significantly. On March 3, 2020, the 10-year Treasury yield fell
below 1.00% for the first time, and the Federal Reserve reduced the target federal funds rate by 50 basis points to 1.00% to
1.25%. On March 15, 2020, the Federal Reserve further reduced the target federal funds rate by 100 basis points to 0.00% to
0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the
COVID-19 pandemic. The Federal Reserve reduced the interest that it pays on excess reserves from 1.60% to 1.10% on March 3,
2020, and then to 0.10% on March 15, 2020. We expect that these reductions in interest rates, especially if prolonged, could
adversely affect our net interest income and margins and our profitability.
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We have a concentration in commercial real estate lending that could cause our regulators to restrict our ability to grow.
As a part of their regulatory oversight, the federal regulators have issued guidance on Concentrations in Commercial Real
Estate Lending, Sound Risk Management Practices, or the CRE Concentration Guidance, with respect to a financial institution’s
concentrations in CRE lending activities. The CRE Concentration Guidance identifies certain concentration levels that, if
exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE concentration risk.
The CRE Concentration Guidance is designed to promote appropriate levels of capital and sound loan and risk management
practices for institutions with a concentration of CRE loans. In general, the CRE Concentration Guidance establishes the
following supervisory criteria as preliminary indications of possible CRE concentration risk: (1) the institution’s total
construction, land development and other land loans represent 100% or more of total capital; or (2) total CRE loans as defined in
this guidance, or Regulatory CRE, represent 300% or more of total capital, and the institution’s Regulatory CRE has increased by
50% or more during the prior 36-month period. Pursuant to the CRE Concentration Guidance, loans secured by owner occupied
CRE are not included for purposes of the CRE concentration calculation. As of December 31, 2019, our Regulatory CRE
represented 322.6% of our total Bank capital and our construction, land development and other land loans represented 66.3% of
our total Bank capital, as compared to 263.8% and 93.1% as of December 31, 2018, respectively. During the prior 36-month
period, our Regulatory CRE has decreased 111.6%. 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 have
implemented 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.
Because a portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate
values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.
Adverse developments affecting real estate values, particularly in Oklahoma City and the Dallas/Fort Worth metropolitan
area, could increase the credit risk associated with our real estate loan portfolio. Real estate values may experience periods of
fluctuation, and the market value of real estate can fluctuate significantly in a short period of time. Adverse changes affecting real
estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan
portfolio, and could result in losses that adversely affect credit quality, financial condition and results of operation. Negative
changes in the economy affecting real estate values and liquidity in our market areas could significantly impair the value of
property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional
losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans.
Such declines and losses could have a material adverse impact on our business, results of operations and growth prospects. If real
estate values decline, it is also more likely that we would be required to increase our allowance, which could adversely affect our
business, financial condition and results of operations.
Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.
As of December 31, 2019, we had approximately $696.8 million of commercial purpose loans, which include general
commercial, energy, agricultural, and CRE loans, representing approximately 98.3% of our gross loan portfolio. Commercial
purpose loans are often larger and involve greater risks than other types of lending. Because payments on these loans are often
dependent on the successful operation or development of the property or business involved, their repayment is more sensitive
than other types of loans to adverse conditions in the real estate market or the general economy.
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Accordingly, a downturn in the real estate market or the general economy could heighten our risk related to commercial
purpose loans, particularly energy and CRE loans. Unlike residential mortgage loans, which generally are made on the basis of
the borrowers’ ability to make repayment from their employment and other income and which are secured by real property whose
value tends to be more easily ascertainable, commercial purpose loans typically are made on the basis of the borrowers’ ability to
make repayment from the cash flow of the commercial venture. If the cash flow from business operations is reduced, the
borrowers’ ability to repay the loan may be impaired. As a result of the larger average size of each commercial purpose loan as
compared with other loans such as residential loans, as well as the collateral which is generally less readily marketable, losses
incurred on a small number of commercial purpose loans could have a material adverse impact on our financial condition and
results of operations.
Our largest loan relationships make up a material percentage of our total loan portfolio.
As of December 31, 2019, our 20 largest borrowing relationships ranged from approximately $10.4 million to $31.0
million (including unfunded commitments) and totaled approximately $348.1 million in total commitments (representing, in the
aggregate, 38.5% of our total outstanding commitments as of December 31, 2019). Of these 20 relationships, $196.3 million were
originated from the Oklahoma market, with the remaining $151.8 million extended to borrowers located in the Dallas/Fort Worth
metropolitan area. Each of the loans associated with these relationships has been underwritten in accordance with our
underwriting policies and limits. Along with other risks inherent in these loans, such as the deterioration of the underlying
businesses or property securing these loans, this concentration of borrowers presents a risk that, if one or more of these
relationships were to become delinquent or suffer default, we could be exposed to material losses. The allowance for loan losses
may not be adequate to cover losses associated with any of these relationships, and any loss or increase in the allowance would
negatively affect our earnings and capital. Even if these loans are adequately collateralized, an increase in classified assets could
harm our reputation with our regulators and inhibit our ability to execute our business plan.
Our largest deposit relationships currently make up a material percentage of our deposits and the withdrawal of deposits by
our largest depositors could force us to fund our business through more expensive and less stable sources.
At December 31, 2019, our 20 largest deposit relationships accounted for 24.6% of our total deposits. Withdrawals of
deposits by any one of our largest depositors or by one of our related customer groups could force us to rely more heavily on
borrowings and other sources of funding for our business and withdrawal demands, adversely affecting our net interest margin
and results of operations. We may also be forced, as a result of withdrawals of deposits, to rely more heavily on other, potentially
more expensive and less stable funding sources. Additionally, such circumstances could require us to raise deposit rates in an
attempt to attract new deposits, which would adversely affect our results of operations. Under applicable regulations, if the Bank
were no longer “well capitalized,” the Bank would not be able to accept brokered deposits without the approval of the FDIC.
A substantial portion of our loan portfolio consists of loans maturing within one year, and there is no guarantee that these
loans will be replaced upon maturity or renewed on the same terms or at all.
As of December 31, 2019, approximately 41.7% of our gross loans were maturing within one year, compared to
approximately 45.3% of our gross loans that were maturing within one year as of December 31, 2018. As a result, we will either
need to renew or replace these loans during the course of the year. There is no guarantee that these loans will be originated or
renewed by borrowers on the same terms or at all, as demand for such loans may decrease. Furthermore, there is no guarantee
that borrowers will qualify for new loans or that existing loans will be renewed by us on the same terms or at all, as collateral
values may be insufficient or the borrowers’ cash flow may be materially less than when the loan was initially originated. This
could result in a significant decline in the size of our loan portfolio.
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Our allowance for loan losses may not be adequate to cover our actual loan losses, which could adversely affect our earnings.
We maintain an allowance for loan losses in an amount that we believe is appropriate to provide for losses inherent in the
portfolio. While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time
there are loans included in the portfolio that will result in losses but that have not been identified as nonperforming or potential
problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets
or that we will be able to limit losses on those loans that are identified. As a result, future additions to the allowance may be
necessary. Additionally, future additions may be required based on changes in the loans comprising the portfolio and changes in
the financial condition of borrowers, such as may result from changes in economic conditions or as a result of incorrect
assumptions by management in determining the allowance. Federal banking regulators, as an integral part of their supervisory
function, periodically review our allowance for loan losses. These regulatory agencies may require us to increase our provision
for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any
increase in the allowance for loan losses could have a negative effect on our financial condition and results of operations.
Commercial and commercial real estate loans comprise a significant portion of our total loan portfolio. These types of loans
typically are larger than residential real estate loans and other consumer loans. Because our loan portfolio contains a significant
number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or a few of these
loans may cause a significant increase in nonperforming assets. An increase in nonperforming loans could result in a loss of
earnings from these loans, an increase in the allowance for loan losses, or an increase in loan charge-offs, which could have an
adverse impact on our results of operations and financial condition.
We rely on our senior management team and may have difficulty identifying, attracting and retaining necessary personnel,
which may divert resources and limit our ability to execute our business strategy and successfully expand our operations.
Our business plan includes, and is dependent upon, our hiring and retaining highly qualified and motivated personnel at every
level. Our senior management team has significant industry experience, and their knowledge and relationships would be difficult
to replace. The loss of senior management without qualified successors who can execute our strategy could have an adverse
impact on our business, financial condition and results of operations. For example, since joining the Bank in August 2015, one
senior loan officer in the Dallas/Fort Worth metropolitan area, has originated 25.3% of our total loan portfolio as of December 31,
2019. The senior loan officer is subject to a noncompetition agreement but the loss of his expertise and ability, could have an
adverse impact on our business, financial condition and results of operations.
Competition for senior executives and skilled personnel in the financial services and banking industry is intense, which
means the cost of hiring, incenting and retaining skilled personnel may continue to increase. We need to continue to identify,
attract and retain key personnel and to recruit qualified individuals to succeed existing key personnel to ensure the continued
growth and successful operation of our business. In addition, as a provider of relationship-based commercial banking services, we
must identify, attract and retain qualified banking personnel to continue to grow our business. Our ability to effectively compete
for senior executives and other qualified personnel by offering competitive compensation and benefit arrangements may be
restricted by applicable banking laws and regulations. If we are unable to hire and retain qualified personnel we may be unable to
successfully execute our business strategy and manage our growth. In addition, to attract and retain personnel with appropriate
skills and knowledge to support our business, we may offer a variety of benefits, which could reduce our earnings or have a
material adverse effect on our business, financial condition or results of operations.
Our profitability depends on interest rates generally, and we may be adversely affected by changes in market interest rates.
Our profitability depends in substantial part on our net interest income. Net interest income is the difference between the
amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. Our net
interest income depends on many factors that are partly or completely outside of our control, including competition, federal
economic, monetary and fiscal policies and economic conditions generally. Our net interest income will be adversely affected if
market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on
loans and investments.
Changes in interest rates could affect our ability to originate loans and deposits. Historically, there has been an inverse
correlation between the demand for loans and interest rates. Loan origination volume usually declines during periods of rising or
high interest rates and increases during periods of declining or low interest rates. Changes in interest rates also have a significant
impact on the carrying value of certain of our assets, including loans and other assets, on our balance sheet.
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Interest rate increases often result in larger payment requirements for our borrowers, which increase the potential for
default. At the same time, the marketability of any underlying property that serves as collateral for such loans may be adversely
affected by any reduced demand resulting from higher interest rates. An increase in interest rates that adversely affects the ability
of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income
recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan
on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we
continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the
associated funding expense. Thus, an increase in the amount of nonaccrual loans would have an adverse impact on net interest
income.
As short-term interest rates have remained at low levels, and as longer term interest rates have fallen, we expect to
experience net interest margin compression as our interest-earning assets will continue to reprice downward while our interest-
bearing liability rates could fail to decline in tandem. This could have a material adverse effect on our net interest income and our
results of operations.
The ratio of variable- to fixed-rate loans in our loan portfolio, the ratio of short-term (maturing at a given time within 12
months) to long-term loans, and the ratio of our demand, money market and savings deposits to certificates of deposit (and their
time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates. The
composition of our rate-sensitive assets or liabilities is subject to change and could result in a more unbalanced position that
would cause market rate changes to have a greater impact on our earnings. Fluctuations in market rates and other market
disruptions are neither predictable nor controllable and may adversely affect our financial condition and earnings.
We rely on short-term funding, which can be adversely affected by local and general economic conditions.
As of December 31, 2019, approximately $554.9 million, or 73.3%, of our deposits consisted of demand, savings, money
market and negotiable order of withdrawal, or NOW, accounts. Approximately $202.5 million of the remaining balance of
deposits consists of certificates of deposit, of which approximately $156.3 million, or 20.6% of our total deposits, was due to
mature within one year. Based on our experience, we believe that our savings, money market and non-interest-bearing accounts
are relatively stable sources of funds. Historically, a majority of non-brokered certificates of deposit are renewed upon maturity
as long as we pay competitive interest rates. Many of these customers are, however, interest-rate conscious and may be willing to
move funds into higher-yielding investment alternatives. Our ability to attract and maintain deposits, as well as our cost of funds,
has been, and will continue to be significantly affected by general economic conditions. In addition, as market interest rates rise,
we will have competitive pressure to increase the rates we pay on deposits. If we increase interest rates paid to retain deposits,
our earnings may be adversely affected.
Liquidity risk could impair our ability to fund operations and meet our obligations as they become due and could jeopardize
our financial condition.
Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they
come due because of an inability to liquidate assets or obtain adequate funding. The Bank’s primary funding source is customer
deposits. In addition, the Bank has historically had access to advances from the Federal Home Loan Bank of Topeka, or the
FHLB, the Federal Reserve Bank of Kansas City, or the FRB, discount window and other wholesale sources, such as internet-
sourced deposits to fund operations. We participate in the Certificate of Deposit Account Registry Service, or CDARS, where
customer funds are placed into multiple certificates of deposit, each in an amount under the standard FDIC insurance maximum
of $250,000, and placed at a network of banks across the United States. Although the Bank has historically been able to replace
maturing deposits and advances as necessary, it might not be able to replace such funds in the future. An inability to raise funds
through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on liquidity.
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Our access to funding sources in amounts adequate to finance our activities or on acceptable terms could be impaired by
factors that affect our organization specifically or the financial services industry or economy in general. Factors that could
detrimentally impact access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in
the markets in which our loans are concentrated or adverse regulatory actions against us. The Bank’s ability to borrow or attract
and retain deposits in the future could be adversely affected by the Bank’s financial condition or regulatory restrictions, or
impaired by factors that are not specific to it, such as FDIC insurance changes, disruption in the financial markets or negative
views and expectations about the prospects for the banking industry. Borrowing capacity from the FHLB or FRB may fluctuate
based upon the condition of the Bank or the acceptability and risk rating of loan collateral and counterparties could adjust
discount rates applied to such collateral at the lender’s discretion.
The FRB or FHLB could restrict or limit the Bank’s access to secured borrowings. Correspondent banks can withdraw
unsecured lines of credit or require collateralization for the purchase of fed funds. Liquidity also may be affected by the Bank’s
routine commitments to extend credit. Market conditions or other events could also negatively affect the level or cost of funding,
affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations and fund
asset growth and new business transactions at a reasonable cost, in a timely manner and without adverse consequences.
Any substantial, unexpected or prolonged change in the level or cost of liquidity could have a material adverse effect on
our financial condition and results of operations, and could impair our ability to fund operations and meet our obligations as they
become due and could jeopardize our financial condition.
We face strong competition from banks, credit unions and other financial services providers that offer banking services, which
may limit our ability to attract and retain banking customers.
Competition in the banking industry generally, and in our primary markets specifically, is intense. Competitors include
banks as well as other financial services providers, such as savings and loan institutions, consumer finance companies, brokerage
firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors
include several larger national and regional financial institutions whose greater resources may afford them a marketplace
advantage by enabling them to maintain numerous banking locations and ATMs, achieve larger economies of scale, offer a wider
array of banking services, make larger investments in technologies needed to attract and retain customers and conduct extensive
promotional and advertising campaigns. If we are unable to offer competitive products and services as quickly as our larger
competitors, our business may be negatively affected. Additionally, as a smaller institution, we are disproportionately affected by
the continually increasing costs of compliance with new banking and other regulations. Banks and other financial institutions
with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are
thereby able to serve the credit needs of a broader customer base than us. Larger competitors may also be able to offer better
lending and deposit rates to customers, and could increase their competition as we become a public company and our growth
becomes more visible. If our competitors extend credit on terms we find to pose excessive risks, or at interest rates which we
believe do not warrant the credit exposure, we may not be able to maintain our business volume and could experience
deteriorating financial performance. Moreover, larger competitors may not be as vulnerable as us to downturns in the local
economy and real estate markets since they often have a broader geographic area and their loan portfolio is often more
diversified.
Additionally, we face growing competition from so-called “online businesses” with few or no physical locations,
including financial technology companies, online banks, lenders and consumer and commercial lending platforms, as well as
automated retirement and investment service providers. New technology and other changes are allowing parties to effectuate
financial transactions that previously required the involvement of banks. For example, consumers can maintain funds in
brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete
transactions such as paying bills and transferring funds directly without the assistance of banks. The process of eliminating banks
as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits
and the related income generated from those deposits. The loss of these revenue streams and access to lower cost deposits as a
source of funds could have a material adverse effect on our business, results of operations and financial condition.
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We also compete against community banks, credit unions and non-bank financial services companies that have strong
local ties. These smaller institutions are likely to cater to the same small- to medium-sized businesses that we target. If we are
unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios and our
results of operations and financial condition may be adversely affected. Ultimately, we may be unable to compete successfully
against current and future competitors.
Our risk management framework may not be effective in mitigating risks or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the
types of risk to which we are subject, including credit, market, liquidity, interest rate, operational, reputation, business and
compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and
judgment. Our risk management framework may not be effective under all circumstances and may not adequately mitigate risk or
loss to us. If our risk management framework is not effective, we could suffer unexpected losses and our business, financial
condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to
potentially adverse regulatory consequences.
Failure to keep pace with technological change could adversely affect our business.
Advances and changes in technology could significantly affect our business, financial condition, results of operations and
future prospects. We face many challenges, including the increased demand for providing customers access to their accounts and
the systems to perform banking transactions electronically. Our ability to compete depends on our ability to continue to adapt
technology on a timely and cost-effective basis to meet these demands.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. Many of our competitors have substantially greater resources to invest in technological
improvements. We may not be able to effectively or timely implement new technology-driven products and services or be
successful in marketing these products and services to our customers and clients. Failure to successfully keep pace with
technological change affecting the financial services industry could have a material adverse impact on our business, financial
condition, results of operations or cash flows.
We are exposed to cybersecurity risks associated with our internet-based systems and online commerce security, including
“hacking” and “identify theft.”
We conduct a portion of our business over the internet. We rely heavily upon data processing, including loan servicing
and deposit processing, software, communications and information systems from a number of third parties to conduct our
business. As a bank, we are more likely to be targeted by cyber attacks in an effort to unlawfully access customer funds or
customer personally identifiable information.
Third-party or internal systems and networks may fail to operate properly or become disabled due to deliberate attacks or
unintentional events. Our operations are vulnerable to disruptions from human error, natural disasters, power loss, computer
viruses, spam attacks, denial of service attacks, unauthorized access and other unforeseen events. Undiscovered data corruption
could render our customer information inaccurate. These events may obstruct our ability to provide services and process
transactions. While we believe we are in compliance with all applicable privacy and data security laws, an incident could put our
customer confidential information at risk.
Although we have not experienced a cyber-incident which has been successful in compromising our data or systems, we
can never be certain that all of our systems are entirely free from vulnerability to breaches of security or other technological
difficulties or failures. We monitor and modify, as necessary, our protective measures in response to the perpetual evolution of
known cyber-threats.
A breach in the security of any of our information systems, or other cyber-incident, could have an adverse impact on,
among other things, our revenue, ability to attract and maintain customers and our reputation. In addition, as a result of any
breach, we could incur higher costs to conduct our business, to increase protection, or related to remediation. Furthermore, our
customers could incorrectly blame us and terminate their account with us for a cyber-incident which occurred on their own
system or with that of an unrelated third party. In addition, a security breach could also subject us to additional regulatory
scrutiny and expose us to civil litigation and possible financial liability.
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Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to
comply with banking regulations.
We depend to a significant extent on a number of relationships with third-party service providers. Specifically, we receive
core systems processing, essential web hosting and other internet systems, loan and deposit processing and other processing
services from third-party service providers. If these third-party service providers experience financial, operational or
technological difficulties or terminate their services and we are unable to replace them with other service providers, our
operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial
condition and results of operations could be materially adversely affected. Even if we are able to replace our service providers, it
may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.
We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an
inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our
ability to maintain regulatory compliance, would be adversely affected.
Our business strategy calls for continued growth. We may need to raise additional capital in the future to support our
continued growth and to maintain our required regulatory capital levels. Our ability to raise additional capital depends on
conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding
the banking industry, market conditions and governmental activities, and on our financial condition and performance. Any
occurrence that may limit our access to the capital markets may adversely affect our capital costs and our ability to raise capital.
Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking
to raise capital, and we would have to compete with those institutions for investors. Accordingly, there are no assurances that we
will be able to raise additional capital if needed or on terms acceptable to us. Our growth may be constrained if we are unable to
raise additional capital as needed. Furthermore, if we fail to maintain capital to meet regulatory requirements, our financial
condition, liquidity and results of operations would be materially and adversely affected.
We may be exposed to risk of environmental liabilities with respect to properties to which we take title.
In the course of our business, we may foreclose and take title to real estate, and we could be subject to environmental
liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage,
personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we
may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated
with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a
contaminated site, we may be subject to claims by third parties based on damages and costs resulting from environmental
contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business,
financial condition, liquidity and results of operations could be materially and adversely affected.
Risks Relating to Our Regulatory Environment
We are subject to extensive regulation, which increases the cost and expense of compliance and could limit or restrict our
activities, which in turn may adversely impact our earnings and ability to grow.
We operate in a highly regulated environment and are subject to regulation, supervision and examination by a number of
governmental regulatory agencies, including the Federal Reserve, the OBD, and the FDIC. Regulations adopted by these
agencies, which are generally intended to provide protection for depositors, customers and the DIF, rather than for the benefit of
shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other
companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels, dividend payments
and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound
practices or violations of law. Following examinations, we may be required, among other things, to change our asset valuations or
the amounts of required loan loss allowances or to restrict our operations, as well as increase our capital levels, which could
adversely affect our results of operations. The laws and regulations applicable to the banking industry could change at any time
and we cannot predict the effects of these changes on our business, profitability or growth strategy. Increased regulation could
increase our cost of compliance and adversely affect profitability. Moreover, certain of these regulations contain significant
punitive sanctions for violations, including monetary penalties and limitations on a bank’s ability to implement components of its
business plan, such as expansion through mergers and acquisitions or the opening of new branch offices. In addition, changes in
regulatory requirements may add costs associated with compliance efforts. Furthermore, government policy and regulation,
particularly as implemented through the Federal Reserve, significantly affect credit conditions. Negative developments in the
financial industry and the impact of new legislation and regulation in response to those developments could negatively impact our
business operations and adversely impact our financial performance.
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Monetary policy and other economic factors could affect our profitability adversely.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the
Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the
instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government
securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments
are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and
deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business,
financial condition and results of operations cannot be predicted.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we
collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security and data protection laws, including requirements concerning
security breach notification, and we could be negatively impacted by these laws. For example, our business is subject to the
Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share non-public personal
information about our customers with non-affiliated third parties; (ii) requires that we provide certain disclosures to customers
about our information collection, sharing and security practices and afford customers the right to “opt out” of any information
sharing by us with non-affiliated third parties (with certain exceptions) and (iii) requires we develop, implement and maintain a
written comprehensive information security program containing safeguards appropriate based on our size and complexity, the
nature and scope of our activities and the sensitivity of customer information we process, as well as plans for responding to data
security breaches. Various state and federal banking regulators and states have also enacted data security breach notification
requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in
the event of a security breach. Moreover, legislators and regulators in the United States are increasingly adopting or revising
privacy, information security and data protection laws that potentially could have a significant impact on our current and planned
privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of
consumer or employee information, and some of our current or planned business activities. This could also increase our costs of
compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-
related enforcement activity at the federal level by the Federal Trade Commission, as well as at the state level.
We rely on third parties, and in some cases subcontractors, to provide information technology and data services. Although
we provide for appropriate protections through our contracts and perform information security risk assessments of its third-party
service providers and business associates, we still have limited control over their actions and practices. In addition, despite the
security measures that we have in place to ensure compliance with applicable laws and rules, our facilities and systems, and those
of our third-party providers may be vulnerable to security breaches, acts of vandalism or theft, computer viruses, misplaced or
lost data, programming and/or human errors or other similar events. In such cases, notification to affected individuals, state and
federal regulators, state attorneys general and media may be required, depending upon the number of affected individuals and
whether personal information including financial data was subject to unauthorized access.
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Compliance with current or future privacy, data protection and information security laws (including those regarding
security breach notification) affecting customer or employee data to which we are subject could result in higher compliance and
technology costs and could restrict our ability to provide certain products and services, which could have a material adverse
effect on our business, financial conditions or results of operations. Our failure to comply with privacy, data protection and
information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation,
fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition or
results of operations.
Risks Related to Our Common Stock
There are no assurances that an active public trading market will develop or persist for our common stock; and, even if it
does, our share price may be subject to substantial volatility.
We cannot predict the extent to which investor interest in our Company will lead to the development and persistence of an
active trading market on the NASDAQ Global Select Market or otherwise, or how liquid that market may be, especially if few
stock analysts follow our stock or issue research reports concerning our business. If an active trading market does not develop or
persist, it may be difficult to sell our shares. No market maker in our common stock is obligated to make a market in our shares,
and any such market making may be discontinued at any time in the sole discretion of each market maker.
The price of our common stock could be volatile.
The market price of our common stock may be volatile and could be subject to wide fluctuations in price in response to
various factors, some of which are beyond our control. These factors include, among other things:
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actual or anticipated variations in our quarterly or annual results of operations;
recommendations by securities analysts;
operating and stock price performance of other companies that investors deem comparable to us;
news reports relating to trends, concerns and other issues in the financial services industry generally;
conditions in the banking industry such as credit quality and monetary policies;
perceptions in the marketplace regarding us or our competitors;
fluctuations in the stock price and operating results of our competitors;
domestic and international economic factors unrelated to our performance;
general market conditions and, in particular, developments related to market conditions for the industry;
new technology used, or services offered, by competitors; and
changes in government regulations.
In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor
confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or
results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even
if unsuccessful, could be costly to defend and be a distraction to management.
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Shares of certain shareholders may be sold into the public market. This could cause the market price of our common stock to
drop significantly.
Our principal shareholders (collectively, the “Haines Family Trusts”) have the benefit of certain registration rights
covering all of their shares of our common stock pursuant to the registration rights agreement that we entered into with the
Haines Family Trusts in connection with our initial public offering. Sales of a substantial number of these shares in the public
market, or the perception that these sales could occur, could cause the market price of our common stock to decline or to be lower
than it might otherwise be. In addition, as of December 31, 2019 approximately 63.7% of our outstanding common stock is
beneficially owned by our principal shareholders, executive officers and directors. The substantial amount of common stock that
is owned by and issuable to our principal shareholders, executive officers and directors may adversely affect our share price, our
share price volatility and the development and persistence of an active and liquid trading market. The sale of these shares could
impair our ability to raise capital through the sale of additional equity securities.
Oklahoma law and the provisions of our amended and restated certificate of incorporation and amended and restated bylaws
may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding
companies.
Oklahoma corporate law and provisions of our amended and restated certificate of incorporation, or certificate of
incorporation, and our amended and restated bylaws, or bylaws, could make it more difficult for a third party to acquire us, even
if doing so would be perceived to be beneficial by our shareholders. Furthermore, with certain limited exceptions, federal
regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly,
acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability
to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our
Company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need
to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common
stock. Collectively, provisions of our certificate of incorporation and bylaws and other statutory and regulatory provisions may
delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our
shareholders receiving a premium over the market price for their common stock. Moreover, the combination of these provisions
effectively inhibits certain business combinations, which, in turn, could adversely affect the market price of our common stock.
We are controlled by trusts established for the benefit of members of the Haines family, whose interests may not coincide with
our other shareholders.
As of December 31, 2019, the Haines Family Trusts control approximately 57.3% of our common stock. So long as the
Haines Family Trusts continue to control more than 50% of our outstanding shares of common stock, they will have the ability, if
they vote in the same manner, to determine the outcome of all matters requiring shareholder approval, including the election of
directors, the approval of mergers, material acquisitions and dispositions and other extraordinary transactions, and amendments to
our certificate of incorporation, bylaws and other corporate governance documents. In addition, this concentration of ownership
may delay or prevent a change in control of our Company and make some transactions more difficult or impossible without the
support of the Haines Family Trusts. The Haines Family Trusts also have certain rights, such as registration rights, that our other
shareholders do not have. In any of these matters, the interests of the Haines Family Trusts may differ from or conflict with our
interests as a company or the interests of other shareholders. Accordingly, the Haines Family Trusts could influence us to enter
into transactions or agreements that other shareholders would not approve or make decisions with which other shareholders may
disagree.
We are a “controlled company” within the meaning of the rules of NASDAQ, and qualify for exemptions from certain
corporate governance requirements. As a result, our shareholders do not have the same protections afforded to shareholders
of companies that are subject to such requirements.
We are a “controlled company” under NASDAQ’s corporate governance listing standards, meaning that more than 50% of
the voting power for the election of our board of directors will be held by a single person, entity or group. As a controlled
company, we are exempt from the obligation to comply with certain corporate governance requirements, including the
requirements:
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• that a majority of our board of directors consists of “independent directors,” as defined under NASDAQ rules;
• that director nominations are selected, or recommended for the board of directors’ selection, by either (i) the
independent directors constituting a majority of the board of directors’ independent directors in a vote in which only independent
directors participate, or (ii) a nominating and corporate governance committee that is composed entirely of independent directors;
and
• that we have a compensation committee that is composed entirely of independent directors.
Even though we are a “controlled company,” we currently intend to comply with each of these requirements. However,
we may avail ourselves of certain of these other exemptions for as long as we remain a “controlled company.” Accordingly, our
shareholders may not have the same protections afforded to shareholders of companies that are subject to all of NASDAQ’s
corporate governance requirements, which could make our stock less attractive to investors or otherwise harm our stock price.
Our bylaws have an exclusive forum provision, which could limit a shareholder's ability to obtain a favorable judicial forum
for disputes with us or our directors, officers or other employees.
Our bylaws have an exclusive forum provision providing that, unless we consent in writing to an alternative forum, the
state or federal courts for the Western District of Oklahoma are the sole and exclusive forum for (i) any derivative action or
proceeding brought on behalf of the Company, (ii) any action asserting a claim for breach of a fiduciary duty owed by any
director, officer, employee or agent of the Company to the Company or the Company’s shareholders, (iii) any action asserting a
claim arising pursuant to any provision of the Oklahoma General Corporation Act, or OGCA, the certificate of incorporation or
the bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case subject to said courts having
personal jurisdiction over the indispensable parties named as defendants therein. Any person purchasing or otherwise acquiring
any interest in any shares of our capital stock will be deemed to have notice of and to have consented to this provision of our
certificate of incorporation. The exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum
that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits.
Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur
additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions.
Holders of our common stock are entitled to receive only such cash dividends as our board of directors may declare out of
funds legally available for such payments. Any declaration and payment of dividends on our common stock will depend upon our
earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to
service any equity or debt obligations senior to our common stock and other factors deemed relevant by our board of directors.
Furthermore, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs and other
factors, we have made, and will continue to make, capital management decisions and policies that could adversely affect the
amount of dividends, if any, paid to our common shareholders.
The Federal Reserve has indicated that bank holding companies should carefully review their dividend policy in relation
to the organization’s overall asset quality, current and prospective earnings and level, composition and quality of capital. The
guidance provides that we inform and consult with the Federal Reserve prior to declaring and paying a dividend that exceeds
earnings for the period for which the dividend is being paid or that could result in an adverse change to our capital structure,
including interest on any debt obligations. If required payments on our debt obligations are not made, or dividends on any
preferred stock we may issue are not paid, we will be prohibited from paying dividends on our common stock.
24
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We are a bank holding company and our only source of cash, other than further issuances of securities, is distributions from
the Bank.
We are a bank holding company with no material activities other than activities incidental to holding the common stock of
the Bank. Our principal source of funds to pay distributions on our common stock and service any of our obligations, other than
further issuances of securities, would be dividends received from the Bank. Furthermore, the Bank is not obligated to pay
dividends to us, and any dividends paid to us would depend on the earnings or financial condition of the Bank and various
business considerations. As is the case with all financial institutions, the profitability of the Bank is subject to the fluctuating cost
and availability of money, changes in interest rates and in economic conditions in general. In addition, various federal and state
statutes limit the amount of dividends that the Bank may pay to the Company without regulatory approval.
Prior to our initial public offering, we were treated as an S Corporation, and claims of taxing authorities related to our prior
status as an S Corporation could harm us.
Upon consummation of our initial public offering, our status as an S Corporation terminated and we became taxed as a C
Corporation under the provisions of Sections 301 to 385 of the Code, which treat the corporation as an entity that is subject to an
entity level U.S. federal income tax. If the unaudited, open tax years in which we were an S Corporation are audited by the IRS,
and we are determined not to have qualified for, or to have violated, our S Corporation status, we likely would be obligated to pay
corporate level tax, plus interest and possible penalties. This could result in tax with respect to all of the income we reported for
periods when we believed we properly were treated as an S Corporation not subject to entity level taxation. Under the terms of a
tax sharing agreement entered into by the Company and the Haines Family Trusts, the Haines Family Trusts will indemnify us
with respect to our unpaid tax liabilities (including interest and penalties) to the extent that such unpaid tax liabilities are
attributable to a decrease in the shareholders’ taxable income for any tax period and a corresponding increase in the Company’s
taxable income for any period. This indemnity includes any additional taxes resulting from the Company not being a valid S
Corporation. Any such claims, however, could result in additional costs to us and could have a material adverse effect on our
results of operations and financial condition.
We have entered into a tax sharing agreement with the Haines Family Trusts, and we could become obligated to make
payments to the Haines Family Trusts for any additional federal, state or local income taxes assessed against them for tax
periods prior to the completion of our initial public offering.
Prior to our initial public offering, we were treated as an S Corporation for U.S. federal income tax purposes. As a result,
the Haines Family Trusts, as our shareholders, were taxed on our income. Therefore, the Haines Family Trusts have received
certain distributions from us that were generally intended to equal the amount of tax such trusts were required to pay with respect
to our income. In connection with our initial public offering, our S Corporation status terminated. As a result of such termination,
we are subject to federal and state income taxes. In the event an adjustment to our taxable income for any taxable period (or
portion thereof) beginning after the date of the termination of our S Corporation status results in any increase in taxable income
of the Haines Family Trusts for any taxable period (or portion thereof) ending prior to termination of our S Corporation status, it
is possible that the Haines Family Trusts would be liable for additional income taxes for such prior periods. Therefore, we have
entered into an agreement with the Haines Family Trusts. Pursuant to this agreement, in the event of any restatement of our
taxable income for any taxable period (or portion thereof) beginning after the date of termination of our S Corporation status
pursuant to a determination by, or a settlement with, a taxing authority, then, depending on the nature of the adjustment, we may
be required to make a payment to the Haines Family Trusts in an amount equal to their incremental tax liability, which amount
may be material. In addition, we will indemnify the Haines Family Trusts with respect to unpaid income tax liabilities to the
extent that such unpaid income tax liabilities are attributable to our taxable income for any period after our S Corporation status
terminates. In both cases, the amount of the payment will be based on the assumption that the Haines Family Trusts are taxed at
the highest rate applicable to individuals for the relevant periods. We will also indemnify the Haines Family Trusts for any
interest, penalties, losses, costs or expenses arising out of any claim under the agreement. However, the Haines Family Trusts will
indemnify us with respect to our unpaid tax liabilities (including interest and penalties) to the extent that such unpaid tax
liabilities are attributable to a decrease in the shareholders’ taxable income for any for tax period and a corresponding increase in
the Company’s taxable income for any period. The Haines Family Trusts will also indemnify the Company with respect to any
additional taxes attributable to our final S Corporation tax year that ends with the termination of our S Corporation status.
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Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
The Company’s corporate offices are located at 1039 N.W. 63rd Street, Oklahoma City, Oklahoma 73116. The Company’s
corporate office space is owned by the Bank’s wholly-owned subsidiary, 1039 NW 63rd, LLC, and consists of approximately
6,600 square feet, an annex of approximately 4,400 square feet, and a 10,000 square foot operations building. The Bank operates
from our corporate office, five full-service branch offices located in Oklahoma, two full-service branch offices located in
southwest Kansas and two full-service branch offices located in the Dallas/Fort Worth metropolitan area. Of these nine locations,
four are leased and five are owned by the Bank. All branches are equipped with ATMs and all Oklahoma branches provide for
drive-up access. Additionally, we maintain an administrative office located in the Dallas/Fort Worth metropolitan area, which is
leased by the Bank.
Item 3. Legal Proceedings
From time to time, the Company or the Bank is a party to claims and legal proceedings arising in the ordinary course of
business. Management does not believe any present litigation or the resolution thereof will have a material adverse effect on the
business, consolidated financial condition or results of operations of the Company.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s shares of common stock are traded on The NASDAQ Global Select Market under the symbol “BSVN”.
The approximate number of holders of record of the Company’s common stock as of March 11, 2020 was 4. The Company’s
common stock began trading on The NASDAQ Global Select Market on September 20, 2018.
The Company began paying quarterly dividends in the second half of 2019, with $0.10 per share dividends declared and
paid with respect to each of the third and fourth quarters of 2019. The Company currently expects to continue quarterly dividends
of $0.10 per share in the future. Any future determination to pay dividends and the amount of such dividends on the Company’s
common stock will be made by its Board of Directors and will depend on a number of factors, including
•
•
•
•
•
•
•
historical and projected financial condition, liquidity and results of operations;
the Company’s capital levels and requirements;
statutory and regulatory prohibitions and other limitations;
any contractual restriction on the Company’s ability to pay cash dividends, including pursuant to the terms of any of its credit agreements or
other borrowing arrangements;
business strategy;
tax considerations;
any acquisitions or potential acquisitions;
26
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•
•
general economic conditions; and
other factors deemed relevant by the Board of Directors.
Set forth below is information as of December 31, 2019 regarding equity compensation plans. The plan that has been approved
by the shareholders is the 2018 Equity Incentive Plan.
Plan
Equity compensation plans approved by shareholders
Equity compensation plans not approved by shareholders
Number of securities to
be issued upon exercise
of outstanding options
and rights
Weighted average
exercise price
267,000
––
$
18.88
––
Number of securities
remaining available for
issuance under plan
149,500
––
COMPANY PERFORMANCE
Presented below is a line graph which compares the percentage in the cumulative total return on the Company’s Common
Stock to the cumulative total return of the NASDAQ Stock Market (U.S. Companies) Index and the NASDAQ Bank Stock Index.
The period presented is from September 24, 2018 through December 31, 2019. The graph assumes an investment on September
24, 2018 of $100 in the Company’s Common Stock and in each index, and that any dividends were reinvested. The values
presented for each quarter during the period represent the cumulative market values of the respective investment. The
performance graph represents past performance and should not be considered to be an indication of future performance.
Item 6. Selected Financial Data
The following table sets forth selected historical consolidated financial and operating data as of and for the years ended
December 31, 2019, 2018, and 2017. Selected financial data as of and for the years ended December 31, 2019, 2018 and 2017 has
been derived from our audited consolidated financial statements included elsewhere in this report.
27
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You should read the following financial data in conjunction with the other information contained in this report, including
under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the financial statements
and related notes included elsewhere in this report.
As of or for the Year Ended
December 31,
2018
(Dollars in thousands, except per share data)
2019
2017
Income Statement Data:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Total noninterest income
Total noninterest expense
Provision for income taxes
Net income
Balance Sheet Data:
Cash and due from banks
Total loans
Allowance for loan losses
Total assets
Interest-bearing deposits
Noninterest-bearing deposits
Total deposits
Total shareholders’ equity
$
$
51,709 $
9,516
42,193
-
1,308
28,432
6,844
8,225
117,128 $
707,304
7,846
866,392
538,262
219,221
757,483
100,126
46,800 $
7,169
39,631
200
1,331
14,965
797
25,000
128,090 $
599,910
7,832
770,511
474,744
201,159
675,903
88,466
42,870
4,739
38,131
1,246
1,435
14,531
—
23,789
100,054
563,001
7,654
703,594
459,920
165,911
625,831
69,176
The following table sets forth selected ratios as of and for the years ended December 31, 2019, 2018 and 2017. The
performance, asset quality and capital ratios are unaudited and derived from our audited financial statements as of and for the
periods presented. Average balances are unaudited and have been calculated using daily averages.
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Share and Per Share Data:
Earnings per share (basic)
Earnings per share (diluted)
Dividends per share
Book value per share
Tangible book value per share(1)
Weighted average common shares outstanding–basic
Weighted average common shares outstanding–diluted
Shares outstanding at end of period
Selected Ratios:
Return on average:
Assets
Shareholders’ equity
Yield on earnings assets
Yield on loans
Yield on loans (excluding loan fee income)(1)
Cost of funds
Cost of interest-bearing deposits
Cost of total deposits
Net interest margin
Net interest margin (excluding loan fee income)(1)
Noninterest expense to average assets
Efficiency ratio
Loans to deposits
Credit Quality Ratios:
Nonperforming assets to total assets
Nonperforming assets to total loans and OREO
Nonperforming loans to total loans
Allowance for loan losses to nonperforming loans
Allowance for loan losses to total loans
Net charge-offs to average loans
Capital Ratios (Bank) (2):
Tangible equity to tangible assets
Common equity tier 1 capital ratio
Tier 1 leverage ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Capital Ratios (Company):
Total shareholders’ equity to total assets
Common equity tier 1 capital ratio
Tier 1 leverage ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
As of or for the Year Ended
December 31,
2018
(Dollars in thousands, except per share data)
2017
2019
$
$
$
0.81
0.81
0.60
9.96
9.78
10,145,032
10,147,311
10,057,506
3.08
3.03
7.71
8.68
8.49
8,105,856
8,237,638
10,187,500
3.26
3.26
1.34
9.49
9.19
7,287,500
7,287,500
7,287,500
1.03%
8.42
6.55
7.58
6.88
1.37
1.89
1.37
5.35
4.78
3.56
65.39
93.38
0.38%
0.47
0.47
235.40
1.11
-0.002
11.37
14.28
11.65
14.28
15.42
11.56%
14.11
11.53
14.11
15.25
3.53%
33.01
6.48
7.58
6.71
1.11
1.52
1.08
5.49
4.78
2.05
37.04
88.76
0.35%
0.45
0.44
299.50
1.31
0.004
11.25
14.78
11.26
14.78
16.03
11.48%
14.61
11.13
14.61
15.86
3.62%
37.43
6.60
7.69
6.14
0.80
1.02
0.77
5.87
4.59
2.21
37.24
89.96
0.28%
0.35
0.34
404.55
1.36
0.09
9.55
12.58
10.53
12.58
13.83
9.83%
11.61
9.72
11.61
12.86
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Share and Per Share Data:
Earnings per share (basic) – S Corp
Earnings per share (basic) – C Corp(1)
Earnings per share (diluted) – S Corp
Earnings per share (diluted) – C Corp(1)
Dividends per share
Book value per share
Tangible book value per share(2)
Weighted average common shares outstanding–basic
Weighted average common shares outstanding–diluted
Shares outstanding at end of period
Selected Ratios:
Return on average:
Assets – S Corp
Assets – C Corp(1)
Shareholders’ equity – S Corp
Shareholders’ equity – C Corp(1)
Yield on earnings assets
Yield on loans
Yield on loans (excluding loan fee income)(2)
Cost of funds
Cost of interest-bearing deposits
Cost of total deposits
Net interest margin
Net interest margin (excluding loan fee income)(2)
Noninterest expense to average assets
Efficiency ratio
Loans to deposits
Credit Quality Ratios:
Nonperforming assets to total assets
Nonperforming assets to total loans and OREO
Nonperforming loans to total loans
Allowance for loan losses to nonperforming loans
Allowance for loan losses to total loans
Net charge-offs to average loans
Capital Ratios:
Total shareholders’ equity to total assets
Tangible equity to tangible assets(2)
Common equity tier 1 capital ratio(3)
Tier 1 leverage ratio(3)
Tier 1 risk-based capital ratio(3)
Total risk-based capital ratio(3)
As of or for the Year Ended
December 31,
2018
(Dollars in thousands, except per share data)
2019
2017
$
$
$
1.48
0.81
1.48
0.81
0.60
9.96
9.78
10,145,032
10,147,311
10,057,506
3.18
2.48
3.13
2.44
7.71
8.68
8.49
8,105,856
8,238,753
10,187,500
3.26
1.96
3.26
1.96
1.34
9.49
9.19
7,287,500
7,287,500
7,287,500
1.88%
1.03
15.44
8.42
6.55
7.58
6.88
1.37
1.89
1.37
5.35
4.78
3.56
65.39
93.38
0.38%
0.47
0.47
235.40
1.11
-0.002
11.56%
11.37
14.28
11.65
14.28
15.42
3.53%
2.75
33.01
25.69
6.48
7.58
6.71
1.11
1.52
1.08
5.49
4.78
2.05
37.04
88.76
0.35%
0.45
0.43
299.50
1.31
-0.004
11.48%
11.25
14.78
11.26
14.78
16.03
3.62%
2.17
37.43
22.46
6.60
7.69
6.14
0.80
1.02
0.77
5.87
4.59
2.21
37.24
89.96
0.28%
0.35
0.34
404.55
1.36
0.09
9.83%
9.55
12.58
10.53
12.58
13.83
(1) Represents a non-GAAP financial measure. See “GAAP reconciliation and management explanation of non-GAAP
financial measures” for a reconciliation of these measures to their most comparable GAAP measures.
(2) Ratios are based on Bank level financial information rather than consolidated information.
30
Table of Contents
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However,
we also evaluate our performance based on certain additional financial measures discussed in this report as being non-GAAP
financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or
includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or
excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in
effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP
financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using
exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not
non-GAAP financial measures or both.
The non-GAAP financial measures that we discuss in this report should not be considered in isolation or as a substitute
for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in
which we calculate the non-GAAP financial measures that we discuss in this report may differ from that of other companies
reporting measures with similar names. It is important to understand how other banking organizations calculate their financial
measures with names similar to the non-GAAP financial measures we have discussed in this report when comparing such non-
GAAP financial measures.
Tangible Book Value Per Share. We calculate (1) tangible equity as total shareholders’ equity less goodwill and other
intangibles; and (2) tangible book value per share as tangible equity divided by our shares outstanding at the end of the relevant
period. The most directly comparable GAAP financial measure for tangible book value per share is book value per share.
Tangible Shareholders’ Equity to Tangible Assets. We calculate (1) tangible assets as total assets less goodwill and other
intangibles; and (2) tangible shareholders’ equity to tangible assets as tangible equity (as defined in the preceding paragraph)
divided by tangible assets at the end of the relevant period. The most directly comparable GAAP financial measure for tangible
shareholders’ equity to tangible assets is total shareholders’ equity to total assets.
We believe that tangible book value per share and tangible shareholders’ equity to tangible assets are measures that are
important to many investors in the marketplace who are interested in changes from period to period in our shareholders’ equity
exclusive of changes in intangible assets. Intangible assets have the effect of increasing total shareholders’ equity while not
increasing our tangible book value per share or tangible shareholders’ equity to tangible assets. The following table reconciles, as
of the dates set forth below, total shareholders’ equity to tangible shareholders’ equity, total assets to tangible assets and presents
tangible book value per share compared to book value per share and tangible shareholders’ equity to tangible assets to total
shareholders’ equity to total assets:
As of December 31,
2018
(Dollars in thousands, except per share data)
2019
2017
Tangible Shareholders’ Equity:
Total shareholders’ equity
Adjustments:
Goodwill and other intangibles
Tangible shareholders’ equity
Tangible Assets:
Total assets
Adjustments:
Goodwill and other intangibles
Tangible assets
End of period common shares outstanding
Book value per share
Tangible book value per share
Total shareholders’ equity to total assets
Tangible shareholders’ equity to tangible assets
$
100,126
$
88,466
$
69,176
(1,789)
$
98,337
(1,995)
$
86,471
(2,201)
66,975
866,392
$
770,511
$
703,594
(1,789) $
$
864,603
(1,995)
$
768,516
(2,201)
701,393
$
$
$
$
10,187,500
10,057,506
$
8.68
$
9.96
$
8.49
9.78
$
$
$
11.48%
11.56%
11.25%
11.37%
7,287,500
9.49
9.19
9.83%
9.55%
Exclusion of loan fee income. We calculate (1) yield on loans (excluding loan fee income) as interest income on loans less
loan fee income divided by average total loans and (2) net interest margin (excluding loan fee income) as net interest income less
loan fee income divided by average interest-earning assets. The most directly comparable GAAP financial measure for yield on
loans (excluding loan fee income) is yield on loans and for net interest margin (excluding loan fee income) is net interest margin.
The following table reconciles, as of the dates set forth below, yield on loans (excluding loan fee income) to yield on loans and
net interest margin (excluding loan fee income) to net interest margin:
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As of or for the Year Ended December 31,
2018
(Dollars in thousands)
2019
2017
Loan interest income (excluding loan fee income):
Interest income on loans, including loan fee income
Adjustments:
Loan fee income
Interest income on loans (excluding loan fee income)
Average total loans
Yield on loans
Yield on loans (excluding loan fee income)
Net interest margin (excluding loan fee income):
Net interest income
Adjustments:
Loan fee income
Net interest income (excluding loan fee income)
Average interest-earning assets
Net interest margin
Net interest margin (excluding loan fee income)
$
48,200
$
44,279
$
41,450
$
$
(4,443)
$
43,757
(5,121)
$
39,158
(8,331)
33,119
636,274
$
7.58%
6.88%
584,003
$
7.58%
6.71%
539,302
7.69%
6.14%
$
42,193
$
39,631
$
38,131
$
$
(4,443)
$
37,750
(5,121)
$
34,510
(8,331)
29,800
789,009
$
5.35%
4.78%
721,935
$
5.49%
4.78%
649,757
5.87%
4.59%
One-time executive stock transfer. We had net income of $8.2 million for the year ended December 31, 2019. On
September 5, 2019, our largest shareholders, the Haines Family Trusts, contributed 656,925 of their shares to the Company,
approximately 6.5% of shares outstanding. Subsequently, the Company immediately issued those shares to certain executive
officers, which was charged as compensation expense through the income statement of the Company. As part of this transaction,
the Company retired 149,425 shares, or $2.6 million, for income and payroll taxes. This previously announced transaction was a
one-time, non-cash expense; however, because the shares were simultaneously contributed into the Company by the Haines
Family Trusts, the transaction had a virtual net-zero impact to shareholders’ equity.
Excluding the one-time, non-cash expense related to the stock transfer outlined above, net income would have been $20.0
million for the year ending December 31, 2019. Illustrated below is a reconciliation of pro forma net income through the year
ended December 31, 2019.
(Dollars in thousands)
Pro Forma Net Income
Total Interest Income
Total Interest Expense
Net Interest Margin
Provision for Loan Losses
Total Noninterest Income
Total Noninterest Expense
Stock Transfer Compensation Expense (1)
Pro Forma Noninterest Expense
Pro Forma Pre-Tax Income
Pro Forma Income Tax Expense
Pro Forma Net After-Tax Income
(1)
Compensation expense includes $168,000 in payroll taxes.
For the Year Ended
December 31,
2019
2018
$ Change
% Change
51,709 $
9,516
42,193
- $
1,308 $
28,432 $
(11,796)
16,636
46,800 $
7,169
39,631
200 $
1,331 $
14,966 $
-
14,966
4,909
2,347
2,562
-
(23)
13,466
(11,796)
1,670
10.49%
32.73%
6.47%
(1.71%)
89.98%
11.16%
26,866 $
25,796 $
1,070
4.15%
6,836 $
5,719 $
1,117
19.53%
20,030 $
20,077 $
(47)
(0.24%)
$
$
$
$
$
$
$
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CAUTIONARY NOTE ABOUT FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements. These forward-looking statements reflect our
current views with respect to, among other things, future events and our financial performance. These statements are often, but
not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,”
“believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,”
“outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or
phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current
expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management,
many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution that any such forward-
looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that
are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as
of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking
statements.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these
forward-looking statements, including, but not limited to, the following:
• our ability to effectively execute our expansion strategy and manage our growth, including identifying and
consummating suitable acquisitions;
• business and economic conditions, particularly those affecting our market areas of Oklahoma, the Dallas/Fort Worth
metropolitan area and Kansas, including a decrease in or the volatility of oil and gas prices or agricultural commodity prices
within the region;
• the geographic concentration of our markets in Oklahoma, the Dallas/Fort Worth metropolitan area and Kansas;
• high concentrations of loans secured by real estate and energy located in our market areas;
• risks associated with our commercial loan portfolio, including the risk for deterioration in value of the general
business assets that secure such loans;
• risks related to the significant amount of credit that we have extended to a limited number of borrowers;
• our ability to maintain our reputation;
• our ability to successfully manage our credit risk and the sufficiency of our allowance;
• reinvestment risks associated with a significant portion of our loan portfolio maturing in one year or less;
• our ability to attract, hire and retain qualified management personnel;
• our dependence on our management team, including our ability to retain executive officers and key employees and
their customer and community relationships;
• interest rate fluctuations, which could have an adverse effect on our profitability;
• competition from banks, credit unions and other financial services providers;
• system failures, service denials, cyber-attacks and security breaches;
• our ability to maintain effective internal control over financial reporting;
• employee error, fraudulent activity by employees or customers and inaccurate or incomplete information about our
customers and counterparties;
• increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when
capital is not available on favorable terms or at all;
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• costs and effects of litigation, investigations or similar matters to which we may be subject, including any effect on our
reputation;
• severe weather, acts of god, acts of war, pandemics or terrorism;
• impact of COVID-19, the coronavirus, on the United States economy, particularly the hospitality industry;
• compliance with governmental and regulatory requirements, including the Dodd-Frank and Wall Street Consumer
Protection Act, or Dodd-Frank Act, and other regulations relating to banking, consumer protection, securities and tax matters;
• changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax,
trade, monetary and fiscal matters, including the policies of the Federal Reserve and as a result of initiatives of the Trump
administration; and
• other factors that are discussed in the section entitled “Risk Factors,” beginning on page 13.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary
statements included in this report. Because of these risks and other uncertainties, our actual future results, performance or
achievements, or industry results, may be materially different from the results indicated by the forward-looking statements in this
report. In addition, our past results of operations are not necessarily indicative of our future results. Accordingly, no forward-
looking statements should be relied upon, which represent our beliefs, assumptions and estimates only as of the dates on which
such forward-looking statements were made. Any forward-looking statement speaks only as of the date on which it is made, and
we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information,
future developments or otherwise, except as required by law.
Item 7. 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 report.
Unless the context indicates otherwise, references in this management’s discussion and analysis to “we”, “our”, and
“us,” refer to Bank7 Corp. and its consolidated subsidiaries. All references to “the Bank” refer to Bank7, our wholly owned
subsidiary.
General
We are Bank7 Corp., a bank holding company headquartered in Oklahoma City, Oklahoma. Through our wholly-owned
subsidiary, Bank7, we operate nine full-service branches 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 we will also pursue strategic acquisitions.
As a bank holding company, we generate most of our revenue from interest income on loans and from short-term
investments. The primary source of funding for our loans and short-term investments are deposits held by our subsidiary,
Bank7. We measure our performance by our return on average assets, return on average equity, earnings per share, capital ratios,
and our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent
basis and noninterest income.
As of December 31, 2019, we had total assets of $866.4 million, total loans of $707.3 million, total deposits of $757.5
million and total shareholders’ equity of $100.1 million. In September 2018, in conjunction with our initial public offering, the
Company terminated its status as an S Corporation and elected to be treated as a C Corporation. As this termination occurred at
the end of the third quarter, we have presented information as pre-tax and pro forma numbers in the non-GAAP reconciliation
below.
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Table of Contents
In December 2019, a novel strain of coronavirus was reported in Wuhan, China. The World Health Organization has
declared the outbreak to constitute a “Public Health Emergency of International Concern.” The COVID-19 outbreak is disrupting
supply chains and affecting production and sales across a range of industries. The extent of the impact of COVID-19 on our
operational and financial performance will depend on certain developments, including the duration and spread of the outbreak,
impact on our customers, employees and vendors all of which are uncertain and cannot be predicted. At this point, the extent to
which COVID-19 may impact our financial condition or results of operations is uncertain.
Our Initial Public Offering
Our initial public offering, or IPO, closed on September 20, 2018 and a total of 2,900,000 shares of common stock were
sold at $19.00 per share. After deducting underwriting discounts and offering expenses, the Company received total net proceeds
of $50.1 million from the initial public offering and the exercise of the underwriter option. Upon completion of the IPO, the
Company became a publicly traded company with our common stock listed on The NASDAQ Global Select Market under the
symbol “BSVN”.
Factors Affecting Comparability of Financial Results
S Corporation Status
Since our formation in 2004, we have elected to be taxed for U.S. federal income tax purposes as an S Corporation. As a
result, our net income has not been subject to, and we have not paid, U.S. federal or state income taxes, and we have not been
required to make any provision or recognize any liability for U.S. federal income tax in our financial statements. The
consummation of our initial public offering resulted in the termination of our status as an S Corporation and in our taxation as a C
Corporation for U.S. federal and state income tax purposes. Upon the termination of our status as an S Corporation, we
commenced paying U.S. federal income tax on our pre-tax net income for each year (including the short year beginning on the
date our status as an S Corporation terminated), and our financial statements reflect a provision for U.S. federal income tax. As a
result of this change, the net income and earnings per share data presented in our historical financial statements and the other
financial information set forth in this report (unless otherwise specified), which do not include any provision for U.S. federal
income tax, will not be comparable with our future net income and earnings per share in periods after we commence to be taxed
as a C Corporation, which will be calculated by including a provision for U.S. federal and state income tax.
The termination of our status as an S Corporation may also affect our financial condition and cash flows. Historically, we
have made periodic cash distributions to our shareholders in amounts estimated by us to be sufficient for such shareholders to pay
their estimated individual U.S. federal income tax liability resulting from our taxable income that was “passed through” to them.
However, these distributions have not been consistent, as sometimes the distributions have been in excess of the shareholder’s
estimated individual U.S. federal income tax liability resulting from the ownership of our shares. In addition, these estimates have
been based on individual U.S. federal income tax rates, which may differ from the rates imposed on the income of C
Corporations. With the termination of our status as an S Corporation, no income will be “passed through” to any shareholders,
but, as noted above, we will commence paying U.S. federal income tax. The amounts that we have historically distributed to the
shareholders are not indicative of the amount of U.S. federal income tax that we will be required to pay after we commence to be
taxed as a C Corporation. Depending on our effective tax rate and our future dividend rate, if any, our future cash flows and
financial condition could be positively or adversely affected compared to our historical cash flows and financial condition.
Furthermore, deferred tax assets and liabilities will be recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of our existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of the change in tax
rates resulting from becoming a C Corporation were recognized in income in the quarter the change took place. This difference
between the financial statement carrying amounts of assets and liabilities and their respective tax bases was recorded as a net
deferred tax asset of $1.1 million (net of $13,000 uncertain tax liability) on our consolidated balance sheet as of December 31,
2019.
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Table of Contents
Pro Forma Income Tax Expense and Net Income
As a result of our status as an S Corporation, we had no U.S. federal income tax expense for the year ended December 31,
2017. Further, we do not have U.S. federal income tax expense for the full year ended December 31, 2018, but rather only for the
short year after conversion to C corporation status (as discussed earlier). The pro forma impact of being taxed as a C Corporation
is illustrated in the following table:
Before Taxes
Net income(1)
Pro forma C Corporation
Combined effective income tax rate(2)
Income tax provision
Net income
Total shareholders’ equity
Earnings per share (basic)
Earnings per share (diluted)
Return on average:
Assets
Shareholders’ equity
As of or for the
year ended
December 31,
2018
(Dollars in thousands)
2017
2019
$
15,069
$
25,797
$
23,789
$
45.42%
6,844
$
8,225
100,126
0.81
0.81
22.19%
5,720
$
20,077
88,466
2.48
2.44
1.03
8.42
2.75
25.69
39.97%
9,509
14,280
69,176
1.96
1.96
2.17
22.46
(1)
(2)
A portion of our net income in each of these periods was derived from nontaxable investment income and other nondeductible expenses.
Based on a statutory federal income tax rate of 21%, 21%, and 35% for the years ended December 31, 2019, 2018 and 2017, respectively, plus the
applicable statutory state income tax rate for each of the respective periods. State income tax expense would have been approximately:
-
-
-
$1.2 million for the year ended December 31, 2019 with an effective state tax rate of 4.4%
$1.3 million for the year ended December 31, 2018 with an effective state tax rate of 4.9%
$1.3 million for the year ended December 31, 2017 with an effective state tax rate of 5.4%
2019 Highlights
For the year ended December 31, 2019, we reported pre-tax net income of $15.0 million compared to pre-tax net income
of $25.8 million for the year ended December 31, 2018. The decrease was related to compensation expense from the one-time,
non-cash executive stock transaction. For the year ended December 31, 2019, average loans totaled $636.3 million, an increase
of $52.5 million or 9.0%, from December 31, 2018. For the year ended December 31, 2019, loan yields, excluding loan fee
income, were 6.88%, an increase of 17 basis points from the same period in 2018. Loan yield excluding loan fee income is a
non-GAAP measure. See “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” elsewhere in
this report.
Pre-tax return on average assets and return on average equity was 1.88% and 15.44%, respectively for the year ended
December 31, 2019, as compared to 3.53% and 33.01%, respectively, for the same period in 2018. Our efficiency ratio for the
year ended December 31, 2019 was 65.39% as compared to 37.04% for the year ended December 31, 2018.
As of December 31, 2019, total loans were $707.3 million, an increase of $107.4 million, or 17.9%, from December 31,
2018. Total deposits were $757.5 million as of December 31, 2019, an increase of $81.6 million, or 12.1%, from December 31,
2018. Tangible book value per share was $9.78 as of December 31, 2019, an increase of $1.29, or 15.2%, from December 31,
2018. Tangible book value per share is a non-GAAP financial measure. See “GAAP Reconciliation and Management Explanation
of Non-GAAP Financial Measures” elsewhere in this report.
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Table of Contents
Results of Operations
Years Ended December 31, 2019, December 31, 2018, and December 31, 2017
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.
2019
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
For the Years Ended December 31,
2018
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
2017
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest-earning assets:
Short-term investments(1)
Investment securities(2)
Loans held for sale
Total loans(3)
Total interest-earning assets
Noninterest-earning assets
Total assets
Funding sources:
Interest-bearing liabilities:
Deposits:
Transaction accounts
Time deposits
Total interest-bearing deposits
Other borrowings
Total interest-bearing liabilities
(Dollars in thousands)
1,065
236
$ 151,434 $ 3,459
50
$
$
—
$ 636,274 $ 48,200
$ 789,009 $ 51,709
$
9,519
$ 798,528
2.28% $ 136,880 $ 2,521
—
1,052
4.69% $
0.00% $
—
182
7.58% $ 583,821 $ 44,279
6.55% $ 721,935 $ 46,800
$
8,629
$ 730,564
1.84% $ 109,410 $ 1,420
—
1,045
0.00% $
0.00% $
—
224
7.58% $ 539,078 $ 41,450
6.48% $ 649,757 $ 42,870
$
7,811
$ 657,568
1.30%
0.00%
0.00%
7.69%
6.60%
$ 295,576 $ 5,057
$ 208,375 $ 4,459
$ 503,951 $ 9,516
$
—
— $
$ 503,951 $ 9,516
1.71% $ 240,881 $ 3,584
2.14% $ 220,023 $ 3,410
1.89% $ 460,904 $ 6,994
0.00% $
175
3,652 $
1.89% $ 464,556 $ 7,169
1.49% $ 242,790 $ 2,214
1.55% $ 200,513 $ 2,288
1.52% $ 443,303 $ 4,502
4.79% $
237
5,740 $
1.54% $ 449,043 $ 4,739
0.91%
1.14%
1.02%
4.13%
1.06%
Noninterest-bearing liabilities:
Noninterest-bearing deposits
Other noninterest-bearing liabilities
Total noninterest-bearing liabilities
Shareholders’ equity
Total liabilities and shareholders’
equity
$ 192,562
$
4,585
$ 197,147
$ 97,430
$ 798,528
$ 183,750
$
4,110
$ 187,860
$ 78,148
$ 730,564
$ 142,035
$
2,932
$ 144,967
$ 63,558
$ 657,568
Net interest income
Net interest spread(4)
Net interest margin
$ 42,193
$ 39,631
$ 38,131
4.67%
5.35%
4.94%
5.49%
5.54%
5.87%
(1) Includes income and weighted average balances for fed funds sold, interest-earning deposits in banks and other miscellaneous interest-earning assets.
(2) Includes income and weighted average balances for FHLB and FRB stock.
(3) Average loan balances include monthly average nonaccrual loans of $2.1 million, $991,000 and $2.6 million for the years ended December 31, 2019,
2018 and 2017, respectively.
(4) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
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Table of Contents
We continued to experience strong asset growth for the year ended December 31, 2019 compared to the year ended
December 31, 2018:
-
-
-
-
Total interest income on loans increased $3.9 million, or 8.9%, to $48.2 million which was attributable to a $52.5 million increase in the
average balance of loans to $636.3 million during the year ended 2019 as compared with the average balance of $583.8 million for the year
ended 2018;
Loan fees totaled $4.4 million, a decrease of $678,000 or 13.2% which was attributable to nonrecurring loan fee income earned during the
year ended 2018 as compared to 2019;
Yields on our interest-earning assets totaled 6.55%, an increase of 7 basis points; and
Net interest margin for the year ended 2019 and 2018 was 5.35% and 5.49%, respectively.
For the year ended December 31, 2018 compared to the year ended December 31, 2017:
-
-
-
-
Total interest income on loans increased $2.8 million, or 6.8%, to $44.3 million which was attributable to a $44.7 million increase in the
average balance of loans to $583.8 million during the year ended 2018 as compared with the average balance of $539.1 million for the year
ended 2017;
Loan fees totaled $5.1 million, a decrease of $3.2 million or 38.5% which was attributable to nonrecurring loan fee income earned during the
year ended 2017 as compared to 2018;
Yields on our interest-earning assets totaled 6.48%, a decrease of 12 basis points which was attributable to the $3.2 million decrease in
nonrecurring loan fee income earned during the year ended 2018; and
Net interest margin for the year ended 2018 and 2017 was 5.49% and 5.87%, respectively.
Interest income on short-term investments increased $938,000, or 37.21%, to $3.5 million for year ended December 31,
2019, due to an increase in the average balances of $14.5 million, or 10.63% and a yield increase of 44 basis points. Interest
income on short-term investments increased $1.1 million, or 77.54%, to $2.5 million for the year ended December 31, 2018, due
to an increase in the average balances of $27.4 million, or 25.11%, and a yield increase of 54 basis points.
Interest expense on interest-bearing deposits totaled $9.5 million for the year ended December 31, 2019, compared to $7.0
million for 2018, an increase of $2.5 million, or 36.06%. The increase was related to average daily interest bearing deposit
balances increasing by $43.0 million or 9.34% while the cost of interest-bearing deposits grew to 1.89% for the year ended
December 31, 2019 from 1.52% for the year ended December 31, 2018. Interest expense on interest-bearing deposits totaled $7.0
million for the year ended December 31, 2018, compared to $4.5 million for 2017, an increase of $2.5 million, or 55.35%. The
increase was related to average daily interest bearing deposit balances increasing by $17.6 million or 3.97% while the cost of
interest-bearing deposits grew to 1.52% for the year ended December 31, 2018 from 1.02% for the year ended December 31,
2017.
Net interest margin, including loan fee income, for the years ended December 31, 2019, 2018 and 2017 was 5.35%,
5.49% and 5.87%, respectively. Our net interest margin has decreased from 2017 and 2018 levels due to larger loan fee income in
prior years. Excluding our loan fee income, net interest margin for the years ended December 31, 2019, 2018 and 2017 was
4.78%, 4.78% and 4.59%, respectively. Net interest margin excluding loan fee income is a non-GAAP measure. See “GAAP
Reconciliation and Management Explanation of Non-GAAP Financial Measures” elsewhere in this report.
The following table sets 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).
38
Table of Contents
For the Year Ended
December 31, 2019 vs. 2018
Change due to:
For the Year Ended
December 31, 2018 vs. 2017
Change due to:
Volume(1)
Rate(1)
(Dollars in thousands)
Interest
Variance
Volume(1)
Rate(1)
Interest
Variance
Increase (decrease) in interest income:
Short-term investments
Investment securities
Total loans
Total increase in interest income
Increase (decrease) in interest expense:
Deposits:
Transaction accounts
Time deposits
Total interest-bearing deposits
Other borrowings
Total interest-bearing liabilities
Increase in net interest income
$
$
$
$
$
$
$
$
$
268 $
--- $
3,978 $
4,246 $
814 $
(181) $
633 $
---
633 $
670 $
50 $
(57) $
663 $
659 $
1,230 $
1,889 $
(175)
1,714 $
938 $
50 $
3,921 $
4,909 $
1,473 $
1,049 $
2,522 $
(175)
2,347 $
357 $
--- $
3,440 $
3,797 $
(17) $
223 $
205 $
(86)
119 $
744 $
--- $
(611) $
133 $
1,387 $
899 $
2,287 $
24
2,311 $
1,101
---
2,829
3,930
1,370
1,122
2,492
(62)
2,430
3,613 $
(1,051) $
2,562 $
3,678 $
(2,178) $
1,500
(1) Variances attributable to both volume and rate are allocated on a consistent basis between rate and volume based on the
absolute value of the variances in each category.
Provision for Loan Losses
For the year ended December 31, 2019 compared to the year ended December 31, 2018:
-
-
The provision for loan losses decreased by $200,000, or 100%, to $0; and
The allowance as a percentage of loans decreased by 20 basis points to 1.11%.
For the year ended December 31, 2018 compared to the year ended December 31, 2017:
-
-
The provision for loan losses decreased by $1 million, or 83.95%, to $200,000; and
The allowance as a percentage of loans decreased by 5 basis points to 1.31%.
Noninterest Income
Noninterest income for the year ended December 31, 2019 was $1.3 million compared to $1.3 million for the year ended
December 31, 2018, a decrease of $23,000, or 1.73%. Noninterest income for the year ended December 31, 2018 was $1.3
million compared to $1.4 million for the year ended December 31, 2017, a decrease of $104,000, or 7.25%. The following table
sets forth the major components of our noninterest income for the years ended December 31, 2019, 2018 and 2017:
For the Years Ended
December 31,
For the Years Ended
December 31,
2019
2018
$ Increase
(Decrease)
% Increase
(Decrease)
2018
2017
$ Increase
(Decrease)
% Increase
(Decrease)
(Dollars in thousands)
(Dollars in thousands)
Noninterest income:
Service charges on deposit
accounts
Gain on sale of loans
Other income and fees
Total noninterest income
$
$
$
$
392 $
164 $
752 $
1,308 $
347 $
212 $
772 $
1,331 $
(48)
45
(20)
(23)
(22.64%) $
12.97% $
(2.59%) $
(1.73%) $
347 $
212 $
772 $
1,331 $
336 $
183 $
916 $
1,435 $
11
29
(144)
(104)
3.27%
15.85%
(15.72%)
(7.25%)
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Table of Contents
Noninterest Expense
Noninterest expense for the year ended December 31, 2019 was $28.4 compared to $15.0 million for the year ended
December 31, 2018, an increase of $13.5 million or 90.0%. Noninterest expense for the year ended December 31, 2018 was
$15.0 compared to $14.5 million for the year ended December 31, 2017, an increase of $434,000, or 3.0%. The following table
sets forth the major components of our noninterest expense for the years ended December 31, 2019, 2018 and 2017:
For the Years Ended
December 31,
For the Years Ended
December 31,
2019
2018
$ Increase
(Decrease)
% Increase
(Decrease)
2018
2017
$ Increase
(Decrease)
% Increase
(Decrease)
(Dollars in thousands)
(Dollars in thousands)
21,265 $
829
1,677
1,078
8,113 $
684
1,105
966
13,152
145
572
112
162.11% $
21.20%
51.76%
11.59%
8,113 $
684
1,105
966
7,611 $
831
1,049
891
502
(147)
56
75
6.60%
(17.69%)
5.34%
8.42%
757
126
305
542
452
(416)
148.20%
(76.75%)
305
542
284
450
21
92
7.39%
20.44%
588
553
35
6.33%
553
433
120
27.71%
368
1,744
28,432 $
699
1,998
14,965 $
(331)
(254)
13,467
(47.35%)
(12.71%)
89.99% $
699
1,998
14,965 $
1,041
1,941
14,531 $
(342)
57
434
(32.85%)
2.94%
2.99%
Noninterest expense:
Salaries and employee
benefits
$
Furniture and equipment
Occupancy
Data and item processing
Accounting, legal and
professional fees
Regulatory assessments
Advertising and public
relations
Travel, lodging and
entertainment
Other expense
Total noninterest expense
$
For the year ended December 31, 2019 compared to the year ended December 31, 2018:
-
-
-
Salaries and employee benefits expense was $21.3 million compared to $8.1 million, an increase of $13.2 million, or 162.1%. The increase in
2019 was attributable to our one-time non-cash executive stock transaction.
Occupancy expense was $1.7 million compared to $1.1 million, an increase of $572,000, or 51.8%. The increase in 2019 was primarily due
to the renovation of our headquarters and the expansion into two new markets.
Accounting, legal and professional fees were $757,000 compared to $305,000, an increase of $452,000, or 148.2%. The increase was
primarily due to 2019 being our first full year as a public company.
For the year ended December 31, 2018 compared to the year ended December 31, 2017:
-
-
-
-
Salaries and employee benefits expense was $8.1 million compared to $7.6 million, an increase of $502,000, or 6.6%. The increase in 2018
was attributable to higher salaries and incentive compensation expense.
Furniture and equipment expense was $684,000 compared to $831,000, a decrease of $147,000, or 17.7%. The decrease in 2018 was
primarily due to lower bank vehicle expenses compared to 2017.
Regulatory assessments totaled $542,000 compared to $450,000, an increase of $92,000, or 20.4%. The change came primarily from FDIC
assessments that totaled $440,000 in 2018 compared to $394,000 in 2017, an increase of $46,000, or 11.7%. The increase is due to a higher
assessment associated with an increase in deposits accounts due to organic growth and expansion into the Texas market.
Travel, lodging and entertainment expense was $699,000 compared to $1.0 million, a decrease of $342,000, or 32.9%. The decrease in 2018
was primarily due to lower aircraft expenses as the aircraft was sold at the end of the third quarter of 2018.
40
Table of Contents
Financial Condition
The following discussion of our financial condition compares December 31, 2019, 2018, and 2017.
Total Assets
Total assets increased $95.9 million, or 12.4%, to $886.4 million as of December 31, 2019, as compared to $770.5 million
as of December 31, 2018 and $703.6 million as of December 31, 2017. The increasing trend in total assets is primarily
attributable to strong organic loan and retail deposit growth within the Oklahoma City market and expansion into the Dallas/Fort
Worth metropolitan area.
Loan Portfolio
Our loans represent the largest portion of our earning assets. The quality and diversification of the loan portfolio is an
important consideration when reviewing our financial condition. As of December 31, 2019, 2018 and 2017, our gross loans were
$708.7 million, $601.9 million and $564.6 million, respectively.
The following table presents the balance and associated percentage of each major category in our loan portfolio as of
December 31, 2019, December 31, 2018 and December 31, 2017:
As of December 31,
2019
% of Total
Amount
As of December 31,
2018
% of Total
Amount
(Dollars in thousands)
As of December 31,
2017
% of Total
Amount
Construction & development
1-4 family real estate
Commercial real estate - other
Total real estate
Commercial & industrial
Agricultural
Consumer
Gross loans
Less deferred loan fees, net
Total loans
Allowance for loan and lease losses
$
70,628
34,160
273,278
378,066
260,762
57,945
11,895
708,668
(1,364)
707,304
(7,846)
10.0% $
4.8
38.5
53.3
36.8
8.2
1.7
100.0%
87,267
33,278
156,396
276,941
248,394
62,844
13,723
601,902
(1,992)
599,910
(7,832)
14.5% $
5.5
26.0
46.0
41.3
10.4
2.3
100.0%
103,787
31,778
137,534
273,099
204,976
74,871
11,631
564,577
(1,576)
563,001
(7,654)
Net loans
$
699,458
$
592,078
$
555,347
18.4%
5.6
24.4
48.4
36.3
13.3
2.1
100.0%
We have established internal concentration limits in the loan portfolio for 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, and we further stress test the debt service under higher interest rate
scenarios. Financial and performance covenants are used in commercial lending to allow us to react to a borrower’s deteriorating
financial condition, should that occur.
41
Table of Contents
The following tables show the contractual maturities of our gross loans as of the periods below:
Due in One Year or Less
Fixed
Rate
Adjustable
Rate
As of December 31, 2019
Due after One Year
Through Five Years
Fixed
Rate
Adjustable
Rate
(Dollars in thousands)
Due after Five Years
Fixed
Rate
Adjustable
Rate
Total
$
Construction &
development
1-4 family real estate
Commercial real estate -
other
Total real estate
Commercial & industrial
Agricultural
Consumer
Gross loans
$
$
—
282
31,860
9,598
$
$
833
3,843
37,483
19,676
$
$
—
43
$
452
718
1,849
2,131
11,677
3,947
2,042
19,797
$
23.533
64,991
176,329
34,875
—
276,195
$
23,194
27,870
9,973
2,786
4,824
45,453
$
219,390
276,549
54,233
13,055
159
343,996
$
335
378
12
1,319
4,047
5,756
$
4,977
6,147
8,538
1,963
823
17,471
$
70,628
34,160
273,278
378,066
260,762
57,945
11,895
708,668
Due in One Year or Less
Fixed
Rate
Adjustable
Rate
As of December 31, 2018
Due after One Year
Through Five Years
Fixed
Rate
Adjustable
Rate
(Dollars in thousands)
Due after Five Years
Fixed
Rate
Adjustable
Rate
Total
Construction &
development
$
1-4 family real estate
Commercial real estate -
other
Total real estate
Commercial & industrial
Agricultural
Consumer
Gross loans
$
741 $
682
457
1,880
13,725
4,474
2,688
22,767 $
29,412 $
19,866
14,280
63,558
153,891
32,496
---
249,945 $
56,497 $
10,934
134,090
201,521
66,631
17,669
50
285,871 $
--- $
---
2,197
2,197
14
1,374
4,453
8,038 $
--- $
153
5,089
5,242
6,255
2,747
1,089
15,333 $
87,267
33,278
156,396
276,941
248,394
62,844
13,723
601,902
617 $
1,643 $
283 $
2,543
7,878
4,084
5,443
19,948 $
42
Table of Contents
Construction &
development
1-4 family real estate
Commercial real estate -
other
Total real estate
Commercial & industrial
Agricultural
Consumer
Gross loans
$
Due in One Year or Less
Fixed
Rate
Adjustable
Rate
As of December 31, 2017
Due after One Year
Through Five Years
Fixed
Rate
Adjustable
Rate
(Dollars in thousands)
Due after Five Years
Fixed
Rate
Adjustable
Rate
Total
$
$
1,699
1,877
45,186
14,671
$
$
3,006
1,734
53,850
13,235
$
$
—
43
$
46
218
5,619
9,195
45,182
3,495
2,608
60,480
$
13,505
73,362
108,921
37,335
126
219,744
$
1,221
5,961
5,895
6,956
6,221
25,033
$
108,832
175,917
27,169
20,927
665
224,678
$
2,445
2,488
704
2,743
1,391
7,326
$
5,912
6,176
17,105
3,415
620
27,316
$
103,787
31,778
137,534
273,099
204,976
74,871
11,631
564,577
Allowance for Loan and Lease Losses
The allowance is based on management’s estimate of probable losses inherent in the loan portfolio. In the opinion of
management, the allowance is adequate to absorb estimated losses in the portfolio as of each balance sheet date. While
management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions. 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. 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.
The allowance was $7.8 million at December 31, 2019, $7.8 million at December 31, 2018 and $7.7 million at December
31, 2017. The increasing trend was related to, and in conjunction with, loan growth.
43
Table of Contents
The following table provides an analysis of the activity in our allowance for the periods indicated:
Balance at beginning of the period
Provision for loan losses
Charge-offs:
Construction & development
1-4 family real estate
Commercial real estate - other
Commercial & industrial
Agricultural
Consumer
Total charge-offs
Recoveries:
Construction & development
1-4 family real estate
Commercial real estate - other
Commercial & industrial
Agricultural
Consumer
Total recoveries
Net charge-offs
Balance at end of the period
$
$
2019
For the Year Ended
December 31,
2018
(Dollars in thousands)
$
$
7,654
200
7,832
—
—
(2)
—
(4)
(11)
(1)
(18)
—
5
—
24
3
—
32
14
7,846
$
—
(25)
—
(73)
—
—
(98)
—
3
—
71
1
1
76
(22)
$
7,832
2017
6,873
1,246
—
—
(224)
(242)
—
(46)
(512)
—
23
6
6
—
12
47
(465)
7,654
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:
2019
Amount
Percent
As of December 31,
2018
Amount
Percent
(Dollars in thousands)
2017
Amount
Percent
$
$
782
378
3,025
2,887
642
132
7,846
9.97% $
4.82%
38.55%
36.80%
8.18%
1.68%
100.0% $
1,136
433
2,035
3,231
818
179
7,832
14.50% $
5.53%
25.98%
41.26%
10.44%
2.29%
100.0% $
1,407
431
1,865
2,779
1,015
157
7,654
18.38%
5.63%
24.37%
36.31%
13.26%
2.05%
100.0%
Construction & development
1-4 family real estate
Commercial real estate - other
Commercial & industrial
Agricultural
Consumer
Total
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.
44
Table of Contents
A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and loans modified in a troubled debt
restructuring, or TDR. Income from a loan on nonaccrual status is recognized to the extent cash is received and when the loan’s
principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based
upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable
market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered
collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is
determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted
based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan
monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual
market for the collateral. The impairment amount on a collateral dependent loan is charged off to the allowance if deemed not
collectible and the impairment amount on a loan that is not collateral dependent is set up as a specific reserve.
In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to
contractual terms, the loan is classified as a TDR. Included in certain loan categories of impaired loans are TDRs on which we
have granted certain material concessions to the borrower as a result of the borrower experiencing financial difficulties. The
concessions granted by us may include, but are not limited to: (1) a modification in which the maturity date, timing of payments
or frequency of payments is modified, (2) an interest rate lower than the current market rate for new loans with similar risk, or (3)
a combination of the first two concessions.
If a borrower on a restructured accruing loan has demonstrated performance under the previous terms, is not experiencing
financial difficulty and shows the capacity to continue to perform under the restructured terms, the loan will remain on accrual
status. Otherwise, the loan will be placed on nonaccrual status until the borrower demonstrates a sustained period of performance,
which generally requires six consecutive months of payments. Loans identified as TDRs are evaluated for impairment using the
present value of the expected cash flows or the estimated fair value of the collateral, if the loan is collateral dependent. The fair
value is determined, when possible, by an appraisal of the property less estimated costs related to liquidation of the collateral.
The appraisal amount may also be adjusted for current market conditions. Adjustments to reflect the present value of the expected
cash flows or the estimated fair value of collateral dependent loans are a component in determining an appropriate allowance, and
as such, may result in increases or decreases to the provision for loan losses in current and future earnings.
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned,
or OREO, until sold, and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.
Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans
modified under TDRs that are not performing in accordance with their modified terms. Nonperforming assets consist of
nonperforming loans plus OREO. Loans accounted for on a nonaccrual basis were $1.8 million as of December 31, 2019, $2.6
million as of December 31, 2018 and $1.2 million as of December 31, 2017. The gross balance of loans accounted for on a
nonaccrual basis at December 31, 2019 was $1.8 million; however, this amount includes one relationship with a balance of $1.8
million, of which 75% is guaranteed by the Small Business Administration (“SBA”). OREO was $0 as of December 31, 2019,
$110,000 as of December 31, 2018 and $100,000 as of December 31, 2017.
45
Table of Contents
The following table presents information regarding nonperforming assets as of the dates indicated.
2019
As of
December 31,
2018
(Dollars in thousands)
$
$
Nonaccrual loans
Troubled debt restructurings
Accruing loans 90 or more days past due
Total nonperforming loans
Other real estate owned
Total nonperforming assets
Ratio of nonperforming loans to total loans
Ratio of nonperforming assets to total assets
$
$
The following tables present an aging analysis of loans as of the dates indicated.
1,809
912
612
3,333
—
3,333
2,615
-
-
2,615
110
2,725
$
$
0.47%
0.38%
0.44%
0.35%
2017
1,217
675
—
1,892
100
1,992
0.34%
0.28%
Construction & development
1-4 family real estate
Commercial real estate - other
Commercial & industrial
Agricultural
Consumer
Total
Construction & development
1-4 family real estate
Commercial real estate - other
Commercial & industrial
Agricultural
Consumer
Total
$
$
$
$
Loans
30-59 days
past due
Loans
60-89 days
past due
—
—
—
—
—
90
90
$
$
—
—
—
—
—
—
0
$
$
Loans
30-59 days
past due
Loans
60-89 days
past due
As of December 31, 2019
Total Loans
90+ days and
accruing
Loans
90+ days
past due
Total past
due
Loans
Current
Loans
Gross
Loans
$
(Dollars in thousands)
$
—
—
—
14
598
—
612
—
—
—
14
598
—
612
$
$
—
—
—
14
598
90
702
$
$
70,628
34,160
273,278
260,748
57,347
11,805
707,966
$
$
70,628
34,160
273,278
260,762
57,945
11,895
708,668
As of December 31, 2018
Total Loans
90+ days and
accruing
Loans
90+ days
past due
Total past
due
Loans
Current
Loans
Gross
Loans
(Dollars in thousands)
- $
-
-
-
-
-
0 $
- $
-
-
-
-
-
0 $
- $
8
-
5
-
41
54 $
87,267 $
33,270
156,396
248,389
62,844
13,682
601,848 $
87,267
33,278
156,396
248,394
62,844
13,723
601,902
- $
8
-
-
-
41
49 $
- $
-
-
5
-
-
5 $
46
Table of Contents
Loans
30-59 days
past due
Loans
60-89 days
past due
As of December 31, 2017
Total Loans
90+ days and
accruing
Loans
90+ days
past due
Total past
due
Loans
Current
Loans
Gross
Loans
Construction & development
1-4 family real estate
Commercial real estate - other
Commercial & industrial
Agricultural
Consumer
Total
$
$
— $
—
—
2
—
54
56 $
— $
—
—
—
—
—
— $
(Dollars in thousands)
— $
— $
—
111
—
—
—
—
—
—
—
—
— $
111 $
— $
111
—
2
—
54
167 $
103,787 $
31,667
137,534
204,974
74,871
11,577
564,410 $
103,787
31,778
137,534
204,976
74,871
11,631
564,577
In addition to the past due and nonaccrual criteria, the Company also evaluates loans according to its internal risk grading
system. Loans are segregated between pass, watch, special mention, and substandard categories. The definitions of those
categories are as follows:
In addition to the past due and nonaccrual criteria, the Company also evaluates loans according to its internal risk grading
system. Loans are segregated between pass, watch, special mention, and substandard categories. The definitions of those
categories are as follows:
Pass: These loans generally conform to Bank policies, are characterized by policy-conforming advance rates on collateral,
and have well-defined repayment sources. In addition, these credits are extended to borrowers and guarantors with a strong
balance sheet and either substantial liquidity or a reliable income history.
Watch: These loans are still considered “Pass” credits; however, various factors such as industry stress, material changes
in cash flow or financial conditions, or deficiencies in loan documentation, or other risk issues determined by the lending officer,
Commercial Loan Committee or CQC warrant a heightened sense and frequency of monitoring.
Special mention: These loans 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 “Watch” or “Substandard” as this is viewed as a transitory loan grade.
Substandard: These loans are not adequately protected by the sound worth and debt service capacity of the borrower, but
may be well-secured. The loans have defined weaknesses relative to cash flow, collateral, financial condition or other factors that
might jeopardize repayment of all of the principal and interest on a timely basis. There is the possibility that a future loss will
occur if weaknesses are not remediated.
Substandard loans totaled $11.1 million as of December 31, 2019, an increase of $2.0 million compared to December 31,
2018. The increase primarily related to one agricultural relationship comprised of four notes totaling $1.8 million with no specific
reserve, one agricultural relationship comprised of three notes totaling $555,000 with no specific reserve, one mixed relationship
comprised of eight notes totaling $4.2 million with no specific reserve, and one mixed relationship comprised of four notes
totaling $2.8 million with no specific reserve.
47
Table of Contents
Outstanding loan balances categorized by internal risk grades as of the periods indicated are summarized as follows:
As of December 31, 2019
Pass
Watch
Construction & development
1-4 family real estate
Commercial real estate - other
Commercial & industrial
Agricultural
Consumer
Total
Construction & development
1-4 family real estate
Commercial real estate - other
Commercial & industrial
Agricultural
Consumer
Total
Construction & development
1-4 family real estate
Commercial real estate - other
Commercial & industrial
Agricultural
Consumer
Total
Troubled Debt Restructurings
$
$
$
$
$
$
70,628 $
33,622
267,437
241,176
53,290
11,895
678,048 $
84,485 $
29,942
154,353
204,671
57,782
13,723
544,956 $
103,787 $
23,011
127,771
192,035
64,990
11,555
523,149 $
Pass
Watch
Pass
Watch
Special mention Substandard
(Dollars in thousands)
— $
—
—
11,524
2,128
—
13,652 $
— $
—
5,841
2,750
2,527
—
11,118 $
— $
538
—
5,312
—
—
5,850 $
As of December 31, 2018
Special mention Substandard
(Dollars in thousands)
— $
—
—
—
3,207
—
3,207 $
— $
115
484
7,381
1,097
—
9,077 $
2,782 $
3,221
1,559
36,342
758
—
44,662 $
As of December 31, 2017
Special mention Substandard
(Dollars in thousands)
— $
—
—
4,146
7,228
—
11,374 $
— $
111
675
1,031
2,563
76
4,456 $
— $
8,656
9,088
7,764
90
—
25,598 $
Total
70,628
34,160
273,278
260,762
57,945
11,895
708,668
Total
87,267
33,278
156,396
248,394
62,844
13,723
601,902
Total
103,787
31,778
137,534
204,976
74,871
11,631
564,577
TDRs are defined as those loans in which a bank, for economic or legal reasons related to a borrower’s financial
difficulties, grants a concession to the borrower that it would not otherwise consider. A loan is considered impaired when, based
on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in
accordance with original contractual terms of the loan. Loans with insignificant delays or insignificant short-falls in the amount
of payments expected to be collected are not considered to be impaired. Loans defined as individually impaired, based on
applicable accounting guidance, include larger balance nonperforming loans and TDRs.
48
Table of Contents
The following table presents loans restructured as TDRs as of December 31, 2019, December 31, 2018 and December 31,
2017.
Commercial real estate - other
Agricultural
Total
Commercial & industrial
Total
Commercial real estate - other
Commercial & industrial
Total
As of December 31, 2019
Number of
Contracts
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
Specific Reserves
Allocated
1 $
2
3 $
(Dollars in thousands)
1,809 $
912
2,721 $
1,809 $
912
2,721 $
26
-
26
As of December 31, 2018
Number of
Contracts
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
Specific Reserves
Allocated
1 $
1 $
(Dollars in thousands)
501 $
501 $
501 $
501 $
-
-
As of December 31, 2017
Number of
Contracts
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
Specific Reserves
Allocated
1 $
1
2 $
(Dollars in thousands)
675 $
861
1,536 $
675 $
861
1,536 $
300
-
300
There were no payment defaults with respect to loans modified as TDRs as of December 31, 2019, 2018, and 2017.
Impairment analyses are prepared on TDRs in conjunction with the normal allowance process. TDRs restructured during
the years ended December 31, 2019, 2018 and 2017 required $26,000, $0 and $300,000 in specific reserves, respectively. There
were no charge-offs on TDRs for the years ended December 31, 2019, 2018 or 2017.
The following table presents total TDRs, both in accrual and nonaccrual status as of the periods indicated:
Accrual
Nonaccrual
Total
As of December 31, 2019
As of December 31, 2018
As of December 31, 2017
Number of
Contracts
Amount
Number of
Contracts
Amount
Number of
Contracts
Amount
2 $
1
3 $
912
1,809
2,721
(Dollars in thousands)
- $
1
1 $
-
501
501
1 $
1
2 $
675
861
1,536
49
Table of Contents
Deposits
We gather deposits primarily through our seven branch locations and online though 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 were obtained through brokered transactions. We participate in the CDARS program, where customer funds are placed
into multiple certificates of deposit, 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 December 31, 2019, 2018 and 2017 were $757.5 million, $675.9 million and $625.8 million,
respectively. The following table sets forth deposit balances by certain categories as of the dates indicated and the percentage of
each deposit category to total deposits.
2019
Percentage
of
Total
Amount
As of December 31,
2018
Percentage
of
Total
(Dollars in thousands)
Amount
2017
Percentage
of
Total
Amount
$
219,221
29.0% $
201,159
29.8% $
165,911
26.5%
112,420
150,554
72,750
176,998
25,540
538,262
757,483
14.8
19.9
9.6
23.3
3.4
71.0
100.0%
91,896
118,150
69,548
167,304
27,846
474,744
675,903
13.6
17.5
10.3
24.8
4.1
70.2
100.0% $
74,870
56,671
85,000
213,575
29,804
459,920
625,831
12.0
9.1
13.6
34.1
4.8
73.5
100.0%
Noninterest-bearing demand
Interest-bearing:
NOW deposits
Money market
Savings deposits
Time deposits (more than $100,000)
Time deposits ($100,000 or less)
Total interest-bearing
Total deposits
$
The following table summarizes our average deposit balances and weighted average rates for the years ended December
31, 2019, 2018 and 2017:
2019
Weighted
Average
Rate
Average
Balance
As of the Year Ended
December 31,
2018
Average
Balance
Weighted
Average
Rate
(Dollars in thousands)
2017
Weighted
Average
Rate
Average
Balance
$
192,562
0.00% $
183,750
0.00% $
142,035
Noninterest-bearing demand
Interest-bearing:
NOW
Money market
Savings
Time
Total interest-bearing
Total deposits
$
95,694
132,265
67,617
208,375
503,951
696,513
1.83
1.83
1.30
2.14
1.89
1.37% $
50
71,384
90,230
79,267
220,023
460,904
644,654
1.56
1.65
1.23
1.55
1.52
1.08% $
134,351
29,961
78,477
200,513
443,302
585,337
0.00%
1.02
0.90
0.73
1.14
1.02
0.77%
Table of Contents
The following tables set forth the maturity of time deposits as of the dates indicated below:
(Dollars in thousands)
Time deposits ($100,000 or less)
Time deposits (more than $100,000)
Total time deposits
Time deposits ($100,000 or less)
Time deposits (more than $100,000)
Total time deposits
(Dollars in thousands)
Time deposits ($100,000 or less)
Time deposits (more than $100,000)
Total time deposits
Other Borrowed Funds
Three Months
$
$
6,998 $
52,048
59,046 $
Three Months
$
$
6,229 $
33,308
39,537 $
Three Months
$
$
7,615 $
25,436
33,051 $
Six Months
As of December 31, 2019 Maturity Within:
After
Six to
Three to
12 Months
12 Months
(Dollars in thousands)
8,387 $
49,700
58,087 $
5,024 $
34,126
39,150 $
8,231 $
38,024
46,255 $
Six Months
As of December 31, 2018 Maturity Within:
After
Six to
Three to
12 Months
12 Months
(Dollars in thousands)
10,342 $
71,827
82,169 $
4,791 $
41,193
45,984 $
6,484 $
20,976
27,460 $
Six Months
As of December 31, 2017 Maturity Within:
After
Six to
Three to
12 Months
12 Months
(Dollars in thousands)
8,243 $
94,473
102,716 $
4,710 $
46,661
51,371 $
9,236 $
47,005
56,241 $
Total
28,640
173,898
202,538
Total
27,846
167,304
195,150
Total
29,804
213,575
243,379
The Company had debt outstanding with The Bankers Bank of $5.6 million at December 31, 2017, secured by certain shares of
common stock of the Bank held by the Company. The purpose of this transaction was to facilitate the purchase of The
Montezuma State Bank in 2014 and to inject capital into the Bank. The remaining principal balance of the note, as well as the
accrued interest payable, was paid in full in September 2018.
Liquidity
Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the
same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our
liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash
requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate
balance between assets and liabilities to meet the return on investment objectives of our shareholders.
Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid
assets include cash, interest-bearing deposits in correspondent banks and fed funds sold. Other available sources of liquidity
include wholesale deposits and borrowings from correspondent banks and FHLB advances.
Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment
of prepaying and maturing balances in our loan portfolios, and increases in customer deposits. Other alternative sources of funds
will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or
long-term basis.
As of December 31, 2019, 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 $71.7 million as of December 31, 2019 and $66.3 million as of December 31, 2018.
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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), the Bank 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
required the Bank to maintain minimum amounts and ratios of Common Equity Tier 1, or CET1, capital, Tier 1 capital and total
capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, referred to as the “leverage ratio.” For further
information, see “Supervision and Regulation – Regulatory Capital Requirements” and “Supervision and Regulation – Prompt
Corrective Action Framework.”
In the wake of the global financial crisis of 2008 and 2009, the role of capital has become fundamentally more important,
as banking regulators have concluded that the amount and quality of capital held by banking organizations was insufficient to
absorb losses during periods of severely distressed economic conditions. The Dodd-Frank Act and banking regulations
promulgated by the U.S. federal banking regulators to implement Basel III have established strengthened capital standards for
banks and bank holding companies and require more capital to be held in the form of common stock. These provisions, which
generally became applicable to the Bank on January 1, 2015, impose meaningfully more stringent regulatory capital requirements
than those applicable to the Bank prior to that date. In addition, the Basel III regulations implement a concept known as the
“capital conservation buffer.” In general, banks, bank holding companies with more than $3.0 billion in assets and bank holding
companies with publicly-traded equity are required to hold a buffer of CET1 capital equal to 2.5% of risk-weighted assets over
each minimum capital ratio by January 1, 2019 in order to avoid being subject to limits on capital distributions (e.g., dividends,
stock buybacks, etc.) and certain discretionary bonus payments to executive officers. For community banks, such as us, the
capital conservation buffer requirement commenced on January 1, 2016, with a gradual phase-in. Full compliance with the capital
conservation buffer was required by January 1, 2019.
As of December 31, 2019, the FDIC categorized the Bank as “well-capitalized” under the prompt corrective action
framework. There have been no conditions or events since December 31, 2019 that management believes would change this
classification.
The table below also summarizes the capital requirements applicable to the Bank in order to be considered “well-
capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of December 31, 2019, 2018 and 2017. The
Bank exceeded all regulatory capital requirements under Basel III and the Bank was considered to be “well-capitalized” as of the
dates reflected in the tables below.
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Table of Contents
Actual
With
Capital Conservation
Buffer
Minimum
To be Considered
“Well-Capitalized”
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of December 31,
2019:
Total capital to
risk-weighted
assets
Company
Bank
Tier 1 capital to
risk-weighted
assets
Company
Bank
CET 1 capital to
risk-weighted
assets
Company
Bank
Tier 1 leverage
ratio
Company
Bank
$
105,137
106,148
15.25% $
15.42
72,393
72,287
10.500%
10.500
N/A
68,845
N/A
10.00
97,291
98,302
14.11
14.28
58,604
58,518
8.500
8.500
N/A
55,076
97,291
98,302
14.11
14.28
48,262
48,192
7.000
7.000
N/A
44,749
97,291
98,302
11.53
11.65
N/A
N/A
N/A
N/A
N/A
42,241
N/A
8.00
N/A
6.50
N/A
5.00
Actual
Amount
Ratio
With
Capital Conservation
Buffer
Amount
Ratio
(Dollars in thousands)
Minimum
To be Considered
“Well-Capitalized”
Amount
Ratio
$
As of December 31, 2018:
Total capital to risk-weighted assets
Company
Bank
Tier 1 capital to risk-weighted assets
Company
Bank
CET 1 capital to risk-weighted assets
Company
Bank
Tier 1 leverage ratio
Company
Bank
92,693
93,704
85,382
86,393
85,382
86,393
85,382
86,393
57,709
57,709
46,021
46,021
37,255
37,255
N/A
N/A
9.875%
9.875
7.875
7.875
6.375
6.375
N/A
N/A
N/A
58,439
N/A
46,751
N/A
37,985
N/A
38,355
N/A
10.00
N/A
8.00
N/A
6.50
N/A
5.00
15.86% $
16.03
14.61
14.78
14.61
14.78
11.13
11.26
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Table of Contents
Actual
Amount
Ratio
With
Capital Conservation
Buffer
Amount
Ratio
(Dollars in thousands)
Minimum
To be Considered
“Well-Capitalized”
Amount
Ratio
$
As of December 31, 2017:
Total capital to risk-weighted assets
Company
Bank
Tier 1 capital to risk-weighted assets
Company
Bank
CET 1 capital to risk-weighted assets
Company
Bank
Tier 1 leverage ratio
Company
Bank
74,140
79,740
66,928
75,528
66,928
75,528
66,928
75,528
12.86% $
13.83
11.61
12.58
11.61
12.58
9.72
10.53
53,331
53,330
41,800
41,799
33,152
33,151
N/A
N/A
9.250%
9.250
7.250
7.250
5.750
5.750
N/A
N/A
N/A
57,654
N/A
46,123
N/A
37,475
N/A
36,436
N/A
10.00
N/A
8.00
N/A
6.50
N/A
5.00
Shareholders’ equity provides a source of permanent funding, allows for future growth and provides a cushion to
withstand unforeseen adverse developments. Total shareholders’ equity increased to $100.1 million as of December 31, 2019,
compared to $88.5 million as of December 31, 2018 and $69.2 million as of December 31, 2017. The increases were driven by
retained capital from net income during the periods.
Contractual Obligations
The following tables contain supplemental information regarding our total contractual obligations as of December 31,
2019:
Deposits without a stated maturity
Time deposits
Borrowings
Operating lease commitments
Total contractual obligations
Within
One Year
$
$
554,945 $
156,283
-
623
711,851 $
Three Years
Payments Due as of December 31, 2019
After
Three to
One to
Five Years
Five Years
(Dollars in thousands)
- $
- $
1,945
44,310
-
-
49
845
1,994 $
45,155 $
Total
- $
-
-
-
- $
554,945
202,538
-
1,517
759,000
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate
cash levels. We expect to maintain adequate cash levels through profitability, loan repayment and maturity activity and continued
deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheet. The contractual or notional amounts of those instruments reflect the extent of involvement we have in
particular classes of financial instruments. To control this credit risk, the Company uses the same underwriting standards as it
uses for loans recorded on the balance sheet.
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Table of Contents
Loan commitments are agreements to lend to a customer, as long as there is no violation of any condition established in
the contract. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of the
customer to a third party. They are intended to be disbursed, subject to certain conditions, upon request of the borrower.
The following table summarizes commitments as of the dates presented.
Commitments to extend credit
Standby letters of credit
Total
Critical Accounting Policies and Estimates
$
$
2019
As of December 31,
2018
(Dollars in thousands)
135,015 $
1,078
136,093 $
191,459 $
3,338
194,797 $
2017
145,888
1,544
147,432
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 report, as well as any financial statements that we file in the future, will not be subject to all new or revised
accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging
growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.
The following is a discussion of the critical accounting policies and significant estimates that we believe require us to
make the most complex or subjective decisions or assessments. Additional information about these policies can be found in Note
1 of the Company’s consolidated financial statements as of December 31, 2019.
Allowance for Loan and Lease Losses
The allowance is based on management’s estimate of probable losses inherent in the loan portfolio. In the opinion of
management, the allowance is adequate to absorb estimated losses in the portfolio as of each balance sheet date. While
management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions and changes in the composition of the loan portfolio. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Bank’s allowance. In analyzing the adequacy of the
allowance, a comprehensive loan grading system to determine risk potential in loans is utilized together with the results of
internal credit reviews.
To determine the adequacy of the allowance, the loan portfolio is broken into segments based on loan type. 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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Table of Contents
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.
Goodwill and Intangibles
Goodwill from an acquisition is the value attributable to unidentifiable intangible elements acquired. At a minimum,
annual evaluation of the value of goodwill is required. Management evaluated the carrying value of the Company’s goodwill as
of December 31, 2019, 2018 and 2017, and determined that no impairment existed.
An entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. Factors assessed include all relevant events and circumstances including macroeconomic
conditions, industry and market conditions, cost factors that have a negative effect on earnings and cash flows, overall financial
performance, other relevant entity or reporting unit specific events and, if applicable, a sustained decrease in share price.
If after assessing the totality of events or circumstances, such as those described above, an entity determines that it is
more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity is to perform a two-step
impairment test.
The first step of the impairment test compares the fair value of a reporting unit with its carrying amount, including
goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is to be
performed to measure the amount of impairment loss, if any, when it is more likely than not that goodwill impairment exists.
Other intangible assets consist of core deposit intangible assets and are amortized on a straight-line basis based on the
estimated useful life of 10 years. Such assets are periodically evaluated as to the recoverability of their carrying values.
Income Taxes
The Company files a consolidated income tax return. Deferred taxes are recognized under the balance sheet method based
upon the future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities,
using the tax rates expected to apply to taxable income in the periods when the related temporary differences are expected to be
realized.
The amount of accrued current and deferred income taxes is based on estimates of taxes due or receivable from taxing
authorities either currently or in the future. Changes in these accruals are reported as tax expense, and involve estimates of the
various components included in determining taxable income, tax credits, other taxes and temporary differences. Changes
periodically occur in the estimates due to changes in tax rates, tax laws and regulations and implementation of new tax planning
strategies. The process of determining the accruals for income taxes necessarily involves the exercise of considerable judgment
and consideration of numerous subjective factors.
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Table of Contents
Management performs an analysis of the Company’s tax positions annually and believes it is more likely than not that all
of its tax positions will be utilized in future years.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurement, defines fair value as the price that would be received to sell a financial asset or
paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. The degree of
management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted
market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or
observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and
parameters are not available, management judgment is necessary to estimate fair value. In addition, changes in market conditions
may reduce the availability of quoted prices or the observable date.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our financial management
policy provides management with the guidelines for effective funds management, and we have established a measurement system
for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our
established guidelines.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets
and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a
short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic
losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to
measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time
maximizing income.
We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not
enter into instruments such as leveraged derivatives, financial options or financial future contracts to mitigate interest rate risk
from specific transactions. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price
risk. We do not own any trading assets.
Our exposure to interest rate risk is managed by the Asset/Liability Committee, or the ALCO Committee, in accordance
with policies approved by the Holding Company’s 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.
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Table of Contents
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:
Change in Interest Rates (Basis Points)
+400
+300
+200
+100
Base
-100
As of December 31,
2019
As of December 31,
2018
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
69.65%
51.57
33.39
14.91
(3.81)
(13.68)
21.41%
19.84
18.15
16.34
14.39
12.34
48.28%
35.66
22.99
10.17
(3.07)
(15.30)
22.97%
21.50
19.95
18.29
16.50
14.58
The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations.
We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and fed funds
rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The
assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net
interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will
differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in
market conditions and the application and timing of various strategies.
Impact of Inflation
Our consolidated financial statements and related notes included elsewhere in this Form 10-K 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.
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Table of Contents
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements Index
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2019 and 2018
Consolidated Statements of Income for each of the three years in the period ended December 31, 2019
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2019
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2019
Notes to Consolidated Financial Statements
59
Page
60
61
62
63
64
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Table of Contents
Report of Independent Registered Public Accounting Firm
Shareholders, Board of Directors
and Audit Committee
Bank7 Corp.
Oklahoma City, Oklahoma
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Bank7 Corp. (the Company) as of December 31, 2019 and
2018, the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over
financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2011.
/s/ BKD, LLP
Oklahoma City, Oklahoma
March 30, 2020
60
Bank7 Corp.
Consolidated Balance Sheets
(Dollar amounts in thousands)
Table of Contents
Assets
Cash and due from banks
Interest-bearing time deposits in other banks
Loans, net of allowance for loan losses of $7,846 and
$7,832 at December 31, 2019 and 2018, respectively
Loans held for sale
Premises and equipment, net
Nonmarketable equity securities
Foreclosed assets held for sale
Goodwill and intangibles
Interest receivable and other assets
Total assets
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing
Interest-bearing
Total deposits
Income taxes payable
Interest payable and other liabilities
Total liabilities
Shareholders’ equity
Preferred stock, par value $0.01 per share, 1,000,000
shares authorized; none issued or outstanding
Common stock, non-voting, par value $0.01 per share,
20,000,000 shares authorized; none issued or outstanding
Common stock, $0.01 par value; 50,000,000 shares authorized; shares
issued and outstanding: 10,057,506 and 10,187,500, respectively
Additional paid-in capital
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
See Notes to Consolidated Financial Statements
61
December 31,
2019
December 31,
2018
$
117,128
30,147
$
699,458
1,031
9,624
1,100
-
1,789
6,115
128,090
31,759
592,078
512
7,753
1,055
110
1,995
7,159
$
866,392
$
770,511
$
219,221
538,262
$
201,159
474,744
757,483
675,903
357
8,426
1,913
4,229
766,266
682,045
-
-
101
92,391
7,634
-
-
102
80,275
8,089
100,126
88,466
$
866,392
$
770,511
Table of Contents
Bank7 Corp.
Consolidated Statements of Income
(Dollar amounts in thousands, except per share data)
For the Years Ended December 31,
2018
2019
2017
Interest Income
Loans, including fees
Interest-bearing time deposits in other banks
Interest-bearing deposits in other banks
Total interest income
Interest Expense
Deposits
Other borrowings
Total interest expense
Net Interest Income
Provision for Loan Losses
$
$
48,200
1,709
1,800
$
44,279
588
1,933
41,450
592
828
51,709
46,800
42,870
9,516
-
9,516
6,994
175
7,169
4,502
237
4,739
42,193
39,631
38,131
-
200
1,246
Net Interest Income After Provision for Loan Losses
42,193
39,431
36,885
Noninterest Income
Secondary market income
Service charges on deposit accounts
Other
Total noninterest income
Noninterest Expense
Salaries and employee benefits
Furniture and equipment
Occupancy
Data and item processing
Accounting, marketing and legal fees
Regulatory assessments
Advertising and public relations
Travel, lodging and entertainment
Other
Total noninterest expense
Income Before Taxes
Income tax expense
Net Income
Earnings per common share - basic
Earnings per common share - diluted
Weighted average common shares outstanding - basic
Weighted average common shares outstanding - diluted
See Notes to Consolidated Financial Statements
62
164
392
752
212
347
772
183
336
916
1,308
1,331
1,435
21,265
829
1,677
1,078
757
126
588
368
1,744
8,113
684
1,310
966
305
542
553
699
1,793
7,611
831
1,049
891
284
450
433
1,041
1,941
28,432
14,965
14,531
$
$
15,069
6,844
8,225
0.81
0.81
10,145,032
10,147,311
$
$
25,797
797
25,000
3.08
3.03
8,105,856
8,237,638
$
$
23,789
-
23,789
3.26
3.26
7,287,500
7,287,500
Table of Contents
Bank7 Corp.
Consolidated Statements of Shareholders’ Equity
(Dollar Amounts in thousands, except share data)
Common Stock (Shares)
Balance at beginning of period
Common stock issued
Shares issued for restricted stock units
Shares acquired and canceled
Balance at end of period
Common Stock (Amount)
Balance at beginning of period
Shares issued, net of offering costs
Shares acquired and canceled
Balance at end of period
Additional Paid-in Capital
Balance at beginning of period
Capital contribution
Shares issued, net of offering costs
Reclassification of undistributed S Corporation earnings
Stock-based compensation expense
Balance at end of period
Retained Earnings
Balance at beginning of period
Net income
Reclassification of undistributed S Corporation earnings
Common stock acquired and canceled
Cash dividends declared ($0.60, $7.71, $1.34 per share)
Balance at end of period
Total shareholders' equity
See Notes to Consolidated Financial Statements
63
Year Ended December 31,
2018
2019
2017
10,187,500
-
19,431
(149,425)
10,057,506
7,287,500
2,900,000
-
-
10,187,500
7,287,500
-
-
-
7,287,500
$
$
$
$
$
$
$
102
-
(1)
101
80,275
-
-
-
12,116
92,391
8,089
8,225
-
(2,645)
(6,035)
7,634
$
$
$
$
$
$
73
29
-
102
6,987
137
50,125
22,872
154
80,275
$
$
$
$
$
62,116
25,000
(22,872)
-
(56,155)
$
8,089
73
-
-
73
6,987
-
-
-
-
6,987
48,076
23,789
-
-
(9,749)
62,116
100,126
$
88,466
$
69,176
Table of Contents
Bank7 Corp.
Consolidated Statements of Cash Flows
(Dollar Amounts in thousands)
For the Years Ended December 31,
2018
2019
2017
Operating Activities
Net income
Items not requiring (providing) cash
Depreciation and amortization
Provision for loan losses
Net increase on other real estate owned
Gain on sales of loans
Stock-based compensation expense
Loss on sale of premises and equipment
Cash receipts from the sale of loans originated for sale
Cash disbursements for loans originated for sale
(Gain) loss on sale of other real estate owned
Deferred income tax benefit
Changes in
Interest receivable and other assets
Interest payable and other liabilities
$
8,225 $
25,000 $
23,789
849
-
-
(164)
12,116
183
7,697
(8,052)
(330)
(20)
1,064
(2,388)
1,097
200
(10)
(212)
154
-
8,185
(8,097)
3
(1,069)
(1,405)
3,155
1,088
1,246
-
(183)
-
-
9,060
(9,108)
92
-
(415)
308
Net cash provided by operating activities
19,180
27,001
25,877
Investing Activities
Maturities of interest-bearing time deposits in other banks
Purchases of interest-bearing time deposits in other banks
Net change in loans
Purchases of premises and equipment
Proceeds from sale of premises and equipment
Purchase of nonmarketable equity securities
Proceeds from sale of foreclosed assets
18,583
(16,971)
(107,458)
(3,100)
403
(45)
518
3,884
(5,475)
(36,981)
(378)
1,336
(6)
47
1,743
(2,490)
(61,668)
(3,969)
-
(6)
597
Net cash used in investing activities
(108,070)
(37,573)
(65,793)
Financing Activities
Net change in deposits
Repayment of borrowed funds
Cash distributions
Capital injection
Common stock acquired and canceled
Net change in common stock
81,580
-
(1,006)
-
(2,646)
-
50,072
(5,600)
(56,155)
137
-
50,154
76,275
(800)
(9,749)
-
-
-
Net cash provided by financing activities
77,928
38,608
65,726
(Decrease) Increase in Cash and Due from Banks
(10,962)
28,036
25,810
Cash and Due from Banks, Beginning of Year
128,090
100,054
74,244
Cash and Due from Banks, End of Year
$
117,128 $
128,090 $
100,054
Supplemental Disclosure of Cash Flows Information
Interest paid
Income taxes paid
Dividends declared and not paid
Non-cash stock contribution
Foreclosed assets acquired in settlement of loans
See Notes to Consolidated Financial Statements
64
$
$
$
$
$
9,342 $
6,779 $
5,029 $
11,627 $
78 $
7,304 $
- $
- $
- $
50 $
4,739
-
-
-
684
Table of Contents
Bank7 Corp.
Notes to 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.
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
loan losses, valuation of other real estate owned, other-than-temporary impairments, income taxes, goodwill and intangibles
and fair values of financial instruments.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents.
Interest-Bearing Time Deposits in Other Banks
Interest-bearing time deposits in other banks totaled $30.1 million and $31.8 million at December 31, 2019 and December
31, 2018, respectively, and have original maturities generally ranging from one to five years.
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Securities
Bank7 Corp.
Notes to Consolidated Financial Statements
Debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity”
and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in
earnings. Securities not classified as held-to-maturity or trading, including equity securities with readily determinable fair
values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from
earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income
using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the
trade date and are determined using the specific identification method. For debt securities with fair value below amortized
cost when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to
sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment
of a debt security in earnings and the remaining portion in other comprehensive income. The Company had no “available-
for-sale” or held to maturity investments as of December 31, 2019 and 2018.
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.
Mortgage Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the
aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income.
Gains and losses on loan sales are recorded in noninterest income and direct loan origination costs and fees are deferred at
origination of the loan and are recognized in noninterest income upon the sale of the loan.
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.
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Bank7 Corp.
Notes to Consolidated Financial Statements
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.
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.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is charged to operating expense and
is computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are
charged to expense as incurred while improvements are capitalized. Premises and equipment is tested for impairment if
events or changes in circumstances occur that indicate that the carrying amount of any premises and equipment may not be
recoverable. Premises that are identified to be sold are transferred to other real estate owned at the lower of their carrying
amounts or their fair values less estimated costs to sell. Any losses on premises identified to be sold are charged to
operating expense. When premises and equipment are transferred to other real estate owned, sold, or otherwise retired, the
cost and applicable accumulated depreciation are removed from the respective accounts and any resulting gains or losses
are reported in the statement of income.
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Non-Marketable Equity Securities
Bank7 Corp.
Notes to Consolidated Financial Statements
Non-marketable equity securities consist primarily of Federal Home Loan Bank of Topeka (FHLB) stock and Federal
Reserve Bank of Kansas City stock and are required investments for financial institutions that are members of the FHLB
and Federal Reserve systems. The required investment in common stock is based on a predetermined formula, carried at
cost and evaluated for impairment.
Long-Lived Asset Impairment
The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances
indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted
estimated future cash flows is expected to result from the use and eventual disposition of the asset is less than the carrying
amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the
carrying amount of a long-lived asset exceeds its fair value.
No asset impairment was recognized during the years ended December 31, 2019, 2018, and 2017.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale consist of assets acquired through, or in lieu of, loan foreclosure and are initially recorded at
fair value, less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations
are periodically performed by management and the assets are carried at the lower of carrying amount of fair value less costs
to sell. Revenue and expenses from operations and changes in the valuation allowance are included in current operations.
Goodwill and Intangible Assets
Goodwill is tested annually for impairment. 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.
Segments
While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed
and financial performance is evaluated on a Company-wide basis. Discrete financial information is not available other than
on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be
aggregated in one reportable operating segment.
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Income Taxes
Bank7 Corp.
Notes to Consolidated Financial Statements
Prior to September 24, 2018, the Company had elected to be taxed as an S Corporation for federal and state income tax
purposes. As such, stockholders were taxed on their pro rata share of earnings and deductions of the Company, regardless
of the amount of distributions received. Generally, the Company was not subject to federal income tax. Effective September
24, 2018, the Company converted from an S Corporation to a C Corporation and is subject to federal and state taxes at that
date.
The Company uses a comprehensive model for recognizing, measuring, presenting, and disclosing in the financial
statements tax positions taken or expected to be taken on a tax return. A tax position is recognized as a benefit only if it is
‘‘more likely than not’’ that the tax position would be sustained in a tax examination, with a tax examination being
presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being
realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the
years ended December 31, 2019, 2018 and 2017, the Company recognized no interest and penalties.
Revenue Recognition
In addition to lending and related activities, the Company offers various services to customers that generate revenue.
Contract performance typically occurs in one year or less. Incremental costs of obtaining a contract are expensed when
incurred when the amortization period is one year or less.
Service and transaction fees on depository accounts
Customers often pay certain fees to the bank to access the cash on deposit including certain non-transactional fees such as
account maintenance or dormancy fees, and certain transaction based fees such as ATM, wire transfer, or foreign exchange
fees. Revenue is recognized when the transactions occur or as services are performed over primarily monthly or quarterly
periods. Payment is typically received in the period the transactions occur, or in some cases, within 90 days of the service
period.
Interchange Fees
Interchange fees, or “swipe” fees, are charges that merchants pay to the processors who, in turn, share that revenue with us
and other card-issuing banks for processing electronic payment transactions. Interchange fees represent the portion of the
debit card transaction amount that the card issuer retains to compensate it for processing transactions and providing
rewards. Interchange fees are settled and recognized on a daily or monthly basis.
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Recent Accounting Pronouncements
Bank7 Corp.
Notes to Consolidated Financial Statements
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. ASU 2014-09 was adopted for the annual period ending December 31, 2019 and did not have a significant impact on
the Company’s financial statements.
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. ASU 2016-01 was adopted for the
annual period ending December 31, 2019 and did not have a significant impact on the Company’s financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU requires lessees to recognize a lease
liability and a right-of-use asset for all leases, excluding short-term leases, at the commencement date. The guidance in the
ASU is effective for reporting periods beginning after December 15, 2019. Additionally, a modified retrospective transition
approach is required for a leases existing at the earliest comparative period presented. Management is assessing the impact
of this ASU; however, it is not expected to have a material impact on the Company’s financial condition, results of
operation, or capital position, but will impact the presentation on the balance sheet of the Company’s current operating
leases. The Company will adopt this ASU in the first quarter of 2021.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The ASU requires the
replacement of the current incurred loss model with an expected loss model, referred to as the current expected credit loss
(CECL) model. The guidance in the ASU is effective for reporting periods beginning after December 15, 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 2023.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. The ASU amends existing guidance to simplify the subsequent measurement of goodwill by
eliminating Step 2 from the goodwill impairment test. The guidance in the ASU is effective for reporting periods
beginning after December 15, 2021 with prospective application. It is expected that adoption will not have a significant
impact on the Company’s financial condition and results of operations. The Company expects to adopt the standard in the
first quarter of 2020.
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 expects to adopt
the standard in the first quarter of 2020.
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Table of Contents
Note 2: Change in Capital Structure
Bank7 Corp.
Notes to Consolidated Financial Statements
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.
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 2016.
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 December 31, 2019 was $18.0 million.
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Note 4: Earnings Per Share
Bank7 Corp.
Notes to Consolidated Financial Statements
Basic earnings per common share represents the amount of earnings for the period available to each share of common stock
outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average
number of common shares outstanding during the year.
Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding
including common stock that would have been outstanding assuming the issuance of common shares for all dilutive
potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income
dividend by the weighted average number of commons shares outstanding during each period, adjusted for the effect of
dilutive potential common shares, such as restricted stock awards and nonqualified stock options, calculated using the
treasury stock method.
The following table shows the computation of basic and diluted earnings per share:
As of and for the Years ended December 31,
2018
2017
2019
(Dollars in thousands, except per share amounts)
Numerator
Net income
Denominator
$
8,225 $
25,000 $
23,789
Denominator for basic earnings per common share
Dilutive effect of stock compensation (1)
Denominator for diluted earnings per share
10,145,032
2,279
10,147,311
8,105,856
131,782
8,237,638
7,287,500
-
7,287,500
Earnings per common share
Basic
Diluted
$
$
0.81 $
0.81 $
3.08 $
3.03 $
3.26
3.26
(1) Nonqualified stock options outstanding of 163,000 and 150,000 as of December 31, 2019 and 2018, respectively, have
not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented.
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Bank7 Corp.
Notes to Consolidated Financial Statements
Note 5: Loans and Allowance for Loan Losses
A summary of loans at December 31, 2019 and 2018, are as follows (dollars in thousands):
Construction & development
1-4 family commercial
Commercial real estate - other
Total commercial real estate
Commercial & industrial
Agricultural
Consumer
Gross loans
Less allowance for loan losses
Less deferred loan fees
Net loans
December 31,
2019
December 31,
2018
$
70,628 $
34,160
273,278
378,066
260,762
57,945
11,895
87,267
33,278
156,396
276,941
248,394
62,844
13,723
708,668
601,902
(7,846)
(1,364)
(7,832)
(1,992)
$
699,458 $
592,078
73
Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
The following table presents, by portfolio segment, the activity in the allowance for loan losses for the years ended December 31,
2019, 2018, and 2017 (dollars in thousands):
Construction &
Development
1 - 4 Family
Commercial
Commercial
Real Estate -
Other
Commercial
& Industrial Agricultural Consumer
Total
December 31, 2019
Balance, beginning of
period
$
1,136 $
433 $
2,035 $
3,231 $
818 $
179 $
7,832
Charge-offs
Recoveries
Net charge-offs
Provision (credit) for
loan losses
-
-
-
(2)
5
3
-
-
-
(4)
24
20
(11)
3
(8)
(1)
-
(1)
(18)
32
14
(354)
(58)
990
(364)
(168)
(46)
-
Balance, end of period
$
782 $
378 $
3,025 $
2,887 $
642 $
132 $
7,846
Construction &
Development
1 - 4 Family
Commercial
Commercial
Real Estate -
Other
Commercial
& Industrial Agricultural Consumer
Total
December 31, 2018
Balance, beginning of
period
$
1,407 $
431 $
1,865 $
2,779 $
1,015 $
157 $
7,654
Charge-offs
Recoveries
Net charge-offs
Provision (credit) for
loan losses
-
-
-
(25)
3
(22)
-
-
-
(73)
71
(2)
-
1
1
-
1
1
(98)
76
(22)
(271)
24
170
454
(198)
21
200
Balance, end of period
$
1,136 $
433 $
2,035 $
3,231 $
818 $
179 $
7,832
Construction &
Development
1 - 4 Family
Commercial
Commercial
Real Estate -
Other
Commercial
& Industrial
Agricultural
Consumer
Total
December 31, 2017
Balance, beginning of
period
$
1,565 $
287 $
1,193 $
2,523 $
1,074 $
231 $
6,873
Charge-offs
Recoveries
Net charge-offs
Provision (credit) for
loan losses
-
-
-
-
23
23
(224)
6
(242)
6
(218)
(236)
-
-
-
(46)
12
(34)
(512)
47
(465)
(158)
121
890
492
(59)
(40)
1,246
Balance, end of period
$
1,407 $
431 $
1,865 $
2,779 $
1,015 $
157 $
7,654
74
Table of Contents
Bank7 Corp.
Notes to 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 December 31, 2019 and 2018 (dollars in thousands):
Construction &
Development
1 - 4 Family
Commercial
Commercial
Real Estate -
Other
Commercial
& Industrial Agricultural Consumer
Total
December 31, 2019
Allowance Balance
Ending balance
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
$
- $
- $
26 $
- $
- $
- $
26
782
378
2,999
2,887
642
132
7,820
Total
$
782 $
378 $
3,025 $
2,887 $
642 $
132 $
7,846
Gross Loans
Ending balance
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
$
- $
- $
5,841 $
2,750 $
2,527 $
- $
11,118
70,628
34,160
267,437
258,012
55,418
11,895
697,550
Total
$
70,628 $
34,160 $
273,278 $
260,762 $
57,945 $
11,895 $
708,668
December 31, 2018
Allowance Balance
Ending balance
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
$
- $
- $
32 $
14 $
- $
- $
46
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
Collectively
evaluated for
impairment
$
- $
115 $
484 $
7,381 $
1,097 $
- $
9,077
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
75
Table of Contents
Internal Risk Categories
Bank7 Corp.
Notes to Consolidated Financial Statements
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.
76
Table of Contents
Bank7 Corp.
Notes to 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 the period ended December 31, 2019.
The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category as of
December 31, 2019 and 2018 (dollars in thousands):
Construction &
Development
1 - 4 Family
Commercial
Commercial
Real Estate -
Other
Commercial
& Industrial Agricultural Consumer
Total
December 31, 2019
Grade
1 (Pass)
2 (Watch)
3 (Special Mention)
4 (Substandard)
$
70,628 $
-
-
-
33,622 $
538
-
-
267,437 $
-
-
5,841
241,176 $
5,312
11,524
2,750
53,290 $
-
2,128
2,527
11,895 $
-
-
-
678,048
5,850
13,652
11,118
Total
$
70,628 $
34,160 $
273,278 $
260,762 $
57,945 $
11,895 $
708,668
Construction &
Development
1 - 4 Family
Commercial
Commercial
Real Estate -
Other
Commercial
& Industrial
Agricultural
Consumer
Total
December 31, 2018
Grade
1 (Pass)
2 (Watch)
3 (Special Mention)
4 (Substandard)
$
84,485 $
2,782
-
-
29,942 $
3,221
-
115
154,353 $
1,559
-
484
204,671 $
36,342
-
7,381
57,782 $
758
3,207
1,097
13,723 $
-
-
-
544,956
44,662
3,207
9,077
Total
$
87,267 $
33,278 $
156,396 $
248,394 $
62,844 $
13,723 $
601,902
77
Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31,
2019 and 2018 (dollars in thousands):
Past Due
30–59
Days
60–89
Days
Greater than
90 Days
Total
Current
Total
Loans
Total Loans
> 90 Days &
Accruing
December 31, 2019
Construction &
development
$
1 - 4 Family Real Estate
Commercial Real Estate
- other
Commercial & industrial
Agricultural
Consumer
- $
-
-
-
-
90
Total
$
90 $
December 31, 2018
Construction &
development
$
1 - 4 Family Real Estate
Commercial Real Estate
- other
Commercial & industrial
Agricultural
Consumer
- $
8
-
-
-
41
Total
$
49 $
- $
-
-
-
-
-
- $
- $
-
-
5
-
-
5 $
- $
-
-
14
598
-
- $
-
70,628 $
34,160
70,628 $
34,160
-
14
598
90
273,278
260,748
57,347
11,805
273,278
260,762
57,945
11,895
612 $
702 $
707,966 $
708,668 $
- $
-
-
-
-
-
- $
- $
8
-
5
-
41
87,267 $
33,270
87,267 $
33,278
156,396
248,389
62,844
13,682
156,396
248,394
62,844
13,723
54 $
601,848 $
601,902 $
-
-
-
14
598
-
612
-
-
-
-
-
-
-
The following table presents impaired loans as of December 31, 2019 and 2018 (dollars in thousands):
Unpaid
Principal
Balance
Recorded
Investment
with No
Recorded
Investment
with an
Allowance
Allowance
Total
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
December 31, 2019
Construction &
development
$
1 - 4 Family Real Estate
Commercial Real Estate
- other
Commercial &
industrial
Agricultural
Consumer
- $
-
- $
-
- $
-
- $
-
- $
-
- $
208
5,841
4,032
1,809
5,841
26
2,557
2,750
2,527
-
2,750
1,744
-
-
-
-
2,750
1,744
-
-
-
-
5,495
2,238
98
Total
$
11,118 $
8,526 $
1,809 $
10,335 $
26 $
10,596 $
December 31, 2018
Construction &
development
$
1 - 4 Family Real Estate
Commercial Real Estate
- other
Commercial &
industrial
Agricultural
Consumer
- $
115
- $
115
- $
-
- $
115
1,990
1,506
484
1,990
7,614
1,097
5
7,359
1,097
-
22
-
-
7,381
1,097
-
- $
-
32
14
-
-
- $
82
440
7,049
1,313
28
Total
$
10,821 $
10,077 $
506 $
10,583 $
46 $
8,912 $
-
-
440
281
174
-
895
-
4
148
560
82
1
795
Impaired loans include nonperforming loans and also include loans modified in troubled-debt restructurings where
concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a
reduction in interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to
maximize collection.
78
Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired.
At December 31, 2019, the Company had $2,721,000 of commercial real estate loans that were modified in troubled-debt
restructurings and impaired and $501,000 in commercial loan modifications as of December 31, 2018. There were $2.7
million in newly modified troubled-debt restructurings during the year ended December 31, 2019, consisting of $1.8
million of commercial real estate loans and $900,000 in agricultural loans. The modification of the terms of the TDR loan
included a reduction of the stated interest rate of the loan to a stated rate of interest lower than the current market rate for
new debt with similar risk. These modifications did not result in any increase or decrease to the allowance for loan losses
for the year ending December 31, 2019. These TDRs resulted in no charge offs during the year ended December 31, 2019.
There were no newly modified TDRs during the year ended December 31, 2018.
There were no troubled-debt restructurings modified in the past twelve months that subsequently defaulted for the year
ended December 31, 2019.
The following table represents information regarding nonperforming assets at December 31, 2019 and 2018 (dollars in
thousands):
Nonaccrual loans
Troubled-debt restructurings (1)
Accruing loans 90 or more days past due
Total nonperforming loans
As of
December 31,
2019
2018
$
$
1,809 $
912
612
3,333 $
2,615
-
-
2,615
(1) $1.81 million and $501,000 of TDRs as of December 31, 2019 and December 31, 2018, respectively, are
included in the nonaccrual loans balance in the line above
Note 6: Premises and Equipment
Major classifications of premises and equipment, stated at cost and net of accumulated depreciation are as follows (dollars
in thousands):
Land, buildings and improvements
Furniture and equipment
Automobiles
Less accumulated depreciation
Net premises and equipment
79
December 31,
2019
December 31,
2018
$
9,942 $
2,117
760
12,819
(3,195)
8,414
1,654
722
10,790
(3,037)
$
9,624 $
7,753
Table of Contents
Note 7:
Intangible Assets
Bank7 Corp.
Notes to Consolidated Financial Statements
The gross carrying amount and accumulated amortization of recognized intangible assets at December 31, 2019 and 2018,
were (dollars in thousands):
December 31,
2019
December 31,
2018
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Core deposit intangible
$
2,061 $
(1,283) $
2,061 $
(1,077)
Amortization expense for intangible assets totaled $206,000 for the years ended December 31, 2019, 2018, and 2017.
Estimated amortization expense for each of the following four years is as follows (dollars in thousands):
2020
2021
2022
2023
Note 8:
Interest-Bearing Deposits
$
$
206
206
206
160
778
Interest-bearing time deposits in denominations of $250,000 or more were $57.0 million and $58.2 million at December 31,
2019 and 2018, respectively.
At December 31, 2019, the scheduled maturities of interest-bearing time deposits were as follows (dollars in thousands):
2020
2021
2022
2023
$
156,283
34,775
9,535
1,945
$
202,538
80
Table of Contents
Note 9:
Income Taxes
Bank7 Corp.
Notes to Consolidated Financial Statements
In connection with the initial public offering, as discussed in Note 2, the Company terminated its S Corporation status and
became a taxable entity (“C Corporation”) effective September 24, 2018. As such, any periods prior to September 24, 2018
will only reflect an effective state income tax rate.
The (benefit)/provision for income taxes for the years ended December 31, 2019 and 2018 consists of the following (dollars
in thousands):
Federal:
Current
Deferred
Total federal tax provision
State:
Current
Deferred
Total state tax provision
Total income tax provision
Year Ended December 31,
2019
2018
$
$
$
$
$
5,516 $
-
5,516 $
1,308 $
20
1,328 $
6,844 $
1,563
(1,036)
527
303
(33)
270
797
The provision for income taxes for the years ended December 31, 2019 and 2018 differs from the federal rate of 21% due
to the following:
Statutory U.S. Federal Income Tax
Increase (decrease) resulting from:
State Taxes
Benefit of S corporation status
Permanent Differences
Conversion as of September 24, 2018 to C corporation
Other
Provision for income taxes
81
Year Ended December 31,
2019
2018
$
3,160 $
5,417
1,048
-
2,327
-
309
6,844 $
213
(3,933)
-
(863)
(37)
797
$
Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
Deferred tax assets (liabilities) included in other assets in the accompanying consolidated balance sheet consist of the
following:
Deferred tax assets:
Allowance for loan losses
Non-accrual loans
Deferred revenue
Other
Deferred compensation
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Intangible assets
Prepaid expenses
Method change IRC 481(a)
Other
Total deferred tax liabilities
Net deferred tax assets
Year Ended December 31,
2019
2018
$
$
$
$
$
1,918 $
60
165
-
78
2,221 $
(320) $
(202)
(122)
(476)
(12)
(1,132) $
1,942
-
-
80
38
2,060
(268)
(220)
(177)
(254)
(72)
(991)
1,089 $
1,069
In assessing the Company’s ability to realize deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers projected future taxable income and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than not that the Company will realize all benefits
related to these deductible differences as of December 31, 2019.
The Company does not have any net operating loss or tax credit carryforwards as of December 31, 2019.
The Company is not presently under examination by the Internal Revenue Service or any state tax authority.
The Company establishes reserves for uncertain tax positions that reflect management’s best estimate of deductions and
credits that may not be sustained on a more-likely-than-not basis. Recognized income tax positions are measured at the
largest amount that is considered greater than 50% likely of being realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs. A reconciliation of the beginning and ending amount of
uncertain tax positions is as follows (in thousands):
82
Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
Balance at beginning of year
Additions for positions taken in prior years
Reductions for positions taken in prior years
Balance at end of year
For the Year Ended December 31,
2019
2018
$
$
13 $
-
-
13 $
-
15
(2)
13
There were no interest or penalties related to uncertain tax positions reflected in the consolidated statements of income for
the years ended December 31, 2019 and 2018.
Note 10: Letters of Credit
The Bank has entered into an arrangement with the FHLB resulting in the FHLB issuing letters of credit on behalf of the
Bank with the resulting beneficiary being certain public funds in connection with these deposits. Outstanding letters of
credit to secure these public funds at December 31, 2019 and 2018 were $1.3 million and $1.5 million, respectively. Loans
with a collateral value of approximately $73.0 million were used to secure the letters of credit.
Note 11: Advances and Borrowings
The Bank has a blanket floating lien security agreement with a maximum borrowing capacity of $71.7 million at December
31, 2019, with the FHLB, under which the Bank is required to maintain collateral for any advances, including its stock in
the FHLB, as well as qualifying first mortgage and other loans. The Bank had no advances from the FHLB at December
31, 2019 or 2018.
Note 12: Shareholders’ Equity
On September 5, 2019, the Company adopted a Repurchase Plan (the “RP”). The RP authorizes the repurchase of up to
500,000 shares of the Company’s common stock. To date the Company has made no repurchases under the RP. 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:
Number of shares repurchased
Average price of shares repurchased
Shares remaining to be repurchased
Year Ended December
31,
2019
2018
$
-
- $
500,000
-
-
-
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.
83
Table of Contents
Bank7 Corp.
Notes to Consolidated 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 December 31, 2019, 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 December 31, 2019, the most recent notification from the Federal Deposit Insurance Corporation (FDIC) categorized
the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain capital ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank’s category.
The Company’s and Bank’s actual capital amounts and ratios are presented in the following table (dollars in thousands):
84
Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
Actual
Amount
Ratio
Minimum
Capital Requirements
Ratio
Amount
With Capital
Conservation Buffer
Ratio
Amount
Minimum
To Be Well Capitalized
Under Prompt
Corrective Action
Ratio
Amount
As of December 31, 2019
Total capital to risk-
weighted assets
Company
Bank
Tier I capital to risk-
weighted assets
Company
Bank
CET I capital to risk-
weighted assets
Company
Bank
Tier I capital to average
assets Company
Bank
As of December 31, 2018
Total capital to risk-
weighted assets
Company
Bank
Tier I capital to risk-
weighted assets
Company
Bank
CET I capital to risk-
weighted assets
Company
Bank
Tier I capital to average
assets Company
Bank
$
$
105,137
106,148
15.25% $
15.42% $
55,157
55,076
8.00% $
8.00% $
72,393
72,287
10.50%
10.50% $
N/A
68,845
N/A
10.00%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
97,291
98,302
14.11% $
14.28% $
41,368
41,307
6.00% $
6.00% $
58,604
58,518
8.50%
8.50% $
N/A
55,076
N/A
8.00%
97,291
98,302
14.11% $
14.28% $
31,026
30,980
4.50% $
4.50% $
48,262
48,192
7.00%
7.00% $
N/A
44,749
97,291
98,302
11.53% $
11.65% $
33,833
33,793
4.00%
4.00%
N/A
N/A
N/A
N/A
$
N/A
42,241
N/A
6.50%
N/A
5.00%
92,693
93,704
15.86% $
16.03% $
46,751
46,751
8.00% $
8.00% $
57,709
57,709
9.875%
9.875% $
N/A
58,439
N/A
10.00%
85,382
86,393
14.61% $
14.78% $
35,063
35,063
6.00% $
6.00% $
46,021
46,021
7.875%
7.875% $
N/A
46,751
N/A
8.00%
85,382
86,393
14.61% $
14.78% $
26,298
26,298
4.50% $
4.50% $
37,255
37,255
6.375%
6.375% $
N/A
37,985
85,382
86,393
11.13% $
11.26% $
30,684
30,684
4.00%
4.00%
N/A
N/A
N/A
N/A
$
N/A
38,355
N/A
6.50%
N/A
5.00%
In July 2013, the federal regulatory authorities issued a new capital rule based, in part, on revisions developed by the Basel
Committee on Banking Supervision to the Basel capital framework (Basel III). The Bank became subject to the new rule
effective January 1, 2015. Generally, the new rule implements higher minimum capital requirements, revises the definition
of regulatory capital components and related calculations, adds a new common equity tier 1 capital ratio, implements a new
capital conservation buffer, increases the risk weighting for past due loans and provides a transition period for several
aspects of the new rule. In addition, banks with less than $250 billion in assets were given a one-time opt-out election
under Basel III Capital Rules to filter from regulatory capital certain accumulated other comprehensive income (AOCI)
components. The Bank made the opt-out election and excludes the AOCI components from the capital ratio computations.
The current (new) capital rule provides that, in order to avoid limitations on capital distributions, including dividend
payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital
conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The
buffer is measured relative to risk-weighted assets.
As fully phased in, a banking organization with a buffer greater than 2.5% would not be subject to additional limits on
dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would
be subject to increasingly stringent limitations as the buffer approaches zero. The new rule also prohibits a banking
organization from making dividend payments or discretionary bonus payments if its eligible retained income is negative in
that quarter and its capital conservation buffer ratio was less than 2.5% as the beginning of that quarter. Eligible net income
is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and
associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital
conservation buffer is as follows:
85
Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
Capital Conservation Buffer
(as a % of risk-weighted assets)
Greater than 2.5%
≤2.5% and >1.875%
≤1.875% and >1.25%
≤1.25% and >0.625%
≤0.625%
Maximum Payout
(as a % of eligible retained income)
No payout limitations applies
60%
40%
20%
0%
The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.
At December 31, 2019, approximately $34.6 million of retained earnings was available for dividend declaration from the
Bank without prior regulatory approval.
Note 13: Related-Party Transactions
At December 31, 2019 and 2018, the Company had loans outstanding to executive officers, directors, significant
shareholders and their affiliates (related parties) approximating $1.1 million and $6.9 million, respectively. A summary of
these loans is as follows (dollars in thousands):
Balance
Beginning of
the Period Additions
Collections/
Terminations
Balance
End of
the Period
Year ended December 31, 2019
Year ended December 31, 2018
$
$
6,897 $
6,684 $
2,613 $
7,319 $
(8,455) $
(7,106) $
1,055
6,897
In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of
business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the
time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more
than normal risk of collectability or present other unfavorable features.
The Bank leases office and retail banking space in Woodward, Oklahoma from Haines Realty Investments Company, LLC,
a related party of the Company. Lease expense totaled $184,000 for the years ended December 31, 2019, 2018, and 2017.
In addition, payroll and office sharing arrangements were in place between the Company and certain of its affiliates.
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Table of Contents
Note 14: Employee Benefits
401(k) Savings Plan
Bank7 Corp.
Notes to Consolidated Financial Statements
The Company has a retirement savings 401(k) plan covering substantially all employees. Employees may contribute up to
the maximum legal limit with the Bank matching up to 5% of the employee’s salary. Employer contributions charged to
expense for the years ended December 31, 2019, 2018, and 2017 totaled $223,000, $198,000 and $178,000, respectively.
Stock-Based Compensation
The Company adopted a nonqualified incentive stock option plan (the “Bank7 Corp. 2018 Equity Incentive Plan”) in
September 2018. The Bank7 Corp. 2018 Equity Incentive Plan will terminate in September 2028, if not extended.
Compensation expense related to the Plan for the years ended December 31, 2019 and 2018 totaled $628,000 and $154,000
respectively.
On September 5, 2019, the Company’s largest shareholders, the Haines Family Trusts, contributed approximately 6.5% of
their shares (656,925 shares) to the Company. Subsequently, the Company immediately issued those shares to certain
executive officers, which was charged as compensation expense of $11.8 million, including payroll taxes, through the
income statement of the Company. Additionally, at the discretion of the employees receiving shares to assist in paying tax
withholdings, 149,425 shares were withheld and subsequently canceled, resulting in a charge to retained earnings of $2.6
million.
In connection with its IPO in September 2018, the Company granted to employees restricted stock units (RSUs) which vest
ratably over five years and stock options which vest ratably over four years. All RSUs and stock options were granted at
the fair value of the common stock at the time of the award. The RSUs are considered fixed awards as the number of
shares and fair value are known at the date of grant and the fair value at the grant date is amortized over the vesting and/or
service period.
The Company uses newly issued shares for granting RSUs and stock options.
The following table is a summary of the stock option activity under the Bank7 Corp. 2018 Equity Incentive Plan (dollar
amounts in thousands, except per share data):
Year Ended December 31, 2019
Outstanding at December 31, 2018
Options Granted
Options Exercised
Options Forfeited
Outstanding at December 31, 2019
Exercisable at December 31, 2019
Options
Wgtd. Avg. Exercise
Price
Wgtd. Avg. Remaining
Contractual Term
Aggregate
Intrinsic
Value
150,000 $
20,500
-
(7,500)
163,000 $
35,625
19.00
16.98
-
19.00
18.75
8.79 $
8.73 $
41
-
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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Table of Contents
Bank7 Corp.
Notes to 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:
Risk-free interest rate
Dividend yield
Stock price volatility
Expected term
Year Ended
December 31, 2019
2.48%
2.20%
31.14%
7.01 yrs
The following table summarizes share information about RSUs for the year ended December 31, 2019:
Outstanding at December 31, 2018
Shares granted
Shares settled
Shares forfeited
End of the period balance
Number of
Shares
Wgtd. Avg. Grant
Date Fair Value
19.09
-
-
-
19.09
130,000 $
-
(26,000)
-
104,000 $
As of December 31, 2019, there was approximately $1.8 million of unrecognized compensation expense related to 104,000
unvested RSUs and $383,000 of unrecognized compensation expense related to 163,000 unvested and/or unexercised stock
options. The stock option expense is expected to be recognized over a weighted average period of four years, and the RSU
expense is expected to be recognized over a weighted average period of five years.
Note 15: 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
88
Table of Contents
Recurring Measurements
Bank7 Corp.
Notes to Consolidated Financial Statements
There were no assets measured at fair value on a recurring basis as of December 31, 2019 and 2018.
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 December 31, 2019 and 2018 (dollars in
thousands):
Decmeber 31, 2019
Impaired loans (collateral- dependent)
December 31, 2018
Impaired loans (collateral- dependent)
Foreclosed assets held for sale
Fair Value
(Level 1)
(Level 2)
(Level 3)
$
$
$
1,783 $
- $
- $
1,783
506 $
110 $
- $
- $
- $
- $
506
110
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a
nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of
such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process
used to develop the reported fair value is described below.
Collateral-Dependent Impaired Loans, Net of Allowance for Loan Losses
The estimated fair value of collateral-dependent impaired loans is based on fair value, less estimated cost to sell.
Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.
The Company considers evaluation analysis as the starting point for determining fair value and then considers other factors
and events in the environment that may affect the fair value. Values of the collateral underlying collateral-dependent loans
are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by executive
management and loan administration. Values are reviewed for accuracy and consistency by executive management and
loan administration. The ultimate collateral values are reduced by discounts to consider lack of marketability and estimated
cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of fair value at acquisition date or current estimated fair value, less
estimated cost to sell when the asset is acquired. Estimated fair value of foreclosed assets is based on appraisals or
evaluations. Foreclosed assets held for sale are classified within Level 3 of the fair value hierarchy.
89
Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
Appraisals of foreclosed assets held for sale are obtained when the asset is acquired and subsequently as deemed necessary
by the Company. Appraisals are reviewed for accuracy and consistency by executive management and loan administration.
Unobservable (Level 3) Inputs
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3
fair value measurements.
Fair Value
Valuation
Technique
Unobservable
Inputs
Weighted-
Average
December 31, 2019
Collateral-dependent impaired loans $
1,783
properties
Estimated cost to sell
Appraisals from comparable
December 31, 2018
Collateral-dependent impaired loans $
506
properties
Estimated cost to sell
Appraisals from comparable
Foreclosed assets held for sale
$
110
properties
Estimated cost to sell
Appraisals from comparable
3-5%
7-10%
7-10%
90
Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
The following tables presents estimated fair values of the Company’s financial instruments not recorded at fair value at
December 31, 2019 and 2018 (dollars in thousands):
Carrying
Amount
Level 1
Level 2
Level 3
Total
Fair Value Measurements
December 31, 2019
Financial Assets
Cash and due from banks
$
Interest-bearing time deposits in other banks $
$
Loans, net of allowance
$
Mortgage loans held for sale
$
Nonmarketable equity securities
$
Interest receivable
117,128 $
30,147 $
699,458 $
1,031 $
1,100 $
3,954 $
117,128 $
- $
- $
- $
- $
- $
- $
30,147 $
698,672 $
1,031 $
1,100 $
3,954 $
- $
- $
1,809 $
- $
- $
- $
117,128
30,147
700,481
1,031
1,100
3,954
Financial Liabilities
Deposits
Interest payable
December 31, 2018
Financial Assets
$
$
757,483 $
636 $
- $
- $
757,520 $
636 $
- $
- $
757,520
636
Cash and due from banks
$
Interest-bearing time deposits in other banks $
$
Loans, net of allowance
$
Mortgage loans held for sale
$
Nonmarketable equity securities
$
Interest receivable
128,090 $
31,759 $
592,078 $
512 $
1,055 $
4,538 $
128,090 $
- $
- $
- $
- $
- $
- $
31,758 $
591,893 $
512 $
1,055 $
4,538 $
- $
- $
506 $
- $
- $
- $
128,090
31,758
592,399
512
1,055
4,538
Financial Liabilities
Deposits
Interest payable
$
$
675,903 $
461 $
- $
- $
675,017 $
461 $
- $
- $
675,017
461
The following methods were used to estimate the fair value of all other financial instruments recognized in the
accompanying consolidated balance sheets at amounts other than fair value:
Cash and Due from Banks, Interest-Bearing Time Deposits in Other Banks, Nonmarketable Equity Securities, Interest
Receivable and Interest Payable
The carrying amount approximates fair value.
Loans and Mortgage Loans Held for Sale
The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would
be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics
were aggregated for purposes of the calculations.
Deposits
Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying
amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow
calculation that applies the rates currently offered for deposits of similar remaining maturities.
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Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
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
December 31, 2019 or 2018.
Note 16: 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 December 31, 2019 and 2018 (dollars in thousands):
Commitments to extend credit
Financial and performance standby letters of credit
December 31,
2019
December 31,
2018
$
191,459 $
3,338
135,015
1,078
$
194,797 $
136,093
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Each instrument generally has fixed expiration dates or other termination clauses. Since many
of the instruments are expected to expire without being drawn upon, total commitments to extend credit amounts do not
necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary, by the Company upon extension of credit is based on
management’s credit evaluation of the customer. Standby letters of credit are irrevocable conditional commitments issued
by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers.
Note 17: Significant Estimates and Concentrations
GAAP requires disclosure of certain significant estimates and current vulnerabilities due to certain concentrations.
Estimates related to the allowance for loan losses are reflected in Note 5 regarding loans. Current vulnerabilities due to off-
balance sheet credit risk are discussed in Note 10.
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Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
As of December 31, 2019, hospitality loans were 24% of gross total loans with outstanding balances of $167.0 million and
unfunded commitments of $39.4 million; energy loans were 14% of gross total loans with outstanding balances of $102.1
million and unfunded commitments of $28.9 million.
The Company evaluates goodwill for potential goodwill impairment on an annual basis or more often based on
consideration if any triggering events have occurred. A prolonged strain on the U.S. Economy impacting the Company
could result in goodwill being partially or fully impaired. At December 31, 2019, goodwill of $1 million was recorded on
the consolidated balance sheet.
Note 18: Operating Leases
GAAP require The Company leases certain of its branch facilities and office equipment under operating leases. Rental
expense for these leases was $770,000 and $596,000, and $421,000 for the years ended December 31, 2019, 2018, and
2017 respectively.
Future minimum rental commitments of branch facilities and office equipment due under non-cancelable operating leases
at December 31, 2019, were as follows (dollars in thousands):
2020
2021
2022
2023
Thereafter
$
$
623
451
220
174
49
1,517
93
Bank7 Corp.
Notes to Consolidated Financial Statements
Table of Contents
Note 19: Parent-only Financial Statements
Condensed Balance Sheets
Assets
Cash and due from banks
Investment in bank subsidiary
Dividends receivable
Goodwill
Other assets
Total assets
Liabilities and Shareholders’ Equity
Other liabilities
Total liabilities
Total shareholders’ equity
December 31,
2019
December 31,
2018
$
296 $
99,076
5,029
1,011
-
295
87,377
-
1,011
39
$
105,412 $
88,722
5,286
5,286
256
256
100,126
88,466
Total liabilities and shareholders’ equity
$
105,412 $
88,722
Condensed Statements of Income
Income
Dividends received from subsidiary bank
Other
Total Income
Expense
Interest expense
Other
Total expense
Income and equity in undistributed net income of bank subsidiary
Equity in undistributed net income of bank subsidiary
Income before Taxes
Income tax expense
For the Years Ended December 31,
2018
2019
2017
$
6,035 $
155
11,930 $
-
10,765
-
6,190
11,930
10,765
-
4
4
6,185
2,040
8,225
-
175
315
490
11,440
13,521
24,961
(39)
238
-
238
10,527
13,262
23,789
-
Net Income Available to Common Shareholders
$
8,225 $
25,000 $
23,789
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Table of Contents
Condensed Statements of Cash Flows
Operating Activities
Net income
Items not requiring (providing) cash
Equity in undistributed net income
Dividends receivable from subsidiary bank
Stock-based compensation expense
Changes in
Accounts payable and accrued expenses
Other current assets and liabilities
Bank7 Corp.
Notes to Consolidated Financial Statements
For the Years Ended December 31,
2018
2019
2017
$
8,225 $
25,000 $
23,789
(2,040)
(5,029)
-
(13,521)
-
154
(13,262)
-
-
(149)
-
-
199
-
(2)
Net cash provided by operating activities
1,007
11,832
10,525
Financing Activities
Repayment of borrowed funds
Common stock issued, net of offering costs
Dividends paid
Net cash used in financing activities
Increase in Cash and Due from Banks
Cash and Due from Banks, Beginning of Period
Cash and Due from Banks, End of Period
Supplemental Disclosure of Cash Flows Information
Interest paid
Dividends declared and not paid
95
-
-
(1,006)
(5,600)
50,154
(56,155)
(800)
-
(9,749)
(1,006)
(11,601)
10,549
1
231
(24)
295
64
296 $
295 $
- $
5,029 $
175 $
- $
$
$
$
88
64
239
-
Table of Contents
Bank7 Corp.
Notes to Consolidated Financial Statements
Note 20: Selected Quarterly Financial Data (Unaudited)
The following tables summarize the unaudited condensed results of operations for each of the quarters during the fiscal
years ended December 31, 2019 and 2018:
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense (benefit)
Net income (loss)
EPS
Basic
Diluted
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
EPS (1)
Basic
Diluted
For the three months ended
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
10,353 $
-
223
3,755
6,821
1,705
5,116 $
10,583 $
-
295
4,048
6,830
1,704
5,126 $
10,600 $
-
509
16,072
(4,963)
1,556
(6,519) $
0.50 $
0.50 $
0.50 $
0.50 $
(0.64) $
(0.64) $
10,657
-
281
4,557
6,381
1,879
4,502
0.45
0.45
For the three months ended
March 31,
2018
June 30,
2018
September
30,
2018
December
31,
2018
9,861 $
100
264
3,675
6,350
-
6,350 $
0.87 $
0.87 $
9,439 $
-
486
3,546
6,379
-
6,379 $
0.88 $
0.88 $
9,801 $
-
319
3,805
6,315
(395)
6,710 $
0.88 $
0.87 $
10,530
100
262
3,939
6,753
1,192
5,561
0.55
0.54
$
$
$
$
$
$
$
$
(1) The quarterly EPS amounts, when added, may not coincide with the full fiscal year EPS reported on the Consolidated
Statements of Income due to differences in the computed weighted average shares outstanding as well as rounding differences.
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Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure
a) Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted
an evaluation of the effectiveness as of December 31, 2019 of the Company’s 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, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this
Form 10-K.
b) Management’s Annual Report on Internal Control over Financial Reporting
This annual report does not include a management’s report regarding internal control over financial reporting due to a
transition period established by rules of the Securities and Exchange Commission for newly public companies.
c) Attestation Report of the Independent Registered Public Accounting Firm
Not applicable because the Company is an emerging growth company.
d) Changes in Internal Control Over Financial Reporting
There were no significant changes made in the Company’s internal control over financial reporting during the fourth
quarter of the year ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
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Table of Contents
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its
2020 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its
2020 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its
2020 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its
2020 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its
2020 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
PART IV
Item 15. Exhibits, Financial Statement Schedules
Financial Statements
See index to Consolidated Financial Statements on page 59.
Financial Statement Schedules
Financial statement schedules have been omitted because they are not applicable or not required or the required
information is shown in the Consolidated Financial Statements or Notes thereto under “Part II — Item 8. Financial Statements
and Supplementary Data.”
Exhibits
3.1
3.2
4.1
4.2
Amended and Restated Certificate of Incorporation of Bank7 Corp.(1)
Amended and Restated Bylaws of Bank7 Corp.(2)
Specimen Common Stock Certificate of Bank7 Corp.(3)
Description of Common Stock Securities Registered Pursuant to Section 12 of the Exchange Act of 1934
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Table of Contents
10.1
Form of Tax Sharing Agreement(4)
10.2
Bank7 Corp. 2018 Equity Incentive Plan(5)
10.3
Form of Stock Option award Agreement under the Bank7 Corp. 2018 Equity Incentive Plan(6)
10.4
Form of Restricted Stock Unit Award Agreement under the Bank7 Corp. 2018 Equity Incentive Plan(7)
10.5
Form of Indemnification Agreement(8)
10.6
Form of Registration Rights Agreement(9)
10.7
Stock Award Agreement Between the Company and Thomas L. Travis issued under the 2018 Equity Incentive Plan (10)
10.8
Stock Award Agreement Between the Company and John T. Phillips issued under the 2018 Equity Incentive Plan (11)
21.1
Subsidiaries of Bank7 Corp.
23
Consent of Independent Registered Public Accounting Firm
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 2019 and 2018, (ii) the
Consolidated Statements of Income for the years ended December 31, 2019 and 2018, (iii) the Consolidated Statements of Retained Earnings
for the years ended December 31, 2019 and 2018, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2019 and
2018, and (v) the notes to the Consolidated Financial Statements
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August
24, 2018 (File No. 333-227010).
Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August
24, 2018 (File No. 333-227010).
Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on
September 10, 2018 (File No. 333-227010).
Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August
24, 2018 (File No. 333-227010).
Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on
September 10, 2018 (File No. 333-227010).
Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on
September 10, 2018 (File No. 333-227010).
Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on
September 10, 2018 (File No. 333-227010).
99
Table of Contents
(8)
(9)
Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on
September 10, 2018 (File No. 333-227010).
Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August
24, 2018 (File No. 333-227010).
(10)
Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 5,
2019.
(11)
Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 5,
2019.
100
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2020
Bank7 Corp.
By: /s/ Thomas L. Travis
Thomas L. Travis
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kelly J. Harris
Kelly J. Harris
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
/s/ William B. Haines
William B. Haines
/s/ Thomas L. Travis
Thomas L. Travis
/s/ Charles W. Brown
Charles W. Brown
/s/ William M. Buergler
William M. Buergler
/s/ John T. Phillips
John T. Phillips
/s/ Gary D. Whitcomb
Gary D. Whitcomb
/s/ Lonny D. Wilson
Lonny D. Wilson
/s/ J. Michael Sanner
J. Michael Sanner
Director; Chairman
Director; President and Chief Executive Officer
(Principal Executive Officer)
Director
Director
Director
Director
Director
Director
Date
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
DESCRIPTION OF REGISTRANT’S SECURITIES
REGISTERED PRUSANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.2
Bank7 Corp. (the “Company”) has one class of security registered under Section 12 of the Securities Exchange Act of 1934: the
Company’s common stock.
DESCRIPTION OF COMMON STOCK
The following summary of the terms of the Company’s common stock is based upon its Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Amended and Restated Bylaws (the “Bylaws”). This summary is not
complete, and is qualified by reference to the Company’s Certificate of Incorporation and Bylaws, each of which is incorporated
by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.2 is a part.
General
Pursuant to the Certificate of Incorporation, the Company is authorized to issue 50,000,000 shares of common stock, par value
$0.01 per share.
Dividends
Our board of directors may declare, at its discretion, dividends payable in cash or shares of the Company to the extent permitted
by applicable law.
Voting Rights
Each holder of shares of our common stock is entitled to one vote for each share held on all questions submitted to a vote at a
meeting of shareholders. There are no cumulative voting rights in the election of directors.
A majority of the votes cast is required for all actions to be taken by shareholders, except with respect to director elections, which
requires a plurality of the votes cast. Except as otherwise required by the Oklahoma General Corporation Act, or voting rights
granted to any subsequently issued preferred stock, the common stock is the only class of capital stock entitled to vote on any
matter to be voted on by the Company’s shareholders.
Other Rights
Upon any liquidation, dissolution or winding up of the Company, holders of its common stock are entitled to share equally and
ratably in any assets remaining after the payment of all debt and other liabilities, subject to the prior rights of holders of any
outstanding shares of preferred stock.
Listing
The Company’s common stock is listed on the NASDAQ Global Select Market System under the symbol “BSVN.”
Classification of the Board
Our board of directors is classified into three (3) classes of approximately equal size designated as Class I, Class II and Class III,
with the term of office of one class expiring each year. Each director shall serve for a term ending on the third annual meeting of
shareholders following the annual meeting of shareholders at which such director was elected, or until his or her earlier death,
resignation or removal.
Anti-Takeover Effects of Certain Provisions
Certain provisions of the Company's Certificate of Incorporation and its Bylaws summarized in the paragraphs above and in the
following paragraphs may have an anti-takeover effect. It is possible that these provisions could make it more difficult to
accomplish or could deter transactions that shareholders may otherwise consider to be in their best interest or in the best interests
of the Company, including transactions that might result in a premium over the market price for shares of the Company's
common stock.
Special Shareholder Meetings
Unless otherwise permitted by applicable law, the Company's Bylaws provides that special meetings of shareholders may
be called only by (i) the Board, (ii) the Chairman of the Board, (iii) the President or (iv) the Baord upon the written request of
shareholders holding at least 30% of all the votes entitled to be cast on each issue to be considered at the special meeting as of the
date of submission of the request.
Requirements for Advance Notification of Shareholder Nominations and Proposals
Under the Company's Bylaws, to be properly brought before an annual meeting of shareholders, any shareholder proposal
or nomination for election to the Board must be delivered to the Company’s Secretary not less than 90 days nor more than 120
days prior to the one-year anniversary of the preceding year’s annual meeting; provided that in the event that the date of the
annual meeting is called for a date that is not within 30 days before or 60 days after such anniversary date, notice by the
shareholder must be so delivered not earlier than the close of business on the 120th day prior to the date of such annual meeting
and not later than the close of business on the later of the 90th day prior to the date of such annual meeting, or the announcement
thereof, or, if the first public announcement of the date of such annual meeting is less than one hundred (100) days prior to the
date of such annual meeting, a shareholder’s written notice must be delivered not later than the 10th day following the day on
which public announcement of the date of such meeting is first made by the Company. Such notice must contain information
specified in the Company's Bylaws as to the director nominee or proposal of other business, information about the shareholder
making the nomination or proposal and the beneficial owner, if any, on behalf of whom the nomination or proposal is made.
2
Subsidiaries of Bank7 Corp.
Entity Name
Bank7
Subsidiaries of Bank7
Entity Name
1039 NW63RD, LLC
State of Incorporation
Oklahoma
State of Organization
Oklahoma
Exhibit 21.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement of Bank7 Corp. (the Company) on Form S-8 (File No.
333-227437) of our report, dated March 30, 2020, on our audits of the consolidated financial statements of the Company as of
December 31, 2019 and 2018, and for each of the years in the three-year period ended December 31, 2019, which report is
included in this Annual Report on Form 10-K.
Exhibit 23
/s/ BKD, LLP
Oklahoma City, Oklahoma
March 30, 2020
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
UNDER SECURITIES EXCHANGE ACT RULE 13a-14(a)
I, Thomas L. Travis, certify that:
1. I have reviewed this Annual Report on Form 10-K of Bank7 Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 30, 2020
By:
/s/ Thomas L. Travis
Thomas L. Travis
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECURITIES EXCHANGE ACT RULE 13a-14(a)
I, Kelly J. Harris, certify that:
1. I have reviewed this Annual Report on Form 10-K of Bank7 Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 30, 2020
By:
/s/ Kelly J. Harris
Kelly J. Harris
Senior Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
UNDER 18 U.S.C. § 1350 FURNISHED PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(b)
In connection with the Annual Report on Form 10-K of Bank7 Corp. (the “Company”) for the year ended December 31,
2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in his
respective capacities indicated below, hereby certifies, pursuant to 18 U.S.C. § 1350, as enacted by Section 906 of the Sarbanes-
Oxley Act of 2002, that, to his knowledge and belief,
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of
1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: March 30, 2020
By:
By:
/s/ Thomas L. Travis
Thomas L. Travis
President and Chief Executive Officer
/s/ Kelly J. Harris
Kelly J. Harris
Senior Vice President and Chief Financial Officer