Bank7 Corp. filed on May 15, 2019 10-Q Form

Bank7 Corp. filed 10-Q with SEC. Read ‘s full filing at 000114036119009160.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) For the quarterly period ended March 31, 2019 OR For the transition period from                 to Commission File Number: 001-38656 Bank7 Corp. (Exact name of registrant as specified in its charter) Registrant’s telephone number, including area code: 405-810-8600 Securities registered pursuant to Section 12(b) of the Act: Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘large accelerated filer,’ ‘accelerated filer,’ ‘smaller reporting company,’ and ’emerging growth company’ in Rule 12b-2 of the Exchange Act. If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐  No  ☒ As of May 15, 2019, the registrant had 10,187,500 shares of common stock, par value $0.01, outstanding. TABLE OF CONTENTS Table of Contents Forward-Looking Statements This Form 10-Q contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as ‘anticipate,’ ‘believes,’ ‘can,’ ‘could,’ ‘may,’ ‘predicts,’ ‘potential,’ ‘should,’ ‘will,’ ‘estimate,’ ‘plans,’ ‘projects,’ ‘continuing,’ ‘ongoing,’ ‘expects,’ ‘intends’ and similar words or phrases. Any or all of the forward-looking statements in (or conveyed orally regarding) this presentation may turn out to be inaccurate. The inclusion of or reference to forward-looking information in this presentation should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on its current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of risks, uncertainties and assumptions that are difficult to predict. Factors that could cause such differences are discussed in the section titled ‘Risk Factors’ in our most recent Annual Report on Form 10-K, and may be discussed from time to time in our other SEC filings, including our Quarterly Reports.  If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. You are cautioned not to place undue reliance on forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as may be required by law. All forward-looking statements herein are qualified by these cautionary statements. Table of Contents Item 1. Financial Statements Bank7 Corp. Consolidated Balance Sheets (Dollar amounts in thousands) See Notes to Unaudited Consolidated Financial Statements 3 Table of Contents Bank7 Corp. Unaudited Consolidated Statements of Income (Dollar amounts in thousands, except per share data) See Notes to Unaudited Consolidated Financial Statements 4 Table of Contents Bank7 Corp. Unaudited Consolidated Statements of Shareholders’ Equity (Dollar Amounts in thousands, except share data) See Notes to Unaudited Consolidated Financial Statements 5 Table of Contents Bank7 Corp. Unaudited Consolidated Statements of Cash Flows (Dollar Amounts in thousands) See Notes to Unaudited Consolidated Financial Statements 6 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements Nature of Operations Bank7 Corp. (the ‘Company’), formerly known as Haines Financial Corp, is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Bank 7 (the ‘Bank’).  The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers located in Oklahoma, Kansas, and Texas.  The Bank is subject to competition from other financial institutions.  The Company is subject to the regulation of certain federal agencies and undergoes periodic examinations by those regulatory authorities. Basis of Presentation The accompanying unaudited interim consolidated financial statements contained herein reflect all adjustments which are, in the opinion of management, necessary to provide a fair statement of the financial position, results of operations, and cash flows of the Company for the interim periods presented. All such adjustments are of a normal and recurring nature. There have been no significant changes in the accounting policies of the Company since December 31, 2018, the date of the most recent annual report.  The consolidated balance sheet of the Company as of December 31, 2018 has been derived from the audited consolidated balance sheet of the Company as of that date.  The information contained in the financial statements and footnotes included in the Company’s annual report for the year ended December 31, 2018, should be referred to in connection with these unaudited interim consolidated financial statements. Certain information and notes normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Form 10-K annual report for 2018 filed with the Securities and Exchange Commission. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company, the Bank and its subsidiary, 1039 NW 63rd, LLC, which holds real estate utilized by the Bank.  All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (‘GAAP’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.   7 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of other real estate owned, other-than-temporary impairments, income taxes, goodwill and intangibles and fair values of financial instruments. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized over the respective term of the loan. The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay and estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral-dependent. Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. Recent Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The ASU supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, and establishes a new control-based revenue recognition model for revenue from contracts with customers.  The revenue line items in scope of this ASU have been identified and final assessment is pending; however, the majority of the Company’s financial instruments are not within the scope of Topic 606.  Material revenue streams within the scope of Topic 606 include service charges on deposits.  The guidance in the ASU is effective for annual reporting periods beginning after December 15, 2018.  Based on the revenue streams impacted, this ASU is not expected to have a material impact on the Company’s financial condition or results of operation.  The Company will adopt this ASU for the annual period ending December 31, 2019. In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  The ASU requires certain equity investments to be measured at fair value with changes recognized in net income.  It also requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purpose and eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value disclosed for financial instruments measured at amortized cost.  The guidance in the ASU is effective for annual reporting periods beginning after December 15, 2018.  The Company will adopt this ASU for the annual period ending December 31, 2019. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The ASU requires lessees to recognize a lease liability and a right-of-use asset for all leases, excluding short-term leases, at the commencement date.  The guidance in the ASU is effective for reporting periods beginning after December 15, 2019. Management is assessing the impact of this ASU; however, it is not expected to have a material impact on the Company’s financial condition, results of operation, or capital position, but will impact the presentation on the balance sheet of the Company’s current operating leases.  The Company will adopt this ASU in the first quarter of 2020. 8 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326).  The ASU requires the replacement of the current incurred loss model with an expected loss model, referred to as the current expected credit loss (CECL) model.  The guidance in the ASU is effective for reporting periods beginning after December 15, 2021 with a cumulative-effect adjustment to retained earnings required for the first reporting period.  Management is still assessing the impact of this ASU; however, it is expected that it will not have a significant impact on the Company’s financial condition and results of operations as this modifies the calculation of the allowance by accelerating the recognition of losses.  The Company will adopt this ASU in the first quarter of 2022. In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350):  Simplifying the Test for Goodwill Impairment.  The ASU amends existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  The guidance in the ASU is effective for reporting periods beginning after December 15, 2021 with prospective application.  Management is still assessing the impact of this ASU; however, it is expected that it will not have a significant impact on the Company’s financial condition and results of operations.  The Company will adopt this ASU in the first quarter of 2022. In August 2018, the FASB issued ASU No. 2018-13, ‘Fair Value Measurement (Topic 820).’ ASU 2018-13 removes, modifies and adds disclosure requirements on fair value measurements. ASU 2018-13 will be effective for the Company on January 1, 2020. Early adoption is permitted. In addition, early adoption of any removed or modified disclosures and delayed adoption of the additional disclosures until the effective date is also permitted.  It is expected that adoption will not have a significant impact on the Company’s financial condition and results of operations.  The Company will adopt this ASU in the first quarter of 2020. 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. 9 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements Initial Public Offering On September 20, 2018, the Company completed the initial public offering of its common stock.  In connection with the Company’s initial public offering, the Company sold and issued 2,900,000 shares of common stock at $19 per share.  After deducting the underwriting discounts and offering expenses, the Company received total net proceeds of $50.1 million from the initial public offering. In connection with the initial public offering, the Company terminated its S Corporation status and became a taxable entity (‘C Corporation’) on September 24, 2018. As such, any periods prior to September 24, 2018 will only reflect an effective state income tax rate. As a result of the termination of S Corporation status, we increased our deferred tax asset and recorded an initial tax benefit of $863,000. The deferred tax asset is the result of timing differences in the recognition of income/deductions for generally accepted accounting principles (‘GAAP’) and tax purposes.  Net deferred tax assets are included in other assets and no valuation allowance is considered necessary. We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  We are no longer subject to U.S. federal or state tax examinations for years before 2015. The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank.  The reserve required at March 31, 2019 was $18.3 million. 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. 10 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements The following table shows the computation of basic and diluted earnings per share: (1) Nonqualified stock options outstanding of 165,000 and restricted stock units of 130,000 as of March 31, 2019 have not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented. A summary of loans at March 31, 2019 and December 31, 2018, are as follows (dollars in thousands): 11 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three months ended March 31, 2019 and 2018 (dollars in thousands): 12 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements The following table presents, by portfolio segment, the balance in allowance for loan losses and the gross loans based upon portfolio segment and impairment method as of March 31, 2019 and December 31, 2018 (dollars in thousands): 13 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements Internal Risk Categories Certain loan segments were reclassified during 2018.  Each loan segment is made up of loan categories possessing similar risk characteristics.  The Company’s re-alignment of the segments primarily consisted of reclassifying consumer-related and agricultural-related real estate loans from the real estate category to the consumer and agricultural categories, respectively.  Management believes this more 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. 14 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements 15 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements The Company evaluates the definitions of loan grades and the allowance for loan losses methodology on an ongoing basis.  No changes were made to either during period ended March 31, 2019. The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category as of March 31, 2019 and December 31, 2018 (dollars in thousands): 16 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements   The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of March 31, 2019 and December 31, 2018 (dollars in thousands): The following table presents impaired loans as of March 31, 2019 and December 31, 2018 (dollars in thousands): 17 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements Impaired loans include nonperforming loans and also include loans modified in troubled-debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired.  At March 31, 2019, the Company had $411,000 of commercial loans, $1,944,000 of commercial real estate loans, and $1,012,000 of agricultural loans that were modified in troubled-debt restructurings and impaired and $501,000 in commercial loan modifications as of December 31, 2018.  There were $2.9 million in newly modified troubled-debt restructurings during the three month period ended March 31, 2019, consisting of $1.9 million of commercial real estate loans, and $1.0 million of agricultural loans compared to no newly modified TDRs during the year ended December 31, 2018. The modification of the terms of the TDR loans included one or a combination of the following: a reduction of the stated interest rate of the loan; or an extension of the maturity date at 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 period ending March 31, 2019, primarily due to collateral support provided by the secondary source of repayment and/or the ability of the borrower to service restructured payments. These TDRs resulted in no charge offs during the period ended March 31, 2019. There were no troubled-debt restructurings modified in the past three months that subsequently defaulted for the period ended March 31, 2019. The following table represents information regarding nonperforming assets at March 31, 2019 and December 31, 2018: 18 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements   Major classifications of premises and equipment, stated at cost and net of accumulated depreciation are as follows (dollars in thousands): The gross carrying amount and accumulated amortization of recognized intangible assets at March 31, 2019 and December 31, 2018, were (dollars in thousands): Amortization expense for intangible assets totaled $52,000 for the three months ended March 31, 2019 and 2018.  Estimated amortization expense for each of the following five years is as follows (dollars in thousands): Interest-bearing time deposits in denominations of $250,000 or more were $60.1 million and $58.2 million at March 31, 2019 and December 31, 2018, respectively. 19 Table of Contents  Bank7 Corp. Notes to Unaudited Consolidated Financial Statements At March 31, 2019, the scheduled maturities of interest-bearing time deposits were as follows (dollars in thousands): Some interest-bearing deposits are obtained through brokered transactions and the Company participates in the Certificate of Deposit Account Registry Service (‘CDARS’).  CDARS deposits totaled $56.0 million at March 31, 2019 and $32.5 million at December 31, 2018. 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 March 31, 2019 and December 31, 2018 were $1.5 million.  Loans with a collateral value of approximately $69.9 million were used to secure the letters of credit. The Bank has a blanket floating lien security agreement with a maximum borrowing capacity of $68.4 million at March 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 March 31, 2019 or December 31, 2018. The Bank is subject to various regulatory capital requirements administered 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 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 Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  Furthermore, the Company’s and the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier I , and Common Equity capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined).  Management believes, as of March 31, 2019, that the Bank meets 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. 20 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements   As of March 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 Bank’s actual capital amounts and ratios are presented in the following table (dollars in thousands): 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. 21 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements   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.  Phase-in of the capital conservation buffer requirements became effective January 1, 2016.  The transition schedule for new ratios, including the capital conservation buffer, is as follows: 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: The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.  At March 31, 2019, approximately $37.3 million of retained earnings was available for dividend declaration from the Bank without prior regulatory approval. 22 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements   At March 31, 2019 and December 31, 2018, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties) approximating $7.9 million and $6.9 million, respectively.  A summary of these loans is as follows (dollars in thousands): In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons.  Further, in management’s opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features. The Bank leases office and retail banking space in Woodward, Oklahoma from Haines Realty Investments Company, LLC, a related party of the Company.  Lease expense totaled $46,000 for the three months ended March 31, 2019 and 2018.  In addition, payroll and office sharing arrangements were in place between the Company and certain of its affiliates. 401(k) Savings Plan The Company has a retirement savings 401(k) plan covering substantially all employees.  Employees may contribute up to the maximum legal limit with the Bank matching up to 5% of the employee’s salary.  Employer contributions charged to expense for the three months ended March 31, 2019 and 2018 totaled $66,000 and $50,000, respectively. Stock-Based Compensation The Company adopted a nonqualified incentive stock option plan (the ‘Bank7 Corp. 2018 Equity Incentive Plan’) in September 2018. The Bank7 Corp. 2018 Equity Incentive Plan will terminate in September 2028, if not extended. Compensation expense related to the Plan for the three months ended March 31, 2019 was $171,000. 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. 23 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements   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): 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. The following table shows the assumptions used for computing stock-based compensation expense under the fair value method on options granted during the periods presented: The following table summarizes share information about RSUs for the three months ended March 31, 2019: As of March 31, 2019, there was approximately $2.22 million of unrecognized compensation expense related to 130,000 unvested RSUs and $479,000 of unrecognized compensation expense related to 165,000 unvested 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.  As of March 31, 2019, no RSUs or stock options were vested. 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: 24 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements   Recurring Measurements There were no assets measured at fair value on a recurring basis as of March 31, 2019 and December 31, 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 March 31, 2019 and December 31, 2018 (dollars in thousands): 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. 25 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements   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. 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. 26 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements   The following tables presents estimated fair values of the Company’s financial instruments not     recorded at fair value at March 31, 2019 and December 31, 2018 (dollars in thousands): 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. 27 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements   Deposits Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. Commitments to Extend Credit, Lines of Credit and Standby Letters of Credit The fair values of unfunded commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair values of standby letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The estimated fair values of the Company’s commitments to extend credit, lines of credit and standby letters of credit were not material at March 31, 2019 or December 31, 2018. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying consolidated balance sheets.  The following summarizes those financial instruments with contract amounts representing credit risk as of March 31, 2019 and December 31, 2018 (dollars in thousands): 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. 28 Table of Contents Bank7 Corp. Notes to Unaudited Consolidated Financial Statements   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 16. As of March 31, 2019, hospitality loans were 23% of gross total loans with outstanding balances of $137.4 million and unfunded commitments of $23.8 million; energy loans were 18% of gross total loans with outstanding balances of $105.6 million and unfunded commitments of $28.6 million. The Company leases certain of its branch facilities and office equipment under operating leases.  Rental expense for these leases was $152,000 and $146,000 for the three months ended March 31, 2019 and 2018, respectively. Future minimum rental commitments of branch facilities and office equipment due under non-cancelable operating leases at March 31, 2019, were as follows (dollars in thousands): 29 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2018. 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 seven full-service branches in Oklahoma, the Dallas/Fort Worth, Texas metropolitan area and Kansas, and opened a loan production office in Tulsa, Oklahoma during the period. 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 March 31, 2019, we had total assets of $787.2 million, total loans of $586.6 million, total deposits of $686.7 million and total shareholders’ equity of $93.8 million. In September 2018, in conjunction with our initial public offering, we terminated our 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. 30 Table of Contents Our Initial Public Offering Our initial public offering, or IPO, closed on September 24, 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’. GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this Form 10-Q as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both. The non-GAAP financial measures that we discuss in this Form 10-Q should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Form 10-Q may differ from that of other companies reporting measures with similar names. It is important to understand how other banking organizations calculate their financial measures with names similar to the non-GAAP financial measures we have discussed in this communication when comparing such non-GAAP financial measures. Exclusion of loan fee income. We calculate (1) yield on loans (excluding loan fee income) as interest income on loans less loan fee income divided by average total loans and (2) net interest margin (excluding loan fee income) as net interest income less loan fee income divided by average interest-earning assets. The most directly comparable GAAP financial measure for yield on loans (excluding loan fee income) is yield on loans and for net interest margin (excluding loan fee income) is net interest margin. 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: 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. 31 Table of Contents 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, in order to enhance the comparability of the periods presented, we have, on a pro forma basis, tax-affected 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). Pre-tax, pre-provision net earnings is defined as income before taxes and provision for loan losses.  We believe the most directly comparable GAAP financial measure is income before taxes.  Disclosure of this measure enables you to compare our operations to those of other banking companies before consideration of taxes and provision expense, which some investors may consider to be a more appropriate comparison given our S Corporation status and recaptures from the allowance for loan losses.  We calculate our pro forma provision for income taxes and pro-forma net income, return on average assets, return on average equity, and per share amounts by using a combined C Corporation effective tax rate for federal and state income taxes of 26.0% in 2018.  We used an actual combined C Corporation effective tax rate of 25.0% for the three months ended March 31, 2019.  This calculation reflects only the change in our status as an S Corporation and does not give any effect to any other transaction. For the three months ended March 31,2018, results are presented on a pro forma basis by using a combined C Corporation effective tax rate for federal and Oklahoma income taxes of 26.0%. For the three months ended March 31, 2019, results presented are actual results, which reflect the income taxes incurred in accordance with our status as a C Corporation. 32 Table of Contents 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: Results of Operations Performance Summary. For the first quarter of 2019 we reported pre-tax income of $6.8 million, compared to pre-tax income of $6.3 million for the first quarter of 2018.  For the first quarter of 2019, interest income increased by $1.238 million, or 10.9%, compared to the first quarter of 2018.  Our strong loan growth, combined with increased loan yields enabled us to offset a $543,000 decrease in non-recurring loan fee income compared to the first quarter of 2018.  For the first quarter of 2019, average total loans were $586.4 million with loan yields of 8.0% as compared to $566.0 million and loan yields of 7.7% for the first quarter of 2018. Pre-tax return on average assets was 3.67% for the first quarter of 2019, as compared to 3.62% for the same period in 2018.  The pre-tax return on average equity was 30.46% for the first quarter of 2019, as compared to 35.56% a year ago.  The efficiency ratio was 35.99% for the first quarter of 2019, as compared to 36.82% for the same period in 2018. 33 Table of Contents Net Interest Income and Net Interest Margin Including Loan Fee Income. Net interest income, representing interest income less interest expense, was the primary contributor to income and earnings for the periods shown Interest income is generated from interest earned on loans, dividends, and interest earned on deposits at other institutions.  Interest expense is incurred on interest-bearing liabilities including deposits and other borrowings. Net interest income is evaluated by measuring (i) yield on loans and other interest-earning assets, (ii) the costs of deposits and other funding sources and (iii) net interest margin. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Changes in market interest rates and interest rates earned on interest-earning assets or paid on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest margin and net interest income. The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates;(iii) net interest income; and (iv) the net interest margin. 34 Table of Contents For the first quarter of 2019 compared to the first quarter of 2018: Net Interest Income and Net Interest Margin Excluding Loan Fee Income. Due to higher levels of nonrecurring loan fee income in 2018, we have illustrated our net interest margin below, excluding loan fee income.  Net interest income, representing interest income less interest expense, was the primary contributor to income and earnings for the periods shown below. Interest income is generated from interest earned on loans, dividends, and interest earned on deposits at other institutions.  Interest expense is incurred on interest-bearing liabilities including deposits and other borrowings. Net interest income is evaluated by measuring (i) the yield on loans and other interest-earning assets, (ii) the costs of deposits and other funding sources and (iii) net interest margin. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Changes in market interest rates on interest-earning assets, or paid by us on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest margin and net interest income. 35 Table of Contents 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. For the first quarter of 2019 compared to the first quarter of 2018: 36 Table of Contents Increases and decreases in interest income and interest expense result from changes in average balances, or volume, of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables set forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Provision for Loan Losses Credit risk is inherent in the business of making loans. We establish an allowance for loan losses (‘Allowance’) through charges to earnings, which are shown in the statements of income as the provision for loan losses. Specifically identifiable and quantifiable known losses are charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our allowance and applying the shortfall or excess, if any, to the current quarter’s expense. See the discussion under ‘-Critical Accounting Policies and Estimates-Allowance for Loan and Lease Losses.’ This has the effect of creating variability in the amount and frequency of charges to our earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market areas. The allowance as a percentage of loans was 1.34% at March 31, 2019 as compared to 1.31% at December 31, 2018. Noninterest Income Noninterest income for the three months ended March 31, 2019 was $223,000 compared to $264,000 for the same period in 2018, a decrease of $41,000, or 15.53%.  The following table sets forth the major components of our noninterest income for the three months ended March 31, 2019 and 2018: 37 Table of Contents Noninterest Expense Noninterest expense for the three months ended March 31, 2019 was $3.8 million compared to $3.7 million for the same period in 2018, an increase of $79,000, or 2.15%, which is discussed below. The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2019 and 2018: Accounting, legal and professional fees totaled $147,000 for the first quarter of 2019 compared to $34,000 for the same period in 2018, an increase of $113,000 or 332.4%.  This increase related to the additional costs associated with being a public company. Travel, lodging and entertainment totaled $42,000 for the first quarter of 2019 compared to $194,000 for the same period in 2018, a decrease of $152,000 or 78.4%.  This decrease was primarily related to the elimination of aircraft expense as the plane was sold during the third quarter of 2018. Other expense for the three months ended March 31, 2019 was $413,000 compared to $305,000 for the same period in 2018, an increase of $108,000, or 35.41%. $43,000 of this increase related to utilizing various deposits products for large FDIC coverage.  Financial Condition The following discussion of our financial condition compares March 31, 2019 and December 31, 2018. Total Assets Total assets increased $16.7 million, or 2.2%, to $787.2 million as of March 31, 2019, as compared to $770.5 million as of December 31, 2018. The increasing trend in total assets is primarily attributable to strong organic deposit growth within the Oklahoma City and Dallas/Fort Worth metropolitan areas, and our expansion into the Tulsa market. Loan Portfolio Our loans represent the largest portion of our earning assets. The quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition. As of March 31, 2019 and December 31, 2018, our gross loans were $588.2 million and $601.9 million, respectively. The following table presents the balance and associated percentage of each major category in our loan portfolio as of March 31, 2019, and December 31, 2018: 38 Table of Contents We have established internal concentration limits in the loan portfolio for Commercial Real Estate (CRE) loans, hospitality loans, energy loans, and construction loans, among others. All loan types are within our established limits. We use underwriting guidelines to assess each borrower’s historical cash flow to determine debt service capabilities, and we further stress test the customer’s debt service capability under higher interest rate scenarios as well as other underlying macro-economic factors. Financial and performance covenants are used in commercial lending to allow us to react to a borrower’s deteriorating financial condition, should that occur. The following tables show the contractual maturities of our gross loans as of the periods below: 39 Table of Contents Allowance for Loan and Lease Losses The allowance is based on management’s estimate of potential losses inherent in the loan portfolio. In the opinion of management, the allowance is adequate to absorb estimated losses in the portfolio as of each balance sheet date. While management uses available information to analyze losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance. In analyzing the adequacy of the allowance, a comprehensive loan grading system to determine risk potential in loans is utilized together with the results of internal credit reviews. To determine the adequacy of the allowance, the loan portfolio is broken into segments based on loan type. Historical loss experience factors by segment, adjusted for changes in trends and conditions, are used to determine an indicated allowance for each portfolio segment. These factors are evaluated and updated based on the composition of the specific loan segment. Other considerations include volumes and trends of delinquencies, nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk and the experience and abilities of our lending personnel.

The Company has a retirement savings 401(k) plan covering substantially all employees.  Employees may contribute up to the maximum legal limit with the Bank matching up to 5% of the employee’s salary.  Employer contributions charged to expense for the three months ended March 31, 2019 and 2018 totaled $66,000 and $50,000, respectively.

As of March 31, 2019, hospitality loans were 23% of gross total loans with outstanding balances of $137.4 million and unfunded commitments of $23.8 million; energy loans were 18% of gross total loans with outstanding balances of $105.6 million and unfunded commitments of $28.6 million.

Pre-tax, pre-provision net earnings is defined as income before taxes and provision for loan losses.  We believe the most directly comparable GAAP financial measure is income before taxes.  Disclosure of this measure enables you to compare our operations to those of other banking companies before consideration of taxes and provision expense, which some investors may consider to be a more appropriate comparison given our S Corporation status and recaptures from the allowance for loan losses.  We calculate our pro forma provision for income taxes and pro-forma net income, return on average assets, return on average equity, and per share amounts by using a combined C Corporation effective tax rate for federal and state income taxes of 26.0% in 2018.  We used an actual combined C Corporation effective tax rate of 25.0% for the three months ended March 31, 2019.  This calculation reflects only the change in our status as an S Corporation and does not give any effect to any other transaction.

For the three months ended March 31,2018, results are presented on a pro forma basis by using a combined C Corporation effective tax rate for federal and Oklahoma income taxes of 26.0%. For the three months ended March 31, 2019, results presented are actual results, which reflect the income taxes incurred in accordance with our status as a C Corporation.

For the three months ended March 31,2018, results are presented on a pro forma basis by using a combined C Corporation effective tax rate for federal and Oklahoma income taxes of 26.0%. For the three months ended March 31, 2019, results presented are actual results, which reflect the income taxes incurred in accordance with our status as a C Corporation.

Performance Summary. For the first quarter of 2019 we reported pre-tax income of $6.8 million, compared to pre-tax income of $6.3 million for the first quarter of 2018.  For the first quarter of 2019, interest income increased by $1.238 million, or 10.9%, compared to the first quarter of 2018.  Our strong loan growth, combined with increased loan yields enabled us to offset a $543,000 decrease in non-recurring loan fee income compared to the first quarter of 2018.  For the first quarter of 2019, average total loans were $586.4 million with loan yields of 8.0% as compared to $566.0 million and loan yields of 7.7% for the first quarter of 2018.

Pre-tax return on average assets was 3.67% for the first quarter of 2019, as compared to 3.62% for the same period in 2018.  The pre-tax return on average equity was 30.46% for the first quarter of 2019, as compared to 35.56% a year ago.  The efficiency ratio was 35.99% for the first quarter of 2019, as compared to 36.82% for the same period in 2018.

– Interest income on short term investments totaled $955,000 as compared to $514,000, an increase of $441,000 or 85.6% which was attributable to a $42 million increase in interest-bearing deposits at other institutions and a 78 basis point, or 46.7% increase in average yield.

Interest income on short term investments totaled $955,000 as compared to $514,000, an increase of $441,000 or 85.6% which was attributable to a $42 million increase in interest-bearing deposits at other institutions and a 78 basis point, or 46.7% increase in average yield.

– Total interest income on loans, including loan fee income, increased $797,000 or 7.4% to $11.6 million which was attributable to a $20.5 million increase in the average balance of loans to $586.4 million as compared with the average balance of $566.0 million for the first quarter of 2018.

Total interest income on loans, including loan fee income, increased $797,000 or 7.4% to $11.6 million which was attributable to a $20.5 million increase in the average balance of loans to $586.4 million as compared with the average balance of $566.0 million for the first quarter of 2018.

– Loan fees totaled $1.3 million, a decrease of $543,000 or 29.6% compared to the first quarter of 2018 which was attributable to nonrecurring loan fee income earned during the first quarter of 2018.

Loan fees totaled $1.3 million, a decrease of $543,000 or 29.6% compared to the first quarter of 2018 which was attributable to nonrecurring loan fee income earned during the first quarter of 2018.

– Net interest margin for the first quarter of 2019 and 2018 was 5.63% and 5.72%, respectively.

Net interest margin for the first quarter of 2019 and 2018 was 5.63% and 5.72%, respectively.

– Total interest income on loans, excluding loan fee income, increased $1.3 million or 14.9% to $10.3 million which was attributable to a $20.5 million increase in the average balance of loans to $586.4 million as compared with the average balance of $566.0 million for the first quarter of 2018.

Total interest income on loans, excluding loan fee income, increased $1.3 million or 14.9% to $10.3 million which was attributable to a $20.5 million increase in the average balance of loans to $586.4 million as compared with the average balance of $566.0 million for the first quarter of 2018.

– Net interest margin, excluding loan fee income, for the first quarter of 2019 and 2018 was 4.93% and 4.65%, respectively.

Net interest margin, excluding loan fee income, for the first quarter of 2019 and 2018 was 4.93% and 4.65%, respectively.

The allowance as a percentage of loans was 1.34% at March 31, 2019 as compared to 1.31% at December 31, 2018.

Accounting, legal and professional fees totaled $147,000 for the first quarter of 2019 compared to $34,000 for the same period in 2018, an increase of $113,000 or 332.4%.  This increase related to the additional costs associated with being a public company.

Travel, lodging and entertainment totaled $42,000 for the first quarter of 2019 compared to $194,000 for the same period in 2018, a decrease of $152,000 or 78.4%.  This decrease was primarily related to the elimination of aircraft expense as the plane was sold during the third quarter of 2018.

Other expense for the three months ended March 31, 2019 was $413,000 compared to $305,000 for the same period in 2018, an increase of $108,000, or 35.41%. $43,000 of this increase related to utilizing various deposits products for large FDIC coverage.

Total assets increased $16.7 million, or 2.2%, to $787.2 million as of March 31, 2019, as compared to $770.5 million as of December 31, 2018. The increasing trend in total assets is primarily attributable to strong organic deposit growth within the Oklahoma City and Dallas/Fort Worth metropolitan areas, and our expansion into the Tulsa market.

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.

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