Bank7 Corp. 10-K

Item 8 . Financial Statements and Supplementary Data Consolidated Financial Statements Index Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 686 ) 50 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 2022 and 2021 51 Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2022 52 Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2022 53 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2022 54 Notes to Consolidated Financial Statements 55 49 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, 2022 and 2021, the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022 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 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 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 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 financial statements. We believe our audits provide a reasonable basis for our opinion. FORVIS, LLP (Formerly, BKD,LLP) /s/ FORVIS, LLP We have served as the Company’s auditor since 2011 Oklahoma City, Oklahoma March 24, 2023 50 Table of Contents Bank7 Corp. Consolidated Balance Sheets (Dollar amounts in thousands, except par value) December 31, Assets 2022 2021 Cash and due from banks $ 109,115 $ 195,359 Federal funds sold - 9,493 Cash and cash equivalents 109,115 204,852 Interest-bearing time deposits in other banks 5,474 3,237 Available-for-sale debt securities 173,165 84,808 Loans, net of allowance for loan losses of $ 14,734 and $ 10,316 at December 31, 2022 and December 31, 2021, respectively 1,255,722 1,018,085 Loans held for sale - 464 Premises and equipment, net 13,106 17,257 Nonmarketable equity securities 1,209 1,202 Core deposit intangibles 1,336 1,643 Goodwill 8,603 8,479 Interest receivable and other assets 16,439 10,522 Total assets $ 1,584,169 $ 1,350,549 Liabilities and Shareholders’ Equity Deposits Noninterest-bearing $ 439,409 $ 366,705 Interest-bearing 989,891 850,766 Total deposits 1,429,300 1,217,471 Income taxes payable 1,054 - Interest payable and other liabilities 9,715 5,670 Total liabilities 1,440,069 1,223,141 Shareholders’ equity Common stock, $ 0.01 par value; 50,000,000 shares authorized; shares issued and outstanding: 9,131,973 and 9,071,417 at December 31, 2022 and December 31, 2021 respectively 91 91 Additional paid-in capital 95,263 94,024 Retained earnings 58,049 33,149 Accumulated other comprehensive income (loss) ( 9,303 ) 144 Total shareholders’ equity 144,100 127,408 Total liabilities and shareholders’ equity $ 1,584,169 $ 1,350,549 See accompanying notes to Consolidated Financial Statements 51 Table of Contents Bank7 Corp. Consolidated Statements of Comprehensive Income (Dollar amounts in thousands, except per share data) Year ended December 31, 2022 2021 2020 Interest Income Loans, including fees $ 74,403 $ 55,768 $ 52,450 Interest-bearing time deposits in other banks 46 169 525 Debt securities, taxable 2,313 143 - Debt securities, tax-exempt 360 31 - Other interest and dividend income 1,627 178 339 Total interest income 78,749 56,289 53,314 Interest Expense Deposits 9,322 3,053 6,153 Total interest expense 9,322 3,053 6,153 Net Interest Income 69,427 53,236 47,161 Provision for Loan Losses 4,468 4,175 5,350 Net Interest Income After Provision for Loan Losses 64,959 49,061 41,811 Noninterest Income Mortgage lending income 486 435 175 Loss on sales, prepayments, and calls of available-for-sale debt securities ( 127 ) - - Service charges on deposit accounts 900 550 442 Other 1,680 1,265 1,048 Total noninterest income 2,939 2,250 1,665 Noninterest Expense Salaries and employee benefits 17,040 11,983 10,130 Furniture and equipment 1,468 883 868 Occupancy 2,329 1,899 1,957 Data and item processing 2,068 1,237 1,091 Accounting, marketing and legal fees 984 800 536 Regulatory assessments 1,344 604 506 Advertising and public relations 477 282 400 Travel, lodging and entertainment 363 409 241 Other 2,568 2,300 1,863 Total noninterest expense 28,641 20,397 17,592 Income Before Taxes 39,257 30,914 25,884 Income tax expense 9,619 7,755 6,618 Net Income $ 29,638 $ 23,159 $ 19,266 Earnings per common share - basic $ 3.26 $ 2.56 $ 2.05 Earnings per common share - diluted 3.22 2.55 2.05 Weighted average common shares outstanding - basic 9,101,523 9,056,117 9,378,769 Weighted average common shares outstanding - diluted 9,204,716 9,091,536 9,379,154 Other Comprehensive Income Unrealized gains(losses) on securities, net of tax benefit of $ 2.8 million, $ 0 , and $ 0 for the years ended December 30, 2022 , 2021 , and 2020 , respectively $ ( 9,543 ) $ 144 $ - Reclassification adjustment for realized loss included in net income net of tax of $ 31 , $ 0 , and $ 0 the years ended 2022 , 2021 , and 2020 , respectively 96 - - Other comprehensive (loss) income $ ( 9,447 ) $ 144 $ - Comprehensive Income $ 20,191 $ 23,303 $ 19,266 See accompanying notes to Consolidated Financial Statements 52 Table of Contents Bank7 Corp. Consolidated Statements of Shareholders’ Equity (Dollar amounts in thousands, except per share data) Year Ended December 31, 2022 2021 2020 Common Stock (Shares) Balance at beginning of period 9,071,417 9,044,765 10,057,506 Exercise of employee stock options 17,450 - - Shares issued for restricted stock units 43,106 26,652 19,437 Shares acquired and canceled - - ( 1,032,178 ) Balance at end of period 9,131,973 9,071,417 9,044,765 Common Stock (Amount) Balance at beginning of period $ 91 $ 90 $ 101 Shares issued for restricted stock units - 1 ( 11 ) Balance at end of period $ 91 $ 91 $ 90 Additional Paid-in Capital Balance at beginning of period $ 94,024 $ 93,162 $ 92,391 Shares purchased and retired ( 145 ) 426 257 Stock-based compensation expense 1,384 436 514 Balance at end of period $ 95,263 $ 94,024 $ 93,162 Retained Earnings Balance at beginning of period $ 33,149 $ 14,067 $ 7,634 Net income 29,638 23,159 19,266 Common stock acquired and canceled - - ( 9,065 ) Cash dividends declared ($ 0.52 , $ 0.45 , $ 0.41 per share) December 31, 2022, 2021, and 2020, respectively ( 4,738 ) ( 4,077 ) ( 3,768 ) Balance at end of period $ 58,049 $ 33,149 $ 14,067 Accumulated Other Comprehensive Income(Loss) Balance at beginning of period $ 144 $ - $ - Comprehensive income(loss) ( 9,447 ) 144 - Balance at end of period $ ( 9,303 ) $ 144 $ - Total Shareholders’ equity $ 144,100 $ 127,408 $ 107,319 See accompanying notes to Consolidated Financial Statements 53 Table of Contents Bank7 Corp. Consolidated Statements of Cash Flows (Dollar amounts in thousands) Year Ended December 31, 2022 2021 2020 Operating Activities Net income $ 29,638 $ 23,159 $ 19,266 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,406 1,031 1,093 Provision for loan losses 4,468 4,175 5,350 Amortization of premiums and discounts on securities 812 30 - Gain on sales of loans ( 486 ) ( 435 ) ( 175 ) Net loss on sale of available for sale debt securities 127 - - Stock-based compensation expense 1,384 862 771 Gain on sale of premises and equipment ( 24 ) ( 1 ) ( 3 ) Cash receipts from the sale of loans originated for sale 33,776 23,954 8,924 Cash disbursements for loans originated for sale ( 32,826 ) ( 23,659 ) ( 8,042 ) Deferred income tax (benefit) ( 1,423 ) 235 ( 875 ) Changes in Interest receivable and other assets ( 1,865 ) 907 ( 162 ) Interest payable and other liabilities 4,727 ( 303 ) ( 912 ) Net cash provided by operating activities 39,714 29,955 25,235 Investing Activities Net cash received for acquisition, net of cash paid - 20,432 - Maturities of interest-bearing time deposits in other banks 2,490 13,175 28,162 Purchases of interest-bearing time deposits in other banks ( 4,727 ) - ( 14,427 ) Proceeds from sale of available-for-sale debt securities 11,820 1,173 - Maturities, prepayments and calls of available-for-sale debt securities 19,736 290 - Purchases of available-for-sale debt securities ( 133,052 ) - - Net change in loans ( 242,105 ) ( 77,951 ) ( 132,866 ) Purchases of premises and equipment ( 294 ) ( 599 ) ( 438 ) Proceeds from sale of premises and equipment 3,370 17 27 Change in nonmarketable equity securities ( 7 ) ( 30 ) ( 72 ) Net cash used in investing activities ( 342,769 ) ( 43,493 ) ( 119,614 ) Financing Activities Net change in deposits 211,829 68,470 148,031 Cash distributions ( 4,366 ) ( 3,982 ) ( 7,803 ) Net cash settlement of equity compensation ( 145 ) - - Common stock issued for restricted stock units - 1 ( 9,076 ) Net cash provided by financing activities 207,318 64,489 131,152 Net Increase/(Decrease) in Cash and Due from Banks ( 95,737 ) 50,951 36,773 Cash and Due from Banks, Beginning of Period 204,852 153,901 117,128 Cash and Due from Banks, End of Period $ 109,115 $ 204,852 $ 153,901 Supplemental Disclosure of Cash Flows Information Interest paid $ 9,100 $ 3,222 $ 6,502 Income taxes paid $ 9,981 $ 7,511 $ 7,731 Dividends declared and not paid $ 1,463 $ 1,089 $ 994 Measurement period goodwill adjustment $ 124 $ - $ - Supplemental Disclosure of Investing Activities Cash consideration for acquisition $ - $ 29,266 $ - Fair value of assets acquired in acquisition $ - $ 267,327 $ - Fair value of liabilities assumed in acquisition $ - $ 245,528 $ - See accompanying notes to Consolidated Financial Statements 54 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”) is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Bank7 (the “Bank”). The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers located in Oklahoma, Texas, and Kansas. The Bank is subject to competition from other financial institutions. The Company is subject to the regulation of certain federal agencies and undergoes periodic examinations by those regulatory authorities. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company, the Bank and its subsidiary, 1039 NW 63 rd , 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. Included in cash and cash equivalents is $ 267 ,000 restricted cash related to the acquisition of Watonga Bancshares, Inc. Interest-Bearing Time Deposits in Other Banks Interest-bearing time deposits in other banks totaled $ 5.5 million and $ 3.2 million at December 31, 2022 and December 31, 2021 respectively, and have original maturities generally ranging from one to five years . Available-for-Sale Debt Securities Available-for-sale debt securities are carried at fair value with unrealized gains and losses excluded from earnings and reported separately in other comprehensive income. The Company currently has no securities designated as trading or held-to-maturity. Interest income is recognized at the coupon rate adjusted for amortization and accretion of premiums and discounts. Discounts are accreted into interest income over the estimated life of the related security and premiums are amortized against income to the earlier of the call date or weighted average life of the related security using the interest method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. They are included in noninterest income or expense and, when applicable, are reported as a reclassification adjustment in other comprehensive income. 55 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Declines in the fair value of individual available-for-sale securities below their cost that are other-than-temporary result in write-downs of the individual securities to their fair value. The Company monitors the investment security portfolio for impairment on an individual security basis and has a process in place to identify securities that could potentially have a credit impairment that is other than temporary. This process involves analyzing the length of time and the extent to which the fair value has been less than the amortized cost basis, the market liquidity for the security, the financial condition and near-term prospects of the issuer, expected cash flows, and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the temporary impairment. A decline in value due to a credit event that is considered other-than-temporary is recorded as a loss in noninterest income. 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. Loans acquired through business combinations are required to be carried at fair value as of the date of the combination. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date. 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. 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. 56 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements 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. Non-Marketable Equity Securities 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. 57 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements 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, 2022, 2021, and 2020. 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. Business Combinations The acquisition method of accounting is used for business combinations. Under the acquisition accounting method, the acquiring Company recognizes 100% of the assets acquired and liabilities assumed at the acquisition date fair value. The excess of fair value of the consideration transferred over the acquisition date fair value of net assets acquired is recorded as goodwill. Further, one-time extraordinary expenses related to the acquisition are expected to be incurred. Goodwill and Intangible Assets Intangible assets totaled $ 1.3 million and goodwill, net of accumulated amortization totaled $ 8.6 million for the year ended December 31, 2022, compared to intangible assets of $ 1.6 million and goodwill, net of accumulated amortization of $ 8.5 million for the year ended December 31, 2021. The decrease in intangible assets is due to amortization of core deposit intangibles and the increase in goodwill recognized is due to the resolution of contractual obligations, assessment of fair value of premises and equipment, and tax provision adjustments that relate to the acquisition of Watonga Bancshares, Inc. on December 9, 2021. Goodwill resulting from a business combination represents the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is tested annually for impairment or more frequently if other impairment indicators are present. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the accompanying consolidated financial statements. Other intangible assets consist of core deposit intangible assets and are amortized on a straight-line basis based on an estimated useful life of 10 years. Such assets are periodically evaluated as to the recoverability of their carrying values. 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. 58 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Income Taxes 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, 2022, 2021 and 2020, the Company recognized no interest and penalties. The Company or one of its 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 2019. Comprehensive Income Comprehensive income includes all changes in stockholders’ equity during a period, except those resulting from transactions with stockholders. Besides net income, other components of the Company’s comprehensive income includes the after tax effect of changes in the net unrealized gain/loss on debt securities available-for-sale. The Company’s policy is to release material stranded tax effects included in accumulated other comprehensive income on a specific identification basis. Reclassifications Certain reclassifications have been made to the 2021 consolidated financial statements to conform to the 2022 consolidated financial statement presentation. These reclassifications had no effect on net earnings. 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. Interchange fees are included with noninterest income and recorded net of related expenses as the Bank acts as an agent, introducing the customer transactions to the processor. 59 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Recent Accounting Pronouncements Standards Adopted During Current Period: 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 annual reporting periods beginning after December 15, 2021. Additionally, a modified retrospective approach is required for leases existing at the earliest comparative period presented. The Company adopted this new standard on January 1, 2022, using a modified retrospective transition approach and recognized right-of-use lease assets and related lease liabilities totaling $ 2.2 and $ 2.2 million, respectively. The Company elected to apply certain practical adoption expedients provided under the updates whereby it did not reassess initial direct costs for any existing leases. No cumulative-effect adjustment was recognized as the amount was not material, and the impact on our results of operations and cash flows was also not material. No prior periods were adjusted. See Note (19) for the financial position impact and additional disclosures. Standards Not Yet Adopted: In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The guidance in the ASU is effective for reporting periods beginning after December 15, 2022 with a cumulative-effect adjustment to retained earnings required for the first reporting period. The ASU requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The ASU requires enhanced disclosures related to the significant estimates and judgements used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU will be effective for the Company on January 1, 2023. The Company believes under current assumptions the adoption will result in an immaterial change in our allowance for loan loss. The Company is currently finalizing the execution of its implementation controls and processes, the ultimate impact of the adoption of the ASU as of January 1, 2023 could differ from its current assumptions. Furthermore, the ASU will necessitate that the Company establish an allowance for expected credit losses for certain debt securities and other financial assets. The Company expects to adopt the standard in the first quarter of 2023. Legislative and Regulatory Developments In April 2020, the Company began originating loans to qualified small businesses under the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). PPP loans are fully guaranteed by the SBA and thus have a zero percent risk weight under applicable risk-based capital rules. As of December 31, 2022, the Company had two PPP loans with balances totaling $ 2.6 million, and 43 PPP loans with balances totaling $ 18.7 million as of December 31, 2021. The Company recognized $ 219 ,000 in fee income during the year ended December 31, 2022, with $ 50,000 remaining to be recognized, as compared to $ 2.3 million recognized and $ 269,000 to be recognized as of December 31, 2021. 60 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 2: Recent Events, Including Mergers and Acquisitions On December 9, 2021, the Company’s largest shareholder sold approximately 1.1 million shares of stock pursuant to an S-3 registered secondary offering. The Company incurred $ 423 ,000 in non-recurring expenses associated with the offering, which are included in noninterest expenses. The effect of this purchase and related expenses was included in the consolidated financial statement of the Company as of December 31, 2021. Business Combinations On December 9, 2021, the Company acquired 100 % of the outstanding equity of Watonga Bancshares, Inc. (“Watonga”), the bank holding company for Cornerstone Bank, for $ 29.3 million in cash. Immediately following the acquisition, Watonga was dissolved and Cornerstone Bank merged with and into Bank7. A summary of the fair value of assets acquired and liabilities assumed from Watonga are as follows: (in thousands) Estimated Fair Value Assets Acquired Cash and cash equivalents $ 41,747 Available-for-sale debt securities 86,166 Federal funds sold 7,941 Loans 117,335 Premises and equipment 8,669 Core deposit intangible 1,254 Prepaid expenses and other assets 4,512 Total assets acquiried $ 267,624 Liabilities Assumed Deposits $ 243,487 Accounts payable and accrued expenses 2,232 Total liabilities assumed $ 245,719 Net assets acquired $ 21,905 Consideration transferred 29,498 Goodwill $ 7,593 Goodwill increased $ 124 ,000 for the twelve months ended December 31, 2022, respectively, related to the resolution of contractual obligations, assessment of the fair value of premises and equipment, and tax provision adjustments. The Company engaged a third-party specialist to develop the fair value estimate of Watonga’s loan portfolio as of the acquisition date in accordance with ASC 820. Inputs and assumptions used in the fair value estimate of the loan portfolio, includes interest rate, servicing, credit and liquidity risk, and required equity return. The fair value of loans was calculated using a discounted cash flow analysis based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. There was no carryover of Watonga’s allowance for loan losses associated with the loans that were acquired, as the loans were initially recorded at fair value as of the acquisition date. None of the acquired loans were deemed purchased-credit impaired as of the acquisition date. The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years. The fair value of retail demand and interest-bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities. The Company has determined the above noted acquisition constitutes a business combination as defined by ASC Topic 805, which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. The Company has recorded the assets purchased and liabilities assumed at their estimated fair value in accordance with ASC Topic 805. As of the acquisition date, the Company evaluated $ 117.3 million of net loans ($ 118.5 million gross loans less $ 1.2 million discount) purchased in conjunction with the acquisition of Watonga Bancshares, Inc. in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs. As of December 31, 2022, the net loan balance of the ASC Topic 310-20 purchased loans is $ 63.0 million ($ 63.8 million gross loans less $ 743,000 discount). The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. Summary of Unaudited Pro Forma Information The following table presents unaudited pro-forma information as if the acquisition of Watonga had occurred on January 1, 2020. This pro-forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects and is based on our historical results for the periods presented. Transaction-related costs related to each acquisition are not reflected in the pro-forma amounts. The pro-forma information does not necessarily reflect the results of operations that would have occurred had the Company acquired Watonga at the beginning of fiscal year 2020. Cost savings are also not reflected in the unaudited pro-forma amounts. Actual from Acquisition Date through December 31, 2021 Pro-Forma for Year Ended December 31, 2021 2020 Net interest income $ 411 $ 60,420 $ 54,690 Non-interest income 67 3,261 3,721 Net income 124 21,935 17,433 Pro-forma earnings per share: Basic $ 2.42 $ 1.86 Diluted $ 2.41 $ 1.86 Subsequent Events The Company evaluated subsequent events through the date the consolidated financial statements were issued. There were no subsequent events requiring recognition or disclosure. 61 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 3: Restriction on Cash and Due from Banks On March 26, 2020, the Federal Reserve Board reduced reserve requirement ratios to zero percent, effectively eliminating reserve requirements for all depository institutions. There was no reserve requirement as of December 31, 2022. Note 4: Earnings per Share Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the year. Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income dividend by the weighted average number of commons shares outstanding during each period, adjusted for the effect of dilutive potential common shares, such as restricted stock awards and nonqualified stock options, calculated using the treasury stock method. The following table shows the computation of basic and diluted earnings per share: As of and for the Years ended December 31, 2022 2021 2020 (Dollars in thousands, except per share amounts) Numerator Net income $ 29,638 $ 23,159 $ 19,266 Denominator Weighted-average shares outstanding for basic earnings per share 9,101,523 9,056,117 9,378,769 Dilutive effect of stock compensation (1) 103,193 35,419 385 Denominator for diluted earnings per share 9,204,716 9,091,536 9,379,154 Earnings per common share Basic $ 3.26 $ 2.56 $ 2.05 Diluted $ 3.22 $ 2.55 $ 2.05 (1) The following have not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented: Nonqualified stock options outstanding of 5,000 , 264,000 , and 185,250 as of December 31, 2022, 2021, and 2020, respectively; Restricted stock units outstanding of 0 , 0 , and 10,000 as of December 31, 2022, 2021, and 2020, respectively. 62 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 5: Debt Securities The following table summarizes the amortized cost and fair value of debt securities available-for-sale at December 31, 2022 and December 31, 2021, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income: (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available-for-sale as of December 31, 2022 U.S. Federal agencies $ 1,292 $ - $ ( 150 ) $ 1,142 Mortgage-backed securities (1) (2) 42,953 - ( 4,879 ) 38,074 State and political subdivisions 30,632 - ( 2,276 ) 28,356 U.S. Treasuries 104,940 - ( 4,280 ) 100,660 Corporate debt securities 5,500 - ( 567 ) 4,933 Total available-for-sale 185,317 - ( 12,152 ) 173,165 Total debt securities 185,317 - ( 12,152 ) 173,165 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available-for-sale as of December 31, 2021 U.S. Federal agencies $ 311 $ 2 $ - $ 313 Mortgage-backed securities (1) 33,085 69 - 33,154 State and political subdivisions 45,245 49 - 45,294 U.S. Treasuries 6,052 - ( 5 ) 6,047 Corporate debt securities - - - - Total available-for-sale 84,693 120 ( 5 ) 84,808 Total debt securities 84,693 120 ( 5 ) 84,808 (1) All of our mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored entities. (2) Included in mortgage-backed securities is $ 27.90 million of residential mortgage-backed securities and $ 15.05 million of commerical mortgage-backed securities. 63 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The amortized cost and estimated fair value of investment securities at December 31, 2022 and December 31, 2021, by contractual maturity, are shown below. The expected life of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or without call or prepayment penalties. (in thousands) Amortized Cost Fair Value Available-for-sale as of December 31, 2022 Due in one year or less $ 2,133 $ 2,115 Due after one year through five years 118,108 113,415 Due after five years through ten years 21,495 19,030 Due after ten years 628 531 Mortgage-backed securities 42,953 38,074 Total available-for-sale 185,317 173,165 (in thousands) Amortized Cost Fair Value Available-for-sale as of December 31, 2021 Due in one year or less $ 3,622 $ 3,623 Due after one year through five years 22,030 22,076 Due after five years through ten years 22,819 22,821 Due after ten years 3,137 3,134 Mortgage-backed securities 33,085 33,154 Total available-for-sale 84,693 84,808 There were no holdings of securities of any issuer in an amount greater than 10% of stockholders equity at December 31, 2022. The following table presents a summary of realized gains and losses from the sale, prepayment and call of debt securities for the twelve months ended December 31, 2022 and December 31, 2021. Year Ended December 31, 2022 Year Ended December 31, 2021 (in thousands) Proceeds from sales, prepayments and calls $ 31,556 $ - Gross realized gains on sales, prepayments and calls 10 - Gross realized losses on sales, prepayments and calls ( 137 ) - Total realized (losses), net $ ( 127 ) $ - The following table details book value of pledged securities as of December 31, 2022: (in thousands) December 31, 2022 December 31, 2021 Book value of pledged securities $ 85,280 $ 37,477 64 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The following table details gross unrealized losses and fair values of investment securities aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2022 and December 31, 2021. As of December 31, 2022, the Company had the ability and intent to hold the debt securities classified as available-for-sale for a period of time sufficient for a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying debt securities were purchased and acquired. The fair value of those debt securities having unrealized losses is expected to recover as the securities approach their maturity date or repricing date, or if market yields for such investments decline. Management has no intent or requirement to sell before the recovery of the unrealized loss; therefore, no impairment loss was realized in the Company’s consolidated statement of comprehensive income. Less than Twelve Months Twelve Months or Longer Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses (in thousands) Available-for-sale as of December 31, 2022 U.S. Federal agencies $ 1,142 $ ( 150 ) $ - $ - $ 1,142 $ ( 150 ) Mortgage-backed securities 38,074 ( 4,879 ) - - 38,074 ( 4,879 ) State and political subdivisions (1) 28,356 ( 2,276 ) - - 28,356 ( 2,276 ) U.S. Treasuries 100,660 ( 4,280 ) - - 100,660 ( 4,280 ) Corporate debt securities 4,933 ( 567 ) - - 4,933 ( 567 ) Total available-for-sale $ 173,165 $ ( 12,152 ) $ - $ - $ 173,165 $ ( 12,152 ) Less than Twelve Months Twelve Months or Longer Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses (in thousands) Available-for-sale as of December 31, 2021 U.S. Federal agencies $ - $ - $ - $ - $ - $ - Mortgage-backed securities - - - - - - State and political subdivisions (1) - - - - - - U.S. Treasuries 6,047 ( 5 ) - - 6,047 ( 5 ) Corporate debt securities - - - - - - Total available-for-sale $ 6,047 $ ( 5 ) $ - $ - $ 6,047 $ ( 5 ) (1) Of our state and political subdivisions securities $ 25.02 million are rate BBB+ or better and $ 3.34 million are not rated. 65 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 6: Loans and Allowance for Loan Losses A summary of loans at December 31, 2022 and December 31, 2021, are as follows (dollars in thousands): December 31, 2022 December 31, 2021 Construction & development $ 163,203 $ 169,322 1 - 4 family real estate 76,928 62,971 Commercial real estate - other 439,001 339,655 Total commercial real estate 679,132 571,948 Commercial & industrial 513,011 361,974 Agricultural 66,145 73,010 Consumer 14,949 24,046 Gross loans 1,273,237 1,030,978 Less allowance for loan losses ( 14,734 ) ( 10,316 ) Less deferred loan fees ( 2,781 ) ( 2,577 ) Net loans $ 1,255,722 $ 1,018,085 Included in the commercial & industrial loan balance at December 31, 2022 and December 31, 2021, are $ 2.6 million and $ 18.7 million of loans that were originated under the SBA PPP program, respectively. 66 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, 2022, 2021, and 2020 (dollars in thousands): Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2022 Balance, beginning of period $ 1,695 $ 630 $ 3,399 $ 3,621 $ 730 $ 241 $ 10,316 Charge-offs - - - ( 2 ) ( 50 ) ( 22 ) ( 74 ) Recoveries - - - 10 4 10 24 Net (charge-offs) recoveries - - - 8 ( 46 ) ( 12 ) ( 50 ) Provision (credit) for loan losses 194 260 1,681 2,308 81 ( 56 ) 4,468 Balance, end of period $ 1,889 $ 890 $ 5,080 $ 5,937 $ 765 $ 173 $ 14,734 Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2021 Balance, beginning of period $ 1,239 $ 334 $ 3,337 $ 4,035 $ 580 $ 114 $ 9,639 Charge-offs - - - ( 3,750 ) - ( 68 ) ( 3,818 ) Recoveries - - - 16 300 4 320 Net (charge-offs) recoveries - - - ( 3,734 ) 300 ( 64 ) ( 3,498 ) Provision (credit) for loan losses 456 296 62 3,320 ( 150 ) 191 4,175 Balance, end of period $ 1,695 $ 630 $ 3,399 $ 3,621 $ 730 $ 241 $ 10,316 Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2020 Balance, beginning of period $ 782 $ 378 $ 3,025 $ 2,887 $ 642 $ 132 $ 7,846 Charge-offs - - - ( 3,289 ) ( 300 ) ( 1 ) ( 3,590 ) Recoveries - 2 - 18 10 3 33 Net (charge-offs) recoveries - 2 - ( 3,271 ) ( 290 ) 2 ( 3,557 ) Provision (credit) for loan losses 457 ( 46 ) 312 4,419 228 ( 20 ) 5,350 Balance, end of period $ 1,239 $ 334 $ 3,337 $ 4,035 $ 580 $ 114 $ 9,639 67 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, 2022 and December 31, 2021 (dollars in thousands): Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2022 Allowance Balance Ending balance Individually evaluated for impairment $ - $ - $ - $ 133 $ - $ - $ 133 Collectively evaluated for impairment 1,889 890 5,080 5,804 765 173 14,601 Total $ 1,889 $ 890 $ 5,080 $ 5,937 $ 765 $ 173 $ 14,734 Gross Loans Ending balance Individually evaluated for impairment $ - $ - $ 1,983 $ 19,015 $ - $ 22 $ 21,020 Collectively evaluated for impairment 163,203 76,928 437,018 493,996 66,145 14,927 1,252,217 Total $ 163,203 $ 76,928 $ 439,001 $ 513,011 $ 66,145 $ 14,949 $ 1,273,237 December 31, 2021 Allowance Balance Ending balance Individually evaluated for impairment $ - $ - $ - $ 253 $ - $ - $ 253 Collectively evaluated for impairment 1,695 630 3,399 3,368 730 241 10,063 Total $ 1,695 $ 630 $ 3,399 $ 3,621 $ 730 $ 241 $ 10,316 Gross Loans Ending balance Individually evaluated for impairment $ - $ - $ 14,481 $ 9,354 $ - $ 19 $ 23,854 Collectively evaluated for impairment 169,322 62,971 325,174 352,620 73,010 24,027 1,007,124 Total $ 169,322 $ 62,971 $ 339,655 $ 361,974 $ 73,010 $ 24,046 $ 1,030,978 68 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Internal Risk Categories Each loan segment is made up of loan categories possessing similar risk characteristics. Risk characteristics applicable to each segment of the loan portfolio are described as follows: Real Estate – The real estate 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. 69 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Loan grades are numbered 1 through 4. Grade 1 is considered satisfactory. The grades of 2 and 3, or Watch and Special Mention, respectively, represent loans of lower quality and are considered criticized. Grade of 4, or Substandard, refers to loans that are classified. • Grade 1 (Pass) – These loans generally conform to Bank policies, and are characterized by policy conforming advance rates on collateral, and have well-defined repayment sources. In addition, these credits are extended to Borrowers and/or Guarantors with a strong balance sheet and either substantial liquidity or a reliable income history. • Grade 2 (Watch) – These loans are still considered “Pass” credits; however, various factors such as industry stress, material changes in cash flow or financial conditions, or deficiencies in loan documentation, or other risk issues determined by the Lending Officer, Commercial Loan Committee (CLC), or Credit Quality Committee (CQC) warrant a heightened sense and frequency of monitoring. • Grade 3 (Special Mention) – These loans must have observable weaknesses or evidence of imprudent handling or structural issues. The weaknesses require close attention and the remediation of those weaknesses is necessary. No risk of probable loss exists. Credits in this category are expected to quickly migrate to a “2” or a “4” as this is viewed as a transitory loan grade. • Grade 4 (Substandard) – These loans are not adequately protected by the sound worth and debt service capacity of the Borrower, but may be well secured. They have defined weaknesses relative to cash flow, collateral, financial condition, or other factors that might jeopardize repayment of all of the principal and interest on a timely basis. There is the possibility that a future loss will occur if weaknesses are not remediated. The Company evaluates the definitions of loan grades and the allowance for loan losses methodology on an ongoing basis. No changes were made to either during the period ended December 31, 2022. 70 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category as of December 31, 2022 and December 31, 2021 (dollars in thousands): Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2022 Grade 1 (Pass) $ 163,203 $ 76,928 $ 397,295 $ 493,412 $ 65,857 $ 14,927 $ 1,211,622 2 (Watch) - - 14,976 - 288 - 15,264 3 (Special Mention) - - 24,747 584 - - 25,331 4 (Substandard) - - 1,983 19,015 - 22 21,020 Total $ 163,203 $ 76,928 $ 439,001 $ 513,011 $ 66,145 $ 14,949 $ 1,273,237 Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2021 Grade 1 (Pass) $ 169,322 $ 62,971 $ 282,268 $ 341,661 $ 72,295 $ 24,000 $ 952,517 2 (Watch) - - 14,976 4,658 255 - 19,889 3 (Special Mention) - - 27,112 6,300 460 - 33,872 4 (Substandard) - - 15,299 9,355 - 46 24,700 Total $ 169,322 $ 62,971 $ 339,655 $ 361,974 $ 73,010 $ 24,046 $ 1,030,978 71 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, 2022 and December 31, 2021 (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, 2022 Construction & development $ - $ - $ - $ - $ 163,203 $ 163,203 $ - 1 - 4 family real estate - - - - 76,928 76,928 - Commercial real estate - other - 617 - 617 438,384 439,001 - Commercial & industrial (1) 21 - 9,923 9,944 503,067 513,011 9,923 Agricultural 4 - - 4 66,141 66,145 - Consumer 291 82 22 395 14,554 14,949 18 Total $ 316 $ 699 $ 9,945 $ 10,960 $ 1,262,277 $ 1,273,237 $ 9,941 (1) The $ 9.92 million that is greater than 90 days past due consists of a single loan that is well collateralized and for which collection is being diligently pursued. December 31, 2021 Construction & development $ - $ - $ - $ - $ 169,322 $ 169,322 $ - 1 - 4 family real estate - - - - 62,971 62,971 - Commercial real estate - other - 174 - 174 339,481 339,655 - Commercial & industrial - 19 501 520 361,454 361,974 401 Agricultural - - 77 77 72,933 73,010 77 Consumer 48 15 18 81 23,965 24,046 18 Total $ 48 $ 208 $ 596 $ 852 $ 1,030,126 $ 1,030,978 $ 496 The following table presents impaired loans as of December 31, 2022 and December 31, 2021 (dollars in thousands): Unpaid Principal Balance Recorded Investment with No Allowance Recorded Investment with an Allowance Total Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized December 31, 2022 Construction & development $ - $ - $ - $ - $ - $ 21 $ - 1 - 4 family real estate - - - - - - - Commercial real estate - other 2,808 1,983 - 1,983 - 11,749 141 Commercial & industrial 19,882 18,882 133 19,015 133 11,773 1,214 Agricultural - - - - - 14 - Consumer 31 22 - 22 - 27 - Total $ 22,721 $ 20,887 $ 133 $ 21,020 $ 133 $ 23,584 $ 1,355 December 31, 2021 Construction & development $ - $ - $ - $ - $ - $ - $ - 1 - 4 family real estate - - - - - - - Commercial real estate - other 15,412 14,481 - 14,481 - 11,879 902 Commercial & industrial 9,476 9,101 253 9,354 253 12,584 275 Agricultural - - - - - 161 - Consumer 18 19 - 19 - 33 1 Total $ 24,906 $ 23,601 $ 253 $ 23,854 $ 253 $ 24,657 $ 1,178 72 Table of Contents Bank7 Corp. Notes to 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 December 31, 2022, the Company had $ 1.2 million of commercial real estate loans, compared to $ 1.4 million of commercial real estate loans that were classified as troubled-debt restructurings and impaired as of December 31, 2021. There were no newly modified troubled-debt restructurings during the year ended December 31, 2022. There were no troubled-debt restructurings modified in the past twelve months that subsequently defaulted for the year ended December 31, 2022. The following table represents information regarding nonperforming assets at December 31, 2022 and December 31, 2021 (dollars in thousands): Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2022 Nonaccrual loans $ - $ - $ 1,348 $ 6,686 $ - $ 5 $ 8,039 Troubled-debt restructurings (1) - - - - - - - Accruing loans 90 or more days past due - - - 9,923 - 18 9,941 Total nonperforming loans $ - $ - $ 1,348 $ 16,609 $ - $ 23 $ 17,980 Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2021 Nonaccrual loans $ - $ - $ 2,708 $ 7,163 $ - $ 14 $ 9,885 Troubled-debt restructurings (1) - - - - - - - Accruing loans 90 or more days past due - - - 401 77 18 496 Total nonperforming loans $ - $ - $ 2,708 $ 7,564 $ 77 $ 32 $ 10,381 (1) $ 1.2 million of TDRs as of December 31, 2022 and $ 1.4 million as of December 31, 2021, are included in the nonaccrual loans balance. 73 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 7: Premises and Equipment Major classifications of premises and equipment, stated at cost and net of accumulated depreciation are as follows (dollars in thousands): December 31, 2022 December 31, 2021 Land, buildings and improvements $ 15,504 $ 18,327 Furniture and equipment 2,803 3,100 Automobiles 958 946 19,265 22,373 Less accumulated depreciation ( 6,159 ) ( 5,116 ) Net premises and equipment $ 13,106 $ 17,257 Note 8: Goodwill and Core Deposit Intangibles The following is a summary of goodwill and intangible assets (dollars in thousands): Gross Carrying Amount Accumulated Amortization Net Carrying Amount As of December 31, 2022 Goodwill $ 8,833 $ ( 230 ) $ 8,603 Core deposit intangibles 3,315 ( 1,979 ) 1,336 Total $ 12,148 $ ( 2,209 ) $ 9,939 Gross Carrying Amount Accumulated Amortization Net Carrying Amount As of December 31, 2021 Goodwill $ 8,709 $ ( 230 ) $ 8,479 Core deposit intangibles 3,315 ( 1,672 ) 1,643 Total $ 12,024 $ ( 1,902 ) $ 10,122 See Note 2 for discussion on the $ 124 ,000 in adjustments to Goodwill as of the year-ended December 31, 2022. Amortization expense for intangible assets totaled $ 307 ,000, $ 183 ,000 and $ 206 ,000 for the years ended December 31, 2022, 2021 and 2020, respectively. Estimated amortization expense for each of the remaining life is as follows (dollars in thousands): 2023 $ 305 2024 155 2025 125 2026 125 2027 125 Thereafter 501 Total $ 1,336 74 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 9: Interest-Bearing Deposits Interest-bearing time deposits in denominations of $250,000 or more were $ 42.6 million and $ 45.9 million at December 31, 2022 and 2021, respectively. At December 31, 2022, the scheduled maturities of interest-bearing time deposits were as follows (dollars in thousands): 2023 $ 157,233 2024 18,150 2025 5,775 2026 2,076 Thereafter 268 Total $ 183,502 As of December 31, 2022, 2021, and 2020 brokered deposits were $ 261.3 million, $ 273.8 million, and $ 427.0 million , respectively, of these $ 261.3 million, $ 273.8 million, and $ 427.0 million , respectively, were reciprocal deposits . Note 10: Income Taxes The (benefit)/provision for income taxes for the years ended December 31, 2022, 2021 and 2020 consists of the following (dollars in thousands): Year Ended December 31, 2022 2021 2020 Federal: Current $ 9,480 $ 6,204 $ 5,944 Deferred ( 1,309 ) 90 ( 684 ) Total federal tax provision $ 8,171 $ 6,294 $ 5,260 State: Current $ 1,562 $ 1,440 $ 1,549 Deferred ( 114 ) 21 ( 191 ) Total state tax provision $ 1,448 $ 1,461 $ 1,358 Total income tax provision $ 9,619 $ 7,755 $ 6,618 75 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The provision for income taxes for the years ended December 31, 2022, 2021 and 2020 differs from the federal rate of 21 % due to the following: Year Ended December 31, 2022 2021 2020 Statutory U.S. Federal Income Tax $ 8,244 $ 6,492 $ 5,434 Increase (decrease) resulting from: State Taxes 1,154 1,214 1,077 Permanent Differences 240 121 118 Return to provision and deferred true ups ( 7 ) - - FIN 48 Activity ( 13 ) - - Other 1 ( 72 ) ( 11 ) Provision for income taxes $ 9,619 $ 7,755 $ 6,618 Deferred tax assets (liabilities) included in other assets in the accompanying consolidated balance sheet consist of the following: Year Ended December 31, 2022 2021 Deferred tax assets: Allowance for loan losses $ 3,345 $ 2,413 Non-accrual Loans 204 135 Deferred Compensation 218 253 Deferred Revenue 302 285 Discounts and premiums on assets acquired 191 318 Net unrealized loss on securities available for sale 2,639 - Accrued expenses 204 - Lease liabilities 492 - Total deferred tax assets $ 7,595 $ 3,404 Deferred tax liabilities: Property and equipment $ ( 1,066 ) $ ( 1,189 ) Intangible assets ( 402 ) ( 473 ) Prepaid Expenses ( 149 ) ( 25 ) Right of Use Asset ( 500 ) - Net unrealized gains on securities available for sale - ( 478 ) Other ( 15 ) ( 15 ) Total deferred tax liabilities $ ( 2,132 ) $ ( 2,180 ) Net deferred tax assets $ 5,463 $ 1,224 76 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements 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, 2022. The Company does not have any net operating loss or tax credit carryforwards as of December 31, 2022. 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): For the Year Ended December 31, 2022 2021 Balance at beginning of year $ 13 $ 13 Additions for positions taken in prior years - - Reductions for positions taken in prior years - - Balance at end of year $ 13 $ 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, 2022, 2021, and 2020. 77 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 11: 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, 2022 and 2021 were $ 800,000 and $ 600,000 , respectively. Loans with a collateral value of approximately $ 130.0 million and $ 78.7 million were used to secure the letters of credit at December 31, 2022 and 2021, respectively. Note 12: Advances and Borrowings The Bank has a blanket floating lien security agreement with a maximum borrowing capacity of $ 129.2 million at December 31, 2022, 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, 2022 or 2021. Note 13: Shareholders’ Equity On September 5, 2019, the Company adopted a Repurchase Plan (the “RP”). The RP initially authorized the repurchase of up to 500,000 shares of the Company’s common stock. On March 13, 2020, the Company’s Board of Directors approved a 500,000 share expansion, and on November 2, 2020, approved a 750,000 share expansion to the RP, for a total of 1,750,000 shares authorized under the RP. All shares repurchased under the RP have been retired and not held as treasury stock. The RP expired on September 5, 2021. On October 28, 2021, the Company adopted a new Repurchase Plan (the “New RP”) that authorizes the repurchase of up to 750,000 shares of the Company’s stock. Stock repurchases under the New RP will take place pursuant to a Rule 10b5-1 Plan with pricing and purchasing parameters established by management. There were no repurchases as of December 31, 2022. A summary of the activity under the RP is as follows: Year Ended December 31, 2022 2021 Number of shares repurchased - - Average price of shares repurchased $ - $ - Shares remaining to be repurchased 750,000 750,000 78 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The Company and Bank are subject to risk-based capital guidelines issued by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under GAAP, regulatory reporting requirements and regulatory capital standards. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company’s and the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier I, and Common Equity capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2022, 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, 2022, 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. In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA. Federal bank regulatory agencies have issued an interim final rule that permits banks to neutralize the regulatory capital effects of participating in the Paycheck Protection Program Lending Facility (the “PPP Facility”) and clarify that PPP loans have a zero percent risk weight under applicable risk-based capital rules. Specifically, a bank may exclude all PPP loans pledged as collateral to the PPP Facility from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPP Facility will be included. 79 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The Company’s and Bank’s actual capital amounts and ratios are presented in the following table (dollars in thousands): Actual Minimum Capital Requirements With Capital Conservation Buffer Minimum To Be Well Capitalized Under Prompt Corrective Action Amount Ratio Amount Ratio Amount Ratio Amount Ratio As of December 31, 2022 Total capital to risk-weighted assets Company $ 158,158 12.41 % $ 101,990 8.00 % $ 133,862 10.50 % N/A N/A Bank 158,158 12.42 % 101,909 8.00 % 133,756 10.50 % 127,387 10.00 % Tier I capital to risk-weighted assets Company 143,424 11.25 % 76,493 6.00 % 108,365 8.50 % N/A N/A Bank 143,424 11.26 % 76,432 6.00 % 108,279 8.50 % 101,909 8.00 % CET I capital to risk-weighted assets Company 143,424 11.25 % 57,370 4.50 % 89,241 7.00 % N/A N/A Bank 143,424 11.26 % 57,324 4.50 % 89,171 7.00 % 82,801 6.50 % Tier I capital to average assets Company 143,424 9.19 % 62,460 4.00 % N/A N/A N/A N/A Bank 143,424 9.18 % 62,489 4.00 % N/A N/A 78,111 5.00 % As of December 31, 2021 Total capital to risk-weighted assets Company $ 127,946 12.54 % $ 81,620 8.00 % $ 107,126 10.50 % N/A N/A Bank 127,844 12.54 % 81,539 8.00 % 107,020 10.50 % $ 101,924 10.00 % Tier I capital to risk-weighted assets Company 117,631 11.53 % 61,215 6.00 % 86,721 8.50 % N/A N/A Bank 117,528 11.53 % 61,154 6.00 % 86,635 8.50 % 81,539 8.00 % CET I capital to risk-weighted assets Company 117,631 11.53 % 45,911 4.50 % 71,417 7.00 % N/A N/A Bank 117,528 11.53 % 45,866 4.50 % 71,347 7.00 % 66,250 6.50 % Tier I capital to average assets Company 117,631 10.56 % 44,571 4.00 % N/A N/A N/A N/A Bank 117,528 10.55 % 44,571 4.00 % N/A N/A 55,714 5.00 % The federal banking agencies require that banking organizations meet several risk-based capital adequacy requirements. The current risk-based capital standards applicable to the Company and the Bank are based on the Basel III Capital Rules established by the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. The requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. The Basel III Capital Rules require the Bank and the Company to comply with four minimum capital standards: a Tier 1 leverage ratio of at least 4.0%; a CET1 to risk-weighted assets of 4.5%; a Tier 1 capital to risk-weighted assets of at least 6.0%; and a total capital to risk-weighted assets of at least 8.0%. The calculation of all types of regulatory capital is subject to definitions, deductions and adjustments specified in the regulations. 80 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The Basel III Capital Rules also require a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital requirements. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) are subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers based on the amount of the shortfall. As of December 31, 2022, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements under the Basel III Capital Rules on a fully phased-in basis. The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2022, approximately $ 59.4 million of retained earnings was available for dividend declaration from the Bank without prior regulatory approval. Note 14: Related-Party Transactions At December 31, 2022 and December 31, 2021, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties) approximating $ 132,000 and $ 0 , respectively. 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 $ 155,000 , $ 175,000 and $ 177,000 for the years ended December 31, 2022, 2021 and 2020, respectively. In addition, payroll and office sharing arrangements were in place between the Company and certain of its affiliates. 81 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 15: Employee Benefits 401(k) Savings Plan The Company has a retirement savings 401(k) plan covering substantially all employees. Employees may contribute up to the maximum legal limit with the Bank matching up to 5 % of the employee’s salary. Employer contributions charged to expense for the years ended December 31, 2022, 2021 and 2020 totaled $ 366,000 , $ 267,000 and $ 230,000 , respectively. Stock-Based Compensation The Company adopted a nonqualified incentive stock option plan (the “Bank7 Corp. 2018 Equity Incentive Plan”) in September 2018 and amended the Bank7 Corp. 2018 Equity Plan on May 20, 2020 adding an additional 507,500 shares to the plan. The Bank7 Corp. 2018 Equity Incentive Plan will terminate in September 2028, if not extended. Compensation expense, net of settlement of shares for payroll withholding related to the Plan for the years ended December 31, 2022, 2021 and 2020 totaled $ 1,384,000 , $ 862,000 and $ 771,000 , respectively. There were 700,087 shares available for future grants as of December 31, 2022. The Company grants to employees and directors restricted stock units (RSUs) which vest ratably over either three or five years and stock options which vest ratably over four years . All RSUs and stock options are granted at the fair value of the common stock at the time of the award. The RSUs are considered fixed awards as the number of shares and fair value are known at the date of grant and the fair value at the grant date is amortized over the vesting and/or service period. The Company uses newly issued shares for granting RSUs and stock options. 82 Table of Contents Bank7 Corp. Notes to 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): Options Wgtd. Avg. Exercise Price Wgtd. Avg. Remaining Contractual Term Aggregate Intrinsic Value Year Ended December 31, 2022 Outstanding at December 31, 2021 264,000 $ 17.41 Options Granted 5,000 23.87 Options Exercised 17,450 17.73 Options Forfeited - - Outstanding at December 31, 2022 251,550 17.52 6.64 $ 2,032,509 Exercisable at December 31, 2022 170,485 18.39 6.05 $ 1,229,200 Options Wgtd. Avg. Exercise Price Wgtd. Avg. Remaining Contractual Term Aggregate Intrinsic Value Year Ended December 31, 2021 Outstanding at December 31, 2020 185,250 $ 18.73 Options Granted 80,500 14.31 Options Exercised - - Options Forfeited ( 1,750 ) 14.31 Outstanding at December 31, 2021 264,000 17.41 7.56 $ 1,474,840 Exercisable at December 31, 2021 121,932 18.82 6.82 $ 509,257 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 period presented: For the Year Ended December 31, 2022 December 31, 2021 Risk-free interest rate 3.47 % 0.52 % Dividend yield 1.96 % 2.89 % Stock price volatility 34.92 % 66.67 % Expected term 7.01 6.41 83 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The following table summarizes share information about RSUs for the years ended December 31, 2022 and 2021: Number of Shares Wgtd. Avg. Grant Date Fair Value Year Ended December 31, 2022 Outstanding at December 31, 2021 172,993 $ 19.02 Shares granted 3,000 4.03 Shares vested ( 61,902 ) 18.88 Shares forfeited ( 1,500 ) 22.13 End of the period balance 112,591 $ 18.66 Number of Shares Wgtd. Avg. Grant Date Fair Value Year Ended December 31, 2021 Outstanding at December 31, 2020 118,000 $ 18.09 Shares granted 90,575 19.95 Shares vested ( 35,582 ) 18.30 Shares forfeited - - End of the period balance 172,993 $ 19.02 As of December 31, 2022, there was approximately $ 1.8 million of unrecognized compensation expense related to 113 ,000 unvested RSUs and $ 351,000 of unrecognized compensation expense related to 252,000 unvested and/or unexercised stock options. The stock option expense is expected to be recognized over a weighted average period of 2.05 years, and the RSU expense is expected to be recognized over a weighted average period of 2.32 years. 84 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 16: Disclosures about Fair Value of Assets and Liabilities Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs supported by little or no market activity and significant to the fair value of the assets or liabilities Recurring Measurements Assets and liabilities measured at fair value on a recurring basis include the following: Available-for-sale securities: Debt securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For those debt securities classified as Level 2, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data for similar securities, market consensus prepayments speeds, credit information and the bond’s terms and conditions, among other things. 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, 2022 and December 31, 2021 (dollars in thousands): Fair Value (Level 1) (Level 2) (Level 3) December 31, 2022 Impaired loans (collateral- dependent) $ 6,553 $ - $ - $ 6,553 December 31, 2021 Impaired loans (collateral- dependent) $ 6,910 $ - $ - $ 6,910 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. 85 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements 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. 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, 2022 Collateral-dependent impaired loans $ 6,553 Appraisals from comparable properties Estimated cost to sell 20 % December 31, 2021 Collateral-dependent impaired loans $ 6,910 Appraisals from comparable properties Estimated cost to sell 20 % 86 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The estimated fair values of the Company’s financial instruments that are reported at amortized cost in the Company’s consolidated balance sheets, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value, are as follows : Carrying Fair Value Measurements Amount Level 1 Level 2 Level 3 Total December 31, 2022 Financial Assets Cash and due from banks $ 109,115 $ 109,115 $ - $ - $ 109,115 Interest-bearing time deposits in other banks 5,474 - 5,474 - 5,474 Loans, net of allowance 1,255,722 - 1,245,825 6,553 1,252,378 Loans held for sale - - - - - Nonmarketable equity securities 1,209 - 1,209 - 1,209 Interest receivable 8,124 - 8,124 - 8,124 Financial Liabilities Deposits $ 1,429,300 $ - $ 1,427,465 $ - $ 1,427,465 Interest payable 339 - 339 - 339 December 31, 2021 Financial Assets Cash and due from banks $ 195,359 $ 195,359 $ - $ - $ 195,359 Federal funds sold 9,493 9,493 - - $ 9,493 Interest-bearing time deposits in other banks 3,237 - 3,237 - 3,237 Loans, net of allowance 1,018,085 - 1,011,048 6,910 1,017,958 Loans held for sale 464 - 464 - 464 Nonmarketable equity securities 1,202 - 1,202 - 1,202 Interest receivable 4,259 - 4,259 - 4,259 Financial Liabilities Deposits $ 1,217,471 $ - $ 1,217,094 $ - $ 1,217,094 Interest payable 117 - 117 - 117 87 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value: Cash and Due from Banks, Federal Funds Sold, 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. 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, 2022 or December 31, 2021. 88 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 17: 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, 2022 and December 31, 2021 (dollars in thousands): December 31, 2022 December 31, 2021 Commitments to extend credit $ 198,027 $ 200,393 Financial and performance standby letters of credit 1,043 5,809 $ 199,070 $ 206,202 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 18: 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 6 regarding loans. As of December 31, 2022, hospitality loans were 19 % of gross total loans with outstanding balances of $ 244.3 million and unfunded commitments of $ 15.5 million; energy loans were 14 % of gross total loans with outstanding balances of $ 182.8 million and unfunded commitments of $ 43.8 million. The Company evaluates goodwill for potential goodwill impairment on an annual basis or more often based on consideration if any impairment indicators have occurred. A prolonged strain on the U.S. economy impacting the Company could result in goodwill being partially or fully impaired. At December 31, 2022, goodwill of $ 8.6 million was recorded on the consolidated balance sheet. 89 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 19: Operating Leases Lessee On January 1, 2022, the Company adopted ASU No. 2016-02, Leases (Topic 842), which requires the recognition of the Company’s operating leases on its balance sheet. See Note (1) for additional information. The Company has operating leases, which primarily consist of office space in buildings, ATM locations, equipment and land on which it owns certain buildings. Rental expense on all operating leases, including those rented on a monthly or temporary basis were as follows (Dollars in thousands): Year Ending December 31: 2022 $ 777 2021 799 2020 837 As of December 31, 2022, a right of use lease asset included in interest receivable and other assets on the balance sheet totaled $ 2.0 million, and a related lease liability included in accrued interest payable and other liabilities on the balance sheet totaled $ 2.1 million. As of December 31, 2022, our operating leases have a weighted-average remaining lease term of 12.5 years and a weighted-average discount rate of 3.6 percent. Future minimum rental commitments of branch facilities and office equipment due under non-cancelable operating leases at December 31, 2022, were as follows (dollars in thousands): 2023 $ 532 2024 448 2025 367 2026 298 2027 155 Thereafter 530 Total lease payments 2,330 Less imputed interest ( 254 ) Operating lease liability $ 2,076 90 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 20: Parent-only Financial Statements (dollars in thousands) Condensed Balance Sheets Assets December 31, 2022 December 31, 2021 Cash and due from banks $ 297 $ 297 Investment in bank subsidiary 143,049 126,783 Dividends receivable 1,463 1,089 Goodwill 1,011 1,011 Total assets $ 145,820 $ 129,180 Liabilities and Shareholders’ Equity Dividends Payable $ 1,463 $ 1,089 Other liabilities 257 683 Total liabilities 1,720 1,772 Total shareholders’ equity 144,100 127,408 Total liabilities and shareholders’ equity $ 145,820 $ 129,180 Condensed Statements of Comprehensive Income For the Years Ended December 31, 2022 2021 2020 Income Dividends from subsidiary bank $ 4,738 $ 4,078 $ 12,846 Total Income 4,738 4,078 12,846 Expense Other - - - Total expense - - - Income and equity in undistributed net income of bank subsidiary 4,738 4,078 12,846 Equity in undistributed net income of bank subsidiary 24,900 19,081 6,420 Income before Taxes 29,638 23,159 19,266 Net Income Available to Common Shareholders $ 29,638 $ 23,159 $ 19,266 Other Comprehensive Income Equity in other comprehensive (loss) income of subsidiary ( 9,447 ) 144 - Other comprehensive gain(loss) $ ( 9,447 ) $ 144 $ - Comprehensive Income $ 20,191 $ 23,303 $ 19,266 91 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Condensed Statements of Cash Flows For the Years Ended December 31, 2022 2021 2020 Operating Activities Net income $ 29,638 $ 23,159 $ 19,266 Items not requiring (providing) cash Equity in undistributed net income ( 24,900 ) ( 19,081 ) ( 6,420 ) Changes in Other current assets and liabilities ( 374 ) ( 102 ) 4,039 Net cash provided by operating activities 4,364 3,976 16,885 Financing Activities Common stock issued, net of offering costs - 1 ( 9,076 ) Dividends paid ( 4,364 ) ( 3,982 ) ( 7,803 ) Net cash used in financing activities ( 4,364 ) ( 3,981 ) ( 16,879 ) Increase (Decrease) in Cash and Due from Banks - ( 5 ) 6 Cash and Due from Banks, Beginning of Period 297 302 296 Cash and Due from Banks, End of Period $ 297 $ 297 $ 302 Supplemental Disclosure of Cash Flows Information Dividends declared and not paid $ 1,463 $ 1,089 $ 995 92 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.