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 ) 45 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 2023 and 2022 48 Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2023 49 Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2023 50 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2023 51 Notes to Consolidated Financial Statements 52 44 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders, Board of Directors, and Audit Committee Bank7 Corp. Report of Independent Registered Public Accounting Firm To the 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. (“Company”) as of December 31, 2023 and 2022, 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, 2023, 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, 2023 and 2022 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Notes 1 and 6 to the financial statements, the Company changed its method of accounting for loans and the allowance for credit losses in 2023 due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses . 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 that our audits provide a reasonable basis for our opinion. 45 Shareholders, Board of Directors, and Audit Committee Bank7 Corp. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Credit Losses – Loans The Company adopted Topic 326 effective January 1, 2023. The Company’s loan portfolio totaled $1.34 billion as of December 31, 2023 and the allowance for credit losses – loans (“ACL") was $19.7 million. As more fully described in Notes 1 and 6 to the financial statements, the ACL is a contra-asset valuation account, calculated in accordance with Topic 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the ACL represents management’s best estimate of current expected credit losses on loans considering all available information from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the loans. Loans with similar risk characteristics are aggregated into homogenous segments for assessment. Reserve factors are based on estimated probability of default (“PD”) and loss given default (“LGD”) for substantially all segments. The estimates include economic forecasts over the reasonable and supportable forecast period based on projected performance of economic variables that have a statistical relationship. Management qualitatively adjusts its model results for risk factors such as that were not considered within the modeling processes but were still relevant in assessing the expected credit losses within the loan pools. In some cases, management determined that an individual loan exhibited unique characteristics which differentiated the loan from other loans with the identified loan pools. In such cases, the loans were evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Auditing management’s estimate of the ACL involved a high degree of subjectivity due to the nature of the qualitative factor adjustments included in the ACL and complexities of the PD and LGD model. Management’s identification and measurement of the qualitative factor adjustments are highly judgmental and had a significant effect on the ACL. The primary audit procedures we performed as of December 31, 2023 to address this critical matter included: • Obtained an understanding of the Company’s process for establishing the ACL • Evaluated and tested the design of internal controls over the reliability and accuracy of data used to calculate and estimate the components of the ACL including: o Loan data completeness and accuracy o Grouping of loans by segment o Model inputs including PD, LGD, and discounted cash flow o Model assumptions o Establishment of qualitative factors o Loan risk ratings • Tested the completeness and accuracy of the data utilized in the ACL • Tested the model’s mathematical accuracy • Evaluated the relevance and reliability of data and assumptions used in the estimate • Evaluated the qualitative and economic forecast adjustments to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions • Evaluated credit quality trends in delinquencies, non-accruals, charge offs, and loan risk gradings • Tested the internal loan review function and evaluated the reasonableness of loan grades 46 Shareholders, Board of Directors, and Audit Committee Bank7 Corp. • Evaluated the reasonableness of specific allocations associated with individually evaluated loans • Evaluated the overall reasonableness of the ACL and compared to trends identified within peer group • Evaluated the reasonableness of methodology utilized by a third party in determining loss driver economic performance variables • Evaluated the accuracy and completeness of Topic 326 disclosures in the financial statements Other Assets – Oil and Gas Property The value of the Oil and Gas Property was $13.5 million at December 31, 2023. The asset is included in other assets on the consolidated balance sheet. As more fully described in Note 1 to the financial statements, the Oil and Gas Property held by the Company is accounted for under the successful efforts method of accounting. The fair value of proved properties (no unproved properties are held) are measured using valuation techniques that convert future cashflows to a single discounted amount. To estimate the value of reserves, management employs a specialist who makes significant estimates using significant inputs and assumptions including forecasting timing, volume of production, and corresponding rate of production decline for producing properties. Auditing management’s estimate of fair value of proved properties involved a high degree of subjectivity and complexity due to the nature of inputs and assumptions. The changes in certain inputs and assumptions which are subjective in nature could have a significant impact on depletion expense and the fair value of the Oil and Gas Property. The primary audit procedures we performed as of December 31, 2023 to address this critical matter included: • Obtained an understanding of the Company’s process for preparing the oil and gas reserve estimates • Identified inputs and assumptions that were significant to the period end determination of proved reserve volumes and tested management’s process of determining the significant inputs and assumptions, as follows: o Assessed the reasonableness of operating cost inputs by comparing the forecasted amount to current year actual costs o Assessed the reasonableness of forecasted capital expenditures by comparing to management’s planned future investment o Assessed the reasonableness of forecasted production estimates by (i) comparing forecasted production amounts to actual results and (ii) comparing forecasted production amounts in the current year reserve report to the actual historical production amounts in the current year o Vouched the working and royalty interests used in the reserve report to underlying ownership records o Assessed the reasonableness of pricing inputs and market differentials by comparing to third-party sources and actual results in the current year FORVIS, LLP We have served as the Company’s auditor since 2013. Oklahoma City, Oklahoma March 25, 2024 47 Table of Contents Bank7 Corp. Consolidated Balance Sheets (Dollar amounts in thousands, except par value) December 31, Assets 2023 2022 Cash and due from banks $ 181,042 $ 109,115 Interest-bearing time deposits in other banks 17,679 5,474 Available-for-sale debt securities 169,487 173,165 Loans, net of allowance for credit losses of $ 19,691 and $ 14,734 at December 31, 2023 and December 31, 2022, respectively 1,341,148 1,255,722 Loans held for sale 718 - Premises and equipment, net 14,942 13,106 Nonmarketable equity securities 1,283 1,209 Core deposit intangibles 1,031 1,336 Goodwill 8,458 8,603 Interest receivable and other assets 35,878 16,439 Total assets $ 1,771,666 $ 1,584,169 Liabilities and Shareholders’ Equity Deposits Noninterest-bearing $ 482,349 $ 441,509 Interest-bearing 1,109,042 989,891 Total deposits 1,591,391 1,431,400 Income taxes payable 302 1,054 Interest payable and other liabilities 9,647 7,615 Total liabilities 1,601,340 1,440,069 Shareholders’ equity Common stock, $ 0.01 par value; 50,000,000 shares authorized; shares issued and outstanding: 9,197,696 and 9,131,973 at December 31, 2023 and December 31, 2022 respectively 92 91 Additional paid-in capital 97,417 95,263 Retained earnings 78,962 58,049 Accumulated other comprehensive loss ( 6,145 ) ( 9,303 ) Total shareholders’ equity 170,326 144,100 Total liabilities and shareholders’ equity $ 1,771,666 $ 1,584,169 See accompanying notes to Consolidated Financial Statements 48 Table of Contents Bank7 Corp. Consolidated Statements of Comprehensive Income (Dollar amounts in thousands, except per share data) Year ended December 31, 2023 2022 2021 Interest Income Loans, including fees $ 109,843 $ 74,403 $ 55,768 Interest-bearing time deposits in other banks 519 46 169 Debt securities, taxable 2,791 2,313 143 Debt securities, tax-exempt 330 360 31 Other interest and dividend income 8,061 1,627 178 Total interest income 121,544 78,749 56,289 Interest Expense Deposits 38,998 9,322 3,053 Total interest expense 38,998 9,322 3,053 Net Interest Income 82,546 69,427 53,236 Provision for Credit Losses 21,145 4,468 4,175 Net Interest Income After Provision for Credit Losses 61,401 64,959 49,061 Noninterest Income Mortgage lending income 331 486 435 Loss on sales, prepayments, and calls of available-for-sale debt securities ( 16 ) ( 127 ) - Service charges on deposit accounts 869 900 550 Other 8,058 1,680 1,265 Total noninterest income 9,242 2,939 2,250 Noninterest Expense Salaries and employee benefits 17,385 17,040 11,983 Furniture and equipment 995 1,468 883 Occupancy 2,689 2,329 1,899 Data and item processing 1,730 2,068 1,237 Accounting, marketing and legal fees 543 984 800 Regulatory assessments 1,537 1,344 604 Advertising and public relations 427 477 282 Travel, lodging and entertainment 374 363 409 Other 7,740 2,568 2,300 Total noninterest expense 33,420 28,641 20,397 Income Before Taxes 37,223 39,257 30,914 Income tax expense 8,948 9,619 7,755 Net Income $ 28,275 $ 29,638 $ 23,159 Earnings per common share - basic $ 3.09 $ 3.26 $ 2.56 Earnings per common share - diluted 3.05 3.22 2.55 Weighted average common shares outstanding - basic 9,161,565 9,101,523 9,056,117 Weighted average common shares outstanding - diluted 9,264,307 9,204,716 9,091,536 Other Comprehensive Income (Loss) Unrealized gains (losses) on securities, net of (tax expense) tax benefit of ($ 1.0 million), $ 2.8 million, and $ 0 for the years ended December 31, 2023 , 2022 , and 2021 , respectively $ 3,146 $ ( 9,543 ) $ 144 Reclassification adjustment for realized loss included in net income net of tax of $ 4 , $ 31 , and $ 0 for the years ended 2023 , 2022 , and 2021 , respectively 12 96 - Other comprehensive income(loss) $ 3,158 $ ( 9,447 ) $ 144 Comprehensive Income $ 31,433 $ 20,191 $ 23,303 See accompanying notes to Consolidated Financial Statements 49 Table of Contents Bank7 Corp. Consolidated Statements of Shareholders’ Equity (Dollar amounts in thousands, except per share data) Year Ended December 31, 2023 2022 2021 Common Stock (Shares) Balance at beginning of period 9,131,973 9,071,417 9,044,765 Exercise of employee stock options 28,423 17,450 - Shares issued for restricted stock units 57,354 61,902 35,582 Shares acquired and canceled ( 20,054 ) ( 18,796 ) ( 8,930 ) Balance at end of period 9,197,696 9,131,973 9,071,417 Common Stock (Amount) Balance at beginning of period $ 91 $ 91 $ 90 Shares issued for restricted stock units 1 - 1 Balance at end of period $ 92 $ 91 $ 91 Additional Paid-in Capital Balance at beginning of period $ 95,263 $ 94,024 $ 93,162 Shares purchased and retired for restricted stock units ( 513 ) ( 454 ) ( 178 ) Exercise of stock options 503 309 - Stock-based compensation expense 2,164 1,384 1,040 Balance at end of period $ 97,417 $ 95,263 $ 94,024 Retained Earnings Balance at beginning of period $ 58,049 $ 33,149 $ 14,067 Net income 28,275 29,638 23,159 Cumulative effect of change in accounting principle, net of tax of $ 178 (Note 1) ( 572 ) - - Cash dividends declared ($ 0.74 , $ 0.52 , and $ 0.45 per share for the years ended December 31, 2023, 2022, and 2021, respectively) ( 6,790 ) ( 4,738 ) ( 4,077 ) Balance at end of period $ 78,962 $ 58,049 $ 33,149 Accumulated Other Comprehensive Income(Loss) Balance at beginning of period $ ( 9,303 ) $ 144 $ - Comprehensive income(loss) 3,158 ( 9,447 ) 144 Balance at end of period $ ( 6,145 ) $ ( 9,303 ) $ 144 Total Shareholders’ equity $ 170,326 $ 144,100 $ 127,408 See accompanying notes to Consolidated Financial Statements 50 Table of Contents Bank7 Corp. Consolidated Statements of Cash Flows (Dollar amounts in thousands) Year Ended December 31, 2023 2022 2021 Operating Activities Net income $ 28,275 $ 29,638 $ 23,159 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,302 1,406 1,031 Provision for credit losses 21,145 4,468 4,175 Amortization of premiums and discounts on securities 381 812 30 Gain on sales of loans ( 331 ) ( 486 ) ( 435 ) Net loss on sale of available-for-sale debt securities 16 127 - Stock-based compensation expense 2,164 1,384 1,040 Gain on sale of premises and equipment ( 77 ) ( 24 ) ( 1 ) Cash receipts from the sale of loans originated for sale 10,535 33,776 23,954 Cash disbursements for loans originated for sale ( 10,922 ) ( 32,826 ) ( 23,659 ) Deferred income tax (benefit) ( 1,259 ) ( 1,423 ) 235 Changes in Interest receivable and other assets ( 2,536 ) ( 1,865 ) 907 Interest payable and other liabilities 432 4,727 ( 303 ) Net cash provided by operating activities 49,125 39,714 30,133 Investing Activities Net cash (paid) received for acquisition ( 16,482 ) - 20,432 Maturities of interest-bearing time deposits in other banks 8,471 2,490 13,175 Purchases of interest-bearing time deposits in other banks ( 20,676 ) ( 4,727 ) - Proceeds from sale of available-for-sale debt securities - 11,820 1,173 Maturities, prepayments and calls of available-for-sale debt securities 7,422 19,736 290 Purchases of available-for-sale debt securities - ( 133,052 ) - Net change in loans ( 106,762 ) ( 242,105 ) ( 77,951 ) Purchases of premises and equipment ( 2,834 ) ( 294 ) ( 599 ) Proceeds from sale of premises and equipment 78 3,370 17 Change in nonmarketable equity securities ( 74 ) ( 7 ) ( 30 ) Net cash used in investing activities ( 130,857 ) ( 342,769 ) ( 43,493 ) Financing Activities Net change in deposits 159,991 211,829 68,470 Cash distributions ( 6,323 ) ( 4,366 ) ( 3,982 ) Shares purchased and retired for restricted stock units ( 513 ) ( 454 ) ( 178 ) Net settlement of stock options 503 309 - Common stock issued for restricted stock units 1 - 1 Net cash provided by financing activities 153,659 207,318 64,311 Net Increase/(Decrease) in Cash and Due from Banks 71,927 ( 95,737 ) 50,951 Cash and Due from Banks, Beginning of Period 109,115 204,852 153,901 Cash and Due from Banks, End of Period $ 181,042 $ 109,115 $ 204,852 Supplemental Disclosure of Cash Flows Information Interest paid $ 37,935 $ 9,100 $ 3,222 Income taxes paid $ 10,800 $ 9,981 $ 7,511 Dividends declared and not paid $ 1,932 $ 1,463 $ 1,089 Measurement period goodwill adjustment $ ( 146 ) $ 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 51 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 two subsidiaries, 1039 NW 63 rd , LLC, which holds real estate utilized by the Bank, and Giddings Production, LLC, which is engaged in the production of oil, natural gas and natural liquid (“NGL”) reserves in Texas. 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. Reclassifications Certain reclassifications have been made to the 2022 and 2021 consolidated financial statements to conform to classification used for December 31, 2023. These reclassifications had no impact on net income, shareholders’ equity or cash flows as previously reported. Cash Equivalents The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. Interest-Bearing Time Deposits in Other Banks Interest-bearing time deposits in other banks totaled $ 17.7 million and $ 5.5 million at December 31, 2023 and December 31, 2022 respectively, and have original maturities generally ranging from three months 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. 52 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Allowance for Credit Losses – Investment Securities On January 1, 2023, the Company was required to adopt a new credit loss methodology, the Current Expected Credit Losses (“CECL”) methodology. See Note 1, Recent Accounting Pronouncements, for additional information regarding adoption. Allowance for Credit Losses - AFS Securities - The Company evaluates its available-for-sale securities portfolio on a quarterly basis for potential credit-related impairment. The Company assesses potential credit impairment by comparing the fair value of a debt security to its amortized cost basis. If the fair value of a debt security is greater than the amortized cost basis, no impairment is recognized. If the fair value is less than the amortized costs basis, the Company reviews the factors to determine if the impairment is credit-related or noncredit-related. For debt securities the Company intends to sell or is more likely than not required to sell, before the recovery of their amortized cost basis, the difference between fair value and amortized cost is impaired and is recognized through earnings. For debt securities the Company does not intend to sell or is not more likely than not required to sell, prior to expected recovery of amortized cost basis, the credit portion of the impairment is recognized through earnings, with a corresponding entry to an allowance for credit losses, and the noncredit portion is recognized through accumulated other comprehensive loss. 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. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts. Accrued interest receivable totaled $ 8.7 million and $ 7.2 million at December 31, 2023 and December 31, 2022, respectively, and was reported in interest receivable and other assets on the consolidated balance sheets. The Company has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Interest income is accrued on the unpaid principal balance using the simple-interest method on the daily balances of the principal amounts outstanding. For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized over the respective term of the loan. The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans acquired through business combinations are required to be carried at fair value as of the date of the combination. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date. 53 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Allowance for Credit Losses On January 1, 2023, the Company was required to adopt a new credit loss methodology, the Current Expected Credit Losses (“CECL”) methodology. See Note 1, Recent Accounting Pronouncements, for additional information regarding adoption. The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The allowance for credit losses is adjusted by a credit loss provision which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Expected credit loss inherent in non-cancellable off-balance sheet credit exposures is accounted for as a separate liability included in other liabilities. The allowance for credit losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay and estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The methodology for estimating the amount of credit losses reported in the allowance for credit losses has two basic components: an asset-specific component involving loans that do not share risk characteristics and the measurement of expected credit losses for such individual loans; and a pooled component for expected credit losses for pools of loans that share similar risk characteristics. Loans That Do Not Share Risk Characteristics (Individually Analyzed) Loans that do not share similar risk characteristics are evaluated on an individual basis. Loans deemed to be collateral dependent have differing risk characteristics and are individually analyzed to estimate the expected credit loss. A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is dependent on the operation or liquidation and sale of the underlying collateral. For collateral dependent loans where foreclosure is probable, the expected credit loss is measured based on the difference between the fair value of the collateral (less selling cost) and the amortized cost basis of the asset. For collateral dependent loans where foreclosure is not probable, the Company has elected the practical expedient allowed by ASC 326-20 to measure the expected credit loss under the same approach as those loans where foreclosure is probable. For loans with balances greater than $ 250 ,000, the fair value of the collateral is obtained through independent appraisal of the underlying collateral. For loans with balances less than $ 250 ,000, the Company has made a policy election to measure expected loss for these individual loans utilizing loss rates for similar loan types. Loans That Share Similar Risk Characteristics (Pooled Loans) The general steps in determining expected credit losses for the pooled loan component of the allowance are as follows: • Segment loans into pools according to similar risk characteristics; • Develop historical loss rates for each loan pool segment; • Incorporate the impact of forecasts; • Incorporate the impact of other qualitative factors; and • Calculate and review pool specific allowance for credit loss estimate. 54 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Methodology The weighted-average remaining maturity method (“WARM”) methodology is utilized as the basis for the estimation of expected credit losses for consumer segment loans. The WARM method uses a historical average annual charge-off rate. This average annual charge-off rate contains loss content over a historical lookback period and is used as a foundation for estimating the credit loss reserve for the remaining outstanding balances of loans in a segment at the balance sheet date. The average annual charge-off rate is applied to the contractual term, further adjusted for estimated prepayments, to determine the unadjusted historical charge-off rate. The calculation of the unadjusted historical charge-off rate is then adjusted for current conditions and for reasonable and supportable forecast periods. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss factors. A discounted cash flow (“DCF”) methodology is utilized to calculate expected cash flows for the life of each individual loan, with the exception of consumer segment loans. The discounted present value of expected cash flow is then compared to the loan’s amortized cost basis to determine the credit loss estimate. Individual loan results are aggregated at the pool level in determining total reserves for each loan pool. The primary inputs used to calculate expected cash flows include historical loss rates which reflect probability of default (“PD”) and loss given default (“LGD”), and prepayment rates. The historical look-back period is a key factor in the calculation of the PD rate and is based on management’s assessment of current and forecasted conditions and may vary by loan pool. LGD rates generally reflect the historical average net loss rate by loan pool. Expected cash flows are further adjusted to incorporate the impact of loan prepayments which will vary by loan segment and interest rate conditions. In general, prepayment rates are based on observed prepayment rates occurring in the loan portfolio and consideration of forecasted interest rates. Forecast Factors Adjustments are made to incorporate the impact of forecasted conditions. Certain assumptions are also applied, including the length of the forecast and reversion periods. The forecast period is the period within which management is able to make a reasonable and supportable assessment of future conditions. The reversion period is the period beyond which management believes it can develop a reasonable and supportable forecast, and bridges the gap between the forecast period and the use of historical default and loss rates. The remainder period reflects the remaining life of the loan. The length of the forecast and reversion periods are periodically evaluated and based on management’s assessment of current and forecasted conditions and may vary by loan pool. For purposes of developing a reasonable and supportable assessment of future conditions, management utilizes established industry and economic data points and sources, with the forecasted unemployment rate being a significant factor. PD rates for the forecast period will be adjusted accordingly based on management’s assessment of future conditions. PD rates for the remainder period will reflect the historical mean PD rate. Reversion period PD rates reflect the difference between forecast and remainder period PD rates closed using a straight-line adjustment over the reversion period. Qualitative Factors Loss rates are further adjusted to account for other risk factors that impact loan defaults and losses. These basis point adjustments are based on management’s assessment of trends and conditions that impact credit risk and resulting credit losses, more specifically internal and external factors that are independent of and not reflected in the quantitative loss rate calculations. Risk factors management considers in this assessment include trends in underwriting standards, nature/volume/terms of loan originations, past due loans, loan review systems, collateral valuations, concentrations, legal/regulatory/political conditions, and the unforeseen impact of natural disasters. 55 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Purchased Loans When a loan portfolio is purchased, an allowance is established for those loans considered purchased with more-than-insignificant credit deterioration (“PCD”), and those not considered purchased with more-than-insignificant credit deterioration (“non-PCD”). The allowance established utilizes the same risk factors discussed above for our non-acquired allowance. The allowance established for non-PCD loans is recognized through provision expense upon acquisition, whereas the allowance established for loans considered PCD at acquisition is offset by an increase in the basis of the acquired loans. Any subsequent increases and decreases in the allowance related to acquired loans are recognized through provision expense, with future charge-offs recorded to the allowance. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The Company estimates expected credit losses over the contractual period in which it is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense and is recorded in interest payable and other liabilities. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life and applies the same estimated loss rate as determined for current outstanding loan balances by segment. 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. 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, 2023, 2022, and 2021. 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. 56 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements 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. Asset Acquisition The fair value of assets acquired is measured and recognized at the amount of monetary assets or liabilities exchanged, which generally includes the transaction costs of the assets acquired. No gain or loss is recognized unless the fair value of any noncash assets given as consideration differs from the assets carrying amounts on the acquiring entities books. Goodwill and Intangible Assets Intangible assets totaled $ 1.0 million and goodwill, net of accumulated amortization totaled $ 8.5 million for the year ended December 31, 2023, compared to intangible assets of $ 1.3 million and goodwill, net of accumulated amortization of $ 8.6 million for the year ended December 31, 2022. The decrease in intangible assets is due to amortization of core deposit intangibles and the decrease in goodwill recognized is 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. 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, 2023, 2022 and 2021, 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 2020. 57 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements 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. 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. 58 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Summary of Significant Accounting Policies--Specific to Production of Oil and Natural Gas Reserves Operations Use of Estimates Significant items subject to estimates and assumptions include, the proved oil, and natural gas and NGL reserves used in the valuation of oil and gas properties, asset retirement obligations, fair value of derivatives and revenue accruals. It is possible these estimates could be revised in the near term and these revisions could be material. The Company’s estimates of oil, natural gas and NGL reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data, as well as the projection of future rates of production. Reserve engineering is a subjective process of estimating underground accumulations of oil, natural gas, and NGL that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable oil, natural gas and NGL reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effect of regulations by governmental agencies, and assumptions governing future oil, natural gas, and NGL prices, future operating costs, severance taxes, and workover costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of expected oil, natural gas, and NGL attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity of the reserves, which could affect the carrying value of the Company’s oil, natural gas, and NGL properties and/or the rate of depletion related to the oil, natural gas, and NGL properties. Accounts Receivable The Company’s oil and gas related accounts receivable primarily consists of oil, natural gas and NGL receivables and joint interest billings to our partners for their share of expenses on projects for which we are the operator. These balances are generated when estimating and accruing for expected oil, natural gas and NGL sales, upon receipt of oil, natural gas and NGL sales and when our cost is cutback to our joint interest partners. The oil and gas related accounts receivable balance is included in “Interest receivable and other assets” on the consolidated balances sheets. Additionally, due to the creditworthiness of our purchasers, we do not have any allowance for doubtful accounts recorded and do not expect to write off any portion of our oil and gas related accounts receivable. Accounts Payable The Company’s oil and gas related accounts payable balance primarily consists of trade payables owed to vendors that provide services and equipment for the wells and assets that we operate. The oil and gas related accounts payable balance is included in “Interest payable and other liabilities” on the consolidated balances sheets. Revenue Recognition We recognize revenue from the sale of oil, natural gas and NGLs in the period that the performance obligations are satisfied in accordance with ASC 606. Our performance obligations are primarily comprised of the delivery of oil, natural gas or NGLs at a delivery point (pipeline, railcar or truck). Each barrel of oil, MMBtu of natural gas or other unit of measure is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. The transaction price used to recognize revenue is a function of the contract billing terms. Revenue is invoiced, if required, by calendar month based on volumes at contractually based rates with payment typically received within 30 days of the end of the production month. Performance obligations are satisfied at a point in time once control of the product has been transferred to the customer through monthly delivery of oil, natural gas and NGLs. Revenue from the sale of oil, natural gas and NGLs is included in “Other” noninterest income on the consolidated statements of comprehensive income, and taxes assessed by governmental authorities on oil, natural gas and NGL sales are included in “Other” noninterest expense on the consolidated statements of comprehensive income. 59 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Oil and Gas Property (Successful Efforts Method of Accounting) The Company uses the successful efforts method of accounting for its oil and gas production activities. Costs incurred by the Company related to the acquisition of oil and gas properties and the cost of drilling development wells are capitalized. Costs incurred to maintain wells and related equipment, delay rentals, lease and well operating costs are charged to expense as incurred. Gains and losses arising from sales of production are generally included in the consolidated statements of comprehensive income. Capitalized acquisition costs attributable to proved oil and gas properties are depleted by formation or field using the unit-of-production method based on proved reserves. Capitalized development costs, including asset retirement obligations, are amortized by producing unit, based on proved developed producing reserves. Depletion, depreciation, and amortization expense related to proved oil and gas properties was $ 3.6 million for the year ended December 31, 2023, and is included in “Other” noninterest expense on the consolidated statements of comprehensive income. Capitalized costs are evaluated for impairment in accordance with FASB ASC Topic 360, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC Topic 360), whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. The fair values of proved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. The underlying commodity prices embedded in the Company’s estimated cash flows are the product of a process that begins with applicable forward curve pricing, adjusted for estimated location and quality differentials, as well as other factors that Company management believes will impact realizable prices. To determine if a depletable unit is impaired, the carrying value of the depletable unit is compared to the undiscounted future net cash flows by applying management’s estimates of future oil and gas prices to the estimated future production of oil and gas reserves over the economic life of the property and deducting future costs. Future net cash flows are based upon third party reservoir engineers’ estimates of proved reserves and internal management estimates for probable and possible reserves. For a property determined to be impaired, an impairment loss equal to the difference between the carrying value and the estimated fair value of the impaired property will be recognized. Fair value, on a depletable unit basis, is estimated to be the present value of the aforementioned expected future net cash flows. Each part of this calculation is subject to a large degree of judgment, including the determination of the depletable units’ estimated reserves, future net cash flows and fair value. No impairment expense recorded for the year ended December 31, 2023. There were no costs of unproved properties at December 31, 2023, and during the year ended December 31, 2023, the Company recognized no abandonment expense. 60 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Asset Retirement Obligation The Company follows the provisions of ASC 410, Asset Retirement Obligations, which requires recognition of liabilities for retirement obligations associated with tangible long-lived assets, such as producing well sites when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. When the assumptions used to estimate a recorded asset retirement obligation change, a revision is recorded to both the asset retirement obligation and the asset retirement cost. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment. The Company’s asset retirement obligations relate to the plugging, dismantlement, removal, site reclamation and similar activities of its oil and natural gas properties. The asset retirement obligation balance is included in “interest payable and other liabilities” on the consolidated of balance sheets. Fair Value Measurements All derivatives are recognized on the consolidated balance sheet and are measured at fair value using mark-to-market accounting. Derivatives During 2023, the Company entered into a certain oil derivative position. The Company primarily utilizes oil swap contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, and (ii) reduce commodity price risk associated with certain capital projects. By using derivative financial instruments to economically hedge exposures to changes in commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. The Company is not required to post any collateral. The Company does not receive collateral from its counterparties. The Company does not apply hedge accounting to any of its derivative instruments as defined under accounting guidance. The Company nets derivative assets and liabilities by commodity where legal right to such netting exists. Therefore, the Company’s derivatives are presented on a net basis on the consolidated balance sheets in “Interest receivable and other assets” or “Interest payable and other liabilities”. Unrealized and realized gains or losses are recognized in “Other” noninterest income on the consolidated statements of comprehensive income. As of December 31, 2023, the Company has a single contract for oil swaps that settle monthly from January to December 2024. The total notional barrels under this contract are 63,000 barrels at a fixed swap price of $ 73.25 per barrel. The estimated fair value of this contract utilizing future price estimates is $ 0.1 million and are included in “Interest receivable and other assets” on the consolidated balance sheets. For the year ended December 31, 2023, the Company recognized an unrealized gain of $ 0.1 million. 61 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Recent Accounting Pronouncements Standards Adopted During Current Period: In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” On January 1, 2023, the Company adopted ASU 2022-02, which eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification (“ASC”) 310-40, “Receivables -Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments—Credit Losses—Measured at Amortized Cost. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” On January 1, 2023 the Company adopted ASU 2016-13, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, Accounting Standards Codification (“ASC”) 326 made changes to the accounting for purchased loans and securities with credit deterioration and available-for-sale debt securities. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Operating results for periods from January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our 2022 Form 10-K. The Company recorded a net decrease to retained earnings of $ 572 ,000, gross of $ 750 ,000 net of tax of $ 178 ,000, as of January 1, 2023 for the cumulative effect of adopting ASC 326, and the impact on our results of operations and cash flows was not material. The Company has not recorded an allowance for credit losses against its available-for-sale securities, as the credit risk is not material. The following table illustrates the impact of ASC 326 on the allowance for credit losses on the Company’s loans as of January 1, 2023 (dollars in thousands). January 1, 2023 As Reported Under ASC 326 Pre ASC 326 Adoption Impact of ASC 326 Adoption Construction & development $ 1,933 $ 1,889 $ 44 1 - 4 family real estate 752 890 ( 138 ) Commercial real estate - other 4,912 5,080 ( 168 ) Total commercial real estate $ 7,597 $ 7,859 $ ( 262 ) Commercial & industrial 6,653 5,937 716 Agricultural 616 765 ( 149 ) Consumer 118 173 ( 55 ) Allowance for credit losses on loans $ 14,984 $ 14,734 $ 250 Allowance for credit losses on off-balance sheet credit exposures (unfunded commitments), see Note (6) and Note (17) 500 - 500 Total Impact $ 15,484 $ 14,734 $ 750 62 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Standards Not Yet Adopted: In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), primarily focused on income tax disclosures regarding effective tax rates and cash income taxes paid. ASU 2023-09 requires public business entities, on an annual basis, to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income by the applicable statutory income tax rate). ASU 2023-09 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2024, with early adoption permitted. The Company will complete an evaluation of the impact this standard will have on its results of operations, financial position or disclosures. In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which expands reportable segment disclosure requirements through enhanced disclosures about significant segment expenses. The amendments in this update introduce a new requirement to disclose significant segment expenses regularly provided to the chief operating decision maker, extend certain annual disclosures to interim periods, clarify that single reportable segment entities must apply Topic 280 in its entirety, permit more than one measure of segment profit or loss to be reported under certain conditions and require disclosure of the title and position of the chief operating decision maker. ASU 2023-07 is effective for public business entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The adoption of ASU 2023-07 is not expected to have a material impact on the Company’s operations, financial position or disclosures. 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, 2023, the Company had one PPP loan with balances totaling $ 2.0 million, and two PPP loans with balances totaling $ 2.6 million as of December 31, 2022. The Company recognized $ 50 ,000 in fee income during the year ended December 31, 2023, with $ 0 remaining to be recognized, as compared to $ 219 ,000 recognized and $ 50 ,000 to be recognized as of December 31, 2022. 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. 63 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: Estimated Fair Value (in thousands) Assets Acquired Cash and cash equivalents $ 41,747 Available-for-sale debt securities 86,166 Federal funds sold 7,941 Loans 117,335 Premises and equipment 8,669 Core deposit intangible 1,254 Prepaid expenses and other assets 4,512 Total assets acquiried $ 267,624 Liabilities Assumed Deposits $ 243,487 Accounts payable and accrued expenses 2,086 Total liabilities assumed $ 245,573 Net assets acquired $ 22,051 Consideration transferred 29,498 Goodwill $ 7,447 Goodwill decreased $ 146 ,000 for the year ended December 31, 2023 related to tax provision adjustments. As of the acquisition date, the Company evaluated $ 117.3 million of net loans ($ 118.5 million gross loans less $ 1.2 million discount) purchased in conjunction with the acquisition of Watonga Bancshares, Inc. in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs. As of December 31, 2023, the net loan balance of the ASC Topic 310-20 purchased loans is $ 48.4 million. Upon acquisition, the fair values of assets acquired and liabilities assumed were preliminary and based on valuation estimates and assumptions. The accounting for business combinations require estimates and judgments regarding expectations of future cash flows of the acquired business, and the allocations of those cash flows to identifiable tangible and intangible assets. The estimates and assumptions underlying the preliminary valuations were subject to collection of information necessary to complete the valuations (specifically related to projected financial information) within the measurement periods, which are up to one year from the acquisition date. Adjustments to our estimates of purchase price allocation were made in the periods in which the adjustments were determined, and the cumulative effect of such adjustments were calculated as if the adjustments had been completed as of the acquisition date. As we are now outside of the measurement periods, no further adjustments will be made. 64 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements 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 Pro-Forma for Year Ended December 31, Date through December 31, 2021 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 Acquisition On October 31, 2023, the Company entered into an asset purchase and sale agreement, effective September 1, 2023 , to acquire proven oil and natural gas properties from HB2 Origination, LLC, which consisted of nine wells in formations in four counties in Texas for $ 15.4 million in cash. On November 17, 2023, the transaction closed for a total purchase price of $ 15.1 million, after closing adjustments. As a part of the purchase, the Company assumed asset retirement obligations of $ 0.4 million that were included in “interest payable and other liabilities” on the consolidated balance sheets as of December 31, 2023. The acquisition was considered an asset acquisition and did not meet the definition of a business under ASC 805, Business Combinations. Additionally, transaction costs of $ 1.4 million were capitalized into oil and gas properties related to this acquisition. The purchase price and related asset retirement obligations were allocated based on the relative fair values of the assets acquired and $ 1.7 million was allocated to proved leasehold costs while the remaining $ 15.4 million was allocated to “interest receivable and other assets” on the consolidated balance sheets. As of December 31, 2023, the Company had oil and gas assets and related receivables of $ 16.8 million included in “interest receivable and other assets” on the consolidated balance sheets, assets retirement obligations and oil and gas related liabilities of $ 1.3 million included in “interest payable and other liabilities” on the consolidated balance sheets, oil and gas related revenues of $ 6.0 million included in “Other” noninterest income on the consolidated statements of comprehensive income, and oil and gas related expenses of $ 4.8 million included in “Other” noninterest expense on the consolidated statements of comprehensive income. 65 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, 2023. Note 4: Earnings per Share Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the year. Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income 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, 2023 2022 2021 (Dollars in thousands, except per share amounts) Numerator Net income $ 28,275 $ 29,638 $ 23,159 Denominator Weighted-average shares outstanding for basic earnings per share 9,161,565 9,101,523 9,056,117 Dilutive effect of stock compensation (1) 102,742 103,193 35,419 Denominator for diluted earnings per share 9,264,307 9,204,716 9,091,536 Earnings per common share Basic $ 3.09 $ 3.26 $ 2.56 Diluted $ 3.05 $ 3.22 $ 2.55 (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 , 5,000 , and 264,000 as of December 31, 2023, 2022, and 2021, respectively; Restricted stock units outstanding of 156,186 , 0 , and 0 as of December 31, 2023, 2022, and 2021, respectively. 66 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, 2023 and December 31, 2022, 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, 2023 U.S. Federal agencies $ 138 $ - $ ( 3 ) $ 135 Mortgage-backed securities (1) (2) 38,465 - ( 3,963 ) 34,502 State and political subdivisions 27,368 - ( 1,512 ) 25,856 U.S. Treasuries 106,030 - ( 1,373 ) 104,657 Corporate debt securities 5,500 - ( 1,163 ) 4,337 Total available-for-sale 177,501 - ( 8,014 ) 169,487 Total debt securities 177,501 - ( 8,014 ) 169,487 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available-for-sale as of December 31, 2022 U.S. Federal agencies $ 1,292 $ - $ ( 150 ) $ 1,142 Mortgage-backed securities (1) (2) 42,953 - ( 4,879 ) 38,074 State and political subdivisions 30,632 - ( 2,276 ) 28,356 U.S. Treasuries 104,940 - ( 4,280 ) 100,660 Corporate debt securities 5,500 - ( 567 ) 4,933 Total available-for-sale 185,317 - ( 12,152 ) 173,165 Total debt securities 185,317 - ( 12,152 ) 173,165 (1) All of our mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored entities. (2) Included in amortized cost of mortgage-backed securities is $ 24.80 million and $ 27.90 million of residential mortgage-backed securities and $ 13.67 million and $ 15.05 million of commercial mortgage-backed securities as of December 31, 2023 and December 31, 2022, respectively . 67 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The amortized cost and estimated fair value of investment securities at December 31, 2023 and December 31, 2022, by contractual maturity, are shown below. The expected life of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or without call or prepayment penalties. (in thousands) Amortized Cost Fair Value Available-for-sale as of December 31, 2023 Due in one year or less $ 105,944 $ 105,186 Due after one year through five years 15,654 14,675 Due after five years through ten years 17,276 14,980 Due after ten years 162 144 Mortgage-backed securities 38,465 34,502 Total available-for-sale 177,501 169,487 (in thousands) Amortized Cost Fair Value Available-for-sale as of December 31, 2022 Due in one year or less $ 2,133 $ 2,115 Due after one year through five years 118,108 113,415 Due after five years through ten years 21,495 19,030 Due after ten years 628 531 Mortgage-backed securities 42,953 38,074 Total available-for-sale 185,317 173,165 There was one holding of securities of issuers in an amount greater than 10% of stockholders equity at December 31, 2023, a U.S. Treasury note with a fair value of $ 99.32 million . The following table presents a summary of realized gains and losses from the sale, prepayment and call of debt securities for the year ended December 31, 2023 and December 31, 2022. Year Ended December 31, 2023 2022 (in thousands) Proceeds from sales, maturities, prepayments and calls $ 7,422 $ 31,556 Gross realized gains on sales, prepayments and calls - 10 Gross realized losses on sales, prepayments and calls ( 16 ) ( 137 ) Total realized (losses), net $ ( 16 ) $ ( 127 ) The following table details book value of pledged securities as of December 31, 2023: Year Ended December 31, (in thousands) 2023 2022 Book value of pledged securities $ 121,283 $ 85,280 68 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, 2023 and December 31, 2022. As of December 31, 2023, the Company had the ability and intent to hold the debt securities classified as available-for-sale for a period of time sufficient for a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying debt securities were purchased 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, 2023 U.S. Federal agencies $ - $ - $ 135 $ ( 3 ) $ 135 $ ( 3 ) Mortgage-backed securities - - 34,502 ( 3,963 ) 34,502 ( 3,963 ) State and political subdivisions (1) 1,160 ( 5 ) 24,696 ( 1,507 ) 25,856 ( 1,512 ) U.S. Treasuries - - 104,657 ( 1,373 ) 104,657 ( 1,373 ) Corporate debt securities - ( 195 ) 4,337 ( 968 ) 4,337 ( 1,163 ) Total available-for-sale $ 1,160 $ ( 200 ) $ 168,327 $ ( 7,814 ) $ 169,487 $ ( 8,014 ) 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 ) (1) Of our state and political subdivision securities , $ 22.84 million and $ 25.02 million are rated BBB+ or better and $ 3.02 million and $ 3.34 million are not rated as of December 31, 2023 and December 31, 2022, respectively . 69 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, 2023 and December 31, 2022, are as follows (dollars in thousands): December 31, 2023 2022 Construction & development $ 137,206 $ 163,203 1 - 4 family real estate 100,576 76,928 Commercial real estate - other 518,622 439,001 Total commercial real estate $ 756,404 $ 679,132 Commercial & industrial 526,185 513,011 Agricultural 66,495 66,145 Consumer 14,517 14,949 Gross loans 1,363,601 1,273,237 Less allowance for credit losses ( 19,691 ) ( 14,734 ) Less deferred loan fees ( 2,762 ) ( 2,781 ) Net loans $ 1,341,148 $ 1,255,722 Included in the commercial & industrial loan balances are $ 2.0 million and $ 2.6 million of loans that were originated under the SBA PPP program as of December 31, 2023 and December 31, 2022, respectively. 70 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements On January 1, 2023, the Company adopted ASU 2016-13, which replaces the incurred loss methodology for determining its provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. See Note (1) for additional information regarding the factors that influenced the Company’s current estimate of expected credit losses. Upon adoption, the allowance for credit losses was increased by $ 250 ,000 and $ 500 ,000 for loans and unfunded commitments, respectively, with no impact to the consolidated statement of income. Subsequent to the adoption of ASU 2016-13, the Company recorded a $ 21.2 million and ($ 36 ,000) provision for credit losses related to loans and unfunded commitments, respectively, for the twelve months of 2023 utilizing the newly adopted CECL methodology. The following table presents, by portfolio segment, the activity in the allowance for credit losses for the years ended December 31, 2023 and 2022 (dollars in thousands): Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2023 Loans Balance, beginning of period $ 1,889 $ 890 $ 5,080 $ 5,937 $ 765 $ 173 $ 14,734 Impact of CECL adoption 44 ( 138 ) ( 168 ) 716 ( 149 ) ( 55 ) 250 Charge-offs - - - ( 16,500 ) ( 7 ) ( 17 ) ( 16,524 ) Recoveries - - - 40 2 8 50 Net (charge-offs) recoveries - - - ( 16,460 ) ( 5 ) ( 9 ) ( 16,474 ) Provision (credit) for credit losses ( 516 ) 519 1,977 19,044 17 140 21,181 Balance, end of period $ 1,417 $ 1,271 $ 6,889 $ 9,237 $ 628 $ 249 $ 19,691 Unfunded Commitments Balance, beginning of period $ - $ - $ - $ - $ - $ - $ - Impact of CECL adoption 171 4 24 274 25 2 500 Provision (credit) for credit losses ( 13 ) - ( 16 ) 6 ( 14 ) 1 ( 36 ) Balance, end of period $ 158 $ 4 $ 8 $ 280 $ 11 $ 3 $ 464 Total Allowance for Credit Losses $ 1,575 $ 1,275 $ 6,897 $ 9,517 $ 639 $ 252 $ 20,155 Total Provision for Credit Losses $ ( 529 ) $ 519 $ 1,961 $ 19,050 $ 3 $ 141 $ 21,145 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 credit 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 71 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. 72 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, 2023. 73 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The following table presents the amortized cost of the Company’s loan portfolio with the gross charge-offs for the twelve months ended by year of origination based on internal rating category as of December 31, 2023 (dollars in thousand s): As of December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Construction & development Grade 1 (Pass) $ 26,915 $ 2,266 $ 3,182 $ 201 $ 98 $ 44 $ 103,711 $ 136,417 2 (Watch) - - - - - - - - 3 (Special Mention) 563 - - - - - 226 789 4 (Substandard) - - - - - - - - Total construction & development 27,478 2,266 3,182 201 98 44 103,937 137,206 Current-period gross charge-offs - - - - - - - - 1 - 4 family real estate Grade 1 (Pass) 48,275 22,573 13,305 3,928 1,808 1,069 9,618 100,576 2 (Watch) - - - - - - - - 3 (Special Mention) - - - - - - - - 4 (Substandard) - - - - - - - - Total 1 - 4 family real estate 48,275 22,573 13,305 3,928 1,808 1,069 9,618 100,576 Current-period gross charge-offs - - - - - - - - Commercial real estate - other Grade 1 (Pass) 187,086 153,764 32,641 36,278 2,613 4,043 86,370 502,795 2 (Watch) - - - - - - - - 3 (Special Mention) 14,612 - - - - 1,089 - 15,701 4 (Substandard) - - - - - 126 - 126 Total Commercial real estate - other 201,698 153,764 32,641 36,278 2,613 5,258 86,370 518,622 Current-period gross charge-offs - - - - - - - - Commercial and industrial Grade 1 (Pass) 158,062 59,265 38,093 2,777 1,706 4,059 221,471 485,433 2 (Watch) - - - - - - 4,094 4,094 3 (Special Mention) 4,151 - - - - - 1,616 5,767 4 (Substandard) 20,660 7,937 98 8 - - 2,188 30,891 Total Commercial and industrial 186,967 67,202 38,191 2,785 1,706 4,059 225,275 526,185 Current-period gross charge-offs 16,500 - - - - - - 16,500 Agriculural Grade 1 (Pass) 9,283 5,789 23,205 4,283 927 1,104 21,904 66,495 2 (Watch) - - - - - - - - 3 (Special Mention) - - - - - - - - 4 (Substandard) - - - - - - - - Total agriculural 9,283 5,789 23,205 4,283 927 1,104 21,904 66,495 Current-period gross charge-offs - 7 - - - - - 7 Consumer Grade 1 (Pass) 4,415 1,545 2,171 2,554 663 1,819 1,270 14,437 2 (Watch) - - - - - - - - 3 (Special Mention) - - - - - - - - 4 (Substandard) - - - - - 80 - 80 Total consumer 4,415 1,545 2,171 2,554 663 1,899 1,270 14,517 Current-period gross charge-offs 17 - - - - - - 17 Total loans held for investment $ 478,116 $ 253,139 $ 112,695 $ 50,029 $ 7,815 $ 13,433 $ 448,374 $ 1,363,601 Total current-period gross charge-offs $ 16,517 $ 7 $ - $ - $ - $ - $ - $ 16,524 74 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, prior to the adoption of ASU 2016-13, as of December 31, 2022 (dollars in thousands): Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2022 Grade 1 (Pass) $ 163,203 $ 76,928 $ 397,295 $ 493,412 $ 65,857 $ 14,927 $ 1,211,622 2 (Watch) - - 14,976 - 288 - 15,264 3 (Special Mention) - - 24,747 584 - - 25,331 4 (Substandard) - - 1,983 19,015 - 22 21,020 Total $ 163,203 $ 76,928 $ 439,001 $ 513,011 $ 66,145 $ 14,949 $ 1,273,237 Aged Analysis of Past Due Loans Receivable The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2023 and December 31, 2022 (dollars in thousands): Past Due Total Loans 30–59 Days 60–89 Days Greater than 90 Days Total Current Total Loans > 90 Days & Accruing December 31, 2023 Construction & development $ - $ - $ - $ - $ 137,206 $ 137,206 $ - 1 - 4 family real estate - - - - 100,576 100,576 - Commercial real estate - other - - - - 518,622 518,622 - Commercial & industrial (1) 472 10,969 9,946 21,387 504,798 526,185 9,946 Agricultural - - - - 66,495 66,495 - Consumer (2) - 27 80 107 14,410 14,517 80 Total $ 472 $ 10,996 $ 10,026 $ 21,494 $ 1,342,107 $ 1,363,601 $ 10,026 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 $ 9.95 m illi on and $ 9.92 million that is greater than 90 days past due as of December 31, 2023 and December 31, 2022, respectively, primarily consists of a single borrower that is well collateralized and for which collection is being diligently pursued . (2) The $ 80 ,000 that is greater than 90 days past due as of December 31, 2023, consists of a single borrower that is well secured and for which collection is being diligently pursued. 75 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Nonaccrual Loans The following table presents information regarding nonaccrual loans as of December 31 , 2023 (dollars in thousand s): With an Allowance No Allowance Total Non- Accrual Loans Related Allowance Interest Income Recognized December 31, 2023 Construction & development $ - $ - $ - $ - $ - 1 - 4 Family Real Estate - - - - - Commercial Real Estate - other - 126 126 - 24 Commercial & industrial 10,255 8,560 18,815 2,147 3,625 Agricultural - - - - - Consumer - - - - - Total $ 10,255 $ 8,686 $ 18,941 $ 2,147 $ 3,649 The following table presents impaired loans, prior to the adoption of ASU 2016-13, as of December 31, 2022 (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 76 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Collateral Dependent Loans A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. During the nine months ended December 31, 2023, no material amount of interest income was recognized on collateral-dependent loans subsequent to their classification as collateral-dependent. At a minimum, the estimated value of the collateral for loan equals the current book value. The following table summarizes collateral-dependent gross loans held for investment by collateral type and the related specific allocation as follows (dollars in thousands): Collateral Type Business Specific Real Estate Assets Other Assets Total Allocation December 31, 2023 Construction & development $ - $ - $ - $ - $ - 1 - 4 Family Real Estate - - - - - Commercial Real Estate - other 126 - - 126 - Commercial & industrial - 20,848 9,932 30,780 2,038 Agricultural - - - - - Consumer 27 - 80 107 - Total $ 153 $ 20,848 $ 10,012 $ 31,013 $ 2,038 Loan Modifications to Troubled Borrowers As part of the Company’s ongoing risk management practices, the Company attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Modifications could include extension of the maturity date, reductions of the interest rate, reduction or forgiveness of accrued interest, or principal forgiveness. Combinations of these modifications may also be made for individual loans. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Principal reductions may be made in limited circumstances, typically for specific commercial loan workouts, and in the event of borrower bankruptcy. Each occurrence is unique to the borrower and is evaluated separately. Troubled loans are considered those in which the borrower is experiencing financial difficulty. The assessment of whether a borrower is experiencing financial difficulty can be subjective in nature and management’s judgment may be required in making this determination. The Company may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future absent a modification. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty. 77 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Modifications to Borrowers Experiencing Financial Difficulty The following tables present the amortized cost basis at the end of the reporting period of loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of modification made, as well as the financial effect of the modifications made as of December 31, 2023: Term Extension and Payment Deferral Amortized Cost Basis % of Total Class Financial Effect December 31, 2023 Construction & development $ - - % 1 - 4 Family Real Estate - - Commercial Real Estate - other - - Commercial & industrial 10,108 1.9 Extended the maturity of loan by four months , and payment of principal and interest deferred until the sale of collateral Agricultural - - Consumer - - Total $ 10,108 1.9 % The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months: Current 30-89 Days Past Due 90+ Days Past Due Non-Accruing December 31, 2023 Construction & development $ - $ - $ - $ - 1 - 4 Family Real Estate - - - - Commercial Real Estate - other - - - - Commercial & industrial - - - 10,108 Agricultural - - - - Consumer - - - - Total $ - $ - $ - $ 10,108 78 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Troubled Debt Restructurings (Prior to the adoption of ASU 2022-02) Impaired loans included nonperforming loans and also included loans modified in troubled-debt restructurings where concessions had been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Included in certain loan categories in the impaired loans were troubled debt restructurings that were classified as impaired. At December 31, 2022, the Company had $ 1.2 million of commercial real estate loans. There were no newly modified troubled-debt restructurings during the year ended December 31, 2022. As of December 31, 2022, there were no troubled-debt restructurings modified and subsequently defaulted for the year ended December 31, 2022. The following table represents information regarding nonperforming assets at December 31, 2022 (dollars in thousands): Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2022 Nonaccrual loans $ - $ - $ 1,348 $ 6,686 $ - $ 5 $ 8,039 Troubled-debt restructurings (1) - - - - - - - Accruing loans 90 or more days past due - - - 9,923 - 18 9,941 Total nonperforming loans $ - $ - $ 1,348 $ 16,609 $ - $ 23 $ 17,980 (1) $ 1.2 million of TDRs as of December 31, 2022, are included in the nonaccrual loans balance. 79 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, 2023 2022 Land, buildings and improvements $ 18,138 $ 15,504 Furniture and equipment 2,625 2,803 Automobiles 976 958 21,739 19,265 Less accumulated depreciation ( 6,797 ) ( 6,159 ) Net premises and equipment $ 14,942 $ 13,106 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, 2023 Goodwill $ 8,688 $ ( 230 ) $ 8,458 Core deposit intangibles 3,315 ( 2,284 ) 1,031 Total $ 12,003 $ ( 2,514 ) $ 9,489 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 See Note 2 for discussion on the $ 146 ,000 in adjustments to Goodwill as of the year-ended December 31, 2023. Amortization expense for intangible assets totaled $ 305 ,000, $ 307 ,000 and $ 183 ,000 for the years ended December 31, 2023, 2022 and 2021, respectively. Estimated amortization expense for each of the remaining life is as follows (dollars in thousands): 2024 $ 155 2025 125 2026 125 2027 125 2028 125 Thereafter 376 Total $ 1,031 80 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 9: Interest-Bearing Deposits The aggregate amount of interest-bearing time deposits in denominations that meet or exceed the insured limit were $ 88.1 million and $ 42.6 million at December 31, 2023 and 2022, respectively. At December 31, 2023, the scheduled maturities of interest-bearing time deposits were as follows (dollars in thousands): 2024 $ 224,811 2025 29,383 2026 1,962 2027 483 Thereafter 137 Total $ 256,776 Note 10: Income Taxes The (benefit)/provision for income taxes for the years ended December 31, 2023, 2022 and 2021 consists of the following (dollars in thousands): Year Ended December 31, 2023 2022 2021 Federal: Current $ 8,490 $ 9,480 $ 6,204 Deferred ( 921 ) ( 1,309 ) 90 Total federal tax provision $ 7,569 $ 8,171 $ 6,294 State: Current $ 1,540 $ 1,562 $ 1,440 Deferred ( 161 ) ( 101 ) 21 FIN48 - ( 13 ) - Total state tax provision $ 1,379 $ 1,448 $ 1,461 Total income tax provision $ 8,948 $ 9,619 $ 7,755 81 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The provision for income taxes for the years ended December 31, 2023, 2022 and 2021 differs from the federal rate of 21 % due to the following: Year Ended December 31, 2023 2022 2021 Statutory U.S. Federal Income Tax $ 7,789 $ 8,244 $ 6,492 Increase (decrease) resulting from: State Taxes 1,069 1,154 1,214 Permanent Differences 57 240 121 Return to provision and deferred true ups 13 ( 7 ) - FIN 48 Activity - ( 13 ) - Other 20 1 ( 72 ) Provision for income taxes $ 8,948 $ 9,619 $ 7,755 Deferred tax assets (liabilities) included in other assets in the accompanying consolidated balance sheet consist of the following: Year Ended December 31, 2023 2022 Deferred tax assets: Allowance for loan losses $ 4,666 $ 3,345 Non-accrual Loans 317 204 Deferred Compensation 347 218 Deferred Revenue 291 302 Discounts and premiums on assets acquired 15 191 Net unrealized loss on securities available for sale 1,651 2,639 Accrued expenses - 204 Lease liabilities 471 492 Other 330 - Total deferred tax assets $ 8,088 $ 7,595 Deferred tax liabilities: Property and equipment $ ( 940 ) $ ( 1,066 ) Intangible assets ( 355 ) ( 402 ) Prepaid Expenses ( 124 ) ( 149 ) Right of Use Asset ( 464 ) ( 500 ) Other ( 318 ) ( 15 ) Total deferred tax liabilities $ ( 2,201 ) $ ( 2,132 ) Net deferred tax assets $ 5,887 $ 5,463 82 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, 2023. The Company does not have any net operating loss or tax credit carryforwards as of December 31, 2023. 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. There were no uncertain tax positions as of December 31, 2023 and 2022, and there were no interest or penalties related to uncertain tax positions reflected in the consolidated statements of income for the years ended December 31, 2023, 2022, and 2021. 83 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, 2023 and 2022 were $ 400,000 and $ 800,000 , respectively. Loans with a collateral value of approximately $ 159.6 million and $ 130.0 million were used to secure the letters of credit at December 31, 2023 and 2022, respectively. Note 12: Advances and Borrowings The Bank has a blanket floating lien security agreement with a maximum borrowing capacity of $ 159.2 million and $ 129.2 million at December 31, 2023 December 31, 2022, respectively, 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, 2023 or 2022. Note 13: Shareholders’ Equity On October 28, 2021, the Company adopted a Repurchase Plan (the “RP”) that authorizes the repurchase of up to 750,000 shares of the Company’s stock. Stock repurchases under the RP take place pursuant to a Rule 10b5-1 Plan with pricing and purchasing parameters established by management. The RP expired on October 28, 2023. There were no share repurchases under this plan. On October 30, 2023, 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, 2023. A summary of the activity under the RP is as follows: Year Ended December 31, 2023 2022 Number of shares repurchased - - Average price of shares repurchased $ - $ - Shares remaining to be repurchased 750,000 750,000 84 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, 2023, that the Company and Bank meet all capital adequacy requirements to which it is subject and maintains capital conservation buffers that allow the Company and Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to certain executive officers. As of December 31, 2023, the most recent notification from the Federal Deposit Insurance Corporation (FDIC) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain capital ratios as set forth in the table. 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. 85 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, 2023 Total capital to risk-weighted assets Company $ 185,171 12.74 % $ 116,251 8.00 % $ 152,579 10.50 % N/A N/A Bank 185,118 12.75 % 116,169 8.00 % 152,472 10.50 % $ 145,211 10.00 % Tier I capital to risk-weighted assets Company 166,982 11.49 % 87,188 6.00 % 123,516 8.50 % N/A N/A Bank 166,942 11.50 % 87,127 6.00 % 123,429 8.50 % 116,169 8.00 % CET I capital to risk-weighted assets Company 166,982 11.49 % 65,391 4.50 % 101,719 7.00 % N/A N/A Bank 166,942 11.50 % 65,345 4.50 % 101,648 7.00 % 94,387 6.50 % Tier I capital to average assets Company 166,982 9.50 % 70,318 4.00 % N/A N/A N/A N/A Bank 166,942 9.50 % 70,318 4.00 % N/A N/A 87,897 5.00 % As of December 31, 2022 Total capital to risk-weighted assets Company $ 158,158 12.41 % $ 101,990 8.00 % $ 133,862 10.50 % N/A N/A Bank 158,158 12.42 % 101,909 8.00 % 133,756 10.50 % $ 127,387 10.00 % Tier I capital to risk-weighted assets Company 143,424 11.25 % 76,493 6.00 % 108,365 8.50 % N/A N/A Bank 143,424 11.26 % 76,432 6.00 % 108,279 8.50 % 101,909 8.00 % CET I capital to risk-weighted assets Company 143,424 11.25 % 57,370 4.50 % 89,241 7.00 % N/A N/A Bank 143,424 11.26 % 57,324 4.50 % 89,171 7.00 % 82,801 6.50 % Tier I capital to average assets Company 143,424 9.19 % 62,460 4.00 % N/A N/A N/A N/A Bank 143,424 9.18 % 62,489 4.00 % N/A N/A 78,111 5.00 % 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. 86 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, 2023, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements under the Basel III Capital Rules on a fully phased-in basis. The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2023, approximately $ 65.5 million of retained earnings was available for dividend declaration from the Bank without prior regulatory approval. Note 14: Related-Party Transactions At December 31, 2023 and December 31, 2022, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties) approximating $ 203,000 and $ 132,000 , respectively. The Bank leases office and retail banking space in Oklahoma City and Woodward, Oklahoma from Central Park on Lincoln, LLC and Haines Realty Investments Company, LLC, respectively, both related parties of the Company. Lease expense totaled $ 251,000 , $ 155,000 and $ 175,000 for the years ended December 31, 2023, 2022 and 2021, respectively. In addition, payroll and office sharing arrangements were in place between the Company and certain of its affiliates. 87 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, 2023, 2022 and 2021 totaled $ 399,000 , $ 366,000 and $ 267,000 , 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, 2023, 2022 and 2021 totaled $ 2,164,000 , $ 1,384,000 and $ 1,040,000 , respectively. There were 637,371 shares available for future grants as of December 31, 2023. The Company grants to employees and directors restricted stock units (RSUs) which vest ratably over one , three , four , five , or eight years and stock options which vest ratably over four years . All RSUs and stock options are granted at the fair value of the common stock at the time of the award. The RSUs are considered fixed awards as the number of shares and fair value are known at the date of grant and the fair value at the grant date is amortized over the vesting and/or service period. The Company uses newly issued shares for granting RSUs and stock options. The following table is a summary of the stock option activity under the 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, 2023 Outstanding at December 31, 2022 251,550 $ 17.52 Options Granted - - Options Exercised ( 28,423 ) 17.71 Options Forfeited ( 2,188 ) 15.15 Outstanding at December 31, 2023 220,939 17.52 5.64 $ 2,172,070 Exercisable at December 31, 2023 173,684 18.04 5.27 $ 1,616,278 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 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. 88 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements The following table shows the assumptions used for computing stock-based compensation expense under the fair value method on options granted during the year ended December 31, 2022, there were no options granted during the year ended December 2023: For the Year Ended December 31, 2022 Risk-free interest rate 3.47 % Dividend yield 1.96 % Stock price volatility 34.92 % Expected term 7.01 The following table summarizes share information about RSUs for the years ended December 31, 2023 and 2022: Number of Shares Wgtd. Avg. Grant Date Fair Value Year Ended December 31, 2023 Outstanding at December 31, 2022 112,591 $ 19.15 Shares granted 163,311 29.76 Shares vested ( 57,354 ) 19.48 Shares forfeited ( 7,087 ) 27.34 End of the period balance 211,461 $ 26.98 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 22.66 Shares vested ( 61,902 ) 18.88 Shares forfeited ( 1,500 ) 22.13 End of the period balance 112,591 $ 19.15 As of December 31, 2023, there was approximately $ 4.5 million of unrecognized compensation expense related to 211 ,000 unvested RSUs and $ 156,000 of unrecognized compensation expense related to 221,000 unvested and/or unexercised stock options. The RSU expense is expected to be recognized over a weighted average period of 3.85 years, the stock option expense is expected to be recognized over a weighted average period of 1.29 years. 89 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, 2023 and December 31, 2022 (dollars in thousands): Fair Value (Level 1) (Level 2) (Level 3) December 31, 2023 Impaired loans (collateral- dependent) $ 16,370 $ - $ - $ 16,370 Asset retirement obligations 361 - - 361 December 31, 2022 Impaired loans (collateral- dependent) $ 6,553 $ - $ - $ 6,553 90 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Collateral-Dependent Impaired Loans, Net of Allowance for Loan Losses The estimated fair value of collateral-dependent impaired loans is based on fair value, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. The Company considers evaluation analysis as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Values of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by executive management and loan administration. Values are reviewed for accuracy and consistency by executive management and loan administration. The ultimate collateral values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. 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, 2023 Collateral-dependent impaired loans $ 16,370 Estimated cash to be received pending resolution of bankruptcy proceedings Estimated cost to sell 0 % Asset retirement obligaions 361 Expected present value Plugging and abandonment expense 0 % December 31, 2022 Collateral-dependent impaired loans $ 6,553 Appraisals from comparable assets Estimated cost to sell 20 % The following table presents estimated fair values of the Company’s financial instruments not recorded at fair value at December 31, 2023 and December 31, 2022 (dollars in thousands): Carrying Fair Value Measurements Amount Level 1 Level 2 Level 3 Total December 31, 2023 Financial Assets Cash and due from banks $ 181,042 $ 181,042 $ - $ - $ 181,042 Interest-bearing time deposits in other banks 17,679 - 17,679 - 17,679 Loans, net of allowance 1,341,148 - 1,321,413 16,370 1,337,783 Loans held for sale 718 - 718 - 718 Nonmarketable equity securities 1,283 - 1,283 - 1,283 Interest receivable and other assets 35,878 - 19,211 16,667 35,878 Financial Liabilities Deposits $ 1,591,391 $ - $ 1,590,295 $ - $ 1,590,295 Interest payable and other liabilities 9,647 - 8,335 1,312 9,647 December 31, 2022 Financial Assets Cash and due from banks $ 109,115 $ 109,115 $ - $ - $ 109,115 Interest-bearing time deposits in other banks 5,474 - 5,474 - 5,474 Loans, net of allowance 1,255,722 - 1,245,825 6,553 1,252,378 Nonmarketable equity securities 1,209 - 1,209 - 1,209 Interest receivable 8,124 - 8,124 - 8,124 Financial Liabilities Deposits $ 1,431,400 $ - $ 1,429,565 $ - $ 1,429,565 Interest payable 339 - 339 - 339 91 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, 2023 or December 31, 2022. Interest Receivable and Other Assets Interest receivable and other assets include prepaid expenses, right-of-use lease assets, interest receivable on loans, deferred tax assets, and oil and gas related assets. For prepaid expense, right-of-use lease assets, deferred tax assets, and interest receivable on loans the carrying amount approximates fair value. For the determination of fair value of oil and gas assets, see discussion in Note 1, Summary of Significant Accounting Policies--Specific to Production of Oil and Natural Gas Reserves Operations. Interest Payable and Other Liabilities Interest payable and other liabilities include unfunded commitment liabilities, lease liabilities, interest payable on deposits,dividends payable, other accrued liabilities, and oil and gas related liabilities. For unfunded commitment liabilities, lease liabilities, interest payable on deposits, dividends payable, and other accrued liabilities carrying amount approximates fair value.For the determination of fair value of oil and gas liabilities, see discussion in Note 1, Summary of Significant Accounting Policies--Specific to Production of Oil and Natural Gas Reserves Operations . 92 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, 2023 and December 31, 2022 (dollars in thousands): December 31, 2023 December 31, 2022 Commitments to extend credit $ 256,888 $ 198,027 Financial and performance standby letters of credit 4,247 1,043 $ 261,135 $ 199,070 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Each instrument generally has fixed expiration dates or other termination clauses. Since many of the instruments are expected to expire without being drawn upon, total commitments to extend credit amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the Company upon extension of credit is based on management’s credit evaluation of the customer. Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. On January 1, 2023, the Company adopted ASU 2016-13, see Note (1) and Note (6). Upon adoption, the Company estimated an allowance for credit losses on off-balance sheet credit exposures, which resulted in recording a reserve for unfunded loan commitments of $ 500 ,000. The reserve for unfunded loan commitments totaled $ 464 ,000 and $ 0 at December 31, 2023 and December 31, 2022, respectively. 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, 2023, hospitality loans were 22 % of gross total loans with outstanding balances of $ 298.5 million and unfunded commitments of $ 5.7 million; energy loans were 14 % of gross total loans with outstanding balances of $ 190.6 million and unfunded commitments of $ 55.1 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, 2023, goodwill of $ 8.5 million was recorded on the consolidated balance sheet. 93 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: 2023 $ 1,001 2022 777 2021 799 As of December 31, 2023, 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 $ 2.0 million. As of December 31, 2023, our operating leases have a weighted-average remaining lease term of 16.0 years and a weighted-average discount rate of 3.8 percent. Future minimum rental commitments of branch facilities and office equipment due under non-cancelable operating leases at December 31, 2023, were as follows (dollars in thousands): 2024 $ 553 2025 353 2026 274 2027 200 2028 108 Thereafter 850 Total lease payments 2,338 Less imputed interest ( 350 ) Operating lease liability $ 1,988 94 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 20: Asset Retirement Obligation Asset retirement obligations (“ARO”) relate to our obligation for the plugging and abandonment of oil and natural gas properties. The ARO is recorded at fair value and accretion expense, recognized over the life of the property, increases the liability to its expected settlement value. Accretion expense is included within “Other” noninterest expense of the consolidated statements of comprehensive income and consolidated statements of cash flows. If the fair value of the estimated ARO changes, an adjustment is recorded for both the ARO and the asset retirement cost. The following table is a reconciliation of changes in the Company’s asset retirement obligations for the periods ended December 31, 2023: Asset retirement obligations as of January 1, 2023 $ - Liability additions 350,563 Accretion expense 10,517 Asset retirement obligations as of December 31, 2023 $ 361,080 The fair value of the ARO is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate. Fair value, to the extent possible, includes a market risk premium for unforeseeable circumstances. Inherent in the fair value calculation of the ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. Note 21: General Litigation The Company is involved in the later stages of a process related to a loan customer that filed for bankruptcy in the third quarter of 2023. As a part of that process, one of the parties involved has also filed a separate lawsuit that is also being adjudicated by the bankruptcy court. As of December 31, 2023, the Company has recorded a specific reserve related to the loans with this customer, included in the allowance for credit losses. As of the date of the financial statements, management believes the specific reserve for these loans is sufficient to cover the remaining costs related to the bankruptcy process and related litigation. 95 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Note 22: Parent-only Financial Statements Condensed Balance Sheets December 31, Assets 2023 2022 Cash and due from banks $ 40 $ 297 Investment in bank subsidiary 169,275 143,049 Dividends receivable 1,932 1,463 Goodwill 1,011 1,011 Total assets $ 172,258 $ 145,820 Liabilities and Shareholders’ Equity Dividends Payable $ 1,932 $ 1,463 Other liabilities - 257 Total liabilities 1,932 1,720 Total shareholders’ equity 170,326 144,100 Total liabilities and shareholders’ equity $ 172,258 $ 145,820 Condensed Statements of Comprehensive Income For the Years Ended December 31, 2023 2022 2021 Income Dividends from subsidiary bank $ 6,790 $ 4,738 $ 4,078 Total Income 6,790 4,738 4,078 Expense Other - - - Total expense - - - Income and equity in undistributed net income of bank subsidiary 6,790 4,738 4,078 Equity in undistributed net income of bank subsidiary 21,485 24,900 19,081 Income before Taxes 28,275 29,638 23,159 Income tax expense - - - Net Income Available to Common Shareholders $ 28,275 $ 29,638 $ 23,159 Other Comprehensive Income Equity in other comprehensive (loss) income of subsidiary $ 3,158 $ ( 9,447 ) $ 144 Other comprehensive gain(loss) $ 3,158 $ ( 9,447 ) $ 144 Comprehensive Income $ 31,433 $ 20,191 $ 23,303 96 Table of Contents Bank7 Corp. Notes to Consolidated Financial Statements Condensed Statements of Cash Flows For the Years Ended December 31, 2023 2022 2021 Operating Activities Net income $ 28,275 $ 29,638 $ 23,159 Items not requiring (providing) cash Equity in undistributed net income ( 21,485 ) ( 24,900 ) ( 19,081 ) Changes in Other current assets and liabilities ( 727 ) ( 374 ) ( 102 ) Net cash provided by operating activities 6,063 4,364 3,976 Financing Activities Common stock issued, net of offering costs 1 - 1 Dividends paid ( 6,323 ) ( 4,364 ) ( 3,982 ) Net cash used in financing activities ( 6,322 ) ( 4,364 ) ( 3,981 ) Increase (Decrease) in Cash and Due from Banks ( 259 ) - ( 5 ) Cash and Due from Banks, Beginning of Period 297 297 302 Cash and Due from Banks, End of Period $ 38 $ 297 $ 297 Supplemental Disclosure of Cash Flows Information Dividends declared and not paid $ 1,932 $ 1,463 $ 1,089 97 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.