Bank7 Corp. quarterly report, Q1 FY2021

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Bank7 Corp. 2021 Q1 Form 10-Q Summary

Business context and reporting period

Bank7 Corp. is an Oklahoma-based bank holding company operating through Bank7, which provides banking and financial services to individual and corporate customers in Oklahoma, Kansas and Texas. The unaudited report covers the three months ended March 31, 2021, with comparisons to the three months ended March 31, 2020 and December 31, 2020 balance-sheet amounts.

Financial performance and condition

  • Net income: $5.1 million, compared with $5.1 million in Q1 2020. Basic and diluted EPS increased to $0.56 from $0.51, primarily reflecting fewer weighted-average shares outstanding.
  • Interest income: $13.2 million, down 2.4% year over year. Net interest income increased 7.7% to $12.3 million as interest expense declined to $875,000 from $2.1 million.
  • Net interest margin: 5.12%, compared with 5.31% in Q1 2020. Average loans increased to $847.5 million from $747.8 million, while the average loan yield declined to 6.27% from 7.05%.
  • Provision and credit metrics: Provision for loan losses increased to $1.3 million from $650,000. The allowance rose to $10.9 million, or 1.26% of loans, from $9.6 million, or 1.15%, at year-end 2020. Net charge-offs were $50,000.
  • Noninterest income and expense: Noninterest income was $337,000, up 2.1%. Noninterest expense increased 4.4% to $4.5 million, including a 12.8% increase in salaries and employee benefits. The reported efficiency ratio improved to 35.9% from 37.0%.
  • Profitability ratios: Return on average assets was 2.11%, compared with 2.32%; return on average equity was 19.02%, compared with 19.97%.
  • Assets and loans: Total assets increased to $1.046 billion from $1.017 billion. Gross loans increased 3.0% to $864.3 million, and net loans increased to $850.5 million. Commercial real estate represented 52.3% of gross loans and commercial and industrial loans represented 41.8%.
  • Deposits and liquidity: Deposits increased 2.6% to $929.0 million, including $269.1 million of noninterest-bearing deposits. Cash and due from banks increased to $170.1 million from $153.9 million. The company reported $70.4 million of FHLB borrowing availability and no outstanding unsecured correspondent fed funds borrowings.
  • Cash flow: Operating activities provided $9.2 million; investing activities used $15.5 million, primarily from a $24.8 million increase in loans; financing activities provided $22.5 million, primarily from deposit growth. Cash increased $16.2 million during the quarter.
  • Capital: Shareholders’ equity increased to $111.7 million from $107.3 million. The Bank’s total risk-based capital ratio was 15.35%, CET1 ratio was 14.10%, Tier 1 risk-based capital ratio was 14.10%, and Tier 1 leverage ratio was 11.23%. The Bank remained categorized as well capitalized.

Material changes versus comparable periods

  • Loan growth and lower deposit funding costs increased net interest income despite lower loan and short-term investment yields.
  • PPP loan balances increased to $64.7 million from $44.9 million at December 31, 2020. The company recognized $830,000 of PPP origination fees in Q1 and had $757,000 of deferred PPP fees at March 31, 2021.
  • Nonperforming loans declined modestly to $16.4 million from $16.5 million at year-end 2020; the nonperforming-loan ratio improved to 1.90% from 1.98%.
  • Pass-rated loans increased to $780.4 million from $773.4 million, while watch loans increased to $50.0 million from $32.2 million. Substandard loans declined to $22.9 million from $23.1 million.
  • No shares were repurchased in Q1 2021, compared with 793,094 shares repurchased in Q1 2020. The repurchase program had 717,822 shares remaining authorized at March 31, 2021. Cash dividends declared increased to $995,000 from $926,000.

Guidance, outlook, risks and unusual items

  • The filing does not provide formal quantitative earnings or revenue guidance. Management expects liquidity needs to be met through profitability, loan repayments and maturities, continued deposit gathering and available borrowing mechanisms.
  • COVID-19 remains a material uncertainty. Seven COVID-related loans totaling $42.3 million were modified but were not classified as troubled debt restructurings. The filing states that the pandemic could adversely affect liquidity, asset valuations, loan performance, goodwill, deferred tax assets, regulatory capital and results of operations.
  • Hospitality exposure was $208.3 million, or 24% of gross loans, with $62.0 million of unfunded commitments. Energy exposure was $93.3 million, or 11% of gross loans, with $10.0 million of unfunded commitments.
  • Off-balance-sheet commitments totaled $210.6 million, consisting of $208.4 million of commitments to extend credit and $2.2 million of standby letters of credit. These amounts do not necessarily represent future cash requirements because commitments may expire undrawn.
  • Management increased the loan-loss provision because of the potential for losses from an elevated level of nonperforming assets over an extended period. Allowance adequacy remains dependent on economic conditions, loan composition, delinquencies, collateral values and regulatory review.
  • The company expects to adopt lease accounting guidance in the fourth quarter of 2021 and the CECL credit-loss standard in the first quarter of 2023; management did not expect the lease change to materially affect financial condition or capital, while the CECL impact remained under assessment.
  • Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material legal proceedings or material changes to previously disclosed risk factors were reported.

Important facts for investors to verify

  • Whether hospitality and energy borrowers experience further stress and whether nonperforming loans or provisioning increase.
  • The sustainability of loan growth and PPP-related fee income as PPP balances are forgiven or mature.
  • Future net interest margin performance in a low-rate environment and the effect of deposit repricing.
  • The concentration of commercial real estate and commercial and industrial loans, including criticized and substandard balances.
  • The eventual effect of CECL adoption on the allowance, retained earnings and regulatory capital.
  • Available liquidity sources, deposit stability, FHLB borrowing capacity and the potential funding impact of $210.6 million of off-balance-sheet commitments.