Bank7 Corp. 2021 Form 10-K Summary
Business context and reporting period
Bank7 Corp. is an Oklahoma City-based bank holding company operating Bank7, a commercial bank serving Oklahoma, the Dallas/Fort Worth metropolitan area and Kansas. The filing covers the fiscal year ended December 31, 2021; quarterly data includes the three months ended December 31, 2021.
- The Bank operated 12 full-service branches and had 122 full-time employees at year-end.
- Core lending markets include commercial real estate, hospitality, energy, commercial and industrial, agricultural and consumer lending.
- On December 9, 2021, the Company acquired Watonga Bancshares, Inc., whose Cornerstone Bank operations were merged into Bank7.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total assets | $1.351 billion | $1.017 billion | +32.9% |
| Gross loans | $1.031 billion | $839.1 million | +22.9% |
| Total deposits | $1.217 billion | $905.5 million | +34.5% |
| Shareholders’ equity | $127.4 million | $107.3 million | +18.7% |
| Net interest income | $53.2 million | $47.2 million | +12.9% |
| Provision for loan losses | $4.2 million | $5.4 million | -$1.2 million |
| Noninterest income | $2.3 million | $1.7 million | +35.1% |
| Noninterest expense | $20.4 million | $17.6 million | +15.9% |
| Income before taxes | $30.9 million | $25.9 million | +19.4% |
| Net income | $23.2 million | $19.3 million | +20.2% |
| Diluted EPS | $2.55 | $2.05 | +24.4% |
| Net interest margin | 5.12% | 5.01% | +11 basis points |
| Efficiency ratio | 36.76% | 36.03% | Higher by 73 basis points |
Pre-tax return on average assets was 2.96%, pre-tax return on average equity was 26.41%, tax-adjusted return on average assets was 2.21%, and tax-adjusted return on average equity was 20.13%.
- Cash and cash equivalents were $204.9 million at year-end, compared with $153.9 million in 2020.
- Net cash provided by operating activities was $30.0 million, compared with $25.2 million in 2020.
- Net cash used in investing activities was $43.5 million, primarily reflecting $78.0 million of net loan growth, partially offset by $20.4 million of net cash received from the Watonga acquisition.
- Net cash provided by financing activities was $64.5 million, including a $68.5 million net increase in deposits.
- FHLB borrowing availability was $78.1 million; the Bank had no FHLB advances outstanding at year-end.
- Bank7’s total capital ratio was 12.54%, CET1 ratio was 11.53%, and Tier 1 leverage ratio was 10.55%. The Bank was categorized as well-capitalized.
Material changes versus the prior comparable period
- Watonga Bancshares was acquired for $29.3 million in cash. The transaction added $267.3 million of assets, including $117.3 million of loans, and $243.5 million of deposits. It generated $477,000 of revenue during the 23 days after closing and incurred $712,000 of acquisition-related expenses.
- Loan growth was supported by organic expansion and the acquisition. Commercial real estate loans increased to $571.9 million, or 55.5% of gross loans, from $427.4 million, or 50.9%, in 2020.
- Average loans increased 10.0% to $905.8 million. Loan interest income increased 6.3% to $55.8 million, while loan yields declined to 6.16% from 6.37%.
- Interest expense on deposits fell 50.4% to $3.1 million as the average cost of interest-bearing deposits declined to 0.48% from 1.05%.
- Nonperforming loans declined to $10.4 million, or 1.01% of total loans, from $16.5 million, or 1.98%, in 2020. Nonaccrual loans declined to $9.9 million from $14.6 million.
- The allowance for loan losses increased to $10.3 million, but declined to 1.00% of loans from 1.15%. Net charge-offs were $3.5 million, compared with $3.6 million in 2020.
- PPP loans declined to $18.7 million from $44.9 million, while recognized PPP fee income increased to $2.3 million for 2021.
- Goodwill increased to $8.5 million from $1.0 million and core deposit intangibles increased to $1.6 million from $572,000, primarily due to the Watonga acquisition.
- The Company paid quarterly dividends of $0.11 per share during the first three quarters and $0.12 per share in the fourth quarter. Management stated that it currently expects quarterly dividends of $0.12 per share to continue, subject to regulatory and other conditions.
Guidance, outlook, management commentary, risks and unusual items
- Management intends to pursue disciplined organic growth and selective strategic acquisitions while maintaining asset quality, credit discipline and cost control.
- The Company expects technology, automation and repeatable processes to support operating efficiency as it scales.
- Management identified rising interest rates as a significant consideration. The Federal Reserve began raising rates in March 2022, and rate changes may affect loan demand, deposit costs, net interest margin, borrower performance and securities valuations.
- Loan concentrations are material: hospitality loans were approximately $198.4 million, or 19.2% of gross loans, and energy loans were approximately $98.5 million, or 9.6%. Hospitality and energy borrowers remain sensitive to economic conditions, travel activity and oil and gas prices.
- Regulatory CRE represented 302.47% of Bank capital at year-end, while construction, land development and other land loans represented 129.02%. Regulators could require additional capital, reduce concentrations or limit growth if concentration risk increases.
- The 20 largest borrowing relationships represented approximately 32.7% of total outstanding commitments, and the 20 largest deposit relationships represented 23.2% of total deposits, creating concentration and liquidity risks.
- COVID-19, including potential variants and related economic effects, could continue to affect hospitality borrowers, loan demand, credit losses, collateral values and operating costs.
- The Company has exposure to the transition away from LIBOR and expects certain contracts, securities and subordinated debt instruments to require replacement-rate or contract modifications.
- The Company expects to adopt lease accounting guidance in the fourth quarter of 2022 and the CECL credit-loss standard in the first quarter of 2023. Management does not expect the lease standard to materially affect financial condition or capital; the filing does not provide a quantified expected CECL impact.
- A December 2021 secondary offering by the largest shareholder involved approximately 1.1 million shares and resulted in $163,000 of nonrecurring expenses.
- The independent auditor issued an unqualified opinion on the financial statements. As an emerging growth company, Bank7 was not required to obtain an auditor attestation on internal control over financial reporting; management concluded that internal controls were effective.
Most important facts an investor should verify
- Whether the Watonga acquisition delivers expected cost savings, deposit retention, loan growth and earnings contribution after only 23 days of reported 2021 ownership.
- Credit performance in the hospitality, energy, commercial real estate and commercial and industrial portfolios, including migration of watch, special mention and substandard loans.
- Whether the $10.3 million allowance remains adequate as the portfolio expands and the Company adopts CECL in 2023.
- The effect of higher interest rates on deposit pricing, funding costs, net interest margin, loan demand and borrower defaults.
- Liquidity resilience given deposit concentration, short-term deposit maturities, unfunded commitments of $200.4 million and standby letters of credit of $5.8 million.
- Regulatory response to CRE concentration levels and the Company’s ability to continue branch expansion, acquisitions and capital distributions.
- The final purchase-accounting valuations for Watonga, including goodwill and core deposit intangibles, which were preliminary at year-end.
- Execution of the LIBOR transition, cybersecurity controls and compliance with the new 36-hour regulatory incident-notification requirement effective in 2022.