Bank7 Corp. — Form 10-Q Summary
Business Context and Reporting Period
Bank7 Corp. is an Oklahoma-based bank holding company whose wholly owned subsidiary, Bank 7, provides banking and financial services to individual and corporate customers in Oklahoma, Kansas and Texas through nine locations. The filing covers the unaudited quarter and nine months ended September 30, 2019, compared primarily with the corresponding 2018 periods and December 31, 2018. The company became a taxable C corporation in September 2018 following its initial public offering.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total interest income | $13.1 million, up 11.3% | $38.7 million, up 13.1% |
| Net interest income | $10.6 million, up 8.2% | $31.5 million, up 8.4% |
| Provision for loan losses | $0 | $0, compared with $0.1 million in 2018 |
| Noninterest income | $0.5 million, up 59.6% | $1.0 million, down 3.9% |
| Noninterest expense | $16.1 million, up 322.4% | $23.9 million, up 116.5% |
| Net income | $(6.5) million; diluted EPS $(0.64) | $3.7 million; diluted EPS $0.37 |
| Net interest margin | 5.27%, versus 5.36% | 5.45%, versus 5.47% |
| Efficiency ratio | 144.7%, versus 37.6% | 73.3%, versus 37.1% |
At September 30, 2019, total assets were $826.8 million, gross loans were $676.0 million, net loans were $666.8 million, deposits were $722.1 million and shareholders’ equity was $100.6 million. Cash and due from banks totaled $110.6 million, and interest-bearing time deposits in other banks totaled $31.9 million.
Gross loans increased 12.3% from December 31, 2018, led by commercial real estate-other loans, which increased to $254.0 million from $156.4 million. Commercial real estate represented 52.2% of gross loans, commercial and industrial loans represented 37.3%, agricultural loans 8.7%, construction and development loans 10.2%, and consumer loans 1.8%. The allowance for loan losses was $7.8 million, or 1.16% of loans, compared with 1.31% at year-end 2018.
Total deposits increased 6.8% from year-end 2018. Interest-bearing deposits increased to $521.3 million, while noninterest-bearing demand deposits were $200.8 million. The company reported no borrowings at September 30, 2019. FHLB borrowing availability was $64.1 million, and the company reported no unsecured fed funds lines with amounts advanced.
For the first nine months, operating activities provided $14.7 million of cash, investing activities used $75.8 million, primarily from a $74.8 million increase in loans, and financing activities provided $43.6 million, primarily from a $46.2 million increase in deposits. Cash and due from banks declined $17.5 million to $110.6 million.
Material Changes Versus Comparable Periods
- Third-quarter net loss was driven primarily by an $11.8 million, one-time, non-cash stock-based compensation charge, including payroll taxes, related to shares transferred to executive officers. Excluding this item, management reported third-quarter net income of approximately $5.1 million.
- For the first nine months, management reported pro forma net income of $15.4 million, compared with $14.3 million on the comparable 2018 pro forma basis, excluding the stock-transfer charge and adjusting for corporate taxes.
- Interest income and net interest income increased because of loan growth and higher short-term investment yields. Deposit costs also increased, with interest expense rising 40.3% for the nine months.
- Net interest margin was broadly stable, while margin excluding loan fee income improved to 4.84% from 4.74% for the nine months. Loan fee income declined from the prior year because of nonrecurring 2018 fees.
- Nonperforming loans increased to $4.2 million, or 0.63% of total loans, from $2.6 million, or 0.44%, at December 31, 2018. Nonperforming assets increased to $4.3 million, or 0.52% of assets.
- Substandard loans increased to $11.7 million from $9.1 million at year-end 2018. The filing attributes the increase primarily to several agricultural and mixed commercial relationships.
- The company adopted a plan in September 2019 authorizing repurchases of up to 500,000 shares; no shares had been repurchased through the filing date.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management states that it intends to grow organically through selective branch openings and potential strategic acquisitions, while continuing to focus on business owners and entrepreneurs in its target markets.
Management considered the allowance for loan losses adequate and cited strong credit quality and low historical losses, but acknowledged that future provisions could be required because of economic conditions, loan growth, portfolio composition, delinquencies, nonaccrual loans, criticized loans and collateral values. Hospitality loans represented 23% of gross loans and energy loans represented 17%, creating industry concentration risk.
Off-balance-sheet commitments totaled $200.0 million, including $197.5 million of commitments to extend credit and $2.6 million of standby letters of credit. The filing states that these amounts do not necessarily represent future cash requirements because many commitments may expire unused.
The Bank was categorized as well-capitalized under prompt corrective action rules. At September 30, 2019, the Bank’s total risk-based capital ratio was 16.25%, Tier 1 risk-based capital ratio was 15.06%, CET1 ratio was 15.06% and Tier 1 leverage ratio was 12.27%. Management reported compliance with applicable capital requirements and no subsequent conditions expected to change the Bank’s classification.
The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, effective disclosure controls and no material changes in internal control over financial reporting. Management also disclosed forward-looking statement risks, including economic conditions, interest-rate changes, credit losses, regulatory requirements, liquidity, industry concentrations and the subjectivity of allowance, tax, fair-value and goodwill estimates.
Investor Verification Checklist
- Verify the sustainability of loan growth, particularly the rapid increase in commercial real estate-other exposure and related concentration limits.
- Monitor nonperforming loans, substandard loans, troubled-debt restructurings and future charge-offs or provisions.
- Separate recurring operating performance from the $11.8 million one-time, non-cash executive stock-transfer compensation charge and its tax effects.
- Assess deposit pricing and retention, especially the increase in interest-bearing deposit costs and time deposits over $100,000.
- Reconcile reported cash flows with loan growth, deposit growth and available FHLB liquidity.
- Review the company’s non-GAAP pro forma results and tax assumptions before comparing profitability with prior periods or peers.
- Track hospitality and energy loan performance, unfunded commitments and broader economic conditions in the company’s markets.
- Confirm the treatment and timing of the authorized 500,000-share repurchase program and the effect of future repurchases on capital and per-share metrics.