Bank7 Corp. Form 10-Q Summary
Business Context and Reporting Period
Bank7 Corp. is a bank holding company headquartered in Oklahoma City, Oklahoma. Through Bank7, it provides banking and financial services to individuals and businesses in Oklahoma, Kansas, and Texas through nine locations. The filing covers the unaudited quarter and six months ended June 30, 2020, with comparisons to the periods ended June 30, 2019 and December 31, 2019.
Financial Performance and Position
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Total interest income | $13.6 million | $13.1 million | $27.1 million | $25.6 million |
| Net interest income | $11.9 million | $10.6 million | $23.4 million | $20.9 million |
| Provision for loan losses | $1.4 million | — | $2.1 million | — |
| Net income | $5.0 million | $5.1 million | $10.1 million | $10.2 million |
| Diluted EPS | $0.54 | $0.50 | $1.05 | $1.00 |
| Net interest margin | 4.99% | 5.46% | 5.14% | 5.54% |
- Pre-tax income was $6.7 million in Q2 2020 and $13.5 million for the first six months, compared with $6.8 million and $13.7 million, respectively, in the prior-year periods.
- Pre-tax, pre-provision net earnings increased to $8.1 million in Q2 and $15.5 million for the first six months, compared with $6.8 million and $13.7 million, respectively, in the prior-year periods.
- Return on average assets was 2.09% for Q2 and 2.20% for the first six months. Return on average equity was 20.36% and 20.17%, respectively.
- Noninterest income was $301,000 in Q2 and $631,000 for the first six months. Noninterest expense was $4.1 million and $8.5 million, respectively.
- Efficiency ratio improved to 33.7% in Q2 and 35.3% for the first six months, compared with 37.2% and 36.4% in the comparable 2019 periods.
- At June 30, 2020, total assets were $1.004 billion, gross loans were $840.2 million, net loans were $828.1 million, deposits were $894.2 million, and shareholders’ equity was $101.6 million.
- Cash and due from banks totaled $127.8 million. The company reported no borrowings, and had $72.6 million of borrowing availability from the Federal Home Loan Bank.
- Net cash provided by operating activities was $15.7 million for the first six months, while investing activities used $128.7 million, primarily reflecting $130.7 million of net loan growth. Financing activities provided $123.7 million, primarily from a $136.7 million increase in deposits.
Material Changes Versus Comparable Periods
- Average loans increased to $826.1 million in Q2 2020 from $613.9 million, and to $786.9 million for the first six months from $600.2 million. Loan yields declined to 6.52% and 6.77%, respectively, from 7.91% and 7.97%.
- Net interest income increased despite lower asset yields, primarily because of substantially higher loan balances and lower deposit funding costs. Interest expense declined 34.5% in Q2 and 21.3% for the first six months.
- Net interest margin declined because of lower market interest rates and lower yields on loans and short-term investments. Excluding loan fees, the margin was 4.30% in Q2 and 4.50% for the first six months, compared with 4.76% and 4.84%.
- Gross loans increased $131.5 million, or 18.6%, from December 31, 2019. Commercial and industrial loans increased to $372.6 million from $260.8 million, while commercial real estate represented 48.5% of gross loans.
- Deposits increased $136.7 million, or 18.0%, from year-end 2019. Noninterest-bearing deposits increased to $304.3 million from $219.2 million and represented 34.0% of total deposits.
- The allowance for loan losses increased to $9.9 million from $7.8 million, and the allowance ratio increased to 1.18% from 1.11%. Net charge-offs were $18,000 for the first six months.
- Nonperforming loans increased to $7.9 million, or 0.94% of total loans, from $3.3 million, or 0.47%, at year-end 2019. Substandard loans increased to $16.3 million from $11.1 million.
- The company repurchased and retired 831,254 shares during the first six months at an average price of $8.56 per share. A total of 168,746 shares remained authorized for repurchase at June 30, 2020.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide formal earnings or financial guidance. Management states that it intends to grow organically through selective branch expansion and strategic acquisitions.
- The company originated 328 SBA Paycheck Protection Program loans totaling $64.0 million. It received $1.8 million of PPP origination fees, of which $906,000 was recognized in interest income and $863,000 was deferred.
- Management reported 174 COVID-19-related loan modifications totaling $312.8 million that were not classified as troubled debt restructurings.
- COVID-19 could adversely affect credit quality, past-due loans, charge-offs, collateral values, asset valuations, liquidity, regulatory capital, deferred tax assets, and goodwill. Management performed an interim goodwill analysis following a decline in stock price and market capitalization and recorded no impairment charge.
- Hospitality loans were 21% of gross loans, or $179.8 million, with $53.0 million of unfunded commitments. Energy loans were 11% of gross loans, or $90.2 million, with $14.0 million of unfunded commitments.
- Off-balance-sheet commitments totaled $180.4 million, including $177.8 million of commitments to extend credit and $2.6 million of standby letters of credit.
- The Bank was categorized as well capitalized at June 30, 2020. Its total risk-based capital ratio was 14.34%, CET1 ratio was 13.09%, and Tier 1 leverage ratio was 10.30%.
- Management states that liquidity is expected to be supported by profitability, loan repayments and maturities, continued deposit gathering, and available borrowing mechanisms. No material litigation proceedings were reported.
- The company plans to adopt the lease standard in the first quarter of 2021 and the CECL credit-loss standard in the first quarter of 2023. Management did not expect the lease adoption to materially affect financial condition or capital, but stated that CECL impact remains under assessment.
Important Facts for Investors to Verify
- Whether COVID-19-related modifications and the $312.8 million of affected loans result in future delinquencies, nonaccruals, charge-offs, or additional provision expense.
- The sustainability of loan growth, including the $64.0 million PPP portfolio, after government-sponsored lending activity and unusually strong deposit growth normalize.
- Exposure to hospitality, energy, commercial real estate, and commercial and industrial borrowers, including concentration and collateral risks.
- Whether the allowance for loan losses remains adequate as criticized, substandard, and nonperforming loans increase.
- The effect of lower interest rates and declining loan yields on net interest margin after PPP fee income is substantially recognized.
- The company’s ability to maintain well-capitalized status while continuing dividends, share repurchases, and balance-sheet growth.
- The effect of future CECL adoption, potential goodwill impairment, and broader pandemic-related asset valuation changes.