Bank7 Corp. — Q1 2022 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 individuals and businesses in Oklahoma, Kansas and Texas. The filing covers the three months ended March 31, 2022, with unaudited comparative results for the three months ended March 31, 2021.
The company operated twelve locations and focused on business-owner and entrepreneurial customers. The December 2021 acquisition of Watonga Bancshares and its subsidiary, Cornerstone Bank, contributed to year-over-year growth in assets, loans, deposits, income and expenses.
Financial Performance and Key Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total interest income | $14.925 million | $13.188 million | 13.2% increase |
| Net interest income | $14.208 million | $12.313 million | 15.4% increase |
| Provision for loan losses | $276,000 | $1.275 million | 78.4% decrease |
| Noninterest income | $675,000 | $337,000 | 100.3% increase |
| Noninterest expense | $6.420 million | $4.545 million | 41.3% increase |
| Income before taxes | $8.187 million | $6.830 million | 19.9% increase |
| Net income | $6.184 million | $5.104 million | 21.2% increase |
| Diluted EPS | $0.67 | $0.56 | Increase |
| Net interest margin | 4.42% | 5.12% | 70 basis-point decrease |
| Return on average equity | 19.26% | 19.02% | Increase |
Average loans increased to approximately $1.004 billion from $847.5 million, while the average loan yield declined to 5.81% from 6.27%. Loan growth more than offset lower yields, increasing loan interest income by $1.283 million. The filing does not provide a single consolidated revenue figure; for this bank, interest income and noninterest income are the principal revenue components.
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets were $1.421 billion at March 31, 2022, up 5.2% from $1.351 billion at December 31, 2021.
- Gross loans increased 3.3% to $1.064 billion; net loans increased to $1.051 billion. Commercial and industrial loans rose to $416.7 million, while total commercial real estate loans were $565.4 million.
- Total deposits increased 5.4% to $1.283 billion. Noninterest-bearing deposits increased to $421.0 million, or 32.8% of deposits.
- Cash and cash equivalents declined to $134.4 million from $204.9 million, primarily because the company purchased $131.1 million of available-for-sale securities and funded loan growth.
- Net cash provided by operating activities was $12.2 million, compared with $9.2 million in Q1 2021. Investing activities used $147.4 million, and financing activities provided $64.7 million.
- The filing does not report material borrowings or outstanding debt. Liabilities consisted primarily of deposits, which totaled $1.283 billion.
- FHLB borrowing availability was $86.2 million at March 31, 2022, compared with $78.1 million at year-end 2021. The company also identified wholesale deposits and correspondent-bank borrowings as alternative liquidity sources.
- Shareholders’ equity was $128.6 million, compared with $127.4 million at December 31, 2021. The quarter included a $4.139 million after-tax other comprehensive loss from unrealized securities losses.
Material Changes Versus the Prior Comparable Period
- Net income rose 21.2%, supported by higher average loan balances, newly acquired and purchased debt securities, lower loan-loss provision expense and higher noninterest income.
- Net interest margin compressed from 5.12% to 4.42% as asset yields declined, despite lower deposit funding costs.
- Noninterest expense increased 41.3%, principally from higher salaries and employee benefits, staffing and operating costs associated with organic growth and the Watonga acquisition.
- Noninterest income doubled, reflecting increased mortgage-related secondary-market income, deposit service charges and other income from the acquired business. Results also included a $127,000 loss on sales of available-for-sale securities.
- Nonperforming loans declined to $9.630 million, or 0.91% of total loans, from $10.381 million, or 1.01%, at year-end 2021.
- The allowance for loan losses increased slightly to $10.599 million and remained 1.00% of loans. Q1 2022 had net recoveries of $7,000 compared with net charge-offs of $50,000 in Q1 2021.
Guidance, Outlook, Risks and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management stated that it intends to grow organically through selective branch expansion and pursue strategic acquisitions.
- Management believes liquidity is sufficient to meet contractual obligations through profitability, loan repayments, maturities and continued deposit gathering. Contractual obligations totaled $1.285 billion, predominantly deposits.
- Hospitality loans represented 17% of gross loans, or $179.2 million, and energy loans represented 11%, or $115.6 million. These concentrations create exposure to industry-specific and regional economic conditions.
- Commercial real estate and commercial and industrial loans comprised approximately 92% of gross loans, increasing concentration exposure to borrower cash flows, property values and economic conditions.
- Off-balance-sheet commitments included $215.3 million of commitments to extend credit and $4.2 million of standby letters of credit.
- Available-for-sale securities had a fair value of $198.4 million and gross unrealized losses of $5.5 million, primarily attributable to rising market interest rates. Management stated it had the ability and intent to hold the securities until recovery or maturity.
- The Bank was categorized as well capitalized. At March 31, 2022, its total risk-based capital ratio was 12.56%, CET1 ratio was 11.56% and Tier 1 leverage ratio was 9.28%.
- The company expects to adopt the lease standard in the fourth quarter of 2022 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 CECL adoption will require a cumulative-effect adjustment to retained earnings.
- The Watonga acquisition accounting remained preliminary; goodwill increased by $328,000 during the quarter as the company continued evaluating acquired assets, liabilities and tax positions.
- Management reported no material changes to previously disclosed risk factors, no material legal proceedings and no material changes in internal controls.
Important Facts for Investors to Verify
- Whether loan growth can continue without further compression in net interest margin as interest rates and funding costs change.
- The sustainability of the decline in provision expense and the adequacy of the $10.6 million allowance under the upcoming CECL methodology.
- Credit performance in hospitality, energy, commercial real estate and commercial and industrial portfolios.
- The effect of rising interest rates on the $198.4 million securities portfolio and accumulated other comprehensive income.
- The final purchase-accounting adjustments for the Watonga acquisition and any resulting goodwill or intangible-asset changes.
- Deposit stability and the availability and cost of FHLB, wholesale and correspondent-bank funding.
- The size of the cumulative-effect adjustment when CECL is adopted in Q1 2023.
- The company’s ability to fund $219.5 million of off-balance-sheet credit commitments while maintaining well-capitalized status and dividend capacity.