Bank7 Corp. 2023 Q3 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, Texas and Kansas through 12 locations. The filing covers the three and nine months ended September 30, 2023, compared primarily with the corresponding 2022 periods and December 31, 2022. The financial statements are unaudited.
Financial Performance and Position
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total interest income | $31.7 million | $21.7 million | $89.1 million | $53.3 million |
| Net interest income | $20.7 million | $19.0 million | $61.3 million | $49.0 million |
| Provision for credit losses | $4.2 million | $2.3 million | $5.6 million | $2.8 million |
| Noninterest income | $1.0 million | $0.8 million | $2.5 million | $2.2 million |
| Noninterest expense | $7.4 million | $7.1 million | $22.4 million | $20.5 million |
| Income before taxes | $10.2 million | $10.4 million | $35.7 million | $27.9 million |
| Net income | $7.9 million | $8.0 million | $27.2 million | $21.2 million |
| Diluted EPS | $0.85 | $0.87 | $2.94 | $2.31 |
- Net interest margin was 4.87% in Q3 2023 versus 5.04% in Q3 2022, and 5.01% for the first nine months versus 4.66% in the prior-year period.
- Average Q3 loans were $1.34 billion, with an 8.52% yield, compared with $1.21 billion and 6.69% in Q3 2022. Nine-month average loans were $1.30 billion, with an 8.34% yield, compared with $1.10 billion and 6.13% in 2022.
- Return on average equity was 18.89% in Q3 and 23.29% for the first nine months, compared with 23.72% and 21.54%, respectively, in the prior-year periods.
- Total assets were $1.77 billion, up 11.9% from $1.58 billion at December 31, 2022. Gross loans increased 9.6% to $1.40 billion, while net loans increased to $1.37 billion.
- Total deposits increased 11.3% to $1.59 billion from $1.43 billion at year-end 2022. Interest-bearing deposits represented 69.9% of total deposits.
- Shareholders’ equity increased to $167.9 million from $144.1 million. The company declared dividends of $0.21 per share in Q3 and $0.53 per share for the first nine months.
- Cash and due from banks totaled $169.5 million at September 30, 2023, compared with $109.1 million at December 31, 2022. Nine-month operating cash flow was $33.0 million; investing activities used $130.5 million, primarily reflecting loan growth; and financing activities provided $157.9 million, primarily from deposit growth.
- The filing does not show outstanding borrowings or debt financing on the balance sheet. Bank7 had $146.6 million of borrowing availability from the Federal Home Loan Bank based on pledged collateral.
- The allowance for credit losses was $20.6 million, or 1.48% of loans, versus $14.7 million, or 1.16%, at year-end 2022.
Material Changes Versus Comparable Periods
- First-nine-month net income increased 28.0%, while Q3 net income declined 2.3%. The Q3 decrease reflected higher credit-loss provisions and increased funding costs despite substantially higher loan yields and balances.
- Q3 interest income increased 46.2%, and nine-month interest income increased 67.3%, primarily from loan growth and higher interest rates.
- Deposit interest expense increased to $11.0 million in Q3 from $2.6 million and to $27.9 million for the first nine months from $4.2 million, reflecting higher deposit rates and balances.
- Noninterest expense increased 3.6% in Q3 and 9.3% for the first nine months. Salaries and employee benefits were the primary driver, increasing 22.9% in Q3 and 17.7% year to date.
- Commercial real estate and commercial and industrial lending increased materially. Commercial real estate represented 53.6% of gross loans, while commercial and industrial loans represented 40.7% at September 30, 2023.
- The company adopted the CECL expected-loss model on January 1, 2023. The adoption reduced retained earnings by $572,000 after tax and established $500,000 of reserves for unfunded commitments.
Outlook, Risks, Contingencies and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management describes its strategy as organic growth through selective branch expansion and potential strategic acquisitions.
- A single commercial and industrial loan customer filed for bankruptcy during Q3. Bank7 recorded a $3.0 million allowance and increased nonaccrual loans by approximately $40.1 million. Total nonaccrual loans were $41.2 million, and total nonperforming assets were $51.1 million, compared with $18.0 million at year-end 2022.
- Management expects an additional reserve or charge-off related to this borrower in Q4 but stated that it could not estimate the amount as of the filing date.
- The company formed a bank subsidiary to pursue the acquisition and operation of certain oil and gas assets of the bankrupt customer. Its bid was accepted on October 31, 2023, and management expected the transaction to close in Q4 for an estimated purchase price of $16 million.
- Hospitality loans were 21% of gross loans, or $292.8 million, and energy loans were 16%, or $223.5 million. These concentrations expose results to sector-specific stress and borrower credit deterioration.
- Regulatory CRE represented 294.0% of Bank capital at September 30, 2023, near the supervisory concentration threshold of 300%. Regulators could restrict growth, require additional capital or demand reductions in loan concentrations.
- Available-for-sale securities had a fair value of $167.1 million and unrealized losses of $11.9 million, primarily due to higher market interest rates. Management stated that it had the intent and ability to hold the securities until recovery and recorded no credit impairment.
- The Bank was categorized as well capitalized. Its total risk-based capital ratio was 12.64%, CET1 ratio was 11.39%, and Tier 1 leverage ratio was 9.75% at September 30, 2023.
- Interest-rate sensitivity modeling indicated that a gradual 100-basis-point increase could increase projected 12-month net interest income by 7.76%, while a 100-basis-point decrease could reduce it by 1.33%. Actual results may differ materially from modeled outcomes.
- Commitments to extend credit and standby letters of credit totaled $247.2 million, supported by a $464,000 reserve for unfunded commitments.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It also reported no material pending legal proceedings.
Important Facts for Investors to Verify
- Quantify any additional Q4 reserve or charge-off associated with the bankrupt borrower and assess the recoverability of the collateral and the planned $16 million oil and gas asset purchase.
- Monitor nonaccrual loans, nonperforming assets, criticized and classified loans, and the allowance coverage ratio as the portfolio grows.
- Evaluate the effect of deposit repricing and funding mix changes on net interest margin and profitability.
- Review commercial real estate, hospitality and energy concentrations, including regulatory responses if CRE exposure remains near supervisory thresholds.
- Assess liquidity using cash balances, deposit stability, time-deposit maturities, FHLB availability and $247.2 million of off-balance-sheet commitments.
- Confirm the terms, funding source and regulatory approvals for the planned subsidiary and oil and gas asset acquisition.