Bank7 Corp. 2023 Form 10-K Summary
Business context and reporting period
Bank7 Corp. is an Oklahoma City-based bank holding company operating Bank7, a full-service commercial bank with 12 branches in Oklahoma, Texas and Kansas. The business focuses on commercial customers and entrepreneurs, with significant exposure to commercial real estate, hospitality, energy, and commercial and industrial lending. This filing covers the fiscal year ended December 31, 2023; it is an annual report rather than a quarterly filing.
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total assets | $1.772 billion | $1.584 billion | +11.8% |
| Gross loans | $1.364 billion | $1.273 billion | +7.1% |
| Total deposits | $1.591 billion | $1.431 billion | +11.2% |
| Shareholders’ equity | $170.3 million | $144.1 million | +18.2% |
| Net income | $28.3 million | $29.6 million | -4.6% |
| Diluted EPS | $3.05 | $3.22 | -5.3% |
| Net interest income | $82.5 million | $69.4 million | +18.9% |
| Net interest margin | 4.97% | 4.82% | +15 bps |
| Net cash from operating activities | $49.1 million | $39.7 million | +23.7% |
Financial performance and condition
- Pre-tax income was $37.2 million, down 5.2% from $39.3 million in 2022. Pre-tax return on average assets was 2.21% and pre-tax return on average equity was 23.47%, compared with 2.68% and 29.32%, respectively, in 2022.
- Interest income increased to $121.5 million from $78.7 million, reflecting loan growth and higher yields. Loan interest income rose 47.6% to $109.8 million.
- Interest expense increased sharply to $39.0 million from $9.3 million as the average cost of interest-bearing deposits increased to 3.60% from 1.05%. The higher funding cost partially offset the benefit of higher asset yields.
- Provision for credit losses increased to $21.1 million from $4.5 million. The allowance for credit losses was $19.7 million, or approximately 1.45% of total loans, compared with $14.7 million, or 1.16%, at year-end 2022.
- Noninterest income increased to $9.2 million from $2.9 million, primarily because of $6.0 million of revenue from oil and gas assets acquired in the fourth quarter. Noninterest expense increased to $33.4 million from $28.6 million, largely because of $4.8 million of oil and gas operating expenses.
- Cash and due from banks increased to $181.0 million from $109.1 million. Investing activities used $130.9 million, primarily due to $106.8 million of net loan growth and $16.5 million paid for the oil and gas asset acquisition. Financing activities provided $153.7 million, principally from $160.0 million of deposit growth.
- The filing does not report traditional funded debt or FHLB advances at December 31, 2023. The Bank had $159.2 million of FHLB borrowing availability and no FHLB advances outstanding.
- The Bank remained well-capitalized. At December 31, 2023, Bank total risk-based capital was 12.75%, Tier 1 risk-based capital was 11.50%, CET1 capital was 11.50%, and Tier 1 leverage was 9.50%.
Material changes versus the prior comparable period
- Loan growth was concentrated in commercial real estate and selected commercial and industrial lending. Commercial real estate represented 55.5% of gross loans, up from 53.3% in 2022.
- Credit quality weakened. Nonperforming assets increased to $29.0 million from $18.0 million; nonaccrual loans increased to $18.9 million from $8.0 million; and the nonperforming-loan ratio increased to 2.13% from 1.42%.
- A single commercial and industrial borrower filed for bankruptcy. Bank7 recorded a $16.5 million charge-off, increased nonaccrual loans by $18.4 million, and recorded a $2.0 million specific reserve. Related bankruptcy litigation remained ongoing, although management believed the specific reserve was sufficient.
- Substandard loans increased to $31.1 million from $21.0 million, primarily because of the same commercial relationship.
- Bank7 adopted the CECL credit-loss methodology on January 1, 2023, recording a $750,000 after-tax cumulative reduction to retained earnings, including a $250,000 increase to the loan allowance and a $500,000 reserve for unfunded commitments.
- Bank7 acquired nine proven oil and natural gas wells in Texas for $15.1 million in cash, plus assumed asset retirement obligations and capitalized transaction costs. The acquisition contributed $6.0 million of revenue and $4.8 million of expense in 2023.
- Available-for-sale securities totaled $169.5 million at fair value and had $8.0 million of gross unrealized losses, compared with $12.2 million at year-end 2022. Management stated it had the intent and ability to hold the securities until recovery or maturity.
Guidance, outlook, commentary and risks
- Management intends to pursue disciplined organic growth, selectively expand its branch presence, improve digital banking capabilities and consider strategic acquisitions. No quantitative earnings or revenue guidance was provided.
- Management expects to continue quarterly dividends of $0.21 per share, subject to board approval, earnings, liquidity, capital levels, regulatory restrictions and other factors. Dividends paid or declared totaled $0.74 per share in 2023.
- Liquidity is primarily supported by customer deposits, cash, securities, loan repayments and access to FHLB and Federal Reserve facilities. Approximately 83.9% of deposits were demand, savings, money market or NOW accounts; $224.8 million of time deposits was scheduled to mature within one year.
- Key risks include geographic concentration in Oklahoma, Texas and Kansas; commercial real estate, hospitality and energy concentrations; rising deposit costs and interest-rate sensitivity; deposit concentration; refinancing and renewal risk on short-term-maturity loans; cybersecurity and third-party technology risks; regulatory capital and compliance requirements; and climate or severe-weather events.
- Hospitality loans totaled approximately $298.5 million, or 21.9% of loans, and energy loans totaled $190.6 million, or 14.0% of loans. Regulatory commercial real estate exposure was 290.69% of Bank capital, near the supervisory concentration threshold cited by management.
- The company had $261.1 million of off-balance-sheet commitments, including $256.9 million of commitments to extend credit and $4.2 million of standby letters of credit. The reserve for unfunded commitments was $464,000.
- Management reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2023. The independent auditor issued an unqualified opinion and identified the allowance for credit losses and oil and gas property valuation as critical audit matters.
Most important facts for investors to verify
- Whether the bankruptcy-related commercial loan and related litigation produce additional charge-offs, reserves or recoveries.
- Whether nonperforming assets, substandard loans and allowance coverage continue to rise as the commercial real estate, hospitality and energy portfolios mature or reprice.
- Whether deposit growth is sustained without materially higher funding costs, particularly given brokered deposits of $273.5 million and significant time-deposit maturities.
- Whether the 2023 oil and gas asset acquisition generates recurring cash flow and whether reserve, commodity-price and asset-retirement assumptions remain supportable.
- Whether net interest margin remains resilient if market rates decline or deposit pricing remains competitive.
- Whether Bank7 maintains its well-capitalized status while continuing loan growth, dividends and any future share repurchases or acquisitions.