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 filing is the Form 10-K for the fiscal year ended December 31, 2022; it does not provide a separate fourth-quarter income statement. The bank focuses on commercial real estate, hospitality, energy, commercial and industrial, deposit and related banking services.
At December 31, 2022, Bank7 reported 123 full-time employees, $1.58 billion of assets, $1.27 billion of gross loans, $1.43 billion of deposits and $144.1 million of shareholders’ equity.
Financial Performance and Condition
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total interest income | $78.7 million | $56.3 million | +39.9% |
| Net interest income | $69.4 million | $53.2 million | +30.4% |
| Provision for loan losses | $4.5 million | $4.2 million | +7.0% |
| Noninterest income | $2.9 million | $2.3 million | +30.6% |
| Noninterest expense | $28.6 million | $20.4 million | +40.4% |
| Income before taxes | $39.3 million | $30.9 million | +27.0% |
| Net income | $29.6 million | $23.2 million | +28.0% |
| Diluted EPS | $3.22 | $2.55 | +26.3% |
| Net interest margin | 4.82% | 5.12% | Down 30 bps |
| Efficiency ratio | 39.29% | 36.76% | Higher by 253 bps |
- Average loans increased 26.2% to $1.14 billion, while period-end gross loans increased 23.5% to $1.27 billion.
- Loan yields increased 35 basis points, but deposit costs increased materially: interest expense on deposits rose 205.3% to $9.3 million, contributing to the lower net interest margin.
- Pre-tax return on average assets was 2.68% and pre-tax return on average equity was 29.32%. Tax-adjusted returns were 2.02% and 23.92%, respectively.
- The allowance for loan losses increased to $14.7 million, or 1.16% of loans, from $10.3 million, or 1.00%, at year-end 2021. Net charge-offs were $50,000.
- Nonperforming assets increased to $18.0 million, or 1.13% of assets, from $10.4 million, or 0.77%. Nonaccrual loans declined to $8.0 million, but accruing loans 90 or more days past due increased to $9.9 million.
- Available-for-sale securities were $173.2 million and carried $12.2 million of unrealized losses, primarily reflecting higher market interest rates. The unrealized loss reduced accumulated other comprehensive income.
Cash Flow, Liquidity, Capital and Debt
- Operating activities provided $39.7 million of cash. Investing activities used $342.8 million, principally because loan growth used $242.1 million and purchases of available-for-sale securities used $133.1 million. Financing activities provided $207.3 million, primarily from a $211.8 million increase in deposits.
- Cash and cash equivalents declined to $109.1 million from $204.9 million at year-end 2021.
- Total deposits increased 17.4% to $1.43 billion. Noninterest-bearing deposits were $439.4 million, or 30.8% of total deposits. Brokered deposits were $261.3 million, all described as reciprocal deposits.
- The Bank had no FHLB advances at year-end and reported $129.2 million of FHLB borrowing availability based on pledged collateral. The filing reports no unsecured fed funds lines with correspondent institutions.
- The Bank was classified as well-capitalized. Its total risk-based capital ratio was 12.42%, CET1 ratio was 11.26% and Tier 1 leverage ratio was 9.18%, all above applicable minimums.
- Off-balance-sheet commitments totaled $199.1 million, including $198.0 million of commitments to extend credit and $1.0 million of standby letters of credit.
Material Changes, Outlook and Risks
- Growth in 2022 was driven by larger interest-earning assets and continued loan and deposit expansion. The Federal Reserve’s rate increases supported asset yields but also increased deposit funding costs and may pressure borrowers in a slowing economy.
- Management intends to pursue disciplined organic growth, selective branch expansion and strategic acquisitions. It expects quarterly common dividends of $0.16 per share, subject to board, capital, liquidity, regulatory and other conditions.
- Commercial real estate represented 53.3% of gross loans. Regulatory CRE was 304.72% of Bank capital, and construction, land development and other land loans were 101.20% of Bank capital. Management is using enhanced monitoring because these concentrations approach or exceed regulatory guidance.
- Hospitality loans were approximately $244.3 million, or 19.2% of loans, and energy loans were $182.8 million, or 14.4%. Energy-related unfunded commitments were $43.8 million and hospitality unfunded commitments were $15.5 million.
- Credit risk is concentrated geographically in Oklahoma, the Dallas/Fort Worth metropolitan area and Kansas, and commercially in large borrowers. The 20 largest borrowing relationships represented approximately $451.1 million of commitments, or 35.4% of total outstanding commitments; the 20 largest deposit relationships represented 29.8% of deposits.
- Interest-rate risk, deposit repricing, liquidity access, real estate and energy conditions, hospitality performance, inflation, cybersecurity, third-party service providers and regulatory changes are identified as material risks.
- The Company adopted the new lease standard on January 1, 2022, recognizing approximately $2.2 million of right-of-use assets and lease liabilities. It expected adoption of the current expected credit loss standard on January 1, 2023 and estimated an immaterial initial effect, although the ultimate impact could differ.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective; an auditor attestation was not required because the Company was an emerging growth company.
Most Important Facts to Verify
- Whether loan growth and elevated concentrations in commercial real estate, hospitality and energy remain consistent with underwriting standards and regulatory expectations.
- Whether nonperforming loans, particularly the $9.9 million of accruing loans more than 90 days past due, result in future charge-offs or additional provisioning.
- The sustainability of the 4.82% net interest margin as deposit costs continue to reprice and competition for funding increases.
- Available liquidity under the $129.2 million FHLB facility, collateral requirements, deposit concentration and the stability of reciprocal and other rate-sensitive deposits.
- The effect of the $12.2 million unrealized securities loss on tangible capital and the potential impact of future interest-rate movements.
- The actual first-quarter 2023 transition impact of the current expected credit loss standard, which the filing only estimates to be immaterial.
- Dividend capacity and future distributions, which depend on Bank earnings, regulatory capital and restrictions on dividends from the subsidiary Bank.