Bank7 Corp. 2020 Form 10-K Summary
Business context and reporting period
Bank7 Corp. is an Oklahoma City-based bank holding company operating Bank7, a commercial bank with nine full-service branches in Oklahoma, the Dallas/Fort Worth metropolitan area and Kansas. The filing covers the fiscal year ended December 31, 2020; quarterly information for the fourth quarter is included but this is an annual report, not a standalone Q4 filing. The business focuses on commercial real estate, hospitality, energy, commercial and industrial, consumer and deposit banking services.
Financial performance and condition
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total interest income | $53.3 million | $51.7 million | 3.1% |
| Net interest income | $47.2 million | $42.2 million | 11.8% |
| Provision for loan losses | $5.4 million | $0 | Increase |
| Noninterest income | $1.7 million | $1.3 million | 27.3% |
| Noninterest expense | $17.6 million | $28.4 million | (38.1%) |
| Net income | $19.3 million | $8.2 million | Increase |
| Basic and diluted EPS | $2.05 | $0.81 | Increase |
| Net interest margin | 5.01% | 5.35% | Down 34 bps |
| Return on average assets | 2.03% | 1.03% | Increase |
| Return on average equity | 18.82% | 8.42% | Increase |
| Efficiency ratio | 36.03% | 65.39% | Improved |
| Balance-sheet and liquidity metric | December 31, 2020 | December 31, 2019 |
|---|---|---|
| Total assets | $1.017 billion | $866.4 million |
| Total loans | $836.6 million | $707.3 million |
| Total deposits | $905.5 million | $757.5 million |
| Shareholders’ equity | $107.3 million | $100.1 million |
| Cash and due from banks | $153.9 million | $117.1 million |
| Allowance for loan losses | $9.6 million | $7.8 million |
| Loans-to-deposits ratio | 92.39% | 93.38% |
| FHLB borrowing availability | $64.8 million | $71.7 million |
| Borrowings outstanding | None reported | None reported |
Operating cash flow was $25.2 million, compared with $19.2 million in 2019. Investing activities used $119.6 million, primarily because of $132.9 million of net loan growth. Financing activities provided $131.2 million, primarily from $148.0 million of deposit growth, partly offset by $7.8 million of distributions and $9.1 million of share repurchases. Cash and due from banks increased by $36.8 million to $153.9 million.
Material changes versus the prior comparable period
- Average loans increased 29.4% to $823.2 million, while period-end loans increased 18.3% to $836.6 million. PPP loans totaled $44.9 million at year-end.
- Deposits increased 19.5% to $905.5 million, with noninterest-bearing deposits of $246.6 million and interest-bearing deposits of $658.9 million.
- Net interest income rose despite margin compression because loan growth and lower deposit funding costs more than offset lower asset yields. The cost of interest-bearing deposits declined to 1.05% from 1.89%.
- Loan yields excluding loan fee income declined to 5.76% from 6.88%, and the net interest margin excluding loan fee income declined to 4.48% from 4.78%.
- The provision for loan losses increased to $5.4 million, and net charge-offs were $3.6 million, compared with net recoveries of $14,000 in 2019.
- Nonperforming loans increased to $16.5 million, or 1.98% of loans, from $3.3 million, or 0.47%. Nonperforming assets increased to 1.63% of total assets from 0.38%.
- Substandard loans increased to $23.1 million from $11.1 million, while the allowance coverage ratio declined to 58.29% of nonperforming loans from 235.40%.
- Reported earnings benefited from the absence of the $11.8 million, one-time, noncash executive stock-transfer compensation expense recorded in 2019. Excluding that 2019 item, pro forma net income declined to $19.3 million from $20.0 million.
- The company repurchased and retired 1,032,178 shares during 2020 at an average price of $8.73, leaving 717,822 shares authorized for future repurchase at year-end.
Guidance, outlook, management commentary, risks and unusual items
- Management intends to pursue disciplined organic growth, selective branch expansion and strategic acquisitions while maintaining cost discipline and credit standards. No quantitative earnings or revenue guidance was provided.
- Management expects low interest rates to continue affecting profitability. The bank is asset-sensitive, so loan and investment yields may decline faster than deposit costs, creating further net interest margin pressure.
- COVID-19 materially affected economic conditions, borrower performance, interest rates and credit-loss estimates. Eight COVID-related loan modifications totaling $33.0 million were not classified as troubled debt restructurings at year-end.
- Hospitality exposure was approximately $194.3 million, or 23.2% of gross loans, with $65.0 million of unfunded commitments. Energy loans were $101.9 million, or 12.1% of loans, with $10.7 million of unfunded commitments.
- Regulatory commercial real estate exposure was 343.8% of Bank capital, up from 322.6%, and construction, land development and other land loans were 93.5% of Bank capital. Regulators could restrict growth, require additional capital or demand reductions in concentrations.
- The 20 largest borrowing relationships represented approximately 34.7% of total outstanding commitments, and the 20 largest deposit relationships represented 33.6% of deposits, creating concentration and liquidity risks.
- Commitments to extend credit totaled $206.5 million and standby letters of credit totaled $2.4 million at year-end. These commitments may require future funding and involve credit risk.
- The Bank was categorized as well-capitalized. Its year-end capital ratios included a CET1 ratio of 13.51%, Tier 1 leverage ratio of 10.78% and total risk-based capital ratio of 14.75%.
- The company paid quarterly dividends of $0.10 per share in the first three quarters and $0.11 in the fourth quarter, and stated that it currently expects quarterly dividends of $0.11 going forward, subject to regulatory, capital and financial considerations.
- The company is a controlled company; the Haines Family Trusts controlled approximately 63.7% of common stock at year-end. Key risks include market concentration, hospitality and energy credit exposure, commercial real estate concentration, interest-rate sensitivity, deposit concentration, liquidity, cybersecurity, regulation and COVID-19 effects.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. The company was not required to obtain an auditor attestation on internal control over financial reporting because it is an emerging growth company.
Most important facts for an investor to verify
- Whether the sharp increase in nonperforming loans, substandard loans and charge-offs is temporary or signals broader deterioration in hospitality, energy, commercial real estate or commercial lending.
- The adequacy of the $9.6 million allowance for loan losses, particularly relative to $16.5 million of nonperforming loans and the expected transition to the CECL model in 2023.
- The sustainability of loan and deposit growth after PPP activity and pandemic-related liquidity increases normalize.
- The effect of prolonged low interest rates on loan yields, net interest margin and future net interest income.
- The concentration of regulatory CRE, hospitality, energy, large borrower and large depositor exposures, including related unfunded commitments.
- The availability and cost of contingent liquidity, including the $64.8 million of FHLB borrowing capacity and the absence of borrowings at year-end.
- Whether the stated $0.11 quarterly dividend and continuing share repurchases remain consistent with capital requirements, regulatory restrictions and the Bank’s ability to upstream dividends.
- The potential financial impact of COVID-19-related loan modifications, TDRs, collateral valuations, regulatory changes and future credit-loss provisions.