Bank7 Corp. 2019 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 nine branches in Oklahoma, the Dallas/Fort Worth metropolitan area and Kansas. The filing covers the fiscal year ended December 31, 2019, with audited comparisons for 2018 and 2017. The bank focuses on commercial real estate, hospitality, energy, commercial and industrial, agricultural and consumer lending.
| Balance-sheet measure | December 31, 2019 | Change from 2018 |
|---|---|---|
| Total assets | $866.4 million | Up 12.4% |
| Total loans | $707.3 million | Up 17.9% |
| Total deposits | $757.5 million | Up 12.1% |
| Shareholders’ equity | $100.1 million | Up 13.2% |
| Loans-to-deposits | 93.38% | Up from 88.76% |
Financial performance and key metrics
| Metric | 2019 | 2018 | Year-over-year change |
|---|---|---|---|
| Total interest income | $51.7 million | $46.8 million | Up 10.5% |
| Net interest income | $42.2 million | $39.6 million | Up 6.5% |
| Provision for loan losses | $0 | $0.2 million | Down 100% |
| Noninterest income | $1.3 million | $1.3 million | Down 1.7% |
| Noninterest expense | $28.4 million | $15.0 million | Up 90.0% |
| Income before taxes | $15.1 million | $25.8 million | Down 41.7% |
| Net income | $8.2 million | $25.0 million | Down 67.1% |
| Diluted EPS | $0.81 | $3.03 | Down 73.3% |
| Net interest margin | 5.35% | 5.49% | Down 14 basis points |
| Return on average assets | 1.03% | 3.53% | Down 250 basis points |
| Return on average equity | 8.42% | 33.01% | Down 24.59 percentage points |
| Efficiency ratio | 65.39% | 37.04% | Higher, reflecting increased expenses |
Net cash provided by operating activities was $19.2 million, compared with $27.0 million in 2018. Investing activities used $108.1 million, primarily because net loans increased by $107.5 million. Financing activities provided $77.9 million, mainly from an $81.6 million increase in deposits. Cash and due from banks declined to $117.1 million from $128.1 million.
The company had no outstanding borrowings at December 31, 2019. FHLB borrowing availability was $71.7 million, and the company reported no unsecured fed funds advances. The bank’s regulatory capital remained strong: the Bank’s total risk-based capital ratio was 15.42%, CET1 ratio was 14.28% and Tier 1 leverage ratio was 11.65%. The Bank was classified as well-capitalized.
Material changes versus the prior comparable period
- Loan growth accelerated, with gross loans increasing to $708.7 million from $601.9 million. Commercial real estate increased to $378.1 million, or 53.3% of gross loans, from $276.9 million.
- Average loans increased 9.0% to $636.3 million. Loan yield excluding loan fee income increased to 6.88% from 6.71%, but higher deposit funding costs reduced the net interest margin.
- Interest expense increased 32.7% to $9.5 million as average interest-bearing deposits and their cost increased.
- Noninterest expense rose $13.5 million, primarily because of a one-time, non-cash executive stock transfer compensation expense of approximately $11.8 million, including payroll taxes. Excluding this item, pro forma net income was approximately $20.0 million, versus $20.1 million in 2018.
- The company began paying quarterly dividends in the second half of 2019, declaring $0.10 per share for each of the third and fourth quarters. Management stated that it expected to continue quarterly dividends of $0.10 per share, subject to board, regulatory and financial conditions.
- Credit quality weakened modestly: nonperforming assets increased to $3.3 million, or 0.38% of assets, from $2.7 million, or 0.35%; nonperforming loans increased to $3.3 million from $2.6 million. The allowance was $7.8 million, or 1.11% of loans.
Guidance, outlook, risks and unusual items
Management’s strategy is continued disciplined organic growth, selective branch expansion and potential acquisitions, with emphasis on commercial relationships, cost discipline, technology and asset quality. The filing does not provide quantitative earnings or revenue guidance.
The filing, signed March 30, 2020, highlights substantial uncertainty from COVID-19 and the sharp decline in oil prices after year-end. Management warned that pandemic-related disruption could affect deposits, borrower repayment capacity, loan demand, liquidity, operations and financial markets. Hospitality loans were approximately $167.0 million, or 23.6% of gross loans, with $39.4 million of unfunded commitments. Energy loans were $102.1 million, or 14.4% of loans, with $28.9 million of unfunded commitments.
- Commercial real estate represented 322.6% of Bank capital under the regulatory concentration measure, potentially exposing the bank to heightened regulatory scrutiny and growth restrictions.
- Approximately 98.3% of gross loans were commercial-purpose loans, and the 20 largest borrowing relationships represented approximately 38.5% of total outstanding commitments.
- The 20 largest deposit relationships represented 24.6% of total deposits, creating potential concentration and funding-cost risk.
- Approximately 41.7% of gross loans matured within one year, creating renewal and reinvestment risk.
- Total unfunded commitments and standby letters of credit were $194.8 million, including $191.5 million of commitments to extend credit.
- The company converted from an S corporation to a C corporation in September 2018; 2019 comparability is affected by the resulting income-tax expense. The 2019 effective tax rate was approximately 45.42% on a pro forma basis.
- The company adopted a repurchase plan authorizing up to 500,000 shares, but had made no repurchases by year-end.
Most important facts for an investor to verify
- Whether COVID-19 materially affected hospitality and energy borrowers, loan deferrals, nonperforming assets, charge-offs and allowance requirements after December 31, 2019.
- Current commercial real estate, hospitality and energy concentrations, including unfunded commitments and collateral values.
- Deposit stability, deposit pricing and available borrowing capacity under stressed liquidity conditions.
- Whether net interest margin remains pressured by lower market rates and higher deposit costs.
- The recurring earnings profile excluding the one-time executive stock-transfer expense and the impact of the C-corporation tax structure.
- Future dividend payments, capital conservation-buffer requirements and any use of the authorized share-repurchase plan.
- The filing’s reported total assets contain an apparent textual inconsistency in one MD&A passage; the audited balance sheet reports $866.4 million at December 31, 2019.