Bank7 Corp. 2018 Form 10-K Summary
Business Context and Reporting Period
Bank7 Corp. is an Oklahoma City-based bank holding company operating through Bank7, a full-service commercial bank with seven branches in Oklahoma, the Dallas/Fort Worth metropolitan area and Kansas. The filing covers the fiscal year ended December 31, 2018, including unaudited fourth-quarter results. Bank7 focuses on commercial banking for business owners and entrepreneurs, with significant lending in commercial real estate, hospitality, energy and commercial and industrial categories.
The company completed its initial public offering on September 20, 2018, selling 2.9 million shares at $19.00 per share and receiving net proceeds of approximately $50.1 million. Its S Corporation status terminated on September 24, 2018, and the company became taxable as a C Corporation.
Financial Performance and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total interest income | $46.8 million | $42.9 million | 9.2% increase |
| Net interest income | $39.6 million | $38.1 million | 3.9% increase |
| Provision for loan losses | $0.2 million | $1.2 million | 83.9% decrease |
| Noninterest income | $1.3 million | $1.4 million | 7.3% decrease |
| Noninterest expense | $15.0 million | $14.5 million | 3.0% increase |
| Income before taxes | $25.8 million | $23.8 million | 8.4% increase |
| Net income | $25.0 million | $23.8 million | 5.1% increase |
| Basic EPS | $3.08 | $3.26 | Decline, affected by IPO share issuance and taxes |
| Diluted EPS | $3.03 | $3.26 | Decline |
Fourth-quarter 2018 net income was $5.6 million, compared with $4.6 million in the fourth quarter of 2017. Fourth-quarter income before taxes was $6.8 million, and the quarter included $1.2 million of income tax expense following the conversion to C Corporation status.
- Average loans increased 8.3% to approximately $583.8 million; reported year-end loans increased 6.6% to $599.9 million.
- Total assets increased 9.5% to $770.5 million.
- Total deposits increased 8.0% to $675.9 million, including $201.2 million of noninterest-bearing deposits.
- Shareholders’ equity increased to $88.5 million from $69.2 million, primarily reflecting IPO proceeds and retained earnings.
- Net interest margin declined to 5.49% from 5.87%, mainly because 2017 included higher nonrecurring loan fee income. Excluding loan fee income, net interest margin improved to 4.78% from 4.59%.
- Return on average assets was 3.53%, compared with 3.62% in 2017. Return on average equity was 33.01%, compared with 37.43%.
- The efficiency ratio improved modestly to 37.04% from 37.24%.
- Allowance for loan losses was $7.8 million, or 1.31% of loans, compared with 1.36% in 2017. Net charge-offs were $22,000.
Cash Flow, Debt and Liquidity
- Net cash provided by operating activities was $27.0 million, compared with $25.9 million in 2017.
- Investing activities used $37.6 million, principally due to $37.0 million of net loan growth.
- Financing activities provided $38.6 million, including $50.2 million of IPO proceeds and $50.1 million of deposit growth, partially offset by $56.2 million of cash distributions and repayment of $5.6 million of borrowings.
- Cash and due from banks increased to $128.1 million from $100.1 million.
- The company had no borrowings outstanding at December 31, 2018. FHLB borrowing availability was $66.3 million, supported by pledged loan collateral.
- Approximately $167.7 million of time deposits was scheduled to mature within one year, and $480.8 million of deposits had no stated maturity.
- Off-balance-sheet commitments totaled $136.1 million, including $135.0 million of commitments to extend credit and $1.1 million of standby letters of credit.
Material Changes Versus the Prior Comparable Period
- Loan growth remained strong, but the mix shifted toward commercial and industrial lending. Commercial and industrial loans increased to $248.4 million from $205.0 million, while construction and development loans declined to $87.3 million from $103.8 million.
- Loan fee income fell to $5.1 million from $8.3 million because 2017 included nonrecurring fee income.
- Interest expense increased 51.3% to $7.2 million, primarily because the cost of interest-bearing deposits rose to 1.52% from 1.02%.
- Nonperforming assets increased to $2.7 million, or 0.35% of total assets, from $2.0 million, or 0.28%. Nonaccrual loans increased to $2.6 million from $1.2 million.
- Substandard loans increased to $9.1 million from $4.5 million, although past-due loans remained very low at $54,000.
- Regulatory capital strengthened materially. The Bank’s total risk-based capital ratio rose to 16.03% from 13.83%, and its Tier 1 leverage ratio rose to 11.26% from 10.53%.
- The company paid $56.2 million of distributions in 2018, compared with $9.7 million in 2017. Management stated that it does not anticipate paying common dividends in the foreseeable future as a C Corporation and expects to retain earnings to fund growth.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative earnings or revenue guidance. Its stated strategy is to pursue disciplined organic growth, selective branch expansion and strategic acquisitions while maintaining cost discipline, asset quality and a relationship-based commercial banking model.
- The loan portfolio is concentrated in commercial borrowers, real estate, hospitality and energy. Hospitality loans were approximately $123.0 million, or 20.4% of gross loans; energy loans were approximately $110.0 million, or 18.3%.
- Regulatory commercial real estate exposure was 263.8% of Bank capital, below the 300% supervisory indicator, but it had increased 114.2% over the prior 36 months. Management enhanced monitoring, but regulators could restrict growth, acquisitions or branch expansion if concentration risk increases.
- Approximately 45.3% of gross loans matured within one year, creating refinancing and reinvestment risk.
- The 20 largest borrowing relationships represented approximately $263.8 million of total commitments, while the 20 largest deposit relationships represented 25.2% of total deposits.
- Interest-rate increases could raise deposit costs, compress margins or increase borrower payment stress. Management’s simulation showed estimated net interest income declining 15.3% under a 100-basis-point rate decrease and increasing 10.2% under a 100-basis-point increase; actual results may differ materially.
- The conversion to C Corporation status creates ongoing federal and state tax expense. The 2018 income tax provision was $797,000, and the year-end net deferred tax asset was $1.1 million.
- The company recorded $154,000 of stock-based compensation expense in 2018 and had approximately $2.6 million of unrecognized compensation expense related to unvested restricted stock units and options.
- Management identified credit losses, energy and hospitality exposure, commercial real estate concentrations, liquidity, deposit pricing, regulatory compliance, cybersecurity, reliance on key personnel and execution of acquisitions as material risks.
- The company expects to adopt the CECL credit-loss model in the first quarter of 2022. Management is still evaluating the impact, and adoption could increase the allowance for credit losses.
- The company had no material pending litigation according to management and reported no significant changes in internal control over financial reporting during the fourth quarter.
Important Facts for Investors to Verify
- Reconcile reported 2018 net income of $25.0 million with the $25.8 million income-before-tax figure and the selected-data presentation, which also references pre-tax and pro forma measures.
- Assess whether rising nonaccrual, substandard and nonperforming assets remain manageable as the commercial loan portfolio grows.
- Review energy, hospitality and commercial real estate concentrations, including unfunded commitments and collateral sensitivity.
- Evaluate the sustainability of the 4.78% net interest margin excluding loan fee income as deposit costs continue to rise.
- Confirm the effect of the C Corporation tax status on future earnings, cash taxes, deferred taxes and comparability with historical results.
- Monitor the maturity and renewal of loans and time deposits, particularly the substantial balances due within one year.
- Review future dividend policy, retained earnings plans and regulatory restrictions on distributions.
- Consider dilution and compensation effects from 130,000 unvested restricted stock units and 150,000 outstanding stock options.