Bank7 Corp. 10-Q Summary
Business Context and Reporting Period
Bank7 Corp. is an Oklahoma City-based bank holding company operating Bank7, which provides banking and financial services to individuals and businesses in Oklahoma, Texas and, to a lesser extent, Kansas. The Bank operated 12 locations as of September 30, 2022. The filing covers the three and nine months ended September 30, 2022; financial statements are unaudited.
The company focuses on business owners and entrepreneurs, with revenue primarily generated from loan interest income and short-term investments and funding primarily provided by customer deposits. The December 2021 acquisition of Watonga Bancshares and its Cornerstone Bank subsidiary affected year-over-year comparisons.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total interest income | $21.7 million, up 54.9% | $53.3 million, up 28.0% |
| Net interest income | $19.0 million, up 43.4% | $49.0 million, up 24.9% |
| Provision for loan losses | $2.3 million, versus $0.8 million | $2.8 million, versus $3.3 million |
| Noninterest income | $0.8 million, up 45.6% | $2.2 million, up 47.8% |
| Noninterest expense | $7.1 million, up 49.3% | $20.5 million, up 44.5% |
| Pre-tax income | $10.4 million, up 24.9% | $27.9 million, up 20.1% |
| Net income | $8.0 million, up 28.4% | $21.2 million, up 21.6% |
| Diluted EPS | $0.87, versus $0.69 | $2.31, versus $1.92 |
| Net interest margin | 5.04%, unchanged | 4.66%, versus 5.18% |
| Return on average equity | 23.72%, versus 21.09% | 21.54%, versus 20.53% |
All dollar amounts in the table are in millions except per-share data. The filing reports a nine-month effective income tax rate of approximately 23.8%, based on income tax expense of $6.6 million and pre-tax income of $27.9 million.
Balance Sheet, Liquidity and Capital
- Total assets were $1.581 billion at September 30, 2022, up 17.1% from December 31, 2021.
- Gross loans were $1.237 billion, up 20.0%; net loans were $1.220 billion, up 19.8%. Commercial real estate represented 53.4% of gross loans, and commercial and industrial loans represented 40.1%.
- Total deposits were $1.437 billion, up 18.1%. Noninterest-bearing deposits increased to $497.8 million, or 34.7% of total deposits, from $366.7 million, or 30.1%.
- Cash and cash equivalents were $147.2 million, compared with $204.9 million at year-end 2021. The company reported no outstanding unsecured correspondent fed funds lines and had $95.8 million of FHLB borrowing availability.
- The filing does not report outstanding borrowings or other material debt balances on the consolidated balance sheet; deposits were the principal funding source.
- Shareholders’ equity was $135.8 million, up from $127.4 million. Accumulated other comprehensive loss was $10.4 million, primarily reflecting unrealized losses on available-for-sale securities.
- The Bank remained categorized as well capitalized. At September 30, 2022, the Bank reported total capital to risk-weighted assets of 12.10%, CET1 capital to risk-weighted assets of 11.04% and Tier 1 capital to average assets of 9.01%.
Cash Flow and Credit Quality
- For the nine months, operating activities provided $29.9 million of cash, compared with $23.0 million in the prior-year period.
- Investing activities used $304.1 million, primarily reflecting $204.8 million of net loan growth and $133.1 million of available-for-sale securities purchases.
- Financing activities provided $216.6 million, primarily from a $219.9 million increase in deposits, partially offset by $3.3 million of dividends.
- Cash and cash equivalents decreased by $57.6 million during the nine months, ending at $147.2 million.
- The allowance for loan losses increased to $13.2 million from $10.3 million, and increased to 1.07% of loans from 1.00%.
- Nonperforming loans increased to $18.2 million, or 1.47% of total loans, from $10.4 million, or 1.01%. Accruing loans 90 or more days past due increased to $9.9 million from $0.5 million, while nonaccrual loans declined to $8.2 million from $9.9 million.
- Hospitality loans represented 19% of gross loans, or $233.2 million, and energy loans represented 14%, or $171.1 million. These concentrations expose results to sector-specific and economic conditions.
Material Changes Versus Comparable Periods
- Third-quarter loan interest income increased $6.5 million, driven principally by a 31.2% increase in average loans and higher loan yields of 6.69% versus 5.98%.
- Year-to-date average loans increased 24.3%, but the average loan yield declined to 6.13% from 6.23%, primarily because 2021 benefited from Paycheck Protection Program loan fees.
- Interest expense increased materially as average interest-bearing deposits grew and deposit rates increased. Third-quarter deposit interest expense was $2.6 million versus $0.7 million; nine-month expense was $4.2 million versus $2.4 million.
- Net interest margin was stable in the third quarter but declined year to date, reflecting lower loan yields and higher funding costs.
- Noninterest expense growth was substantial, particularly salaries and employee benefits, data processing, furniture and equipment, and regulatory assessments. Management attributed much of the increase to organic growth and the Watonga acquisition.
- Available-for-sale debt securities increased to $174.5 million from $84.8 million. The portfolio had $13.6 million of gross unrealized losses at September 30, 2022, largely attributable to rising market interest rates.
- Nonperforming loans increased despite limited net charge-offs of $6,000 during the nine months. The filing reports no newly modified troubled-debt restructurings during the period.
Outlook, Risks, Contingencies and Unusual Items
- No formal earnings or financial guidance is provided. Management states that it intends to grow organically through selective branch expansion and may pursue strategic acquisitions.
- Management believes liquidity is adequate and expects contractual obligations to be met through profitability, loan repayments, maturities, continued deposit gathering and borrowing mechanisms.
- Management states that the allowance for loan losses is adequate, but acknowledges that future provisions may be required as economic conditions, loan composition, delinquencies, criticized loans or collateral values change.
- The company expects to adopt the current expected credit loss standard, ASU 2016-13, in the first quarter of 2023. The filing does not provide a quantified expected adoption impact.
- The company planned to adopt the new lease standard, ASU 2016-02, in the fourth quarter of 2022. Management did not expect a significant effect on financial condition, results of operations or capital, but expected balance-sheet presentation changes.
- Rising interest rates have generated material unrealized losses in the securities portfolio and could affect funding costs, loan demand, credit quality and fair values.
- Off-balance-sheet commitments totaled $230.7 million, including $228.0 million of commitments to extend credit and $2.7 million of standby letters of credit. Many commitments may expire undrawn.
- Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, effective disclosure controls, and no material changes in internal control over financial reporting.
- The Watonga acquisition remains subject to final valuation adjustments. Goodwill was $8.1 million at September 30, 2022, down from $8.5 million at year-end 2021.
Important Facts for Investors to Verify
- Whether the increase in 90-day accruing loans and total nonperforming loans persists or results in higher provisions and charge-offs.
- The effect of rising deposit costs and additional rate increases on net interest margin and profitability.
- Credit exposure to hospitality, energy, commercial real estate and construction lending, including related unfunded commitments.
- The magnitude of the CECL adoption adjustment in the first quarter of 2023.
- Whether the $13.6 million of unrealized securities losses remain temporary and whether liquidity or capital could be affected by securities sales.
- Loan growth sustainability, deposit retention and the company’s continued reliance on deposits as its principal funding source.
- Future regulatory capital ratios and the Bank’s continued well-capitalized classification.
- Whether the authorized 750,000-share repurchase plan is used; no shares were repurchased during the nine months ended September 30, 2022.