Bank7 Corp. 10-Q Summary
Business Context and Reporting Period
Bank7 Corp. is an Oklahoma-based bank holding company operating through Bank7, which provides banking and financial services to individual and corporate customers in Oklahoma, Kansas and Texas. The filing covers the three months ended March 31, 2020, with unaudited consolidated financial statements. The company operated nine locations and focused on business owners and entrepreneurs.
Financial Performance and Condition
| Metric | Q1 2020 | Comparable period or date |
|---|---|---|
| Total interest income | $13.5 million | $12.6 million in Q1 2019 |
| Net interest income | $11.4 million | $10.4 million in Q1 2019 |
| Net interest margin | 5.31% | 5.63% in Q1 2019 |
| Net interest margin excluding loan fees | 4.72% | 4.93% in Q1 2019 |
| Provision for loan losses | $650,000 | None in Q1 2019 |
| Noninterest income | $330,000 | $223,000 in Q1 2019 |
| Noninterest expense | $4.4 million | $3.8 million in Q1 2019 |
| Income before taxes | $6.8 million | $6.8 million in Q1 2019 |
| Net income | $5.1 million | $5.1 million in Q1 2019 |
| Basic and diluted EPS | $0.51 | $0.50 in Q1 2019 |
| Return on average assets | 2.32% | 2.75% in Q1 2019 |
| Return on average equity | 19.97% | 22.85% in Q1 2019 |
At March 31, 2020, total assets were $974.4 million, gross loans were $787.5 million, net loans were $777.2 million, deposits were $871.0 million, cash and due from banks were $148.6 million, and shareholders’ equity was $97.6 million. The filing reports no borrowings outstanding; liquidity sources included deposits, cash, correspondent-bank facilities and Federal Home Loan Bank availability of $77.8 million.
The allowance for loan losses was $8.5 million, or 1.08% of loans, compared with $7.8 million, or 1.11%, at December 31, 2019. Nonperforming loans totaled $3.3 million, or 0.42% of total loans, compared with 0.47% at year-end 2019. The bank reported no other real estate owned.
Operating cash flow was $8.5 million. Investing activities used $78.6 million, primarily due to $78.4 million of net loan growth. Financing activities provided $101.6 million, primarily from a $113.5 million increase in deposits, partly offset by $6.8 million of share repurchases and $5.0 million of cash distributions. Cash and due from banks increased by $31.5 million to $148.6 million.
The bank was categorized as well capitalized. At March 31, 2020, the bank’s total risk-based capital ratio was 13.56%, Tier 1 risk-based capital ratio was 12.45%, common equity Tier 1 ratio was 12.45%, and Tier 1 leverage ratio was 10.97%.
Material Changes Versus Prior Period
- Average loans increased to $747.8 million from $586.4 million, driving higher loan interest income, while the loan yield declined to 7.05% from 8.04%.
- Net interest income increased 10.4%, but net interest margin declined because of lower asset yields and reduced short-term investment income.
- The company recorded a $650,000 loan-loss provision versus none in Q1 2019, reflecting increased credit-risk considerations.
- Noninterest income increased 48.0% to $330,000, while noninterest expense increased 15.9% to $4.4 million, partly due to personnel and operating costs associated with two new branches.
- Total assets increased 12.5% from December 31, 2019, while gross loans increased 11.1% and deposits increased 15.0%.
- The company repurchased and retired 793,094 shares at an average price of $8.59, reducing shares outstanding and shareholders’ equity. The program had 206,906 shares remaining at March 31, 2020.
- Loan-risk classifications worsened in certain areas: watch loans increased to $18.2 million from $5.9 million, special-mention loans increased to $18.6 million from $13.7 million, and substandard loans increased to $15.1 million from $11.1 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or financial guidance. Management stated that it intended to continue organic growth through selective branch expansion and strategic acquisitions, but emphasized that operating results are subject to substantial uncertainty from COVID-19 and broader economic conditions.
COVID-19-related risks include increased delinquencies, charge-offs, loan-loss provisions, declining collateral values, reduced loan demand, lower asset yields, margin compression, liquidity pressures, vendor disruptions, cybersecurity and payment fraud, and potential impairment of loans, goodwill or deferred tax assets. Management performed an interim goodwill impairment qualitative analysis due to the decline in stock price and market capitalization and recorded no impairment charge.
During the first quarter, 25 loans totaling $80.2 million were modified in response to COVID-19 without being classified as troubled debt restructurings. Through May 12, 2020, the company had modified 165 loans totaling approximately $285.7 million. Through the same date, it had approved 298 Paycheck Protection Program loans totaling approximately $63.9 million. PPP participation exposes the company to compliance, SBA-guaranty, credit and litigation risks.
Hospitality loans represented 22% of gross loans, or $175.5 million, with $55.4 million of unfunded commitments. Energy loans represented 12% of gross loans, or $96.2 million, with $15.1 million of unfunded commitments. Total off-balance-sheet commitments were $190.8 million, including $187.2 million of commitments to extend credit and $3.5 million of standby letters of credit.
Management stated that liquidity and contractual obligations were expected to be met through cash, profitability, loan repayments and maturities, deposit gathering and available borrowing mechanisms. No material legal proceedings were reported.
Investor Verification Points
- Verify the subsequent performance of COVID-19-modified loans, including the $285.7 million modified through May 12, 2020, and related allowance requirements.
- Monitor hospitality and energy portfolio performance, collateral values, delinquencies, charge-offs and migration of loans into criticized classifications.
- Assess the effect of lower interest rates on loan yields, deposit costs, net interest margin and future earnings.
- Review PPP loan approval, funding, forgiveness and SBA-guaranty exposure, including potential litigation or compliance liabilities.
- Reconcile future deposit growth and loan growth with available liquidity, FHLB borrowing capacity and off-balance-sheet commitments.
- Evaluate the effect of share repurchases, dividends and potential credit losses on regulatory capital and future capital-distribution capacity.