Bank7 Corp. 2019 First-Quarter Form 10-Q Summary
Business context and reporting period
Bank7 Corp. is an Oklahoma-based bank holding company whose wholly owned subsidiary, Bank 7, provides banking and financial services to individual and corporate customers in Oklahoma, Kansas and Texas. The company operated seven full-service branches and opened a loan production office in Tulsa during the quarter. This unaudited Form 10-Q covers the three months ended March 31, 2019, with comparisons primarily to March 31, 2018 and December 31, 2018.
The company became a taxable C corporation following its September 2018 initial public offering. Accordingly, first-quarter 2019 results include actual income taxes, while the 2018 comparison includes pro forma tax-adjusted information in certain management measures.
Key financial metrics
| Metric | Q1 2019 | Comparable period or date |
|---|---|---|
| Total interest income | $12.6 million | $11.3 million in Q1 2018 |
| Net interest income | $10.4 million | $9.9 million in Q1 2018 |
| Provision for loan losses | $0 | $100,000 in Q1 2018 |
| Noninterest income | $223,000 | $264,000 in Q1 2018 |
| Noninterest expense | $3.8 million | $3.7 million in Q1 2018 |
| Income before taxes | $6.8 million | $6.3 million in Q1 2018 |
| Income tax expense | $1.7 million | No GAAP tax expense in Q1 2018 |
| Net income | $5.1 million | $6.3 million in Q1 2018; $4.7 million pro forma tax-adjusted |
| Basic and diluted EPS | $0.50 | $0.87 reported; $0.64 pro forma tax-adjusted in Q1 2018 |
| Net interest margin | 5.63% | 5.72% in Q1 2018 |
| Net interest margin excluding loan fees | 4.93% | 4.65% in Q1 2018 |
| Efficiency ratio | 35.99% | 36.82% in Q1 2018 |
| Net cash provided by operating activities | $7.2 million | $7.5 million in Q1 2018 |
| Net increase in cash and due from banks | $28.1 million | $4.1 million in Q1 2018 |
At March 31, 2019, total assets were $787.2 million, net loans were $578.8 million, total deposits were $686.7 million and shareholders’ equity was $93.8 million. Cash and due from banks totaled $156.1 million. The company had no FHLB advances or other borrowings outstanding, and reported $68.4 million of FHLB borrowing availability.
Average loans increased to $586.4 million from $566.0 million in Q1 2018. The loan portfolio was concentrated in commercial real estate, including construction and development, and commercial and industrial loans. Hospitality loans represented 23% of gross loans and energy loans represented 18%.
The allowance for loan losses was $7.8 million, or approximately 1.34% of loans, compared with 1.31% at December 31, 2018. Net charge-offs were $4,000, offset by $7,000 of recoveries, resulting in net recoveries of $3,000.
The Bank remained well capitalized. At March 31, 2019, Bank regulatory ratios included total capital to risk-weighted assets of 17.36%, Tier 1 capital of 16.11%, common equity Tier 1 capital of 16.11% and Tier 1 leverage of 12.18%.
Material changes versus prior comparable periods
- Interest income rose 10.9%, driven by higher average loan balances, higher loan yields and increased income from short-term investments.
- Loan interest income, including fees, increased 7.4% to $11.6 million. Loan fee income declined $543,000, or 29.6%, because Q1 2018 included nonrecurring fees.
- Interest expense increased $745,000, principally because the average rate on interest-bearing deposits rose to 1.89% from 1.25% and average interest-bearing deposits increased.
- Reported net income declined because Q1 2019 included $1.7 million of income tax expense following the conversion to C corporation status. On a pro forma tax-adjusted basis, Q1 2019 net income of $5.1 million exceeded Q1 2018 pro forma net income of $4.7 million.
- Noninterest income decreased 15.5%, while noninterest expense increased 2.2%. Public-company accounting, legal and professional costs increased by $113,000; travel expenses declined after the sale of the company aircraft in 2018.
- Total assets increased $16.7 million, or 2.2%, from December 31, 2018, primarily due to deposit growth and expansion into the Tulsa market.
- Gross loans declined $13.7 million, or 2.3%, from December 31, 2018, as commercial and industrial and agricultural balances declined despite growth in construction and development loans.
- Total deposits increased $10.8 million, or 1.6%. Interest-bearing deposits increased $26.6 million, while noninterest-bearing deposits declined $15.8 million.
- Nonperforming loans increased to $4.6 million, or 0.78% of total loans, from $2.6 million, or 0.44%, at year-end. Nonperforming assets increased to $4.7 million, or 0.60% of total assets, from $2.7 million, or 0.35%.
Guidance, outlook, management commentary, risks and unusual items
Management stated that it intends to grow organically through selective branch expansion and may pursue strategic acquisitions. No quantitative earnings or revenue guidance was provided.
Management characterized the allowance for loan losses as adequate but noted that future provisions may be required if economic conditions, loan composition, delinquencies, criticized loans or other credit conditions deteriorate. Newly modified troubled-debt restructurings totaled $2.9 million during the quarter, and total TDRs were $3.4 million at March 31, 2019. No charge-offs or subsequent defaults were reported on these TDRs during the period.
Credit concentration is a material risk. Hospitality and energy loans represented 23% and 18%, respectively, of gross loans, with additional unfunded commitments. Substandard loans increased to $10.2 million from $9.1 million at year-end, primarily due to several relationships totaling $2.9 million.
Liquidity was supported by cash, deposit gathering, loan repayments and maturities, and available FHLB borrowing capacity. Off-balance-sheet commitments to extend credit totaled $139.6 million, and standby letters of credit totaled $1.0 million. The company stated that these commitments do not necessarily represent future cash requirements because many may expire undrawn.
The principal market risk is interest-rate volatility. The company does not use leveraged derivatives, options or futures to hedge interest-rate risk. Its simulation indicated that a 100-basis-point rate decline could reduce projected one-year net interest income by 18.17%, although management cautioned that model results are inherently uncertain.
The company reported no material legal proceedings, no material changes to previously disclosed risk factors, no stock repurchases or unregistered stock sales, and effective disclosure controls as of March 31, 2019.
Most important facts for investors to verify
- Reconcile reported net income and EPS with pro forma tax-adjusted results because the C corporation conversion materially affects year-over-year comparability.
- Monitor nonperforming loans, TDRs, substandard loans and the allowance coverage ratio, particularly within commercial real estate, hospitality, energy and agricultural exposures.
- Assess the sustainability of loan yields and net interest income as nonrecurring loan fees decline and deposit funding costs increase.
- Review deposit composition, time-deposit maturities and reliance on brokered or CDARS deposits for liquidity and funding risk.
- Evaluate the effect of interest-rate changes on net interest income, given the company’s disclosed sensitivity to a rate decline.
- Consider the $140.6 million of off-balance-sheet credit commitments and the $69.9 million of loans pledged to secure outstanding letters of credit.
- Confirm the company’s strong regulatory capital ratios and well-capitalized status, including the applicable capital conservation buffer requirements.