Bank7 Corp. — Second-Quarter 2021 Form 10-Q
Business context and reporting period
Bank7 Corp. is an Oklahoma-based bank holding company operating Bank7, which provides banking and financial services to individual and corporate customers in Oklahoma, Kansas, and Texas through nine locations and online channels. The filing covers the three and six months ended June 30, 2021. Financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Interest income | $14.4 million | $13.6 million | $27.6 million | $27.1 million |
| Net interest income | $13.7 million | $11.9 million | $26.0 million | $23.4 million |
| Provision for loan losses | $1.3 million | $1.4 million | $2.6 million | $2.1 million |
| Noninterest income | $579,000 | $301,000 | $916,000 | $631,000 |
| Noninterest expense | $4.9 million | $4.1 million | $9.4 million | $8.5 million |
| Net income | $6.1 million | $5.0 million | $11.2 million | $10.1 million |
| Diluted EPS | $0.67 | $0.54 | $1.24 | $1.05 |
| Net interest margin | 5.38% | 4.99% | 5.25% | 5.14% |
- Return on average assets was 2.39% in the second quarter and 2.25% for the first six months, compared with 2.09% and 2.20%, respectively, in the prior-year periods.
- Return on average equity was 21.61% in the second quarter and 20.34% year to date, compared with 20.36% and 20.17% in 2020.
- Efficiency ratio was 34.22% for the quarter and 35.02% year to date.
- Total assets were $1.133 billion at June 30, 2021, including gross loans of $936.1 million, net loans of $919.7 million, and cash and due from banks of $187.7 million.
- Total deposits were $1.009 billion, including $330.1 million of noninterest-bearing deposits. Shareholders’ equity was $117.0 million.
- The filing does not report outstanding borrowings or traditional debt on the balance sheet. FHLB borrowing availability was $72.7 million at June 30, 2021.
- Net cash provided by operating activities was $17.3 million for the first six months. Investing activities used $84.5 million, primarily from loan growth, while financing activities provided $101.0 million, primarily from deposit growth. Cash increased by $33.8 million.
Material changes versus comparable periods
- Second-quarter net income increased 21.2% and year-to-date net income increased 11.1% versus the corresponding 2020 periods.
- Second-quarter net interest income increased 14.6%; year-to-date net interest income increased 11.2%. Loan growth and lower deposit funding costs more than offset lower yields on short-term investments.
- Average loans increased to $889.3 million in the second quarter from $826.1 million and to $868.5 million year to date from $786.9 million. Loan yields declined to 6.48% from 6.52% for the quarter and to 6.37% from 6.77% year to date.
- Interest-bearing deposit costs declined to 0.51% in the second quarter from 1.10% and to 0.53% year to date from 1.30%.
- Noninterest income increased 92.4% in the quarter and 45.2% year to date, driven primarily by other income and fees and higher mortgage-related secondary market income.
- Noninterest expense increased 18.2% in the quarter and 11.1% year to date, led by higher salaries and employee benefits associated with growth in the employee base.
- Total assets increased $116.4 million, or 11.5%, from December 31, 2020. Gross loans increased $97.0 million, or 11.6%, and deposits increased $103.0 million, or 11.4%.
- The allowance for loan losses increased to $12.3 million from $9.6 million, and the allowance ratio increased to 1.32% from 1.15%. Management cited loan growth and migration of one relationship to substandard status.
- Nonperforming loans declined to $13.7 million, or 1.47% of total loans, from $16.5 million, or 1.98%, at December 31, 2020. Substandard loans increased to $29.1 million from $23.1 million.
Guidance, outlook, risks and unusual items
- No formal earnings or financial guidance is provided in the filing. Management states that it intends to grow organically through selective branch expansion and strategic acquisitions.
- PPP exposure consisted of 359 loans totaling $47.5 million at June 30, 2021. PPP loans generated $913,000 of origination fees in the second quarter and $1.7 million year to date; $831,000 of PPP fees remained deferred.
- Hospitality loans represented 22% of gross loans, or $208.6 million, with $49.8 million of unfunded commitments. Energy loans represented 11%, or $104.0 million, with $9.2 million of unfunded commitments.
- At June 30, 2021, nonaccrual loans were $13.6 million and accruing loans 90 or more days past due were $106,000. Two nonaccrual troubled-debt restructurings totaled $12.2 million and included a $3.0 million specific reserve.
- One COVID-19-related modified loan totaling $3.1 million was not classified as a troubled-debt restructuring. Management reported no newly modified TDRs during the first six months and no subsequent defaults on modified TDRs.
- Off-balance-sheet commitments totaled $199.9 million, consisting of $193.7 million of commitments to extend credit and $6.2 million of standby letters of credit.
- COVID-19 effects remain uncertain and could affect liquidity, asset valuations, loan losses, goodwill, deferred tax assets, regulatory capital and results of operations.
- The Bank was categorized as well capitalized. At June 30, 2021, the Bank reported a 14.48% total capital ratio, 13.23% Tier 1 risk-based ratio, 13.23% CET1 ratio and 11.28% Tier 1 leverage ratio.
- The company repurchased no shares during the first six months of 2021; 717,822 shares remained authorized for repurchase at June 30, 2021. Quarterly cash dividends were $0.11 per share.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors or material legal proceedings were reported.
- The company expects to adopt CECL in the first quarter of 2023. The filing does not provide a clear estimate of the adoption impact.
Important facts for investors to verify
- Whether continued loan and deposit growth can be sustained without further deterioration in criticized, substandard or nonperforming loans.
- The adequacy of the $12.3 million allowance, including the $3.0 million specific reserve and concentrations in hospitality, energy, commercial real estate and commercial lending.
- The durability of PPP-related fees and the effect of loan repricing and short-term investment yields on future net interest margin.
- Liquidity coverage relative to deposit maturities, unfunded commitments and the $72.7 million of available FHLB borrowing capacity.
- The potential effect of COVID-19 developments, CECL adoption and future regulatory examinations on credit costs, capital and distributions.
- Whether higher personnel and operating expenses remain consistent with revenue growth and the reported efficiency ratio.