Bank7 Corp. 2022 Q2 Form 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 and six months ended June 30, 2022. The company operated 12 locations and had 9,099,905 common shares outstanding as of August 15, 2022.
The December 2021 acquisition of Watonga Bancshares and its Cornerstone Bank subsidiary materially expanded the company’s loan, deposit, securities, and operating base.
Financial Results and Key Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Total interest income | $16.7 million | $14.4 million | $31.6 million | $27.6 million |
| Net interest income | $15.8 million | $13.7 million | $30.0 million | $26.0 million |
| Provision for loan losses | $0.2 million | $1.3 million | $0.5 million | $2.6 million |
| Noninterest income | $0.7 million | $0.6 million | $1.4 million | $0.9 million |
| Noninterest expense | $7.0 million | $4.9 million | $13.4 million | $9.4 million |
| Pre-tax income | $9.3 million | $8.1 million | $17.5 million | $14.9 million |
| Net income | $7.0 million | $6.1 million | $13.2 million | $11.2 million |
| Diluted EPS | $0.76 | $0.67 | $1.44 | $1.24 |
| Net interest margin | 4.47% | 5.38% | 4.44% | 5.25% |
Net income increased approximately 15.1% in the second quarter and 17.8% for the first six months. Return on average equity was 21.67% in Q2 and 20.52% for the six-month period.
- Total assets were $1.49 billion at June 30, 2022, up 10.2% from December 31, 2021.
- Gross loans were $1.16 billion, up 12.1% from year-end; net loans were $1.14 billion.
- Total deposits were $1.35 billion, up 10.6% from year-end. Noninterest-bearing deposits represented 33.2% of deposits, compared with 30.1% at year-end.
- Shareholders’ equity was $131.5 million, compared with $127.4 million at December 31, 2021.
- The allowance for loan losses was $10.8 million, or 0.94% of loans, versus 1.00% at year-end.
- The filing presents no material debt balance; liabilities were primarily deposits and other operating liabilities.
Cash Flow, Liquidity, and Capital
- Operating activities provided $24.9 million of cash during the first six months, compared with $17.3 million in the prior-year period.
- Investing activities used $233.0 million, primarily reflecting $133.1 million of available-for-sale securities purchases and $123.9 million of net loan growth.
- Financing activities provided $126.6 million, principally from a $128.8 million increase in deposits.
- Cash and cash equivalents declined to $123.4 million from $204.9 million at December 31, 2021.
- FHLB borrowing availability was $90.2 million at June 30, 2022. The company also identified wholesale deposits and correspondent-bank borrowings as alternative liquidity sources.
- The Bank was categorized as well capitalized. Its total risk-based capital ratio was 12.15%, CET1 ratio was 11.21%, Tier 1 risk-based capital ratio was 11.21%, and Tier 1 leverage ratio was 8.97%.
Material Changes Versus Prior Comparable Period
- Interest income increased 15.5% in Q2 and 14.4% for the six-month period, driven by loan growth and the addition of investment securities following the Watonga acquisition.
- Average loans increased 22.6% in Q2 and 20.6% for the first six months, but loan yields declined to 5.80% from 6.48% and 6.37%, respectively.
- Net interest margin declined to 4.47% in Q2 and 4.44% for the first six months, versus 5.38% and 5.25%, respectively, largely reflecting lower loan yields and reduced PPP loan-fee income.
- The provision for loan losses decreased substantially, while net recoveries were $8,000 for the six-month period compared with $92,000 of net recoveries in the prior-year period.
- Noninterest income increased 19.5% in Q2 and 49.2% year to date, supported by higher secondary-market income, deposit service charges, and other fees.
- Noninterest expense increased 42.8% in Q2 and 42.1% year to date, primarily because of higher staffing and operating costs associated with organic growth and the Watonga acquisition.
- Accumulated other comprehensive loss was $7.8 million at June 30, 2022, principally from $9.3 million of unrealized losses on available-for-sale securities as interest rates increased.
- No shares were repurchased during the first six months; 750,000 shares remained authorized for repurchase under the new plan.
Outlook, Risks, Contingencies, and Unusual Items
- No quantitative earnings or financial guidance was provided. Management stated that it intends to grow organically through selective branch expansion and 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.
- Key credit concentrations include hospitality loans of $200.3 million, or 17% of gross loans, and energy loans of $131.6 million, or 11%. Commercial real estate and commercial and industrial loans together represented approximately 70% of gross loans.
- Nonperforming loans were $9.5 million, or 0.83% of total loans, down from $10.4 million, or 1.01%, at year-end. Nonaccrual loans were $9.5 million, and one $1.3 million commercial real estate loan remained a troubled-debt restructuring.
- Available-for-sale securities had $9.3 million of gross unrealized losses. Management stated it had the ability and intent to hold the securities until recovery and did not recognize an impairment loss.
- The company expects to adopt lease accounting guidance in the fourth quarter of 2022 and the CECL credit-loss standard in the first quarter of 2023. Management does not expect the lease adoption to materially affect capital, but the impact of CECL was not quantified.
- Goodwill was $8.7 million. Management noted that prolonged economic weakness could result in partial or full impairment.
- Commitments to extend credit and standby letters of credit totaled $236.2 million, including $234.0 million of lending commitments. These amounts may not represent future cash requirements because commitments may expire unused.
- Management reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30, 2022.
Important Facts for Investors to Verify
- Whether loan growth and deposit growth remain sustainable after the Watonga acquisition.
- Whether declining loan yields and net interest margin pressure continue as interest rates and funding costs change.
- The credit performance of hospitality, energy, commercial real estate, and commercial and industrial exposures.
- The eventual impact of CECL adoption on the allowance, retained earnings, regulatory capital, and future provision expense.
- Whether unrealized securities losses affect liquidity, capital, or the company’s ability to hold securities through maturity.
- Future operating expenses and stock-based compensation associated with branch expansion, staffing, and acquisition integration.