Bank7 Corp. 2020 Q3 Form 10-Q Summary
Business Context and Reporting Period
Bank7 Corp. is an Oklahoma-based bank holding company operating Bank7, which provides banking and financial services to individuals and businesses in Oklahoma, Kansas and Texas through nine locations. The unaudited report covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods and December 31, 2019 balance-sheet amounts. The company remains an emerging growth company and reports common stock trading under the symbol BSVN.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net interest income | $11.6 million, versus $10.6 million | $35.0 million, versus $31.5 million |
| Provision for loan losses | $1.25 million, versus none | $3.3 million, versus none |
| Noninterest income | $334,000, versus $509,000 | $965,000, versus $1.03 million |
| Noninterest expense | $4.6 million, versus $16.1 million | $13.1 million, versus $23.9 million |
| Income before taxes | $6.1 million, versus a $5.0 million loss | $19.6 million, versus $8.7 million |
| Net income | $4.4 million, versus a $6.5 million loss | $14.5 million, versus $3.7 million |
| Basic and diluted EPS | $0.48, versus $(0.64) | $1.53, versus $0.37 |
- Net interest margin including loan fee income was 4.81% in the quarter and 5.02% for the nine months, down from 5.27% and 5.45%, respectively. Excluding loan fees, margins were 4.36% and 4.45%, compared with 4.85% and 4.84%.
- Average loans increased to $847.1 million in the quarter and $807.1 million for the nine months, while loan yields declined to 6.00% and 6.50%, respectively, from 7.42% and 7.77%.
- Return on average assets was 1.83% for the quarter and 2.07% for the nine months. Return on average equity was 17.16% and 19.14%, respectively.
- The efficiency ratio improved to 38.4% for the quarter and 36.3% for the nine months, compared with 144.7% and 73.3% in the prior-year periods.
- At September 30, 2020, total assets were $973.4 million, net loans were $869.4 million, deposits were $863.7 million and shareholders’ equity was $105.2 million.
- Gross loans were $883.2 million, including $64.3 million of SBA Paycheck Protection Program loans. The allowance for loan losses was $11.1 million, or 1.26% of loans, compared with $7.8 million, or 1.11%, at December 31, 2019.
- Cash and due from banks totaled $60.7 million, compared with $117.1 million at year-end 2019. Nine-month operating cash flow was $18.5 million; investing activities used $167.0 million, primarily because of loan growth; and financing activities provided $92.1 million, primarily from deposit growth.
- The filing reports no borrowings outstanding. FHLB borrowing availability was $65.3 million based on pledged collateral, and the company had no unsecured fed funds lines outstanding.
- The Bank reported a 14.10% total risk-based capital ratio, 12.85% Tier 1 risk-based capital ratio, 12.85% CET1 ratio and 10.72% Tier 1 leverage ratio at September 30, 2020. The Bank was categorized as well capitalized.
Material Changes Versus Prior Comparable Period
- Net income improved substantially because of higher net interest income, lower deposit funding costs and sharply lower noninterest expense.
- The major expense comparison was affected by a one-time, noncash executive stock transaction recorded in the third quarter of 2019 that generated approximately $11.8 million of compensation expense, including payroll taxes. The 2020 quarter therefore is not fully comparable on an underlying expense basis.
- Loan growth was substantial: gross loans increased 24.6% from December 31, 2019, while deposits increased 14.0%. Commercial and industrial loans rose to $400.4 million from $260.8 million, and construction and development loans rose to $108.5 million from $70.6 million.
- Credit quality weakened. Nonaccrual loans increased to $20.5 million from $1.8 million, nonperforming loans rose to $20.5 million from $3.3 million, and the nonperforming-loan ratio increased to 2.33% from 0.47%. Substandard loans increased to $34.5 million from $11.1 million.
- The company repurchased and retired 835,254 shares during the first nine months at an average price of $8.56 per share. Shares outstanding declined to 9.24 million from 10.06 million at December 31, 2019. A further 164,746 shares remained authorized for repurchase at September 30.
- Shareholders’ equity increased by $5.1 million from year-end despite repurchases and $2.8 million of declared dividends, primarily due to year-to-date net income.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide quantitative earnings or balance-sheet guidance. Management describes an intention to grow organically through selective branch expansion and strategic acquisitions.
- COVID-19 remains the principal disclosed uncertainty. Management states that further economic deterioration could increase credit-quality problems, delinquencies, charge-offs and collateral-value declines, and could adversely affect liquidity, asset valuations, earnings, capital and regulatory ratios.
- The company originated 333 PPP loans totaling $64.3 million. It received $1.8 million of PPP origination fees during the nine months, of which $1.1 million was recognized in interest income and $731,000 was deferred.
- As of September 30, 23 COVID-19-related loans totaling $121.0 million had been modified without being classified as troubled-debt restructurings under applicable relief guidance.
- Hospitality loans represented 21% of gross loans, or $188.7 million, and energy loans represented 14%, or $126.0 million. These concentrations increase sensitivity to sector-specific economic conditions.
- At September 30, the company had $191.5 million of commitments to extend credit and $860,000 of standby letters of credit. These amounts are not necessarily expected to become funded obligations.
- Management identified a COVID-19-related decline in stock price and market capitalization as a goodwill impairment indicator but recorded no goodwill impairment charge. Goodwill on the balance sheet was approximately $1.0 million.
- Management concluded that disclosure controls and procedures were effective, and reported no material change in internal control over financial reporting. Management also stated that no pending legal proceedings were expected to have a material adverse effect.
Most Important Facts for Investors to Verify
- Whether the sharp increase in nonaccrual, nonperforming and substandard loans leads to additional provisions or charge-offs as pandemic-related relief expires.
- The sustainability of loan growth, PPP-related fee income and the 2020 expense improvement after excluding the unusual 2019 executive stock compensation charge.
- The effect of lower market interest rates on loan yields, deposit costs and net interest margin.
- Exposure and performance of hospitality, energy, commercial real estate and commercial and industrial loans.
- Liquidity available through cash, deposit gathering and the $65.3 million of FHLB borrowing capacity, particularly if deposit outflows or loan funding needs increase.
- Whether the Bank maintains its well-capitalized status and capital-distribution capacity while credit losses and loan concentrations evolve.