Bank7 Corp. Form 10-Q Summary
Business Context and Reporting Period
Bank7 Corp. is an Oklahoma-based bank holding company whose wholly owned subsidiary, Bank7, provides banking and financial services to individuals and businesses in Oklahoma, Kansas and Texas through seven full-service branches. The filing covers the three and nine months ended September 30, 2018, compared primarily with the same periods in 2017 and, for balance-sheet items, December 31, 2017.
The company completed its initial public offering on September 24, 2018, issuing 2.9 million shares at $19.00 per share and receiving approximately $50.1 million in net proceeds. It also terminated its S Corporation status and became a taxable C Corporation.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Interest income | $11.7 million, up 9.6% | $34.2 million, up 3.6% |
| Net interest income | $9.8 million, up 3.7% | $29.1 million, down 1.8% |
| Provision for loan losses | $0.0 million versus $0.15 million | $0.1 million versus $1.1 million |
| Noninterest income | $0.3 million, down 16.5% | $1.1 million, down 17.3% |
| Noninterest expense | $3.8 million, up 1.9% | $11.0 million, up 3.9% |
| Pre-tax income | $6.3 million versus $5.9 million | $19.0 million versus $19.2 million |
| Net income | $6.7 million versus $6.0 million | $19.4 million versus $19.2 million |
| Diluted earnings per share | $0.87 versus $0.82 | $2.62 versus $2.64 |
The third-quarter tax benefit of $395,000 and nine-month tax benefit of $395,000 included the impact of the deferred tax asset recognized when the company converted from an S Corporation to a C Corporation. Management also presents pro forma C Corporation results using a 25% effective tax rate for 2018 and 37.4% for 2017: pro forma net income was $4.7 million for the quarter and $14.3 million for the nine months.
- Total assets were $751.2 million at September 30, 2018, up 6.8% from December 31, 2017.
- Gross loans were $586.7 million, up from $564.6 million; net loans were $577.1 million.
- Total deposits were $664.3 million, up from $625.8 million. Noninterest-bearing deposits increased to $222.7 million from $165.9 million.
- Shareholders’ equity was $82.8 million, compared with $69.2 million at year-end, reflecting IPO proceeds and other capital activity partly offset by a $56.2 million cash distribution to pre-IPO shareholders.
- Cash and due from banks totaled $127.2 million, up from $100.1 million.
- There were no borrowings outstanding at September 30, 2018; the $5.6 million note outstanding at year-end was repaid during September.
- Net cash provided by operating activities was $20.1 million; investing activities used $19.9 million; and financing activities provided $27.0 million for the nine months.
- The allowance for loan losses was $7.7 million, or 1.32% of loans, compared with 1.41% at September 30, 2017.
- The bank was categorized as well capitalized. Its September 30 total risk-based capital ratio was 15.11%, Tier 1 risk-based capital ratio was 13.86%, common equity Tier 1 ratio was 13.86% and Tier 1 leverage ratio was 10.90%.
Material Changes Versus Comparable Periods
- Average loans increased to $596.5 million in the third quarter from $541.4 million, supporting higher interest income despite lower loan yields including fees, which declined to 7.43% from 7.63%.
- Excluding loan fee income, third-quarter loan yield increased to 6.80% from 6.32%, and net interest margin increased to 4.85% from 4.71%. Including loan fees, net interest margin declined to 5.36% from 5.79% because 2017 included substantially higher nonrecurring loan fees.
- For the nine months, loan fee income declined by $3.9 million, causing reported net interest income to decrease despite loan growth and higher underlying yields.
- Noninterest income declined primarily because the company sold its mortgage servicing portfolio at the end of 2017. Noninterest expense increased primarily from salaries, occupancy, data processing and advertising.
- Net charge-offs declined to $26,000 for the nine months from $473,000 in the prior-year period, while the provision for loan losses declined to $100,000 from $1.1 million.
- Nonperforming assets improved to $1.2 million, or 0.16% of total assets, from $2.0 million, or 0.28%, at December 31, 2017. Nonaccrual loans were $729,000 versus $1.2 million.
- Substandard loans increased to $9.6 million from $4.5 million at year-end, primarily due to one commercial relationship consisting of four notes totaling approximately $7.9 million.
Outlook, Risks, Contingencies and Unusual Items
- Management intends to grow organically through selective branch expansion and to pursue strategic acquisitions, but the filing provides no quantitative earnings or growth guidance.
- Hospitality loans represented 23% of gross loans, or $133.8 million, and energy loans represented 21%, or $121.0 million, creating material industry concentration exposure. Related unfunded commitments were $32.4 million and $29.4 million, respectively.
- Off-balance-sheet commitments totaled $137.4 million, including $135.8 million of commitments to extend credit and $1.6 million of standby letters of credit. Outstanding letters of credit securing public funds totaled $24.6 million and were collateralized by approximately $61.1 million of loans.
- FHLB borrowing availability was $37.3 million, although no FHLB advances were outstanding. Management stated that liquidity needs are expected to be met through cash, profitability, loan repayments, deposit growth and available borrowing mechanisms.
- The primary market risk is interest-rate volatility. The company does not use derivatives to hedge interest-rate risk. Its simulation indicated that a 100-basis-point rate increase would increase projected net interest income by 10.48%, while a 100-basis-point decrease would reduce it by 8.54%; actual results may differ materially.
- The company granted 130,000 restricted stock units and 150,000 stock options in connection with the IPO. No awards were vested at September 30, 2018, and approximately $2.8 million of related compensation expense remained unrecognized.
- The company adopted or plans to adopt several accounting standards, including revenue recognition and financial-instrument changes in 2019, leases in 2020 and CECL in 2021, subject to the filing’s stated emerging-growth-company transition provisions.
- Management reported effective disclosure controls, no material changes in internal control over financial reporting, and no material pending legal proceedings or material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Assess the sustainability of earnings after removing the $50.1 million IPO proceeds, the $56.2 million shareholder distribution, the conversion-related tax benefit and unusually high prior-period loan fees.
- Monitor the $9.6 million of substandard loans, particularly the $7.9 million commercial relationship, and the adequacy of the $7.7 million allowance.
- Evaluate concentration risk in hospitality, energy, commercial real estate and construction lending.
- Track deposit pricing and funding costs as interest-bearing deposit rates increased materially and compressed reported margins.
- Reconcile the company’s GAAP results with its pro forma C Corporation measures and other non-GAAP metrics.
- Confirm the effect of IPO-related equity awards, future compensation expense and the company’s post-IPO capital allocation policy.