Bank7 Corp. 2023 Q2 Form 10-Q Summary
Business context and reporting period
Bank7 Corp. is an Oklahoma City-based bank holding company operating Bank7, which provides banking and financial services to individuals and businesses in Oklahoma, Texas and Kansas through 12 locations. The unaudited filing covers the quarter and six months ended June 30, 2023, compared primarily with the same periods in 2022 and with December 31, 2022 for balance-sheet information.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Total interest income | $30.0 million | $16.7 million | $57.4 million | $31.6 million |
| Net interest income | $20.5 million | $15.8 million | $40.5 million | $30.0 million |
| Provision for credit losses | $1.0 million | $0.2 million | $1.5 million | $0.5 million |
| Pre-tax income | $12.9 million | $9.3 million | $25.5 million | $17.5 million |
| Net income | $9.7 million | $7.0 million | $19.4 million | $13.2 million |
| Diluted EPS | $1.05 | $0.76 | $2.09 | $1.44 |
| Net interest margin | 5.04% | 4.47% | 5.09% | 4.44% |
Net income increased approximately 39% in the second quarter and 47% for the first six months. The filing does not provide a clearly labeled GAAP net profit margin; based on reported net income divided by total interest and noninterest income, the approximate margins were 31.6% for the quarter and 32.9% for the six months.
- Average loan yields increased to 8.40% in the second quarter and 8.25% for the six-month period, versus 5.80% in both comparable 2022 periods, primarily reflecting Federal Reserve rate increases.
- Average loans increased 17.7% year over year in the second quarter and 22.0% for the six months.
- Interest expense rose substantially as deposit pricing increased. Average interest-bearing deposit costs increased to 3.53% in the quarter and 3.25% for the six months, versus 0.40% and 0.38%, respectively, in 2022.
- Total noninterest income was $794,000 in the quarter and $1.5 million for the six months. Total noninterest expense was $7.4 million and $15.0 million, respectively.
- Cash provided by operating activities was $20.1 million for the first six months, compared with $24.9 million in 2022. Investing activities used $8.9 million, while financing activities provided $76.1 million, producing an $87.3 million increase in cash and due from banks.
Financial position, liquidity and capital
| Balance-sheet metric | June 30, 2023 | December 31, 2022 |
|---|---|---|
| Total assets | $1.68 billion | $1.58 billion |
| Gross loans | $1.28 billion | $1.27 billion |
| Net loans | $1.26 billion | $1.26 billion |
| Total deposits | $1.51 billion | $1.43 billion |
| Shareholders’ equity | $161.8 million | $144.1 million |
| Cash and due from banks | $196.5 million | $109.1 million |
- Deposits grew $78.9 million, or approximately 5.5%, while interest-bearing deposits increased and noninterest-bearing deposits declined.
- The filing does not show outstanding debt on the condensed balance sheet. Liquidity sources include deposits, correspondent-bank funding, Federal Home Loan Bank advances and other borrowing mechanisms.
- FHLB borrowing availability was $159.0 million at June 30, 2023, compared with $129.2 million at year-end 2022. The company reported no unsecured fed funds lines with correspondent institutions and no amounts advanced.
- The Bank remained classified as “well-capitalized.” At June 30, 2023, Bank total capital to risk-weighted assets was 13.10%, CET1 capital was 11.89%, Tier 1 capital was 11.89%, and Tier 1 leverage was 9.71%.
Material changes versus comparable periods
- Net interest income benefited from both loan growth and higher loan yields, while deposit repricing significantly increased funding costs.
- Provision expense increased to $1.0 million in the second quarter and $1.5 million year to date, compared with $219,000 and $495,000, respectively, in 2022.
- Allowance for credit losses on loans increased to $16.4 million from $14.7 million at year-end 2022, or 1.28% of loans versus 1.16%. The company also recorded a $576,000 allowance for unfunded commitments.
- Commercial real estate loans increased to $699.7 million, or 54.7% of gross loans, from $679.1 million, or 53.3%, at year-end. Construction and development loans declined materially to $123.8 million from $163.2 million.
- Nonperforming assets declined to $17.3 million from $18.0 million. The nonperforming-loan ratio improved to 1.35% from 1.42%, while nonaccrual loans declined to $7.3 million from $8.0 million.
- Accumulated other comprehensive loss was $8.7 million at June 30, 2023. Available-for-sale securities had $11.0 million of gross unrealized losses, primarily attributable to higher market interest rates; management stated it had the intent and ability to hold the securities through recovery.
- The company adopted the CECL expected-credit-loss standard on January 1, 2023, recording a $572,000 after-tax reduction to retained earnings, including a $250,000 increase to the loan allowance and a $500,000 reserve for unfunded commitments.
Outlook, commentary, risks and unusual items
- Management describes its strategy as organic growth through selective branch expansion and potential strategic acquisitions, with a focus on business owners and entrepreneurs.
- Management stated that liquidity and contractual obligations can be met through profitability, loan repayments and maturities, deposit gathering and available borrowing mechanisms. No specific earnings or revenue guidance was provided.
- Hospitality loans represented 21% of gross loans, or $271.1 million, and energy loans represented 13%, or $161.3 million, creating sector concentration exposure.
- Commercial real estate concentration remains a principal regulatory risk. Regulatory CRE represented 276.55% of Bank capital at June 30, 2023, below 304.72% at year-end, but regulators could restrict growth, require additional capital or require reductions in concentration.
- The filing identifies potential risks from further deposit migration, higher deposit costs, reduced access to wholesale funding, unrealized securities losses, interest-rate volatility, economic deterioration and changes in bank regulation following 2023 bank failures.
- Subsequent to quarter-end, a borrower filed for bankruptcy with an intention to liquidate. The borrower remained current, and management stated it was monitoring the matter closely.
- Management reported no material legal proceedings, effective disclosure controls, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether higher deposit costs or deposit competition compress future net interest margin as rates and liquidity conditions change.
- The performance and collateral coverage of the $19.6 million of loans classified as special mention or substandard, including the post-quarter-end bankruptcy borrower.
- Credit trends in commercial real estate, hospitality and energy exposures, together with the adequacy of the $16.4 million loan allowance and $576,000 unfunded-commitment reserve.
- The potential earnings and capital effects of the $11.0 million unrealized loss position in available-for-sale securities if securities must be sold before recovery.
- Whether the Bank maintains its well-capitalized status and continued access to FHLB and other liquidity sources under stressed deposit or market conditions.
- The filing’s interest-rate simulation results, which indicate that a 100-basis-point rate decline would reduce modeled next-12-month net interest income by 0.29%, while a 400-basis-point increase would increase it by 22.87%; actual results may differ materially from these estimates.