Bank7 Corp. 2019 Q2 Form 10-Q Summary
Business context and reporting period
Bank7 Corp. is an Oklahoma-based bank holding company operating through Bank 7, which provides commercial and consumer banking services across Oklahoma, Texas and Kansas through nine locations. The filing covers the unaudited quarter and six months ended June 30, 2019. The company focuses on business owners and entrepreneurs, with revenue primarily generated from loan interest and short-term investments.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Interest income | $13.1 million | $11.1 million | $25.6 million | $22.5 million |
| Net interest income | $10.6 million | $9.4 million | $20.9 million | $19.3 million |
| Net income | $5.1 million | $6.4 million | $10.2 million | $12.7 million |
| Diluted EPS | $0.50 | $0.88 | $1.00 | $1.75 |
| Net interest margin, including loan fees | 5.46% | 5.38% | 5.54% | 5.53% |
| Net interest margin, excluding loan fees | 4.76% | 4.74% | 4.84% | 4.69% |
| Noninterest income | $295 thousand | $486 thousand | $518 thousand | $750 thousand |
| Noninterest expense | $4.0 million | $3.5 million | $7.8 million | $7.2 million |
At June 30, 2019, total assets were $798.4 million, gross loans were $633.0 million, net loans were $623.6 million, deposits were $696.1 million, and shareholders’ equity was $99.0 million. Cash and due from banks totaled $123.8 million. The company reported no borrowings outstanding at quarter-end.
Six-month operating cash flow was $9.3 million, compared with $13.1 million in the prior-year period. Investing activities used $33.8 million, primarily reflecting $31.6 million of net loan growth. Financing activities provided $20.2 million from deposit growth. Cash and due from banks declined by $4.3 million to $123.8 million.
The allowance for loan losses was $7.8 million, or approximately 1.24% of loans, compared with 1.31% at December 31, 2018. There was no loan-loss provision in the 2019 periods, versus a $100 thousand provision in the first six months of 2018.
Material changes versus comparable periods
- Second-quarter interest income increased 17.3%, driven by higher average loan balances and stronger yields. Average loans increased to $613.9 million from $572.0 million, while loan yield increased to 7.91% from 7.42%.
- Six-month interest income increased to $25.6 million from $22.5 million, and net interest income increased 8.5% to $20.9 million.
- Deposit interest expense increased materially as average interest-bearing deposits grew and deposit pricing increased. Six-month interest expense rose to $4.7 million from $3.2 million.
- Noninterest income declined 39.3% in the quarter and 30.9% year to date, primarily because of lower other income and fees and nonrecurring loan fee income in the prior-year period.
- Noninterest expense increased 14.2% in the quarter and 8.0% year to date. Salaries and benefits increased with personnel additions for newly opened locations; professional fees increased with public-company costs. Travel expense declined after the company sold its aircraft in the third quarter of 2018.
- Net income declined despite higher pre-tax income because 2019 reflects the company’s taxable C corporation status following the September 2018 IPO. The company recorded income tax expense of $1.7 million in the quarter and $3.4 million year to date, while 2018 reported no income tax expense.
- Gross loans increased 5.2% from December 31, 2018, while deposits increased 3.0%. Commercial real estate represented 48.6% of gross loans and commercial and industrial loans represented 40.4%.
- Shareholders’ equity increased from $88.5 million at year-end 2018 to $99.0 million, primarily from retained 2019 earnings. No cash distributions were declared in 2019; the prior-year period included $4.4 million of distributions.
Outlook, risks, contingencies and unusual items
Management stated that it intends to grow organically through selective branch expansion and to pursue strategic acquisitions. The filing provides no quantitative earnings, revenue or loan-growth guidance.
Liquidity was supported by cash, interest-bearing deposits, deposit gathering and available borrowing sources. The company reported $62.3 million of FHLB borrowing availability at June 30, 2019 and stated that it expects profitability, loan repayments, maturities and continued deposit growth to meet contractual obligations.
The Bank was categorized as well-capitalized. At June 30, 2019, the Bank’s total risk-based capital ratio was 17.16%, CET1 ratio was 15.91%, and Tier 1 leverage ratio was 12.35%, all above applicable minimums.
Credit quality requires monitoring. Nonperforming loans increased to $4.0 million from $2.6 million at year-end, and nonperforming assets increased to $4.2 million from $2.7 million. Substandard loans rose to $9.9 million, including an agricultural relationship. The company recorded $2.9 million of newly modified troubled-debt restructurings during the first six months, with no related charge-offs.
Hospitality loans were 22% of gross loans, or $138.8 million, and energy loans were 19%, or $118.3 million. These concentrations expose results to sector-specific economic conditions, borrower cash flow, collateral values and commodity or operating trends. Off-balance-sheet commitments to extend credit and standby letters of credit totaled $174.6 million, up from $136.1 million at December 31, 2018.
Interest-rate risk is the principal market risk. The company does not use leveraged derivatives, options or futures to hedge specific interest-rate exposures. Its simulation indicated that a 100-basis-point decline in rates could reduce projected 12-month net interest income by 12.10%, although management cautioned that model results may differ from actual outcomes.
The company adopted its taxable C corporation status after the IPO and received $50.1 million of net IPO proceeds. It expected no material impact from the pending revenue-recognition and fair-value accounting standards and planned to adopt the leases standard in 2020 and the CECL standard in 2022, subject to potential effective-date changes noted in the filing.
Management concluded that disclosure controls were effective as of June 30, 2019, and reported no material changes in internal control over financial reporting. Management also stated that no material legal proceedings or material changes to previously disclosed risk factors existed.
Important facts for investors to verify
- Whether loan growth and the 7.91% quarterly loan yield can be sustained as deposit costs rise.
- Trends in nonperforming loans, substandard loans, troubled-debt restructurings and the adequacy of the $7.8 million allowance.
- Exposure to hospitality, energy, commercial real estate and agricultural borrowers, including unfunded commitments.
- The effect of C corporation taxes on future net income, EPS, returns and cash generation compared with historical S corporation results.
- Deposit pricing, time-deposit maturities and the availability and cost of FHLB or other wholesale funding.
- Whether off-balance-sheet commitments of $174.6 million convert into funded loans or produce credit losses.
- The assumptions and limitations underlying management’s interest-rate sensitivity models.
- Future expense levels associated with branch expansion, public-company compliance, stock-based compensation and unrecognized compensation expense.