Bank7(BSVN) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents Bank7 Corp.'s unaudited condensed consolidated financial statements as of September 30, 2023, including Balance Sheets, Statements of Comprehensive Income, Statements of Shareholders' Equity, and Statements of Cash Flows, along with accompanying notes, highlighting a 28.2% increase in net income for the nine months ended September 30, 2023, and the adoption of the CECL accounting standard on January 1, 2023 Unaudited Condensed Consolidated Balance Sheets Total assets increased by 11.9% to $1.77 billion as of September 30, 2023, from $1.58 billion at December 31, 2022, primarily driven by an increase in net loans, while total liabilities grew to $1.60 billion due to an 11.3% increase in total deposits, and total shareholders' equity rose by 16.5% to $167.9 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,772,399 | $1,584,169 | | Loans, net | $1,372,128 | $1,255,722 | | Total Deposits | $1,593,572 | $1,431,400 | | Total Liabilities | $1,604,492 | $1,440,069 | | Total Shareholders' Equity | $167,907 | $144,100 | Unaudited Condensed Consolidated Statements of Comprehensive Income For the third quarter of 2023, net income was $7.9 million, a slight decrease from $8.0 million in Q3 2022, but for the nine months ended September 30, 2023, net income increased by 28.0% to $27.2 million from $21.2 million in the prior-year period, driven by a significant increase in net interest income to $61.3 million, partially offset by a higher provision for credit losses Income Statement Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $20,746 | $19,045 | $61,250 | $49,047 | | Provision for Credit Losses | $4,159 | $2,348 | $5,645 | $2,843 | | Net Income | $7,853 | $8,041 | $27,206 | $21,249 | | Diluted EPS | $0.85 | $0.87 | $2.94 | $2.31 | Unaudited Condensed Consolidated Statements of Shareholders' Equity Total shareholders' equity increased from $135.8 million at the end of Q3 2022 to $167.9 million at the end of Q3 2023, primarily driven by $27.2 million in net income for the nine-month period, partially offset by $4.9 million in cash dividends and a $572,000 reduction to retained earnings due to CECL adoption - Retained earnings grew to $79.8 million as of September 30, 2023, up from $51.1 million a year prior, reflecting strong profitability[15] - Cash dividends declared increased to $0.21 per share in Q3 2023 from $0.12 per share in Q3 2022[15] Unaudited Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, net cash provided by operating activities was $33.0 million, net cash used in investing activities was $130.5 million primarily due to a net increase in loans, and net cash provided by financing activities was $157.9 million driven by a significant net increase in deposits, resulting in a net increase in cash of $60.4 million for the period Cash Flow Summary (Nine Months Ended, in thousands) | Activity | September 30, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $32,967 | $29,935 | | Net cash used in investing activities | ($130,487) | ($304,107) | | Net cash provided by financing activities | $157,895 | $216,561 | | Net Increase/(Decrease) in Cash | $60,375 | ($57,611) | Notes to Unaudited Condensed Consolidated Financial Statements The notes provide detailed information on accounting policies and financial statement line items, highlighting the adoption of the CECL standard on January 1, 2023, which changed the methodology for calculating the allowance for credit losses and resulted in a $250,000 increase to the allowance for credit losses on loans upon adoption, along with details on loan and securities portfolios, capital adequacy, and a significant nonaccrual loan customer - The company adopted the Current Expected Credit Loss (CECL) standard on January 1, 2023, replacing the incurred loss methodology with an expected loss model, which resulted in a net decrease to retained earnings of $572,000[62][48] Impact of CECL Adoption on Allowance for Credit Losses (in thousands) | Loan Category | Impact of ASC 326 Adoption | | :--- | :--- | | Commercial real estate | ($262) | | Commercial & industrial | $716 | | Total Allowance for credit losses on loans | $250 | | Allowance for credit losses on off-balance sheet credit exposures | $500 | | Total Impact | $750 | - Gross loans grew to $1.40 billion as of September 30, 2023, from $1.27 billion at year-end 2022, with the allowance for credit losses increasing to $20.6 million from $14.7 million over the same period[240] - During Q3 2023, a single loan customer filed for bankruptcy, leading to a $3.0 million ACL reserve, with the company expecting an additional reserve or charge-off in Q4 related to this customer[305] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance and condition, highlighting organic growth in its key markets, with net interest income growing 24.9% year-over-year for the first nine months of 2023, driven by higher loan volumes and yields, partially offset by a significant increase in the provision for credit losses due to a single large commercial loan customer filing for bankruptcy, while total assets grew 11.9% to $1.77 billion since year-end 2022, maintaining strong capital and liquidity positions Results of Operations For the nine months ended September 30, 2023, net interest income increased by $12.2 million (24.9%) to $61.3 million compared to the prior year, driven by a 17.8% increase in average loans and higher loan yields, while the provision for credit losses doubled to $5.7 million largely due to a single nonperforming loan, and noninterest income grew 12.0% as noninterest expense rose 9.3% primarily from higher compensation costs Net Interest Income Analysis (Nine Months Ended) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Average Interest-Earning Assets | $1,634.8M | $1,407.9M | | Average Interest-Bearing Liabilities | $1,070.4M | $868.3M | | Net Interest Income | $61.3M | $49.0M | | Net Interest Margin | 5.01% | 4.66% | - The provision for credit losses for the first nine months of 2023 was $5.7 million, compared to $2.8 million for the same period in 2022, with the increase largely attributable to a single loan customer filing for bankruptcy[360][331] - Salaries and employee benefits for the first nine months of 2023 increased by $2.2 million (17.7%) year-over-year, attributed to increased compensation to remain competitive[346] Financial Condition As of September 30, 2023, total assets reached $1.77 billion, an 11.9% increase from year-end 2022, fueled by organic loan growth to $1.40 billion, while nonperforming assets rose significantly to $51.1 million (2.88% of total assets) from $18.0 million (1.13% of total assets) at year-end, primarily due to one large nonaccrual loan, and total deposits grew to $1.59 billion, with the company remaining well-capitalized - Total assets increased by $188.2 million, or 11.9%, to $1.77 billion as of September 30, 2023, compared to December 31, 2022, due to continued organic growth[99] Nonperforming Assets (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Nonaccrual loans | $41,243 | $8,039 | | Total nonperforming assets | $51,099 | $17,980 | | Ratio of nonperforming assets to total assets | 2.88% | 1.13% | - The allowance for credit losses as a percentage of total loans increased to 1.48% at September 30, 2023, from 1.16% at December 31, 2022[366] Critical Accounting Policies and Estimates Management identifies the Allowance for Credit Losses, Goodwill and Intangibles, and Income Taxes as critical accounting policies, highlighting the adoption of CECL on January 1, 2023, as a significant change to an expected loss model that requires substantial management judgment regarding future economic conditions - The allowance for credit losses is a critical accounting estimate, with the methodology changing to the Current Expected Credit Loss (CECL) model effective January 1, 2023[145] - Goodwill is tested annually for impairment, or more frequently if indicators are present, and as of September 30, 2023, goodwill was $8.5 million[147][396] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility, which it manages through its Asset/Liability Committee (ALCO) using simulation models, and the analysis shows the company is asset-sensitive, projecting an 11.74% increase in net interest income over a 12-month horizon with a hypothetical +200 basis point parallel rate shock as of September 30, 2023 - The primary component of market risk is interest rate volatility, and the company does not use derivatives, options, or futures contracts to mitigate this risk[149][150] Interest Rate Sensitivity Analysis (Simulated Change over 12-Month Horizon) | Change in Interest Rates (bps) | % Change in Net Interest Income (Sept 30, 2023) | % Change in Fair Value of Equity (Sept 30, 2023) | | :--- | :--- | :--- | | +300 | 15.67% | 19.00% | | +200 | 11.74% | 18.05% | | +100 | 7.76% | 16.99% | | -100 | -1.33% | 14.50% | Controls and Procedures Based on an evaluation conducted by management, including the CEO and CFO, the company's disclosure controls and procedures were deemed effective as of September 30, 2023, with no material changes in internal control over financial reporting during the third quarter - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that disclosure controls and procedures were effective as of September 30, 2023[197] - No changes occurred in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, such controls[198] PART II. OTHER INFORMATION Legal Proceedings The company is involved in routine legal actions incidental to its business, and management believes that the outcome of these proceedings, individually or in aggregate, will not have a material adverse effect on the company's financial statements - Management is of the opinion that no existing legal proceedings would have a material adverse effect on the company's financial statements if determined adversely[162] Risk Factors The report highlights a specific risk concerning the company's concentration in Commercial Real Estate (CRE) lending, noting that as of September 30, 2023, the Regulatory CRE to total Bank capital ratio was 294.00%, which is below the 300% regulatory guidance level that could trigger additional supervisory scrutiny, and this ratio has decreased from 304.72% at year-end 2022 - The company has a concentration in commercial real estate (CRE) lending, which could expose it to additional supervisory analysis from regulators if certain thresholds are exceeded[164] CRE Concentration Ratios | Metric | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Regulatory CRE to Total Bank Capital | 294.00% | 304.72% | | Construction/Land Loans to Total Bank Capital | 74.85% | 101.20% | Unregistered Sales of Equity Securities and Use of Proceeds The company has a stock repurchase plan, approved in October 2021, authorizing the repurchase of up to 750,000 shares of its common stock, but no shares were repurchased under this plan during the nine months ended September 30, 2023 - The Board of Directors approved a repurchase plan for up to 750,000 shares of common stock, and no shares were purchased under this plan during the nine months ended September 30, 2023[139] Defaults Upon Senior Securities, Mine Safety Disclosures, and Other Information For the reporting period, the company reported no defaults upon senior securities, had no mine safety disclosures to make, and provided no other information under Item 5 - The company reported "None" for Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), and Item 5 (Other Information)[140][175] Exhibits This section lists the exhibits filed with the Form 10-Q, which include the CEO and CFO certifications required by the Sarbanes-Oxley Act of 2002, and the XBRL Interactive Data Files - Exhibits filed include certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1) and XBRL data files (Exhibit 101)[189]