BSVN - Bank7: A Really Great Bank To Bank On

2023-10-03 09:41:16 ET

Summary

• Bank7 has performed well despite challenging conditions in the banking sector.
• The company has experienced significant growth in loans, deposits, cash, and securities without taking on any debt.
• Net interest income and profits have increased, and the company is trading at a discount to book value and at a slight premium to tangible book value.

Unfortunately, this is not an easy environment for banks. Earlier this year, we went through a banking crisis. But even outside of that, there are significant challenges, such as rising interest rates and the prospect of weakening consumer sentiment. If things go according to plan as set forth by the Federal Reserve, businesses will also start to see some weakness before too long. So to see a firm like Bank7 ( BSVN ) hold up surprisingly well at this time, particularly when it has a market capitalization of only $213 million, is definitely impressive. Though it's not the most appealing prospect that I have seen, it definitely warrants a solid ‘buy’ rating at this time.

A bank worth banking on

At this time, Bank7 is based out of Oklahoma City. The company operates 12 full service branches, with these branches split between Oklahoma, Texas, and Kansas. Simply put, Bank7 is nothing more than a traditional commercial bank. It accepts deposits, both from commercial enterprises and other parties. It also engages in a wide variety of lending. Examples include lending for commercial real estate, hospitality lending, energy lending, and commercial and industrial lending. Some of its activities also include consumer lending, which can take the form of both secured and unsecured term loans and home improvement loans. The company also engages in loans for residential real estate, mortgage banking, personal lines of credit, and more.

Over the past few years, the management team at Bank7 has done a fantastic job growing the enterprise. As an example, we should first touch on the value of loans on its books. These grew from $836.6 million in 2020 to $1.27 billion in 2022. By the end of the second quarter of this year, loans had grown further to nearly $1.28 billion. Its greatest overall exposure happens to be to the commercial and industrial loan category. $503.7 million, or 39.4%, of the loans on its books fall under this category. A close second would be commercial real estate that does not include construction and development or one to four family real estate properties. Under this category, the company has $487.9 million, accounting for 38.1% of the value of its loan portfolio.

As the company's loan portfolio grew, the value of both securities that it invests in and the cash it has on its books also grew. Back in 2020, the company had $170.3 million in cash and cash equivalents and it had nothing in the way of investment securities. By the end of the second quarter of this year, cash had grown to $207 million, while investment securities had increased to $169.9 million. What's really great is that the company achieved all of this without taking on any debt.

Of course, none of this could be possible without continued growth in deposits. From 2020 through 2022, the value of deposits for the bank expanded from $905.5 million to $1.43 billion. The banking crisis earlier this year did cause massive outflows from some financial institutions. But the good news is that there is no evidence of this occurring when it comes to Bank7. From the end of last year through the first quarter of this year, deposits at the bank managed to climb by $62.3 million up to $1.49 billion. And by the end of the second quarter, they had increased another $16.6 million to $1.51 billion. We don't have any data for the end of the 2022 fiscal year. But we do know that by the end of the first quarter 28.3% of the bank’s deposits were classified as uninsured. This number fell further to 22.2% during the second quarter. As a rule of thumb, I like to see this number at or below 30%. So it meets that target.

The growth in both its deposits and loans, not to mention cash and securities, has made possible continued expansion on its top and bottom lines. In 2020, for instance, the bank generated net interest income of $41.8 million. This expanded to $65 million in 2022. Non-interest income almost doubled from $1.7 million to $2.9 million, while net profits managed to grow from $19.3 million to $29.6 million. Even in the current fiscal year, with all the troubles that are plaguing the banking sector and an all-around challenging environment, financial performance continues to impress.

Net interest income in the first half of the year, for starters, shot up from $29.5 million to $39 million. On top of benefiting from a growing asset base, the company also saw its net interest margin increase from 4.44% to 5.09%. While this may not seem material, I would argue that it is. When applied to the total assets of the bank, the increase in net interest margin alone resolved in net interest income being about $10.6 million more than it otherwise would have been. This, combined with a rise in non-interest income, helped push net profits from $13.2 million last year to $19.4 million this year.

In terms of pricing the company, there are two different methods that I like to take. The first is in relation to book value per share. And that brings me to another great thing about Bank7. As you can see in the chart above, both its book value per share and its tangible book value per share have consistently increased from year to year. That growth has continued into the current fiscal year. The company is trading at about a 19.9% discount to its book value, while trading at only a 6.3% premium to its tangible book value. It is looking like this year will be better than last year. But I would prefer to err on the side of caution when it comes to the valuation of the company from a price to earnings approach. Using, instead, last year's results, the bank is trading at a multiple of 7.2.

Takeaway

When it comes to investing, I am very picky in picking out ‘strong buy’ candidates. To me, institutions that are granted that rating are truly the best in terms of opportunity. While writing this article, I came very close to rating Bank7 a ‘strong buy’ because it checked many of my boxes. Deposits have continued to grow, loan values have grown, it is cheap relative to both earnings and book value, top line and bottom line financial performance also continues to improve, and the company has no debt on its books. The only thing that stopped me from giving it that highest rating was the fact that it is trading at a slight premium to tangible book value. Ideally, I would have wanted it to be a bit cheaper on that front. Don't get me wrong. We are looking at a really great prospect. But for now, I have decided to settle on a very solid ‘buy’ rating at the moment.

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