Senior Vice President and Equity Research Analyst at Keefe, Bruyette & Woods
Wood Lay is a Senior Vice President and Equity Research Analyst at Keefe, Bruyette & Woods, specializing in coverage of small and mid-cap regional banks. He covers companies including John Marshall Bancorp, HomeTrust Bancshares, Luther Burbank, First Financial Northwest, California BanCorp, CrossFirst Bankshares, South Plains Financial, and BancFirst, achieving a 77% success rate and an average return of approximately 6%, with his most profitable call delivering over 80% return. Lay began his career after earning a BA in Economics and History from The University of North Carolina and an MS in Commerce from the University of Virginia, joining KBW in 2017 following earlier experience in financial services analysis. He holds the CFA designation and is a FINRA-registered securities professional.
Wood Lay asked if Southside Bancshares anticipates additional securities restructures to fund future loan growth, especially if strong growth continues.
CEO Lee Gibson stated that while most of the heavy lifting in the AFS portfolio is complete, the company retains flexibility to fund loan growth and may consider further restructurings if market conditions allow, particularly with securities now at gains.
Wood Lay inquired about the strength of the loan pipeline entering the fourth quarter, given the significant loan growth on the last day of Q3, and the typical pull-through rate. He also asked about specific segments showing strength, the competitive pricing environment, and whether additional securities restructures are anticipated to fund future loan growth.
President Keith Donahoe confirmed a strong, rebounding loan pipeline at $1.8 billion, noting a typical 25%-30% pull-through rate, while acknowledging potential year-end payoffs. He described intense competition, disciplined pricing, and spreads for fully funded transactions (around 2% over SOFR) and construction debt ($250-$275 basis points). CEO Lee Gibson stated that most heavy lifting in the AFS portfolio is done, but further restructuring is possible if market conditions allow, leveraging increased balance sheet flexibility.
Wood Lay of KBW followed up on the net interest margin, asking how recent swaps affect the bank's interest rate sensitivity. He also questioned the drivers behind the lower-than-expected expenses and requested details on a restructured CRE credit, including its type and location.
CEO Lee Gibson explained that the bank's rate sensitivity is positioned to be positive whether the Fed holds or cuts rates, with swaps added for protection. Executive Lindsey Bailes clarified that the expense decrease was not from targeted reductions but from lower incentive and share-based compensation costs compared to the prior quarter. Regarding the credit, Mr. Gibson stated it's an Austin, TX property whose negotiated extension required a nonperforming classification, though the borrower remains current on payments and lease-up is progressing.
Wood Lay of Stephens Inc. inquired about the drivers behind the Q4 loan growth, the potential for net interest margin (NIM) expansion in 2025, and the expected trend for deposit betas.
CEO Lee Gibson explained that the strong Q4 loan growth was driven by a combination of client demand and pull-through of full-funding commercial real estate (CRE) opportunities that closed late in the quarter. He anticipates the most significant NIM expansion will occur in the second through fourth quarters of 2025, as positive loan growth impacts are partially offset by hedge rolloffs in Q1. Regarding deposits, Gibson expects that maturing CDs and potential Fed rate cuts will allow the bank to lower overall deposit rates during the year.
Wood Lay inquired about the progress of Southside Bancshares' C&I lending initiative, including the number of new hires. He also asked about deposit pricing trends following the recent Fed rate cut and whether the bank's asset-sensitive positioning remains accurate.
CEO Lee Gibson reported that two C&I lenders were hired during the quarter, with more interviews underway, and that tangible results from the initiative are expected in 2025. He detailed that the bank was able to lower rates on nearly $1 billion in deposits following the Fed's cut. Gibson confirmed the bank remains asset-sensitive in the short term but likely trends toward neutral over a 6-to-9-month period.
Wood Lay asked about the drivers behind the lowered full-year 2025 expense guidance and inquired about the company's M&A strategy in the current uncertain economic environment.
CFO Robert Cafera confirmed the expense guide is linked to the fee income guide, citing macro uncertainty, a slowdown in mortgage activity, and reduced consumer spending on cards. CEO Neal Arnold added that the company remains opportunistic on M&A, feels confident in its capital position, and will focus on acquisitions within its existing footprint.
Wood Lay asked for color on credit downgrades from special mention to substandard, the outlook for the reserve level given the latest Moody's forecast, and quantification of loan production in core segments for Q1 and the outlook for the back half of the year.
CFO Leslie Lunak stated that credit migration was normal with various puts and takes, and the bank's existing qualitative reserves are sufficient to cover any increase from the April Moody's forecast. She also mentioned that Q1 production slightly exceeded budget but declined to provide specific production numbers. COO Thomas Cornish added that CRE portfolio movements are often tied to tenant lease abatements rolling on and off.
Wood Lay inquired about the outlook for Net Interest Income (NII) growth, potential challenges in deposit gathering amid a competitive environment, and expectations for the overall asset base size in the upcoming year.
CFO Leslie Lunak projected mid-to-high single-digit NII growth for the next year. CEO Raj Singh stated that while deposit competition is manageable, the lending side is seeing tighter spreads. Singh also noted that the period of significant wholesale funding paydowns is ending, likely resulting in slight balance sheet growth.
Woody Lay from Keefe, Bruyette & Woods followed up on the noninterest-bearing deposit guidance, asking if it referred to end-of-period or average balances. He also questioned a pickup in CRE past-due loans and the status of criticized office loans that were moved in Q1 due to lease concessions.
EVP & CFO Leslie Lunak clarified that the guidance for flat-to-slightly-down noninterest-bearing deposits applied to both average and end-of-period balances. She explained the past-due CRE loan was an existing non-accrual loan that had just technically become past-due. Ms. Lunak also confirmed the expectation remains that the criticized office loans will be upgraded once their lease concessions expire and rent collection is established.
Wood Lay inquired about the outlook for the core NIM target of 3.35% by year-end, the reasons for the quarterly increase in criticized and classified loans, and whether macroeconomic uncertainty has altered the company's M&A strategy.
Treasurer Michael Young stated the NIM trajectory remains positive but could be impacted by the timing of the Heartland acquisition closing. Chief Credit Officer James Stallings clarified that the rise in criticized loans was due to a few idiosyncratic situations, not a systemic trend, with CEO Charles Shaffer adding that minimal loss is expected. Shaffer also confirmed Seacoast remains open to M&A but will stay disciplined amidst volatility, noting share buybacks could also be an attractive option.
Wood Lay from Keefe, Bruyette & Woods inquired about Seacoast's loan growth outlook for 2025, the yield on new loan production amidst competitive pressures, and potential uses of excess capital, particularly regarding M&A.
CEO Charles Shaffer confirmed the loan growth guidance of low- to mid-single digits early in the year, accelerating to high-single digits by year-end, attributing it to a strong talent pipeline. Treasurer Michael Young noted that new loan add-on rates were slightly above 7% in Q4 and are supported by the current yield curve, despite competition. Regarding capital, Shaffer stated that M&A conversations have accelerated post-election and the bank will be opportunistic.
Woody Lay asked about the motivation for the recent bond portfolio repositioning, the potential for further restructuring, the future trend of accretable yield, and the sustainability of growth in noninterest-bearing deposits.
Michael Young, Treasurer and Director of Investor Relations, clarified the bond repositioning was an opportunistic move based on favorable math and not for liquidity to fund loan growth. CFO Tracey Dexter and CEO Charles Shaffer indicated that accretable yield would likely continue its recent tapering trend. Shaffer also expressed confidence that the strong growth in noninterest-bearing deposits, driven by new client onboarding in the C&I space, is sustainable.
Wood Lay inquired about the primary drivers of USCB's significant deposit growth, its potential seasonality, and the future trajectory for the Net Interest Margin (NIM) given late-quarter loan production and excess liquidity. He also sought to reconcile the asset-sensitive ALCO model with management's commentary suggesting NIM could expand in a lower-rate environment.
Executive Luis de la Aguilera attributed the balanced deposit growth to strength in correspondent banking, HOA, and business banking verticals. CFO Robert Anderson guided for a "flat to slightly up" NIM, explaining that potential Fed rate cuts would benefit deposit costs. Anderson clarified that the bank historically outperforms its conservative ALCO models, particularly on deposit betas, which supports their optimistic outlook for margin performance in a down-rate scenario despite the model's asset-sensitive indication.
Wood Lay asked about the drivers behind the lower loan production yields in Q4, questioning if it was due to market rates or increased competition. He also inquired about the outlook for deposit growth in a competitive market and its potential impact on deposit costs, and requested details on the maturity schedule for the time deposit portfolio.
Executive Luis de la Aguilera attributed the yield compression to both lower market rates and 'sporty' competition in Miami-Dade, stressing the bank's focus on full-service relationships. CFO Robert Anderson added that a significant portion of Q4 production was in lower-yield correspondent banking lines. Regarding deposits, Anderson acknowledged funding is a challenge but expects deposit growth to align with loan growth. He noted that approximately $180 million in time deposits will mature in the next year, presenting an opportunity to lower costs.
Wood Lay of Keefe, Bruyette & Woods inquired about the stability of the strong noninterest-bearing deposit growth, the specific verticals driving overall deposit increases, and the sustainability of double-digit loan growth heading into the fourth quarter.
CFO Robert Anderson confirmed that while there was a point-in-time increase in noninterest-bearing deposits, the bank's focus on operating accounts should support continued growth. CEO Luis de la Aguilera added that deposit growth was broad-based but highlighted significant contributions from the Jurist Advantage (attorney clients), HOA, and association banking verticals, which now constitute 31% of total deposits. De la Aguilera also affirmed that the Q4 loan pipeline is robust and in line with budget, supporting the expectation of continued momentum.
Wood Lay from Stephens Inc. inquired about credit quality, specifically the size of a downgraded office credit and drivers of improvement in classified loans. He also asked about the potential for further reductions in deposit costs and a corresponding improvement in Net Interest Margin (NIM), including the deposit beta assumption used in the Net Interest Income (NII) guidance.
William Furr (executive) stated the downgraded office credit was an $18 million loan and that positive migration in classifieds came from a series of smaller credits. On deposit costs, Furr noted that while the team has done well, the largest portion of the benefit from the Fed's rate cuts has been realized, with only modest further declines expected. He expressed comfort that NII has stabilized due to the upward-sloping yield curve and confirmed the deposit beta assumption for the NII guide was 5%.
Wood Lay followed up on asset sensitivity, asking for expected cash flows from the securities portfolio in 2025 and the potential yield pickup. He also inquired about the drivers of the strong Q4 deposit growth and sought details on the credit upgrades that reduced criticized loans.
Executive William Furr estimated securities portfolio cash flows between $250-$300 million for 2025, with a potential reinvestment yield pickup of about 150 basis points. He attributed the strong deposit growth to both normal customer activity and some larger, episodic events like clients selling businesses, noting balances may normalize in Q1. Furr specified that the reduction in criticized loans was driven by a few specific upgrades, including one in the commercial real estate space where a customer injected additional capital, improving property cash flows.
Wood Lay of Keefe, Bruyette & Woods inquired about the sustainability of strong performance in the structured finance business, the potential for continued growth in fixed income fees, and whether fixed mortgage expenses have reached their lowest point.
EVP and CFO William Furr explained that the success in structured finance is tied to state-specific down payment assistance programs, which are episodic and not within Hilltop's control. He noted that while lower rates and a steeper yield curve generally benefit the fixed income business, results can be volatile. Regarding mortgage expenses, Mr. Furr anticipates they will remain relatively stable, with potential for a slow increase as the company hires more loan originators, while maintaining a focus on back-office efficiency.
Wood Lay of Keefe, Bruyette & Woods inquired about South Plains Financial's ability to further reduce deposit costs, the potential for net interest margin (NIM) expansion given sticky loan yields, and the scale of recent loan payoffs.
Executive Steven Crockett stated that while the bulk of deposit cost reductions are complete, there is still room to lower rates on some exception-priced accounts, aided by strong liquidity. President Cory Newsom and CEO Curtis Griffith affirmed the potential for modest NIM expansion, driven by loan repricing, strong liquidity allowing for selectivity, and stable loan pricing. Regarding payoffs, Chief Credit Officer Brent Bates noted they were about $10 million higher in Q1 but are manageable, with a healthy production pipeline expected to offset them.
Wood Lay inquired about the factors that allowed the loan yield to remain stable in Q4 despite rate cuts, the near-term outlook for the Net Interest Margin (NIM), and the drivers behind the strong loan pipeline.
Executive Steven Crockett explained the stable loan yield was due to the mix of loan payoffs and new loan bookings at higher rates, not a single large non-recurring item. Crockett, along with President Cory Newsom and CEO Curtis Griffith, expressed conservative optimism for a stable to incrementally improving NIM, supported by their strong liquidity position and potential benefits from future Fed rate cuts. Chief Credit Officer Brent Bates attributed the robust loan pipeline to both new hire production and growing optimism and planned capital outlays from clients.
Woody Lay from KBW asked for details on deposit pricing trends before and after the recent 50 basis point Fed rate cut and whether deposit betas were in line with expectations. He also questioned if the large loan payoffs in the quarter generated significant prepayment fees that boosted NII and inquired about the outlook for the mortgage business after adjusting for MSR volatility.
Executive Steven Crockett confirmed that deposit pricing trends post-cut are in line with expectations. CEO Curtis Griffith added that competitive pressure on CD rates has softened. Regarding loan payoffs, Chief Credit Officer Brent Bates stated there were no large prepayment fees recognized. On the mortgage front, President Cory Newsom explained that while the business is entering a seasonally slower period, it is performing as budgeted, with disciplined expense management positioning it well for an eventual recovery in volumes.
Wood Lay of Keefe, Bruyette & Woods inquired about the financial impact of the recent loan securitization, the potential for future securitizations, and the drivers behind the strong loan growth observed in April.
Executive John McWhorter clarified that the securitization's financial benefit, an origination fee, will boost the net interest margin by approximately 5 basis points in Q2, with all impacts flowing through the margin. He stated that future securitizations are contingent on loan demand and concentration ratios. McWhorter and CEO Bart Caraway explained that the April loan growth was primarily from fundings on existing commercial revolving lines rather than new deals, and despite high paydowns, the pipeline remains strong due to a cautiously optimistic Texas economy.
Wood Lay inquired about the drivers behind the strong Q4 loan yield beta, the pricing spreads on new loan production amidst rising competition, and the near-term outlook for the net interest margin (NIM).
Executive John McWhorter attributed the outperformance in loan yields and cost of funds to better spreads on new loans. Executive Bart Caraway added that disciplined pricing discussions for full-wallet relationships were also a key factor. Management maintains a pricing floor of SOFR plus 300 basis points for most new loans, turning away deals that don't meet this target. Regarding the NIM, McWhorter noted it was suppressed by 5-7 basis points due to excess cash in Q4 and is expected to rise as the bank targets a 95-96% loan-to-deposit ratio.
Wood Lay of Keefe, Bruyette & Woods inquired if the expense savings from the mortgage business restructuring would be reinvested or contribute to the bottom line. He also asked if persistent macroeconomic uncertainty could affect the timeline for strategic initiatives and requested more color on the five commercial loans that were downgraded to special mention status.
Chairman and CEO Gerald Plush confirmed that the expense savings from the mortgage business are expected to drop to the bottom line. He also stated that key strategic initiatives, such as new branch openings, are too far along to be delayed and are seen as significant contributors to deposit growth. Regarding the special mention loans, Plush and CFO Sharymar Yepez explained the downgrades were driven by updated 2024 year-end financials and missed milestones, not a systemic issue in a single industry, characterizing the action as proactive risk management.
Wood Lay of Keefe, Bruyette & Woods inquired about the core expense growth rate into 2025, considering ongoing talent acquisition and new office openings. He also asked for the outlook on a more normalized charge-off rate for 2025 and beyond, given the improving credit trends but remaining runoff in the consumer portfolio.
CEO Jerry Plush and CFO Sharymar Calderon clarified that the expense run rate from the sold Houston franchise is being reallocated to fund growth initiatives and personnel in Florida, making the guided $68.5 million a good go-forward run rate. Ms. Calderon projected a normalized charge-off level of 30-40 basis points for 2025, after an elevated Q4 2024 rate of around 70 basis points due to the runoff of the indirect consumer loan portfolio.
Wood Lay of Keefe, Bruyette & Woods inquired about the composition of the strong loan pipeline, the timing for loan execution based on client sentiment, and the outlook for the loan loss reserve given the current economic uncertainty.
Executive Tyson Abston explained that the loan pipeline is at a multiyear high, with a composition similar to the existing granular portfolio and spread across all regions. He noted that clients are waiting for national economic uncertainties, particularly around tariffs, to resolve before acting, despite the strong Texas economy. Regarding the reserve, Abston stated they do not expect to build it further as they are still carrying elevated qualitative factors from prior events and would only release them once certainty improves. Executive Shalene Jacobson added that these conservative factors have been maintained through various recent events.
Wood Lay from Keefe, Bruyette & Woods inquired about the composition of the loan pipeline, client sentiment amid national economic uncertainty, and the outlook for the allowance for credit losses.
Executive Tyson Abston explained that the loan pipeline is strong and granular, similar in composition to the existing portfolio. He noted that while the Texas economy is robust, clients are cautious due to national issues like tariffs. Regarding reserves, both Tyson Abston and Executive Shalene Jacobson stated they do not anticipate building reserves further, as they have maintained elevated qualitative factors since the pandemic. A reserve release is possible once economic uncertainty subsides.
Wood Lay from Keefe, Bruyette & Woods asked about the drivers of the Q4 net interest margin (NIM) expansion, the outlook for loan growth in 2025, and the bank's strategy for deposit growth given its low loan-to-deposit ratio.
Executive Shalene Jacobson confirmed a minor, non-meaningful nonaccrual interest recovery and highlighted that $450 million in variable-rate loans are set to reprice in 2025, which should support yields. Executive Tyson Abston added that the bank models continued NIM expansion throughout 2025 in various rate scenarios. Abston also expressed increased optimism for quality loan growth but did not provide specific targets, noting the bank has ample capacity. He clarified that aggressive deposit gathering is not a primary focus for 2025, as the bank will continue its strategy of building core granular deposit relationships.
Woody Lay of KBW followed up on the loan shrinkage observed in the third quarter, asking to quantify the portion related to non-relationship runoff. He also questioned if the company would continue purchasing bonds if loan growth remains slow and requested more specific details on the volume of CDs repricing in the next quarter.
Executive Tyson Abston explained that the loan runoff was primarily from non-core relationships or projects the bank was not comfortable funding further, but did not provide a specific quantification. He affirmed that the company would continue to systematically add to its bond portfolio if loan growth lags. Executive Shalene Jacobson specified that approximately $254 million in CDs, with a current weighted average rate of 4.77%, are set to reprice in Q4 to rates between 3.55% and 4.2%.
Wood Lay of Keefe, Bruyette & Woods inquired about the primary drivers for the upgraded revenue guidance, the health of the loan growth pipeline for the second quarter, and the company's approach to share buybacks given the current stock valuation.
CFO Matt Scurlock confirmed the revenue guidance increase is driven by stronger Net Interest Income (NII), as key performance indicators like deposit betas and loan growth have met or exceeded expectations. He noted that while the C&I loan pipeline remains strong, there are some risks from potential CRE payoffs. Regarding capital, Scurlock stated the firm maintains its disciplined buyback approach but sees the current stock price as attractive and has increased capital flexibility from implementing enhanced credit structures for mortgage finance clients.
Wood Lay asked about TCBI's loan growth strategy, particularly regarding the recent healthcare portfolio acquisition, and inquired about the key drivers behind the record investment banking income in the quarter.
President and CEO Rob Holmes clarified the portfolio acquisition was a strategic onboarding of bankers and their client relationships, not a simple loan purchase for growth. He stated that loan growth will naturally follow from significant client acquisition. Holmes also attributed the record investment banking revenue to broad-based success in syndications, capital markets, and sales & trading, creating repeatable income. CFO Matt Scurlock added that capital deployment remains dynamic and guided for a modest pullback in investment banking fees in Q4 as pipelines rebuild.
Wood Lay inquired about the specific collateral underlying the fast-food franchise loan, the performance of the broader hospitality portfolio, and the methodology for the Allowance for Credit Losses (ACL), including scenario weighting and the impact of updated economic forecasts.
President Jay Brogdon detailed that the fast-food loan is collateralized by the real estate and equipment, with personal recourse to the principal, though guarantor reliance is now viewed cautiously. He emphasized the St. Louis hotel issue is isolated to the downtown area and not indicative of the wider, healthy hospitality portfolio. Brogdon and CFO Daniel Hobbs explained that while economic baseline scenarios are worsening, SFNC is already reserved at the high end of its model's range, providing a buffer against future forecast deterioration.
Wood Lay inquired about the key assumptions behind the Net Interest Income (NII) guidance, the factors influencing the high and low ends of the range, the rationale for below-normal loan growth guidance, and the bank's priorities for deploying excess capital in 2025.
President Jay Brogdon and CFO Daniel Hobbs explained the NII guide is based on January 13 forwards, with an earlier rate cut pushing results to the high end of the range. They noted that muted loan growth reflects a disciplined focus on 'soundness, profitability, and growth,' in that order. For capital deployment, Mr. Brogdon prioritized organic growth initiatives and potential balance sheet restructures, followed by the dividend and then share buybacks.
Wood Lay of Keefe, Bruyette & Woods asked about the strategy behind the opportunistic bond sale, including its sizing. He also inquired about deposit pricing trends before and after the recent rate cut and the repricing outlook for CDs maturing in Q4.
President Jay Brogdon described the bond sale as a patient, opportunistic move based on favorable market rates, not a major overhaul, balancing earnings and capital. CFO Daniel Hobbs noted that deposit costs had already peaked and were trending down before the rate cut, which accelerated the decline. Hobbs added that maturing CDs are repricing at favorable rates (around 3.97%) and are expected to remain short-duration.
Wood Lay of Keefe, Bruyette & Woods inquired about HomeStreet's Net Interest Margin (NIM) trajectory, the breakeven level needed to achieve profitability in the first half of the year, and whether additional strategic actions were planned.
CFO John Michel explained that while there is no specific NIM target, the recent loan sale and debt retirement will have an immediate positive impact on earnings. CEO Mark K. Mason confirmed that profitability in the first half of the year is achievable without further interest rate cuts. Mason added that the current strategy focuses on accelerating profitability by proactively working with commercial real estate borrowers on loan repricing.
Wood Lay of Keefe, Bruyette & Woods asked about the expected timing for clarity on the merger's next steps or the execution of the standalone 'Plan B'. He also sought commentary on deposit pricing trends following recent rate cuts, the outlook for net interest margin in Q4, and whether the company plans to backfill recently vacated positions.
Executive Mark K. Mason stated that the timeline depends on evaluating alternative regulatory structures or negotiating an early termination of the merger agreement, which matures in mid-January. Mason noted that competitors have also lowered deposit rates and that HomeStreet may seek to migrate CD customers to money market accounts. CFO John Michel added that falling rates most immediately benefit their wholesale funding costs. Mason confirmed they do not plan to backfill employee positions, as headcount is being aligned with business unit activity.
Wood Lay asked if the Q4 loan yield included any one-time interest recognition from a nonaccrual loan paydown. He also requested color on the yield differential between loans that paid off versus new production. Finally, he inquired about the status of a large construction project that moved to special mention loans.
CFO Dave Bonaccorso confirmed there was some catch-up interest recognized. He specified that for commercial and construction loans, payoffs had a yield of 5.81% while new originations came on at 6.23%, a 42 basis point improvement. Regarding the special mention loan, former CFO Tani Girton stated the property has not yet been listed for sale but discussions are ongoing, and the borrower has the ability to remargin if needed. CEO Tim Myers added that the bank does not have significant concerns about this particular credit.
Wood Lay asked if potential hiring from team lift-outs in 2025 is included in expense guidance, sought a reminder on the accounting changes from increasing ownership in Argent Financial, and requested an update on the anticipated Durbin amendment impact.
Chairman, President and CEO, Drake Mills, stated that significant hiring opportunities are not baked into the expense guidance but that the bank is prepared to act on culturally aligned C&I teams. CFO Wally Wallace explained that crossing 20% ownership in Argent would trigger the equity method of accounting, helping to partially offset the Durbin impact, which is estimated at $5.5 to $6 million pretax annually starting in Q3 2026. President and CEO of Origin Bank, Lance Hall, suggested the Argent share purchase would likely be a Q2 event.
Wood Lay from Keefe, Bruyette & Woods asked about the drivers behind the loan shrinkage in Q4, particularly in the energy and hospitality segments, and inquired about the loan growth outlook for 2025. He also questioned if loan demand was improving and sought commentary on the sustainability of the Net Interest Margin (NIM) following its strong performance, especially if more rate cuts occur.
Jason Estes (Executive) attributed the Q4 loan shrinkage to unscheduled principal payoffs from clients selling assets, a trend expected to continue into Q1. He anticipates a return to growth for the full year 2025, supported by improved deal flow, but stressed a disciplined pricing strategy. Regarding the NIM, Estes acknowledged future compression is likely but expects it to stay within historical norms. Kelly Harris (Executive) clarified that Q4 NIM was boosted by one-time nonaccrual interest payments and the current real-time NIM is around 4.50%. Thomas Travis (Executive) added that he expects any future NIM fluctuations to be narrow and contained.
Wood Lay from Keefe, Bruyette & Woods inquired about Bank7's loan growth pipeline for the fourth quarter, the impact of recent interest rate cuts on client activity, and the bank's strategy regarding deposit betas and future rate adjustments.
Executive Jason Estes projected that Q4 loan growth would moderate, aligning with the full-year moderate-to-high single-digit target, noting continued selectivity in hospitality and energy. Executive Thomas Travis added that client activity remains steady due to regional economic strength and a historically normal interest rate environment. Regarding deposits, Travis explained that the lockstep movement of deposit and loan betas reflects disciplined balance sheet management. He and Executive Kelly Harris confirmed they are prepared for up to 100 basis points in rate cuts without significant issue, remaining confident in maintaining their historical Net Interest Margin (NIM) range.
Wood Lay asked about the drivers of Bank7's Q1 loan growth, particularly in the hospitality sector, and the outlook given macroeconomic uncertainty. He also inquired about recent trends in the hospitality portfolio and the company's strategy regarding share buybacks amid market volatility.
Executive Jason Estes noted that strong C&I bookings contributed to loan growth alongside hospitality, and that deal flow remained strong entering Q2. Executive Thomas Travis added that hospitality growth is within the bank's internal limits and long-term norms. Regarding hospitality trends, Travis stated that while Q1 is seasonally slow, feedback from large operators indicates business is steady. On share buybacks, Travis explained that with record capital and high ROE, there is no pressure to repurchase shares. He emphasized a cautious stance, preferring to preserve capital in the uncertain economic environment but retaining the flexibility to act if the share price declines significantly.
Wood Lay inquired about the drivers of the strong noninterest-bearing deposit growth and its sustainability. He also asked about the future of the bank's loan purchase strategy, the outlook for the loan pipeline, and the potential impact of recent rate cuts on the net interest margin (NIM).
Executive James Beckwith explained that while one large, long-term relationship contributed significantly to noninterest-bearing deposit growth, the remainder was granular. He anticipates continued, though perhaps less pronounced, growth in Q4. Beckwith clarified that the loan purchase strategy with Bankers Health Group (BHG) is capped at $300 million, a level the bank has nearly reached. He projected mid-single-digit loan growth for Q4, supported by a solid pipeline. Regarding the NIM, he noted that the wholesale deposits funding the purchased loans have short, 3-month repricing intervals, which should lower funding costs and benefit the margin in Q1 and Q2 2025. CFO Heather Luck provided the specific BHG loan balance of $274 million as of September 30.
Wood Lay sought confirmation that the strong DDA growth was broad-based and asked for details on how deposit costs and rate betas performed following the recent Fed rate cut.
CEO Scott Wylie confirmed the DDA growth was driven by broad-based client activity rather than a few large accounts. He and CFO David Weber addressed deposit costs, highlighting that the spot net interest margin at quarter-end improved to 2.40%. David Weber specified that the bank achieved an 85% downward beta on its money market accounts following the rate cut, without experiencing any significant deposit outflows.
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