Bank7 - Q2 2024

Transcript

Operator (participant)

Good day, and welcome to the Bank7 Corp. second quarter earnings call. Before we get started, I'd like to highlight the legal information and disclaimer on page 26 of the investor presentation. For those who do not have access to the presentation, management is going to discuss certain topics that contain forward-looking information, which is based on management's beliefs as well as assumptions made by management and information currently available to management. Although management believes that the expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks, uncertainties, and assumptions, including, among other things, the direct and indirect effect of economic conditions on interest rates, credit quality, loan demand, liquidity, and monetary and supervisory policies of banking regulators.

Should one or more of these risks materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected. Also, please note that this conference call contains references to non-GAAP financial measures. You can find reconciliations of these non-GAAP financial measures to GAAP financial measures in an 8-K that was filed this morning by the company. Representing the company on today's call, we have Brad Haines, Chairman, Tom Travis, President and CEO, J.T. Phillips, Chief Operating Officer, Jason Estes, Chief Credit Officer, and Kelly Harris, Chief Financial Officer. With that, I'll turn the call over to Tom Travis. Please go ahead.

Tom Travis (President and CEO)

Thank you, and welcome to everyone on the call. We're delighted with our results. They were strong, record profits, and we achieved those. We always thank our team members. We don't take them for granted. It's an outstanding group, and we're just very grateful to be part of this team. It's just a wonderful group of professional people that take pride in producing these results. As you can see, we continue to reap the rewards of a well-matched balance sheet, and we again posted a strong NIM, which drove us to those earnings, record earnings. Those earnings were achieved in spite of a relatively flat loan book, and that was because we experienced some large loan paydowns towards the end of the quarter, and a few of our anticipated new loan fundings were pushed to July.

Earnings were also strong due to our cost discipline and our low efficiency ratio. That's one of the hallmarks of who we are. As far as liquidity goes, our cash position continues to be historically higher than industry averages. In addition to that, our public funds segment is small, and made up of the towns and counties and school districts within our community. So we like our core funding. We also continue to have a large amount of availability on our lines. We view those as a backstop facility. We don't use those lines, but they're certainly available sources of funding. Then the drop in deposits compared to last quarter was principally related to one very large deposit we've been carrying of approximately $80 million.

At certain points, it was up as much as $100 million, and it related to a bankruptcy court deposit that was finally disbursed per the bankruptcy court. So that's really the story on the drop in the deposits, and it never really was part of our core funding. It was a good funding source, though, because there was no interest paid on it for several months. So all in all, the liquidity is really strong and good. And then as far as asset quality, you know, I constantly shout out to Jason Estes and his team that they do an exceptional job in that area, and our overall credit quality is very, very strong, and it's always a big strength of our company.

You will note we had a small net charge-off, and that was the tail-end remnants of the large credit that we worked through last year and early this year. We had not charged it down completely at the end of last year because we weren't sure, but we were cautious. We thought there might be a little bit more to charge off, but instead of taking that charge off last year, we had a $2 million specific reserve related to the credit. Again, we were not sure, and as we worked through the resolution of that credit, it became obvious that that reserve was gonna be needed, so we went ahead and just took that.

And then I think pivoting to the CRE loan vertical, it seems to get a lot of play these days, and we've provided enhanced disclosures in our deck. I'll just say that we are absolutely unconcerned with any aspect of our CRE portfolio. It's very strong, and we just, we just aren't concerned about it. With regard to our capital levels, clearly, they, they grow rapidly because of the earnings. We benefit from those strong earnings, and we also keep a relatively low dividend payout ratio. I think it's almost half of what the peer group pays out. So when you look at rapid and a high earner with a lower dividend payout, it really rapidly rebuilds that capital. So we had a strong quarter.

We're very pleased at our returns and what we provide to the shareholders, and we're excited about the future. You know, navigating forward is something that, you know, we're mindful of every day, and we know that we stick to our fundamentals, and we're gonna be fine. As optimistic as we are, we are mindful of the large deficits that our national leaders are running. It's disgraceful and reckless to run any enterprise that way. Regardless, we're cautiously optimistic. We're really comforted by our long-term history, but also the fact that we have economic geographic advantages compared to other parts of the country.

And I just can't stress enough that the news seems to emanate, you know, from the Northeast and some from the West Coast, and it's just a completely different ballgame when you're operating in the environment that we're in down here. And so that's what makes us cautiously optimistic as we move forward in spite of all those other factors. So with all that being said, we're standing by for any questions anyone has. Thank you.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily for the first question. Our first question today comes from Woody Lay with KBW. Please go ahead.

Woody Lay (VP)

Hey, good morning, guys.

Tom Travis (President and CEO)

Good morning.

Woody Lay (VP)

So the core NIM, if you exclude the loan fees, came a little bit better than what I was expecting. I know that $100 million of non-interest-bearing deposits came out midway through the quarter, but what do you think is a good run rate for that core NIM of the back half of the year?

Kelly Harris (CFO)

Hi, Woody. This is Kelly. That's correct. We're forecasting... I'll just give you real time. June NIM was down to 4.58%, and I think if you look at the potential loan fundings in Q3, we're forecasting anywhere between 4.60% and 4.65% from a core NIM perspective.

Tom Travis (President and CEO)

Yeah, and I would add to that, Woody, that, you know, a lot of that's gonna depend on, you know, the actual timing of the loan growth. And, you know, if we have to go and secure funding for that, it could be a little more costly. And so, Kelly is absolutely technically correct. It's kind of tough to believe that we could maintain it at that same exact level, but we're very comfortable that we're gonna continue to operate within those ranges. And even if it were to bleed down based on timing, I don't expect it would be a meaningful reduction.

Woody Lay (VP)

Got it. And then maybe turning to the loan growth, you know, I know on a quarter-to-quarter basis, it can be a little lumpy sometimes. You mentioned some fundings being pushed out. Is that sort of a reflection of, you know, customers waiting on potential rate cuts? Is it other factors? And a follow-up question. It sounds like, you know, the growth next quarter could be strong.

Jason Estes (Chief Credit Officer)

Yeah, I think it's a combination of a lot of factors, Woody, and this is Jason. We, you know, we continue to see customers sell businesses, take advantage of maybe equity raises, and so that led to some increased payoffs during the quarter that Tom referred to in his comments. So, you know, when you have those lumpy pay downs, even though our new fundings in the quarter, they were what I would describe as pretty average, with June being particularly stronger. We think we'll grow again in the third quarter, but if you go back, you know, I would say 18 months, we've kind of been signaling that, hey, listen, you know, high single-digit loan growth is kind of what we expect. And again, I feel really good about that for the full year.

And so as you mentioned, you know, going quarter to quarter, you can see some blips, spikes, peaks, valleys, whatever you want to call them. But just if you look over the course of the year, I feel really good about that high single digit. But, you know, the other side of that, and we've talked about this previously as well, you really have to remember, we're so focused on maintaining profit margins, we do sacrifice growth for that. And I think this quarter is a really, really good example of that. And, you know, we like that. Some investors may not, but that's how we're going to continue to operate, and we just think it's the right thing to do.

Woody Lay (VP)

Yep, that makes sense. And then lastly, capital's, you know, grown really nicely over the past couple quarters. Just how do you think about deploying some of that excess capital in the current environment? I'm assuming the preference would be through M&A.

Tom Travis (President and CEO)

Clearly, that's correct. And we're very aware of the fact that, you know, we've had quite a few discussions over the last year, especially with potential targets, and I think the industry refers to some of the banks as zombie banks, but there's a large number of banks that would like to do something, but their hands are tied, and they're wanting to wait until they can unwind some AOCI. And so we're mindful of that. And if you believe that we're on the precipice of, you know, some rate reductions, then I think you could see opportunities that arise in the near future. And so we're not in any hurry....

I would say this, too, that, you know, we hear folks talk to us from time to time about share repurchase, and, you know, we hear those things. But let's remember, one of the great strengths of Bank7 is this: when you're making, call it 20%-22% return on average tangible common equity, there really shouldn't be a hyper focus on share repurchases, because if we can produce really high returns, far better than most any other bank, and do it safely, we're not as driven to worry about running out and making share repurchases to, you know, to support or for whatever reason, the share price.

And so I think it's a combination of providing great returns, reduces a sense of urgency, and at the same time, against the backdrop of knowing that there are people out there that are going to want to sell when the AOCI unwinds. And that's, that's our view. And clearly, I think, yeah, I would say that we certainly don't predict, and we're not saying that we're going to do something at the end of the year or first quarter. But if we're sitting here in nine months and, and it doesn't look like there's any opportunities, then I think at some point, it would be prudent to revisit that, that concept. But for now, we're, we're steady as she goes.

Woody Lay (VP)

Got it. Thanks for taking my question.

Tom Travis (President and CEO)

Mm-hmm.

Operator (participant)

Our next question will come from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race (Senior Research Analyst)

Yeah. Hi, guys. Good morning. Thanks for taking the question.

Tom Travis (President and CEO)

Good morning.

Nathan Race (Senior Research Analyst)

Was wondering if you could just update us in terms of where you guys stand on the oil and gas assets that you acquired late last year, in terms of specifically how we should think about the fee income and expenses associated with those assets going forward?

Tom Travis (President and CEO)

You know, Kelly, I think, has the exact numbers, Nate, but, just from a high level, you know, what we described back in December was, you know, when we booked those assets, it was a little over $16.5 million. And we said at the time that just harvesting the monthly cash flows off that business, we would recover between 55% and 60% of that outlay, or I think that we would be down to 55% or something as far as remaining. And so, Kelly, why don't you follow up on that?

But I'll just say, from a high level, we're not only on path, we're actually doing a little bit better, and so we view it as a, we're halfway through the year, and so the $16 million asset is really more of a, you know, $10 million asset. And compared to the size of our company, it's not that significant. But Kelly can give you the specifics.

Kelly Harris (CFO)

Yeah, Nate, this is Kelly. So if you look at Q2, I mean, total non-interest income was $3.165 million. Of that, $2.4 million related to the oil and gas. And so we had core fee of $735,000, which is a little bit higher than what we anticipated, of that normalized $650,000 dollar run rate. But I think on a go-forward, I mean, you could potentially use $2 million for the oil and gas from a fee perspective, and then still keep that core fee number at $650,000. And on the expense side, non-interest expenses for the quarter were $9.142 million, and of that, $8.042 million related to oil and gas. Or I'm sorry, $1.1 million related to oil and gas.

And so you had core expenses of $8 million, which is a little bit below what we had given guidance on, $8.3 million. We still think that $8.3 million is a good guide from a core expense perspective for Q3, and potentially using $1 million in expenses additional for the oil and gas.

Tom Travis (President and CEO)

But Kelly, if you just... I'm not being critical, that was a lot of numbers. If you just focus on the revenue and the expenses, what's the net on the oil and gas for the quarter? Net.

Kelly Harris (CFO)

Yes. The net for Q2 was $1 million.

Tom Travis (President and CEO)

Right.

Kelly Harris (CFO)

For Q3-

Tom Travis (President and CEO)

And so... Go ahead.

Kelly Harris (CFO)

Yeah, for Q3, I mean, it could be $800,000 after tax.

Tom Travis (President and CEO)

Right.

Kelly Harris (CFO)

$715,000.

Tom Travis (President and CEO)

Right.

Kelly Harris (CFO)

And that's going to continue to go down. It's going to continue to go down from there, Nate.

Nathan Race (Senior Research Analyst)

Right. And to your point, Tom, it's a relatively small piece, but just, is there any interest in- or is there any interest, so to speak, in, you know, other people acquiring these assets? Or is the plan just to retain these assets on balance sheet, for the duration as well?

Tom Travis (President and CEO)

You know, we had that discussion recently because we actually are... the properties we re-engineer to make sure our values are correct, and the current engineering indicates that the wells are performing even better, and therefore, the values are higher. So, what we talked about was a high-class problem, Nate.

Meaning, do we sell it and, you know, maybe sell it and take some small gain, or do we just keep harvesting the cash flow because we're doing so well? And so it's possible that we could, we could sell it, but we don't feel any sense of urgency to do it.

Nathan Race (Senior Research Analyst)

Got it. Very helpful. And then just maybe staying on credit and switching to the hospitality book. Curious what you guys are seeing just in terms of NOI levels across your client base. Obviously, it seems like a lot of those loans are tied to floating rates. So just curious, you know, how a lot of those clients are dealing with the higher cost of debt these days?

Jason Estes (Chief Credit Officer)

Yeah. So remember, just as a reminder, everybody, the hospitality activity in our portfolio is largely concentrated in Texas and specifically the Dallas-Fort Worth metro. Business as usual there, for first quarter, NOIs were up slightly from last year. We really don't have the second quarter data yet. But based on performance and conversations with borrowers, I expect second quarter to probably be all-time high NOIs. So business as usual in the Texas hospitality industry.

Nathan Race (Senior Research Analyst)

Mm-hmm. And Jason, you know, as you guys provide for some growth returning going forward in terms of loans, do you guys kinda expect the reserve to kinda remain where it is coming out of the second quarter? Or how do you guys kinda think about the relative reserve level in the back half of the year?

Jason Estes (Chief Credit Officer)

Yeah, there may be a small provision to keep up if the growth, you know, kinda comes in on the top line of, or top end of what we think could happen. You know, we may have to put a little bit more to it. But, yeah, I think that percentage is pretty good, something in that one to five, you know, our historical range.

Tom Travis (President and CEO)

Well, I also would add to that, you know, the rapid growth in equity, it's really comforting, and so, we feel like because of the increase in equity so quickly, that it's not as critical for us to worry about immediately adding to the reserves. And, you know, when you look at the portfolio, and you look at the CECL methodology, and, you know, how we look, we just can't find a lot of stress right now. And so, I guess what I'm trying to say is that we've got flexibility relative to the capital building up very quickly, and we really feel like we're in a good spot.

Nathan Race (Senior Research Analyst)

Okay, great. And then just one last one for me, perhaps for Kelly on the NIM going forward. You know, obviously, you guys are asset sensitive, so just curious, you know, how we should think about the margin impact from each 25 pip cut.

Kelly Harris (CFO)

Yeah, Nate, and I think I would highlight to our historical NIM, and you can even look. We threw another, another spot in there on our spread overlay with the loan yields and the cost of funds with the 5 and 10-year Treasury. And I think, you know, we just feel comfortable operating in our normal historical range, irrespective of rate hikes and rate cuts. You know, Tom mentioned we may have, we may have to pick up some higher cost of funds to fund some of this loan growth, and so a lot of that compression would be related to that and not necessarily the rate cut per se.

Tom Travis (President and CEO)

But with that said, Nate, we have the same. We're not worried at all, and Kelly's comments are so accurate. But with that said, we had an ALCO meeting yesterday morning, and we assigned ourselves a project which won't take us more than a couple of days, and we're gonna go do some testing on the balance sheet to say, okay, what happens? And we'll be able to tell exactly. We think it's going to be pretty neutral because if you look at, I don't know the numbers off the top of my head, it's in the deck, but we have so many that are daily floaters on the loan side, and then we've got some deposits that won't reprice, you know, the non-interest bearing.

So we're gonna run some scenarios and just really precisely test and see what happens on 25, what happens on 50, and what happens on 75. But we're very confident. But we'll know the answer to that exactly, and I would be really surprised if our core NIM ever got below the, you know, the long-term average.

Nathan Race (Senior Research Analyst)

Yeah, just to clarify, it seems like that long-term average is about 4.5%. Is that kinda what you guys are referencing?

Tom Travis (President and CEO)

You know, I don't even wanna give a number, but I was thinking it was more like 4.3% or 3.5%, but I think we're almost splitting hairs here, you know?

Nathan Race (Senior Research Analyst)

Sure, sure. Got it. Okay. I appreciate all the color. Thanks, guys.

Operator (participant)

And again, if you would like to ask a question, please press star then one. Our next question is gonna come from Jordan Ghent with Stephens. Please go ahead.

Jordan Ghent (Equity Research Associate)

Hey, good morning. My question is just on the charge-offs. I know you mentioned that it was for the quarters, the remnants of the larger charge-offs historically, but kind of going forward, were you guys expecting to see charge-off levels? Are they kind of normalize, or do you expect them to be a little bit lower?

Tom Travis (President and CEO)

Yeah, I would say lower than the last few quarters, definitely, and returning kind of the historical... Just look over a 10-year period and come up with a very small number and roll that forward. There's not. The credit quality is as good as it's been, you know, since really the last 7 or 8, 9, 10 years. So feeling really good about the loan book and asset quality.

Jordan Ghent (Equity Research Associate)

Perfect. And then, just one more actually. So on interest-bearing deposit costs, you guys had, like, a minimal amount increasing. And I know you guys talked about that, some of the loan funding got pushed out to July, and that you might have to go get some funding that's a little bit more expensive. But where do you guys see the interest-bearing deposit costs going from this quarter?

Tom Travis (President and CEO)

It's a good question. I think from a total cost of funds perspective, we're right now currently at 3.10%. And so I think it really just depends on the balance sheet needs from a funding perspective.

Jordan Ghent (Equity Research Associate)

Okay, perfect. Thank you for answering my question.

Operator (participant)

This will conclude our question and answer session. I'd like to turn the conference back over to Tom Travis for any closing remarks.

Tom Travis (President and CEO)

Well, great quarter, great company, great culture. Thanks to our teammates, and we're gonna keep doing what we've always done and keep our heads down and work hard. So we appreciate the partnerships and investors and analysts, and thank you.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.