Bank7 - Q3 2024
October 11, 2024
Transcript
Operator (participant)
Good morning, and welcome to Bank7 Corp.'s third 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 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 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.
Tom Travis (President and CEO)
Thank you. Thank you. We also have Paul Tillman with us, who is Kelly's right-hand person, and shout out to Kelly and Paul for their great work, but also getting the information out very timely. So I'm not surprised. We have a great, great group. So good morning. Welcome to everyone. Before we launch into our results, we're certainly aware of the devastation inflicted by the recent storms on our fellow citizens, and our thoughts and prayers certainly go out to them. Very trying times over in the Eastern Seaboard for sure. As we move into our strong financial results, we're excited. We're cautiously optimistic, even in the face of this upcoming and very divisive national election. It'll be nice if we can tone down the rhetoric, for sure.
Clearly, we're in for some choppy waters over the next few months, and yet we're continually stressing how comforted we are to be in this part of the United States. It's a real geographic financial advantage for sure. With that in mind, those issues are still always on our mind, and this is certainly a time for caution, and that's why we take such comfort in our fundamental strengths, especially the high levels of capital, and it isn't just the higher levels of capital that gives us that comfort. We have a very strong liquidity position, and we further enhanced that last quarter by adding a second liquidity backstop, and that being the new Fed facility, which is now in place should we ever need it in times of stress.
So we now have two meaningful sources of additional liquidity, the FHLB, which we've had for a long time, and the new Fed facility. Our disciplined approach to maintaining that properly balanced matched balance sheet has really been proven through the rate cycles. And those of you that have followed us over a long period of time, and I know that we include in the deck spread management that compares our spread through up and down rate cycles in the various Treasury markets. It's a great strength of the company, and really, it's the foundation, along with our credit quality, that produces these results. And as you can see, record earnings and a record EPS, not only for the recent quarter, but our year-to-date results. And so we're very proud of those accomplishments. And those were achieved through normal operations.
And in the case of our EPS, they weren't driven by share buybacks. So our strong earnings and capital levels were the driving factors that motivated us recently to make a large increase to our cash dividend. But even with that large increase, our dividend payout ratio is still in the 20% range, and when you compare that to banks that do pay dividends, the average is a little bit more than 35%. So Bank7 has plenty of room for further increases if we want to do that, while at the same time being comforted by our top-tier earnings that rapidly accumulates capital. And as majority shareholders, we're really pleased with the total shareholder returns produced by our company. And as you can see in the published materials, we rapidly compound shareholder value much faster than almost any other institution.
Our results are certainly attributed to our outstanding team members who work with our loyal customers. We're all very aligned, and we're really looking forward to our future, and I can't thank the team members enough. So with that said, we're certainly ready for any questions and ready for Q&A, this morning. 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 touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster... and our first question today comes from Woody Lay with KBW. Please go ahead.
Woody Lay (Equity Research Analyst)
Hey, good morning, guys.
Tom Travis (President and CEO)
Morning, Woody Lay
Woody Lay (Equity Research Analyst)
Wanted to start on the loan growth side. I mean, the growth was great to see in the third quarter. I know there was some commentary last quarter that there was some funding delayed. But I was just curious how the pipeline is looking entering the fourth quarter.
Jason Estes (Chief Credit Officer)
Yeah. So thanks for the question. You know, last quarter, we were very confident, you know, that we had a lot of fundings coming. This quarter, I would say, you know, I would expect us to finish more in line with where we are now. I wouldn't expect another nice growth quarter. But I think, you know, here we are, kind of ending up in that range we've talked about, for the full-year of, you know, kind of a moderate to high single-digit loan growth for the year. And I think we're going to be right in line with that. I think in general, there are certain segments we restrict, you know, to, to just continue to mitigate the risk in our portfolio.
And so we continue to see opportunities there, and we're passing on more deals, you know, specifically in the hospitality space, the energy space. Those two components, we continue to really sift through opportunities to make sure we're optimizing the portfolio return with those dollars that we restrict, you know, by our own intent. So all in all, should fall right in line with what we thought at the beginning of the year.
Woody Lay (Equity Research Analyst)
Yeah. And as you talk with clients, have you noticed a difference in activity now that we have a couple of rate cuts behind us, or is it still about the same?
Jason Estes (Chief Credit Officer)
About the same.
Tom Travis (President and CEO)
Woody, this is Tom. I would add to Jason's comments that, again, this goes back, I believe, to two factors. One is the geographic advantage of the robust nature of this part of the country. Two, you know, it confounds me on a regular basis, how the financial mentality has been about, quote, "higher interest rates" in the United States. I think that's just been somewhat of a false narrative. What I specifically mean is, I don't know the exact number. I know that Jason and Kelly and I looked at this four or five months ago, and I think we went back for the last 60 years, and I think there's only 9x where the 10-year Treasury was higher than where it's been.
And so I think this narrative evolved when the Fed started raising rates, that, "Oh, my gosh, we're in these high interest rates," and then that bled into borrowers aren't going to be able to make payments or, you know, economic activity. And when you really look at long-term averages, it really hasn't been an interest rate story, it's been a cost story that may have had a dampening effect on companies borrowing money and building projects and, you know, and investing in capital goods. And so I'm not trying to be long-winded here, but I think it's important for all of us to remember that we're operating in a very normal interest rate environment.
And when you marry that with where we are in the part of the country, and the inward migration, it's just a very nice, steady, ambient level of economic activity. And,
Jason Estes (Chief Credit Officer)
And that's why the growth continues.
Tom Travis (President and CEO)
That's right
Jason Estes (Chief Credit Officer)
... you know, through-
Tom Travis (President and CEO)
That's right
Jason Estes (Chief Credit Officer)
Throughout the last, call it fifteen months, eighteen months.
Tom Travis (President and CEO)
That's right. And again, you know, said another way, I mean, we bounced into historical, modern low modern history of the United States, historical interest rate lows. And so when you bounce off of that, people think, "Oh, my gosh, the rates are high," but that's just not the case. Go look at the research, go look at the historical numbers on the treasury markets. And so anyway, enough of that. But we feel really good about. As Jason said, we could have put even more loans on the books, but we're trying to be very careful.
Woody Lay (Equity Research Analyst)
Yeah. No, that, that's really helpful color. I guess shifting over to more the deposit side, I really appreciate the color you provided on the loan betas and the deposit betas, and how those shifted with the recent rate cuts. And I was a little surprised to see the deposit beta sort of go in lockstep with the loan beta. Did you see any deposit runoff when you made those rate adjustments? And with future cuts, do you think you can continue to cut deposit rates as aggressively?
Tom Travis (President and CEO)
I think, this is Tom again, Woody. We're not surprised. You know, your comment about, you were, you know, I forget your words, but you noted how we had gone lockstep, you know, and I think it goes back to my opening comments relative to a properly matched balance sheet. We work so hard, and we don't take our eye off the ball relative to loan floors and floaters and, you know, keeping our fixed rates, you know, I think it's 24% of the loan portfolio or something like that, and even those are rapidly amortizing. So, the end result is, a very properly, methodically applied concept here. I would tell you that we have modeled... I mean, Kelly, what did we do? We did four columns.
We did 25, 50, 75 and 100 basis points, and I guess I would use the term non-issue for the first hundred basis points, Kelly?
Kelly Harris (CFO)
Correct. And then once you get through the first hundred to hundred and fifty, that's when you start to see the floors really start to kick in.
Tom Travis (President and CEO)
Right. And so, you know, historically, it becomes more difficult as you get into that hundred basis point territory because you do have customers that will wanna come in and say, "Hey, I think my floors are, you know, maybe too high, and I wanna renegotiate." And, but again, you know, we've lived through these cycles, and we've been very successful. And so, yes, it might get a little more difficult, but the end of the day, Woody, we are very comfortable operating our NIM in our historical ranges, and that's really the final message.
Woody Lay (Equity Research Analyst)
Yeah. Well, that's all for me. Congrats on the great quarter.
Tom Travis (President and CEO)
And, Woody, I have a question. This is Tom. I noticed your target was $40. It seems to me like you're sandbagging because we're almost already there.
Woody Lay (Equity Research Analyst)
It was a great quarter, so we'll see where it goes from there.
Tom Travis (President and CEO)
We appreciate your coverage, Woody. Thank you.
Woody Lay (Equity Research Analyst)
Yep, of course. Thanks, guys.
Operator (participant)
Again, if you have a question, please press Star, then one. And our next question comes from Nathan Race with Piper Sandler. Please go ahead.
Nathan Race (Senior Research Analyst)
Hey, guys. Good morning. Thanks for taking the questions.
Tom Travis (President and CEO)
Hey, Nate.
Jason Estes (Chief Credit Officer)
Good morning.
Nathan Race (Senior Research Analyst)
Just going back to the margin commentary previously, you know, I appreciate you still expect the margins to remain kind of within that historical range, but, you know, just given that you guys posted, you know, 20%+ NII growth as short-term rates are going up the last couple of years, just curious how you're thinking about NII growth prospects in the next year, just given that, you know, short-term rates are expected to decline from here?
Jason Estes (Chief Credit Officer)
Yeah. So, Nate, I think that one of the things that's not really been spoken about on this call yet is the fact that, you know, banks, in general, in 2023, after what happened in March, really tightened up on lending money. And so our net interest income and our NIM, that's been helped because we've been able to be more stubborn on giving in negotiations on loan rates, okay? And that's allowed us to give in a little more on deposit rates. And so, you know, there's different, I would say, variables involved as we're negotiating loans and deposits and trying to attract new clients and take care of our existing clients. But in general, you know, I hear you. Yes, there's been pressure, but we've been able to navigate that because they're really...
In our market, you still have good, healthy economic growth, and you have, I would say, fewer banks really pursuing loans. There's always competition, but I think the level of competition for loans, it shifted a little bit, you know, last year, really in the second half of the year. Yeah, I'm sure that's gonna normalize, and it wouldn't surprise me, you know, as we continue to try to grow both loans and deposits, going into next year, if some of that restriction, or governance that we've seen on some of these competing banks, if they start to return to more normal competing levels.
And so, you know, I think we've talked about this now for several quarters in a row, that we could see our NIM, you know, gradually sliding down, but, you know, we're fighting every day to maximize it.
Nathan Race (Senior Research Analyst)
Got it. That's very helpful. And while we have you, Jason, just would be curious to hear an update on the credit quality front. You know, it seemed like, you know, nonperformers are relatively stable in the quarter. So just curious to hear what you're seeing in terms of criticized prospect trends these days.
Jason Estes (Chief Credit Officer)
Yeah. So, you know, we were up $1 million, roughly in the quarter, but there's a lot that's actually gone on there that doesn't really show up in that individual number. We had a couple of really nice results. The largest NPA we had left, we actually got $1.6 million in principal reduction during the quarter. And we had, you know, the final tail of the energy credit paid, paid off. That was $1.1 million. And so we collected just under $3 million on last quarter's numbers of, from the NPA in principal, which is a good result. We did have two new relationships, show up on this list that are on nonaccrual. I think those two. You know, we don't expect, meaningful loss there.
One, approximately $3 million, the other one, $750,000, in total balance. But I do think those will stay on here through year-end. My goal is to always work this number to zero. And so we've had good, good results throughout this entire year, credit-wise. The portfolio is performing well overall, but, you know, still, always, you know. The book's big enough now where, you know, there's enough clients, there's enough exposure to various areas and industries, and so we're always eyeing something, but we're working through those successfully.
Nathan Race (Senior Research Analyst)
Okay, great. And then just in terms of thinking about the future, provisioning levels, you know, if, you know, growth kind of reverts to the mid-single digit range going forward, any thoughts on just the provision and kind of where you'd like to reserve to kind of trend over time going forward, relative to, I think, one and a quarter coming out of 3Q?
Jason Estes (Chief Credit Officer)
Yeah, you know, this quarter, depending on, you know, what happens with the economy in the fourth quarter, I still expect us to operate in these same ranges, you know, as long as the portfolio holds up and the economic activity stays, you know, similar. Knock on wood, it's been really good in Texas and Oklahoma, and so we're hopeful that it continues kind of in the same ranges.
Tom Travis (President and CEO)
Yeah, and I think to add to Jason's comments, Nate, this is Tom. You know, as we've commented before, you know, it's the Rubik's Cube, so to speak, and what I specifically mean is, we carry a significant amount of cushion over and above the PCA levels of capital. And, Kelly, I don't remember, do we put that slide in the deck? I know we have the stress test. I don't think we do, but I have it in my lap. But if you look at the cushion, the dollar cushion of where we are relative to excess capital, if you want to call it that way, you really are in a splitting hairs environment, whether it's $125, $120, or, you know, $130. And so we really look at those factors in tandem.
You know, as an example, it's not in the deck, but I've got it here. You know, just on the CET1 ratio, we have $98 million of excess capital just over and above the prompt corrective action levels. It's kind of consistent with you go through risk-based capital at 60-some-odd million. We don't really feel like that, that we're going to always. I mean, we're mindful of CECL. We have a very precise application of our methodology, but we're not conflicted at all about minor variations. A lot of that has to do with how great of a job Jason and his staff do on asset quality. That's a long answer, but that's kind of how we feel about it.
Nathan Race (Senior Research Analyst)
Got it. That's helpful. And one last one for me. Tom, as you described, you guys are treating capital at pretty strong clips, to say the least. So just curious how you're thinking about the M&A environment today and just kind of the acquisition prospects going forward.
Tom Travis (President and CEO)
You know, Nate, you know us well, and, you know, there are, I'm pretty certain, a few people on this call that I've interfaced with relative to the M&A space, this year and continue to do so. We were pretty far down the road on a particular potential transaction earlier this year that ended up not doing. I would tell you that the market is very robust, and, we are constantly, over the last four or five months, being approached, not as a potential person to sell, but as a bank that's known for, you know, public currency and a high-performing bank.
And so what's now starting to increasingly occur are quite a few opportunities, and some of which are, unfortunately, what I call the zombie banks, who are really stuck with AOCI issues, or not just in their securities portfolio, but also in the loan rate, interest rate mark world. And I don't want to be as bold or forward to say that some of these banks may have been using hope as a strategy relative to interest rates falling and therefore unwinding some of that AOCI and interest rate marks. But I think the reality has hit in many places. And I mean, if you just look at it, the ten-year is still around 4% today, right?
And so I don't remember where the ten-year dipped, but I think there are, based on the volume of opportunities that are being presented to our institution because of our performance and our currency, but also the fact that some of these banks have, I think, come to realize that it's a slower boat to China relative to unwinding some of these marks, that I would expect that more. I think more opportunities that were more discussion type, exploratory conversations will convert into actual transactions. And we certainly see that. You know, we're constantly engaged. We have some specific targets and discussions, and so we've always been consistent that we want to build capital to be opportunistic. And I would expect. I would expect transactions to occur, given all those dynamics, sooner rather than later in our space.
Nathan Race (Senior Research Analyst)
Got it. That's great color. I appreciate the commentary. Thanks, guys. Congrats on a great quarter.
Jason Estes (Chief Credit Officer)
And our next question comes from Matt Olney with Stephens. Please go ahead.
Matt Olney (Managing Director)
Hey, good morning. Tom, on those last comments on the M&A front... Just remind us of the characteristics of an M&A partner that you're looking for, as it relates to size and geography, and just the type of bank you're looking to partner with.
Tom Travis (President and CEO)
You know, Matt, we've been consistent in our history, and I like to call it, you've heard this many times, the right side of the balance sheet, and so we are. You know, we have opportunities now, and we're evaluating a handful that are really nice core banking groups with core funding and really good cultures, and so I guess I would flip the coin over and say that we're not, you know, what we're not interested in are specific verticals and fintechs and you know earnings. We're interested in people that are culturally aligned, that would bring a really nice balance sheet to the bank and blend really well with the Bank7 team, and as far as size goes, you know, we're excited about...
You know, we compound equity so quickly, and we have excess equity. You know, we would love to do an MOE. You know, I think those are fun to do, and they're also very rewarding to the shareholder base and our executive team. You know, we're big bank people, and we're, you know, without sounding arrogant, we're properly trained. And hopefully, as you followed us over the, you know, the last six years and all those quarters, what is that? 24 quarters now since we've been public, and we've been rock steady with our reporting and no misstatements. And I think that, again, I give so much credit to this team and how precise and professional and top-tier performing they are.
And so when you really think about that, married with the excess capital and the compounding of equity, an MOE or a, you know, a $2 billion or $1 billion or whatever it is, institution, is right in our wheelhouse. And so, and I think that, you know, those are the, those are the preferred things. Does that mean we wouldn't do a $500 million acquisition? No, we would. So if those characteristics are in place, that's how we would, that's how we would see the future.
Matt Olney (Managing Director)
Okay. That's, that's great, Tom. Appreciate that. And I guess sticking with the M&A theme, that there's lots of, you know, financial metrics to consider as you review these. In your view and the board's view, what's the, what are the more important financial metrics to review as you kind of go through these various M&A options?
Tom Travis (President and CEO)
You know, I think it's a very difficult question to answer, because, look, you know, some people are more focused on earnback, some people are more focused on PE ratios and tangible book value and deposit premiums. And for us, really, we are guided by long-term fundamental principles. And so all of those metrics have to coalesce. They have to merge and blend. And so with that being said, you're not going to see Bank7 get outside of any normal or right down the middle of the fairway parameters. There's no reason for us to do that. And so, you know, if you look at us and again, not trying to, you know, prop ourselves up, but these are just facts, but we are a top-tier organization, and we're top 1%.
And you look at that in any metric, whether it's efficiency ratio, ROE, ROA, credit quality; we are just liquidity. And so when you really look at that, you know, we're trading at... Where are we today? About 1.8x or-
Kelly Harris (CFO)
2x.
Tom Travis (President and CEO)
Two times book, and then, you know, our PE is 9.5 or 10. And so when you start thinking about, you know, some banks, and they seem to think that, you know, that. Or maybe the investment bankers, with all due respect to you guys, go in and say, "Well, we think you guys are worth," you know, metrics that are anywhere near what I just described, but yet their performance is not there. It's a pretty tough, you know, thing for us to accept that. And so what we try to do when we approach, we do, and so we'll pay a very fair price, and it'll make a lot of sense. And then the rising tide, so to speak, will raise both boats going forward.
And so that's not a specific, you know, metric-by-metric, you know, answer for you, but it's how we view things, and we view things over the course of a three and a five-year, you know, strategic period.
Matt Olney (Managing Director)
Okay. Great. Appreciate the commentary, Tom. And I guess just stepping away from M&A, going back to the core margin discussion. You talked about kind of maintaining that historical range, you know, regardless of what the Fed does in the near term. Any general commentary about the core margin as it relates to the Fed? So if we were to see a very active Fed cutting each meeting, 25 or 50 bps versus a more methodical, slower moving Fed, cutting maybe every other meeting. Just, you know, any commentary about kind of directionally, what that would mean for the core margin? Thanks.
Tom Travis (President and CEO)
I just think historically, I mean, you can go back to the COVID years and go back to the slide that we have, and nothing, nothing concerns us, our ability to manage that. I don't know what page that slide's on. It's on Page nine, but you know, we've gone back to 2016 and shown our spread compared to the five year, the ten year, and cost of funds, and so there's nothing that would indicate to us. And again, we've modeled it, and we're not, we're not concerned at all, so I think the lowest, the non-fee income NIM components, what's the low point? 430
Kelly Harris (CFO)
438
Tom Travis (President and CEO)
438.
Kelly Harris (CFO)
For a full-year.
Tom Travis (President and CEO)
Right.
Kelly Harris (CFO)
Yeah.
Tom Travis (President and CEO)
I think Jason has said, you know, in the past, and I think he's right, that, you know, at some point, as the bank gets larger and larger, you say, well, maybe you touch those lows, and maybe it goes to four and a quarter or 415 if you get it to be a really large bank in a certain economic environment. But, if that were to ever happen, then fine, we're still gonna be a top-tier bank.
Matt Olney (Managing Director)
Okay. Thanks, guys.
Tom Travis (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Nathan Race with Piper Sandler, with a follow-up. Please go ahead.
Nathan Race (Senior Research Analyst)
Yeah, thanks for taking the follow-up. Maybe a question for Kelly, just in terms of thinking about the impact within fees and expenses from the oil and gas assets going forward.
Kelly Harris (CFO)
Yeah, Nate. For Q4, we do feel like that we saw peak revenue and expenses from an oil and gas perspective in Q3. I mean, that said, non-interest income combined, bank-wide, $3 million, and $2.3 million of that's gonna come from the oil and gas, and $700,000 coming from core fee. And then from a non-interest expense perspective for Q4, we're modeling $9.5 million, with $1 million coming from the oil and gas and $8.5 million coming from core. So core non-interest expense up a little bit, quarter-over-quarter. Historically, our fourth quarters have been a little bit higher in that perspective.
Nathan Race (Senior Research Analyst)
Got it. That's helpful, and then one last one. I know there's some noise in...
Tom Travis (President and CEO)
Nate, are you still there?
Nathan Race (Senior Research Analyst)
Did you not hear my question?
Tom Travis (President and CEO)
No, we did.
Kelly Harris (CFO)
No, the phone cut out.
Nathan Race (Senior Research Analyst)
Oh, I apologize. Just the last question around non-interest-bearing deposit levels. I know there was some noise the last couple of quarters tied to some legal matters, so just curious how you're thinking about that trajectory going forward.
Tom Travis (President and CEO)
Pretty flat, just our normal growth. You know, we did have that large $100 million deposit that flowed out of here earlier this year. And then, I'd say pretty flat. Nothing major either way.
Nathan Race (Senior Research Analyst)
Okay, so it seems like some of the mix shift changes have largely slowed across the client base lately, if not entirely?
Tom Travis (President and CEO)
Yes.
Nathan Race (Senior Research Analyst)
Okay, great.
Tom Travis (President and CEO)
Yes.
Nathan Race (Senior Research Analyst)
I appreciate you guys taking the follow-ups. Thanks again.
Tom Travis (President and CEO)
Thank you.
Operator (participant)
This concludes our question-and-answer session. I would like to turn the conference back over to Tom Travis for any closing remarks.
Tom Travis (President and CEO)
Thank you all for your interest. We appreciate the coverage, and we look forward to the future. Thank you. Bye-bye.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.