Q1 2023 Bank7 Corp Earnings Call
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.
Selected 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.
One or more of these risks materialize or should underlying.
<unk> prove incorrect actual results may vary materially from those expected.
Also please note that this conference call contains references contains references to non-GAAP financial measures to 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 .
T Phillips Chief operating Officer, Jason Estes, Chief Credit Officer, Kelly Harris, Chief Financial Officer. Please note. This conference is being recorded with that I'll turn the call over to Tom Travis.
Thank you for joining us everyone.
We were pleased that we again delivered strong results.
You have to acknowledge and thank our team members for their outstanding contributions, let's move onto our results. We started the year with an all time high loan book and the majority of those loans had daily floating rates and that really set the stage for our strong quarter as we progressed through the quarter, we were able to overcome a significant loan.
Paydown and payoff activity. Therefore on a net basis alone team was successful and achieved a small amount of growth in the portfolio, which was also helpful.
At the same time and consistent with expectations. We mentioned during our January call deposit costs accelerated and continued to rise during the quarter, which put downward pressure on our margin regardless, we still achieved strong net revenue and we're pleased with our margin and expect it to remain with.
Our historical range.
It's probably good to move into a discussion regarding our liquidity, which clearly is a major focal point in today's environment. You can see we have provided enhanced disclosures and we are comfortable with our overall liquidity profile. Our cash position is historically more than industry averages and continues to be that.
Way today. In addition, our reliance on public funds as far below industry averages. We also have a large amount of availability on our lines of credit, which we did not draw as we did not experience panic from our customer base in fact.
We show a small increase in deposits for the quarter, including a small increase in our core transaction accounts, which continues to be the case as of yesterday.
We do not anticipate incurring stress in this area.
We also provided more disclosure regarding our asset sensitive balance sheet as you can see our asset liability matching has us in a good position our historical use of floating rate loans with interest rate floors, and shorter maturities will continue to benefit our company our balance sheet.
<unk> is properly matched and strong as we don't have much of an <unk> adjustment and we continued to operate debt free.
Regarding our small Aoc Aoc I adjustment it will rapidly decline is more than half of the investment portfolio consists of U S. Treasury notes that mature in only 10 months.
Overall credit quality of steady and continues to exhibit strong characteristics. We upgraded a few adversely rated credits and also had one pay off we added a few downgrades, but nothing out of the ordinary.
We also converted our allowance methodology to the seasonal model and our allowance is strong and where it needs to be.
Moving into capital with regard to capital.
Plan to continue building it and the combination of our strong earnings and low dividend payout ratio will cause it to increase quickly, especially considering a slower growth environment. Clearly this environment of macroeconomic stress guides us to maintain capital at slightly higher levels.
Our high level of earnings is a real source of strength for our company, we like to illustrate that strengthen the deck with the inclusion of our stress test scenario as it reflects how our strong earnings provides a substantial buffer based on industry and bank examiner DFAST parameters.
In conclusion, we had a very strong quarter. We are pleased to provide exceptional returns to our shareholders and also report that we are well positioned to navigate through the choppy waters.
That are in place today, we intend to continue to build capital and keep our focus on liquidity and growing our deposits. We continue to benefit from being located in this dynamic part of the country.
Therefore in spite of the current macroeconomic headwinds we remain cautiously optimistic about the near future and are excited about our company. So with that being said we are standing by for any questions. Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the keys.
Sorry. Your question. Please press Star then two.
The first question comes from Nathan race of Piper Sandler. Please go ahead.
Yes, hi, everyone. Good morning.
Hey, good morning.
Maybe just start on <unk>.
The outlook for loan deposit growth you had some growth.
Deposits in the quarter it looks like it was mostly in Cds. So just curious to kind of get your updated thoughts on just how we should think about deposit growth over the balance of 2023, and how youre thinking about loan growth within the context of the pipelines coming out of it.
As I stand here in April .
This is Tom I'll take the deposit side, and then ask Jason on the loan side, but with regard to deposits.
I would say that with all due respect and understanding that we're in a tough economic environment. There's a lot of noise centered around a few spectacular outliers and we believe the fundamentals the combination of fundamentals of our business model and our geographic location.
We'll we'll continue to do what we've always done and that is grow our bank.
With transaction accounts with money market accounts.
In conjunction with the expansion of our customer base and so I wouldn't expect any.
Meaningful.
Up or down movement, it's just steady as she goes and business as usual.
For us.
I think Jason can speak to the loan book Best Yeah. Good morning, Dave I think on the loan side.
We're still seeing what I would call a healthy deal flow.
But what resembles what I would describe as normal.
Loan demand and I think thats really driven by our geography.
Look at Texas and Oklahoma.
The economies here are very strong and there is still growth and so I still kind of refer back to I think on our January call. We talked about loan demand this year in growth rates probably in single digits.
Instead of you know last year. It was very very robust and so I still think thats pretty accurate I will say, it's a little more cloudy on the second half of the year.
Not sure if they are done raising rates.
And so with each move up there seems to be a little bit of.
The slowdown in demand, but we'll see where it ends up but I still feel like there'll be a.
Slide or moderate amount of growth for the year.
Okay. That's helpful and I think in the past, Jason we're talking maybe mid to high single digit loan growth, putting those pieces together with your comments does that kind of still reasonable expectation going forward.
Albeit with some lumpiness quarter.
<unk>.
Yes, Sir.
Okay, Great and then maybe a question for Kelly just around the margin outlook going forward obviously.
Deposit pricing environment as we sit here today and that May only continue to ratchet up.
Going forward. So I guess, just kind of thinking about the margin trajectory from here is the decline that we saw on the margin at least on a reported basis.
Though down 11 basis points.
In the first quarter Thats, not a reasonable expectation to extrapolate going forward or do you think the margin pressures intensify from here.
I think you'll continue to see liability cost reprice at a quicker clip than the assets.
<unk> said, we did decrease about 12 basis points of core NIM for the first quarter and I would anticipate a slower degradation in Q2, and then potentially Q3, but you will see.
Can you decline, but as Tom pointed out on page 10, we feel very comfortable operating in our our net interest margin range historically.
Mhm.
And Matthew Kelley.
Part of the offset some.
Some of the deposit pricing pressures just maybe redeploying.
Redeploying some of that cash will come off the securities book into loans.
Can you just remind us how much gasoline coming off the securities portfolio each quarter.
Yes.
Big tranche is going to occur in February which is a $100 million and I believe within the next excluding that youre looking at about $1 million a month.
Total historical portfolio was around $185 million.
It's really not this Tom made it's really not going to make.
A material impact on the margin.
Over the next eight or nine months, it's just going to be one big slug.
Yes of course, we were to sell that treasury position earlier than in next February which is possible. So other than that big redemption or maturity on that one or two few securities.
<unk>.
The.
Benefit of reinvestment between now and then is just really negligible.
And the liability costs will be more driven off of bringing in new money and then the time deposits repricing higher.
Okay, I'm going to point out another thing.
It is obvious that sometimes we don't always think of it.
That is that we believe it's prudent to hold more capital today. We believe it is prudent to hold more liquidity and so those are detrimental to the net interest margin. So if we chose to run the bank a little hotter. We chose the bank chose to eliminate some of those higher priced liabilities and clear.
Really the NIM with benefit, but we don't believe that's the prudent thing to do right now it's time to be cautious and so the benefit to the company is that we operate at a really healthy NIM environment and so we have the flexibility to do that versus maybe some others that don't have that strengthen their NIM in there there.
Constrained or they have to really suffer.
NIM degradation of more meaningful so I think thats, an important point to make.
Yes for sure understood.
Maybe a couple more just maybe on the expense outlook, obviously, a nice step down.
No.
It seemed like the <unk> levels are elevated just given the strong performance.
Last year.
Just any thoughts on just kind of where the run rate goes from here that you can manage it around so now.
Million dollars per quarter.
Any thoughts on just kind of the go forward run rate for expenses.
Yes, you saw a decline in the noninterest expense.
Post Q4, I believe it was 6%.
And I think the Q1.
Is a pretty good guide going forward.
Although you will see some expense creep as the year progresses.
Yes.
Makes sense and then maybe just one last one on credit I appreciate the additional disclosures around the office series portfolio. It seems like.
That asset class, particularly is going to be a non issue for you guys just given.
Lot of the specifics that you guys described in the slide deck, but are there any other portfolios, we're keeping a closer eye on these days or are you seeing any negative migration in terms of criticized classified it looks like MTA levels were essentially stable in the quarter.
Yes, we haven't seen a material shift in really any of those industries.
I will say that the hospitality segment. That's one that we clearly are fond of and we keep a very close eye on that and most of that lending activities in Texas, particularly Dallas Fort worth Metro area.
And.
We got the data for the full year last year I don't have the first quarter, yet, but it just continues to show strength and set all time records for.
Revenue in the occupancy and ADR they've recovered.
From those.
Covid.
Downturn times, where it was really.
For a short term period, there really bleak and they've just.
Rebounded.
It's just you couldn't ask for better performance really out of the out of that segment, so and I would add to Jason's comment and remind everyone that the.
Yes.
The interest rate environment.
The environment, we're very asset sensitive and the great great majority of those hospitality loans are floaters.
And I don't know if its 90%, but it's 80 or whatever it is it's a it's the majority of the portfolio whether it's <unk>.
60, or whatever 80% of it doesn't matter. The point is the substantial increase in the interest rates has not.
<unk> concern in our portfolio and I think it speaks to the underwriting and the discipline that we have that we've been able to.
Underwrite upfront properly have proper margins in our debt coverage ratios.
And so that's a very important point to point out.
Yes, understood Thats great color.
That's all I have I'll sit back and I appreciate all the color thanks, guys nice quarter.
The next question comes from Brady Gailey of <unk>. Please go ahead.
Hey, Thanks, good morning, guys.
Good morning.
So I just wanted to get an update on that.
The.
Yeah.
Your <unk> are.
Just one or two kind of larger credits, mostly and I think one of them is there is an energy law in any update on the resolution of the energy NPA.
Yeah that that company I think we've reported I don't remember, how many quarters ago, but there was a new management team put in place.
Little over a year ago or right at a year ago. They continue to improve the operation it's not improved to the point, where we can remove it from this list, but there is still I think we described it as green shoots and theyre getting taller and hitting more vibrant but.
Still not to the point, where we can upgrade.
And what remind us what is the size of that credit.
Yes, its approximately $7 million.
Seven Okay, and then I think total NPA is.
Our around $18 million. So are there any other larger low yes.
There is there is the one deal that's in litigation I don't want to get into any details on that one, but it's approximately $10 million and so.
Those two credits you're really talking about.
Almost the entire NPA bucket.
I'll say that in that litigation same comment we've made previously we're well secured the collateral is highly liquid and it's under the control of a receiver.
Court appointed receiver so.
It's just a matter of working through the.
Court system.
Okay.
Any outlook I know you guys occasionally we'll consider bank M&A, although the backdrop and I expect you might be kind of a tough nowadays, but any update on <unk>.
The conversations you are having on the bank M&A crop.
We're talking to a group right now I mean, we've had one meeting and there seems to be a potential way too early to say anything beyond that so.
We continue to be very active in probing and searching.
And.
But that's that's.
That's about it.
Alright, great. Thanks for the color guys.
As a reminder, if you have a question please press star one.
Next question comes from Matt Olney of Stephens. Please go ahead.
Hi, Thanks. Good morning, most of my questions have been addressed but also wanted to ask about just any color on incremental pricing on both deposits and loans, what youre seeing on both sides there. Thanks.
I would say that on the.
The loan side.
The.
Negotiations are probably less fierce as borrowers.
Of used to.
This new rate environment, I think last year.
Was more cumbersome going through those conversations after they've just been used to these lower rates and then on the deposit side.
Youre seeing a little bit of a shift in the mix. There was a comment made by one of the analysts about.
The CD growth, because I think youre seeing people migrate from where they didn't care. If it was in a checking account, earning nothing or a savings account, earning next to nothing or a CD, earning just slightly better than that now, they're saying Oh wait a minute. This is actually attractive to put money in a bank and lock it up for 12 or 24 months.
It's worth their while and so I would say youll see more of that mix shifting.
Throughout the year, but as far as the conversations with the depositors go.
Somewhat relief from them that they finally get to earn.
Some interest on their deposits so.
I think that.
Maintaining that NIM in our historical range is very possible I don't think it is easy, but I do think we will succeed.
And any color on the other side on the on the loan yield side incremental.
On that side.
Yes, I mean, if you want some examples I would say right now average originations are somewhere in the low eights probably.
Who knows what happens the rest of the year, but that's kind of the.
Current.
Current market.
Yep.
Okay. That's helpful. And then I think Tom mentioned carrying higher levels of liquidity at this point given the uncertainty in the environment and definitely appreciate that and I think most if not all your peers are saying something similar.
At least with bank seven we can see that in some of the ended the quarter data at March 31.
No it's tough to answer but curious on thoughts on just the duration of current excess liquidity and how much longer.
You expect to carry the higher higher levels. Thanks.
Well I think there's a couple of things at play here I think.
<unk> seen already.
The proposed.
The commentary and propose new metrics that are going to be coming out of the fed relative to liquidity and so I would say that.
We're expecting.
Yes.
If you look at your Camel rating the elder liquidity, we're expecting.
Perhaps I don't know if they will change the.
Call report.
I don't know if they will come up with a new metric, but we expect at some point.
We certainly don't with all due respect to regulators.
We don't need regulators to tell us how to run the bank.
And so we.
We have prudently managed our liquidity based on our own experience and knowledge and we believe we understand what it takes to properly match, our balance sheet and funding funded bank, but with that being said we.
We expect some of that and so thats number one number two I think.
The speed at which the public rushed into.
Recall these very very few.
I guess I would refer to them as outlier banks.
That that either have failed or in the case of like first Republic has had a massive deposit exited.
You have to be mindful of that and so I think whether it's.
Being cautious with regard to the public or whether it's a nod towards understanding at what might be coming down the road.
Tell you that what page is that on.
The red.
I think it was late last week earlier this week.
There was a commentary that some of you talk to the I think it was the FDIC and OCC and they were if you go to page four.
In our in our deck.
The piece that I read was identical to what we put in our deck here and what we illustrated was our uninsured deposits and then we subtract it out.
Insider deposits collateralized deposits I don't think the insider deposit was mentioning with the fed but I think the point is is that we anticipate some of this and so.
I think caution is the word of the day in and again I think if you're if you're.
Operating a bank debt.
That.
Has to struggle or pull levers or do things too.
In order to really achieve that.
High performance net earnings you have less flexibility, but for us.
It kind of goes back to that comment on the net interest margin.
We will suffer a smaller margin.
By being more liquid and we have the profits and the cash flow that.
We have to hold more cash okay will hold more cash and we're still going to be benefiting from that high performance. So.
That's a long way to say that who knows but we're going to be prepared and ready for it.
Uh huh.
Yes.
Okay, Great commentary, Tom I appreciate that and then just one more from me on the on the credit front, Tom you mentioned.
Several upgrades this quarter, there was a payoff and maybe a downgrade or two as you step back and look at some of the migrations both directions.
Any themes that you see whether it's by loan type or geography, or anything that would be helpful for us. Thanks.
I don't see any I think it's.
Our radar dishes constantly.
It's on alert and we have a few that have popped up just like you always do.
Some that we've managed out and I don't see anything thats that.
And when I, when I say that.
Specifically focused on losing money on loans.
Youre always going to have people that get into stress and work their way out of it but as far as losses to the company I certainly don't see it.
Yes, okay.
Hey, guys. Thanks for your help appreciate it.
This concludes our question and answer session I would like to turn the conference back over to Mr. Chavez for closing remarks.
Thanks, again for everyone, joining and we're really proud of the company and I think the the.
The litmus test for the banking industry was the month of March at least most recent litmus test and who knows what happens today in the rest of the rest of the next few weeks, but.
We didn't have panic and I think Thats, a testament to the institution I think it's a testament to the customer base and the fact that.
We try to be steady as she goes yet provide that good strong performance and so we're pleased we're excited about the future and I appreciate everyone's involvement in consideration.
Thank you.
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