Q2 2023 Bank7 Corp Earnings Call
Good morning, everyone. Welcome to Bank7 Corp's second quarter earnings call. Before we get started, I'd like to highlight the legal information and disclaimer on page 25 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 just based on the 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. Social Making Guidelines
Should one or more of these risks materialize or should underlying assumptions prove incorrect, statistical 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 8K that was filed this morning by the company.
Representing the company on today's call we have Brad Haynes, 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 would like to turn the floor over to Tom Travis.
Thank you, good morning and welcome everyone. We were pleased with our quarter and pleased with our year to date. If you boil it all down to why we were able to again have record profits and earnings for share.
It's really a story of sticking to your fundamentals, our fundamentals, and relationship banking. And we're proud of the banking team that we have, the bankers, the executive management, all the way down to the front line. And we're just... That's what you have to be thinking.
continue to stay focused on our fundamentals and we are also mindful of what's going on in the market and we're carrying
excess liquidity just in case, and we're happy with the position of that balance sheet that continues to have no debt, extra liquidity, and plenty of money for...
turbulent should it come into the markets again. And so with that being said, it's not sexy and fancy, but fundamentals just don't go out of style as they say, and we're real pleased about it. And I think if you look back at the prior two quarters earnings call commentary, maybe three quarters, the year has kind of shaped up the way we thought it would.
may have. Thank you.
Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using your touch-tone telephones.
To withdraw your questions, you may press star and 2.
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Once again, in order to join the question queue, you may press star and one.
Our first question today comes from Bob Windler from Stevens Incorporated. Please go ahead with your question.
Our first question today comes from Tom Windler from Stevens Incorporated. Please go ahead with your question. Hey, good morning everyone.
Good morning.
I just want to start off with expenses. We saw another decrease this quarter. Can you maybe give us some color on your expectations for expense growth moving forward?
Yes, we did have a slight decrease in Q2 versus Q1 and from a run rate perspective, I like the second quarter better going forward. stayed away from me.
Yes, we did have a slight decrease in Q2 versus Q1, and from a run rate perspective, I like the second quarter better going forward. Maybe a little bit higher at 7.5 million.
Perfect, thank you. And then just kind of moving on to credit, we saw a step up in your allowance this quarter, even with decreasing non-performing loans and loan balances remaining relatively flat.
Keith, maybe give us some color around the reserve field.
Yeah, I think that it's just kind of our DNA whenever you have what we believe to be some economic headwinds out there or potential headwinds to continue to build. You know the portfolio has held up very well.
past dues are down, you know, you'll see positive trends, credit trends throughout the book, I think when you're comparing to the last couple of quarters. So, with that being the case, you know, we still, we're not oblivious to the impact of higher interest rates and what that's going to look like in the economy as the year goes on and you're starting to see.
me. Loan balances remained flat this quarter. Maybe give us some color on your expectations for loan growth and if there's any sort of segments you're looking to grow more than others.
From a segment standpoint, we're...
Pretty consistent, I think you see us, you know hospitality energy CNI And then the same same stuff we've been doing I think is Expect the same in the future
And as far as growth, I think if you go back to the last couple of calls and the commentary has been, hey look, this won't be a year like last year where the growth was probably a little bit more than we had anticipated. You know, think.
single digits this year and I still feel confident in that. I think this will be the third call in a row or maybe even the fourth where we talked about what does this year look like and I think we're unchanged even though, you know, March was a little bit turbulent and caused some uncertainty. It's still looking like that's a good number for the overall year.
Jason, am I correct that construction is actually down? It is, it is. Yeah, so that's one segment that we would point out that, I don't know the numbers, but our construction lending has definitely slowed as we expected it would.
All right, that was great color. Thank you guys. Great quarter.
All right, that was great color. Thank you guys, and great quarter. Thank you.
Our next question comes from Nathan Race from Piper Sandler. Please go ahead with your question.
Our next question comes from Nathan Race from Piper Sandler. Please go ahead with your question. Yep, hi guys, good morning.
I appreciate you taking the question. Just a question on just kind of the margin outlook, X-Fees and accretion. You know, it looks like it came down about six basis points versus the first quarter. It looks like the increase in deposit costs was actually less than what we saw during the first quarter. So just curious to kind of get your expectations in terms of.
perhaps the magnitude of future pressure that we can expect during 3-2 and 4-2 of this year. Hey, this is Kelly. I think from an ex-fee perspective, 4.55 is a good number and I'll just highlight the fact that we are carrying additional liquidity and so...
you could see a shift, you know, potentially, if we do fund up loans. When we do fund up loans, some of that cash bleeds down, and that could prop up NIM a little bit as well.
the Fed is meeting next week and so that I'll have an impact on them going forward as well. But I think from a...
The core NIM perspective, 455 is a good number.
That's kind of real time isn't it Kelly? That is.
Okay, gotcha. And perhaps maybe a larger kind of more broader question on them going forward. You know in a theoretical kind of higher for longer interest rate environment.
Where do you guys kind of see your margin kind of settling out, XVs over that kind of longer term period?
We're delighted and proud of the efforts of the team with regard to negotiating and walking away from transactions that don't meet our hurdle. And we've consistently said that we're going to operate within our historical ranges and I believe if you look back in history, I'm not sure we'd ever get below about
4.25 or 4.3. And so there's nothing that we see today that would lead us to believe that we're going to operate outside of those ranges. And I'm not saying that we're going to go from 455 real time today to 430, but if it happens, it happens. And the thing is, with that said I'm going to end my presentation at 8 and after deadline if you are interested in till, I should have brought the minus sunset for everybody, and the time has expired. If this is been colour automatic, so we got to go back anduckles and no cards and just a couple of decrees just a couple ofbre revered
I think a lot of it depends on the Fed and what they do. I think everyone's expecting a rain increase next week. However, if they do take a pause and they don't do any more, then I think you're going to more easily keep your NIM from dropping to the absolute low in the historical range.
So, you know, we'll just see, but as we point out in our deck, I think it's 51% of our loans are daily floaters, and we have right now about 80 million or so that are at the ceilings. But clearly when the Fed increases next week, you're gonna have a few more loans at the ceiling. But I think for us...
we're going to be within those historical norms. I would point out also, at some point in Nate, we're carrying a pretty heavy treasury note position. We're seven months away from the actual maturity on that instrument. If we chose to do so today...
You know, we could liquidate that and pick up, you know, pick up, I don't know what the effect would be to NIM and basis points, but it would certainly pick up earnings. And so there are some things that we have that are going to eventually offset that.
We could liquidate that and pick up, I don't know what the effect would be, the NIM and basis points, but it would certainly pick up earnings. There are some things that we have that are going to eventually offset that NIM pressure.
And if I remember correctly, that large maturity in the securities book that occurs in the first quarter of next year.
And if I remember correctly, that large maturity in the securities book, that occurs in the first quarter of next year? February , I think it's the end of February .
And perhaps just changing gears, thinking about the energy portfolio in particular,
Didn't appear that you guys had much growth. In fact, it looks like they also shrank a little bit versus the first quarter. So just curious kind of what opportunities you're seeing in that space and perhaps just if you could kind of touch on what you're seeing from a credit quality perspective across your energy portfolio as well.
Yeah, outside of, there's one large credit I think that's out there in the public realm that we really can't talk about because there's ongoing litigation. Outside of that one credit, the energy book is performing very well. I will say that the deal flow there has slowed quite a bit from...
the pace of last year and we did contract about, it's about 10 million during the quarter. Wouldn't be surprised if there's a little more contraction as the year goes on in that book and but overall credit quality there is very strong with.
primarily companies we banked for for a long time.
Gotcha. And, Jason, just any update on those kind of two large non-accrual loans that I believe constitute the large majority of the existing MPA balances coming out of the second quarter? Yes.
yeah so one of them had a
consistent, nice, continued improvement and it has now for 12 months, maybe a little more than 12 months. We used to refer to it as the green shoots. I don't even know if you can call it that at this point. It's just a nice recovery story there. We're optimistic that that one may.
come out of that bucket in the near future. And then the other credit, again, that involves litigation, well secured.
don't expect any loss, but we have to work through the court system to get that money back.
Okay, great. And I appreciate the added details on the Office Commercial Real Estate Exposure in the slide deck. Okay, great.
Any additional color you can provide on that portfolio in terms of kind of the maturities
better expected over the next year or so, and just generally how you're feeling overall about the office theory portfolio, just given that.
an area of focus these days for investors? It is. We're so unique, I think, compared to maybe other banks our size and especially the bigger banks because a lot of, you know, the majority of our office, this is going to be an owner-occupied deal and it's typically, don't think downtown at all, think downtown.
Suburban, you know, we used to call them like a house office almost, you know, these are smaller loans They're amortizing rapidly and they're we just don't expect stress in in that portfolio of ours We really don't see a single loan in there that we have any expected issues on
You know, Nate, I would add to Jason's comments that we all know that the news...
is dominated and emanates from New York and Washington and some on the West Coast as well. And that's where you have this spectacular news stories about, I mean, you read about the horror in San Francisco downtown and some of these other cities and also on the East Coast and...
And, you know, I'm not making fun of anybody or anything, but it's just a perfect illustration of...
So, somebody decides it's a big deal and it is a big deal in those geographies and in those urban markets, but it doesn't have anything to do with how we loan money and what goes on in Texas and Oklahoma markets. And so, regardless, it's nice to hear your...
reinforcement in your comments about we anticipated concern. And it seems like in the world that we live in, you're guilty. You know, if you have one office loan, it's like, oh my God. And so we anticipated the questions and that's why we went into additional disclosures. And so it's nice to hear you point that out.
And so it's just a different world than where the news comes from. Got it. That's very helpful. And if I could just ask one last one for Tom, perhaps on just kind of capital management priorities. Obviously you guys are continuing to build TCE.
Your regulatory capital ratio is also increased in the quarter. You guys have what I think is a premium currency on a tangible
book basis relative to peers. I think a couple of quarters ago we were talking about a potential acquisition opportunity so we'd just love to kind of hear your thoughts on kind of how you're prioritizing excess capital deployment and within that context I can understand just given the macro uncertainty that exists out there that maybe there's a more of an impetus to perhaps just kind of hold capital these days so we'll just be any thoughts along those lines.
balance sheet and so we're constantly talking and pursuing opportunities that make sense and in the meantime it's just going to continue to pile up and there's really not much we can do about it with the exception of you know I guess we could do a
special dividend or we could do something but you know these are these are slippery slopes that we're living in right now. So we're plenty comfortable with.
letting the capital build up for a little while. You know, we just, we have flexibility. I think our dividend payout ratio, I think Nate, you helped us with some of that, and so did KBW, and I think we're at somewhere in the 18, 19% Kelly in payout ratio, and I think the industry is 35.
I think we're a little bit below that with the... Right. So I guess what I'm trying to say, Nate, is that this earnings machine is a beast and we have optionality if we chose to.
reduce capital by other ways, you know, but for now we're gonna, steady as she goes, and maybe we'll find something to buy.
Yep, no understudents. Definitely a good column to have. Are you seeing any more...
opportunities on the acquisition side of things these days you know obviously you know a lot of your smaller competitors I imagine some of you are experiencing margin pressures well and above you guys so I'm just curious if that's maybe leading to an increased
a number of discussions these days? Well, you would think it would, but I think this phenomenon that we have where you have these 220 channels?
Some people call them zombie banks, but there's so many people that went out and unfortunately for them made the decisions to extend way out in their durations and now they're just stuck and and they're they're stuck and not able to
to sell their institutions because of that big MTM issue, AOCI, and I don't see that changing unless... The higher the rates go, the worse it is for them and the more stuck they are. So that's taken a lot of opportunities off the table, and it's just gonna be that way for a while. So yeah...
Got it. Understood.
It makes sense. I appreciate you guys taking all the questions and all the color. Great quarter.
Thank you. And once again, if you would like to ask a question, please press star and one.
Our next question comes from Brady Gailey from KBW. Please go ahead with your question. Hey, thank you, good morning guys. Yeah, I just wanted to circle back to the energy credit that was recently in the media. I think this was an energy company that you guys were a lender to that went bankrupt.
on our books. It's a club deal, multiple banks involved, four total. And yeah, the loan is current.
You know, there's litigation going on here, and so I don't want to get too far into it other than to say we're a senior secured lender. We believe in the asset value. We believe in the cash flow the assets produce and we do not expect at this time that there would be a loss on that credit and so
The good news on the credit is, you know, with it being in this bankruptcy process, this isn't gonna linger, you know.
The good news on the credit is, with it being in this bankruptcy process, this isn't gonna linger. I could see it being an issue.
into the fourth quarter, but I don't think it's going to be an issue past the fourth quarter. And so we're going to have resolution pretty quickly here. Okay, and then I think that energy company was into natural gas. I know the price of natural gas has been pretty depressed here.
This was just a, this was the management of the company dropping the ball, okay? And you know, we see management teams in this industry operate as much like banking. We see management teams operate through down cycles and up cycles and the people that stick to the fundamentals that watch their liquidity.
they don't get caught in traps. And so this is a lot less to do with the price of the commodity than it is the management and the oversight of the company. And we'll just leave it at that. Okay, and then my final question, you talked about having capital piling up here, and your excess capital is growing.
And we talked about M&A, but I mean, if you look at your stock, if the stock trades at 145, a tangible book value, which if you look at that relative to the ROE that you guys are performing at, like that's a very compelling valuation. So do share buybacks ever make sense as a way to give capital back to shareholders.
Well, you know, I think the answer to that is that we've always felt like that the market hasn't properly valued the company based on quarter after quarter and year after year of exemplary performance. That's just a fact.
And so, unless that dynamic changes, it's hard to see that it's going to change materially. But with that being said, I think it wanders into, are you a short-term investor or are you a long-term investor? And if you really like a compounder, there's not a better stock.
And so we love what we're doing and we really don't feel the pressure to do any share buybacks because even with
the capital piling up, what was our, what's our ROE, 22, 3%? 26. Right, 26, well that was for the quarter. And so, I don't know what it's going to be for the year, but I guess I would say to you, Brady that, yeah, I understand the argument, but until we dip down into your central bank account and taken advantage of your internet connection, then we don't pay anything racers. Wevette awake Medici. Go to Tony Courier's website and get Sol significantly better as you.
a much lower return on equity, we're proving to the market that we can grow the company and we can carry substantial capital and yet still outperform on the returns. And so we really don't have that, I guess you'd call it immediate pressure.
or even near-term pressure to repurchase shares. And so that's kind of the way we view it. And ladies and gentlemen, at this time, in showing no additional questions, I'd like to turn the floor over to the panelists.
We're really blessed to be in the part of the country that we're in.
country that we're in.