Q4 2023 Bank7 Corp Earnings Call
Welcome to thank seven Corp, fourth quarter and full year earnings call.
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Before we get started I'd like to highlight the legal information and disclaimer on page 24 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.
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 Vice Chairman and CEO.
Speaker Change: J T Phillips Chief operating officer.
Jason <unk> Chief Credit Officer.
Speaker Change: Kelly Harris Chief Financial Officer.
Speaker Change: And with that I'll turn the call over to Tom Travis. Please go ahead.
Thomas L. Travis: Thank you good morning, everyone.
Thomas L. Travis: Beautiful day here in Oklahoma City to those of you that are around the country. We've.
Thomas L. Travis: We've had a <unk>.
Cold spell of whether that it's nice to be nice to be over with.
Thomas L. Travis: As you can see we had signaled in our last earnings call.
Thomas L. Travis: In late October that we had subsequent events.
Thomas L. Travis: The third quarter closing.
Thomas L. Travis: That we're going to affect significantly affect the fourth quarter numbers and as you can see that in fact did happen.
So I suppose that it reminds me of a comment I've heard before and I think everyone on the calls earned before and that is.
Except for the.
Thomas L. Travis: One event, how was the play Mrs Lincoln and not to be more of it but that's pretty much how we view our company today, because when you look at the totality of.
Thomas L. Travis: The fundamentals of the company for the year.
Thomas L. Travis: But for that one event.
Thomas L. Travis: It was a phenomenal year and when you when you evaluate what we say is a phenomenal year, even with the large charge related to the one credit.
Thomas L. Travis: We're still at almost 19, 5% return on tangible common equity actually that's average tangible common equity and we did some analytics about three weeks ago and we used the first three months of first nine months of the year and about 90% of the banks in the country.
Thomas L. Travis: Very.
Thomas L. Travis: It did not make 19, 5% return on average tangible common equity so.
Thomas L. Travis: As you can see and as we mentioned in the lab.
Last earnings call.
Thomas L. Travis: In a perverse way the strength of the company is highlighted by the fact that we took this significantly one off out of character negative event and just kept brought on moving forward and so.
That's the way we view it and we take comfort in that and if you look at the other components of the company and not just the earnings and the return on equity you can see that the company has done an excellent job of managing its net interest margin.
Thomas L. Travis: The historical averages of the net interest margin are pretty much where we are today and we did that through a pretty difficult rate environment.
Thomas L. Travis: Yeah, but not for that one credit the credit metrics are really strong and even better than they had been for the prior year or two and so we feel really good about the book.
Thomas L. Travis: The interest of the operating expenses for the company are very much intact as far as maintaining our efficiency ratio.
Speaker Change: The one comment I would make is that.
Speaker Change: The company as a part of that one credit we acquired a couple of handfuls of oil and gas wells, we did not acquire a company we acquired specific working interest in oil and gas wells and as a result of that Youll see a slightly inflated noninterest income number youll all.
Speaker Change: Also see a slightly inflated noninterest expense number and so if you remove those two items out of the income statement. You will have you would have seen that the efficiency ratio would still be in that 33% to 34% range instead of a 39% range and so.
Speaker Change: When we look at the fundamentals of the company, we feel really good about it I would say that with regard to the one particular one off credit.
Speaker Change: We are in the.
Speaker Change: Seventh or eighth inning of the bankruptcy process and litigation, we have real strong clarity and good optics into where we think it's going to end up we feel good about the.
Speaker Change: The amount of money, that's been either expense or set aside relative to some certainty clearly we don't feel good about having to do it. However, we are confident that we've accounted for what we need to account for and with regard to that credit with regard to the bankruptcy with regard to the litigation.
<unk>.
Speaker Change: We're a very transparent company. We always answer every question. We can however, we cannot really speak much to it.
We need to be respectful of the fact that.
Speaker Change: Details and specifics are in the public realm here today, and so we're not really going to comment much beyond what's been said today other than we feel like we've accounted for it properly.
Speaker Change: So with all that being said.
Speaker Change: We feel really good about our company and we're excited to move forward into this new year and with that we'll open it up for questions.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble the roster.
Speaker Change: And our first question will come from Brady Gailey of <unk>. Please go ahead.
Brady Gailey: Hey, Thank you good morning, guys.
Brady Gailey: Good morning, everyone.
Brady Gailey: So.
Brady Gailey: I understand the impact of owning these energy assets and it's pushing up the income is pushing up expenses.
Brady Gailey: How long do you anticipate.
Owning these assets is this gonna be a short term thing or is this something that you anticipate all in for a while.
Thomas L. Travis: This is Tom.
Thomas L. Travis: And I've got I'll give you the approximate numbers have the exact numbers in my lap, but just to make it easy for you.
Thomas L. Travis: So we booked approximately $16 $9 million of an asset value on the balance sheet.
Thomas L. Travis: And the effective date and cash flow of the wells started September the first of last year and so when you look at the starting point and the balance sheet of $16 9 million for the first four months, we will have collected for $5 million.
Thomas L. Travis: So the new asset.
Thomas L. Travis: Or the actual cash flow.
Thomas L. Travis: That results from that is about $12 4 million.
Thomas L. Travis: So we will have collected for the first four months and most of which we have collected 27% a bad asset value. So then when you think about cash flow for 2020 for the cumulative cash flow for at the end of this year is projected to be 60.
Thomas L. Travis: Yeah. So when math that means we will have collected $10 2 million of the $16 nine and Dan If you want to roll that forward for through 2025, we will have collected 13 two of the $16 nine which is about 78.
Thomas L. Travis: Percent of the cash flow and for anyone on the call that's not familiar.
Thomas L. Travis: The cash flows from producing oil and gas wells is not a linear decline curve.
Thomas L. Travis: It's skewed more heavily towards the more recent months and so as you collect the cash flow the asset value will come down much more quickly in the early months and then it smoothed out so the bottom line is is that.
Thomas L. Travis: Again, we will have collected a little over 25% of the cash flows of that beginning asset value by now and then by the end of the year, 60% and so we expect it's already.
Thomas L. Travis: Not a material amount relative to the company, but we will expect by the end of the year to be pretty immaterial.
Speaker Change: Okay Alright.
Speaker Change: Alright, so thats the plan and there is not a thought of just simply selling these assets more near term.
Speaker Change: It's possible.
Speaker Change: I will tell you that.
We have hedged the about was at 62% of the oil Jason oil revenue. So this is predominantly oil and not natural gas and so we have hedged to make sure that we can receive the most of the cash flows if not all of it and so yes.
Speaker Change: It is possible.
Speaker Change: If you saw an increase in.
Speaker Change: The commodity prices in the market with value the assets higher it's possible we could sell.
Speaker Change:
Speaker Change: Okay Alright.
Speaker Change: And then maybe you are.
Looking at the core fundamentals of the bank, which were pretty impressive in the quarter. How are you guys thinking about loan growth from here and what's the outlook for the core net interest margin.
Speaker Change: Hey, Brady is Jason I think again kind of like last year. At this time, we were sitting here coming off of a really rapid growth in 2022, and we signaled hey, this is going to be a different year, we think it'll be more like mid moderate single digit I think we ended up at seven <unk>.
Speaker Change: I think something in that range is probably reasonable to expect for this year.
I think we've got a.
Speaker Change: Fair amount of known payoffs coming in the first half of the year expected known quantified payoffs the deal pipeline is still nice.
Speaker Change: We booked about $90 million of new fundings in the fourth quarter, which was a nice solid quarter.
Speaker Change: And so.
Speaker Change: It looks like first quarter pipeline is decent but with those known payoffs I think will be pretty muted in the first half of the year and picking up in the second half.
Speaker Change: I would also note that we would have to signal that.
Speaker Change: The large energy credit pay down and pay off.
Speaker Change: <unk> has been delayed somewhat because of the bankruptcy. So you you could likely see a little bit higher pay off amount in the first quarter due to that than you would normally see.
Speaker Change: Alright, that's helpful. And then the core margin, it's been pretty consistent around $4 50 for the back half of 'twenty. Three is that how we should think about it going forward or do you think that there could be some slippage there.
Speaker Change: Hey, Barry This is Kelly if you look at December NIM core NIM, we were at 445 average $4 50 for the quarter.
Kelly J. Harris: We do have a large tranche of U S. Treasuries that matures at the end of February that that will move to a higher yielding asset of 533, assuming the fed.
Kelly J. Harris: And so you will see there is some positive events that will occur during the quarter that should lift NIM.
Kelly J. Harris: That said.
Kelly J. Harris: No color on what the Feds are going to do a march as well as then fighting paydowns.
Speaker Change: That's a good recap Kelly I would I would use the word delighted but not surprised.
Speaker Change: We are delighted with our company's ability to manage the NIM through the interest rate cycle, we're not surprised about it we purposely worked very hard to match the balance sheet. So that we're not caught with interest rate swings in wild fluctuations and so.
Speaker Change: As we are are prone to say on a regular basis. We are pleased with our ability to illustrate a NIM that's very steady.
Irrespective of the changes in the interest rate markets, and we don't see that changing.
Speaker Change: Alright, and then just finally for me Kelly, what what's the size of those treasuries that are rolling off and whats the rate there.
Kelly J. Harris: 100 million at one 5%.
Speaker Change: Okay, great. Thanks, guys.
Speaker Change: The next question.
Nathan Race: Western comes from Nathan race of Piper Sandler. Please go ahead.
Nathan Race: Hey, guys good morning.
Nathan Race: Good morning, Greg.
Nathan Race: Just wanted to clarify on the last point around the securities that are maturing in the first quarter is the plan just to leave those in cash or do you guys plan on redeploying that into securities in the first half of the year, just leaving it for some dry powder to redeploy into loans as.
Nathan Race: Jason described earlier.
Speaker Change: We're not going to we're not going to speculate.
Speaker Change: <unk>.
Speaker Change: Obviously, it's tempting to believe that we're at the end of <unk>.
<unk> cycle in however, as we all know that I think the wise thing for anyone to do is to not speculate and think you know and so we're going to take advantage of the yield curve inversion and I think today, the 10 year somewhere around what does it for one and the fed still over five <unk>.
Speaker Change: So I think our our belief is that we'll put it at the fed and.
Speaker Change: And kind of stay away from any kind of.
Fixing in and tried to anticipate rates dropping I think you also remember that liquidity is a real important function of the bank and part of the Rubik's cube and so.
Speaker Change: $100 million sounds like a lot of money, but it's really not relative to the movements on the balance sheet relative to loans and liquidity. So keeping it short and in cash will benefit us on the yield curve side that also maintains that strength and flexibility for liquidity and cash.
Speaker Change: Okay got it that's helpful.
Speaker Change: I'm just curious how you guys are thinking about deposit betas and pricing on the way down if we get a few fed rate cuts at some point. This year, how do you see that impacting the margin and just kind of overall the trajectory in NII over the course of 2024.
Speaker Change: I don't I mean, Kelly or Jason you want to talk about we budgeted pretty pretty similar to where we are yeah. I think if you look at our historical NIM through various rate cycles, we've been able to manage it up amended it down at all.
Speaker Change: Foresee this as being any different and so if the fed cut and we will be able to push down the deposit rates in tandem with with the asset side.
Anything you want to add to that Jason no other than we spend a lot of time on these calls talking about NIM and growth rates and they're very important things and I think if you look at our history, we've proven that we're not willing to sacrifice margins.
For the sake of growth and so I think youre going to see our disciplined just like it was there last year, it's going to continue to be the same right. We're going to work as hard as we can to maintain.
Jason: Top tier profitability, while we grow this company.
Speaker Change: Got it very helpful makes sense.
Speaker Change: Just one last one for me on kind of excess capital priorities into this year you guys are operating with pretty healthy capital levels across the board. So I'm just curious what youre seeing in terms of acquisition opportunities and just kind of your optum.
Speaker Change: There's a level on that front.
Speaker Change: I would say that we are.
Speaker Change: Laser focused on acquisition opportunities and it takes laser focus because.
There is still a healthy amount of what we call. The zombie banks that I think you guys do too.
Speaker Change: And we.
Speaker Change: We continue to have conversations we're making calls on people that are not for sale, we're planting seeds.
Speaker Change: We are constantly evaluating.
Speaker Change: Everything we can and.
Speaker Change: It's probably going to be.
Speaker Change: A tougher environment for the next two or three or four months for.
Speaker Change: Just as tough environment, I should say and then.
Speaker Change: If rates do start coming down.
Speaker Change: Some of the quote zombie banks.
Speaker Change: Yes.
Speaker Change: It may have an ability to sell and so you might see a little.
Speaker Change: Flurry there in the back half of the year, if the rates come down and so are our goal is to position ourselves to try to be there when when we can so that we can buy them and we definitely are we definitely have a mindset to do that.
Speaker Change: Got it that's great and if I am.
Speaker Change: If I could squeeze actually one last one in just curious Jason maybe in terms of.
Speaker Change: We're all.
Speaker Change: Accretion trends in criticized and classified in the quarter.
Speaker Change: Side of the one energy loan that we've touched on yet.
Jason: Yes, so the quarter as Tom mentioned in his opening comments the credit quality of the book the metrics have actually improved outside of this one credit not that they were bad other than the steel but.
Jason: I think if you.
Jason: Recall, a couple of years ago, we had another charge off that loan paid in full during the quarter the remainder of it and so the balance we had left is all paid off and it's gone and then.
Jason: We've had another NPA, we've been carrying that's about 34% of the NPA balance at the end of the year and we're optimistic that that thing could be off of that list here and maybe even in the first quarter and so.
Jason: Were not seeing stress throughout the portfolio that that being said you know we've got a medical relationship is migrated down and it's about $10 million altogether, but.
Jason: More going positive then there has been negative for the last couple of quarters outside of the one credit.
Speaker Change: Gotcha, and just within that context, you kind of envision the reserve kind of remaining where it was coming out of the end of the year relative to loans or do you guys kind of see it as kind of an over inflated level just given some of the credit events that occurred late last year.
Speaker Change: I would say, it's probably over inflated of our historical range and where we strive.
Strive to keep it but I think it's warranted based on what's transpired in the last couple of quarters.
Speaker Change: Okay great.
Appreciate all the color. Thank you.
Speaker Change: Okay.
Speaker Change: The next question comes from Matt Olney of Stephens. Please go ahead.
Matt Olney: Alright, thanks, guys good morning.
Matt Olney: Good morning.
Matt Olney: Do you guys have the dollar amount of the charge offs for the fourth quarter.
Matt Olney: I didn't see that one.
Matt Olney: And Matt This is Kelly the other total <unk> for the quarter was $16 5 million.
Matt Olney: Okay.
Okay perfect. Thank you Kelly and then on the deposit side.
Really strong non interest bearing deposits in the fourth quarter any color on the growth there and then you hit on the betas earlier, but just the appetite.
Matt Olney: To grow deposit balances.
Matt Olney: For the year.
Kelly J. Harris: Well, the noninterest bearing will come down a little bit in the early part of the year. We had a few large significant noninterest bearing deposits that occurred later in the in the last year and we expect some of that to run off and so.
Kelly J. Harris: We don't believe that the noninterest bearing deposits are going to show much absolute growth from the prior year because of that.
Kelly J. Harris: Inflated number that came in late in the late last year, So now relative to.
Kelly J. Harris: <unk>.
Kelly J. Harris: If you take those.
Few deposits out we would expect to do what we've always done and that is a nice steady growth in our deposit book and our relationship deposits. Our bankers are doing a really nice job of.
Kelly J. Harris: Making loans when we have new deposit relationships and so we don't expect there to be much much different if at all.
Kelly J. Harris: And the way we operate going forward I think it's probably fair to say we are still seeing some migration where people are moving what were noninterest bearing accounts over into some interest bearing products and that's been ongoing ever since the rate. This last rate cycle moving up started.
Speaker Change: Yes, okay.
Speaker Change: That makes sense.
Speaker Change: And then just as far as the rate sensitivity you gave us some good details there on slide four it.
Speaker Change: It looks like about 78% of your.
Speaker Change: No Arnie assets reprice in that first year.
Just within the loans in and that's it it seems like most of those reprice at first you are going to be floaters that reprice in the first few weeks. After a fed cut is that right or any color on kind of what percent of those loans are floaters.
Speaker Change: Yes, I think if you look at the first footnote on that same page Matt.
Speaker Change: That million dollars 43 in the loans in that less than a year $901 million, our daily floaters and of that <unk> got $86 million at the ceiling.
Speaker Change: So roughly 90% of that total.
Speaker Change: That was you said that maintenance is one 1 billion in loans or floaters 900, yes.
Speaker Change: Look I think we always have to remember not saying that people don't but we are very active in managing our floors and <unk>.
Speaker Change: So that's.
Speaker Change: That's part and parcel to the.
Speaker Change: Stability in the NIM and the historical illustration that we show you in our ability to maintain that NIM. So.
Speaker Change: Yes, they will slow down but at some point, we start hitting floors and that's.
Speaker Change: That's a big component of our of our bank.
Speaker Change: Yep, Okay. Good.
Speaker Change: Good points.
Speaker Change: And then on expenses and fees any any color on the way youre thinking about that in 2024, if we if we just remove the oil and gas assets that you've mentioned before.
Speaker Change: We're proud of that we if you look at the expense load for the bank and you take out the oil and gas impact in MRI Kelly It was 33% efficiency ratio.
Speaker Change: And if you look at the expenses.
Speaker Change: Two the size of the bank and we feel really good about our ability to manage our expenses and I think that's been proven over the over the years and nothing is going to change we are spending a little bit of money to upgrade and relocate a few fixed assets, but that really won't show up until very.
Speaker Change: Late in the year, and probably really not until next year because it just takes a while to construct a few branches so but even with that we don't expect the expense load of the bank to change in a meaningful way.
Speaker Change: Okay.
Speaker Change: Alright, guys. Thanks for your help.
Speaker Change: Okay.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Tom Travis for any closing remarks.
Thomas L. Travis: Thank you again, we're pleased with our position of our company and our results and.
We're especially pleased to move past that one off event and it's in the rearview mirror and we've shown the ability to manage through that and still produced good results and we're really excited about this year and excited too.
Thomas L. Travis: Just get right back on track to those really truly strong strong numbers and we appreciate everyone's participation and involvement.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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