Bank7 Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 7 speakers on the call.

Operator

Morning, everyone. Welcome to Bank 7 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. 3.

Operator

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 10, monetary and supervisory policies of banking regulators. Should 1 or more of these risks materialize 4 should underlying assumptions prove incorrect. Actual results may vary materially from those expected. 3.

Operator

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 ks that was filed this morning by the company. 7. Representing the company on today's call, we have Brad Haynes, Chairman Tom Travis, President and CEO J. T.

Operator

Phillips, Chief Operating Officer Jason Estes, Chief Credit Officer and Kelly Harris, Chief Financial Officer. 9. With that, I would like to turn the floor over to Tom Travis.

Speaker 1

Thank you. Good morning and welcome everyone. 2. We were pleased with our quarter and pleased with our year to date. If you boil it all down to why we were able 2.

Speaker 1

Again, have record profits and earnings per 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 frontline. And we're just 2. We continue to stay focused on our fundamentals and we are also mindful of what's going on in the market and 2.

Speaker 1

We're carrying excess liquidity, just in case, and we're happy with the 2. Position of that balance sheet that continues to have no debt, extra liquidity and plenty of money for turbulence should it come into the markets again. And so with that being said, 3. It's not sexy and fancy, but fundamentals just

Speaker 2

don't go out of style as they say,

Speaker 1

and we're real pleased about it. And I think 2. If you look back at the prior 2 quarters earnings call commentary, maybe 3 quarters, the year has kind of shaped up the way we thought it would. 3. And with the Fed continuing to increase rates, clearly the funding costs have gone up, but we've managed our margin within our historical ranges and very happy about that.

Speaker 1

So with all that being said, we're happy to take any all calls or questions you may have. Thank you.

Operator

Ladies and gentlemen, at this time, we'll begin the question and answer session. 2. 2. 1 again. Our first question today comes from Todd Windler from Stephens Incorporated.

Operator

Please go ahead with your question.

Speaker 2

Hey, good morning, everyone. Good morning. 2. Just want to start off with expenses. We saw another decrease this quarter.

Speaker 2

Can you maybe give us some color on your expectations for expense growth moving forward?

Speaker 3

Yes. We did have a slight decrease in Q2 versus Q1. And from a run rate perspective, I like the Q2 better going forward, maybe a little bit higher at 7,500,000.

Speaker 2

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 nonperforming loans and loan balances remaining relatively flat, can you maybe give us some color around the reserve field?

Speaker 4

Yes, I think that it's just kind of our DNA whenever you have what we believe to be some economic headwinds out there or 2. The portfolio has held up very well. Past dues are down. You'll see positive trends, credit trends throughout of the book. I think when you're comparing to the last couple of quarters.

Speaker 4

So with that being the case, 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 2. Some of those effects I think in the economic data. And so regardless of what the Fed does in the next couple of meetings, we just think it was prudent to get ahead of that.

Speaker 2

Okay. No, that was really good color. And then one last one from me. Loan balances remained flat this quarter. Can you 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?

Speaker 4

Yes. From a segment standpoint, we're 3. Pretty consistent I think. You see us hospitality, energy, C and I 3. And then the same stuff we've been doing, I think is expect the same in the future.

Speaker 4

2. 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. I think single digits 6 this year and I still feel confident in that. I think this will be the 3rd call in a row or maybe even the 4th where we talked about what does this year look like. And 2.

Speaker 4

I think we're unchanged even though March was a little bit turbulent and caused some uncertainty. 2. It's still looking like that's a good number for the overall year.

Speaker 1

Jason, am I correct that Construction is actually down. It is. It is. Yes. 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.

Speaker 2

All right. That was great color. Thank you guys and great quarter.

Operator

Thank you. 2. Our next question comes from Nathan Race from Piper Sandler. Please go ahead with your question.

Speaker 5

Yes. Hi, guys. Good morning. 2. Thanks for taking the question.

Speaker 5

Good morning. Just a question on just kind of the margin outlook ex fees and accretion. It looks like it came down about 6 basis points versus the Q1. It looks like the increase in deposit costs was actually less than what we saw during the Q1. 2.

Speaker 5

Just curious to kind of get your expectations in terms of perhaps the magnitude of future pressure that we can expect during 3Q and 4Q of this year?

Speaker 1

Nate, this is Kelly. I

Speaker 3

think from an ex fee perspective, 455 is a good number 3. And I'll just highlight the fact that we are carrying additional liquidity. And so you could see a shift 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 will have an impact on NIM going forward as well. But I think from a core NIM perspective, 455 is

Speaker 1

a good number. That's kind of real time, isn't it, Kelly? That is.

Speaker 5

Okay. Got you. And perhaps maybe a larger kind of more broader question on the NIM going forward. 2. In a theoretical kind of higher for longer interest rate environment, where do you guys going to see your margin kind of settling out ex fees over that kind of longer term period?

Speaker 1

We're delighted and proud of the efforts of the team with regard to negotiating 2. 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've ever dipped 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.

Speaker 1

And I'm not saying that we're going to go from 455 real time today to 430. 2. But if it happens, it happens. And I think a lot of it depends on the Fed and what they do. I think everyone's expecting a rate increase next week.

Speaker 1

However, if they do take a pause and they don't do anymore, then I think you're going to More easily keep your NIM from dropping to the absolute low in the historical range. And So we'll just see, but as we point out in our deck, I think it's 51% of our loans are daily floaters and 3. You're going to have a few more loans at the ceiling, but I think for us, 2. We're going to be within those historical norms. And I would point out also at some point Nate, we're carrying a 3.

Speaker 1

Pretty heavy treasury note position. We're 7 months away from the actual maturity on that instrument. 2. And if we chose to do so today, we could liquidate that and pick up, 2. I don't know what the effect would be to NIM in basis points, but it would certainly pick up earnings.

Speaker 1

And so there are of things that we have that are going to eventually offset that NIM pressure.

Speaker 5

And if I remember correctly, that large maturity in the securities book that occurs in the Q1 of next year?

Speaker 1

February, I think it's the end of February.

Speaker 5

Okay, great. And perhaps just changing gears, thinking about the energy portfolio in particular. It didn't appear that you guys had much growth. In fact, it looks like the ounces shrink a little bit versus the Q1. 2.

Speaker 5

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.

Speaker 4

Yes. 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, 2. The energy book is performing very well. I will say that the deal flow there has slowed quite a bit 2 from the pace of last year.

Speaker 4

And we did contract about it's about $10,000,000 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've banked for a long time.

Speaker 5

Got you. And Jason, just any update on those kind of 2 large non accrual loans that I believe constitute large majority of the existing NPA balances come out of the 2nd quarter?

Speaker 4

2. Yes. So, one of them had a consistent, nice, continued improvement and it has now for 12 months, maybe a little more than 12 months. And so, we used to refer to it as the green shoots. I don't even know if you can call it that at this point.

Speaker 4

It's just a nice recovery story there. And so we're optimistic that that one may come out of that bucket in the near future. 3. And then the other credit, again, that involves litigation, well secured. Don't expect any loss, that we have to work through the court system to get that money back.

Speaker 5

Okay, great. And I appreciate the added details on the office commercial real estate exposure on the slide deck. 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 CRE portfolio, just given that scenario of focus these days for investors?

Speaker 4

It is. We're so unique, I think, compared to maybe other banks our size and especially the bigger banks because a lot of 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 suburban. 2. We used to call them like a house office almost. These are smaller loans.

Speaker 4

They're amortizing rapidly in there. We just don't expect stress In that portfolio of ours, we really don't see a single loan in there that we have Any expected issues on? Nate, I would add to Jason's comments that we all know that the news is dominated and emanates 2

Speaker 1

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 I'm not making fun of anybody or anything, but it's just a perfect illustration of 2. Somebody decides it's a big deal and it is a big deal in those geographies and in those urban markets, but it hasn't it doesn't have anything to do with how we loan money and what goes on in Texas and Oklahoma markets. And so 2.

Speaker 1

Regardless, it's nice to hear your reinforcement in your comments about we anticipated concern. 2. And it seems like in the world that we live in, you're guilty. 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.

Speaker 1

And so it's nice to hear you point that out. 2. And so it's just a different world than where the news comes from.

Speaker 5

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. 2.

Speaker 5

Your regulatory capital ratio has also increased in the quarter. You guys have what I think is a premium currency on a tangible book basis relative to peers. And I think a couple of quarters ago, we were talking about 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 more of an impetus to perhaps just kind of hold capital these days.

Speaker 5

So we just love to get any thoughts along those lines, Tom?

Speaker 1

Well, I guess we could be kind of a smart aleck and answer and say, gosh, we're sorry that we're making so much money that capital is piling up so quickly. 3. But with all seriousness, that's the fact. And we clearly are very interested in acquisitions. We've always been consistent.

Speaker 1

We look at the right side of the 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 2. There's really not much we can do about it, with the exception of, I guess, we could do a Special dividend or we could do something, but these are slippery slopes that we're living in right now. So 2.

Speaker 1

We're plenty comfortable with letting the capital build up for a little while. We just and 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 and payout ratio and I think the industry is 35.

Speaker 4

Correct. I think

Speaker 3

we're a little bit

Speaker 4

below that with the Right.

Speaker 1

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, but for now we're going to steady as she goes and maybe we'll find something to buy.

Speaker 5

Yes. No, understood. It's definitely a good problem to have. Are you seeing any more opportunities on the acquisition side of things these days. Obviously, a lot of your smaller competitors, I imagine, to some degree are experiencing margin pressures well and above you guys.

Speaker 5

So I'm just curious if that's maybe leading to an increased number of discussions these days?

Speaker 1

Well, you would think it would, but I think this phenomenon that we have where you have these, I think some people call them zombie banks, but these there are 2. 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 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. 2. So that's taken a lot of opportunities off the table and it's just going to be that way for a while.

Speaker 5

Got it. Understood. Makes sense. I appreciate you guys taking all the questions and all the color. Great quarter.

Speaker 1

2.

Operator

Our next question comes from Brady Gailey from KBW. Please go ahead with your question.

Speaker 6

Hey, thank you. Good morning, guys. 3. Yes, 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.

Speaker 6

I was just wondering if you could talk about the size of that credit and it doesn't appear that that credit moved into NPAs. So do we think that will be more of a 3rd quarter NPA increase?

Speaker 4

Yes. So the loan is approximately $33,000,000

Speaker 1

on our books.

Speaker 4

It's a club deal, multiple banks involved, 4 total. And yes, the loan is current. And there's litigation 3. 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.

Speaker 4

We believe in the cash flow that's produced. And we do not expect at this time that there would be a loss on that credit. And so 2. The good news on the credit is with it being in this bankruptcy process, this isn't going to linger. I could see it being an issue into the Q4, but I don't think it's going to be an issue past the Q4.

Speaker 4

10. So we're going to have resolution pretty quickly here.

Speaker 6

Okay. And then I think that energy company was into natural gas. I know the price of natural gas has been pretty depressed here. Are you all seeing any other weaknesses in any of your other nat gas borrowers?

Speaker 1

This is Tom Brady. Listen, this is not a it's the answer is no, we're not. This was just a This is the management of the company dropping the ball, okay? And we see management teams in this industry 2. Operate as much like banking.

Speaker 1

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.

Speaker 6

Okay. And then my final question, you talked about 7.7 times. Having capital piling up here, your excess capital is growing. And we talked about M and A, but I mean, if you look at your stock, The stock trades at $145,000,000 a tangible book value, but 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?

Speaker 1

Well, 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 5. 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.

Speaker 1

2. 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 ROE, 22%, 3%?

Speaker 4

26%.

Speaker 1

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 yes, I understand the argument, but 2. Until we dip down into a much lower return on equity, we're proving to the market that we can grow the company 3. 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.

Speaker 1

And so that's kind of the way we view it.

Operator

7. At this time, I'm showing no additional questions. I'd like to turn the floor back over to Tom Travis for closing remarks.

Speaker 1

Thanks again for your interest and participation. We like where we're at. The company is dynamic. We've got a wonderful team of bankers and management and we're really blessed to be in the part of the country that we're in. And we'll

Operator

3. And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your

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Key Takeaways

  • Bank 7 delivered record profits and EPS in Q2 by sticking to its fundamentals of relationship banking, holding excess liquidity, and carrying no debt.
  • Net interest margin ex-fees remained around 4.5%, within historical norms, despite rising funding costs and a heavy liquidity position.
  • The loan loss allowance was increased proactively amid anticipated economic headwinds, even as nonperforming loans declined and credit trends stayed positive.
  • Loan balances were flat in Q2, with management targeting mid-single-digit loan growth for the year, focusing on hospitality, energy, C&I, and a slowdown in construction lending.
  • Capital generation remains strong with a low payout ratio, no immediate share buybacks planned, and optionality to pursue acquisitions as opportunities arise.
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Earnings Conference Call
Bank7 Q2 2023
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