Bank7 Q4 2023 Earnings Call Transcript

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January 29, 2024

There are 7 speakers on the call.

Operator

Welcome to Banc7 Corp's 4th Quarter and Full Year Earnings Call. All participants will be in listen only mode. 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 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.

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. Representing the company on today's call, we have Brad Hain, Chairman Tom Travis, Vice Chairman and CEO J. T. Phillips, Chief Operating Officer Jason Estes, Chief Credit Officer Kelly Harris, Chief Financial Officer.

Operator

And with that, I'll turn the call over to Tom

Speaker 1

country. We've had a cold spell of weather that it's nice to be over with. As you can see, we had signaled in our last earnings call back in late October that we had subsequent events post the Q3 closing that we're going to affect significantly affect the 4th quarter numbers and as you can see that in fact did happen. And so I suppose that it reminds me of a Comment I've heard before and I think everyone on the call has heard before and that is except for the One event, how was the play, Mrs. Lincoln?

Speaker 1

And not to be morbid, but that's pretty much how we view our company today because when you look at the totality of the fundamentals of the company for the year, But for that one event, it was a phenomenal year. And when you evaluate What we say is a phenomenal year even with the large charge related to the one credit, 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 3 weeks ago and we used the 1st 3 months or 1st 9 months of the year And about 90% of the banks in the country did not make 19.5% return on average tangible common equity. So, as you can see and as we mentioned in the Last earnings call, 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 right on moving forward. And so that's the way we view it and we take comfort in that.

Speaker 1

And if you look at the other components of the company and not just earnings and the return on equity, you can see that the company has done an excellent job of managing its net interest margin. 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, but not for that one credit. The credit metrics are really strong and even better than they had been for the prior year or 2. And so we feel really good about the book.

Speaker 1

The interest of the operating expenses for the company are very much intact as far as maintaining our efficiency ratio. The one comment I would make is that 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, you'll see a slightly inflated non interest income number. You'll also see a slightly inflated non interest expense number.

Speaker 1

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 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, we are in the 7th or 8th 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 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.

Speaker 1

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, we're a very transparent company. We always answer every question we can. However, we cannot really speak much to it and we need to be respectful of the fact that 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 1

And so with all that being said, 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.

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble the roster. And our first question will come from Brady Gailey of KBW. Please go ahead.

Speaker 2

Thank you. Good morning, guys.

Speaker 1

Good morning. Good morning.

Speaker 2

So I understand the impact of Owning these energy assets and it's pushing up fee income, it's pushing up expenses. How long do you anticipate Owning these assets, is this going to be a short term thing or is this something that you anticipate owning for a while?

Speaker 1

This is Tom. And I've got I'll give you the approximate numbers. I have the exact numbers Just to make it easy for you. So we booked approximately $16,900,000 of an asset value on the balance sheet. And the effective date and cash flow of the wells started September 1 last year.

Speaker 1

And so when you look at the starting point in the balance sheet of $16,900,000 For the 1st 4 months, we will have collected $4,500,000 So the new asset or the actual cash flow that results from that is about $12,400,000 So we will have collected for the first 4 months and most of which we have collected 27% of that asset value. So then when you think about cash flow for 2024, the cumulative cash flow for at the end of this year is projected to be 60%. So in math, that means we will have collected $10,200,000 of the $15,900,000 And then if you want to roll that forward for through 2025, we will have collected $13,200,000 of the 16.9%, which is about 78% of the cash flow. And for anyone on the call It's not familiar. The cash flows from producing oil and gas wells is not a linear decline curve.

Speaker 1

It 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 smooth out. So the bottom line is that 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 Not a material amount relative to the company, but we will expect by the end of the year to be pretty immaterial.

Speaker 3

Okay. All

Speaker 2

right. So that's the plan and there's not a thought of just simply selling these assets more near term?

Speaker 1

It's possible. I will tell you that we have hedged the about was it 62%

Speaker 3

The oil revenue.

Speaker 1

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 It is possible if you saw an increase in the commodity prices and The market would value the assets higher, it's possible we could sell.

Speaker 2

Okay. All right. And then maybe back or 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 4

Hey, Brady, this is Jason. I think again kind of like last year at this time we were sitting here coming off of a really growth in 2022 and we signaled, hey, this is going to be a different year. We think it will be more like a mid moderate single digit. I think we ended up at 7%. I think something in that range is probably reasonable to expect for this year.

Speaker 4

I think we've got a fair amount of known payoffs coming in the first half of the year, expected known quantified payoffs. The deal pipeline Still nice. We booked about $90,000,000 of new fundings in the Q4, which was a nice solid quarter. And It looks like Q1 pipeline is decent, but with those known payoffs, I think we'll be pretty muted in the first half of the year and picking up in second half.

Speaker 1

I would also note that we would have to signal that the large energy credit pay down and payoff has been delayed somewhat because of the bankruptcy. So you could likely see a little bit higher payoff amount in the Q1 due to that than you would normally see.

Speaker 2

All right. That's helpful. And then the core margin, it's been pretty consistent around $450,000,000 for the back half of twenty twenty three. Is that How we should think about it going forward or do you think that there could be some slippage there?

Speaker 5

Hey, Brady, this is Kelly. If you look at December NIM, core NIM, we were at 4.45 average 4.50 for the quarter. We do have a large tranche of U. S. Treasuries that mature at the end of February that that will move to a higher yielding asset of 533, assuming the Fed.

Speaker 5

And so you will see there's some positive events that will occur during the quarter that should lift NIM. That said, No color on what the Fed are going to do in March, as well as in fighting pay downs?

Speaker 1

That's a good Kelly, I would use the word delighted, but not surprised. We are delighted with our Company's ability to have managed the NIM through the interest rate cycle, we're not surprised about it. We purposely Work very hard to match the balance sheet so that we're not caught with interest rate swings and wild fluctuations. And so As we are prone to say on a regular basis, we're 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 2

And then just finally for me, Kelly, what's the size of those treasuries that are rolling off and what's the rate there?

Speaker 5

$100,000,000 at 1.5%.

Speaker 2

Okay, great. Thanks guys.

Operator

The next question comes from Nathan Race of Piper Sandler. Please go ahead.

Speaker 3

Hi, guys. Good morning. Good morning, Nathan. Just want to clarify on the last point around the securities that are maturing in the Q1. Is the plan just to leave those in cash or do you guys plan on redeploying that into in the first half of the year or just leaving it for some dry powder to redeploy into loans as Jason described earlier?

Speaker 1

We're not going to speculate. It's obviously, it's tempting to believe that we're at the end of a Great cycle and 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 is it 4.1% and the Fed still over 5%. So I think our belief is that we'll put it at the Fed and kind of stay away from any kind of fixing in and trying to anticipate rates dropping.

Speaker 1

I think you also remember that Liquidity is a real important function of the bank and part of the Rubik's cube. And so, 100,000,000 dollars 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 and it also maintains that strength and flexibility for liquidity and cash.

Speaker 3

Okay, got it. That's helpful. 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 1

I mean, Kelly or Jason, you want to talk about we budgeted pretty similar for where we are. Yes. I think if you

Speaker 5

look at our historical NIM through various rate cycles, we've been able to manage it up and manage it down. And I don't foresee this being any different. And so if It's a Fed cut and we'll be able to push down the deposit rates in tandem with the asset side.

Speaker 1

Anything you want to add to that,

Speaker 4

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 you're going to see our discipline 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 top tier profitability while we grow this company.

Speaker 3

Got it. Very helpful. Makes sense. And just one last one for me on kind of excess capital priorities And do this year, you guys are operating with pretty healthy capital levels across the board. So just curious what you see in terms of acquisition opportunities just kind of your optimism level on that front?

Speaker 1

I would say that We are laser focused on acquisition opportunities and it takes laser focus because There's still a healthy amount of what we call the zombie banks that I think you guys do too. And We continue to have conversations. We are making calls on people that are not for sale. We're planting seeds. We are constantly evaluating everything we can and it's Probably going to be a tougher environment for the next 2 or 3 or 4 months for Just as tough of environment, I should say.

Speaker 1

And then if rates do start coming down, Some of the quote zombie banks may have an ability to sell. And so you might see a little flurry there in the back half of the year if the rates come down. And so our goal is to position ourselves and to try to be there when we can so that we can buy and we definitely are We definitely have a mindset to do that.

Speaker 3

Got it. That's great. And if I could squeeze actually one last one in. Just curious, Jason, maybe in terms of Overall, migration trends and criticizing classified in the quarter outside of the One Energy loan that we've touched on?

Speaker 4

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 this deal, but I think if you 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 have left is all paid off and it's gone. And then we've had another NPA we've been It'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 in the maybe even in the Q1.

Speaker 4

And so we're not seeing stress throughout the portfolio. That being said, we've got a medical relationship that has migrated down and it's about $10,000,000 altogether, but it's more going positive than there has been negative for the last couple of quarters outside of the one credit.

Speaker 3

Got you. And just within that context, you kind of envision the reserve kind of remaining where it was come 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 4

I would say it's probably over inflated of our historical range and where we Strive to keep it, but I think it's warranted based on what's transpired in the last couple of quarters.

Operator

The next question comes from Matt Olney of Stephens. Please go ahead.

Speaker 6

Hey, thanks guys. Good morning.

Speaker 3

Good morning.

Speaker 6

Do you guys have the dollar amount of the charge off For the Q4, I didn't see that one.

Speaker 5

Hey, Matt, this is Kelly. The other total NCO for the quarter was 16,500,000

Speaker 6

Okay, perfect. Thank you, Kelly. And then on the deposit side, Really strong non interest bearing deposits in the Q4. Any color on the growth there? And then You hit on the betas earlier, but just the appetite to grow deposit balances for the year?

Speaker 1

Well, the non interest bearing will come down a little bit in the early part of the year. We have a few large significant non interest bearing deposits that occurred later in the last year and we expect some of that to run off. And so We don't believe that the non interest bearing deposits are going to show much absolute growth from the prior year because of that inflated number that came in late in the late in last year. So now relative 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 making loans when we have new deposit relationships. And so we don't expect there to be much difference if at all in the way we operate going forward.

Speaker 4

I think it's probably fair too to say we're still seeing some migration where people are moving what were non interest 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 6

Yes. Okay. That makes sense. And then just as far as the rate sensitivity, you gave us some good Details there on Slide 4. It looks like about 78% of your earning assets repriced in that first Year, just within the loans and that's it, it seems like most of those that reprice the 1st year are going to be Floaters that reprice in the 1st few weeks after a Fed cut.

Speaker 6

Is that right? Or any color on kind of what percent of those loans are floaters?

Speaker 5

Yes. I think if you look at the first footnote on that same page, Matt, of that $1,043,000,000 in loans in that less than a year, dollars 901,000,000 are daily floaters and of that you've got $86,000,000 at the ceiling. So roughly what 90% of that total?

Speaker 1

That was you said there's $1,000,000,000 in loans, are there floaters? 900. Yes. And look, I think we always have to remember not saying that people don't, but We are very active in managing our floors. And so that's part and parcel to the stability of the NIM and the historical illustration that we show you and our ability to maintain that NIM.

Speaker 1

Yes, they'll float down, but at some point we start hitting floors and that's a big component of our bank.

Speaker 6

Yes. Okay. Good points. And then on expenses and fees, any color on the way you're thinking about that in 2024, if we just remove the oil and gas assets that you mentioned before?

Speaker 1

We're proud of that. If you look at the expense load for the bank and you take out the oil and gas impact and Am I right, Kelly? It was 33% efficiency ratio. And if you look at the expenses to 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 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 late in the year and probably really not until next year because it just takes a while to construct a few branches.

Speaker 1

So But even with that, we don't expect the expense load of the bank to change in a meaningful way.

Speaker 6

Okay. All right, guys. Thanks for your help.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Tom Travis for any closing remarks.

Speaker 1

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 produce good results. And we're really excited about this year and excited to Just get right back on track to those really truly strong, strong numbers and we appreciate everyone's participation and involvement.

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Earnings Conference Call
Bank7 Q4 2023
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