Bank7 Corp. Q1 FY2024 Earnings Call

Welcome to Bank7 Corp's First Quarter Earnings Call. Before we get started, I'd like to highlight the legal information and disclaimer on Page 23 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, 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 differ 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 Tom Travis, President and CEO; Jason Estes, Chief Credit Officer; Kelly Harris, Chief Financial Officer. Please note, this event is being recorded. With that, I'll turn the call over to Tom Travis. Please go ahead.

Good morning, everyone. Thank you for joining us. Well as you can see, we posted record earnings and record earnings per share, and we are obviously very pleased with those results. It reflects our continued discipline on the way we manage our balance sheet, match up the interest rate risk and maintain our liquidity, and you can tell that it's been successful with our steady and strong NIM. And you can also see that the cost controls continue to be in place, which all adds up to really good results. And with regard to the loan book, the asset quality is very good, regardless of which vertical you view. And I know in this day and time, there's a hyper focus on CRE. And I will tell you, we have no issues with our portfolio and no issues with our CRE and feel very confident about where we are and how we're doing with asset quality. So with all that being said, we'll turn it over for any questions that people might have.

The first question today comes from Woody Lay with KBW.

I wanted to start with the treasury maturity that occurred in the first quarter. I was hoping you could just give some color on where the funds went into. It wasn't super clear to me if they all went into cash or if you redeployed some of that back into the bond book. So any color there would be helpful.

Woody, this is Kelly. We had the maturity that occurred at the end of February. We reinvested around $85 million into three-month treasury products and then $15 million into cash.

And do you have the NIM in the month of March post that reinvestment?

Yes. Core NIM, excluding fees for March was 4.58%.

I wanted to shift over to M&A and just get your thoughts on sort of your appetite for M&A in this current backdrop?

Woody, as you know, we're constantly working on potential acquisitions. We were a finalist in one recently and it didn't work out. But we're constantly meeting with people and sticking to our strategy of pursuing what we call the right side of the balance sheet and heavily focused on core deposits and good fundamental banks. And so I would say that nothing has changed in regard to our commitment to doing that, and we're going to continue to do that.

And then if an M&A deal is pushed out, would you look to the buyback as a potential leverage just to deploy your excess capital? Or is that less likely in the future?

I guess I don't understand the question well enough.

Yes. I guess I mean would you be interested in the buyback with where the stock is currently traded? Or is that less appealing to you right now?

I think what happens is that there are a couple of factors, and we have been, as you know, you have followed us for a long time, and we have been very disciplined on the buybacks with regard to how high the multiple of the stock is. And also, we want to maintain a little bit of extra capital in case we can find an acquisition that makes sense. And so it's a delicate balance there because we understand that piling up capital doesn't really benefit anyone other than if we were able to use it to deploy into an acquisition. So as every month that goes by, because we're a strong earner and a strong compounder, it just has the tendency to cause that question to come up increasingly. And so at some point, absent an acquisition, it may motivate us to think more favorably about stock buybacks, even though a multiple may be a little higher than where we would like it to be. And so that's how we view it.

The next question is from Thomas Wendler with Stephens.

I just wanted to go back to the securities. Can you give us an idea of the yields on the securities that you purchased?

Yes. I believe they were 5.38% at the end of February. And so we picked up on a go-forward 15 basis points on NIM, although because it was only one month in Q1, it was 5 basis points.

Let me provide some clarification. If I'm not mistaken, Kelly, it's important for people to know that the primary reason we re-entered certain securities was due to the final tailwind from the bankruptcy proceedings related to that significant case, correct? This was very short-term. The closure in bankruptcy court for that large credit required us to post funds, and they requested securities. If it weren't for that situation, we wouldn't have reassigned the $100 million that matured, which then reduced to a requirement of $85 million. Therefore, we wouldn't have taken that step. This was not a deliberate strategy on our part to shift; we would have preferred to just place the money with the Fed.

I appreciate that color. And then just sticking on the yield side, we saw a large step-up in loan yields during the quarter. Can you give me an idea of what drove the increase there? And how should we think about loan yields moving forward?

I believe that's due to that $1 million of lift. If you look at the slide deck, the investor presentation that we put out, you'll see there was a $1 million one-time item related to the full collection of a workout loan that had been showing up in our past dues for probably six quarters in a row. And so I think that's a good signal or reminder of our commitment to behaving like owners because we are owners, okay? And I think that there are probably financial institutions out there that maybe would have walked away from that deal without realizing that income but just another good result from a hard-working team committed to doing things the right way and maximizing our returns.

Perfect. And then if I can sneak one more in here. Previously, I think we were expecting to collect 60% of the $16.9 million in asset value from the oil and gas business in cash flows in 2024. Is that still how we should be thinking about it? I'm just looking for any update from last quarter's call on the revenues and expenses from the oil and gas business.

We are spot on with that projection through the first quarter and so no deviation whatsoever. So far, just for your knowledge, $6.4 million of revenue has been recognized, $5 million of cash has been collected, there's $1.4 million due to us that will come in, in the next 30 days. And then we've got the updated engineering projections for the rest of the year and we are exactly in line with those previous estimates.

I would also add that we are hedged and think of 70% as a good number. The portion that's unhedged in the oil and gas sector shows that oil prices are significantly higher than they were six weeks ago, putting us in a good position. One could argue that we purchased the hedge to protect against potential losses. Typically, if we had not hedged, we would be seeing higher returns. However, we understand that our goal is to recover most of the assets rather than speculate. In addition to meeting our production targets, we are in a strong financial position regarding hedging and pricing.

The next question is from Nathan Race with Piper Sandler.

Just going back to the last question, just curious if you guys are actively shopping those oil and gas assets? Or is the expectation that you're going to retain those assets through the recuperation period going forward that we just touched on?

Honestly, Nate, it's such a small item on our balance sheet. It's really small. It's working as we thought it would, and it's rapidly being collected. I'm not going to say that we ignore it, but we've been really busy around here and just haven't focused hard on selling off the asset. So we may look at that over the next two or three months and consider it, but it just isn't enough for us to worry about.

And then just maybe a technical question on fees and expenses for Kelly. Can you just kind of help us think about the fee income and expense run rate that we should be expecting as these assets remain going forward?

Yes. I think for core non-interest income number, $650,000 is a good guide. And then on non-interest expense, I believe we were closer to $8 million, excluding the oil and gas activity. I think on a go-forward maybe for Q2, $8.3 million is a better run rate, excluding the oil and gas activity. But I think that maybe the first quarter would provide a good estimate on your go-forward for the oil and gas gross revenue and gross expense.

And then, just thinking about the margin outlook fees going forward, I think you mentioned the core margin in March was around 4.50% or so or 4.45%. How do you guys kind of think about the margin trajectory in a higher-for-longer interest rate environment going forward?

Yes. And then just a correction, the core NIM, excluding fees in March was 4.58%. And so that was with the fully baked in migration of treasuries into higher-yielding assets. On a go-forward, we still feel really comfortable operating in that similar range. And you may see some slight movement either way but more of the same.

And then how do you guys anticipate the margin reacting or responding to each Fed cut as they occur?

I would say that, Nate, as you know, if we had a slide here showing the NIM over the last 10 years, you would see that we operate within our usual ranges. We don't expect any significant changes in that. I wouldn't be surprised if our margin, which is currently at 4.58%, dips a little lower due to the dynamics of the yield curve in the markets. However, I've noticed recently that some online banks, money markets, and high-yield savings accounts have decreased without any changes from the Fed. Therefore, I believe we are close to the end of any increases in our funding costs. I’m not sure we even have $100 million of CDs left to reprice.

Yes.

Right. So I think when you think about our cost of funds and our margin, it's really a function of do we have to go obtain more deposits to keep up with the loan book, and if you do that, do you have to pay a little bit more. So I think that's the only dynamic that could cause the margin to come down a little bit, but we're going to be in our historical ranges and we should be fine there.

And then maybe a question for Jason, just on kind of the loan growth outlook. Nice to see some growth in the first quarter here. I think you were a little more guarded last quarter in terms of growth here starting out the year. So just curious to get your updated thoughts on how we should be thinking about loan growth and also deposit growth in 2024.

Sure. I think you're going to see us continue our commitment to profitability over growth, right? And so when we were talking three months ago, I kind of emphasized heavily, don't expect a 2022 type growth year. We're going to be, absent some kind of meaningful change in interest rates or something that really gives us an opportunity to maintain our margins while growing, it's just going to be a single-digit number in my opinion. And so I think that I'm just going to reiterate what I said then: we are valuing profitability over growth.

And then maybe one last one for you, Jason. Just curious what you saw in terms of criticized and classified trends in the quarter?

It was a strong quarter in that aspect, and I believe we will return to our historical levels throughout this year, possibly extending into the first quarter of next year. As you know, there is some ongoing litigation related to a large energy credit, so we prefer not to comment further, except to say that it will eventually come to a conclusion. We are confident in the $2 million specific reserve we have in place, which we believe we have fully accounted for in the income statement. It's good to have that behind us. Fortunately, everything has lined up well credit-wise, and we are eager to move past that issue. In the meantime, the book is performing better than I expected, considering the fluctuations in interest rates and their effects on borrowers. This situation reinforces that we are underwriting loans properly, and we are currently seeing the benefits of that.

That's great to hear. And then Tom, lastly, can you just remind us in terms of acquisition partners, kind of the size of targets that you're looking at and just kind of the overall range there and also by geography too?

I noticed that JP Morgan was down 3% today and they may become a target as they seem to have missed a bit on their margin. We plan to reach out to you, Nate, to discuss how much capital we need to raise. Honestly, our team makes me very proud. If people aren’t familiar with us and our history, I aim to avoid sounding overconfident, but the fact is, we are not just a $1.7 billion or $1.8 billion company; we operate like a much larger institution. Therefore, we are open to pursuing opportunities that make sense, even if they are larger. I want to reiterate that we are not looking to acquire others simply because they have attractive loan books or unique verticals; we focus on established liquidity and the team's proven ability to effectively deploy resources in what I consider to be the best economic region on the planet, Texas and Oklahoma. It is an excellent environment for growth. We want to avoid distractions from smaller pursuits, but if a larger opportunity arises that fits our criteria, we will not shy away from it. That’s our perspective.

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

Well, thank you again to everyone. I think we've covered most of the components. And again, we're really proud of our team, we're proud of our results. We're really happy with the breadth and depth of the company and all facets and just look forward to continuing to do what we do. So thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.