Earnings Call Transcript - BSVN Q3 2024

Operator, Operator

Good morning and welcome to Bank7 Corp's Third Quarter Earnings Call. Before we get started, I'd like to highlight the legal information and disclaimer on Page 26 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 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 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'll turn the call over to Tom Travis. Please go ahead.

Thomas Travis, President and CEO

Thank you. Thank you. We also have Paul Tillman with us who is Kelly's right-hand person, and shout out to Kelly and Paul for their great work, but also getting the information out very timely. So I'm not surprised. We have a great group. So good morning. Welcome to everyone. Before we launch into our results, we're certainly aware of the devastation inflicted by the recent storms on our fellow citizens and our thoughts and prayers certainly go out to them. Very trying times over in the Eastern seaboard for sure. As we move into our strong financial results, we're excited. We're cautiously optimistic even in the face of this upcoming and very divisive national election. It will be nice if we can tone down the rhetoric for sure. Clearly, we're in for some choppy waters over the next few months. And yet we're continually stressing how comforted we are to be in this part of the United States. It's a real geographic financial advantage for sure. With that in mind, those issues are still always on our mind, and this is certainly a time for caution. And that's why we take such comfort in our fundamental strengths, especially the high levels of capital. And it isn't just the higher levels of capital that gives us that comfort. We have a very strong liquidity position and we further enhanced that last quarter by adding a second liquidity backstop and that being the new Fed facility, which is now in place, should we ever need it in times of stress. So we now have two meaningful sources of additional liquidity, the FHLB, which we've had for a long time, and the new Fed facility. Our disciplined approach to maintaining that properly balanced matched balance sheet has really been proven through the rate cycles. And those of you that have followed us over a long period of time know that we include in the debt the spread management that compares our spread through up and down rate cycles in the various treasury markets. It's a great strength of the company, and really, it's the foundation, along with our credit quality, that produces these results. As you can see, record earnings and a record EPS not only for the recent quarter but our year-to-date results. And so we're very proud of those accomplishments, and those were achieved through normal operations. In the case of our EPS, they weren't driven by share buybacks. So our strong earnings and capital levels were the driving factors that motivated us recently to make a large increase to our cash dividend. But even with that large increase, our dividend payout ratio is still in the 20% range. When you compare that to banks that do pay dividends, the average is a little bit more than 35%. So Bank7 has plenty of room for further increases if we want to do that while at the same time being comforted by our top-tier earnings that rapidly accumulate capital. As majority shareholders, we're really pleased with the total shareholder returns produced by our company. Our results are certainly attributed to our outstanding team members who work with our loyal customers. We're all very aligned and we're really looking forward to our future, and I can't thank the team members enough. So with that said, we're certainly ready for any questions and ready for Q&A this morning. Thank you.

Operator, Operator

We will now begin the question-and-answer session. Our first question today comes from Woody Lay with KBW. Please go ahead.

Wood Lay, Analyst

Hey, good morning, guys.

Thomas Travis, President and CEO

Good morning, Woody.

Kelly Harris, Chief Financial Officer

Good morning.

Wood Lay, Analyst

Wanted to start on the loan growth side. I mean, the growth was great to see in the third quarter. I know there was some commentary last quarter that there was some funding delayed. But I was just curious how the pipeline is looking entering the fourth quarter?

Jason Estes, Chief Credit Officer

Yes. So thanks for the question. Last quarter, we were very confident that we had a lot of fundings coming. This quarter, I would say, I would expect us to finish more in line with where we are now. I wouldn't expect another nice growth quarter. But I think here we are kind of ending up in that range we've talked about for the full year of kind of a moderate to high single-digit loan growth for the year. And I think we're going to be right in line with that. I think in general, there are certain segments we restrict to just continue to mitigate the risk in our portfolio. And so we continue to see opportunities there and we're passing on more deals specifically in the hospitality space, the energy space. Those two components, we continue to really sift through opportunities to make sure we're optimizing the portfolio return with those dollars that we restrict by our own intent. So all-in-all, should fall right in line with what we thought at the beginning of the year.

Wood Lay, Analyst

Yes. And as you talk with clients, have you noticed the difference in activity now that we have a couple of rate cuts behind us or is it still about the same?

Jason Estes, Chief Credit Officer

About the same.

Wood Lay, Analyst

Got it.

Thomas Travis, President and CEO

And, Woody, this is Tom. I would add to Jason's comments that, again, this goes back, I believe, to two factors. One is the geographic advantage of the robust nature of this part of the country and two, it confounds me on a regular basis how the financial mentality has been about higher interest rates in the United States. I think that's just been somewhat of a false narrative. What I specifically mean is, I don't know the exact number. I know that Jason and Kelly and I looked at this four or five months ago. And I think we went back for the last 60 years. I think there's only nine times where the 10-year treasury was higher than where it's been. This narrative evolved when the Fed started raising rates, that, oh my gosh, we're in these high interest rates, and then that bled into borrowers not being able to make payments or economic activity. When you really look at long-term averages, it really hasn't been an interest rate story. It's been a cost story that may have had a dampening effect on companies borrowing money and building projects and investing in capital goods. I'm not trying to be long-winded here. But I think it's important for all of us to remember that we're operating in a very normal interest rate environment. When you marry that with where we are in the part of the country and the inward migration, it's just a very nice steady ambient level of economic activity.

Jason Estes, Chief Credit Officer

And that's why the growth continued.

Thomas Travis, President and CEO

That's right.

Jason Estes, Chief Credit Officer

Throughout the last, call it, 15 months, 18 months.

Thomas Travis, President and CEO

That's right. And again, I said another way, I mean, we bounced into historical modern low interest rate lows. When you bounce off of that, people think, oh my gosh, the rates are high, but that's just not the case. Go look at the research, go look at the historical numbers on the treasury markets. Anyway, enough of that, but we feel really good about. As Jason said, we could have put even more loans on the books, but we're trying to be very careful.

Wood Lay, Analyst

Yes. No, that's really helpful color. I guess shifting over to more of the deposit side, I really appreciate the color you provided on the loan betas and the deposit betas and how those shifted with the recent rate cuts. I was a little surprised to see the deposit betas sort of go in lockstep with the loan beta. Did you see any deposit runoff when you made those rate adjustments? And with future cuts, do you think you can continue to cut deposit rates as aggressively?

Thomas Travis, President and CEO

I think this is Tom again, Woody. We're not surprised. Your comment about you were, I forget your words, but you noted how we had gone in lockstep. I think it goes back to opening comments relative to a properly matched balance sheet. We work so hard, and we don't take our eyes off the ball relative to loan floors and floaters and keeping our fixed rates. I think it's 24% of the loan portfolio or something like that. Even those are rapidly amortizing. The end result is a very properly and methodically applied concept here. I would tell you that we have modeled, I mean, Kelly, what did we do? We did four columns. We did 25, 50, 75 and 100 basis points. I guess I would use the term non-issue for the first 100 basis points, Kelly?

Kelly Harris, Chief Financial Officer

Correct. And then once you get through the first 100 to 150, that's when you start to see the floors really start to kick in.

Thomas Travis, President and CEO

Right. Historically, it becomes more difficult as you get into that 100 basis point territory because you do have customers that will want to come in and say, hey, I think my floors are maybe too high. I don't want to renegotiate. But again, we've lived through these cycles and we've been very successful. Yes, it might get a little more difficult, but at the end of the day, Woody, we are very comfortable operating our NIM and our historical ranges, and that's really the final message.

Wood Lay, Analyst

Yeah. Well, that's all for me. Congrats on the great quarter.

Thomas Travis, President and CEO

And Woody I have a question. This is Tom. I noticed your target was $40. It seems to me like you're sandbagging because we're almost already there.

Wood Lay, Analyst

Well, it was a great quarter. So we'll see where it goes from there.

Thomas Travis, President and CEO

We appreciate your coverage, Woody. Thank you.

Operator, Operator

And our next question comes from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race, Analyst

Hey, guys. Good morning. Thanks for taking the questions.

Thomas Travis, President and CEO

Hey, Nate.

Kelly Harris, Chief Financial Officer

Good morning.

Nathan Race, Analyst

Just going back to the margin commentary previously. I appreciate you still expect the margin to remain kind of within that historical range. But just given you guys posted 20% plus NII growth and short-term rates are going up in the last couple of years. Just curious how you're thinking about NII growth prospects in the next year, just given that short-term rates are expected to decline from here?

Jason Estes, Chief Credit Officer

Yes. So, Nate, I think that one of the things that's not really been spoken about on this call yet is the fact that banks, in general, in 2023 after what happened in March, really tightened up on lending money. Our net interest income and our NIM have been helped because we've been able to be more stubborn on giving in and negotiations on loan rates, okay? That's allowed us to give in a little more on deposit rates. There are different variables involved as we're negotiating loans and deposits and trying to attract new clients and take care of our existing clients. In general, I hear you, yes, there's been pressure, but we've been able to navigate that because in our market, you still have good, healthy economic growth, and you have fewer banks really pursuing loans. There's always competition, but I think the level of competition for loans shifted a little bit last year really in the second half of the year. Yes, I'm sure that's going to normalize, and it wouldn't surprise me as we continue to try to grow both loans and deposits going into next year. Some of that restriction or governance that we've seen on some of these competing banks, if they start to return to more normal competing levels. We've talked about this now for several quarters in a row that we could see our NIM gradually sliding down, but we're fighting every day to maximize it.

Nathan Race, Analyst

Got it. That's very helpful. And while we have you Jason, just would be curious to hear an update on the credit quality front. It seemed like nonperformers are relatively stable in the quarter. So just curious to hear what you're seeing in terms of criticized prospect trends these days?

Jason Estes, Chief Credit Officer

Yes. So we were up $1 million roughly in the quarter, but there's a lot that's actually gone on there that doesn't really show up in that individual number. We had a couple of really nice results. The largest NPA we had left, we actually got $1.6 million in principal reduction during the quarter. We had the final tail of the energy credit paid off. That was $1.1 million. We collected just under $3 million on last quarter's numbers from the NPA in principle, which is a good result. We did have two new relationships show up on this list that are on nonaccrual. I think those two, we don't expect a meaningful loss there. One is approximately $3 million, the other one is $750,000 in total balance. I do think those will stay on here through year-end. My goal is always to work this number to zero. We've had good results throughout this entire year. Credit-wise, the portfolio is performing well overall, but still always, the book is big enough now where there's enough clients, there's enough exposure to various areas and industries. We're always eyeing something, but we're working through those successfully.

Nathan Race, Analyst

Okay, great. And then just in terms of thinking about the future provisioning levels, growth kind of reverts to the mid-single-digit range going forward. Any thoughts on just the provision and kind of where you'd like the reserve to kind of trend over time going forward relative to, I think, 1.25 coming out of 3Q?

Jason Estes, Chief Credit Officer

Yes. This quarter, depending on what happens with the economy in the fourth quarter. I still expect us to operate in these same ranges. As long as the portfolio holds up and the economic activity stays similar, knock on wood, it's been really good in Texas and Oklahoma. We're hopeful that it continues kind of in the same ranges.

Thomas Travis, President and CEO

Yes, and I think to add to Jason's comments, Nate, this is Tom. As we've commented before, it's the Rubik's cube, so to speak. What I specifically mean is we carry a significant amount of cushion over and above the PCA levels of capital. Kelly, I don't remember. Do we put that slide in the deck? I know we have the stress test. I don't think we do, but I have it in my lap. If you look at the cushion, the dollar cushion of where we are relative to excess capital, if you want to call it that way, you're really in a splitting hairs environment, whether it's 125, 120 or 130. We look at those factors in tandem. As an example, it's not in the deck, but I've got it here. Just on the CET1 ratio, we have $98 million of excess capital just over and above the prompt corrective action levels. It's kind of consistent as you go through risk-based capital at about $60-some-odd million. We don't really feel like that we're going to always, I mean, we're mindful of CECL. We have a very precise application of our methodology, but we're not conflicted at all about minor variations. A lot of that has to do with how great of a job Jason and his staff do on asset quality. That's a long answer, but that's kind of how we feel about it.

Nathan Race, Analyst

Got it. That's helpful. One last one for me. Tom, as you described, you guys are creating capital at pretty strong clips to say the least. So just curious how you're thinking about the M&A environment today and just kind of the acquisition prospects going forward?

Thomas Travis, President and CEO

Nate, you know us well, and there are, I'm pretty certain, a few people on this call that I've interfaced with relative to the M&A space this year and continue to do so. We were pretty far down the road on a particular potential transaction earlier this year that ended up not happening. I would tell you that the market is very robust, and we are constantly over the last four or five months being approached, not as a potential person to sell, but as a bank known for public currency and high performance. More opportunities are starting to emerge, some of which are unfortunately what I call the zombie banks, who are really stuck with AOCI issues, not just in their securities portfolio, but also in the loan rate interest rate mark world. I don't want to be bold or forward to say that some of these banks may have been using hope as a strategy relative to interest rates falling and therefore unwinding some of that AOCI and interest rate marks. But I think the reality has hit in many places. Just look at it; the 10-year is still around 4% today. I don't remember where the 10-year dipped, but I think there are based on the volume of opportunities being presented to our institution because of our performance and currency. Some of these banks come to realize it's a slower boat to China relative to unwinding some of these marks. I expect that more of these exploratory discussions will convert into actual transactions. We're constantly engaged. We have some specific targets and discussions. We've been consistent that we want to build capital to be opportunistic. I would expect transactions to occur given all those dynamics sooner rather than later in our space.

Nathan Race, Analyst

Got it. That's great color. I appreciate the commentary. Thanks, guys. Congrats on a great quarter.

Operator, Operator

And our next question comes from Matt Olney with Stephens. Please go ahead.

Matt Olney, Analyst

Hey, good morning. Tom, on those last comments on the M&A front, just remind us of the characteristics of an M&A partner that you're looking for as it relates to size and geography and just the type of bank you're looking to partner with?

Thomas Travis, President and CEO

Matt, we've been consistent in our history, and I'd like to call it, you've heard this many times, the right side of the balance sheet. We have opportunities now and we're evaluating a handful that are really nice core banking groups with core funding and really good cultures. I'd say that we're not interested in specific verticals and Fintechs and our earnings. We are interested in people that are culturally aligned that would bring a really nice balance sheet to the bank and blend well with the Bank7 team. As far as size goes, we would love to do an MOE. I think those are fun to do and they're also very rewarding to the shareholder base. We're big bank people, and we're properly trained. Hopefully, as you've followed us over the last six years and all those quarters, what is that, 24 quarters since we've been public, we've been rock steady with our reporting and no misstatements. I give so much credit to this team and how precise and professional they are. When you think about that married with the excess capital of compounding the equity, an MOE or a $2 billion or $1 billion or whatever it is institution is right in our wheelhouse. Those characteristics are in place; that's how we see the future.

Matt Olney, Analyst

Okay. That's great, Tom. I appreciate that. I guess on sticking with the M&A theme, there's lots of financial metrics to consider as you review these. What's the more important financial metrics to review as you go through these various M&A options?

Thomas Travis, President and CEO

It's a very difficult question to answer because some people are more focused on earn back. Some people are more focused on P/E ratios and tangible book value and deposit premiums. We are guided by long-term fundamental principles. All of those metrics have to coalesce, merge, and blend. You're not going to see Bank7 get outside of any normal or right down the fairway parameters. No reason for us to do that. We are a top-tier organization, top 1%. Look at us in any metric, whether it's efficiency ratio, ROE, ROA, credit quality, liquidity. When you're thinking about that, we're trading at about 1.8 or 2 times book, and our P/E is 9.5% or 10%. When some banks seem to think that their worth metrics are anywhere near what I just described yet their performance is not there, it's tough for us to accept that. We want to pay very fair prices that make a lot of sense, then the rising tide will raise both boats going forward. That's not a specific metric-by-metric answer but rather how we view things over the course of three and five year strategic periods.

Matt Olney, Analyst

Okay. Great. I appreciate the commentary, Tom. Sticking back to the core margin discussion, you talked about maintaining that historical range regardless of what the Fed does in the near term. Any general commentary about the core margin as it relates to the Fed? If we were to see a very active Fed cutting each meeting 25 or 50 bps versus a slower-moving Fed cutting maybe every other meeting, any commentary about directionally what that would mean for the core margin?

Thomas Travis, President and CEO

I just think historically, you can go back to the COVID years. We've gone back to show our spread compared to the five-year, the 10-year, and cost of funds. There's nothing that would indicate to us. Again, we've modeled it, and we're not concerned at all. The lowest non-fee income NIM components hit 4.38 for a full year.

Kelly Harris, Chief Financial Officer

4.38 for a full year.

Thomas Travis, President and CEO

4.38, right. Jason has said in the past, and I think he's right, at some point as the bank gets larger, maybe you touch those lows, and maybe it goes to 4.25 or 4.15 if you get to be a really large bank in a certain economic environment. But if that were to ever happen then fine. We're still going to be a top-tier bank.

Matt Olney, Analyst

Okay. Thanks, guys.

Thomas Travis, President and CEO

Thank you.

Operator, Operator

Our next question comes from Nathan Race with Piper Sandler with a follow-up. Please go ahead.

Nathan Race, Analyst

Yes. Thanks for taking the follow-up. Maybe a question for Kelly just in terms of thinking about the impact within fees and expenses from the oil and gas assets going forward.

Kelly Harris, Chief Financial Officer

Yes, Nate, for Q4, we do feel like we saw a peak revenue expenses from an oil and gas perspective in Q3. That said, noninterest income combined bank buy $3 million and $2.3 million that's going to come from the oil and gas and $700,000 coming from core fee. From a noninterest expense perspective for Q4, we're modeling $9.5 million with $1 million coming from the oil and gas and $8.5 million coming from core. So core noninterest expense is up a little bit quarter-over-quarter. Historically, our fourth quarters have been a little bit higher in that perspective.

Nathan Race, Analyst

Got it. That's helpful. Then one last one. I know there's some noise tied to some legal matters. So just curious how you're thinking about that trajectory going forward?

Kelly Harris, Chief Financial Officer

Pretty flat. Just our normal growth. We did have that large $100 million deposit that flowed out here earlier this year. I'd say pretty flat. Nothing major either way.

Nathan Race, Analyst

Okay. So it seems like some of the mix shift changes have largely slowed across the client base lately, if not entirely?

Kelly Harris, Chief Financial Officer

Yes.

Nathan Race, Analyst

Great. I appreciate you guys taking the follow-ups. Thanks again.

Kelly Harris, Chief Financial Officer

Thank you.

Operator, Operator

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

Thomas Travis, President and CEO

Well, thank you all for your interest. We appreciate the coverage and we look forward to the future. Thank you. Bye-bye.

Operator, Operator

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