Bank7 Corp
NASDAQ:BSVN
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Bank7 Corp
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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 that 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, to 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, President and CEO; J.T. Phillips, Chief Operating Officer; Jason Estes, Chief Credit Officer; Kelly Harris, Chief Financial Officer. Please note this conference is being recorded.
With that, I'll turn the call over to Tom Travis.
Thank you for joining us to everyone. We're pleased that we again delivered strong results. We have to acknowledge and thank our team members for their outstanding contributions.
Let's move on to our results. We started the year with an all-time high loan book, and the majority of those loans had daily floating rates, and that really set the stage for our strong quarter. As we progressed through the quarter, we were able to overcome significant loan paydown and payoff activity.
Therefore, on a net basis, the loan team was successful and achieved a small amount of growth in the portfolio, which was also helpful. At the same time and consistent with expectations we mentioned during our January call, deposit costs accelerated and continued to rise during the quarter, which put downward pressure on our margin. Regardless, we still achieved strong net revenue and we're pleased with our margin and expect it to remain within our historical range.
It's probably good to move into a discussion regarding our liquidity, which clearly is a major focal point in today's environment. You can see we have provided enhanced disclosures and we are comfortable with our overall liquidity profile. Our cash position is historically more than industry averages and continues to be that way today.
In addition, our reliance on public funds is far below industry averages. We also have a large amount of availability on our lines of credit, which we did not draw, as we did not experience panic from our customer base. In fact, we show a small increase in deposits for the quarter, including a small increase in our core transaction accounts, which continues to be the case as of yesterday. We do not anticipate incurring stress in this area.
We also provided more disclosure regarding our asset-sensitive balance sheet. And as you can see, our asset liability matching has us in a good position. Our historical use of floating rate loans with interest rate floors and shorter maturities will continue to benefit our company. Our balance sheet is properly matched and strong as we don't have much of an AOCI adjustment, and we continue to operate debt-free. Regarding our small AOCI adjustment, it will rapidly decline as more than half of the investment portfolio consists of U.S. treasury notes that mature in only 10 months.
Overall credit quality is steady and continues to exhibit strong characteristics. We upgraded a few adversely rated credits and also had one payoff. We added a few downgrades, but nothing out of the ordinary. We also converted our allowance methodology to the CECL model and our allowance is strong in where it needs to be.
Moving into capital with regard to capital. We plan to continue building it and the combination of our strong earnings and low dividend pay-out ratio will cause it to increase quickly, especially considering a slower growth environment.
Clearly, this environment of macroeconomic stress guides us to maintain capital at slightly higher levels. Our high level of earnings is a real source of strength for our company. We like to illustrate that strength in the deck with the inclusion of our stress test scenario as it reflects how our strong earnings provide a substantial buffer based on industry and bank examiner DFAST parameters.
So in conclusion, we had a very strong quarter. We are pleased to provide exceptional returns to our shareholders and also report that we are well positioned to navigate through the choppy waters that are in place today.
We intend to continue to build capital and keep our focus on liquidity and growing our deposits. We continue to benefit from being located in this dynamic part of the country. Therefore, in spite of the current macroeconomic headwinds, we remain cautiously optimistic about the near future and are excited about our company.
So with that being said, we're standing by for any questions. Thank you.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Nathan Race of Piper Sandler. Please go ahead.
Hi, everyone. Good morning. Hope everyone is doing well.
Good morning.
Maybe just start on kind of the outlook for loan deposit growth. You had some growth in the deposits in the quarter. It looks like it was mostly in CDs. So just curious to kind of get your updated thoughts on just how we should think about deposit growth over the balance of 2023 and how you're thinking about loan growth within the context of pipelines come out as they stand here in April.
This is Tom. I'll take the deposit side and ask Jason on the loan side. But with regard to deposits, I would say that with all due respect and understanding that we're in a tough economic environment, there's a lot of noise centered around a few spectacular outliers. And we believe the fundamentals, the combination of fundamentals, our business model and our geographic location will continue to do what we've always done, and that is grow our bank with transaction accounts with money market accounts and in conjunction with the expansion of our customer base. And so I wouldn't expect any meaningful up or down movement. It's just steady as she goes and business as usual for us. And I think Jason can speak to the loan book, Beth.
Yeah. Good morning, Nate. I think on the loan side, we're still seeing what I would call a healthy deal flow, but what resembles what I would describe as normal loan demand. And I think that's really driven by our geography. If you look at Texas and Oklahoma, the economies here are very strong, and there's still growth.
And so I still kind of refer back to, I think, on our January call, we talked about loan demand this year and growth rates probably in single-digits. Instead of last year, it was very, very robust. And so I still think that's pretty accurate. I will say it's a little more cloudy on the second half of the year. I'm not sure if they're done raising rates. And so with each move up, there seems to be a little bit of slowdown in demand, but we'll see where it ends up, but I still feel like there will be a slight or moderate amount of growth for the year.
Okay. That's helpful. And I think in the past, Jason, we were talking maybe mid to high single-digit loan growth, putting those pieces together with your comments. Is that kind of still a reasonable expectation going forward, albeit with the lumpiness --
Yes, sir.
Okay. Great. And then maybe a question for Kelly, just around the margin outlook going forward. And obviously, that's the challenging deposit pricing environment as we sit here today and that may only continue to ratchet up going forward. So I guess just kind of thinking about the margin trajectory from years, the decline that we saw on the margin, at least on a reported basis of down 11 basis points in the first quarter. Is that kind of a reasonable expectation to extrapolate out going forward or do you think the margin pressure is intensified from here?
I think you'll continue to see liability costs reprice at a quicker clip than the assets. That said, we did decrease about 12 basis points core NIM for the first quarter and I would anticipate a slower degradation in Q2 and then potentially Q3. But you will see continued decline. But as Tom pointed out, on Page 10, we feel very comfortable operating in our net interest margin range historically.
And I imagine, Kelly, part of the offset of some of the deposit pricing pressures is maybe redeploying some of the cash flow come off the securities book into loans. Can you just remind us how much cash flow you are coming off the securities portfolio each quarter?
Yes. The big tranche is going to occur in February, which is $100 million. And I believe within the next, excluding that, you're looking at about $1 million a month. Total portfolio is around $185 million.
This is Tom, Nate. It's really not going to make a material impact on the margin for the next eight or nine months. It's just going to be one big slug unless, of course, we were to sell that treasury position earlier than next February, which is possible. So other than that big redemption or maturity on that one or few securities, the benefit of reinvestment between now and then is just really negligible.
And the liability costs will be more driven off of bringing in new money and then the time deposits repricing higher.
I want to point out another thing, it's obvious, but sometimes we don't always think of it, and that is that we believe it's prudent to hold more capital today. We believe it's prudent to hold more liquidity. And so those are detrimental to the net interest margin. So if we chose to run the bank a little hotter, we chose the bank, chose to eliminate some of those higher priced liabilities then clearly, the NIM would benefit, but we don't believe that's the prudent thing to do right now. It's time to be cautious. And so the benefit to the company is that we operate in a really healthy NIM environment. And so we have the flexibility to do that versus maybe some others that don't have that strength in their NIM and they're constrained or they have to really suffer NIM degradation of more meaningful. So I think that's an important point to make.
Maybe a couple more just maybe on the expense outlook. Obviously, a nice step down. It seemed like the 4Q levels were elevated, just given the strong performance last year. Just any thoughts on kind of where the run rate goes from here? Do you guys think you can imagine it around $7.5 million per quarter? Any thoughts on just kind of the go-forward run rate for expenses?
Yes. You saw a decline in the noninterest expense post Q4, I believe it was 6%. And I think that Q1 is a pretty good guide going forward, although you will see some expense create as the year progresses.
Yes. Makes sense. And then maybe just one last one on credit. I appreciate the additional disclosures around the office CRE portfolio. It seems like that asset class in particular is going to be a nonissue for you guys, just given a lot of the specifics that you guys described in the slide deck. But are there any other portfolios where you're keeping a closer eye on these days? Or are you seeing any negative migration in terms of criticized classified? It looks like MTA levels were essentially stable in the quarter.
Yes. We haven't seen a material shift in really any of those industries. I will say that the hospitality segment, that's one that we clearly are fond of, and we keep a very close eye on that. And most of that lending activities in Texas, particularly Dallas-Fort Worth metro area. And we got the data for the full year last year. I don't have the first quarter yet, but it just continues to show strength and set all-time records for revenue and the occupancy and ADR, they've recovered from those COVID downturn times where it was really for a short-term period there really bleak and they've just rebounded, it's just you couldn't ask for better performance really out of the segment.
And I would add to Jason's comments and remind everyone that in the interest rate environment, we're very asset sensitive. And the great, great majority of those hospitality loans are floaters. And I don't know if it's 90%, but it's 80% or whatever it is. It's the majority of the portfolio, whether it's sixth year, whatever, 80%, it doesn't matter.
The point is the substantial increase in the interest rate has not created concern in our portfolio. And I think it speaks to the underwriting and the discipline that we have that we've been able to underwrite upfront properly, have proper margins in our debt coverage ratios. And so that's a very important point to point out.
Yeah, understood. That's great color. That's all I had. I'll step back and I appreciate all the color. Thanks, guys. Nice quarter.
The next question comes from Brady Gailey of KBW. Please go ahead.
Thanks. Good morning, guys.
Good morning.
Good morning.
So I just wanted to get an update on the -- I know your NPAs are just one or two kind of larger credits mostly. And I think one of them is an energy loan. Any update on the resolution of the energy NPA?
Yes. That company, I think we've reported, I don't remember how many quarters ago, but there was a new management team put in place a little over a year ago or right out a year ago. They continue to improve the operation. It's not improved to the point where we can remove it from this list, but there's still I think we described it as green shoots, and they're getting taller and getting more vibrant, but still not to the point where we can upgrade.
And remind us what is the size of that credit?
It's approximately $7 million.
$7 million. Okay. And then I think total NPAs are around $18 million. So are there any other larger loans?
Yes. There's the one deal that's in litigation. I don't want to get into any details on that one, but it's approximately $10 million. And so between those two credits, you're really talking about almost the entire NPA bucket. I will say that in that litigation, same comment we've made previously, we're well secured. The collateral is highly liquid, and it's under the control of an appointed receiver. So it's just a matter of working through the corp system.
Okay. And then any outlook, I know you guys occasionally will consider bank M&A, although the backdrop makes bank M&A kind of tough nowadays. But any update on any conversations you're having on the bank M&A front?
We're talking to a group right now. I mean we've had one meeting, and there seems to be a potential. Way too early to say anything beyond that. So we continue to be very active in probing and searching, but that's about it.
All right. Great. Thanks for the color guys.
[Operator Instructions] The next question comes from Matt Olney of Stephens. Please go ahead.
Hey, thanks. Good morning. Most of my questions have been addressed, but I also want to ask about just any color on incremental pricing on both deposits and loans, what you're seeing on both sides there? Thanks.
I would say that on the loan side, the negotiations are probably less fierce as borrowers get kind of used to this new rate environment. I think last year, it was more cumbersome going through those conversations after they've just been used to these lower rates. And then on the deposit side, you're seeing a little bit of a shift in the mix.
There was a comment made by one of the analysts about the CD growth that I think you're seeing people migrate from where they didn't care if it was in a checking account earning nothing or a savings account earning next to nothing or a CD earning just slightly better than that. Now they're saying, Oh, wait a minute, this is actually attractive to put money in a bank and lock it up for 12 or 24 months. It's worth their while.
And so I would say you'll see more of that mix shifting throughout the year. But as far as the conversations with the depositors go, there's somewhat relief from them that they finally get to earn some interest on their deposits. So I think that maintaining that NIM in our historical ranges is very possible. I don't think it's easy, but I do think we'll succeed.
And any color on the other side, on the loan yield side, incremental yields on that side?
Yes. I mean if you want some examples, I would say, right now, average originations are somewhere in the low 8s probably. Who knows what happens the rest of the year, but that's kind of the current market.
Yes. Okay. That's helpful. And then I think Tom mentioned carrying higher levels of liquidity at this point given the uncertainty in the environment and I definitely appreciate that. And I think most, if not all your peers are saying something similar. And at least with Bank7, we can see that in some of the end of the quarter data, March 31. I know it's tough to answer, but curious on thoughts on just the duration of term excess liquidity and how much longer you expect to carry the higher levels? Thanks.
Well, I think there's a couple of things at play here. I think I've seen already proposed commentary and proposed new metrics that are going to be coming out of the Fed relative to liquidity.
And so I would say that we're expecting some, if you look at your CAMELS rating, the L there, liquidity, we're expecting perhaps, I don't know if they'll change the call report data, I don't know if they'll come up with a new metric, but we expect that at some point, we certainly don't with all due respect to regulators, we don't need regulators to tell us how to run the bank.
And so we have prudently managed our liquidity based on our own experience and knowledge, and we believe we understand what it takes to properly match our balance sheet and fund the bank. But with that being said, we expect some of that. And so that's number one.
Number two, I think the speed at which the public rushed into, I recall these very, very few I guess I would refer to them as outlier banks that either have failed or in the case of like First Republic, they've had a massive deposit exited, you have to be mindful of that. And so I think whether it's being cautious with regard to the public or whether it's a nod towards understanding what might be coming down the road.
And I will tell you that, what page was that on, I read, I think it was late last week or earlier this week, there was a commentary that somebody has talked to the -- I think it was the FDIC and OCC and they were, if you go to page four in our deck, the piece that I read was identical to what we put in our deck here and what we illustrated was our uninsured deposits, and then we subtracted out insider deposits, collateralized deposits. I don't think the insider deposit was mentioned with the Fed.
But I think the point is, is that we anticipate some of this. And so I think caution is the word of the day. And again, I think if you're operating a bank that that has to struggle or pull levers or do things in order to really achieve that high performance in net earnings, you have less flexibility.
But for us, as it kind of goes back to that comment on the net interest margin, we'll suffer a smaller margin by being more liquid. And we have the profits and the cash flow that if we have to hold more cash, okay, we'll hold more cash, and we're still going to be benefiting from that high performance. So that's a long way to say that who knows, but we're going to be prepared and ready for it.
Yes. Okay. Great commentary, Tom. I appreciate that. And then just one more for me on the credit front. Tom, you mentioned several upgrades this quarter. There is a payoff and maybe a downgrade or two. As you step back and look at some of the migrations in both directions, in any themes that you see, whether it's by loan type or geography or do you think that would be helpful for us? Thanks.
I don't see any. I think our radar Dish is constantly on alert and we have a few that have popped up just like you always do. And you have some that we've managed out. And I don't see anything. And when I say that, I'm specifically focused on losing money on loans, and you're always going to have people that get into stress and work their way out of it. But as far as losses to the company, I certainly don't see it.
Yeah, okay. Okay, guys. Thanks for your help. Appreciate it.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Travis for closing remarks.
Thanks again for everyone joining and we're really proud of the company. And I think the litmus test for the banking industry was the month of March, at least the most recent litmus test, and who knows what happens today and the rest of the next few weeks. But we didn't have panic and I think that's a testament to the institution. I think it's a testament to the customer base and the fact that we try to be steady as she goes yet provide that good strong performance. And so we're pleased. We're excited about the future and appreciate everyone's involvement and consideration. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.