Bank7 Corp
NASDAQ:BSVN
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Bank7 Corp
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Good morning, everyone. Welcome to Bank7 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, which is based on the 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 Brad Haines, Chairman; 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 would like to turn the floor over to Tom Travis.
Thank you. Good morning, and welcome, everyone. We were pleased with our quarter and pleased with our year-to-date. If you boil it all down to why we were able to 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 front line. And we're just continue to stay focused on our fundamentals and we are also mindful of what's going on in the market, and we're carrying excess liquidity just in case, and we're happy with the position of that balance sheet that continues to have no debt, extra liquidity and plenty of money for turbulent should it come into the markets again.
And so with that being said, it's not sexy and fancy, but fundamentals just don't go out of style as they say, and we're real pleased about it. And I think 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.
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.
So with all that being said, we're happy to take any all calls or questions you may have. Thank you.
[Operator Instructions] Our first question today comes from Tom Wendler from Stephens Inc.
I just want to start off with expenses. We saw the decrease this quarter. Can you maybe give us some color on your expectations for expense growth moving forward?
Yes. We did have a slight decrease in Q2 versus Q1. And from a run rate perspective, I like the second quarter better going forward, maybe a little bit higher at $7.5 million.
Perfect. And then just kind of moving on to credit. We saw a step-up in your allowance this quarter even with the decreasing nonperforming loans and loan balances remaining relatively flat. Can you maybe give us some color around the reserve build?
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 potential headwinds to continue to build. The portfolio has held up very well. Past dues are down, you'll see positive trends, credit trends throughout the book, I think if you're comparing to the last couple of quarters. 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 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.
And then one last one for me. Loan balances remained flat this quarter. Can you just 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?
Yes. From a segment standpoint, we’re pretty consistent, I think. You see us hospitality, energy, C&I and then the same stuff that we’ve been doing, I think, is expect the same in the future. 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, single digits this year. And I still feel confident in that. I think this will be the third call in a row or maybe even the fourth where we talked about what does this year look like? And I think we’re unchanged, even though March was a little bit turbulent and caused some uncertainty, it’s still looking like that’s a good number for the overall year.
Jason, am I correct that construction is actually down.
It is. It is.
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.
Our next question comes from Nathan Race from Piper Sandler.
Question on just kind of the margin outlook ex fees and accretion. It looks like it came down about 6 basis points versus the first quarter. It looks like the increase in deposit costs was actually less than what we saw during the first quarter. So 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?
This is Kelly. I think from an ex-fee perspective, 4.55% is a good number. 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 leads 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, 4.55% is a good number.
That's kind of real time, isn't it Kelly?
It is.
Okay. Got you. And perhaps maybe a larger kind of more broader question on the NIM going forward. In a theoretical kind of higher for longer interest rate environment, what are you guys going to see your margin kind of subbing out ex fees over that kind of longer-term period?
We're delighted and proud of the efforts of the team with regard to negotiating 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. And I'm not saying that we're going to go from 4.55% real time today to 4.30%, but if it happens, it happens. And I think a lot of it depends on the Fed and what they do.
I think everyone is expecting a rate increase next week. However, if they do take a pause and they don't do any more, then I think you're going to more easily keep your NIM from dropping to the absolute loan 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 we have right now about $80 million or so that are at the ceilings. But clearly, when the Fed increases next week. You're going to have a few more loans at the ceiling. But I think for us, we're going to be within those historical norms.
And I would point out also at some point, we're carrying a pretty heavy treasury note position. We're 7 months away from the actual maturity on that instrument. And if we chose to do so today, we can liquidate that and pick up, I don't know what the effect would be the NIM in basis points, but it would certainly pick up earnings. And so there are some things that we have that are going to eventually offset that NIM pressure.
And if I remember correctly, that large maturity in the securities book that occurs in the first quarter of next year?
February, I think it's the end of February.
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 balance has shrank a little bit versus the first quarter. 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.
Yes. Outside -- 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 line of credit, the energy book is performing very well. I will say that the deal flow there has slowed quite a bit from the pace of last year, and we did contract about. It's about $10 million during the quarter. I wouldn't be surprised if there's a little more contraction as the year goes on in that book, but overall, credit quality there is very strong with primarily companies we bank for a long time.
And Jason, just any update on those kind of 2 large nonaccrual loans that I believe constitute a large majority of the existing NPA balances come out of the second quarter?
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. 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. And then the other credit, again, that involves litigation, well-secured, don't expect any loss, but we have to work through the corp system to get that money back.
Okay. Great. And I appreciate the added details on the office commercial real estate exposure in the slide deck. Any additional color you can provide on that portfolio in terms of kind of the maturities that are expected over the next year or so. And just generally how you're feeling overall about the office [series] portfolio, just given this an area of focus these days for investors?
It is, we're so unique, I think, compared to maybe other banks of 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.
I think suburban -- we used to call them like a house office almost. These are smaller loans. They're amortizing rapidly, and 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 from New York to Washington and some on the West Coast as well. And that's where you have this spectacular new 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 I just -- it's just a perfect illustration of 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 regardless, it's nice to hear your reinforce with me your comments about we anticipated concern. And it seems like in the world that we live in, you're guilty. If you have 1 office loan, it's like, "Oh, my God." And so we anticipated the questions and that's why we went into additional disclosures. And so it's nice to hear you point that out. And so it's just a different world than where the news comes from.
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, regulatory capital ratios also increased in the quarter. You guys have, what I think, is a premium currency on tangible book basis relative to peers.
And I think a couple of quarters ago, we were talking about a potential acquisition opportunity. So would just love to kind of get 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. So I would just love to get any thoughts along those lines, Tom.
Well, I guess we could be kind of a smart could answer and say, gosh, we're sorry that we're making so much money that capital is piling up so quickly. But with all seriousness, that's the fact. And we clearly are very interested in acquisitions. We've always been consistent.
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 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 we're plenty comfortable with letting the capital build up for a little while. 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, in payout ratio. And I think the industry is 35%.
I think we're a little bit below that with the --
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.
No, understood. 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 some of you are experiencing margin pressures is well and above you guys. So I'm just curious if that's maybe leading to an increased number of discussions to those?
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 there are 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 and they're stuck and not able to sell their institutions because of 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 stuff they are. So that's taken a lot of opportunities off the table. And it's just going to be that way for a while.
Our next question comes from Brady Gailey from KBW.
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 102 that went bankrupt. 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 third quarter NPA increase?
Yes. So the loan is approximately $33 million on our books. It's a club deal, multiple banks involved, 4 total. And the loan is current. And there's litigation going on here, 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.
We believe in the cash flow the assets produce and we do not expect at this time that there would be a loss on that credit. And so 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 fourth quarter, but I don't think it's going to be an issue past the fourth quarter. And so we're going to have resolution pretty quickly here.
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?
This is Tom, Brady. Listen, this is not -- the answer is no, we're not. This was just a -- this was the management of the company dropping the ball, okay? And we see management teams in this industry operate much like banking. 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.
Okay. And then my final question, you talked about having capital piling up here, your excess capital is growing. And we talked about M&A. But I mean, if you look at your stock, stock trades at 1.45% at 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.
Well, I think the answer to that is that we've always felt like that the market hasn't properly value the company based on quarter after quarter and year after year of exemplary performance. That's just the fact. And so unless that dynamic changes, it's hard to see. 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 you're a long-term investor.
And if you really like a compounder, there's not a better stock. 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's our ROE, 23%, 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 until we dip down into a much lower return on equity, we're proving to the market that we can grow the company and we can carry substantial capital and yet still outperform on the returns. And so we really don't have that, I guess, you call it immediate pressure or even near-term pressure to repurchase shares. And so that's kind of the way we view it.
And ladies and gentlemen, at this time, I'm showing no additional questions, I'd like to turn the floor back over to Tom Travis for closing remarks.
Thanks again for your interest and participation. We like where we're at the company's 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 keep doing what we've been doing. So thank you.
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 lines.