Bank7 Corp
NASDAQ:BSVN
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Bank7 Corp
Earnings Call Analysis
Summary
Q2-2024
The company reported record profits this quarter, driven by a strong Net Interest Margin (NIM) and rigorous cost discipline. Despite reduced loan growth due to large paydowns and delayed fundings, the firm maintained high liquidity and a low efficiency ratio. Deposits dropped due to a non-core $80 million bankruptcy court deposit being dispersed. The company's credit quality remains robust, with minimal charge-offs. Capital has grown rapidly due to strong earnings and a low dividend payout ratio, and the firm remains optimistic about future opportunities, including potential M&A. They expect continued high single-digit loan growth for the full year.
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Good day, and welcome to the Bank7 Corp. Second 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 the management.
Although management believes that the expect 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, [ this rate ] credit quality, loan demand, liquidity and [indiscernible]. [indiscernible] 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'll turn the call over to Tom Travis. Please go ahead.
Thank you, and welcome to everyone on the call. We're delighted with our results. They were strong, record profits, and we achieved those. We always think our team members. We don't take them for granted. It's an outstanding group, and we're just very grateful to be part of this team. It's just a wonderful group of professional people that take pride in producing these results.
As you can see, we continue to reap the rewards of a well-matched balance sheet, and we again posted a strong NIM, which drove us to those earnings, record earnings. Those earnings were achieved in spite of a relatively flat loan book, and that was because we experienced some large loan paydowns towards the end of the quarter and a few of our anticipated new loan fundings were pushed to July.
Earnings were also strong due to our cost discipline and our low efficiency ratio. That's one of the hallmarks of who we are. As far as liquidity goes, our cash position continues to be historically higher than industry averages. And in addition to that, our public fund segment is small and made up of [ talented counties ] and school districts within our communities. So we like our core funding.
We also continue to have a large amount of availability on our lines. We view those as a backstop facility. We don't use those lines, but they're certainly available sources of funding. And then the drop in deposits compared to last quarter was principally related to one very large deposit. [indiscernible] bearing of approximately $80 million at certain points, it was up as much as $100 million, and it related to a bankruptcy court deposit that was finally dispersed for the bankruptcy court.
And so that's really the story on the drop in the deposits and it never really was part of our core funding. It was a good funding source, though, because there was no interest paid on it for several months.
So all in all, the liquidity is really strong and good. And then as far as asset quality, constantly shout out to Jason Estes and his team, they do an exceptional job in that area and our overall credit quality is very, very strong. And it's always a big strength of our company.
You will note we had a small net charge-off, and that was the [ tail in ] remnants of the large credit that we worked through last year and early this year. We had not charged it down completely at the end of last year because we weren't sure, but we were cautious. We thought there might be a little bit more to charge off.
But instead of taking that charge off last year, we had a $2 million specific reserve related to the credit. Again, we were not sure. And as we work through the resolution of that credit, it became obvious that, that reserve was going to be needed. So we went ahead and just took that.
And then I think pivoting to the CRE loan vertical. It seems to get a lot of play these days. And we've [ prided ] enhanced disclosures in our deck. I'll just say that we are absolutely unconcerned with any aspect of our CRE portfolio. It's very strong, and we just aren't concerned about it.
With regard to our capital levels, clearly, they grow rapidly because of the earnings. We benefit from those strong earnings, and we also keep a relatively low dividend payout ratio. I think it's almost half of what the peer group pays out. So when you look at rapid and high earner with a lower dividend payout, it really rapidly rebuilds that capital.
So we had a strong quarter. We're very pleased at our returns and what we provide to the shareholders, and we're excited about the future. Navigating forward is something that we're mindful of every day, and we know that we stick to our fundamentals, and we're going to be fine.
As optimistic as we are, we are mindful of the large deficits that our national leaders are running. It's disgraceful and reckless to run any enterprise that way, regardless, we're cautiously optimistic. We're really comforted by our long-term history but also the fact that we have economic geographic advantages compared to other parts of the country.
I just can't stress enough that the news seems to emanate from the Northeast and some from the West Coast, and it's just a completely different ballgame when you're operating in the environment that we are in down here. And so that's what makes us cautiously optimistic as we move forward in spite of all those other factors. So with all that being said, we're standing by for any questions anyone has. Thank you.
[Operator Instructions] Our first question today comes from Woody Lay with KBW.
So the core NIM, if you exclude the loan fees came a little bit better than what I was expecting. I know that $100 million of noninterest-bearing deposits came out midway through the quarter. But what do you think is a good run rate for that core NIM over the back half of the year?
This is Kelly. That's correct. We're forecasting -- I'll just give you real time, June NIM was down to 4.58. And I think if you look at the potential loan funding in Q3, we're forecasting anywhere between 4.60 and 4.65 from a core NIM perspective.
Yes. And I would add to that, Woody, that a lot of that's going to depend on the actual timing of the loan growth. And if we have to go and secure funding for that, it could be a little more costly. And so Kelly is absolutely technically correct.
It's kind of tough to believe that we could maintain it at that same exact level, but we're very comfortable that we're going to continue to operate within those ranges. And even if it were to bleed down based on timing, I don't expect it would be a meaningful reduction.
Got it. And then maybe turning to the loan growth. I know on a quarter-to-quarter basis, it can be a little lumpy sometimes. You mentioned some funding being pushed out. Is that sort of a reflection of customers waiting on potential rate cuts? Is it other factors? And a follow-up question. It sounds like the growth next quarter could be strong.
Yes. I think it's a combination of a lot of factors, Woody, and this is Jason. We continue to see customers sell businesses take advantage of maybe equity raises. And so that led to some increased payoffs during the quarter that Tom referred to in his comments.
So when you have those lumpy paydowns, even though our new fundings in the quarter. They were -- what I would describe as pretty average with June being particularly stronger. We think we'll grow again in the third quarter. But if you go back, I would say 18 months, we've kind of been signaling that, hey, listen, high single-digit loan growth is kind of what we expect. And again, I feel really good about that for the full year.
So as you mentioned, going quarter-to-quarter, you can see some blips, spikes, peaks, valleys, whatever you want to call them. But just if you look over the course of the year, I feel really good about that high single digit. But the other side of that, and we've talked about this previously as well, you really have to remember, we're so focused on maintaining profit margins. We do sacrifice growth for that. And I think this quarter is a really, really good example of that and we like that. Some investors may not, but that's how we're going to continue to operate, and we just think it's the right thing to do.
Yes. That makes sense. And then lastly, capital has grown really nicely over the past couple of quarters. Just how do you think about deploying some of that excess capital in the current environment? I'm assuming the preference would be through M&A?
Clearly, that's correct. And it's -- we're very aware of the fact that we've had quite a few discussions over the last year especially with potential targets. And we -- I think the industry refers to some of the banks as zombie banks, but there's large number of banks that would like to do something, but their hands are tied and they're wanting to wait until they can unwind some AOCI and so we're mindful of that.
And if you believe that we're on the precipice of some rate reductions, then I think you could see opportunities that arise in the near future. And so we're not in any hurry. And I would say this, too, that we hear folks talk to us from time to time about share repurchase and hear those things.
But let's remember, one of the great strengths of Bank7 is this. When you're making, call it, 20% to 22% return on average tangible common equity, there really shouldn't be a hyper focus on share repurchases because if we can produce really high returns far better than most any other bank and do it safely, we're not as driven to worry about running out and making share repurchases to support or for whatever reason, the share price.
And so I think it's a combination of providing great returns, reduces a sense of urgency and at the same time against the backdrop of knowing that there are people out there that are going to want to sell when the AOCI unwinds, and that's our view. And clearly, I think I would say that we certainly don't predict and we're not saying that we're going to do something at the end of the year or first quarter.
But if we're sitting in 9 months and it doesn't look like there's any opportunities. And I think at some point, it would be prudent to revisit that concept. But for now, we're steady as [indiscernible].
And our next question will come from Nathan Race with Piper Sandler.
I was wondering if you could just update us in terms of where you guys stand on the oil and gas assets that you acquired late last year in terms of specifically how we should think about the fee income and expenses associated with those assets going forward?
Kelly, I think, has the exact numbers, Nate. But just from a high level, what we described back in December was when we booked those assets, it was a little over $16.5 million, and we said at the time that just harvesting monthly cash flows off that business, we would recover between 55% and 60% of that outlay or I think we would be down to 55% or something as far as remaining.
And so Kelly, why don't you follow up on that, but I'll just say from a high level, we're not only on path. We're actually doing a little bit better. And so we view it as a -- we're halfway through the year, and so a $16 million asset is really more of a $10 million asset and compared to the size of our company, it's not that significant, but Kelly can give you the specifics.
Yes, Nate, this is Kelly. So if you look at Q2, I mean, total noninterest income was $3.165 million of that $2.4 million related to the oil and gas. And so we had core fee of $735,000, which is a little bit higher than what we anticipated at that normalized $650,000 run rate.
But I think on a go-forward, I mean, you could [indiscernible] $2 million for oil and gas from a fee perspective and then still keep that core fee number at $650,000. And on the expense side, noninterest expenses for the quarter were $9.142 million, and of that $8.42 million related to oil and gas -- or I'm sorry, $1.1 million related to oil and gas.
If you had core expenses of $8 million which is a little below what we had given guidance on in $8.3 million. We still think that $8.3 million is a good guide from a core expense perspective for Q3. And potentially using $1 million in expenses additional for the oil and gas.
But Kelly, if you just I'm not being critical, that was a lot of numbers. If you just focus on the revenue and the expenses, what's the net on the oiling for the quarter?
Yes. The net Q2 was $1 million and it could be $800,000 after tax? $715,000. It's going to continue to go down from there, Nate.
Tom, it's a relatively small piece, but just is there any interest in -- or is there any interest, so to speak, in other people acquiring these assets? Or is the plan just to retain these assets on balance sheet?
We had that discussion recently because we actually are -- the properties we reengineer to make sure our values are correct and the current engineering indicates that the wells are performing even better, and there [indiscernible] are higher.
And so what we talked about was a high-class problem, Nate, meaning, do we sell it and maybe sell it and take some small gain? Or do we just keep harvesting the cash flow because we're doing so well. And so it's possible that we could sell it, but we don't feel any sense of urgency to do it.
And then just maybe staying on [indiscernible] switching to the hospitality book. Curious what you guys are seeing just in terms of NOI levels across your client base. Obviously, it seems like a lot of those loans are tied to floating rates. So just curious how a lot of those clients are dealing with the higher cost of debt these days?
Yes. So the -- remember, just as a reminder, everybody, the hospitality activity in our portfolio is largely concentrated in Texas and specifically the [ Sport Worth ] metro and business as usual there, fourth quarter NOIs were up slightly last year. And we really don't have the second quarter data yet, but based on performance and conversations with borrowers, I expect the second quarter to probably be all-time high NOI. And so business as usual in the Texas hospitality industry.
And Jason, as you guys provide for some growth returning going forward in terms of loans, do you guys kind of expect the reserve to kind of remain where it is coming out of the second quarter? How you guys kind of think about the relative reserve level in the back half of the --
There may be a small provision to keep up if the growth kind of comes in on the top line of our top end of what we think could happen. We may have to put a little bit more to it. But yes, I think that percentage is pretty good, something in that 1.25% our historical range.
Well, I also would add to that, that the rapid growth in equity, it's really comforting. And so we feel like because of the increase in equity so quickly that it's not as critical for us to worry about immediately adding to the reserves. And when you look at the portfolio and you look at the CECL methodology and how we look, we just can't find a lot of stress right now. And so I guess what [indiscernible] to say is that we've got flexibility relative to the capital building up very quickly and we really feel like we're in a good spot.
Okay. Great. And then just one last one for me, perhaps for Kelly, on the NIM going forward. Obviously, you guys are asset-sensitive. So just curious how we should think about the margin impact from each 25 bp cut?
Yes, Nate, I think I would highlight to our historical NIM and you can even look through another slide in there on our spread overlay with the loan yields and the cost of funds with the 5- and 10-year treasury. And I think we just feel comfortable operating in our normal historical range irrespective of rate hikes and rate cuts.
Tom mentioned, we may have to pick up some higher cost of funds to fund some of this loan growth. And so a lot of that compression would be related to that and not necessarily the rate cut per se.
But with that said, Nate, we have the same -- we're not worried at all and Kelly's comments are so accurate. But with that said, we had an ALCO meeting yesterday morning, and we assigned ourselves a project, which won't take us more than a couple of days. And we're going to go do some testing on the balance sheet to say, okay, what happens and we'll be able to tell exactly.
We think it's going to be pretty neutral because if you look at -- I don't know the numbers off the top of my head, it's in the deck, but we have so many that are daily floaters on the loan side. And then we've got some deposits that won't reprice the noninterest-bearing. And so we're going to run some scenarios and just really precisely test and see what happens on 25, what happens on 50 and what happens on 75, but we're very confident. But we'll know the answer to that exactly. And I would be surprised if it -- I would be really surprised if our core NIM ever got below the long-term average.
Yes. And just to clarify, it seems like that long-term average is about 4.5%. Is that kind of what you guys are referencing?
I -- I don't want to give a number, but I was thinking it was more like 4.3% or 3.5%, but I think we're almost splitting hairs here.
[Operator Instructions] Our next question is going to come from [ Jordan Gan ] with Stephens.
My question is just on the charge-offs. I know you mentioned that it was for the quarter is the remnants of the larger charge-offs historically. But kind of going forward, where are you guys expecting to see charge-off levels? Are they kind of normalized? Or do you expect to be a little bit lower?
Yes. I would say lower than the last few quarters definitely and return in kind of the historical just look over a 10-year period and come up with a very small number and roll that forward. There's not -- the credit quality is as good as it's been since really the last 9, 10 years. So feeling really good about the loan book and asset quality.
Perfect. And then just one more, actually. So on the interest-bearing deposit costs, you guys had like a minimal amount increasing? And I know you guys talked about that some of the loan funding got pushed out to July and that you might have to go get some funding that's a little bit more expensive. But where do you guys see the interest-bearing deposit costs going from this quarter?
It's a good question. I think from a total cost of funds perspective, we're right now currently at $310 million. And so I think it really just depends on the balance sheet needs from a funding perspective.
And this will conclude our question-and-answer session. I'd like to turn the conference back over to Tom Travis for any closing remarks.
Well, great quarter, great company, great culture, thanks to our teammates, and we're going to keep doing what we've always done and keep our heads down and work hard. So we appreciate the partnerships and investors and analysts and thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.