Bank7 Corp
NASDAQ:BSVN
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Bank7 Corp
Earnings Call Analysis
Q4-2023 Analysis
Bank7 Corp
The recent earnings call revealed a year that could have been impeccable for the company, if not for a single significant event that greatly impacted the fourth quarter. Despite the setback, the company's fundamentals remained robust, showcasing a remarkable return on tangible common equity of nearly 19.5%. This performance is impressive considering that 90% of banks in the U.S. did not reach this level of return. Net interest margins stayed in line with historical averages, and the management of operating expenses reflected a stable efficiency ratio, hovering around 33% to 34%, slightly inflated due to non-standard oil and gas well acquisitions.
In terms of asset management, approximately 62% of oil revenue has been hedged to secure cash flows, with a potential strategy in place to sell these assets should commodity prices rise and market valuation of these assets improve.
Looking ahead, the company anticipates a moderate single-digit growth rate, around 7%, for the upcoming year. This tempered expectation is due to a line-up of known payoffs in the first half, offset by a decent new deal pipeline. Management projects more vibrant activity in the second half of the year, with possibly inflated payoff amounts in the first quarter due to the delayed resolution of a large energy credit paydown.
The company has diligently managed its net interest margin (NIM) to prevent drastic fluctuations, boasting a core margin consistency of around 4.50% for the latter half of the year. Executives emphasized the company's deliberate matching strategy on the balance sheet to ensure stability irrespective of changes in interest rate markets. An expected shift of assets from U.S. treasuries to potentially higher-yielding assets postures the company to maintain or improve this margin going forward.
The company expressed a strategic stance of not speculating in anticipation of rate cycles, choosing instead to place maturing assets with the Federal Reserve as a response to the current yield curve inversion. This approach is part of their broader discipline to prioritize liquidity and stable margins over speculative growth.
Credit quality has been a focus, with improvements noted apart from one specific energy loan. There was a migration downwards in a medical relationship amounting to approximately $10 million, signaling attention to credit quality beyond singular events. Furthermore, the total net charge-off for the quarter was reported at $16.5 million. In terms of capital deployment, noninterest-bearing deposit growth was strong in the fourth quarter, despite some migration towards interest-bearing products as the interest rate environment shifts.
The financial reserve is considered overinflated relative to the historical range but viewed as necessary due to recent events. About 78% of the company's earning assets, which include approximately $901 million in daily floating loans, are positioned to reprice within the first year. This level of preparedness showcases the company's proactive asset-liability management and commitment to maintaining its NIM in the face of potential downward repricing following any potential Federal Reserve cuts.
The company touted its ability to manage expenses, which has resulted in an efficiency ratio at 33%. Commitments to managing expenses and upgrading assets are made with foresight, and such expenses are not expected to significantly impact the bank's financials in the current year. This indicates the company's ongoing attention to efficient operations as a key aspect of its overall strategy.
Concluding the call, the company expressed confidence in its strategic position, resilience in overcoming a major setback, and enthusiasm for maintaining strong performance in the upcoming year.
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Welcome to Bank7 Corp.'s Fourth Quarter and Full Year Earnings Call. [Operator Instructions] Please note this event is being recorded.
Before we get started, I'd like to highlight the legal information and disclaimer on Page 24 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 Brad Haines, Chairman; Tom Travis, Vice Chairman and CEO; J.T. Phillips, Chief Operating Officer; Jason Estes, Chief Credit Officer; Kelly Harris, Chief Financial Officer. And with that, I'll turn the call over to Tom Travis. Please go ahead.
Thank you. Good morning, everyone. It's a beautiful day here in Oklahoma City to those of you that are around the country. We've had a cold spell of weather that it's nice to be over with. As you can see, we had signaled in our last earnings call back in late October that we had subsequent events post the third quarter closing that were going to effect -- significantly affect the fourth quarter numbers. And as you can see that, in fact, did happen.
And so I suppose that it reminds me of a comment I've heard before and I think everyone on the call has heard before, and that is except for the one event, how was the play, Mrs. Lincoln? And not to be morbid, but that's pretty much how we view our company today because when you look at the totality of the fundamentals of the company for the year, but for that one event, it was a phenomenal year. And when you evaluate what we say is a phenomenal year, even with the large charge related to the one credit, we're still at almost 19.5% return on tangible common equity, actually, that's average tangible common equity.
And we did some analytics about 3 weeks ago, and we used the first 3 months -- or first 9 months of the year. And about 90% of the banks in the country did not make 19.5% return on average tangible common equity. So as you can see and as we mentioned in the last earnings call, in a perverse way, the strength of the company, as highlighted by the fact that we took this significantly one-off out of character negative event and just kept right on moving forward. And so that's the way we view it, and we take comfort in that.
If you look at the other components of the company and not just the earnings and the return on equity, you can see that the company has done an excellent job of managing its net interest margin. The historical averages of the net interest margin are pretty much where we are today. And we did that through a pretty difficult rate environment, but not for that one credit. The credit metrics are really strong and even better than they had been for the prior year or 2. And so we feel really good about the book.
The interest of the operating expenses for the company are very much intact, as far as maintaining our efficiency ratio. The one comment I would make is that the company as a part of that one credit, we acquired a couple of handfuls of oil and gas wells. We did not acquire a company. We acquired specific working interest in oil and gas wells. And as a result of that, you'll see a slightly inflated noninterest income number, you'll also see a slightly inflated noninterest expense number. And so if you remove those 2 items out of the income statement, you will have -- you would have seen that the efficiency ratio would still be in that 33% to 34% range instead of a 39% range. And so when we look at the fundamentals of the company, we feel really good about it.
I would say that with regard to the one particular one-off credit, we are in the seventh or eighth inning of the bankruptcy process and litigation. We have real strong clarity and good optics into where we think it's going to end up. We feel good about the amount of money that's been either expensed or set aside relative to some certainty.
Clearly, we don't feel good about having to do it. However, we are confident that we've accounted for what we need to account for. And with regard to that credit, with regard to the bankruptcy, with regard to the litigation, we're a very transparent company, we always answer every question we can. However, we cannot really speak much to it, and we need to be respectful of the fact that details and specifics are in the public realm here today. And so we're not really going to comment much beyond what's been said today other than we feel like we've accounted for it properly.
And so with all that being said, we feel really good about our company, and we're excited to move forward into this new year. And with that, we'll open it up for questions.
[Operator Instructions] And our first question will come from Brady Gailey of KBW.
So I understand the impact of owning these energy assets, and it's pushing up fee income, it's pushing up expenses. How long do you anticipate owning these assets? Is this going to be a short-term thing? Or is this something that you anticipate owning for a while?
This is Tom. And I've got -- I'll give you the approximate numbers. I have the exact numbers in my lap, but just to make it easy for you. So we booked approximately $16.9 million of an asset value on the balance sheet. And the effective date and cash flow of the wells started September 1 of last year. And so when you look at the starting point on the balance sheet of $16.9 million, for the first 4 months, we will have collected $4.5 million. So the new asset or the actual cash flow that results from that is about $12.4 million. So we will have collected for the first 4 months and most of which we have collected, 27% of that asset value.
So then when you think about cash flow for 2024, the cumulative cash flow for -- at the end of this year is projected to be 60%. So in math, that means we will have collected $10.2 million of the $16.9 million. And then if you want to roll that forward through 2025, we will have collected $13.2 million of the $16.9 million, which is about 78% of the cash flow. And for anyone on the call, that's not familiar, the cash flows from producing oil and gas wells is not a linear decline curve. It's skewed more heavily towards the more recent months. And so as you collect the cash flow, the asset value will come down much more quickly in the early months and then smooth out.
And so the bottom line is that, again, we will have collected a little over 25% of the cash flows of that beginning asset value by now and then by the end of the year, 60%. And so we expect -- it's already not a material amount relative to the company, but we will expect by the end of the year to be pretty immaterial.
Okay. All right. So that's the plan, and there's not a thought of just simply selling these assets more near term?
It's possible. I will tell you that we have hedged the -- about, was it, 62%? Jason?
Of the oil. The Oil Revenue.
So this is predominantly oil and not natural gas. And so we have hedged to make sure that we can receive most of the cash flows, if not all of it. And so it is possible if you saw an increase in the commodity prices and the market would value the assets higher, it's possible we could sell.
Okay. All right. And then maybe back -- or looking at the core fundamentals of the bank, which were pretty impressive in the quarter. How are you guys thinking about loan growth from here? And what's the outlook for the core net interest margin?
Brady, this is Jason. I think, again, kind of like last year at this time, we were sitting here coming off of a really rapid growth in 2022, and we signaled, hey, this is going to be a different year. We think it will be more like a mid -- moderate single digit. I think we ended up at 7%. I think something in that range is probably reasonable to expect for this year. I think we've got a fair amount of known payoffs coming in the first half of the year, expected, known, quantified payoffs. The deal pipeline is still nice. We booked about $90 million of new fundings in the fourth quarter, which was a nice solid quarter. And so it looks like first quarter pipeline is decent. But with those known payoffs, I think we'll be pretty muted in the first half of the year and pick it up in the second half.
I would also note that we would have to signal that the large energy credit pay down and pay off has been delayed somewhat because of the bankruptcy. So you could likely see a little bit higher payoff amount in the first quarter due to that than you would normally see.
All right. That's helpful. And then the core margin, it's been pretty consistent around 4.50% for the back half of '23. Is that how we should think about it going forward? Or do you think that there could be some slippage there?
Brady, this is Kelly. If you look at December NIM, core NIM, we were at 4.45%, average 4.50% for the quarter. We do have a large tranche of U.S. treasuries that matured at the end of February that, that will move to a higher-yielding asset, 5.33%, assuming the Fed. And so you will see there's some positive events that will occur during the quarter that should lift NIM. That said, no color on what the Feds are going to do in March, as well as -- than fighting pay downs.
That's a good recap, Kelly. I would use the word delighted, but not surprised. We are delighted with our company's ability to have managed the NIM through the interest rate cycle. We're not surprised about it. We purposely work very hard to match the balance sheet so that we're not caught with interest rate swings and wild fluctuations. And so, as we are prone to say on a regular basis, we're pleased with our ability to illustrate a NIM, that's very steady, irrespective of the changes in the interest rate markets, and we don't see that changing.
All right. And then just finally for me, Kelly, what's the size of those treasuries that are rolling off? And what's the rate there?
A $100 million at 1.5%.
The next question comes from Nathan Race of Piper Sandler.
I just want to clarify on the last point around the securities that are maturing in the first quarter. Is the plan just to leave those in cash? Or do you guys plan on redeploying that into securities in the first half of the year or just leaving it for some dry powder to redeploy the loans as Jason described earlier?
We're not going to speculate. It's -- obviously, it's tempting to believe that we're at the end of a rate cycle. And however, as we all know, that I think the wise thing for anyone to do is to not speculate and think, you know. And so we're going to take advantage of the yield curve inversion. And I think today, the 10-year is somewhere around, what is it, 4.1% and the Fed is still over 5%. So I think our belief is that we'll put it at the Fed and kind of stay away from any kind of fixing in and trying to anticipate rates dropping.
I think you also remember that liquidity is a real important function of the bank and part of the Rubik's cube. And so $100 million sounds like a lot of money, but it's really not relative to the movements on the balance sheet relative to loans and liquidity. So keeping it short and then cash will benefit us on the yield curve side and also maintains that strength and flexibility for liquidity and cash.
Okay. Got it. That's helpful. Just curious how you guys are thinking about deposit betas and pricing on the way down. We get a few Fed rate cuts at some point this year. How do you see that impacting the margin and just kind of overall, the trajectory in NII, over the course of 2024?
I don't -- I mean, Kelly or Jason, you want to talk about we budgeted pretty similar from where we are...
Yes. I think if you look at our historical NIM through various rate cycles, we've been able to manage it up and manage it down. I don't foresee this being any different. And so if the Fed's cut, then we'll be able to push down the deposit rates in tandem with the asset side.
Anything you want to add to that, Jason?
No. Other than we spend a lot of time on these calls talking about NIM and growth rates and they're very important things. And I think if you look at our history, we've proven that we're not willing to sacrifice margins for the sake of growth. And so I think you're going to see our discipline, just like it was there last year, it's going to continue to be the same, right? We're going to work as hard as we can, to maintain top-tier profitability while we grow this company.
Got it. Very helpful. Makes sense. And just one last one for me on kind of excess capital priorities into this year. You guys are operating with pretty healthy capital levels across the board. So just curious what you're seeing in terms of acquisition opportunities and just kind of your optimism level on that front?
I would say that we are laser-focused on acquisition opportunities, and it takes laser focus because there's still a healthy amount of what we call the zombie banks, that I think you guys do, too, and we've -- we continue to have conversations. We're making calls on people that are not for sale. We're planting seeds. We are constantly evaluating everything we can, and it's probably going to be a tougher environment for the next 2 or 3 or 4 months for -- or just as tough environment, I should say.
And then if rates do start coming down, some of the "zombie banks" may have an ability to sell. And so you might see a little flurry there in the back half of the year, if the rates come down. And so our goal is to position ourselves in to try to be there, when we can so that we can buy. And we definitely are -- we definitely have a mindset to do that.
Got it. That's great. And if I could squeeze actually one last one in. Just curious, Jason, maybe in terms of overall migration trends in criticized and classified in the quarter, outside of the one energy loan, that we've touched on?
Yes. So the quarter, as Tom mentioned in his opening comments, the credit quality of the book, the metrics have actually improved outside of this one credit not that they were bad other than this deal. But I think if you recall a couple of years ago, we had another charge-off. That loan paid in full during the quarter, the remainder of it. And so the balance we have left is all paid off and it's gone.
And then we've had another NPA, we've been carrying that's about 34% of the NPA balance at the end of the year. And we're optimistic that, that thing could be off of that list here, maybe even in the first quarter. And so we're not seeing stressed throughout the portfolio. That being said, we've got a medical relationship that has migrated down and it's about $10 million altogether, but it's more going positive than there has been negative for the last couple of quarters outside of the one credit.
Got you. And just within that context, you kind of envisioned the reserve kind of remaining, where it was come out the end of the year relative to loans? Or do you guys kind of see it as kind of overinflated level just given some of the credit events that occurred late last year?
I would say it's probably overinflated of our historical range and where we strive to keep it, but I think it's warranted based on what's transpired in the last couple of quarters.
The next question comes from Matt Olney of Stephens.
Do you guys have the dollar amount of the charge-off for the fourth quarter? I didn't see that one.
Matt, this is Kelly. Yes, the total NCO for the quarter was $16.5 million.
Okay. Perfect. And then on the deposit side, really strong noninterest-bearing deposits in the fourth quarter. Any color on the growth there? And then you hit on the betas earlier, but just the appetite to grow deposit balances for the year?
Well, the noninterest-bearing will come down a little bit in the early part of the year. We have a few large significant noninterest-bearing deposits that occurred later in the last year, and we expect some of that to run off. And so we don't believe that the noninterest-bearing deposits are going to show much absolute growth from the prior year because of that inflated number that came in late in the last year.
So now relative to -- if you take those few deposits out, we would expect to do what we've always done, and that is a nice steady growth in our deposit book and our relationship deposits. Our bankers are doing a really nice job of making loans, when we have new deposit relationships. And so we don't expect there to be much different, if at all, in the way we operate going forward.
I think it's probably fair, too, to say we're still seeing some migration, where people are moving what were noninterest-bearing accounts over into some interest-bearing products. And that's been ongoing ever since the rate -- this last rate cycle moving up started.
Yes. Okay. That makes sense. And then just as far as the rate sensitivity, you gave us some good details there on Slide 4. It looks like about 78% of your earning assets repriced in that first year. Just within the loans, and that's a -- it seems like most of those that reprice the first year are going to be floaters that reprice in the first few weeks after a Fed cut. Is that right? Or any color on kind of what percent of those loans are floaters?
Yes. I think if you look at the first footnote on that same page, Matt, of that $1.043 billion in loans in that less than a year, $901 million are daily floaters and of that you've got $86 million at the ceiling. So roughly, what, 90% of that total?
That was -- you said that there's $1 billion in loans that are floaters?
$900 million.
Yes. And look, I think we always have to remember not saying that people don't, but we are very active in managing our floors. And so that's part and parcel to the stability of the NIM and the historical illustration that we show you in our ability to maintain that NIM. So yes, they'll flow down, but at some point, we started having floors, and that's a big component of our bank.
Yes. Okay. Good points. And then on expenses and fees, any color on the way you're thinking about that in 2024, if we just remove the oil and gas assets that you mentioned before?
We're proud of that. We -- if you look at the expense load for the bank and you take out the oil and gas impact, and am I right, Kelly, it was 33% efficiency ratio? And if you look at the expenses to the size of the bank, and we feel really good about our ability to manage our expenses, and I think that's been proven over the over the years and nothing is going to change. We are spending a little bit of money to upgrade and relocate a few fixed assets, but that really won't show up until very late in the year and probably really not until next year because it just takes a while to construct a few branches. So -- but even with that, we don't expect the expense flow to the bank to change in a meaningful way.
This concludes our question-and-answer session. I would like to turn the conference back over to Tom Travis for any closing remarks.
Thank you. Again, we're pleased with our position of our company and our results, and we're especially pleased to move past that one-off event, and it's in the rearview mirror and we've shown the ability to manage through that and still produce good results. And we're really excited about this year and excited to just get right back on track to those really truly strong, strong numbers, and we appreciate everyone's participation and involvement.
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.