Bank7 Corp. (NASDAQ:BSVN) Q4 2023 Earnings Call Transcript

Bank7 Corp. (NASDAQ:BSVN) Q4 2023 Earnings Call Transcript January 29, 2024

Bank7 Corp. beats earnings expectations. Reported EPS is $0.12, expectations were $-0.08. BSVN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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 effects 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 eight 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 myself. I will turn the call over to Tom Travis. Please go ahead.

Thomas Travis: 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 is a 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 affect, 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 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 had average tangible common equity, and we did some analytics about three weeks ago, and we use the first three months or first nine months of the year and done about 90% of the banks in the country. It 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 is 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.

And 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 two. And so we feel really good about the book. The interest, the operating expenses for the Company are very much intact as far as maintaining our efficiency ratio. And 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 two 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 in 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 than we need to be respectful of the fact that some 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: [Operator Instructions]. Our first question will come from Brady Gailey of KBW.

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Q&A Session

Brady Gailey: Thank you. Good morning, guys, or anyone. So I understand the impact of owning these energy assets and it’s pushing up the income, it’s pushing up expenses. How long do you anticipate owning these assets? Is this going to be a short term then? Or is this something that you anticipate holding for a while?

Thomas Travis: This is Tom and I’ve got I’ll give you the approximate numbers, but 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 the 1st of last year. And so when you look at the starting point of the balance sheet of $16.9 million for the first four 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 four 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. And then if you want to roll that forward for through 2025, we will have collected 13.2 of the 16.9 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 more the more recent months. And so as you collected cash flow, the asset value will come down much more quickly in the early months and then smoothed 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 ArCom motor.

Brady Gailey: That’s the plan. And there’s not a thought of just simply selling these assets more near term, if possible.

Thomas Travis: I will tell you that and we have hedged the about was 62% of the oil JV from oil revenue. So this is predominantly oil and not natural gas. And so we have hedged to make sure that we can receive the most of the cash flows, if not all of it. And so it is possible if you saw an increase in if commodity prices in the market would value the assets higher. It’s possible we could sell and Parker on.

Brady Gailey: 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?

Jason Estes: Hi, 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 from 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. You know, I think we’ll be pretty muted in the first half of the year and picking up in the second half.

Thomas Travis: I would also note that we would have to signal that the large energy credit paydown and payoff has been delayed somewhat because of the bankruptcy. So you could likely see a little bit higher payoff amount in the first quarter. And due to that, then you would normally see.

Brady Gailey: Right, that’s helpful. And then the core margin, it’s been pretty consistent around 40 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?

Kelly Harris: Hey, Brady, this is Kelly. If you look at December NIM, we were at 4.45% average 4.50% for the quarter. We do have a large tranche of US treasuries that mature at the end of February that that will move to a higher yielding asset of 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., and that’s it no color on what the Fed’s going to do in March as well as then fighting paydowns.

Thomas Travis: That’s a good recap, Kelly. I would say I would use the word delighted, but not surprised. We are delighted with our Company’s ability to manage the NIM. through the interest rate cycle. We’re not surprised about it we’ve purposely worked 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 are pleased with our ability to illustrate a name that’s very steady irrespective of the changes in the interest rate markets, and we don’t see that changing.

Brady Gailey: And then just finally for me, Kelly, what’s the size of those treasuries that are rolling off and what’s the rate there?

Kelly Harris: $100 million at 1.5%.

Brady Gailey: Okay, great.

Operator: Next question comes from Nathan Race of Piper Sandler.