Q1 2022 Bank7 Corp Earnings Call

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 Tom Travis President and CEO .

J T Phillips, Chief operating Officer, Jason Estes, Chief Credit Officer, Kelly Harris, Chief Financial Officer.

With that I will turn the call over to Tom Travis.

Good afternoon, thanks for joining us we're very pleased with our.

Earnings for the first quarter and.

The company continues to benefit from our robust geographic markets in our pro business environment.

And we're really pleased with where we are today and we're really excited about the rest of the year end.

And so with that we'll open it up for questions.

And ladies and gentlemen at this time, we'll begin the question and answer session.

If you would like to ask a question you can join the question queue by pressing Star and then one using your Touchtone telephone.

To withdraw your question you May press Star two.

You are using a speaker phone, we ask that you. Please pick up the handset prior to pressing the numbers to ensure the best sound quality.

Once again that is star and then one to join the question queue.

Our first question today comes from Brady Gailey from <unk>. Please go ahead with your question.

Hey, Thanks, good afternoon guys.

Perfect.

So I just wanted to start with the margin I know this is the first full quarter.

With the acquisition.

And I know the.

Loan fees were down a little bit.

But you know like last year your margin was pretty regularly over 5%. It's now about 443, how are you thinking about the margin outlook from here.

Who wants to take that one.

This is Kelly.

Picked up an extra $100 million in destin.

<unk> securities in the first quarter Middle of March really and so and that was on top of on top of the other $100 million that we picked up in December 200 million.

The book yield is about 175 $1 76.

That really has weighed down our overall NIM in Q1.

I think it would be fair to say as we continue to fund the loan growth as well as windows debt securities mature.

And move out of that bucket, you will see our NIM expand to more historical levels.

Okay.

And I know we've talked about.

The fee component of the margin.

Keep hearing you guys say that'll normalize lower to about 50 basis points, but it's a bit higher than that just for years now that <unk> kind of.

Nearing the end here, but you.

We still think the the loan fees.

Component of the NIM will still get down to that 50 roughly basis point level.

Yes, I think if you look at the data on slide eight Brady. This is Tom what Youll see is if you go back to.

Historical levels, you can see a definite downward trend in that number.

So obviously.

Obviously, 'twenty one was really interrupted by by Covid and so I think that what we've been saying for some time that it wouldn't surprise us if that number got to 40 basis points at some point in our lifecycle that just happens as you as you.

Grow so I don't I don't think that Theres any belief on our case that that temporary.

March downward is as with anything but COVID-19 related.

Okay.

You all had a pretty nice loan growth quarter.

<unk> was about 15% linked quarter annualized.

Are there any.

Reason to think that that will slow at all from here.

Or is that a good run rate.

It's interesting we continuously kind of provide the feedback or input that we expect kind of low double digit growth rate year over year.

Don't really like to get into gone by quarter to quarter to quarter, because we go through phases.

All banks, especially our size would go through this where you get kind of lumpy fundings and lumpy Paydowns and.

I feel really good about our deal pipeline today.

Obviously, the first quarter was good.

This masks as we had heavy pay off really fourth quarter and first quarter.

And so we were able to offset those overcome it however, you want to describe it through.

Through the acquisition and then through.

Just nice organic loan generation.

So I.

I think theres going to be.

A lot more pressure in the second half of the year on loan growth than there has been.

In the first portion of the year.

I still stand by kind of that low double digit growth for the year wouldn't shock me. If we if we beat that a little bit it wouldn't shock me. If we came in on the low end of it.

Okay and then finally last question for me.

Sensors.

$6 4 million of expenses in the first quarter.

Is there maybe some noise with.

I don't know if there is noise with the merger.

One time charges or any upcoming cost saves, but how are you all thinking about expenses off of that kind of $6 4 million dollar base is that a good base to grow from here.

I would say in Q1, there was probably about 250000 related to one time <unk> some of the noise related to the acquisition and expect to see something similar in Q2, but then after Q2 it should normalize.

Okay.

Great. Thanks for the color guys.

Thank you.

Our next question comes from Nathan race from Piper Sandler. Please go ahead with your question.

Yes, hi, guys good afternoon.

Going back to the margin discussion just kind of drilling into the outlook for loan yields going forward. It looks like ex fees loan yields came down by 20 basis points or so versus the fourth quarter and I. Appreciate the disclosures in the deck around the kind of repricing characteristics of the loan book.

So just curious kind of what the weight average rate on new loan originations were in the quarter and if you guys are kind of expecting some pricing pressures on new volumes to be offset by the repricing of the law.

Loan book higher.

As the.

Short end goes higher.

Yes, I think in general I don't.

Not see big changes in what we're booking now and what we've had historically I think some of that decrease that youre seeing that happened in the first quarter as a result of.

A change in the loan mix, we had some.

Repayment through when.

They sold assets companies, who were refinanced.

In the fourth and first quarter, where we had some.

The higher yielding loans.

Some were hospitality there was some shuffling in our C&I book as well that you had maybe some loans that were.

Priced a little higher that were gone and then.

Our new bookings seem to be consistent and have been really for the last I'd say three quarters as far as what we're able to achieve on an interest rate and fee in most cases on new originations for fresh new business and so.

I think.

There will be some pressure in the second half of the year on interest rates, but I still don't think that it's going to be enough to overcome the positive benefits.

Rising interest rates and our asset sensitive portfolio.

I guess as I'm sitting here thinking about our pipeline that we look at every week.

And we will take a stab at it Jason but the new the net new fundings over the next 60 days I'm going to say on an all in average excluding fees is in that $4 75 range, yes, and it's starting to lift, but I think thats, probably a good guesstimate.

So I don't know how that compares to.

Or what what Youre seeing Nate on that 20 basis points degradation, but.

Yeah, I think I think youre going to see us.

If everything was static you'd see us booking in that $4 75 range, yes, yes.

Yes.

Okay got it and then just on the loan growth discussion.

It looks like C&I was a nice driver in the quarter was that a function Jason of increase in line utilization, just adding new clients.

So the base is a nice combination of both.

Okay, Great and then also looks like the energy on the E&P side was a driver as well in the quarter.

Just some opportunistic.

Climb.

Sure.

Are you guys seeing in the energy Arena these days.

There is a very robust.

Field out there.

All kinds of opportunities.

You're seeing us.

Say with what we know and that is the production loans with rapid amortization hedged production and in.

Some cases, some significant secondary support to go along with that but very favorable deal terms for the bank and frankly that that segment will help with some of that NIM pressure.

I would add to Jason's comments Nathan.

I don't want to suggest that we should say, we feel sorry for the energy space because their prices are so high but.

It's quite fascinating if you look at the space with regard to the ESG pressure, especially on the equity side there are.

It is hard to describe.

How swiftly and materially.

The industry has been impacted by certain segments of capital that just say, we don't want to go into the energy space for ESG reasons and at the same time the world is dying for more energy and so.

What is what is remarkable is that.

Incredibly high quality I would I would couch it as pretty much risk with <unk>.

Transactions because of the hedging and you have energy borrowers that.

If you want to charge five 5% today of 5% and it's really quite stunning at the magnitude and how broad and deep it is and so.

When Jason talks about.

How thats a somewhat of a buffer even though that's what Jason is.

11% or 12% of the portfolio now.

That's about right, yes, but.

It is.

We book Energy credits and we are going to because we have.

Quite a few very very good opportunities.

At a substantial premium and yet.

Risk isn't there and so it's an interesting dynamic.

Gotcha, Okay, and then maybe just one last one for me just in terms of thinking about the reserve trajectory from here, obviously zero charge offs in the quarter you guys provided for some growth.

I guess based on what you guys see out there is there much in the way of loss content and it seems like that one nonperformer still constitutes 70% of overall balances with an NPA is.

So just trying to think about the trajectory of the reserve from here I would appreciate any thoughts along those lines.

Yeah, we haven't seen any negative.

Turns.

Any meaningful credits or anything of any size.

I can't remember, how many quarters in a row, but I would say it's at least.

Five or six where you really feel like each quarter.

<unk>.

It just improves.

The outlook improved and there's nothing that's happened that's changed that but obviously there is a lot going on in the economy and so we will keep a close eye on it and make sure. We're adequately reserved at all times I think that we think I know that we are living within our <unk>.

<unk> in the range of our company has always been between 95, Bips and 130 bps and.

So I think presently we're at the lower end of the range and we're really isn't any need for us to.

Juice it back up to the higher end of the range, because we don't see any stress and so I.

I think in our budget. This year, we had we had provided for in the allowance to stay pretty pretty constant in that low 1% to 105 or I don't know that against the one one.

Okay.

Helpful I'll step back.

I appreciate all the color. Thank you.

Thank you.

Once again, if you would like to ask a question. Please press star and one to withdraw yourself on the question can you May press star two.

Our next question comes from Matt Olney from Stephens. Please go ahead with your question.

Hey, Thanks, guys I wanted to ask more about your.

Expectations of funding the loan growth.

This year do you expect to grow deposits or just fund that growth with some of the excess liquidity.

Yes, I think youll see deposit growth consistent with what we've seen in the past the framers.

So quite a bit out there.

And then I guess second part of that is.

Thinking about deposit repricing with higher rates and you gave us some great disclosures on the loan side on page seven but what about on the deposit side I'm curious what your expectations are and are you increasing any deposit rates, so far and just some commentary maybe about the overall.

Core markets and how much pricing discipline youre seeing so far yes.

We actually had to revise our budget.

When we are initially we're budgeting I think along with most people back in the December timeframe. There was a belief that the fed was going to do 25 basis points. In however, many times they were going to do it. So we finished our budget and then things kind of went bonkers in late December and January and early February and so we.

Revised our budget and we carefully budgeted for.

Basically we put in our budget 50 bps and next week and then another 50 in June and then I think we did maybe 25 and 25 and then what we did on deposit beta as we went by.

When you look at our the mix of our customer base, it's almost exactly 50 50.

On business purpose.

Positive versus consumer and so.

That dynamic we have.

Substantial book of entrepreneurs that are really less focused on deposit rates and they are really more focused on the credit side of the bank.

Getting the benefits from our credit apparatus and so therefore.

When we attack the cost of funds budgeting process, we took that in mind kept that in mind and.

And so.

We're very confident in our deposit betas and.

Our ability to.

I would expect us to have.

Really good favorable deposit betas because of that dynamic.

So when you look at the impact of that.

In conjunction with the <unk>.

Asset.

Sensitivity.

We displayed in that one slide.

We're very bullish on <unk> I would say that we're bullish on <unk>.

And very very bullish on <unk>, and <unk> and <unk> with regard to the.

The assets really pricing up and us our ability to hold our cost of funds down.

Okay. That's great I would also add that it's somewhat related debt and when you start thinking about the bank.

The great loan growth that you noted that Jason talked about the great percentage of that loan growth occurred very late in the quarter and so we didn't have the benefit of that growth for the full quarter, which is another factor that.

It makes us feel really good about not only the deposit betas and the asset sensitivity, but the.

The full blown effect of putting more loans on the books.

Yes, okay.

Perfect.

Earlier in the call I think Kelly you mentioned some of the.

One time expenses.

<unk> and possibly again in <unk>.

Was there anything unusual from the acquisition with respect.

NII with any kind of deal accretion purchase accounting accretion Im just trying to appreciate there's any kind of noise in that in that first quarter number.

We did sell the Yukon branch in March there was a $440000 gain with that that we took against goodwill.

Lowered goodwill and then there were some purchase price accounting adjustments.

Also that increased goodwill so I think the net increase of <unk> 330000.

I mean outside of that with the net decrease of goodwill there was a net increase increase on which one.

You mean on the gain.

$440000 gain lowered goodwill, but then there were some purchase price accounting.

Sorry, yes, rather than focus on those the net increase was 328000 330000, yes.

And outside of that with the ongoing deconversion and conversion costs related to the acquisition that I spoke to.

You're really looking at 250000 net <unk> noninterest expense in Q1 and Q2, but.

But I don't think any of it was considered material correct right.

Okay.

Got it.

And then I guess thinking more about the efficiency ratio improvement from here I think we were in that mid 30 range.

Last year, and obviously with the with the M&A deal jumped up can you talk about kind of the roadmap to get back to that mid 30% range kind of what you guys need to see to get back there.

Yes, I think we've tried to signal at the acquisition that too negative events were going to happen.

One was going to be a decrease in the NIM because of the securities and then the efficiency ratio was going to add we felt both of those were temporary changes in the.

Obviously for a lot of other reasons, we like the acquisition when we did it and we really like it now because it's coming to fruition because the ROE is going up and some other factors and so but.

I would specifically say that.

If you look at our our budget and our expectations.

It's more realistic that the efficiency ratio settles in may be in that 37% to 38% range, which.

I don't know if it gets back to 35 and disciplines on if we can remix the balance sheet in the securities and get a little more revenue but.

We've always said, it's going to be really difficult to live at 35% and but we will take 38 or 39, two so I think thats, probably the best way to say it.

Yes, okay.

Thanks, guys.

Thank you.

And our next question is a follow up from Nathan race from Piper Sandler. Please go ahead with your follow up.

Yes, thanks for taking the follow up just a question on capital.

TCE really wasn't impacted like most peers. This quarter because you guys don't really have a large securities book, So would just love to get some updated thoughts on.

Buyback appetite from here obviously.

Your stock like most peers has been under pressure for the last few months. So just curious how you guys are kind of weighing buyback opportunities versus other opportunities to deploy excess capital.

Nate we're a broken record and.

We have a <unk>.

Somewhat of a.

You know if I should use the word unique dynamic but.

Listen we trade pretty much in line with peer on a tangible book value basis, but were far below on a p/e basis, and we Brad always says, we get penalized for making too much money.

And so.

And so.

I know that it's quite interesting in the eyes of the Beholder right. So if you look at our.

Stock price and if you ask that question and if your mind is either consciously or subconsciously driven more by the p/e ratio of slide Bye Bye bye, but if your mind is more driven by tangible book value multiple than where we're trading then it's less less so and so.

We're not.

We don't ignore those factors and we appreciate People's perspective, However, we've been consistent from day, one that we are.

Our opportunistic stock purchasers just like antibody that may be on this call are that may have already bought our stock or anybody else in the market and so.

We think anytime the tangible book value multiples are where they are.

Less opportunistic and <unk>.

And that's not to say that we're comfortable with the stock valuation because we think that we should get a higher valuation on a p/e basis based on our strong performance but.

We're just not prone to rush out and.

And repurchase the stock and.

And that kind of environment doesn't mean to say that we wouldn't.

But we don't have any.

Pre determined.

Belief that we should really jump out there and really try to be eager and anticipate that we are buying stock really cheap because of the PE multiple and I think that look if we were.

A company like first financial in Abilene that had been on the market been public for a lot longer and they are benefiting from that higher tangible book value in that higher P/e, There's a few others out there Frost bank.

That I think that that strategy may be.

It would be a lot easier to buy into that p/e discount.

<unk>.

Number but for us we're not in any hurry to do it and the other thing is if we can produce 20%.

We estimate a return on equity, which we've been doing on an annualized basis.

And then you extrapolate that and then you start saying what.

Why why are we going to go buy stock if we're not totally.

Believing that it's really opportunistic when we can generate double digit increase in earnings per share anyway.

Alright, thank you.

Yes.

And so.

And so it's I guess, it's a rubik's cube type thing and as I said, we're not we don't believe that the stock we think stock prices of goodbye to date for.

For the reasons that we just talked about.

But theres no pressure and rush to do it.

Understood.

I agree.

Appreciate all the color again, thanks, Tom.

Okay.

And ladies and gentlemen at this time in showing no additional questions I would like to turn the floor back over to management for any closing remarks.

We're again, we're very happy with our quarter, our company is broadening and deepening everyday and our fundamentals are strong our management team is intact and we're happy with each other and we're really proud of our lending team and our bankers and.

We really appreciate the support we get from the from the market and the analysts and we're excited about the rest of the year, especially in the markets that we're in so thank you very much.

And ladies and gentlemen, with that we'll conclude today's presentation. We do thank you for joining you may.

May now disconnect your lines.