Q2 2022 Bank7 Corp Earnings Call
To.
Welcome to Bank 7 Corporation, 2nd Quarter Erning's Call.
Before we get started, Iíd like to highlight the legal information and disclaimer on page 19 of the investor presentation.
For those who do not have access to that presentation, management is going to discuss certain topics that contain forward-looking information, which is based on management's beliefs, as well as its assumptions.
made by information currently available to management.
Although management believes that its expectations reflected in such forward-looking statements are reasonable, they can give no insurance 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. Simon Williams
Should one or more of these risks materialize or should underlying assumptions prove incorrect? The results may vary materially from those expected.
Also, please note that this conference call contains references to non-GAAP financial messengers.
You could find recommendations of these non- GAAP financial measures to GAAP financial measures in the 8K that was found this morning by the company.
Representing the company in today's goal, we have Tom Travis, President and CEO .
J.T. Phillips, Chief Operating Officer. Jason Estes, Chief Credit Officer. And Kelly Harris, Chief Financial Officer.
With that, Iíll turn the call over to Tom Travis.
Thank you. Welcome. Welcome to the call. We're delighted about our quarter. As you can see in the materials, it was a record quarter and
It was driven largely by strong loan growth and of course our recent acquisition helped a lot. I just want to make a couple of comments and then we can get into questions and answers. One of the comments would be the, I think sometimes.
some of us in the world of business take for granted the strength and the depth of our teams. And I think that when you look at Bank 7's results, specifically the loan growth, and Jason and his team of commercial bankers, you know, we can't take it for granted, and we need to...
give a big shout out and thanks to that. I think the, when you look at the group of bankers that we have, what's really comforting is......that we have, what's really comforting is...
About a half dozen or so have been together 17 or 18 years and there's probably another half dozen to maybe a little bit more that have been together for 10 plus years and there's a lot to be comforted by with that. We just don't have the turnover and we have people that are dynamic and intergaged and when you marry that with...
the skill set they have and then the geographic territory that we operate in, it's just very comforting and our earnings are truly core earnings in the breadth and depth of the commercial banking group just continues to get stronger and stronger on a weekly basis and so it's a real strength of our company. The second point I would make is that the second point I would make is that
you know, since we've gone public, this was our first acquisition, and although we had prior experience in a lot of different areas and different sizes, it wasn't with Bank 7. And so we are delighted at the integration and system conversion that we completed in early June . And Darrell Matthews is our manager of operations and IT, and he had a team.
It was a large team and a broad and deep team, and our elements came together and really did a fine job of integrating the systems. As we sit here today, we're highly confident that we have achieved the objectives that we set out to achieve. At the same time, we've maintained our customer base from the acquisition. So, that's what we're going to do today.
A lot to be thankful for and really good core strengths of our company have come through and it's just really nice to see that. With that being said, we'll open it up for any questions that you might have.
again the question answers action.
Ask a question, may press star the one on your touch tone phone.
Use it as a spaker volume please pick up your handset before pressing the keys.
So draw your question, please press star then two.
This time we'll pause momentarily to assemble the roster.
First question comes from Ray Galey of KBW. Please go ahead.
Hey, thank you. Good morning, guys.
Good morning.
But as I look at the second quarter, you guys put some cash to use in the bond portfolio. So is that you still have some excess liquidity out there? Do you think you'll continue to move funds into the bond portfolio or is that mostly done?
You're going to see the bond portfolio continually decline as we redeploy into loans.
And then cost of funds really.
Did move a ton. I think your total cost of deposits was up only three basis points.
to 27 basis points. I just remind us how are you thinking about your deposit beta going forward? I'm sure with what we're seeing in rates, cost of deposits is gonna go higher. How are you thinking about the pace of that?
Well, you know, we're all having to be agile and nimble and dependent on the fad and what they're doing and of course competition.
I would say the banking industry as a whole has not raised the liability costs in rapidly. And we're no different and it has to do with our liquidity and our deposit profile. And so with that being said, I would expect you're going to see.
more substantial increases not only from us, but for the entire industry, as in the back half of the year. And so I can't give you a deposit beta number, but...
I can tell you that for us.
We've been very disciplined and we're going to continue to be very disciplined.
And we still have, what is it, 32% non-interest bearing? Yes?
And so, so...
I would say we'll probably have a little larger increase in liability costs for the back half of the year than we did in the front half. And obviously, most of that's driven by the fact that the first rate increase wasn't until what, mid-March? Yeah.
And so it will be fully baked in here moving forward.
But we still expect our NIM to continue to head back towards, you know, a little more of our normal range. A lot of it has to do with re-investing the security in the loans. A lot of it has to do with re-investing the security in the loans.
just remind us what you consider kind of a normal range for your net interest margin.
Well, what does it say on that slide? I think we put the average in there. I think we put the average in there.
I think it's in that...
I guess we didn't put the average but uh...
You know, it's going to be in that low 4% range. I always talk excluding fee income, but...
I would say a range of, you know, the low point was..................
391 in the first quarter, it's back up over four. And so what we've been consistent with is as we grow, we expect our...
NIM to come down a little bit, but we still expect to maintain.
You know, somewhere in that low 4% range or high 3% range.
And then lastly for me, it seems like other expenses
ran a little heavy this quarter. They were almost 700,000. Was there anything one time in nature and other expenses?
Yes, there was related to the conversion of Cornerstone.
approximately 250,000 that was one time.
that I think we alluded to in Q1.
Okay, so you said it was 250,000 in the second quarter.
Any other one-time benefits or burdens in the quarter?
Thank you, many.
I mean look, the expenses in general, you know, you hear it all over the place and you see it, there's definitely wage pressure. There's definitely cost increases.
And so we're gonna be running higher expenses than just due to those factors. And, um,
higher expenses than just due to those factors. And we still...
We still expect a slight increase in our efficiency ratios. And I certainly don't want to give any guidance that we're going to go back to, where we get 35%. Yeah. But it wouldn't surprise me if it was, you know, back into the 38 or 39, or I don't know if we can get to 37%. But it's difficult to do when you're down at those levels. But we...
We do recognize the inflationary environment that we're in.
Great, thanks for the color, guys.
Thank you. And our next question, come from Thomas Wiggler of Stevens. Go in.
Hey, good morning everyone.
Good morning.
In the slides you guys are mentioning going back to normal profitability levels. I'm just wondering if I can get a little clarity on that. Are you expecting the bank to drift up towards that 2017 2021 average return average assets of 2.33%? Is that how I should be thinking about it?
Yeah, I mean, I don't know that we're going to get back to that absolute number. However, if you were just to simply...
Cash in the bond portfolio redeploy into the loan portfolio and just look at that interest income lift without any change in the expense levels you're going to be right back to those historical numbers so the question becomes...
What does the yield curve look like? What does the cost of funds look like? And but there's no doubt in our minds that as we change the mix on the balance sheet. What does the yield curve look like?
which is one of the benefits of the.
acquisition that we're going to get a lift.
Alright, thank you. And then fees came in a little bit softer than we were expecting this quarter. Give me any color around that.
I would say the loan fees were in excess of our internal budget. We had a very strong quarter of new loan generation and the fee component was very sound by our metrics and so that's really all the color I can give you on that. We were very pleased with our fee income in Q2. How about the...
Oh yeah, it was 42 Bips versus 51 in the first quarter. Yeah, historically we'd run in that 50, 40 in the end. Yeah, yeah, around that range.
Thank you.
Thank you. And the next question will be from Nathan Race of Piper Sandler. Please go ahead.
You and an expression will be from Nathan race of Piper Sandler, please go ahead Yeah, hi guys, good morning
Hey.
Well, one of the highlights on the quarter was the deposit growth on a core basis. You know, we haven't seen that from a lot of your peers thus far into your earnings season. So we've just been curious to get some of the drivers there. It's just kind of winning more full relationships or new clients coming on board. Any color there?
I think it goes back to the opening comments regarding the banking team and the focus that we have in our company. Thank you for joining us today.
we are just dogged in our pursuit of true relationships and, you know, we're aware of...
a couple of relationships in particular that had some asset sales and carrying some really large balances, but I wouldn't attribute the success of the deposit growth strictly to that. I would say to you that it's that broad and deep.
commitment to, you know, every week when we meet and look at loans and we specifically on every loan, we specifically focus on where the relationship is keeping their deposits and when we go talk to...
a person and we give them a term sheet and we talk about loan terms. We immediately tie the rate in the terms to deposits and we get commitments. And so the fact that our commercial bankers are so dialed in and doing it on a regular basis is really the strength. And I'll just make a comment here.
I was interviewing a person to maybe add an experienced person to our banking team in one of the markets as a lender. And in the interview, this person works for a...
almost a $20 billion bank and
there a long time lender. And we, and I pivoted and started talking about the deposits and the person's response was, well, I'm a lender, I'm not really focused on the deposits. And I tell you that because I think that there's a... information that I need that. Whatever it is. So now I'll have this unclear example. you
Uh oh.
I don't want to say that analysts or people or investors take it for granted, but I can tell you that.
keeping it top of mind to wear this from your banking team is critical and uh... it certainly is critical in our world
Got it. That's helpful, caller. Appreciate that.
And then just kind of turning to credit, it's nice to see non-performers continue to turn in the right direction. Guys had no charge-offs in the quarter, and assuming kind of low double-digit loan growth is still doable in this environment today, how are you guys kind of thinking about the need to provide for growth, and again, assuming charge-offs remain fairly low going forward?
Yeah, we'll see how the growth...
Ended up in the second half of the year. I would say we were pleasantly surprised with the loan production and the teams. And, you know, we're in the process of a Cecil adoption. And so you're gonna see lots of continued testing and modeling from us, you know, this quarter and full implementation coming soon. So we're certainly...
paying attention to the provision and the performance metrics of the portfolio overall, but you know, it just continues to be a really nice credit story.
Okay, got it. And then just going back to kind of overall balance sheet dynamic.
It sounds like you guys aren't expecting much in the way of deposit outflows and deposit growth should largely keep pace with long growth going forward. So does that kind of imply kind of a flat earning asset? So does that kind of imply kind of a flat earning asset?
Based from here, as you guys just kind of remix cash rolls coming off the bomb book in the long growth going forward.
This is Kelly's, I think it would just be a direct result of the overall down growth. And so we can keep pace with the long growth.
That will be the main driver of the Ernie assets. I would also add that it took
Kelly, I would say the period between the Fed increase in March.
and
The most recent, well I guess it'll be the day, but it took in that period of time, some time for us to fill up the floors on some of the daily floaters.
And so, I don't think that the back half of the year is solely a function of loan growth. I think there has a lot to do with the fact that we will now be fully benefiting every day from higher interest accruals because we hit those floors mainly in mid-June. Correct. never made it to our destination this year.
So, I would say that the second quarter, you didn't have, correct me if I'm wrong, Kelly, you didn't have every day or you didn't even have half the days where you were benefiting because of the floors not being filled up and that condition will not exist because we're there in the third quarter. Makes sense.
Got it, understood. I appreciate you guys taking the questions and all the color. Congrats to the great quarter.
Thanks. Thank you.
Thank you and again if you have a question please press star then one.
Next question comes from Sam Haskell, please go ahead.
Thank you. Good morning everybody.
I'm looking here at slide 10 under asset quality and it shows energy portfolio is a percent of total loans. And it shows energy portfolio is a percent of total loans.
a bit perhaps like I should look at.
The energy portfolio is the source of non-performers at some point or another.
But could you talk a little bit about
how the underwriting and the competition might be different or better since you were back at 15% in 2017-28, simply?
Can I ask a question, clarification to Sam, you said something about energy and non-performers.
Yeah, it's just you have an asset quality slide and you and you have an energy portfolio is a percent of total loans like like the energy portfolio should be a focus for asset quality.
Well, my response to that is that the
I certainly don't want to speak on behalf of the street, but we have...
I believe that the street...
believes that an energy is inherently
more risky and not getting into any kind of debate whether it is or it isn't if you prepare historical losses and segments. And so what we have come to realize after becoming a publicly traded company is that we're going to get questions on the energy partly because we're in Oklahoma and Texas. And so we might as well just put this information in the deck so that people can see.
where the portfolio is and what it's doing. And so as it relates to asset quality,
I think that's the reason it's there.
Right, and so what I'm really looking at is...
We just get the raw percentage.
But, and you touched a little bit on this in your last quarterly call.
My perception is that underwriting and competition, you know, the backdrop is more favorable than it was three, four years ago, mainly because...
you know, scores of banks have left the industry. That's what I was really trying to get at.
That's correct. You are correct. It is...
It is...
I would use the word remarkable.
that the
Opportunities in the energy space.
are really great and at the same time because of the exit from...
Frankly, a lot of investment, vehicles, and also certain lenders, the energy borrowers.
vehicles and also certain lenders, the energy borrowers
R
understanding of the pricing power that the banks have. And at the same time, the underwriting requirements are really strong. I'm not sure they've ever been stronger.
Fair to say in this case. And so I think the thesis that. And so I think the thesis that.
If this is what you're saying, we totally agree. The energy loan quality today is probably the best it's been since I can remember. And the terms are...
really favorable for the banks.
That's why we haven't left the space. That's why we're going to continue to instant energy commitments. And we think it's a really good strength of the company.
appreciate that and as a shareholder if that's the case then I'd have no problem if you got back to or even above your five-year average of 15%
Pa.
Well, we, Jason and I had this discussion many times and over the last, what, 30, 60 days, Jason? Yes, sir. Part of it is driven by the number of opportunities that we have and part of it is...
I had this discussion many times. And over the last, what, 30, 60 days Jason? Yes sir. And part of it's driven by the number of opportunities that we have and part of it is... that we have and part of it is...
you know, running our business in a prudent manner and trying to...
The guys uh,
respectfully ignore the chatter, Sam.
to understand. Alright, thank you guys.
Thank you. This concludes the questioning of the session.
I'd like to turn the conference back over to Mr. Tom Travis for closing remarks. Thanks everyone for their interest and we look forward to the rest of the year and and.
Hope to see you all soon. Bye bye.
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