Q3 2022 Bank7 Corp Earnings Call

Welcome.

The Bank seven Corp, third quarter earnings call before we get started.

The highlight the legal information and disclaimer on page 20 of the Investor presentation.

But those are not have access to the presentation.

Ben 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.

Given the oil change that such expectations will 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 at monetary and supervisory policies of banking regulators.

For one or more of these risks materialize or should any 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 and the 8-K that was filed this morning by the company.

Now representing each call, we have Brad Haines, Chairman, Tom Travis President and CEO .

J T Phillips Chief operating officer.

Jason asked US Chief Credit Officer, Kelly Harris, Chief Financial Officer, with that I'll turn the call over to Mr. Tom Travis.

Good morning, Thank you for joining US today, we're very pleased with our third quarter and our year to date results as well.

Successfully managed to the seamless conversion and then.

Adopted a great group of new team members so.

So we met the expectations, we had for the quarter actually exceeded them slightly we.

We expanded our name we grew our loan book, we returned back to are extremely low efficiency ratio and that all added up to record profits double digit increase in <unk>.

<unk> per share so we.

We added a significant value amount of value the shareholders.

A lot of hard work done by our team members.

And just start daily focus on our <unk>.

Or discipline of executing at the highest level at every on every transaction and we're just delighted with the quarter. So with that being said we're here to answer any questions. Thank you.

Thank you.

Now begin the question and answer session.

Ask a question you might presto or the one on your Touchtone phone.

Make a phone please pick up your handset before pressing the keys.

Draw. Your question. Please press Star then too.

This time up almost momentarily to assemble the roster.

First question comes from Thomas Windler.

Please go ahead.

Hey, good morning, everyone.

Good morning, good morning.

Just starting off with energy loans. It looks like you grew them to 14% of gross loans last quarter. He's give me an idea of where you're comfortable portfolio growing too.

Yeah, I think as we talked about in the last quarter. You know you you probably won't see that much past, 20% I think comfortable in this range, absolutely with a little bit of room to grow it.

Okay I I appreciate that and then with your growth and M. This quarter do do you have an idea with the increasing interest bearing deposit costs, where you're NIM might be peaking which quarter.

I would say that 22, we expected and budgeted for NIM expansion, especially in the second half of the year and so what's playing out exactly the way we thought it my route because of the actions of the fed and because of our discipline on the asset sensitivity of that.

Balance sheet so.

Historically manage the steady NIM through interest rates cycles, and economic cycles, whether we can expand it a bit more depends on several factors, including customer pushback on low Brett loan rate increases and how hard they push on deposit rate increases regardless, we expect continue.

You'd nimbed strength through the end of the year.

We believe beginning.

Some time in the first quarter of next year, it wouldn't surprise us to see low yields and a cost of funds somewhat similar to 2019 or perhaps slightly higher you can see what what it looked like in 2019 and a slide deck.

And of course, it depends on what the fed does and how stable. The economy is so will continue to benefit from strong margins in at some point and again, depending on the bed margins will eventually compress, but we're starting at a very high level.

Perfect. Thank you and then one last one for me it was kind of a modeling question. It looks like your other non interest income took a bit of a step up last quarter was there anything unusual in there that I should be thinking about.

It did it was increase about 140000 from the previous quarter and we did have some one time.

Income items in that so I think a normal run rate is closer to Q too.

Alright, that's everything for me, thanks, guys and great corner.

Thank you again, if you have a question. Please press Star then one.

Next question comes from what he Lee K B W. Please go ahead.

Hey, good morning Guy.

Good morning.

So looking at <unk> I mean, there was another strong quarter for growth in the third quarter.

Just you know given the macro environment I'm, assuming that growth will will moderate but just the expectations for a loan growth going forward.

From a year over year standpoint, we always point toward low double digit growth is R.

Pretty standard reply to that but I will say that.

We do have a few large payoffs expected in the next quarter.

Quarter or maybe two quarters so.

You'll see that robust pace, we've had the last couple of quarters definitely slide back to more of our normal growth metrics.

Okay, and then on the other side of the balance sheet I mean deposit growth you know kinda match, the loan growth and a good chunk of that deposit growth was non interest bearing.

Could you just talk about the success you had on the non interest bearing front and do you think that do you think Gretchen that segment <unk> can continue from here.

Well part of it was a bit of an anomaly we had ah.

Few really large new accounts come to the bank and it just so happened that one of those accounts hit right at quarter end and they started out in a non interest bearing account and then eventually or shortly thereafter transferred into interest bearing and so the typical number.

We had I believe the prior quarter was 29 or 30% and and we had increased to 34% in so.

Much of that increase was a bit of an anomaly. There we would expect to do what we've always done which is at 29 28, 30% and it's driven by our core values of extreme discipline in in not making loans to people that are not going to bring deposit.

As to the bank and so we don't see anything that would change that historical dynamic.

Okay got it.

And then last for me it looks like M. P. A saw jump up in the quarter just any color you can <unk> provide on they're the ones that were added to nonaccrual.

Yeah, it's one relationship and.

[noise] NPA did go up <unk>.

But.

That loan is that loan on non accrual.

No past right. So I believe that let me make sure you're quite I understand your question MPA did go up but but the Nonaccruals did not go up.

Okay, Yes, it's tied to one relationship and there's litigation and so I'm not going to go into it other than to say, we are well secured by marketable securities and they are under the control of a court appointed receiver and so beyond that I don't really want to get into this <unk>.

<unk>, but it's it's.

It's all tied in to one relationship the increase.

Alright got it that's all from me thanks, guys.

Thank you next question from Nathan race like per Sandler. Please go ahead.

Yeah good morning.

One in the morning.

Just going back to the last question on the increasingly appears on the quarter doesn't sound like you guys are expecting much if any loss content on the.

Loan that moved to number four and a quarter just given how your collateralized insecure. There. So was the larger provision this gorgeous largely purely a function of just a stronger longer that we saw.

It's loan growth driven and the.

Economy is definitely going to slow down.

But it's primarily loan growth it's.

Yeah, we really probably.

I don't want to say should have but at the in May and June timeframe in the second quarter.

We weren't sure about how sticky that loan growth was going to be and so after the acquisition our loan loss reserve it come down.

And so what what became obvious to us in the third quarter was the loan growth was going to be more sticky and therefore, we wanted to be consistent with way we've always been.

Relative to our alone loss reserves.

And so that that drove a big part of what we did most of almost what we did.

Understood that's helpful and maybe changing gears, a little bit and I apologize. If this was previously touched on as I got on somewhat late this morning, but just in terms of.

From what Jason described to the previous question in terms of maybe some moderation alone grill and the sore throat, just given some expectations for payoffs arise.

I was kind of thinking about you know where you guys want to manage the loan to deposit ratio into next year. Obviously, you guys had great deposit girls in the quarter.

But it sounds like there might be in the near term slow down and grill. So maybe not necessarily into 2023, just given you know that <unk> that you guys operate and then some of the market sure games that we're seeing come through on the Lone Grove side of things.

Well I think that.

We're very mindful of the current macroeconomic headwinds.

So caution is very much in focus for our team.

And everyone, obviously around the world is aware of the the.

The financial markets are in pretty good distress right now and not to mention what's going on in the war fraud and so.

It's hard to predict.

And believe that we would continue with the same loan to deposit ratio of given our mindset of caution.

And so.

It wouldn't surprise us if we were where we are at 83% in the quarter Kelly.

When surprises if we were at in the low eighties and at the same time, given our geographic locations.

And the fact is nee as you know.

When they're stressed starts entering the markets, we've typically done well relative to being opportunistic with loan opportunities because entrepreneur, Steve see opportunities to make acquisitions and so.

You know without rambling further it's just pretty there's a lot of volatility out there and so wouldn't surprises to be in the low eighties, if we bounce back up to the low nineties okay.

Understood and just kind of thinking about some of the drivers for longer tour for it you know you guys are kind of below.

You're kind of internal concentration limit on energy loans I think you guys wanted to keep that no more than 20 per cent just curious kind of what you're seeing in the energy lending Arena. These days and you know if you can you expect that to be a nice driver for future loan growth at least over the next quarter or two.

The deal pipeline is still very strong and that segment and so we continue to be selectively active and I I think that will continue for the next couple of quarters.

We also have some large customers that don't owe us anything on there.

Credit facilities, right now and they'll they'll be using those credit facility. So.

There is a little bit of it baked in.

Got it okay.

Maybe just one last one no. It sounds like you guys are in the final innings of integrating cornerstone at this point you you guys have more access capital flexibility relative to most period, just given that you guys haven't been impacted by <unk> over this right cycle. So just curious maybe to get some color in terms of what you guys are seen in terms of additional acquisition.

Opportunities or is just the math still pretty difficult just with interest rate marks and so forth. These days.

Yeah, I think there is as you well know and probably most people on the call there's fewer and further.

It started as many opportunities you've got some.

Some sellers that can't sell right now because of the big <unk> Ci adjustment, they just can't and.

And then you have other buyers that the.

Currencies aren't where they used to be so.

We don't see a lot of activity out there we just Don.

Mhm.

Okay, and if I could just actually sneak one last one and the margin outlook going forward and obviously, some really nice expansion.

This quarter and I imagine we can see some additional expansion just give them a <unk> a future rate hikes and just given the floating rate nature of your loan book I guess as you guys look out over the next few quarters is it fair to assume we're still you know at least one or two quarters away from Tennessee peak margin, assuming that that kinda takes its foot off the gas at some point.

Next year.

I wouldn't say that I would I would it's hard to predict I would say that we're closer to peek margin.

Today.

Then we would be in January and February at some point and we've we've been doing this increasingly you start protecting your your franchise by customers are saying, Hey, guys. Enough's enough can you give me a little relief and so for those that have those great deposit relations.

Chips, which is most of ours.

We are providing a little bit of relief and so again, that's the advantage we have it.

At you know the name where it is if we choose to.

Strategically give people a quarter point break here, there and it impacts our margin and a little bit that's fine, but I I believe that.

What we've seen and what we budgeted for was.

Passing along fed rate increases to the borrowers.

Much more aggressively.

And the last half of the year, which has started to happen. So it's gotta be really difficult to keep from increase in those deposit rates and you're gonna get a little more squeezer alone right. So I think for us as I said.

We look at 2019, if you look at our loan yields then and you look at our cost of funds then we.

We could get close to that numbers, perhaps a little bit higher this information in the deck.

And so it's just really hard to tell with what's going on with the fed.

Gotcha, and just maybe within that context.

Most of the time are you guys, putting new loans on the books kind of similar to the portfolio yoga as some of your caution around the margins just given that you're seeing some increasing competitive pressures that or maybe resulting in.

<unk> new loans come on the books kind of below the port for portfolio yield expansion that we saw here in the third quarter.

I think the new loans are coming on very much in line with with the data you are seeing for the third quarter.

Okay, Great I appreciate all of color and you guys, taking the questions. Congrats on a great court.

Thanks.

[noise]. Thank you.

Concludes our question and answer session.

Turn to call back over to Mister Tom Travis for closing remarks.

Thank you again for joining again, we're delighted with our results and we're excited for the rest of the year and at the same time, we have our eyes wide open for the volatility that's in the markets and so I appreciate everyone's participation today and thank you.

Conference has now concluded. Thank you for attending today's presentation you may now disconnect.