Bank7 Corp (NASDAQ:BSVN) Q2 2022 Earnings Conference Call July 27, 2022 11:00 AM ET
Company Participants
Tom Travis – President and CEO
J.T. Phillips – Chief Operating Officer
Jason Estes – Chief Credit Officer
Kelly Harris – Chief Financial Officer
Conference Call Participants
Brady Gailey – KBW
Thomas Wendler – Stephens
Nathan Race – Piper Sandler
Operator
Welcome to the Bank7 Corp. Second Quarter Earnings Call.
Before we get started, I’d like to highlight the legal information and disclaimer on Page 19 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 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 assurance that expectations will prove to be correct. They’re 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 the 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; and Kelly Harris, Chief Financial Officer.
With that, I’ll turn the call over to Tom Travis.
Tom Travis
Thank you. Welcome to the call. We’re delighted about our quarter. And 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 Bank7’s results, specifically the loan growth and Jason and his team of commercial bankers, 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 about a half dozen or so have been together 17 or 18 years, and there’s probably another half a 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 engaged.
And when you marry that with the skill set they have and in 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 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 Bank7. And so we are delighted at the integration and system conversion that we completed in early June, and Darrell Mathews is our manager of operations and IT, and he had a team and 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. And so as we sit here today, we’re highly confident that we have achieved the objectives that we stood out to achieve. And at the same time, we’ve maintained our customer base from the acquisition. And so 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.
So with that being said, we’ll open it up for any questions that you might have.
Question-and-Answer Session
Operator
[Operator Instructions] The question comes from Brady Gailey of KBW.
Brady Gailey
So as I look at the second quarter, you guys put some cash to use in the bond portfolio. 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?
Tom Travis
You’re going to see the bond portfolio continually decline as we redeploy in the loans.
Brady Gailey
Okay. And then cost of funds really did move a ton. I think your total cost of deposits was up only 3 basis points to 27 basis points. 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 going to go higher, how are you thinking about the pace of that?
Tom Travis
Well, we’re all having to be agile and nimble and dependent on the Fed and what they’re doing and, of course, competition. The — I would say the banking industry as a whole has not raised the liability costs 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 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% noninterest-bearing?
Unidentified Company Representative
Yes.
Tom Travis
And 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 is driven by the fact that the first Fed rate increase wasn’t until, what, mid-March. And so it will be fully baked in here moving forward. But we still expect our NIM to continue to head back towards a little more of our normal range. A lot of it has to do with reinvesting in the securities and the loans.
Brady Gailey
And just remind us what do you consider kind of a normal range for your net interest margin?
Tom Travis
Well, what does it say on that slide? I think we put the average in there. I think it’s in that — I guess we didn’t put the average. But it’s going to be in that low 4% range. If you — I always talk excluding fee income. But I would say a range of the low point was 3.91% in the first quarter. It’s back up over 4%. 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 somewhere in that low 4% range or high 3% range.
Brady Gailey
All right. And then lastly for me, it seems like other expenses ran a little heavy this quarter. They were almost $700,000. Was there anything onetime in nature in other expenses?
Kelly Harris
Brady, this is Kelly. Yes, there was related to the conversion of Cornerstone, approximately $250,000 that was onetime that I think we alluded to in Q1.
Brady Gailey
Okay. So you said it was $250,000 in the second quarter?
Kelly Harris
Correct.
Brady Gailey
Any other onetime benefits or burdens in the quarter?
Tom Travis
I mean, look, the expenses in general, 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 going to be running higher expenses than just due to those factors. And 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 were, 35%?
Kelly Harris
Yes.
Tom Travis
But it wouldn’t surprise me if it was back into the 38% or 39%. 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 do recognize the inflationary environment that we’re in.
Operator
And our next question will come from Thomas Wendler of Stephens.
Thomas Wendler
In the slides, you guys are mentioning going back to normal profitability levels. Just wondering if I could get a little clarity on that. Are you expecting the bank to drift up towards that 2017, 2021 average — return-on-average assets of 2.3%. Is that how I should be thinking about it?
Tom Travis
Yes. I mean it’s — 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 is the cost of funds look like? But there’s no doubt in our mind that as we change the mix on the balance sheet, which is one of the benefits of the acquisition that we’re going to get a lift.
Thomas Wendler
All right. And then fees came in a little bit softer than we were expecting this quarter. Can you give me any color around that?
Unidentified Company Representative
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. About the…
Unidentified Company Representative
Yes, what was it, 42 bps versus 51 in the first quarter, yes. Historically, we run in that 50 bps — 40 bps around that range.
Operator
And the next question will be from Nathan Race of Piper Sandler.
Nathan Race
One of the highlights in the quarter was the deposit growth on a core basis. We — you haven’t seen that from a lot of your peers thus far in 2Q earnings season. So would just be curious to get some of the drivers there. Is it just kind of winning more full relationships or new clients coming on board? Any color there?
Tom Travis
I think it goes back to the opening comments regarding the banking team and the focus that we have in our company. And we are just dogged in our pursuit of true relationships. And 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 than that. I would say to you that it’s that broad and deep commitment to 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, the 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 almost a $20 billion bank. And they’re a long-time lender. And we 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 there’s a — 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 awareness from your banking team is critical. And it certainly is critical in our world.
Nathan Race
Got it. That’s helpful color. I appreciate that. And then just kind of turning to credit. It’s nice to see nonperformers continue to trend in the right direction. I guess 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?
Unidentified Company Representative
Yes. We’ll see how the growth ends up in the second half of the year. I would say we were pleasantly surprised with the loan production in the teens. And we’re in the process of a CECL adoption. And so you’re going to see lots of continued testing and modeling from us 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 it just continues to be a really nice credit story.
Nathan Race
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 loan growth going forward. So does that kind of imply kind of a flat earning asset based from here as you guys just kind of remix cash flows coming off the bond book in the loan growth going forward?
Kelly Harris
Nate, this is Kelly. I think it would just be a direct result of the overall loan growth. And so we can keep pace with the loan growth. It will — that will be the main driver of the earning assets.
Tom Travis
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 will be today, — 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.
Kelly Harris
Correct.
Tom Travis
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 floor is not being filled up, and that condition will not exist because we were there…
Kelly Harris
In the third quarter.
Tom Travis
Makes sense.
Operator
[Operator Instructions] Next question comes from Sam [Indiscernible] of [Coley and Partners].
Unidentified Analyst
I’m looking here at Slide 10 under asset quality, and it shows energy portfolio as a percent of total loans, a bit perhaps like I should look at the energy portfolio is a source of nonperformers 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, 2018 please?
Tom Travis
Can I ask a question in clarification. Sam, you said something about energy and nonperformers.
Unidentified Analyst
Yes, just — you have an asset quality slide and you have an energy portfolio as a percent of total loans, like the energy portfolio should be a focus for asset quality.
Tom Travis
Well, my response to that is that the — I certainly don’t want to speak on behalf of the Street, but we have a belief that the Street believes that energy is inherently more risky and not getting into any kind of debate whether it is or it isn’t, if you compare historical losses on 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.
Unidentified Analyst
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 on your last quarterly call. My perception is that underwriting and competition, the backdrop is more favorable than it was 3, 4 years ago, mainly because scores of banks have left the industry. That’s what I was really trying to get at.
Tom Travis
That’s correct. You are correct. 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 are 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 space. 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. And that’s why we haven’t left the space. That’s why we’re going to continue to extend energy commitments, and we think it’s a really good strength of the company.
Unidentified Analyst
Right. Well, I 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 5-year average of 15%.
Tom Travis
Well, we — Jason and I had this discussion many times. And over the last, what, 30, 60 days, Jason?
Jason Estes
Yes, sir.
Tom Travis
And part of it is driven by the number of opportunities that we have. And part of it is running our business in a prudent manner and trying to, gosh, respectfully ignore the chatter, Sam.
Operator
This concludes the question-and-answer session. I’d like to turn the conference back over to Mr. Tom Travis for closing remarks.
Tom Travis
Thanks, everyone, for their interest, and we look forward to the rest of the year and hope to see you all soon. Bye-bye.
Operator
Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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