Bank7 Corp. (NASDAQ:BSVN) Q3 2022 Earnings Conference Call October 26, 2022 10:00 AM ET
Company Representatives
Brad Haines – Chairman
Tom Travis – President, Chief Executive Officer
J.T. Phillips – Chief Operating Officer
Jason Estes – Chief Credit Officer
Kelly Harris – Chief Financial Officer.
Conference Call Participants
Thomas Wendler – Stephens
Woody Lee – KBW
Nathan Race – Piper Sandler
Operator
Welcome to the Bank7 Corp, Third Quarter Earnings Call. Before we get started, I’d like to highlight the legal information and disclaimer on Page 20 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 the management’s beliefs, as well as its 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 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. Should 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 in the 8-K that was filed this morning by the company.
Now representing the company on today’s call, we have Brad Haines, Chairman; 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 Mr. Tom Travis.
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. In the early part of ’22 we were busy preparing for our systems integration of the most recent acquisition that occurred in early June and it was very successful. At the same time our commercial bankers were extremely busy with a robust loan pipeline. So as we moved into the third quarter, we felt good about it and we all talked about that as we had successfully managed the seamless conversion and then adopted a great group of new team members.
So we met the expectations we had for the quarter, actually exceeded them slightly. We expanded our NIM, we grew our loan book, we returned back to our extremely low efficiency ratio and that all added up to record profits, double digit increase in earnings per share. So we added a significant value, amount of value to the shareholders. A lot of hard work done by our team members, and just our daily focus on our core discipline of executing at the highest level 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. First question comes from Thomas Wendler. Please go ahead.
Thomas Wendler
Hey! Good morning everyone.
Tom Travis
Good morning.
Thomas Wendler
Just starting off with energy loans, it looks like you grew them to 14% of gross loans last quarter. Just give me an idea of where you’re comfortable with this portfolio of growing to?
Tom Travis
I think as we talked about in the last quarter, you know you probably won’t see that much past 20%. You know I think comfortable in this range, absolutely, with a little bit of room to grow it.
Thomas Wendler
Yeah, I appreciate that. And then with your growth in NIM this quarter, do you have an idea with the increasing interest bearing deposit costs where your NIM might be peaking, which quarter?
Tom Travis
I would say that in ’22 we expected and budgeted for NIM expansion, especially in the second half of the year, and so it’s playing out exactly the way we thought it might because of the actions of the Fed and because of our discipline on the asset sensitivity of the balance sheet.
So, we’ve historically managed to study NIM though interest rate cycles and economic cycles. Whether we can expand it a bit more depends on several factors, including customer pushback on loan rate increases and how hard they push on deposit rate increases. Regardless, we expect continued NIM strength through the end of the year.
We believe beginning sometime in the first quarter of next year, it wouldn’t surprise us to see loan yields and a cost of funds somewhat similar to 2019 or perhaps slightly higher. You can see what it looked like in 2019 in the slides deck and of course it depends on what the fed does and how stable the economy is. So we’ll continue to benefit from strong margins and at some point and again depending on the Fed, margins will eventually compress, but we’re starting at a very high level.
Thomas Wendler
Perfect! Thank you. And then one last one for me. This is 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?
Kelly Harris
It did. It was an increase about $140,000 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 Q2.
Thomas Wendler
All right, that’s everything for me. Thanks guys and great quarter.
Operator
Thank you. [Operator Instructions] The next question comes from Woody Lee, KBW. Please go ahead.
Woody Lee
Hey, good morning guys!
Tom Travis
Good morning.
Woody Lee
So looking at loan growth, I mean it was another strong quarter for growth in the third quarter. Just you know given the macro environment, I’m assuming that growth will moderate, but just expectations for loan growth going forward.
A – Kelly Harris
From a year-over-year standpoint, you know we always point toward low double digit growth as our pretty standard reply to that. But I will say that you know we do have a few large pay-offs expected in the next call it quarter or maybe two quarters. So you know you’ll see that robust pace we’ve had over the last couple of quarters definitely slide back to more of our normal growth metrics.
Woody Lee
Okay. And then on the other side of the balance sheet, I mean deposit growth you know kind of matched 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 growth in that segment can continue from here?
Tom Travis
Well, part of it was a bit of an anomaly. We had a 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 that we had I believe in the prior quarter was 29% or 30% and we had increased to 34%.
So much of that increase was a bit of an anomaly there. We would expect to do what we’ve always done, which is that 29%, 28%, 30%, and it’s driven by our core values of extreme discipline and not making loans to people that are not going to bring deposits to the bank, and so we don’t see anything that would change that historical dynamic.
Woody Lee
Okay, got it. And then last for me, it looks like NPA saw a jump up in the quarter. Just any color you can provide on those loans that were added to non-accrual?
A – Kelly Harris
Yeah, it’s one relationship and…
Tom Travis
One second, NPA’s did go up, but that loan, is that loan on non-accrual?
Kelly Harris
No, past it.
Tom Travis
Right. So I believe that – let me make sure your question – I understand your question. NPA did go up, but the non-accruals did not go up.
Woody Lee
Okay.
Kelly Harris
Yeah, and 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 discussion, but it’s – you know it’s all tied into one relationship, the increase.
Woody Lee
All right, got it. That’s all for me. Thanks guys.
Operator
Thank you. Next question will be from Nathan Race, Piper Sandler. Please go ahead.
Nathan Race
Yeah, hi guys! Good morning.
A – Tom Travis
Hey Nate!
Kelly Harris
Good morning Nate!
Nathan Race
Just going back to the last question on the increase in NPAs in the quarter, it doesn’t sound like you guys are expecting much of any loss content on the loan that moved to non-performing in the quarter, just given how you’re collateralized and secured there. So was the larger provision in this quarter just largely purely a function of just the stronger loan growth that we saw?
A – Kelly Harris
Its loan growth driven and you know the economy is definitely going to slow down.
Tom Travis
But it’s primarily loan growth. it’s – we really probably, I don’t want to say should have, but in the 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 had come down, and so 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 the way we’ve always been relative to our loan loss reserves and so that drove a big part of what we did, most of almost what we did.
Nathan Race
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 in loan growth in the fourth quarter, just given some expectations for payoffs to rise, how are you guys 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 growth in the quarter, but it sounds like there may be a near term slowdown in growth, but maybe not necessarily into 2023 just given you know that footprint that you guys operate in and some of the market share gains that we’re seeing come through on the loan growth side of things.
A – Tom Travis
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 financial markets are in pretty good distress right now and you know not to mention what’s going on in the war front. And so you know it’s hard to predict and believe that we would continue with the same loan-to-deposit ratio given our mindset of caution, and so it wouldn’t surprise us if we were – were we at 83% in the quarter Kelly?
I mean, it wouldn’t surprise us if we were in the low 80’s and at the same time given our geographic locations and the fact is Nate, as you know, when the stress starts entering the market, we’ve typically done well relative to being opportunistic with loan opportunities, because entrepreneurs seek opportunities to make acquisitions. And so you know without rambling further, it’s just pretty – there’s a lot of volatility out there, so it wouldn’t surprise us to be in the low 80’s, if we bounce back up to the low 90’s, okay.
Nathan Race
Understood. And just kind of thinking about some of the drivers you know for loan growth going forward, you know you guys are kind of below your kind of internal concentration limit on energy loans. I think you guys want to keep that no more than 20%. Just curious kind of what you’re seeing in the energy lending arena these days, and you know if you can expect that to be a nice driver for future loan growth at least over the next quarter or two?
Kelly Harris
The deal pipeline is still very strong in that segment you know and so we continue to be selectively active, and I think that will continue you know for the next couple of quarters.
A – Tom Travis
We also have some large customers that don’t owe us anything on their credit facilities right now and they’ll be using those credit facilities, so there’s a little bit of it baked in.
Nathan Race
Got it, okay. Maybe just one last one. You know it sounds like you guys are in the final innings of integrating Cornerstone at this point. You guys have more excess capital flexibility relative to most peers, just given that you guys haven’t been impacted by AOCI over this rate cycle. So just curious maybe to get some color in terms of what you guys are seeing in terms of additional acquisition opportunities or is just the math still pretty difficult just with interest marks and so forth these days?
A – Tom Travis
Yeah, I think there is – as you well know and probably most people on the call, there’s fewer and further. There just aren’t as many opportunities. You’ve got some sellers that can’t sell right now, because of this big AOCI adjustment, they just can’t, and then you have other buyers that you know the currencies aren’t where they used to be. So we don’t see a lot of activity out there, we just don’t.
Nathan Race
Okay. If I could just actually sneak one last one in on the margin outlook going forward. You know obviously some really nice expansion this quarter and I imagine we can see some additional expansion just given what the forward curve implies for 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 kind of seeing the peak margin, assuming the fed kind of takes its foot off the gas at some point in the middle of next year?
Tom Travis
I wouldn’t say that. I would – it’s hard to predict. I would say that we’re closer to peak margin today than we would be in January and February you know at some point and we’ve been doing this increasingly. You start protecting your franchise by – you know customers who are saying, ‘hey guys, enough is enough. Can you give me a little relief?’ And so for those that have those great deposit relationships, which is most of ours, we’re providing a little bit of relief. And so again, that’s the advantage we have at the NIM where it is.
If we choose to strategically give people a quarter point break here or there and it impacts our margin a little bit, that’s fine, but I believe that what we’ve seen and what we budgeted for was passing along fed rate increases to the borrowers much more aggressively in the last half of the year, which has started to happen. So it’s going to be really difficult to keep from increasing those deposit rates and you’re going to get a little more squeeze on the loan rate.
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. You know we could get close to that numbers, perhaps a little bit higher. The information is in the deck, and so it’s just really hard to tell with what’s going on with the fed.
Nathan Race
Gotcha. And just maybe within that context, lastly Tom, are you guys putting new loans on the books, kind of similar to the portfolio yield or is some of your costs around the margin just given that you’re seeing some increasing competitive pressures that are maybe resulting in loan, you know new loans come on the books kind of below the portfolio yield expansion that we saw here in the third quarter?
A – Kelly Harris
I think the new loans are coming on very much in line with the data you are seeing for the third quarter.
Nathan Race
Okay, great. I appreciate all the color and you guys taking the questions. Congrats on a great quarter!
A – Tom Travis
Thank you.
Operator
Thank you. This concludes our question-and-answer session. I like to turn the call back over to Mr. Tom Travis for closing remarks.
Tom Travis
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.
Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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