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spk04: Welcome to Bank 7 Corporation's 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 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 assurance that such expectations will prove to be correct. Investors 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. What were 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 8K 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.
spk08: Thank you. Welcome. 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, 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, we can't take it for granted and we need to give a big shout out and thanks to that. I think 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 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 then the geographic territory that we operate in, it's just very comforting and our earnings are truly core earnings and 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 Bank 7. And so we are delighted at the integration and system conversion that we completed in early June. And Daryl Matthews 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 set 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.
spk09: I'll begin the question and answer session.
spk04: To ask a question, you may press star the one on your touchtone phone. To the speakerphone, please pick up your handset before pressing the keys. To answer your question, please press star the two.
spk09: At this time, we'll pause momentarily to assemble the roster. The next question comes from Ray Gailey of KBW. Please go ahead.
spk06: Hey, thank you. Good morning, guys. Good morning. Good morning. Good. As I look at the second quarter, you guys put some cash to use in the bond portfolio. 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?
spk09: You're going to see the bond portfolio continually decline as we redeploy into loans.
spk06: 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. 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?
spk08: Well, you know, we're all having to be agile and nimble and dependent on the Fed and what they're doing and, of course, competition. 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. 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. 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. 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's driven by the fact that the first Fed rate increase wasn't until, what, mid-March. And so it'll 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 the securities and the loans.
spk06: Just remind us, what do you consider the normal range for your net interest margin?
spk08: 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. I always talk excluding fee income, but I would say a range of low point was 391 in the first quarter. It's back up over 4. 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. All right.
spk06: 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 in other expenses?
spk03: Brady, this is Kelly. Yes, there was. related to the conversion of Cornerstone, approximately $250,000 that was one-time that I think we alluded to in Q1.
spk06: Okay. So you said it was $250,000 in the second quarter? Correct. Any other one-time benefits or burdens in the quarter?
spk09: I can't think of any.
spk08: I mean, look, 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 at 35%. 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.
spk09: Great. Thanks for the color, guys.
spk04: Thank you. And our next question will come from Thomas Wegler of Stevens. Please go ahead.
spk00: Hey, good morning, everyone.
spk03: Good morning.
spk00: In the slides you guys are mentioning, going back to normal profitability levels, I'm just wondering if I get a little clarity on that. Are you expecting the bank to drift up towards that 2017-2021 average return on average assets of 2.33%? Is that how I should be thinking about it?
spk08: 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 is the cost of funds? look like. But there's no doubt in our minds 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.
spk00: All right. Thank you. And then fees came in a little bit softer than we were expecting this quarter. Give me any color around that.
spk01: I would say the loan fees were in excess of our internal budget, you know, 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.
spk05: I thought the, oh, yeah, it was, what is it, 42 BIPs versus 51 in the first quarter? Yeah. Historically, we run in that 51. 40 to 50. Yeah, around that range. All right.
spk09: Thank you. Thank you. And the next question will be from Nathan Race of Piper Sandler.
spk04: Please go ahead.
spk09: Yeah. Hi, guys.
spk10: Good morning. Hey. Well, one of the highlights in the quarter was the deposit growth on a core basis. You know, we We haven't seen that from a lot of your peers thus far in 2Q earnings season, so we're just 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?
spk08: I think it goes back to the opening comments regarding the banking team and the focus that we have in our company. 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 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 and 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 almost a $20 billion bank and they're a long time lender. And I pivoted and started talking about 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.
spk09: Got it. That's helpful, caller. Appreciate that.
spk10: And then just kind of turning to, you know, credit, it's nice to see non-performers continue to turn in the right direction. You 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, you know, charge-offs remain fairly low going forward.
spk01: 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 teams. We're in the process of a Cecil 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.
spk09: Okay, got it.
spk10: 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 into loan growth going forward?
spk03: 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. That'll be the main driver of the earning assets.
spk08: 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 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. 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.
spk09: Makes sense? Got it. Understood. I appreciate you guys taking the questions in all the color.
spk10: Congrats on the great quarter. Thanks. Thank you.
spk04: Thank you, and again, if you have a question, please press star then one. Next question comes from Sam Haskell of Coley & Partners. Please go ahead.
spk07: Thank you. Good morning, everybody. I'm looking here at slide 10 under asset quality, and it says energy portfolios and percent of total loans. A bit, perhaps, like I should look at. The energy portfolio is a 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, 2018, please?
spk08: Can I ask a question in clarification, Sam? You said something about energy and non-performers.
spk07: Yeah, it's 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.
spk08: 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 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.
spk07: Right. And so what I'm really looking at is we just get the raw percentage. And you touched a little bit on this in your last quarterly call. My perception is that underwriting In competition, the backdrop is more favorable than it was three or four years ago, mainly because scores of banks have left the industry. That's what I was really trying to get at. That's correct.
spk08: You are correct. I would use the word remarkable that the opportunities in the energy space are 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.
spk01: Fair to say.
spk08: 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.
spk07: All 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 five-year average of 15%. Well, Jason and I had this.
spk08: discussion many times and over the last, what, 30, 60 days, Jason?
spk01: Yes, sir.
spk08: And part of it's driven by the number of opportunities that we have and part of it is, you know, running our business in a prudent manner and trying to, gosh, respectfully ignore the chatter, Sam.
spk09: I understand. All right. Thank you, guys.
spk04: Thank you. This concludes the question and answer session. I'd like to turn the conference back over to Mr. Tom Travis for closing remarks.
spk08: Thanks, everyone, for their interest, and we look forward to the rest of the year and hope to see you all soon.
spk09: Bye-bye.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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