This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Welcome to Bank 7 Corp's 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. 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 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 8K that was filed this morning by the company. Now representing the company in today's call, we have Brad Haynes, Chairman. Tom Travis, President and CEO, J.T. Phillips, Chief Operating Officer, Estes, Credit Officer, and Kelly Harris, Chief Financial Officer. With that, I'll turn the call over to Mr. Tom Travis.
spk03: 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 NEM. 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 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.
spk07: Thank you.
spk04: I'll begin the question and answer session. Ask a question, you may press star the one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. For all your questions, please press star the two. This time we'll pause momentarily to assemble the roster. First question comes from Thomas Wendler.
spk01: Please go ahead. Hey, good morning, everyone.
spk07: Good morning.
spk01: Good morning. Just starting off with energy loans, it looks like you grew them to 14% of gross loans last quarter. Can you give me an idea of where you're comfortable with this portfolio growing to?
spk02: Yeah, I think as we talked about in the last quarter, you know, you probably won't see that up much past 20%. You know, I think comfortable in this range, absolutely, with a little bit of room to grow it.
spk01: 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?
spk03: 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 the steady NIM through 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 NIMS 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 slide 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.
spk01: Perfect. Thank you. And then one last one for me, just 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?
spk05: It did. It was an increase of 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.
spk01: All right. That's everything for me.
spk07: Thanks, guys. Great quarter. Thank you.
spk04: Again, if you have a question, please press star, then 1. Next question comes from Woody Lee. KDW, please go ahead.
spk06: Hey, good morning, guys. Good morning. 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?
spk02: From a year-over-year standpoint, you know, we always point toward, you know, low double-digit growth as our Pretty standard reply to that. But I will say that, you know, we do have a few large payoffs expected in the next quarter or maybe two quarters. So, you know, you'll see that robust pace we've had the last couple quarters definitely slide back to more of our normal growth metrics.
spk06: Okay. And then on the other side of the balance sheet, I mean, deposit growth 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? Do you think growth in that segment can continue from here?
spk03: 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 the prior quarter was 29 or 30%, and we had increased to 34%. And 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.
spk06: 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?
spk02: Yeah, it's one relationship. Hang on one second.
spk03: NPAs did go up, but is that loan on non-accrual?
spk02: No. Passed it.
spk03: Right. So, I believe, let me make sure I understand your question. NPAs did go up, but the non-accruals did not go up. Okay.
spk02: 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. All right. Got it.
spk07: That's all from me. Thanks, guys.
spk04: Thank you. Next question will be from Nathan Race, Piper Sandler. Go ahead.
spk08: Yeah. Hi, guys. Good morning. Hey, Nathan. Good morning. Good morning, Nathan. Just going back to the last question on the increase in MPAs in the quarter, it doesn't sound like you guys are expecting much, if any, lost 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?
spk02: It's loan growth driven, and the economy is definitely going to slow down.
spk03: 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.
spk08: 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 of loan growth in the fourth quarter, just given some expectations for payoffs to rise, How are you guys kind of thinking about 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 the 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.
spk03: 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 financial markets are in pretty good distress right now, and not to mention what's going on in the war front. And so it's hard to predict and believe that we would continue with the same loan-to-deposit ratio given our mindset of caution. 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 80s and at the same time, given our geographic locations, and the fact is, Nate, as you know, when the stress starts entering the markets, 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, wouldn't surprise us to be in the low 80s. If we bounce back up to the low 90s, okay.
spk08: 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, you know, expect that to be a nice driver for future loan growth at least over the next quarter or two.
spk02: The deal pipeline is still very strong in that segment, you know, and so we continue to be selectively active, and I think that'll continue for the next couple of quarters.
spk03: 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.
spk08: Got it. Okay. Maybe just one last one. 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 rate marks and so forth these days?
spk03: Yeah, I think there's, 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 the 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.
spk00: Mm-hmm.
spk08: That's it. If I could just actually sneak one last one in on the margin outlook going forward, 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 at least one or two quarters away from kind of seeing a peak margin, assuming the Fed kind of takes its foot off the gas at some point middle of next year?
spk03: I wouldn't say that. It's hard to predict. I would say that we're closer to peak margin today than we would be in January and February. At some point, and we've been doing this increasingly, you start protecting 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 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 NEM 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. it's gonna be really difficult to keep from increasing those deposit rates and you're gonna get a little more squeeze on a 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, we could get close to that number, perhaps a little bit higher, the information's in the deck. And so it's just really hard to tell what's going on with the Fed.
spk08: Gotcha, and just maybe within that context, Lastly, Tom, were you guys putting new loans on the books kind of similar to the portfolio yield or is some of your caution around the margin just given that you're seeing some increasing competitive pressures that are maybe resulting in new loans come on the books kind of below the portfolio yield expansion that we saw here in the third quarter?
spk02: I think the new loans are coming on very much in line with the data you're seeing for the third quarter.
spk07: Okay, great.
spk08: I appreciate all the color and you guys taking the questions. Congrats on a great quarter. Thank you.
spk04: Thank you. This concludes our question and answer session. I'd like to turn the call back over to Mr. Tom Travis for closing remarks.
spk03: 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 appreciate everyone's participation today, and thank you.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer