Good afternoon, everyone, and welcome to Bank7 Corp's first quarter earnings conference call. Before we get started, I'd like to highlight the legal information and disclaimer on page 22 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 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 prove to 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 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 an 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, Kelly Harris, Chief Financial Officer. With that, I will turn the call over to Tom Travis.
Good afternoon. Thanks for joining us. We're very pleased with our earnings for the first quarter, and the company continues to benefit from our robust geographic markets and our pro-business environment. We're really pleased with where we are today, and we're really excited about the rest of the year. With that, we'll open it up for questions.
Ladies and gentlemen, at this time, we'll begin the question-and-answer session. If you would like to ask a question, you can join the question queue by pressing star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we ask that you please pick up the handset prior to pressing the numbers to ensure the best sound quality. Once again, that is star and then one to join the question queue. Our first question today comes from Brady Gailey from KBW. Please go ahead with your question.
Hey, thanks. Good afternoon, guys.
Good afternoon, Brady.
I just wanted to start with the margin. I know this is the first full quarter with the acquisition embedded. I know that your loan fees were down a little bit. You know, like, last year, your margin was pretty regularly over 5%. It's now about 4.43%. How are you thinking about the margin outlook from here?
Who wants to take that one?
Brady, this is Kelly. You know, we picked up an extra $100 million in debt securities in the first quarter, middle of March, really. That was on top of, o n top of the other $100 million th at we picked up in December. $200 million, you know, book yield is about 1.75%-1.76%. That really has weighed down our overall NIM in Q1. I think it would be fair to say as we continue to fund up loan growth as well as when those debt securities mature and move out of that bucket, you will see our NIM expand to more historical levels.
Okay. I know that we've talked about the fee component of the margin, which I keep hearing you guys say that'll, you know, normalize lower to about 50 basis points. It's been higher than that just for years now. I know PPP is kinda nearing the end here, but do you still think that, you know, the loan fees as a component of the NIM will still get down to that roughly 50 basis point level?
Yeah. I think if you look at the data on slide eight, Brady, this is Tom. What you'll see is if you go back to historical levels, you can see a definite downward trend in that number. Obviously, 2021 was really interrupted by COVID. I think that what we've been saying for some time that it wouldn't surprise us if the number got to 40 basis points at some point in our life cycle. It just happens as you grow. I don't think that there's any belief on our case that that temporary march downward was anything but COVID related.
Okay, you know, y'all had a pretty nice loan growth quarter, ex-PPP, it was about 15% linked quarter annualized. You know, is there any reason to think that that will slow at all from here, or is that a good run rate?
You know, it's interesting. We continuously kind of provide the feedback or input that we expect kinda low double-digit growth rates year-over-year. I don't really like to get into going by quarter to quarter to quarter because we go through phases and I think all banks, especially our size, would go through this, where you get kind of lumpy fundings and lumpy pay downs. You know, I feel really good about our deal pipeline today. Obviously, the first quarter was good.
What this masks is, you know, we had heavy payoffs really fourth quarter and first quarter. We were able to offset those, overcome it, however you wanna describe it, through the acquisition and then through, you know, just nice organic loan generation. I think there's gonna be a lot more pressure in the second half of the year on loan growth than there has been, you know, in the first portion of the year. I still stand by kinda that low double-digit growth for the year. Wouldn't shock me if we beat that a little bit. Wouldn't shock me if we came in on the low end of it.
Okay. Finally, last question for me is expenses. The $6.4 million of expenses in the first quarter. I know there's, you know, maybe some noise. I don't know if there is noise with the merger or any one-time charges or any upcoming cost saves. How are y'all thinking about expenses off of that kinda $6.4 million base? Is that a good base to grow from here?
I would say in Q1, there was probably about $250,000 related to one-time and/or some of the noise related to the acquisition, and expect to see something similar in Q2. After Q2, it should normalize.
Okay. All right. Great. Thanks for the call, guys.
Thank you.
Our next question comes from Nathan Race from Piper Sandler. Please go ahead with your question.
Yeah. Hi, guys. Afternoon.
Hi, Nate.
Going back to the margin discussion, you know, just kinda drilling into the outlook for loan yields going forward. Looks like ex fees, you know, loan yields came down by, you know, 20 basis points or so versus the fourth quarter. I appreciate, you know, the disclosures in the deck around the kinda repricing characteristics of the loan book. So just curious kinda what the weighted average rate on new loan originations were in the quarter, and if you guys are kind of expecting, you know, some pricing pressures on new volumes to be offset by just the repricing of the loan book higher as the short end goes higher.
Yeah. I think in general, I don't see big changes in what we're booking now and what we've had historically. I think some of that decrease that you're seeing that happened in the first quarter is a result of a change in the loan mix. We had some repayment through whether they sold assets, companies who were refinanced, you know, in the fourth and first quarter, where we had some higher yielding loans. I'll note, you know, some were hospitality. There was some shuffling in our C&I book as well that you had maybe some loans that were priced a little higher that were gone. You know, our new bookings seem to be consistent and have been really for the last, I'd say, three quarters as far as what we're able to achieve.
On an interest rate and fee income, in most cases, on new originations for fresh new business. I think, you know, there will be some pressure in the second half of the year on interest rates, but I still don't think that it's gonna be enough to overcome the positive benefits of rising interest rates in our asset sensitive portfolio.
I guess as I'm sitting here thinking about our pipeline that we look at every week, I'm gonna take a stab at it, Jason. The net new fundings over the next 60 days, I'm gonna say on an all-in average, excluding fees, is in that $475 range.
Yeah. And it's starting to lift, you know, but I think that's probably a good guesstimate.
Yeah. I don't know how that compares to what you're seeing, Nathan, on that 20 basis points degradation. Yeah, I think you're gonna see us. If everything was static, you'd see us booking in that 475 range.
Yeah. Yeah.
Okay. Got it. Just, you know, on the loan growth discussion, you know, looks like C&I was a nice driver in the quarter. Was that a function, Jason, of, increase in loan utilization or just adding new clients to the bank?
It was a nice combination of both.
Okay, great. It also looks like energy, on the E&P side was a driver as well in the quarter. Just some opportunistic client adds there. What are you guys seeing in the energy arena these days?
There's a very robust field out there for all kinds of opportunities, and I think you're seeing us stay with what we know, and that is, you know, the production loans with, you know, rapid amortization, hedged production, and in some cases, you know, some significant secondary support to go along with that. Very favorable deal terms for the bank. Frankly, that segment will help with some of that NIM pressure.
You know, I would add to Jason's comments, Nate, that I don't wanna suggest that we should say we feel sorry for the energy space because their prices are so high. It's quite fascinating if you look at the space with regard to the ESG pressure, especially on the equity side. It is hard to describe how swiftly and materially the industry's been impacted by certain segments of capital that just say, we don't wanna go into the energy space for ESG reasons. At the same time, the world is dying for more energy. What is remarkable is that incredibly high quality, I would couch it as pretty much riskless transactions because of the hedging.
You have energy borrowers that if you wanna charge 5.5% today or 5%, and it's really quite stunning at the magnitude in how broad and deep it is. When Jason talks about how that's somewhat of a buffer, even though that's what, Jason, is it 11% or 12% of the portfolio now?
That's about right.
It is if we book energy credits, and we are going to because we have quite a few very good opportunities. It's at a substantial premium, and yet the risk isn't there. It's an interesting dynamic.
Gotcha. Okay. Then maybe just one last one for me. Just in terms of thinking about the reserve trajectory from here, you know, obviously zero charge-offs in the quarter, you guys provided for some growth. You know, I guess based on what you guys see out there, is there much in the way of loss content? It seems like, you know, that one nonperformer still constitutes, you know, 70% of overall balances within NPAs. Just trying to think about the trajectory of the reserve from here. I would appreciate any thoughts along those lines.
Yeah, we haven't seen any negative turns, you know, of any meaningful credits or anything of any size. You know, I can't remember how many quarters in a row, but I would say it's at least five or six where you really feel like each quarter, it just improves, you know, the outlook improves. There's nothing that's happened that's changed that, but obviously there's a lot going on in the economy, you know. We'll keep a close eye on it and, you know, make sure we're adequately reserved at all times.
I think that, I don't think I know that we're living within our range, and the range at our company's always been between 95 basis points and 130 basis points. I think presently we're at the lower end of the range, and there really isn't any need for us to juice it back up to the higher end of the range because we don't see any stress. I think in our budget this year, we had provided for the allowance to stay pretty constant in that low 1%- 1.05%, or I don't know that it gets to 1.1%.
Okay. Very helpful. I will step back. I appreciate all the color. Thank you.
Thank you.
Once again, if you would like to ask a question, please press star and one. To withdraw yourself from the question queue, you may press star and two. Our next question comes from Matt Olney from Stephens. Please go ahead with your question.
Hey, thanks, guys. I wanna ask more about your expectations of funding the loan growth this year. Do you expect to grow deposits or just fund that growth with some of the excess liquidity?
Yeah, I think you'll see deposit growth consistent with what we've seen in the past. I mean, there's still quite a bit out there.
I guess second part of that is, thinking about, deposit repricing with higher rates, and you gave us some great disclosures on the loan side on page seven, but what about on the deposit side? I'm curious what your expectations are and are you increasing any deposit rates so far? Just some commentary maybe about the overall, core markets and how much pricing discipline you're seeing so far. Thanks.
Yeah, we actually had to revise our budget when we initially were budgeting. I think along with most people back in the December timeframe, there was belief that the Fed was gonna do 25 basis points and however many times they were gonna do it. We finished our budget, and then things kind of went bonkers in late December and January and early February. We revised our budget and we carefully budgeted for basically we put in our budget 50 bps next week and then another 50 in June. I think we did maybe 25 and 25. What we did on deposit beta is we went by when you look at our mix of our customer base. It's almost exactly 50/50 on business purpose deposits versus consumer.
You know, that dynamic, we have a substantial book of entrepreneurs that are really less focused on deposit rates than they're really more focused on the credit side of the bank and getting the benefits from our credit apparatus. Therefore, when we attacked the cost of funds budgeting process, we took that in mind, kept that in mind. We're very confident in our deposit betas and our ability to. I would expect us to have really good favorable deposit betas because of that dynamic. When you look at the impact of that in conjunction with the asset sensitivity that we displayed in that one slide, we're very bullish on 2Q. I would say that we're very bullish on 2Q and very, very bullish on 4Q and 3Q and 4Q with regard to the assets really pricing up and our ability to hold our cost of funds down.
Okay, that's great commentary.
I would also add that it's somewhat related that when you start thinking about the bank, you know, the great loan growth that you noted that Jason talked about, the great percentage of that loan growth occurred very late in the quarter. We didn't have the benefit of that growth for the full quarter, which is another factor that makes us feel really good about not only the deposit betas and the asset sensitivity, but the, you know, the full-blown effect of putting more loans on the books.
Yep. Okay. Perfect. Earlier in the call, I think Kelly mentioned some of the one-timish expenses in 1Q and possibly again in 2Q. Was there anything unusual from the acquisition with respect to NII with any kind of deal accretion, purchase accounting accretion? Just trying to appreciate if there's any kind of noise in that first quarter number.
We did sell the Yukon branch in March. There was a $440,000 gain with that we took against goodwill, lowered goodwill, and then there were some purchase price accounting adjustments also that increased goodwill. I think the net increase to goodwill was $330,000. I mean, outside of that, with the-
Net decrease to goodwill.
It was a net increase.
Increase? On which one? You mean on the gain?
$440,000 gain lowered goodwill, but then there was some purchase price accounting adjustments.
Oh, sorry. Yeah, I wasn't focused on those.
The net increase was $328,330.
Yeah.
Outside of that, with the ongoing deconversion and conversion costs related to the acquisition that I spoke to, you're really looking at $250,000 net ups on non-interest expense in Q1 and Q2.
I don't think any of it was considered material.
Correct.
Right.
Okay. Got it. Then I guess thinking more about the efficiency ratio and improvements from here, I think we were in the mid-30 range last year, obviously with the M&A deal, jumped up. Can you talk about kind of the roadmap to get back to that mid-30% range, kind of what you guys need to see to get back there?
Yeah. I think we've tried to signal at the acquisition that two negative events were gonna happen. One Was gonna be a decrease in the NIM because of the securities, and then the efficiency ratio was gonna add. We felt both those were temporary changes, and we, you know, obviously, for a lot of other reasons, we like the acquisition when we did it, and we really like it now 'cause it's coming to fruition because the ROE is going up and some other factors and so. I would specifically say that, if you look at our budget and our expectations, I think it's more realistic that the efficiency ratio settles in maybe in that 37%-38% range, which, you know, I don't know if it gets back to 35%.
It just depends on if we can remix the balance sheet and the securities and get a little more revenue. We've always said it's gonna be really difficult to live at 35%, but you know, we'll take 38% or 39% too. I think that's probably the best way to say it.
Yep. Okay. Thanks, guys.
Thank you.
Our next question is a follow-up from Nathan Race from Piper Sandler. Please go ahead with your follow-up.
Yeah, thanks for taking the follow-up. Just a question on capital. You know, TCE really wasn't impacted like most peers this quarter because you guys don't really have a large securities book. So we'd just love to get, you know, some updated thoughts on kind of the buyback appetite from here. Obviously, your stock, like most peers, has been under pressure over the last few months. So just curious how you guys are kind of weighing buyback opportunities versus, you know, other opportunities to deploy excess capital.
You know, Nate, we're a broken record, and we have somewhat of a. I don't know if I should use the word unique dynamic. Listen, we trade pretty much in line with peer on a tangible book value basis, but we're far below on a PE basis, and we, Brad always says we get penalized for making too much money. I know that it's quite interesting. It's the eye of the beholder, right? If you look at our stock price, and if you ask that question, and if your mind is either consciously or subconsciously driven more by the PE ratio, it's like buy, buy. If your mind is more driven by tangible book value multiple, and where we're trading, then it's less so.
You know, we're not, we don't ignore those factors, and we appreciate people's perspective. However, we've been consistent from day one that we're opportunistic stock purchasers, just like anybody that may be on this call or that may have already bought our stock or anybody else in the market. We think any time the tangible book value multiples are where they are, it's less opportunistic. That's not to say that we're comfortable with the stock valuation because we think that we should get a higher valuation on a PE basis based on our strong performance. We're just not prone to rush out and repurchase the stock in that kind of a environment.
Doesn't mean to say that we wouldn't, but we don't have any predetermined belief that we should really, you know, jump out there and really try to be eager and anticipate that we're buying stock really cheap because of the PE multiple. I think that, look, if we were a company like First Financial and Abilene that had been on the market, been public for a lot longer, and they're benefiting from that higher tangible book value and that higher PE, there's a few others out there, Frost Bank and, you know, then I think that that strategy may be it would be a lot easier to buy into that PE discount number. But for us, we're not in any hurry to do it.
The other thing is, if we can produce 20% estimate, you know, return on equity, which we've been doing on an annualized basis, and then you extrapolate that and then you start saying, why are we gonna go buy stock if we're not totally believing that it's really opportunistic when we can generate double-digit increase in earnings per share anyway, right?
Mm-hmm.
And so, y ou know, I guess it's a Rubik's Cube type thing. As I said, we don't believe that the stock. We think the stock price is a good buy today, for the reasons that we just talked about. There's no pressure and rush to do it.
Understood. I agree, and I appreciate all the color again. Thanks, Tom.
Ladies and gentlemen, at this time and showing no additional questions, I would like to turn the floor back over to management for any closing remarks.
Well, again, we're very happy with our quarter. Our company is broadening and deepening every day, and our fundamentals are strong. Our management team is intact, and we're happy with each other, and we're really proud of our lending team and our bankers and, you know, we really appreciate the support we get from the market and the analysts and we're excited about the rest of the year, especially being in the markets that we're in. Thank you very much.
Ladies and gentlemen, with that, we'll conclude today's presentation. We do thank you for joining. You may now disconnect your lines.