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. They 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. If 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.
Thank you. Welcome. Welcome to the call. We're delighted about our quarter. 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 depths of our teams. I think that when you look at Bank7's results, specifically the loan growth and Jason and his team of commercial bankers, you know, 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] maybe a little bit more that have been together for 10+ years. There's a lot to be comforted by with that. You know, we just don't have the turnover, and we have people that are dynamic and integrated engaged. When you marry that with the skill set they have and then the geographic territory that we operate in, it's just very comforting. 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. It's a real strength of our company.
The second point I would make is that, you know, since we've gone public, this was our first acquisition. Although we had prior experience in a lot of different areas and different sizes, it wasn't with Bank7. We are delighted at the integration and system conversion that we completed in early June. Darrell Mathews is our Manager of Operations in IT, and he had a team, and it was a large team and a broad and deep team. Our elements came together and really did a fine job of integrating the systems. As we sit here today, we're highly confident that we have achieved the objectives that we set out to achieve. At the same time, we've maintained our customer base from the acquisition.
A lot to be thankful for and really good core strengths of our company have come through. It's just really nice to see that. With that being said, we'll open it up for any questions that you might have.
I'll begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're on a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble the roster. The question comes from Brady Gailey of KBW. Please go ahead.
Hey, thank you. Good morning, guys.
Good morning. Good morning.
As I look at the second quarter, you know, you guys put some cash to use in the bond portfolio. You know, is that, do 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?
You're going to see the bond portfolio continually decline as we redeploy into loans.
Okay. Cost of funds really didn't 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, you know, your deposit beta going forward. I'm sure with what we're seeing in rates, cost of deposits is gonna go higher. How are you thinking about the pace of that?
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, as 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 gonna continue to be very disciplined. We still have, what is it, 32% non-interest bearing.
Yes.
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. Obviously, most of that's driven by the fact that the first Fed rate increase wasn't until, what, mid-March.
Mm-hmm.
It'll be fully baked in here moving forward. We still expect our NIM to continue to head back towards, you know, a little more of our normal range. A lot of it has to do with reinvesting the securities in the loans.
Yep. Just remind us, what do you consider kind of the normal range for your net interest margin?
Well, what does it say on that slide? I think we put the average in there. I think it's in that.
Page 7.
I guess we didn't put the average. You know, it's gotta be in that low 4% range. I always talk excluding fee income. You know, I would say a range of, you know, low point was 3.91 in the first quarter. It's back up over four. What we've been consistent with is as we grow, we expect our NIM to come down a little bit and we still expect to maintain, you know, somewhere in that low 4% range or high 3% range.
All right. Lastly for me, it seems like other expenses ran a little heavy this quarter. They were almost $700 thousand. Was there anything one time in nature in other expenses?
Brady, this is Kelly. Yes, there was, related to the conversion of Cornerstone. Approximately $250,000 that was one time. I think we alluded to it in Q1.
Okay. You said it was $250,000 in the second quarter?
Correct.
Okay. Any other one time benefits or burdens in the quarter?
Can't think of any. I mean, look, the expenses in general, you know, you hear it all over the place and you see it, there's definitely wage pressure. There's definitely cost increases. We're gonna be running higher expenses than just due to those factors. We still expect a slight increase in our efficiency ratio. I certainly don't wanna give any guidance that we're gonna go back to where we were at 35%.
Yeah.
It wouldn't surprise me if it was, you know, back into the 38% or 39%, or I don't know if we can get to 37%. It's difficult to do when you're down at those levels. We do recognize the inflationary environment that we're in.
Great. Thanks for the color, guys.
Mm-hmm.
Thank you. Our next question will come from Thomas Wagler of Stephens. Please go ahead.
Hey, good morning, everyone.
Morning.
In the slides, you guys are mentioning going back to normal profitability levels. I'm just wondering if I can 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?
Yeah. I mean, I don't know that we're gonna 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 gonna be right back to those historical numbers. The question becomes what does the yield curve look like? What does the, you know, cost of funds look like? 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, you know, acquisition, that we're gonna get a lift.
All right. Thank you. Fees came in a little bit softer than we were expecting this quarter. Just give me any color around that.
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. That's really all the color I can give you on that. We were very pleased with our fee income in Q2.
I thought. Oh, yeah, it was what was it? 42 basis points versus 51 in the first quarter.
Right.
Yeah.
Historically, we run in that 50.
40-50, yeah.
Yeah, around that range.
All right. That's all for me. Thank you.
Yep, thank you.
The next question will be from Nathan Race of Piper Sandler. Please go ahead.
Yeah. Hi, guys. Good morning.
Hey.
Well, one of the highlights in the quarter was the deposit growth on a core basis. You know, we haven't seen that from a lot of your peers thus far in 2Q earnings seasons. 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?
You know, 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. You know, 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 focus on where the relationship is keeping their deposits.
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. The fact that our commercial bankers are so dialed in and doing it on a regular basis is really the strength. 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. In the interview, this person works for almost a $20 billion bank, and they're a longtime lender. I pivoted and started talking about the deposits, and the person's response was, "Well, I'm a lender.
I'm not really focused on the deposits." I tell you that because I think I don't wanna 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. It certainly is critical in our world.
Got it. That's helpful color. Appreciate that. Just kinda turning to, you know, credit. You know, it's nice to see nonperformers continue to trend in the right direction. You guys had no charge-offs in the quarter. Assuming kinda low double-digit loan growth is still doable in this environment today, how are you guys kinda thinking about the need to provide for growth? Again, assuming, you know, charge-offs remain fairly low going forward.
Yeah. 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. You know, we're in the process of a CECL adoption, so you're gonna see lots of continued testing and modeling from us, you know, this quarter and a full implementation coming soon. We're certainly paying attention to the provision and the performance metrics of the portfolio overall. You know, it just continues to be a really nice credit story.
Okay, got it. Just going back to kinda 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. Does that kind of imply kind of a flat earning asset base from here as you guys just kinda remix cash flows coming off the bond book into loan growth going forward?
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.
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. It took, in that period of time, some time for us to fill up the floors on some of the daily floaters. 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.
Correct.
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.
Correct.
In the third quarter. Make sense?
Got it. Understood. I appreciate you guys taking the questions and all the color. Congrats on the great quarter.
Thanks. Thank you.
Thank you. Again, if you have a question, please press star then one. Next question comes from [Sam] Haines of Cowen and Company. Please go ahead.
Thank you. Good morning, everybody.
Morning, Sam.
I'm looking here at slide 10 under asset quality, and it shows energy portfolio as a % of total loans, a bit perhaps like I should look at the energy portfolio as a source of non-performers at some point or another. 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, you know, 2017, 2018, please?
Can I ask a question clarification, Sam? You said something about energy and non-performers.
Yeah. It's just, you have an asset quality slide and you have an energy portfolio as a % of total loans, like the energy portfolio should be a focus for asset quality.
Well, my response to that is that I certainly don't wanna speak on behalf of The Street, but we have a belief that The Street believes that in 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. What we have come to realize after becoming a publicly traded company is that we're gonna get questions on 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. As it relates to asset quality, yeah, I think that's the reason it's there.
Right. What I'm really looking at is if we just get the raw percentage, but. You touched a little bit on this in your last quarterly call. My perception is that underwriting and competition, you know, the backdrop is more favorable than it was three-four years ago, mainly because, you know, scores of banks have left the industry. That's what I was really trying to get at.
That's correct. You are correct. It is 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. At the same time, the underwriting requirements are really strong. I'm not sure they've ever been stronger.
Fair to say, yeah.
In this space. 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. That's why we haven't left the space. That's why we're gonna continue to extend energy commitments. We think it's a really good strength of the company.
All right. Well, I appreciate that. 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 kind of discussion many times and over the last, what, 30, 60 days, Jason?
Yes, sir.
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.
I understand. All right. Thank you, guys.
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.
Thanks everyone for their interest, and we look forward to the rest of the year and hope to see you all soon. Bye-bye.
Conference is now concluded. Thank you for attending today's presentation.