Welcome to the Bank7 Third Quarter 2026 Earnings Call. Before we get started, I'd like to highlight the legal information and disclaimer on page 25 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 be proved 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 the 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 Brad Haines, Chairman, Tom Travis, President and CEO, JT Phillips, Chief Operating Officer, Jason Estes, Chief Credit Officer, Kelly Harris, Chief Financial Officer, Paul Timmons, Director of Accounting. With that, I'll turn the call over to Tom Travis.
Thank you, and welcome to the call. First and foremost, what a great company we have here at Bank7. It doesn't happen by accident. Our team's been together a long time. We execute at a high level every day. We like to say it takes courage to be great, and we're proud of our consistent top-tier results. Just a fantastic company and really good results, especially given all the things that we're having to do at the same time closing our recent acquisition. So, a really great quarter. I would say that highlights would start out with very strong loan growth that is stronger than what it appears because we overcame substantial unscheduled pay downs from large customers. So, our loan team, as usual, is functioning at a very high level, and we're very thankful for them.
Then we discipline ourselves with our loan pricing and our deposit pricing, and we properly manage that balance sheet, which enables us to continue benefiting from that strong and consistent NIM. We also benefit from the robust economy and the business-friendly markets down here in Texas and Oklahoma, and it's a real blessing, and we're mindful of that. For a long time, people on the call were asking us what we were going to do with the excess capital, and it was tempting to distribute some of those funds while the calls were being made asking us what we were going to do, but we waited, and we're glad we did.
And we are very excited about the pending merger with Century in New Mexico, and it is a really good example of discipline and patience and prudent use of capital, which really drives the metrics on how transformational and beneficial this transaction will be. Century is an outstanding deposit and banking franchise. It is well entrenched in the communities in New Mexico, especially Santa Fe and its surrounding areas. We really look forward to that merger. We look forward to continuing serving our existing communities and customers as well as theirs and coming together as one team. We are well positioned for the future, looking forward to executing on our plans. With that, we are here to answer any questions anyone might have. Thank you.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Woody Lay with KBW. Please go ahead.
Hey, good morning, guys.
Good morning.
I wanted to start on the organic growth in the quarter. As you mentioned, it was very impressive considering all the things you were juggling intra-quarter. Maybe specifically on the deposit strategy. Deposits were up pretty significantly in the quarter, and you are about to add a really good source of cheap core funding with Century Financial. Just curious what you sort of plan to do with the excess liquidity that is on the balance sheet. Is this a sign that the loan pipeline is pretty strong in your eyes?
Hey, Woody, this is Kelly. Yeah. During the quarter, we experienced, as Tom mentioned, substantial loan pay down. We chose to be conservative from an excess liquidity, higher deposit balance.
Because of the known loan fundings as well as the pending merger and some of that cash that goes out related to that. That is kind of the game plan going forward. A strong pipeline as well as closing this merger.
Got it. And then, I know the merger is closing November 1st, so midway through the fourth quarter, but just any sort of NIM guidance you could provide, pro forma with Century Financial plus, the potential for an additional rate hike from here, I feel like that would be helpful.
Yeah. I think from a deal perspective, we currently view the deal as neutral to our margin, and we intend to sell some to all of Century's bonds. Depending on when those sales occur, it will generate a meaningful amount of cash, and we will be methodical about how we deploy that cash. In some scenarios, it will be more accretive to our margin. In other scenarios, it will be more neutral to our margin. From a Bank7 legacy perspective, the loan beta in the quarter was close to 60%. The deposit beta was around 52%. I think, forward-looking, assuming a rate hike in Q4, we anticipate that loan beta being in the 65%-70% range. The deposit beta a little bit harder to project, but we assume less.
Yeah, I would add to that is really good, Kelly, and accurate. I would add to that, if you could think of the word bias or think of the word tendency, once the merger happens, we are going to have a bias or a tendency to be able to more easily maintain that margin due to the influx of a cheaper cost of funds. That advantage will gradually dissipate over time as we redeploy. Some of it could be redeployed into slightly lower-yielding loans. If you think of a trade-off between growing slower by maintaining existing pricing compared with growing faster potentially on the loan book because you decide that you want to capitalize on slightly lower cost of funds, therefore you can lower your loan rates. I do not think that is going to be a material thing.
It is not like you are going to see all of a sudden lower loan pricing. I am just pointing out that we are going to have some flexibility in the near term to medium term because of that advantage of a slightly lower cost of funds.
Yep. Got it. Then maybe just last for me, and you have kind of hit on it a little bit, on the bond portfolio. Longer term with the acquisition of Century, it would feel like there is a significant opportunity on the balance sheet remix side to help that 25% plus accretion longer term. How do you think about remixing Century's loan portfolio over the medium to longer term?
I think you're going to see us continue to do what we've done in the past. They have commercial banking talent that aligns philosophically with us. You'll see us kind of expanding into a couple new markets there, but doing the same thing that we've traditionally done, which is catering to business owners, entrepreneurs, high-net-worth individuals, and really pursuing that commercial loan. It'll look similar to what we've done in our other markets. It also gives us some more opportunity, specifically in our Dallas operation, where we're constantly funding challenged there. A lot more loan growth than there is deposit growth, so maybe we can share some of the newly acquired funds into our Dallas market.
Got it. All right. Well, that's all from me. Thanks for taking my questions.
The next question comes from Nathan Race with Piper Sandler. Please go ahead.
Hey, guys. Good morning. Thanks for taking the questions. Just going back to one of the previous questions, just thinking about any potential runoff that you're anticipating at the Century loan portfolio and just maybe bigger picture, how do you anticipate the addition of Century kind of impacting Bank7's historical kind of high single to double-digit loan trajectory that we've seen kind of longer term from you guys?
I don't think there's any day one plan to specifically run off loan balances. I think you'll hopefully see a steady similar to what we typically do, and as you just referenced, a 5% mid-single digit to low double-digit company-wide growth. Whichever markets are able to contribute to that consistently. Remember, we still run into these chunky periods of payoffs. You can't see it in the numbers, but our payoffs this quarter were over $130 million. Okay? We backfilled that and were able to grow nicely over the prior, but that is a very a typical amount of payoffs followed on the heels of reasonably significant payoffs in Q2. But we knew going at least midway through Q2, that we were stacked with a big loan pipeline to fund throughout the rest of the year.
Most of that funding has occurred, but we still have some clarity, some visibility to a little bit of additional funding in the fourth quarter. So, it's really, go back to Tom's opening statement about the strong economies that we operate within, and we have a great team of bankers. They're out working and we are finding deals, and we're not going to stop, we're not going to change. I don't see a consistent move up or down. I want us to keep doing more of the same, right? Let's just be what we are, and if we run into a couple periods where we can grow a little faster because things are going well, then let's do it. But we're not going to take unnecessary risk and we're not going to give away our margin.
Yeah. There's one minor addition I would say, that Century did have a more aggressive use of buying loan participations. It's certainly not the majority of the portfolio, but it's a healthy amount that we intend to. We're not going to pursue that in those particular loan participations as they mature. As we have the opportunity to exit those, we would, which would then provide additional funding sources.
Got it. That's really helpful. Just curious on some of the competitive dynamics in your geographies these days. I think there's some growing competition across some of those markets. So, just curious what you're seeing in terms of new loan pricing these days. It was great to see, I think, core loan yields ticked up two basis points quarter-over-quarter. So, just curious what you're seeing from a competitive perspective, particularly across some of the specialties that you guys operate within.
Haven't seen any dynamic changes there, Nate. It's very consistent. We always have tough competition in all the markets where we're actively loaning money. I don't see that changing. I guess there was a period during COVID where there were some people that were not particularly aggressive in loaning out money, but it's been very consistent for the last three to four years. Lots of banks looking to deploy into loans, and that's where the relationship bankers win the day.
Got it. That's helpful. Maybe one more for Kelly, just on the expense outlook. I think Century is running around $12 million a quarter over the last handful of quarters in terms of overhead costs. Obviously, it'll be noisy the next couple of quarters, but just any sense in terms of as you get to the 30% cost saves and the timing around the systems conversion to, I imagine, realize the large majority of those cost saves?
Yeah. I like to look at our previous deal with Cornerstone. You saw efficiency ratio creep up a couple hundred basis points initially, and then over time, we feel very confident that we can operate Century's non-interest expense at or below where we currently operate ours. I think from a timing of systems conversions, it's more of a Q3.
Yeah, I would say, we modeled when we sent that deck out, we talked about expected efficiencies and the numbers in there, and I've got two numbers that I'm looking at in my head. I don't know the percentage, but I would say that at least 75% or 80% of the cost savings will occur immediately in the first quarter, and then there'll be the remainder spread out between the end of the second quarter and the end of, I'm sorry, the end of the first quarter and the end of the second quarter. So, call it 75%, 25%, 75% cost savings to be achieved right away. But back to Kelly's point, I think you can look at that. What are we at 2.05% of non-interest expense?
Average assets, yeah.
Is it close to that number?
Yeah.
When you think about that number, Nate, we should be well south of 2% if you just look at, if you want to call it the Century standalone, right? Because you always have heavier at the headquarters.
Got you. Maybe if I could just sneak one more in. Obviously, it is a pretty transformational deal. I think Century's largest acquisition in the history of the company. Just curious, is 2027 more of a digest and integrate type of year for Bank7? Or do you guys maybe anticipate some additional M&A coming your way to the extent those opportunities are still there for you guys?
Nate, we're always in a shoot, move, communicate mode, and we would be disappointed as a group if we allowed much of the noise and expense to linger far into 2027. With the exception of the burden that we have because the providers are always so slow to give us conversion dates, I believe our conversion date is in July. We don't have any choice but to allow, call it, that 20%- 25% of last cuts to the efficiencies to be realized. We're not going to be slow. We're not going to take a casual approach to this. We're going to do what we always do, and we're going to make those adjustments and create as many efficiencies as we can day one.
Yes, the back half of the year will be more profitable than the front half of the year, but you're going to see us really achieve very meaningful results starting immediately.
Yep. Got you. Makes sense. Thanks for that, Tom. If I could actually just make one housekeeping question for Kelly. On the goodwill number for Century, the slide deck indicated that you're expecting a material write-up on some assets within some of the locations. Any sense of what kind of all-in goodwill number we can anticipate for the fourth quarter once the deal closes?
Yeah, Nate, I think it's too soon. I know that the increase in rates are going to impact some of the marks, and then some of the valuation pieces, so I think it's too soon to confirm that.
Okay. Fair enough. I appreciate all the color, guys. Congrats on the great quarter again.
Thanks.
As a reminder, if you would like to ask a question, please press star then one to join the question queue. The next question comes from Jordan Ghent with Stephens. Please go ahead.
Hey, good morning. Thanks for taking my question. I just wanted to kind of talk about the loan to deposit ratio. Historically, you guys have been operating with a higher loan to deposit ratio, kind of in the mid-90s. Now with Century, where do you see that going? Do you expect it to go back up to the mid-90s, towards 100%, or do you expect to keep it a little lower? Thanks.
That is a function, as you well know, that is a function of a lot of different things which include liquidity capital and debt instruments and ability to capture liquidity if necessary. It also is impacted by the loan maturity distribution schedule. We have our loan portfolio. We have a high number of notes that mature during the year. It is much more complex, it is much more dynamic than a simple answer. I would just say that just similar to our NIM, you probably will not see us operate much below 80% in our world. There will be times, depending on all those various factors that I just mentioned, that we may sneak up to that 95% level. Again, that would just depend on the circumstances as far as capital and liquidity and markets and all the things that we see.
Generally speaking, one thing I will say is that if you see us operating in those higher ranges, we are going to be doing that only if we have tremendous sources of funding that are overnight capable sources to make darn sure that Bank7 is well-positioned for any kind of a macro event or any kind of liquidity scare like we saw in March of 2023. I know that is a long potential non-answer, but the fact is that we are comfortable operating in that band and those ranges, depending on all those factors and circumstances.
Got it. Then maybe just one more on the one-time transaction expenses that you guys had in the deck of, I think it was around $16 million. Has any of that been realized already? Maybe what is remaining, or how much of it is remaining, I guess?
What was the question?
Sorry, the one-time merger expenses you guys had. I think you said it was $16.2 million you guys put in the slide deck.
Oh, that's the catchall investment banker fees. Those are conversion fees, early contract termination.
Q4.
Yeah, all those things that will be realized. It's just like any other M&A transaction.
Okay. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Tom Travis for any closing remarks.
Thank you again for participating. We appreciate our investment partners, and we appreciate the analysts covering us the way they do. If there is any of our team members that are on the call, we appreciate you a lot. If there is anybody from Century that is on the call, we are super excited to be joining forces together and looking forward to the future together and onward and upward for more good results for our great company. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.