Bank7 Corp (BSVN) 2021 Q4 法說會逐字稿

Good day, and welcome to Bank7 Corp.'s Fourth Quarter and Full Year Earnings Call.

Before we get started, I would like to highlight the legal information and disclaimer on Page 21 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 these expectations reflected in such forward-looking statements are reasonable, they can give no assurance that these 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 Mr. Brad Haines, Chairman; Tom Travis, President and CEO; J.T. Phillips, Chief Operating Officer; and Jason Estes, Chief Credit Officer.

With that, I'll turn the call over to Mr. Tom Travis. Please go ahead.

Thank you. Welcome, everyone, to the call, and we were very pleased to report record earnings for the company.

We had -- for those of you that have been a part of our merry band for a while, we had a lot going on in the last quarter of the year, and we were successful in closing on our acquisition on about 23 days before the end of the year, and we're excited about that. The acquisition went down really well, and we remain confident of our prior guidance and numbers relative to that acquisition. And I would say, as we sit here, what, 7 weeks later, 8 weeks later, it's going well. And that -- the next big thing that -- with the acquisition will be the computer conversion in June, and we don't expect any issues there. So it looks good.

So we were busy in the fourth quarter. In spite of that, we were able to continue moving forward in the -- with the organic growth of the company. And we're just really pleased at accomplishing so much and reporting those record profits.

We also had an event that closed the same day as the acquisition. That was the registration and the sale of about 1.1 million shares. So that effect would basically put a little bit more volume out there on the market.

So all in all, positive. We look forward to 2022. And we'll open it up for questions.

(Operator Instructions) And the first question will come from Nathan Race with Piper Sandler.

Maybe just to start on the loan growth outlook. The last couple of quarters, excluding the loans that you guys acquired from Cornerstone in the fourth quarter, been kind of in the high single-digit range. I would just love to kind of get your expectations for 2022 in terms of organic growth. Should we still expect kind of growth to track in that low double-digit range that we've discussed previously?

Yes. That's the range we're expecting. It's probably, like most years, not going to come in sequential order. We expect the first quarter to have more headwinds due to known payoffs that have either already happened or will happen. And so then I think you'll see us return to that more normal growth level probably as early as second quarter, but it could push into the third quarter before we see that type of activity. But overall, new looks are solid and we're generating good new fundings. We've just had some headwinds with known payoffs.

I would also say that at some point, we're going to have to think about low double digit. We've had that same response for 3 or 4 years. And I think eventually, just the sheer size of the institution's going to catch up. And so if we were to fall in that 7% or 8% or 9% range, it wouldn't surprise me. But I think Jason's still pretty bullish.

Understood. I can definitely appreciate that the payoffs can be tough to predict quarter-to-quarter within that context.

Just thinking about loan growth and the overall margin dynamics going forward, the margin held in more stable than I was anticipating here in the quarter. So would just kind of be curious to get some color around kind of near-term expectations for the margin. And I imagine there's some opportunities to remix the earning asset profile a little bit, just given the liquidity that you guys acquired with Cornerstone, so I imagine that could provide some near-term support. And then maybe as we think about the back half of this year, how do you guys kind of expect the margin to trend as the Fed presumably raised the short-term rates? And within that context, curious in terms of the amount of floating rate loans that you guys have today, and what floors, if any, would need to be -- we would need to move through in order to see some repricing of those loans?

We started some extensive modeling a few weeks ago and relative to loan floors and which ones are at the floor and which ones will -- basically, what amounts in the loan portfolio every 25 basis point increase would generate additional revenue to the bank. And so we have concluded that modeling. We know what to expect. And as a result of that and the fact that we now are going to have a securities portfolio for a while, I would expect the pressure -- downward pressure on the margin. And I don't know that you could degrade by 25 basis points on the margin in a full year. I'm not saying that. I'm saying that there's too much uncertainty with how many Fed rate increases and what they're going to be. And so I would just say that if we were to degrade down to the lower end of our range over time, over the next several quarters, it wouldn't surprise me for those reasons.

Probably fair to say also, though, that we've been very pleased with how resilient our margins have been in spite of continued pressure from competitors and borrowers. And just very pleased overall with the sales staff and the effective results throughout the last year, for sure.

And I think the benefits of -- you'll notice the deposits grew and yet we maintained -- I think it's 30.5% at year-end were noninterest-bearing, right? And so we have some strength in the company that continues to help soften any kind of a margin decline that we might have.

Understood. But it sounds like there's also some inherent repricing, higher characteristics within the loan portfolio that we should see as the Fed starts to move. Or would that impact be somewhat delayed as we get through some floors within those floating rate loans?

Correct. That is correct.

Okay. Great. And maybe just turning to credit. You guys had net recoveries in the quarter, it appears. Provision was still a little higher. Was that higher provision relative to charge-offs just a function of growth in the quarter? Or any specific downgrades within the portfolio? And how are you guys kind of thinking about providing for growth within the context of charge-offs for this year, again, within that context of low double-digit to high single-digit loan growth expectations?

Well, with the addition of the Cornerstone portfolio, our percentage of ALLL's at the low end of our range. And so we're going to add to the provision just to be consistent with our history. And so I would say that with the exception of the one credit that we've talked about, it seems like forever, the rest of the portfolio has improved. Jason has all the data on it. But we feel we're sufficiently reserved. We'll reserve a little bit more for the year. And we've had definite positive movement in the NPAs in the company.

The next question will come from Brady Gailey with KBW.

I know you all didn't necessarily disclose the specifics for fee income and expenses. But fees were up a decent amount if you look at it linked quarter. Anything driving that? I know fees are a small part of your business, but was there anything onetime in nature driving that tick up?

I don't think so. Nothing of large magnitude.

Okay. And then as far as one-timers are concerned in the quarter, I know you called out the $875,000 related to the merger and some expenses for broad stock sale. But any other onetime in nature things to be aware of in the quarter?

Are you speaking to expense increase on noninterest?

I mean I'm talking to expenses or fee income, just any kind of large onetime in nature item in the quarter beyond the $875,000.

No.

Okay. And where did PPP fees finish for the year? I think they were about $27 million at the end of September. Where were they at the end of December?

$27 million, are you talking about the total outstanding balance, Brady?

Yes, for PPP loans.

Yes, into the $18.5 million.

Okay. $18.5 million. All right. And what was the exact amount of Cornerstone loans acquired?

At year end?

I'm just trying the back end of -- I'm trying to back end what was...

Yes, I think it was right at $115 million to $118 million at the end of the year.

Okay. All right. So if you look at core loans ex PPP, ex acquired, they were down on a linked quarter basis?

Yes, down. Yes.

He said about third quarter to fourth quarter?

Yes. He's talking from the end of September to December.

Slightly. Not what...

Yes, I would call it flat.

Our next question will come from Matt Olney with Stephens.

It sounds like you've been doing some work around modeling for interest rate sensitivity. I didn't see any update to the 100 basis point shock analysis in the slides. But the last disclosure I found on that was that the 100 basis point shock analysis is about a 10% benefit to NII. Any updated commentary you guys can disclose? I bet you've done a little bit more work over the last few weeks on that.

What is 10% in dollars?

Are you reconfirming that 10% is a good number?

No, I'm asking. I'm trying -- I'm thinking about your question, and I don't know what 10% translates to in dollars of net interest income increase.

NII was about $53 million in 2021, so call it, about $5 million.

Yes, I don't see that. I don't see that subject to -- we have a deep, deep dive going to -- that's going to occur next week on our -- we've done some enhanced work with our loan floors and work on that. And then based on Chairman Powell's remarks, we're going to modify the expectations and tweak that model. But -- and look, don't hold me to that, but that would surprise me. I mean $5 million is a big number for us to lift.

Okay. We'll look for that information, I guess, in the 10-Q when you guys put that out.

Yes.

Let's see here. Outside of that, operating expenses, you kind of folding in Cornerstone now. And we'll get the full impact of that in the first quarter. Any -- is there a level you can point us towards for operating expenses in 1Q and then into -- throughout 2022?

No. Overall, organic growth on fees is going to be in that traditional range. But obviously, we had Cornerstone for about 25% of the quarter, and that was the majority of the balance of the noninterest expense increase between the $875,000 and the actual change.

Okay. J.T., maybe just more broadly, any commentary just on investments or expenses at the legacy bank as you look into 2022, putting Cornerstone aside for a second?

I think from a legacy standpoint, obviously, there's pressure on labor costs, like everyone else has seen. So you might see a little higher than traditional increases on labor. But overall, we're in line with what we've done historically, ex Cornerstone.

Matt, going to go back to your net interest income up 100 scenario, I should know this, but I don't, is what you're looking at, are you using that number for Bank7 on a stand-alone? Or was that for the combined new entity?

That disclosure I was referencing was as at December 31, 2020, the last disclosure I could find, so it would not include Cornerstone.

Got you. Yes. That's part of the reason that we had to modify the -- we had a lot to get done in the last 23 or 4 days of December and get all this out. So I think the modeling will be a little different for us this year because of that Cornerstone and that securities portfolio, but I still wouldn't expect it to be $5 million. Okay. Thank you.

And I wanted to shift over towards energy, and we're seeing some higher commodity prices over the last few weeks and a few months. I'm curious what this means for the bank with respect to, I guess, a few things. One, your thought on maybe your higher risk energy loan category, but also potential to add more energy credits to the balance sheet.

I think you'll see us continue to be opportunistic there. I would say we had a large energy loan payoff in the fourth quarter where we've stepped in and supported people when the market was down. And when it's up like this, this is when we're a lot more conservative. And I think you'll see us stay to those disciplines. It doesn't mean we won't be active in the space, it just means we'll be more selective. And then this is, to us, a more risky time to really get out there and get aggressive on the energy lending space.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Travis for any closing remarks. Please go ahead, sir.

Again, we're happy with our results, and we continue to be an excellent compounder for our fellow shareholders. We're excited about 2022. And we benefit greatly from where we are in the country. It's pretty dynamic in our part of the world, and so we're excited to continue to do more of the same and keep compounding our values there for our shareholders. And that's where we get excited. So we thank you, and look forward to the rest of the year.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.