Bank7 Corp. (NASDAQ:BSVN) Q4 2021 Earnings Conference Call January 28, 2022 3:00 PM ET
Company Participants
Brad Haines – Chairmen
Tom Travis – President and CEO
J.T. Phillips – Chief Operating Officer
Jason Estes – Chief Credit Officer
Conference Call Participants
Nathan Race – Piper Sandler
Brady Gailey – KBW
Matt Olney – Stephens
Operator
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 the 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 super — 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 Brad Haines, Chairmen; 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.
Tom Travis
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 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 seven weeks later, eight weeks later, it’s going well and that the next big thing that with the acquisition will be the computer conversion in June, 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 close 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And the first question will come from Nathan Race with Piper Sandler. Please go ahead.
Nathan Race
Okay. Good afternoon.
Tom Travis
Hi, Nathan.
J.T. Phillips
Good morning.
Nathan Race
Maybe just start on the loan growth outlook. 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 just love to kind of get your expectations for 2022 in terms of organic growth, should we still expect kind of growth to tracking the low double-digit range that we’ve discussed previously?
Tom Travis
Yeah. 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.
J.T. Phillips
I would also say that …
Nathan Race
Okay.
J.T. Phillips
…at some point, we’re going to have to think about low double-digit. We’ve had that same response for three years or four years and I think, eventually, just the sheer size of the institution is 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, still pretty bullish.
Nathan Race
Understood. It can definitely appreciate it, the payoffs can be tough to predict quarter-to-quarter within the context. Just thinking about longer than the overall margin dynamics going forward, the margin held in more stable then I was anticipating here in the quarter. So we just kind of be curious get some color around kind of near-term expectations for the margin. And I imagine there’s some opportunities to remix earning asset profile a little bit, just given the liquidity that you guys acquired with Cornerstone, so 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 I said, presumably raises short-term rates within that context, I am 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 re-pricing of those loans?
Tom Travis
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.
Jason Estes
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.
J.T. Phillips
Yeah. I think the benefits of, you’ll notice the deposits grew, and yet we maintain, I think, it’s 30.5% at year end were non-interest-bearing, right? And so, there — we have some strength in the company that that continues to help soften any kind of a margin decline that we might have.
Nathan Race
Understood. But it sounds like, there’s also some inherent re-pricing, higher characteristics within the loan portfolio that we should see as the fed starts move or would that impact the somewhat delayed as we get through some floors within those floating rate loans?
J.T. Phillips
Correct. That is correct.
Nathan Race
Okay. Great. And maybe just turning to credit, you guys have met recoveries on the quarter that 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 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?
Tom Travis
Well, with the addition of the Cornerstone portfolio, our percentage of ALLLs [ph] 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 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 will reserve a little bit more for the year and we’ve had definite positive movement in the NPAs in the company.
Nathan Race
Okay. Great. I will step back. I appreciate you guys taking the questions and all the color. Thank you.
Tom Travis
Thank you.
Operator
The next question will come from Brady Gailey with KBW. Please go ahead.
Brady Gailey
Hey. Thanks. Good afternoon, guys.
Tom Travis
Good afternoon.
Brady Gailey
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 that I know fees are a small part of your business, but was anything one-time in nature driving that tick-up?
Tom Travis
I don’t think so.
J.T. Phillips
Nothing of a large magnitude.
Brady Gailey
Okay. And then as far as one-timers are concerned in the Corner, I know you call out the $875,000 related to the merger and some expenses for Brad stock sale, but any other one-time in nature things to be aware of in the quarter?
J.T. Phillips
Are you speaking to expense increase or non-interest?
Brady Gailey
I mean, I’m talking to expenses or fee income, just any kind of large one-time in nature item…
J.T. Phillips
No…
Brady Gailey
…in the quarter beyond the $875,000?
J.T. Phillips
No.
Brady Gailey
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 as the end of December?
Tom Travis
$27 million, are you talking about the total outstanding balance, Brady?
Brady Gailey
Yeah. For PPP loans?
Tom Travis
Yeah. In the $18.5 million.
J.T. Phillips
Yeah.
Brady Gailey
Okay. $18.5 million. And what was the exact amount of Cornerstone loans acquired?
Tom Travis
Yeah.
Brady Gailey
I am just trying to ask end of — I’m trying to ask…
Tom Travis
Yeah. I think, it was — yeah, yeah, $115 million to $118 million at the end of the year.
Brady Gailey
Okay. All right. And if you look at core loans ex PPP, ex acquired, they were down on a linked quarter basis?
Tom Travis
Yes. Down. Yes.
J.T. Phillips
So third quarter to fourth quarter.
Tom Travis
Yeah. He’s talking from the end of September to December.
J.T. Phillips
Slightly. Yeah.
Tom Travis
Yeah.
J.T. Phillips
Down.
Tom Travis
I would call it.
Brady Gailey
Okay. All right. That’s all for me. Thanks, guys.
J.T. Phillips
Thank you, Brady.
Operator
[Operator Instructions] Our next question will come from Matt Olney with Stephens. Please go ahead.
Matt Olney
Thanks. Hey, guys. Good afternoon.
J.T. Phillips
Hi, Matt.
Tom Travis
Hello.
Matt Olney
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 at the 100-basis-point analysis — shock analysis is about a 10% benefit to NII. Any updated commentary you guys can disclose, I know that you’ve been a little bit more woke over the last few weeks on that?
J.T. Phillips
What is 10% in dollars?
Matt Olney
Are you reconfirming that 10% is a good number?
J.T. Phillips
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.
Matt Olney
NII was about $53 million in 2021. So call it about $5 million?
J.T. Phillips
Yeah. I don’t see that. I don’t see that subject to, we have a deep, deep dive going to — go — 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 Paul’s [ph] remarks, we’re going to modify the expectations and tweak that model. But look, don’t hold me to that, but that would surprise me. I mean, $5 million is a big number for us to lift.
Matt Olney
Okay. We’ll look for that information, I guess, in the 10-Q when you guys put that out?
J.T. Phillips
Yeah.
Matt Olney
Let’s see here, outside of that, operating expenses, you kind of folding in Cornerstone now, 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?
Tom Travis
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 non-interest expense increase between the $875,000 in the actual change.
Matt Olney
Okay. J.T. when we look more broadly, any commentary just on investments or expenses of the legacy Bank, as you look into 2022, putting Cornerstone aside for a second?
J.T. Phillips
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 Olney
Okay. And then on…
J.T. Phillips
Matt, coming back to your net interest income of $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 standalone or was that for the combined new entity?
Matt Olney
That disclosure I was referencing was as of December 31, 2020, the last disclosure I can find, so would not include Cornerstone?
J.T. Phillips
Got you. Yeah. That’s part of the reason that we had to modify the — we had a lot to get done the last 23 days or four 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.
Matt Olney
Okay.
J.T. Phillips
Okay. Thank you.
Matt Olney
And I want to shift over towards energy and we’re seeing some higher commodity prices over the last few weeks and few more — 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?
Tom Travis
I think you’ll see us continue to be opportunistic there. I would say, we have a large energy loan payoff in the fourth quarter where we 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 the 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 the more risky time to really get out there and get aggressive on the energy lending space.
Matt Olney
Got it. Okay. Okay, guys. Thanks for your help.
J.T. Phillips
Yeah.
Tom Travis
Thank you.
Operator
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.
Tom Travis
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.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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