Q4 2022 Bank7 Corp Earnings Call
Welcome to Bank seven Corp, fourth quarter and full year earnings call before we get started I'd like to highlight the legal information and disclaimer on page 22 of the Investor presentation.
Those who do not have access to the presentation management is going to fix its got certain topics that contain forward looking information, which is based on management's beliefs as well as assumptions made by and informed.
Information currently available.
Right.
Although management believes that the expectations reflected in such forward looking statements are reasonable they can give no assurance that subject.
Expectation will prove to be correct.
Such statements are subject to certain risks uncertainties and assumptions, including among other things go direct and indirect effect of economic conditions on interest rates credit quality loan demand liquidity and monetary and supervisory Tory policies up thank you.
Excellent.
Should one or more of these 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.
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.
Of course that makes the company on today's call, we have Brad Haines, Chairman, Tom Chavez, Chief Executive Officer, J T Phillips, Chief operating Officer, Jason Estes.
Credit Officer, Kelly Harris, Chief Financial Officer.
With that I'd like to turn the call over to Tom Travis.
Thank you very much.
Are excited about our year and our recap.
For those of you that had been on the call with US before we generally don't spend a lot of time with comment, but central recapping. The year, we will take a few minutes here to highlight some of the things that excited.
So once again, we delivered strong results, we're very happy about that and.
And we must acknowledge and we do acknowledge and thank our team members for their contributions they not only grew our loan and deposit portfolios in a meaningful way they did it while satisfying our customers as we recap our results for the year, we begin with record earnings and again, we acknowledge our commercial banking team.
And we have to give credit where credit is due because our record earnings is a function of our loan growth and it should not be confused or attributed with the fed rate hikes, it's pure organic loan growth, we didn't buy loans. The team went out and captured new loans and deposits.
So the best understand what occurred last year.
We look back to the quarterly timeline and we start with the first quarter. The first red fed rate increase didn't occur until mid to late March and then was followed by the next few rate increases during the second quarter. So in those first two quarters, we had very little benefit from the rate hike because we had many.
Loan floors and also at the same time, our loan growth had not yet materialized in a meaningful way in essence, we spent the first quarter and most of the second quarter filling up our loan force beginning in late May and early June and continuing into the third quarter loan growth was exceptional and we posted a <unk>.
<unk> third quarter, although we finally did start seeing some benefit from the rate hikes in the third quarter. It was not much in fact, we refer you to page 35 of our prior third quarter 10-Q as it illustrates the nine month period, ending September 30, and it clearly shows that our.
The increase was attributable to the growth of the loan portfolio, which had grown significantly compared to the prior period period yet.
That the data shows that our gross loan yield through that period was actually three basis points lower than the prior period further highlighting the growth contribution in component that caused the income lift we cannot emphasize enough. How pleased we are with our commercial banking team.
And all the people who support them.
<unk> up the year as you look into Q4, we continued to increase the loan book and when combined with the fed rate hike.
Full benefit of a higher loan book and strong rates.
That's the strong rates in the NIM can be seen.
You can see how well we've done.
Guarding our NIM and reflecting back on the full year. It is a similar story regarding the steady increase throughout the year in late 'twenty. One in early 'twenty, two we had signaled and discuss the expected NIM compression associated with our December 21 acquisition due largely to.
The lower loan yield to the low yield on the incoming bond portfolio.
Our expectation of a lower NIM was realized and we began in Q1 with a core NIM of $3 nine one as the loan book began to grow in the late spring and into the summer and fall. The NIM began to recover than late in the year as the fed rate hikes were being more fully realized we grew our loans even more in the COO.
Core NIM returned to exactly where it was for the prior year.
So from an earnings and NIM perspective, it was a great story and a story based on our commercial banking team and their ability to price loans properly and to grow loans and so I think thats a good start with the.
With the income and the NIM component and I'd like to add Jason that he would cover the asset quality aspect of that loan portfolio.
Thanks, Tom.
Very pleased with our loan portfolio as the calendar tire we've not seen a change in paas new levels of problem credits as rates have increased Ncos were minimal for the year and our disciplined underwriting combined combined with season lending teams will continue to serve us well as we operate in a higher interest rate.
Construction loan balances have started to decline our hospitality construction activities have significantly reduced in the homebuilding industry.
Started to lower their inventory levels to match current demand.
Just as a reminder, our homebuilder portfolio is primarily starter homes in the Oklahoma City, and Dallas Metro areas with very little lot and land lending activity.
Not concerned with this segment.
Our energy portfolio has grown over the past year, but we continue to closely monitor that growth as we selectively remain active originating high quality new loans.
Overall, we continue to lend money.
Same way, we have for decades, the economies in Oklahoma, and Texas are healthy and our credit quality continues to benefit from both.
I'll hand, it back to you Jason Thanks for that report and again, just a real shout out to the commercial banking team and all of those efforts.
So as we move into our capital we're pleased to have quickly reestablished our risk based capital.
And we're back to our higher levels, especially considering it was done while at the same time experiencing record growth and a 33% increase to our dividend regarding our dividend even with a 33% increase our dividend payout ratio is still significantly below the average payout ratio for all dividend paying banks.
It's especially comforting and gratifying that bank seven has topped 5% earnings I believe once all the numbers come in for the year, we might even be in the top 1%.
And because of those strong earnings and consistently strong earnings it enables us to build capital rapidly. It is a real source of strength for our company as it provides flexibility for acquisition dividend payout through share repurchases or simply to support growth.
We refer you to page 15 of this IP as it shows the great earnings strength and the buffer based on industry and examiner base DFAST stress parameters.
And then moving into liquidity, it's remained strong and our cornerstone acquisition provided additional meaningful runway for future growth. Our team members from cornerstone had done an outstanding job of retaining and in some cases growing our core deposit base and we thank them very much.
Our bankers rarely take a day off from their focus on core deposit gathering and it's evidenced by our healthy noninterest bearing component of core deposits, even what our growth was so strong in 'twenty two so in conclusion.
<unk>, we had a very strong year and we're pleased to provide exceptional returns to our shareholders. We're blessed to have such great team members at bank seven and we benefit from being located in a dynamic part of the country.
And therefore in spite of the current macroeconomic headwinds we remain cautiously optimistic for the near future. So with that we'll standby for any questions you might have.
Thank you.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the key Tim.
Withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble I gotcha.
Our first question comes from Nathan race with Piper Sandler. Please go ahead.
Yes, hi, guys good morning, and congratulations.
Jason on the.
Promotion to president.
Yeah.
Thank you.
First question, just maybe kind of thinking about the loan growth and overall kind of balance sheet.
Trajectory from here, obviously, you guys had a nice core deposit growth in the quarter. One loss ratio is still south of 90%. So just curious how you guys are seeing the pipeline stack up today entering 2023, and just kind of overall expectations for both loan and core deposits.
In 2023.
Yeah, Nate. Thank you for the question and I would just say that.
We wouldn't expect the growth to be exactly what we did last year that was an exceptional year.
There are some known payoffs coming in the loan portfolio that we think will be able to overcome it.
<unk> growth for the full year wouldn't surprise me, if we had a quarter or two that were flat or possibly even down during this year, but overall.
I think you should I think most years, we're saying low double digit growth on the loan book this year I'd, probably couch it as a high single digit maybe even a mid single digit growth, but we do expect to grow throughout the year and on the deposit side, we have several initiatives that were continuing to.
Focus on to continue to generate.
Deposit growth to keep up with the loan side. So hopefully we could we could do as well as we do on the loan side with the deposits this year.
The banking team is very very focused on both and they have been.
Very successful over the last few years at grabbing both new loans and new deposits.
Existing and new relationships, so optimistic we'll be able to grow this year, but it won't be as much as last year I wouldn't expect it to be as much as last year.
And I would say Nate this is Tom that Jason spot on and I would say that we've remarked over the last four to five weeks on this is probably the most difficult budget environment that we have been faced with and so we have budgeted for more muted growth based on those economic headwinds.
And just the uncertainty around the fed and what theyre going to do.
So we even with that we're still budgeting a nice increase as we always do.
But I do I do echo Jason's comments regarding the budget matching up to slightly lower expectations given all those factors.
Got it that's great color.
One theme I think lot of investors are thinking about these days on things.
Kind of.
The timing of kind of peak margin in NII.
And assuming the fed raises by another.
50 basis points between now and the next couple of months.
Have you guys kind of thinking about just the trajectory for NII and margin over the next couple of quarters in deferred.
Kind of pauses in the middle of this year give or take how do you guys think that kind of margin trajectory plays out thereafter.
What margin are you talking about.
Morning.
NIM.
Thanks Kelly.
Yes so.
We ended the year fourth quarter at $4 87 core NIM.
We're projecting obviously, we're already seeing that that the cost of funds is increasing at a faster clip than the loan side and so we are seeing some NIM compression.
Where that in in Q1, that's to be determined based on what the fed does but I would say we reached peaking in Q4.
Unless something else changes.
Yeah, and I would add to that that the.
The.
The challenge that we've had relates to really quality and longtime loan customers.
Across the industry pushed back and say enough is enough and so it's not just a matter of loan and deposit beta it's a matter of strategically and tactically negotiating with customers to to keep those customers and so.
When we did our budget, we actually budgeted a certain percentage of the loan portfolio, even though the loans would not mature this year, we actually budgeted for a certain percentage of those loans to be priced downward a bit for retention of customers and so that <unk>.
Victor is in addition to the factors that Kelly.
Uses when calculating loan and deposit beta and it kind of goes back to Jason's comments regarding.
The tougher year in the slower growth and that's why we're hedging instead of the usual low double digit we're back into the high single digits just in case, but it's very comforting to us.
<unk>.
I guess I guess another side of the coin would be a group telling you. We're not sure. We can match our earnings from last year because of these factors and we're absolutely not saying that.
Okay.
Understood.
And then just.
Maybe thinking about a potential more dovish fed.
Later this year into 2024.
It's kind of having success may begin loan floors on new originations or where you guys may be exploring hedging your derivatives that may kind of lessen the impact in terms of loans repricing lower.
Third where to cut later this year or into 2024.
We've looked at some of those programs.
And.
There is still as you know Nate.
And your firm does a great job of presenting us with material.
As you know there is still a bit of.
Speculation involved in that and so yes. Some of it is quote hedging and buying insurance, but it could also be.
Money that you don't need to spend and so for us.
Because we are so asset sensitive and we're starting with a high book of loan floaters, and a really nice healthy margin.
It's higher than our where we would normally be we don't feel like we need to aggressively pursue some of those instruments take on that cost for that what if.
Now, we say that with the expectation we actually.
Budgeted more of a 75 basis point increase.
Versus the 50 I think the 50 didn't really emerge until the last two weeks and so if we get into it.
March and April timeframe, and it looks like those instruments could really help the bank based on the current landscape and clearly we reevaluate but for right now it's not something that we need to worry about because we have some built in defenses I think it's worth mentioning as well that the concept of loan floors.
That's not new our portfolio because it's so heavy on variable interest rates.
Floors have been long established Kino and some of those as you get into a higher rate environment will yeah. The floors they get lifted.
And as we've seen in the past year, you may have to renegotiate some of those on the way down if we end up back in the same kind of rate environment with operated in the last few years, but.
For now the floors are moving up with rates.
Okay, Great that's helpful and if I could just ask one more just in terms of the.
The reserve outlook from here you guys are adopting to still I believe.
First quarter.
Which kind of complicated I think the reserving.
Methodology to some degree charge offs were zero.
Last year, you guys still add reserves at a pretty healthy clip to support loan growth.
So I guess I'm just curious if you guys are seeing anything on the foreseeable horizon that would cause.
A meaningful increase in charge offs, and just kind of how youre thinking about the reserve.
Trajectory on either absolute dollar basis, or just relative to loans within that kind of high single digit loan growth outlook.
Was described earlier.
Let me start with the macro and then Jason can get into specifics.
Listen we'd be foolish not to understand the headwinds that are out there and so yes, it's a loan growth story, which made us.
Motivated us to make sure that we increased our reserve.
We're really in that low one two to $1 25 area, which we're comfortable operating in and so I think from a macro perspective.
We're going to keep our eye on the ball relative to you know.
Those overall conditions and of course diesel and then I think Jason may have some color on.
A few credits or what we might see yeah. I think the important thing if you go back and you look over the last five or seven years, we've really had the one credit that stung us twice and.
That deal is looking better there is a new team in there they've got some green shoots.
For the last two quarters, it's been.
Positive positive results, an encouraging results, but we are.
We're still not 100% sure that that is totally behind us.
Anything that would be left has been well reserved for we don't have a specific reserve on the remaining loan balance, but that's the one that's out there that would cause me some level of concern in the future.
For the rest of the portfolio as I stated earlier in my comments the portfolio is performing very very well and we continue to see a healthy deal pipeline and we just we feel really good about the book overall and I would just follow up on that one credit.
It's really that further out tail risk and in spite of the green shoots. So we feel they are greener and longer than they were two quarters ago. So we're encouraged but we're still keeping a loan on non accrual and we're doing that as a matter of prudence relative to that unknown tail risk, which we've always said for the COVID-19 side.
<unk> to cycle out.
Was that close to 1% and we haven't hit that 1%, but if that tailwind risked didn't materialize and things went the other way on that credit its a small number.
But that's that's really it.
Understood and if I could just ask one last one on that specific credit that we were just discussing can you remind us kind of what the specific reserves.
That exists on that credit today relative to outstanding there is no specific reserve on that credit today.
Got you.
Leave you charged off already a good chunk of it.
Yes.
And can you remind us what that amount is relative to.
With no value originally.
It's approximately $7 million in total has been charged off related to that credit.
And that credit was how large Jason.
<unk> 14 and <unk>.
Yeah.
Okay.
Our next question comes from Thomas Wendler with Stephens, Inc. Please go ahead.
Hey, good morning, everyone.
Good morning.
Most of my questions have already been asked but one final one for me is we saw a pretty large step up in salary expense last quarter could you give us some commentary there and then maybe how youre thinking about expense growth for 2023.
We did a.
We will call it a one off.
When you look at our year at the end of the year, we were very close to a 30% increase in net income.
And we evaluated that relative to I think our best estimate was the industry was going to be somewhere around 5% to 6% when I say industry are our competitive set and we were so pleased with the banking team and the employee base and as we said it was a function of organic.
Loan and deposit growth.
Everyone hitting on all cylinders and so we made a decision towards the end of the year to expense money and pay people for sharing the fruits of that labor and <unk>.
And so we would expect to we're already.
<unk> I don't know what our number is but.
We really don't have disjointed increases or decreases in our salary expenses, we manage the company. This was purely a a payout based on that phenomenon.
Yeah.
Alright, I appreciate all color that was my only question. Thanks guys.
Okay.
Again, if you'd like to ask a question. Please press Star then one our next question comes from what do you lay with <unk>. Please go ahead.
Hey, good morning, guys.
Good morning.
Was just hoping that you could give some color on sort of the deposit pricing competition in your local markets. I mean is it are you competing more with other institutions is it more.
Treasury market, just any dynamics there.
It's really all over the board yet the segment segment. When you think about it you've got your older more retiree base that are more in that CD space. The Cds are a real small portion of our funding I think I think only $100 million of $110 million to $20 million.
Instead of 175.
But it's a smaller portion. So then when you really roll into and you think about.
The bank.
And our profile and we are a commercial bank and so we have a lot of high net worth individuals and entrepreneurs and they tend to be in money market accounts.
And so when you segment the liability section of the balance sheet.
Different factors and.
So it's really hard to it's really hard to nail down one competitor or not I mean look.
I'll tell Ya Raymond James as they constantly run newspaper ads in the small towns and so theyre paying high rate since other retirees look at that and they come into the bank lobbies.
Fortunately for us.
The data shows that our ability to maintain our cost of funds and do a good job with deposit betas is centered around the fact that a great percentage of our deposits are based on credit and so when we have customers that we're very responsive to on the credit side. They don't push it as hard on the on the deposit side, but.
But it's something that we fight every day on a relationship by relationship basis and its just across the board.
Yes, that's great color.
And then switching to the <unk>.
Our loan growth outlook.
It makes sense that.
The growth would be coming down a little bit.
Okay are there any segments youre, saying youre seeing a pullback in growth and are there any concentrations do you expect to sort of drive the growth in 2023.
I would say that you can see a clear pullback in our construction activity and part of that is driven by cost part of it is driven by the.
The home <unk>.
Buying market. So you can you can see that pretty clearly in the change for this last quarter.
Youre starting to see those numbers show that change.
Our energy concentration is one that I mentioned that we watch very very closely.
There is a little bit of growth room left there, but we're still.
Sticking to we don't want to get too far into the energy market.
And so we're doing that on a very selective basis with rapid amortization and so I would say those are two areas youre seeing a pretty good shift in our hospitality activity. If you go and you look at the last.
Three years, that's been a pretty high growth.
That balance has changed significantly and so it'll it'll move more in line with the whole portfolio at this point and kind of.
Before.
With our.
We are intending to keep that in that kind of range that it's at as far as a percentage of the overall portfolio mix and so those are the few.
Few areas I would highlight that as one of the delightful parts of the story on the loan growth and we have that slide in the deck and it's.
It's got the broad and deep loan growth is the header and as Jason said that.
We were very disciplined on our concentrations and when you get to where you're almost at your Max in and you're a few categories.
You are always concerned about how can I grow the portfolio or how can we grow the portfolio and when you look at that debt.
That slide you can go back to 2018 and you can see that in 2018 energy was 18% of the book.
And as of year end it was 14% of the book and then you look at hospitality and it stayed exactly where it was and so.
It's very comforting to know that the bank has the ability and as we've grown to broaden that we have that ability to continue to grow in those other segments.
And I think it's a testament to the team.
To stay disciplined and stay focused because if we didn't have that discipline and we didnt have that focus.
Jason I would argue that it would've been really easy for us to run our energy book to 20, or 22% and hospitality to 'twenty five and we're just not going to do a share very easy.
Okay.
Alright.
Very helpful.
That's all for me thanks, guys.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Tom Chavez for any closing remarks.
Thank you again, we're really pleased we're excited about the year in spite of the headwinds we're really blessed to be in this part of the country.
We're excited about the year, we're continuing to look at.
Opportunities on the acquisition space there are more limited due to the mark to market issues and the lump in the securities portfolio, but we are truly excited in.
And.
We've reverted back to our our good old fashioned NIM numbers and our efficiency ratio, even with the increase that one off and the salary we're still below 40% on the efficiency ratio. So.
Delighted I think with these new records or Theyre comforting and our team is committed to.
I would say more of the same and we're excited about it. So we thank you.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.