Bank7 Corp. (NASDAQ:BSVN) Q4 2022 Earnings Call Transcript

Bank7 Corp. (NASDAQ:BSVN) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Welcome to Bank7 Corp.’s 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. 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 prove to be correct. Such statements are subject to certain risks, uncertainties, and assumptions, including, among other things, the direction in direct effect of economic conditions on interest rates, credit quality, loan demand, liquidity, and monetary and suppository 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, Chairman; Tom Travis, Chief Executive Officer; J.T. Phillips, Chief Operating Officer; Jason Estes, Chief Credit Officer; Kelly Harris, Chief Financial Officer. With that, I’d like to turn the call over to Tom Travis.

Tom Travis: Thank you very much. We are excited about our year and our recap. For those of you that have been on the call with us before, we generally don’t spend a lot of time with comments, but since we’re recapping the year, we’ll take a few minutes here to highlight some of the things that excite us. So, once again, we delivered strong results. We’re very happy about that, 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 began 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 a loan growth, and it should not be confused or attributed with the Fed rate hikes.

That’s pure organic loan growth. We didn’t buy loans. The team went out and captured new loans and deposits. So to best understand what occurred last year, we look back to the quarterly time line, and we start with the first quarter. The first 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 hikes 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 floors. Beginning in late May and early June and continuing into the third quarter, loan growth was exceptional, and we posted a strong 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 income increase was attributable to the growth in the loan portfolio, which had grown significantly compared to the prior period end. In fact, the data shows that our gross loan yield through that period was actually 3 basis points lower than the prior period, further highlighting the growth contribution and 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. Wrapping up the year, as you look into Q4, we continued to increase the loan book.

And when combined with the Fed rate hikes, the full benefit of a higher loan book and strong rates in the NIM can be seen, and you can see how well we’ve done. Regarding our NIM and reflecting back on the full-year is a similar story regarding steady increase throughout the year. In late 2021 and early 2022, we had signaled and discussed the expected NIM compression associated with our December 2021 acquisition, due largely to the 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 . As the loan book begin to grow in the late spring and into the summer and fall, the NIM began to recover, then late in the year, the Fed rate hikes were being more fully realized, we grew our loans even more and the 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 that’s a good start with the income and the NIM component. And I’d like to ask Jason if he would cover the asset quality aspect of that loan portfolio.

Jason Estes: Thanks, Tom. We’re very pleased with our loan portfolio as the calendar turns. We’ve not seen a change in past due levels of problem credits as rates have increased. NCOs were minimal for the year. And our disciplined underwriting combined with seasoned lending teams will continue to serve us well as we operate in this higher interest rate environment. Construction loan balances have started to decline. Our hospitality construction activities have significantly reduced. And the homebuilding industry, they’ve 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 locked and land lending activity.

We’re 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 the same way we have for decades. The economies in Oklahoma and Texas are healthy, and our credit quality continues to benefit from both. And Tom, I’ll hand it back to you.

Tom Travis: Jason, thanks for that report. And again, just a real shout out to the commercial banking team and all those efforts. So, as we move into our capital, we’re pleased to have quickly reestablish 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 the 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 Bank7 has top 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 payouts or share repurchases are simply to support growth. We will refer you to Page 15 of this IP as it shows the great earnings strength and the buffer based on industry and examiner based DFAST stress parameters. And then moving into liquidity, it’s remained strong, and our Cornerstone acquisition provides additional meaningful runway for future growth. Our team members from Cornerstone have 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 when our growth was so strong in 2022.

So in conclusion, 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 Bank7, 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. And so with that, we’ll stand by for any questions you might have. Thank you.

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Q&A Session

Operator: Thank you. Our first question comes from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race: Hi guys, Good morning and congratulations, Jason, on the promotion to President.

Jason Estes: Thank you.

Nathan Race: First question, just maybe, kind of thinking about, kind of the loan growth and overall kind of balance sheet trajectory from here. Obviously, you guys had nice core deposit growth in the quarter on loan deposit ratio is still south of 90%. So, just curious, how you guys are seeing the pipeline today entering 2023 and just kind of overall expectations for both loan and core deposits in 2023?

Jason Estes: Yes, 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 and show growth for the full-year. It wouldn’t surprise me if we had a quarter or two that were flat or probably 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 that 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 we’re continuing to focus on to continue to generate enough deposit growth to keep up with the loan side.

So, hopefully, 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’ve been very successful over the last few years at grabbing both new loans and new deposits from existing and new relationships. So, optimistic we’ll be able to grow this year, but won’t be as much as last year. I wouldn’t expect it to be as much as last year.

Tom Travis: And I would say, Nate, this is Tom, that Jason is 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 they’re going to do. So, even with that, we’re still budgeting a nice increase as we always do, but I do echo Jason’s comments regarding the budget matching up to slightly lower expectations given all those factors.

Nathan Race: Got it. That’s great color. And one theme, I think a lot of investors are thinking about these days on banks is just, kind of the timing of kind of peak margin and peak NII? And assuming the Fed raises by another 50 basis points between now and the next couple of months, how are you guys, kind of thinking about just the trajectory for NII and margin over the next couple of quarters? And if the Fed, kind of pauses in the middle of this year, give or take, how do you guys think the, kind of margin trajectory plays out thereafter?

Tom Travis: What margin are you talking about?

Jason Estes: Net gross margin. NIM.

Tom Travis: Oh NIM. Do you want to take that, Kelly?

Kelly Harris: Yes. So, we ended the year fourth quarter at 4.87% core NIM, and we’re projecting, obviously, we’re already seeing that the cost of funds is increasing at a faster clip than the loan side. And so, we are seeing some NIM compression, you know where that ends in Q1, that’s to be determined based on what the Fed does, but I would say, we reached peak NIM in Q4 unless something else changes.

Tom Travis: Yes. And I would add to that the challenge that we’ve had relates to really quality and long-time loan customers that across the industry push 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 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 factor 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 and 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 because I guess another side of the coin would be a group telling you we’re not sure we can match earnings from last year because of these factors, and we’re absolutely not saying that.

Nathan Race: Okay. Understood. And then just maybe thinking about a potential more later this year into 2024, are you guys, kind of having success, maybe getting loan floors on new originations or are you guys maybe exploring any hedging or derivatives that may, kind of lessen the impact in terms of loans repricing lower if the Fed were to cut later this year or into 2024?

Tom Travis: We’ve looked at some of those programs. And there’s still, as you know, Nate, and your firm does a great job of presenting us with material. As you know, there’s still a bit of speculation involved in that. And so yes, some of it is “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 that’s higher than 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 the March and April time frame 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.