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 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 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. Yeah, 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. We were successful in closing on our acquisition on about 23 days before the end of the year.
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. I would say, as we sit here, what, 7 weeks later, 8 weeks later, it's going well. The next big thing with the acquisition will be the computer conversion in June, and we don't expect any issues there. It looks good.
We were busy in the fourth quarter. In spite of that, we were able to continue moving forward with the organic growth of the company. 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. You know, that effect would basically put a little bit more volume out there on the market. All in all, positive. We look forward to 2022, and we'll open it up for questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily while we assemble our roster.
Hit then on just one.
The first question will come from Nathan Race with Piper Sandler. Please go ahead.
Hey, guys. Good afternoon, everyone.
Hey, Nate.
Hi, Nate.
Maybe just start on the loan growth outlook. Last couple quarters, excluding the loans that you guys acquired from Cornerstone in the fourth quarter, been kind of in the high single-digit range. 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 gonna come in, you know, sequential order. We expect the first quarter to have more headwinds due to known payoffs that have either already happened or will happen.
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. Overall, you know, new looks are solid, and we're generating good new fundings. We've just had some headwinds with known payoffs.
Got it.
I would also say that at some point, we're gonna 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 gonna catch up and, you know. If we were to fall in that 7 or 8% or 9% range, it wouldn't surprise me. 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, you know, the margin held in more stable than I was anticipating here in the quarter. Would just kind of be curious, get some color around, kind of near-term expectations for the margin.
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. Imagine that could provide some near-term support. 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 raises short-term rates?
Within that context, I'm curious in terms of the amount of floating rate loans that you guys have today and what floors, if any, 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. We have concluded that modeling. We know what to expect.
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 you know 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. 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.
Mm-hmm
You know, in spite of, you know, continued pressure, you know, from competitors and borrowers and, just very pleased overall with the sales staff and the effective results throughout the last year for sure.
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 non-interest-bearing, right? There, we have some strength in the company that continues to, you know, to help soften any kind of a margin decline that we might have.
Understood. It sounds like, you know, 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. Maybe just turning to credit, you know, 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 you guys kinda 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 ALLs at the low end of our range, and so we're gonna add to the provision just to be consistent with our history. 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. 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.
Okay, great. I will step back. I appreciate you guys taking the questions and all the color. Thank you.
Thank you.
The next question will come from Brady Gailey with KBW. Please go ahead.
Hey, thanks. Good afternoon, guys.
Good afternoon.
You know, I know y'all didn't necessarily disclose the specifics for fee and common expenses, but you know, fees were up you know a decent amount if you look at it linked quarter. Anything driving that on other fees are a small part of y'all's business, but was there anything one-time in nature driving that tick up?
I don't think so.
Nothing of large magnitude.
Okay. As far as one-timers are concerned in the quarter, I know you call out the $875,000 related to the merger and some expenses for Brad's stock sale, but any other one-time in nature things to be aware of in the quarter?
Are you speaking to expense increase on noninterest?
I mean, I'm talking about expenses or fee income, just any kind of large one-time in-nature item.
No
in the quarter beyond the 87.5.
No.
Okay. 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?
Four-
$27 million. Are you talking about the total outstanding balance, Brady?
Yeah, for PPP loans.
Yeah. It ended at 18.5.
Okay. 18.5. All right. What was the exact amount of Cornerstone loans acquired?
Year-end
I'm trying to back into what you-
I think it was right at 110, 115-118 at the end of the year.
If you look at core loans ex PPP, ex acquired, they were down on a linked-quarter basis?
Yes. Yes.
You're talking about third quarter to fourth quarter?
Yeah, he's talking from the end of September to December.
Slightly.
Yeah.
Not a lot.
I would call it flat.
Okay. Okay. All right. That's all for me. Thanks, guys.
Thank you, Brady.
Again, if you have a question, please press star then one. Our next question will come from Matt Olney with Stephens. Please go ahead.
Thanks. Hey, guys. Good afternoon.
Hey, Matt.
Hello.
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 now that 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 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.
Yeah. I don't see that. I don't see that subject to. We have a deep dive that's going to occur next week on our. We've done some enhanced work with our loan files and work on that. Then based on Chairman Powell's remarks, we're going to modify the expectations and tweak that model. 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.
Yeah.
Let's see here. Outside of that, operating expenses, you're kind of folding in Cornerstone now. We'll get the full impact of that in the first quarter. Is there a level you can point us towards for operating expenses in 1Q and then into throughout 2022?
No, you know, overall, organic growth on fees is gonna be in that traditional range. 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 and the actual change.
Okay. JT, maybe just more broadly, any commentary just on investments or expenses of 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 is seeing. You might see a little higher than traditional increases on labor. Overall, we're in line with what we've done historically, ex Cornerstone.
Okay.
Matt, going 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 standalone, or was that for the combined new entity?
That disclosure I was referencing was as of December 31, 2020.
Yeah.
The last disclosure I could find.
Yeah.
Would not include Cornerstone.
Gotcha. Yeah. That's part of the reason that we had to modify the. You know, we had a lot to get done the last 23 or 24 days of December and get all this out. 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.
Okay. Thank you.
I wanted to shift over towards energy. 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, you know, we had a large energy loan payoff in the fourth quarter where, you know, we stepped in and supported people when the market was down.
When it's up like this is when we're a lot more conservative. I think you'll see us stay to those disciplines. Doesn't mean we won't be active in the space. It just means we'll be more selective. You know, this is to us a more risky time to really get out there and get aggressive on the energy lending space.
Got it. Okay. Okay, guys. Thanks for your help.
Sure. 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. Please go ahead, sir.
Again, we're happy with our results, and you know, 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. We're excited to continue to do more of the same and keep compounding our values there for our shareholders. That's where we get excited. 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.