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spk02: Welcome to Bank 7 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 and direct effects 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 8K that was filed this morning by the company. Representing the company on today's call, we have Brad Haynes, 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.
spk03: 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 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 a loan growth. And it should not be confused or attributed with the Fed rate hike. It'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 timeline 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 10Q as it illustrates the nine-month period ending September 30th, and it clearly shows that our income increase was attributable to the growth of 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 three 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, you can see how well we've done. Regarding our NIM and reflecting back on the full year, it is a similar story regarding the steady increase throughout the year. In late 21 and early 22, we had signaled and discussed the expected NIM compression associated with our December 21 acquisition due largely 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 3.91. As the loan book began to grow in the late spring and into the summer and fall, the NIM began to recover, Then late in the year, as 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 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.
spk09: Thanks, Tom. We're very pleased with our loan portfolio as the calendar turns. We've not seen a change in past due levels or problem credits as rates have increased. NCOs were minimal for the year. And our discipline underwriting combined with seasoned lending teams will continue to serve us well as we operate in this higher interest rate environment. You know, construction loan balances have started to decline. Our hospitality construction activities have significantly reduced. And the home building industry, they've started to lower their inventory levels to match current demand. And just as a reminder, Our home builder portfolio is primarily starter homes in the Oklahoma City and Dallas metro areas, with very little lot 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.
spk03: 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 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 7 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, or simply to support growth. We refer you to page 15 of this IP as it shows the great earnings streak and the buffer based on industry and examiner-based DFAS 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 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 and noninterest-bearing component of core deposits, even when our growth was so strong in 22. 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 Bank 7, 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 stand by for any questions you might have. Thank you.
spk02: 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 you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two.
spk01: At this time, we will pause momentarily to assemble our roster. Our first question comes from Nathan Rates with Piper Sandler. Please go ahead.
spk07: Yep. Hi, guys. Good morning, and congratulations, Jason, on the promotion to president. Thank you. First question just made me kind of think about kind of the loan growth and overall kind of balance sheet trajectory from here. You know, obviously you guys had nice core deposit growth in the quarter. You know, the loan deposit ratio is still south of 90%. So just curious, you know, how you guys are seeing the pipeline change. deck up today entering 2023 and just kind of overall expectations for both loan and core deposits in 2023.
spk09: Yeah, Nate, thank you for the question. And I would just say that, you know, we wouldn't expect the growth to be exactly what we did last year. You know, that was an exceptional year. There are some known payoffs coming in the loan portfolio that we think we'll be able to overcome and and show growth for the full year. It 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 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. 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. 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.
spk03: And I would say, Nate, this is Tom, that Jason's 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.
spk07: Got it. That's great, Tyler. And, you know, one theme I think a lot of investors are thinking about these days on banks is just kind of the the timing of kind of peak margin and peak NAI, you know, and assuming, you know, the Fed raises by another 50 basis points between now and the next couple months, how are you guys kind of thinking about just the trajectory for NAI and margin for the next couple quarters? And, you know, if the Fed kind of pauses, you know, in the middle of this year, give or take, how do you guys think the kind of margin trajectory plays out thereafter?
spk03: What margin are you talking about?
spk06: Yeah, this morning. Yeah.
spk03: Oh, yeah. You want to take that, Kelly?
spk06: Yes. So we ended the year fourth quarter at 4.87 core NEM. And, you know, 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 compression, you know, where that ends in Q1. You know, it's to be determined based on what the Fed does. But I would say, you know, we reached peak NIM in Q4 unless something else changes.
spk03: Yeah, and I would add to that 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's 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.
spk07: Okay. Understood. And then just maybe thinking about a potential more dovish Fed 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?
spk03: You know, we've looked at some of those programs, and, you know, 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, quote, hedging and buying insurance, but it could also be, you know, 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 timeframe and it looks like those instruments could really help the bank based on the current landscape, then clearly we reevaluate. But for right now, it's not something that we need to worry about because we have some built-in defenses.
spk09: 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, the floors have been long established. And some of those, as you get into a higher rate environment, well, yeah, the floors, they get lifted. And as we've seen in the past, you may have to renegotiate some of those on the way down if we end up back in the same kind of rate environment we've operated in the last few years. But for now, the floors are moving up with rates.
spk07: Okay, great. That's helpful. And if I could just ask one more, just in terms of kind of the reserve outlook from here. You know, you guys are adopting Feasible, I believe, in the first quarter, which kind of complicates, I think, the reserving methodology to some degree. You know, charge-offs were zero last year. You guys still add this to the reserve. Had 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, you know, a meaningful increase in charge-offs and just kind of how you're thinking about the reserve trajectory on either absolute dollar basis or just relative to loans, you know, within that kind of high single-digit loan growth outlook that was described earlier.
spk03: Let me start with a macro and then Jason can get into specifics. Listen, you know, we'd be foolish not to understand the headwinds that are out there. And so, yes, it's a long growth story, which made us, motivated us to make sure that we increased our reserve. And we're really in that low 1.2 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, Cecil. And then I think Jason may have some color on, you know, a few credits or what we might see.
spk09: Yeah, I think the important thing, you know, if you go back and you look over the last five or seven years, we've really had that one credit that stung us twice. And, you know, that deal is looking better. There's a new team in there. They've got some green shoots and, for the last two quarters, it's been positive results and encouraging results, but 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 feel really good about the book overall.
spk03: 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, we feel they're greener and longer than they were two quarters ago. So we're encouraged, but we're still keeping the loan on non-accrual, and we're doing that as a matter of prudence relative to that unknown tail risk, which, you know, we've always said for the COVID, cycle in to cycle out, it was that close to 1%, and we haven't hit that 1%. But if that tail end risk did materialize and things went the other way on that credit, it's a small number, but that's really it.
spk07: 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 reserve that exists on that credit today?
spk09: There is no specific reserve on that credit today.
spk08: Gotcha.
spk07: But I believe you've charged off already a good chunk of it. Yes. Can you remind us what that amount is relative to the note value originally?
spk09: It's approximately $7 million in total that has been charged off related to that credit.
spk07: And that credit was how large, Jason? 14 and a half, yeah, 14 and a half, 15.
spk08: Our next question comes from Thomas Wendler with Stephen Zink.
spk02: Please go ahead.
spk04: Hey, good morning, everyone. 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. Can you give us some commentary there and then maybe how you're thinking about expense growth for 2023? We did a, we'll call it a one-off.
spk03: 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, 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 and 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 fruit to that labor. And so we would expect to, we're already reverting, I don't know what our number is, but we really don't have disjointed increases or decreases in our salary expenses. We've managed the company. This was purely a a payout based on that phenomenon.
spk04: All right. I appreciate all the color. That was my only question. Thanks, guys.
spk02: Again, if you'd like to ask a question, please press star then 1. Our next question comes from Woody Lay with KBW. Please go ahead.
spk05: Hey, good morning, guys. Good morning. Just hoping that you could give some color on the deposit pricing competition in your local markets. Are you competing more with other institutions? Is it more the treasury market? Just any dynamics there?
spk03: It's really all over the board. You have to segment it 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 only $100 million or $110 or $20 million. Is it $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're 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 And so when you segment the liability section of the balance sheet, there's just different factors. And so it's really hard to nail down one competitor or not. I mean, look, like I'll tell you, Raymond James, they constantly run newspaper ads in the small towns. And so they're paying high rates. And so the 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 data 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 us as hard on the deposit side, but it's something that we fight every day on a relationship-by-relationship basis, and it's just across the board.
spk05: Yeah, that's great color. And then switching to the loan growth outlook, you know, it makes sense that, you know, the growth would be coming down a little bit. Are there any segments you're seeing a pullback in growth and are there any concentrations you expect to sort of drive the growth in 2023?
spk09: I would say that you can see a clear pullback in our construction activity. Part of that's driven by cost, part of it's driven by the home buying market. So you can see that pretty clearly in the change for this last quarter. You're starting to see those numbers show that change. Our energy concentration is one that I mentioned that we watch very, very closely. There's 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 markets. We're doing that on a very selective basis with rapid amortization. I would say those are two areas you're seeing a pretty good shift. Our hospitality activity, if you go and you look at the last three years, that's been a pretty high growth. you know, that balance has changed significantly. And so it'll move more in line with the whole portfolio at this point, you know, and kind of for, you know, with our, we're 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 areas I would highlight.
spk03: That's one of the delightful parts of the story on the loan growth. And we have that slide in the deck and it's got the broad and deep loan growth as the header. And as Jason said, that we're very disciplined on our concentrations. And when you get to where you're almost at your max in your few categories, you're always concerned about how can I grow the portfolio or how can we grow the portfolio? And when you look at 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 didn't have that focus, Jason, I would argue that it would have been real easy for us to run our energy book to 20% or 22% and hospitality to 25% and we're just not going to do it. Sure. Very easy.
spk05: All right. That's very helpful.
spk08: That's all for me. Thanks, guys.
spk01: This concludes our question and answer session.
spk02: I would like to turn the conference back over to Tom Travis for any closing remarks.
spk03: 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. They're more limited due to the mark-to-market issues in the securities portfolios. But we're truly excited, and we've reverted back to our good old-fashioned NIM numbers and our efficiency ratio. Even with the increase, that one-off in the salary, we're still below 40% on the efficiency ratio. So delighted. I think these new records are comforting, and our team is committed to, I would say, more of the same. And we're excited about it, so we thank you.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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