Thomas Travis; President, Chief Executive Officer, Director of the Company and the Bank; Bank7 Corp
Jason Estes; Executive Vice President, Chief Credit Officer, President and Chief Credit Officer of the Bank; Bank7 Corp
Nathan Race; Analyst; Piper Sandler & Co.
Matt Olney; Analyst; Stephens Inc.
Welcome to Bank7 Corp's fourth-quarter and full-year 2024 earnings call. Before we get started, I'd like to highlight the legal information and disclaimer on page 25 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 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 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, President and CEO; J.T. Phillips, Chief Operating Officer; Jason Estes, Chief Credit Officer; Kelly Harris, Chief Financial Officer; and Paul Timmons, Director of Accounting.
With that, I'll turn the call over to Tom Travis.
Thank you. Good morning. Welcome to all those that joined today. Before we move into our financial results, we certainly are aware of the devastation inflicted on the West Coast by those fires on our fellow citizens. Our thoughts and prayers go out to them.
As we move into our strong financial results, we're very excited and cautiously optimistic. The results of the recent election have certainly unleashed a robust amount of animal spirits and it's especially driven -- we're especially interested in the many statements from the incoming administration relative to creating a less bureaucratic regulatory environment. We'll see if that happens, but it certainly is encouraging and the markets have responded to that message in a positive manner. With that said, the current rate of inflation and other economic factors have caused the Fed to possibly pause their interest rate reductions, therefore, we continue to acknowledge a bit of uncertainty relative to interest rates. The variability does seem, however, to be contained within a more narrow band.
That is our belief. One thing we know for certain, we continue to stress how comforted we are to be operating in this dynamic part of the United States. It's a real blessing. We really are pleased with our fundamental strengths, especially our high levels of capital, and it's not just the higher levels of capital that gives us comfort because we also have a very strong liquid position something that we mentioned, we further enhanced last year when we added a second liquidity backstop with the Fed. So we now have two meaningful sources of additional liquidity.
We continue to reap the rewards of our disciplined approach to properly matching our balance sheet, something that has proven to be effective for us over a long period of time and you can see that when you review our NIM stability through various rate cycles. That steady NIM working in conjunction with our strong asset quality and dedication to expense controls, all work together to drive strong results. We're pleased with our accomplishments as they were achieved through normal operations and in the case of our strong EPS, not driven by share buybacks. Our dividend payout ratio is still in the 20% range, which is far lower compared to the average dividend payout ratio of 35% that is paid for -- paid by banks that do pay dividends. With all that said, we have plenty of room for further increases should we decide to do it, while at the same time being comforted by our ability to rapidly accumulate capital.
As majority shareholders, we're pleased with the total shareholder returns produced by our company and as you can see in the published materials, we rapidly compound shareholder value much faster than most other institutions. As always, we think our outstanding team members who work with our loyal customers. We are all aligned and we're looking forward to a bright future, and it's because of them that we produced our results. So with all that said, we're here and ready to answer any questions that you might have. Thank you.
Operator
(Operator Instructions) Woody Lay, KBW.
Woody Lay
Wanted to start on the loan shrinkage you saw in the fourth quarter. It looked like it was mainly driven by the energy and hospitality segments. Any color you could give on the lower balances there? And I guess, overall, how are you thinking about growth into 2025?
Jason Estes
Yes. You can see a lot of those came in somewhat late in the fourth quarter. We had several people exit. They sold businesses or sold specific assets off. And so we have more of that expected in the first quarter.
I was looking at last year for the full year between Energy and Hospitality, we had over $160 million of unscheduled principal payoff, right? And so we were able to redeploy throughout the year a good portion of that. And so if you look for the full year, we did have small amount of loan growth that really got nailed with those unscheduled payoffs from those exits in the fourth quarter. And again, there's going to be a little bit more of that in the first quarter, but the silver lining is that gives us some room within those two specific categories where we've been -- if you look back over the last six years as a percentage of the portfolio, I think the Energy component is half of what it used to be. So we've got a little bit of room to backfill there.
And the similar comments there on the Hospitality side, you'll see us redeploy. We've done a nice job of growing the rest of the book. C&I was a highlight. We grew that a little over 5% for the year. And so more of the same, build up the other segments around those 2.
But again, I think you'll see us redeploy within those two segments. So return to some level of growth here hopefully in the first half of the year, but for sure for full year.
Woody Lay
Yes, that's helpful. And then, I guess, outside of those expected paydowns you mentioned in the first quarter, I mean, does it feel like loan demand is picking up? Or is the uncertainty around the interest rate environment. Is that sort of keeping some clients on the sideline for the time being?
Jason Estes
I would say our deal flow slightly improved, but it never was really bad last year. And I think we were very consistent in our message on the earnings calls, just really reiterating that we're going to really, really, really manage our NIM, okay? And so we're seeing a lot of deals. We're winning probably more than we're losing right now, but we are still drawing a very hard line on where we'll go with loan rates and deposit rates.
Woody Lay
Yes. I guess that's a good segue into the NIM. I think last earnings call, you -- there was some thought that maybe we could see some compression, but the NIM was actually up in the quarter. And I've just been impressed by the loan and deposit betas kind of moving in lockstep with the recent cuts. I mean to the extent we get more cost, do you think that's a trend that can continue? And how are you feeling about the margin going forward?
Jason Estes
Well, thank you for the compliment. We did exceed our own expectations in the quarter and in the full year. I was contemplating this morning kind of thinking about this coming up. And I would just say that when rates move up, we have a slight advantage. And when rates move down, we have a slight disadvantage. And so I would agree that there is some compression on the horizon. I also believe we'll operate in our historical norms, but that's really where we focus every day at the transaction level on doing the absolute best we can in regard to maintaining what I would call a very healthy NIM.
Thomas Travis
Kelly, you might comment on real-time NIM right now.
Kelly Harris
Yes, we did have a couple of ticky-tack things during the quarter that kind of fell in our favor. We had a few loan relationships with non-accrual interest that paid off and that kind of helped increase core NIM. I think if you excluded those items during the quarter, we would have been closer to 4.7 times fees. And then as Jason mentioned, due to the loan paydowns during the quarter and the excess liquidity, you may see some short-term pressure on NIM. Currently, we're at 450, but as we would redeploy the higher earning assets to loans, you'll see that start to expand again.
Woody Lay
Yes. Are those sort of onetime interest items that you called out, is that included in that $1.1 million of loan fee income that you'll highlight in the slide?
Jason Estes
No, I don't believe so. No. It shouldn't be.
Thomas Travis
It's going to boost your interest income right, Kelly?
Kelly Harris
Correct.
Thomas Travis
So and they are a onetime Woody -- and it's relatively small amounts, but it goes into the interest income. And it's really a reflection of we are a conservative shop and if we see a threat of -- we're not sure if we could have an issue here, we're -- I'm not going to say we're too fast on the trigger to put it non-accrual, but we're very certain when we make those decisions. And sometimes when you -- it's happened to us two or three times over the last couple of years. We don't really have many credit issues, but we get on them early. And so it's a little -- it's infrequent, it's a little disjointed, but it is extraordinary.
I think right now, what do we have total on non-accrual? Not hardly any now. And so I wouldn't expect it to be much. And I think just wrapping up on the NIM, we're very proud of ourselves. We really are.
And when you look at -- I'm not making any predictions here, but it's almost like I don't believe the 4.7%. The real time is 4.50%, 4.55%, whatever it is. And I think I'm correct that our 10-year look back low point, it's like 4.30% or something.
So as Jason said, we're still within our ranges, but it's hard to believe that we can continue to operating where we are. But with that said, it's going to be on the margin. It's going to be narrow. It's going to be subtle. It's not going to be a wild fluctuation that you have seen from a great, great number of other banks out there.
I think that's one of our hallmarks.
Operator
Nathan Race, Piper Sandler.
Nathan Race
Just going back to the margin discussion. I'm curious if you guys can shed some additional color on how much additional deposit cost leverage you have, assuming the Fed remains on pause over the next couple of quarters. You obviously had nice reductions in deposit costs this quarter. But just curious how much more opportunities are to reprice CDs lower and what other opportunities there are to bring down non-maturity deposit costs as well.
Thomas Travis
I would say, Nate, that -- two things. The CD portfolio is by far the smaller, I think it's $150 million or $180 million, whatever it is $200 million of the $1.5 billion in deposits. And so the opportunity to reprice down is pretty limited because of its size, A and B, that part of the portfolio tends to be a segment that really reads the newspaper and the Internet and once that lasts 5 basis points. And so I wouldn't say that would be a major factor at all for us or a meaningful factor and I would say that also that I think we may have talked about this. It was second quarter, third quarter last year.
And I believe what we said at the time was the first few Fed rate cuts, it's a lot easier always historically to lower your rates and pick up 100% of that beta -- and as you get deeper into Fed rate cuts, it becomes a little more challenging. And that view has not changed for us. And we're delighted and proud of the fact that our loan and deposit betas have reacted the way they have. But look, if notwithstanding our belief that the rates are going to operate in a very narrow band.
Look, we do recognize, I think the tenure has fluctuated 100 basis points in the last four months. And so I think if there was a 25-basis-point cut, it would be more of the same. But I think once you get past that, it becomes more difficult to maintain that deposit beta.
Nathan Race
Got it. That's very helpful. And just going back to some of Jason's comments. Curious if you can maybe comment on what you're seeing in terms of new loan pricing these days?
Jason Estes
Yes. I think real time isn't the interest $750, $755 portfolio-wide. So that kind of gives you a snapshot of the range. And I think that's pretty indicative of what we're seeing on the new stuff coming in. In those two segments, I mentioned energy and hospitality. There may be a slight benefit or increase there, depending on the opportunities we can go find. But I think that 7.5% range is pretty good.
Thomas Travis
I would have predicted you would have said 7.25%, Jason.
Jason Estes
It depends on the mix.
Nathan Race
Yes. Got it. That's helpful. Maybe a question for Kelly. Just curious how you're thinking about the expense run rate going forward. Obviously, the impact from the oil and gas assets is continuing to decline. So just curious how you're thinking about the run rate over the course of 2025.
Kelly Harris
Just in the short term for Q1, we're anticipating $9.6 million in core or in non-interest expense, $1.4 million relates to oil and gas and then 8.2% core.
Nathan Race
Okay. And then any just thoughts on kind of any investments you're planning on undertaking this year that may cause some upward pressure to that run rate on a core basis?
Thomas Travis
Investments.
Nathan Race
Right.
Thomas Travis
No, I think you're going to see more of the same.
Nathan Race
Okay. Got it. And maybe one last one for me. You guys continue to have a high-class problem with your excess capital levels continue to build a really strong clips. So Tom, just be curious to get your updated thoughts on how you're thinking about deployment opportunities and just what you're seeing on the M&A front as well.
Thomas Travis
We're working hard, Nate. We didn't close anything in 2024, and that was very disappointing. I can tell you that we had a lot of activity, some serious looks. We tried really hard and we were not able to get anything done. And so as we roll into 2025, our mentality has not changed.
And we are actively pursuing some opportunities right now and you know how that goes. And we could have something materialize sooner rather than later, we might not. We're disciplined buyers. We don't just grow just to grow. And so I know that sounds like a word salad probably, but we're trying really, really hard and we're being very strategic about it.
I mean there are a couple of particular opportunities right now in Texas right now that if we wanted to, I'm highly confident we could do strategically. We're not sure we want to and so we're going to continue to work really hard. And the time is certainly right with the currency value with the excess capital. And sellers obviously benefit from taking our stock and they get to ride the upside with us and they also get to deferred taxes and then they -- in some cases, if it's privately owned companies, they get the benefit of liquid investment that they haven't had before and the cash dividends along the way. So there's a lot of compelling reasons for people to join forces with Bank7 and that's been acknowledged to us and that may help us get a few deals over the finish line.
So that's the way we view it.
Nathan Race
Okay. Great. Sounds encouraging. I appreciate the color.
Operator
(Operator Instructions) Matt Olney, Stephens.
Matt Olney
I want to go back to the comment that Jason made around the loan mix I heard you mentioned some paydowns in energy and hospitality in the fourth quarter, but also opportunities to kind of backfill that those two portfolios in 2025. and I also heard some commentary about some just general C&I growth. So just trying to appreciate if we'll see any material mix shift of that loan portfolio over the next year or 2?
Jason Estes
Yes. I don't think you'll see us deviate from our historical ranges. And when referred to the energy book. It used to be twice -- it's just under 10%. It used to be just under 20% of our total outstanding loans.
And so we're not going back to that high of a percentage. But if you look at the last few years, we've been in that 11% or 12%, maybe even 13% range. So there's some room there. Hospitality, it floats kind of between 18%, 23%, 24%, and we're closer to the bottom end of the range there. So more of the same on mix, but if you went and looked at our history since being public, you'd see we're at the low end of the range on three key segments, okay? And that's construction, one to four family.
This was intentional when costs got really I would say, accelerated over the last several years, a lot of pullback from within our group of customers that they did on their own and then there were some on our part where we shrunk that segment, right? And then Energy fluctuates, it just does, that's the nature of that industry. And then Hospitality, we've grown other things around it and it's given us a little bit of room to backfill.
Thomas Travis
I would add too that it's interesting, you have to keep top of mind awareness of what kind of institution we are. And we're the bank for entrepreneurs that have done really well that are constantly developing new verticals or buying companies. And so we're going to always have a little more of that paydown segment.
And I don't want to say that we're lumpy because Jason and his staff are excellent at growing our portfolio every year. But we do have -- we have had historical periods where we've had people that have -- their investments have matured, they've sold and on to the next deal. And so that's part of it.
And the other part of it is that look, we have a wonderful relationship with our regulators. And we just concluded an exam, and everything was great and just we weren't surprised. And we don't -- with all due respect to the regulators, we don't run our bank based on the regulators. However, with that said, we all need to remember that the environment for call it, mid-2023 up until even the recent months, there has been a heightened, heightened focus and scrutiny on CRE and so you've probably read about it if you focus on it at all, if you listen to the examiners and it was a reaction to the failures in the spring and the summer of 2023.
And they're definitely, definitely was a pivot and a mandate that came out that said, really scrub CRE and liquidity and look at it really, really hard. And I think that it may have been a subtle wet blanket over the CRE market. But as I speak to our brethren executive management around the country, it was definitely on the top of everyone's minds. And I think that it's fair to say that the underwriting standards were a little tougher and I think that had somewhat of a muted effect on the growth of CRE portfolios across the board. And I don't think we were really any different. And I think as we look today, what's our 100 bucket?
Are we 70, 73. And then if you look at the 300 bucket, we're below that. And I think I would submit to you that for quite a few number of years, there were banks that were -- they weren't blowing through stop signs, but they were certainly not as worried about it. And so again, it's not a -- it wasn't a major issue, but it was definitely a contributing factor to a little bit of muted growth.
Matt Olney
Yes. No, I appreciate the commentary on the loan growth front. I guess just kind of following up with that, is it reasonable to assume that in 2025, loan growth for Bank7 could be similar to what we saw in 2024 to where it's kind of all of the quarter to quarter given some of those paydowns and asset sales. But at the end of the day, we still got to kind of organic growth level in that low single-digit number. Is that a reasonable expectation for us?
Jason Estes
I think it's reasonable. I'd be disappointed if that's where we end up.
Matt Olney
Okay. And if there was upside on that, would you -- is it reasonable to assume that it would be more the back half of the year than the front half?
Jason Estes
Absolutely. Yes.
Matt Olney
Okay. Okay. I appreciate that. And then I guess going back to -- I think Kelly mentioned that the non-accrual interest was a little bit elevated in the fourth quarter. I don't know if you have the dollar amount of that in front of us so we can kind of normalize that for the first quarter?
Thomas Travis
Matt, it was around $600,000.
Matt Olney
Okay. Great. And then just lastly for me on the fees front. Any more color you can give as far as expectations for fees in 2025?
Kelly Harris
Yes. For Q1, combined $2.4 million, $1.7 million of that related to oil and gas and then $700,000 for your core fees.
Thomas Travis
I think his question was moving forward. Am I incorrect about that?
Kelly Harris
Yes. Just for the first quarter, though, I mean, you could -- Oh, I see -- you're talking about --
Thomas Travis
Yes, this quarter. Okay. I misunderstood.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Tom Travis for any closing remarks. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
