Q4 2019 Earnings Call
Thank you. Welcome everyone that's on the call. We're here to review the slide deck and the earnings release material we sent out we're excited about our results. We're very pleased with 2019 since it's a year-end review. I thought it would be a good time to remind everyone who we are and how our model is working. So well and how we drive or results. Our model is one of the branch light model that focuses heavily on Commercial Banking with a Relentless commitment to a strong credit culture. And when we married that with our low efficiency ratio that proves to drive Banks Evans outstanding results, and that's our model. That's what's Driven our success and that's what we're going to continue to do for the full year. We increased our pro-forma pre-tax income by 4% and while that may initially not seem like much we believe it is dead.
increase was in achieved and
Flight of absorbing costs associated with our launch into to New Markets and 2019 fully absorbing the public company costs all the while operating in a declining interest rate environment. We're very pleased with the strong deposit growth. One of the Hallmarks of our company is we're not just a transactional company. And if you look at our deposit growth were very pleased that we maintain the 29% non-interest-bearing portion of those deposits. We also had very strong loan growth. That was the driving force and enabled us to overcome. All of those costs that we had occurred, which were were costs that were thought about deeply and we know will position us well for the future and I would like to touch on a few basic fundamentals related to our performance last year Nim seems to be one of the most popular topics these days so we'll start with that their birth.
we are industry-wide challenges, but we
Maintains a strong Nim and well within our historical ranges, it looks like the FED is not going to be as active in the near-term at least for the next 3 or 4 months. Therefore we anticipate a slightly more stable Market at bank 7. We supported our Nim by doing a good job of consistently negotiating floors on our loans in addition off some time ago. We've been inserting more prepayment penalties into our loans and we're having some success with that and we think it'll help as we move forward, especially if if rates were both fall and refinancings would would continue regarding our returned on and Equity. We continue to generate your turns. Well in excess of Industry averages. Our total package has outperformed the KBW Bank stock index that we follow amongst others since our September 2018 IPO with regard to ur name.
4share are consistent.
Li strong earnings means that we don't feel undue pressure to buy back stock just to boost EPS while we certainly understand that strategy and I'm not opposed to it many banks have repurchased their shares that just about any price even at high multiples. We prefer to buy back our stock at low multiples as we think that's a better long-term strategy. But again, we can do that because of our strong earnings in our high r o e we take the long-term View and we know that our strategy will produce good long-term shareholder value, which will exceed the returns of most of our peers.
As far as m&a goes we didn't buy anything in 2019. We had a few options and we had many discussions. We were actively planting seeds meeting with people. We know walk in reaching out to our networks and contacts to meet people. We don't know and with targets that we have identified it is certainly a tough m&a environment seller expectations are still high life. Nonetheless. There are always opportunities to buy or merge and we will continue to devote meaningful time to that initiative. However, we will be patient and we will not overreach and overpay we woke up, but determine in the meantime, we will continue to manage the company for the long term and stay focused on providing very strong returns to our shareholders. As far as twenty-twenty goes off Outlook. We are very well positioned and we are in a dynamic market and are positive about our near-term future. We do understand the need that we are deep into the economic expansion and we thinking
Out that daily and we here.
Or concerns from our customers related to labor shortages increased labor costs for those who are working construction costs being very high certainly the uncertainty in Washington bothers am not just the impeachment things that are going on but you know what happens if we have a turnover and the government, what does that mean for tax rates not to mention, you know the volatility in the yield curve just today the 10-year treasury went below the 90-day bill. So, you know here we are again with an inverted yield curve. Nonetheless wage are near Term Loan pipeline is very strong and it gives us good Comfort going into twenty-twenty, especially the first half of the year. And so with all that in mind that's that's where we are and we will certainly open it up for questions.
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star and then one on your touchtone phone. If you are using a cell phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to our first question. Stay will come from Brady gaily with KBW home, please go ahead.
Hey, thanks.
Afternoon, guys, we had another strong alone in deposit growth quarter in the fourth quarter. I think both were up around 20% off annualized is we look to twenty twenty. Do you think that this loan and deposit growth kind of in that mid to high teens is still appropriate or will growth be slower in 2020.
Yeah Braves JT. I think I think our feeling is consistent with where we've been low double-digit growth year-over-year.
Okay, I would add to that. I would add to that that we V specific knowledge that we have with regard to the pipeline excites a month for the first half of the year. We've got a few transactions that we're not sure they're going to be done but we feel pretty good about them in the ones that we do know that are going to be done. Give us great comfort in the whole front half of the year as far as the loan growth which which will out which will surpass the deposit growth. I think, you know, we could have had once per month on the year. So I think that's probably more more objects on the deposits for security. Okay, and then I notice in the fourth quarter of the tax rate was a little higher the tax rate was 30% I think you guys had been running closer to the 25% range. Was there anything abnormal in that little higher tax rate?
Yeah.
It had to do with the distribution of income state income tax, you know, Texas vs. Oklahoma vs Kansas. So we had a disproportionately high number of income in Oklahoma and the and so that impacted the overall tax when we adjusted it here in
Okay, so so going forward, you know back to the 25% or is 30% that he run right? No, no, no, no twenty five to $25 a month is probably where it's going to run but because you know you work off of estimates and then you get to the end of the year and and and so there are some adjustments that go into the year-end number that is why that was a little bit disproportionate.
All right, and finally for me just on Cecil any thoughts in your reserve right now is that you know 111 basis points any thoughts. See you soon. Actually, I can't remember. Are you guys delaying Cecil? Yeah, we're not we don't have to start till January 1st 2023 and so forth, you know, we're actually covered for a couple of reasons emerging Growth Company and then and then sighs but where we we have plenty of Running Room, but I'll just say that that our view, is that the Cecil
We're going to always marry our loan loss Reserve with our cat with a with a view towards our capital and remember remember it's it's important for everyone to remember. We used to run a higher at about 1:25 to 1:35 historically, but remember that's when we had less capital and so we're at record Capital levels on tier one a risk-based capital and so we have a tremendous Capital cushion. And so therefore it's really not necessary for us. And I know that is a methodology that's tied to what you think you need but there's always qualitative and quantitative factors. And so I think for us because of that heavy Capital load, I think our our analysis for Cecil will certainly balance the conditions in the markets the credit portfolio the concentrations, but I wouldn't expect us when once we start to have much variation
All right. Thanks for the color guys.
Our next question will come from Matt only with Stephens, please go ahead. Hey, thanks guys. I wanted to go back to the discussion around the the core margin and and and Tom it sounds like you've based off your commentary you prepared remarks you expect some stability in that called margin. Can you just expand on that as far as what gives you the confidence of the the stability? And is that based off the the adjusted margin in the fourth quarter of 460 or is that based off of a separate number? Thanks. I would I would suggest to you mad at that fourth-quarter number. That's what we try to put in there to give you real-time information. We feel pretty good now admittedly, we've budgeted a slight compression and I think that has more to do with the yield curve, you know, we're budgeting it was back to Flat now here it is today inverting again. And so I would suggest to you that wage.
the reason that we feel pretty good about the the margin is
Of the opposite of a death by a Thousand Cuts meaning there's a lot of little things that go into it. The floors are big deals and you know, the prepayment penalties that we're putting in our loans that add that adds to it. And I also think that you know, the the feds if they don't touch the rates Like the quote experts claim that they're not going to for the next three or four months straight top-of-mind awareness isn't there, you know, last year was brutal cuz everytime the rate goes down the borrowers the phones ring and ring and ring and so so I think it's a combination of a lot of things for us and just just the comfort that we have knowing that as we've grown our company over the years. We have a really good comfort in that band that we're operating in
Okay, got it. And then it sounds like you've got a really good pipeline for growth in the first half of the year. Can you give us some color as far as the yields at some of those loans in the pipeline that you hope to close in the first half of the year was Jason take that? Yeah, I think you you know kind of looking back at the fourth quarter. It's probably more of the same kind of same industry segments and I would expect you know to fall right in that band that we've been in the past really the past 90 to 120 days.
and and
Specifically what kind of yields are we looking at in the fourth quarter that would be similar in in the first half the year. I would say that the new business was mostly in the mid 5 a.m.
Got it. Okay, and the operating expenses this quarter ran a little bit higher than fourth quarter and I think the press release mentioned updating the headquarters converting the the Tulsa lpo into a full service Branch are these costs now fully baked in the Run rate in the fourth quarter or we're going to see a little bit more uptick in in the in one Q. Know. They're baked in we you know, if they're in the year, we had fixed assets in work-in-process while chairman Hayes was working his magic. We would invite everyone to come down and see Monday work. We're really proud of it. He he kind of went a little bit off budget, but will let him get by with it. But for the year, it was early in the year. We had most of the fixed assets going in the working process and then we started converting it to depreciating assets and later in the year and it's all been done now.
And then how should we be thinking about the operating expense growth in in 2020?
I don't think you're going to see any. I think we're we're really focused on costs and expenses. You know, 2019 was a year where we you know, we were very busy with the fixed a surge that expansion into the two new locations and then the headquarters and the banking office here and completely renovated and remodeled and and I will say that so so so there really is no need for Bank 7 to have any increases in expenses other than we're probably going to have to add a few people for you know, various support roles. And but I think what you're going to see is a pretty flat expense and maybe maybe we might be able to cut some not not making any predictions so I don't I don't expect any upward increases in that in that in that area. Now one thing I'd make comment about we're proud of the headquarters, but we're also proud of the good stewardship of our Capital usage and what I mean by that is that if you come down here and you see and I think
Want to make seventh great strength is go look at the percentage of fixed assets of total asset to the company and look at our overhead costs. And so we're proud of it, but we certainly didn't go bananas and spend a lot of money on necessarily in fixed assets. Yeah now understood you guys are are highly profitable Bank, especially relative to a lot of your peers out there long.
and then
Shipping over towards credit overall crowd trans look good. Nanak rules were a good anything else worth noting any migrations in special mention or classify, you know without them that you you'd notice in the fourth quarter. You want to call out?
No, specifically.
I think if you go back from the prior-year end to 10:00 now you you would know I would say modest improvement though. It was good a year ago. I'm probably slightly better now. But again, we're pretty deep into this expansion cycle. So not unexpected that credit quality remains good.
I would add to that that the overall growth of the bank the bank continues to to benefit from scale and in the banking team as a result of that are a good percentage concentrations have come down. We're not against tag. It's just not a dynamic market and so that markets not growing and so those percentages of come down. The energy percentages have come down from 18 to 14% And they're going to continue to bleed down and then on the construction and development life and where we had a all time low and we we were and and hopefully we'll call some of that back during 20-20, right? So as it relates to the migration, I think Jason's address that but then you look at the concentration of the company that was discussed Ad nauseam on the Roadshow and you'll see that we have we have reduced class.
directions
Right. Okay. I'm all set guys. Thanks for your help, and I'll see you guys next week in Dallas the on Monday Matt. Thank you.
Reminder if you would like to ask you a question, please press * then 1 hour. Next question will come from Nathan race with Piper Sandler, please go ahead. Good afternoon. I'm going back going back to the margin discussion next loan fees. It sounds like you guys think you can kind of keep it stable here around 460. So just curious when you think about that kind of stable Outlook how much deposit pricing leverage exists obviously a nice step down in deposit cost in the fourth quarter. So just curious. You know, how much room there is to go on that front.
I don't think there's a lot I think the I think that's probably one of the most challenging areas for all banks is the deposit competition. You know, we've been talking about this for a long time at bank seven about internet and all these alternative sources of deposits. And so I think that that's going to continue to be the ending of a challenge for all banks is to is to make meaningful in roads to get costs down and that's why we're so proud of the fact that when we grew our deposits double-digits we were still able to maintain that 29% non-interest-bearing number so and I think back to your opening comment about 4.6. I don't think we're going to be absolute there. But I do think that we're well within our historical ranges. I think that I think in the slide deck where we at where we in 2015 4.0 dead.
Yeah, so we've been down to 4.37 and and we're not saying we're going there but we're very very comfortable in our historical ranges.
Got it. That's that's very helpful, and just going back to the loan growth discussion commercial real estate. Looks like it was a nice contributor in the quarter along with my and so just kind of curious with commercial real estate, you know getting up there in terms of close to 3% total Capital. What type of Governors you guys are kind of looking at in terms of You Know Your Capacity to continue to grow in commercial real estate going forward in 2020.
Yeah, we we still you know that split up in the few different segments. Obviously, we're big in the hospitality segment. We have room within our own policies to continue adding. I'm not really in all segments specifically the construction bucket is where I would like to see some some growth here in the first half of 2026 Hospitality. That one is an interesting mix because you you see that growth there. We we turn through I I call it churn that there's a fair amount of refinance or property sale that goes on there amongst those borrowers. And so you consistently need to have some of those in the pipeline because we we had about fifty million dollars pay off in that portfolio last year that we had to replace in order to grow that and so I like to see a nice robust pipeline there at all times because it's just got a a high churn rate, so I think off
probably
Fair to say we have room in all of those buckets and we're out out looking for good business in each of those segments.
I would also add that we've consciously focused and worked on in Dallas expanding and diversifying into other time and we have benefited in 2019. We had some really nice owner-occupied buildings and and a few Healthcare facilities through our own networking in our customer base. And so we're pushing hard. We tried to get into a couple of multi-family situations. That's a very very long in Texas. It's just amazing how people are pricing that segment of the market on their loan. So it was really hard to break into that market, but we're going to continue to diversify into office that segment through our customer base and then network network with open that area.
Understood and if I could just ask a couple more. I appreciate your guys's comments on credit quality remaining fairly benign as you guys see it today. So just curious, you know with the kind of low double-digit growth expectations for the issue here is still fair to assume that, you know Provisions going to be fairly low similar to what we saw in 2019.
We budgeted we budgeted a pretty healthy loan loss reserve and you know notwithstanding the comments earlier regarding Cecil and the heavy Capital levels, you know, you just can't get away from your DNA and being putting hay in the barn so to speak and so I think what you're going to see this year is maybe I should say j t v and a more normal levels just to make sure we don't fall behind right now. I anticipate maintaining our current a trip low rate as far as 1,000 111-105 in that range throughout the year.
Okay, understood.
I could just ask one more on acquisition prospect. That sounds like you guys are still having some good conversations. So just curious, you know where you guys are most interested in expanding inquisitive lie around your existing home around your existing up.
today
Yeah, I think for us the the natural more energetic places would be you know, Oklahoma City or Tulsa area and then North Texas and Central Texas and off and you know, if it was the right opportunity even down into the Houston area. So those are the natural places for us to go.
Make sense. I appreciate all the color. Thank you. Thank you.
This will conclude today's question-and-answer session. I would now like to turn the conference back over to mr. Tom Travis for any closing remarks.
No, I think for us we feel really good about our company. We're excited about our future. We we're proud of the return that we provided to our shareholders. Obviously, we're major shareholders chairman Haynes. We all know what his State gives but there's other people as well. And we we continue to stay very very very focused. And we really look forward to the future of spite of I mean, we've got a virus named after a beer and we've got all these other all these other things going on in Brad kind of has a sore throat. I don't know if you want to make a few comments. He's he's got a little throat. So so we feel really good about where we are and where we're going and we're we're going to continue to do that.
Thank you. The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.
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