Q1 2021 Bank7 Corp Earnings Call

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Welcome to bank seven Corp's first quarter earnings call before we get started I'd like to highlight the legal information and disclaimer on page 19 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.

It 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 on 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 on.

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, with that I'll turn the call over to Tom Travis.

Thank you and welcome to the call we're pleased to.

I've had another outstanding quarter.

P P, especially was nice to see the increase almost a double digit increase.

Rather than regurgitate the numbers I'm sure you've had time to see them. We're pleased about it I would just say that the the numbers or are on.

What they are and theyre, good and they don't happen by accident and specifically the banking team has been through quite a law and the since January one.

Really going back to last year, but specifically the lending team led by Jason asked this of course, Kelly Harris and his group the PPP and the government stimulus programs.

Everything that's been going on.

<unk> has been managed very well and at the same time the back half of the first quarter.

We really saw the economic activity in our region of the country pick up and so they've done an outstanding job of managing the stimulus programs. The work associated with those programs and at the same time. The banking teams are out and about dealing with the green shoots that are real.

<unk> emerging all around our markets and so with that being said, we're excited about the rest of the year and we'll open it up for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.

Withdraw from the question queue. Please press Star then two.

The first question is from Nathan race of Piper Sandler. Please go ahead.

Yeah, Hi, guys.

Good afternoon.

Maybe just thinking about kind of loan growth trends on the quarter and the outlook it looks like growth in the quarter was.

Partially driven by the CRE hospitality.

Segment, So just curious kind of what opportunities you're seeing in that phase in.

If you can frame up expectations for loan growth over the balance of this year both in terms of Magna.

Magnitude and by product type.

Yeah. So.

In the quarter growth was pretty modest.

PPP loans were.

A portion of the growth I think you know when you referenced the slight uptick in hospitality.

I think that'll continue to be the case based on construction fundings not necessarily bringing in <unk>.

Any additional operating properties.

It would be more of a funding up the existing.

Commitments on the construction side.

And then.

More broadly we've seen a significant.

The increase in just normal deal flow, whether it's C&I owner occupied real estate medical or seeing a rebound and I think youre going to see a more.

Non hospitality driven growth through the rest of the year that that would be my projections. I think you can stick with our standard low double digit growth expectations for the year, but not necessarily concentrated in hospitality youll see it in more diverse categories.

Got it that's helpful. So it sounds like Jason we're kind of building up towards kind of that low double digit run rate over the course of this year. She says economies continue to reopen across pulp, Oklahoma, Texas, and Kansas as well for that matter.

Yes, that's correct and Youll see the PPP portfolio.

That is the forgiveness applications are processed we're well on the way through the first round theres only a handful left with.

We continue to fund the second round.

Loans, and so you'll have to get through those.

Forgiveness period, and then the debt.

That process will start with those so when I'm talking about double digit growth I'm talking core.

More or less exclude PPP activity.

Understood and when you kind of look at the weighted average rate on new loan production pipeline.

We obviously saw some loan yield.

Margin pressure ex loan fees. This quarter, how are you guys kind of thinking about.

The margin outlook ex these.

Over the balance of this year.

And again kind of within the context of what Youre seeing in terms of.

Weighted average rates on the production.

Recently looking forward.

Yes, some of that.

Pressure, you're talking about is caused by those 1% PPP loans and so we'll get some relief as those are forgiven.

Then I think you can you can.

<unk> in the range of <unk>.

438 to $4 75 on average probably for the for the new production.

On rate, excluding the fee component.

Hmm mm.

And in terms of fees can you update us in terms of the remaining PPP fees that are.

So not.

Not come through yet on the margin.

Yes, Nate through Q1, we had 750000 book on the.

Alex sheet.

Now, we see some growth the activity in Q2, but.

Yes.

Okay, Great I'll step back for now thank you.

The next question is from Matt Olney of Stephens. Please go ahead.

Yes, Thanks, guys just to follow up on that last question around PPP.

In the first quarter results I think there was about $2 million worth of fees, how much of that was PPP versus non PPP.

1.080 million with PPP governmental related and then the 911000 was considered core it's about 38 basis points of the 83.

Got it okay.

Thanks for that and then Oh.

Also want to ask you about a potential impact of higher interest rates and then curious kind of what the updated thoughts on it but when I look at your disclosures.

Disclosures.

100 basis point rate shock higher I see a really big potential benefit for.

For the bank.

One of the highest ones that peer group. So was curious if you just kind of walk us through some of the drivers of this as you guys do that shock analysis and remind us of.

What the floors are and if short term rates do start to rise at some point could there be a lag there from when you guys start to benefit from that or would you benefit pretty quickly.

That's a that's a very challenging exercise to go through if you look back in history.

Of course every customer interact differently and so sometimes you're forced to negotiate on.

Transactions that you didn't think you were going to and sometimes you're not and so it never obviously ever works out exactly like the model that was I would just say generally speaking.

We would expect.

Some benefit for an uptick in rates.

None of us are expecting an uptick in rates and.

And then I think on the liability side.

We would certainly be coy.

Cautious with raising our liability costs, and so I don't want to call it and nothing Burger but.

We will be able to manage our NIM and perhaps have a slight benefit.

On the early stages of what would be considered the first.

Rate increase which again.

I don't see that we don't see that happening until next year.

And there is there is some belief that it won't even happen until late next year, who knows but it's certainly not going to be a negative for the company.

Okay. Thanks for the commentary and then I guess, just lastly, I think when we spoke.

<unk> with the hospitality portfolio it sounds like it's performing better on occupancy trends in March it sounds like are up compared to when we last spoke I think they were just maybe two hotels in the portfolio that had any real risk of loss as you guys saw it back then we'd love to hear on yet.

You have on those two hotels with respect to their occupancy and Revpar.

Yeah.

Yes, so the one of those two was north of 60% occupancy in March the other was in the mid Forty's and so they are seeing a return to.

To normalcy.

So far.

Call it through the first couple of weeks of April.

The occupancies continue to more or less exceed expectations throughout the portfolio and I think youre seeing.

People, just willing to more willing to move about.

As a good thing for the hospitality segment.

Okay I'll step back in the queue. Thank you.

Thanks.

Again, if you have a question. Please press Star then one the next question is from Tim Abbott of Twin Lions management. Please go ahead.

Hey, guys congrats on the strong results.

Hey, Tim Thanks.

So just quick.

A clarification question when you talked about new production coming in at four and three eight to $4 75, when you're referring to core NIM.

Yes.

Actually sorry.

Interest rate I'm, excluding the fee component growth low rate.

Loan yield or net so I guess I'm just wondering if that's the growth yield or that after taking out funding costs.

Loan yield.

Got it the base rate that's the base rate of the note Tim Yep Yep understood.

So that's.

A fair amount lower than your current if im doing the math right. Your current loan yield excluding PPP loans is.

Five six excluding DPP lines on excluding feeds.

Here are a little over five points ex today right.

Correct.

Okay got it.

And then.

One other quick one on.

On credit so it seems like another quarter of strong credit performance essentially no charge offs.

Can you just provide an update on the one large energy loan.

That was.

Partially charged off last year on kind of just help me understand how that's progressing and whether you expect a resolution.

The next few quarters.

So as we said in the last quarter.

It was a fluid situation it remains fluid.

Been a little bit a little bit of positive not enough for us to back off of our.

Plan, which was.

Until we can see clarity and revenue growing.

Prepared for whatever the final resolution of that is going to be later this year and so.

The decision that we made gross to take a partial hit last year and then make sure we had enough on our loan loss reserve.

So that if we did have to take additional.

Charged down this year debt, we have them do it and that's in fact, what we've done.

And for right now we're not.

Theres, a few positive things happening and I think that.

It'll be it'll be resolved towards the end of the year and so we don't think today that we need to take on additional charge, but we could be in a position in the future and the <unk> are probably the <unk> timeframe, we may decide that.

They're not going to climb out of it like we thought and we could have to take another charge, but again, we've already sufficiently.

<unk> for that possibility and so we're on track with the original plan.

That's great great to hear on.

Obviously, it also seems like excluding that line on your your minimal really minimal NPL. So encouraged to see that continue to be the case. We're proud we're proud of what we've done through the pandemic and you're exactly correct. If it hadn't been for one credit it was.

It was a.

Just a non event for bank seven which is the way we've operated historically, we're known as credit people, we don't have <unk>.

Those of any magnitude in our history and so.

We're looking at this pandemic event.

Something we certainly didn't want to go through nor anyone else, but it highlighted the ability of the bank to function through some pretty serious disruption in our credit.

Quality metrics held up well.

Great well congrats.

Congrats on the strong results on that keep it up guys.

Okay. Thank you.

The next question is from Brady Gailey of <unk>. Please go ahead.

Hey, Thanks, good afternoon guys.

Hey, Brady how does Atlanta.

Let's go low let's go.

Totally agree with your comments, Tom I think you guys have done a great job.

This pandemic, especially considering.

The above average exposure you guys have the energy and hospitality, but really it's been great to see.

Let's see can you just remind us the warm energy world that we were just talking about what is the size of that loan now and how much have you already marked it down.

No.

It's.

We need to be careful here not we're not trying to be lack of transparency, but within that 13 or $14 million range and we've taken.

A little over $3 million.

And.

And our markdown on that loan.

It is still in that just a little bit north of that $10 million range.

And that's where we are today.

Okay.

On the two hotel loans that you were nervous about it it feels like they're doing better now.

Remind us the size of those two loans as well.

Yes, so the one that had the lower occupancies and the $3 million right at $3 million.

And then.

There is another one thats.

And between eight five and $9 million.

I would say ready that if you recall I think back in the.

Maybe it was in the third quarter last year, I don't recall day of the fourth quarter, but.

Everyone was really struggling with.

I'm trying to put a number on Oh, my gosh, the pandemic and how is it going to affect.

Portfolio, and we stay away from guidance, but I think we did make a comment that.

We would have been really surprised too.

Even lose two or $3 million out of that entire portfolio and I would suggest to you today. If you are searching for.

What is the number there and I am very comfortable with that number.

Worst case, Oh, my gosh environment, I think Thats still close Jason Yes, Sir.

So when you look at in the context of this segment.

They are number if you really want to get and we're not predicting anything and we don't have anything on on.

In the hospitality portfolio debt.

We're thinking that's going to head to a non accrual and were thinking thats going to cause us to take a hit.

But that's those are the real numbers and so that's why we have such confidence and we're so proud of what we've done.

Alright.

Energy.

Energy your interest.

Net exposure has come down over the years, even in even in the quarter. It went from 14% of loans down to 11%.

Hospitality has remained.

Pretty big exposure at 25% of loans do you think over time.

Your concentration on hospitality will decline or do you think it will kind of grow with the loan book and remain around that 25% Mark.

Go ahead.

My expectation would be that the other components of the portfolio would grow faster around it not that we would have a reduction in that balance that you see in the <unk>.

Hospitality portfolio.

We're on a on a mission to grow all of these other lines of business and so I think youll see it become less of a concentration over time.

Think thats, well said and I would add to that debt, we have internal limits and.

The pandemic caused the hospitality percentages to go up for two reasons. One the book always has churn people sell properties and.

So we get a pay off and then we re book and the pandemic to average.

<unk> came to a screeching halt while it came to a screeching halt in so no properties were sold we also had some construction loans that were on the book that continue to fund and so the at the same time the loan portfolio growth was pretty much nonexistent for.

Three quarters or so and so by automatically then you step back and you watched as these construction loans funded and that percentage came up.

Interesting you bring that up Jason and I were talking about it.

Yesterday, and we were looking at our limits and we don't we don't want to send a signal that we're nervous at all about hospitality. However, we are carrying more than where we would prefer to carry and so as Jason said the other elements of the portfolio, we're going to grow and then.

Then at some point Youre going to start seeing a few properties sell matter of fact, we have some that are boiling right now and so it's our express per.

And Ken to reduce the hospitality percentage.

But I think thats not going to start occurring until probably third or fourth quarter.

Yes.

I think you can expect to see us carrying a little bit more than we did historically, but then it's going to come down.

Okay, Alright, and then it doesn't look like you all repurchased any stock in the quarter is that correct.

That's correct.

Okay.

How do you I mean the stocks.

145 of tangible.

You're generating a ton of capital here. So how do you feel about buybacks at.

At this point.

Well, we're a broken record and.

We've always preferred to.

Buy the stock at a at a good price just like any other investor would and of course, we're stewards of the bank capital we recognize that.

And so.

But it hasnt tempted us to go in and repurchase the shares at one five or one four times book.

And then finally for me yes.

Just an update on M&A I think you all have locked in Texas in the past it feels like Texas.

We saw the cadence Bancorp south deal and it feels like we're going to see.

At decent amount of M&A out of Texas, just wanted to see if that was still something that you all were focusing on.

Hum.

If so kind of what's the ideal target size range per bank seven.

We're still focused on it and sell.

Sellers across Texas, we have lines in the water and communication.

And I would say that the.

The good strong sellers are not going to sell at lower multiples, there's just too much.

There's too much excitement about Texas, and an intelligent seller understands that there is value and so I think the M&A space sound sexy and Theres been a few large deals with what cadence is doing and what Dan Rollins is doing over there on some of his deal but.

I don't see us.

We'd like to think we're smart buyers and disciplined buyers and so we're working hard a lot of meetings and dinner and large communication.

And if something Pops, that's great if not we're going to continue to growth organically with banking teams in our markets and so.

That's the way we're approaching it as far as size goes.

I think.

Anything up to a $1 billion or size or a billion five is good I think we probably wouldn't flow.

Operating below.

Two or $300 million.

You never know I mean, sometimes you get a strategic bolt on this a little bit smaller.

That's pretty much the range I would say for us.

Okay, Great Alright.

Well. Thank you all for the color I appreciate it.

Thank you.

Next is a follow up from Matt Olney of Stephens. Please go ahead.

Yes, just a quick follow up on credit all the trends on credit look great.

In the first quarter it looks like the reserve ratio ticked up quite a bit just curious kind of what the thoughts are on the reserve ratio from here and then how you see the provision expense over the next few quarters as you can.

ROE loans within your targeted range. Thanks.

Yes, I think youll see us keep that reserve ratio in the same ranges that we've always operated within maybe towards the top end of the range over the last few years, because we really went.

Two full years, there with with virtually no charge offs.

After.

Really what had been a three year period with pretty minimal charge offs. So after that five year.

On the <unk>.

Reserve.

Probably was operating near the bottom end of our preferred internal range and so youll see us stick more to the top end of that range and really the loan portfolio growth is what's going to determine.

Barring any.

We're seeing.

Credit issues.

Youre going to see the.

Portfolio growth or.

Lack of growth whichever it is.

Determine the provision levels.

Yes, I think thats right and I would also add that the.

Talked about.

Our analysis during the peak of the COVID-19 or.

Are the depths of COVID-19 I guess I should say on whatever it was in the 2020.

We talked about the cycle and a cycle out potential worst case of a 1% hit and so I.

I think what was it 43 basis points last year.

We still have we're not suggesting that we're going to hit 1%. We could it's still our outer bound and I don't know that were totally through this pandemic cycle.

I think all of us believe here that.

Part of the economy is a little false theres, so much liquidity sloshing around and there is so much money being spent all the stimulus hasnt Warren often and so.

There's still some question on our minds relative to the ambient level of economic activity absent the stimulus money and I think so we're going to we're going to stay cautious and then.

As Jason said.

I'm really excited about what Jason and his group are doing relative to loan growth and I think I think if we don't.

We don't have any more surprises on the stimulus wears off.

And we're where we thought we would be on the actual hits that we ended up taking through the cycle.

It's a pretty exciting.

Environment is a little bit like walking across a frozen pond, and we think the items really firm under isn't in our market as you know but.

It's a little spooky out there so.

Caution more of the same on the loan loss reserve build driven mainly by the growth in.

With an eye towards we're still not totally out of the woods yet.

Okay.

And then I think Jason mentioned kind of operating in that historic range and if I am.

Look at this right.

Now at the top end of the historical range. So suffice to say you don't expect any incremental build from here am I interpreting that correctly.

I think it depends on the growth incremental build.

I wouldn't say a lot if any I think youre probably pretty close.

And lastly on this topic do you guys have any any specific reserves allocated to any of your.

Outstanding credits and if so any any amounts you can disclose for us.

Only a small amount.

It's less than $200000.

Okay.

Great. Thank you guys.

This concludes our question and answer session I would like to turn the conference back over to Tom Travis for closing remarks.

Thanks to everyone for their participation in the call we're excited about our future.

Invite you down to Oklahoma City anytime.

Bye bye.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.