Q2 2021 Bank7 Corp Earnings Call

Hello, and welcome to the Bank Southern Corp, second quarter earnings call.

For me get started I'd like to.

On the legal information and disclaimer on page 20, other investor presentation.

For those who don't 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 information currently available to management.

Although management believes expectations reflected in such forward.

Forward looking statements are reasonable they can give no assurance that such expectations will prove to be correct. So on.

Statements are certainly ours are subject to certain risks uncertainties and assumptions, including among other things direct and indirect effects of economic conditions on interest rates credit quality loan demand liquidity and monetary and supervisory.

Policies of banking regulators.

Sure 1 on more of these risks materialize or should underlying assumptions prove incorrect actual results may vary materially from those opex for those affected.

Also please note that this conference call contains references to non-GAAP financial measures you can find reconciliations on non-GAAP measures to GAAP financial.

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 Day, Travis President and CEO J T Phillips Chief Operating Officer, Jason is just Chief Credit Officer, Kelly Harris, Chief Financial Officer, and Henry Litchfield legal counsel with that.

I will turn the call over to Tom Travis.

Thank you welcome to the call.

As you can see from our second quarter results, it's been a really busy year and.

<unk> started to grow for us early in the year and the results are starting to show up so we benefit from that.

Geographic area that we're in we're pleased with our second quarter and we are here to answer any calls so with that I'll yield the floor.

Okay. Thank you moving on.

I'll begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone.

Yeah.

If you're using a speaker phone please pick up the handset to ensure good sound quality Press Star then 2 to remove yourself from the list and that's on all of this call is being recorded.

Please give us a moment to assemble the roster.

And your first question comes from Matt Olney with Stephens.

Hey, Thanks, guys good afternoon.

Afternoon.

Hi, Matt.

Want to start with the organic loan growth are really impressive numbers once I back out the P. P. P. I'm looking at your disclosures it looks like it's C&I.

AG CRE and energy.

I'd be curious you announced.

On phone you can share on the growth and in particular can you hit on the the growth in the AG portfolio, we haven't seen this in a while.

Yeah that AG portfolio growth is largely related to it.

Single transaction with a corporate borrower.

The invested into a large.

Operation, but as you noted a little bit unusual I will comment that you may see an additional small uptick there because we are seeing some activity in our normal AG market, but it will be to a much lesser extent the net price.

For quarter.

Thanks for that anything just more broadly are that you can share as far as the growth I mean, the as far as the yields on some of the new production and you mentioned it sounded like some of the there are some larger credits.

Is that the largest addition was the single a credit or are there any other sizable individuals.

Credit this quarter.

That would have been the largest.

Individual credit and then we've had nice broad based growth. In addition to some of these larger credits that we've originated and you know.

For the.

Growth interest rate on these is coming in in line with prior guidance, we're seeing a lot of stuff on the.

Okay in the mid to high fours debt.

Kind of the range, we're landing in I guess like Youre, saying, Jason its just a broad and deep recovery on our part of the world.

First on the AG side, you've had other.

Right.

As true and gain market share.

Yeah.

So yeah. This is Jim.

Kind of day.

Come around.

It's time for <unk>.

It looks like they're going to.

Yes.

Okay great.

And then on the on the credit front on on the hospitality portfolio I think last time, we talked.

<unk> talked I think the only concern it was maybe 2.2 hotel loans that had any potential for loss content at all would love to hear more on any kind of update on these 2 loans in particular, yes.

No no changes there is still I on the same 2 properties.

Nice steadying.

And occupancy.

See it within the slide day.

You can just see this nice rebuild in both the Occupancies recovered first and now the ADR is coming with it and Thats, a broad base recovery as well.

Okay great.

And then.

On loan fees.

Back out the P. P. P fees that were disclosed it looks like the remaining loan fees that gets around in 1 and a half million dollars I think that's the highest we've seen in a few quarters just remind us about these fees are these more based off of origination fees are these early pay offs or you're just kind of any color on that and then from a.

Passing perspective, I think we want to talk about those fees in a normal quarter, representing around 50.50 bps of loan balances.

Is that still the right way to think about this from a longer term perspective.

It is.

It is.

Yes.

For cash and any color as far as those those feet. A day is that more based off of our originations are they pay offs or any color at all on that's outside of the PPP fees.

Yes, the first half of the year, that's been largely driven by new loan originations.

You do get some mix of early.

Pay offs or prepayment penalty, but that's going to be very minor compared to the new loan origination.

I think it just goes hand in hand with the robust growth.

Market is really growing and the transactions are flowing in our book has a tendency to generate that fee income and thats what youre seeing.

Okay, Great I'll step back in the queue. Thanks, guys.

Thanks. Thank you on the next question comes from Brady Gailey with <unk>.

Hey, Thanks, good afternoon guys.

Okay.

But I know you guys are notable energy lenders, but the exposure to energy has come down.

Kind of post IPO.

If you look at the pricing on the commodity on the commodities within entertainment they've recovered so nicely as <unk>.

Our time to think about increasing your energy exposure back up.

Potential where it used to be.

Yes.

Yes, not not to the levels that we had it in the past, but we continue to be somewhat active and opportunistic there but.

But no it won't return to the same level, it's Brady on I'd add to Jason's comment, it's a little bit counter intuitive I think really it's more dangerous to start doing it now in.

Prices are so high natural gas hasn't been this high since 2014 oil since 2018, and so last year you remember the third quarter last year, we had a couple of very nice safe transactions, where people with serious money went in and they bought on the dip.

So I would say to you.

<unk>, a counter intuitive thing and we're certainly not going to be loading up when prices are higher now we do have a few transactions, but if we do on we're going to require hedging. So Jason is spot on we're not you're not going to see an increase and a meaningful increase in the mixture of oil and gas.

Yeah that makes sense.

And then my next question is on the reserve ex PPP I mean, the ratio has been growing if you look at it at the end of last year was 121 basis points.

Then 135 basis points last quarter now up to 139 basis more it seemed like it seems like most banks with.

It's more moving backdrop.

Backdrop, our sand reserve ratio go the other way down.

Just wondering you know roughly 140 basis points right now.

Which seems a little high but maybe not just maybe comments on how you think the reserve ratio trends from here.

Well 3 basis points.

<unk> is a it's not even a rounding error. So we really were pretty static in.

The answer to your question is yes, it was driven by growth.

Okay, and then and then finally for me just an update on M&A I know you guys.

It has been active looking around debt potential targets, especially.

The impacts us any anything new on the M&A for Ron do you feel like you're getting closer to a transaction possibly.

You know, we're talking to a lot of people and it.

It seems to be invoked to talk a lot and whether that translates into a transaction or not I don't know, but our team is highly motivated.

It is highly focused and we're talking to a lot of people and so that's still our intent.

Okay, great well, thanks for the color guys.

Thank you.

Thank you and once again. Please press Star then 1 if you'd like to ask a question.

And the next question comes from Nathan race with Piper Sandler.

Afternoon, everyone.

On a rig.

Maybe a question on expenses.

Growth in the quarter, obviously, I imagine that's just kind of reflective of some incentive true up just given the strong performance through the first half of the year and we're just.

Love to get some card.

Commentary around kind of the run rate for the back half of this year.

If you plan for any additional hires on the production side of things or if theres any kind of pending technology costs as well.

Could come into the run rate going forward.

Not significant changes to the run rate going forward with the robust loan growth.

Got salespeople on.

<unk> people involved in and those great results from the first half and so you see a little bit more there on the compensation side and those go hand in hand.

They earned it and so that's the primary driver of the difference you've seen so far and so if you see continued difference it's because the revenues.

Year exceeding expectations as well.

Okay got it.

Going back to the capital discussion.

Hum.

M&A still.

Opportunities still being reviewed I'm just curious how you guys are thinking about it.

Dividend.

Going forward, obviously, you guys have a payoff.

Ratio that is below some peers. So just curious.

What the appetite is to increase the dividend.

Capital ratio is likely to continue to build.

This profitability profile continues.

Well the first order of business is to see if we can.

Fine.

Transaction and so I think.

On the near and medium term if we if we can get that accomplished then it's a moot point. If not then we will have to address it not have to you, but we would.

Mhm.

Yeah.

Okay, Great and then just thinking about the the rights on the balance sheet obviously.

Really impressive growth on the lending side, but just in thinking about deposit growth.

Was that largely a function of just from the new clients net added in terms of caffeine that full relationship or would love to just share some color on the drivers for the deposit growth and if the expectations that deposits will continue to fill.

Build along with Bill commensurately with loans.

Going forward.

Yes, a lot of that is related to the new relationships and remember it's.

It's only been a couple of years since we were active in Tulsa.

The Dallas or the Irving and Frisco branches that we have they are maturing as well and so youre seeing the benefit of the.

Investments that were made there and the people.

And I'll give a shout out to assets and his his lending apparatus to people are sticklers about getting deposits and not just making loans.

I think it's correct that our percentage of.

Uh huh.

Borrowers with deposit relationships is still a bit low 80% range correct.

So it's not like Jason and his crowd went out and just.

Hey, let's go make loans at their relationship loans.

That's great to hear from you and obviously evidenced in the.

Numbers as well.

That's all I had and I appreciate all the color thanks guys.

Thanks.

Thank you and then ask questions a follow on from Matt Olney with Stephens.

Yes, thanks for taking the follow up I just wanted to ask about energy.

I think on slide 11, the presentation I didn't see any.

Notable changes in any of the risk ratings on the energy portfolio didn't have more broadly do you see any more commentary on some of the higher risk.

Loan grades out there and for some of those loans to be eventually upgraded I'm curious if we if we need to see these current commodity prices just hold on for a few.

Quarters or is it a bit more nuance on that just any commentary on trying to move those other balance sheet. Thanks.

Yeah, I think you're hitting it right on the head a few more quarters Youll see some more migration is what I would call. It but I also still think youre going to see some continued.

For more.

Pay offs.

Through through some of that higher risk stuff on.

Our philosophy here as a management team and its been driven.

On to the lending staff by Tom <unk>, our CEO here that you manage them up or you manage them out and so letting that balance stagnant not something.

Net interest us Youll see.

A large scale changes over the past 12 months in these numbers and that will continue.

Okay.

Jason isn't it fair to say that more than 50% of what we're talking about is still that 1 credit yes. So.

Listen on the energy book.

Delighted we're really happy we did have 1 credit that frankly, we're tired of talking about it we've reserved for it and if you take that out on the mix man I don't want to sound arrogant, but the energy portfolios and nothing burger as far as risk or expectations of loss.

Okay, great. Thanks for the commentary guys.

Thank you.

Thank you on that.

The other question and answer session and I'd like to turn a profit back I would imagine on for any closing comments.

No. We appreciate your involvement and interest in the company and.

And we.

We look forward to the bad.

Half of the year.

Thank you and that does conclude today's teleconference. Thank you for attending today's presentation. You may now disconnect your lines.

Yeah.