Q3 2021 Bank7 Corp Earnings Call
Great question Jamie.
Welcome to Bank Southern Corp, third quarter 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 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.
Or should underlying assumptions prove incorrect actual results may vary materially from those expected.
Also please note.
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.
By the company.
Representing the company on today's call, we have 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. Please go ahead.
<unk>.
Thank you welcome to the call for those who are joining us.
For those who have joined US on past earnings calls, we ask that you indulge just a bit here, we're going to take a little more time than we usually do.
We will reflect on past events and current results today.
Today, we'll start by reflect.
<unk> on two different anniversaries, then we'll review and discuss our exceptional third quarter results.
The first anniversary we reflect upon as the third quarter of 20 years ago. Some of US on this call lost friends family members fellow workers and first responders and although it was long ago those.
We're certainly trying times, we all remember that day it will never forget its effects on all of us.
Especially our friends back east.
Sure some of you on this call.
We will never forget either.
With that said, we move onto the second anniversary and Thats the three year.
Anniversary of our IPO. Some of you on today's call were instrumental in helping us.
Its bankers and advisers are investors and we're happy to have you with us today are.
We reflect back to our S. One and the three week Roadshow and ask ourselves, whether we met our representation and achieve.
We'll set during that time to that question. We affirmatively know that we have performed in accordance with what we said we would do we are proud of our results.
So let's take a few minutes to review a few items related to that.
One question posed to US was weather bank seven would be able to maintain.
<unk> the high levels of return on assets and return on equity while also experiencing strong growth as you can see from the compounded return data we have maintained our strong profit levels and it illustrated the ability of our model to continue producing exceptional returns while also experience.
<unk> seen strong growth.
In fact over the three year period, our total return to shareholders has been 85%.
And while the future's never guaranteed at this pace of shareholder value creation. Thanks, Evan is on track to have doubled your money and slightly more than <unk>.
<unk>.
Our exceptional profits are a real strength and they're driven by many factors the cornerstone of which is our relentless focus and commitment to a strong credit risk management discipline, which has produced a high quality credit book, we have a high level of confidence in this area.
Three years. Additionally, we have grown our loan book with good yields without compromising our tried and true underwriting principles, Jason <unk>, Our chief Credit Officer is rock solid his guidance and discipline, while working with our lending staff as a real strength for our company as are our lenders they.
Area to be congratulated.
We knew what we had in this area three years ago, and what we continue to have today and we're excited to continue to build with that team in the future.
Another key element that received significant discussion and questions. During the Roadshow was our strong net interest margin we were frequently.
Two questions would we be able to grow and also maintain that margin.
And where there are strong net interest margin was a function of too much credit risk.
With respect to the first question, we refer to the historical data in our Investor presentation.
As it illustrates our success in maintaining.
We have strong margin EBIT in the face of unprecedented low interest rates and increased competitive pressures.
Our strength in this area is attributable to many factors with the most important being our strong customer relationships and a recognition of the value of banking with bank seven.
Another.
That sure we consistently discussed was the focus by management and frontline bankers on the importance of core deposits and we are especially proud to show solid core deposit growth over the last three years, while also maintaining a consistent portion of those core deposits in our noninterest bearing category.
In fact with respect to the second question of whether our strong NIM was a function of too much credit risk as previously mentioned, we point to our years of success with our credit book as we know that our credit underwriting apparatus work as it should and you can achieve dual outcomes of a strong margin and the solid credit book.
One last item that was often question and discussed during the IPO process related to our strong efficiency ratio and whether we could sustain that as we grew.
We repeatedly expressed confidence in our branch light model and also our strict adherence to processes that maximize the efficiencies and how that would.
Our costs down even in a high growth environment and as the data shows we've sustained that low efficiency ratio and we also highlight that our assets per employee metric has continued to improve and remain very strong in.
In summary, the results we've posted over the last three years highlight.
Would keep absolutely well our management team has performed something we expected from ourselves and promised to deliver to our fellow investors. We also note that we did not surprise anyone with poor or weak financial results.
We're proud that we produced 12 consecutive strong quarters, which.
This is especially noteworthy considering the extraordinary challenges related to the COVID-19 related economic stress.
Now if we shift gears and we look forward, we recently announced the subsequent event to three Q that being the pending acquisition of cornerstone Bank, which we're excited about.
<unk> included a one page recap in this investor presentation. However, if youre not already aware, we recently filed our 8-K and investor presentation, which outlines that transaction illustrates why are we excited about it we encourage you to read it.
We look forward to working with the new team members, who are long time bankers and people who.
With <unk> the ability to serve their customers and communities very well their credit culture has been strong for a long time, and we expect our cultures will blend well together from a financial perspective, the acquisition increases core deposits by approximately 20%, which is always welcome as it provides further.
Who are building capabilities to us and once those are fully deployed we expect a double digit increase to our earnings per share.
We're also comforted by knowing that we deployed our excess capital yet we are still above what is considered well capitalized and therefore, we maintain our capital strength, which of course is rapidly reinforced with.
Their phone earnings as.
As we wrap up today, we are pleased with our third quarter and excited to move forward executing on our strategy and integrating the new bank into ours.
At the risk of salary like a broken record and that's OK <unk>.
Emphasize how exceptional management team is and how gratifying it is.
Our strong with them and all of our team members frankly, it's a lot of fun to succeed together and it isn't anything to take for granted I look forward to working with our fellow team members to continue our higher levels of achievement.
With that we thank you for your participation today and we invite any questions you might have.
To work.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause.
Momentarily to assemble our roster.
The first question comes from Brady Gailey of <unk>. Please go ahead.
Thank you good afternoon guys.
Good afternoon.
Okay. Thanks for the three year recap that's Ah congrats on all the hard work.
I wanted to hit on loan growth net loan growth can be lumpy for you guys just quarter to quarter.
But when you think about the pro forma company.
With cornerstone in the mix, but what do you think you are.
In a longer term loan growth rate should be.
We're still thinking in the low double digit range Brady.
Alright.
And then when you look at it it looks like you guys.
Charge.
Sure.
Some previously reserved for net charge offs in the quarter.
Maybe just a comment on kind of the dynamics there and then and then separately you know that takes your reserved al on the <unk>.
To about 1.0% to 4% of non PPP loans, So maybe just a comment on.
Kind of how you think that reserve level will trend from here as well.
Yeah Yeah.
Youre right that was previously identified as a specific reserve.
There was litigation involved not between us and the client.
That was.
It became more clear through the quarter and so that transaction was around as you said it was.
Previously specifically identified and then as it relates to the triple a level part of Thats driven by the NPA and overall portfolio performance.
And so.
This level something that were comfortable with currently and especially when we are carrying excess capital.
Alright, and then the net charge offs I'm guessing are related to that midstream energy credit that you guys have been talking about were there any net charge offs.
Beyond that one energy credit.
No just a minor recovery.
Okay.
Alright, and then lastly for me you know theres not as much focus on hospitality anymore. It seems like everybody is getting on getting on with life post COVID-19, but.
Maybe just a quick update on the house.
Hospitality book, well I know yours there.
Well to repair that.
Does that industry undergoes relationships there continue to improve.
The industry does continue to improve in our <unk>.
Slide deck, there was a comment in there about second quarter.
Our revenue in Texas hospitality.
<unk>.
Ceding 2019 second quarter, and so there was a little bit of it.
Deficit compared comparing the two and ADR and Revpar, but overall gross revenues were up and so as you are aware most of our activity in the hospital.
Fatality space is in Texas, specifically, the Dallas Fort worth Metro and so we have continued to see.
Improvement and strong performance through the summer.
Due to the summertime the vast majority.
<unk> of our portfolio of properties.
Brian I would also say that we have been.
Kind of like a broken record on the hospitality and we've been commenting that there is really just two operating hotel loans that we had any concern about and those have also recovered.
Theres still the two that are the laggards I would say and so we still.
We expect little to no.
Meaningful.
Actual losses in the portfolio and really it's just a story of those two credits and their ability to continue to recover and.
I would add on top of that that the.
World as quickly.
Still especially in Texas and.
We're confronted with.
What is it almost $50 million of.
Hospitality loans that are going to be paying off here in the next 60 days because the.
Buyers are back and forth and they're recognizing value for these strong.
Changes in these strong markets and so.
So I guess my point is is that it's performing the way we thought it would and.
We're not concerned about any meaningful exposure whatsoever.
Okay, great. Thanks for the color guys.
Mhm.
<unk> next question comes from Nathan race of Piper Sandler. Please go ahead.
Hi, guys.
Okay.
Question, just on the margin outlook.
I'm curious, how we should kind of think about the trajectory or the pressure.
Expected there from the $4 41 level.
You saw here and perhaps maybe just within the context of.
Kind of what the weight average rate on new loan production is lately.
We start there.
Okay.
Yes go ahead, Jason well I would say on the.
Level that with new loan originations theyre coming in similar to the last two quarters and what we have reported their kind of mid fours.
That's holding pretty consistent and as it remain that way throughout <unk>.
Pretty much this entire year.
I would say this on the NIM.
It's been very very difficult with.
What are we keeping at the fed Kelly $150 million to $200 million.
It's been really tough to maintain that margin with that much cash at the fed and doesn't make any money.
And so.
At the same time data that were at lunch today talking about.
The competitive pressures.
And especially in the Texas market.
And while I guess, it's just as bad in Oklahoma City and Tulsa.
Lenders are just really down.
Dirt and so.
Given the liquidity in the current interest rate environment, and where we are it's not going to surprise us to see our NIM degrade down.
And as Jason that we're talking about at launch it's really.
Look if we wanted to grow the portfolio a lot faster we could do it if we lowered our rates, we still think theres plenty of economic activity to where we don't have to get crazy with our rates and we can still maintain our discipline. All of this is to say that we wouldn't be surprised to see the NIM slipped from here.
Here for those reasons.
Understood Thats great color. Thank you.
Just a clarifying question Tom to your earlier point just in terms of expecting some hospitality payoffs does that kind of factored into Jason's earlier comment in terms of.
Expected kind of low double digit growth on a combined.
Uh huh.
Basis with cornerstone come into the fold this quarter.
You know it's.
We have we have a we have a nice pipeline Nate and.
And so I think that the.
Part of what we're also faced with this quarter and I would.
Imagine that other banks will be facing it as well as there is a quite a flurry of potential sales of assets and companies to meet this deadline to try to get ahead of any capital gains tax treatment change and so.
I would say that that's exacerbated.
The potential pay offs, but.
We still have that ambient level of underlying economic activity in this part of the country that keeps our new fundings and pipelines.
In good shape.
And so.
And so we could experience.
Yes.
A slight dip in our non.
Acquisition booked for the fourth quarter, but we would expect to recover that quickly just because of those factors that I mentioned.
Understood makes sense.
And just maybe one last one from me just going back to the energy credit.
Logos this quarter could you update us just in terms of what the.
Balance remaining on the books is tied to that particular and kind of what the outlook is for any remaining.
A portion of that credit going forward.
Yes, so the remaining balance of $6 9 million.
And.
In the chart that represents about 70% of the NPA as at quarter end and there's actually two other credits that represent 27% combined.
I'd say the 27% those two.
It had been in the NPA category.
And then a long time and continue to pay and perform.
There is some expectation.
Those would come out of the bucket at some point and the same thing with the single large energy credit, it's just hard to predict exactly when but.
Yes.
Improvement is.
Affected.
From this point.
Continued improvement.
Okay, Great I appreciate all the color. Thank you guys and congrats again.
The next question comes from Matt Olney of Stephens. Please go.
Hey, guys good afternoon.
It seems like bank Seven's always run at a higher level of liquidity. So I guess, if I could.
Question is kind of what's the what's the view of a more normalized level of liquidity at the bank at this point and then once you fold in cornerstone deal how do you expect that to change.
I would say that.
Anytime that you know.
And that you are running the bank and that high 80% to low 90% loan to deposit you really need to prudently maintain extra liquidity and so regardless of the fact that it hurts you because of the fed.
Interest rate policy, it's still.
It tried and true fundamentals that you just you just need to do it so.
And I would say that the.
The other thing that with all of our mind during Covid was I mean, frankly, the whole world was very scared right and so it wasn't a time for us to consider.
<unk> liquidity down and doing anything with it and so we're always going to be a little bit heavy on the liquidity side and we have that luxury because of our NIM and because of the earnings and.
And that's just that's just the way we are and as far as moving forward.
What are the things I.
Did not mentioned in the NIM is what comes with this acquisition in the near term as the bond portfolio.
And.
And so.
Clearly, we plan to reposition the balance sheet to where we gradually convert the bonds into better yielding loans and so that that's a factor as well.
And so I don't know if that answered your question other than.
Something that we constantly will watch, but always maintain strong liquidity.
Yes, that's helpful.
For that and then.
On the operating expense side, you guys had some.
Good cost controls this quarter any anything to call out in particular in the third quarter, and then kind of rolling forward.
I guess just general thoughts about.
Managing expenses.
In light of an inflation in.
Higher expenses just to run the core bank even outside.
Side of the pending acquisition I.
I would say that for the next.
Two to three quarters clearly the acquisition, we're going to have acquisition related expenses and we're going to keep those in a separate obviously general ledger and we're going to be.
We're able to report what those extraordinary one time expenses were.
And then over and above that there is clearly wage pressure clearly.
<unk>.
But outside of the wage pressure because we're a branch light model, we're not a manufacturer with raw material inputs and things like that.
I would expect the non wage expense area of the bank too to be more of the same.
I mean clearly.
Small items like energy cost increase for us is not near what it would be if we had a lot of branches but.
I don't think outside of the wage pressures that we're experiencing.
It will be more of the same.
Right.
Okay, Alright, Thats all from me guys, Thanks, and congrats on the quarter.
Thank you. Thank you.
Again, if you have a question. Please press Star then one.
And our next question will come from Tim Abbott of Twin Lions. Please go ahead.
Hey, guys.
Congrats on the strong quarter and really consistent execution over the first three years as a public company.
Thank you Eric Thank you.
So I guess first question on the acquisition.
Tom you referenced.
The opportunity to take their bond portfolio and convert that into some higher yielding assets.
It looks like from their call reports.
Warner Center is running.
With a loan deposit ratio somewhere in the 50, so quite a bit of excess liquidity.
Are you in your guidance.
When you talk about 7% accretion in 2022, 13% in 2023 are you factoring in the benefit from deploying some of that excess liquidity into higher yielding assets.
Or.
Is that sort of in addition to the.
Over and above the guided accretion.
It's all together and most of it is going to recur in 2023, I would say the back half of <unk>.
2022, but fully into 2023.
Okay, just to make sure I'm understanding you correctly I guess you're modeling in your guidance on the accretion does include that the benefit of deploy.
Applying to that excess liquidity.
Correct.
Got it.
And then one other just quick one sort of point of clarification. When you guys talk about new.
New production coming in at somewhere in sort of the mid fours average yield.
Is that ex fees.
Or does that include the benefit from from the fee income.
Okay.
Ex fees.
Great.
Alright, that's all I got thanks, a lot guys.
Thank you. Thank you.
This concludes our question and answer session I would like to turn the.
The conference back over to management for any closing remarks.
Thank you for joining the call. We appreciate your involvement and look forward to talking to you in the near future.
Yes.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.