Earnings Call: Q2 2021

Jul 29, 2021

Hello, and welcome to the Bank Southern Corp. 2nd Quarter Earnings Call. Before we get started, I'd like to highlight the legal information and disclaimer on Page 20 of the 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 and by information currently available to management. Although management believes 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, direct and indirect effects of economic conditions on interest rates, credit quality, loan demand, liquidity and monetary and supervisory policies of banking regulators. Should 1 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 the non GAAP measures to GAAP financial measures in an 8 ks that was filed this morning by the company. Representing the company on today's call, we have Brad Haynes, Chairman Tom Davis, President and CEO J. T. Phillips, Chief Operating Officer Jason Estes, Chief Credit Officer Kelly Harris, Chief Financial Officer and Henry Lichtfield, Legal Counsel. With that, I'll turn the call over to Tom Travis. Thank you. Welcome to the call. As you can see from our Q2 results, it's been a really busy year and the snowball started to grow for us early in the year and the results are starting to show up. So we benefit from the geographic area that we're in. We're pleased with our Q2 and we're here to answer any calls. So with that, I'll yield the floor. Okay, thank you. We will now begin the question and answer session. And the first question comes from Matt Olney with Stephens. Hey, thanks guys. Good afternoon. Hi, Matt. I want to start with the organic loan growth, really impressive numbers once I back out the PPP. Looking at the disclosures, it looks like it's C and I, Ag, CRE and Energy. I'd be curious if anything else you can share on the growth. And in particular, can you hit on the growth in the ag portfolio? We haven't seen this in a while. Yes. That ag portfolio growth is largely related to a single transaction with a corporate borrower that 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 than that prior quarter. Okay. Thanks for that. Anything just more broadly that you can share as far as the growth? I mean, as far as the yields on some of the new production and you mentioned it sounds like some of these are some larger credits. Was that the largest addition with the single add credit or are there any other sizable individual credits 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 the gross interest rate on these is coming in, in line with prior guidance. We're seeing a lot of stuff in the mid to high 4s. That's kind of the range we're landing in. I guess, like you're saying, Jason, it's just a broad and deep recovery in our part of the world. Yes. Plus on the ag side, you've had an abundance of rain in the Midwest. That's true. And grain markets are up. Yes. Harvesters are looking good. So this is just kind of the ag time that we come around and start. It's time for them to make some real money. It looks like they're going to. Okay. Great. And then on the credit front and on the hospitality portfolio, I think last time we talked, I think the only concern was maybe 2 hotel loans that had any potential for loss content at all. Would love to hear more. Any kind of update on these 2 loans in particular? Yes. No changes there. Still eye on the same two properties. Nice steadying ADR and occupancy. It was in the slide deck. You can just see this nice rebuild in both. The occupancy has recovered first and now the ADR is coming with it. And that's a broad based recovery as well. Okay. Great. And then on loan fees, if I back out the PPP fees that were disclosed, it looks like the remaining loan fees, I think it's around $1,500,000 I think that's the highest we've seen in a few quarters. Just remind us about these fees. Are these more based off origination fees? Are these early payoff fees? Just kind of any color on that. And then from a forecasting perspective, I think we once talked about those fees in a normal quarter representing around 50 bps of loan balances. Is that still the right way to think about this from a longer term perspective? It is. It is. Any color as far as those fees? Is that more based off of originations or early payoffs or any color at all? And 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 payoff 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. When the market is really growing and the transactions are flowing and our book has a tendency to generate that fee income and that's what you're seeing. Okay, great. I'll step back in the queue. Thanks guys. Thanks. Thank you. And the next question comes from Brady Gailey with KBW. Hey, So I know you guys are notable energy lenders, but the exposure to energy has come down kind of post IPO. I mean, if you look at the pricing on the commodity, on the commodities within energy, I mean, they've recovered so nicely. Is now a time to think about increasing your energy exposure back up to potentially where it used to be? Yes, not to the levels that we had it in the past, but we continue to be somewhat active and opportunistic there. But no, it won't return to the same level. It's Brady, and I'd add to Jason's comment. It's a little bit counterintuitive. I think really it's more dangerous to start doing it now when prices are so high. Natural gas hasn't been this high since 2014, oil since 2018. And so last year, you remember the Q3, last year we had a couple of very nice safe transactions where people with serious money went in and they bought on the dip. And so I would say to you it's more of a counterintuitive 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 them, we're going to require hedging. So Jason is spot on. We're not you're not going to see an increase in a meaningful increase in the mixture of oil and gas. Yes, that makes sense. Well, 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, it was 121 basis points, then 135 basis points last quarter, now up to 139 basis points. It seems like most banks with the improving backdrop are seeing reserve ratios go the other way, down. So I was just wondering, is that 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 is a it's not even a rounding error. So we really were pretty static. And the answer to your question is yes, it was driven by growth. Okay. And then finally for me, just an update on M and A. I know you guys have been active looking around at potential targets, especially in Texas. Anything new on the M and A front? You feel like you're getting closer to a transaction possibly? We're talking to a lot of people and it seems to be in vogue to talk a lot. And whether that translates into a transaction or not, I don't know. But our team is highly motivated and 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 the next question comes from Nathan Race with Piper Sandler. Good afternoon, everyone. Hi, Nathan. Hi, Nathan. Maybe a question on expenses. Growth in the quarter, obviously, I imagine that's just kind of reflective of some incentive true ups, just given the strong performance through the first half of the year. And we'd just love to get some 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 there's any kind of impending technology costs as well that could come to the run rate going forward? Not significant changes to the run rate going forward. With the robust loan growth, you've got salespeople and operations people involved in 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 revenue is exceeding expectations as well. Okay. Got it. And then just maybe going back to the capital discussion, with M and A still opportunities still being reviewed, just curious how you guys are thinking about the dividend going forward? Obviously, you guys have a payout ratio that is below some peers. So just curious what the upside is to increase the dividend, what capital ratio is likely to continue to build as this profitability profile continues? Well, the first order of business is to see if we can find a nice transaction. And so I think in the near to medium term, if we can get that accomplished, then it's a moot point. If not, then we'll have to address it. Not have to, but we would. Okay, great. And then just thinking about the right side of the balance sheet, obviously, really impressive growth on the lending side, but just thinking about deposit growth. Was that largely a function of just some of the new clients that added in terms of capturing that full relationship? Or would love to just hear some color around the drivers for the deposit growth and if the expectation is that deposits will continue to build along with or build commensurately with loans going forward? Yes. A lot of that is related to the new relationships. And remember, it's only been a couple of years since we were active in Tulsa and the Dallas or the Irving and Frisco branches that we have, they're maturing as well. And so you're seeing the benefit of the investments that were made there in the people. And I'll give a shout out to Estes and his lending apparatus. The people are sticklers about getting deposits and not just making loans. And I think it's correct that our percentage of borrowers with deposit relationships is still about low 80% range. Correct. So it's not like Jason and his crowd went out and just said, hey, let's go make loans. They're relationship loans. That's great to hear. Yes, and obviously evident in the numbers as well. That's all I had and appreciate all the color. Thanks, guys. Thank you. Thank you. And the next question is a follow-up from Matt Olney with Stephens. Yes. Thanks for taking the follow-up. Just want 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 know if more broadly, if you use 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 need to see these current commodity prices just holding in for a few more quarters? Or is it a bit more nuance than that? Just any commentary on trying to move those up the balance sheet? Thanks. Yes. I think you're hitting it right on the head. A few more quarters, you'll see some more migration is what I would call it. But I also still think you're going to see some continued payoffs through some of that higher risk stuff. Our philosophy here is a management team and it's been driven into the lending staff by Tom, our CEO here, that you manage them up or you manage them out. And so letting that balance sit stagnant is not something that interests us. You'll see large scale changes over the past 12 months in these numbers and that will continue. Jason, isn't it fair to say that more than 50% of what we're talking about is still that one credit? Yes. So Matt, listen, on the energy book, we're delighted. We're really happy. We did have one credit that frankly we're tired of talking about it. We've reserved for it. And if you take that out of the mix, man, I don't want to sound arrogant, but the energy portfolio is a nothing burger as far as risk or expectations of loss. Okay, great. Thanks for the commentary, guys. Thank you. Thank you. And that does conclude the question and answer session. And I'd like to turn it forward back over to management for any closing comments. No, we appreciate your involvement and interest in the company and we look forward to the back 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.