Earnings Call: Q1 2021

Apr 29, 2021

Welcome to Bank 7 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, 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 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 these non GAAP financial 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 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. Welcome to the call. We're pleased to have had another outstanding quarter. The PPE 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 numbers are what they are and they're good and they don't happen by accident. And specifically, the banking team has been through quite a lot in the since January 1 and really going back to last year, but specifically, the lending team led by Jason Estes and of course Kelly Harris and his group, the PPP and the government stimulus programs and everything that's been going on 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 really 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. The first question is from Nathan Race of Piper Sandler. Maybe just thinking about kind of loan growth trends in 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 space and kind of if you can frame up expectations for loan growth over the balance of this year, both in terms of magnitude and by product type? Yes. So in the quarter, growth was pretty modest. PPP loans were a portion of the growth, I think, and you referenced the slight uptick in hospitality. I think that will continue to be the case based on construction fundings, not necessarily bringing in many additional operating properties. It would be more of funding up the existing commitments on the construction side. And then more broadly, we've seen significant increase in just normal deal flow whether it's C and I, owner occupied real estate, medical, we're seeing a rebound. And I think you're going to see a more non hospitality driven growth through the rest of the year. That would be my projection. I think you can stick with our standard low double digit growth expectations for the year, but not necessarily concentrated in hospitality. You'll see it in more diverse categories. Yes, that's helpful. And 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 just as economies continue to reopen across both Oklahoma and Texas and Kansas as well for that matter? Yes, that's correct. And you'll see the PPP portfolio contract as the forgiveness applications are processed. We're well on the way through the 1st round. There's only a handful left. We continue to fund 2nd round loans. And so you'll have to get through those forgiveness periods and then that process will start with those. So when I'm talking about double digit growth, I'm talking core. I more or less exclude PPP activity. Understood. And when you kind of look at the weighted average rate on new loan production in the pipeline, we obviously saw some loan yield I'm sorry, some margin pressure ex loan fees this quarter. How are you guys kind of thinking about the margin outlook ex fees over the balance of this year? And again, it's kind of within the context of what you're seeing in terms of weighted average rates on 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. And then I think you can pencil in a range of 4.38 to 4.75 on average probably for the new production on rate excluding the fee component. And in terms of fees, can you update us in terms of the remaining PPP fees that are not come through yet in the margin? Yes, Nate, through Q1, we had $750,000 left on the balance sheet. Now you can see some growth, the activity in Q2, but 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 Q1 results, I think there was about $2,000,000 worth of fees. How much of that was PPP versus non PPP? $1,080,000 was PPP governmental related and then $911,000 was considered core. So about 38 basis points of the 83. Got it. Okay. Thanks for that. And then also want to ask you about a potential impact of higher interest rates. And then curious kind of what the updated thoughts are. But when I look at your disclosures of the 100 basis point rate shock higher, I see a really big potential benefit for the bank, one of the highest ones in peer group. So I was curious if you could 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? Thanks. That's a very challenging exercise to go through if you look back in history. And of course, every customer interacts 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 models. I would just say generally speaking that we would expect some benefit for an uptick in rates. None of us are expecting an uptick in rates. And then I think on the liability side, we would certainly be cautious with raising our liability costs. And so I don't want to call it a nothing burger, but we will be able to manage our NIM and perhaps have a slight benefit in the early stages of what would be considered the 1st rate increase, which again, I don't see that we don't see that happening until next year. There's 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 in January with the hospitality portfolio, it sounds like it's performing better. Occupancy trends in March, it sounds like are up compared to when we last spoke. I think there were just maybe 2 hotels in the portfolio that had any real risk of loss as you guys saw back then. Would love to hear any update you have on those 2 hotels with respect to their occupancy in RevPAR. Thanks. Yes. So the one of those 2 was north of 60% occupancy in March. The other was in the mid-40s. And so they are seeing a return to normalcy. So far, call it, through the 1st couple of weeks of April, the occupancies continue to more or less exceed expectations throughout the portfolio. I think you're seeing people just willing to more willing to move about, which is a good thing for the hospitality segment. Okay. I'll step back in the queue. Thank you. Thanks. The next question is from Tim Abbot of TwinWines Management. Please go ahead. Hey, guys. Congrats on the strong results. Hey, Tim. Thanks. So just quick clarification question. When you talk about new production coming in at 4.38 to 4.75, were you referring to core NIM? Yes. No, actually sorry, just interest rate. I'm excluding the fee component. Gross loan yield or NIM? So I guess I'm just wondering if that's the gross yield or that's after taking out funding costs? Loan yield. Got it. That's the face rate of the note, Tim. Yes, yes, understood. So that's a fair amount lower than your current if I'm doing the math right, your current loan yield excluding PPP loans is 5.6%, excluding PPP loans and excluding fees. You're a little over 5.6 today, right? That's correct. Okay, got it. And then one other quick one 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 and kind of just help me understand how that's progressing and whether you expect a resolution in the next few quarters? So as we said in the last quarter, it was a fluid situation. It remains fluid. There's been a little bit of positive, not enough for us to back off of our plan, which was until we could see clarity and revenue growing, we're prepared for whatever the final resolution of that's going to be later this year. And so the decision that we made was to take a partial hit last year and then make sure we had enough in our loan loss reserve so that if we did have to take additional charge downs this year that we have the money to do it. And that's in fact what we've done. And for right now, we're not there's a few positive things happening. And I think that it will be resolved towards the end of the year. And so we don't think today that we need to take an additional charge, but we could be in a position in the future in the 2Q or probably the 3Q 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 reserved for that possibility and so we're on track with the original plan. That's great, great to hear. And obviously, it also seems like excluding that loan, you have minimal really minimal NPLs. So encouraged to see that continue to be the case. We're proud of what we've done through the pandemic. And you're exactly correct. If it hadn't been for 1 credit, it was just a nonevent for Bank 7, which is the way we've operated historically. We're known as credit people. We don't have NCOs of any magnitude in our history. And so we're looking at this pandemic event as 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 and our credit quality metrics held up well. Great. Well, congrats on the strong results and keep it up guys. Okay. Thank you. The next question is from Brady Gailey of KBW. Please go ahead. Hey, thanks. Good afternoon, guys. Hey, Brady. How's Atlanta? It's going well. It's going well. I totally agree with your comments, Tom. I think you guys have done a great job through this pandemic, especially considering kind of the above average exposure you guys have to energy and hospitality. So that really has been great to see. Well, see, can you just remind us the one energy loan that we were just talking about, what is the size of that loan now? And how much have you already marked it down? We need to be careful here. We're not trying to be lack of transparency, but it was in that $13,000,000 or $14,000,000 range and we've taken a little over 3,000,000 dollars in a markdown on that loan. So it's still in that just a little bit north of that $10,000,000 range and that's where we are today. Okay. And in the 2 hotel loans that you were nervous about, 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 occupancy is in the $3,000,000 right at $3,000,000 And then there's another one that's in between $8,500,000 $9,000,000 I would say, Brady, that if you recall, I think back in the maybe it was in the Q3 last year, I don't recall, maybe the Q4, but everyone was really struggling with trying to put a number on a, oh my gosh, the pandemic and how is it going to affect the portfolio. And we stay away from guidance, but I think we did make a comment that we would have been really surprised to even lose $2,000,000 or $3,000,000 out of that entire portfolio. And I would suggest to you today, if you're searching for what is the number there, then I'm very comfortable with that number in a worst case, oh my gosh environment. I mean, do you think that's still close, Jason? Yes, sir. And so when you look in the context of our largest segment, there's a number if you really want to get and we're not predicting anything and we don't have anything on in the hospitality portfolio that we're thinking that's going to head to a non accrual and we're thinking that's 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. All right. And energy your energy exposure has come down over the years. Even in the quarter, it went from 14% of loans down to 11%. Hospitality has remained a pretty big exposure at 25% of loans. Do you think over time your concentration in 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 hospitality portfolio, but we're on a mission to grow all these other lines of business. And so I think you'll see it become less of a concentration over time. I think that's well said. And I would add to that that we have internal limits. And we 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 payoff and then we rebook. And the pandemic, everything came to a screeching halt. Well, while it came to a screeching halt and so no properties were sold, we also had some construction loans that were on the books that continued to fund. And so the at the same time, the loan portfolio growth was pretty much nonexistent for 3 quarters or so. And so by automatically then, you sat back and you watched as these construction loans funded and that percentage came up. And It's interesting you bring that up. Jason and I were talking about it yesterday and we were looking at our limits and 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 are going to grow. And then at some point, you're 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 intent to reduce the hospitality percentage, but I think that's not going to start occurring until probably 3rd or Q4. So 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. All right. And then it doesn't look like you all repurchased any stock in the quarter. Is that correct? That's correct. Okay. And how do you I mean the stock at $145,000,000 of tangible and you're generating a ton of capital here. So how do you feel about buybacks at this point? Well, we're a broken record and we've always preferred to buy the stock at a good price just like any other investor would. And of course, we're stewards of the bank's capital. We recognize that. And so but it hasn't tempted us to go in and repurchase the shares at 1.5x or 1.4x book. Okay. And then finally for me, just an update on M and A. I think you all have looked in Texas in the past. It feels like Texas we saw the cadence Bancorp South deal. It feels like we're going to see a decent amount of M and A out of Texas. Just wanted to see if that was still something that you all were focusing on. And if so, kind of what's the ideal target size range for Bank 7? We're still focused on it. And sellers across Texas, we have lines in the water and communication. And I would say that the good strong sellers are not going to sell at lower multiples. There's just too much excitement about Texas and an intelligent seller understands that there's value. And so I think the M and A space sounds sexy and there's been a few large deals with what Cadence is doing and what Dan Rollins is doing over there with some of his deals. But I don't see us we like to think we're smart buyers and disciplined buyers. And so we're working hard, a lot of meetings and dinner and lunch, communication. And if something pops, that's great. If not, we're going to continue to grow 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 $1,000,000,000 our size or $1,500,000,000 is good. I think we probably wouldn't fool around with anything below $200,000,000 or $300,000,000 you never know. I mean sometimes you get a strategic bolt on that's a little bit smaller. But that's pretty much the range I would say for us. Okay. Great. All right. Well, thank you all for the color. 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 Q1. 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 grow loans within your targeted range? Thanks. Yes. I think you'll see us keep that reserve ratio in the same ranges that we've always operated within, maybe toward the top end of the range over the last few years because we really went 2 full years there with virtually no charge offs after really what had been a 3 year period with pretty minimal charge offs. So after that 5 year run, the reserve probably was operating near the bottom end of our preferred internal range. And so you'll 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 overseeing credit issues that pop up, you're going to see the portfolio growth or lack of growth, whichever it is, determine the provision levels. Yes, I think that's right. And I would also add that the we talked about in our analysis during the peak of the COVID or the depths of COVID, I guess, I should say, whatever it was in 2020, we talked about the cycle in to cycle out potential worst case of a 1% hit. And so I think what was it, 43 basis points last year. So we still have we're not suggesting that we're going to hit 1%. We could. It's still our outer bounds, and I don't know that we're totally through this pandemic cycle. I think all of us believe here that part of the economy is a little false. There's so much liquidity sloshing around and there's so much money being spent. All the stimulus hasn't worn off. And so there's still some question in our minds relative to the ambient level of economic activity absent the stimulus money. And I think so 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 if we don't have any more surprises when the stimulus wears off and we're where we thought we would be on the actual hits that we end up taking through the cycle, it's a pretty exciting environment. It's a little bit like walking across a frozen pond. We think the ice is really firm under us in our markets, 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 and 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 the historic range. And if I look at this right, you're 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 builds, I wouldn't say a lot, if any. I think you're probably pretty close. And lastly, on this topic, do you guys have any specific reserves allocated to any of your outstanding credits? And if so, any amounts you can disclose for us? Only a small amount. It's less than $200,000 This concludes our question and answer session. I would like to turn the conference back over to Tom Travis closing remarks. Thanks everyone for their participation in the call. We're excited about our future and invite you down to Oklahoma City anytime. Bye bye.