Bank7 Corp (BSVN) 2019 Q1 法說會逐字稿

Welcome to Bank7 Corp.'s first quarter earnings conference call. (Operator Instructions) Please note this event is being recorded.

Before we get started, I'd like to highlight the legal information and disclaimer on Page 1 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 refers 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; and Henry Litchfield, General Counsel.

With that, I'll turn the call over to Tom Travis. Please go ahead.

Thank you, Andrea. Welcome, everyone, to our first quarter conference call. I'm sure you've seen the publication that went out earlier, and we're very, very happy with our first quarter results. As you can see, we've had year-over-year balance sheet growth in all the major components of the balance sheet. On top of that, we were able to generate record pretax income for the company. We did that in spite of absorbing costs associated with being a public company as well as certain costs related to our new Tulsa location which we opened in the first quarter. We did all that and we maintained our efficiency ratio. We actually slightly improved on that efficiency ratio, and we're really excited about those results. And the team is looking forward for the rest of the year to build on those results, especially with the footprint expansion that we've outlined in the material. So with all that being said, the team is here and ready to take any questions that anyone might have. Thank you.

(Operator Instructions) And our first question comes from Brady Gailey of KBW.

So you've recently opened offices in Tulsa and in Dallas, obviously, 2 good growth markets. Maybe talk about the opportunity on the loan growth side that you expect as these new offices fully come on board.

First, I would say you jumped the gun by 1 day, Brady. We're going to open Dallas tomorrow, but you almost got it right.

So our group got together in doing our budgets in November and December, and we built in what our expectations were. And we believe that the expectations for loan growth, specifically for the entire company, are definitely double-digit loan growth for this year driven in -- and a significant part of that will be Tulsa and the new Dallas location.

All right. That's helpful. And then you guys are beating consensus earnings estimates pretty handily this quarter and last quarter. I mean a lot of it is coming through a higher-than-expected net interest margin. And specifically the loan fees that run through the NIM, like I know it was almost $1.3 million this quarter. But maybe, John, I know that's hard to forecast and y'all have been saying that those loan fees will come down, but it just doesn't really look like that's happening. So maybe just update us on your thoughts on how you're thinking about the amount of loan fees in the margin and then how you're thinking about how the core margin trends from here. That was also up about 8 basis points link quarter.

I'd like to just make a brief comment, and then I think J.T. or Kelly could provide more color, put them on the spot. But I believe I'm correct in the loan fee income in the first quarter was actually down. Correct?

Compared to first quarter last year, yes.

Correct. So when we're comparing year-over-year quarters, I believe that number was around $500,000 in loan fee income that was lower this year this quarter versus last year last quarter. So I think I would say that, and then I guess, J.T. or Kelly can take it from there.

Hey, this is J.T. Hey, Brady. Excluding loan fees, you saw a slight increase for the quarter. Expectations for the year are in line with what 2018 was, in the 4.7, 4.75 range. So that's a good expectation going forward on NIM exclusive of loan fee. From the loan fee side, I mean, my standard line is always 50 basis points and 0.5% of outstanding loans. And we the last 2 quarters have been in that 70 basis point range, which is not out of what our expectations are, but our standard response is 0.5% of outstanding loans.

Okay. And then on the NPA side. NPAs were up a little bit last quarter and the fourth quarter, and then they were up another almost $2 million this quarter. I mean it's still a relatively low level. And I mean you look in dollar terms, I mean, up $2 million isn't a big number. But considering y'all's size, I mean that does -- that is a notable percentage increase. Maybe just a little color on the NPA increase this quarter and how that kind of compares to last quarter.

Brady. Jason Estes. And just to note on those too, but we had 2 loans, they're each about $1 million, that flipped over into the NPA category this quarter. One of those involved some litigation. Both are ag credits. They just got to the point where they needed to be included in this group. One of them, I expect for, I would say, within 6 months to the rehabbed and off the list. And then the other one, I don't know that I have the clarity into how quickly it will be removed. But we don't anticipate actual losses, but these are loans that just needed to be added to the list. And again, most of them were ag-related credits.

All right. That's helpful. Then finally for me, just on the M&A side. I mean your capital -- with y'all's profitability, capital is continuing to grow here. Anything new on the M&A front? Do you feel like you're closer to an acquisition? And I know y'all have looked at deals more on the funding side. Just an update on kind of what you'd be interested in.

We -- I guess to use the metaphor, we have lines in the water, as you know, Brady, and we're fishing. And you're aware that we looked really hard at that opportunity in North Texas. We were well positioned. It was really us and 2 other potential people, but we had to back away because the earnback didn't make sense for us. We had another one presented to us recently that hasn't been announced by anyone. We can't really talk about it. It was a smaller transaction in Oklahoma. We decided that it wasn't a strategic fit for our company. We have a lot of dialogue, and nothing has changed, and we haven't withdrawn our eagerness to make a transaction. So I would say that we don't -- we're not any closer on any specific transaction, but we're going to continue with our fishing with our lines in the water.

Our next question comes from Brendan Nosal of Sandler O'Neill + Partners.

Just starting off here on loan growth to follow up the first question. I guess, one, could you talk a little bit about what pushed down loan balances this quarter? And then, two, I mean, the outlook for double-digit growth this year implies a very strong ramp in loan growth in the final 3 quarters of the year. So just talk a little bit about your confidence in growth accelerating so much.

Well, first -- I'll take the first -- the back half of that question first. We're very confident, highly confident. And our team worked hard spearheaded by Jason into the thrust end of the Tulsa market. We're really excited about that. And I think the rest of the portfolio between Oklahoma City and Dallas and the deal flow that we have in those specific 2 markets that are more dynamic for our company, we do a weekly pipeline, and we talk about it every day and -- I mean, every week. And today, we had our meeting. And I don't want to give you the number, but it's a really, really nice large pipeline, and we feel really good about that.

The first part of the question. Really, we talked late in the fourth quarter about some of the companies that had sold and some payoffs. And that extended into January and early February. And then, there just really wasn't much we could do about it. I think that's the flip side of the energy space when your customers are doing well and they get a chance to be bought. And so I think the silver lining there is that that's part of the reason why we're able to show that really robust and nice deposit growth as well. So I think for us, it's just a factor of some large company purchases and just the way the portfolio settled there for about 3 months. But we fully expect and believe that we're going to hit our targets that we budgeted for back in December.

All right. Fantastic. That's very helpful color. And then, another follow-up for me on the net interest margin outside of the loan fees. I mean you guys pointed to a level of 4.70 to 4.75 for the full year. I think that number was around 4.93 this quarter. That implies 20-ish, 25 basis points of compression from the current level. Just kind of help us understand what some of the drivers are of that potential compression coming in the next couple of quarters.

Sure. And I'm not projecting that -- I mean, if you look just at -- this is J.T. If you look just at the first quarter, obviously, there was some shifting between loan and deposits that had some impact on the NIM net of loan fees. So I think that will normalize to a level that's closer to 2018 when you look at it on average for 2019. That's really more what I was trying to say.

Okay. Understood. And then final one for me. Expenses look really nice this quarter, down about 5% from the fourth quarter level. Can you just help us understand the expected piece of expense growth this year, including the Dallas expansion and the decision to turn Tulsa into a full branch?

Yes. Excluding the branch expansion, we're still in the 5% range on expense growth. I think that was kind of what we had talked about last quarter. Obviously, each one of those branches will have specific branch cost. Won't have a huge impact on the overall expense, but I suspect it'll be above 5%.

(Operator Instructions) And our next question comes from Matt Olney of Stephens.

I want to start on the hospitality loan book. Saw some positive growth there. Can you just talk about what loans were booked there and if they're similar to what you've been booking over the last few years, I think mostly in the North Texas market?

Yes. This is Jason again. And they would be very similar in composition. And actually, we had a couple of payoffs in that segment. So we really have a nice booking of new loans there, and our pipeline remains strong with that market. And so there's a little bit of hidden strength there. And again, there's always going to be a little bit of churn in that portfolio. But I think, overall, we will continue to experience strong growth. And it's more of that limited service branded hotels in North Texas.

Okay. And then going back to the strong pipelines. Can you talk more about kind of what types of loans you see in that pipeline? Is hospitality going to continue to lead the way or general C&I or any of the commentary you have on that?

Yes. I would say general C&I represents a larger component probably than our current loan mix, and then you'll see hospitality would come in probably second on the list right now. And then again, we're looking at -- we always have a strong robust pipeline of energy deals, and we pick and choose where we play there. But I would say those are the 3 main drivers right now.

And there's a decent construction pipeline. You'll notice our construction numbers have come down over the past 3 quarters or however long you guys have been able to see our numbers. Well, I guess even going back on the call reports, you'll see we've come down, so I would expect some nice fund up on the construction portfolio as well throughout this year and into next.

I would also add to Jason's comments is he's pretty much saying it's more of the same for us, with a couple of comments. One, it's the second quarter in a row -- I believe I'm correct, Jason, it's the second quarter in a row that we're below the 100 bucket on the construction.

It is.

So we've got plenty of running room if we need it. And number two, I believe when we started down this road in the public world, I think our energy peak was about 25%. And I think today, we're -- it's the second quarter in a row we've been around 17% or 18%. So I think the general composition is exactly like Jason said, it's more of the same, but we are going to be a little more slanted towards the C&I business.

Okay. That's helpful. And then I guess the other portfolio we haven't talked too much about is on the ag side. I think ag is now below 10% of loans. I think you talked in the past about not expecting too much growth in the ag book for a while. I know ag can be somewhat seasonal. And should you expect this to maintain below 10% of loans the next few quarters? Or could this work up more near term from just seasonal effects?

Well, I'd say a couple of things there. It's not really -- we're not trying to send a signal that we're pulling back from the ag segment. I think what's happening is the other segments of the portfolio are just growing much faster. So therefore, ag is going to continue to fall as a percentage as we grow the other elements of the portfolio, number one. And number two, we have a really strong niche in the Kansas market and very, very strong borrowers. They don't borrow a lot.

But they will tell you that the -- as you probably hear, especially in Nebraska and Iowa, and the things are the ag business is in real trouble, and the commodity prices are just really low. And so if you put those 2 factors together, we're blessed that we don't have any stressed borrowers in the ag crop segment. We just don't operate much there, and our borrowers that are there are conservative. But it's also not a growth area for the ag sector in general because of the commodity prices.

And then within the ag book, I think you mentioned earlier there were 2 credits that were downgraded this quarter. Any color on the collateral of those 2 reserves? Did you guys update the collateral this quarter or -- give us an idea of the loan value there.

Well, yes. It's -- I would suggest to you that both the credits have been watched for some time, and the stress in the markets cause one credit to weaken a little bit. That particular credit is not dependent on cattle or crops. It's secured by land. And so we don't see any loss issues there.

The second credit is an unfortunate story. One of our borrowers' father passed away a couple of years ago, and it was a father and 2 sons. And the son died. I guess, Brad, they were maybe in their 50s or something like that. But anyway, it turns out that the father had apparently defrauded his bank. And so when he passed away, they discovered they were upside down on a large cattle loan. And so when they responded, they drew our borrower into litigation. And so our borrower eventually won. Unfortunately, he suffered through a lot of litigation costs and he's -- he never was a very wealthy man, but he had land and he had cattle. And so what he did was he came to the bank a year ago and he pledged additional -- he's pledged everything he had, and we worked through it with him. And so he's going to have to try to earn his way out.

So I would suggest to you that, that credit -- 50% of that credit is backed by an FSA guarantee. And so the portion that you see is the non-FSA part, and we are dependent on a little bit of real estate, a little bit of cattle, a little bit of equipment. And so that's the story on that credit. So it really wasn't an underwriting issue. It was more of an extraneous issue that landed in his lap that no one was anticipating.

(inaudible) comment. You might mention that there's been a lot of moisture out in the western Oklahoma area, so that's good for the farmers and ranchers. And I believe his cattle sale is coming up. With the market the way it is, he's going to be able to meet all of his obligations.

Right. That's right.

And this concludes our question-and-answer session. I would like to turn the conference back over to the Bank7 management for any closing remarks.

Brad, you want to add any final comments or...

No. I'm just going to reiterate -- I loss what I was going to say. Anyway, we're very happy with the progress we're making. Extremely happy with this team, and we appreciate everybody joining in on the call and the questions. But Bank7's is focused on continuing to do what we do, and I see no reason why it's not going to happen. So thank you very much for participating in the call.

Thanks, everyone.

Thank you.

Thank you.

Buh-bye.

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