Bank7 Corp (BSVN) 2019 Q4 法說會逐字稿

Hello, and welcome to Bank7 Corp.'s fourth quarter and full year earnings conference call.

Before we get started I'd like to highlight that legal information and disclaimer on Page 15 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 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 or interest rates, credit quality, loan demand, liquidity and monetary and supervisory policies of banking regulations. 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 makes 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 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.

Thank you. Welcome, everyone, that's on this call. We're here to review the slide deck and the earnings release material we sent out. We're excited about our results. We're very pleased with 2019. Since it's a year-end review, I thought it would be a good time to remind everyone who we are and how our model is working so well and how we drive our results.

Our model is one of a branch-light model that focuses heavily on commercial banking with a relentless commitment to a strong credit culture. And when we marry that with our low efficiency ratio, it proves to drive Bank7's outstanding results. That's our model. That's what's driven our success, and that's what we're going to continue to do.

For the full year we increased our pro forma pretax income by 4%. And while that may initially not seem like much, we believe it is. The increase was achieved in spite of absorbing costs associated with our launch into 2 new markets in 2019, fully absorbing the public company costs, all the while operating in a declining interest rate environment. We're very pleased with the strong deposit growth.

One of the hallmarks of our company is we're not just a transactional company. And if you look at our deposit growth, we're very pleased that we maintained the 29% noninterest-bearing portion of those deposits. We also had very strong loan growth. That was the driving force and enabled us to overcome all of those costs that we had incurred, which were costs that were thought about deeply, and we know will position us well for the future.

I'd also like to touch on a few basic fundamentals related to our performance last year. NIM seems to be one of the most popular topics these days. So we'll start with that. There certainly are industry wide challenges, but we maintained a strong NIM and well within our historical ranges. It looks like the Fed is not going to be as active in the near term or at least for the next 3 or 4 months, therefore, we anticipate a slightly more stable market. At Bank7, we supported our NIM by doing a good job of consistently negotiating floors on our loans.

In addition, some time ago, we've been inserting more prepayment penalties into our loans, and we're having some success with that. And we think it will help as we move forward, especially if rates were to fall and refinancings would continue. Regarding our return on equity, we continue to generate returns well in excess of industry averages. Our total return has outperformed the KBW Bank stock index that we follow, amongst others, since our September 2018 IPO.

With regard to earnings per share, our consistently strong earnings means that we don't feel undue pressure to buy back stock just to boost EPS. While we certainly understand that strategy, and we're not opposed to it, many banks have repurchased their shares at just about any price even at high multiples. We prefer to buy back our stock at low multiples as we think that is a better long-term strategy. But again, we can do that because of our strong earnings and our high ROE. We take the long-term view, and we know that our strategy will produce good long-term shareholder value, which will exceed the returns of most of our peers.

As far as M&A goes, we didn't buy anything in 2019. We had a few options, and we had many discussions. We are actively planting seeds, meeting with people we know and reaching out through our networks and contacts to meet people we don't know and with targets that we have identified. It is certainly a tough M&A environment, seller expectations are still high. Nonetheless, there are always opportunities to buy or merge, and we will continue to devote meaningful time to that initiative. However, we will be patient, and we will not overreach and overpay. We are patient but determined. In the meantime, we will continue to manage the company for the long-term and stay focused on providing very strong returns to our shareholders.

As far as 2020 goes and our outlook, we are very well positioned, and we are in a dynamic market and are positive about our near-term future. We do understand the need -- that we are deep into the economic expansion, and we think about that daily. And we hear concerns from our customers related to labor shortages, increased labor costs for those who are working, construction costs being very high.

Certainly, the uncertainty in Washington bothers everyone, not just the impeachment things that are going on, but what happens if we have a turnover in the government, and what does that mean for tax rates. Not to mention the volatility in the yield curve, just today, the 10-year treasury went below the 90-day bill. So here we are again with an inverted yield curve. Nonetheless, our near-term loan pipeline is very strong and it gives us good comfort going into 2020, especially the first half of the year.

And so with all that in mind, that's where we are, and we will certainly open it up for questions.

(Operator Instructions) Our first question today will come from Brady Gailey with KBW.

We had another strong loan and deposit growth quarter in the fourth quarter. I think both were up around 20% linked quarter annualized. As we look to 2020, do you think that this loan and deposit growth kind of in that mid to high teens is still appropriate? Or will growth be slower in 2020?

Yes. Brady, this is J.T. I think our feeling is consistent with where we've been, low double-digit growth year-over-year.

I would add to that. I would add to that that we -- the specific knowledge that we have with regard to the pipeline excites us more for the first half of the year. We've got a few transactions that we're not sure they're going to be done, but we feel pretty good about them. And the ones that we do know that are going to be done, give us great comfort in the front half of the year as far as the loan growth, which will out -- which will surpass the deposit growth. I think we could have one spurt early in the year. So I think that's probably more optics on the deposit supports, Brady.

Okay. And then I noticed in the fourth quarter, the tax rate was a little higher. The tax rate was 30%. I think you guys had been running closer to the 25% range. Was there anything abnormal in that little higher tax rate?

Yes. Brady, it had to do with the distribution income, state income tax, Texas versus Oklahoma versus Kansas. So we had a disproportionately high income in Oklahoma. And so that impacted the overall tax when we adjusted at year-end.

Okay. So going forward, back to the 25%? Or is 30% the new run rate?

No. No. No. 25% to 25.5% is probably where it's going to run. But because you work off of estimates, and then you get to the end of the year. And so there are some adjustments that go into the year-end numbers, is why that was a little bit disproportionate.

All right. And then finally for me, just on CECL. Any thoughts -- I mean, your reserve right now is at 111 basis points? Any thoughts on CECL. And I actually -- I can't remember, are you guys delaying CECL?

Yes. We're not -- we don't have to start until January 1, 2023. And so we're actually covered for a couple reasons, emerging growth company and then size. But we have plenty of running room. But I'll just say that our view is that the CECL -- we're going to always marry our loan loss reserve with our cap -- with a view towards our capital. And remember, it's important for everyone to remember, we used to run a higher ALL at about 1.25% to 1.35% historically. But remember, that's when we had less capital. And so we're at record capital levels on Tier 1 and risk-based capital. And so we have a tremendous capital cushion. And so therefore, it's really not necessary for us.

And I know that ALL is a methodology that's tied to what you think you need, but there's always qualitative and quantitative factors. And so I think for us because of that heavy capital load, I think our analysis for CECL will certainly balance the conditions in the markets, the credit portfolio, the concentrations, but I wouldn't expect us, once we start, to have much variation.

Our next question will come from Matt Olney with Stephens.

I wanted to go back to the discussion around the core margin? And Tom, it sounds like you've -- based off your commentary, in your prepared remarks, you expect some stability in that core margin. Can you just expand on that as far as what gives you the confidence of the stability? And is that based off the adjusted margin in the fourth quarter of 4.60%? Or is that based off a separate number?

I would suggest to you, Matt, that that fourth quarter number, that's what we try to put in there to give you real-time information. We feel pretty good. Now admittedly, we've budgeted a slight compression. And I think that has more to do with the yield curve when we were budgeting, it was back to flat. Now here it is today inverting again.

And so I would suggest to you that the reason that we feel pretty good about the margin, it's kind of the opposite of a death by 1,000 cuts, meaning there's a lot of little things that go into it. The floors are big deals. And the prepayment penalties that we're putting in our loans, that adds to it.

And I also think that the Feds, if they don't touch the rates like the "experts" claim that they're not going to for the next 3 or 4 months, the interest rate -- top of mind awareness isn't there. Last year was brutal because every time the rate goes down, the borrowers, the phones ring, and ring, and ring. And so I think it's a combination of a lot of things for us and just the comfort that we have knowing that as we've grown our company over the years, we have a really good comfort in that band that we're operating in.

Okay. Got it. And then it sounds like you've got a really good pipeline for growth in the first half of the year. Can you give us some color as far as the yields on some of those loans in the pipeline that you hope to close in the first half of the year?

Let's let Jason take that.

Yes. I think kind of looking back at the fourth quarter, it's probably more of the same, kind of same industry segments. And I would expect fall right in that band that we've been in the past, really the past 90 to 120 days.

And specifically, what kind of yields are we looking at in the fourth quarter that would be similar in the first half of the year?

I would say that the new business was mostly in the mid-5s.

Got it. Okay. And the operating expenses this quarter ran a little bit higher in the fourth quarter. I think the press release mentioned updating the headquarters, converting the Tulsa LPO to a full service branch. Are these costs now fully baked in the run rate in the fourth quarter? Or are we going to see a little bit more uptick in 1Q?

No, they're baked in. We -- during the year, we had fixed assets and work in process, while Chairman Haines was working his magic. We would invite everyone to come down and see Brad's handy work. We're really proud of it. He kind of went a little bit off budget, but we'll let him get by with it. But for the year, it was early in the year, we had most of the fixed assets going in the work in process. And then we started converting it to depreciating assets later in the year, and it's all been done now.

And then how should we be thinking about the operating expense growth in 2020?

I don't think you're going to see any. I think we're really focused on cost and expenses. 2019 was a year where we were very busy with the fixed asset expansion into the 2 new locations and then the headquarters and the banking office here and completely renovated and remodeled. And I will say that -- so there really is no need for Bank7 to have any increases in expenses other than we're probably going to have to add a few people for various support roles. And -- but I think what you're going to see is a pretty flat expense and maybe we might be able to cut some, not making any predictions. So I don't expect any upward increases in that area.

Now one thing I'd make a comment about, we're proud of the headquarters, but we're also proud of the good stewardship of our capital usage. And what I mean by that is that if you come down here and you see, and I think bank -- one of Bank7's great strengths is go look at the percentage of fixed assets to total assets of the company and look at our overhead costs. And so we're proud of it, but we certainly didn't go bananas and spend a lot of money unnecessarily in fixed assets.

Yes. No, understood. You guys are a highly profitable bank, especially relative to a lot of your peers out there.

And then shifting over towards credit. Overall, credit trends look good. Nonaccruals look good. Anything else worth noting? Any migrations? Any special mention or classify anything else out there that you noticed in the fourth quarter you want to call out?

Not specifically fourth quarter, but I think if you go back from the prior year-end to now you would note, I would say, modest improvement, though it was good a year ago, probably slightly better now. But again, we're pretty deep into this expansion cycle. So not unexpected that credit quality remains good.

I would add to that that the overall growth of the bank. The bank continues to benefit from scale and the banking teams. And as a result of that, our ag percentage concentrations have come down. We're not against ag. It's just not a dynamic market. And so that market is not growing. And so those percentages have come down, the energy percentages have come down from 18% to 14%, and they're going to continue to bleed down. And then on the construction and development, Jason, where we had an all-time low in...

We were and hopefully, we'll claw some of that back during 2020.

Right. So as it relates to the migration, I think Jason's addressed that. But then you look at the concentration of the company that was discussed ad nauseam on the road show, and you'll see that we have reduced concentrations.

(Operator Instructions). Our next question will come from Nathan Race with Piper Sandler.

Going back to the margin discussion ex loan fees, it sounds like you guys think you can kind of keep it stable here around 4.60%. So I was just curious, when you think about that kind of stable outlook, how much deposit pricing leverage exists. Obviously, a nice step down in deposit costs in the fourth quarter. So just curious how much room there is to go on that front?

I don't think there's a lot. I think the -- I think that's probably one of the most challenging areas for all banks is the deposit competition. We've been talking about this for a long time at Bank7 about internet and all these alternative sources of deposits. And so I think that that's going to continue to be the industry-wide challenge for all banks is to make meaningful inroads to get costs down.

And that's why we're so proud of the fact that when we grew our deposits double digits, we were still able to maintain that 29% noninterest-bearing number. So -- and I think back to your opening comment about 4.6. I don't think we're going to be absolute there, but I do think that we're well within our historical ranges. I think that -- I think in the slide deck, what were we in 2015, 4 point...

4.63%, 4.37% and 4.59%.

Yes. So we've been down to 4.37%, and we're not saying we're going there, but we're very, very comfortable in our historical ranges.

Got it. That's very helpful. And just going back to the loan growth discussion, commercial real estate looks like it was a nice contributor in the quarter, along with C&I. And so just kind of curious with commercial real estate getting up there in terms of close to 300% total capital what type of governors you guys are kind of looking at in terms of your capacity to continue to grow in commercial real estate going forward in 2020?

Yes. We still -- that's split up in a few different segments. Obviously, we're big in the Hospitality segment. We have room within our own policies to continue adding really in all segments. Specifically, the construction bucket is where I would like to see some growth here in the first half of 2020. Hospitality, that one is an interesting mix because you see that growth there. We churn through, I call it, churn, there's a fair amount of refinance or property sale that goes on there amongst those borrowers.

And so you consistently need to have some of those in the pipeline because we had about $50 million pay off in that portfolio last year that we had to replace in order to grow that. And so I like to see a nice robust pipeline there at all times because it's just got a high churn rate. So I think it's probably fair to say, we have room in all of those buckets, and we're out looking for good business in each of those segments.

I would also add that we've consciously focused and worked on in Dallas, expanding and diversifying into other types, and we have benefited in 2019. We had some really nice owner-occupied buildings and a few health care facilities through our networking and our customer base. And so we're pushing hard. We tried to get into a couple of multi-family situations, that's a very, very -- at least in Texas, it's just amazing how people are pricing that segment of the market on their loan. So it was really hard to break into that market, but we're going to continue to diversify into that segment through our customer base and then network in that area.

Understood. And if I could just ask a couple more. I appreciate your guys' comments on credit quality remaining fairly benign as you guys see it today. So just curious with the kind of low double-digit growth expectations for this year, is it still fair to assume that provisioning is going to be fairly low, similar to what we saw in 2019?

We've budgeted -- Nate, we've budgeted a pretty healthy loan loss reserve. And notwithstanding the comments earlier regarding CECL and the heavy capital levels, you just can't get away from your DNA of being -- putting hay in the barn, so to speak. And so I think what you're going to see this year is, maybe I should say, J.T., the return to more normal levels just to make sure we don't fall behind.

Right. That -- I anticipate maintaining our current ALLL rate as far as 1.10%, 1.11%, 1.05% in that range throughout the year.

Okay. Understood. And if I could just ask one more on acquisition prospects. It sounds like you guys are still having some good conversations. So just curious where you guys are most interested in expanding acquisitively around your existing of -- or is that around your existing of today?

Yes. I think for us, the natural more energetic places would be Oklahoma City or Tulsa area and then North Texas and Central Texas. And if it was the right opportunity, even down into the Houston area. So those are the natural places for us to go.

This will conclude today's question-and-answer session. I would now like to turn the conference back over to Mr. Tom Travis for any closing remarks.

I think for us, we feel really good about our company. We're excited about our future. We're proud of the return that we've provided to our shareholders. Obviously, we're major shareholders, Chairman Haines, we all know what his stake is, but there's other people as well. And we continue to stay very, very, very focused, and we really look forward to the future in spite of -- I mean, we've got a virus named after a beer, and we've got all these other things going on.

And Brad kind of has a sore throat. I don't know if you want to make a few comments?

It's okay. I'm good. Thanks.

He's kind of got a little sore throat. So we feel really good about where we are and where we're going, and we're going to continue to do that.

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