Bank7 Corp (BSVN) 2021 Q3 法說會逐字稿

Welcome to Bank7 Corp.'s 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 condition son 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-K that was filed this morning 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.

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 us a bit here. We're going to take a little more time than we usually do, and we'll reflect on past events and current results.

Today, we'll start by reflecting on 2 different anniversaries, then we'll review and discuss our exceptional third quarter results. The first anniversary to reflect upon is 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 were certainly trying times. We all remember that day and we'll never forget its effects on all of us, especially our friends back East. I'm sure some of you on this call will never forget either.

With that said, we move on to the second anniversary, and that's the 3-year anniversary of our IPO. Some of you on today's call were instrumental and helpful to us, whether it's bankers, advisers or investors, and we're happy to have you with us today. We reflect back to our S-1 and the 3-week roadshow and ask ourselves whether we met our representations and achieved the goal set during that time. To that question, we affirmatively know that we have performed in accordance with what we said we would do. We're 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 whether Bank7 would be able to maintain its 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 experiencing strong growth. In fact, over the 3-year period, our total return to shareholders has been 85%. And while the future is never guaranteed, at this pace of shareholder value creation, Bank7 is on track to have doubled your money in slightly more than 3 years.

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. Additionally, we have grown our loan book with good yields without compromising our tried and true underwriting principles. Jason Estes, our Chief Credit Officer, is rock solid. His guidance and discipline while working with our lending staff is a real strength for our company. As are our lenders, they are to be congratulated. We knew what we had in this area 3 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 road show was our strong net interest margin, we were frequently asked 2 questions: would we be able to grow and also maintain that margin and whether our 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 that strong margin even 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 their recognition of the value of banking with Bank7. Another factor 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 3 years while also maintaining a consistent portion of those core deposits in our noninterest-bearing category.

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 works as it should, and you can achieve dual outcomes of a strong margin and a solid credit book.

One last item that was often questioned 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 efficiencies and how that would keep 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 summary, the results we've posted over the last 3 years highlight how exceptionally 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. And we're proud that we produced 12 consecutive strong quarters, which is especially noteworthy considering the extraordinary challenges related to the COVID-related economic stress.

Now if we shift gears and we look forward, we recently announced a subsequent event to 3Q, that being the pending acquisition of Cornerstone Bank, which we're excited about. We included a 1-page recap in this investor presentation. However, if you're not already aware, we recently filed our 8-K and investor presentation, which outlines that transaction and illustrates why we're 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 have illustrated 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 financials perspective, the acquisition increases core deposits by approximately 20%, which is always welcome, as it provides further funding 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 our strong earnings.

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 in 2 hours. At the risk of sounding like a broken record, and that's okay, I emphasize how exceptional the management team is and how gratifying it is to work 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 the fellow team members to continue our high levels of achievement.

So with that, we thank you for your participation today, and we invite any questions you might have.

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

Thanks for the 3-year recap. That's -- congrats on that. That's a lot of hard work. I wanted to hit on loan growth. I know 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, what do you think your kind of longer-term loan growth rate should be?

We're still thinking in the low double-digit range, Brady.

All right. And then when you look at -- it looks like you guys charged off some previously reserved for net charge-offs in the quarter. Maybe just a comment on kind of the dynamics there. And then separately, that takes your reserve down to about 1.04% of non-PPP loans. Maybe just a comment on kind of how you think that reserve level will trend from here as well.

Yes. You're right. That was previously identified as a specific reserve. There was litigation involved, not between us and the client, but that was -- it became more clear through the quarter, and so that transaction was run -- as you said, it was previously specifically identified.

And then as it relates to the ALLL level, part of that's driven by the NPAs and overall portfolio performance. And so this level is something that we're comfortable with currently and especially when we're carrying excess capital.

All right. 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.

All right. And then lastly for me, there's not as much focus on hospitality anymore. It seems like everybody is getting on with life post-COVID, but maybe just a quick update on the hospitality book. I know you all fared pretty well through COVID, but does that industry and zealous relationships there continue to improve?

The industry does continue to improve. In our slide deck, there was a comment in there about second quarter revenue in Texas hospitality exceeding 2019 second quarter. And so there was a little bit of a deficit comparing the 2 in ADR and RevPAR. But overall, gross revenues were up. And so as you're aware, most of our activity in the hospitality space is in Texas, specifically the Dallas-Fort Worth metro. And so we've continued to see improvement and strong performance through the summertime at the vast majority of our portfolio properties.

Brady, I would also say that we've been kind of like a broken record on the hospitality, and we've been commenting that there's really just 2 operating hotel loans that we had any concern about. And those have also recovered. There's still the 2 that are the laggards, I would say. And so we still expect little to no meaningful actual losses in the portfolio. And really, it's just a story of those 2 credits and their ability to continue to recover.

And I would add on top of that, that the world has quickly changed, especially in Texas. And I mean 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 in force, and they're recognizing value for these strong brands and these strong markets. And so I guess my point is that it's performing the way we thought it would, and we're not concerned about any meaningful exposure whatsoever.

The next question comes from Nathan Race of Piper Sandler.

Question just on the margin outlook ex fees. Curious how we should kind of think about the trajectory or the pressure expected there from the 4.41% level that we saw here and perhaps maybe just within the context of kind of what the weighted average rate on new loan production is lately. Can we start there?

Yes. Go ahead, Jason.

Well, I would say on the new loan originations, they're coming in similar to the last 2 quarters. And what we've reported there, kind of mid-4s, that's holding pretty consistent and has remained that way throughout 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 -- Jason and I were at lunch today talking about the competitive pressures in -- especially in the Texas market. And well, I guess, it's just as bad in Oklahoma City and Tulsa. But lenders are just really down in the dirt.

And so given the liquidity and 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 and I were talking about at lunch, 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 there's plenty of economic activity to where we don't have to get crazy with our rates and we can still maintain our discipline. All this is to say that we wouldn't be surprised to see the NIM slip from here for those reasons.

Understood. That's great color. And just a clarifying question, Tom, to your earlier point, just in terms of expecting some hospitality payoffs. Is that kind of factored into Jason's earlier comment in terms of expecting kind of low double-digit growth on the combined basis with Cornerstone coming into the fold this quarter?

It's -- we have a nice pipeline, Nate. 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, is there is quite a flurry of potential sales of assets and companies to beat this deadline to try to get ahead of any capital gains tax treatment change. And so I would say that that's exacerbated a little bit the potential payoffs. 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 we could experience a slight dip in our nonacquisition book for the fourth quarter, but we'd expect to recover that quickly just because of those factors that I mentioned.

Understood. Makes sense. And just maybe one last one for me. Just going back to the energy credit and the charge-offs this quarter. Could you update us just in terms of what the balance remaining on the books tied to that credit in particular and kind of what the outlook is for any remaining portion of that credit going forward?

Yes. So the remaining balance is $6.9 million, and then that represents about 70% of the NPAs at quarter end. And there's actually 2 other credits that represent 27% combined. And I would say the 27%, those 2 have been in the NPA category for a long time. They continue to pay and perform. There's some expectation that 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 improvement is expected from this point -- continued improvement.

The next question comes from Matt Olney of Stephens.

So I guess the question is kind of 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 any time that you're running the bank in 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 hurt you because of the Fed's interest rate policy, it's still tried and true fundamentals that you just need to do it.

And so -- and I would say that the other thing that was on 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 pulling 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 that's just the way we are.

And as far as moving forward, one of the things I did not mention in the NIM is what comes with this acquisition in the near term is a bond portfolio. And so clearly, we plan to reposition the balance sheet to where we gradually convert the bonds into better yielding loans. And so that's a factor as well. And so I don't know if that answered your question, other than it's something that we constantly will watch but always maintain strong liquidity.

Yes. That's helpful. And then on the operating expense side, you guys had some good cost controls this quarter. 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 inflation and higher expenses just to run the core bank even outside of the pending acquisition?

I would say that for the next 2 to 3 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 able to report what those extraordinary onetime expenses were.

And then over and above that, there's clearly wage pressure, clearly. And -- 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 to be more of the same. And 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 -- so I don't think -- outside of the wage pressures that we're experiencing, it will be more of the same.

(Operator Instructions) And our next question will come from Tim Abbott of Twin Lions.

Congrats on the strong quarter and really consistent execution over the first 3 years as a public company. 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. And it looks like from their call reports, Cornerstone is running with a loan-to-deposit ratio somewhere in the 50s, 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 occur in 2023. I'd say the back half of 2022 but fully into 2023.

Okay. But just to make sure I'm understanding you correctly, I guess your modeling and your guidance on the accretion does include that -- the benefit of deploying some of that excess liquidity?

Correct. Got it. And then one other just quick one sort of point of clarification. When you guys talk about new production coming in at somewhere in sort of the mid-4s average yield, is that ex fees? Or does that include the benefit from fee income?

That's ex fees.

This concludes our question-and-answer session. I would like to turn 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.

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