Bank7 Corp (BSVN) 2020 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 24 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-K that was filed this morning by the company. Please note, this event is being recorded.

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; and Kelly Harris, Chief Financial Officer.

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

Thank you. Welcome, everyone, to the call. We're glad you're listening and we're pleased with our quarter. Really not going to discuss much, just turn it over to a Q&A, other than to say that we're very pleased with the PPE that we have; we think that's a tremendous strength of our company. And we're using that PPE to build equity and build loan loss reserves, and feel very good about our company and moving forward.

So with that, we'll open it up for questions.

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

Why don't we start with the NPA increase? I think it was -- in the release, you say it was related to one energy loan. Can you just talk about the size of that energy loan and what's going on there?

Brady, it's our midstream segment and the loan is about $14 million. And basically the company has -- there are several parts to this company. And it was a bridge loan that we entered into and they had already executed a take-out with a large, multinational bank, which was their plan. And they were about to fund and take us out in late February, early March, and then the COVID hit and things were just put on hold.

And so that particular transaction was a bridge loan that's now turned into a longer term loan. And the company still has various subsidiaries and parents and they're in different business lines in the midstream space. And so that's that credit.

Okay. All right. It was good to see some improvement in deferrals. They're still relatively high at about 15% of loans. How would you expect deferrals to trend from here?

They'll continue to decrease, provided that we don't get another serious lockdown that impacts multiple markets. But we've seen the gradual improvement. And I think what you're seeing is these are larger hospitality and real estate loans. And they're big balance loans, but we're only talking about 23 total loans in our whole book, which is a very small number of credits.

And in addition to that, we've got much improved visibility, especially into the energy space. And so our projection would be continued decline in these deferral numbers.

Okay. And then finally for me is maybe just an update on the health of your hospitality book. I know you guys do a lot of hospitality lending, especially in Texas. Maybe just update us on how that's performing now and update on occupancy levels, et cetera.

Yes. We tried to enhance kind of some of that detail because that tends to be an area of interest, obviously, for the investors and the analysts. And in the slide deck, I'll refer you into there, there's some good detail on Slides 11 and 12. And in general, the third quarter occupancy was approximately 60% for those 28 loans that are back on payments as of 9/30. And so at that level, we've continuously said somewhere around 50%, maybe 55% occupancy with fairly normal ADR, that these guys are low-cost providers and they can amortize our loans at those ranges. And so that 60% number was nice.

The 7 properties that are not amortizing yet, 3 of those are on interest only payments and their occupancies for the quarter were in the mid-40% range. So they've seen substantial improvement, it's just not enough yet. And those, again, would be more the business-oriented properties.

Okay. Actually one more for me is, just the buybacks. I know you guys were fairly aggressive in the buyback a few quarters ago, but it doesn't look like any share buybacks now. Any thoughts on buying back the stock here?

Kelly, wasn't that -- is that part of this 8-K?

Yes. We have 150,000 subsequent to quarter end. I believe it was like October 5, is when it settled. We had minimal activity for the quarter, though, correct.

Yes. And going forward, do you expect buybacks to continue to be fairly active?

We haven't changed anything there. I think the 150,000-or-so share purchase the first week of October is pretty indicative of our feelings; and that is, when the market irrationality, if blocks come available at bargain prices, we intend to leverage the great strength of the company, which is excess capital and really strong PPE and we would continue to follow that protocol. It really is just a function of the market and what the market's doing. So no real change in our philosophy there.

The next question is from Matt Olney of Stephens.

I want to go back to the midstream energy credit that was described. And can you describe what the collateral of this loan looks like? And is there any specific allowance for this credit? Thanks.

So we really, with the size of the bank and we need to be careful when we're talking about 1 credit. Let's just say this, Matt. That when we made the bridge loan, we don't do a lot of enterprise lending, but this credit had a component of enterprise lending, which is not that unusual for a short-term bridge loan. And so we do not have hard collateral that backs the entire loan. But the substantial amount of the loan is backed by hard collateral. And so, yes, we have a, to be cautious, we have a portion of the loan loss reserve in mind should the credit not work out.

We still have a strong belief that that credit will work out, but we're being very careful. Because of the thrust of your question, we want to be careful that if we have to rely on an adverse event and rely on enterprise value that we're plenty reserved for it. And we feel that we are. We know that we are.

So we're not anticipating any losses coming out of this, not at all.

Okay. And I guess just taking a step back and reading that slide deck. It sounds like you've got some increased confidence in the energy portfolio now that you've had time to assess all the credits and assess what's going on. Can you try to ring fence what potential charge-offs could look like from the entire portfolio?

We believe that outside of the credit that we just spoke about, there is no exposure for loss. Part of the increased optics also relates to the fact that many service companies have substantially shrunk. They've sold assets. They've decreased their debt. In some cases, we've had customers pay us off completely and we've had really large pay downs.

And so it's just any time in any asset class that you're late into the cycle, you always have better optics. And I would suggest that the energy downturn -- when did it start? Early '19?

Very early '19.

So you have to recall or remember that we were almost a year, if not a full year, into the downturn in the energy cycle before COVID even hit. And so you had many borrowers across the energy space that were cutting costs, contracting, selling assets, doing what they needed to do.

And so for us, I would suggest to you that we feel -- we've always felt good about the energy space. I mean, as you know, we've had less than $10,000 in the energy space in net charge-offs in the history of our company. We've always felt good about it. But here at the, what I would consider to be more towards the tail end of the downturn, it's proving up once again our ability to make intelligent energy loans across the portfolio.

In addition, Tom, you know we've got some customers that are waiting on Main Street closings.

That's true.

And so you're going to see some fairly large customers that are going to be going out just because of the Main Street program.

Got it. Okay. And then in the loan growth category, it looks like there was an increase of E&P. Anything else you can tell us about that? Is that -- Was it a series of loans? Or is it a few larger loans? Just any color you can give us on the new loan growth this quarter?

Yes. It's a small group of larger loans. But there have been some opportunities that have been created by this downturn. If you go and you look at natural gas prices and what they've done, really since June, there's a nice story there. And so there have been a couple of opportunities for us to extend credit there and then also in the service segment on an acquisition with a well-capitalized group.

And so you're starting to see -- that's part of why we believe you're seeing kind of the tail end or a bottoming out as we're starting to see the money come in and transactions, they're presenting us with opportunities to make loans and we're passing on quite a few and we found a few there that quarter that we did like, and we participated in.

I think I would add that if you recall back to the April call that we had, for certain at the July call, we were focused on some green shoots. And I think it's an example of those green shoots where really big, smart money comes in, in various asset classes, including energy, and we were fortunate enough that we booked a couple or 2 or 3 really, really nice transactions.

(Operator Instructions) The next question comes from Nathan Race of Piper Sandler.

Just going back to the hotel portfolio. Of those 7 that aren't making normal payments at this point, of those 35 in aggregate, I guess what proportion of those remain deferrals? Are -- do those include -- and just kind of what's the kind of operational status of those 7 as you look forward within that kind of context that Jason alluded to with deferrals expecting to drop over the balance of 2020 here?

Yes. So 2 of those properties -- they're all open and operating. One was newly opened in August, so we really don't have much of an operating history for it. But 2 of the properties are on a 90-day deferral that will expire December or January; I'm not sure which. And then there are 3 that are on deferral for either 30 or 60 days, then they're interest only and then they're switching over to P&I by January. And so it's kind of we customize those based on what these guys are seeing currently and then what they're projecting based on future bookings that they have. So that's part of the confidence in the improvement. We have 3 of those that are already scheduled to come out at some point in the near future.

Okay. That's helpful. And then maybe changing gears on the margin outlook ex-fees. It's obviously coming down and the PPP loans went on that as well. But I guess if we kind of strip out the PPP impact going forward, how are you guys going to think about the margin kind of trajecting into the fourth quarter to resume a continued step-down and, perhaps, to what magnitude are you guys thinking?

Kelly, why don't you respond to that with your numbers relative to if we didn't have the PPP and we didn't have that one nonaccrual, where would we be?

So gross loan yields would be 595. PPP degrades that 35 bps. And then the nonaccrual's another 15 basis points. Down to 545 ex-fees.

And then the liability side of that, obviously, is going to continue to degrade as well, I think. We ended at cost of funds were 54 at the end of the quarter, and we're projecting that to be down to 49 basis points by the end of the year.

And I would say that just overall, I guess I would call it almost a flat line of NIM that we've seen in the last 4 to 6 weeks. I mean, if you exclude the PPP and the…

And it really depends on the mix, obviously. If we run a little hotter, we're going to get some expansion.

Yes.

As those PPP loans are forgiven, we're going to get expansion.

Right. Got it. Okay. That's helpful. And then just, thinking about the provision in the quarter. How much of that -- I think you guys alluded to it earlier. But how much of that was driven by any specific impairments on the energy nonaccrual that came up in 3Q versus how much of it was maybe just qualitative based on the environment?

Yes, it’s very small. I would call it a just in case and us being prudent. We view it, you may not, but we view what we've been doing all year as heavy provisioning. I think -- what's our ALLL up? 42%? And so we've increased it up 42% year-to-date. And when you look at the -- we talked about how we're deeper into the cycle with energy but also the other asset classes. And remember that we're on an incurred loss model and we're very, very involved at the executive level with every single credit. And so when you put all that together, we feel very good about what we're doing. Having said that, we're not cavalier about the environment that we're in and we feel it's prudent to continue the provision just in case.

So I would suggest to you that it's more to do with macro and a bit of uncertainty and let's just be prudent than it is having identified a plethora of credits that we feel like we're going to have issues on, and we're prepared.

Okay. Got it. That's helpful.

One more thing I'd like to add about the loan -- one more thing that I think is really, really, really important about that loan loss reserve, we do not have consumer exposure. We do not have restaurant. Our restaurant exposure is almost 0. We don't have retail exposure. And so I'm not going to say that it annoys us. But I think it's very, very important that people like to talk about hospitality and energy concentrations, but we don't ever have anybody say, gee, guys, you don't have any consumer exposure. And guys what? We were looking at Chase numbers just the other day. And not to pick on that great institution and great leadership, but half of their loan loss reserve is for the consumer segment.

And so you go back historically and there are more components that live and die within a bank than a few energy or hospitality credits. And I think as it relates to the loan loss reserve, I think that's a very important number to keep in mind.

And we'll see at the end of the day how we hold up in our few segments that everyone likes to talk about, compared to others who have a very heavy consumer book. And these are not musings on my part. These are actual factual numbers. If you go back to the Great Recession of '08 and '09 and '10, you can see it for yourself, that's where the hits came from.

So those are factors that we look at when we're doing our heavy provisioning, with a nod towards a few credits that we're watching.

Got it. That's not lost on me. And not to beat a dead horse, but just going back to the energy loan that came on nonaccrual this quarter. I mean was it previously marked substandard or watch prior to 3Q? Or I guess was the move to nonaccrual just a function that it didn't get taken out by the, I think the sponsor you guys referenced earlier? I'm just trying to understand exactly what kind of transpired over the course of this year a little better.

I would say that overall that's the tip of the sword. The issue, as you well know, Nate, you've done this long enough and you're smart, that's the tip of the sword of the issue. Timing, when do you recognize? And when you sit around a table -- look at our group. Our group is close and we're tight and we have a similar lending philosophy, but not everyone agrees. Should it be a 3 or a 4 today? Is it time to put it on nonaccrual or not put it on nonaccrual? And those are considerations that you have to deal with on a credit-by-credit basis.

And generally speaking, not even generally speaking, if you look at the loss history and the NPA history of Bank7, we are confident, and, of course, nobody gets optics into the examination process, but the examiners have always been very complementary of our early warning system. And so without a exact specific answer on when the credit was a 2, a 3, or a 4 and when it went on nonaccrual, it's just we look at these things every month and we react as we need to react.

And listen. The other thing that's happening in this particular environment is, this is more of a science situation and a pandemic situation. And Brad commented on you have some people that are going to get Main Street loans, not many, but some, and that has an impact on how you react and what you do.

And so what I'm trying to describe to you is that it's a very unique time in history and I'm also trying to describe that because of that, we feel strongly about provisioning for just in case, but you don't want to be too fast to go make a charge-down and hit a credit with an NCO that you didn't need to do as long as you have the money over there in reserve.

Got it. And the fluidity of the environment's definitely not lost on me either. So I appreciate all those comments.

There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Tom Travis for closing remarks.

I would just say that we appreciate the coverage from the analysts; we know it's not easy for you either. And we feel really good about our company. Our PPE, we probably sound like we're beating a dead horse. But that PPP is just beautiful. And it gives us the ability to, if we need to put extra money in the loan loss reserve, we do it. And we can do it without worrying about cutting a dividend or having our capital ratios go backwards. And I would conclude it by saying our TCE to total assets, our CET1 capital ratios are above averages. And so we're well positioned and confident going forward that we'll all get through this and emerge on the other side, hopefully, without too many battle scars. So thank you very much.

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