Bank7 Corp (BSVN) 2022 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to Bank7 Corp.'s First Quarter Earnings Conference 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 just 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.

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 will turn the call over to Tom Travis.

Good afternoon. Thanks for joining us. We're very pleased with our earnings for the first quarter, and the company continues to benefit from our robust geographic markets and our pro business environment. And we're really pleased with where we are today, and we're really excited about the rest of the year.

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

(Operator Instructions) Our first question today comes from Brady Gailey from KBW.

So I just want to start with the margin. I know this is the first full quarter with the acquisition embedded. And I know that your loan fees were down a little bit, but like last year, your margin was pretty regularly over 5%. It's now about 4.43%. How are you thinking about the margin outlook from here?

Who wants to take that?

Brady, this is Kelly. We picked up an extra $100 million in debt securities in the first quarter, middle of March really. And so...

And that was on top of...

On top of the other $100 million.

That we picked up in December.

$200 million, book yield is at 1 75, 1 76. So that really has weighted down our overall NIM in Q1. And I think it would be fair to say, as we continue to fund up loan growth as well as when those debt securities mature and move out of that bucket, you will see our NIM expand to more historical levels.

Okay. And I know that we've talked about the fee component of the margin, which I keep hearing you guys say that will normalize lower to about 50 basis points, but it's been higher than that just for years now. I know PPP's kind of nearing the end here, but do you still think that the loan fees as a component of the NIM will still get down to that 50 roughly basis point level?

Yes. I think if you look at the data on Slide 8 -- Brady, this is Tom. What you'll see is, if you go back to historical levels, you can see a definite downward trend in that number. And so obviously, '21 was really interrupted by COVID. And so I think that what we've been saying for some time that it wouldn't surprise us if the number got to 40 basis points at some point in our life cycle. It just happens as you grow. So I don't think that there's any belief on our case that, that temporary march downward was anything but COVID related.

Okay. Then you all had a pretty nice loan growth quarter, ex PPP was about 15% linked quarter annualized. Is there any reason to think that, that will slow at all from here? Or is that a good run rate?

It's interesting. We continuously kind of provide the feedback or input that we expect kind of low double-digit growth rates year-over-year. I don't really like to get into go on by quarter to quarter to quarter because we go through phases. And I think all banks, especially our size, will go through this where you get kind of lumpy fundings and lumpy paydowns. And I feel really good about our deal pipeline today. Obviously, the first quarter was good.

What this masks is, we had heavy payoffs, really, fourth quarter and first quarter, and so we were able to offset those, overcome it, however you want to describe it, through the acquisition and then through just nice organic loan generation. And so I think there's going to be a lot more pressure in the second half of the year on loan growth than there has been in the first portion of the year. So I still stand by kind of that low double-digit growth for the year. Wouldn't shock me if we beat that a little bit. It wouldn't shock me if we came in on the low end of it.

Okay. And then finally, last question for me is expenses. The $6.4 million of expenses in the first quarter. I know there's maybe some noise with -- I don't know if there is noise with the merger or any onetime charges or any upcoming cost saves. But how are you all thinking about expenses off of that kind of $6.4 million base? Is that a good base to grow from here?

I would say, in Q1, there was probably about $250,000 related to onetime and/or some of the noise related to the acquisition and expect to see something similar in Q2. But then after Q2, it should normalize.

Our next question comes from Nathan Race from Piper Sandler.

Going back to the margin discussion, just kind of drilling into the outlook for loan yields going forward. It looks like ex fees, loan yields came down by 20 basis points or so versus the fourth quarter. And I appreciate the disclosures in the deck around the kind of repricing characteristics of the loan book. So just curious kind of what the weighted average rate on new loan originations were in the quarter? And if you guys are kind of expecting some pricing pressures on new volumes to be offset by just the repricing of the loan book higher as the short end goes higher?

Yes. I think in general, I don't see big changes in what we're booking now and what we've had historically. I think some of that decrease that you're seeing that happened in the first quarter as a result of a change in the loan mix, we had some repayments through whether they sold assets, companies or refinanced in the fourth and first quarter where we had some higher-yielding loans on -- though some were hospitality. There was some shuffling in our C&I book as well that you had maybe some loans that were priced a little higher that were gone.

And then our new bookings seem to be consistent and have been really for the last, I'd say, 3 quarters as far as what we're able to achieve on an interest rate and fee in most cases on new originations for fresh new business. And so I think there will be some pressure in the second half of the year on interest rates, but I still don't think that it's going to be enough to overcome the positive benefits of rising interest rates and our asset-sensitive portfolio.

I guess as I'm sitting here thinking about our pipeline that we look at every week, I'm going to take a stab at it, Jason, but the new -- the net new fundings over the next 60 days, I'm going to say, on an all-in average, excluding fees, is in that 4 75 range.

Yes. And it's starting to lift, but I think that's probably a good guesstimate.

Yes. So I don't know how that compares to what you're seeing made on that 20 basis points degradation. But yes, I think you're going to see us -- if everything was static, you'd see us booking in that 4 75 range.

Yes. Yes.

Okay. Got it. And then just on the loan growth discussion, it looks like C&I was a nice driver in the quarter. Was that a function, Jason, of increase in line utilization or just adding new clients to the bank?

It was a nice combination of both.

Okay. Great. And it also looks like energy on the E&P side was the driver as well in the quarter. Just some opportunistic client adds there. What are you guys seeing in the energy arena these days?

There's a very robust field out there for all kinds of opportunities. And I think you're seeing us stay with what we know, and that is the production loans with rapid amortization, hedge production and, in some cases, some significant secondary support to go along with that, but very favorable deal terms for the bank. And frankly, that segment will help with some of that NIM pressure.

I would add to Jason's comments, Nate, that I don't want to suggest that we should say, we feel sorry for the energy space because their prices are so high. But it's quite fascinating, if you look at the space with regard to the ESG pressure, especially on the equity side, there are -- it is hard to describe how swiftly and materially the industry has been impacted by certain segments of capital. That's just saying, we don't want to go into the energy space for ESG reasons.

And at the same time, the world is dying for more energy. And so what is remarkable is that incredibly high quality, I would count it as pretty much riskless transactions because of the hedging, and you have energy borrowers that if you want to charge 5.5% a day or 5%, and it's really quite stunning at the magnitude and how broad and deep it is. And so when Jason talks about how that's somewhat of a buffer, even though that's -- Jason, is it 11% or 12% of the portfolio now?

That's about right.

Yes. But it is -- if we book energy credits and we are going to because we have quite a few very, very good opportunities, it's at a substantial premium. And yet, the risk isn't there, and so it's an interesting dynamic.

Got you. Okay. And then maybe just one last one for me. Just in terms of thinking about the reserve trajectory from here, obviously, 0 charge-offs in the quarter, you guys provided for some growth. I guess based on what you guys see out there, is there much in the way of lost content? It seems like that one nonperformer still constitutes 70% of overall balances within NPAs. So just trying to think about the trajectory of the reserve from here. I would appreciate any thoughts along those lines.

Yes. We haven't seen any negative turns of any meaningful credits or anything of any size that I can't remember how many quarters in a row, but I would say, it's at least 5 or 6 where you really feel like each quarter, it just improves -- the outlook improves, and there's nothing that's happened that's changed that. But obviously, there's a lot going on in the economy, and so we'll keep a close eye on it and make sure we're adequately reserved at all times.

I think that we're -- I think I know that we're living within our range, and the range in our company has always been between 95 bps and 130 bps. And so I think, presently, we're at the lower end of the range, and there really isn't any need for us to juice it back up to the higher end of the range because we don't see any stress. And so I think in our budget this year, we had provided for the allowance to stay pretty constant in that low 1% to 1.05%, or I don't know that it gets to 1.1%.

(Operator Instructions) Our next question comes from Matt Olney from Stephens.

I want to ask more about your expectations of funding the loan growth this year. Do you expect to grow deposits or just fund that growth with some of the excess liquidity?

Yes. I think you'll see deposit growth consistent with what we've seen in the past, and there's still quite a bit out there.

And then, I guess, the second part of that is, thinking about deposit repricing with higher rates, and you gave us some great disclosures on the loan side on Page 7, but what about on the deposit side? I'm curious what your expectations are? And are you increasing any deposit rates so far? And just some commentary maybe about the overall core markets and how much pricing discipline you're seeing so far?

Yes. We actually had to revise our budget. When we initially were budgeting, I think along with most people back in the December timeframe, there was belief that the Fed was going to do 25 basis points and however many times they were going to do it. So we finished our budget, and then things kind of went bonkers in late December and January and early February. And so we revised our budget, and we carefully budgeted for -- basically, we put in our budget 50 bps next week and then another 50 in June. And then I think we did maybe 25 and 25.

And then what we did on deposit beta as we went by, when you look at our -- the mix of our customer base, it's almost exactly 50, 50 on business purpose deposits versus consumer. And so that dynamic, we have a substantial book of entrepreneurs that are really less focused on deposit rates, and they're really more focused on the credit side of the bank and getting the benefits from our credit apparatus. And so therefore, when we attack the cost of funds budgeting process, we took that in mind -- kept that in mind.

And so we're very confident in our deposit betas and our ability to -- I would expect us to have really good favorable deposit betas because of that dynamic. And so when you look at the impact of that in conjunction with the asset sensitivity that we displayed in that one slide, we're very bullish on 2Q. I would say that we're bullish on 2Q and very, very bullish on 4Q and -- 3Q and 4Q with regard to the assets really pricing up and our ability to hold our cost of funds down.

I would also add that it's somewhat related that when you start thinking about the bank, the great loan growth that you noted that Jason talked about, the great percentage of that loan growth occurred very late in the quarter. And so we didn't have the benefit of that growth for the full quarter, which is another factor that makes us feel really good about not only the deposit betas and the asset sensitivity, but the full-blown effect of putting more loans on the books.

Yes. Okay. Perfect. Earlier in the call, I think Kelly mentioned some of the onetime-ish expenses in 1Q and possibly again in 2Q. Was there anything unusual from the acquisition with respect to NII within kind of deal accretion, purchase accounting accretion? Just trying to appreciate if there was any kind of noise in that first quarter number.

We did sell the Yukon branch in March. There was a $440,000 gain with that, that we took against goodwill -- lowered goodwill. And then there were some purchase price accounting adjustments also that increased goodwill. So I think the net increase should give a little $330,000. I mean outside of that, with the...

Net decrease of goodwill.

It was a net increase.

Increase? On which one? You mean on the gain?

$440,000 gain, lowered goodwill, but then there was some purchase price accounting.

Sorry. Yes, I wasn't focused on those.

The net increase was $328,000, $330,000.

Yes.

And outside of that with the ongoing deconversion and conversion costs related to the acquisitions that I spoke to, you're really looking at $250,000 net ups on noninterest expense in Q1 and Q2.

But I don't think any of it was considered material. Correct. Right.

Okay. Got it. And then I guess thinking more about the efficiency ratio and improvements from here. I think we were in the mid-30 range last year, obviously, with the M&A deal jumped up. Can you talk about kind of the roadmap to get back to that mid-30% range, kind of what you guys need to see to get back there?

Yes. I think we've tried to signal that the acquisition that 2 negative events were going to happen. One was going to be a decrease in the NIM because of the securities and then the efficiency ratio was going to have. We felt both of those were temporary changes, and we -- obviously, for a lot of other reasons, we like the acquisition when we did it, and we really like it now because it's coming to fruition because the ROE is going up and some other factors.

And so -- but I would specifically say that if you look at our budget and our expectations, I think it's more realistic that the efficiency ratio settles in maybe in that 37% to 38% range, which I don't know if it gets back to 35%, it just depends on if we can remix the balance sheet and the securities and get a little more revenue. But it's -- we've always said, it's going to be really difficult to live at 35%, but we'll take 38% or 39%, too. So I think that's probably the best way to say it.

And our next question is a follow-up from Nathan Race from Piper Sandler.

Just a question on capital. [TC] really wasn't impacted like most peers this quarter because you guys don't really have a large securities book. So we'd just love to get some updated thoughts on kind of the buyback appetite from here. Obviously, your stock, like most peers, has been under pressure over the last few months. So just curious how you guys are kind of weighing buyback opportunities versus other opportunities to deploy excess capital?

Nate, we're a broken record, and we have somewhat of a -- I don't know if I should use the word unique dynamic. But listen, we trade pretty much in line with peer on a tangible book value basis, but we're far below on a PE basis. And we -- Brad always says, we get penalized for making too much money. And so I know that it's quite interesting. It's the eyes of the beholder, right? So if you look at our stock price and if you ask that question, and if your mind is either consciously or subconsciously driven more by the PE ratio, it's like buy, buy, buy. But if your mind is more driven by tangible book value multiple and where we're trading, then it's less so.

And so we're not -- we don't ignore those factors, and we appreciate people's perspective. However, we've been consistent from day one that we're opportunistic stock purchasers just like anybody that may be on this call or that may have already bought our stock or anybody else in the market. And so we think any time the tangible book value multiples are where they are, it's less opportunistic.

And that's not to say that we're comfortable with the stock valuation because we think that we should get a higher valuation on a PE basis based on our strong performance, but we're just not prone to rush out and repurchase the stock in that kind of an environment. It doesn't mean to say that we wouldn't, but we don't have any predetermined belief that we should really jump out there and really try to be eager and anticipate that we're buying stock really cheap because of the PE multiple.

And I think that -- look, if we were a company like First Financial and Abilene that had been on the market, been public for a lot longer, and they're benefiting from that higher tangible book value and that higher PE. There's a few others out there, Frost Bank, and then I think that, that strategy may be -- it would be a lot easier to buy into that PE discount number. But for us, we're not in any hurry to do it.

And the other thing is, if we can produce 20% estimate return on equity, which we've been doing on an annualized basis, and then you extrapolate that and then you start saying what -- why are we going to go buy stock if we're not totally believing that it's really opportunistic when we can generate double-digit increase in earnings per share anyway, right?

And so it's -- I guess it's a Rubik's Cube type thing. And as I said, we're not -- we don't believe that the stock -- we think the stock price is a good buy today for the reasons that we just talked about. But there's no pressure and rush to do it.

And ladies and gentlemen, at this time and showing no additional questions, I would like to turn the floor back over to management for any closing remarks.

Again, we're very happy with our quarter. Our company is broadening and deepening every day, and our fundamentals are strong. Our management team is intact, and we're happy with each other, and we're really proud of our lending team and our bankers. And we really appreciate the support we get from the market and the analysts, and we're excited about the rest of the year, especially being in the markets that we're in. So thank you very much.

And ladies and gentlemen, with that, we'll conclude today's presentation. We do thank you for joining. You may now disconnect your lines.