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spk01: Welcome to Bank7Corp's first quarter earnings call. Before we get started, I'd like to highlight the legal information and disclaimer on page 19 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 8K that was filed this morning by the company. Representing the company on today's call, we have Brad Haynes, Chairman, 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.
spk04: Thank you. Welcome to the call. We're pleased to have had another outstanding quarter. The PPE especially was nice to see the increase, almost a double-digit increase rather than regurgitate the numbers, I'm sure you've had time to see them. We're pleased about it. I would just say that the numbers are what they are, and they're good, and they don't happen by accident. And specifically, the banking team has been through quite a lot since January the 1st, and really going back to last year. But specifically, the lending team led by Jason Estes and, of course, Kelly Harris and his group, the PPP and the government stimulus programs and everything that's been going on has been managed very well. And at the same time, the back half of the first quarter, we really saw the economic activity in our region of the country pick up. And so they've done an outstanding job of managing the stimulus programs the work associated with those programs, and at the same time, the banking teams are out and about dealing with the green shoots that are really emerging all around our markets. And so with that being said, we're excited about the rest of the year, and we'll open it up for questions.
spk01: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. The first question is from Nathan Race of Piper Sandler. Please go ahead.
spk02: Yep. Hi, guys. Good afternoon. Hi, Nate. Hi, Nate. Maybe just thinking about kind of low growth trends in the quarter and the outlook. It looks like growth in the quarter was, you know, partially driven by the CRE hospitality. segment, so just curious kind of what opportunities you're seeing in that space and kind of if you can frame up expectations for loan growth over the balance of this year, both in terms of magnitude and byproduct type.
spk06: Yeah, so in the quarter, you know, growth was pretty modest. PPP loans were a portion of the growth, I think, you know, and you referenced the slight uptick in hospitality. I think that will continue to be the case based on construction fundings, not necessarily bringing in many additional operating properties. It would be more of funding up the existing commitments on the construction side. And then, you know, more broadly, we've seen significant increase in just normal deal flow, whether it's C&I, owner-occupied real estate, medical, we're seeing a rebound. And I think you're going to see a more non-hospitality-driven growth through the rest of the year. That would be my projection. I think you can stick with our standard low double-digit growth expectations for the year, but not necessarily concentrated in hospitality. You'll see it in more diverse categories.
spk02: Yeah, that's helpful. And so it sounds like, Jason, we're kind of building up towards kind of the low double-digit run rate over the course of this year, just as, you know, economies continue to reopen across both Oklahoma and Texas and Kansas as well, for that matter.
spk06: Yes, that's correct. And you'll see the PPP portfolio contract, you know, as the forgiveness applications are processed. We're well on the way through the first round. There's only a handful left. We continue to fund second round loans, and so you'll have to get through those forgiveness periods, and then that process will start with those. So when I'm talking about double-digit growth, I'm talking core. I more or less exclude PPP activity.
spk02: Understood. And when you kind of look at the weight average rate on new loan production in the pipeline, we obviously saw some margin pressure loan fees this quarter. How are you guys thinking about the margin outlook over the balance of this year? Again, within the context of what you're seeing in terms of weighted average rates on production recently and looking forward.
spk06: Some of that pressure you're talking about is caused by those 1% PPP loans. We'll get some relief as those are forgiven. And then I think you can pencil in a range of 4 and 3H to 475 on average probably for the new production on rate, excluding the fee component.
spk02: And in terms of fees, can you update us in terms of the remaining PPP fees that have not come through yet in the margins?
spk07: Yeah, Nate, through Q1, we had $750,000 left on the balance sheet. Now, you can see some growth, the activity in Q2, but... Okay, great.
spk02: I'll step back for now. Thank you.
spk01: The next question is from Matt Olney of Stevens. Please go ahead.
spk08: Yeah, thanks, guys. Just to follow up on that last question around PPP, in the first quarter results, I think there was about $2 million worth of fees. How much of that was PPP versus non-PPP?
spk07: $1,080,000 was PPP, governmental related, and then $911,000 was considered core. So about 38 basis points of the 83. Got it. Okay.
spk08: Thanks for that. And then I also want to ask you about a potential impact of higher interest rates. And I'm curious kind of what your thoughts are. But when I look at your just disclosures of the 100 basis point rate shock higher, I see a really big potential benefit for the bank, one of the highest ones than peer groups. So I was curious if you could just kind of walk us through some of the drivers of this as you guys do that shock analysis and remind us of what the floors are, and if short-term rates do start to rise at some point, could there be a lag there from when you guys start to benefit from that, or would you benefit pretty quickly? Thanks.
spk04: You know, that's a very challenging exercise to go through if you look back in history. And, you know, of course, every customer interacts differently. And so, you know, sometimes you're forced to negotiate on, transactions that you didn't think you were going to and sometimes you're not. And so it never obviously ever works out exactly like the models. I would just say, generally speaking, that we would expect some benefit for an uptick in rates. None of us are expecting an uptick in rates. And then I think on the liability side, we would certainly be cautious with raising our liability costs. I don't want to call it a nothing burger, but we will be able to manage our NEM and perhaps have a slight benefit in the early stages of what would be considered the first rate increase, which again, we don't see that happening until next year. There's some belief that it won't even happen until late next year. Who knows? But it's certainly not going to be a negative for the company.
spk08: Okay. Thanks for the commentary. And then I guess just lastly, I think when we spoke in January with the hospitality portfolio, it sounds like it's performing better. Our occupancy trends in March it sounds like are up compared to when we last spoke. I think there were just maybe two hotels in the portfolio that had any real risk of loss, as you guys saw it back then. We'd love to hear any update you have on those two hotels with respect to their occupancy in RevPAR. Thanks.
spk06: Yes, so one of those two was north of 60% occupancy in March. The other was in the mid-40s. And so they are seeing a return to normalcy so far. you know, call it through the first couple weeks of April, the occupancies continue to more or less exceed expectations throughout the portfolio. I think you're seeing people just more willing to move about, which is a good thing for the hospitality segment.
spk08: Okay. I'll step back in the queue. Thank you. Thanks.
spk01: Again, if you have a question, please press star, then 1. The next question is from Tim Abbott of Twin Lines Management. Please go ahead.
spk03: Hey, guys. Congrats on the strong results.
spk04: Hey, Tim. Thanks.
spk03: So, just quick clarification question. When you talked about new production coming in at four and three-eighths to 475, were you referring to core NIM?
spk06: Yes. No, actually, sorry. Just interest rate. I'm excluding... The fee component.
spk04: Right.
spk03: Loan yield or NIM. So I guess I'm just wondering if that's the gross yield or that's after taking out funding costs.
spk04: Loan yield. Got it. That's the face rate of the note, Kim.
spk03: Yep. Understood. So that's a fair amount lower than your current. If I'm doing the math right, your current loan yield excluding PPP loans is 5.6, excluding PPP loans and excluding fees. You're a little over 5.6 today, right? Correct. Okay, got it. And then one other quick one on credit. So it seems like another quarter of strong credit performance, essentially no charge-offs. Can you just provide an update on the one large energy loan that was partially charged off last year and just help me understand how that's progressing and whether you expect a resolution in the next few quarters?
spk04: As we said in the last quarter, it was a fluid situation. It remains fluid. There's been a little bit of positive. not enough for us to back off of our plan, which was until we could see clarity and revenue growing, we're prepared for whatever the final resolution of that's going to be later this year. And so the decision that we made was to take a partial hit last year and then make sure we had enough in our loan loss reserves so that if we did have to take additional charge downs this year, that we have the money to do it. And that's, in fact, what we've done. And for right now, there's a few positive things happening. And I think that it'll be resolved towards the end of the year. And so we don't think today that we need to take an additional charge. but we could be in a position in the future in the 2Q or probably the 3Q timeframe, we may decide that they're not going to climb out of it like we thought, and we could have to take another charge. But again, we've already sufficiently reserved for that possibility, and so we're on track with the original plan.
spk03: That's great. Great to hear. And obviously, also, It seems like excluding that loan, you have minimal, really minimal NBLs. So, I'm encouraged to see that continue to be the case.
spk04: We're proud of what we've done through the pandemic, and you're exactly correct. If it hadn't been for one credit, it was just a non-event for Bank 7, which is the way we've operated historically. We're known as credit people. We don't have NCOs of any magnitude in our history. You know, we're looking at this pandemic event as something we certainly didn't want to go through nor anyone else, but it highlighted the ability of the bank to function through some pretty serious disruption, and our credit quality metrics held up well.
spk03: Great. Well, congrats on the strong results, and keep it up, guys. Okay. Thank you.
spk01: The next question is from Brady Gailey of KBW. Please go ahead.
spk05: Hey, thanks. Good afternoon, guys.
spk04: Hey, Brady. How's Atlanta?
spk05: It's going well. It's going well. I totally agree with your comments, Tom. I think you guys have done a great job through this pandemic, especially considering kind of the above average exposure you guys have to energy and hospitality. So that really has been great to see. Can you just remind us, the one energy loan that we were just talking about, what is the size of that loan now, and how much have you already marked it down?
spk04: You know, we need to be careful here. We're not trying to be lack of transparency, but one was in that 13 or 14 million dollar range and we've taken a little over three billion in a mark down on that loan. So it's still in that, just a little bit more to that 10 million dollar range and that's where we are today.
spk05: Okay, and in the two hotel loans, that you were nervous about it. It feels like they're doing better now. Remind us the size of those two loans as well.
spk06: Yeah, so the one that had the lower occupancy is in the $3 million, right at $3 million. And then there's another one that's in between $8.5 and $9 million.
spk04: I would say, Brady, that if you recall, I think back in the maybe it was in the third quarter last year, I don't recall, maybe the fourth quarter, but, you know, everyone was really struggling with trying to put a number on a, oh my gosh, you know, the pandemic and how is it going to affect the portfolio. And we stay away from guidance, but I think we did make a comment that we would have been really surprised to even lose two or three million dollars out of that entire portfolio. And I would suggest to you today, If you're searching for what is the number there, then I'm very comfortable with that number in a worst case, oh my gosh, environment. I mean, you think that's still close, Jason? Yes, sir. And so when you look in the context of our largest segment, they're your number if you really want to get. And we're not predicting anything, and we don't have anything in the hospitality portfolio that we're thinking it's going to head to a non-accrual and we're thinking it's going to cause us to take a hit. But those are the real numbers. And so that's why we have such confidence and we're so proud of what we've done.
spk05: All right. And, you know, energy, you know, energy, your energy exposure has come down over the years. Even in the quarter, it went from, you know, 14% of loans down to 11%. But, you know, hospitality has remained, you know, a pretty big exposure at 25% of loans. Do you think over time your concentration in hospitality will decline or do you think it'll kind of grow with the loan book and remain around that 25% mark? Go ahead.
spk06: My expectation would be that the other components of the portfolio would grow faster around it, not that we would have a reduction in that balance that you see in the hospitality portfolio, but we're on a mission to grow all these other lines of business, and so I think you'll see it become less of a concentration over time.
spk04: I think that's well said, and I would add to that that we have internal limits, and the pandemic caused the hospitality industry percentages to go up for two reasons. One, the book always has churn. People sell properties and so we get a payoff and then we rebook and the pandemic, everything came to a screeching halt. Well, while it came to a screeching halt and so no properties were sold, we also had some construction loans that were on the books that continued to fund At the same time, the loan portfolio growth was pretty much non-existent for three quarters or so. Automatically then, you sat back and you watched as these construction loans funded and that percentage came up. It's interesting you bring that up. Jason and I were talking about it yesterday and we were looking at our limits and we don't We don't want to send a signal that we're nervous at all about hospitality. However, we are carrying more than where we would prefer to carry. And so, as Jason said, the other elements of the portfolio are going to grow. And then at some point, you're going to start seeing a few properties sell. Matter of fact, we have some that are boiling right now. And so it's our express intent to reduce the hospitality percentage, but I think that's not going to start occurring until probably third or fourth quarter. So I think you can expect to see us carrying a little bit more than we did historically, but then it's going to come down.
spk05: Okay. All right. And then it doesn't look like y'all repurchased any stock in the quarter. Is that correct?
spk07: That's correct.
spk05: Okay. And how do you, I mean, the stock said, you know, 145 of tangible. And, you know, you're generating a ton of capital here. So how do you feel about buybacks, you know, at this point?
spk04: Well, you know, we're a broken record. And, you know, we've always preferred to buy the stock at a good price, just like any other investor would. And, of course, we're stewards of the bank's capital. We recognize that. And so, but it hasn't tempted us to go in and repurchase the shares at one and a half or 1.4 times the book.
spk05: Okay. And then finally for me, you know, just an update on M&A. I think y'all have looked in Texas in the past. It feels like Texas, you know, we saw the Cadence Bancorp South deal and it feels like we're going to see a decent amount of M&A out of Texas. Just wanted to see if that was still something that y'all were focusing on. And if so, kind of what's the ideal target size range for Bank 7?
spk04: We're still focused on it. And sellers across Texas, we have lines in the water and communication. And I would say that the good, strong sellers are not going to sell at lower multiples. There's just too much excitement about Texas and an intelligent seller understands that there's value. And so I think the M&A space sounds sexy and there's been a few large deals with what Cadence is doing and what Dan Rollins is doing over there with some of his deals. But I don't see us, we like to think we're smart buyers. and discipline buyers and so we're working hard, a lot of meetings and dinner and lunch, communication and if something pops, that's great. If not, we're gonna continue to grow organically with banking teams in our markets and so that's the way we're approaching it. As far as size goes, I think anything up to a billion our size or a billion five is good. I think we probably wouldn't fool around with anything below $200 or $300 million, you never know. I mean, sometimes you get a strategic bolt-on that's a little bit smaller. But that's pretty much the range, I would say, for us.
spk05: Okay, great. All right, well, thank you all for the color. Appreciate it. Thank you.
spk01: Next is a follow-up from Matt Olney of Stevens. Please go ahead.
spk08: Yeah, just a quick follow-up on credit. All the trends on credit look great in the first quarter. It looks like the reserve ratio ticked up quite a bit. Just curious kind of what the thoughts are on the reserve ratio from here and then how you see the provision expense over the next few quarters as you grow loans within your targeted range. Thanks.
spk06: Yeah, I think you'll see us keep that reserve ratio in the same ranges that we've always operated within maybe toward the top end of the range over the last few years because we really went two full years there with virtually no charge-offs after really what had been a three-year period with pretty minimal charge-offs. So after that five-year run, the reserve probably was operating near the bottom end of our preferred internal range. you'll see us stick more to the top end of that range. And really the loan portfolio growth is what's gonna determine, barring any overseen credit issues that pop up, you're gonna see the portfolio growth or lack of growth, whichever it is, determine the provision levels.
spk04: Yeah, I think that's right. And I would also add that we talked about in our analysis during the peak of the COVID, or the depths of COVID, I guess I should say, but whatever it was in 2020, we talked about the cycle in to cycle out potential worst case of a 1% hit. And so I think we, what was it, 43 basis points last year? So, you know, we still have, we're not suggesting that we're going to hit 1%. We could. It's still our outer bound, and I don't know that we're totally through this pandemic cycle. I think all of us believe here that part of the economy is a little false. There's so much liquidity sloshing around, and there's so much money being spent. All the stimulus hasn't worn off, and so there's still some question in our minds relative to the ambient level of economic activity absent the stimulus money, and I think We're going to stay cautious. As Jason said, I'm really excited about what Jason and his group are doing relative to loan growth. I think if we don't have any more surprises when the stimulus wears off and we're where we thought we would be on the actual hits that we end up taking through the cycle, it's a pretty exciting environment. It is a little bit like walking across a frozen pond. We think the ice is really firm under us in our markets, but it's a little spooky out there. So caution, more of the same on the loan loss reserve bill, driven mainly by the growth and with an eye towards we're still not totally out of the woods yet.
spk08: Okay. And then I think Jason mentioned kind of operating in the historic range. And if I'm Look at this, right? You're now at the top end of the historical range. So suffice to say, you don't expect any incremental build from here. Am I interpreting that correctly?
spk04: I think it depends on the growth. Oh, incremental build? I wouldn't say a lot, if any. I think you're probably pretty close.
spk08: And lastly, on this topic, do you guys have any specific reserves allocated to any of your outstanding credits and if so, any amounts you can disclose for us?
spk06: Only a small amount. It's less than $200,000. Okay. Great.
spk08: Thank you, guys.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Tom Travis for closing remarks.
spk04: Thanks, everyone, for the participation in the call. We're excited about our future and Invite you down to Oklahoma City any time. Bye-bye.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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