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Edited Transcript of BSVN.OQ earnings conference call or presentation 26-Jul-19 4:00pm GMT

Q2 2019 Bank7 Corp Earnings Call

Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank7 Corp earnings conference call or presentation Friday, July 26, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason E. Estes

Bank7 Corp. - Executive VP & Chief Credit Officer

* Thomas L. Travis

Bank7 Corp. - President, CEO & Director

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Conference Call Participants

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* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Brendan Jeffrey Nosal

Sandler O'Neill + Partners, L.P., Research Division - Director

* Matthew Covington Olney

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Welcome to Bank7 Corp.'s Second Quarter Earnings Call.

Before we get started, I'd like to highlight the legal information and disclaimer on Page 1 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 the 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 risks, uncertainties and assumptions including, among other things, the direct and indirect effects of economic conditions of 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 by the company yesterday morning.

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; and Kelly Harris, Chief Financial Officer.

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

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Thomas L. Travis, Bank7 Corp. - President, CEO & Director [2]

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Good morning, everyone. I'm glad to host this call, and we appreciate the -- everyone showing up and dialing in. We had another good quarter, record pretax income.

We're really pleased with that pretax income because we've added 2 new branches this year. We added a second branch this year in April in the Dallas metroplex area. And so we've absorbed -- just in the second quarter, we had $536,000 of expenses related to our 2 new branches, and then being a public company, that we didn't have in the second quarter of last year.

And so we feel really good about our balance sheet growth and our credit quality, our efficiency ratio, and that's what continues to drive the results.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brendan Nosal with Sandler O'Neill + Partners.

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Brendan Jeffrey Nosal, Sandler O'Neill + Partners, L.P., Research Division - Director [2]

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Just wanted to start off on the net interest margin here. So I mean obviously, there was a fair bit of compression in the ex loan fee margin down to 4.76%, I think a lot of that was widely expected based on your comments last quarter. I'm just curious, one, what are your expectations for the ex loan fee margin next quarter? And then two, when you think about the impact of a Fed rate cut, what do you think that means for the margin for each 25 basis point reduction in Fed funds?

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Thomas L. Travis, Bank7 Corp. - President, CEO & Director [3]

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Good question. We started some extensive modeling a couple of months ago, maybe 6 weeks ago, with various scenarios. We've modeled 25 down, 50 basis points down, et cetera, et cetera, and various scenarios on the deposit side. And so what we believe is that we -- it wouldn't surprise us to see our margin sneak down in the 4.5% to 4.6% range, which, as you know, is well within our historical norms.

We do have protection. We have 56% of our loans that are either fixed -- well, we have very few fixed rate loans, but we have -- we're very aggressive with our floors. And so 56% of our portfolio is already at the floor and will not reprice. And then, on the liability side, we still carry good noninterest-bearing DDAs at 27%.

And then I think on top of that, the loan growth that we exhibited in the second quarter continues. We continue to have a good pipeline, and so we're redeploying excess liquidity that we have at the Fed at a low yield into the loan portfolio. So we think all of those factors are going to help us maintain a good robust net interest margin, but we do expect a little bit of compression.

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Brendan Jeffrey Nosal, Sandler O'Neill + Partners, L.P., Research Division - Director [4]

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All right. Fantastic. That's really good color. And then shifting over to capital. Just wanted to get an update from you about how you're thinking about capital? I mean obviously, the TC ratio is sitting north of 12%, which is a very healthy level, and it probably should build from here. You know the outlook for loan growth is strong. So just wanted to see if you've considered anything like a regular dividend or maybe a special dividend at this point?

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Thomas L. Travis, Bank7 Corp. - President, CEO & Director [5]

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Yes. We model and see. We try to normalize return on equity as though capital isn't piling up so high. And we recognize that we were north of 25% ROE, and now we're down in that 21% or 22% range. But if we held capital static, we still would have been in that 26% or 27% range. And so we're very focused on it and we're very mindful of that. And so obviously, no one comments on what they may or may not do relative to a dividend or stock buyback or anything like that.

So I think we haven't changed our strategic focus on acquisitions. We also understand the realities of today's market. And so we are just aggressively doing what we can do to grow organically to keep the capital ratios from getting out of hand. And then, I guess all options are on the table if other considerations need to be made.

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Operator [6]

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Our next question comes from Matt Olney with Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [7]

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Want to focus on the loan growth that was very strong this quarter. Congrats on that. Any more color you can give about -- on the loan growth? Did the paydowns slowed? Did production accelerate? Or a combination? Just looking for any color around the loan growth.

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Jason E. Estes, Bank7 Corp. - Executive VP & Chief Credit Officer [8]

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Yes. It was a combination of both, Matt. We had really nice activity, picked up some good owner-occupied real estate, picked up some C&I business. The hospitality portfolio continued to have a little bit of churn in it. I think we had just around $20 million of paydowns, but we were able to offset that -- actually grow that portfolio within the quarter and I think just kind of resetting everything to -- we feel really good about our ability to continue to grow that portfolio in that low double-digit range year-over-year. But the pipeline was good. Performance was good and the churn definitely did slow.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [9]

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And even though you had a strong loan growth, there was still no material provision expense to speak of. That seemed a little unusual. Any details you can provide behind that? Were there some upgrades, the watch list, the classified loans? Any more color you can give me on the credit front?

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Thomas L. Travis, Bank7 Corp. - President, CEO & Director [10]

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Jason, why don't you take the loan growth and I'll take the others?

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Jason E. Estes, Bank7 Corp. - Executive VP & Chief Credit Officer [11]

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Yes. So the credit quality remains very good and positive overall. We just continued to enjoy the strong economy, and that's pretty clear in the numbers. We're just seeing the same thing that probably most of the other banks around the country are seeing. There really aren't a lot of credit problems out there.

And so within our own portfolio, we know, at levels like this, it's hard to recognize trends or anything, so any little blip looks like a big change. But I think it's just more of the same that we've seen for the past couple of years. And so there was some modest paydowns and some of those different classifications you mentioned and -- but in all, it's just continued really solid credit quality throughout the portfolio.

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Thomas L. Travis, Bank7 Corp. - President, CEO & Director [12]

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And I would add, the -- with regard to the allowance, you really harken back to the first question -- or first part of the meeting, we talked about our capital ratios. And so we have made a determination clearly that when you're running capital so high, do you really need to be at our historical 1.35 level? You don't get credit anything over 1.25 anyway.

And so while we're always going to be mindful of a strong loan loss reserve, we view it simply that the capital levels are so high that it's not really necessary to maintain at 1.34, 1.35, and we don't have a problem if it bleeds down a little bit.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [13]

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Okay. Makes sense. And then, last questions for me on the energy portfolio. Looks like there was a little bit of growth for you guys on the energy front. I'm curious what your view is of the credit trends within energy? I think some of your larger regional bank peers that also deal in energy have reported some more troubling credit trends. So anything you're seeing on the energy credit trend front that's worth noting?

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Jason E. Estes, Bank7 Corp. - Executive VP & Chief Credit Officer [14]

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What I'm seeing is we get a lot more looks right now at deals, and you'll see we selectively grew a little bit during the quarter. But I would say when you start talking about deal pipeline or opportunity level, not necessarily pipeline, that's where, in the past, really, 9 months, we've seen many, many, many opportunities, but we are very selective in the opportunities we choose to pursue.

And so we did have a little bit of growth in that segment. But we're continuing to be very selective and we're very mindful of the energy markets overall.

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Thomas L. Travis, Bank7 Corp. - President, CEO & Director [15]

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And we do see some -- I mean we do see some stress in the industry as well. And so whether that bleeds in to a couple of our credits remains to be seen. But by and large, I would say that everyone needs to pay close attention to the energy, and we feel confident with our ability to continue to manage the bank the way we always have without any meaningful degradation.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [16]

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And Tom, you guys have a diversified energy portfolio. What part of that keeps you up at night? Or what part of that would you anticipate stress building over the next few quarters?

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Thomas L. Travis, Bank7 Corp. - President, CEO & Director [17]

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I think that -- I guess the service industry, depending on where you are geographically. I think if you're in the service industry and you're -- if you're too concentrated in areas where the drilling isn't as robust as it otherwise was, I think you could see some pullback.

As you know, we really -- I think we -- Jason, we only have one or 2 E&P credits to just ridiculously strong people. So I think for -- from a macro perspective, I would suggest to you the -- I think the service industry component is where you would see a little bit of stress.

And of course, I don't really speak to the E&P side because we just don't have exposure there. And so -- but clearly, if oil went to $30 or something like that, then, clearly, I think guys that have E&P would have some stress show up.

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Operator [18]

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(Operator Instructions) Our next question comes from Brady Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [19]

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So you've opened up a couple of new locations here recently, most recently in Dallas. Any interest in looking at locations beyond those 2?

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Thomas L. Travis, Bank7 Corp. - President, CEO & Director [20]

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Yes. We're bullish on Texas. I would suggest that we probably wouldn't go into South Texas or in the border areas. But clearly, anything that's in the major areas of Texas, we've had a few opportunities. We have discussions from time to time. And so we're highly focused on any opportunity down there.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [21]

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All right. And then I know in the past, we've talked about, outside of any sort of new location, expense growth should be around that 5% level. Is that still the right way to think about kind of core expense growth going forward?

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Thomas L. Travis, Bank7 Corp. - President, CEO & Director [22]

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I think that you may see us -- I'm not predicting and saying for sure that we will, Brady, but we recognize that the M&A market is just not as robust. And we have really doubled down the organic side and we're seeking to add producers.

And so I think you could see us spend a little money today to continue to increase the growth on the organic side. Don't really have any percentages or numbers, but it wouldn't surprise me if we added some experienced people, which obviously would increase the expense upfront in order to increase production.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [23]

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All right. Thanks for the energy update. Hospitality is also a big focus for you guys, about 20% of all your spend. Maybe just an update on the health of the hospitality space as you all see it?

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Jason E. Estes, Bank7 Corp. - Executive VP & Chief Credit Officer [24]

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Yes. And just to remind you and everyone, we focus heavily on that Dallas-Fort Worth metro area, and Texas is kind of the secondary market, but the primary market of where we focus that lending is DFW. And that market continues low single-digit growth in occupancy, ADR and RevPAR. So the metrics all look solid. As there have been in a lot of the metro areas, there's been a lot of additional supply come in, but they continue to sneak out a small growth in RevPAR.

So we study it every quarter and the metrics look really, really nice. And again, credit quality in that portfolio is holding up as well.

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Operator [25]

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I'm seeing no further questions. I would like to turn the conference back over to Tom Travis for any closing remarks.

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Thomas L. Travis, Bank7 Corp. - President, CEO & Director [26]

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Thanks again to everyone. It's more of the same, I suppose, splitting hairs with Bank7. We continue to outperform most segments with regard to the major areas that we focus on, the efficiency, ROA, ROE, and credit quality and NIM and all those great things that we talk about. So hopefully, we can just do more of the same and just keep moving down the road. Thank you.

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Operator [27]

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