Welcome to Bank7 Corp.'s Fourth Quarter and Full Year Earnings Call. [Operator Instructions] Please note, this event is being recorded. .

Before we get started, I'd like to highlight the legal information and disclaimer on Page 23 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 any 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 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 Brad Haines, Chairman; Tom Travis, President and CEO; J.T. Phillips, Chief Operating Officer; Jason Estes, Chief Credit Officer; Kelly Harris, Chief Financial Officer. .

And with that, I'll turn the call over to Tom Travis. Please go ahead. .

Good morning, everyone. Thank you for joining us. Our group feels that we're glad 2020 is in the rearview mirror, looking forward to 2021. I'm sure everyone on the call feels the same way. .

Rather than get into a lengthy opening statement, the real theme for our company in 2020 was our exceptionally strong PPE and the growth in that PPE.

And all of us -- many of you who are on the phone have been with us for a long time, and we've constantly reinforced the great strength of the company, which is that really large margin and profitability which gives us maximum optionality. .

We grew our balance sheet; we added a tremendous amount to the loan loss reserve because of the unknowns with the pandemic; repurchased a significant amount of shares at a deep discount; and yet, we maintained excellent 19% return on equity; and our capital almost was neutral versus where it started at the beginning of the year. .

And so that's the story of Bank7. We've talked about it repeatedly. And the 2020 results illustrate what we've constantly talked about and feel so good about with our company. So that's our story for 2020. And of course, the other components did not slip. We feel really good about where we are.

We're definitely excited to have 2020 behind us and looking forward to 2021. .

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

[Operator Instructions] And our first question comes from Brady Gailey of KBW. .

I wanted to start with net charge-offs. They were elevated for you guys, $3 million or $4 million, I think, in the fourth quarter. Maybe just a little color on what drove those net charge-offs. .

We've spoken at quite length about -- in the third quarter regarding the one energy credit. And what occurred in the fourth quarter is what we thought, which was there was some possibility that, that credit was going to be taken out of the bank with a Main Street loan that did not occur.

And so although we are not convinced that there's loss in the credit, we felt the prudent thing to do was to go ahead and take an estimated charge to be prudent and just in case. And that's the story of that credit. .

Now remind me, how big is the size of that loan?.

It's down to a little over $10 million now.

And it also, when you go into the NPAs, what does it represent at our NPAs, Jason?.

60-plus percent. .

So the story of the bank relative to NCOs and NPAs is that one credit. And again, it's the one that we've been discussing. And there's a lot of moving parts to it. We're not sure. And so that's where it is. .

Well, it was great to see all the activity on the buyback front last year. I mean, you repurchased over 10% of the company at a big discount to tangible book value. So that was great to see. Now the stock has rebounded some. I think the stock today is trading around 1.30x tangible.

So how should we think about the buyback? Well, clearly, you guys still have excess capital, but the stock is not as cheap as it used to be.

Will you all still be active in the buyback in 2021?.

Brady, we've been consistent. You know, you've been with us since the beginning. And we are opportunistic people and we're patient people. And we believe that stock buybacks are an important tool.

And as you know, we're consistent with saying that we're not going to rely on stock buybacks at higher multiples to help us with EPS or any of those kinds of issues. We have the benefit of that strong earnings stream. .

And so when you look at Bank7, what you've seen us do in the past is what you'll see us do in the future. And meaning, when there's market irrationality, you'll see us be active. And when the market is more rational, we don't feel compelled to rush in and make repurchases. .

Yes. That makes sense. And then over the course of this year, I would appreciate those commentary and update just on your hospitality portfolio, which I know is a big focus for you guys.

But how is the trends in the hotel book recently?.

Yes. I think the fourth quarter, particularly December, is typically soft for the hotel operators, but there's a lot of -- I guess there's more optimism going into the spring, based on their pre-bookings, compared to what the spring ended up being last year.

And so in general, there's this desire by our borrowers and the operators of these properties to get past December, January and get into the vaccine taking its effect and people being able to move around more. .

We still feel really good about the drive-to markets. Dallas-Fort Worth is a huge center of our lending activity in that space. And the guys are -- they're holding in there. Obviously, it was a very challenging year for them. And you really -- you feel for them. But these are long-time operators and they know what they're doing.

And they're probably more excited for this year than we are. .

I would add to Jason's comments that we have [ 35 ] operating property loans.

Jason?.

Correct. .

Brady, there are 2 hotel loans out of 35 that potentially, potentially, worst-case scenario, we could suffer a small loss on. And if you really sit back and you think about that comment, there's things that really need to be emphasized. And I think the first one is location matters. And Texas is just a tremendous dynamic market, number one.

Number two, Jason's comment about the drive-to market is really critical.

Three, the limited service, low loan per room portfolio that we carry to the experienced operators that Jason mentioned is a completely different product if you were to sit back and think about a national hotel portfolio where you would have a mixed bag of convention hotels, business hotels, urban hotels that are full service.

And so as we sit here today, we are absolutely delighted at the quality of our hospitality portfolio, and I think it's because of those factors that we just went through. .

So we're delighted. We're not surprised. But it's a nice validation to the way that we've loaned money. And I'll say that I spent probably 30 minutes on the phone yesterday with one of the leading, if not the leading, stressed hotel groups. They've been around for 40 years in the country.

And I talked to one of the principals yesterday, I specifically sought him out so that I could get real-time data and information. And what he basically told me yesterday, they've been selling pools for CMBS properties, 20 at a time, some good, some new, some old, some not so good. .

And what the market is doing right now, real-time, with buyers, is they're taking the 2019 net operating income from property, and they're applying a 10% or 11% cap rate. In some cases 9% if it's a newer property.

And when you go and you do that math and then you apply that to our portfolio, what you'll see is that the great, great, great majority, well over 90%, if not over 95%, of our hotel loans have so much equity that even in the current high cap rate discounts that the market is doing, we're fine. .

And so we feel very good about our portfolio. We have a couple that we're a little concerned about. I don't want to be cavalier, we don't want to be -- we don't want people to think that we're not eating our meals out of reality. But for us, it's a nothing burger. .

Yes. And actually, just 1 more. I mean, I'm guessing some of these hotels would be up for a round 2 of PPP, which could help them out.

Is that the case?.

Correct. Correct. .

They're not all qualifying, but some are. .

The next question comes from Matt Olney of Stephens. .

I wanted to ask about the energy portfolio. I think we're down to 14% of the loans now. I think we're -- the peak was, a few years ago, 18%. It seems like the bank's always been pretty opportunistic with growth in that portfolio. I know you guys break down energy into 4 different segments.

Would love to hear how you guys are thinking about these various segments with respect to growth over the next year. .

Yes. For us, within each segment, I don't know that we have good enough visibility to say, yes, this one's going to grow and this one is going to shrink. Other than I do think that the mineral section will continue to just decline as it has. If you go back and look over the past 2 years, really, that 1 segment has just kind of -- it's winding down.

There's just not a lot of demand there at the moment. .

The other 3 segments, I think we'll continue to be active in, based on the opportunities presented. There was a decent amount of deal flow in the third quarter. Fourth quarter, we really didn't see a lot of opportunities. We do have a couple currently that we're reviewing, but it's just dependent upon the mix that comes in. .

And again, most of this opportunity we've had over the past year has been long-time people that have operated in that space and have quite a bit of wells. And that they will come in and be opportunistic. And so we'll go along with them in a very safe manner. .

Okay. Yes, I guess just taking a step back and thinking about the entire loan portfolio, would love to hear just more about pipelines and how you guys are thinking about growth for 2021. .

Yes. I think you'll see our construction bucket fund up a little bit. That's one thing that we have good visibility into. We have some nice deals already booked that haven't funded. And then we have some more in the pipeline.

And I think you'll see, certainly in the markets that we're in, single-family housing has been very strong and continues to be strong. And so we'll stay active there. .

I think there's going to be some opportunity to continue to fund some energy loans here and there. I don't think it will be as robust as it's been in certain years in the past. But construction is definitely a bright spot for us and is expected to grow this year.

You'll also see us continue to try to grow the C&I portion of our portfolio, which we've done successfully over the last couple of years. The growth opportunity is there, again, probably more driven by acquisitions going with large, experienced groups with strong financial backing. Those are really the main targets, obviously, for this year. .

Okay. That's great color.

And I guess when you take a step back and think about the portfolio, what type of growth rate would you point us to, given the pipe -- considering the pipelines and any potential paydowns?.

This year is unique. Last year, we knew third quarter, fourth quarter of the prior year, that we had a nice backlog and a big, robust pipeline going into 2020. Obviously, that propelled us to some of the growth we were able to have because we had it early in the year. That really slowed.

You're dependent upon the government programs more or less to drive loan growth, other than a few opportunities we had in the third and fourth quarter. .

I think this year, you're going to go back to slower first half of the year. And then if there's a return to normal, then we'll be right back to that typical low double-digit growth. That's still our goal, it's still what we want. But it's really going to be dependent upon the economy coming back to life a little bit. .

And we see an imbalance that, based on that historical growth, because of the lost momentum with COVID, it would take a little longer to roll out this year. So I would expect the first 2 quarters would probably be more challenging than the back half of the year. .

And I would say, too, that all the news about Texas, it's amazing to me how many banks have opened LPOs and other things. And so I think word's out for sure, and there's a lot of competition. So I think a multitude of factors are going to make it a bit more challenging in the first part of the year. .

We've got a good sales force and we've got a pipeline in place. And it's not like we don't have anything going on. But there definitely is a little different feel, like Jason said, compared to last year. .

Okay. And then the PPP, as you guys disclosed a few items on that. Anything else you can mention as far as what the fees were attributed to PPP in the fourth quarter? And then what the remaining fees are that you expect to realize over the course of 2021. .

Yes. So in the fourth quarter, it was, we're guessing, around $250,000 to $300,000 of the fee income recognized for the quarter was related to the PPP. .

For the year, it was $1.3 million. .

You have about $400,000, $450,000 of that. .

Yes. And then $450,000 remaining from the first one, correct, which excludes the second round that we're doing right now. .

Correct. .

Sure. Okay.

And are those PPP fees, the $250,000 to $300,000 that you mentioned for the fourth quarter, is that embedded in that call it, $1 million of loan fee income you disclosed in your results? Or is it separate from that?.

It would be. .

It's embedded. It's all -- we don't break it out. We just include it in loan fee income.

And then for the year, we had, what, $5 million of loan fee income?.

Correct. .

Of which, $1.3 million was PPP for the full year. .

Okay. Perfect. And then on -- I guess, would love to hear kind of the updated thoughts around M&A. And I know that's something we talked about a year ago pre-pandemic. Would love to hear kind of the updated thoughts around M&A and the chatter within the markets you're targeting. .

With the stock coming back up and then with the vaccine rollout, there's certainly a momentum that has started just in the recent weeks. And I'm discussing with various people, possibilities. And we continue to focus on the M&A.

The -- I would say it was a kind of a restart-type mentality when it's obvious no one was going to do anything with low stock prices, but now we're getting back closer to reality. .

So I think you're going to see us active in discussions. Do we have anything that's anywhere near worth talking about? No, we don't. But it's a focus for our company. .

[Operator Instructions] And our next question will come from Nathan Race of Piper Sandler. .

Question just maybe around the margin outlook ex loan fees going forward. It sounds like the loan pipeline is pretty strong and you guys obviously had some core deposit inflows over the course of last year, which I imagine, we're trying to redeploy to try to keep that margin somewhat stable. .

But I imagine the main headwind to the margin at this point, again, ex fees, is just rates on new loan originations and so forth.

Is that kind of the right way to think about it? And if so, what kind of step down should we kind of think about in the margin ex PPP fees entering 2021?.

Nate, I think for Q1 of 2021, you may see something similar to Q3, that ex fees, in that [ 4.35% range to 4.40% ]. Again, until we're able to loan off some of that excess liquidity. .

Okay. Got it. That's helpful. And then just maybe changing gears. The other fee line was up a little bit, about $300,000 or so linked-quarter in 4Q.

Any commentary in terms of the driver there? And kind of how we should think about that run rate entering 2021?.

I would say that 2021 for the fee area will be pretty comparable. I don't think it's a material change one way or the other for '21 versus '20. .

Got you. Okay. And then perhaps just one last one. Expenses, those are up 6% or so in 2020. Obviously, you guys have less travel cost. And other kind of more typical operational expenses that didn't necessarily occur last year.

How are you kind of thinking about the overall expense growth rate this year? Is it kind of still in the mid- to high single-digit range? Or perhaps a little higher than that. .

I think going forward, probably in that 5% to 6% range. .

Okay, great. So pretty consistent with what we saw last year. .

Actually, just one more on just the provision outlook entering this year. So with the charge-off that we had in the [ fourth quarter ], seems like that credit is hopefully largely resolved. I know you guys are still working through that remaining complications with that bar and so forth.

But I imagine, with the cleanup that we saw this quarter, that, that may not recur to a similar degree.

And then with the loan growth outlook that Jason alluded to earlier, just curious how we should think about providing for growth this year and just within the context of charge-offs hopefully reverting to levels that we saw for the first 3 quarters of last year. .

I would say, Nate, that we talked consistently about that entering into the cycle and in exiting the cycle. And we've always believed that the NCO cycle-to-cycle, with that 1% cumulative number, is probably a pretty good number. I suppose if the planets lined up against us in every way, you could sneak into 1.1% or 1.2%.

And so a lot depends on the one credit. It's possible there could be additional needs there. We just don't know. We feel like we've addressed a great majority of it, if not all of it, and it may not even come to fruition. .

So again, I think for Bank7, if you just look at the cycle, and you can use that 1% number, ought to be pretty close. And so I mentioned the 2 hotels. There's just a lot of moving parts with those. And so what our intentions are is to recognize that it is a potential. It's not a probability, but it's a potential.

And so the theme for the bank was to heavy-provision last year, to continue provisioning this year. Not as heavy as last year, but to continue provisioning, such that if we did hit that 1% cycle-to-cycle, that we won't have to make any additional entries that would cause the earnings to be interrupted. .

So we have flexibility today. We have an internal range of loan loss reserve of 1% to 1.25%. You saw us exceed that range last year for prudent reasons. But right now, I think we ended the year at 1.22%.

And so if you really get into and you say, well, what -- you quantify what is 1.22% compared to 1%? I think that's a couple of million dollars, a little over $2 million above the absolute minimums. .

And so when you think about the context of, I believe, we had 43 basis points of charge-offs.

So if you really want to do the delta between 43 basis points and a 1% cycle-to-cycle, then you can say the provision that we put in this year, plus the over $2 million that were above our self-imposed minimum, we will have sufficient money in our loan loss reserve through the normal reserving this year to handle that delta of worst-case expectations.

And that's the way we look at it. .

Understood. That's helpful. And if I could just ask one more... .

And let me make one more comment about loan loss reserve. It's very important, very important. I think The Street investors sometimes have a tenancy to do just raw comparisons. And you may look at our ALL at 1.22%. I was reading some information the other day. And I think there was an average of 1.35% or 1.4%, whatever.

We all need to always remember that Bank7 carries more tangible common equity than the average.

I think the average tangible common is 8.9%, and we're at 10.5%, right?.

And so if you go in there and you say, "Okay, if we're running at 9% like others, or even 10%, then the percentage of your loan loss reserve becomes more important." And so we ballast the excess capital with our loan loss reserves. And at the end of the day, we put in the reserve what we think is prudent.

So I always like to remind all of us that it's a combination of capital and loan loss reserve and not just the absolute loan loss reserve. .

Got it. Makes sense. Yes. I just had one last one for Jason. Just outside of some of the hotel loans, those 2 hotel loans and so forth that you're keeping a closer eye on of late, at least during the back half of last year. Just trying to get a sense of criticized inflows and outflows and just overall levels in the fourth quarter. .

Sure. Fourth quarter is similar to third, where you have continued loans moving from more of a path to a watch through a couple of different segments. But hospitality was a good portion of that. And then we did have a large reduction in substandard loans, which was a positive. Our substandard category was down a little over 40% from Q3 to Q4.

And so we'll only know when we're looking back, but it feels a little bit like your peak NPA could have been in the third quarter, but we'll only know once it's all past us. But in general, through the more severe downgraded credits, we had a pretty large reduction through payoffs. And then, of course, the charge down there, the $3.5 million, so. .

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Travis for any closing remarks. .

Well, thanks for joining. We're excited about our company. We're glad you're part of it.

Brad Haines, any comments?.

No, we're all good. .

Okay. Thank you all. Bye-bye. .

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