Bank7 Corp. Price & Performance (BSVN)

Representing the company on today's call we have Brad Haines, Chairman Tom Travis, President and CEO JT Phillips, Chief Operating Officer Jason Estes, Chief Credit Officer Kelly Harris, Chief Financial Officer and Paul Timmons, Director of Accounting. With that, I'll turn the call over to Tom Travis. Thank you. Good morning, and welcome to our call today. We certainly acknowledge how quickly the landscape is changed from our January earnings call when there was so much excitement regarding less regulations, some green shoots related to M and A and basically cautious optimism regarding the direction of the nation. Clearly the narrative related to tariffs, potential trade wars, and the possible impact on the economy are front and center the capital markets certainly are nervous and large outflows from equities are are now seemingly the norm. It certainly has affected bank stocks and everyone else. On top of that, there are plenty of prognosticators who believe that longer term tariffs are inflationary on the American consumer. Who knows if the tariffs will stick and if so, how much impact they might have? One thing is for certain, consumer sentiment is definitely not as strong as it was and people aren't nervous.

On top of that, the government is still operating at unsustainable deficit levels and issuing debt at a record pace, with the very countries that are now being hit by those tariffs being large buyers of that debt. All of this is to say that we're very aware of these factors and understand that we're in a very volatile environment. So our job is to watch closely but more importantly to stay very close to our commercial customers and understand in real time how they're being impacted. It's too early to know how Main Street might be impacted we know we must monitor everything carefully and we're doing that. In the meantime, the beat goes on. Our continued strong earnings will rapidly add to our already high levels of capital and we'll continue to operate without debt while maintaining strong liquidity. We take comfort in our fundamental strengths as evidenced by our exceptional level of earnings a strong capital base, reliable and steady liquidity, our strong credit book with good asset quality. The greatest fundamental strength of Bank7 is our team of bankers and our long term customer relationships. The bankers are the backbone of this company. And they are driving these results and that makes us proud and gives us confidence to move forward.

We continue to also stress how grateful we are to be in the dynamic part of The U. S. In this dynamic part and we're cautiously optimistic moving forward. So with that being said, we're ready for any questions.

We will now begin the question and answer session. At this time, first question comes from Woody Lay with KBW. Please go ahead.

Hey, good morning guys. Good I wanted to start on loan growth. I was positively surprised by the growth you saw in the quarter. It looks like it came mostly from the hospitality portfolio. Just any color on the growth you recognized in the quarter and just given all the macro uncertainty, how should we think about growth from here?

Yes, it was a good quarter. As you noted, hospitality kind of stuck out, but there was some strength in the C and I bookings as well that was mass by some payoffs. And so when you're looking at this every ninety days, sometimes the numbers don't tell the full story, but we were really pleased with what was booked and it was a little more diverse than maybe what ends up in the final numbers there. Because of those payoffs. But we come into April and the second quarter with a really nice deal flow, a good backlog of things in the works and what's gone on here the past few weeks in the economy. We really don't know what that's going to do to new bookings, but we really felt great through the first quarter and into April with really strong loan demand. And as Tom mentioned, it's these markets that we operate in Oklahoma City and Tulsa and Texas. I mean, these are just high growth areas, really strong diverse economies. And we're grateful that's where we loan money. Yeah. And I would also add that for the first time, we modified the deck to show you the illustrate the on page 13, the long term averages of the loan segments.

And even though we had nice growth in the hospitality space, it's well within our norms. And of course, as you know, I would remind everyone on the call that we do have internal self imposed limits on each category. So we didn't step out of our norms.

Yeah, that's helpful. And then going back to your opening comments, I think you called out the the consumers becoming a little more cautious and we're all a little in the dark on the eventual impact of the tariffs. But looking at the hospitality portfolio, it has a really strong track record. But any trends you're seeing over the past ninety days with occupancy rates or bookings that might point to any overall consumer trends?

It's a good question. It's a difficult answer today because as you know, hospitality is very seasonal. And so I think one of the worst quarters historically is the first quarter, and specifically, January and February. I was in Dallas talking to one of our larger groups about what are they seeing a couple of weeks ago And they didn't see anything that was out of the norm. And so we remain optimistic that the breadth and depth of that portfolio, which is really not geared towards it's a good mix for business, leisure, lower price point. Lower price point. Properties. And so And so far, it's steady as she goes.

Got it.

And then last for me, [indiscernible] volatile on a day to day basis. But longer term, can you just remind us how you're thinking about share buybacks just looking back in history, you all are active in 2020, but that came with the price well below tangible book value. So just any thoughts on share buyback strategy? I'll say two things there. Number one, we're so blessed that we don't need to do share buybacks in order to boost EPS.

And I know that that's a common strategy from a lot of companies But Kelly, correct me if I'm wrong, we're either right at or super close to record levels of capital in the company. Correct.

Right?

Yet, we're still posting, I'm just going to say, percent return on equity. And so when you can when you can be in that situation there's really not internal pressures or thoughts to quickly do it. The second thing I would say is that our mentality right now is we're cautiously optimistic but I would say that I'm not sure in today's environment you can have too much capital. And when you look at the specter of what President Trump is doing targeting China, And I think they hold almost a trillion dollars worth of our debt And there's some speculation that they react by okay, we just won't buy any more of your debt. We're still issuing a lot of debt. It's a scary time out there. It's very, very scary. And so we think it's very comforting to have record levels of capital yet still produce tremendous returns that are top 1% And we think it's time just to take a pause, and watch and see what happens over the next two to three to four months to see if there's any kind of normalcy that can return to the market. And so that's not to say that if prices continue to deflate in the equity markets, that's not to say that we wouldn't jump in because we're debt free, we've got plenty of liquidity.

So we have maximum flexibility, but we definitely have an eye towards caution over the next over the near term. And And I also think that you know, if we do have continued stress that bleeds into the banking space, then there may be opportunities. And so we're just not gonna be in any rush to do anything absent a major decline in our share price.

And I think where are we today? We're still at 1.6 or seven times tangible book.

So it's come down from over two but we're still in I think we're where's the bank indexes these days? At one thirty, one forty maybe?

Sounds right. [indiscernible] So I think caution is the word, and while we're being cautious, we can provide our investment partners with top tier returns and that's our mentality today.

Yeah. Well, it's an enviable position to be in.

Alright, that's all for me. Thanks [indiscernible] for taking my questions.

The next question comes from Matt Olney with Stephens. Please go ahead.

Hey, thanks.

Good morning.

I think you guys already addressed the question around the hospitality portfolio. I guess I'd be curious also about the energy portfolio. I think it's around 9%, 10% of your overall loans. I'm just curious how you think about energy commodity prices and the risk to your borrowers. I think you guys give us a good segmentation on the types of energy borrowers on slide 14. I'd just be curious about how you see the risk to the commodity price on each of these types of borrowers. Thanks.

Jason, you want to take that? Yes. I think that this is where your underwriting comes in and we never lose focus of how important it is before you make the loan to make sure that you're running these sensitivity cases and our large energy borrowers They're very active with hedging. And there's been opportunities here over the last couple of years to lock in for very extended periods of time for these borrowers so they could meet their hurdles on returns and really de risk their operations. And so that's not a new concept. This isn't a new thing. This is where the tried and true underwriting fundamentals really come in to protect the bank And then on the service side of that portfolio, we're aligned with very well capitalized long time industry management and capital providers that these are quite the norm in that industry to have these cycles where the prices move up and move down. We're very well equipped. Within that portfolio to handle stress or even what I would call severe stress.

That's an excellent response, Jason, and just coincidentally, I was reviewing just this morning our largest energy credit that is secured by crude producing properties And I was reading the loan memorandum from last year, and we always run, as Jason says, sensitivity pricing. And I was looking at, just as a refresher, that particular customer on the sensitivity case projected cash flow from last year, we used $45 oil and $2 natural gas And the sensitivity case also included the fact that the customer hedges 60% of their oil production And so when you consider that's a really good example of what Jason was talking about on our underwriting And the customer is just fine cash flowing and repaying the debt. Based on that those underwriting criteria and that the agreement we have in the loan agreement. So just a good real time example of what Jason was talking about.

Okay. Perfect. That's great color. Appreciate that. And then I guess sticking with credit, good to see that the NPAs moved lower in the first quarter. Just any color on that movement? And then anything to call out on the sub standard loan levels as of March 31?

No, we're pleased with where the book is overall. We always want to be perfect but the book's very clean, migration, nothing alarming. In any of the trends for loan grades past dues or very, very low. Based on historical levels. And so, the economy does really start going into severe deep recession, we certainly enter it with a very clean credit book and very strong capital levels.

Plenty of loan loss reserve, and a nice run rate to sustain us. So credit looks very clean.

Okay.

And then guess if I could sneak in one more on your net interest margin think we talked back in January and there was an expectation at that time that that your margin would trough sometime early in the first quarter and then build back up the latter part of the quarter. Just love to hear any updated thoughts on kind of how that margin react in the first quarter and your thoughts from here?

Yes, Matt, this is Kelly. We did have picked up some nice core deposits during the quarter.

Were able to lower our cost of funds from 2.7 to 2.58 with the average and that really helped benefit the NIM. I think going into the second quarter, we had some nice loan growth as well. And so we've really bottomed out in that $4.60 range and that's currently where we're at. We do anticipate NIM to hold up and perform well going into Q2 and Q3.

Okay. Okay, great. Thank you, guys.

Our next question comes from Nathan Race with Piper Sandler. Please go ahead.

Hey guys, good morning. Hope you're doing well. Good morning. Picture question. It's obviously fluid times. And lots changed over the past week or so. But as you're talking to clients and going through their financials and so forth, do you have any sense across your commercial client base to what extent some of their product inputs are relying upon international economies and then on the other end of the equation, to what degree are some of their clients related on international exports as well. I think it's safe to say that if the tariffs are really broad based, it will be challenging for large swaths of bank clients, commercial businesses, commercial clients. But the people that we've been talking to [indiscernible] they're looking for different ways to find a different supplier from a different region that is not going to be impacted as much by the tariffs. And business people, entrepreneurs, they're very creative [indiscernible] protecting their interest, which is protecting our interest. And so I have found the larger companies are very Some of the smaller companies they're going to be looking for solutions provided by whatever countries end up being the least expensive to do business with.

And thankfully, a lot of these are long time operators and they've got multiple sources of finding materials or services. We're very I guess we're paying very close attention to these things. But it's also very early and it's very fluid. So I can't say they have final solutions, but they're certainly looking into solutions. And that's across the board. I think what's probably been more noticeable on immediate impact were some of the disruptions to money coming out of the government We've had multiple clients that make comments about, hey, we may may need to rely on a line of credit here due to payment delays coming out of whether it's direct government payment or quasi government through some kind of quasi government entity or some other arm that is fed by the government. And so those have smoothed out, but that initial Doge effort was impactful. Can't say that we actually did have to extend any credit into that, but there were certainly some conversations.

I also think that COVID kind of helped in a way because a lot of people were well down a road of reshoring manufacturing and sourcing and getting it away from China and into other parts. And so I think COVID kind of got that ball rolling So some people are gonna be already ahead of the game. And, you know, we have one customer that's he started his company fifty, sixty years ago. Forty, fifty years ago. And he's a manufacturer of in the industrial space And he went to Europe and he's in a free trade zone. Jason was telling me yesterday and it's just a part of his business. And I was laughing about what is a free trade zone And he's wondering too, I'm sure, but he has a fortress balance sheet, most of his business is here in The U. S. But I think that I think people are as Jason said, these smart business people are pretty agile and so we don't see it as a major impact to our book and our company I think part of that too is due to our size.

We had a $100,000,000,000 bank. I think we probably have people that were international that could that are going to be affected Got it. That's really helpful. Appreciate that color. Maybe changing gears a little bit, Kelly, any thoughts on just kind of the trajectory of oil and gas related revenue and expenses going forward and kind of what that implies for your expense run rate? Going forward this year?

Yes, Nate. I mean, you can see it's trending downwards. I think we highlighted [indiscernible] projected that in previous quarters and so think on a go forward, if you use Q1 run rate as kind of a a good template for Q2. It's It's just becoming less and less of not only the income side of things, but also the expense side of things. And so from a core fee perspective, $7.50 is good for Q2 and then 8,500,000.0 for the expense side of things core and then using the run rate from the oil and gas in Q1. Going forward. What's the Kelly, what's the total value right now that remaining asset is 9,000,000 I think we have it listed at close to 10,000,000 and that's Slide 24. [indiscernible] Yeah, it's just become as we projected, not to be arrogant, but we pretty much nailed that one. And the recovery is what we thought it was going to be. But of course, that recovery, you're on to now you're really moving into the tail end and long term tail cash flow.

But I think Jason, are we on pace to recaptured all of our money by the end of this year or within the next twelve months.

Next twelve months.

Right. Now that's cash flow, right? [indiscernible] we expended $16,000,000 to capture the asset. And in the next twelve months, we're going to have recovered all of that $16,000,000 in cash But as you know, on the accounting side, you have to match up the revenue and expenses. And so, was a really good transaction for us. It provides a little bit of a, I call it a nuisance noise factor but it's just not material.

Got it. Thanks for that. One last one for me. Tom, you mentioned maybe some distressed acquisition opportunities could emerge and you guys continue to have the good problem of kind of how your excess capital levels are increasing. So just curious get your kind of thoughts on the M and A environment today. Obviously, we saw one announcement in your backyard, I believe, last week. But just kind of any thoughts on how you're looking at potential acquisition opportunities going forward?

Yes, we were aware of that potential that was in our backyard and very aware of it last year. And so I think AOCI is still an overhang on a lot of these banks and frankly, it's a bit maddening. And it's just gonna be a slow boat to China for some of these people which is going to continue to have a dampening effect. And I think we were active in an opportunity recently [indiscernible] we had offered what we consider to be a just a phenomenal nice price [indiscernible] we weren't even close. And so we were frankly a little shocked but I think quality banks that are out there the really quality banks that don't have an AOCI issue are going to be challenging for disciplined buyers such as such as us. And so it doesn't mean we're not trying. It doesn't mean that we're not looking And doing more than looking. And modeling a lot of different opportunities But again, when you're a disciplined buyer, when it your money and not other people's money and you're a good steward of it, it's just tougher. And so it means we're going to have to keep doing what we're doing, spend some you know, shoe leather and some analysis, and and just try really, really hard.

And That's just what we have.

Got it. Really appreciate all the color. Thanks, guys.

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

Well, thank you again. Clearly, a great quarter great company. We're so thankful for our teammates and our bankers and our markets and we are going to continue to keep a watchful eye on the what's going on in Washington and and continue to grow our capital in the near term and make sure that we're cautious. And provide a really good return for our partners in the in the near term. So thank you very much.

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