Bank7 Corp.

Welcome to the Bank7Corp second quarter 2025 earnings call. Before we get started, I'd like to highlight the legal information and disclaimer on page 27 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, 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 Tom Travis, President and CEO, J.T. 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. Welcome to the call. We obviously had a great quarter, as you can see in the results. Before we get to that, a couple of weeks ago today, there was a really bad flood in my hometown of Kerrville, Texas. And so, Anyone on the call that has money left in their budgets for relief fund, there's a great organization there, Kerr County Relief Fund. They really need support, so consider that when you're looking at your expenditures in that area. I'm sure that the people down there will put it to good use. Back to the call, it was one of our best quarters ever, and we always have to recognize that those results happen because of our talented group of bankers. They drove strong loan and deposit growth, and we thank them very, very much. As you can see, we maintained our NIM on the higher end of our historical range, and we also continued to benefit from that low efficiency ratio. When you put those factors together with the solid loan growth, we experienced nice, strong core earnings. We're very comfortable with our asset quality, and I always give a shout out to Jason Estes and his team They've done an excellent job of maintaining a high-quality credit book while at the same time growing that portfolio. So we're very proud of our results. We're pleased to continue to provide shareholders with excellent top-tier results. And without further ado, I guess we're standing by for any questions you may have.

Thank you. We'll now begin the question-and-answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing any keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause for just a moment to assemble our roster. And your first question today will come from Woody Lay with KBW. Please go ahead.

Hey, good morning, guys. Good morning, Woody. Good morning. Wanted to start on loan growth. Obviously, a really strong quarter on the growth front, and it's been a really successful first half of the year when many other in the industry have kind of lagged in growth. You know, I know your growth can be a little bit lumpy quarter to quarter, but how are you thinking about the growth momentum in the back half of the year?

Always depends on the lumpy paydown. You know, I think our deal pipeline, it looks solid right now. You know, I think we've signaled that the last couple quarters in a row that, you know, things in Oklahoma, things in Texas, economically, they're just in a really good spot. We're thankful to do business where we do business. And so, you know, going into Q3, again, pipeline looks strong. But you just never know on the chunky paydowns, you know, what's really coming. I think it was fourth quarter of last year, you know, we just had a big wave of Companies selling, people selling assets, various things that lead to a little bit of unpredictability there in the payoff side. But from the origination side, Q1 was strong. Q2 was stronger slightly. And I think Q3 is lining up to be similar, but we'll see.

And then how do you think about the NIM outlook given the growth? Deposit costs were relatively low. stable in the quarter? Just given the expectation for strong growth, could we see deposit costs start to move up to fund the growth, and how does that impact the MIM?

Yeah, I think that's a fair way to state what we see real time is that, you know, to keep up on the deposit side, it does cost a little bit more money. We're always focused on offsetting some of that higher-priced money with the transaction accounts, the zero-cost accounts. And so bankers have done a really nice job of dragging that business in. And hopefully we can continue to do so, but I think we've been talking for a few quarters in a row about, yeah, we expect a slight degradation, but we do expect to remain in our historical ranges. And that holds true today.

Got it. And then last for me, you know, we've seen deal activity pick up in your backyard. Just any update on the M&A front for you all?

You know, Woody, we've come close a couple times over the last 12 months. We've actually, you know, had a couple of signed LOIs and, you know, we're very disciplined in our approach and for various reasons those didn't happen. We continue to meet with various potential partners. We're very focused on we'd love to do an MOE, but we just continue to have a lot of meetings and do a lot of evaluations. I think the tendency for people now as they improve their AOCIs somewhat, which is going to loosen up the market. But we're going to just continue to evaluate opportunities in what we consider to be dynamic markets and common cultures. And it's just hard to predict when one of those might break loose.

All right, that's all for me. Thanks for taking my questions.

Thank you. And your next question today will come from Nathan Race with Piper Sandler. Please go ahead.

Hey, guys. Good morning. Thanks for taking the questions. Just following up on the margin commentary, you know, curious maybe, Jason, if you can kind of touch on some of the competitive pricing dynamics you're seeing and just kind of where you're seeing new loans come on the portfolio relative to the 7.6% kind of core yield in the second quarter.

Yeah, I think it would be slightly lower than the 7.6, but still, I think if you go back a year ago or two years ago, there were fewer banks really aggressively looking for loans, especially after March of 23. And I would consider today's environment very historically normal from a pricing standpoint, you know, within the competitive set, you know, here in Texas and Oklahoma. It just seems pretty benign, you know, and that's nice to see some return to normalcy. So, yeah, there's always pricing pressure, Nate, but right now feels like people have kind of settled in on the deposit and the loan side, which is part of what led to the results.

Got it. That's helpful. And then just kind of thinking about the appetite to maybe add some producers going forward. There's obviously been some M&A announcements within two of your key MSAs recently, so just curious kind of what the appetite is, maybe add some talent, maybe relative to the existing capacity across the teams.

Nate, I met with a person in Dallas on Monday, and we've looked at a few lift-out possibilities, and Those are delicate things, as you can imagine. And I think the dynamic when you look at a lift out or people coming out of those situations is always the credit comes first, and then the deposits to help fund that growth seems to be a slower dynamic. We evaluate those, and you may see us do something in the North Texas region, but I don't know that it's going to be anything that's materially dynamic at first. We're very, very careful, and culture is very, very important to us, and so we'll see how that goes in the next couple of months.

Okay, great. Maybe one last one for me for Kelly. You know, if I strip out some of the oil and gas impacts within expenses, I think you're running around $8.8 million coming out of the quarter. So just curious how you're thinking about kind of the expense run rate over the back half of this year.

Yeah, Nate, I believe Q2 is probably a solid guide. Internally, we are showing a little bit of expense creep. So you could increase that slightly, but it's probably a good start. I think from a Q3 perspective, fees, $2 million split evenly with oil and gas and core. And then on the expense side, we're using $10 million with $1 million in oil and gas and $9 million on the expenses.

But I don't think it's had a real meaningful impact to our efficiency ratio. Correct. We're still in that core 36% or 37%, 38% core. Core. Right. And so I guess I would argue it's probably splitting hairs at this point, Nate.

Right. And then can you just remind us what the remaining life is on the oil and gas assets? Should that largely run off by the end of, or should the recovery pretty much conclude by the end of next year or before then?

I think when I read your piece, you said that we had recovered 75% of our cash outlay. Is that what you said in your piece this morning, Nate?

Correct. Versus, I think, 68% at the end of last quarter.

Right. Right. And I think that's pretty accurate.

Yeah, we should recover fully cash on cash middle of next year, I think, is what we're projecting. So three to four more quarters.

We've achieved our goal there, Nate. It's working really, really well. And we've achieved our goal on that. And so it's going to just continue to perform that way and become, it's really not material anymore. And that's a good thing.

Right. Got it. I appreciate all the color. Congrats on a great quarter, guys. Thank you.

Thank you. Again, if you have a question, please press star and then one. And your next question today will come from Matt Olney with Stevens. Please go ahead.

Yeah, thanks for taking the question, guys. Just a few follow-ups here. Kelly, I think I missed your commentary you just made about the fees for the third quarter with and without the oil and gas revenue. Can you just go over that again?

Yeah, we're internally projecting $2 million in fees, not split evenly between the oil and gas and the core. Got it.

Okay, that's helpful. Thank you, Kelly. And then... Going back to the loan growth discussion, it looks like a portion of that growth was within energy lending, just looking for any more color and kind of the opportunities you see on that side. And then just overall growth that you're seeing in 2Q in the pipeline, just any color on the overall granularity of these loans. I think some of these loans can be smaller singles and doubles, but I think also you've you're open to some larger, chunkier loans. Any more color on the granularity, what you're seeing these days?

Sure. Matt, it's always a mix with us, you know, and I would say going back to the first of this year, you know, I think if you look, production loans, you know, that's really where we're up, you know, 30, 35 million in that energy bucket. And what's happened in our energy portfolio really since we went public is, you know, just this shift away from service. The service deals we're in are big fund deals typically. And it's shifted a lot more to production, you know, just think hedged oil and gas production. And so that's kind of the story for this first half of the year as well. And then from a CNI standpoint, there's some strength there this year that's getting a little bit clouded by some exits within that portfolio. And so we've really had a nice origination year in the CNI portfolio. And then owner-occupied real estate, we've had a good year there. We're up about 19 million net net. And then a little bit of growth in our dollars outstanding in the hospitality portfolio. But again, that's another one. Like energy and like CNI, those And the hospitality between those three portfolios, there's just a lot of churn. And so lots of exits, lots of asset sales. And then, you know, we're constantly trying to reload that customer base. And so, you know, we're benefiting from some of these exits on the deposit side. And so we like to stay real active in those three books because it's really helped us grow the company here over the last 10 years.

I would add to Jason's comments that if you look at a long-term horizon going back to for the last seven or eight years, the energy exposure today is almost half what it was seven or eight years ago. Because of the growth in the other segments and the hospitality segment is down exposure-wise from a percentage basis. We haven't expanded those verticals and in fact in the energy it's come down quite a bit. And I really, as Jason said, it doesn't have anything to do with us exiting a segment. It has everything to do with the ability to grow the other parts of the portfolio and specifically in the Dallas-Fort Worth region. So I think it's important to remember the long-term dynamics that are in play there.

Yep. Okay. Well, I appreciate the color on that, and then I guess going back to the margin discussion, I think you kind of hit on a little bit of pressure in the third quarter we already discussed. Just remind us of your rate sensitivity, and I guess the market's currently expecting a September Fed phones cut, and I guess with that on your balance sheet, I'm just now assuming there could be a little bit more incremental margin headwind in the fourth quarter, if that's the case. But just remind me if your overall is attributed to rates.

Yeah, Matt, this is Kelly. The first few rate cuts, we were able to keep the loan beta and the positive beta one for one. We anticipate more of the same for the next couple rate cuts. And as floors kick in, we'll definitely help out on the liability side.

Okay. Okay.

That's great. I think you can see some of that dynamic on page 10. We tried to illustrate the floors and what the dynamics are. I would say generally that we always talk about our NIM. When we talk about NIM, we're looking at the net NIM without loan fee income. Historically, we're very close to the high end of our historical range. I think it's a natural thing that we are very well positioned for when rates do come down. And we're not concerned about it because we have so many floaters and floors. And we're funding it on the other side properly. But I think that it's important that we all remember the long-term averages that we experience in that net NEM. And I'm delighted that we've been able to keep it where it is. I mean, I got a little bit of bone to pick with Nate. I saw Nate. I didn't realize, Nate, last quarter that you had predicted us to be even higher than where we are. I feel like a pole vaulter that just pole vaulted 20 feet. And Nate's like, well, you should have done 21. But I'm half kidding, Nate. But seriously, I think when you look at NEM, it's really important to remember the long-term dynamics of the matched balance sheet, the floors, and that, look, if we bleed down into the more typical historical range, that's okay. And it wouldn't surprise us. Okay, guys. Thanks for the color.

Appreciate it. Thank you.

Thank you.

And your next question today will come from Nathan Race with Piper Sandler. Please go ahead.

Unrelated question to your last comment, Tom, but just wondering if Jason could maybe just comment on what he's seen in terms of criticized classified migration in the quarter and just how you're thinking about credit quality and charge-offs over the balance of this year and into next.

Yeah, I'd say, you know, if you go look back over the last several quarters, you know, it's just kind of this continuous path toward a little cleaner, you know, a little smaller MPA number. Really, nothing has changed, you know, over the last year. I'd say six to nine months internally. You know, our past dues are very clean. Economic environment here is good. We stick to our underwriting fundamentals. We're not adding new business lines. It's just more of the same. And, you know, there's a little bit of uncertainty, I think, in the economy. You know, if you just look at the headlines and see the tariffs and different things going on with immigration policy. It's pretty remarkable as we talk to our clients and these business owners and how they operate. You'll see someone have to deal with an issue here or there, but all in all, it's just been a really good experience. run of multiple quarters here where we operate. The economy is strong.

Great. That's helpful. Tom, I'll be sure to set a low core margin bar for you in the future. Appreciate it.

We appreciate it, Nate. It's easier to meet low expectations. You know that.

Indeed. Thanks, guys.

Thank you.

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

Well, again, we're delighted with the quarter, with the first half of the year. We're cautiously excited about the rest of the year, just the great markets that we operate in and the great team of bankers that we have, and we're just delighted to continue to provide shareholders with absolute top-tier results, and we're going to Keep doing what we've always done, and so thank you.

Bye-bye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.