Bank7 - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered core profitability with diluted EPS of $1.08 and net income of $10.3M; net interest margin (NIM) was 4.98% and efficiency ratio 39.45%, with management emphasizing deposit cost reductions and a “properly matched” balance sheet as key drivers.
• EPS and revenue modestly beat S&P Global consensus: EPS $1.08 vs $0.99 (+8.7%) and revenue $22.6M vs $22.6M (+0.2%); beats were aided by lower average cost of funds (2.58% vs 2.70%) and steady loan demand entering April.
• Credit and capital remained strong: CET1 14.02%, Tier 1 leverage 12.39%, NPLs/Total Loans 0.50%, and liquidity covering adjusted uninsured deposits by 2.81x; 85% of earning assets reprice within one year.
• Near-term guidance: NIM “bottomed” in the 4.60% range and is expected to “hold up” in Q2–Q3; core noninterest expense targeted at ~$8.5M and core fees ~$0.75M in Q2 as oil & gas income declines toward the tail.
• Catalysts: disciplined loan/deposit pricing, improving cost of funds, and potential M&A optionality; management remains cautious on buybacks but open to opportunistic deployment if equity markets reset further.

What Went Well and What Went Wrong

• What Went Well

  • Lower average cost of funds (from 2.70% to 2.58%) supported margin resilience; “we’ve really bottomed out in that 4.60% range… anticipate NIM to hold up… into Q2 and Q3”.
  • Loan growth momentum and backlog entering Q2, with hospitality and C&I mix managed within internal limits and historical norms; “we didn’t step out of our norms”.
  • Capital, liquidity, and asset quality remain top-tier, enabling flexibility without reliance on buybacks; “we’re… close to record levels of capital… and we’re still posting… ~20% ROE”.

• What Went Wrong

  • YoY pressure on NII and EPS: net income down 8.4% YoY ($10.3M vs $11.3M) and NIM down to 4.98% vs 5.14% YoY amid rate dynamics and mix shifts.
  • Noninterest income declined YoY ($1.76M vs $2.01M) as oil & gas contribution tapered per plan, creating a “nuisance noise factor” despite being not material.
  • Macro uncertainties (tariffs, deficits, consumer sentiment) cited as headwinds; “we are in a very volatile environment… consumer sentiment is definitely not as strong”.

Transcript

Operator (participant)

Welcome to Bank7 Corp's Q1 2025 Earnings Call. Before we get started, I'd like to highlight the legal information and disclaimer on page 26 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 current 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 8-K that was filed this morning by the company. Please note this event is being recorded. 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 Paul Timmons, Director of Accounting. With that, I'll turn the call over to Tom Travis.

Tom Travis (President and CEO)

Thank you. Good morning and welcome to our call today. We certainly acknowledge how quickly the landscape has changed from our January earnings call when there was so much excitement regarding less regulations and green shoots related to M&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 now seemingly the norm. It certainly has affected the 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, but 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 will 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, and 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. and this dynamic part, and we're cautiously optimistic moving forward. With that being said, we're ready for any questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the 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'll pause momentarily to assemble our roster. The first question comes from Woody Lay with KBW. Please go ahead.

Woody Lay (VP)

Hey, good morning, guys.

Kelly Harris (CFO)

Morning.

Woody Lay (VP)

Wanted to start on loan growth. I was positively surprised by the growth you saw in the quarter. It looked like it came mostly from the hospitality portfolio. Just any color on the growth you recognized in the quarter? Just given all the macro uncertainty, how should we think about growth from here?

Jason Estes (Chief Credit Officer)

Yeah, it was a good quarter. As you noted, hospitality kind of stuck out, but there was some strength in the C&I bookings as well that was masked by some payoffs. When you're looking at this every 90 days, sometimes the numbers do not 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. We come into April and the Q2 with a really nice deal flow, a good backlog of things in the works, and what has gone on here the past few weeks in the economy. We really do not know what that is going to do to new bookings, but we really felt great through the Q1 and into April with really strong loan demand.

As Tom mentioned, these markets that we operate in, 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.

Tom Travis (President and CEO)

Yeah, I would also add that for the first time, we modified the deck to show you, to illustrate on page 13, the long-term averages of the loan segments. Even though we had nice growth in the hospitality space, it's well within our norms. 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.

Woody Lay (VP)

Yep, that's helpful. Going back to your opening comments, I think you called out the consumers becoming a little more cautious, and we're all a little in the dark on the eventual impact of the tariffs. Looking at the hospitality portfolio, it has a really strong track record. Any trends you're seeing over the past 90 days with occupancy rates or bookings that might point to any overall consumer trends?

Tom Travis (President and CEO)

It's a good question. It's a difficult answer today because, as you know, hospitality is very seasonal. I think one of the worst quarters historically is the Q1, 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. 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.

Jason Estes (Chief Credit Officer)

Lower price point.

Tom Travis (President and CEO)

Lower price point properties. So far, it's steady as she goes.

Woody Lay (VP)

Got it. Last for me, market's very volatile on a day-to-day basis, but longer term, can you just remind us how you're thinking about share buyback? Just looking back in history, y'all were active in 2020, but that came with the price well below tangible book value. Just any thoughts on share buyback strategy?

Tom Travis (President and CEO)

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. 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.

Kelly Harris (CFO)

Correct.

Tom Travis (President and CEO)

Right? Yet we're still posting, I'm just going to say, 20% return on equity. 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. When you look at the specter of what President Trump is doing targeting China, and I think they hold almost $1 trillion 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.

We think it's very comforting to have record levels of capital yet still produce tremendous returns that are top 1%. 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. 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. We have maximum flexibility, but we definitely have an eye towards caution over the near term. I also think that if we do have continued stress that bleeds into the banking space, then there may be opportunities.

We're just not going to be in any rush to do anything absent a major decline in our share price. I think where are we today? We're still at 1.6 or 1.7 times tangible book. It has come down from over 2, but we're still in, I think, where's the bank indexes these days? At 130, 140 maybe?

Kelly Harris (CFO)

Sounds right.

Woody Lay (VP)

Yep.

Tom Travis (President and CEO)

I think caution is the word. While we're being cautious, we can provide our investment partners with top-tier returns, and that's our mentality today.

Woody Lay (VP)

Yep. It is an enviable position to be in. All right, that's all for me. Thanks for taking my questions.

Operator (participant)

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

Matt Olney (Managing Director)

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.

Tom Travis (President and CEO)

Jason, you want to take that?

Jason Estes (Chief Credit Officer)

Yeah, 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. Our large energy borrowers, they're very active with hedging. There have 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. That is not a new concept. This is not a new thing. This is where the tried and true underwriting fundamentals really come in to protect the bank. On the service side of that portfolio, we're aligned with very well-capitalized, long-time industry management and capital providers. These are quite the norm in that industry to have these cycles where the prices move up and move down.

We are very well equipped within that portfolio to handle stress or even what I would call severe stress.

Tom Travis (President and CEO)

That's an excellent response, Jason. Just coincidentally, I was reviewing just this morning our largest energy credit that's secured by Proved Producing Properties. I was reading the loan memorandum from last year, and we always run, as Jason says, sensitivity pricing. 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. The sensitivity case also included the fact that the customer hedges 60% of their oil production. When you consider, that's a really good example of what Jason was talking about on our underwriting. The customer is just fine cash flowing and repaying the debt based on those underwriting criteria. That's the agreement we have in a loan agreement. Just a good real-time example of what Jason was talking about.

Matt Olney (Managing Director)

Okay. Perfect. That's great color. Appreciate that. I guess sticking with credit, good to see that the NPAs move lower in the Q1. Just any color on that movement? Anything to call out on the substandard loan levels as of March 31st?

Jason Estes (Chief Credit Officer)

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 are very, very low based on historical levels. If the economy does really start going into a severe or 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. Credit book's very clean.

Matt Olney (Managing Director)

Okay. I guess if I could sneak in one more on your net interest margin. I think we talked back in January, and there was an expectation at that time that your margin would trough sometime early in the Q1 and then build back up the latter part of the quarter. Just love to hear any updated thoughts on kind of how that margin reacted in the Q1 and your thoughts from here.

Kelly Harris (CFO)

Yeah, Matt, this is Kelly. We did have a we picked up some nice core deposits during the quarter. We were able to lower our cost of funds from 270 to 258, which is the average, and so that really helped benefit the NIM. I think going into the Q2, we had some nice loan growth as well. We have really bottomed out in that 460 range, and that's currently where we're at. We do anticipate NIM to hold up and perform well going into Q2 and Q3.

Matt Olney (Managing Director)

Okay. Okay. Great. Thank you, guys.

Operator (participant)

Again, if you have a question, please press star, then one. Our next question comes from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race (Managing Director and Senior Research Analyst)

Hey, guys. Good morning. Hope you're doing well.

Jason Estes (Chief Credit Officer)

Morning.

Nathan Race (Managing Director and Senior Research Analyst)

Bigger picture question. It's obviously fluid times, and lots changed over the past week or so. 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 reliant upon international economies? On the other end of the equation, to what degree are some of their clients related on international exports as well?

Jason Estes (Chief Credit Officer)

I think it's safe to say that if the tariffs are really broad-based, it'll be challenging for large swaths of bank clients, commercial businesses, commercial clients. The people that we've been talking to, they're looking for different ways to find a different supplier from a different region that's not going to be impacted as much by the tariffs. Business people, entrepreneurs, they're very creative in protecting their interest, which is protecting our interest. I have found the larger companies are very proactive. 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. Thankfully, a lot of these are long-time operators, and they've got multiple sources of finding materials or services.

We're paying very close attention to these things, but it's also very early, and it's very fluid. I can't say they have final solutions, but they're certainly looking into solutions. 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 have made comments about, "Hey, we 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." 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.

Tom Travis (President and CEO)

I also think that COVID kind of helped in a way because a lot of people were well down the road of reshoring, manufacturing, and sourcing, and getting away from China and into other parts. I think COVID kind of got that ball rolling. Some people are going to be already ahead of the game. We have one customer that's he started his company 40-50 years ago, and he's a manufacturer in the industrial space. He went to Europe, and he's in a free trade zone, Jason was telling me yesterday. It's just a part of his business. I was laughing about, "What is a free trade zone?" He's wondering too, I'm sure, but he has a fortress balance sheet. Most of his business is here in the U.S.

I think people are, as Jason said, these smart business people are pretty agile. We do not see it as a major impact to our book and our company. I think part of that too is due to our size. If we had a $100 billion bank, I think we'd probably have more people that were international that are going to be affected.

Nathan Race (Managing Director and Senior Research Analyst)

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?

Kelly Harris (CFO)

Yeah, Nathan, I mean, you can see it's trending downwards. I think we highlighted or projected that in previous quarters. I think on a go forward, if you use Q1 run rate, it's kind of a good template for Q2. It's just becoming less and less of not only the income side of things, but also the expense side of things. From a core fee perspective, $750,000 is good for Q2, and then $8.5 million for the expense side of things, core. Using the run rate from the oil and gas in Q1 going forward.

Tom Travis (President and CEO)

Kelly, what's the total value right now of that remaining asset? Is it $9 million?

Kelly Harris (CFO)

I think we have it listed at close to 10 in slide 24.

Tom Travis (President and CEO)

Yeah. Yeah, it's just become, as we projected, not to be arrogant, but we pretty much nailed that one. The recovery is what we thought it was going to be. Of course, that recovery, you're onto the now you're really moving into the tail end and the long-term tail cash flow. I think, Jason, are we on pace to have recaptured all of our money by the end of this year or within the next 12 months?

Jason Estes (Chief Credit Officer)

Next 12 months.

Tom Travis (President and CEO)

Right. Now, that's cash flow, right? We expended $16 million to capture the asset. In the next 12 months, we're going to have recovered all of that $16 million in cash. As you know, on the accounting side, you have to match up the revenue and expenses. It 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.

Nathan Race (Managing Director and Senior Research Analyst)

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

Tom Travis (President and CEO)

Yeah, we were aware of that potential that was in our backyard and very aware of it last year. I think the AOCI is still an overhang on a lot of these banks. Frankly, it's a bit maddening. It's just going to be a slow boat to China for some of these people, which is going to continue to have a dampening effect. I think we were active in an opportunity recently, and we had offered what we consider to be just a phenomenal nice price, and we were not even close. We were, frankly, a little shocked. I think the quality banks that are out there, the really quality banks that do not have an AOCI issue, are going to be challenging for disciplined buyers such as us. It does not mean we are not trying.

It does not mean that we are not looking and doing more than looking and modeling a lot of different opportunities. When you are a disciplined buyer, when it is your money and not other people's money and you are a good steward of it, it is just tougher. It means we are going to have to keep doing what we are doing, spend some shoe leather and some analysis, and just try really, really hard. That is just what we have.

Nathan Race (Managing Director and Senior Research Analyst)

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

Operator (participant)

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

Tom Travis (President and CEO)

Thank you again. Clearly, a great quarter, great company. We're so thankful for our teammates and our bankers and our markets. We're going to continue to keep a watchful eye on what's going on in Washington 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 near term. Thank you very much.

Operator (participant)

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