Q1 2025 Bank7 Corp Earnings Call
Speaker Change: Welcome to Bank7 Corp's first quarter, 2025 earnings call. Before we get started, I'd like to highlight the legal information and disclaimer on page 26 of the investor presentation.
Speaker Change: 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 an information currently available to management.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Also, please note that this conference call contains references to non-GAAP financial measures. You can find reconciliation of these non-GAAP financial measures to GAAP financial measures in an 8K that was filed this morning by the company.
Please note this event is being recorded.
Speaker Change: 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.
Speaker Change: We certainly acknowledge how quickly the landscape has changed from our January earnings
Speaker Change: When there was so much excitement, regarding less regulations, some green suits related to the M&A and...
Basically cautious optimism regarding the direction of the nation.
Speaker Change: Clearly the narrative related to tariffs, potential trade wars and the possible impact on the economy or front and center. The capital markets certainly are nervous and large outflows from equities are now seemingly the norm.
Speaker Change: It certainly has affected the bank stocks that everyone else. On top of that, there are plenty of...
Speaker Change: 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.
Speaker Change: On top of that, the government is still operating at unsustainable deficit levels and issuing debt at a record pace.
Speaker Change: with the very countries that are now being hit by those tariffs being large buyers of that debt.
Speaker Change: 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.
Speaker Change: But more importantly, to stay very close to our commercial customers and understand in real-time how they are 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.
Speaker Change: 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.
Speaker Change: We take comfort in our fundamental strengths as evidenced by our exceptional level of earnings.
Speaker Change: A strong capital-based, reliable and steady liquidity, and our strong credit book with that good asset quality.
Speaker Change: The greatest fundamental strength of Bank7 is our team of bankers and our long-term customer relationships.
Speaker Change: The bankers are the backbone of this company and they're driving these results and that makes us proud and gives us confidence to move forward.
Speaker Change: 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. So with that being said, we're ready for any questions.
We will now begin the question-and-answer session.
Woody Lay: The first question comes from Wood Lay with KBW. Please go ahead.
Hey, good morning, guys.
Good morning.
Woody Lay: One of the start on loan growth, you know, is 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 recognize in the quarter and just given all the macro uncertainty. How should we think about growth from here? Thank you very much.
Woody Lay: 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 massed by some payoffs. And so when you're looking at this every 90 days, sometimes the...
Woody Lay: 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
Woody Lay: What ends up in the final numbers there because of those payoffs, but...
You know, we come in too.
April and the second quarter were really nice.
Speaker Change: It felt great through the first quarter and into April with really strong loan demand. And as Tom mentioned, these markets that we operate in in Oklahoma City and Tulsa and Texas, I mean, these are...
Speaker Change: Just high growth areas, really strong diverse economies, and we're grateful that's where we loan money.
Speaker Change: Yeah, and I would also add that for the first time, we modified the deck to put, show you the Illustrate D.
Speaker Change: On page 13, the long-term averages of the long segments and even though we had nice growth in the hospitality.
Speaker Change: 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.
Speaker Change: Yeah, that's hopeful. I mean, going back to your opening comments, you know, I think you called out the consumers.
Speaker Change: We're becoming a little more cautious and we're all a little in the dark on the eventual impact of the Terrace.
Speaker Change: But looking at the hospitality portfolio, it has a really strong track record. But any trends you're seeing over the past 90 days with occupancy rates or bookings that might point to any overall consumer trends?
Speaker Change: It's a good question. It's a difficult answer today because, as you know, hospitality is very seasonal.
Speaker Change: And so I think one of the worst quarters historically is the first quarter and specifically January and February . I was in Dallas.
Speaker Change: Talking to one of our larger groups about, you know, what are they seeing a couple of weeks ago?
Speaker Change: 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...
You know, we're price point, lower price point, properties, and so...
And so, so far, it's steady as she goes.
Speaker Change: Got it. And then last for me, you know, markets very volatile on a day-to-day basis, but longer term can you remind us how you're thinking about share buybacks just looking back in history, you know, you're active in 2020, but that came with the price well below tangible book values. So just any thoughts on share buyback strategy?
Speaker Change: You know, I'll say two things there. Number one, we're so blessed that...
Speaker Change: 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, you know, Kelly, curtain if I'm wrong, we're either right at or...
Speaker Change: Super close to record levels of capital in the company. And yet we're still posting, I'm just going to say 20% return on equity. And so when you can when you can
Speaker Change: You know, 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...
Speaker Change: I would say that I'm not sure in today's environment you can have too much capital. And, you know, when you look at the specter of...
Speaker Change: You know, what President Trump is doing targeting China, and I think they hold almost a trillion dollars worth of our debt.
Speaker Change: And, you know, 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.
Speaker Change: 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.
Speaker Change: 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...
Speaker Change: Deflate in the equity market. That's how to say that we wouldn't.
Speaker Change: And, and I also think that, you know, if we do have continued...
Stress that bleeds into...
Speaker Change: The banking space then there may be opportunities and so we're just not going to be in any rush to do anything absent a major you know decline in our share price. And I think where are we today? We're still at 1.6 or 7 times.
Speaker Change: Jamesville 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 130, 140 maybe? That's right.
Yep.
Speaker Change: 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.
Speaker Change: Yeah. Well, it's an inviable position at the end. All right, that's all for me. Thanks for taking my question.
Speaker Change: The next question comes from Matt Olney with Stevens. Please go ahead.
Matt Olney: Hey, thanks. Good morning. I think you guys already addressed the question around the hospitality portfolio.
Matt Olney: I guess that would 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.
Matt Olney: 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 just be curious about how you see the risk to the commodity price on each of these types of borrowers. Thanks.
Our large energy borrowers.
They're very active.
with hedging.
Matt Olney: And there's been opportunities here over the last couple of years.
Matt Olney: to lock in, you know, for very extended periods of time.
Matt Olney: Come in to protect the bank, and then on the service side of that portfolio, we're aligned with...
Very well-capitalized.
You know, long time industry, management, and capital providers that...
Matt Olney: These are quite the norm in that industry, you know, to have these cycles where the prices move up and move down and we're very well equipped within that portfolio to handle, you know, stress or even without cost of your stress.
Speaker Change: You know, that's an excellent response, Jason, and just coincidentally, I was reviewing just this morning our largest energy credit that's secured by producing properties, and I was reading the...
Speaker Change: Lone Memorandum from last year, and we always run as Jason says, sensitivity pricing, and I was looking at this as a refresher that particular customer on the sensitivity case projected cash flow from last year. We used $45 oil. [inaudible]
And $2 natural gas.
Speaker Change: And the sensitivity case also included the fact that the customer hedges 60% of their oil production.
And so, when you consider.
Speaker Change: That's a really good example of what Jason was talking about on our underwriting.
Speaker Change: And the customers just find cash flowing and repaying the debt based on those underwriting criteria. And that's the agreement we have in the loan agreement. So just a good real time example of what Jason was talking about.
Speaker Change: Okay, perfect. That's a great color. Appreciate that. And then I guess sticking with credit, good to see that the MPAs move lower in the first quarter, just any color on that movement. And then anything to call out on the substandard loan levels as of March 31st.
Speaker Change: 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 long grades, past dues
Speaker Change: Very, very loved based on historical levels and so, the economy does, you know, really...
Speaker Change: Start, you know, going into a severe or deeper session, we certainly enter it with a very clean credit book and very strong capital levels, millennial loan loss reserve and a nice run rate to sustain us.
Credit books very clean.
Speaker Change: The latter part of the quarter just led to any beta thoughts on kind of how that margin we act in the first quarter and your thoughts from here.
Speaker Change: Yeah, Matt, this is Kelly. We did have, we picked up some nice supportive pauses during the quarter. We were able to lower our cost of funds from 270 to 258, which was the average and staff really helped benefit the NIM. I think going into the second quarter, we had some nice loan growth as well.
Speaker Change: And so we've really bought about 460 range and that's currently where we're at. We do anticipate them to hold up and perform well, going into Q2 and Q3.
Okay.
Speaker Change: Again, if you have a question, please press star then one.
Speaker Change: Our next question comes from Nathan Race with Piper Sammler. Please go ahead.
Hey guys, good morning. Hope you're doing well.
on it.
Speaker Change: A bigger picture question. It's obviously fluid times and a lot of change over the past week or so, but as you're talking to clients and going through
Speaker Change: They're 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. Thank you.
Speaker Change: I think it's, you know, safe to say that if the tariffs are really broad-based, it'll be...
Speaker Change: Challenging for large swaths of bank clients, commercial businesses, commercial clients, but the people that we've been talking to, they're looking for different ways to find...
Protecting their interest, which is protecting our interest. And so I have found...
Speaker Change: The larger companies are very proactive, some of the smaller companies, they're going to be looking for solutions provided by you know...
Speaker Change: Whatever countries end up being the least expensive to do business with and thankfully you know a lot of these are long time operators and they've got multiple sources of finding materials or services and you know we're very...
Speaker Change: I guess we're paying very close attention to these things but you know 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.
Speaker Change: I think what's probably been more noticeable on a immediate impact were some of the disruptions to money coming out of the government.
Speaker Change: We've had multiple clients that 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...
Speaker Change: Some other, you know, arm that is fed by the government. So those have smoothed out, but that initial those effort, you know, was impactful. Can't say that we actually did have to extend any credit into that, but there were certainly some conversations.
Speaker Change: I also think that COVID kind of helped in a way because a lot of people were well down a road of...
Speaker Change: Re-shoring, 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 going to be already ahead of the game and we have one customer that's...
Speaker Change: He started his company 50, 60 years ago, 40, 50 years ago, and he's a manufacturer in the industrial space.
Speaker Change: And, you know, he went to Europe and he's in a free trade zone, Jason was telling me yesterday.
Speaker Change: It's just a part of his business of 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 businesses are here in the U.S. but...
Speaker Change: I think that I think people are, as Jason said, these smart business people are pretty agile and...
Speaker Change: We don't see it as a major impact to our book and our company, and I think part of that too is due to our size.
You know, clean that up.
Speaker Change: $100 billion bank. I think we probably have more people that are international that are going to be affected.
Speaker Change: You got it. It'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?
Speaker Change: I mean, you can see it's trending downward, I think we highlighted it, or...
Speaker Change: Projected that in previous quarters and so I think on a go for it if you use Q1 run rate it's kind of a good template for Q2.
Speaker Change: It's just becoming less and less of not only the income side of things but also the expense side of things, but so from a core, to a perspective.
Speaker Change: 750. It's good for Q2, and then 8.5 million for the expense that it thinks cooler. And then using the run rate for metal and gas and Q1, going forward. What's the, Kelly, what's the,
Speaker Change: How are you right now, of that remaining asset? Is $9 million? I think we have a list of the cost of $10, and that it's flight 24. Yeah.
Speaker Change: Yeah, I just become, as we project it, you know, not to be arrogant, but we pretty much nailed that one.
Speaker Change: But I think Jason, are we on pace to recaptured?
Speaker Change: All of our money by the end of this year, or by, within the next 12 months. Next 12 months. Right, now that's cash flow, right? So we, we expended 16 million to capture the asset.
Speaker Change: And in the next 12 months, we're going to have recovered all of that 16 million in cash.
Speaker Change: But as you know, on the accounting side, you have to match up the revenue and expenses and so 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.
Matt Olney: Got it. Thanks for that. One last one for me. Tommy mentioned maybe some distressed acquisition this not pleased could emerge.
Speaker Change: You guys continue to have the good problem of kind of how your excess capital levels are increasing. So just curious to get your thoughts on the M&A environment today. You obviously 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.
Yeah, we were aware of that.
Speaker Change: Potential, it was in our backyard and very aware of it last year and so you know I think the AOCI is still an overhang on a lot of these banks.
And it's, frankly, it's a bit maddening.
Speaker Change: And it's just going to be a slow boat to China for some of these people.
Speaker Change: Which is going to continue to have a dampening effect, and I think...
You know, we were active in an opportunity.
Speaker Change: Recently, and we had offered what we consider to be just a phenomenal knife.
Speaker Change: Price, and we weren't even close, and so we were frankly a little shocked, but I think the quality banks that are out there, the really quality banks.
Thank you. Bye bye. Bye bye.
That don't have an AOCI issue.
are going to be challenging for disciplined buyers such as...
Speaker Change: 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.
Speaker Change: But again, when you're a discipline buyer, when it's 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...
That's just what we have.
Got it. Really appreciate all the color. Thanks, guys.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Tom Travis for any closing remarks.
Speaker Change: Well, thank you again, clearly a great quarter, great company. We're so thankful for our teammates and our bankers and our...
Speaker Change: We're going to continue to keep a watchful eye on what's going on in Washington and continue to...
Speaker Change: 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. So thank you very much.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.