Bank7 (BSVN) Q2 2025 Earnings Call Transcript

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DATE

• Thursday, July 17, 2025. at 10 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Thomas Travis
• Chief Credit Officer — Jason Estes
• Chief Financial Officer — Kelly Harris

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TAKEAWAYS

• Net Interest Margin (NIM): Remained at the higher end of the historical range, despite mild anticipated future degradation as stated by Thomas Travis.
• Loan Growth: The deal pipeline "looks solid right now," according to Travis; Q2 originations surpassed Q1 and growth momentum is expected to continue in Q3 2025, pending unpredictable paydowns.
• Core Yield on New Loans: Recent portfolio additions are yielding slightly below the 7.6% core yield reported for Q2 2025, as noted by Jason Estes.
• Expense Outlook: Projected Q3 total expenses of $10 million, split between $1 million in oil and gas and $9 million in other expenses, per Kelly Harris.
• Oil and Gas Asset Recovery: Internal Q3 projection of $2 million in fees, including oil and gas-related fees, expected to remain within the 36%-38% core range, without material disruption from current expense or revenue trends. 75% of cash outlay has been recovered, with full recovery expected by mid-2025.
• M&A Strategy: Company continues to engage in discussions, with a pronounced focus on "MOE" deals; prior signed LOIs did not proceed due to discipline on terms.
• Credit Quality: Continued improvement in "a little cleaner, you know, a little smaller MPA number" has been observed over the last several quarters, with very clean past dues and adherence to underwriting fundamentals as discussed by Jason Estes.
• Portfolio Mix Trends: Shift within energy loans from service deals to production loans, with energy exposure now almost half of the level it was seven or eight years ago; hospitality and C&I portfolios noted for high churn and active customer base management.
• Deposit Costs: Deposits remain relatively stable, though management anticipates slight increases to support growth in Q3 2025, offset by focusing on attracting zero-cost transaction accounts.
• Interest Rate Sensitivity: Management expects loan and deposit betas to move "one for one" on the first few rate cuts, with loan floors helping offset potential margin compression.

SUMMARY

Bank7 (NASDAQ:BSVN) management signaled confidence in sustaining above-average NIM and operational efficiency while preparing for minor margin moderation if deposit costs rise. Full cash recovery from oil and gas assets remains on track, and the lending pipeline signals sustained growth for Q2 2025, barring unpredictable paydowns. The company maintains active M&A dialogue but has held firm on deal discipline, focusing on fit and value creation.

• M&A conversations remain frequent, with market participants' improved Accumulated Other Comprehensive Income (AOCI) expected to loosen deal activity in key dynamic geographies.
• Liquidity and portfolio granularity are supported by churn and asset turnover in the energy, hospitality, and C&I sectors, facilitating customer base renewal and segment growth.
• Jason Estes stated, "our past dues are very clean," reflecting management's continued focus on credit quality and risk controls despite broader economic uncertainties.
• Talent acquisition may occur selectively in North Texas, but management emphasized culture and credit discipline over rapid expansion in response to recent regional M&A trends.

INDUSTRY GLOSSARY

• MOE (Merger of Equals): A business combination in which two companies of similar size consolidate, typically with shared governance and integration of operations.
• AOCI (Accumulated Other Comprehensive Income): A component of equity reflecting unrealized gains and losses not included in net income, affecting tangible capital and M&A dynamics in banking.
• MPA (Mentioned Pass Assets): Bank-specific term used internally to denote credits closely monitored because of risk factors, prior to official regulatory classification as criticized or classified.
• Loan Beta / Deposit Beta: The responsiveness of loan or deposit yields to changes in benchmark interest rates, indicating asset and liability sensitivity in rate cycles.

Full Conference Call Transcript

Thomas 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, their 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 continue 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 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.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, 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 2. 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.

Woody Lay: Hey, good morning, guys.

Thomas Travis: Morning, Woody.

Woody Lay: 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 others 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?

Thomas Travis: Always depends on the lumpy paydowns. 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 are 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 pay downs 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. You know? And I think Q3 is lining up to be similar, but we'll see.

Woody Lay: And then how do you think about the NIM outlook given the growth? Deposit costs are relatively 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 NIM?

Thomas Travis: Yeah. I think that's a fair way to state what we see real-time is that to keep up on the deposit side, it does cost a little bit more money. We're always focused on, you know, offsetting some of that higher-priced money with the transaction accounts, you know, the zero-cost accounts. And so bankers have done a really nice job of dragging that business in. And, you know, 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.

Woody Lay: 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?

Thomas Travis: Woody, we've come close a couple of times over the last twelve months. We've actually had a couple of signed LOIs and then 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. And yeah, I think the tendency for people now is they improved their AOCIs somewhat which is gonna loosen up the market we're gonna 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.

Woody Lay: Alright. That's all for me. Thanks for taking my questions.

Thomas Travis: Thank you.

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

Nathan Race: Hey, guys. Good morning. Thanks for taking the questions.

Thomas Travis: Hi, Nathan. Good morning.

Nathan Race: Just following up on the margin commentary. 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% kinda core yield the second quarter?

Jason Estes: Yeah. I think it would be slightly lower than the 7.6, but you know, still I think, you know, if you go back a year ago, or two years ago, there were fewer banks really aggressively looking for loans, after March 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 kinda settled in on the deposit and the loan side. Which is part of what led to the results.

Nathan Race: Got it. That's helpful. Then just kinda thinking about the appetite to maybe add some producer going forward. There's obviously been some M&A announcements within, you know, two of your key MSAs recently. So just curious kinda what the appetite is, maybe add some talent maybe relative to the existing capacity across the teams.

Thomas Travis: Nate, I met with a person in Dallas on Monday, and we you know, we've looked at a few lift-out possibilities and those are delicate things as you can imagine. And you know, 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. And so 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 that anything that's materially dynamic at first. You know, 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.

Nathan Race: Okay. Great. Maybe, one last one for me for Kelly. You know, I strip out some of the oil and gas impacts within the expenses, I think you run around $8,800,000 coming out of the quarter. So just curious how you're thinking about kind of expense run rate over the back half of this year.

Kelly Harris: 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 $2,000,000 split evenly with oil and gas and core. And then on the expense side, we're using $10,000,000 with a million in oil and gas and $9,000,000 on the expenses.

Thomas Travis: Okay. I don't think it's had a real meaningful impact to our efficiency ratio. Correct. It's you know, we're still in that core 36 or 37, 38% core.

Nathan Race: Right.

Thomas Travis: And so I guess I would argue it's probably splitting hairs at this point, Nate.

Nathan Race: 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 much conclude by the end of next year? Before then?

Thomas Travis: I think I 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?

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

Thomas Travis: 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 really not material anymore. Then that's a good thing.

Nathan Race: Right. Got it. I appreciate all the color. Congrats on a great quarter, guys.

Thomas Travis: Thank you.

Operator: Thank you. And your next question today will come from Matt Olney with Stephens. Please go ahead.

Matt Olney: 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?

Kelly Harris: Yeah. We're internally projecting $2,000,000 in fees not split evenly between the oil and gas and the core.

Matt Olney: Got it. Okay. 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 on 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 open to some larger chunkier loans. Just any more color on the quick granularity what you're seeing these days?

Thomas Travis: Sure. Matt, it's always a mix with us, you know, and I would say going back to the first of this year, know, I think if you look our production loans, you know, that's really where we're up. You know, $3,035,000,000. 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 shifted a lot more to production. You know, just think it hedged oil and gas production. And so you know, that's kind of a story for this first half of the year as well.

And then, you know, from a C and I 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 C and I portfolio. And then you know, owner-occupied real estate, we've had a good year there. We're up you know, about $19,000,000 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 C and I, 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 ten 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.

And because of the growth in the other segments, and the other the hospitality segment is down exposure-wise from a percentage basis. And so 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.

Matt Olney: 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 some a little bit of pressure in the third quarter we already discussed. Just remind us of your rates and sensitivity and, I guess, the market's currently expecting a September Fed funds 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 you were well distributed to rates.

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

Thomas Travis: That's great. You can see I can 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. And when we talk about NIM, we're looking at the net NIM without loan fee income. And historically, we're very close to the high end of our historical range. And so 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 NIM 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 did say he's 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 NIM, it's really important to remember the long-term dynamics of the match 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.

Matt Olney: Okay, guys. Thanks for the color. Appreciate it.

Thomas Travis: Thank you.

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

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

Jason Estes: 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, 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 and it's pretty remarkable you know, as we talk to our clients and these business owners and how they operate and you know, you'll see someone have to deal with the issue here or there, but all in all, it's just been a really good you know, run of multiple quarters here where we operate. I mean, the economy is strong.

Nathan Race: Okay. Great. That's helpful. And Tom, I'll be sure to set a low core margin bar for you in the future.

Thomas Travis: Appreciate it. You know, we appreciate it, Nate. You know, it's easier to meet low expectations. You know that.

Nathan Race: Indeed. Thanks, guys.

Thomas Travis: Thank you.

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

Thomas Travis: Well, we're 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 gonna keep doing what we've always done. And so thank you. Bye-bye.

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

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