Bank7 Corp. ($BSVN)

Welcome to Bank7 Corp. First Quarter 2026 Earnings Call. Before we get started, I'd like to highlight the legal information and disclaimer on Page 25 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 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. 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. Please go ahead.

Thank you. Welcome to [ the ] -- as you can see, we are happy with our results today. As we regularly say, we're probably a little boring in this area, but we have to thank our team of bankers and I know some of them listen to these calls and if you're on the call, thank you. And we have a great group that's been together for a few decades. And it's very comforting to have such a strong, deep, broad team, and that's why we produce the results that we do. And so I suppose it's a little boring for some people quarter after quarter, where we're always putting up these fantastic results, but it takes a lot of effort. And we don't take many days off around here, and we do it the right way and the results speak for themselves. And so last quarter, we were I think the markets were expecting rate cuts in this quarter. Now the market thinking maybe the rates will go the other way due to the increase in commodity prices associated with the Middle Eastern conflict. Who [ knows ]. But the reason that I bring it up is that we are really proud of our ability to manage our NIM and to properly mix our balance sheet, and we're not concerned about rates going out or rates going up, we're positioned either way. And so with all of that said, you can see the major metrics in the deck, and we're here to answer any questions. So thank you.

[Operator Instructions] Our first question comes from Nathan Race with Piper Sandler.

This is Adam Kroll on for Nathan Race. Yes. So maybe just starting on loan growth. It looks like average loan growth was pretty solid while some payoffs later in the quarter dragged down end-of-period balances. So I guess, I'm curious if your expectations for loan growth has changed for the remainder of the year? And along with that, if you're seeing any noticeable change in demand within your energy portfolio?

Yes. Thanks for the question. This is Jason. And I think our goals for the year remain intact. We're still thinking moderate single digit. But I would say that coming off of the third and fourth quarter we had last year where we had really robust growth that kind of exceeded expectations in both quarters. We're not at that pace. So I would say that it has slightly slowed down, but we had really nice bookings in the first quarter. So just expect kind of the same from us this year. I do think like last year, we offset really sizable early payoffs throughout last year. That's a routine thing for us. I think you'll see more of that this year in the second quarter, in particular. We expect pretty sizable payoffs, and then we'll just offset that with new loan bookings throughout the rest of the year.

And as it relates to the energy portfolio, it's -- I believe it's at a 10-year low. It's about -- it was 8% -- a little over 8% of the portfolio. And so on the energy space, most of your well-capitalized professional organizations, really are not changing a lot as it relates to rushing out to drill, so to speak, I would say, just because of the spike in energy prices, I don't think anyone believes that there's any stability in the oil prices when it goes up due to what's going on in the Middle East. And so for us, we're opportunistic when those energy loan opportunities come along, but it's not a huge driver for our company. We're active, and we like the portfolio we have, but I wouldn't expect the energy piece to be causing a lot of dynamic change one way or the other.

Got it. No, that's super helpful color. Maybe shifting to the net interest margin. Some really nice expansion during the quarter. I was wondering if you could provide some color on how you expect the net interest margin ex [ loan ] fees to trend, assuming rates remain here through '26.

Adam, this is Kelly. We did make some really good progress on the liability side, cost of funds and that was [ related ] to our talented bankers, continuing to bring in some quality core deposits. That said, we are modeling in that same range $440 to [ $4.45 ] from a core NIM perspective. And on the loan fee side of things, kind of reverting back to the normal of 28 to 35 basis points.

Got it. And then lastly for me on capital management. Just given the strong profitability metrics, you should be building capital at a pretty strong clip. So I guess I'd be curious to hear your updated thoughts on M&A and just overall comfort level and letting capital levels build from here if the right partner doesn't come along?

Well, clearly, as we sit here today, I think we ended the quarter at [ 15.96% ] on risk based. So we're probably over 16% today, who knows. But clearly, the need for us to accumulate more capital is not on the top of our minds, and we're more into growing and organically and then on the M&A side. And so we've always been active in the M&A space and for the right strategic opportunities, we're going to continue to pursue those and we think that would be an efficient use of the capital.

Our next question comes from [ Will Jones ] with KBW.

Jumping in for Woody Lay. I wanted to follow up on the margin discussion and specifically just talk about deposit costs. It feels just at the time you alluded that the market has all [ but ] pulled cuts out of the forecast, maybe even we see up rates this year, but you guys kind of see the margin more stable in that setting. But specifically, with deposit costs, how would you guys kind of characterize the competitive environment right now? And in that scenario, is there a chance we actually see deposit costs trickle up towards the back half of the year, just as competitive dynamics kind of increase?

I don't think you're going to see -- I don't think it's that dynamic, so to speak. And if you -- so it's really kind of a two-part question you asked. And I don't see a massive fluctuation or any meaningful fluctuation in deposit costs. And then second -- now that's absent a rate increase, right? So I'm just assuming that there's no rate increase. And then the second part is, as far as the margin goes related to that, we just [ look ] at -- we provide that in the deck on the stability and the lack of volatility in the margin. So we don't expect anything materially different.

Okay. Got it. That's helpful. And then maybe could you guys just -- you guys called out some interest recoveries you saw this quarter. Would you be able to just quantify that just so we can think about kind of a clean, [ more ] recurring margin run rate this quarter?

Yes, from a core NIM perspective, I think the nonaccrual interest net up was $1.1 million, a little bit under. And then on a fee perspective, it was closer to [ 17% ]. And so again, that reverts us back to that normalized core NIM of $440 [ million ] and then 28 to 30-plus basis points on the fee side.

Got it. Okay. Very helpful there. I wanted to just pivot to the credit discussion. I there's just [ puts ] and takes on credit each quarter, very little migration, generally speaking, and asset quality is strong. And you guys have really kind of hit [ a ] 0 provision for the past, call it, 5 out of -- 4 or 5 quarters, but what is the messaging on the provision and reserve levels going forward? It feels like at some point that, that trend may have to give a little bit, but I just wanted to kind of get your views on the provision and where you see the credit story today?

A little bit challenging of the question to answer when we really don't know what the economy is going to do for the rest of the year. But what we're looking at today is, I mean, I think our credit book is as clean as it's ever been. And there was some migration during the quarter. When you see that nonaccrual interest recovery, I mean, those loans were paid in full. And so we had multiple credit transition out, full payoffs and then we had a couple of downgrades during the quarter. But on the surface, it looks like the numbers were fairly neutral, but I can't overstate how active we are managing the loan portfolio from a credit quality standpoint. And so let's say we grow the book, again, a pretty sizable amount and the [ economy ] stays the same, yes, we'll have to provision a little bit more. But if the loan growth is more timid, think low single digits, then we may not have to provision more. It just -- and let's see what's going on. There's quite a conflict going in the Middle East. And so does that [ intruded ] into our daily lives here in a bigger way so far, it's been a nonevent, especially within our credit book. But we're going to stay true to our fundamentals and do the same things we've done for the last decade.

I would also add to that, that we have quoted a payoff for this [ Friday ] that for the only really material remaining NPA we have, we have a high confidence factor that that's going to happen. And if that happens, the net effect would be NPAs of somewhere in that $4 million to $5 million range. And when you look at [ a ] $5 million on our portfolio, I think that equates to 25 bps or something like that. So to echo Jason's comments, we certainly don't feel any pressure, absent of macro [ about ] building more ACO loan loss reserve.

I appreciate all that context. I know I'm asking you to look into a crystal ball a little bit there. So I guess just one last one for me, just on capital. We've talked about buybacks not really being an efficient use for you guys, just through your lens. Just -- [ could ] you just remind, is that still kind of how you're viewing the buyback? And does it look any more attractive today than it did, say, 90 days ago? I would love your thoughts there.

Well, look, buybacks are [ -- ] we've often said this that we're blessed with a very top 1% return on equity in our company. And because of that, we produce really good earnings per share and we're not driven to reach for increasing EPS by doing some share buybacks. We've been beneficiaries of strong earnings and growth. And so now with that said, as we've said in the last few quarters, we recognize that we're very, very capital heavy. And especially for a company with no debt, and so at some point, the rubber meets the road. But just generally speaking, our philosophy is too strong [ a ] word. Our view is that the share buybacks really don't add franchise value, and it's more of a short-term mechanism. So I'm not trying to suggest that we would never do one. What I'm simply saying is that it hasn't been a critical need for us in the past. But clearly, if there were ever a time in the future where we felt like that the buybacks would make sense, it would probably be driven by a good share repurchase price and no other alternatives.

Our next question is from Jordan Ghent with Stephens.

I just had a follow-up on the migration on those downgrades during the quarter. Is there any additional details you can give on the type of credits they were? And kind of the loan type and things like that?

Yes. So we had a large builder developer relationship that we downgraded during the quarter, and that was the one Tom referenced that we think will pay off this week. So that's the only industry specific thing that I could get into.

Okay. Got it. And then just one more follow-up for me around kind of the M&A discussion. I think previously, you've brought up the idea of doing an MOE. Is that something that's still on the table? Or would you be kind of looking more towards that downstream partners?

I think the answer is both. And we don't -- strategic matters are inherently long term in nature. And so we've not deviated from our thinking on that.

Perfect. And then actually just one more. Could you guys maybe touch on the fees and expense guidance going forward? And maybe excluding the oil and gas impact?

Yes. [ The ] expense side, we're projecting internally in that range of $9 million to $9.25 million. And on the fee side, low end of $750,000 upwards of $850.

What do you talk about [ fee ]

On interest income.

Our next question comes from Nathan Race with Piper Sandler.

Yes, maybe just a follow-up for Kelly, just on updated expectations for the impact to fees and expenses from the oil and gas?

I mean, I think that it will be continued the expense offsetting the income. So not really material to the bottom line, but temporarily grossing up both sides of the P&L.

And Nate, this is Tom. As we've mentioned in the last I know last quarter and I think the last two quarters, perhaps three, we have accomplished our goal, as you recall, the goal was to reduce the [ that ] we had on an energy loan, and we're delighted with the results and we're -- what are we, 20 months in [ 20 ] I mean, [ 20 ] months. 20 months into it, -- and we've accomplished our goal. I think that for us to continue to hold that asset is just not something that we would plan to do. And I think that as a reminder, we have signaled to the market that we look at it as a cash recovery versus a GAAP income item. And so if we do exit that portfolio, then we may have an adjustment very slight on the GAAP, the way they've recognized income on the app basis, but on a cash basis, we will have but we already have accomplished what we wanted to accomplish. And so I bring all that up to say that it's a really small item. It's a real outlier item. We're delighted with what we've done and what we've accomplished, and I would expect that to be either gone altogether or diminished quite a bit over the next few months.

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

Again, thank you for joining the call. We're delighted to be where we are and continue to produce these results, and we're mindful of the macro Middle Eastern situation and when the inflation starts biting as predicted because of the higher oil prices, we're prepared as much as anybody can be for it. And in the meantime, it's steady as [ she ] goes for Bank7. Thank you.

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