Good day and welcome to Bank7 Corp.'s second quarter earnings call. [Operator Instructions].

Please note, this event is being recorded. .

Before we get started, I'd like to highlight the legal information and December 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. With that, I will turn the conference over to Tom Travis. .

Thank you. Good afternoon, and thank you for today. We appreciate your interest and involvement with our team and our great company. All things considered, we're pleased with our second quarter results, especially our strong PPE, a great strength of our company. .

Reflecting back on the April call, we understood we were facing many unknowns. And while much has changed between then and now, certainly, we've seen some things materialize yet many unknowns remain. In addition, we've witnessed new sources of social unrest.

It's unrelated to the pandemic, and that too has contributed to greater volatility creating less certainty about the future, something none of us really needed. .

With all of that said, we do see green shoots beginning to emerge, and we recognize the benefits provided by the Fed, Congress, the Treasury Department and also from the executive branch of governments. Not to mention the progress being made by the scientists and the doctors.

During these times of extreme volatility, it is reassuring to see the Bank17 sic [ Bank7 ] team performing at such a high level. They are to be congratulated for their tireless work and outstanding performance. It is truly a privilege to work with professional and exceptional people and be part of such an outstanding company. .

The industry faces heightened risks, including credit risk, margin pressure, stress to our customers and team members, additional threats related to IT intrusions and cybercrimes.

Regardless, we're closely managing those risks and remain very focused on our credit book, our liquidity and capital levels and certainly, our expense discipline and internal operations.

The volatile environment caused us to closely review and refresh our extreme stress scenarios, and we're using those results in conjunction with our deep transactional knowledge to assess potential impacts to our company. .

We are comforted by the thorough involvement between our experienced credit executives who work directly with lenders and our customers. Our enhanced stress scenario is based on the most recent Fed guidance then compared to actual results that occurred in the Great Recession, which is then balanced with a view towards our incurred loss methodology.

The result is a high degree of confidence in our revenue stream and the shock absorption capability of earnings and capital. That is why we also expect to continue to pay our dividend. .

Moving into the data, we focus on our strong PPE, as it was once again very high and consistent with historical levels. The data illustrates 2 very important items. The first shows our significant capital cushion and the second reveals how our PPE is much stronger than our peers. We are very proud of our strength in this area.

With regard to capital, we entered into this period of uncertainty with a very strong capital base. Additionally, not only did we enter the current crisis with strong capital position, our exceptional earnings will rapidly add to our capital base and much faster than most other banks.

We're very mindful that the near-term future is full of uncertainty. Nonetheless, we remain confident in our capital strength. Our confidence is further evidenced by the fact that none of the shares owned by our insiders have been sold, not one share. We have far more at stake in this company than anyone else. .

Regarding credit quality, we are mostly in uncharted waters, and we realize this pandemic is far-reaching and different. Nonetheless, we remain confident that asset quality will remain relatively strong, as our underwriting principles and long-time customer relationship have always carried us through the toughest of times.

Our strategy of loaning into more of the blue-collar types of projects and segments will serve us well. We can especially see that by reviewing the data related to the hospitality and CRE segments. Experiences taught us that economic downturns typically hit the more leverage and higher end segments, especially hard.

We also know that past recessions have revealed the strength in what we call the cycle down segments of the economy. We are very confident in our loan book.

Being mindful of the heightened scrutiny surrounding credit quality, we've provided enhanced reporting for our energy hospitality and CRE segments, and we'll ask Jason Estes, our Chief Credit Officer, to walk us through the credit book. .

Thanks, Tom. As mentioned, visibility is improving on the impact of the -- on the economy and our loan portfolio. This event has quickly created a stress to the hospitality industry that have been performing at a high level since the Great recession. The energy industry was -- were already present but were compounded by the sudden collapse in demand.

As a result, we've seen downward migration within the portfolio. Our NPAs and substandard loans have increased, and we've increased our provision after the extended period of low provision and low charge-off activity. While charge-offs remain low, it's important to recognize that our client base has been helped by significant government stimulus.

The energy portfolio continue to stress with the service and midstream companies feeling the impact the most.

Most of the service companies are in some stage of shrinking or winding completely down with the majority positioning to sell assets or already well into the process of selling off excess equipment that just won't be needed in the near future. .

Now a couple of positive notes. Our E&P and mineral clients continue to perform at a high level with minimal payment modification activity to date.

So far, the challenging deals we've navigated have had positive end results, with asset sales and account receivable reductions, eliminating or reducing debt levels to a point where the remaining operation can service what's left of the debt. .

Now as seen in the slide deck, 22 of our 34 operating hotels have returned or will return in August to original monthly payment schedule. This rebound is driven by the blue-collar property set.

It's also worth mentioning that our minimal exposure to retail, land and nonowner-occupied office real estate is serving us well and will continue to do so in the future. .

Overall, our high levels of capital and commitment to executive management involvement at the transaction level, give me great confidence in our ability to navigate this challenging economic environment. .

And with that, I'll turn it back over to Tom. .

Thanks, Jason. That's a good report on the credit side of the bank. Thank you for your hard work. As we move forward, our focus will continue to be on fundamentals. We'll continue to produce very strong PPE and reinforce our capital.

Wrapping up, we would say that we're also comforted by the fact that our part of the country continues to outperform to many other areas. And we know the green shoots we are seeing are important because there are flows of capital seeking opportunity, and that is a very good sign. So we intend to be vigilant, pay close attention to smart opportunities.

.

Being nimble, yet large enough to capitalize on those opportunities is critical to our near-term future, and we're very focused on that aspect. So we thank you for your time, and we're here to field any questions you might have. .

[Operator Instructions] And the first question will come from Brady Gailey with KBW. .

Why don't we start with loan growth? If you take out the PPP balances, I think loans were down a little bit.

Maybe just talk about the drivers there and how you're thinking about loan growth for the back half of this year and into next?.

I would say that -- remember, we entered into -- if you go back to November and December of last year, we were extremely excited about our loan pipeline. And in fact, in January and February, we had some very good loan fundings, and that pipeline was beginning to fund.

And so it propelled us to a very large increase in our loan portfolio at the end of the first quarter. And then as we all know, I would suggest to you that things came to a screeching halt around that first or second week of March. And that certainly had an impact on the funding of the rest of that pipeline.

And so where we are without PPP, at the end of the quarter, it was about $775 million, correct? And suffice it to say that there are many -- most people that are really not interested in borrowing money right now.

However, the reason that we wanted to comment on the green shoots and specifically related to Texas, there is a very, even more migration into Texas and business owners. And so those green shoots that we're seeing are going to propel us forward, I don't think you're going to see any meaningful loan growth for the back half of this year.

But having said that, we actually have opportunities right now and so it's hard to handicap, but I would say that you would probably expect us to be pretty flat through the rest of the year, part of that is also driven by the Main Street program. And as you know, the existing lender has certain limitations that a new lender may not.

And so it's possible that we could see a few credits refinanced out of the bank, through the Main Street program with other lenders, that puts further pressure on the portfolio. .

All right. That's some good color.

So next, can we talk about deferrals and just where those are at today and maybe talk about the need for any second ramp of the deferrals what you anticipate that need to be?.

Let's let Jason do that. But quickly, Brady, on your piece that came out this morning, thank you for that. One comment I would make, it's a subtle thing, but it's a major thing. I think you had mentioned in your piece that 22 out of our 43 properties were back on schedule. And you really need to back out.

There's 9 of those 43 that are construction -- under construction, never really were on an operational condition. And so therefore, I think the number is 22 out of 34 operating properties. So with that being said, we'll turn it over to Jason. .

Yes. So the COVID mods, temporary modifications. Remember, we stuck to a 60- and 90-day modifications in the first round with the majority of those being executed in late, late, late March and through early April. And so at the end of June, it was 10% of our notes and 37% of our loan balances.

And today -- well, as of the 24th, we were down to 87 notes which would be -- I don't have the percentage here, but it's -- what is that? I'll do the math on that in a second, but another $100 million that was deferred has come back on the normal payment. So we've cut it from $313 million on deferrals to $203 million on deferrals.

And there's another big chunk that falls off in the next 30 days, and you'll be down to just those handful that have had an additional deferral past that original deferral. .

All right. All right. That's helpful. And then finally for me, as we look at the provision, how do you expect that to trend in the back half of the year? I know you guys are not CECL adopters yet. The reserve was built some this quarter.

But do you anticipate the reserve continuing to go higher in the back half of the year?.

It wouldn't surprise us. The intention right now is subject to change. It's a rapidly changing thing, but it wouldn't surprise to see it built slightly and I think the clarity for all of us is going to be more and more over the next 4 to 8 weeks, maybe 12 weeks with medicine and science and the things that they're doing.

And the wearing of masks seems to be pretty prevalent throughout the country and that appears to be helping plateau. And so I think that the last piece of that, Brady, is going to be the next stimulus package, everyone expects a stimulus package.

And so at this point in time, we're very comfortable with our loan loss reserve and -- but yet, we're not living a dream down here. We understand the unknowns. And so I would say to you that we finished it -- well, we have 128 -- 127, 128. And remember, our view is we've got such strong PPE that we're just moving money from one pocket to the other. .

And so if we need to -- I think the number I calculated was somewhere around $1.5 million more dollars would get us up to 1.5%, which is pretty healthy. If you consider, the last thing I would say is we don't have consumer loan exposure. And we have 1.5% of our loans, we don't have credit cards.

And if you don't look at the components, especially chase and the big guys, I think their largest loss component, not number 1, number 2, is the consumer book.

And so if you don't have that consumer book and then you try to balance that with where we are with our loan loss reserve and our history of charge-offs and our underwriting, we just don't see a great urgent need to throw a bunch of money in there. And I think you'll see us be consistent over the next quarter to 2 quarters.

But would it surprise me if it went up a little bit? No. What it surprised me if it was flat? No. So we're close to where we think we need to be subject to all those things I mentioned relative to what we'll know in the next 3 months. .

Next question comes from Nathan Race with Piper Sandler. .

Just going back to the last question just in terms of thinking about the reserve build going forward.

I was curious maybe within that context, if you can kind of elaborate on what criticized and classified trends were in the quarter? And kind of how you see that evolving over the next quarter or 2?.

Yes. So the watch list grew -- our special mention list grew slightly. And then our substandard set of loans also grew. All of them are within some historical bands for us within the last 5 years, but there's certainly been some downward migration. And you can see in the NPA, if you know, that number was up. From last quarter.

We did have some nice stories within that number, where we had some reductions in already identified NPAs actually how to pay off in there and then some continued amortization. But then we added a few credits to that group. So we'll see moving forward, but that's kind of how it went this past quarter. .

I would say this, just from a macro perspective, when you look at the allowance, you look at the migration of NPAs and the credit book and the grading, it's very, very difficult to draw any conclusions because you need to do it based on a perspective and a belief of whatever this new normal is going to be.

And a great example, what do we have 5 SBA loans in the company? I don't even know. .

It was 7. .

7. Yes. And so you may have borrowers, like we have a borrower who's a veterinarian. And that operation was hit pretty hard. And just like a lot of others, our chiropractors, another example. And so the SBA decided without anyone asking, well, they're going to step in and make 6 monthly payments for you.

So if you're running an organization and you say, well, these people are not -- no one's going to the chiropractors.

And so does that make that person substandard credit? Does it make them something beyond the watch list? And so my point is that we've done this for a long, long time, and you grade credits based on what you think is a reasonable outlook and where you are today. And what I'm suggesting to you is that's a very difficult thing to do.

And so what we have to do is we have to be patient, and we have to know that the capital is there, if we ever need it, but we need to wait and determine a more permanent effect on certain segments and certain asset classes. And then I think you can draw conclusions.

But I would say one more thing about deferments, I know for a fact -- I know 2 banks for certain that they have lower deferments, but guess what, they're making side notes to borrowers. So the borrower comes in, they get a side note, they can draw proceeds off that note. So that they don't have a deferment.

Now you may think that Gamesman ship or whatever. And -- but my point is this. There is no standards that have been published. And so while I certainly appreciate the difficulty of an analyst job, I don't want to draw any conclusions.

We don't want to draw conclusions for our company and make permanent decisions today based on what we consider to still be a temporary situation relative to the grading of the credits unless it's a certain thing unless you -- I mean, if we were had a loan to a drilling contractor secured by drilling rigs, then yes, we think that's going to be a very, very long-term thing.

But absent a few obvious ones, then that's going to be our perspective. And so we're not worried about this new metric that all of a sudden appeared. There were people are comparing deferments compared from bank to bank to bank because there just is no standardization there.

And again, we know you have a job to do, but it's very difficult to make projections at this point. .

Yes, understandable. It's obviously an evolving world. So I definitely appreciate those comments, Tom.

So I guess at this point, I mean, you guys aren't really reserving for any specific credits, and you kind of expect some additional general reserve builds over the next quarter or 2? Is that kind of a fair characterization, I suppose, of those comments?.

We do have some specific reserves. We have credits that have some specific reserves, yes. .

And was that a factor in the, I guess, with the small object that we saw in NPAs during this current quarter?.

I would say it's a combination of both, but it skewed less towards specific reserves and more towards just macro events and trying to understand that we're facing unknowns. And we think that the peak or the severity that's going to hit certain asset classes won't be fully known until the last of the stimulus packages run out.

Now we can see some emerging like we talked about. Brad and I were at lunch today talking about the airline industry. And I think we all would agree for the near future, there's going to be too many airplanes out there. So we're not an airplane lender.

But so there are certain asset classes that you can make that determination on, but I think that those really won't be fully known until later in the year. .

[Operator Instructions] The next question will come from Matt Olney with Stephens. .

I wanted to ask more about the midstream energy portfolio, and it sounds like your views of your portfolio are evolving. When I think of this category, I think it's pipelines, but it sounds like this may not be exactly the business that you classify under midstream.

So can you tell us more about how your views of your portfolio are evolving from midstream energy? And if you can be a little more specific about what types of businesses these are if they're not pipelines?.

Sure. Their pipeline service companies, pipeline construction companies, mostly environmentally driven. And so going in -- back in April, we thought, okay, maybe a couple of weeks to a month here, they're disrupted.

It's been larger than that as these giant midstream companies have delayed projects into the future that these guys were either constructed the service or build. And so some of it, like I say, is environmentally driven. And so they only have a certain amount of time that they can delay getting this work done.

But the fact is in the second quarter, they saw really a quick deterioration in the pipeline for them. And so that's why you see that shift within that sheet. I'm sure you're referring to the slide deck. And that's where this question is coming from. .

But anyway, so that's just what's happened in the last 90 days to our view of those companies. And really I would say, I was somewhat surprised that the severity of the revenue slump for them and really the very short-term outlook for those companies. .

Jason, a lot of those jobs -- the job hadn't already started once the pandemic hit. Most of those jobs got pushed either from the big companies just been crushed along with everybody else. But some of them are now coming back on the table. Things are looking up a little bit. So probably all eyes on the election right now. .

And based off the slide deck, none of those midstream borrowers have modified loan terms. So I was a little surprised about that.

Help me reconcile the increased concern, but no modified loan balances?.

Sure. PPP proceeds. You've had a government assistance on some of this stuff, but that doesn't change our overall view of these credits in the business environment, but they've not needed any payment help -- payment relief. .

Got it. Okay. That's helpful. And then on the hospitality side, I think you disclosed that the average occupancy for those 22 properties that are returning to normal payment status here pretty quickly was around 63% in June.

So for the remaining 12 properties does that still require additional payment relief? What's the occupancy in that part of the book? And then kind of part 2, what common themes are you seeing? As you look at those 22 properties, returning normal status versus the 12, any other themes that you can think if you can share with us between that portfolio?.

Definitely. So of the 12 remaining, 2 have decided that they're just going to temporarily close until conditions improve. So there's really 10 other that have been open and operating, and their occupancy in June was 29%.

And I think the thing that will stand out is you're going to be looking at higher end, closer to downtown, more dependent upon business travel in that segment that's lagging versus interstate properties that have little reliance on business.

There are going to be people that are traveling, getting from point A to point B, need a place to stop and rest or leisure travelers. .

And that's been a steady. I know I put the June number in there, but if you go back and you look at March, April, May, June, you're going to see this very steady increase in occupancy and ADR amongst really both property sets, but the one is recovering faster than the other.

But it is worth noting the 10 other operating properties, their March occupancy was 19%. So now they're at 29%. So there is some level of rebound. It's just not the same pace as those others. .

Okay. That's helpful. And then if I switch gears over to the margin, the margin adjusted for loan fees, I believe, was around $430 million in 2Q.

How do you see that margin playing out for the back half of the year?.

I think you're going to see us operating at the low end of our historical range. We're fighting very hard to keep it where it is and all banks are. And part of the issue is the Fed. It's -- we're proud of our liquidity, but we had a Board meeting the other day. I think we had $100 million on deposit to Fed.

We made a whopping $7,000 in income off that in 1 month. And so I think it's really a function of -- it's a confluence of the banks being smart and cautious and prudent in keeping our liquidity up at a time where keeping your liquidity up cost you pressure on your margin. And so we're going to do some things. We're going to whittle here and there.

We already have. So it has just as much to do with that as it does borrowers coming in and demanding or borrowing at a better rate. And I would say, are we still at 90% plus on our loan force. .

94%. .

Yes. So we're insulated, and I think some borrowers will chip away at you. And -- but we're comfortable operating in that historical range, albeit at the lower end. And it's -- again, it's mainly on the liability side of the balance sheet and our inability to drive interest income off of our strong liquidity. .

Okay. Good. And then on the operating expense side, saw somewhat good cost control this quarter, I think, expenses were down sequentially.

Do you still think you can hold expenses down this lower level? And what's the outlook for the back half of the year?.

We're focused on that every day, and we've created a high-class problem for ourselves. And it's tough to answer that question because you get to a point where your efficiency ratio is 35%, it's -- I can't wait for the quarter where it goes from 35% to 37% and all of a sudden, it's a panic, but we're still better than 98% of the people out there.

So you're kind of splitting here, as I just say that we haven't changed our outlook and our perspective one bit as far as watching our pennies. .

And so these times that the efficiency ratio really rises to the top. .

Right. .

Yes. We're -- we've got enough to do. We all do. But the one thing we don't have to worry about is [indiscernible] around trying to figure out how to get more efficient. .

Yes, below 34% is definitely impressive, especially versus pretty much all your peers out there. So that's great to see. What about on the buyback side of the stock? You got plenty of capital, great, great profitability.

Was there any activity in 2Q? And what are the updated thoughts on the buyback from here?.

I would say the -- well, Kelly, the period between the second week of March and about mid-April, we bought back about 830,000 shares. .

85,000 in Q2. .

85,000 of which was in Q2 and so we decided to take a pause, and we're not saying that we wouldn't come back into the market, but there's a lot of considerations there. It's not just price, and it's not just EPS, it's float and liquidity.

And so we're very comfortable with our capital levels in our PPE, and I would say it would be hard for Bank7 to sit on its hands, if the stock took a big dive, and we've got that optionality. But we're very comfortable where we are. We think we've done the right thing for our investors, and so we'll see where it goes from here. .

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

Thank you all for your interest in the company. We have enthusiasm. We have -- we love the markets we operate in.

And while certainly there's stress here, the underlying fundamentals of inward migration is just -- unfortunately, I guess, you could say the strike in the riding that you see in certain parts of the country and believe me, the people that are moving into, especially the Texas market is it just continues and you have low interest rates.

And you have this can-do attitude and inward migration, and that's a pretty powerful formula. And so we don't want to sound giddy, and we don't want to sound overly optimistic because we do think we're going to have a few credit issues. You cannot escape them.

But the reason we put for the first time, the stress test that Kelly and Jason worked on very hard, and we decided to follow the DFAST methodology so that all of you could see the results, we just feel really good about where we are and who we are and we're comfortable with our company.

And I guess I would ask Chairman, Haines, if he has any other comments. .

I believe that's it. We have a great team and team all buys into how we did things, and we're going to continue to do. So thank you very much, guys. .

Thanks. .

Thank you. .

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