Good day and welcome to the Bank7 Corp. Second Quarter 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 beliefs as well as assumptions made by and information currently available to the 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; and Kelly Harris, Chief Financial Officer. With that, I'll turn the call over to Tom Travis. Please go ahead.

Thank you and welcome to everyone on the call. We're delighted with our results. They were strong, record profits, and we achieved those. We always thank our team members. We don't take them for granted. It's an outstanding group and we're just very grateful to be part of this team. It's just a wonderful group of professional people that take pride in producing these results. As you can see, we continue to reap the rewards of a well-matched balance sheet and we again posted a strong NIM, which drove us to those earnings, record earnings. Those earnings were achieved despite a relatively flat loan book, and that was because we experienced some large loan paydowns towards the end of the quarter and a few of our anticipated new loan fundings were pushed to July. Earnings were also strong due to our cost discipline and our low efficiency ratio. That's one of the hallmarks of who we are. As far as liquidity goes, our cash position continues to be historically higher than industry averages. In addition to that, our public fund segment is small and made up of towns and counties and school districts within our communities. We like our core funding. We also continue to have a large amount of availability on our lines. We view those as a backstop facility. We don't use those lines, but they're certainly available sources of funding. And then the drop in deposits compared to last quarter was principally related to one very large deposit. We've been carrying approximately $80 million at certain points, it was up as much as $100 million and it related to a bankruptcy court deposit that was finally dispersed per the bankruptcy court. That's really the story on the drop in the deposits and it never really was part of our core funding. It was a good funding source because there was no interest paid on it for several months. Overall, the liquidity is really strong and good. As far as asset quality, I constantly shout out to Jason Estes and his team; they do an exceptional job in that area and our overall credit quality is very, very strong. It's always a big strength of our company. You will note we had a small net charge-off, and that was the tail-end remnants of the large credit that we worked through last year and early this year. We had not charged it down completely at the end of last year because we weren't sure, but we were cautious. We thought there might be a little bit more to charge-off. Instead of taking that charge-off last year, we had a $2 million specific reserve related to the credit. Again, we weren't sure. As we worked through the resolution of that credit, it became obvious that reserve was going to be needed. We went ahead and took that. I think pivoting to the CRE loan vertical. It seems to get a lot of play these days. We've provided enhanced disclosures in our deck. I'll just say that we are absolutely unconcerned with any aspect of our CRE portfolio. It's very strong, and we just aren't concerned about it. With regard to our capital levels, clearly, they grow rapidly because of the earnings. We benefit from those strong earnings, and we also keep a relatively low dividend payout ratio. I think it's almost half of what the peer group pays out. When you look at rapid and high earnings with a lower dividend payout, it really rapidly rebuilds that capital. We had a strong quarter. We're very pleased with our returns and what we provide to the shareholders, and we're excited about the future. Navigating forward is something that we're mindful of every day, and we know that if we stick to our fundamentals, we're going to be fine. As optimistic as we are, we are mindful of the large deficits that our national leaders are running. It's disgraceful and reckless to run any enterprise that way. Regardless, we're cautiously optimistic. We're really comforted by our long-term history, but also the fact that we have economic geographic advantages compared to other parts of the country. I can't stress enough that the news seems to emanate from the Northeast and some from the West Coast, and it's just a completely different ballgame when you're operating in the environment that we are in down here. That's what makes us cautiously optimistic as we move forward in spite of all those other factors. So with all that being said, we're standing by for any questions anyone has. Thank you.

We will now begin the question-and-answer session. Our first question today comes from Woody Lay with KBW. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning.

So the core NIM, if you exclude the loan fees, came a little bit better than what I was expecting. I know that $100 million of noninterest-bearing deposits came out midway through the quarter. But what do you think is a good run rate for that core NIM in the back half of the year?

Hi, Woody. This is Kelly. That's correct. We're forecasting that June's net interest margin was down to 4.58%. Looking at potential loan funding in the third quarter, we anticipate a core net interest margin between 4.60% and 4.65%.

Yes. And I would add to that, Woody, that a lot of that's going to depend on the actual timing of the loan growth. If we have to go and secure funding for that, it could be a little more costly. Kelly is absolutely technically correct. It's tough to believe that we could maintain it at that same exact level, but we're very comfortable that we're going to continue to operate within those ranges. Even if it were to bleed down based on timing, I don't expect it would be a meaningful reduction.

Got it. And then maybe turning to the loan growth. I know on a quarter-to-quarter basis, it can be a little lumpy sometimes. You mentioned some funding being pushed out. Is that sort of a reflection of customers waiting on potential rate cuts? Is it other factors? And a follow-up question. It sounds like the growth next quarter could be strong.

Yes. I think it's a combination of a lot of factors, Woody, and this is Jason. We continue to see customers sell businesses, take advantage of maybe equity raises. That led to some increased payoffs during the quarter that Tom referred to in his comments. So when you have those lumpy paydowns, even though our new fundings in the quarter were what I would describe as pretty average with June being particularly stronger. We think we'll grow again in the third quarter. If you go back, I would say, 18 months, we've kind of been signaling that high single-digit loan growth is kind of what we expect. Again, I feel really good about that for the full year. Going quarter-to-quarter, you can see some blips, spikes, peaks, valleys, whatever you want to call them. Just if you look over the course of the year, I feel really good about that high single-digit. The other side of that, and we've talked about this previously, you have to remember we're so focused on maintaining profit margins. We do sacrifice growth for that. I think this quarter is a really, really good example of that, and we like that. Some investors may not, but that's how we're going to continue to operate, and we just think it's the right thing to do.

Yes. That makes sense. And then lastly, capital has grown really nicely over the past couple of quarters. Just how do you think about deploying some of that excess capital in the current environment? I'm assuming the preference would be through M&A?

Clearly, that's correct. We're very aware of the fact that we've had quite a few discussions over the last year, especially with potential targets. I think the industry refers to some banks as zombie banks, but there's a large number of banks that would like to do something, but their hands are tied and they're wanting to wait until they can unwind some AOCI. We're mindful of that. If you believe that we're on the precipice of some rate reductions, then I think you could see opportunities that arise in the near future. So we're not in any hurry. I would say this too, we hear folks talk to us from time to time about share repurchase. We hear those things. But let's remember, one of the great strengths of Bank7 is this: when you're making 20% to 22% return on average tangible common equity, there really shouldn't be a hyper focus on share repurchases because if we can produce really high returns far better than most any other bank and do it safely, we're not as driven to worry about running out and making share repurchases to support or for whatever reason, the share price. It’s a combination of providing great returns, which reduces a sense of urgency, and we know that there are people out there that want to sell when the AOCI unwinds. That’s our view. I would say, we're not predicting or saying that we're going to do something at the end of the year or first quarter. But if we're sitting in nine months and it doesn't look like there are any opportunities, I think it would be prudent to revisit that concept. But for now, we're steady as she goes.

Got it. Thanks for taking my question.

And our next question will come from Nathan Race with Piper Sandler. Please go ahead.

Yes. Hi, guys. Good morning. Thanks for taking the question.

Good morning.

I was wondering if you could just update us in terms of where you guys stand on the oil and gas assets that you acquired late last year in terms of specifically how we should think about the fee income and expenses associated with those assets going forward?

Kelly, I think, has the exact numbers, Nate. Just from a high level, what we described back in December was when we booked those assets, it was a little over $16.5 million. We said at the time that just harvesting the monthly cash flows off that business, we would recover between 55% and 60% of that outlay or I think we would be down to 55% or something as far as remaining. Kelly, why don't you follow up on that, but I’ll just say from a high level, we're not only on path, we're actually doing a little bit better. We view it as we're halfway through the year, and so the $16 million asset is really more of a $10 million asset, which compared to the size of our company, it's not that significant, but Kelly can give you the specifics.

Yes, Nate, this is Kelly. If you look at Q2, total noninterest income was $3.165 million, of that $2.4 million related to oil and gas. We had core fee of $735,000, which is a little higher than what we anticipated of that normalized $650,000 run rate. On a go-forward, you could use $2 million for oil and gas from a fee perspective and still keep that core fee number at $650,000. On the expense side, noninterest expenses for the quarter were $9.142 million, of that $1.1 million related to oil and gas. If you had core expenses of $8 million, that's a little below what we had given guidance on $8.3 million. We still think that $8.3 million is a good guide from a core expense perspective for Q3, potentially using $1 million in expenses additional for oil and gas.

But Kelly, if you just focus on the revenue and the expenses, what's the net on the oil and gas for the quarter? Net?

Yes, the net for Q2 was $1 million. For Q3.

Right. Please continue.

Yeah, for Q3, it could be $800,000 after tax.

Right. And that's going to continue to go down from there, Nate.

Right. And to your point, Tom, it's a relatively small piece, but is there any interest in or is there any interest, so to speak, in other people acquiring these assets? Or is the plan just to retain these assets on the balance sheet?

We recently discussed our properties and reengineered them to ensure our valuations are accurate. The current engineering shows that the wells are performing even better than expected, leading to higher values. We have a high-class dilemma: whether to sell and possibly realize a small gain or continue to benefit from the cash flow since things are going so well. While selling is an option, we don't feel any urgency to do so.

Got it. Very helpful. And then just maybe staying on credit and switching to the hospitality book. Curious what you guys are seeing just in terms of NOI levels across your client base. Obviously, it seems like a lot of those loans are tied to floating rates. Just curious how many of those clients are dealing with the higher cost of debt these days?

Yes. Remember, just as a reminder, everybody, the hospitality activity in our portfolio is largely concentrated in Texas, specifically the Dallas Fort Worth Metro. Business as usual, there for first quarter NOIs were up slightly last year. We really don't have the second quarter data yet, but based on performance and conversations with borrowers, I expect second quarter to probably be all-time high NOIs. Business as usual in the Texas hospitality industry.

And Jason, as you guys provide for some growth returning going forward in terms of loans, do you guys kind of expect the reserve to kind of remain where it is coming out of the second quarter? How do you guys kind of think about the relative reserve level in the back half of the year?

Yes, there may be a small provision to keep up if the growth comes in on the top line of what we think could happen. We may have to put a little bit more to it. Yes, I think that percentage is pretty good, something in that 1.25% historical range.

I would also add to that that the rapid growth in equity is really comforting. Because of the increase in equity so quickly, it's not as critical for us to worry about immediately adding to the reserves. When you look at the portfolio and you look at the CECL methodology and how we look, we just can't find a lot of stress right now. I guess what I'm trying to say is that we've got flexibility relative to the capital building up very quickly, and we really feel like we're in a good spot.

Okay. Great. And then just one last one for me, perhaps for Kelly, on the NIM going forward. Obviously, you guys are asset-sensitive. So just curious how we should think about the margin impact from each 25 bps cut?

Yes, Nate, I think I would highlight our historical NIM. You can even look through another slide in there on our spread overlay with the loan yields and the cost of funds with the 5- and 10-year treasury. I think we feel comfortable operating in our normal historical range irrespective of rate hikes and rate cuts. Tom mentioned we may need to pick up some higher cost of funds to fund some of this loan growth. A lot of that compression would be related to that and not necessarily the rate cut per se.

But with that said, Nate, we're not worried at all, and Kelly's comments are very accurate. We had an ALCO meeting yesterday morning and assigned ourselves a project that won't take more than a couple of days. We're going to conduct some testing on the balance sheet to see what happens. We believe it will be pretty neutral because we have many daily floaters on the loan side, and some deposits that won't reprice, especially the noninterest-bearing ones. We'll run some scenarios to test the impact of 25, 50, and 75 basis points, but we're very confident. We'll have the exact answer soon, and I would be surprised if our core net interest margin ever drops below the long-term average.

Yes. Just to clarify, it seems like that long-term average is about 4.5%. Is that kind of what you guys are referencing?

I don't even want to give a number, but I was thinking it was more like 4.3% or 3.5%. We're almost splitting hairs here.

Sure. Got it. Okay. All right. Thanks for all the color. Thanks guys.

Our next question is going to come from Jordan Ghent with Stephens. Please go ahead.

Hey, good morning. My question is just on the charge-offs. I know you mentioned that it was for the quarter as the remnants of the larger charge-offs historically. But going forward, where are you expecting to see charge-off levels? Are they kind of normalized? Or do you expect to be a little bit lower?

Yes. I would say lower than the last few quarters definitely and return to a small number and roll that forward. Credit quality is as good as it's been over the last seven, eight, nine, or even ten years. Feeling really good about the loan book and asset quality.

Perfect. And then just one more, actually. So on the interest-bearing deposit costs, you guys had like a minimal amount increasing? I know you talked about that some loan funding got pushed out to July and you might have to go get some funding that's a little bit more expensive. But where do you see the interest-bearing deposit costs going from this quarter?

It's a good question. From a total cost of funds perspective, we're right now currently at $310 million. I think it really just depends on the balance sheet needs from a funding perspective.

Okay. Perfect. Thanks for answering my questions.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Tom Travis for any closing remarks.

Well, great quarter, great company, great culture, thanks to our teammates, and we're going to keep doing what we've always done and keep our heads down and work hard. We appreciate the partnerships and investors and analysts, and thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.