What Bank7 (BSVN) Said on Its Q3 Earnings Call

Key Points

• Strong loan growth: Bank7 replaced more than $130 million in customer payoffs during Q3 and expects continued companywide loan growth of roughly mid-single digits to low double digits, supported by a solid pipeline.
• Century merger: The pending Nov. 1 acquisition is expected to add lower-cost deposits, support growth in Dallas, and initially be neutral to net interest margin. Bank7 plans to focus on relationship-based lending while allowing purchased loan participations to run off.
• Integration and liquidity: Management expects 75%–80% of merger-related cost savings to arrive in the first quarter after closing, despite approximately $16.2 million in one-time expenses. Bank7 will target a loan-to-deposit ratio generally between 80% and 95%, backed by sufficient contingent funding.

Bank7 NASDAQ: BSVN said its third-quarter performance was supported by strong loan growth, disciplined balance-sheet pricing and a robust operating environment in Texas and Oklahoma, while the company prepares to close its pending merger with Century Financial in New Mexico on Nov. 1.

President and Chief Executive Officer Tom Travis said loan growth was stronger than headline results may indicate because the bank absorbed substantial unscheduled paydowns from large customers during the quarter. Chief Financial Officer Kelly Harris said loan payoffs exceeded $130 million in the period, following meaningful paydowns in the second quarter, but the company was able to replace that volume and grow its loan book.

Management said it entered the second half of the year with a substantial loan pipeline, much of which has already funded, with additional visibility into funding activity during the fourth quarter. Harris said Bank7 expects to continue pursuing companywide loan growth in a range of roughly mid-single digits to low double digits, though quarterly results can be affected by sizable customer payoffs.

Century merger to add lower-cost funding

Travis described the pending Century transaction as a product of the company’s patience and capital discipline. He called Century an established deposit and banking franchise in New Mexico, particularly in Santa Fe and nearby communities.

Harris said the merger is currently expected to be neutral to Bank7’s net interest margin. However, Bank7 plans to sell some or all of Century’s bond holdings, which could generate a meaningful amount of cash. The margin impact of that cash deployment will depend on timing and use, he said, with some possible outcomes more accretive to margin and others more neutral.

Travis said Century’s lower-cost deposits should give Bank7 greater flexibility to maintain margins in the near to medium term. That advantage is expected to diminish gradually as the company redeploys the funds, potentially into lower-yielding loans. Still, he said Bank7 does not expect a material shift toward broadly lower loan pricing.

For Bank7’s legacy business, Harris said the loan beta in the third quarter was near 60%, while the deposit beta was about 52%. If interest rates rise again in the fourth quarter, management expects loan beta to be in the 65% to 70% range, while deposit beta is expected to be lower, though Harris said it is harder to project.

Management also indicated that Century’s funding base could support growth in Bank7’s Dallas operation, where Harris said loan growth has exceeded deposit growth.

Loan strategy and portfolio plans

Bank7 does not have a day-one plan to run off Century’s loan portfolio, Harris said. The company intends to apply its existing commercial-banking strategy in the new markets, focusing on business owners, entrepreneurs and high-net-worth customers.

Travis noted, however, that Century has made more extensive use of purchased loan participations than Bank7. While such participations are not the majority of Century’s portfolio, Bank7 does not intend to pursue them as they mature and expects to exit those exposures when opportunities arise. That runoff could create additional funding capacity, he said.

Harris said competitive conditions across Bank7’s markets have remained consistent, with many banks continuing to seek loan deployment. He said relationship banking remains a key differentiator in that environment.

Integration costs and efficiency targets

Management expects most of the merger-related cost savings to be realized quickly after the deal closes. Travis said approximately 75% to 80% of expected savings should occur immediately in the first quarter following closing, with the remaining 20% to 25% achieved between the end of the first and second quarters.

Bank7 expects a systems conversion in the third quarter, which will delay some final efficiency gains. Travis said the company does not intend to take a slow or casual approach to integration, adding that the second half of the year should be more profitable than the first as the combined company realizes additional efficiencies.

Harris pointed to Bank7’s prior Cornerstone acquisition as a reference point, saying the company’s efficiency ratio initially rose by a couple hundred basis points before improving over time. He said management believes it can ultimately operate Century’s noninterest expense at or below Bank7’s current level.

The company’s presentation included approximately $16.2 million of one-time merger expenses. Management said those costs include investment-banking fees, conversion expenses and early contract termination costs, with the expenses expected to be realized in the fourth quarter.

Liquidity and capital management

Travis said Bank7’s loan-to-deposit ratio will depend on changing factors including liquidity, capital, debt instruments, available funding sources and loan maturity schedules. He said the company generally would not expect to operate materially below an 80% loan-to-deposit ratio, while it could at times approach 95% depending on market conditions.

If Bank7 operates at higher levels, Travis said it would do so only with substantial overnight-capable funding sources available to preserve liquidity in the event of broader market stress.

Management did not provide an estimate for the goodwill that will result from the Century transaction. Harris said it was too early to determine the final figure because interest-rate changes could affect asset marks and other valuation components.

About Bank7 (NASDAQ:BSVN)

Bank7 Corp. NASDAQ: BSVN is the bank holding company for Bank7, a community-focused financial institution headquartered in Oklahoma City, Oklahoma. The bank provides banking and financial services to businesses, professionals and individuals, with an emphasis on relationship-based service and customized lending solutions.

Bank7 offers commercial and industrial loans, commercial real estate financing, energy-related lending, residential and consumer loans, and other credit products. Its deposit and treasury management services include checking and savings accounts, certificates of deposit, online and mobile banking, cash management, and related business banking tools.

The company primarily serves customers in Oklahoma and surrounding markets, including selected communities in Texas.

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