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spk18: Ladies and gentlemen, thank you for standing by, and welcome to the Business First Bank Shares Q2 2023 call. I would like to now turn the call over to Matt Seeley, Director of Corporate Strategy and FP&A. Matt, please go ahead.
spk16: Good afternoon, and thank you all for joining. Earlier today, we issued our second quarter 2023 earnings press release. a copy of which is available on our website, along with the slide presentation that we will reference during today's call. Please refer to slide three of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com. Please also note our safe harbor statements are available on page seven of our earnings press release that was filed with the SEC today. All comments made during today's call are subject to these Safe Harbor statements in our slide presentation and earnings release. I'm joined this afternoon by Business First Bank Shares President and CEO, Jude Melville, Chief Financial Officer, Greg Robertson, Chief Banking Officer, Philip Jordan, and Chief Administrative Officer, Jerry Vaskegu. After the presentation, we'll be happy to address any questions you may have. And with that, I'll turn the call over to you, Jude.
spk26: Okay, thanks, Matt, and thank you, everybody, for joining us. I know it's a busy time, and we appreciate you prioritizing this conversation. Last quarter, I began by discussing our longer-term objectives to give some context to our near-term results, and while it won't take as much time to review the specific long-term goals on this call, I do want to take a moment to remind us of what those general priorities are. Management of risk through diversification as geographical, industry, product set, duration, revenue streams, among others. Number two, achievement of greater efficiency and optionality through scaling. Number three, an increase in core profitability levels through a focus on capital allocation and management. Finally, a qualitative rather than a quantitative goal to continue selective additions when available with key teammates with the experience and talent to help us prepare for the opportunities that will present themselves as we gain success on the previously mentioned three more numerical priorities. We've been through enough periods of uncertainty to know we have a responsibility to continue preparing for the future, even in a time of caution. I'm pleased to congratulate our team on another quarter of progress in each of these areas. On management of risk through diversification, we continue to diversify our asset exposure even in a time of lower growth. Our loan growth was again led by our Dallas region, which generated over 50% of the net increase, with the runner-up this quarter being our North Louisiana region. Two very different regions, both of which we are gaining significant brand recognition with them. On the type of loan front, growth was again led by increased CNI exposure, accounting for roughly two-thirds of our increased balances. I'll also mention encouraging progress in diversifying revenue streams through some positive movement in our SBA line of business. Last year, we had about $200,000 in income from SBA, and this year we expect to average more than that number on a quarterly basis. So it's not yet the needle mover we eventually expect it will be, but we do like the trajectory. On scale, we slowed down our growth to match the current economic and rate environments, a reflection of the optionality our current size offers. This size, we should be able to operate at solid levels of efficiency without relying on the significant levels of growth we've looked over the past few years. So we have the opportunity to be increasingly selective, which will pay off in asset quality, loan pricing, and capital usage. Our growth, while slow, is still healthy at about 8% annualized, a level that's manageable, fundable, and capitalizable within the limits of our retained earnings. Excluding the impact from our sub-debt redemption, we were capital accretive on all regulatory ratios, and if we were to back out the impact of AOCI, we would have been capital accretive on all of our capital ratios, including TCE levels. We expect this to continue to be the case in future quarters as we remain selective on loan growth, likely in the 4% to 5% range. On earnings, we are very pleased with the results, and while we aren't yet where we want to be, we have taken a significant step forward. We booked a 1.18 ROA, a 14% ROE, and 73 cent earnings per share. These are GAAP numbers. Three main drivers are our financial results for good NEM protection, good expense control, and continued solid asset quality. Greg will dive deeper into each of these fronts in a few minutes. Now, these gap results did include some net positive non-run rate income and expenses, but even backing out those items, our results would still have performed at solid levels, producing non-gap results of 1.04 ROA, 12.4% ROE, and 64% TPS. A couple points I want to note. First, non-run rate does not mean accidental or not real. Our additional income came primarily from investments we've made over the years in small business investment companies, or SBICs. which returned at a higher level than normal this quarter, and through a decision to retire some holding company debt early. Second, what we believe has fundamentally changed in our earnings profile is that a roughly 1.0 ROA over the past year or two would have been where we expected to land assuming everything went right. Now we view a 1.0 ROA as a baseline from which we have the opportunity to outperform when things fall our way, as happened this quarter. That doesn't make us a high performer yet, but it's a concrete step in the right direction and in line with the goals we've been articulating for you over the past few quarters. Finally, on the topic of people, while we do not believe we need to add significant numbers of producers at this time, as our most recent hires still have capacity to grow their individual books, we did add two impactful back office hires that are providing immediate impact. Zach Smith joined us as treasurer. Zach was one of the leaders in the treasury department at Bank OZK, a larger regional bank, and also has experience with Comerica. We were also joined by a new chief HR officer, Mike Pelche. Mike was CHRO for Iberia Bank for many years prior to their merger with First Horizons. Both of these individuals, each of whom has been with larger banks as they have grown, will, through their experiences and relationships, contribute materially to our journey, both navigating the current uncertain times and in a time of opportunity that will surely follow. I'm going to turn it over now to Greg and Matt to cover these results in detail, but I'd like to reiterate my thanks to our team. We've navigated a number of crises and perceived crises together, beginning with the great financial crisis while we were a de novo bank. We've navigated not always perfectly, but always with one eye towards the immediate needs of our current customers, shareholders, and regulatory partners, and one eye mindful of the long-term opportunity we believe our franchise has before us. This quarter is another demonstration of our capacity on both fronts. That concludes my remarks, and I'll turn it over to Greg for more detail on the financials.
spk24: Thank you, Jude, and good afternoon, everyone. I'll spend a few minutes just reviewing our Q2 highlights, some of which Jude had already mentioned, including some balance sheet and income statement trends, and we'll include some updated thoughts on our current outlook. The second quarter core net income number was $17.7 million, or $0.70, earnings per share. That equated to a 113 ROA and a 1350 ROE. That was really driven by strong non-interest income, lower loan loss provision expense from our continued stable credit trends and slightly lower loan growth, slightly higher than expected loan discount accretion, as Jude mentioned. These results were partially offset by slightly elevated non-interest expense during the quarter. Before I dive into more of the specifics on the quarter, I'd like to take a moment to call out a few items that might not be readily identifiable, but are important for the context to consider. Our core non-interest income, as Jude mentioned, included $2.8 million in equity investment from SBIC revenue, which 2.6 or about was more than what we had expected. We had modeled about $200,000 for the quarter. Our core non-interest income Expense included the $715,000 really one-time bill from our core provider for some services that were rendered in the past, and that won't be reoccurring in the future. Our loan loss provision, $500,000, was really a consequence of the lower loan growth and the continued strength of our credit book. With all those adjustments, as Jude mentioned, I think it's important to consider really a baseline for what we look at going forward from an earnings standpoint and that so-called adjusted run rate for the quarter would have been 16.2 million or a diluted EPS of 64 cents and a ROA of 104 with ROE of 12.4. That's very strong for us for the quarter and we're really proud of those results. That was highlighted by a few things. We'll start with the balance sheet first and then work our way through some other income statement items. The loan growth for the quarter was 7.9%, really highlighted by our Dallas group with 55 million or 59% of that loan growth for the quarter. That loan growth from our Dallas group remained our Texas exposure at a 37% exposure rate for the portfolio as a whole. As far as loan type for the quarter, CNI was the headline again for the second quarter. $69.9 million of that growth was in CNI loans, with $67 million in C&D loans that actually migrated over because of completion in projects into owner-occupied CRE and income-producing CRE, with the other piece of the loan growth, the actual growth in CRE for the quarter was $9.5 million. for the quarter. As far as deposits go, our deposits increased about $208 million for the quarter. $211 million of that were broker deposits. Really, there's some nuance, and we're very proud of the fact of the work that our branches have done. The branch growth for the quarter was relatively flat, with a little bit of extra story or descriptor around that. In the beginning of the quarter in April, the bank up of our portfolio from a deposit being commercially focused, we experienced a little over $100 million in run out during April for tax related payments from clients. During the remainder of the quarter, branches did an excellent job of really, and the production staff as a whole, going out and really drawing that back to zero. And that's a really important part of the nuance of the quarter. So we feel like those wins in the second half of the second quarter really started to show positive results and we're seeing early results in the first month this quarter with that continued deposit generation profile. Non-interest-bearing deposits is an important topic right now. Our portfolio sits at about 28% of the portfolio being in non-interest-bearing deposits. That's down about 3%. We feel like that migration has started to wane and in the recent months, so we are very optimistic about that. We have been generating about five to seven million in new non-interest-bearing deposits every month so far this year, so really, really still optimistic about that. As far as capital goes, as Jude mentioned, capital increased nicely in the second quarter from a bank-level perspective, with Tier 1 leverage and Tier total risk base increasing about 15 basis points and 13 basis points, respectively. TCE to TA in total risk base at the consolidated level, both decreased about 12 basis points. However, if you would back out the AOCI swing, which we had about 13.3 million in AOCI negative swing this quarter, that would have been an increase in TCE to TA ratio, about nine basis points for the quarter. Furthermore, if you think about it from a tangible book value perspective, looking at it when you strip out A-O-C-I or tangible book value X-A-O-C-I, we had about 10% growth year to date in that and about 13.5% for the quarter. And that tangible book value number X-A-O-C-I would have been slightly above $20. So really, really happy about that performance and creating the value for the shareholder. As far as the margin goes, Our margin was down slightly five basis points. That is right in line with where we had projected. Our expectation on pricing going forward, we're really proud of the efforts of our production staff, the bank. New loans generated for the quarter are really coming to the average weighted yield is about 8.45% for the quarter. The majority of our loans now that are being priced are renewals, and that renewal rate is slightly higher than that, closer to 880, and with the average of our new production being at about 860 on average. As far as deposit pricing, I'll let Matt get into details on the betas here in a minute. We're really happy with our continued deposit generations, although As everyone knows, the cost of those deposits is very competitive in this market right now. Our total deposit beta cycle to date is about 36%, and we expect that to be closer to 40% by year end. And with that, I'll really turn it over to Matt to really kind of cover the deposit betas in more detail right now.
spk08: Sure. Thanks, Greg.
spk16: So as Greg mentioned, total cycle-to-date deposit beta is 36% during the quarter. Interest beta cycle-to-date betas during the quarter were about 50%. We see those trending up about five percentage points each quarter, so ending the year at around 60% for Q4. And on taking a step back, kind of thinking about total interest-bearing liabilities, those betas were 53%, so tracking pretty close to our interest bearing deposit betas. And again, see those going up about five percentage points each quarter. So ending the year Q4 at around 63%. And the quarterly snapshot betas, those were just a little bit above 100% for just the Q2 interest bearing beta on that snapshot. And I think that that's relatively in line with some of the other releases and peers that we've seen. But thinking about things more on a cycle-to-date basis, I think 5% increase over the next two quarters is roughly what we'll see. And with that, I'll turn it back over to Jude for any closing remarks or before we take Q&A.
spk21: No, nothing to add. I'm happy to jump into questions now. Thank you all.
spk18: Your first question comes from the line of Michael Rose from Raymond James. Your line is open.
spk27: Hey, good morning, or good afternoon, guys. Thanks for taking my questions. Maybe we can just start on the beta commentary that you just kind of laid out. Thanks, everyone, for that. What does that assume in terms of where kind of NIB mixed? you know, stabilize. I think you guys are at about 29% at the end of the second quarter. Just trying to get a sense for where you think that stabilizes and, you know, what the expectations are for kind of ex-brokered growth, which, you know, is down a little bit this year. I know you guys have several initiatives in place. We'd just love some thoughts. Thanks.
spk16: Yeah, I think that we'll see the non-interest-bearing composition kind of bottom out towards the end of the year and see that down another couple percentage points. between now and year end, so bottoming out around maybe 26% or so, just as percentage of the overall mix. Our appetite for brokered, I think that we'll just continue to be kind of opportunistic with the pricing mix between brokered and other borrowing sources, but there's still a little bit of room that we have certainly to rely on brokered. That said, and I can let Greg give a little bit more specifics around um, what we're seeing early on in the third quarter, but we're encouraged that, uh, uh, you know, on, on just a excluding broker basis, deposits were flat during the second quarter. And, uh, one important thing to consider there is, uh, we did have some municipality and tax funds that rolled out during the quarter. So when you strip out brokered and you, you factor in the, uh, the tax funds that had moved out being effectively flat from Q1 was, um, in our eyes, a stabilization theme or trend that's starting to occur. I think we're nearing or turning a corner now, but maybe another quarter or two of a little bit further kind of decline in that mix of non-interest bearing. So I'd say it's conservatively maybe a 50-50 split in terms of funding between more wholesale and core deposits. But again, we're optimistic about some of the core funding generation that we've seen early on here in the third quarter. But I'll let Greg kind of hit on maybe some of the more of the new wins and trends we're seeing on the core side of the funding base.
spk24: Hey, Michael. I think there's a little bit of nuance. I think, first of all, we've we have seen and do feel like in the industry, not only us specifically, but in the industry, the outflow is starting to wane. The question as far as non-interest bearing depends on how many more rate increases we see. If we hold flat from here on out, we think maybe we might have seen as much of the movement that we've experienced. Like I mentioned, we are consistently producing five to seven million in new deposit non-interest-bearing generation per month. Now, we have had some recent wins that I expect that number in the first part, especially July and August, to be higher than that. To put it in context, the average cost we've been generating in rate-bearing accounts, deposit accounts open per month, about $100 million. and new originations each month this year. And that most recent weighted average is about 438. So as we continue to manage the balance sheet from a loan growth perspective and weigh that against the cost of brokerage, which today, you know, for one year brokerage is going to be in the 535 range. So if we continue to be successful, and I think we will on the deposit generation front at that lower cost, it's materially different for us. we've seen some, like I said, some wins, so we expect that to continue to happen, but the broker would be kind of plan B, obviously.
spk27: Very comprehensive question, and that gets into the follow-up, which is, you know, the core margin was down kind of, you know, I think about five basis points. You said single digits, so looks like that was good. Just kind of balancing, you know, what you're expecting in terms of deposit beta expectations, NID mix, and what you're seeing on the loan repricing side, is that a good kind of way to think about the third quarter margin, you know, down kind of mid single digits when you put it all together? Or am I missing something?
spk24: Yeah, I would say about break even from where we are today. Maybe with a basis point or two improvement would be what we're expecting going forward.
spk16: Yeah, Michael, I'll give you a little bit more context around that. So the beta assumption that I had mentioned previously, that translates to roughly 35 basis point pickup in just interest-bearing deposits in the third quarter. And when we look at our new and renewed loan yields coming on, like Greg had mentioned, in the 860 to 880 range, we've been executing pretty nicely on pulling through from a cycle-to-date loan beta perspective, holding at around 85%. expect that to continue and pick up about 30 basis points in core loan yield expansion in the third quarter. So when we kind of net all of that, the funding side and the earning asset and loan repricing side, I think we feel pretty good that the core margin should hold flat here. Maybe a little bit too early to... claim success and we're turning a quarter to be accretive. But I think we feel really good that flat in Q3 is where we'll be.
spk27: That's very helpful. Maybe just, you know, one follow-up question for me. Just credit is exceptionally good. And, you know, I say across the industry we're seeing kind of, you know, more signs of normalization and definitely a pickup in kind of idiosyncratic, a one-off. credits, but you guys are doing, you know, really, really well. Anything that you're seeing kind of, you know, on the horizon that you guys are worried about, or is it just the strength of your markets and kind of, you know, hopefully we don't have a recession or anything like that, but just above some general thoughts. Thanks.
spk26: Yeah, I don't think we've seen any evidence anywhere. It's a weird thing to say, but just like last quarter and the quarter before, we're all in sensitive to see what will happen. We haven't seen any degradation in our portfolio. And Phil or Gary, if you want to add anything there that you're seeing, but I don't think any of us would have an area that we would point to as showing signs of stress.
spk24: No, dude, I'm sorry I can't add to that. I would agree, like you said, it feels strange to say that out loud, but no, right now we feel very comfortable where we are and Like you said, strength of markets and the bankers, we always stress credit for sure.
spk02: All right, guys. Thanks for that question.
spk21: Sorry not to have a good roadmap for you on that front, but I guess I'm not that good. That's good. Good stuff. Thanks, guys. Appreciate it.
spk20: Thanks, Mike.
spk18: Your next question comes from the line of Matt Olney from Stevens, Inc. Your line is on.
spk15: Hey, thanks, guys. Good afternoon. Hey, Matt. Just following up on Michael's question around loan yields and those renewals, I think you mentioned that there could be about 30 bps of loan yield expansion core in the third quarter. I'm just looking for more color on that. the newer yields you think are coming on right now, on 880, I think you said. What's the color on what yield those loans are rolling off at? Like, what's the differential? And then as you think about the loan maturities and renewals that are coming up, is this a pretty steady level that you're going to see the next few quarters, or could there be some time period where it's a higher number? Thanks.
spk24: Yeah, I think the loan average rate weighted between new and renewed. Now, fortunately for us, loan growth has slowed down on purpose by us, not been more strategic than it has been for the last pipeline. That renewal pace has been greater than the new one. So we've been seeing renewals come through, like I mentioned, about 880, with the new stuff being priced slightly less than that, for an average between two, about 860. pickup we're seeing on the renewals towards creating the expansion is in some cases as much as 1% and that's a pretty steady stream of those renewals over the next three or four quarters approaching probably a billion dollars of the portfolio that will continue to do that now as we get quarters into the future maybe that isn't wonderful 1% difference in the pricing but some of them will be leaning toward that in the early parts of it because of the difference in the origination to maturity.
spk16: Yeah, Matt, and I'll direct you to page 21 in the investor deck to kind of answer your question on where the loans are sitting now and the repricing opportunity. We've got over the next 12 months about $2.2 billion set to reprice between fixed maturity in the next 12 months and floating rate. And those are sitting on the books at about a 767 weighted average yield. So when you think about the 860 to 880 new and renewed, or I guess renewed and new, that's about a 90-plus basis point pickup in those loans. So that translates to if you just apply that 90 basis point pickup in the actual renewal of that portfolio, which is about 45% of the book, you've got 20 plus million in annual revenue pickup there. So I hope that kind of draws the line or connects the dots between the 30 BIPs in the overall total portfolio pickup and the actual pickup and just the repricing opportunity.
spk15: Yeah, that's perfect, Matt. Thanks for flagging that slide in there. I missed that initially. um perfect and on the on the loan growth front um i think i heard you'd say the back half the year between four to four to five percent i assume that's an annualized number for for the back half just want to confirm that and then as far as the mix you mentioned it was a cni portion that led the way in 2q as you think about pipelines and pay downs, is it going to be similar to what we saw in 2Q where it's mostly C&I growth, whereas some of the construction projects are completed and they move off to a different category?
spk26: Yeah, I would, first part is I did intend for that to be an annualized number. And the second part is that I would think that we would see a similar mix going forward. And not just this quarter, but the past couple quarters we've had that mix as we've kind of downshifted construction production to recalibrate the portfolio. So we'll still see CRE as construction turns over or completes. We'll still see CRE growth, but not at the rate of new production that we have seen historically. And we definitely are... not doing as much construction as we have done in the past.
spk25: So I would anticipate CNI would continue to be the most significant contributor to any kind of net increase.
spk15: Okay. Thanks for that, Jude. And then just lastly, I think the accretion levels were a little bit higher this quarter. Any color on expected accretion in the next few quarters?
spk24: Yeah. Matt, I would think We are expecting similar levels of accretion in the next couple of quarters just by the pace of the deals that we have kind of working through the process right now.
spk14: Okay. That's all from me. Thanks, guys.
spk20: All right. Thank you. Thanks, Matt.
spk18: Your next question comes from the line of Brett Rabattin from Havote Group.
spk21: Hey, good afternoon guys. Uh, thanks for the question.
spk24: Um, wanted to first ask, you know, you talked about the broker CDs and the market and your strength of gathering deposits. You know, some, some banks in your market area and in the Southeast in general have, have indicated that maybe the landscape has gotten a little less competitive with one, you know, larger regional that was super aggressive with the deposit campaign, you know, during may in particular. Have you guys seen that, you know, maybe in some of your markets in Louisiana where maybe it's the competitive landscape has ebbed a little bit or does it still seem as ferocious or however you want to put it as it has been for the past few months?
spk26: Yeah, I don't think we'd describe it as ferocious. I do think it's – or it might have been at one point, but I think it has calmed down a little bit. You know, I would say that – some of our peers have raised deposits at a little greater clip, but I think they also have been a little more willing to pay up a little bit. So we're trying to strike a balance between that deposit growth and protecting the NEM. But I do think that, you know, as we talked about, we're starting to see some signs of deposits coming in, and that's not because we've materially adjusted the strategy we have on rates that we pay. It's because it is probably becoming a little bit looser, but still tough, but not quite ferocious, I would say. Anybody else want to add to that?
spk17: I would say part of the added talent and skill sets that you pulled in have given us better visibility into how we manage our deposits. I know Greg's got kind of a really good look at... the deposit portfolio as a whole. So I think it's allowed us better technologies, allowing us to make really good decisions on deposit pricing. It's good to see. Okay.
spk21: Okay, that's helpful.
spk24: And then I didn't, if you gave it, I missed it, but the securities that are maturing here in the back half of the year, how much is that and will that be partially to fund loan growth or how do you think about the balance sheet management? Yeah, Brett, as far as securities go, I think we've only purchased two securities this year. The portfolio is about 13.5% minus AOCI of assets right now. As far as cash flows go or maturities go, we have an average of about $131 million in per year for the next three years in maturities that are scheduled pretty systematically out. So we're really, from a balance sheet standpoint, we would expect to plow that back in and not really be very selective on securities if and when we do purchase them to maybe extend some duration strategically to pick up some good yield now that the rates seem like they're getting toward the top. But outside of that, we expect to put that money, put those maturities back to work in the form of paying down debt or put it back into the long portfolio.
spk16: The only thing that I'd add to is that during the quarter, we did take out a little bit more broker to have just some more cash on balance sheet. I think we were about 5% cash to assets at the end of the second quarter. Typically, we've been a little bit lower than that, but that was just kind of a remixing of the liquidity. So comfortable letting some of those securities run off and just remix into loans. So the percentage of securities might come down just a little bit, but we've already got more liquid interest-bearing cash balances on the boat.
spk24: Okay. That's helpful. And then if I could sneak in one last one just around strategy. When you guys raise capital, In the fourth quarter, you're basically kind of a year ahead of your five-year plan. And so, Jude, I'm curious to hear if this environment in terms of either interest rates or some uncertainty on the economy, if maybe you've changed what you want to accomplish or if you're still kind of full steam ahead in Texas or what's changed maybe relative to the environment last year.
spk26: Sure, so that's kind of why I started the call with kind of going over what our general priorities are. I talked about it last time a little bit too, but we were ahead of the game in terms of size, where we wanted to be size-wise, which of course required use of some of the capital that we raised last year or led to that. Also ahead of the game in diversity, diversification by geography a little bit. Not ahead, really, as of the end of last year on earnings. So what we wanted to do this year, even pre-preceived crisis, was to continue to grow, continue to diversify, but put more emphasis on earnings out of the three main categories than we have in the past. So I wouldn't say that we have changed our strategy. I'd say that we're going to take advantage of the fact that we're a little ahead of pace on the first two components so that we can prioritize a little more on the third to make sure that we achieve all three. I think this quarter is a really good example of us pivoting in that way. We slowed down the loan growth, but we're still able to continue to focus on growth in the Dallas area. That slowed loan growth. ensured that we were capital accretive, which is something I know when we raised capital in the fall, that was a question, or winter, that was a question, was when would that enable us to be capital accretive, and I think we probably felt like that was possible now, but there was some hesitancy to accept that, I suppose, but so I'm pleased that we were able to do it, and we do plan on continuing that mode of operation, so our growth will be governed by the retained earnings growth, but that still leaves us well within range of our targeted five-year plan growth that we've outlined. So long-winded way to say we haven't changed our goals. We're just managing the process by which we achieve them, but we still remain in our minds on target to accomplish all three in the direction that we wanted to and should be able to do so within our current capital structure. supplemented by the retained earnings.
spk20: Okay. That's really helpful. Thanks so much for all the color. Okay. All right. Well, thank you, Brett. Anybody else?
spk18: Your next question comes from the line of Kevin Fitzsimmons from D.A. Davidson. Your line is live.
spk06: Hey, good afternoon, everyone. Hey, Jude. Greg, I missed, in your prepared remarks, you were talking about like a core X non-run rate type piece of earnings per share. And I just wanted to, if that's what you said, if you could repeat it. And then also how I should be looking or how we should be looking at, you know, a run rate going forward for businesses. core fee revenues and core expenses? Is it really just, are we just kind of pulling out that additional civic revenue and pulling out that extra data processing charge, if you could kind of guide us on those fronts? Thanks.
spk24: Absolutely. Yeah, I was talking about the way we've been thinking, you know, our published core net income, 17.7 and 70 cents EPS, If you were going to take out those two items that we considered to be non-recurring but not intentional like Jude said, one would be the EIC income of 2.6, and the other would be the core IT cost of $715,000. So if you did that, you would get an adjusted $16.291 million, exactly. and that would equal a diluted EPS of 64 cents.
spk28: Got it. Okay.
spk24: And as far as the non-interest income run rate, I think 8.5 million is probably the way we want to think about that going forward. And non-interest expense, right, about 39 or slightly higher than 39 million for the quarter.
spk07: And is it fair to say – I'm sorry, go ahead.
spk16: Oh, sorry. Yeah, if you take what we reported, core non-interest expense of 39.6, you strip out the 700,000 kind of one-off data processing invoice that we received, and then just bake in some just natural course of business expansion, maybe mid-$39 million number is a good run rate going forward, which that reflects about a 5% annualized increase in expenses.
spk06: Great. That's what I was going to ask next. Thank you, Matt. And as far as the bond portfolio, you mentioned the cash flows of it. Some banks have pulled the trigger or are evaluating doing a larger transaction to accelerate that opportunity to get proceeds out at higher rates or whichever alternative you want. Is that something even on the table for you all, or is that something we're in the near term that can put pressure on capital that you might want not to do? Thanks.
spk24: I think it's something we talk about, and we run an analysis every quarter on if we needed to execute on liquidating part of the portfolio immediately, we could do About $135 million of that overnight with less than a $3 million loss. But as far as we feel like the AOCI is going to unwind fairly quickly. So a strategy, to your point, that would put pressure on capital right now. I don't know that we're ready to do anything like that.
spk26: Well, not just for pressure on capital, but just the business decision, I think, is the way I would describe it. We have a fairly short duration of our investment portfolio, and we're comfortable that our projections to accomplish our goals without giving up money. And so we'll keep doing that unless for some reason something changes and we have to. We do analyze it, though, and it certainly is on the table. We need to always look at options. But making the best business decision for us would indicate to me right now that that's not a necessary move.
spk06: Right, right. Good point about the short duration. And then one last one from me. We've had A few deals announced here in recent days, one in the mid-Atlantic. You know, curious if, you know, I know you all are still digesting the Houston deal, but as you look out later stage of the cycle and exit in the cycle, just curious are there conversations going on in new regions or new markets you might have your eye on in terms of
spk05: in terms of looking to expand. Thanks.
spk26: Sure. You know, we're always, like your prior question, is something on the table? I think everything's, most things are on the table, but certainly the equation has to make sense for us, and the equation's a little different today than it was a couple years ago. One of the differences is that we are comfortable that we have a strong geography that we can build out That doesn't mean we wouldn't look at other geographies over time, but we don't need to. I think given the markets that we're in, there's plenty of opportunity here, so the bar would be pretty high in terms of embarking upon an expansion of that geography through an M&A deal. I'm not saying that it couldn't happen, but it's not something that we're necessarily aggressively looking for. I would guess that the more likely outcome would be expansion through, at some point when we're ready, would be expansion through a team lift-down or something incremental of that nature. There definitely are more conversations that we're either a part of or hearing that they're happening, but I don't know if that necessarily makes it more likely to happen. A lot of things have to fall in place. We've developed the organic capacity to be able to grow without M&A, so M&A needs to really fit our needs and and the financial equation needs to work for us. And, you know, hopefully our partner as well. And that's kind of the goal is to get a win-win. But the hurdle is the bar is a little higher than it might have been earlier on just because we do have, and that's what I've started my comments with about one of the values of scale is the optionality it gives you on future growth. And so I feel like we're in a good spot to be able to partner with who we really want to and, you know, not necessarily seeking growth for growth's sake or new markets for new markets' sake. With that said, I do think over the long run, there are plenty of other markets across the Southeast that we want to be in, but there's no rush is the way that I would put it. We have a team that's positioned to be around for a long time, and we need to take opportunities when they make a lot of sense for us, and that's where we are today.
spk06: Yeah, and a good point about the lift-outs, because that's really what you've accomplished in Dallas-Fort Worth.
spk21: Correct.
spk06: That was just all organic lift-out strategy.
spk26: That's right. And New Orleans, we've had really good success with team lift-out as well.
spk20: That's right. That's right.
spk06: Okay.
spk20: Thanks very much, guys. Thank you. Okay. Thank you.
spk18: Your next question comes from the line of Betty Strickland from Jenny Montgomery Scott. Your line is live.
spk20: Hey, good afternoon, everybody.
spk19: Hey, Betty. Good to hear from you.
spk13: Just given all the repricing opportunity that you've talked about on the loan side, and we've got the potential for a Fed pause maybe this year, can we see the margins start to rise in 2024 just given the amount of you know, where you're putting on loans at new rates and the amount of turnover you've got coming online?
spk26: I think it's not beyond comprehension to think that that might happen, but, you know, we certainly want to be conservative in how we think about it, just given the challenges and the environment. We definitely still have some work to do and some fighting to do, but while we're we're projecting kind of a neutral NIM for the rest of the year. I think we do believe that there could be some opportunities for expansion next year, even without a rate decrease. Do you all want to speak more specifically?
spk24: I agree. I think the wild card in that is the liability side. And from a competitive standpoint, that would be my only caveat. I think we're doing a good job to manage the top end and our and our production staff is really focused on C&I account type accounts, which are non-interest-bearing deposit accounts with treasury built in there. That's the highest incentive product. So that's the biggest focus. But really the interest-bearing side and the speed at which those rates continue to go up is where that's really going to play.
spk16: Yeah, I would say that, you know, kind of like you said, the core margin flat for the foreseeable future is where we're comfortable right now, conservatively. But I would say that there's probably more upside, not significantly, but there's probably more upside in that than there is more downside, if that makes sense.
spk13: No, that's very fair. No, I get it. And it's hard to predict exactly what the Fed's going to do, what's going to happen in 2024. And As one of the earlier callers mentioned, you never know what competitors are going to do either. One other piece, and forgive me if I missed this earlier, but has the loan growth guidance really changed? I mean, should we have sort of an upper single-digit annualized growth rate for the next couple quarters? Is that reasonable? Should it be lower or higher? Just trying to figure out where we should peg growth going forward.
spk21: I think we'll continue to kind of downshift a little bit.
spk26: So I would say probably more on the 4% to 6% annualized range as opposed to upper single digits. There are a lot of advantages in this environment to growing at that rate, including capital appreciation and benefit that it provides to the margin being able to not have to fund that last dollar with highest cost funding. we feel like we'll benefit the most economically with a 46% annualized rate. And we are beginning to see a little less demand. Last quarter, I would say that most of the slowdown in growth in the quarter before that, the slowdown was our decision for the most part. But I would say that we would expect the second half of the year and are starting to hear that it's a little more, maybe it's closer to 50-50 decisioning versus demand, or it might even slip into more demand-based deceleration of loan growth from what we're hearing anyway, obviously due to the increasing interest rates.
spk13: Got it. And just one final one from me. Jude, it sounds, I think I heard you earlier say you feel like a 1% ROA is kind of a base from here from what you think you can achieve. You know, do you think that that's, I guess, just to clarify, do you think a 1% ROA is achievable for the year? And then if you take out the uncertainty of provision, do you feel like a 150 PPNR ROA I think I pegged you at 158 this quarter. Just wondering what your thoughts are on that overall profitability.
spk26: Yeah, I do feel like a 4% or 1% ROA is achievable for the year. My guys now are crunching the numbers real quick to see about your other questions. I don't usually think in terms of that ratio, but I do believe that we have evolved enough that we've kind of shifted from from, as Matt put it earlier, the upside risk versus downside risk. We've gone from downside risk of one being turning into other. I think there's more upside opportunity to beat one than not. You know, we do have variability within the different quarters, the different seasons, and the first quarter tends to be lower, but I do expect that we'll be at 1% at least for the year and then build upon that next year. Great job. about the answer to the other question.
spk16: Yeah, yeah. So the 150 you quoted there as a pre-tax, pre-provision ROA, that's exactly in line with if we had the 1% or just over a 1% core for the year, that translates to exactly a 150.
spk20: Understood. Thanks, Matt. That's helpful. Thanks for taking my questions, guys. Sure. Thanks, Greg.
spk18: Your final question comes from the line of Graham Dick from Piper Sandler. Your line is live.
spk11: Hey, good evening, guys.
spk10: I just wanted to circle back to one of Kevin's questions on M&A. I know you said there's a pretty high bar right now and it would have to be attractive on a lot of fronts. But I guess as you look out you know, a few quarters, maybe a calmer environment, multiples return. What, what criteria achieves that, that bar for you? What, what makes a deal look good and something you would really consider financially?
spk09: And then I guess also like strategically. Okay.
spk26: Okay, well, I'll start with probably an answer you don't want because it's not necessarily quantifiable or put in a model, but I do. Well, I shouldn't say that. You might still want it, but it's not as easy to put in a model. From my experience, and we've done a number of mergers now, I think the first thing that I look for is a good partner. We want to make sure that our cultures mesh. It doesn't mean our business models have to mesh, but our cultures need to mesh, you know, the winning spirit and a good person at the top and the exec team has value that they can add. So the first thing that I personally look for would be how does that cultural fit work? And we've been blessed with our deals that we've done thus far to be able to partner with good people. And for every deal that we've done, we've grown the footprint that we inherited. And that was because we were able to bring some larger balance sheet strength to a team that already had capability. So we'll continue to look for that. As I've talked about before, I think our first priority would be in-market, something that brings some density to one of our markets, which would imply also a kind of lower operational risk. Ideally, that's a lower loan-to-deposit ratio, which helps with the liquidity questions. I would say our sweet spot is probably half a billion to a billion and a half, I think, in the market. A billion and a half makes a lot of sense. I think the model that we used in Houston, where we did about a half billion, works well for a new market should we choose to do that. That's kind of big enough that you have something real. but it's also not so big that it's a bet to franchise on a movement in a new market when that time comes. As far as the financial metrics, clearly we want to have a limited as possible payback period for something that's really strong, and when times are normalized, I think we would look at a two-and-a-half, three-year payback as kind of the outside option And that would just be in kind of a special case of that workforce. But in today's environment, if something did happen to happen price-wise, I would expect it to be something closer to a year in terms of payback. So I think once things normalize a little bit, you can obviously consider expanding that outwards a little bit. But again, since we don't have to do M&A, we probably will be a bit conservative on that. You know, the question everybody wants to know about dilution and, you know, these things all kind of balance each other out. And so the payback period is really probably more important than the dilution necessarily. But, you know, obviously in a normal time, we would want to keep that probably in the 3% to 5% range. But it all depends also on the size of the bank. So if it's half a billion to our bank, it's going to be, you know, math just tells you that it's going to be easier to have a lower dilution than if it's a billion and a half opportunity. And that's been our historic Kind of markers, not necessarily good or bad pricing, but more just how big is the bank relative to our current balance sheet. What other metric might I be missing out on there, Greg? I think you covered it. Yeah, so most important thing to me is does it have a chance? A, culture. B, do we have an opportunity to be accretive from an earning standpoint on a per share basis in a reasonable period of time? And ideally... within the first six months. I would hope that we could, or at least ideally within the first six months of enacting the changes that lead to the cost saves that get you the earnings creation.
spk11: Okay, great. That's helpful. All my other questions have been answered. I appreciate it, guys. All right. Well, thank you.
spk21: Thank you, Graham.
spk22: Thanks, everybody, for your coverage.
spk18: That concludes our questions. I would like to now turn the call over to Jude Melville for closing remarks.
spk26: Just to reiterate, really proud of our team's efforts. I wouldn't even say this quarter. This quarter in banking, it doesn't move that quickly. You have some action that you have to deal with in the current environment, but the real most important moves occur over a period of time. The transition in our strategy and Achievement of some of our long-term goals is something that we've been working on for quite some time, and we'll continue to work on. And this was a good quarter of progress towards attainment of those goals, and look forward to getting more done next quarter. Thank you all.
spk22: I think that concludes our remarks. Thanks. you Thank you. Thank you.
spk00: Thank you. Thank you.
spk18: Ladies and gentlemen, thank you for standing by, and welcome to the Business First Bank Shares Q2 2023 call. I would like to now turn the call over to Matt Seeley, Director of Corporate Strategy and FP&A. Matt, please go ahead.
spk16: Good afternoon, and thank you all for joining. Earlier today, we issued our second quarter 2023 earnings press release. a copy of which is available on our website along with the slide presentation that we will reference during today's call. Please refer to slide three of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com. Please also note our safe harbor statements are available on page seven of our earnings press release that was filed with the SEC today. All comments made during today's call are subject to these Safe Harbor statements in our slide presentation and earnings release. I'm joined this afternoon by Business First Bank Shares President and CEO, Jude Melville, Chief Financial Officer, Greg Robertson, Chief Banking Officer, Philip Jordan, and Chief Administrative Officer, Jerry Vaskegu. After the presentation, we'll be happy to address any questions you may have. And with that, I'll turn the call over to you, Jude.
spk26: Okay, thanks, Matt, and thank you, everybody, for joining us. We know it's a busy time, and we appreciate you prioritizing this conversation. Last quarter, I began by discussing our longer-term objectives to give some context to our near-term results, and while it won't take as much time to review the specific long-term goals on this call, I do want to take a moment to remind us of what those general priorities are. Management of risk through diversification, that's geographical, industry, product set, duration, revenue streams, among others. Number two, achievement of greater efficiency and optionality through scaling. Number three, an increase in core profitability levels through a focus on capital allocation and management. Finally, a qualitative rather than a quantitative goal to continue selective additions when available of key teammates with the experience and talent to help us prepare for the opportunities that will present themselves as we gain success on the previously mentioned three more numerical priorities. We've been through enough periods of uncertainty to know we have a responsibility to continue preparing for the future, even in a time of caution. I'm pleased to congratulate our team on another quarter of progress in each of these areas. On management of risk through diversification, we continue to diversify our asset exposure even in a time of lower growth. Our loan growth was again led by our Dallas region, which generated over 50% of the net increase, with the runner-up this quarter being our North Louisiana region. Two very different regions, both of which we are gaining significant brand recognition within. On the type of loan front, growth was again led by increased C&I exposure, accounting for roughly two-thirds of our increased balances. I'll also mention encouraging progress in diversifying revenue streams through some positive movement in our SBA line of business. Last year, we had about $200,000 in income from SBA, and this year we expect to average more than that number on a quarterly basis. So it's not yet the needle mover we eventually expect it will be, but we do like the trajectory. On scale, we slowed down our growth to match the current economic and rate environments, a reflection of the optionality our current size offers. This size, we should be able to operate at solid levels of efficiency without relying on the significant levels of growth we've looked over the past few years. So we have the opportunity to be increasingly selective, which will pay off in asset quality, loan pricing, and capital usage. Our growth, while slow, is still healthy at about 8% annualized, a level that's manageable, fundable, and capitalizable within the limits of our retained earnings. Excluding the impact from our sub-debt redemption, we were capital accretive on all regulatory ratios. And if we were to back out the impact of AOCI, we would have been capital accretive on all of our capital ratios, including TCE levels. We expect this to continue to be the case in future quarters as we remain selective on loan growth, likely in the 4% to 5% range. On earnings, we are very pleased with the results, and while we aren't yet where we want to be, we have taken a significant step forward. We booked a 1.18 ROA, a 14% ROE, and 73-cent earnings per share. These are GAAP numbers. Three main drivers are our financial results for good NEM protection, good expense control, and continued solid asset quality. Greg will dive deeper into each of these fronts in a few minutes. Now, these gap results did include some net positive non-run rate income and expenses, but even backing out those items, our results would still have performed at solid levels, producing non-gap results of 1.04 ROA, 12.4% ROE, and 64% TPS. A couple points I want to note. First, non-run rate does not mean accidental or not real. Our additional income came primarily from investments we've made over the years in small business investment companies, or SBICs. which returned at a higher level than normal this quarter, and through a decision to retire some holding company debt early. Second, what we believe has fundamentally changed in our earnings profile is that a roughly 1.0 ROA over the past year or two would have been where we expected to land assuming everything went right. Now we view a 1.0 ROA as a baseline from which we have the opportunity to outperform when things fall our way, as happened this quarter. That doesn't make us a high performer yet, but it's a concrete step in the right direction and in line with the goals we've been articulating for you over the past few quarters. Finally, on the topic of people, while we do not believe we need to add significant numbers of producers at this time, as our most recent hires still have capacity to grow their individual books, we did add two impactful back office hires that are providing immediate impact. Zach Smith joined us as treasurer. Zach was one of the leaders in the treasury department at Bank OZK, a larger regional bank, and also has experience with Comerica. We were also joined by a new chief HR officer, Mike Pelche. Mike was CHRO for Iveria Bank for many years prior to their merger with First Horizons. Both of these individuals, each of whom has been with larger banks as they have grown, will, through their experiences and relationships, contribute materially to our journey, both navigating the current uncertain times and in a time of opportunity that will surely follow. I'm going to turn it over now to Greg and Matt to cover these results in detail, but I'd like to reiterate my thanks to our team. We've navigated a number of crises and perceived crises together, beginning with the great financial crisis while we were a de novo bank. We've navigated not always perfectly, but always with one eye towards the immediate needs of our current customers, shareholders, and regulatory partners, and one eye mindful of the long-term opportunity we believe our franchise has before us. This quarter is another demonstration of our capacity on both fronts. That concludes my remarks, and I'll turn it over to Greg for more detail on the financials.
spk24: Thank you, Jude, and good afternoon, everyone. I'll spend a few minutes just reviewing our Q2 highlights, some of which Jude had already mentioned, including some balance sheet and income statement trends, and we'll include some updated thoughts on our current outlook. The second quarter core net income number was $17.7 million, or $0.70 earnings per share. That equated to a 113 ROA and a 1350 ROE. That was really driven by strong non-interest income, lower loan loss provision expense from our continued stable credit trends and the slightly lower loan growth, slightly higher than expected loan discount accretion as Jude mentioned. These results are partially offset by slightly elevated non-interest expense during the quarter Before I dive into more of the specifics on the quarter, I'd like to take a moment to call out a few items that might not be readily identifiable but are important for the context to consider. Our core non-interest income, as Jude mentioned, included $2.8 million in equity investment from SBIC revenue, which 2.6 or about was more than what we had expected. We had modeled about $200,000 for the quarter. Our core non-interest income Expense included the $715,000 really one-time bill from our core provider for some services that were rendered in the past and that won't be reoccurring in the future. Our long loss provision of $500,000 was really a consequence of the lower loan growth and the continued strength of our credit book. With all those adjustments, as Jude mentioned, I think it's important to consider really a baseline for what we look at going forward from an earnings standpoint and that so-called adjusted run rate for the quarter would have been 16.2 million or a diluted EPS of 64 cents and a ROA of 104 with ROE of 12.4. That's very strong for us for the quarter and we're really proud of those results. That was highlighted by a few things. We'll start with the balance sheet first and then work our way through some other income statement items. The loan growth for the quarter was 7.9%, really highlighted by our Dallas group with 55 million or 59% of that loan growth for the quarter. That loan growth from our Dallas group remained our Texas exposure at a 37% exposure rate for the portfolio as a whole. As far as loan type for the quarter, CNI was the headline again for the second quarter. $69.9 million of that growth was in CNI loans, with $67 million in C&D loans that actually migrated over because of completion in projects into owner-occupied CRE and income-producing CRE, with the other piece of the loan growth, the actual growth in CRE for the quarter was $9.5 million. for the quarter. As far as deposits go, our deposits increased about $208 million for the quarter. $211 million of that were broker deposits. Really, there's some nuance and we're very proud of the fact of the work that our branches have done. The branch growth for the quarter was relatively flat with a little bit of extra story or descriptor around that. In the beginning of the quarter in April, the bank up of our portfolio from a deposit standpoint being commercially focused, we experienced a little over $100 million in run out during April for tax related payments from clients. During the remainder of the quarter, branches did an excellent job of really, and the production staff as a whole, going out and really drawing that back to zero. And that's a really important part of the nuance of the quarter. So we feel like those wins in the second half of the second quarter really started to show positive results and we're seeing early results in the first month this quarter with that continued deposit generation profile. Non-interest-bearing deposits is an important topic right now. Our portfolio sits at about 28% of the portfolio being in non-interest-bearing deposits. That's down about 3%. We feel like that migration has started to wane in the recent months, so we are very optimistic about that. We have been generating about five to seven million in new non-interest-bearing deposits every month so far this year, so really, really still optimistic about that. As far as capital goes, as Jude mentioned, capital increased nicely in the second quarter from a bank-level perspective with Tier 1 leverage and Tier total risk base increasing about 15 basis points and 13 basis points, respectively. TCE to TA in total risk base at the consolidated level, both decreased about 12 basis points. However, if you would back out the AOCI swing, which we had about 13.3 million in AOCI negative swing this quarter, that would have been an increase in TCE to TA ratio, about nine basis points for the quarter. Furthermore, if you think about it from a tangible book value perspective, Looking at it, when you strip out AOCI or tangible book value X AOCI, we had about 10% growth year-to-date in that and about 13.5% for the quarter. And that tangible book value number X AOCI would have been slightly above $20. So really happy about that performance in creating the value for the shareholder. As far as the margin goes, Our margin was down slightly five basis points. That is right in line with where we had projected. Our expectation on pricing going forward, we're really proud of the efforts of our production staff, the bank. New loans generated for the quarter are really coming to the average weighted yield is about 8.45% for the quarter. The majority of our loans now that are being priced are renewals, and that renewal rate is slightly higher than that, closer to 880, and with an average of our new production being at about 860 on average. As far as deposit pricing, I'll let Matt get into details on the betas here in a minute. We're really happy with our continued deposit generations, although As everyone knows, the cost of those deposits is very competitive in this market right now. Our total deposit beta cycle to date is about 36%, and we expect that to be closer to 40% by year end. And with that, I'll really turn it over to Matt to really kind of cover the deposit betas in more detail right now. Sure.
spk08: Thanks, Greg. Thanks, Greg.
spk16: So as Greg mentioned, total cycle-to-date deposit beta is 36% during the quarter. Interest beta cycle-to-date betas during the quarter were about 50%. We see those trending up about five percentage points each quarter, so ending the year at around 60% for Q4. And on taking a step back, kind of thinking about total interest-bearing liabilities, those betas were 53%, so tracking pretty close to our interest-bearing deposit betas. And again, see those going up about five percentage points each quarter. So ending the year, Q4 at around 63%. And the quarterly snapshot betas, those were just a little bit above 100% for just the Q2 interest-bearing beta, that snapshot. And I think that that's relatively in line with some of the other releases and peers that we've seen. But thinking about things more on a cycle-to-date basis, I think 5% increase over the next two quarters is roughly what we'll see. And with that, I'll turn it back over to Jude for any closing remarks or before we take Q&A.
spk21: No, nothing to add. Happy to jump into questions now. Thank you all.
spk18: Your first question comes from the line of Michael Rose from Raymond James. Your line is open.
spk27: Hey, good morning or good afternoon, guys. Thanks for taking my questions. Maybe we can just start on the beta commentary that you just kind of laid out. Thanks. Thanks, everyone, for that. What does that assume in terms of where kind of NID mix? you know, stabilize. I think you guys are at about 29% at the end of the second quarter. Just trying to get a sense for where you think that stabilizes and, you know, what the expectations are for kind of ex-brokered growth, which, you know, is down a little bit this year. I know you guys have several initiatives in place. We'd just love some thoughts. Thanks.
spk16: Yeah, I think that we'll see the non-interest-bearing composition kind of bottom out towards the end of the year and see that down another couple percentage points between now and year end, so bottoming out around maybe 26% or so, just as percentage of the overall mix. Our appetite for brokered, I think that we'll just continue to be kind of opportunistic with the pricing mix between brokered and other borrowing sources, but there's still a little bit of room that we have certainly to rely on brokered. That said, and I can let Greg give a little bit more specifics around what we're seeing early on in the third quarter, but we're encouraged that, you know, on just an excluding brokered basis, deposits were flat during the second quarter. And one important thing to consider there is we did have some municipality and tax funds that rolled out during the quarter. So when you strip out brokered and you factor in the tax funds that had moved out, being effectively flat from Q1 was – in our eyes, a stabilization theme or trend that's starting to occur. I think we're nearing or turning a corner now, but maybe another quarter or two of a little bit further kind of decline in that mix of non-interest bearing. So I'd say it's conservatively maybe a 50-50 split in terms of funding between more wholesale and core deposits. But again, we're optimistic about some of the core funding generation that we've seen early on here in the third quarter. But I'll let Greg kind of hit on maybe some of the more of the new wins and trends we're seeing on the core side of the funding base.
spk24: Hey, Michael. I think there's a little bit of nuance. I think, first of all, we've we have seen and do feel like in the industry, not only us specifically, but in the industry, the outflow is starting to wane. The question as far as non-interest bearing depends on how many more rate increases we see. If we hold flat from here on out, we think maybe we might have seen as much of the movement that we've experienced. Like I mentioned, we are consistently producing $5 to $7 million in new deposit non-interest-bearing generation per month. Now, we have had some recent wins that I expect that number in the first part, especially July and August, to be higher than that. To put it in context, the average cost we've been generating in rate-bearing accounts, deposit accounts open per month, about 100 million in new originations each month this year. And that most recent weighted average is about 438. So as we continue to manage the balance sheet from a loan growth perspective and weigh that against the cost of brokerage, which today, you know, for one year brokerage is going to be in the 535 range. So if we continue to be successful in And I think we will on the deposit generation front at that lower cost. It's materially different for us. We've seen some, like I said, some wins, so we expect that to continue to happen. But the broker would be kind of plan B, obviously.
spk27: Very comprehensive question. And that gets into the follow-up, which is, you know, the core margin was down kind of Yeah, I think about five basis points. You said single digits, so it looks like that was good. Just kind of balancing, you know, what you're expecting in terms of deposit beta expectations, NID mix, and what you're seeing on the loan repricing side. Is that a good kind of way to think about the third quarter margin, you know, down kind of mid-single digits when you put it all together, or am I missing something?
spk24: Yeah, I would say about... break even from where we are today. Maybe with a basis point or two improvement would be what we're expecting going forward.
spk16: Yeah, Michael, I'll give you a little bit more context around that. So the beta assumption that I'd mentioned previously, that translates to roughly 35 basis point pickup in just interest-bearing deposits in the third quarter. And when we look at our new and renewed loan yields coming on, like Greg had mentioned, in the 860 to 880 range, we've been executing pretty nicely on pulling through from a cycle-to-date loan beta perspective, holding at around 85%. Expect that to continue and pick up about 30 basis points in core loan yield expansion in the third quarter. So when we kind of net all of that, you know, the funding side and the earning asset and loan repricing side, I think we feel pretty good that the margin should hold – flat here. Maybe a little bit too early to claim success and we're turning a quarter to be accretive, but I think we feel really good that flat in Q3 is where we'll be.
spk27: That's very helpful. Maybe just, you know, one follow-up question for me. Just credit is exceptionally good and, you know, I say across the industry we're seeing kind of, you know, more signs of normalization and definitely a pickup in a kind of idiosyncratic or one-off credits, but you guys are doing, you know, really, really well. Anything that you're seeing kind of, you know, on the horizon that you guys are worried about, or is it just the strength of your markets and, and kind of, you know, hopefully we don't have a recession or anything like that, but just above some general thoughts. Thanks.
spk26: Yeah, I don't think we've seen any evidence anywhere. It's a weird thing to say, but just like last quarter and the quarter before, we're all sensitive to see what will happen. We haven't seen any degradation in our portfolio. And I don't know if Gary, if y'all want to add anything there that you're seeing, but I don't think any of us would have an area that we would point to as showing signs of stress.
spk24: No, dude, I'm sorry I can't add to that. I would agree. Like you said, it feels strange to say that out loud. But no, right now we feel very comfortable where we are. And like you said, strength of markets and the bankers, we always stress credit for sure.
spk02: All right, guys. Thanks for that question.
spk21: Sorry not to have a good roadmap for you on that front, but I guess I'm not that strong. No, that's good. Good stuff. Thanks, guys. Appreciate it.
spk20: Thanks, Mike.
spk18: Your next question comes from the line of Matt Olney from Stevens, Inc. Your line is on.
spk15: Hey, thanks, guys. Good afternoon. Hey, Matt. Just following up on Michael's question around loan yields and those renewals, I think you mentioned that there could be about 30 bps of loan yield expansion core in the third quarter. I'm just looking for more color on that. the newer yields you think are coming on right now, on 880, I think you said. What's the color on what yield those loans are rolling off at? Like, what's the differential? And then as you think about the loan maturities and renewals that are coming up, is this a pretty steady level that you're going to see the next few quarters, or could there be some time period where it's a higher number? Thanks.
spk24: Yeah, I think the loan average rate weighted between new and renewed. Now, fortunately for us, loan growth has slowed down on purpose by us, not been more strategic than it has been for the last pipeline. That renewal pace has been greater than the new one. So we've been seeing renewals come through, like I mentioned, about 880, with the new stuff being priced slightly less than that, for an average between two, about 860 pickup we're seeing on the renewals towards creating the expansion is in some cases as much as 1% and that's a pretty steady stream of those renewals over the next three or four quarters approaching probably a billion dollars of the portfolio that will continue to do that now as we get quarters into the future maybe that isn't one full 1% difference in the pricing but some of them will be leaning toward that in the early parts of it because of the difference in the origination to maturity.
spk16: Yeah, Matt, and I'll direct you to page 21 in the investor deck to kind of answer your question on where the loans are sitting now and the repricing opportunity. We've got, over the next 12 months, about $2.2 billion set to reprice between fixed maturing in the next 12 months and floating rates. And those are sitting on the books at about a 767 weighted average yield. So when you think about the 860 to 880 new and renewed, or I guess renewed and new, that's about a 90-plus basis point pickup in those loans. So that translates to if you just apply that 90 basis point pickup in the actual renewal of that portfolio, which is about 45% of the book, you've got 20 plus million in annual revenue pickup there. So I hope that kind of draws the line or connects the dots between the 30 BIPs in the overall total portfolio pickup and the actual pickup and just the repricing opportunity.
spk15: Yeah, that's perfect, Matt. Thanks for flagging that slide in there. I missed that initially. um perfect and on the on the loan growth front um i think i heard you'd say the back half the year between four to four to five percent i assume that's an annualized number for for the back half just want to confirm that and then as far as the mix you mentioned it was a cni portion that led the way in 2q as you think about pipelines and pay downs, is it going to be similar to what we saw in 2Q, where it's mostly C&I growth, whereas some of the construction projects are completed and they move off to a different category?
spk26: First part is I didn't intend for that to be an annualized number. And the second part is that I would think that we would see a similar mix going forward, and not just this quarter, but the past couple quarters we've had that mix as we've kind of downshifted construction production to recalibrate the portfolio. So we'll still see CRE as construction turns over or completes. We'll still see CRE growth, but not at the rate of new production that we have seen historically, and we definitely are... not doing as much construction as we have done in the past.
spk25: So I would anticipate CNI would continue to be the most significant contributor to any kind of net increase.
spk15: Okay. Thanks for that, Jude. And then just lastly, I think the accretion levels were a little bit higher this quarter. Any color on expected accretion in the next few quarters?
spk24: Yeah. Matt, I would think We are expecting similar levels of accretion in the next couple of quarters just by the pace of the deals that we have kind of working through the process right now.
spk14: Okay. That's all from me. Thanks, guys.
spk20: All right. Thank you. Thanks, Matt.
spk18: Your next question comes from the line of Brett Rabattin from Havote Group.
spk21: Hey, good afternoon guys. Uh, thanks for the question.
spk24: Um, wanted to first ask, you know, you talked about the broker CDs and the market and your strength of gathering deposits. You know, some, some banks in your market area and in the Southeast in general have, have indicated that maybe the landscape has gotten a little less competitive with one, you know, larger regional that was super aggressive with the deposit campaign, you know, during may in particular. Have you guys seen that, you know, maybe in some of your markets in Louisiana where maybe it's the competitive landscape has ebbed a little bit or does it still seem as ferocious or however you want to put it, as it has been for the past few months?
spk26: Yeah, I don't think we'd describe it as ferocious. I do think it's – or it might have been at one point, but I think it has calmed down a little bit. You know, I would say that – some of our peers have raised deposits at a little greater clip, but I think they also have been a little more willing to pay up a little bit. So we're trying to strike a balance between that deposit growth and protecting the NEM. But I do think that, as we talked about, we're starting to see some signs of deposits coming in, and that's not because we've materially adjusted the strategy we have on rates that we pay. It's because it is probably becoming a little bit looser, but still tough, but not quite ferocious, I would say. Anybody else want to add to that?
spk17: I would say part of the added talent and skill sets that you pulled in have given us better visibility into how we manage our deposits. I know Greg's got kind of a really good look at the deposit portfolio as a whole. So I think it's allowed us better technologies, allowing us to make really good decisions on deposit pricing. It's good to see. Okay.
spk26: Okay, that's helpful.
spk24: And then I didn't, if you gave it, I missed it, but the securities that are maturing here in the back half of the year, how much is that and will that be partially to fund loan growth or how do you think about the balance sheet management? Yeah, Brett, as far as securities go, I think we've only purchased two securities this year. The portfolio is about 13.5% minus AOCI of assets right now. As far as cash flows go or maturities go, we have an average of about $131 million in per year for the next three years in maturities that are scheduled pretty systematically out. So we're really, from a balance sheet standpoint, we would expect to plow that back in and not really be very selective on securities if and when we do purchase them to maybe extend some duration strategically to pick up some good yield now that the rates seem like they're getting toward the top. But outside of that, we expect to put that money, put those maturities back to work in the form of paying down debt or put it back into the loan portfolio.
spk16: The only thing that I'd add to is that during the quarter, we did take out a little bit more broker to have just some more cash on balance sheet. I think we were about 5% cash to assets at the end of the second quarter. Typically, we've been a little bit lower than that, but that was just kind of a remixing of the liquidity. we're comfortable letting some of those securities run off and just remix into loans. So the percentage of securities might come down just a little bit, but we've already got more liquid interest-bearing cash balances on the boat.
spk24: Okay. That's helpful. And then if I could sneak in one last one just around strategy. When you guys raise capital, In the fourth quarter, you're basically kind of a year ahead of your five-year plan.
spk26: And so, Jude, I'm curious to hear if this environment in terms of either interest rates or some uncertainty on the economy, if maybe you've changed what you want to accomplish or if you're still kind of full steam ahead in Texas or what's changed maybe relative to the environment last year. Sure, so that's kind of why I started the call with kind of going over what our general priorities are. I talked about it last time a little bit too, but we were ahead of the game in terms of size, where we wanted to be size-wise, which of course required use of some of the capital that we raised last year or led to that. Also ahead of the game in diversity, diversification by geography a little bit. not ahead really as of the end of last year on earnings. So what we wanted to do this year, even pre-preceived crisis, was to continue to grow, continue to diversify, but put more emphasis on earnings out of the three main categories than we have in the past. So I wouldn't say that we have changed our strategy. I'd say that we're going to take advantage of the fact that we're a little ahead of pace on the first two components so that we can prioritize a little more on the third to make sure that we achieve all three. And I think this quarter is a really good example of us pivoting in that way. So we slowed down the loan growth, but we're still able to continue to focus on growth in the Dallas area. And that slowed loan growth. ensured that we were capital accretive, which is something I know when we raised capital in the fall, that was a question, or winter, that was a question, was when would that enable us to be capital accretive? And I think we probably felt like that was possible now, but there was some hesitancy to accept that, I suppose. So I'm pleased that we were able to do it, and we do plan on continuing that mode of operation. So our growth will be governed by the retained earnings growth but that still leaves us well within range of our targeted five-year plan growth that we've outlined. So a long-winded way to say we haven't changed our goals. We're just managing the process by which we achieve them, but we still remain in our minds on target to accomplish all three in the direction that we wanted to and should be able to do so within our current capital structure. supplemented by the retained earnings.
spk20: Okay. That's really helpful. Thanks so much for all the color. Okay. All right. Well, thank you, Brett.
spk19: Anybody else?
spk18: Your next question comes from the line of Kevin Fitzsimmons from D.A. Davidson. Your line is live.
spk06: Hey, good afternoon, everyone. Hey, Jude. Greg, I missed, in your prepared remarks, you were talking about like a core X non-run rate type piece of earnings per share. And I just wanted to, if that's what you said, if you could repeat it. And then also how I should be looking or how we should be looking at, you know, a run rate going forward for businesses. core fee revenues and core expenses? Are we just kind of pulling out that additional civic revenue and pulling out that extra data processing charge, if you could kind of guide us on those fronts? Thanks.
spk24: Absolutely. Yeah, I was talking about the way we've been thinking, you know, our published core net income, 17.7 and 70 cents EPS, If you were going to take out those two items that we considered to be non-recurring but not intentional like Jude said, one would be the EIC income of 2.6, and the other would be the core IT cost of $715,000. So if you did that, you would get an adjusted $16.291 million, exactly. and that would equal a diluted EPS of 64 cents.
spk28: Got it. Okay.
spk24: And as far as the non-interest income run rate, I think 8.5 million is probably the way we want to think about that going forward. And non-interest expense, right, about 39 or slightly higher than 39 million for the quarter.
spk07: And is it fair to say – I'm sorry, go ahead.
spk16: Oh, sorry. Yeah, if you take what we reported, core non-interest expense of 39.6, you strip out the 700,000 kind of one-off data processing invoice that we received, and then just bake in some just natural course of business expansion, maybe mid-$39 million number is a good run rate going forward, which that reflects about a 5% annualized increase in expenses.
spk06: Great. That's what I was going to ask next. Thank you, Matt. And as far as the bond portfolio, you mentioned the cash flows of it. Some banks have pulled the trigger or are evaluating doing a larger transaction to accelerate that opportunity to get proceeds out at higher rates or whichever alternative you want. Is that something even on the table for you all or is it more, is that something we're in the near term that can put pressure on capital that you might want not to do? Thanks.
spk24: I think it's something we talk about and we run an analysis every quarter on if we needed to execute on liquidating part of the portfolio immediately, we could do about $135 million of that overnight with less than a $3 million loss. But as far as we feel like the AOCI is going to unwind fairly quickly. So a strategy, to your point, that would put pressure on capital right now. I don't know that we're ready to do anything like that.
spk26: Well, not just for pressure on capital, but just the business decision, I think, is the way I would describe it. We have a fairly short duration of our investment portfolio, and we're comfortable that our projections to accomplish our goals without giving up money. And so we'll keep doing that unless for some reason something changes and we have to. We do analyze it, though, and it certainly is on the table. We need to always look at options. But making the best business decision for us would indicate to me right now that that's not a necessary move.
spk06: Right, right. Good point about the short duration. And then one last one from me. We've had... A few deals announced here in recent days, one in the mid-Atlantic. You know, curious if, you know, I know you all are still digesting the Houston deal, but as you look out later stage of the cycle and exit in the cycle, just curious are there conversations going on in new regions or new markets you might have your eye on in terms of
spk05: in terms of looking to expand. Thanks.
spk26: Sure. You know, we're always, like your prior question, is something on the table? I think everything's, most things are on the table, but certainly the equation has to make sense for us, and the equation's a little different today than it was a couple years ago. One of the differences is that we are comfortable that we have a strong geography that we can build out That doesn't mean we wouldn't look at other geographies over time, but we don't need to. I think given the markets that we're in, there's plenty of opportunity here, so the bar would be pretty high in terms of embarking upon an expansion of that geography through an M&A deal. I'm not saying that it couldn't happen, but it's not something that we're necessarily aggressively looking for. I would guess that the more likely outcome would be expansion at some point when we're ready would be expansion through a team lift down or something incremental of that nature. There definitely are more conversations that we're either a part of or hearing that they're happening, but I don't know if that necessarily makes it more likely to happen. A lot of things have to fall in place. We've developed the organic capacity to be able to grow without M&A, so M&A needs to really fit our needs and And the financial equation needs to work for us. And hopefully our partner as well. And that's kind of the goal is to get a win-win. But the hurdle is, the bar is a little higher than it might have been earlier on just because we do have, and that's what I've started my comments with about one of the values of scale is the optionality it gives you on future growth. And so we're in a good spot to be able to partner with who we really want to and not necessarily seeking growth for growth's sake or new markets for new markets' sake. With that said, I do think over the long run, there are plenty of other markets across the Southeast that we want to be in, but there's no rush. It's the way that I would put it. We have a team that's positioned to be around for a long time, and we need to take opportunities when they make a lot of sense for us, and that's where we are today.
spk06: Yeah, and a good point about the lift-outs because that's really what you accomplished in Dallas-Fort Worth.
spk21: Correct.
spk06: That was just all organic lift-out strategy.
spk26: That's right. And New Orleans, we've had really good success with team lift-out as well.
spk20: That's right. That's right.
spk06: Okay.
spk20: Thanks very much, guys. Thank you. Okay. Thank you.
spk18: Your next question comes from the line of Fetty Strickland from Jannie Montgomery Scott. Your line is live.
spk20: Hey, good afternoon, everybody.
spk19: Hey, Fetty. Good to hear from you.
spk13: Just given all the repricing opportunity that you've talked about on the loan side, and we've got the potential for a Fed pause maybe this year, can we see the margins start to rise in 2024 just given the amount of you know, where you're putting on loans at new rates and the amount of turnover you've got coming online?
spk26: I think it's not beyond comprehension to think that that might happen, but, you know, we certainly want to be conservative in how we think about it, just given the challenges and the environment. We definitely still have some work to do and some fighting to do, but while we're we're projecting kind of a neutral NIM for the rest of the year. I think we do believe that there could be some opportunities for expansion next year, even without a rate decrease. Do you all want to speak more specifically?
spk24: I agree. I think the wild card in that is the liability side. And from a competitive standpoint, that would be my only caveat. I think we're doing a good job to manage the top end and our and our production staff is really focused on C&I account type accounts, which are non-interest-bearing deposit accounts with treasury built in there. That's the highest incentive product. So that's the biggest focus. But really the interest-bearing side and the speed at which those rates continue to go up is where that's really going to play.
spk16: Yeah, I would say that, you know, kind of like you said, the core margin flat for the foreseeable future is where we're comfortable right now conservatively. But I would say that there's probably more upside, not significantly, but there's probably more upside in that than there is more downside, if that makes sense.
spk13: No, that's very fair. No, I get it. And it's hard to predict exactly what the Fed's going to do, what's going to happen in 2024. And, you know, as one of the earlier callers mentioned, you never know what competitors are going to do either. One other piece, and forgive me if I missed this earlier, but has the loan growth guidance really changed? I mean, should we have sort of an upper single-digit annualized growth rate for the next couple quarters? Is that reasonable? Should it be lower or higher? Just trying to figure out where we should peg growth going forward.
spk21: I think we'll continue to kind of downshift a little bit.
spk26: So I would say probably more on the 4% to 6% annualized range as opposed to upper single digits. A lot of advantages in this environment is growing at that rate, including capital appreciation and benefit that it provides to the margin being able to not have to fund that last dollar with highest cost funding. we feel like we'll benefit the most economically with a 46% annualized rate. And we are beginning to see a little less demand. Last quarter, I would say that most of the slowdown in growth in the quarter before that, the slowdown was our decision for the most part. But I would say that we would expect the second half of the year and are starting to hear that it's a little more, maybe it's closer to 50-50 decisioning versus demand, or it might even slip into more demand-based deceleration of loan growth from what we're hearing anyway, obviously due to the increasing interest rates.
spk13: Got it. And just one final one from me. Jude, it sounds, I think I heard you earlier say you feel like a 1% ROA is kind of a base from here, from what you think you can achieve. You know, do you think that that's, I guess, just to clarify, do you think a 1% ROA is achievable for the year? And then if you take out the uncertainty of provision, do you feel like a 150 PPNR ROA I think I pegged you at 158 this quarter. Just wonder what your thoughts are on that overall profitability.
spk26: Yeah, I do feel like a 4% or 1% ROA is achievable for the year. My guys now are crunching the numbers real quick to see about your other questions. I don't usually think in terms of that ratio, but I do believe that we have evolved enough that we've kind of shifted from from, as Matt put it earlier, the upside risk versus downside risk. We've gone from downside risk of one being turning in so that I think there's more upside opportunity to be one. You know, we do have variability within the different quarters, the different seasons, and the first quarter tends to be lower, but I do expect that we'll be at 1% at least for the year and then build upon that next year. Great job. about the answer to the other question.
spk16: Yeah, yeah. So the 150 you quoted there as a pre-tax, pre-provision ROA, that's exactly in line with if we hit the 1% or just over a 1% core for the year, that translates to exactly a 150.
spk20: Understood. Thanks, Matt. That's helpful. Thanks for taking my questions, guys. Sure. Thanks, Greg.
spk18: Your final question comes from the line of Graham Dick from Piper Sandler. Your line is live.
spk20: Hey, good evening, guys.
spk10: I just wanted to circle back to one of Kevin's questions on M&A. I know you said there is a pretty high bar right now and it would have to be attractive on a lot of fronts. But I guess as you look out you know, a few quarters, maybe a calmer environment, multiples return. What, what criteria achieves that, that bar for you? What, what makes a deal look good and something you would really consider financially?
spk09: And then I guess also like strategically. Okay.
spk26: Okay, well, I'll start with probably an answer you don't want because it's not necessarily quantifiable or put in a model, but I do. Well, I shouldn't say that. You might still want it, but it's not as easy to put in a model. From my experience, and we've done a number of mergers now, I think the first thing that I look for is a good partner. We want to make sure that our cultures mesh. It doesn't mean our business models have to mesh, but our cultures need to mesh, you know, the winning spirit and a good person at the top and the exec team has value that they can add. The first thing that I personally look for would be how does that cultural fit work. We've been blessed with our deals that we've done thus far to be able to partner with good people. For every deal that we've done, we've grown the footprint that we inherited. That was because we were able to bring some larger balance sheet strength to a team that already had capability. So we'll continue to look for that. As I've talked about before, I think our first priority would be in-market, something that brings some density to one of our markets, which would imply also a kind of lower operational risk. Ideally, that's a lower loan-to-deposit ratio, which helps with the liquidity questions. I would say our sweet spot is probably half a billion to a billion and a half, I think, in the market. Billion and a half makes a lot of sense. I think the model that we used in Houston, where we did about a half billion, works well for a new market should we choose to do that. That's kind of big enough that you have something real. but it's also not so big that it's a bet to franchise on a movement in a new market when that time comes. As far as the financial metrics, clearly we want to have a limited as possible payback period for something that's really strong, and when times are normalized, I think we would look at a two-and-a-half, three-year payback as kind of the outside option And that would just be in kind of a special case of that workforce. But today's environment, if something did happen to happen price-wise, I would expect it to be something closer to a year in terms of payback. So I think once things normalize a little bit, you can obviously consider expanding that outwards a little bit. But again, since we don't have to do M&A, we probably will be a bit conservative on that. You know, the question everybody wants to know about dilution and, you know, these things all kind of balance each other out. And so the payback period is really probably more important than the dilution necessarily. But, you know, obviously in a normal time, we would want to keep that probably in the 3% or 5% range. But it all depends also on the size of the bank. So if it's half a billion to our bank, it's going to be, you know, math just tells you that it's going to be easier to have a lower dilution than if it's a billion and a half opportunity. So that's been our historic, kind of markers, not necessarily good or bad pricing, but more just how big is the bank relative to our current balance sheet. What other metric might I be missing out on there, Greg? I think you covered it. Yeah, so most important thing to me is does it have a chance, A, culture, B, do we have an opportunity to be accretive from an earning standpoint on a per share basis in a reasonable period of time, and ideally, within the first six months. I would hope that we could, or at least ideally within the first six months of enacting the changes that lead to the cost saves that get you the earnings creation.
spk11: Okay, great. That's helpful. All my other questions have been answered. I appreciate it, guys.
spk21: All right.
spk11: Well, thank you.
spk21: Thank you, Graham.
spk22: Thanks, everybody, for your coverage.
spk18: That concludes our questions. I would like to now turn the call over to Jude Melville for closing remarks.
spk26: Just to reiterate, really proud of our team's efforts. I wouldn't even say this quarter. This quarter in banking, it doesn't move that quickly. You have some action that you have to deal with in the current environment, but the real most important moves occur over a period of time. The transition in our strategy and Achievement of some of our long-term goals is something that we've been working on for quite some time and we'll continue to work on. And this was a good quarter of progress towards attainment of those goals and look forward to getting more done next quarter. Thank you all.
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