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spk00: Good day and thank you for standing by and welcome to the review of the first quarter 2024 financial results conference call. At this time, all participants are on a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Hoppy Cole, Chairman and CEO.
spk04: Good morning, everyone, and welcome to our first quarter earnings call. We've got several of our team members with us today. We have D.D. Lowery, our CFO, J.J. Fletcher, our Chief Lending Officer, and George Nooner, our Chief Credit Officer. And each of those will give us some color on their respective areas after I cover a few highlights for the quarter. Let's go ahead and dive right in. I thought it was a great quarter and a really good start to the year, a strong beginning point for 2024. Operating earnings were up 10% quarter over quarter to $20.6 million, and that was due to reduced operating expenses and reduced provision expense, and we did see some stabilization in the margin. Our core margin was only down four basis points compared to 19 basis points last quarter. Loan balances at quarter end decreased, but actually average balances were up for the quarter. We got some unexpected payoffs on a few large loans right at the end of the quarter. We also had some SBA loan sales, but pipelines grew pretty substantially, and JJ will give us a lot more in-depth color on that in his report. Credit quality remains strong, continuing to help with low past dues at 26 basis points. We had an improvement in MTAs and charge-offs were low at one basis point. So credit quality, remember, continues to perform extremely well. We grew our potential book value during the quarter by 35 cents or 2% for a quarterly basis. We increased our quarterly dividend by a penny a share to 25 cents per share per quarter or a dollar per year, which has been an internal goal for quite some time. So all in all, we thought it was a really strong start to the year. Pleased with where we are and pleased with what the progress looks like for the rest of the year. So, DeeDee, would you like to give us an update on the financial performance for the quarter?
spk09: Sure. Thanks, Hoppy. Obviously, as Hoppy mentioned, a great quarter and first time in several, several quarters that we had really no non-operating items. So very few thousand dollars. So it's great to not have all that noise in there for y'all to have to go through and explain. But on an operating basis, I do have to do that because the last quarter we had several things. But Earnings did increase 1.9 million, which was six cents per diluted share up to 20 million, 20.6 million from 18.7 million. So very pleased with that. And as Hoppy mentioned, most of that was driven by a decrease in our non-interest expenses by a million dollars. And then the no provision needed this quarter. So provision expense was down 1.3 million and we're still at an ACL reserve of 105. So So those two were the big drivers. Our net interest income was basically flat down about right at $300,000 for the quarter. Our cost of deposits increased 24 basis points for the quarter to 178 basis points. Still a really good number based on our granularity and our deposit portfolio. Our interest-bearing deposit costs increased 27 basis points to 245, and that drove our beta up. to 43 from 38 last quarter, so about five basis points. Our yield on our earning assets increased eight basis points, but we also had an increase, obviously, in our interest-bearing liabilities of 18 basis points. And so, as Hoppy mentioned, that we did have a decrease in our core margin of four basis points, which um is obviously less than we had last quarter and kind of what we um kind of led to for this quarter that we would see compression this quarter and then into the next quarter hopefully mid-year maybe um stabilizing this was pretty good four basis points is is It's pretty good, say, and stable. I think we'll still see a little more compression into the second quarter. But, you know, we're talking about here a few basis points. So I think it's, you know, depending on a few factors could go either way on that. But, you know, if no change in rates from the Fed, I think, you know, we're still going to see our cost of deposits go up some this next quarter just from the competition we're still facing. With the Fed not cutting, we're still having to reprice and we're still having to match competition. And our specials, you know, we had in the fourth quarter, um expired at the end of the year but we're still offering you know higher rates close to what we were for those specials because of what's out there in the competition so we're still having to have increased costs so um until we see a cut on that i think our deposit costs are still going to be um you know increasing a little bit as we go but but hopefully can start bringing that down some um Our loans, as Happy mentioned, did decrease $30.1 million, but our average loans actually increased $12.8 million. So that was great on average for the quarter. JJ will give some more information on that. Deposits increased $247.5 million for the quarter. And that was 256 million of that was public funds. So if you exclude the public funds, we were down about 9 million, which really is basically flat for the quarter overall, a small decrease. If you recall, this is our public fund season where we're increasing our public funds for a large amount, as we've talked about in the past, anywhere from $200 million to $300 million, and then we'll see that spend out through the remaining part of the year. So be expecting that as we go forward. We also pay down our borrowings during the quarter by $280 million, and so we're down to $110 million still at the bank term funding program. that will expire in December. And then also I want to talk a little bit about our non-interest-bearing deposit portfolio. You notice that decreased this quarter. It was 28.6 last quarter, and it was 27.4% of total deposits this quarter, so down just a little over 1%. But a big piece of that, almost all of that, is because the increase in deposits was from public funds, which is interest-bearing. If we had just remained the same, basically without all the influx of interest-bearing, our non-interest-bearing would have been about the same. On our liquidity, our liquidity position still remains strong. Our ratios are well above our limits. Our loan-deposit ratio is 77%. We have a borrowing capacity at the home loan bank of $2.5 billion. And then we have about 28% of our securities are in pledged, which is about 480 million. Over the next four quarters, our securities portfolio estimated cash flows coming out of that is about 210 million. And that's coming out at about 180 basis points. So, you know, part of it kind of we've been talking about the last really several quarters is just kind of the restructuring of the balance sheet. I think we'll continue to see that this year as these cash flows come off. at that 180, it'll go in fed funds or loans. And so we'll definitely see pickup and some yield from that. but still kind of remixing the balance sheet this year is the plan. Our ratios for the quarter, ROA was 103, and our return on average tangible common was 1348, and then our efficiency ratio was 61. All of our capital ratios were in line from last quarter, 8.1 TCE, a leverage ratio of 9.7, and a total risk base of 15.2. All of that was last quarter, and overall, very pleased with where we're sitting today. That's all from me, Hoppy.
spk04: Thank you, DeeDee. Appreciate that report.
spk03: Yes, sir. Thank you, Hoppy. As Didi and Hoppy both alluded to, we did have a slight decrease in net loans, but behind that, there were a lot of positive factors that happened during the quarter. First of all, again, the SBA division had a record quarter in terms of loans sold in the secondary market, about $23 million. And really, we were happy to see that because the legacy HSBI SBA group, which we did not have at the first, we began integrating that through the company. And so that was really a result of a lot of referrals from Legacy First Bank and then also loans from HSBI that had seasoned either construction or matured to be able to be sold in the first quarter. So really happy to see that and the income that came from that. The other thing, we did have, as Hoppy said, a couple of large payoffs at the end of the quarter. But on a positive note, about $35 million were made up in three credits, and the majority of that were priced at three and a quarter. So we'll be able to redeploy that in this quarter at much higher rates. And one of those credits, the largest one, was in the hospitality sector, which will give us some additional capacity in that area. So, again, a net decrease, but a lot of positive attributes to those numbers. Average yield did decline a little bit from 826 to 812, but again, if you look deeper into that number, we had two large credits in a very modest origination quarter that amounted to $35 million, one of which is a large CNI credit. The other one of our top development groups that we have full relationship with, that we were real competitive on those two deals. Absent of those two, our yield would have been about 830 for the quarter. We did begin to see some pressure, though, through all the regions as the Fed signaled a pause and then potentially decreased in rates in 24. Some banks did start pricing in the seven, so we're seeing that more often. uh in the mid sevens on average in several markets so we'll be looking at that on a go forward basis probably the the most positive thing from the quarter hoppy alluded to pipelines uh we had a slight contraction at the end of the year but at the end of the quarter we were up almost 50 percent in total pipelines and really across the board uh there was no one area that had that substantial increase it was really averaged out throughout the complete footprint so we're looking very forward to that in the second and third quarter from a pipeline standpoint. Other than that, it was a pretty uneventful quarter regionally. Everybody had modest production, but pretty consistent. And then lastly, I would say that we've made a lot of progress in our systems. We always talk about that. George and his team were rolling out a beta test for a small business express loan for 100,000 and below, which will help our commercial team quickly respond to those needs. And then our centralized consumer underwriting platform should be integrated. George may have more cuddle on this, but really this month or by the end of next month, so by the end of this quarter, that'll be fully integrated, which will add to our efficiency there on the consumer side. So all in all, even though a net negative number on loan growth, a lot of positives came out of the quarter from a lending standpoint.
spk02: Thanks for that report. George, credit quality? Thank you, Hoppy. We continue to see acceptable and generally improving trends for most of our credit quality metrics through the first quarter. Our leading early indicator metric, 30-day delinquencies, was certainly favorable. We finished, as Hoppy said earlier, 30-day past dues of $26 million. basis points that tracks really 12 basis points under our uh annual average in 2023 so good good movement there um asset quality I think reflected stability uh when compared to the quarter 423. our loans on non-approval were up uh minimally by 270 000 but uh very manageable there NPAs declined by a million nine in the quarter. That's a decrease in NPAs of almost 9%. NPAs as a percentage of total loans and OREO remain level at 40 bps for the second consecutive quarter. We're still in positive territory for loan recoveries exceeding loan charge-offs. by $106,000 for the quarter. When just looking at the loan charge-off net piece, we're at a minus 0.02% excluding DDA charge-offs there. ACL ratio remained level at 105. ACL as a percentage of NPLs increased favorably from 456% to 463 there. CRE concentration over time decreased a little bit by one basis point from 207% to 206 of risk-based capital, and that's comfortably below our 300% interagency guidance level. There was an uptick of 29 basis points for classified loans as a percentage of capital plus ACL. This resulted in a small manageable increase in the ratio from 676 to 705. That increase was really comprised of a handful of small midsize relationships and really no delinquencies among them from a problematic standpoint. Overall, as you see in the pie charts, our overall loan portfolio continues to reflect a strategic balance by our major loan types. Owner-occupied CRE still stands at 25% of total loans. Non-owner-occupied CRE is 21%, one to four family 19%, C&I at 15%, and C&D at 12%. And managing this segment continues to be a high priority from both the production and the credit side, especially with respect to CRE and C&D segments. our four major segments in c and d exposure uh land development at 30 percent multi-family 21 other at 20 percent uh and residential at 18 uh reflect pretty pretty stable uh trends for the last year or so really uh in cre only two segments of our portfolio exceed 15 percent of the Pie chart, professional office at 24%, retail center at 16. Average loan size in the portfolio continues to remain conservative. We're at 228,000 for our average loan size bank-wide. And from a portfolio stack ranking, the largest single loan outstanding is at an outstanding of $28.6 million. And the top 20 loans in the bank represent only 6% of the total portfolio. At a borrower relationship level, top 75 borrow relationships comprise 24.1% of total loans. And that ranges from relationship. Professional office quality continues to perform well with an average loan size of $726,000 in professional offices. We think we're positioned well with relatively no exposure to the metro office tower segment or buildings with heights over two to three floors. We continue to see minimal lease renewal issues, acceptable tenant stability, and very few credit issues in our office loan portfolio. And we talked about this a little bit last quarter, though we have seen insurance costs escalating across not only office but all CRE segments. We're continuing to monitor those closely for operating margin compression across our markets. Substandard office loans were unchanged at 4.2% of our total office loans. Combined owner-occupied and non-owner-occupied professional office loans make up about 9.5%. in our total loan portfolio. And I think of particular note, at the close of quarter one, professional office loans with 30 day delinquencies represented less than one basis point of our total outstanding professional office loans. So we like that trend. In summary, asset and credit quality continues to demonstrate the solid borrower resiliency across our markets. And recently risk management enhancements have been added with a new internal loan review function within the bank. We think combined with our ongoing external loan review process, that will certainly help us augment our continued credit quality improvement initiatives for 24 and beyond.
spk04: Thank you, George. Great report. Credit quality remains strong and resilient in the face of maybe some stresses out there in the market. So great report. Appreciate that. That concludes our prepared comments. We'd open it up for questions now.
spk00: And thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by. We compile the Q&A roster. And one moment for our first question. And our first question comes from Brett Rabattin from HopeD Group. Your line is now open.
spk06: Hey, good morning, everybody.
spk04: Hey, good morning, Brett.
spk06: Wanted to start on the deposits again and just thinking about the DDA. It seems like it's gotten to a level of stabilization, but it could have also been somewhat seasonal. Any thoughts on the DDA levels and then just the strong growth you had in the now and other, what you would attribute that to, if anything?
spk04: Well, DDAs, yeah, there is some stabilization, and there's some seasonality to it because now we'll be coming into, you know, we've got pretty good market share in tourist markets, particularly in South Mississippi, South Alabama, Panhandle of Florida, Tampa markets. So those markets will be into their seasons now, and we'll see an increase or should see some increase in non-interfering DDAs as those monies cycle through the season. So we were at our low point probably at the beginning.
spk09: you'll talk about the public influence yes yes sir the the the now another um really big portion of that was our public funds they're they're considered in that now account and that was um 256 million i believe was in the public fund inflow so that's really most of that the rate on that portfolio yeah the rate on the overall public fund book of business is about 270
spk06: Okay, that's helpful. And then it sounds like the loan pipeline is building. And, you know, I think a lot of banks are talking about mid-signal legit growth this year. Can you talk maybe about your expectations for loan growth and then how much remix we might see from securities to loans this year?
spk03: I don't know that we've changed guidance recently. We had this little dip this quarter. Again, it's hard to tell one quarter over another, but currently the pipeline's really had a nice growth. I don't really know where that goes the rest of the year. We'll just have to
spk04: I think we're still thinking, you know, Brett, our budget's still mid-single digits, as you mentioned. That's our budget for the year, and a lot of that remix will be coming out of securities portfolios. So that's essentially using up all of that cash flow out of the securities portfolio remixed in the loan. Yes.
spk06: Okay. And then just last one, if I can sneak this one in on expenses, you know, it's good to see the expense management. Is there other pressure points from here relative to the 1Q level, or can you keep that fairly flat throughout the year?
spk09: I think that will be fairly flat. You know, usually our fourth quarter we have an uptick, usually end of the year accruals needed just But I think, you know, I think the consensus out there is $178 million for the year, and I think that's, you know, a pretty good number, which would be a little bit of an increase from this 43.4 we had this quarter. But overall, I think I've been kind of talking about $44 or so million a quarter.
spk06: Okay. That's helpful. Thanks for all the color.
spk09: Thanks, Brett.
spk00: And thank you. And one moment for our next question. And our next question comes from Matt Olney from Stevens. Your line is now open.
spk05: Hey, thanks, guys. Good morning. Hey, I want to ask more about these deposit costs and the competition around that. And curious what you're seeing in your markets in recent weeks. I think in prepared remarks you mentioned just a handful of competitors still with some some higher promotional rates. I think you mentioned that back in January as well, just looking to see if there's any change in that in recent weeks or still the same level of pressure.
spk09: I think it's changed a little, but we're still with the pressure of the competition. They're still running their specials. We ended, as I mentioned, we had that six-month, five-and-a-quarter season was our special last fall and what we've dropped it to now is we have like a three month at five percent but what we're seeing out there from big names is you know five months eight months at you know five and five and a quarter so you know we have the one-offs as i mentioned last quarter from some smaller banks and you know different markets that are running a little bit higher but um I think it's, you know, and we still have a little bit of money market pressure. You know, we had that special for the money markets was six-month guaranteed rate. It was 5% for six months, and then it was going to drop. And so what we had set up as those come due or that six-month period ends for them, they're cycling into the tiered rate product that we have. And so depending on their balance, that's anywhere from 3.5% to 4.25%. But as you know, when they're coming out, Well, I just had five and I need to be close to five because so-and-so has this. So we're still having to face a little bit of that, you know, repricing pressure, but some will obviously reprice into these tiers that I mentioned.
spk04: I don't think it's quite as bad as the fourth quarter, though.
spk09: Oh, definitely not the fourth quarter.
spk04: Yeah, compared to the fourth quarter, it was really an intense battle, but it seems like there's a little pressure, a little less pressure. Is that fair, J.D.? You're hearing that from your folks?
spk03: That's what we hear throughout the regions, yeah. I agree.
spk05: Okay, thanks for the commentary there. And then in prepared remarks, you mentioned the seasonality in the first quarter. Can you just remind us of the seasonality that we should be forecasting for the second quarter, just the overall size of balance sheet? I think we've seen some contraction on the average balances of the last two years in 2Q. Just curious kind of what you expect for the overall size of balance sheet in 2Q this year.
spk09: Well, you know, I didn't look back at last year's 2-2, but I think, you know, we'll start – usually we still kind of get – if you're talking about public funds on that seasonality, we get a little bit still in April, maybe May, and then they'll start spending that. But we also have the seasonality that Hoppy mentioned from our customers that are in the, you know, the destination places that will pick up, you know, their balances. So, I mean, I'm kind of thinking we'll kind of be where we are. those kind of things kind of offset each other.
spk04: Yeah, kind of flat, didn't you? You really kind of see it in the third quarter, more so in the fourth quarter when you've got sort of double things going. You've got public funds spending out the money, plus you've got the tourist markets are out of their season, so there isn't enough money they've earned during the summer months. So you see probably the biggest contraction in the fourth quarter, Matt.
spk05: Okay, that's helpful. Thanks for that. And then just lastly on the – Security yields, I think we saw some of the benefits in the first quarter of that restructuring from a few months ago. Curious just what the appetite is for additional security sales and repurchases like you did previously. Kind of the appetite there, and then as you look at the market, the financials of such a trade, is it reasonable to assume a similar trade today or given... the markets and the yield curve. Just curious kind of what you're seeing there.
spk09: Well, actually, we were talking about it yesterday and starting to run the numbers on that process to see if we can do the same kind of trade and get the same pickup. You know, we did have some treasuries that we were able to sell that had been purchased in the past for kind of short term. They were kind of Fed funds alternatives back when rates were lower. And so we were able to sell those before and have a bigger gain. So we'll run the numbers. And obviously, if we can...
spk00: something similar we will do it again I would say in this quarter but we're running the numbers now for that so okay thank you thank you thanks man and thank you and one moment for our next question and our next question comes from Catherine Miller from KBW your line is now open
spk08: Thanks. Good morning. Morning.
spk00: Good morning, Catherine.
spk08: I wanted to ask on the buyback. You announced the authorization earlier this quarter. Just curious your thoughts on how active you think you'll be on that.
spk04: So we did announce it earlier in the quarter and got it renewed. We still look to use that as one of our capital management tools. Stock price at 25 is not as attractive. If it gets down to the lower 20s, Catherine, I think it makes a lot more sense for us. Okay.
spk08: Okay, great. And more price sensitive than anything. And then on the margin, how should we think about, so you gave guidance for the margin to be down just a little bit more this next quarter. How do you think about if we don't see rate cuts in the back half of the year, how you think your margin will trend? Do you see more downside as just deposit costs keep pricing up or you know, is there a scenario we could see your NIM actually start to expand even in a higher for longer environment?
spk09: um yeah i think part of um you know what we kind of have been talking about was looking at you know our modeling and our projections on um looking forward and you know and that's you know higher single digit increase in margin but but it that's also has the two the two cuts of july to november cut built in so um i i think I think we'll still see pickup and yield on our loans. There's still some room there as those reprice the cash flows out of that and new loans that are going on, we'll see some pickup in that. I don't think as much as we have seen the past few quarters as it has been increasing on the loan yields, but I still see pickup from that. I see pickup from whether it's in the loan yields or in just deposits, from the cash flow coming out of the investment book. We'll see pickup and yield on that. So, you know, those may offset what I think if there is no change in rates, some of the deposit pressure, because we're really, we're still repricing a few things that people, believe it or not, after how many years has it been now with the rates cuts going two and a half are just now saying, hey, I'm only earning this much. I need a better rate. And you're like thinking, Where have they been? You know, which I'm glad. So we have an occasional one of those come up. But I think, you know, hopefully we're just kind of maintaining. And it looks like looking at when you look at the deck on the deposit cost, we label it out for you per month, January, February, March. And then looking at April, April is trending pretty much in line with March. So I think that we shouldn't see a whole lot of difference, but I'm still, you know, I'm still always leaning toward a little bit of compression just because we are still facing some competition and pricing a few things. So I'm always going to be on that side.
spk04: Stabilizing a bit. I think so.
spk09: Yeah. It's just a lot of little moving pieces there, but it seems very positive, I think. And with just being down four basis points, that's,
spk04: That buys us time to reprice up the curve, but then also the cash flow coming out of it. So seeing the substantial increase in loan pipeline really gives me some comfort around helping the margin in the back half of the year because we'll be able to use that cash flow coming out of the bond portfolio at 181, reprice that back up the curve, hopefully something with an A in front of it for the most part.
spk08: Yeah. That makes sense. And then on loan yields, you've seen really nice increase in loan yields the past couple of quarters. So you're saying, D, that should moderate a little bit in the next couple of quarters until growth picks up? I think so, Catherine, yeah.
spk01: Okay, great. Thank you.
spk00: And thank you. And one moment for our next question. And our next question comes from Christopher Maranac from Janie Montgomery, Scott, LLC.
spk07: Hey, thanks. Good morning. Just want to drill down on the office portfolio just for a second. So, Hoppy, we should be thinking of this holistically as the combination of your construction office, the non-owner-occupied, and then a residual component in the owner-occupied. Is that correct to get us to that total number that was cited in the slides? Yes, that would include all of those components, Chris.
spk02: Okay.
spk07: Great. Just wanted to clarify. And then, can you walk us through kind of the process for debt service coverage and stressing those and, you know, to what extent is that already done or would that be kind of something that may adjust on Criticized and Classified as this year unfolds?
spk02: We're stressing right now. We're still using, essentially, a 300 basis point shock in most of our stress methodology, realizing that we're probably at the top of the curve at this point. But that's still the shock bandwidth, if you will, that we use. And of course, with all renewals, We're looking at a similar, every loan approval has a similar rate shock up to 300 basis points as we're looking at those from an approval standpoint.
spk01: So really have not changed our methodology there.
spk07: Great. Thanks for that. And I guess a similar question on the multifamily side. What are you seeing in multifamily for either construction or for permanent that you are keeping on the balance sheet? Just any trends that are different there.
spk02: We still have, I think, eight or ten projects to move over from construction into PERM. The most recent of those are right on track for their absorption forecasts. We're in some very good markets in multifamily and are seeing good occupancy. A lot of our apartment complexes are not necessarily in the larger metropolitan area. areas where competition tends to be maybe more predominant and so there are fewer options and when you're the newest shiny object complex in a smaller market I think it helps shorten the absorption period so we're not really seeing any problems there most of our permanent loans as we look at those around the footprint we don't see rent concessions uh being made among our multi-family developers uh and and things that you see in some of your larger maybe oversaturated larger metropolitan markets got it great thank you for that background and then um you know hoppy just i guess a quick question for you from a strategic standpoint
spk07: Do you find that other banks are more willing to engage with you now than in the past, or is that sort of just, you know, conversation still the same?
spk04: I think conversations are kind of still – I think people are thinking about it, but, again, the math is somewhat challenging and there's a lot of uncertainty in the market. And, gosh, you know, you saw the new guidance that came out or the new proposal that came out from the FDIC, I guess, on – some merger, things they'll be using to decide mergers on application approval. So I don't know, it doesn't, you know, it's not a ton or we haven't seen a ton of conversations going on right now.
spk07: Great. Thank you for taking all my questions. Thanks, Chris. Thanks, Chris.
spk00: And thank you. And I'm showing no further questions. I would now like to turn the call back over to Hoppy Cole for closing remarks.
spk04: Well, good. Well, thanks, everyone. We appreciate you participating this morning. Again, we think we had a really good quarter and a strong start to the year and a really good position for the balance of the year. So if there are no further questions, that will conclude our call for this morning, for this quarter.
spk00: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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