The First Bancshares, Inc.

Good day, and thank you for standing by. Welcome to the review of the second quarter 2024 financial results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that 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 turn the conference over to your speaker today, Hoppy Cole, CEO. Please go ahead.

Well, thank you, and good morning, everyone. Welcome to our second quarter conference call. As is our custom, we'll start with several prepared remarks this morning and open up to questions at the end. We've got several team members with us this morning, Denny Lowry, our CFO, Ted Day-Fletcher, our Chief Lending Officer, and George Noonan, our Chief Credit Officer. So for the second quarter, we were very pleased with the performance of the company in terms of growth, profitability, and credit quality. Loans grew by $111 million, so they were up about 8.6% on an annualized basis. Our markets continue to provide us ample growth opportunities. We were able to see margin expansion, and our margin expanded six basis points. Our core margin was up actually nine basis points. Credit quality remains strong with only four basis points of net charge-offs and three basis points of migration and MPAs. And although net income was down a little bit, it was down primarily due to the $1.7 million provision that we took associated with the loan growth. Actually, pre-tax, pre-provision income was up 800,000 or 2.9%. So, again, we were very pleased with the performance of the company. Dini, would you like to talk about our financial performance in a little more detail?

Sure. Happy thanks. As Tapial did, what he said, we're very pleased with the quarter and very happy with all-around solid results. But we did report net earnings of $19.7 million, which was $0.62 on a diluted share. That was now $900,000 from first quarter, but we did record a $1.7 million provision expense this quarter and zero for last quarter. So that is basically accounting for the difference there. Pre-tax, pre-provision, operating earnings totaled $27.4 million compared to $26.6 million. So we did have a 2.9% increase for the quarter when you look at pre-tax, pre-provision. As Javi mentioned, our core margin did increase nine basis points to 319. The cost of deposits remained the same at 178, which I'd be like, woo-hoo. We feel like we're there, finally on our deposits. Yes. Our yield on our earning assets increased one basis point, and then, of course, on our interest-bearing liabilities, we had a decrease of three basis points. So our non-interest-bearing portfolio actually increased both in dollars and percent this quarter back to 28%. Our interest-free deposit costs increased one basis point to 246, and our cumulative beta stayed the same at 43% for this quarter. Our deposits did decrease this quarter, 84.2 million, which was about 1.3%, but 38.3 million of that was related to public funds. And as you know, following us, we will continue to see a decrease in deposits throughout the rest of the year. because of our public fund portfolio. So that was expected. On our liquidity position, still remain very strong. Our ratios are well above our limits. Our loan deposit ratio is 79%. We have $2 billion available at the home loan bank for borrowing, and we have about 38% of our securities portfolio unpledged. So we're all pleased with all of those numbers. And actually over the next four quarters, we have about $266 million in cash flows coming off the securities book into cash over the next four quarters. And then our ratios for the quarter, looking at operating ratios, we had an ROA of 101, and our return on average tangible common equity of 1276, and efficiency ratio of 60.65. And then our capital ratios, TCE increased to 8.3. Our leverage ratio was 10, and our total risk base was 15.3, which all were in line with last quarter. So overall, we're very pleased.

Thank you, ma'am. Great report. David, would you like to give us a little color on loan originations for the quarter?

Yes, sir. Thank you, Hoppy. As Hoppy said, we had a great second quarter in terms of loan growth, net increase of about $111 million. Originations were very robust at about $450 million, up from about $253 million in the first quarter. Construction lending and lines continued at a solid pace with approximately 40% of those loans being originated reserved for future funding. After a large increase in the first quarter, you all remember in the pipeline we did see a modest decrease, which is expected based on originations in the first quarter. I would note that we do track the amount to be funded at origination, and at the end of the second quarter, that number was actually higher than the first quarter. So it bodes well entering the back half of the year, we think. Average yield did contract slightly from $8.12 to $7.92 for the quarter, but overall we're at $7.99 or basically 8% year-to-date. Regionally, the Mississippi team had an incredible quarter. They actually had 35% of the entire bank's production. And Georgia, for the first time since our merger, had their strongest showing, and they accounted for about a quarter of all new origination. So we're glad to see that. Lastly, operationally, we've migrated the rest of the legacy branches into the centralized consumer sector. And then George may speak to this too, but we're continuing to refine our small business platform, expanding that, and plan to have the 1071 implementation done by the end of the year ahead of schedule. So overall, great quarter. Appreciate all the lending staff, lenders, and all support folks to make that happen, and I couldn't be more pleased with the quarter. Thanks, JJ.

Great report. George, have you all done this on credit quality?

Thank you, Hockey. We did continue to see good performance across most all of our credit metrics. The leading indicator, 30-day past dues, were manageable. We did see a slight uptick over quarter one, but I think still very acceptable at 40 basis points at the quarter end. Year-to-date average continues to be good at 35.5 bps. Most of the metrics, as I said, we did see some moderate movement, a few upticks here and there, non-accruals brought up five BIPs. All total NPAs ticked up about three BIPs to 26 BIPs. That's a very manageable level for us, we believe. Net charge-offs at four BIPs, as DeeDee's already alluded to. And then the $1.7 million provision kept our ACL at 105. as it was in the last quarter. CRE concentrations ticked up a little bit, 9 bps, but still at 215% of RBC. We think that's a comfortable margin below the 300% interagency guidance level. And we saw C and D actually come down a bit, so we're at 69% of RBC, and that's well below the 100% level. Classified loans as a percentage of capital plus the ACL, they did move up about 47 bps, but still manageable at 7.52%. When you combine those with criticized, we actually came down by 4 bps. And I would note that we continue to see borrower capacity in our substandard loans to pay off loans. We actually had almost 5.8 million in substandard loans payoff in the second quarter. So that has continued a trend that we've been seeing quarter after quarter. Overall loan portfolio continues to reflect the strategic balance that we see. Owner-occupied CRE at 24%, non-owner-occupied at 22%, one-fourth family 19%, and then 13% and 12% respectively for C&I and C&D. We continue to try to balance all of our subsets. C&D exposure is very evenly apportioned among four major categories, as you see in the deck. Land development represents only 3.68%. Total loans, multifamily construction, 2.4%, and then other construction and residential construction under 4% as well. Kind of the same trend for CRE. Our professional office is at 9.1% of total loans, but that's pretty well evenly split between owner-occupied and non-owner-occupied. Retail center at 629, hotel at 553, and warehouse industrial at 4.33% of total loans. So we monitor these categories very closely. Non-owner-occupied office is at 3.75% of total loans, And we've seen our average non-office loan balance remain pretty constant over the last year, 713,000 is the average size in our non-owner-occupied office category. And we see about approximately 18.32% of office loans maturing in the next 18 months. So we think that's a very manageable horizon for that. Our largest single loan continues to hover at about $28.5 million. Top 20 loans represent only about 6.35% of our total portfolio. And top 75 borrower relationships comprise about a quarter of the loan portfolio. In the CRE category, we have continued to see really minimal lease renewal and turnover issues. We've seen good tenant stability. and very few credit issues in our office loan portfolio, thank goodness. But we have witnessed, as all banks have, insurance cost escalations are putting some pressures on OPEX expense for some borrowers, but we're monitoring that very closely across the markets as well as multiple CRE segments. So in summary, we're witnessing some nominal basis point increases across some of the categories. due to the tighter rate environment and OPEX pressures. But we've really been very fortunate to see very few troublesome issues with delinquencies charged to us or unacceptable risk migration. So we really expect to see similar outcomes for the balance of the year into 2025. So thank you, Javi.

Thank you, George. Great report. That concludes our prepared comments. We would open it up to questions now.

Certainly. As a reminder, to ask a question, please press star 11 on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. And our first question will be coming from Matt Olney of Stevens. Your line is open.

Hey, thanks. Good morning, everybody. Good morning, Matt. I'll start on the loan growth front. Really strong loan growth trends. A good report overall. I take a step back and just look at the loan growth the first half of the year. I think we're at about a 3% annualized pace. Just curious if this is a reasonable pace we should expect for the back half of the year. It sounds like the report from earlier sounds like the pipeline still looks really strong even after the two key results. So just curious on expectations for loan growth the back half of the year.

Yeah, I think so, Matt. I think that the expectations for level low growth of what we saw this last quarter would be about that in single-digit range.

I think if you take the two quarters together, we had a lot of stuff that kind of got pushed early into the second quarter, kind of level it out at that 4% type range I think is fair.

Okay. That's helpful. And then on the deposit cost side, really encouraging to see some of that pressure ease up quite a bit in 2Q. We'd love to hear any more color, whether it's by month or kind of what you saw, any kind of an inflection, just any color at all on deposit cost pressure easing, and then same thing, kind of expectations for the back half of the year.

I mean, we are still – Seeing some pressure in our markets with some specials. We're still, as Poppy said a while ago when I was celebrating a little, and, you know, it's still out there, hand-in-hand battle market, you know, going through and matching some things. But, you know, we had, when you look at it kind of monthly, you know, when we had looked at the first quarter and kind of talked about where it was looking like we were kind of there through April and May. And so when you look at that, it's, April was 177, May was 182, and June was down to 174. So it looks like I think we'll be tracking around where we are. Now, we do have a couple of things in play. As I mentioned about the public funds, we will continue to have runoff the rest of the year for that. And then also we do have some brokered CDs. that i had mentioned and and those a group of those are maturing tomorrow and we were replacing those and added a little bit to it the same cost that that was but just some additional dollars so i feel like overall with um those couple of things that i really feel like that just not just the deposit cost but kind of the margin should kind of stay right where we are i would say give or take a couple basis points just kind of projecting forward projecting those decrease in public funds the reduction in home loan bank borrowings, and then the broker CD. So I feel like kind of projecting those forward, we should kind of stay where we are.

Okay, that's helpful, DeeDee. So it sounds like margin relatively stable from what we saw in 2Q. You mentioned some of the balance sheet movements in the third quarter, and also public funds could be a little bit lower today. Any color on just the overall average earning assets in the third quarter? Are we going to see earning asset levels move down a little bit, I guess, given some of the puts and takes that you mentioned?

I think some of those, you know, really what I was talking about on the liability side, really kind of wash a little bit on that side. So, you know... We could see some increase in earning assets if, you know, based on what the loan book does for the third quarter with what the expectations are for there, because we would probably more than likely end up funding it from cash flows out of securities books. So that could fund some of that. So you could see a slight increase or just flat.

Okay. That's helpful. Thanks for taking my questions.

Sure. Thanks, Matt. One moment for our next question. which will be coming from Brett Rabitin of Hold Group. Brett, your line is open.

Hey, good morning, everybody. Morning. Good morning, Brett. Wanted to ask first on the, I think if I heard it correctly, $450 million of loan originations. Is that a function, as you see it, of customers' you know, looking to draw on lines or do projects? Or are you guys maybe moving some market share from competitors?

So those are new originations, really, I think, moving from competitors. And again, we've got that legacy, really strong look of business. A lot of that is still internally generated by our clients, you know, doing new projects or making acquisitions. It's kind of a And we also have the new lending teams. I know we talked about that for two quarters, but don't lose sight of that. We're still getting new credits coming over from those groups, too. So it's really a combination of all those factors, I think.

But a lot of the new originations are new projects. They're new. Yeah.

And we've had some refinances out of the non-recourse market and those for good, longstanding customers. So it's been a combination. Okay.

That's helpful. And then... You know, any thoughts on, you know, obviously with StocksHire, I think people are going to talk about M&A more. You know, Hoppy, any thoughts on M&A and just, you know, how you see that playing out for you guys, you know, the back half of the year, if you think you might be looking to acquire or what you're seeing out there?

Well, so valuations really help that, as everybody. So we always, you know, keep our optionality open, you know, We're always having conversations. There's a number of interesting, you know, banks out there that would fit in our profile. But we always talk. We're always developing relationships.

Okay. And then just lastly, back on the margin, wanted to make sure I understood. So, D.D., the margin is expected to be flottish. in the back half of the year, and that's a function of the brokered CDs that you're going to need to use to replace public funds, you know, offsetting some additional improvement in earning asset yields? I just want to make sure I understood the narrative on that.

Right. I was, you know, basically kind of looking at those three things as far as on the balance sheet side, what the impact of additional funding on the brokered CDs is, But in paying down the homeowner bank advances and then some of the public funds running out, just trying to see kind of what that looked like and really not giving any credit to the earning asset side as far as increase in, you know, loans, those kind of things. But really kind of looking at what that cost was going to do to us is kind of what I was more, you know, They did go and get that loan book rolling. Conservative forecast. I have to look at the conservative side. What am I adding to where we currently are and what does that impact? So that's kind of what I was looking at. So, I mean, we obviously always hope that we'll do a little better and always try to model more conservative on the cost side.

Okay. That's helpful. It's good to see the cost of funds flatten out. That's nice. Thanks for all the color.

Thanks, Brett. Thanks, Brett. One moment for our next question. Our next question will be coming from Catherine Miller of KBW. Your line is open, Catherine.

Thanks. Good morning. Good morning, Catherine. One follow-up on the margin. I noticed that yield on loans just was down a little bit this quarter. Any outlook on just the pace of loan yield increases in the back half of the year? And also maybe what drove the decline this quarter? Sure.

Some of that decline, Catherine, I'll let JJ add about the loan yield piece, but some of that was driven by some late fees, decreasing some fees. So I don't expect, I really don't expect that to continue. That was a little bit of a kind of a one-time deal during the quarter. So JJ can address the actual loan yield piece. Mine was more on the fees.

Yes, and Catherine Hoppe and I were talking about that this morning. If you looked at our notes from the first quarter, we kind of guided to that. We were seeing pressure in most of the markets going into the sevens. We've been in the eights pretty consistently for several quarters. So I think really it's competition. The potential rate cuts are driving some banks to start pricing in early, but to get good competitive deals. And, of course, you know, there's a lot of banks that are sort of on the sidelines right now, but the ones that do have liquidity, I think they're pricing the strong deals. And we only really try to stay in the A-plus credit markets. As you all know, we don't cut on credit. So I just think we're seeing pressure there. I think that's what we're seeing at committee every week, it seems like.

There's no question about it. But now your new originations came on just right under 8%, about 790. Yeah, yeah, still close to 8%. Still close to 8% on new originations. So for the quarter, the real quarter-to-quarter comparison had more to do with the late fee accrual than it did actual loan year.

Okay, that makes sense. And then would you say there's still enough fixed rate repricing opportunity? And then, I mean – If your new loans are still coming on $790, even if that comes down a little bit, I mean, the portfolio is at $586. So it's still fair to assume that the overall portfolio still continues to move higher over the next couple of quarters.

Yeah, we've got roughly $250 million rest of the year in fixed rate, and those are going to be in the lower sixes. So we'll get some bump there on the existing book as well.

Okay, great. And then just back to the deposit growth commentary that you made, DeeDee, I know that public funds fluctuate. It feels like we're hearing from other banks there's kind of more of an effort to push higher cost public funds out of the bank, but it's a bigger business for you all. Is there any way to size the amount of decline you expect this year out of public funds? And then as we model next year, do you think the peak will be as high, or is there less reliance on that deposit type?

It seems the overall, when you kind of look back, we continue, that peak continues to increase every year. Really, COVID was a big increase, and then post that on public funds. But I think we usually... run to the $300 million increase. And so, I mean, decrease over the course of the year. So I can't remember exactly off the top of my head what the first quarter was, but with this $38 million, I mean, I think we still have, I mean, we still could have $100 plus million the rest of the year decrease.

Right. But it's been a good source of funding for us, and it's still, I think, last report was like $272.

Right. Our overall cost of public fund deposits was $270 and some change. So we're not trying to run it off.

But we're not out there and basically bidding new money either. Right. So what you see is more of a seasonality and not a replacement of new money.

Great. Okay. That makes sense. Okay, great. And then maybe one more on just the outlook for fees. I'm sorry, not fees. It's the outlook for expenses.

I think, Catherine, looking at where we are, I think we're still pretty much in line. I've kind of given $176 million for the year. And so I think we were at $43.4 last quarter and $43.7. And, you know, as we go through the year, that will pick up a little bit. But I still think we're in line to be around that $176, $177 million for the year. Okay. Perfect. Yeah.

That's usually very steady for y'all. Great. Thank you. Great quarters.

Thanks, Catherine. For our next question. Our next question will be coming from Christopher Marinette of Jannie Montgomery Scott, LLC. Your line's open.

Hey, thanks. Good morning. I just want to drill down on expenses a little further. What's your thought on this expense rate as a guide going into the next couple quarters and just maybe any kind of inflationary expense we should expect next year?

I think, you know, just kind of talking a little bit about that, I think, you know, we were kind of showing 176, 177 for the year. So I think we'll be in the 44 and some change on operating expenses the next two quarters because, you know, and then typically the fourth quarter all year end bangs the true up. So I think we'll be 44 and some change third quarter and then fourth quarter as well. And I think, you know, we usually budget an increase of 3% or 4%, so I think that's what we're looking at for next year.

Great. That's helpful. And, Javi, I just wanted to follow back up on the deposit cost conversation from earlier. Did you see any deposit campaigns by other, you know, midsize or bigger banks that happened maybe in June that would have happened below the surface and didn't necessarily impact you, but were out there just for the team to kind of, you know, have to work with?

Not as much pressure out there, Chris. We didn't see as many of those campaigns. It was more kind of a one-off match than the actual campaign.

Okay. And I guess the same would be true for credit unions, where they impact you in various markets.

Yeah, we just didn't see much out of credit unions.

Great. Thank you very much for all the background this morning. Thanks.

Thanks, Chris. And one moment for our next question. And our next question will come from Matt Olney of Stevens. Your line is open.

Hey. That? Yeah. I didn't realize you got to go around twice.

Lucky me, I guess. I want to follow up with George. I think George mentioned something interesting about borrower capacity to pay down substandard loans in some cases. Any more color on kind of those examples? Are these just guarantors adding additional equity to the project, or any more color on that topic would be interesting?

You know, it's sort of a variety, Matt, but I would say – in several specific instances, actually the assets were sold. And so there was an outside buyer that had negotiated a deal and it was sufficient enough. The loans were seasoned enough that the principal balances had been reduced. So I would say probably of this past quarter, that was the predominant exit, if you will, were just asset sales, even though we had already marked down the risk rate a little bit. So that was the main driver this past quarter.

Okay. All right. Thanks for that, George. And then maybe just if I could speak in one more. I'd be curious about the bank's appetite for any kind of securities restructuring. I think you guys completed something maybe late last year or first part of this year. Great to move down a little bit lower over the last few weeks. Just curious about the bank's appetite to sell some securities and reinvest that. Thanks.

Yeah, we did actually get the sale accomplished at the last week of December and then purchased those bonds in January of this year. So we are talking about it and looking at it and running the numbers. So I think if we can do something that – Kind of looks like that. As far as the loss in the ironbite, we would consider doing it again. So probably something about the same size. We're not, you know, nothing big and just we're looking at running the numbers. If it makes sense, obviously we'll pull the trigger on it.

Okay. All right. Thanks. Great quarter.

Thanks, Matt. I'm sure no further questions. I would now like to turn the call back to Hoppy for closing remarks.

Well, thanks, everyone. We appreciate your attendance this morning. Again, a good quarter. Very pleased with the performance during the quarter, and we'll circle back up next quarter. Thank you. Thanks.

This concludes today's conference call. Thank you for participating. You may now disconnect.