Q3 2023 Business First Bancshares Inc Earnings Call

Hello, and welcome to the business, but first Bancshares Q3 2023 earnings call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there'll be a question and answer session.

We would like to ask a question. During this time simply press star one on your telephone keypad.

I would now turn accomplished over to Matt Sealy Senior Vice President director of corporate strategy and S. P&A. Please go ahead.

Good afternoon, and thank you all for joining earlier today, we issued our third quarter 2023 earnings press release with 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 disclosures regarding forward looking statements and the use of non-GAAP financial measures and those of you.

And by phone. Please note the slide presentation is available on our website at Www Dot being one bank Dot 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 the safe Harbor statements in our slide presentation and earnings release.

I'm joined this afternoon by business first Bankshares, President and CEO, you'd Melbourne, Chief Financial Officer, Greg Robertson, Chief Banking Officer, Bill, Jordan and Chief administrative officer, Jerry back to you. After the presentation, we'll be happy to address any questions. You may have and with that I'll turn the call over you did.

Alright, Thanks, Matt and thanks, everybody for joining us it's a busy time and we certainly appreciate you prioritize this conversation.

During the third quarter, we continued to deliver solid fundamentals shareholder oriented operating performance generating a core ROA of 1.1%.

Exercising discipline around expenses and maintaining a good margin stability, even as we grew organic deposits.

Including in our core included in our core operating results for several non run rate items, which I'll, let Greg spent on his section.

However, even adjusting for these items, we still paid on a run rate EPS ROA and <unk>.

<unk> ratio at 67 cents, 1.0% to 3%.

62, 4% respectively.

Third quarter was highlighted by balance sheet management, which yielded another quarter of solid capital accretion strong deposit generation margin stability expense management and continued healthy credit quality trends all of which put us in position to be able to increase our dividend by two cents per share for the quarter something we've been able to do for five years in a row now.

I'd like to highlight a couple of specific accomplishments.

We've been particularly focused over the past few quarters on managing growth within our capital structure and I'm pleased to report that our results were again accretive to tangible or excuse me did see RBC to G. P. <unk> P. S. Even factoring in the headwinds of additional a OCI.

Not counting the impact of the OCI, we grew tangible book value per share of <unk> 67 cents, an annualized rate of 20%.

We slowed loan growth during the quarter to 1.7 annualized percent annualized which reflects some slowing demand and continued selecting us and our partner as well as unusually high paydowns and payoffs.

We do still expect full year 2023 loan growth of 7% to 8%.

I'm most pleased to report growth in deposits of 176 million or about 14% annualized linked quarter and we accomplished this without causing material damage to our margin core NIM was down three basis points, but that factors in a gain of 455000 of them recovery from a previous charge off.

And the decision to hold an additional 150 million in excess liquidity at the cost of six basis points to the margin.

Factoring out those two elements are core margin would've been flat, even while we demonstrated continuing improvement in our loan to deposit ratio.

Asset quality continued to improve in the third quarter with nonperforming loans as a percent of total loans declining to appoint three 3% down from 36% in quarter two.

The improvement was largely attributed to the resolution of two nonaccrual loans through current period charge offs of $2 4 million.

As long as you previously assessed for credit losses and fully reserved.

I'd like to point out a few branch movements as we continue on our all of our ongoing efforts to optimize our footprint.

During the quarter, we opened our fifth Dallas Fort worth location with a new full service location in Mckinney, Texas I was there recently for the ribbon cutting and our team is very excited about the opportunities as we expand further into north Texas.

With locations in Mckinney, Frisco, where president and two of the three fastest growing communities in Texas.

We also turned our L. P O in Ruston, Louisiana, another fast growing community and to our branch and move the branch to a more growth oriented part of Monroe, Louisiana.

Finally, we also sold or at least build Louisiana location recognized at $932000 gain on sale.

Attributed to the divestiture.

Although we have added a couple of new slides to our deck that I think would be worth your focus and enhanced a couple of others, particularly around our successful M&A track record loan repricing opportunities and competition of our CRE and office portfolios.

Well I don't want to particularly point you towards is found on page nine which speaks to the consistent improvements we've made in various earnings focused metrics over the past five years.

Core efficiency has improved by 571 basis points.

Importantly, we show tangible book value per share after adjusting for a OCI growing by 33%, even while we have made the investments necessary to grow overall asset size by a factor of three over that time period, youre acquisitions team lift outs and strong organic growth.

This growth has required investments and those investments are paying off we havent, yet, we arent, yet where we plan to be and so we're clearly headed in the right direction.

That concludes my Big picture remarks, Thank you so much for your time.

Now I'll turn it over to Greg for his commentary on the quarter and then look forward to opening the call up to Q&A.

Thank you Judy and good afternoon. Good afternoon, everyone I'd like to spend just a few minutes reviewing our key.

Q3 highlights, including some balance sheet and income statement trends and also discuss our updated thoughts on the current outlook.

Third quarter, non-GAAP core net income and EPS available to common.

Shareholders $17 $96 million and 771 cents a share that.

It came in better than we expected and was driven really by.

Number one expense management.

Two lower loss expense and continued stable credit trends and slightly lower loan growth as Jude mentioned.

Stable net interest margin and slightly better than expected loan discount accretion.

Before I dive into the more of the specifics of the quarter I'd like to take a moment to call out a few of the items that might not be readily identifiable, but are really important to put context into the quarter.

Third quarter, GAAP net income and EPS available to common shareholders was $19 1 million 76 cents per share and benefited from two fee income related items that you've mentioned earlier.

$932000 gain on the sale of our Leesville location and as a side note that location, we sold those deposits for seven 7% deposit premium.

And also the $517000 gain on extinguishment of the Texas citizens sub debt that we acquired in that acquisition.

Excluding these items our core noninterest income was eight 4 million, let's say 4 million.

Dollar figure is a fairly clean run rate figure for the quarter and we see that as a.

Stable.

<unk> for a run rate for 'twenty four.

A little bit of the explanation of that is that that run rate for 'twenty four.

As a stable because we we expect experienced in 23, some one offs.

One time income items for that that we don't feel like that will be repeatable in 'twenty four but we do feel like noninterest income will grow throughout the balance of the year to make that.

Stabilized.

Third quarter GAAP noninterest expense was $38 6 million and included just $2000 of merger related expense. However included in the $38 6 million was a figure it out.

Figure of about 500000 in Mastercard rebate, which we don't expect to reoccur going forward.

Third quarter noninterest expense also benefited from 200000 unusually low in DRC.

FDIC assessment.

And 200000, unusually low other non or interest rate interest expense items.

The Q3 run rate for noninterest expense figure is closer to $39 5 million.

As we expect the FDIC assessment, and the $200000 lower expense item to kind of normalize going forward.

Of the 24th.

Feel like the noninterest.

B.

We experienced a mid to high single digit run rate going forward.

From a base case for the balance of 'twenty four.

Spread income also continued to grow and be strong in the performance in which we attributed to the loan discount accretion.

$2 4 million coming in $500 higher than expected and as well as the decision to hold a little more balance sheet liquidity that you mentioned earlier a boosted.

Boosted net interest income I'll provide more color on these dynamics a little bit later in the discussion on the margin on the surface the optics of credit quality appeared mixed but as.

As Jude mentioned.

We feel like that our credit quality is stable and improving with those two.

Previously discussed charge offs that we discussed.

Prior to now that we're fully marked and we resolve them during this quarter.

As far as the balance sheet.

Balance sheet tends to remain healthy during the quarter.

Loans that were held for sale held for investment grew about 1.7% annualized a little lower than expected, but we.

That were but also consistent with our strategy our strategy of long growth and as Jude mentioned, we feel like that will round out the year at about 7% to 8% and annualized loan growth.

We are proud of the fact that our loan growth for the quarter was really headlined by continued loan yield of eight 6% on new and renewed loans for the quarter.

And that that is helping us continue to hold the margin in place.

Deposits increased as you've mentioned $176 million.

We will conclude the leesville deposits that we sold in that branch.

Number would be closer to $200 million deposit growth deposit growth for the quarter.

Sure.

The 157 million in the new deposits that we generated through a couple of CD campaign different CD or money market specials. During the quarter were very well received by the customers and our production staff did a really good job pushing those through.

During the quarter. Another highlight as we were able to generate about $43 million in total 19, new noninterest bearing deposit accounts and that added to our $14 3 million average that we've been operating on for the last few months.

We also managed to open 80 to.

$82 million in non maturity deposits during the quarter at a weighted average.

Or an offering rate of four 5%.

September numbers for offering rates were all non maturity interest bearing deposit accounts was 436%.

Noninterest bearing deposits remains a challenge and we will we will continue to put our efforts.

And into that area as we move forward into 2024.

Our noninterest bearing deposits ended the quarter at 27, 2% of our total deposits.

Capital increased nicely during the during the second quarter as Jude mentioned Tc.

Three basis points, and total risk based capital up 22 basis points for the quarter.

Tangible book value.

16, Sam.

<unk>.

Armed with borrowings as we mentioned earlier decreased during the quarter about 152 million and that was really as a result of our.

Deposit gathering campaigns that allowed us to pay off all of our short term overnight borrowings with FHA Obi.

For currently priced in the $5 70 to $5 75 range.

We also made the as you mentioned the decision to hold the extra $150 million to $150 million in liquidity on the balance sheet as we continue.

We continue to take advantage of the <unk>.

<unk> funding program earlier in the year, drawing down $300 million of that fund in early in quarter one.

That $150 million that would carry us really doing two things for us its continuing total liquidity levels.

In a range, where we feel comfortable during.

This time and also preparing us to be able to pay pay off that maturity coming forward in next March.

Q3, GAAP net interest margin was 361% that included $2 4 million in loan discount accretion.

Which was about 500000 higher than what we expected, but we expect that accretion to drop back closer to a million dollars a quarter run rate the.

Q3 core net interest margin, excluding the loan discount accretion contracted three bps to $3 49.

As June from $3 49 to $3 46, as Joe mentioned earlier.

He was alluding to the adjustments for.

For the quarter and also the six basis points drag that we experienced for holding that excess liquidity.

Looking forward into.

Into Q4, we expect the margin to remain flat.

Right now maybe a single basis point.

Due to modest continued liquidity build.

<unk> funding pressures a little color on the second point here, we have over $100 million.

Lower cost <unk> borrowings that matured early in order and we will.

Work on refinancing a piece of it and paying down a piece of it so that may.

<unk> negatively impact the margin as we go forward in the quarter.

We as I mentioned earlier, where we are very proud of the production side of the bank with our continued loan yields coming in on new and renewed is the average of 160 and our.

Deposit gathering.

That helped.

To help us maintain our margins.

Now to cover some of the betas from the quarter I will turn it over to Matt.

Sure. Thanks.

So funding betas did increase during the quarter as expected cycle to date total deposit beta and interest bearing deposit beta was 41% and 56% respectively.

Which was slightly ahead of what we had anticipated by about 1% and this is really a function of better than expected deposit growth during the quarter.

Looking ahead to Q4, I would expect the cycle to date deposit betas to increase roughly 4%.

<unk> down slightly from the year to date quarterly beta increases of about 5% to 6%.

Still increasing but at a slower pace.

On the loan side, we continue to hold cycle to date beta is on new loan yields at about 85%.

We're at 84% for Q3 and expect to maintain.

This reflects a weighted average new loan origination yield is a 55 during the quarter.

And with that I believe that concludes our prepared remarks, and I think we're ready to open up the Q&A.

Thank you.

Do you have a question. Please press star one on your telephone keypad.

To withdraw your question simply press Star one again.

One moment. Please for your first question.

Okay.

Your first question comes from the line of Brett Rabbit.

I'm sorry, the first question comes from the line of Matt.

Oh, what Steven Yes.

Your line is now open you May go ahead.

Hey, Matt.

I want to talk more about the funding strategy over the next few quarters.

You grew loans quite I'm, sorry, you grew deposits quite a bit this quarter.

Replace some of the FH L b.

And it sounds like that's going to be the strategy again. These next few quarters, along with our player replacing some other wholesale.

Our borrowings out there you just talk more about.

Deposit growth from here and kind of expectations are to match the loan growth. Thanks.

Yes, Thanks, Matt.

Well.

We're continuing to run.

Internal campaigns for deposits really relying on the production side of the bank.

To continue to generate deposit growth.

As we mentioned earlier, the 14% we experienced this quarter.

It was really really good.

And we're happy with that now.

As you will know across the industry right. Now is just deposits are still a battle everyday stroke. So it's something we're continuing to talk about and focus on if we experience. The same success as going forward. Then we will we will.

So really start to systematically start to unwind some of the higher costing liabilities for example, like <unk>.

We've really tried to focus over the last year or so of really segmenting those higher cost funding sources into buckets for lack of better word to where we can have optionality each quarter to try to unwind that and improve the margin.

That is reliant on us continuing to gather deposits, we will experience as we do seasonally the end of the quarter at the beginning of the first quarter.

Capacity build from a deposit standpoint.

So we do expect that to come in over the later part of the fourth quarter and the beginning of the first quarter that would.

Give us more optionality on top of.

Our typical deposit growth.

One of the things that give us kind of hope is we really consistently not only gather deposits, but really gathered noninterest bearing kind of in the face of the.

The whole industry experience and run off in noninterest bearing sector sector. So.

Experienced.

Account opening both in numbers and in dollars.

Give us a little bit.

Continue to move that way.

Okay.

Okay I appreciate the commentary and just to follow up on the.

The outlook for the margin I think Greg you mentioned flat to slightly down I assume that was with respect to the core margin. Excluding some of that accretion income is that is that fair.

Yeah, that's fair and that's all really a function of.

The deposit flow that we bring in we really really been.

Experiencing.

Pretty stable.

On the top and loan yield side.

Still have a good good pipeline with good volume I think one of the things that.

It's worth noting is.

Sure.

Loan growth this quarter was really.

Kind of muted by.

Outsized quarter of payoffs we had.

Little over $100 million in pay offs all for good reasons projects wrapping up our company selling.

Projects.

So we.

We didn't expect that and if we didn't have that we still feel like our our loan pipeline is in good shape and our growth would have been.

Around four 5% range, maybe this quarter.

Without that but those those yields.

Like I said 850 860.

Coming in at that number so the big factor for the margin.

With the renewals that we have and what we see in the forecast from our renewal strategy is.

Really relying on what our deposit base goes and how that growth continues to grow.

Yes.

Okay, I appreciate that and I guess, if I think about that that margin in the first half of next year. I know there are several puts and takes there that we've discussed before but I guess, what youre, saying also is that there's liquidity could build in anticipation of the pay offs at the bank term funding program I think that you said was.

In early <unk> is that fair.

That's correct.

One of the things that we think that that will help us our slide on page 21 of the day that we put in there that really gives us clarity and what where we're going to see as far as fixed rate.

Loan maturities coming forward in the next few quarters.

So we think with that we should be slightly accretive.

And the margin next year because of that.

Perfect, Okay, well I appreciate the disclosures in the commentary and I'll hop back in the queue.

Thanks Pam.

Your next question comes from the line of Brett Robinson with pulse Kurt.

Line is now open.

Hey, guys good afternoon.

Hey, Brett.

Wonder if I may.

I wanted to.

Hi, I wanted to start off on the A&D book and just.

I was curious if you if you were hoping to get that concentration below 100% and just how you kind of think about that piece of the portfolio going forward, where you see demand and appetite from your perspective.

Yes.

Hum.

Guessing youre, referring to the C&D the construction development book.

Yes, yes.

Yes.

We think it is trending exactly where we thought it would going trending down below 100%, we don't see.

We really haven't been originating any new C&I loans so.

If you think back about at our production last year, and Q2 and Q3 of last year really we're kind of at the edge.

We're experiencing right now the peak of the funding because each of those loans as of 12 to 18 month cycle.

We're getting to a point, where we're a year out on some of them getting towards.

But on the kind of wrap up phase of those where there will be transitioning out of the bank or into owner occupied or income producing.

We don't expect that to be back up over 100, we think it's going to trade it is trending down and going to be right. There in that space for a while.

We're not.

Eradicating T&D from our portfolio. We just felt like we were a little bit on balanced a couple of quarters ago and felt like we needed to right size that a little bit so.

You might want to stay below 100.

But from.

From our internal projections, where we're on pace to do that and stay there.

A lot of our.

Outsize growth last year.

A portion of it was indeed, if we slow down the CND we have.

It should be able to look forward to Vista pretty healthy.

<unk> normalized loan portfolio growth over the course of 'twenty four.

Yeah, Brett and I will give you a little bit of color.

Data point that we included on Slide 26, we've got about.

$298 million Sandy maturing over the next 12 months.

At $700 million total portfolio, just under $300 million, obviously, a lot of that is going to come back on the balance sheet. It remain on balance sheet.

But I think thats, a bullet point that kind of talks to.

Some of those loans.

Rolling off at some point over the next 12 months.

Okay. That's helpful.

And then speaking of slide 26, I'm, just sitting here looking at it and you've got this three charts.

Charged to bottom C&D by geography owner occupied and.

Income producing and.

There is 42% and a little over half on the owner occupied CRE that or.

In all other geographies.

Can you talk about those pieces are they still in Texas, and Louisiana, but just not not in one of the primary markets.

What.

What can you give guidance or color on around.

Yeah, Yeah, absolutely so the other geography.

<unk>, that's that could be construed as outside of our core geographies, our core footprint all of that is within Texas and Louisiana.

And it's simply we picked.

<unk> top 10 geographies by loan balances or by outstanding balances and then the kind of catch all the other would be just everything else within our existing footprint. So we don't have anything outside of our.

Kind of core, Louisiana, Texas footprint, but the reason that we have those geographies listed above is it simply force ranking the top 10 geographies by loan balance so everything within our footprint.

Just think of it Brad.

Outside the listed.

Every other market that we serve and bank today.

Okay and it just speaks to the diversification geographic locations where.

We believe in diversity of geography, and I think that number shows well spread out we are over our footprint.

Okay.

Then just one last one for me.

On the funding side I missed the number that you gave for the DDA growth. The gross DDA growth that you had but youre, obviously being able to keep DDA balances relatively healthy versus maybe some others that have had more down downside to that number are you. One is what was that number and then secondly.

You kind of think there's mix shift change still from here or do you kind of feel like you can grow the DDA to kind of keep the concentration levels are same.

Yes, the number was $43 million and total new noninterest bearing deposits growth for the quarter.

And the second number I gave to that was that that number helped us.

Average of about $14 million per month, so far year to date.

And I do agree with your statement that has allowed us to.

Keep that noninterest bearing lack a lot of lot of our peers have experienced that noninterest bearing just declining even further so we're paying a little bit of offense by playing defense on that.

Yes.

Okay, and then and then Judy any comment on the <unk>.

I'll look for that do you think you continue to keep that.

Or what's your what's your thought on funding composition from here.

Yes, I think we that was Greg talk and but I think we also refinanced earlier, if I remember at about 27% noninterest bearing and I think we anticipated maybe.

Louisiana Percenters due by the end of the year, which is in line with where we said last quarter and possibly a third quarter before that we want we believe we'll finish up the year around 25% non interest bearing maybe 26 and we're not.

It's a focus of ours and as Greg mentioned.

We are opening a lot of new accounts and with.

With the new branches that we've opened within that gives us an opportunity to Q2 call on new clients and so our goal would be to two.

Two.

Kind of remain about that 25% overtime, if not improving.

Okay, Great I appreciate all the color guys.

Sure.

Our next question comes from the line of Graham <expletive> with Piper Sandler Your line is now open.

Hey, good evening guys.

Hey, Graham.

Yes.

So I just wanted to circle back to the loan growth front and I apologize if I missed this but.

I heard there's a lot of payoffs this quarter.

Still some some pretty good markets Dallas seems to be growing.

We substantially still.

How are you guys thinking about loan growth going into 2024 is it going to be a pretty steady at seven 8% kind of like what you are looking at this year, where do you think there'll be a step down maybe as.

The rate environment continues to work its way through bars appetite for new credit.

Now, we think we'll return to kind of 7% to 8% range for for next year.

Our pipeline and connectivity is still strong.

We had purposely.

Chosen to manage capital and manage margin.

Which has meant that we've done fewer loans than we could.

As we continue to work on on.

Earnings and growing within those earnings that gives us more room for growth in loan book.

But it's not.

So it hasnt been a question of demand just dropping off a cliff.

There is some slowdown in demand, but we also have been selected.

We feel confident that we can.

We can again, we'll have to have a little uptick in the fourth quarter to equal our 7% to 8% projection for the year and I would take would be I think in the 5%, 6% range, maybe maybe 45% range.

But then we feel well positioned to be able to.

So to kind of maintain that seven to eight over the course of the year.

And again to Greg's point, we would have we would've been at that 45% without the unexpected pay offs.

I'd emphasize the unexpected payoffs were all for good reasons, we just said.

Developers Thats oil projects that came to fruition, which is how it is supposed to work. So we're pleased about that.

Right got.

Got it and then you mentioned on the on capital building internally kind of if you guys have have managed through this year.

How are you thinking about capital priorities right now when it comes to I guess, a couple of options as far as being like organic growth and then second maybe like a bond restructuring type transaction. We've seen a lot of that recently and then I guess there you did put in that that new slide on M&A. So just wondering.

What your thoughts are on that front as well do you guys have the way youre thinking about capital allocation right now as it relates to those items.

I think number one priority is funding organic growth.

Good.

Moderate but healthy pace.

Those within our capital stack them within our retained earnings.

We do analyze opportunities to restructure the investment portfolio.

When that option seems to make sense, we'll take advantage of that.

We haven't we haven't decided to pull the trigger obviously on that yet but doesn't mean that we're not open to it.

And then on M&A, while it's not our priority in terms of how to spend capital.

We do believe there will be opportunities for us to review and partnerships for us to consider and we are.

We're prepared to do that under the right circumstances, but don't feel like we need to do it understood. If it makes.

A lot of sense for our strategic plan.

But number one priority is funding the organic growth.

Okay got it that's helpful and then I guess the last one for me.

Now I guess sort of a big picture question, but it looks like the 1% ROA target is within reach this year.

Is there anything youre looking at for next year or the year after any new sort of level you guys are targeting our new metric you guys are.

Looking at achieving.

I think it's probably a little early we're in the budgeting process just kind of begun.

Probably with the amount of uncertainty that's out there now I think it would be a little bit too early.

To make any forecast of improvement there I mean, that's our goal we want to keep managing that in over a multiple year period at one reason, we put in the chart about.

Five year improvement.

Across all of the all of the.

Profitability metrics is that we wanted to show that.

We're committed to that being the key driver of how we make decisions over time.

So we'll continue to work, we do believe that over the long run.

We'll move closer to that to that $1 15, $1 20, ROA and pit, but in the short run it's little hard to predict.

Given all the moving parts and again, we're just beginning the budgetary process.

We feel like this year was a big a big step in terms of achieve.

Achieving that 1% kind of.

<unk>.

And we will continue to work to build for me it from there.

We didn't put the M&A chart and necessarily signal that we were getting ready to do M&A, which we did it just to show that.

That over time, the M&A and we have done along with other decisions that we've made.

Have led to improved performance.

And I know from a from an institutional investor standpoint, or from an analyst standpoint, because we were quite active on the M&A front I think there was some concern that maybe.

Maybe we were just doing deals to do deals and being able to blow dramatic here, but but we.

We take it as a point of pride that the deals that we have done a medicine trauma franchise.

So we felt like we had enough information now.

To do a little look back in <unk>.

And prove out the case for our combined M&A and organic growth.

Our growth strategies.

And we will continue to make capital decisions with those longer term goals in mind.

Okay.

Alright, absolutely I hear you. Thank you guys.

Thank you Greg.

Your next question comes from the line of Kevin The silo with D. A Davidson your line is now open.

Hey, guys good evening.

Hey, Kevin Hey, Kevin.

Okay.

First I just want to.

Two little housekeeping, because I'm, just trying to keep up with you as best I could Greg.

Getting slower with my age here, but.

What you said about the fee revenue base eight you said eight four is a clean run rate.

Good to use for going forward is that.

Am I correct, there with what you said, yes that correct, a little bit a little bit of nuance that I may not have conveyed.

We think thats, probably a clean run rate for 'twenty four because we had some one off <unk> for example, and that was unexpected revenue in 'twenty three.

That really we expect that non interest income number to grow because we are going to back out that for example, $2 million out of the run rate that we experienced in 'twenty three.

Putting that eight four flat really as a growth number for us.

Got it got it okay.

Good good clarity and then on expenses.

You made the point that 39, five is a better run rate right and there were.

Yes.

And then in 'twenty four more like mid to high single digit.

Off of that.

Okay, and I know you went through a couple of nuances from <unk>.

Expenses Mastercard FDIC, yes.

Assessment, yes.

Right. That's the right thing in the 35 as the launching point and then that person.

<unk> that I've mentioned is right.

Okay, Okay great.

And then.

It might make maybe it's I don't know if you.

It's something you are just looking at right now but given.

What is still a challenging revenue environment on the expense side is there anything.

<unk> you guys are looking at or is <unk>.

In terms of moves or is it more just an everyday battle on the expense side, how youre going to approach that.

Yes, I think so.

As far as <unk>.

Interest expense yes.

<unk>.

We're just working hard everyday to try to gather those deposits from those expand customer relationships that will help us win.

The reduced like I had mentioned our reliance on borrowings broker those kind of things and we think we've set up the balance sheet to where we are.

As we keep winning on the deposit side, we will have the optionality to pay that off and help us on that.

Overall expense base.

I think.

I'm assuming your question was also about noninterest expense.

Yes.

Thank you.

Yes.

Yeah, I think it's more of it has been a daily decision, making there is not a.

Part of our franchise, we feel like we need to cut off in order to save expenses and we feel like one reason I mentioned the branch branches earlier said.

And we have a we have a slide in the deck to speak to this but I think we've done a good job of continuing to rationalize the network over time as opposed to allowing.

Branches that we bought or.

Our acquired in M&A or or have become obsolete or our legacy branches as opposed to letting that kind of hang out there, where we have to come back and do a <unk>.

10% production I think we've done a good job of every quarter analyzing our infrastructure and figuring.

Figuring out where we were where we might.

If not maybe redeploy into more productive growth oriented locations. So we will continue doing that.

Real time on a quarterly basis.

And thats kind of how we view hiring as well.

One of the reasons that we've had.

Displayed good.

Expense control this past quarter in the quarter for that is that we we've made some some decisions about hiring or putting off hiring until we felt comfortable that net debt to revenue without would justify it and so we will continue on a quarterly basis too.

<unk> on a real everyday basis too.

To think hard about.

About investments.

In infrastructure and in people, we did in 2022.

'twenty, one we made quite a few buyers of bankers.

Sure.

We feel like Theres still.

Some capacity there in terms of portfolio and workload, particularly at this kind of slower loan growth rate and as we've kind.

<unk> transitioned over to focusing more on deposits as well so we feel like we've got a staff.

That is capable of.

Continuing.

To incrementally build and I think thats, a good spot for us to be in right now versus versus.

Embarking upon now.

Yes.

Particularly expensive growth option so.

Expense control is something that we ought to be thinking about on a daily basis as opposed to.

Ignoring it until we have two I guess.

We tried to approach it.

Yes, okay. Thanks Jude.

One last one quick one for me on the subject of deposits you guys called out the.

<unk> financial institutions groups are contributing.

Just curious if that was more something deliberate you guys were pushing or was it more just the behavior of the client banks themselves in terms of.

Giving deposits over to you guys. Thanks.

No I think our approach to C. In general is we want to make sure that thats.

Our relationship with banks that also are looking at other pieces of our product offering added for example.

Loan sales.

Customer relationships with our Ssw group. So its not we are looking for deposits, but I think it's not a <unk>.

Posit install cost strategy into more of a relationship with all of those bank clients.

Got it okay.

That's about that's about $200 million right now.

So it's still a fairly small part of our balance sheet.

Right, Okay understood. Okay. Thanks, Greg.

Thank you. Thank you.

Okay.

And last question comes from the line of Freddie Shekel with Janney Montgomery Scott.

Your line is now open.

Hey, good evening gentlemen.

Okay.

Davidson.

Okay.

Just curious.

Looking to 2024 and beyond are there markets outside your footprint you would be interested in expanding team, whether it's organic more likely organic in the near term and maybe longer term M&A or do you feel like you have plenty of opportunity within the footprint you have now.

Yes.

I don't really view it as a <unk>.

Binary choice I guess is the way that I would say I mean I think.

Our priority in our our most immediate opportunity is certainly within our existing footprint in.

Enough opportunity there to.

To say grace over for many years, that's where we choose to do I do think that is.

We gained momentum.

And as we gain brand recognition.

One of the that's not just among client base, but thats also amongst potential.

Teammates and employees that they may have.

May be attracted to a bank such as ours and if we come across the right employees and we would be open to.

Moving to other geographies if it.

If they're the right fit we've always.

We have a general.

For us to where we want to invest we also have been very.

Bankers, who said that in terms of the specific markets that we've it's been more about the banker than has been the location for.

For example, the Mckinney operation that we just opened.

Although certainly on a numerical basis, when you think about the demographics mckinney into very attractive place to be but we wouldn't have opened in Mckinney. If we didn't find banker in our banking team there.

We felt were the right teammates in that market now with trusted to.

To help us grow our franchise so as we think about.

Future geographies.

I do think we will look.

In other places in the southeast over time, most likely the southeast but.

The order of preference will be determined by the quality of partnership we feel weekend.

We can put together and so as that happens that happens if it doesn't.

<unk>.

We feel like we can.

We can deploy capital constructively over time within our current footprint.

This is Philip I would just add as far as the Mckinney area is concerned.

We are very excited about that opportunity, but he has actually been on staff over a year. It came with our Frisco office immediately built out the portfolio. So that we did when we did open mckinney, whether the colo assets already paid for itself.

I appreciate that that's great additional color and I get it it's all about finding the banker first.

Just one last one from me.

As we look forward in 2024 appreciate talking about all the moving parts ROA everything else, but do you think we could see efficiency ratio core efficiency ratio below 60% potentially in the back half of 'twenty four.

Yes.

That's our that's what we're striving for.

Thank you.

Looking at that as you well know.

Really the deposit gathering and deposit cost will be the key to that.

But that is our goal I think that's it.

Fair enough way to answer that.

Okay.

Understood. Thanks for taking my questions.

Unknown Executive: Hello and welcome to Business Frst Thanks Share Q3 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to answer a question during the time, simply press star one on your telephone keypad.

Thanks, Patty good talking to you.

Got it.

The final question comes from the line of Michael Rowe.

Paul Your line is now open.

Hey, guys. Thanks for taking my questions just a few quick ones.

Greg I was hoping you could kind of give a range of kind of quantify what the impact of the.

Matthew Sealy: I will now turn the conference over to Matt Sealy, Senior Vice President Director of Corporate Strategy and SPNA. Please go ahead.

The seasonal municipal deposits is and what we should expect.

Yes.

We usually see.

Matthew Sealy: Good afternoon and thank you all for joining. Earlier today we issued our third quarter 2023 earnings press release, a copy of which is available on our website along with the slide presentation that we will reference during the day's call. Please refer to slide three of our presentation, which includes our safe harbor disclosures regarding forward-looking statements on the use of non-gap financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com.

Third $50 million to $200 million come in.

Over the course of a quarter.

That.

It does impact the margin negatively because of the cost of those phones that come in they are mostly interest bearing.

But I think the biggest part of that we usually.

Trouble of forecasting as it is tax money. So it's all dependent on the speed at which it comes in for example.

Matthew Sealy: 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 the day's call are subject to the safe harbor statements in our slide presentation and our news release.

Last year it came in.

Very very late at the end of Q4 and balance of it Q1 is just really depends on when the taxpayers brings.

Matthew Sealy: I'm joined this afternoon by Business Frst 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 you, Jude.

Bring their tax payments.

Payments and but it's about 200 million in total.

Got it helpful. And then it seems like loan growth is going to kind of reaccelerate here as we move into next year you guys have done a good job on the deposit side the loan to deposit ratio has gotten down in kind of the mid ninety's.

Jude Melville: All right, thanks, Matt, and thanks everybody for joining us. I know it's busy time, and we certainly appreciate you prioritizing this conversation.

But it seems like maybe that's going to go up again I assume the target is to kind of keep that sub.

Jude Melville: After in the third quarter, we continue to deliver solid fundamental shareholder-oriented operating performance, generating a core ROAA of 1.1 percent by exercising discipline around expenses and maintaining good margin stability, even as we grew organic deposits, including in our core, included in our core operating results for several non-run rate items, which I'll add Greg expand on in his section. However, even adjusting for these items, we still pay our run rate EPS, ROAA, and efficiency ratio at 67 cents, 1.03 percent, and 62.4 percent respectively.

100% is that what we're thinking and I know you've talked about some of the positive stuff earlier, but is there anything more that you are youre looking at to grow some of the core funding.

Yes, I think definitely we want to we'd like to stay below 100% one of the reasons for the excess liquidity is to paying off debt.

At times, but it's also is to make sure we have some wiggle room in terms of liquidity.

So that we can do that even if we have.

Certain relationships that we feel the need to take advantage of it.

Jude Melville: Our third quarter was highlighted by balance sheet management, which yielded another quarter of solid capital aggression, strong deposit generation, margin stability, expense management, and continued healthy credit quality trends, all of which put us in position to be able to increase our dividend by two cents per share for the quarter, something we've been able to do for five years in a row now.

The governors on the loan growth, though will be.

Capital retained earnings.

Capitalizing that growth and then.

Deposit generation so well.

I'd love to love to be able to generate deposits.

Rates were slightly greater than loans.

That may not hold true every single quarter, but over the course of the year.

Jude Melville: I'd like to highlight a couple of specific accomplishments. First, we've been particularly focused over the past few quarters on managing growth within our capital structure, and I'm pleased to report that our results are again accreted to tangible or excuse me, the TRBC, the TTE, and TBVPS, even factoring in the headwinds of additional AOCI. Not counting the impact of AOCI, we grew tangible value per share at 67 cents, and annualized rate of 20 percent.

We feel like with our focus and results that we've demonstrated this year.

And.

The results. So it's one thing to have the deposit growth, but it's another to actually demonstrate and certainly the debt the more balanced approach to growth pays off in terms of higher earnings.

That's a that's a positive thing for us to be able to demonstrate and we have demonstrated it over the course of the year and as we talk internally as we think about incentive programs.

Jude Melville: We flowed long growth during the quarter to 1.7 annualized percent annualized, which reflects some slowing demand and continues selecting us in our part, as well as unusually high paydowns and payoffs. We do still expect full year, 2,023, long growth of 78 percent.

We think about continuing to build upon the cultural aspect of placing importance on deposits.

I don't see any reason that the improvements that we've demonstrated this year won't continue into the future.

Jude Melville: I'm most pleased to report growth in deposits of 176 million, or about 14 percent annualized in quarter, and we accomplished this without causing material damage to start March. Gordon M, was down three basis points, but that factor has been a gain of 455,000 on recovery from a previous charge off, and the decision to hold an additional 150 million in excess liquidity at the cost of six basis points to the margin, factoring up those two elements, our core margin would have been flat, even while we demonstrated continuing improvement in our loan deposit ratio. From 0.36% in quarter two, the improvement was largely attributed to the resolution of two non accrual loans through current period charge off to 2.4 million. Both loans were previously assessed for credit losses and fully reserved.

We certainly.

You and I've talked before about three and half four years ago, and 303 years ago, three and half years ago, We set a five year plan.

And part of that was achieving a certain level of growth and asset size, which we felt was.

Kind of a sweeter spot to be in as.

As we've come close to that now and are on pace to get there over within the five year plan.

That means as I've talked about it in previous quarterly calls.

It's a bit more of a focus on not growth, but on healthy and profitable growth.

And so that means that we're not going to do.

We won't return to two as high level of loan growth in the near future focus on balanced growth, which would imply.

We want to maintain that below a 100% loan to deposit ratio.

Jude Melville: I'd like to point out a few branch movements as we continue on our ongoing efforts to optimize our footprint.

We certainly feel like a seven.

Seven 8%.

Loan growth next year do we feel we can do needs to be accompanied by a similar level of deposit growth.

Jude Melville: During the quarter we opened our fifth Dallas Fort Worth location with a new full service location in McKinney, Texas. There recently for the ribbon cutting in our team is very excited about the opportunities as we expand further into North Texas. With locations in McKinney and Frisco, we are present in two of the three fastest growing communities in Texas. We also turned our LPO in Rustin, Louisiana, another fast growing community into a branch and moved a branch to a more growth oriented part of Monroe, Louisiana.

And that's our that's what we'll work to do.

Very helpful and that dovetails into my final question. It just seems like you're putting together all the pieces.

It looks like you guys should be able to eke out some positive operating leverage next year is that the way.

You should think about it.

That's the goal.

Jude Melville: Finally, we also sold our lease bill, Louisiana location, recognized a $932,000 gain on sale, attributed to the investor. I'll note that we have added a couple of news slides to our deck that I think would be worth your focus and enhanced a couple others, particularly around our successful M&A track record, loan repricing opportunities and composition of our CRD and office portfolios. Want to want to particularly point you towards is found on page nine, which speaks to the consistent improvements we've made in various earnings focus metrics over the past five years.

We've been doing that we've done that the last couple of quarters.

Certainly we want to continue to do that so yes.

Yeah.

Disappointed if we don't.

Okay.

Great. Thanks for taking my questions guys.

Thanks, Mike.

Michael.

Okay.

One other one of the things you point about seasonality in the tax line is coming in and out reminding me. There is some seasonality in our expense base in Q4 I just wanted to be sure. We highlight Q4 is seasonally higher by $1 million little over $1 million on the expense side. So.

Jude Melville: EPS has increased by 81% net income by 292%. A core efficiency is improved by 571 basis points. Importantly, we show changeable value per share after adjusting for AOCI growing by 33%. Even while we have made the investment necessary to grow overall asset size by a factor of three over that time period, your acquisitions team liftouts and strong organic growth. This growth is required investment, those investments are paying off. We haven't yet, we aren't yet where we plan to be and we're clearly headed in the right direction.

I wanted to make sure we can lose side of that.

Okay.

Yes.

Alright, and we get.

Yes.

Any more questions.

I think we've lost our narrator.

I guess I was just okay.

And then on the I was just leaving more room for questions. If you would like to ask a question you can press star and number one.

Jude Melville: That concludes my big picture remarks. Thank you so much for your time.

Gregory Robertson: And I'm not now turn it over to Greg for his commentary on the quarter and then look forward to open the call up to Q&A. Thank you, Jude. Good afternoon, good afternoon everyone.

Alright, and it looks like there are no further questions at this time.

Gregory Robertson: I like to spend just a few minutes reviewing our Q3 highlights, including some balance sheet and income state trends and also discuss our updated thoughts on the current outlook. Third quarter, nine gap core, then income and EPS available in common share orders, 17.96 million and 71 cents a share. It came in better than we expected and was driven really by number one expense management. Two lower loan loss expense and continued stable credit tree and slightly lower long room, as Jude mentioned. A stable met interest margin and slightly better than expected loan discount increase.

I would like to turn the call over to Massimo.

Okay.

I think I'll kick it to Jude for any closing remarks that you might have.

Yes, Thanks, Matt.

Well I appreciate everybody's time today, we were we were very pleased with the quarter.

From a from a capital accretion to the earnings improvement to the focus on.

Adding liquidity environment in which liquidity is hard to come by and doing so.

Fair prices.

That werent damaging to our margins.

Thanks.

I think from an operating standpoint, we had a great operating quarter and I think.

Gregory Robertson: Before I dive into the more of the specifics of the quarter, I'd like to take a moment to call out a few of the items that might not be readily identifiable, but are really important to put context into the court. Third quarter gap net income and EPS available comment shareholders was 19.1 million 76 cents a year and benefited from to the income related items that you've mentioned earlier. The $932,000 gain on the sale of our leads to a location.

Continuing to do that over time will.

Well.

Justified.

Stock appreciation as the market normalizes at some point, which I know it.

Seems like it's been a long time and it could potentially be a while but at some point.

<unk> will be in favor and we feel like we're positioning ourselves to be.

One of the higher fires.

And that market, we will keep.

We'll keep grinding out operationally off we're proud of our game.

Gregory Robertson: And as a side note, that location we saw those deposits for a seven percent deposit premium. And also the $517,000 gain on extinguishing of the Texas citizen sub debt that we acquired in that acquisition. But excluding these items, our core non-interesting income was $8.4 million. And this $8.4 million figure is a fairly clean run rate figure for the quarter. And we see that as a stable figure for a run rate for a 24.

Appreciate the interest happy to happy to have any follow up calls that we need to have.

We have been.

Thank you. This concludes today's conference call you may now disconnect have a green.

[music].

Gregory Robertson: Or a little bit of the explanation of that is that that run rate for 24 is stable because we we experienced in 23 some one off one time income items for that that we don't feel like that will be repeatable in 24, but we do feel like non interest income will grow throughout the balance of the year to make that stabilized. Third quarter gap non interest expense was $38.6 million and included just $2,000 of merge related expense.

Yeah.

[music].

Gregory Robertson: However, included in this $38.6 million was a figure of a figure of about $500,000 in mastercard rebate, which we don't expect to reoccur going forward. So the third quarter non interest expense also benefited from 200,000 and usually low and at DIC at DIC assessment and 200,000 unusually low other non interest rated interest expense items. The Q3 run rate for non interest expense figures closer to $39.5 million as we expect the FDIC assessment and the $200,000 lower expense item to kind of normalize going forward.

Gregory Robertson: As far as 24 we feel like that non interest expense will be experiencing a mid to high single digit run rate going forward for the base case for the balance of 24. Spreading come also continue to grow and be strong in the performance in which we are attributed to long discount accretion of 2.4 million coming in 500,000 higher than expected. And as well as a decision to hold on more balance sheet with what is that you mentioned earlier boosted or net interest income.

Gregory Robertson: I'll provide more color on these dynamics a little bit later in the discussion on the margin on the surface, the optics of credit quality appeared mixed. But as you mentioned, we feel like that our credit quality is stable and improving with those two previously discussed charge offs that we discussed in quarter Friday now. That would fully mark and we resolve them during this quarter. As far as the balance sheet, the balance sheet tends to remain healthy during quarter and loans that were helpful for investment grew about 1.7% annualized little lower than expected.

Gregory Robertson: So we that were but also consistent with our strategy or strategy of long growth. And as you mentioned, we feel like that we're round out the year to about 7% for take and annualized long growth. We are proud of the fact that our loan growth for the quarter was really headlined by a continued loan yield of 8.6% on new and renewed loans for the quarter, and that is helping us continue to hold the margin in place.

Gregory Robertson: Deposit increased, as you mentioned, 176 million. We included the, these bill deposits that we sold in that branch, that that number would be closer to 200 million deposit and gross deposit for the quarter. The 157 million in the new deposits that we generated through a couple of different CD and money market specials during the quarter were very well received by the customers and our production staff had a really good job of pushing those through.

Gregory Robertson: During the quarter, another highlight is we were able to generate about 43 million in total and new non-interest sharing deposit accounts. And that added to our 14.3 million average that we've been operating on for the last few months. We also managed to open 82.82 million in non-maternity deposits during the quarter at a weighted average, an offering rate of 4.25%. The September numbers for offering rates for all non-maternity intersparing deposit accounts was 4.36%.

Gregory Robertson: Non-interest sharing deposits remains a challenge, and we will continue to put our efforts into that area as we move forward into 2024. We are non-interest sharing deposits ended the quarter at 27.2% of our total deposits. Capital increased nicely during the second quarter as Jude mentioned, TCEDTA, three basis points. Total risk-based capital, up 22 basis points for the quarter, tangible value of 16 cents, XALCI. As we mentioned earlier, decreased during the quarter by 152 million.

Gregory Robertson: And that was really as a result of our deposit gathering campaigns that allowed us to pay off all of our short-term overnight borings with FHLB, which for currently price in the 570 to 575 range. We also made the, as you mentioned, the decision to hold the extra $150 million in liquidity on the balance sheet as we continue to take advantage of the ETF funding program earlier in the year, drawing down 300 million of that fund in early in quarter one.

Gregory Robertson: That 150 million that we carry is really doing two things for us. It's continuing to hold liquidity levels in a range where we feel comfortable during this time, and also preparing us to be able to pay off that maturity coming forward in the next March. Q3 gap net interest margin was 3.61%, that included 2.4 million in loan discount increase. Foundation, which was about 500,000 higher than what we expected, but we expect that accretion to drop back closer to a million dollar quarter run rate.

Gregory Robertson: The Q3 core net interest margin, excluding the loan discount accretion, contracted three bits to 349, from 349 to 346, as you mentioned earlier. He was alluding to the adjustments for the quarter and also the six basis points drag that we are experienced for holding that excess liquidity. Looking forward into Kandah Q4, we expect the margin to remain flat, slightly down, maybe a single basis point. Due to modest continued liquidity bill and continued funding pressures.

Gregory Robertson: A little color on the second point here, we have over 100 million and lower cost FHLB borrowings that mature in early in the quarter, and we will work on refinancing a piece of it and paying down a piece of it, so that may negatively impact the margin as we go forward in the quarter. We, as I mentioned earlier, we are very proud of the production side of the bank with our continued loan yields coming in on new renewed as a average of 160 and our deposit gathering that helped us maintain our margins.

Matthew Sealy: And now to cover some of the betas from the quarter, I will turn over to Matt. Sure thing. So, funding betas did increase during the quarter as expected. Cycle-to-date total deposit beta and intersparing deposit beta was 41% and 56% respectively, which was slightly ahead of what we had anticipated by about 1%. And this is really functioning better than expected deposit growth during the quarter. Looking ahead to keep 4, I expect the cycle-to-date deposit beta to increase roughly 4%, which sound slightly from the year-to-date quarterly beta increases of about 5 to 6%.

Matthew Sealy: So, still increasing, but at a slower pace. On the loan side, we continue to hold cycle-to-date beta on new loan yields at about 85%. We are at 84% for Q3 and expecting things. This reflects a weighted average new out-of- origination yield of 855 during the quarter.

Unknown Executive: And with that, I believe that concludes our prepared remarks and I think we're ready to open up the Q&A. Thank you. If you have a question, please press star 1 on your telephone keypad. To withdraw your question, simply press star 1 again. One moment please for your first question.

Unknown Executive: Your first question comes from the line of breadth-rabbitant. I'm sorry, the first question comes from the line of net-on with Steven.

Steven: Your line is now open. You may go ahead. Okay, Matt. I want to talk more about the funding and the strategy of the next few quarters. You grew loans, I'm sorry, you grew deposits quite a bit this quarter, replace some of the FHLB. It sounds like that's going to be the strategy. Again, these next few quarters, along with replacing some other wholesale offerings out there, you just talk more about deposit growth from here and kind of expectations to match the long growth.

Steven: Thanks. Yes, thanks Matt. We're continuing to run internal campaigns for deposits really relying on the production side of the bank to continue to generate deposit growth. As we mentioned earlier, the 14% we experienced this quarter was really, really good and we're happy with that. Now, as you well know across the industry right now, it's just deposits are still in battle every day, so it's something we're continuing to talk about and focus on.

Steven: If we experience the same successes going forward, then we'll really start to systematically start to unwind from the higher costing liabilities, for example, like the FHLB. We've really tried to focus over the last year, so of really segmenting those higher cost funding sources into into buckets for lack of better order to where we can have optionality each quarter to try to unwind that and improve the margin. But that is reliant on us continuing to gather deposits.

Steven: We will experience as we do seasonally the end of the quarter, the beginning of the first quarter, some municipality bill from the positive standpoint. So we do expect us to come in over the later part of the quarter and the beginning of the first quarter that would give us more optionality on top of our typical deposit growth. And one of the things that give us kind of hope is we really consistently not only gather deposits, but really gathered non-interest fairy kind of in the face of the whole industry experience and runoff in that non-interest fairy sector sector.

Steven: So experiencing good account of being both in numbers and in dollars, give us a little bit of continued to move that way. Okay, appreciate the commentary and just follow up on the the outlook for the margin. I think Greg, you mentioned flat is slightly down. I assume that was with respect to the core margin, including some of that accretion income. Is that fair? Yeah, that's fair and that's all really a function of, you know, the deposit flow that we bring in, we've really been experiencing, you know, pretty stable on the top end loan yield side.

Steven: Still have a good, good pipeline with good volume. I think one of the things that is worth noting is, you know, our. Long growth is quarter was really kind of muted by out size quarter payoffs. You know, we had a little over 100 million in payoffs, all for good reasons projects wrapping up or companies selling projects. So if we didn't expect that, and if we didn't have that, we still feel like our, our long time plan isn't good shape and our growth would have been, you know, around the four or five percent range, maybe this quarter without that, but those those yields, you know, like I said, eight, 50, 60 coming in at that number.

Steven: So the big factor for the margin with the renewals we have and what we see in forecast from a renewal strategy is really relying on what our deposit base goes and how that growth continues. Okay. I appreciate that. And I guess if I think about that, that margin in the first half and next year, I know there's several puts and takes that we've discussed before, but I guess what you're saying also is that the liquidity could build an anticipation of the payoffs of the bank term funding program.

Steven: I think that you said was an early two to you. Is that fair? That's correct. And one of the things that we think that it'll help you use our slide on base 21 of the deck that we put in there that really gives clarity into what we're going to see as far as fix rate and a lot of materies coming forward in the next few quarters. So we think with that we should be slightly creative in the margin next year because of that. Perfect. Okay.

Unknown Executive: Well, appreciate the disclosures and the commentary and I'll back in the queue. Thanks, Ben.

Brett Rabatin: Your next question comes from a line of Brett Robinson with host group. The line is now open.

Unknown Executive: Hey guys, good afternoon. Hey, Brett.

Unknown Executive: Why don't you start off on the the AMD book and just let's curious if you if you were hoping to get that concentration below 100% and just how you kind of think about, you know, that piece of portfolio going forward where you see demand and appetite from your perspective. Yeah, I'm guessing you're referring to the CMD, the construction development book. Yes. Yeah, yeah. We think it is trending, you know, exactly where where we thought it would, you know, going trending down below 100%.

Unknown Executive: We don't see we really haven't been originating any new CMD loans. So if you think back about at our production last year in Q2 and Q3 of last year. Really, we're kind of at the experience and right now, the peak of the funding because each of those loans is of 12 to 18 months cycle. So we're getting to a point where we're, you know, a year out on some of them getting towards the on the, you know, kind of wrap up phase of those where they'll be transitioning out of the bank or into on our occupied or income producing. So we don't expect that to be back up over 100. We think it's going to, you know, it's trending down and going to be, you know, right there in that space for a while.

Unknown Executive: We're not eradicating CMD from our portfolio, we just felt like we were a little bit unbalanced a couple quarters ago and felt like we needed to right size that little bit. So definitely want to stay below 100 and look like we're a marked material projections where we're on pace to do that and stay there. A lot of our outsides growth last year, you know, a portion of it was CMD and if we put down the CMD, we have should be able to look forward to just a pretty healthy normalized loan portfolio growth over the course of 24.

Unknown Executive: Yeah, Brett, and I'll give you a little bit of color at data point that we include on side 26, we've got about 298 million CMD maturing over the next 12 months of that $700 million total portfolio just under 300 million maturing. Now, obviously a lot of that's going to come back on balance sheet to remain on balance sheet, but I think that's a bullet point that kind of talks to some of those loans. Rollin' off at some point over the next 12 months.

Unknown Executive: Okay, that's helpful. And then speaking of slide 26, I'm just sitting here looking at it. And you've got those three charts at the bottom. We'll see in deep-out geography on our occupied and in-comproducing. And there's 42% and a little over half on the on our occupied CRE that are in all other geographies. Can you talk about those pieces? Are they still in Texas and Louisiana, but just not in one of the primary markets?

Unknown Executive: Or what can you give guidance or give color on around? Yeah, yeah, absolutely. So the other geography label there, that's not to be construed as outside of our core geographies or core footprint. All of that's within Texas and Louisiana. And it's simply we picked the top 10 geographies by loan balances or by outstanding balances. And then the kind of catch-all, the other would be just everything else within our existing footprints. We don't have anything outside of our core Louisiana Texas footprint.

Unknown Executive: But the reason that we have those geographies listed above is it's simply forced ranking the top 10 geographies by loan balance. So everything within our footprint. Just think of it as outside of the listed one of every other market that we serve in bank today.

Unknown Executive: Okay. It just speaks to diversification, geographic locations, which we believe in diversity of geography. And I think that number shows how well spread out we are over footprint.

Unknown Executive: Okay.

Unknown Executive: And then just one last one for me on the funding side. I miss the number that you gave for the DDA growth, the gross DDA growth that you had, but you're you're obviously being able to keep DDA balances relatively healthy versus maybe some others that have had more downside to that number. Are you one is what was that number? And then secondly, you kind of think there's mixed shift change still from here, or do you kind of feel like you can grow the DDA to kind of keep the concentration levels the same?

Unknown Executive: Yeah, that the number was 43 million total new non-interest varying deposits, crooks for the quarter. And the second number I gave to that was that that number helped us have a average of about 14 million per month so far a year to date. And then I do agree with your statement. That is allowed us to keep that non-interest varying like a lot of a lot of our peers that experienced that non-interest varying just declining even further. So we're paying a little bit of offense about playing defense on that.

Unknown Executive: Okay. And then you didn't come in on the outlook for that you think you continue to keep that flat or what's your what's your thought on funding composition from here? Yeah, I think we that was great. But I think we are part of our member about 27% non-interest varying. And I think we anticipated maybe you know, losing up percent or two by the end of the year, which is in line with where what we've said last quarter and possibly quarter before.

Unknown Executive: But we want we believe we'll finish up the year around 25% on a spare maybe 26. And we're not it's a focus of ours. And as Greg mentioned, we are opening a lot of new accounts and with the new branches that we've opened and that gives us an opportunity to keep to call on new clients. And so our goal would be to I'm kind of reviewing about that 25% over time, if not proving it.

Unknown Executive: Okay, great, appreciate all the color, guys.

Unknown Executive: Sure.

Graham Dick: Our next question comes from the line of Graham Dick with Piper Sandler.

Unknown Executive: Your line is now open. Hey, good evening, guys. Hey, Graham. So I just wanted to just go back to the loan growth front. I apologize if I missed this, but I heard there's, you know, a lot of payoffs is quarter. You're still in some pretty good markets. Dallas needs to be growing pretty substantially still. How are you guys thinking about loan growth going into 2024? Is it going to be a pretty steady, you know, 70% kind of like what you're looking at this year?

Unknown Executive: Where do you think there'll be a step down, maybe as you know, the rate environment continues to work its way through bars appetite for new credit? We think we'll return to kind of 78% range for next year, you know, our pipeline and connectivity is still strong. We've purposely chosen to manage capital and manage margin, which is meant that we've done fewer loans than we could. And, you know, as we continue to work on our own earnings and growing within those earnings that gives us more room for growth and loan book.

Unknown Executive: But it's not a, it hasn't been a question of demand just dropping off cliff. There is some slow down and demand, but we also have been selected. But we feel confident that we can, we can, again, we'll have to have a little uptick in the fourth quarter to equal our seven eight percent projection for the year. I think in the five six percent range, maybe maybe four or five percent range. But then we feel well positioned to be able to kind of maintain that seven eight over the course of the year.

Unknown Executive: And again, to Greg's point, we would have, we would have been at that four or five percent without the unexpected payoffs. And I would emphasize the unexpected payoffs. We're all for good reasons. We just had developers that sold projects at Canada fruition, which is how it's supposed to work. So we're pleased about that. Right. Yeah. Got it.

Unknown Executive: And then you mentioned on on capital building internally, kind of as if you guys have have managed to this year. How are you thinking about capital priorities right now when it comes to, I guess a couple options first being like organic growth. And then the second may be like a bond restructuring type transaction. We've seen a lot of that recently. And then I guess third, you did put in that, that new slide on M&A.

Unknown Executive: So just wondering what your thoughts are on that front as well. So do you guys have a way you're thinking about capital allocation right now? Is it related to those items? Yeah, I think number one priority is funding organic growth at a good moderate but healthy pace when it grows within our capital stack them within our retained earnings. We do analyze opportunities to restructure the investment portfolio from time to time. When that option seems to make sense, we'll take advantage of that.

Unknown Executive: We haven't we haven't decided to pull the trigger obviously on that yet, but doesn't mean that we're not open to it, and then on M&A, while it's not our priority in terms of how to spend capital, we do believe there will be opportunities for us to review and partnerships for us to consider, and we're prepared to do that under the right circumstances, but don't like we need to do it, we should do it if it makes a lot of sense for our strategic plans. But number one priority is funding the organic growth.

Jude Melville: Okay, I got it helpful, and then I guess the last one for me, another I guess a sort of big picture question, but it looks like the 1% ROA target is within reach this year, is there anything you're looking at for next year or the year after any new sort of level you guys are targeting or new metric you guys are looking at achieving. I think it's probably a little early, you know, we're in the budgeting process just kind of begun it and probably with with amount of uncertainty it's out there now, I think it would be a little bit too early to, to make any forecast of improvement there, I mean we're going to that's our goal, we want to keep managing that and over multiple year period at one reason we put in the chart about five year improvement.

Jude Melville: And across all the profitability metrics is that we want to show that we're committed to that being the key driver of how we make decisions over time and so we'll continue to work to we do believe that over the long run. We'll move closer to that to that one 15 120 ROA but I ensure Ron is a little hard to predict given all the moving parts and again we're just beginning the budgetary process.

Jude Melville: We feel like this year was a big step in terms of achieving that 1% kind of baseline. And we'll continue to work to build from there, I didn't we didn't put the M&A chart into necessarily signal that we were getting ready to M&A was we did it just to show that that over time the M&A that we have done along with other decisions that we've made. Have led to improve performance and and I know from an institutional investor standpoint or from an analyst standpoint because we were quite active on the M&A front.

Jude Melville: I think there was some concern that maybe we were just doing deals to do deals and I'm being a little dramatic here but but we we take it as a point of product that the deals that we have done that made us stronger franchise and so we felt like we had enough information now. To build a little look back and and prove out the case for our combined M&A and organic growth strategies and and we'll continue to make capital decisions with with those longer term goals in mind.

Unknown Executive: Alright, absolutely I hear you. Thank you guys. Thank you.

Kevin Fitzsimmons: Your next question comes from the line of Kevin signing the DA Davidson your line is going to open. Hey guys, good evening. Kevin. First I just want to. Do a little housekeeping because I was trying to keep up with you as best I could, Greg, but I'm getting slower with my age here. But so what you said about the fee revenue base, you said 8.4 is a clean run rate and good to use for going forward.

Kevin Fitzsimmons: Is that fact in my character with what you said? Yeah, that's a little bit a little bit of nuance that I may not have conveyed, but you know, we think that's probably a clean run rate for 20 years. 4 because we had some one off SBC, for example, and that was unexpected revenue in 23 that really we expect that not interesting come to number to grow, but because we're going to back out that, for example, $2 million out of that run rate that we experienced in 23 holding that a 4 flat really is a growth number for us. Got it, got it.

Gregory Robertson: Okay, that's good clarity. And then on expenses, you made the point that 39.5 is a better run rate, right? And there were. And then in 24 more like mid to high school digit off of that is that and I know you went to a couple of nuances from expenses master card FDFC assessment. Yeah, that's right. That's the right thing in the 39.5 is the kind of launching point and then that percentage that I mentioned is right.

Gregory Robertson: Okay, okay, great. And then, you know, it might make maybe it's I don't know if it's something you're just looking at right now, but you know, given what's still a challenging revenue environment on the expense side, is there anything specific you guys are looking at or is, you know, in terms of moves or is it more just an everyday battle on the expense side, how you're going to approach that. Yeah, I think our interest expense, yeah, it's we're just working hard every day to try to gather those deposits from those expand customer relationships that ultimately help us win and, you know, reduce, like I've mentioned our alliance on borrowers broker those kind of things.

Gregory Robertson: And we think we set up the balance sheet where we as we keep winning on the deposit side. We'll have the optionality to pay that off and help us overall. I think I think. But certainly your question was also about non interest expense. Yeah, I think it's more of just a daily decision making. There's not a part of our franchise that we feel like we need to cut off in order to save expenses.

Gregory Robertson: And we feel like one reason I mentioned the branches of branches earlier is that. And we have a we have a flood in the deck to speak to this, but I think we've done a good job of continuing to rationalize the network over time, as opposed to allowing branches that we bought and required an M&A or or become obsolete of our legacy branches is opposed to letting that kind of hang out there where we have to come back and do a 10% reduction.

Gregory Robertson: I think we've done a good job of every quarter analyzing our infrastructure and figuring out where we are where we might. Not cut maybe redeploy into more productive growth oriented locations. So we'll continue doing that real time on a quarterly basis. And that's kind of how we view hiring as well. One of the reasons that we've had that we've displayed good, expense control this fast quarter and the quarter for that is that we made some some decisions about hiring they're putting all hiring until we've all comfortable that that the revenue would would justify it and so we'll continue on a quarterly basis to actually on a real everyday basis to think hard about about investments and an infrastructure and and and and people you know we did in 2022 2021 we made quite a few pires of bankers and we feel like there's still some capacity there in terms of portfolio and workload particularly at this kind of slower low growth rate and as we've kind of transitioned over to focusing more on deposits as well.

Gregory Robertson: So, Philip, we've got a staff that is capable of continuing to. Incrementally build and I think that's a good spot for us to be in right now versus versus embarking upon a particularly expensive growth option so expense control is something that we ought to be thinking about on a daily basis as opposed to ignoring it until we have to I guess that's the way we try to approach it.

Kevin Fitzsimmons: Yeah, okay, thanks, dude. One last one quick one for me on the subject of deposits you guys called out the financial institutions group for contributing just curious if that was more something deliberate you guys were pushing or was it more just the behavior of the client banks themselves in terms of giving deposits over you guys. Thanks. No, I think our approach to see in general is we want to make sure that that's a relationship with banks that also are looking at other pieces of our product offering at, for example, long sales.

Kevin Fitzsimmons: Custom relationships with our SS deputy group so it's not we are looking for deposits but I think it's not a deposit thought call strategy will become more of a relationship with all of those bank clients. That's about 200 million right now so it's still a fairly small part of our balance sheet. Right.

Unknown Executive: Okay, understood. Okay, thank you.

Freddie Strickland: Thank you.

Unknown Executive: The last question comes from the line of Freddie Shreklin with Jenny Montgomery Scott. Your line is now open. Hey, good evening, gentlemen. Thanks, Eddie. Just curious, you know, as we look into 2024 and beyond or their markets outside your footprint you be interested in expanding to look for, you know, if it's organic, more like we're organic in the near term is maybe longer term M&A. Or do you feel like you have plenty of opportunity within the footprint you have now?

Unknown Executive: I don't really do it as a binary choice. I guess the way that I would say it. I mean, I think our priority and our most immediate opportunity is certainly within our existing footprint. David, enough opportunity there to say grace over for many years. If that's what we choose to do, I do think that as we game momentum, and as we gain brain recognition, one of the, that's not just among client base, but that's also amongst potential teammates and employees that may be attracted to bankfetchers ours.

Unknown Executive: And if we come across the right employees, then we've be open to moving to other geographies. If it, if it did it right fit, we've always, but we have a general thrust to where we want to invest. We also have been very bankers specific in terms of the specific markets that we've, it's been more about the banker than has been the location, for example, the McKinney operation that we just opened up, although certainly on a numerical basis.

Unknown Executive: When you think about the demographics, McKinney is a very attractive place to be, but we wouldn't have opened a McKinney if we didn't find a banker and a banking team that we felt were the right teammates in that market. And that we trusted to help us grow our franchise. So as we think about future geographies, I do think we'll look in other places in the southeast over time, most likely the southeast, but the order of preference will be determined by the quality of partnership.

Unknown Executive: We feel we can, we can put together and so if that happens, that happens, and if it doesn't, we feel like we can, we can deploy capital constructively over time within our current footprint. I would, this is still about what it has towards the McKinney higher is concerned. We are very excited about that opportunity, but he's actually been on on staff over a year and came to our first go office immediately built up a portfolio so that we did when we did open McKinney within the cold.

Jude Melville: I said sorry for itself. Appreciate that. That's a great additional color and I get it. It's all about a fund of the banker first.

Unknown Executive: Just one last one from me. As we look forward to in 2024, I appreciate talking about all the blue and bars are away everything else, but do you think we could see efficiency ratio core efficiency ratio will low 50% potentially in the back half of 24. Yeah, I think that's what we're striving for. I think looking at that, as you will know, really the deposit gathering and deposit calls to be the key to that, but that is our goal. I think that's probably a fair enough way to answer that. Thank you. Thanks for taking my questions. Thanks, Betty. Good talking to you. Thanks, Betty.

Michael Rose: The final question comes from a line of Michael Rose with Raymond James. The line is now open. You may need to go ahead.

Gregory Robertson: Hey, guys, thanks for taking my questions just a few quick ones. Greg, I was hoping you could kind of give a range or kind of quantify what the impact of the seasonal municipal deposits is and what we should expect. Yeah, that's, we usually see 150 to 200 million come in over this course of a quarter. You know that, that does impact the margin negatively because of the calls for those phones that come in, they're mostly interest bearing, but I think the biggest part that we usually struggle with forecasting is, it is tax money, so it's all dependent on the speed at which it comes in, for example, last year it came in, a very, very late the end of the Q4 and balance of the Q1, it's just really depends on when the taxpayers bring the tax phase payment in, but it's about 200 million in total.

Gregory Robertson: Got it helpful. And then, you know, it seems like, you know, loan growth is going to, you know, kind of reaccelerate here, has been moving to, to make sure you guys have done a good job on the deposit side, not the loan to deposit ratio has gotten down and kind of the mid 90s, but it seems like maybe that's going to go up again. I assume the target is to kind of keep that, you know, sub 100% is that what we're thinking and, you know, I know you talked about some of the deposits up earlier, but is there anything? More that you're, you're looking at to grow some of the core funding.

Gregory Robertson: Thanks. Yeah, I think definitely we want to, we'd like to stay below 100% one of the reasons for the accessibility is to paying off the fund, but it's also just to make sure we have some wiggle room in terms of liquidity. So that we can do that, even if we have certain relationships that we fill in and take advantage of, the governor's on the loan growth, though, will be capital, you know, retained earnings.

Gregory Robertson: Capitalizing that growth and then deposit generation. So we would love to love to be able to generate deposits at a rate is highly greater than most. That may not hold true every single quarter, but over the course of the year we, we feel like with our focus and results that we've demonstrated this year. And, you know, the results, so it's one thing to have the deposit growth, but it's another to actually demonstrate internally that the more balanced approach to growth pays off in terms of higher earnings.

Gregory Robertson: And that's a positive thing for us to be able to demonstrate, and we have demonstrated it over the course of the year. And as we talk internally as we think about incentive programs, as we think about continuing to build upon the cultural aspect of, I think, importance on deposits. I don't see any reason that the improvements that we've demonstrated this year won't continue into the future. We certainly, you know, you and I talked before about three and a half, four years ago, three years ago, three and a half years ago, we said a five year plan.

Gregory Robertson: And, you know, part of that was achieving a certain level of growth and assets, which we felt was kind of a sweeter spot to be. And as we've come close to that now and our own pace to get there over within the five year plan, that means, as I talked about in previous quarter, it calls that it's a bit more of a focus on not growth, but on healthy, profitable growth. And so that means that we're not going to, we won't return to as high level of long growth in the future, focus on balance growth, which would imply that we want to maintain that below 100% low deposit ratio.

Gregory Robertson: And we certainly feel like the eight, seven, eight percent home growth next year to fill we could do needs to be accompanied by a similar level of deposit growth, and that's how that's going to work for you.

Jude Melville: Very helpful and that's uptails into my final question. It just seems like putting together all the pieces. It looks like you guys should be able to eke out some positive operating numbers next year, is that the way we should think about it? That's the goal. I think that we've been doing that. We've done that the last couple quarters and certainly want to continue to do that. So, yeah, I'll be disappointed if we don't.

Unknown Executive: Right.

Unknown Executive: Thanks for taking my questions, guys. Thanks, Michael.

Gregory Robertson: One other one of the things that you're point about seasonality in the tax lines coming in and out, we're reminded me of some seasonality in our expense base and keep for, I just want to be sure we highlight keep for seasonally higher, about a million, a little over a million on the expense side. So just want to make sure we're at least side of that.

Unknown Executive: All right, are we good? Thank you.

Unknown Executive: Any more questions? Yeah. I think we've all started our narrator. I'm here. I just, I was just, I know I'm here. I was just leaving more room for questions.

Unknown Executive: If you would like to ask the question, you can press star number one.

Unknown Executive: All right, and looks like there are no further questions at this time.

Jude Melville: I would like to call, turn the call over to my season. I think I'll kick it to Jude for any closer remarks that you might have. Yeah, thanks, Matt. Well, I appreciate everybody's time today. We were, we were very pleased with the quarter. I mean, it's from a, from a capital accretion to the earnings improvement to the focus on adding liquidity in an environment in which the liquidity is hard to come back and doing so at a fair prices that were damaging to our margins.

Jude Melville: I think we, I think from an operating standpoint, we had a great operating quarter and I think continuing to do that over time will, will, will justify stock appreciation as the market normalizes at some point, which I know it, it seems like it's been a long time and it could potentially be a while, but at some point, banks will be in favor and we feel like we're positioning ourselves to be one of the higher flyers in that, in that market. We'll keep, we'll keep running out operationally all for proud of our team and appreciate the interest. Happy to, happy to have any follow-up calls that we need to have, have been nice. Thank you.

Unknown Executive: This concludes today's conference call. You may now disconnect.

Unknown Executive: Have a green.