Q2 2024 Business First Bancshares Inc Earnings Call

Thank you for standing by. My name is Mandeep and I'll be your operator today.

Unknown Executive: Theater Today. At this time, I'd like to welcome everyone to the Business First Bank Shares Q2-2024 earnings call. All lines being placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press starfall by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you.

Operator: At this time, I'd like to welcome everyone to the Business Frst Bank Shares Q2 2024 earnings call. All lines should be placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Matt Sealy, Senior Vice President, Director of Corporate Strategy and FP&A. You may begin.

Speaker Change: At this time, I'd like to welcome everyone to the Business Frst Bankshares Q2 2024 earnings call.

Speaker Change: All lines be placed on mute to prevent any background noise.

Speaker Change: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you.

Matthew Sealy: I would now like to turn the call over to Matt Sealy. Senior Vice President, Director of Corporate Strategy and FP&A. You may begin. Good afternoon. Thank you all for joining. Earlier today, we issued our second quarter 2020-24 earnings press release, a copy of which is available on our website, along with the slide presentation that will reference during today's call. Please refer to slide three of our presentation, which includes our safe harbor statements regarding forward-looking statements in the use of non-GAAP financial measures. For those of you joining by phone, please note that the slide presentation is available at our website at www.b1bank.com.

Matthew Michael Sealy: I would now like to turn the call over to Matt Sealy, Senior Vice President, Director of Corporate Strategy and FP&A. You may begin.

Matthew Michael Sealy: Good afternoon, and thank you all for joining us today. Earlier today, we issued our second quarter 2024 earnings press release, a copy of which is available on our website, along with the slide presentation that we'll reference during today's call. Please refer to slide three of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com.

Matthew Michael Sealy: Good afternoon, and thank you all for joining. Earlier today, we issued our second quarter 2024 earnings press release, a copy of which is available on our website, along with a slide presentation that we'll reference during today's call.

Speaker Change: Please refer to slide 3 of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available at our website at www.b1bank.com.

Matthew Sealy: Please also note our safe harbor statements are available on page seven of our earnings press release that was followed with the SEC today. All comments made during our call today are subject to safe harbor statements in our slide presentation and earnings release.

Matthew Michael 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 our call today are subject to safe harbor statements in our slide presentation and earnings release. I'm joined this afternoon by Business First Bank Chair's President and CEO, Jude Melville, Chief Financial Officer, Greg Robertson, Chief Banking Officer, Philip Jordan, and Chief Administrative Officer, Jerry Vaskegew. After the presentation, we'll be happy to address any questions that you may have. And with that, I'll turn the call over to you, Jude.

Speaker Change: Please also note our safe harbor statements are available on page 7 of our earnings press release that was filed with the SEC today. All comments made during our call today are subject to safe harbor statements in our slide presentation and earnings release.

Matthew Sealy: I joined this afternoon by Business First Bank shares, President and CEO, Jude Melville. Chief Financial Officer Greg Robinson. Chief Banking Officer Philip Jordan and Chief Administrative Officer Jerry Vasquez. After the presentation, we'll be happy to address any questions that may have.

Speaker Change: Bankshare's President and CEO , Jude Melville, Chief Financial Officer, Greg Robertson.

Speaker Change: Chief Banking Officer, Philip Jordan, and Chief Administrative Officer, Jerry Baskerville.

Matthew Sealy: And with that, I'll turn the call over to you, Jude.

David R. Melville: After the presentation, we'll be happy to address any questions that you may have. And with that, I'll turn the call over to you, Jude. Okay, thanks, Matt. Good afternoon, and thanks, everybody, for taking time out of your schedule to have this conversation with us.

David R. Melville: Okay, thanks Matt. Good afternoon, and thanks everybody for taking time out of your schedule to have this conversation with us. The quarter was relatively straightforward and generally positive for us. Our team produced a healthy rebound in that interest margin, an appropriate amount of loan growth, an improvement in the composition of our deposit base, increased capital levels and tangible book value, and our asset quality remained consistent. An all-around solid quarter. And last quarter, I noted that in our world, still small on a relative basis, there are always a handful of things that can go either way based on a limited number of relationships.

Jude Melville: Okay, thanks, Matt.

Jude Melville: Good afternoon, and thanks everybody for taking time out of your schedule to have this conversation with us. The quarter was for us relatively straightforward and generally positive. Our team produced a healthy rebound in that issue's margins and appropriate amount of loan growth and improvement in a composition of our deposit base, creation and capital levels, and tangible both value, and our asset quality remained consistent and all around solid quarter. The last quarter I noted that in our world, still small and relative basis, they're always a handful of things that can go either way based on a limited number of relationships.

Jude: The quarter was, for us, relatively straightforward and generally positive. Our team produced a healthy rebound in net interest margin, an appropriate amount of loan growth, an improvement in the composition of our deposit base, decreasing the capital levels and tangible book value, and our asset quality remained consistent, an all-around solid quarter.

Jude: Now last quarter I noted that in our world, still small on a relative basis, there are always a handful of things that can go either way based on a limited number of relationships.

Jude Melville: None of these individually make a break of quarter, but sometimes they happen to line up in the same direction. And when they do, they produce self-size movement, and they aggregate quarterly results. Even though they may not be truly indicative of the larger health of the franchise. In the first quarter, you'll remember we had a number of elements go the wrong way concurrently. And that led to weaker than the direct quarterly results, even though the franchise went through it from a broader time horizon, continuing to move in the right direction. In this quarter, we had something of the opposite back to help in the direction the franchise remained strong, but we also had an influence within the outside of the results.

David R. Melville: None of these individually make or break a quarter, but sometimes they happen to line up in the same direction, and when they do, they produce outsized movement in the aggregate quarterly results, even though they may not be truly indicative of the larger health of the franchise. In the first quarter, you'll remember we had a number of elements go the wrong way concurrently, and that led to weaker than desired quarterly results, even though the franchise, when viewed from a broader time horizon, continued to move in the right direction. In this quarter, we had something of the opposite effect.

David R. Melville: None of these individually make or break a quarter, but sometimes they happen to line up in the same direction. And when they do, they produce outsized movement in the aggregate quarterly results, even though they may not be truly indicative of the larger health of the franchise.

David R. Melville: In the first quarter, you'll remember we had a number of elements go the wrong way concurrently, and that led to weaker-than-desired quarterly results, even though the franchise, when viewed from a broader time horizon, continued to move in the right direction.

David R. Melville: The health and direction of the franchise remained strong, but we also had a handful of events leading to outsized positive results. I'd like to highlight a couple of the most material items so that you'll be aware that, while they are real earnings, they may not yet be repeatable on a regular basis. First, we benefited from the sale of a newly originated USDA guarantee loan which produced a gain of $1.9 million.

David R. Melville: In this quarter we had something of the opposite. The health and direction of the franchise remained strong but we also had a handful of events leading to outsized positive results.

Jude Melville: I like to highlight a couple of the most material items that you'll be aware that, while real earnings, they may not get the repeatable on a regular basis. First, we benefited from the sale of a newly originated USDA guaranteed loan, which produced a gain of 1.9 billion. While our pace of government guaranteed loan production is accelerating, we don't expect to have very many of these kind of won't be opportunity, because the stage of our development. So it does all for a window into what's possible down the road as we can use to build out our capacity.

David R. Melville: I'd like to highlight a couple of the most material items so that you'll be aware that while real earnings, they may not yet be repeatable on a regular basis.

David R. Melville: First, we benefited from the sale of a newly originated USDA guarantee loan, which produced a gain of $1.9 million.

David R. Melville: While our pace of government-guaranteed loan production is accelerating, we don't expect to have very many of these kinds of lumpy opportunities at this stage of our development, so it does offer a window into what's possible down the road as we continue to build out our capacity. Second, our core earnings benefited from about $1.7 million in loan discount accretion, which is roughly $900,000 higher than that of the prior quarter and $700,000 higher than market expectations, which are generally reflective of our normal run rate, at least until we close the Oakwood acquisition. Well, I'm pleased to have these earnings and certainly prefer things going our way as opposed to the opposite. I think it's important not to get the impression that they're easily replicated.

Speaker Change: While our pace of government-guaranteed loan production is accelerating, we don't expect to have very many of these kinds of loan fee opportunities at this stage of our development. So it does offer a window into what's possible down the road as we continue to build out our capacity.

Jude Melville: Second, our core earnings benefited from about $1.7 million in low discount increase, which is roughly $900,000 higher than that of the prior quarter, $700,000 higher than market expectations. Johnson, which are generally reflective of our normal run rate, at least until we close the open acquisition. So I'm pleased to have these earnings, and certainly prefer things going our way as opposed to the opposite. I think it's important to not get the impression that they're easily replicated. And so I'd like to point out that after adjusting to these unique movements, we estimate the core profitability for the quarter rate closer to 14.3 million.

David R. Melville: Second, our core earnings benefited from about 1.7 million dollars in loan discount accretion, which is roughly 900,000 higher than that of the prior quarter, 700,000 higher than market expectations.

David R. Melville: which are generally reflective of our normal run rate, at least until we close the Oakwood acquisition.

Speaker Change: Well, I'm pleased to have these earnings and certainly prefer things going our way as opposed to the opposite I think it's important to not get the impression that they are easily replicated And so I'd like to point out that after adjusting for these unique movements We estimate the core profitability for the quarter at closer to 14.3 million

David R. Melville: And so I'd like to point out that after adjusting for these unique movements, we estimate the core profitability for the quarter at closer to 14.3 million, so quite positive in excess of consensus expectation. Beyond short-term earnings, I'd like to emphasize our longer-term success in transitioning our balance sheet. As you know from our communication over time, we decided nearly two years ago to slow loan production in order to effectively manage growth through retained earnings, while also relieving pressure on the funding side of our balance sheet.

Jude Melville: So quite positive and excessive consensus expectations.

David R. Melville: Still quite positive and in excess of consensus expectations.

Jude Melville: Beyond short term earnings, I'd like to emphasize our long term success transitioning our balance sheet. As you know, from our communication over time, we decided nearly two years ago to slow loan production in order to effectively manage growth to retain earnings. We'll also relate in pressure on the funding side of our balance sheet. With each quarter, we've improved the degree or two, and I'm pleased that in the current quarter, we both have created capital about 10 basis points for this. And continue to improve the composition of our deposit base. But first time at a number of quarters, increasing both the absolute and relative level of non-existent deposits, and continuing our trend of paying down levels of wholesale funding.

David R. Melville: Beyond short-term earnings, I'd like to emphasize our longer-term success transitioning our balance sheet. As you know from our communication over time, we decided nearly two years ago to slow loan production in order to effectively manage growth through retained earnings, while also relieving pressure on the funding side of our balance sheet.

David R. Melville: With each quarter, we've improved by a degree or two, and I'm pleased that in the current quarter, we both have created capital, about 10 basis points, and continue to improve the composition of our deposit base for the first time in a number of quarters, increasing both the absolute and relative level of non-interest-bearing deposits and continuing our trend of paying down levels of wholesale funding. This has paid off in the form of a more stable margin, which I was proud of our team for actually growing over the course of the second quarter, the first time in seven quarters.

David R. Melville: With each quarter, we've improved a degree or two, and I'm pleased that in the current quarter, we both have created capital, about 10 basis points, and continue to improve the composition of our deposit base. For the first time in a number of quarters, increasing both the absolute and relative level of non-interest bearing deposits.

Jude Melville: This is paid off in the form of a more stable margin, which I was proud of right team for actually growing over the course of the second quarter. First time in seven quarters.

David R. Melville: and continuing our trend of paying down levels of wholesale funding. This has paid off in the form of a more stable margin, which I was proud of our team for actually growing over the course of the second quarter. First time in seven quarters.

David R. Melville: Finally, I'd like to mention that we are currently on pace to consummate the acquisition of Dallas-based Oakwood Bank. I believed at the time they'd be a good cultural fit, and now I know it. So congratulations to our team for what was a solid second quarter, highlighted by improved metrics essentially across the board. Thanks again to our listeners today for prioritizing us, and I'll now turn the call over to Greg Robertson, our CFO, to review the results in greater detail.

Jude Melville: Finally, I'd like to mention that we are currently on pace to consummate the acquisition of the balance base, Oakwood Bank. And should do it in the fourth quarter. Having gotten to know our future teammates better since announcement with earning class quarter, we had a more excited about the partnership than we were when we announced it. I believe that at the time they did a good cultural fit, and now I know it.

David R. Melville: Finally, I'd like to mention that we are currently on pace to consummate the acquisition of Dallas-based Oakwood Bank.

David R. Melville: and should do it in the fourth quarter. I haven't gotten to know our future teammates better since the announcement with the earning class quarter. We're even more excited about the partnership than we were when we announced it. I believed at the time they'd be a good cultural fit and now I know it.

Jude Melville: So congratulations to our team for what was the solid second quarter, highlighted by improved metrics, essentially across the board.

Gregory Robertson: So congratulations to our team for what was a solid second quarter, highlighted by improved metrics essentially across the board. Thanks again to our listeners today for prioritizing us, and I'll now turn the call over to Greg Robertson, our CFO , to review results in greater detail.

Gregory Robertson: Thanks again to our listeners today for prioritizing us, and I'll now turn the call over to Greg Robertson, our CFO, to our new results in greater detail. Thank you, Judy, and good afternoon, everyone. I'll be brief in my comments as we believe the second quarter results were relatively straightforward. Second quarter, gapment income and EPS available with common shareholders was 15.9 million and 62 cents, and included 419,000 of pre-tax acquisition-related expense. Excluding this non-core item, non-core, non-GAAP, core net income, and EPS available to common shareholders was 16.3 million and 64 cents. As Judy mentioned, there are a couple larger items that drove a strong core operating results.

Gregory Robertson: Thank you, June, and good afternoon, everyone. I'll be brief in my comments as we believe the second quarter results were relatively straightforward. Second quarter gap net income and EPS available to common shareholders was $15.9 million and 62 cents and included $419,000 of pre-tax acquisition related expense. Excluding this non-core item, non-GAAP core net income and EPS available to common shareholders was $16.3 million and 64 cents. As you mentioned, there are a couple of larger items that drove strong core operating results.

Gregory Robertson: Thank you, Jude, and good afternoon, everyone. I'll be brief in my comments as we believe the second quarter results were relatively straightforward.

Gregory Robertson: Second quarter gap net income and EPS available to common shareholders was $15.9 million and 62 cents and included $419,000 of pre-tax acquisition related expense.

Gregory Robertson: Excluding this non-core item, non-GAAP core net income and EPS available to common shareholders was $16.3 million and 64 cents.

Gregory Robertson: However, adjusting for these items, we still feel like record run rate results for the quarter were very favorable and still better than we had expected. Our GAAP reported net interest margin of $3.45 benefited from $1.7 million in loan discount accretion, which was higher than expected. Core NIM, excluding accretion of $3.34, was also a little better than we were expecting.

Gregory Robertson: As you mentioned, there are a couple of larger items that drove our strong core operating results. However, adjusting for these items, we still feel like our core run rate results for the quarter were very favorable and still better than we had expected.

Gregory Robertson: However, adjusting for these items, we still feel like our core run rate results for the quarter were very favorable and still better than we had expected. Our gap reported net interest margin of 345 benefited from 1.7 million in loan discount accretion, which was higher than expected. Core NIM, excluding accretion of 334, was also a little better than we were expecting. The seven basis points linked quarter expansion in the core NIM benefited from continued strong, new and renewed loan yields, repricing tailwinds, and moderating funding pressure. A little context: their awaited average new and renewed loan yields for the second quarter was north of 850, while our quarter of a quarter increase in total deposit cost was just 10 basis points, which compared to the trailing eight quarter average quarterly increase in deposit cost of 33 basis points.

Speaker Change: Our GAAP reported net interest margin of $3.45, benefited from $1.7 million in loan discount accretion, which was higher than expected.

Speaker Change: Core NIM, excluding accretion of 334, was also a little better than we were expecting. The seven basis points link quarter expansion in the Core NIM benefited from continued strong new and renewed loan yields, repricing tailwinds, and moderating funding pressure.

Gregory Robertson: The seven basis points of link quarter expansion in the Core NIM benefited from continued strong new and renewed loan yields, repricing tailwinds, and moderating funding pressure. A little context there, our weighted average new and renewed loan yields for the second quarter were north of $8.50, while our quarter-over-quarter increase in total deposit costs was just 10 basis points, which compares to the trailing eight quarter average quarterly increase in deposits of 33 basis points.

Speaker Change: A little context there, our weighted average new and renewed loan yields for the second quarter was north of 850, while our quarter over quarter increase in total deposit costs was just 10 basis points.

Speaker Change: which compare comparing to the trailing 8 quarter average quarterly increase in deposits of cost of 33 basis points.

Gregory Robertson: While deposit costs did continue to increase during the quarter, that rate of increase slowly slowed considerably. The alleviation of these funding pressures was driven by net growth in non-interest-bearing deposits of $15 million during the quarter and net growth in core money market deposit accounts of $130 million. This positive momentum and core deposit generation allowed us to repay $75 million in higher-cost broker deposits during the quarter.

Gregory Robertson: While deposit cost did continue to increase during the quarter, that rate of increase slowly slowed considerably. The alleviation of these funding pressures was driven by net growth and non-intersparing deposits of 15 million during the quarter, and net growth in core money market deposit accounts of 130 million.

Speaker Change: While deposit costs did continue to increase during the quarter, that rate of increase slowed considerably.

Speaker Change: The alleviation of these funding pressures was driven by net growth in non-interest bearing deposits of $15 million during the quarter, and net growth in core money market deposit accounts of $130 million.

Gregory Robertson: Washington. The positive momentum in core to positive generation allowed us to repay 75 million in higher cost broker deposits during the quarter. Non-interests bearing deposits, as a percent of total deposits, increased slightly from 23.2% last quarter to 23.5% this quarter. Non-interest expense of 42.7 million increased 900,000 or 2.1% from the prior quarter, which was in line with our expectations. While we continue to track and retain top talent, broader wage pressures remain elevated, and we are expected to drive and are expected to drive increases in future quarters non-interest expense. We view the Q2 core non-interest expense figure of 42.7 million as a relatively good run rate to build off the one forward.

Speaker Change: The positive momentum in core deposit generation allowed us to repay $75 million in higher cost broker deposits during the quarter.

Gregory Robertson: Non-interest bearing deposits as a percent of total deposits increased slightly from 23.2% last quarter to 23.5% this quarter. Moving on to the income statement, GAAP non-interest expense was $43.1 million and included $419,000 of acquisition-related expense. Core non-interest expense of $42.7 million increased $900,000, or 2.1% from the prior quarter, which was in line with our expectations. While we continue to track and retain top talent, broader wage pressures remain elevated, and we are expected to drive and are expected to drive increases in future quarters.

Speaker Change: Non-interest bearing deposits as a percent of total deposits increased slightly from 23.2% last quarter to 23.5% this quarter.

Speaker Change: Moving on to the income statement, GAAP non-interest expense was $43.1 million and included $419,000 of acquisition related expense.

Speaker Change: Core non-interest expense of $42.7 million increased $900,000 or 2.1% from the prior quarter, which was in line with our expectations.

Speaker Change: While we continue to track and retain top talent.

Speaker Change: Broader wage pressures remain elevated and are expected to drive increases in future quarters non-interest expense. We view the Q2 core non-interest expense figure of $42.7 million as a relatively good run rate to build off of going forward.

Gregory Robertson: We view the Q2 core non-interest expense figure of $42.7 million as a relatively good run rate to build off of going forward. Second quarter gap and core non-interest income was $12.2 million as there were no non-core items recognized during the second quarter.

Gregory Robertson: The second quarter gap and core non-interest income was 12.2 million as there were no non-core items recognized during the second quarter. And as a previous admission, the core non-interest income did benefit from the 1.9 million gain on sale from a newly originated USDA loan. In addition to greater originations and sales and SBA related to a recent acquisition of Waterstone. While we expect meaningful contributions from our fee income business lines going forward, we would not expect the unusually high gain on sale from Q2 to continue in the media future. Moving on to the balance sheet total on sale for investment increased for 74.0 million or 5.9% annualized during the second quarter.

Speaker Change: The second quarter gap in core non-interest income was $12.2 million as there were...

Gregory Robertson: And as previously mentioned, the core non-interest income did benefit from the $1.9 million gain on sale from a newly originated USDA loan, in addition to greater originations and sales on SBA related to our recent acquisition of WaterStar. While we expect meaningful contributions from our fee income business lines going forward, we would not expect the unusually high gain on sale from Q2 to continue in the immediate future. Moving on to the ballot sheet, total long-term investment increased by 74.0 million, or 5.9% annualized, during the second quarter.

Speaker Change: No non-core items recognized during the second quarter.

Speaker Change: As previously mentioned, the core non-interest income did benefit from the $1.9 million gain on sale from a newly originated USDA loan, in addition to greater originations and sales on SBA related to our recent acquisition of Waterstone.

Speaker Change: While we expect meaningful contributions from our fee income business lines going forward, we would not expect the unusually high gain on sale from Q2 to continue in the immediate future.

Speaker Change: Moving on to the balance sheet, Total Loans Held for Investment increased for $74.00 million or 5.9% annualized during the second quarter.

Gregory Robertson: Loan growth was largely attributable to the net growth and the CNI portfolio of 93.4 million, someone offset by 24.6 million in reduction in our CND portfolio and also 17.1 million reduction in the investment creep portfolio. I'm proud of our team's continued focus to drive production through key commercial relationship wins. The North, the Louisiana region accounted for 60% of our net loan growth during the quarter. While our capital and value regions each produce 21% of our Q2 growth loan growth. Our Texas based loans represent approximately 36% of our overall loan portfolio as the end of Q2, which we do not expect to increase meaningful.

Gregory Robertson: Loan growth was largely attributable to the net growth in the C&I portfolio of $93.4 million, somewhat offset by $24.6 million in a reduction in our C&D portfolio and also $17.1 million in a reduction in the investment CRE portfolio. I'm proud of our team's continued focus on driving production through key commercial relationship wins. The North Louisiana region accounted for 60% of our net loan growth during the quarter, while our capital and value regions each produced 21% of our Q2 loan growth.

Speaker Change: Loan growth was largely attributable to the net growth in the C&I portfolio of $93.4 million, somewhat offset by $24.6 million.

Speaker Change: and reduction in our C&D portfolio and also $17.1 million reduction in the Investment Cree portfolio. I'm proud of our team's continued focus to drive production through key commercial relationship wins.

Speaker Change: The North Louisiana region accounted for 60% of our net loan growth during the quarter, while our capital and value regions

Gregory Robertson: Our Texas-based loans represent approximately 36% of our overall loan portfolio as the end of Q2, which we do not expect to increase meaningfully. However, we do expect to increase that meaningfully with our pending Oakwood acquisition. And that concludes my prepared remarks. I'll hand the call back over to Jude for anything you'd like to add, or we will open up the Q&A.

Speaker Change: Each produced 21% of our Q2 loan growth. Our Texas-based loans represent approximately 36% of our overall loan portfolio at the end of Q2, which we do not expect to increase meaningfully. We do expect to increase that meaningfully with our pending Oakwood acquisition.

Gregory Robertson: We do expect to increase that meaningfully with our pending open acquisition.

Gregory Robertson: And that concludes my prepared remarks.

Jude Melville: I'll hand the call back over to you for anything you'd like to add, or we will open up with Q&A. Okay, thanks, Greg. I don't really need to add anything.

Speaker Change: And that concludes my prepared remarks. I'll hand the call back over to Jude for anything you'd like to add or we will open up the Q&A.

David R. Melville: Okay, thanks, Greg. I don't really need to add anything. We'll jump to Q&A if you have any questions.

Jude Melville: We'll come to Q&A for any questions. Thank you.

David R. Melville: Okay, thanks, Greg. I don't really need to add anything. We'll come to Q&A if you have any questions.

Operator: Thank you. We will now begin the question and answer session. If you've dialed in and would like to ask a question, please press star 1 on your telephone keypad, raise your hand, and join the queue. If you'd like to withdraw your question, simply press star 1 again. Again, press star one to join the queue. Our first question comes from a line called Matt Olney with Stevens. Please go ahead.

Unknown Executive: We will now begin the question and answer session. If you've done, then would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star one again. Again, press star one to join the queue.

Speaker Change: Thank you. We will now begin the question and answer session. If you've dialed in and would like to ask a question, please press star 1 on your telephone keypad, raise your hand, and join the queue. If you'd like to withdraw your question, simply press star 1 again.

Speaker Change: Again, press star 1 to join the queue.

Matthew Olney: Our first question comes from a line of Matt Oldney with Stevens.

Matthew Olney: Please go ahead. Thanks.

Speaker Change: Our first question comes from a line of Matt Olney with Stevens. Please go ahead.

Matthew Covington Olney: Thanks. Good afternoon.

Matthew Olney: Good afternoon. Great quarter. Wanted to ask more about deposit cost. You mentioned the deposit cost, the pressure starting to ease in the second quarter. Curiously, you can provide some more details around deposit cost, pressure, just more broadly in your markets. It seems like the pressure should be easing quite a bit given the expectations of the Fed cut here around the corner, but I guess we're hearing some mixed out of points on that. So appreciate any commentary on deposit cost, pricing pressure within your core markets. Thanks, thanks, Matt. I think the deposit cost is really a helpful answer for us.

David R. Melville: Great quarter. Wanted to ask more about the deposit cost. You mentioned deposit costs, the pressure starting to ease in the second quarter. I'd be curious if you could provide some more details around deposit cost pressure, just more broadly in your markets. Seems like the pressure should be easing quite a bit, given the expectations of a Fed cut here around the corner, but I guess we're hearing some mixed data points on that. So, I would appreciate any commentary on deposit cost pricing pressure within your core markets.

Matthew Covington Olney: Thanks. Good afternoon.

Speaker Change: Great quarter. Wanted to ask more about deposit costs. You mentioned the deposit costs, the pressure starting to ease in the second quarter. Just curious if you could provide some more details around deposit costs, pressure, just more broadly in your markets.

Speaker Change: It seems like the pressure should be easing quite a bit, given the expectations of a Fed cut here around the corner, but I guess we're hearing some mixed data points on that. So appreciate any commentary on deposit costs, pricing pressure within your core markets.

Speaker Change: Thanks, Matt. I think the deposit cost is really a two-fold answer for us. If you think about the success we've been having in the money market space.

Gregory Robertson: If you think about the success we've been having in the money market space, that weighted average rate for those new balances coming on, our new deposits in March was about 502; in June, that weighted average about 488. The spot rate for a new deposit in June, just for a new deposit in that money market category, is about 465. So we are seeing that come down slightly over time. I think that the caveat to that, and the second part of the question for us is the increased or consistent gathering of those non-interest bearing deposits that we have mentioned a few minutes ago.

Speaker Change: You know that weighted average rate for those new balances coming on or new deposits in March was about 502. In June that weighted average about 488.

Speaker Change: The spot rate for a new deposit in June , just for a new deposit in that money market category is about $4.65. So we are seeing that come down slightly over time.

Speaker Change: I think that the caveat to that and the second part of the question for us is.

Speaker Change: Or consistent gathering of those non-interest pairing plot deposits that we had mentioned earlier.

Gregory Robertson: For the first time and quite some time, that percentage of non-interest bearing deposits did show some slight growth, although not a lot. But I think it's important to see that flatten out and slightly uptick for us, because that's a huge component of funding cost as well.

Speaker Change: A few minutes ago, you know, for the first time in quite some time, that percentage of non interest, non interest bearing deposits did show some slight growth.

Speaker Change: Although not a lot, but I think it's important to see that flatten out and slightly uptick for us because that's a huge component of funding cost as well.

Matthew Olney: Okay, I appreciate the color there.

Matthew Olney: And then maybe I'll also ask about the pending acquisition of Oakwood. I think you had some expectations of Oakwood, seeing some improved profitability on the core fundamentals before deal closing. Any color you can provide about what they're seeing in their recent results, and then secondly, just a bit of thoughts around the timing of the deal closing. Thanks. Sure, I'll start on that. I think that their results are similar to ours. They've shown some issues with some of the same pressures that we had in the first quarter on a large level of debt and growth, but I've had a strong second quarter, and they haven't published their results yet, but I think they've improved in many of the same ways that we have.

Speaker Change: Okay, appreciate the cover there. And then maybe I'll also ask about

Speaker Change: The pending acquisition of Oakwood. I think you had some expectations of Oakwood, seeing some improved profitability on their own.

Speaker Change: on the core fundamentals before deal closing. Any color you can provide about what kind of what they're seeing in their recent results. And then secondly, just a bit of thoughts around the timing of the deal closing. Thanks.

Speaker Change: Sure, I'll start. I think that their results are kind of similar to ours, you know, they've shown some, they showed some of the same pressures that we had in the first quarter.

Speaker Change: on a marginal event and growth, but.

Speaker Change: I've had a strong second quarter, and they haven't published their results yet, but I think they've improved in many of the same ways that we have. There seem to be some similarities in the performance of the

Jude Melville: There's going to be some similarities in the performance of the portfolios, and now I would say that's true from an asset quality standpoint as well. So it just speaks well to the potential integration that we're preparing for. Nothing remarkable to address of that. They, we're still in pace to do the fourth quarter level close, and then we'll do the integration from the computer system standpoint. It's important to make sure, not quite sure yet, what that'll be. So, so kind of coordinating the different providers. and the details, the repricing opportunities within the loan portfolio that turns over in the next 12 months, about 48% of loans are little over 2 billion.

Speaker Change: portfolios and I would say that's true from an asset quality standpoint as well so it just speaks well to the potential integration that we're preparing for nothing remarkable to address other than that.

Speaker Change: We are still on pace to do the fourth quarter legal close, and then we'll do the...

Speaker Change: The integration from a computer system standpoint at some point next year, not quite sure yet what date that'll be so so kind of coordinating the different providers

Speaker Change: But as of now, the acquisition as we were going to model it seems to be playing out the way we would like it to.

Speaker Change: Yes, Matt, and I would add a little bit more context on their Q2 financial performance. They're not going to go into any details, but we did receive preliminary results from them. And from a modeling financial outlook perspective, they're very much

Speaker Change: Still on track with our initial forecast and modeling at time of acquisition. Balance sheet trends remain strong, profitability trending in the right trajectory and direction as we had kind of initially anticipated.

Speaker Change: Okay, thanks for the color on the Oakwood deal and then just maybe lastly on the loan growth front.

Speaker Change: We saw some of the paydowns in the construction book, some really nice growth in the C&I. I think this is kind of that mix shift you've been talking about now for the last few quarters. Is this something we should just continue to see as far as a mix shift of

Speaker Change: Some growth in C&I offset by some construction paydowns, and it's just kind of the expectation we should have along with that, you know, loan growth of, you know, high single, mid to high single digit growth overall. Thanks.

Gregory Robertson: [inaudible]

Matthew Covington Olney: Thanks, Matt. I think the deposit cost is really a two-fold answer for us. If you think about the success we've been having in the money market space, that weighted average rate for those new balances coming on, or new deposits, in March was about 502. In June, that weighted average was about 488.

Gregory Robertson: The spot rate for a new deposit in June, just for a new deposit in that money market category, is about $4.65. So we are seeing that come down slightly over time. I think that the caveat to that and the second part of the question for us is the increased or consistent gathering of those non-interest-bearing deposits that we had mentioned a few minutes ago. For the first time in quite some time, that percentage of non-interest-bearing deposits did show some slight growth. Although not a lot, but I think it's important to see that flatten out and slightly increase for us because that's a huge component of the funding cost as well.

Speaker Change: Yeah, this is really kind of the next act and a longer play, and we've been transitioning the balance sheet. I mentioned it generally in my opening, but...

Speaker Change: One of the specific elements that I didn't mention was the

Speaker Change: The increase in concentration and exposure to CND and CRE that we've been able to accomplish over the past five quarters or so. I think I think over about a five-quarter period we've

Speaker Change: moved from about 120% of capital tangible capital in construction exposure and down to the low 80% wise now so pretty dramatic movement and you know that comes

Speaker Change: After a significant amount of coordination

Speaker Change: and work, everything from talking about it culturally and making sure that it worked for us financially in terms of shift to thinking about incentive plans and

Speaker Change: Those are all, none of those were done as short-term fixes. This is a long-term cultural approach that we would like to run at a

Speaker Change: lower concentration level on construction and on C&T. The way to be able to do that and still earn money is to work on your...

Speaker Change: Other types of lending, which includes C&I and on your non-interest income. So there's a ways in which we've

Speaker Change: I've been working to offset some of them.

Speaker Change: The pullback and exposure to construction seems to be working, but I would, I would consider that a longer term part of our model as opposed to a short term movement.

Speaker Change: Okay, thanks for the call guys. Great quarter.

Speaker Change: Thank you. Thank you.

Speaker Change: Our next question comes from a line of Michael Rose with Raymond James. Please go ahead.

David R. Melville: Okay, appreciate the color there. And then maybe I'll also ask about the pending acquisition of Oakwood. I think you had some expectations of Oakwood seeing some improved profitability on their own on the core fundamentals before the deal closing, any color you can provide about what kind of what they're seeing and their recent results. And then secondly, just a bit of thoughts around the timing of the deal closing. Thanks.

Michael Edward Rose: Hey, good afternoon guys. I hope everything is well. I just wanted to ask on

Michael Edward Rose: The fees if I you know in the loan sale gains if I back out the the 1.9

Speaker Change: million you still had pretty good GAN sale loans and I just wanted to get a sense now that you know Waterstone has been in the fold for about a quarter

Speaker Change: You know, how would you size that opportunity and how should we think about kind of the trajectory of loan sales as that business continues to grow and ramp?

Speaker Change: And then separately wanted to ask about SSW, you know, looking at slide 16, you know, it looks like there's been just generally a downtrend in AUM, and that kind of goes against kind of what we're seeing in other, you know, similar types of businesses out there. So I just wanted to get some color and context. Thanks.

David R. Melville: Sure, I'll start. I think that their results are kind of similar to ours. You know, we've shown some, they showed some of the same pressures that we had in the first quarter on a marginal event and growth, but I've had a strong second quarter, and they're, they haven't published their results yet, but I think they've improved in many of the same ways that we have; there seem to be some similarities in the performance of the portfolios. And I would say that's true from an asset So it just speaks well to the potential integration that we're preparing for. There's nothing remarkable to address other than that.

Gregory Robertson: We are still on pace to do the fourth quarter legal close. And then we'll do the integration from a computer system standpoint at some point next year, not quite sure yet what date that'll be. So, so kind of coordinating the different providers. But as of now, the acquisition as we were going to model it seems to be playing out the way we would like it to.

Speaker Change: I'll start. I think that the Oakwoods, I'm sorry, the Waterstones,

Speaker Change: Partnership is just getting started. We really have focused more on Waterstone's ability to impact our internal SBA generation, which we're showing significant traction there and picking up pace.

Gregory Robertson: Yes, Matt, and I would add a little bit more context on their Q2 financial performance. We're not going to go into any details, but we did receive preliminary results from them, and from a modeling financial outlook perspective, they're very much still on track with our initial forecast and modeling at the time of acquisition. Balance sheet trends remain strong, and profitability is trending in the right trajectory and direction as we kind of initially anticipated.

Matthew Covington Olney: Okay, thanks for the color on the Oakwood deal. And then, just maybe lastly, on the loan growth front, we saw some of the paydowns in the construction book, some really nice growth in C&I. I think this is kind of the mix shift you've been talking about now for the last few quarters. Is this something we should just continue to see as far as a mix shift of some growth in C&I offset by some construction paydowns? And is this just kind of the expectation we should have along with that? You know, long growth of, you know, high single digit growth overall. Thanks.

David R. Melville: Yeah, this is really kind of the next act and a longer play, and we've been transitioning the balance sheet. I mentioned it generally in my opening, but one of the specific elements that I didn't mention was the increase in concentration exposure to CFE and CRE that we've been able to accomplish over the past five quarters or so. I think over about a five-quarter period, we've moved from about 120% of tangible capital in construction exposure down to the low 80s percent wise now.

David R. Melville: So pretty dramatic movement. And, you know, that comes after a significant amount of coordination and work, everything from talking about it culturally and making sure that it works for us financially in terms of the shift to thinking about incentive plans. And none of those were done as short-term fixes. This is a long-term cultural approach that we would like to run at a [inaudible]. I would consider that a longer-term part of our model, as opposed to a short-term movement.

Speaker Change: I think the loan sales that you'll see, that you would have seen, not including that outsized one, are probably representative of the beginning of the trend that we begin to see shaping up. So I would expect that, you know, not to take off in the next couple quarters, but I would think it'd be incrementally.

Speaker Change: and then certainly by next year we hope for that to be a more meaningful part of the business.

Speaker Change: have not grown a lot on the non V1 side of their franchise yet. Part of that I think is just that we're spending a lot of time pursuing opportunities internally which is a

Speaker Change: A good problem to have.

Speaker Change: On the SSW, you know, the one, the thing that does make our company different from most of the asset management companies that you might compare it to is that it's almost all fixed income. You know, they're the core of their bank or the core of their business is serving other banks.

Speaker Change: Helping to manage their investment portfolios. And, you know, Michael, as you know, pretty much everything has...

Michael Edward Rose: suffered admonition in their assets and the investment portfolio through the AOCI and then many of them as they are turning those investments to liquidity are trying to put into work.

Michael Edward Rose: Are you doing well? So the bank portfolios in general, all these community bank portfolios that would be our natural client base

Speaker Change: do have smaller portfolios. So we haven't... SSW continues to serve the same number, if not more clients, than they did pre-shift and interest rate exposure, but obviously we have more clients, I don't know the exact number, but...

Michael Edward Rose: But the average size bank investment portfolio in our portfolio is smaller, so it's not indicative of losing any business, it's just smaller client investment portfolios, which as rates turn around.

Michael Edward Rose: Again, this is AOC Ives.

Speaker Change: impacts lessening. I think it would be natural to see that AUM begin to come again. They are paid on a fee that's based on the size of AUM, so that does hurt their earnings, but no reason to think that that's a long-term

Speaker Change: [inaudible]

Speaker Change: Yeah, Michael, two things. The gain on sale, if you back out the one-time USDA, I think our run rate that we feel like pretty good for Q3 is about 10.4.

Speaker Change: and maybe incrementally higher, a couple hundred thousand higher for our Q4.

Speaker Change: So, I think that's a good spot or a good run rate for that. And one more note on the SSW.

Speaker Change: Jude's comments were exactly right. And when the rate environment changed in the end of Q1, beginning of Q2 and 22, they increased their bank coverage universe or their bank clients significantly. And I think here lately,

Speaker Change: Part of the move of the assets under management on a downward direction, they've had a handful of clients that they've advised securities portfolio restructurings and those clients chose to

Speaker Change: Stay off broker deposits with that or put back in the loan portfolio and not reinvest in the securities portfolio.

Speaker Change: So that's an example of, outside of AOCI, that they were advising the client to do the right thing, and it caused their assets under management to go down, they still managed those banks.

Speaker Change: portfolios, but they are smaller because of that.

Speaker Change: And one other thing, Michael, I'd point out that we added this quarter to the SSW slide is the number of bank clients.

Speaker Change: Over time, we added a trend line over that graph and to Greg's point, you can see the increase in the pickup kind of right before and as rates started to move up. But more notably, recently, while AUM has kind of trended down over the past

Speaker Change: 6-8 quarters, we've managed to maintain the actual number of bank clients around 50.

Speaker Change: A very detailed response. I appreciate it, all the color. Maybe just one more for me.

Speaker Change: You know, Greg, I think last quarter, you talked about, you know, about a very similar kind of non-interesting science starting point.

Gregory Robertson: and then kind of 2-3% growth.

Speaker Change: on top of that over the next few quarters. Is that still the thought process? And what would be, you know, some of the drivers of that growth? If you could just remind us. Thanks.

Gregory Robertson: Yeah, we, we, we think.

Gregory Robertson: 175 million at the end of the year still the end point to where we go so that those numbers we talked about last time will still remain consistent.

Speaker Change: I think we're still looking at continuing to invest in the franchise from a personnel standpoint, and then you've got to back after the year with some seasonal bonus-related expense, I think, is really going to be the drivers of those.

Matthew Covington Olney: Okay, thanks for the call, guys. Great quarter.

Speaker Change: Very fair. Thanks for all the call. I appreciate it.

Michael Edward Rose: Our next question comes from a line by Michael Rose with Raymond James. Please go ahead.

Speaker Change: Our next question comes from a line of Feddie Strickland with HubD Group. Please go ahead.

Michael Edward Rose: Hey, good afternoon, guys. I hope everything is well.

Feddie Justin Strickland: Hey, good afternoon, everybody.

Speaker Change: Hey, Feddie. Hey, Feddie. Welcome back.

Feddie Justin Strickland: Thank you. Thank you. Just wanted to go back into deposits. I saw, you know, you mentioned in the deck you had some

Feddie Justin Strickland: Strategic decision to let some brokered roll off. If we get some break cuts sometime soon here, can you talk about how much opportunity you have on the liability side to move some of that down, whether it's brokered CDs or customer CDs?

David R. Melville: Just wanted to ask about the fees. If I, you know, in the loan sale gains, if I back out the 1.9 million, you still had a pretty good gain on sale loans. And I just wanted to get a sense now that, you know, Waterstone has been in the fold for about a quarter. You know, how would you size that opportunity? And how should we think about the kind of trajectory of loan sales as that business continues to grow and ramp up?

Speaker Change: Yeah, I think I think what what we've done and worked real hard over the last year or the first part first answer to your question would be

Speaker Change: We have about $1.9 billion on the balance sheet today, maybe slightly higher than that, in money market accounts, so we can control that pricing with some rate cuts. So that's one thing we've worked.

Speaker Change: To get the balance sheet in a more neutral position, that's been a big driver for us. I think the second part of your question is.

Speaker Change: In the third quarter, we have about $66 million in brokered that is maturing, and then in consumer, customer-related CDs, we have about $450 million maturing before the end of the year.

Speaker Change: So I think the weighted average on both of those.

Speaker Change: are elevated from where we're seeing spot rates coming in today. So there are some opportunities for us.

Speaker Change: to improve in a downward rate environment with even one rate cut.

Speaker Change: So we feel, we feel pretty good about that. We'll keep, we'll keep managing that opportunistically. I think we've worked real hard to make sure every month and within the quarter and every quarter.

Speaker Change: We have the ability and some optionality from a funding standpoint in regards to price.

David R. Melville: And then separately, wanted to ask about SSW. You know, looking at slide 16, it looks like there's been just generally a downtrend in AUM. That kind of goes against kind of what we're seeing at other, you know, similar types of businesses out there. So just wanted to get some color and context. Thanks.

Speaker Change: Appreciate that. That's helpful. And then kind of along the same lines, is it fair to assume a lot of the DDA growth you're seeing is coming from success on the C&I side with new operating accounts, or is there another factor driving that?

Gregory Robertson: So I would expect that, you know, not to take off in the next couple of quarters, but I would think it'd be incremental, and then certainly by next year, we hope for that to be a more meaningful part of the business. They have not grown a lot on the non-P1 side of their franchise yet. Part of that, I think, is just that we're spending a lot of time pursuing opportunities internally, which is a good problem to have.

Gregory Robertson: I'll start. I think that the Oakwood, I'm sorry, the Waterstone Partnership is just getting started. We really have focused more on Waterstone's ability to impact our internal SBA generation, which we're showing significant traction on and picking up pace. I think the loan sales that you'll see, that you would have seen, not including that outsized one, are probably representative of the beginning of the trend that we began to see shaping up.

Gregory Robertson: On SSW, you know, the one thing that does make our company different from most of the asset management companies that you might compare it to is that it's almost all fixed income. You know, they're at the core of their bank, or the core of their business is serving other banks, helping to manage their investment portfolios. And, you know, Michael, as you know, pretty much everything.

David R. Melville: [inaudible] begin to see AOCI's impacts lessen. I think it would be natural to see that AUM begin to come again. They are paid a fee that's based on the size of AUM, so that does purchase earnings, but there's no reason to think that that's a long-term solution.

Speaker Change: I think it's twofold. That first part, you're exactly right. I think our bankers are doing a great job of bringing on those new, meaningful C&I relationships that bring those deposits. I think the second part,

Gregory Robertson: Michael, two things. The gain on sale, if you back out the one-time USDA, I think our run rate that we feel is pretty good for Q3 is about 10.4 and maybe incrementally higher, a couple hundred thousand higher for our Q4. So I think that's a good spot or a good run rate for that. And one more note on the SSW, Jude's comments were exactly right. And, you know, when the rate environment changed at the end of Q1, the beginning of Q2 and 22, they increased their bank coverage universe or their bank clients significantly.

Gregory Robertson: And I think here lately, as part of the move of the assets under management in a downward direction, they've had a handful of clients that they've advised on securities portfolio restructurings, and those clients chose to, Unknown Executive, Gregory Robertson, Robert Greer, Saundra Strong, Philip Jordan, Unknown portfolios, but they are smaller because of that.

Speaker Change: is the structure of this money market account.

Speaker Change: requires to get that highest rate it requires a meaningful non-interest bearing deposit account and that means

Speaker Change: There has to be a certain amount of activity, debit card action, those kind of things. So I think it's twofold, both on the retail and the commercial side of the bank. The bankers are doing a great job.

Gregory Robertson: And, well, one other thing, Michael, I'd point out that we added this quarter to the SSW slide showing the number of bank clients over time. We added a trend line over that graph, and to Greg's point, you can see the increase in the pickup kind of right before and as rates started to move up. But more notably, recently, while AUM has kind of trended down over the past six to eight quarters, we've managed to maintain the actual number of bank clients around 50.

Speaker Change: Got it. One last question from me. I noticed the CRE special mention percentage went up. I think it was from 2.4 to 7.5 if I remember correctly in the deck.

Speaker Change: This quarter, can you talk a little bit about the drivers behind that? I understand the more adversely classified actually went down, which is a positive, but just wanted to understand what was the driver for that jump in special mention in the CRE book.

Michael Edward Rose: A very detailed response. I appreciate it. All the color.

Speaker Change: Yeah, I think we've got a couple of things. I think there are some some credits that in this rate environment You can obviously see there's maybe some cash flow issues

Speaker Change: Those loans are still paying as agreed. I think the other part of that is, you know, as we continue to grow as a bank, and you'll probably hear us talking about this more in the future.

Speaker Change: Part of that growth and continuing to grow is

Speaker Change: Looking at our risk ratings on loans and going through a process of

Speaker Change: essentially re-risk rating to get more granularity so I think that's

Speaker Change: It's probably two-fold, the interest rate environment, the economic environment.

Speaker Change: is driving part of it. Part of it is on us trying to be a little more granular identifying credits.

Speaker Change: But we still, past dues, remain in good shape. We feel good about the portfolio.

Speaker Change: Got it. Thanks guys. Congrats on a great quarter.

Speaker Change: Our next question comes from the line of Manuel Navas with DA Davidson. Please go ahead.

Michael Edward Rose: Maybe just one more for me. You know, Greg, I think last quarter you talked about a very similar kind of a non-interest expense starting point and then kind of two to 3% growth on top of that over the next few quarters. Is that still the thought process? And what would be, you know, some of the drivers of that growth?

Speaker Change: Hey, good evening guys. Can you talk a little bit about your near-term NIM outlook as the kind of loan discount?

Manuel Antonio Navas: Think of it as both reported and core as that loan discount kind of normalizes. Can you just talk through that a bit?

Gregory Robertson: If you could just remind us, thanks. Yeah.

Speaker Change: I'll jump in first and maybe Matt could fill in some of the gaps, but we feel like the, you know, the core NIM, we're looking at low single digits to mid single digit improvement over the next few quarters. We think that's

Gregory Robertson: Yeah, we, we think 175 million at the end of the year will still be the end point to where we go so that those numbers we talked about last time will still remain consistent. I think we're still looking at continuing to invest in the franchise from a personnel standpoint. And then you got the back half of the year with some seasonal bonus related expenses, which I think are really going to be the drivers of those.

Michael Edward Rose: Very fair. Thanks for all the calls. I appreciate it. Thanks, Mark.

Feddie Justin Strickland: Our next question comes from a line by Feddie Strickland with HubD Group. Please go ahead.

Feddie Justin Strickland: Hey, Feddie. Hey, Feddie. Welcome back.

Feddie Justin Strickland: Thank you. Thank you.

Matthew Covington Olney: We feel like loan yields, we expect us to continue to see mid 850 on the loan yield side. And if deposits continue to flatten, we think we'll be able to achieve that.

Feddie Justin Strickland: Um, just wanted to go back into deposits. I saw, you know, you mentioned in the deck that you had some strategic decision to let some of the brokered roll off. If we get some break cuts sometime soon here, can you talk about how much opportunity you have on the liability side to move some of that down, whether it's brokered CDs or customer CDs?

Gregory Robertson: Yeah, I think what we've done and worked real hard over the last year would be, the first answer to your question would be, we have about a billion dollars on the balance sheet today, maybe slightly higher than that, and money market accounts. So we can control that pricing with some rate cuts. So that's one thing we've worked to get the balance sheet in a more neutral position. That's been a big driver for us.

Gregory Robertson: I think the second part of your question is, in the third quarter, we have about 66 million in brokered that is maturing. And then in consumer, customer-related CDs, we have about 450 million maturing before the end of the year. So, I think the weighted average on both of those is elevated from where we're seeing spot rates coming in today.

Gregory Robertson: So, there are some opportunities for us to improve in a downward rate environment with even one rate cut. So, we feel, we feel pretty good about that. We'll keep, we'll keep managing that opportunistically. I think we've worked real hard to make sure every month and within the quarter and every quarter. We have the ability and some optionality from a funding standpoint in regards to price.

Feddie Justin Strickland: I appreciate that. That's helpful.

Matthew Covington Olney: As far as the gap numbers, directionally the same. I think the accretion income should stabilize here going out to about $700,000 per quarter. Is that right? Yes, that's right.

Gregory Robertson: And then kind of along the same lines, is it fair to assume a lot of the DDA growth you're seeing is coming from success on the C&I side with new operating accounts? Or is there another factor driving that? I think it is.

Gregory Robertson: I think it's twofold. That first part, you're exactly right. I think our bankers are doing a great job of bringing in those new meaningful C&I relationships that bring those deposits. I think the second part is the structure of this money market account requires, to get that highest rate, it requires a meaningful non-interest-bearing deposit account. And that means there has to be a certain amount of activity, debit card action, those kinds of things. So I think it's twofold, both on the retail and the commercial side of the bank. The bankers are doing a great job.

Feddie Justin Strickland: Got it. One last question from me.

Speaker Change: Yeah, I'll give a little bit more call on the core. And we've got, I think we spoke in the past about around a 350 kind of core margin outlook in the somewhat near to intermediate term future. And we have a slide in the presentation.

Gregory Robertson: I noticed the CRE special mention percentage went up. I think it was from 2.4 to 7.5, if I remember correctly, in the deck this quarter. Can you talk a little bit about the drivers behind that? I understand the more adversely classified actually went down, which is a positive, but just wanted to understand what was the driver for that jump in special mentions in the CRE book.

Gregory Robertson: Yeah, I think we've got a couple of things. I think there are some credits that, in this rate environment, you can obviously see there are maybe some cash flow issues. Those loans are still being paid back as agreed. I think the other part of that is, you know, we're, as we continue to grow as a bank, and you'll probably hear us talking about this more in the future. Part of that growth and continuing to grow is looking at our risk ratings on loans and going through a process of essentially re-risk rating to get more granularity. So I think that's probably twofold.

Feddie Justin Strickland: The interest rate environment, the economic environment, is driving part of it. Part of it is us trying to be a little more granular, identifying credits. But we still, past dues remain in good shape. We feel good about the portfolio.

Speaker Change: details the repricing opportunities within the loan portfolio that turns over in the next 12 months. It's about 48% of loans, so a little over 2 billion.

Jude Melville: That's going to reprise, and I'm happy to circle up offline and kind of walk through what that implies. But a big picture, directionally, over the next 12 months, that implies that we should be able to get that 350 core margin by springtime-ish next year. More near-term, like Greg mentioned, low-to-mid single-digit basis point pickups on this board margin, and then that might accelerate too. A few more basis points early next year, and then on the gap margin side, I think that accretion drops down from 17 to probably 700-thousand, all that obviously before Oakwood as well. Right, yeah, what's the pace of that 700 drop-in-off?

Speaker Change: I'm happy to circle up offline and kind of walk through what that implies, but a big picture directionally over the next 12 months, that implies that we should be able to hit that 350 core margin by springtime-ish next year.

Gregory Robertson: More near-term, like Greg had mentioned, low to mid-single-digit basis point pickup on the floor margin, and then that might accelerate to a few more basis points early next year.

Gregory Robertson: And then, yeah, on the gap margin side, I think that accretion drops down from 1.7 to probably 700-ish thousand. All that, obviously, before Oakland as well.

Speaker Change: Right. What's the pace of that 700 dropping off?

Matthew Olney: Well, that will that kind of diminish this year a bit or more next year? Maybe because it's let-ish by Oakwood, I understand that; but I'm saying, just this accretion percent part. Right, I think that that 700-ish would sustain at that level at least in the next couple of quarters, probably the next 12 months. Honestly, we could see it averaged around 700-thousand per quarter.

Speaker Change: Will that kind of diminish this year a bit or more next year?

Speaker Change: And make sure it gets replenished by Oakwood, I understand that, but I'm saying just this accretion percent part.

Speaker Change: Right, I think that that 700-ish would be, would sustain at that level at least for the next.

Speaker Change: A couple quarters, probably the next 12 months, honestly, we could see it average around 700-ish thousand per quarter.

Matthew Olney: Okay, and then I guess this is what I was leading with some of these questions: is, because of the repricing opportunity, you should see that. Grind higher, I should just straight expansion through the first couple of rate cuts. Is that the right way to think about it? You mean on the loan repriced side in a rate cuts scenario? In a rate cuts scenario, your nimble continue to expand. Correct, yes, we still see repricing opportunity with the existing book, even if we got. Some cuts, so just for some context, that repricing side to 48 percent that repricing an excellent month, about 2.4 billion.

Speaker Change: Okay, and then I guess this is where I was leaving with it with some of these questions is

Speaker Change: Because of the repricing opportunity, you should see that grind higher, actually just straight expansion through the first couple rate cuts. Is that the right way to think about it?

Speaker Change: You mean on the loan repricing side, in a rate cut scenario? In a rate cut scenario, your NIM will continue to expand.

Speaker Change: Correct. Yes, we still see repricing opportunity.

Speaker Change: with the existing book, even if we got some cuts. So just for some context, that repricing slide, the 48% that are repriced in the next 12 months, about $2.4 billion, that's

Matthew Olney: That's that sitting currently on the book set of weighted average rate of 8 percent. And we're, you know, doing loans right now in the mid-eight. I think the beta on new loan yields in a cuts scenario would not be 100 percent by any means. So we're still going to get some tail lift on the repricing side, even in a rate cuts scenario. And I would say, just directly speaking, the magnitude of the net impact from that repricing in a flat rate environment would probably hold as we're relatively neutral now because of the benefit coming from lower funding costs that we kind of match whatever the incrementally lower.

Speaker Change: That's sitting currently on the books at a weighted average rate of 8%, and we're, you know, doing loans right now in the mid-eighths. I think the beta on new loan yields in a cut scenario...

Speaker Change: That, you know, would not be 100% by any means.

Speaker Change: So we're still going to get some, some tail lift.

Speaker Change: On the repricing side, even in a rate cut scenario, and I would say just directionally speaking.

Speaker Change: The magnitude of the net impact from that repricing in a flat rate environment.

Speaker Change: would probably hold as we're relatively neutral now because of the benefit coming from lower funding costs that would kind of match whatever the incrementally lower

Matthew Olney: Upside from the repricing on the loan side. So it's about 50 to 60 basis point pick up on that portfolio that would repricen the next 12 months in a flat rate environment. That goes down a little bit, but then, obviously, so with funding cost pressures.

Speaker Change: Upside from the repricing on the loan side. So it's about 50 to 60 basis point pickup on that portfolio that would reprice in the next 12 months.

Speaker Change: in a flat rate environment. That goes down a little bit, but then obviously so would funding cost pressures.

Speaker Change: I appreciate that.

Speaker Change: What does your commercial pipeline look like and do you sense some potential excitement from your customer base if there are rate cuts? Would that potentially increase sales?

Speaker Change: Your desire for loan growth and the borrower's desire to take out loans?

Speaker Change: And are you seeing that in the pipeline?

Speaker Change: I think our pipeline is still quite healthy and we have

Speaker Change: Outsized payoffs this quarter and still grew almost 6% annual loss.

Speaker Change: I think we had about $200 million in payoffs, and that wasn't necessarily folks going to the banks. That was people who had projects that sold or matured for other reasons as well.

Speaker Change: So, I would assume that if rates go down, that there would be increased demand as more projects become workable. I will say, though, that our base approach is really based on our internal

Speaker Change: Decisioning around use of capital and wanting to grow within our retained earnings. So I wouldn't anticipate necessarily skyrocketing our

Speaker Change: Our growth percentage on loans, just because rates go down, I think we're going to continue to be selective and make sure that we're serving the best relationships in the best way we can.

Speaker Change: So I wouldn't necessarily see a big movement in our growth just because rates go down.

Speaker Change: We, you know, we've reached, as I talked about on feature, on past quarters.

Speaker Change: We did have some size ambitions four years ago when we started our five-year plan, our most recent five-year plan.

Speaker Change: And we've achieved that particularly with Oakwood, and so now it's less about size and more about allocation of capital and making the most of the resources that we have. So, those will factor into our growth rates just as much as

David R. Melville: David Melville

Speaker Change: I would say also just another tool that we have is our participation network. We started this quarter thinking we might have to sell more than we did and with those outsized payoffs.

Speaker Change: I'll throw that back, but it was the first time that we really tested that market in a couple of quarters.

Speaker Change: We found that there was some demand there too, so we're going to keep the pipeline open. And so those opportunities, I think we sold over 30,000 in one month. Yeah, between 20 and 30, that's not good. But definitely we're seeing, I would envision that might actually be a more likely outcome that's variable.

Speaker Change: to offer more to our bank network that we've been developing through these different non-interest income streams.

Speaker Change: That's really a great commentary. Thank you so much. I'll step back into the queue.

Speaker Change: Thank you.

Speaker Change: There are no further questions. I would now like to turn the call back to Jude Melville for closing remarks.

Jude Melville: Good morning everyone, we're looking at that much of that. I'm proud of our team for a good solid. A quarter we've been grinding it out for a while, and it's nice to see those efforts. We were ordered with good returns, and we go to past couple years in particular, have seen us improve the quality of our franchise and look forward to continuing to do that. And excited about the future no matter what macroeconomic surprises may or may not result. We're getting kind of used to some volatility there, and I think we're doing a good job of managing through them regardless.

Feddie Justin Strickland: Got it. Thanks, guys. Congratulations on a great quarter.

David R. Melville: I really can't add that much to that. I'm proud of our team for a good solid

David R. Melville: A quarter we've been grinding it out for a while and it's nice to see nice to see those efforts be rewarded with with good returns and we feel

Manuel Antonio Navas: Our next question comes from the line of Manuel Navas with DA Davidson. Please go ahead.

Speaker Change: The past couple of years in particular have seen us improve the quality of our franchise and we look forward to continuing to do that.

Manuel Antonio Navas: Hey, good evening, guys. Can you talk a little bit about your near-term NIM outlook and the kind of loan discount? Think of it as both reported and core as that loan discount kind of normalizes.

Speaker Change: I'm excited about the future no matter what.

Gregory Robertson: I'll jump in first, and maybe Matt could fill in some of the gaps, but we feel like the, you know, the core NIM, we're looking at low single digits to mid single digit improvement over the next few quarters. We think that's We feel like loan yields, we expect us to continue to see mid-850 on the loan yield side, and if deposits continue to flatten, we think we'll be able to achieve that. As far as the gap numbers are concerned, directionally the same.

Gregory Robertson: I think the accretion income should stabilize here, going out to about $700,000 per quarter. Is that right? Yes. Yes. That's right. Yes. Yes.

Gregory Robertson: I'll give a little bit more call out on the core. And we've got, I think we spoke in the past about around a $350,000 kind of core margin outlook in the somewhat near to intermediate term future. And we have a slide in the presentation that details the repricing opportunities within the loan portfolio that turns over in the next 12 months. It's about 48% of loans, so a little over $2 billion that's going to reprice. And I'm happy to circle up offline and kind of walk through what that implies.

Gregory Robertson: But the big picture directionally over the next 12 months, that implies that we should be able to hit that $350 core margin by springtime-ish next year. And more near-term, like Greg had mentioned, a low to mid-single-digit basis point pickup on the core margin. And then that might accelerate to a few more basis points early next year. And then, yeah, on the gap margin side, I think that accretion drops down from $1.7 to probably $700-ish thousand.

Speaker Change: What macroeconomic surprises may or may not result. We're getting kind of used to some volatility there, and I think we're doing a good job of managing through them regardless, and look forward to visiting with you all again next quarter. Thanks everybody for dialing in.

Gregory Robertson: Right. What's the pace of that 700 dropping off? Will that kind of diminish this year a bit or more next year? And make sure it gets replenished by Oakwood.

Gregory Robertson: Right, I think that that 700 ish would be sustained at that level at least for the next. [inaudible] Probably the next 12 months, we could see an average around 700-ish thousand per four years.

Manuel Antonio Navas: And then, I guess this is where I was leaving with some of these questions... Because of the repricing opportunity, you should see that grind higher, actually just straight expansion through the first couple rate cuts. Is that the right way to think about it?

Gregory Robertson: You mean on the loan repricing side in a rate cut scenario?

Manuel Antonio Navas: In a breakout scenario, your NIM will continue to expand.

Gregory Robertson: Correct, yes. We still see repricing opportunity with the existing book, even if we got some cuts. So just for some context, that repricing slide, the 48% that are repriced in the next 12 months, about $2.4 billion, that's sitting currently on the books at a weighted average rate of 8%. That would not be 100% by any means.

Unknown Executive: And forward to visiting all with you all again. Next quarter. Thanks, everybody, for going in.

Gregory Robertson: So we're still going to get some tail lift on the repricing side, even in a rate cut scenario. And I would say, just directionally speaking, the magnitude of the net impact from that repricing in a flat rate environment would probably hold as we're relatively neutral now because of the benefit coming from lower funding costs that would kind of match whatever the incrementally lower upside from the repricing on the loan side. So it's about 50 to 60 basis points of pickup on that portfolio that would reprice in the next 12 months in a flat rate environment. That goes down a little bit, but then, obviously, so would funding cost pressures.

Manuel Antonio Navas: I appreciate that. What is your commercial pipeline like? And do you see some potential excitement from your customer base if there are rate cuts? Would that potentially increase your desire for loan growth and the borrower's desire to take out loans? And are you seeing that in the pipeline?

David R. Melville: I think our pipeline is still quite healthy, and we had oversized payoffs this quarter and still grew at almost 6% annual loss. I think we had about 200 million in payoffs, and that wasn't necessarily folks going to the banks; that was people who had projects that sold or matured for other reasons as well.

David R. Melville: So, I would assume that if rates go down, there will be increased demand as more projects become workable. I will say, though, that our pace of growth is really based on our internal, I would not necessarily anticipate skyrocketing our revenue outflows. I would not give growth percentage loans just because rates go down. I think we're going to continue to be selective and make sure that we're serving the best relationships in the best way we can. So I wouldn't necessarily see a big movement in our growth just because rates go down.

David R. Melville: We've reached, as I've talked about in the past, the past quarters. We did have some size ambitions four years ago when we started our most recent five-year plan, and we achieved that, particularly with Oakwood, and so now it's less about size and more about allocation of capital and making the most of the resources that we have. So those will factor into our growth rates just as much as, (inaudible) I would say also just another tool that we have is our participation network.

David R. Melville: We started this quarter thinking we might have to sell more than we did, but with those outsized payoffs, we throttled that back. But it was the first time that we'd really tested that market for a couple of quarters, and we found that there was some demand there, too. So we're going to keep the pipeline open, and so those opportunities are going to be sold over 30, 20, 30, that's real good. But definitely, we're seeing, I imagine that might actually be a more likely outcome, as we're able to offer more to our bank network that we've been developing through these different non-interest income streams. That's really a great, great commentary.

Manuel Antonio Navas: That's really a great, great commentary. Thank you so much. I'll step back into the queue.

David R. Melville: There are no further questions. I would now like to turn the call back to Jude Melville for closing remarks.

Unknown Executive: This concludes today's call. You may now disconnect. Thank you very much.

Operator: This concludes today's call. You may now disconnect.

David R. Melville: I really can't add that much to that. I'm proud of our team for a good, solid performance. We've been grinding it out for a while, and it's nice to see those efforts be rewarded with good returns. I'd like to thank all of you for joining us today, and I look forward to continuing to do so. I'm excited about the future, no matter what. What macroeconomic surprises may or may not result, we're getting kind of used to some volatility there, and I think we're doing a good job of managing. Through them regardless and look forward to visiting all with you all again next quarter. Thanks, everybody, for dialing in.

Speaker Change: This concludes today's call. You may now disconnect.