Business First Bancshares, Inc. (NASDAQ:BFST) has reported a positive third quarter in 2024, with Senior Vice President Matthew Sealy and CEO Jude Melville emphasizing improvements in the company's operating leverage and a successful expansion in Dallas and Houston. CFO Greg Robertson announced a GAAP net income of $16.5 million and a core net income of $17.2 million, attributing growth to commercial real estate and construction loans. The company expects the Oakwood acquisition to continue contributing to net loan growth and aims to achieve a core margin around 3.50% by the second quarter of 2025.
Key Takeaways
- Core net interest margin increased by 12 basis points to 3.46%.
- Core expenses reduced by $1 million.
- GAAP net income stood at $16.5 million, with a core net income of $17.2 million.
- Total loans and deposits grew by $57.3 million and $77.3 million, respectively.
- The Oakwood transaction is expected to contribute approximately $690 million in net loans.
- Non-performing loans increased slightly due to one SBA loan, not reflecting overall portfolio degradation.
- Non-interest income showed strength, particularly from swap fees.
Company Outlook
- Executives anticipate continued NIM growth and a core margin of around 3.50% by Q2 2025.
- The integration of Oakwood is expected to provide a quarterly accretion of $700,000 to $800,000.
- Expense growth will align with loan growth, with cost savings from Oakwood merger materializing towards the end of 2025.
- Focus remains on organic growth within current markets and openness to strategic M&A opportunities.
Bearish Highlights
- The modest near-term impact on non-interest income from Oakwood's integration as the company adapts to new product offerings.
- A slight increase in non-performing loans, primarily attributed to a single SBA loan.
- An increase in the watch list due to higher debt service requirements from rising interest rates.
Bullish Highlights
- Positive loan growth, especially in commercial real estate and construction loans.
- Strength in non-interest income, particularly from swap fees.
- Anticipated margin growth from maturing retail CDs.
- Optimism about the community banking sector's resilience and preparedness for strategic growth opportunities.
Misses
- There were no specific misses mentioned in the provided summary.
Q&A Highlights
- Feddie Strickland inquired about expense growth due to Oakwood's integration, with Robertson indicating alignment of expenses with asset growth.
- Historical pre-merger expenses are used as a benchmark for future growth projections.
- Executives expressed focus on organic growth and potential for strategic M&A.
- Interest rate cuts may positively impact credit upgrades and risk ratings across the portfolio.
Business First Bancshares has demonstrated a solid performance in Q3 2024, with strategic investments and acquisitions contributing to their growth. The company remains optimistic about its future, with plans to align expense growth with loan growth and to capitalize on opportunities arising from market changes. Despite slight challenges, the overall outlook for Business First Bancshares remains positive as they prepare for strategic growth in the coming years.
InvestingPro Insights
Business First Bancshares, Inc. (BFST) continues to show promising financial performance, aligning with the positive third quarter results reported in the article. According to InvestingPro data, the company's market capitalization stands at $762.17 million, reflecting its solid position in the banking sector.
One of the key strengths highlighted by InvestingPro Tips is that BFST has raised its dividend for 6 consecutive years. This consistent dividend growth, coupled with a current dividend yield of 2.24%, underscores the company's commitment to returning value to shareholders. The dividend growth rate of 16.67% over the last twelve months further reinforces this commitment, which may be particularly appealing to income-focused investors.
The company's P/E ratio of 10.51 suggests that BFST's stock may be undervalued compared to its earnings, potentially offering an attractive entry point for investors. This valuation metric aligns with the company's reported strong financial performance and growth prospects mentioned in the article.
It's worth noting that BFST is trading near its 52-week high, with the current price at 95.8% of its 52-week peak. This performance is reflected in the impressive 1-year price total return of 39.61%, indicating strong investor confidence in the company's direction and management.
While the article discusses the company's growth and positive outlook, it's important to consider that InvestingPro Tips also indicate that BFST suffers from weak gross profit margins and that net income is expected to drop this year. These factors may warrant closer attention from investors and align with the company's focus on managing expenses and improving operating leverage as mentioned in the earnings call.
For readers interested in a more comprehensive analysis, InvestingPro offers additional tips and insights on BFST. There are 6 more InvestingPro Tips available, providing a deeper understanding of the company's financial health and market position.
Full transcript - Business First Bancshares Inc (BFST) Q3 2024:
Operator: Good day, everyone, and welcome to the Business First Bancshares Q3 2024 Earnings Call. Just a reminder that today’s call is being recorded. At this time, I would like to hand things over to Mr. Matt Sealy, Senior Vice President, Director of Corporate Strategy and FP&A. Please go ahead, sir.
Matthew Sealy: Good afternoon, and thank you all for joining. Earlier today, we issued our third quarter 2024 earnings press release, a copy of which is available on our website along with the slide presentation that we’ll refer to during today’s call. 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 on our website www.b1bank.com. 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 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 Bancshares’ Chairman, President and CEO, Jude Melville; Chief Financial Officer, Greg Robertson; Chief Banking Officer, Philip Jordan; and President of b1BANK, Jerry Vascocu. After the presentation, we’ll be happy to address any questions you may have. And with that, I’ll turn the call over to you, Jude.
Jude Melville: Okay. Thanks, Matt, and good afternoon, everybody. To begin, I want to be sure to say thank you to everyone currently on the call or listening to it or re-reading the transcripts at some point in the future. We know you have choices to make and we appreciate you making us a priority today. I can be relatively brief as the quarter was straightforward and generally positive. Primary thing, I’d like to highlight is the improvement in operating leverage achieved through a combination of continued expansion of our net interest margin and expense control. Core expenses were down about $1 million linked quarter even while we continue to make the technological investments that we detailed in previous quarterly calls. Our core margin expanded 12 basis points linked quarter to 3.46% driven by roughly flat deposit costs and a one basis point linked quarter paired with increased aggregate portfolio of loan yields as new and renewed loans pricing held steady at 8.46%. Secondary thing, I’d like to highlight is the continued diversification of revenue from the investments we’ve made over the past couple of years and sources of non-interest income including SSW, our asset management company Waterstone, our SBA loan service provider our FIG Group and our nascent internal swaps desk. A new chart on Page 15 explains the primary sources of that increased income and while we expect the components of that income to shift quarter-to-quarter, we’re pleased that the aggregate impact is incrementally positive to income and has been consistently over the course of 2024. Third, we demonstrated discipline in the management of our balance sheet, again growing deposits at a rate faster than loans, while also growing risk assets appropriately in-line with retained earnings, leading to increased capital levels and tangible book value growth even outside the impact of positive AOCI movement. We believe we’ve positioned the loan and deposit portfolios favorably considering the current rate outlook and anticipate continued incremental improvement in our NIM due to this positioning and the hard on the groundwork of our banking teams. Finally, on a broader topic of adding value to the franchise beyond just the numbers, we are pleased to successfully close the Oakwood transaction on October 1, bringing the percentage of our asset exposure in the Dallas and Houston markets to the mid-40s as a percentage of the overall loan book. Thank you to the Oakwood team for their positivity and their energy, and thank you also to our regulatory partners for reviewing the merger in a professional and timely manner. We also recently announced the promotion of Jerry Vascocu to the position of President of the Bank, while I remain Chair and CEO. Jerry has made an impact serving with us for a couple of years already and had an extensive career with growing regional banks before joining our team. We believe we’ll have many opportunities before us in the coming years and want to be sure that we are positioning our internal operations to continue their coordinated performance even while we expand interaction with our external constituencies. This will be especially important as we move closer to the $10 billion asset level, a transition that we want to be certain we approach proactively. With that, I again thank you for calling in, and I’d like to close by congratulating our team and our loyal clients on another successful quarter. I’ll now turn the call over to Greg, for further detail.
Gregory Robertson: Thank you, Jude, and good afternoon, everyone. The third quarter GAAP net income and EPS available to common shareholders was $16.5 million and $0.65 per share and included a $13,000 pretax loss on sale of securities, $319,000 pretax acquisition related expense and a $511,000 pretax conversion related expense. Excluding this non-core item, non-GAAP core net income and EPS available to common shareholders was $17.2 million $0.68 per share. As Jude mentioned, while expenses did come in lower than we had expected, we feel like Q3 represents an overall solid run rate going forward. I’ll start on the balance sheet before moving to the margin and then conclude with the income statement. Total loans held for investment increased by $57.3 million or 4.4% annualized during the third quarter. I should note our production pipeline remains very strong as we sold approximately $30 million in loans to participating banks during the third quarter. Loan growth from linked quarter was largely attributable to net growth in the commercial real estate portfolio of $58.2 million and $16.9 net growth in the C&D portfolio. Production was led by our North Louisiana region and our New Orleans region, which accounted for approximately three-fourths quarters of net loan growth from a linked quarter. Based on unpaid principal balances, Texas based loans represent approximately 35% of the overall portfolio as of September 30. And, as Jude mentioned, as we expect Oakwood to contribute $690 million in net loans, bringing the total Texas loan balances to approximately 42%. Total deposits increased $77.3 million or 5.5% annualized quarter-over-quarter. During the quarter ended September 30, interest bearing accounts drove the increase with $196.5 million in growth, offset by $119 million reduction in noninterest-bearing accounts compared to the linked quarter. The reduction in the noninterest-bearing accounts is isolated to seven clients with production related accounts that make approximately $75 million in deposits. In spite of that, new production remained strong with approximately $25 million in new deposits generated during the quarter. The increase in interest-bearing was largely attributable to $161 million increase in our money market accounts. The weighted average money market portfolio rate declined by 35 basis points in the linked quarter from 4.22% to 3.87%. Total noninterest-bearing deposits represent 21.1% percent of total deposits as of September 30 and down from 23.5% linked quarter but remains in-line with our expectations at the beginning of the year to end the year of 2024 in the low 20% range. Our GAAP reported third quarter net interest margin of 3.51% benefited from $705,000 in discount loan accretion, which was in-line with our consensus expectations. Third quarter core NIM, excluding accretion of 3.46, came in higher than we expected. The 12 basis point linked quarter expansion in the Core NIM benefited from continued strong new and renewed loan yields, re-pricing tailwinds and moderated funding pressures. A little context there. Our weighted average new and renewed loan yields for the third quarter was approximately 8.46% with the spot rate at the end of September at 8.49%. Our quarter-over-quarter total deposits declined one basis point, with the September cut in interest rates, we do expect deposit costs to continue to decline in the near-term but will be affected by our ability to retain and attract lower cost funding and noninterest-bearing deposit accounts. This is a good opportunity to direct your attention to a new slide we created in our earnings presentation. Please reference the slide on Page 21 for a summary of our deposit beta assumptions in an easing interest rate environment. We expect overall total deposit betas to be in the 45% to 55% range, which should translate into low-single-digit expansion in the Core NIM assuming a static balance sheet. There could be additional upside from margin expansion should we assume some normal organic growth. We feel like this new beta slide is a good complement to the following slide on Page 22, which depicts the re-pricing opportunities within the loan portfolio. As you’ll see on Page 22, we have approximately $2 billion in floating rate loans at approximately 8.15% weighted average. But, we also have approximately $500 million in fixed rate loans maturing over the 12 months at a weighted average of 6.28%, which we would expect to re-price in the low 8% range. Last thing I would add is just the impact of the addition of the Oakwood balance sheet, which we have a full quarter impact during the fourth quarter. We continue to expect Oakwood to be a couple of basis points accretive to our overall core margin, and we also expect loan discount accretion to average an approximate $700,000 to $800,000 per quarter range going forward, including Oakwood addition. Moving on to the income statement. Our GAAP non-interest expense was $42.4 million and included $319,000 in acquisition related expense and $511,000 in conversion related expense. Core net interest expense for the third quarter of $41.6 million declined approximately $1.1 million linked quarter and benefited from timing of salaries, salary accruals and certain investments not hitting during the quarter. We would expect this to reverse trend somewhat during the fourth quarter and with the full impact of Oakwood, we view the current consensus estimate for the non-interest expense of approximately $50 million to be a fair estimate and a good run rate going forward. Third quarter GAAP and core non-interest income was $10.8 million but GAAP did include a $13,000 loss of sale on securities. Non-interest income results for the third quarter did come in slightly better than we had expected and was driven by our contribution from our newly formed customer swap business, which generated approximately $900,000 in revenue during the quarter. We view Q3 of core non-interest income as a good run rate going forward and expect our non-interest income continue to trend with an upward trajectory that will be bumpy as our investments continue to season. As Jude mentioned, we did add a new non-interest income slide on Page 15 in our earnings presentation that summarizes those investments and provides additional color. Lastly, while the addition of Oakwood will be additive to the overall non-interest income, that increase will be modest in the near-term as they get used to our product offerings. That concludes my remarks for today, and I’ll hand it back over to, Jude.
Jude Melville: Thanks, Greg. Again, just a good solid work of day quarter, and we’re pleased with the incremental improvement. I think we’re positioned well to continue that over the coming quarters. So with that, I’ll look for any questions that we might have and look forward to the conversation.
Operator: [Operator Instructions] We’ll take our first question from Michael Rose, Raymond James.
Michael Rose: Hey, good afternoon, everyone. Thanks for taking my questions. Nice expansion on the margin. Good to see the deposit costs come down. I think as I recall last quarter, you guys had a bunch of brokered CDs that are expected to mature by the end of the year. I think it was $450 million last quarter. Just wanted to see how much of a tailwind is there? And, I think you had previously talked about the core margin reaching kind of around 350 million by the end of the second quarter. Just wanted to see if there were any updates? And, then just embedded in that, it seems like the accretion might be a little bit lower. Do you have the amount of expected accretion you expect to realize from Oakwood? What the addition would be to the kind of the $9 million that would be remaining at the end of the Q3? Thanks.
Jude Melville: Yes. I’ll start off faster on the first part. As far as the CD books and the maturities go, that was what we had last time we talked to you, we had we’re isolating on about $400 million in retail CD renewals in the near-term. We have been pulling through with a fairly solid above 50% retention rate on that CD book and re-pricing. So, we feel pretty confident, there are some tailwinds and we do feel like that, that will be instrumental in helping us achieve that 350 margin by the second quarter like you spoke of.
Gregory Robertson: Hey, Michael, I’ll jump in, kind of give you a little bit of color in terms of the 350 target in the second quarter. I think you’re referring to the second quarter of 25% core margin run rate. So, we’re obviously a little bit ahead of schedule is what it would appear service level. There’s a couple of things that I would call out that I’m not sure how much could be sustained within that core margin currently. So, within our business manager factoring product set that we have, there’s about 7ish basis points within the core margin attributed to that business line and really no direct balances on balance sheet balances associated with that interest income that we have. There’s a couple of larger clients that are currently reflected in that number. And, the past quarter or so, we’ve been uncertain if they’re going to stick around and fortunately they have. That is a bit of a wild card. So, while we are currently ahead of schedule to hit that 350 core margin by Q2 of next year, I would just caveat it with that those couple of clients that account for a few basis points, maybe about three basis points of that seven related to those folks. Now that is also pre-Oakwood. So, if you layer in Oakwood, they’re another couple of basis points accretive. So, I’d say all in all, still very confident that we can hit that core margin run rate by Q2 of next year and potentially a little bit sooner. But that’s kind of the context around that piece of it. And then lastly on the kind of to Greg’s point about the CD repricing and maturing, we do have on our new slide 21 in the presentation the last bullet point which depicts the upcoming maturities within the CD portfolio in Q4 and Q1 to the tune of about $300 million. So, we’ll try to keep updating that and rolling that forward so you can see kind of the context going forward in the next couple of quarters.
Gregory Robertson: And Michael, your last question in regards to the accretion gain with the Oakwood closing. From the time we announced the transaction, the interest rate environment has changed. So, we’re in the process of finalizing the marks and the accretion and all that on that. So a little bit too early to tell on that, but we’re still working on that. It will be additive, but we’re still zeroing in on that.
Michael Rose: But $700,000 to $800,000 a quarter with Oakwood is what you’re still expecting is I think what I heard?
Gregory Robertson: Yes, that’s right.
Michael Rose: Okay, perfect. Sorry for the three part question in the first question. Just as one follow-up, saw the provision came in a little bit lower than I was expecting. But looking at slide 31, I did notice that the special mention was up and NPLs did go up a little bit as well. Can you just give some context there, anything to worry about? And just any general overall thoughts on credit? Thanks.
Gregory Robertson: I will say I’ll start with NPLs. So, the increase in NPLs is really attributable to one loan that’s SBA guaranteed loan that we should have resolution with that within the next month or so. So, that’s I think what we’re seeing within the credit book is just the impacts of normalized credit performance with, for example, the past due loan, the increase in that, 2 of the 3 loans that make up most of the increase, we should have some resolution on those as well. So, still seeing someone off things. I think as far as the watch list goes, that is an impact or direct reflection of the interest rate environment, probably majority of the movement with that. But I think it would be foolish not to say that we’re in a more normal credit environment. So, we’re seeing no major degradation in the credit portfolio, just one off examples here and there.
Michael Rose: Very helpful. Thanks for taking my questions.
Operator: Next up is Matt Olney, Stephens Inc.
Matt Olney: Hey, thanks for taking the question guys. I want to ask about loan growth, a little bit slower than what we’ve seen at the bank more recently, but still quite a bit above what we’ve seen from peers over the last week or two. We’d love to kind of hear what your borrowers are saying, specifically the C&I borrowers. Looks like utilization rates moved down a little bit. Would love to hear just kind of what you’re hearing from your customers.
Jude Melville: I’ll talk about the impact of the balance sheet and I’ll let Philip or Jerry kind of chime in on what they’re seeing with the customers. The 4.4% is kind of in line with what we’ve been talking about lately in being understanding the impacts to capital with growth and profitability. So, I think that’s right in line. And as I mentioned, we did sell $30 million worth of loans in the quarter to participating banks in our network. So, we still feel like the pipeline’s strong and in a good place. But I’ll let these guys talk a little more about that.
Unidentified Speaker: Yes. I would say I don’t know that there’s necessarily an outlier from that perspective too in customer feedback. I think this is kind of a timing for us. We don’t see it it’s just kind of normal on a year-over-year basis as far as how our clients are utilizing their lines. Also, it’s a point of the year where a lot of our ag loans are paying down, so we’re seeing some of that out of the business necessarily outliners.
Unidentified Speaker: Well, and I would offer, too, kind of my second year through the process, we are seeing some pretty nice growth embedded in there from some core customers that are really kind of having a successful season. It’s been nice to see that this over the last couple of particularly these last few months. It’s manifesting some additional good cohort.
Matt Olney: Okay, great. Thanks for all the commentary on the loan growth. And I guess going over to the fee side, another nice quarter on the fees. I think it was the swap fees that maybe drove the strong trends this quarter. I think these can be a little volatile quarter-to-quarter, but it sounds like based off the prepared remarks, you don’t expect any kind of step back in the near-term. You think you can continue to grow it from this run rate that we saw in the third quarter. Is that right?
Gregory Robertson: That’s right. And if you think about our production in that non-interest income in the second quarter, that was really driven by $1.9 million kind of outlier fee from USDA gain on sale. So, for us to really build from there shows the continued investment in those different business lines that we’ve been and we’re highlighting in the slide deck this quarter. We do think it will be bumpy like you said, but we do expect it to continue to incrementally grow over time.
Jude Melville: I was going to add, it was a good question. One of the things I think we’ve been most pleased about, particularly with the swap business, is it’s become more granular. We’ve got a good rhythm with that product and applying it to the right clients, good clients, If you look at the slide that breaks out the swap, some detail there, it’s 20 trades in the quarter. So, I think what we’ve been most pleased about is it’s not as lumpy in the third quarter, and we can kind of see it leveling out over time in a good way with a good gradual ramp, good response from our bankers and our clients.
Gregory Robertson: I think I would also add just that we don’t expect for swaps to necessarily be the leader every quarter. One of the reasons that we’ve chosen to invest in multiple sources of revenue is that we know that that can be a little more volatile than our traditional spread income. And so we wanted to be sure we had three or four sources. And I think today we’ll probably feel like in the fourth quarter the SBA income probably the stronger pipeline than swap income. Not that the swaps won’t continue to accrete, but we wanted to be sure that we had multiple sources of revenues so that as we experience some fluctuation in the individual components, the overall aggregate results should be incrementally positive.
Matt Olney: Okay, great. All right, I’ll step back. Thanks for the commentary guys.
Jude Melville: Thanks, Matt.
Operator: The next question comes from Feddie Strickland of Hovde Group.
Jude Melville: Hey, Freddie.
Feddie Strickland: Hi. Just wanted to ask, as you integrate Oakwood, how should we think about the expense growth kind of later in ‘25? Are there any major initiatives? I mean, I know you maybe have some cost saves here and there or during the year, but anything major we should look out for or is kind of past years pre-merger a good piece of history to look at for that?
Gregory Robertson: I would say past year’s pre-merger is a good indicator of how we think about it. I think the overarching, we’re going to grow or we want to grow loans in the mid-single digit range next year. And so keeping that expense base in line with that asset growth is really what we’re thinking about from an overall strategy standpoint. And do remember, it’s worth noting that because of the later in the year core conversion within, that we’re not pulling through a lot of cost savings in 2025, those will be showing towards the end of ‘25, ‘26.
Jude Melville: But one thing that I’d add. Greg hit on this in his prepared remarks. All in, Oakwood in the fourth quarter, kind of a good launching point going into 2025 is kind of the current consensus number out there, which I believe is right at $50-ish million all in and that includes fully loaded impact of Oakwood. That’s kind of a good launching point.
Feddie Strickland: Got you. And then you said the cost saves are probably later in the year, wouldn’t see us any of those initially, right?
Gregory Robertson: We’re probably not going to see any of those till the Q4 of next year and then pull them through into ‘26.
Feddie Strickland: Okay, that’s helpful.
Gregory Robertson: And then which is what our expectation was when we structured the deal as we modeled. So not a delay, it’s just a sequence of events with our own internal work, including a core conversion of legacy b1 prior to doing the full conversion.
Feddie Strickland: Understood. And then just one more question for me is just kind of still around Oakwood a little bit, but how do you think about either geographic expansion or just growth going forward? I mean, does M&A remain a part of the playbook in the medium term here? Would you look at doing team lift outs? Or do you just still feel like there’s a good bit of runway with the current footprint in terms of, I guess, low hanging fruit for additional loan and deposit growth?
Jude Melville: Yes. I think as always, we want to be prepared to take advantage of opportunity when it presents itself and we believe that we can be successful on multiple fronts. I would say that our current priority remains organic growth and making sure that we’re maximizing the team that we have. And we do have a really good track record of enabling teams that we partnered with to grow beyond where they were before we partnered with them. And so that certainly will be the first priority, will be in our current footprint, continuing to gain operating leverage. Certainly, team lift outs are a great way to grow and we’ve done that successfully and we’ll continue to look for some opportunities. And we’re prepared -- we feel prepared to take on the M&A should the right partner show. I would say from a footprint standpoint, number one priority is our current footprint. Number two priority is filling in some of the gaps in our current footprint. Dallas to Houston is a possible area that might be fertile and we have still have plenty of room to grow in Louisiana as well as we continue to build our core franchise. Secondarily, I would say there we over time, we’ll look for opportunities most likely to the East. But that’s if we think about our footprint and what we want it to look like 5, 7, 10 years from now, I would imagine more widespread and the pace or the order of how we do that will be determined by who we can partner with. And our location choices have always been about the bankers more than the specific geography and so we’ll continue to do that. But we do think we have plenty to take place over in our current footprint and that will be our whether that’s through organic growth or through partnership, that will be our priority for the near-term.
Gregory Robertson: Jude mentioned to you that we had a couple of bankers retire in our Houston footprint and we’re back to the lows with two new bankers. So yes, for that addition.
Jude Melville: We’re excited about that. And again, some incremental additions to our current talent base, we think, will produce positive earning results.
Feddie Strickland: Perfect. Appreciate the color. I’ll step back in the queue. Thanks for taking my questions.
Gregory Robertson: Thanks, Feddie.
Jude Melville: I think it is worth pointing out that and Greg mentioned it before, but our two biggest growth areas this year or this quarter were North Louisiana and New Orleans. So I know we’re excited about Dallas and Houston and those are things that tend to get the headlines, but we also feel really good about our competitive posture within our core Louisiana franchise. And with each quarter and each year that passes, I think we build credibility, we build brand power and we accumulate additional talent. And so while Texas certainly is a key part of our future, we believe we have plenty of opportunities throughout our footprint. And I think third quarter which is really a good example of the different constituent elements of our footprint working together to serve the greater whole. And you can paint a picture over ‘24 and ‘23, which some of our Southwest Louisiana portion of our footprint, for example, provided the most deposit growth. So, one of the things that we’ve tried to do over time is say with it, we have an opportunity to combine the best of both worlds, which is the more kind of community banker-ish, slightly rural locations that we might have in our Louisiana footprint with the slightly more commercial metro banking than we might do in other areas. And I think when you really kind of parse out the results over the course of this year, we’ve had good evolution of leadership from throughout the footprint and we’re excited about opportunities across the spectrum.
Operator: And we’ll take our next question today from Manuel Navas, D.A. Davidson.
Manuel Navas: Hey, good afternoon. The low single-digit core NIM expansion under the 50 basis point reduction, that’s only so far. What’s the future rate cut improvement? And is that slide only on the balance sheet as of 3Q? Can you just kind of talk through some of the assumptions behind that slide?
Gregory Robertson: Yes. That would be on a static balance sheet as of 3Q and then that would be an assumption for every 50 basis points that would be what we would realize.
Jude Melville: Yes. And a little bit more color there, Manuel. So that’s the incremental and kind of additive expansion on top of our current trajectory assuming flat rates. So, we’ve got a scenario where if rates were not cut, we would still see some expansion and lift. So, that couple of basis point pickup is not off of the current Q3 figure or current Q3 ending figure. There’s already some inherent expansion in there in just a flat rate environment. So, that’s really the additive expansion on top of already some modest expansion over the next 12 months. So that’s not a three month outlook expansion from the recent cut plus ordinary course of business expansion from growth and margin improvement, if that makes sense?
Gregory Robertson: Yes. Well, really, I think the last time we talked about the work we had done to restructure the liability side of the balance sheet. And I think this really paints a picture and shows the work that we’ve put in to become more neutral and position the balance sheet where we can be reactive to interest rate movements. This is just a snapshot that shows indication of what that work proves out to give us a little bit of what to be able to do.
Manuel Navas: So, if that low single digits, let’s say, is 2 to 3 basis points and the forward curve contemplates another 150 basis point cut in Fed funds by middle next year, is this saying almost like another 6 basis points improvement in core NIM under these assumptions?
Gregory Robertson: I think that’d be reasonable to expect.
Manuel Navas: Okay. And then you add in layer in the Oakwood core NIM improvement, Oakwood purchase accounting accretion on top of that? So, there’s a couple of other pieces as well.
Gregory Robertson: Yes. I think the NIM improvement forward from Oakwood is correct. I think the accretion lift on Oakwood, we’re still trying to finalize the numbers on that, but I think there will be slightly some lifts on that.
Manuel Navas: Sure, sure. So, the money markets stepped down pretty nicely this quarter. They’re expected to have pretty strong betas through the cycle. You’re about a month since the Fed cut rates. How has the acceptance of those cuts progressed from your customers?
Gregory Robertson: Not a lot of volatility in that account. We’ve had slight growth since the Fed cuts, no run out. So we feel pretty good about the decision we made so far.
Manuel Navas: That’s great. That’s great to hear. Any other updates on Oakwood now that it’s closed? It seems like there’s a little bit more loan growth there. Did they use up some of the cash? You’re going to have about $100 million cash deployed pretty quickly. Kind of just walk me through any of that?
Gregory Robertson: I’ll give you an update. They did have loan growth since the deal was announced. And so their loan to deposit ratio would tick higher. And so that’s where some of the cash went. And then we’ll continue to evaluate opportunities from their funding base as we move it to ours. They have a little more of a structured term deposit funding base that has renewal opportunities coming up. So, we’ll deal with that on a one-off basis and hopefully be able to see some improvement in that. But everything is going as planned for sure.
Manuel Navas: Okay. I appreciate the update. I’ll step back into the queue. Thank you, guys.
Gregory Robertson: Thank you.
Operator: [Operator Instructions] We’ll go to Christopher Marinac, Janney Montgomery Scott.
Christopher Marinac: Hey, good afternoon. Thanks for hosting us. Wanted to ask about the lower interest rates and the impact on credit upgrades in future quarters. Is that possible and what would that look like?
Gregory Robertson: Yes. It’s a good question. We’re in the process right now of kind of going through at a pretty granular level our risk ratings across the portfolio, and we do feel like there are some opportunities to see some benefit and some improvements in risk ratings. So, we’re looking at it across the board, across the portfolio and applying that factor and going about it in a pretty disciplined fashion. It’s been a good phase.
Jude Melville: Most of our increase in the watch list has been due to higher debt service requirements based on rising rates. So, we would expect that the reverse would hold true to some degree and it is a little bit of a question of timing and how quickly the rates actually move and how does that feed into whatever stress clients might have been under previously. And then also from our perspective just make that decisions, you require documentation and updated financials and all those things will take a little time. But I do think we expect that the changing rate environment should be a net positive for to counter some of the watch list growth that we’ve experienced over the past couple of quarters in particular.
Christopher Marinac: And Jude, is there any kind of I guess separation between watch list that is CRE related versus pure C&I with the C&I have its own separate behavior these next few quarters?
Gregory Robertson: I think there is a pretty good distinction, this is Greg, Chris. There is a pretty good distinction between on the makeup of the watch list I would say it’s probably 60% CRE, 40% C&I, something in that range. But I think the overarching fact kind of flat what you’ve said is about 90% of that watch list is paying as agreed but does have financial performance impacted if you’re looking at ratio from a ratio standpoint. So, and that’s prior to the rate cuts. So, we feel like that it will naturally probably help those customers. But as far as having the granularity on the performance in each group, we can get probably get you some of that data, but we don’t have it right now.
Christopher Marinac: No problem. That’s helpful. And then just last question just goes back to the beta slide on number 21. Would you see that mix changing if we think prospectively 12, 18 months? Or should we think of business versus kind of the same mix in this environment?
Gregory Robertson: I would say we worked real hard over the last 12 to 18 months to move the mix into this position to give us a little more balance or neutral balance sheet. So, I would say going out into the future, say for some dramatic change from an M&A standpoint and I don’t think that’s realistic that this would be what we could expect.
Christopher Marinac: Yes. Very good.
Jude Melville: I’d say that beta range is probably a good assumption to use not just in the recent 50 basis point cut we got, but foreseeable future any rates we might get in the future in the near-term.
Christopher Marinac: Got it. Thank you, Matt. Thank you, Greg. Appreciate it.
Gregory Robertson: Thanks, Chris.
Operator: And at this time, there are no further questions. I’ll hand it back to Jude Melville.
Jude Melville: All right. I’m ready. Thank you and appreciate everybody’s participation and questions. It’s been an unexpected and eventful couple of years and I’m just really proud of the work that we’ve done to position ourselves coming out of this cycle to maximize 2025 and 2026 and beyond and really proud of just community banking in general. There were an awful lot of dark clouds hanging over the industry in general over the past couple of years. And I think we’re going to find that community banks in particular have exceeded expectations and are well prepared to continue to play a critical role in our country’s future in the coming quarters and years. And we’re proud to be a part of it. Thank you for your interest and look forward to next quarter being our first quarter with our Oakwood teammates numbers incorporated in ours and look forward to seeing what we can do together. Thank you.
Operator: Once again everyone that does conclude today’s conference. We would like to thank you all for your participation. You may now disconnect.
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