Business First Bancshares, Inc. (BFST) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the Business First Bancshares' Q2 2023 Call. I would like to now turn the call over to Matt Sealy, Director of Corporate Strategy and FP&A. Matt, please go ahead.

Good afternoon, and thank you all for joining. Earlier today, we issued our second quarter 2023 earnings press release, a copy of which is available on our website along with the slide presentation that we will reference during today's call. Please refer to Slide 3 of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of the non-GAAP financial measures. Those of you joining by phone, please note the slide presentation is available on our website at 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' President and CEO, Jude Melville; Chief Financial Officer, Greg Robertson; Chief Banking Officer, Philip Jordan; and Chief Administrative Officer, 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.

Okay. Thanks, Matt, and thank you, everybody, for joining us. I know it's a busy time, and we appreciate you prioritizing this conversation. Last quarter, I began by discussing our longer-term objectives to give some context to our near-term results. And while I won't take as much time to review the specific long-term goals on this call, I do want to take a moment to remind us of what those general priorities are. Management of risk through diversification as geographical, industry, product set, duration, revenue streams, among others. Number two, achievement of greater efficiency and optionality through scaling. Number three, an increase in core profitability levels through a focus on capital allocation and management. Finally, a qualitative rather than a quantitative goal to continue selective additions when available with key teammates with the experience and talent to help us prepare for the opportunities that will present themselves, as we gained success on the previously mentioned 3 more numerical priorities. We've been through enough periods of uncertainty to know we have a responsibility to continue preparing for the future even in the time of caution. I'm pleased to congratulate our team on another quarter of progress in each of these areas. On management of risk through diversification, how we continue to diversify our asset exposure even in a time of lower growth. Our loan growth was again led by our Dallas region, which generated over 50% of the net increase, with the runner up this quarter being our North Louisiana region. Two very different regions, both of which we are gaining significant brand recognition within. On the type of loan front, growth was again led by increased C&I exposure accounting for roughly 2/3 of our increased balances. Also mentioned encouraging progress in diversifying revenue streams, there's some positive movement in our SBA line of business. Last year, we had about $200,000 in income from SBA and this year, we expect to average more than that number on a quarterly basis. So it's not yet the needle mover we eventually expect it will be, but we do like the trajectory. On scale, we slowed down our growth to match the current economic and rate environments, a reflection of the optionality our current size offers. This size, we should be able to operate at solid levels of efficiency without relying on the significant levels of growth we blew up over the past few years. So we have the opportunity to be increasingly selective, it will pay off in asset quality, loan pricing and capital usage. Our growth, while slow is still healthy at about 8% annualized level that's manageable, fundable and capitalizable within the limits of our retained earnings. Excluding the impact from our sub debt redemption, we were capital accretive on all regulatory ratios and if we were to back out the impact of AOCI, we would have been capital accretive on all of our capital ratios, including TCE levels. We expect this to continue to be the case in future quarters as we remain selective on loan growth, likely in the 4% to 5% range. On earnings, we're very pleased with the results. And while we aren't yet where we want to be, we've taken a significant step forward. We booked a 1.18% ROA, a 14% ROE and $0.73 earnings per share. These are GAAP numbers. Three main drivers of our financial results were good NIM protection, good expense control, and continued solid asset quality. Greg will dive deeper into these -- into the -- each of these fronts in a few minutes. Now these GAAP results that include some net positive non-run rate income and expenses. But even backing out those items, our results would still have performed at solid levels, producing non-GAAP results of 1.04% ROA, 12.4% ROE at $0.64 EPS. A couple of points I want to note. First, non-run rate does not mean accidental or not real. Our additional income came primarily from the investments we've made over the years in small business investment companies or SBICs, which returned at a higher level than normal this quarter and through a decision to retire some holding company debt early. Second, we believe this fundamentally change in our earnings profile is at a roughly 1.0 ROA over the past year or 2 would have been where we expected to land assuming everything went right. Now we view a 1.0 ROA as a baseline from which we have the opportunity to outperform when things fall our way as happened this quarter. That doesn't make us a high performer yet, but it's a concrete step in the right direction and in line with the goals we've been articulating for you over the past few quarters. Finally, on the topic of people, while we do not believe we need to add significant numbers of producers at this time, as our most recent hires still have capacity to grow their individual books. We did add 2 impactful back-office hires that are providing immediate impact. Zach Smith joined us as Treasurer, as Zach was 1 of the leaders in the Treasury Department of Bank OZK, a larger regional bank and also has the experience with Comerica. We are also joined by a new Chief HR Officer, Mike Pelletier. Michael was CHRO for IBERIABANK for many years prior to the merger with First Horizon. Both of these individuals, each of them has been with larger banks as they have grown well through their experiences and relationships contribute materially to our journey, both navigating the current uncertain times and in the time of opportunity that will surely follow. I'm going to turn it over now to Greg and Matt to cover these results in detail, but I'd like to reiterate my thanks to our team. We've navigated a number of crisis and perceived crisis together, beginning with a great financial crisis while we were a de novo bank. We've navigated not always perfectly but always with one eye towards the immediate needs of our current customers, shareholders and regulatory partners and one eye mindful of the long-term opportunity, we believe our franchise has before us. This quarter is another demonstration of our capacity on both fronts. That concludes my remarks, and I'll turn it over to Greg for more detail on the financials.

Thank you, Jude, and good afternoon, everyone. I'll spend a few minutes just reviewing our Q2 highlights, some of which as Jude had already mentioned, including some balance sheet and income statement trends and we'll include some updated thoughts on our current outlook. In the second quarter, core net income number was $17.7 million or $0.70 earnings per share. That equated to a 1.13% ROA and 13.50% ROE. That was really driven by strong noninterest income, lower loan loss provision expense from our continued stable credit trends and a slightly lower loan growth, slightly higher-than-expected loan discount accretion, as Jude mentioned. These results were partially offset by slightly elevated noninterest expense during the quarter. Before I dive into more of the specifics on the quarter, I'd like to take a moment to call out a few items that may not readily identifiable, but are important for the context to consider. Our core noninterest income, as Jude mentioned, included $2.8 million in equity investment from SBIC revenue, which $2.6 million or about was more than what we would have expected. We had modeled about $200,000 for the quarter. Our core noninterest expense included the $715,000 really onetime deal from our core provider for some services that were rendered in the past, and that won't be reoccurring in the future. Our loan loss provision of $500,000 was really a consequence of lower loan growth and the contained -- continued strength of our credibility. With all those adjustments, as Jude mentioned, I think it's important to consider more really a baseline for what we look at going forward from an earnings standpoint and that so-called adjusted run rate for the quarter would have been $16.2 million or a diluted EPS of $0.64, and ROA 1.04% and ROE of 12.14%. That's very strong for us for the quarter, and we're really proud of those results. That was highlighted by a few things. We'll start with the balance sheet first and then work our way through some other income statement items. The loan growth for the quarter was 7.9%, really highlighted by our Dallas group with $55 million or 59% of that loan growth for the quarter. That loan growth from our Dallas group remained our Texas exposure at a 37% exposure rate for the portfolio as a whole. As far as loan type for the quarter, C&I was a headline again for the second quarter $69.9 million of that growth was in C&I loans, with $67 million in C&D loans that actually migrated over because of completion in projects into owner-occupied CRE and income-producing CRE with the other piece of the loan growth, the actual growth in CRE for the quarter was $9.5 million for the quarter. As far as deposits go, our deposits increased about $208 million for the quarter. $211 million of that were broker deposits. Really, there's some nuance and we're very proud of the fact that the work that our branches have done, the branch growth for the quarter was relatively flat with a little bit of extra story or script around that. In the beginning of the quarter, in April, the makeup of our portfolio from a deposit standpoint, being commercially focused, we experienced a little over $100 million on run out during April for tax-related payments from clients. During the remainder of the quarter, branches did an excellent job of really in the production staff as a whole going out and really drawing that back to 0, and that's a really important part of the nuance of the quarter. So we feel like those wins in the second half of the second quarter really started to show positive results and we're seeing early results from the first month of this quarter with that continued deposit generation profile. Noninterest-bearing deposits is an important topic right now. Our portfolio sits at about 28% of the portfolio being in noninterest-bearing deposits, that's down about 3%. We feel like that, that migration has started to wane in the recent months. So we are very optimistic about that. We have been generating about $5 million to $7 million in new noninterest-bearing deposits every month so far this year. So really, really still optimistic about that. As far as capital goes, as Jude mentioned, capital increased nicely in the second quarter from a bank level perspective with Tier 1 leverage and Tier total risk base increasing about 15 basis points and 13 basis points, respectively. TCE to TA and total risk based at the consolidated level both decreased about 12 basis points. However, if you would back out the AOCI swing, which we had about $13.3 million in AOCI negative swing this quarter, that would have been an increase in TCE to TA ratio of about 9 basis points for the quarter. Furthermore, if you think about it from a tangible book value perspective, looking at it when you strip values, AOCI, tangible book value ex AOCI, we had about 10% growth year-to-date in that and about 13.5% for the quarter and that tangible book value number ex-AOCI would have been slightly above $20. So really happy about that performance and creating the value for the shareholder. As far as the margin goes, our margin was down slightly 5 basis points. That is right in line with where we had projected. Our expectation on pricing going forward, we're really proud of the efforts of our production staff, the bank, the new loans generated for the quarter or really coming the average weighted yield is about 8.45% for the quarter. The majority of our loans now that are being priced are renewals and that renewal rate is slightly higher than that, closer to 8.80% and with the average of our new production being a bit about 8.60% on average. For deposit pricing, I'll let Matt get into the details on the betas here in a minute. We're really happy with our continued deposit generation, although as everyone knows, the cost of those deposits is very competitive in this market right now. Our total deposit beta cycle to date is about 36%, and we expect that to be closer to 40% by year-end. And with that, really I'll turn it over to Matt to really kind of cover the deposit betas in more detail right now.

Sure. Thanks, Greg. So as Greg mentioned, total cycle to date deposit beta is 36% during the quarter. Interest beta cycle to date during the quarter was about 50%. We see those trending up about 5 percentage points each quarter. So ending the year at around 60% for Q4. And on -- taking a step back, kind of thinking about total interest-bearing liabilities, those betas were 53%. So tracking pretty close to our interest-bearing deposit betas and again, see those going up about 5 percentage points each quarter, ending the year in Q4 at around 63%. And the quarterly snapshot betas, those were just a little bit above 100% for just the Q2 interest-bearing beta that snapshot. And I think that's relatively in line with some of the other releases, it appears that we've seen. But thinking about things more on a cycle to date basis, I think 5% increase over the next 2 quarters is roughly what we'll see. And with that, I'll turn it back over to Jude for any closing remarks or before we take Q&A.

Nothing to add. I'm happy to jump in to questions now. Thank you.

Your first question comes from the line of Michael Rose from Raymond James.

Maybe we could just start on the beta commentary that you just kind of laid out. What does that assume in terms of where kind of NIB mix stabilized? I think you guys are at about 29% at the end of the second quarter. I'm just trying to get a sense for where you think that stabilizes and what the expectations are for kind of ex brokered growth, which is down a little bit this year? I know you guys have several initiatives in place. Would just love some thoughts.

Yes. So I think that we'll see the noninterest-bearing composition kind of bottom out towards the end of the year, and we see that down another couple of percentage points between now and year-end. So bottoming out around maybe 26% or so, just as a percentage of the overall mix. Our appetite for brokered, I think that will just continue to be kind of be opportunistic with the pricing mix between brokered and other borrowing sources. But there's a little bit of room that we have certainly to rely on brokered. And that said, I can let Greg give a little bit more specifics around what we're seeing early on in the third quarter, but we're encouraged that on just excluding brokered basis, deposits were flat during the second quarter. And 1 important thing to consider there is we did have some municipality and tax funds that rolled out during the quarter. So when you strip out brokered and you factor in the tax funds that had moved out being effectively flat from Q1 was in our eyes stabilization theme or trend that's starting to occur. I think we're nearing or turning a corner now, but maybe another quarter or 2 of a little bit further kind of decline in that mix of noninterest bearing. So I'd say it's conservatively maybe a 50-50 split in terms of funding between more wholesale and core deposits. But again, we're optimistic about some of the core funding generation that we've seen early on here in the third quarter, but I'll let Greg kind of hit on maybe some of the -- more of the new wins and trends we're seeing on the core side of the funding base.

Michael, I think there's a little bit of a nuance. I think, first of all, we have seen and do feel like in the industry, not only us specifically, but in the industry, the outflow was starting to wane. The question for us noninterest-bearing depends on, how many more rate increases we see. If we hold flat from here on out, we think maybe we might have seen as much of the movement that we've experienced. Like I mentioned, we are consistently producing $5 million to $7 million in new deposits noninterest-bearing generation per month. Now we have had some recent wins that I expect that number in the first part is especially July and August to be higher than that. To put in context, the average cost we've been generating in noninterest rate-bearing accounts, deposit accounts opened per month, about $100 million in new originations each month this year. And then most recent weighted average is about 4.38. So as we continue to manage the balance sheet from a loan growth perspective, and weigh that against the cost of broker, which today for 1-year brokerages going to be in the 5.35 range. So if we continue to be successful and I think we will, on the deposit generation front at that lower cost, it's materially different for us. We've seen some -- like I said, some wins. So we expect that to continue to happen, but the broker would be kind of plan B, obviously.

Very comprehensive. Question and that gets into the follow-up, which is the core margin was down kind of, I think, about 5 basis points. You said single digits. So it looks like that was good. Just kind of balancing, what you're expecting in terms of deposit beta expectations, NIB mix? And what you're seeing on the loan repricing side? Is that a good kind of way to think about the third quarter margins, down kind of mid single digits when you put it all together? Or am I missing something?

Yes. I would say about breakeven from where we are today, maybe with a basis point or 2 improvement would be what we'd expect going forward.

Yes, Michael, I'll give you a little bit more context around that. So the beta assumption that I had mentioned previously that translates to roughly 35 basis points pickup in just interest bearing deposits in the third quarter. And when we look at our new and renewed loan yields coming on, like Greg had mentioned in the 8.60 to 8.80 range, we've been executing pretty nicely on pulling through from a cycle-to-date loan beta perspective holding at around 85%. We expect that to continue and pick up about 30 basis points in core loan yield expansion in the third quarter. So when we kind of net all of that, the funding side and the earning asset and loan repricing side, I think we feel pretty good that the margin should hold -- core margin should hold flat here. Maybe a little bit too early to claim success and we're turning the quarter to be accretive, but I think we feel really good that flat in Q3 is where we'll be.

That's very helpful. Maybe just 1 follow-up question for me. Just credit is exceptionally good. And I'd say, across the industry, we're seeing kind of more signs of normalization and definitely a pickup in kind of idiosyncratic of one-off credit. So you guys are doing really, really well. Anything that you're seeing kind of on the horizon that you guys are worried about? Or is it just the strength of your markets? And kind of, hopefully, we don't have a recession or anything like that, but just would love some general thoughts.

Yes. I don't think we've seen any evidence [indiscernible] anything to say and just like last quarter and the quarter before we were all sensitive to see what will happen. We haven't seen any degradation in our portfolio. And [indiscernible] if I want to add anything there that you're seeing, but I don't -- I don't think any of us would say would have an area that we would point to as showing times of stress.

No, Jude. I'm sorry, I can't add to that. I would agree, like you said, still strange to say that low, but right now, we feel very comfortable where we are. And like you said, strength of the markets and the bankers, we always stress credit for sure.

[indiscernible]

Your next question comes from the line of Matt Olney from Stephens Inc.

On -- just following up on Michael's question around loan yields and those renewals. I think you mentioned that there could be about 30 bps of loan yield expansion core in the third quarter. Just looking for more color on that. The newer yield do you think are coming on 8.80. I think you said. What's the color on what yield those loans are rolling off at, like what's the differential? And then as you think about the loan maturities and renewals that are coming up, is this a pretty steady level that you're going to see in the next few quarters? Or could there be some time period where it's a higher number?

Yes. I think the loan average weighted between new and renew now fortunately for us, the loan growth has slowed down on purpose by us, it has not been more strategic than it has been for the last pipeline. That renewal base has been a little bit greater than the new loans originated. So we've been seeing renewals come through, like I mentioned, about 8.80 with the new stuff being priced slightly less than that for an average between 2 about 8.60. The pickup we're seeing on the renewals towards creating the expansion is, in some cases, as much as 1% and that's a pretty steady stream of those renewals over the next 3 or 4 quarters approaching probably $1 billion of the portfolio that we'll continue to do that. Now as we get quarters into the future, maybe that isn't 1% difference in the pricing, but some of them will be leaning into towards that early parts of it because of the difference in the origination to the maturity.

Yes, Matt. And I'll direct you to Page 21 in the investor deck to kind of answer your question on where the loans are sitting now and the repricing opportunity. We've got over the next 12 months, about $2.2 billion to reprice between 6 maturing in the next 12 months in floating rate. And those are sitting on the books at about a 7.67 weighted average yield. So when you think about the 8.60 to 8.80 new and renewed or guess renewed and new. That's about a 90-plus basis point pickup in those loans. So that translates to, if you just apply that 90 basis point pickup, in the actual renewal of that portfolio, which is about 45% of the book [indiscernible] $20-plus million in annual revenue pick up there. So that's -- I hope that kind of draws the line or connects the dots between the 30 bps in the overall total portfolio pickup and the actual pickup and just the repricing opportunities.

Yes. That's perfect, Matt. Thanks for that flagging that slide in there. I missed that initially. Perfect. And on the loan growth front, I think I heard you say the back half of the year between 4% to 5%. I assume that's an annualized number for the back half. I just want to confirm that. And then as far as the mix, you mentioned it was a C&I portion that led the way in 2Q. As you think about pipelines and paydowns, is it going to be similar what we saw in 2Q where it's mostly C&I growth, whereas some of the construction projects are completed and they move off to a different category?

Yes, I would. First part is, I didn't intend for that to be an annualized number. And then second part is that I would think that we would see a similar mix going forward, really not just this quarter but the past couple of quarters, we've had that mix as we've kind of downshifted construction production to recalibrate the portfolio. So we'll still see CRE as construction turns over or completes, also see CRE growth, but not at the rate of new production that we have seen historically and we definitely are not doing as much construction as we have done in the past. So I would anticipate C&I would continue to be the most significant contributor to any kind of that increase.

Okay. And then just lastly, I think the accretion levels are a little bit higher this quarter. Any color on expected accretion in the next few quarters?

Yes. Matt, I would think we would -- we are expecting similar levels of accretion in the next couple of quarters just by the pace of the deals that we have kind of working through the process right now.

Your next question comes from the line of Brett Rabatin from Hovde Group.

I wanted to first ask, you talked about the broker CDs in the market and your strength of gathering deposits. Some banks in your market area and in the Southeast in general have indicated that maybe the landscape has gotten a little less competitive with 1 larger regional that was super aggressive with the deposit campaign during May in particular. Have you guys seen that maybe in some of your markets in Louisiana where maybe it's the competitive landscape has ebbed a little bit? Or does this still seem as ferocious or everyone to put it as it has been for the past few months?

Yes. I don't think we'd describe it as ferocious. I do think it's -- I might have said at 1 point, but I think it has to come down a little bit. I would say that some of our peers have raised deposits at a little greater clip, but I think they also have been a little more willing to pay out a little bit. So we're trying to check and balance between the deposit growth and protecting the NIM. But I do think that as we talked about, we're starting to see some signs of deposits coming in, and that's not because we've materially adjusted the strategy we have on the rates that we pay. It's because it is probably becoming a little bit looser, but still tough but not quite ferocious, I would say, but anybody want to add to that.

I would say part of the added talent and skill sets that we pulled in and given us a better visibility into our -- how we manage the deposits and Greg's get kind of a really good look at the deposit portfolio as a whole. So I think it's allowed us a better technology allowing us to make really good decisions on deposit pricing. It's good to see.

Okay. Okay. That's helpful. And then I didn't -- if you gave it, I missed it, but the securities that are maturing here in the back half of the year. How much is that? And will that be partially to fund loan growth? Or how do you think about the balance sheet management?

Yes. Brett, as far as securities go, I think we've only purchased 2 securities this year. The portfolio is about 13.5%, and as AOCI of assets right now, we haven't -- as far as cash flows go or maturities go, we have about an average of about $131 million per year for the next 3 years in maturities that are scheduled pretty systematically out. So we're really -- from a balance sheet standpoint, we would expect to plow that back in and not really be very selective on securities if and when we do purchase some to maybe extend some duration strategically to pick up some good yield now that the rates seem like they're getting towards the top. But outside of that, we expect to put that money, those maturities back to work in the form of paying down debt or putting back into the loan portfolio.

The only thing that I'd add to is that during the quarter, we did take out a little bit more broker to have some -- just some more cash on balance sheet. I think we were about 5% cash to assets at the end of the second quarter. Typically, we've been a little bit lower than that, but that was just kind of a remixing of the liquidity. So we're comfortable letting some of those securities run off and just remix into loans to the [indiscernible] securities might come down just a little bit, but we've already got more liquid interest-bearing cash balances on the book.

Okay. That's helpful. And then if I could sneak in 1 last one, just around strategy. When you guys raised capital in the fourth quarter, you're basically kind of a year ahead of your 5-year plan. And so Jude, I'm curious to hear if this environment in terms of either interest rates or some uncertainty on the economy, if maybe you've changed what you want to accomplish or if you're still kind of full steam ahead in Texas? Or what's changed maybe relative to the environment last year?

Sure. So that's kind of why I started the call with kind of going over what our general priorities are. I talked about last time a little bit, too, but we are ahead of the game in terms of size, where we wanted to be size-wise, which, of course, required use of some of the capital that we raised last year or led to that. Also ahead of the game in diversity -- diversification by geography a little bit, not ahead really as of the end of last year on earnings. So what we wanted to do this year, even precede prices was to continue to grow, continue to diversify, but put more emphasis on earnings and we added the 3 main categories than we have in the past. So I wouldn't say that we have changed our strategy. I'd say that we're going to take advantage of the fact that we're a little ahead of pace on the first 2 components, so that we can prioritize a little more on the third to make sure that we achieve all 3. And I think this quarter is a really good example of us pivoting in that way. So we slowed down the loan growth, which -- but we're still able to continue to focus on growth in the Dallas area. And that slowed loan growth ensured that we were capital accretive, which is something I know when we raised capital in the fall, that was a question or winter that was a question was when would that enable us to be capital accretive. And I think we probably felt like that was possible now, but there was some hesitancy to accept that, I suppose. But so I'm pleased that we were able to do it. And we do plan on continuing that mode of operation. So our growth will be governed by the retained earnings growth, but that still leaves us well within the range of our targeted 5-year plan growth that we have outlined. So long way to say, we haven't changed our goals. We're just managing the process by which we achieve them, but we still remain, in our minds, on target to accomplish all 3 and the iteration that we wanted to and we should be able to do so within our current capital structure supplemented by the retained earnings.

Your next question comes from the line of Kevin Fitzsimmons from D.A. Davidson.

Great. I missed -- in your prepared remarks, you were talking about like a core ex non-run rate type pace of earnings per share. And I was wondering if that's what you said, if you could repeat it. And then also how I should be looking or how we should be looking at a run rate going forward for core fee revenues and core expenses. Is it really just -- are we just kind of pulling out that additional specific revenue and pulling out that extra data processing charge, if you can kind of guide us on those fronts?

Absolutely. Yes, I was talking about the way we've been thinking our core -- our published core net income, $0.17 -- $0.70 EPS. If you were going to take out those 2 items that we considered to be non-reoccurring, but not potential, like Jude said, so 1 would be the EIC income of $2.6 million and the other would be the core IT cost, $715,000. So if you did that, you would get an adjusted $16.2 million, $16.291 exactly, and that would equal a diluted EPS of $0.64.

Got it. Okay.

As far as the noninterest income run rate, I think $8.5 million is probably the way we want to think about that going forward. And noninterest expense right about $39 million or slightly higher than $39 million for the quarter.

And is it fair to say -- I'm sorry, go ahead.

Yes, if you take what we reported core noninterest expense of $39.6 million [indiscernible] about $700,000 kind of one-off data processing invoice that we received and then just bake in some just natural course of business expansion, maybe mid $39 million number a good run rate going forward, which -- that reflects that a 5% annualized increase in expenses.

Great. That's what I was going to ask next. And as far as the bond portfolio, you mentioned the cash flows of it. Some banks have pulled the trigger or evaluating doing a larger transaction to accelerate that opportunity to get proceeds out at higher rates or whichever alternative you want. Is that something even on the table for you all? Or is it more -- is that something more in the near term that can put pressure on capital that you might want not to do?

Yes. I think it's something we talk about and then we run an analysis every quarter on if we needed to execute on liquidating part of the portfolio immediately. We could do about $135 million of that overnight, but with less than a $3 million loss, but as far as we feel like the AOCI is going to unwind fairly quickly. So strategy, to your point, that would put pressure on capital right now [indiscernible] to do anything like that.

Well, not just for pressure on capital, but just a business decision, I think, is the way I would describe it. We have a further short duration of our investment portfolio and we're comfortable that our projections enable us to accomplish our goals without giving up money. And so we'll keep doing that most for some reason, some changes and we have to. We do analyze it though, and it certainly is on the table. We need to always look at options, but I think making the best business decision for us would indicate to me right now that, that's not a necessary move.

Right. Right. Good point about the short duration. And then one last one for me. We've had a few deals announced here in recent days, one in the Mid-Atlantic. Curious if -- I know you all are still digesting the Houston deal. But as you look out later stage of the cycle and exit in the cycle, just curious if -- are there conversations going on in new regions or new markets you might have your eye on in terms of looking to expand?

Sure. We're always -- like your prior question, is there something on the table? I think everything is -- most things are on the table, but certainly, the equation has to make sense for us and the equation is a little different today than it was a couple of years ago. One of the differences is that we are comfortable that we have a strong geography that we can build out. That doesn't mean we wouldn't look at other geographies over time, but we don't need to. I think given the markets that we're in, there's plenty of opportunity here. So the bar would be pretty high in terms of embarking upon an expansion of that geography through an M&A deal. Not saying that it couldn't happen, but it's not something that we're necessarily aggressively looking for. And I would guess that the more likely outcome would be extension through at some point when we're ready would be expansion through a team lift down or something incremental of that nature. But there definitely are more conversations that we're either part of or hearing that they're happening, but I don't know that necessarily makes it more likely to happen. A lot of things have to fall in place. We've developed the organic capacity to be able to grow without M&A. So M&A needs to really fit our needs and the financial equation needs to work for us. And we are a partner as well, and this kind of goal is to get a win-win, but the hurdle is the bar is a little higher than it might have been earlier on just because we do have -- and that's what I've started my comments with about one of the values of scale is the optionality it gives you on future growth. And so we feel like we're in a good spot to be able to partner with who we really want to and not necessarily seeking growth for growth sake and/or new markets for new markets sake. I do think over the long run, there's plenty out there -- are plenty of other markets across the Southeast, so we want to be in, but it's -- there's no rush is the way that I would put it. We have a team that is in position to be around for a long time, and we need to take things -- opportunities when they make a lot of sense for us. That's where we are today.

Yes. And a good point about the lift outs because that's really what you accomplished in Dallas Fort Worth, right correct? That was just all organic lift-out strategy.

That's right. And New Orleans, we've had really good success with team lift out as well.

Your next question comes from the line of Feddie Strickland from Jenny Montgomery Scott.

Just given all the repricing opportunity that you've talked about on the loan side and we've got a potential for a Fed pause maybe this year. Can we see the margin start to rise in 2024, just given the amount of -- where you're putting on loans at new rates and the amount of turnover you've got coming online?

I think it's not beyond comprehension to think that, that might happen, but we certainly want to be conservative in how we think about it, just given the challenges in the environment. We have -- definitely still have some work to do and some planning to do. But while we're projecting kind of a neutral NIM for the rest of the year, I think we do believe that there are going to be some opportunities for expansion next year, even without a rate decrease. Jude, you want to speak more to it?

I agree. I think the wildcard in that is the liability side. And from a competitive standpoint, that would be my caveat. I think we're doing a good job to manage the top end and our production staff is really focused on C&I account type of accounts, which are noninterest-bearing deposit accounts, treasury bills in there. That's the highest incentive product. So that's the biggest focus really the [indiscernible] side and the speed at which those rates continue to go up is where that's really going to play.

Yes. I would say that we kind of like you said, core margin flat for the foreseeable future is where we're comfortable right now conservatively. But I would say that there's probably more upside, not significantly, but there's probably more upside in that than there is more downside. Does that make sense?

No, that's very fair. I get it. And it's hard to predict exactly what the Fed is going to do, what's going to happen in 2024 and as one of the earlier callers mentioned you never know what competitors are going to do either. One other piece, and forgive me if I missed this earlier, but has the loan growth guidance really changed. I mean, should we have sort of an upper single-digit annualized growth rate for the next couple of quarters? Is that reasonable? Should it be low or higher? Just trying to figure out where we should peg growth going forward.

I think we'll continue to kind of downshift a little bit. So I mean I would say probably more on the 4% to 6% annualized range as opposed to upper single digits. A lot of advantages in this environment is growing at that rate including capital appreciation and benefit that it provides to the margin being able to not have to fund that last dollar with highest cost funding. So we feel like we'll benefit the most economically with a kind of 4% to 6% annualized range. And we are seeing a little less demand. Last quarter, I would say that most of the slowdown in growth in the quarter before that, the slowdown was our decision for the most part. But I would say that we would expect the second half of the year and are starting to hear a little more, maybe it's closer to 50-50 decisioning versus demand and might even slip into more demand-based deceleration of loan growth from what we're hearing anyway. Obviously, due to the increasing interest rates.

Got it. And just one final one for me. Jude, it sounds -- I think I heard you earlier say you feel like a 1% ROA is kind of a base from here from what you think you can achieve. Do you think that, that's -- I guess, -- just to clarify, do you think a 1% ROA is achievable for the year? And then if you take out the uncertainty of provision, do you feel like a 150 PPNR ROA that you bought I think I pegged you at 1.58% this quarter. Just what your thoughts are on that overall profitability?

Yes. I do feel like a [ 0.25% ] or 1% ROA is achievable for the year. My guys now are punching the numbers real quick to see about your other question. I don't usually think in terms of that ratio. But I do believe that we have evolved enough that we've kind of shifted from, as Matt put it earlier, the upside risk versus downside risk. We've gone from the downside risk of 1 being turning into that I think there's more upside opportunity to be 1. We do have variability within the different quarters, the different seasons and the first quarter tends to be lower, but I do expect that we'll be at 1% at least for the year and then build upon that next year. Great job. Matt, you want to answer to the other question?

Yes, yes. So the 1.50% you quoted there as a pretax and pre-provision ROA that's exactly in line with if we had the 1% or just over 1% core for the year. That translates to exactly 1.50%.

Your final question comes from the line of Graham Dick from Piper Sandler.

I just wanted to circle back to one of Kevin's questions on M&A. I know you said that it's a pretty high bar right now and would have to be attractive on a lot of fronts. But I guess as you look out a few quarters, maybe a calmer environment, multiples return. What criteria achieves that bar for you? What makes the deal look good and something you would really consider financially and then I guess also like strategically?

Okay. Well, I'll start with probably an answer, you don't want because it's not necessarily quantifiable or fit in a model, but I do. I shouldn't say that, you might still want it, but it's not as easy to model. From my experience and we've done a number of mergers now, I think the first thing that I look for is a good partner. I would want to make sure that our culture is -- cultures mesh. It doesn't mean our business models have to mesh, but our culture need to mesh. The winning period and good person at top and the team has a value that they can add. So the first thing that I personally look for how does that cultural fit our work. And we've been blessed with our deals, too. We've done thus far to be able to partner with people and for every deal that we've done, we've grown the footprint that we inherited. And that was because we were able to bring some larger balance sheet string to a team that already has capability. So we'll continue to look for that. As I've kind of talked about before, I think our first priority would be end markets, something that brings some density to one of our markets and which would imply also kind of lower operational risk. Ideally, that's a lower loan-to-deposit ratio, which helps with the liquidity questions. I would say anything -- I would say our sweet spot is probably $0.5 billion to $1.5 billion, I think, in the market, $1.5 billion makes a lot of sense. I think we -- the model that we used in Houston, where we did about $0.5 billion works well for a new market, which is to do that. That's kind of a big enough that you have something real, but it's also not so big that it's a better franchise on a movement in a new market when that time comes. As far as the financial metrics, clearly, we want to have a limited as possible payback period for something that's really strong and when times are normalized. I think we would look a 2.5-, 3-year payback as kind of the outside. And that would just be in kind of a special case if that would work for us. But in today's environment, something did happen to happen price-wise, I would expect it to be somewhat closer to a year in terms of payback. So I think one day once things normalize a little bit, you can obviously consider expanding that out forward a little bit. But again, since we don't have to do M&A, we probably will be a bit conservative on that. The question everybody wants to know about dilution and these things all kind of balance each other out. And so the payback period is really probably more important than the dilution necessarily. But obviously, at a normal time, we want to keep that probably in the 3% to 5% range, but it all depends also on the size of the bank. So over $1.5 billion bank is going to be, Matt just tells you, that it's going to be easier to have a lower dilution than it was $1.5 billion opportunity. So has been our historic kind of markers, not necessarily good or bad pricing, but more how big is the bank relative to our current balance sheet. What other metrics might not be missing out on that, Greg, what do you think?

I think you covered it..

Yes, so the most important thing to me is does it have a chance, a, culture, b, do we have an opportunity to be accretive from an earnings standpoint on a per share basis in a reasonable period of time. And ideally within the first 6 months, I would probably hope that we could -- or at least ideally within the first 6 months of enacting the changes that lead to the cost saves that gives you the earnings accretion.

All my other questions have been answered. I appreciate it guys.

Thanks, everybody, for your coverage.

That concludes our questions. I would like to now turn the call over to Jude Melville for closing remarks.

Well, just to reiterate, really proud of our team's efforts, and I wouldn't even say this quarter, this quarter in banking, it doesn't move that quickly, right? You had some -- have some action that you have to deal with in the current environment, but the real most important notes occur over a period of time and the kind of transition and our strategy and the achievement of some of our longer-term goals is something that we've been working on for quite some time. And we'll continue to work on, and this was a good quarter of progress towards attainment of those goals. And look forward to getting more done next quarter. Thank you all. I think that concludes our remarks. Thanks.