Good morning, everybody. Good day, and thank you for standing by, and welcome to the review of the first quarter 2024 financial results conference call. [Operator Instructions] Please be advised that today's conference is being recorded. .

I would now like to hand the conference over to your speaker today, Hoppy Cole, Chairman and CEO. .

Good morning, everyone, and welcome to our first quarter earnings call. We've got several of our team members with us today.

We have Dee Dee Lowery, our CFO; JJ Fletcher, our Chief Lending Officer; and George Noonan, our Chief Credit Officer; and each of those will give us some color on their respective areas, after I cover a few highlights for the quarter. Let's go and drive right in.

I thought it was a great quarter and a really good start to the year, a strong beginning point for 2024. .

Operating earnings were up 10% quarter-over-quarter to $20.6 million, and that was due to reduced operating expenses and reduced provision expense. And we did see some stabilization in the margin. Our core margin was only down 4 basis points compared to 19 basis points last quarter.

Loan balances at quarter end decreased but actually average balances were up for the quarter. .

We got some unexpected payoffs on a few large loans right at the end of the quarter. We also have SBA loan sales. The pipelines grew pretty substantially, and JJ will give us a lot more in-depth color on that in this report. .

Credit quality remained strong, continuing to do well with low past dues at 26 basis points. We had an improvement in NPAs and charge-offs were low at 1 basis point. So credit quality remain continues to perform extremely well. We grew our tangible book value during the quarter by $0.35 or 2% on a quarterly basis.

We increased our quarterly dividend by $0.01 a share to $0.25 per share per quarter or $1 per year, which has been an internal goal for quite some time. So all in all, we thought it was a really strong start to the year. Pleased with where we are and pleased with what the progress looks like for the rest of the year. .

So Dee Dee, would you like to give us an update on the financial performance for the quarter?.

Sure. Thanks, Hoppy. Obviously, as Hoppy mentioned, a great quarter and first time in several, several quarters that we had really no nonoperating items. So very few thousand dollars. So it's great to not have all that noise in there for you all to have to go through and explain.

But on an operating basis, I do have to do that because of last quarter, we had several things. But earnings did increase $1.9 million, which was $0.06 per diluted share up to $20 million -- $20.6 million from $18.7 million. So very pleased with that. .

And as Hoppy mentioned, most of that was driven by a decrease in our noninterest expenses by $1 million. And then the -- no provision needed this quarter, so provision expense was down $1.3 million, and we're still at an ACL reserve of 1.05%. So those 2 were the big drivers. .

Our net interest income was basically flat down about right at $300,000 for the quarter. The -- our cost of deposits increased 24 basis points for the quarter to 178 points, still a really good number based on our granularity in our deposit portfolio.

Our interest-bearing deposit costs increased 27 basis points to 2.45% and that drove our beta to 43% from 38% last quarter, so about 5 basis points. Our yield on our earning assets increased 8 basis points, but we also had an increase, obviously, in our interest-bearing liabilities of 18 basis points. .

And so as Hoppy mentioned that we did have a decrease in our core margin of 4 basis points, which is obviously less than we had last quarter and kind of what we -- kind of led to for this quarter that we would see compression this quarter and then into the next quarter, hopefully midyear, maybe stabilizing.

This was pretty good -- 4 basis points is pretty good, staying stable. .

I think we'll still see a little more compression into the second quarter. But we're talking about here a few basis points. So I think it's -- depending on a few factors, could go either way on that. But if no change in rates from the Fed, I think we're still going to see our cost of deposits go up some this next quarter.

Just from the competition, we're still facing with the Fed not cutting, we're still having to reprice and we're still having to match competition. .

And our specials, we had in the fourth quarter, expired at the end of the year, but we're still offering higher rates close to what we were for those specials because of what's out there in the competition. So we're still having to have increased costs.

So until we see a cut on that, I think our deposit costs are still going to be increasing a little bit as we go, but hopefully can start bringing that down some. .

Our loans, as Hoppy mentioned, did decrease $30.1 million, but our average loans actually increased $12.8 million. So that was great on average for the quarter. JJ will give some more information on that. Deposits increased $247.5 million for the quarter and that was -- $256 million of that was public funds.

So if you exclude the public funds, we were down about $9 million, which really is basically flat for the quarter overall, a small decrease. .

And if you recall, this is our public fund season where we're increasing our public funds for a large amount, as we've talked about in the past, anywhere from $200 million to $300 million, and then we'll see that spend out through the remaining part of the year so be expecting that as we go forward. .

We also paid down our borrowings during the quarter by $280 million. And so we're down to $110 million, still at the bank term funding program. That will expire in December. And then also I want to talk a little bit about our noninterest-bearing deposit portfolio. You noticed that decreased this quarter.

It was 28.6% last quarter, and it was 27.4% of total deposits this quarter. So down just a little over 1%, but a big piece of that, almost all of that, is because the increase in deposits was from public funds, which is interest-bearing.

If we just remain the same, based without all the influx of interest-bearing, our noninterest-bearing would have been about the same. .

So on our liquidity, our liquidity position still remains strong. Our ratios are well above our limits on loan deposit ratio at 77%. We have a borrowing capacity at the Home Loan Bank of $2.5 billion. And then we have about 28% of our securities are unpledged, which is about $480 million.

Over the next 4 quarters, our securities portfolio, estimated cash flows coming out of that is about $210 million, and that's coming out at about 180 basis points. .

So part of it kind of we've been talking about the last really several quarters is just kind of the restructuring of the balance sheet. I think we'll continue to see that this year, as these cash flows come off at that 180. It will go in Fed funds or loans. And so we'll definitely see pick up in some yield from that.

But still kind of remixing the balance sheet this year is the plan. .

Our ratios for the quarter, ROA was 1.03% and our return on average tangible common was 13.48%, and then our efficiency ratio was 61%. All of our capital ratios were in line from last quarter. 8.1% TCE, leverage ratio of 9.7% and a total risk base of 15.2%. So all of that was last quarter and overall, very pleased with where we're sitting today.

That's all for me, Hoppy. .

Thank you, Dee Dee. I appreciate that report.

JJ, would you like to give some a color on lending?.

Yes, sir. Thank you, Hoppy. As Dee Dee and Hoppy both alluded to, we did have a slight decrease in net loans. But behind that, there were a lot of positive factors that happened during the quarter. First of all, again, the SBA division had a record quarter in terms of loans sold in the secondary market, about $23 million.

And really, we're happy to see that because the legacy HSBI, SBA Group, which we did not have at the first, we began integrating that through the company.

And so that was really a result of a lot of referrals from legacy First Bank and then also loans from HSBI that had seasoned either construction or mature to be able to be sold in the first quarter. So really happy to see that in the income that came from that. .

The other thing, we did have, as Hoppy said, a couple of large payoffs at the end of the quarter. But on a positive note, about $35 million were made up in 3 credits, and the majority of that were priced at 3.25. So we'll be able to redeploy that in this quarter at much higher rates.

And one of those credits, the largest one was in the hospitality sector, which will give us some additional capacity in that area. So again, a net decrease, but a lot of positive attributes to those numbers. .

Average yield did decline a little bit from 8.26% to 8.12%. But again, if you look deeper into that number, we had 2 large credits in a very modest origination quarter that amounted to $35 million, one of which is a large C&I credit.

The other one of our top development groups that we have full relationship with, that we're real competitive on those 2 deals. Absent of those 2, our yield would have been about 8.30% for the quarter. .

We did begin to see some pressure, though, through all the regions, as the Fed signaled to pause and then potentially decrease in rates in '24. Some banks did start pricing in the 7. So we're seeing that more often in the mid-7s on average in several markets. So we'll be looking at that on a go-forward basis. .

Probably the most positive thing from the quarter, Hoppy alluded to, pipelines. We had a slight contraction at the end of the year, but at the end of the quarter, we were up almost 50% in total pipelines. And really across the board, there was no one area that had that substantial increase. It was really averaged out throughout the complete footprint.

So we're looking very forward to that in the second and third quarter from a pipeline standpoint. .

Other than that, it was a pretty uneventful quarter. Regionally, everybody had modest production, but pretty consistent. And then lastly, I would say that we've made a lot of progress in our systems. We always talk about that.

George and his team were rolling out a beta test for a small business express loan for $100,000 and below, which will help our commercial team quickly respond to those needs. .

And then our centralized consumer underwriting platform should be integrated. George may have more color on this really this, but really this month or by the end of next month. So by the end of this quarter, that will be fully integrated, which will add to our efficiency there on the consumer side. .

So all in all, even though a net negative number on loan growth, a lot of positives came out quarter from the lending standpoint. .

Thank you, JJ.

George, credit quality?.

Thank you, Hoppy. We continue to see acceptable and generally improving trends for most of our credit quality metrics in the first quarter. Our leading early indicator of metric 30-day delinquencies was certainly favorable.

We finished, as Hoppy said earlier, 30-day past dues of 26 basis points, that tracks really 12 basis points under our annual average in [indiscernible] so good movement there. .

Asset quality, I think reflected stability when compared to the quarter 4 '23. Our loans on nonaccrual were up minimally by $270,000 but very manageable there. NPAs declined by [ $1.9 ] million in the quarter. That's a decrease in NPAs of almost 9%. NPA as a percentage of total loans and OREO remain leveled at 40 bps for the second consecutive quarter. .

We're still in positive territory for loan recoveries exceeding loan charge-offs by $106,000 for the quarter. When just looking at the loan charge-off, net fees, we're at a minus 0.002% excluding the charge-offs there. ACL ratio remained level at 1.05%. ACL as a percentage of NPLs increase favorably from 456% to 463% there..

CRE concentration over time decreased a little bit by 1 basis point from 207% to 206% of risk-based capital, and that's comfortably below our 300% in our agency guidance level. There was an uptick of 29 basis points for classified loans as a percentage of capital plus ACL.

This resulted in a small manageable increase in the ratio from [ 676% to 705% ]. Net increase was really comprised of a handful of small midsized relationships and really no delinquencies among them from a problematic standpoint. .

Overall, as you see in the pie charts, our overall loan portfolio continues to reflect a strategic balance by our major loan types. On our occupied CRE, still stands at 25% of total loans; nonowner-occupied CRE at 21%; 1-4 family at 19%; C&I at 15% and C&D at 12%. .

Managing this segment continues to be a high priority from both production and the credit side, especially with respect to CRE and C&D segments. Our 4 major segments in C&D exposure, land development at 30%, multifamily 21%, other at 20% and residential of 18% reflect pretty stable trends for the last year or so, really.

In CRE, only 2 segments of our portfolio exceed 15% of the overall portfolio pie chart. Professional office at 25% -- excuse me, 24%, retail center at 16%. .

Average loan size in the portfolio continues to remain conservative. We're at $228,000 for our average loan side bank-wide. And from a portfolio stack ranking, the largest single loan outstanding is at an outstanding of $28.6 million and the top 20 loans in the bank represent only 6% of the total portfolio.

A borrower relationship level, top 75 borrowing relationships comprised 24.1% of total loans. And that ranges from relationships of $43 million down to the $10 million level. .

Professional office quality continues to perform well with an average loan size of $726,000 in professional office. So we think we're positioned well with relatively no exposure to the Metro office tower segment. Our buildings with heights over 2, 3 floors.

We continue to see minimal lease renewal issues, acceptable tenant stability and B2C credit issues in our office loan portfolio. And no -- and we talked about this a little bit last quarter, that we have seen insurance costs, escalating across not only office, but all CRE segments.

We're continuing to monitor those closely for operating margin progression across our markets. .

Substandard office loans were unchanged at 4.2% of our total office loans combined owner and nonowner-occupied professional office loans make up about 9.4% of our total loan portfolio.

And I think in particular note, at the close of quarter 1, professional office loans with 30-day delinquencies represented less than 1 basis point of our total outstanding professional office loan. So we like that trend. .

In summary, asset and credit quality continues to demonstrate a solid borrower resiliency across our markets. And recently, risk management enhancements have been added with a new internal loan review function within the bank.

We think combined with our ongoing external loan review process that will certainly help us augment our continued credit quality improvement initiatives for '24 and beyond. .

Thank you, George, great report. Credit quality remains strong and resilient in the face of making some stresses out there in the market. So great report, I appreciate that. That concludes our prepared comments. We open it up for questions now. .

[Operator Instructions] And our first question comes from Brett Rabatin from Hovde Group. .

I wanted to start on the deposits again and just thinking about the DDA was -- it seems like it's gotten to a level of stabilization, but it could have also been somewhat seasonal.

Any thoughts on the DDA levels? And then just the strong growth you had in the now and other, what you would attribute that to, if anything?.

DDAs, yes, there is some stabilization, and there's seasonality to it because now we'll be going into -- we've got pretty good market share in tourist markets, particularly in South Mississippi, South Alabama, Panhandle, Florida, Tampa markets.

So those markets will get into their seasons now, and we'll see an increase or we should see some increase in noninterest-bearing DDAs, as those money cycle through the season. So we were at a low point probably at the beginning of the first quarter. And so we begin to see that stabilize as we move forward.

Dee Dee, do you want to talk about the public inflows?.

Yes. Yes. The now and other really a big portion of that was our public funds. They're considered in that now account, and that was $256 million, I believe, was in the public fund inflow. So that's really most of that. The right on the overall public fund book of business is about 270. .

Okay. That's helpful. And then it sounds like the loan pipeline is building and I think a lot of banks are talking about mid-single-digit growth this year.

Can you talk maybe about your expectations for loan growth? And then how much remix we might see from securities to loans this year?.

Now that we've changed guidance recently, we had this little bit this quarter. Again, it's hard to tell 1 quarter over another, but currently, the pipeline has really had a nice growth. I don't really know where that goes the rest of the year. We just have to kind of see. .

I think we're still thinking -- our budget still mid-single digits, as you mentioned. That's our budget for the year, and a lot of that remix will be coming out of securities portfolio. So that's essentially using up all of that cash flow out of the securities portfolio, remixed in the loan. .

Yes. Okay. And then just last one, if I can sneak this one in on expenses. It's good to see the expense management.

Is there -- are there pressure points from here relative to the 1Q level? Or can you keep that really flat throughout there?.

I think that will be fairly flat. Usually, our fourth quarter, we haven't some kind of -- an uptick usually into the year approvals needed just -- but I think the consensus out there is $178 million for the year. And I think that's a pretty good number which would be a little bit of an increase from this $43.4 million we had this.

But overall, I think I've been kind of talking about $44-or-so million a quarter. .

One moment for our next question. And our next question comes from Matt Olney from Stephens. .

I want to ask more about the deposit cost and the competition around that. And I'm curious what you're seeing in your markets in recent weeks. I think in the prepared remarks, you mentioned just a handful of competitors still with some promotional rates. Any -- I think you mentioned that back in January as well.

Just looking to see if there's any change in that in recent weeks or still the same level of pressure?.

I think it's changed a little, but it's still -- we're still with the pressure of -- the competition are still running their specials. We ended -- as I mentioned, we had that 6 months, 5.25% was our stress last fall. And what we've dropped it to now is we have like a 3-month at 5%.

But what we're seeing out there from big names is 5 months, 8 months at 5% and 5.25%. So we had the one-off, as I mentioned last quarter from some smaller banks in different markets that are running little bit higher. But I think it's -- we still have a little bit of money market pressure. .

We had that -- the special for the money markets was 6-month guaranteed rate, it was 5% for 6 months, and then it was going to drop. And so what we had set up as those come due where that 6-month period ends for them, they're cycling into the tiered product that we have. And so depending on their balance, that's anywhere from 3.5% to 4.5%. .

But as you know, when they're coming out, well, I just had 5, and I need to be close to the 5 because so and so had this. So we're still having to face a little bit of that repricing pressure. But some will obviously reprice into these tiers that I mentioned. But... .

I don't think it's quite as fast as the fourth quarter though. .

Definitely not fourth quarter. .

Yes, compared to fourth quarter, it was really an intense battle. But it seems like there's a little pressure -- a little less pressure..

Is that fair JJ to you hear that from your folks?.

That's what we hear throughout the regions, yes. I agree. .

Okay. And then in the prepared remarks, you mentioned the seasonality in the first quarter. Can you just remind us of the seasonality that we should be forecasting for the second quarter, just the overall size of the balance sheet.

I think we've seen some contraction on the average balances of the last 2 years in 2Q, just curious kind of what you expect for the overall size of the balance sheet in 2Q of this year. .

Well, I didn't look back at last year's 2Q, but I think we'll start -- usually, we still kind of -- if you're talking about public funds on that seasonality, we get a little bit still in April, maybe May and then they'll start spending that.

But we also have the seasonality that Hoppy mentioned from our customers that are in the destination places that will pick up their balances. So -- I mean I'm kind of thinking we'll kind of be where we are. Those kind of things kind of offset each other. .

Yes. Kind of flat. And you really kind of see it in the third quarter, more so on the fourth quarter when you got sort of double things when you got public funds spinning out the money plus you've got -- the tourist markets are out of their season. So there's enough the money they've earned during the summer months.

So you see probably the biggest contraction in the fourth quarter, Matt. .

Okay. That's helpful. And then just lastly on the securities yields. I think we saw some of the benefit in the first quarter of that restructuring from a few months ago. Curious as what the appetite is for additional security sales and repurchases like you did previously, kind of the appetite there.

And then as you look at the market, the financials of such a trade, is it reasonable to assume a similar trade today? Or given the markets and the yield curve? Just curious kind of what you're seeing there. .

Well, actually, we were just -- we were talking about it yesterday and starting to run the numbers on that process to see if it's -- if we can do the same kind of trade and get the same pickup. We did have some treasuries that we were able to sell that we have been purchased in the past for kind of short term.

They were kind of Fed funds alternatives back when rates were lower and so we were able to sell those before and have a bigger gain. So we're growing the numbers. And obviously, if we can -- if it makes sense, and we can do something similar, we will do it again, I would say, in this quarter, but we're running the numbers now for that. .

And one moment for our next question, and our next question comes from Catherine Mealor from KBW. .

I want to ask on the buyback. You announced the authorization earlier this quarter.

Just curious your thoughts on how active you think you'll be on that?.

So we did announce it earlier in the quarter, got it renewed. We still look to use that as one of our capital management tools. Stock price at 25 is not as attractive. It gets down to the lower 20s, Catherine, I think it makes a lot more sense for us. .

Okay. Great. So more price sensitive than anything. And then, yes. On the margin, how should we think about -- so you gave guidance for the margin to be down just a little bit more this next quarter.

How do you think about if we don't see rate cuts in the back half of the year? How you think your margin will trend? Do you see more downside as just deposit costs keep pricing up? Or there is a scenario we could see your NIM actually start to expand even in a higher for longer environment?.

Yes. I think part of what we kind of have been talking about was looking at modeling our projections on looking forward. And that's higher single-digit increase in margin, but that also has the 2 cuts and July to November cut built in. So I think we'll still see pickup in yield on our loans.

There's still some room there, as those reprice the cash flows out of that and new loans that are going on, we'll see some pickup in that. .

I don't think as much as we have seen in the past few quarters, as it has been increasing on the loan yields. But I still see pick up from that. I think pickup from whether it's in the loan yields or in just deposits from the cash flow coming out of the investment, but we'll see pick up in yield on that. .

So those may offset, but I think if there is no change in rates, some of the deposit pressure because we're really -- we're still repricing a few things. The people, believe it or not, after how many years it has been there, with the freight cost going 2.5 or just now saying, "Hey, I only earn this much.

I need a better rate." And you're like thinking, where have they been, which I'm gland but -- so we have occasional one of those come up. .

But I think, hopefully, we're just kind of maintaining and it looks like looking at when you look at the deck on the deposit cost, we label it out for you per month, January, February, March and then looking at April, April is trending pretty much in line with March.

So I think that we shouldn't see a whole lot of difference, but I'm still always leaning toward a little bit of compression just because we are still facing some competition and pricing a few things. So I'm always going to be on that side. .

Yes. It's just a lot of little moving pieces there, but it seems very positive, I think. And with just being down 4 basis points, that's... .

They are positive. It's time to reprice up the curve, but then also the cash flow coming out.

So seeing the substantial increase in loan pipeline really just gives me some comfort around helping the margin in the back half of the year because we'll be able to use that cash flow coming out of the bond portfolio 181, reprice that back up the curve, something [indiscernible]. .

Yes. That makes sense. And then on loan yields, and you've seen really nice increase in loan yields in the past couple of quarters.

So you're C&D that should moderate a little bit in the next couple of quarters until growth picks up?.

I think so, Catherine, yes. .

And one moment for our next question. And our next question comes from Christopher Marinac from Janney Montgomery Scott LLC. .

Just wanted to drill down on the office portfolio just for a second. So Hoppy, we should be thinking of holistically as the combination of your construction office, the nonowner-occupied and then a residual component in the owner occupied.

Is that correct to get us to that total number that was cited in the slides?.

Yes. That would include all of those components. .

Okay. Great. Just wanted to clarify.

And then can you walk us through kind of the process for debt service coverage and stressing those? And to what extent is that already done? Or would that be kind of something that may adjust on criticized and classifieds as this year unfolds?.

We're stressing right now. We're still using essentially a 300 basis point shock in most of our stress methodology, realizing that we're probably at the top of the curve at this point, but that's still the shock bandwidth, if you will, that we use.

And of course, with all renewals -- and we're looking at a similar, every loan approval has a similar rate shock up to 300 basis points, as we're looking at those from an approval standpoint. So really it has not changed our methodology there. .

Great. And just I guess a similar question on the multifamily side.

Just what are you seeing in multifamily for either construction or for permanent that you are keeping on the balance sheet? And just any trends that are different there?.

We still have, I think, 8 or 10 projects to move over from construction into perm. The most recent of those are right on track for their absorption forecast. We're in some very good markets in multifamily and are seeing good occupancy.

A lot of our apartment complexes are not necessarily in the larger metropolitan areas where competition tends to be maybe more predominant. And so there are fewer options. .

And when you are the newest shiny object complete in a smaller market, I think it helps shorten the absorption period. So we're not really seeing any problems there.

Most of our permanent loans, as we look at those around footprint, we don't see rent concessions being made among our multifamily developers and things that you see in some of your larger maybe oversaturated larger metropolitan markets. .

Got it. Great.

Thank you for that background and then Hoppy, I guess a quick question for you from a strategic standpoint, do you find other banks are more willing to engage with you now than the past? Or is that sort of just conversation still the same?.

Conversations are kind of still -- I think people are thinking about it. But again, the math is somewhat challenging and there's a lot of uncertainty in the market. And gosh, you saw the new guidance that came out or the new proposal that came out from the FDIC, I guess, on some merger. I think they'll be using side mergers on application approval.

So I don't know if it doesn't -- it's not a ton -- or we haven't seen a ton of conversations going on right now. .

Great. And I'm showing no further questions. I would now like to turn the call back over to Hoppy Cole for closing remarks. .

Well, good. Well, thanks, everyone. We appreciate you participating this morning. Again, we think we had a really good quarter and a strong start to the year and a really good position for the balance of the year. So if there are no further questions, that will conclude our call for this morning -- for this quarter. .

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