BFST Q3 2026 Earnings Call Transcript

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DATE

Mon, Oct. 26, 2026

CALL PARTICIPANTS

• Senior Vice President, Director of Corporate Strategy and FP&A - Matt Sealy
• Chairman and Chief Executive Officer - Jude Melville
• Chief Financial Officer - Greg Robertson
• President of b1BANK - Jerry Vascocu

TAKEAWAYS

• Net Income -- $23.2 million, or $0.71 per diluted common share, increasing from $22.8 million in the linked quarter.
• Core Net Income -- $26 million, or $0.79 per diluted common share, excluding $3.5 million in merger-related expenses and a loss on the sale of securities.
• Core ROAA -- 1.17%, representing the company’s strongest core profitability in several years due to improved yield and expense management.
• Core Efficiency Ratio -- 61.1%, reflecting disciplined expense control and the realization of cost savings from the Progressive Bank acquisition.
• Loan Growth -- 7.2% annualized, led by the Houston, Texas, and Southwest Louisiana markets.
• Deposit Growth -- 7.7% annualized, driven by an increase in commercial money market accounts and the focus on core deposit relationships.
• Commercial Real Estate Loans -- $2.9 billion, increasing by $72.7 million from the linked quarter.
• Construction Loans -- $774.2 million, representing an increase of $80.7 million from the previous quarter.
• Residential Real Estate Loans -- $1.05 billion, decreasing by $30.6 million during the quarter.
• Net Interest Margin -- 3.86%, expanding 13 basis points from the linked quarter due to improved loan yields and lower funding costs.
• Core Net Interest Margin -- 3.80%, increasing 12 basis points on a linked-quarter basis.
• Cost of Total Deposits -- 2.25% for the month of September 2026, remaining relatively consistent with the full quarter average.
• Core Loan Yields -- 6.66%, up 9 basis points from the linked quarter as the portfolio continues to reprice in the higher interest rate environment.
• New Loan Yields -- 7.13% for the month of September 2026, with a weighted average of 6.99% for the full third quarter.
• Brokered Deposits -- $65.9 million reduction during the quarter, as the company prioritized paying down higher cost funding.
• FHLB Borrowings -- $334.2 million, reflecting a repayment of $108 million during the third quarter.
• Nonperforming Loans Ratio -- 1.24% of total loans held for investment, a 2-basis-point decrease from the linked quarter.
• Net Charge-offs -- 8 basis points of average quarterly total loans, up from 4 basis points in the linked quarter, primarily due to one previously identified commercial relationship.
• Share Repurchases -- $6.3 million, consisting of 204,160 shares repurchased at a weighted average price of $30.81 per share.
• Tangible Book Value -- $23.71 per share, representing a 1.7% annualized increase from the previous quarter.
• Core Noninterest Expense -- $56.9 million, decreasing $1.4 million from the prior quarter due to the accelerated recognition of cost savings.
• Financial Services Group Revenue -- 20% annualized growth, currently serving more than 200 banks through the financial services group.
• Asset Management -- $5.5 billion in assets under management through affiliate Smith Shellnut Wilson, LLC, excluding $1 billion of b1BANK assets.

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RISKS

• Melville stated, "The one area where progress came slightly slower than we had hoped is credit," referring to nonperforming loans moving down only modestly due to timing on positions in motion.
• Robertson warned that competitive rate pressure on the deposit side is emerging across multiple markets, with some retail specials nearing one-year brokered borrowing rates.

SUMMARY

Business First Bancshares, Inc. (NASDAQ:BFST) reported third quarter results characterized by significant margin expansion, balanced loan and deposit growth, and the successful integration of its most recent acquisition. Management reported that the conversion of Progressive Bank was completed in August 2026, positioning the company to capitalize on industrial and technology investments in North Louisiana. The company expanded its core net interest margin by 12 basis points through a combination of increased loan yields and the aggressive repayment of high-cost brokered funding and borrowings. Strategic growth initiatives included the addition of a commercial team lift-out in Tyler, Texas, and the continued development of the Houston pipeline, which began contributing to on-balance-sheet production during the quarter. Management confirmed a goal of reaching a 1.25% return on average assets by the fourth quarter of 2026, supported by expected continued improvement in core profitability and credit resolution.

• The company is seeing a network effect from its statewide Louisiana footprint, with South Louisiana companies winning construction and material contracts for the Meta data center project in North Louisiana.
• CEO Melville noted the strategic importance of recent industrial announcements, stating, "I don't remember in my lifetime... a time in which there was as much excitement about the economic opportunity here in Louisiana."
• The financial services group serves more than 200 banks, providing a non-spread-based revenue stream that management expects to grow at a 20% annualized rate despite quarterly lumpiness.
• Management indicated that the speed of interest rate changes represents a more significant factor for bank portfolio management than the direction of the movement itself.
• The company prioritized capital allocation toward share buybacks, repurchasing over 204,000 shares in the third quarter while still growing tangible book value.
• CEO Melville characterized the period as an "exciting to be boring" quarter, stating, "It really was a little bit of a boring quarter in some ways... It is exciting to be boring in a way because we are a bank."
• A seasonal increase in municipal deposits is expected in the fourth quarter, which management noted could impact overall liability costs and mix.

INDUSTRY GLOSSARY

• AOCI: Accumulated Other Comprehensive Income/Loss, a component of shareholders' equity that includes unrealized gains and losses on certain investments, such as available-for-sale securities.
• Core Efficiency Ratio: A non-GAAP measure that calculates the cost of generating revenue, excluding non-core items like merger expenses and securities gains/losses.
• FHLB: Federal Home Loan Bank, a source of wholesale funding for financial institutions.
• Lift-out: A recruitment strategy where an entire team of professionals is hired from a competing firm to establish or expand a business presence.
• NIM: Net Interest Margin, the difference between the interest income earned by a bank and the amount of interest paid out to its lenders and depositors.
• ROAA: Return on Average Assets, a profitability ratio that indicates how efficiently a company is using its assets to generate earnings.
• SSW: Smith Shellnut Wilson, LLC, an investment advisory affiliate of b1BANK that manages fixed income and equity portfolios.

Full Conference Call Transcript

Operator: Ladies and gentlemen, thank you for standing by. My name is Demi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Business First Bancshares' Third Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypads. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to Matt Sealy, Senior Vice President, Director of Corporate Strategy and FP&A.

You may begin.

Matt Sealy: Thank you. Good morning, and thank you all for joining. Earlier today, we issued our third quarter 2026 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 three of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com. Please also note our safe harbor statements are available on page six 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 on our slide presentation and earnings release. I am joined this morning by Business First Bancshares' Chairman and CEO, Jude Melville, Chief Financial Officer, Greg Robertson, and President of b1BANK, Jerry Vascocu. After the presentation, we will be happy to address any questions you may have. And with that, I will turn the call over to you, Jude.

Jude Melville: Okay. Thanks, Matt. Good morning, everyone, and thank you for joining us. Monday mornings come with plenty of competing priorities. We know that, and we appreciate you spending part of yours with us. When we spoke in July, we told you we expected a stronger second half, loan growth picking up, deposits rebounding, and continued progress on margin. I am pleased to say the third quarter delivered on each of those. I describe it as simply a quarter in which good execution turned into good results.

Loans grew a little over 7% annualized, led by the Houston pipeline we talked about last quarter, and deposits grew at a similar pace, which gave us the opportunity to pay down higher cost brokered funding and borrowings. Margin expanded another 12 basis points on a core basis, and expenses stayed in check. Added up, these incremental improvements produced our strongest core profitability in several years. With our shares trading below what we believe the Business First franchise is worth, we continued buying back stock while still growing tangible book value. The one area where progress came slightly slower than we had hoped is credit.

Non-performing loans moved down only modestly this quarter, primarily due to timing on positions already in motion. We expect to show further progress on non-performing loans in the fourth quarter. One thing worth noting is that while we had an uptick in NCOs, these were primarily loans previously discussed in this forum, the bulk of which were already fully specifically reserved for as we worked on resolution over the course of the year. Just as important, though less visible in the numbers, we completed the Progressive conversion in August.

Conversions are rarely as easy as they look from the outside, and I want to thank our North Louisiana clients and teammates, both in North Louisiana and throughout the company, for making this one as smooth as any I can remember. It positions us to hit the ground running in a region where investment activity continues to build. Looking ahead, the set of opportunities across our footprint is as broad as I have ever seen it. North Louisiana is now home to not only Meta's largest data center, but also in the northwest corner of the state, Amazon's roughly $20 billion commitment. The opportunities in Houston and Dallas speak for themselves.

Southwest Louisiana keeps delivering steady growth, something we expect to continue as SpaceX's $100 billion investment gets underway. We were pleased to add a six-person lift-out of a commercial team in Tyler, Northeast Texas' largest city, giving us the opportunity to begin filling in the I-20 portion of our footprint between Dallas and Shreveport. Finally, our financial services group, now serving more than 200 banks with the addition of American Planning Corp, is growing revenue at better than 20% annualized. Our job is to pursue these opportunities with the same discipline that got us to this point.

If we can do that, we expect to see continued improvement in core profitability, not over the rest of the year, but into 2027. Again, thank you for your time and attention. With that, I will now turn it over to Greg.

Greg Robertson: Thank you, Jude, and good morning, everyone. As always, I will spend a few minutes reviewing our results and will discuss our updated outlook before we open up to Q&A. Third quarter GAAP net income and EPS available to common shareholders was $23.2 million and $0.71 per share and included $3.5 million in merger-related expense and $21,000 loss on sale of securities. Excluding these non-core items, non-GAAP core net income and EPS available to common holders was $26 million and $0.79 per share. From our perspective, third quarter results marked another quarter of strong financial performance, generating a 1.17% core ROAA and a core efficiency ratio of 61.1% core.

Core pre-tax, pre-provision earnings for the third quarter was $36.3 million and exceeded our expectations. Our third quarter earnings results were highlighted by better than expected margin expansion, balanced loan and deposit growth, and disciplined expense control. The third quarter benefited from recognizing substantially all cost saves from Progressive acquisition and a full quarter impact of the loan sale of lower yielding loans. The strong financial results allowed us to remain active repurchasing our common shares during the quarter. On our balance sheet, total loans held for investment increased $21.4 million or 7.2% annualized on a linked quarter basis. Led by our Houston, Texas, and Southwest Louisiana markets.

Based on unpaid principal balance, Texas loans were unchanged from the prior quarter at 35% of our portfolio. Total deposits increased $141.2 million or 7.7% annualized, driven by $119.1 million increase in interest-bearing deposits and $22.1 million increase in non-interest-bearing deposits. The increase in interest-bearing deposits was largely attributable to $180.1 million in commercial money market accounts, partially offset by the decision to pay down roughly $66 million in higher cost brokered deposits during the quarter. During the quarter, we also managed to repay $108 million in FHLB borrowings, bringing our total FHLB balances to $334.2 million. Looking ahead to Q4, we do see some opportunity to further reduce borrowings in brokered deposits.

Lastly, I think it's worth mentioning the slight increase in tangible book value per share, which increased approximately 1.7% annualized during the linked quarter. While this is not a significant increase on an absolute percentage basis, we feel positive movement in tangible book value per share while being active in our buyback plan and while interest rate pressured AOCI is certainly a noteworthy highlight of the quarter. Moving on to the margin, our GAAP reported third quarter net interest margin increased 13 basis points linked quarter to 3.86%, while the non-GAAP core net interest margin, excluding purchase accounting accretion, increased 12 basis points from 3.68%-3.80% for the quarter ended September 30th.

The margin performance during the third quarter was driven by improvement in loan yields and slight decrease in funding costs due to the previously mentioned reduction in brokered deposits and reduction in FHLB balances. The margin also benefited from a full quarter impact of the Progressive loan sale, which occurred in late Q2 of this year. Loan discount accretion during the third quarter was roughly $1.2 million, was driven by higher than expected early paydowns. However, going forward, we expect loan accretion to average about $500,000 for the next few quarters. On a linked quarter basis, cost of total deposits decreased 2 basis points while total loan yields increased 10 basis points.

Core loan yields, excluding loan discount accretion for the third quarter, was 6.66%, up 9 basis points from the prior quarter. Total cost of deposits for the month ended September 2026 is 2.25%, which was relatively consistent for the Q3 2026 full quarter weighted average. We are pleased with our continued ability to hold the line on new loan yields during the quarter with a weighted average of new and renewed loan yield of 6.99% for the third quarter and 7.13% for the month of September. I'd like to make a note of a few takeaways to slide 19 in our investor presentation. We continue to see 45%-55% overall deposit betas achievable regarding any future rate changes.

I'd also like to point out overall core CD balance retention rate was 77% during Q3. This impressive statistic reflects our team's continued focus on maintaining and retaining core deposit relationships. Our baseline assumption is that interest rates remain flat for the remainder of 2026, other than the recent September increase in Fed funds. We would expect additional rate hikes to slightly benefit our net interest margin and net interest income in the near term. On the income statement, GAAP non-interest expense was $60.5 million and excluded $3.5 million in non-reoccurring acquisition conversion related expense, which included $1.23 million in lease termination expense. Core non-interest expense for the third quarter was $56.9 million, down $1.4 million from the prior quarter.

This was below our expectation for the quarter and was driven by an acceleration in recognizing cost saves from the Progressive acquisition. Recall, we completed Progressive's core conversion in mid-August of this year. Third quarter GAAP and core non-interest income was $12.5 million. GAAP results did include a $21,000 loss on sale of securities. Non-interest income results for the third quarter were slightly below our expectations, primarily due to the lower than expected SBIC revenue and swap fee revenue. As we have mentioned in the past, some of our non-interest revenue business can be lumpy from quarter to quarter, but over the immediate and longer term, we do expect a steady build and overall contribution.

Lastly, in credit quality, I'd like to mention the modest improvement in credit quality during the quarter, highlighted by our 30-day or more past due ratio, 0.48%, holding stable over the last three quarters. The ratio of non-performing loans compared to loans held for investment decreased 2 basis points to 1.24% to September 30th, while the ratio of non-performing assets compared to total assets decreased 1 basis point to 1.22% compared to the linked quarter. I'd like to mention the increase in charge-offs during the third quarter was attributed to a single previously identified and fully reserved commercial relationship.

This credit cleanup is consistent with our previous conversations, and we expect continued resolution as we move forward over the next few quarters. That concludes my prepared remarks. I'll hand the call back over to you, Jude, for anything additionally before opening up to Q&A.

Jude Melville: Thanks, Greg. I would just summarize by saying we've been, I think, fairly transparent and consistent in the things that we've been speaking about to you over the past few quarters, and which match up with the things that we've been working on as a bank. Not that complicated. Healthy growth, discipline on the expense side, making sure that we execute on acquisitions, and then making sure that we're thinking through our capital allocation decisions. I think what we saw in the third quarter was those elements of incremental improvement coming together to produce good results.

We look forward to continuing to focus on those kind of broad principles as we navigate the opportunities and inevitable challenges that we'll have over the next few quarters. We look forward to it. With that, I will turn it over for any questions anybody might have.

Operator: Thank you. We will now begin the question and answer session. To ask the question, you will need to press star then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. We do request for today's session that you please limit to one question and one follow-up. Thank you. Our first question comes from the line of Matt Olney with Stephens Inc. Your line is open.

Matt Olney: Hey, thanks. Good morning, everybody. I want to start on the good morning. On the loan growth front, good to see some strong trends this quarter. It sounds like Houston was a big driver. Any more color on the pipelines from here? Then, I guess the second part, you mentioned the lift out of a team in Tyler, would love to hear about expectations that you have for this team. Thanks.

Jude Melville: Sure. I will start us off, Greg. We do see the Houston pipeline that we have been building beginning to turn into actual on-the-books production, which is exciting, and we believe that will continue. One thing we are especially pleased with is that, whenever you recruit bankers over, often they have a period of non-solicitation. A number of the members of our expanded team are operating under that or have been able to produce even with those constrictions. We will look forward to when we pass the year mark and be able to broaden the universe of their calling efforts. We are very pleased with the progress there and anticipate that will continue.

Also saw good moderate loan growth in parts of Louisiana. Southwest Louisiana and the capital region are doing well, and North Louisiana as well. We saw some positive movement. One interesting thing that we are seeing, I talked a fair amount last quarter about the Meta development in Northeast Louisiana, where we now have a significant presence. We have been there for a number of years, but it, of course, was added onto with our Progressive acquisition. One interesting thing about that is we are actually seeing an uptick in loan production in the other parts of our footprint related to the Meta investment.

So when you think about who is actually moving materials and being involved in the construction, quite a bit of it we are seeing is coming from South Louisiana. Some of the uptick in fundings in Baton Rouge and Lake Charles and Lafayette have come from companies already prepared and actively serving in the Meta area. It has been nice to see the kind of network effect of our footprint. Being the only community bank in Louisiana that's truly Louisiana wide in terms of our footprint, we're seeing benefit in multiple areas, which we would expect to continue. I know Greg can talk a little more about that in terms of details, if you want to, Greg.

Greg Robertson: Yep. Matt, we think going forward, Q4, we feel like the mid to upper single-digit growth with the pipeline that we're seeing, as you mentioned, continued build out of Houston is what we're expecting to see. More in line with kind of a replication of the performance in Q3. I think one of the things that we're seeing, and this is kind of moving away from loan growth, but I think it's a result of loan growth, is the probably noticed risk-based capital had a slight decline. I think that the impact of some of the unfunded commitments for these types of business Jude was referring to with some of our better clients.

That unfunded commitment portion does drag on capital a little bit. That is short-term, and we feel like we'll be accreting capital with the loan growth relative to those relationships going forward. We feel good about the pipeline, for sure.

Jude Melville: Matt, I know your second question was on Tyler, which we're excited about. At the beginning of the year in our board planning process, we discussed areas of our footprint that we would be most excited about filling in. I guess it's the right word. It's a new venture, but it also is squarely within our current footprint. Tyler was top of that list. We feel like there's some really a good growth story in East Texas, and Tyler is kind of the jewel of East Texas in that regard.

When you think about it being not only what we could do in Tyler, but as a window to the rest of East Texas, particularly Longview, those other growth areas along I-20, we're excited about the long-term opportunities that we have there. The team that we partnered with came out of a community bank there in Tyler, and feel like they will be able to hit the ground running and make a material difference for us, not only in the long term, but over the next years as they work to transition their book to ours.

We have a good history, not only of being able to move business, but because of the size of our balance sheet relative to most community banks in the area, we can actually allow them to do more with their current clients. We are excited about the opportunity to enable those bankers to better serve their clients, and look forward to seeing what they can do.

Matt Olney: Okay. All right. Well, I appreciate the color, Jude and Greg, on that front. If I switch over to core margin, I am curious also at expectations there. I mean, the 380 margin we are at now is the highest we have seen in a while. So congrats on that. Would just love to appreciate expectations on the core margin from here. It sounds like you are not expecting any rate changes, in the near term at least, but would love to kind of appreciate your outlook, if you sensitize that based off higher rates from here. Thanks.

Greg Robertson: Yeah. We expect the margin to expand in Q4. I will put a little bit of context to that. The 25 basis point rate hike that we saw in September, with our balance sheet being slightly asset sensitive, 53% of our loan book is variable price. We did get some benefit. All of those have repriced by now. As a result of that, it would lead you to believe that we should see some margin expansion. I will say that with a caveat, as we move through Q4, what we are seeing is some competitive rate pressure on the deposit side.

For example, there are some specials we are seeing out there in our pretty much across the markets, that are very nearing one-year broker borrowings rates. We are going to keep an eye on that. Our bankers have been doing an excellent job of recruiting new relationships and managing funding costs. But it is something to stay aware of. That with our build that we seasonally get in Q4 from municipalities, that does have an impact on the liability side from a cost standpoint. We are going to keep an eye on that. I think we feel like margin expansion in the fourth quarter is very achievable. But we will have to continue to manage the liability side of it.

Jude Melville: We started really talking publicly about a year ago about margin being our priority over growth. We think we can do both, but we will continue to focus and prioritize on incrementally improving that margin as we can. This level of growth on the loan side, and particularly when it is match funded, feels like a pretty healthy natural rate. If we can continue to have this moderate healthy growth and maintain a little bit of incremental improvement on the margin each quarter, I think we will all be very pleased with the results.

Matt Olney: Okay. I appreciate the commentary, and congrats on the results. I will step back.

Greg Robertson: Thanks.

Jude Melville: Thanks.

Operator: Next question comes from the line of Feddie Strickland with Hovde Group. Your line is open.

Feddie Strickland: Hey, good morning. Just wanted to ask a couple questions here on fees. There was a $500,000, I think, step down in the other fees line versus both last quarter and last year. Was there any one item driving that?

Greg Robertson: I would say, not necessarily. I think it's just seasonally as we continue to work through different types of client bases. I think that's just the movement that you would expect to see. No major step back from a total standpoint. I think on the non-interest income side, I think the thing that we felt like that really underperformed expectations, as we mentioned, was the SBIC and the timing of the income from those investments sometimes is a little bit tricky. And then also the swap revenue that we've seen quarter-over-quarter. I think the yield curve had a little bit to do with that and also some timing of some deals that are coming through the pipeline.

We expect to see that start to trend back up, though.

Jude Melville: I think we've been able to talk a few times about one of the good side of this part of the business is that it's generally non-spread based, right. It's a diversifier, but the challenge sometimes is that the earnings can be a little bit lumpy quarter to quarter, and you really have to take a step back and look at the overall longer-term trends. And we still remain on pace to improve revenues 20% and bottom-line earnings 20% year-over-year, which would be, I think, the third year that we've done that. And we anticipate that trend will continue.

Just might be a little up and down as we get there, but that's the nature of that type of business, and it's a good thing. We think we'll revert to the mean a little bit in the fourth quarter and should see a little, again, not a major uptick, but maybe a little bit back to the norm in the fourth quarter in that line item.

Greg Robertson: One driver, Feddie, in that group is it's not always predictable to control the revenue coming off of it. As Jude mentioned, it's kind of lumpy. But one thing we're proud of is while growing the business, I think the banks that we serve now that make up part of that revenue stream are over 200 banks. As we continue to grow and add relationships with banks, you would hope that would continue to offset some of the lumpiness.

Jude Melville: Yeah. Same thing that as we grew our core bank, in the early days, particularly being a business bank, the individual client exposure could be fairly lumpy. Rather than try to run off some of those bigger clients, we actually grew into them so that the lumpiness became more diversified and a large enough group that changes in individual client relationships mitigated through the number of client relationships. To Greg's point, we're building a large number of banks in which we have a relationship. The larger we can get that group, then the less lumpy individual transactions will appear. So good opportunity for us to keep working on as we continue to grow that part of the bank.

Feddie Strickland: That's great. Just on that same topic, is there any potential impact I should think about if we do see rate increases and higher long end yields? How does that impact SSW and the FIG group? I get a lower gain on sale and swaps most likely, but just curious how SSW and the FIG group in particular might see changes with where the yield curve is.

Greg Robertson: Yeah, I think we'd have to keep an eye and pay attention to SSW, their RIA. So assets under management matter. AOCI negatively impacts that. But they historically, if you look back at their earnings since our partnership with them, they've not only added banks to offset some of this, like we were talking about previously, but also if you compare their performance versus the industry, the impact to AOCI was significantly less than industry. We feel good about the way they manage that portfolio, and it will be impacted to your point. But I think they are doing the things not only on a day-to-day basis, but also by adding additional banks to offset the income impact as well.

Jude Melville: Yeah, I think that's a really good point. Not to get too weedy, but SSW, who, as you know, worked with us for 17 years before we officially partnered with them. SSW guides their clients in the construction of their investment portfolios to focus more on cash flow than on yield. One of the things that has done is meant that the duration risk as rates increase has been lower than it has been for non-SSW peer banks. So I think from proving out their worth to potential clients, we actually have a good story to tell there.

As rates move, I think that story will be only more apparent, visible, and be a great proof point to potential clients that we offer value in a way that's different from just a normal brokerage-type arrangement. The other thing about managing for cash flow versus just yield is that it means that as rates rise, then they will have the opportunity to reinvest that cash flow faster than some other banks that are not following that same philosophy. That should be an opportunity to serve our client banks at an even higher level, which should ultimately benefit them in terms of being able to grow the client base.

In banking, whether it is the SSW part of the world or the core bank, it is not really rate movements that gets you. It is how quickly the rates move that gets you. Right now it feels as if it is going to be a fairly measured rate of increase, which I think is something that we can all manage through much less painfully than the March Madness days and times at which they had to move rates a lot quicker in order to get done what they felt needed to be done. We do not view it as a negative. We view it as an opportunity.

Greg Robertson: Yeah. Feddie, I think another data point outside of the SSW relationship with a lot of these banks, our FIG group manages slightly over $300 million in deposits from other banks as well. So that is a part of our balance sheet. The funding cost on that is between 75 and 90 basis points below what a one-year FHLB and broker would be today. It is on the higher price, but it is also relative to other funding types cheaper and help solidify those relationships with multiple products.

Feddie Strickland: Perfect. That is great color. Thank you both. I will step back.

Operator: Next question comes from the line of Michael Rose with Raymond James. Your line is open.

Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Greg, I just wanted to start on expenses. I think you said that essentially all of the Progressive cost saves have been realized through the third quarter. Obviously, this quarter's results were better than expected. Just how should we think about the growth rate from here, starting point for the fourth quarter, and then as you continue investing in bankers, infrastructure, and technology as we move into next year, how should we at least initially think about a base rate of expense growth for you guys? Thanks.

Greg Robertson: It's a great question. I think what we expect in the fourth quarter would be about $57 million as the base case, starting there, and then low single-digit organic growth rate going forward over the next year. I think what we expect is to grow maybe not as aggressively as we did with our Houston team lift-out in numbers. But we want to continue to fill in organically bankers in our markets to deepen those relationships that we have in our existing markets, and that'd be Texas and Louisiana.

Michael Rose: Okay. That's helpful. Then I wanted to go back to Matt's question on the margin. I think I heard that the new and renewed loan production was at 7.13% in the month of September. I think you guys said that you don't have any more rate hikes built in, but the forward curve certainly does. I guess the real question is there opportunity for you to kind of continue to lag deposit cost increases? And should we kind of contemplate at least some additional margin expansion at least in the earlier part of next year? Thanks.

Greg Robertson: Yeah, the lag is the key. That's a great point. I think what we think is all things being equal, as long as rates are measured, we think low-to-mid single-digit margin expansion quarterly, depending on that lag, is probably achievable and reasonable. First in the fourth quarter, and then depending on how many moves happen going forward.

Michael Rose: All right. That's helpful. I'll step back. Thanks, guys.

Greg Robertson: Thanks.

Operator: Next question comes from the line of Gary Tenner with D.A. Davidson. Your line is open.

Gary Tenner: Thanks. Good morning. Just wanted to follow up on, Greg, your comment about the September loan yields. Just curious if you're seeing any kind of pressure on demand or transactions as it relates to the higher rate environment.

Greg Robertson: We are pleased with the demand we are seeing and the pipeline we are seeing. I think the rate environment is a component of it, but what we are experiencing is with new bankers and new teammates, their pipeline and moving that business has not really shown any decay due to the 25 basis point rate move. We are excited about it, and more recently saw loan committees with multiple new deals presented with all rates around the 7% mark, which we were very happy with that. We feel good about the pipeline. So far, the rate environment does not look like it has decayed any of the work our bankers have been doing to move those relationships over.

Gary Tenner: Thank you for that. In terms of the deposit beta that you had noted that is in your deck, I assume that is sort of based on the existing deposit base, but if you are able to further reduce the brokered deposit amount, the overall cost of deposit should increase at a pace below the beta that you are targeting. Is that the right way to think about it?

Greg Robertson: [crosstalk] That is exactly right.

Gary Tenner: Is that inclusive of changes in the mix?

Greg Robertson: No, that is the right way to think about it.

Gary Tenner: Great. Thank you.

Operator: Next question comes from the line of Christopher Marinac with Brean Capital. Your line is open.

Christopher Marinac: Hey, good morning. Wanted to ask about Dallas, and is Dallas de-emphasized, or what would be the outlook for there? Again, appreciate all the success in Houston that you have called out this quarter and last quarter too.

Jude Melville: Yeah, not de-emphasized. In fact, we hired a new market leader there about two months ago, and he's jumping in and beginning to make his mark. We did have, if you look at our asset quality upticks that we had earlier in the year, I would say the bulk of them came from the Dallas area. Again, not a huge number when you think about the amount of growth that we've been able to put on the books over the past seven, eight years. But we certainly have an opportunity to kind of hit the reset button a little bit on some of those relationships, and that's why it's been a little flatter as of late.

But in terms of the potential and opportunity going forward, we're as excited about Dallas as we've ever been. Maybe we don't talk about it quite as much because it's kind of a given, just being Dallas. We've been talking more about some of the newer opportunities within our footprint. But Dallas remains. It's actually our largest individual market. As we continue to add bankers there, we anticipate really good things from Dallas as well. As we talk about our overall growth goals, those include performing well in Dallas over the next few quarters as well.

Christopher Marinac: Great, Jude. Thank you for that. I appreciate it. Then just to follow up on sort of the announcement by SpaceX to do a big development in South Louisiana. What does that mean from your standpoint, both for commercial and also residential activity?

Jude Melville: Yeah. Well, much like the Meta investment, maybe even on a bigger scale. It's a tremendous opportunity for Louisiana and therefore a tremendous opportunity for us given our footprint. We were already excited about the opportunities in Lafayette area, the Acadiana area, even without SpaceX. I think they've done a nice job of diversifying their industry exposure over time. If you were to ask me six months ago what area of Louisiana was I most excited about, of course, we would talk about North Louisiana with the data centers. But I would have also put Lafayette there as an area that we want to continue to invest in and take advantage of the growth opportunities there.

So that's only been magnified now that SpaceX has made their announcement. It's really hard to quantify a $100 billion investment in an area that hasn't seen a lot of that type of investment over the years. It's difficult to say with any specificity what that means other than it's going to be really good for the economy. That should impact both commercial opportunities and residential opportunities over time. When you think about our prioritization of new branches within Louisiana, that's most likely to be our number one priority to make sure that we capture our fair share of the benefits. I think there's still some things to figure out in terms of specifically where the activity will take place.

I don't mean the actual spaceport itself, but when you think about roads being constructed, for example, to access the facilities and where the executives that are working there will be living, there's still a little bit of work to be done in terms of planning. I think it's something that we'll probably see a little on the commercial side, we'll probably see the benefit sooner. There are already companies at work, and the infrastructure from a commercial standpoint is already in place. I don't mean the physical spaceport, but I mean the companies that can support the work to build out the infrastructure are already active and in place.

I would expect that we see more commercial uplift in the near term. Over the long term, there should be a lot of residential impact as well as some of the pieces of the puzzle fit in. $100 billion is a lot of money, a lot of investment, and when they're successful, I doubt that will be the last investment. You're already seeing some of the other areas of the state where we have data centers and things of that nature are expanding their investment, and wouldn't surprise me if SpaceX ends up in the same way.

A little hard to quantify exactly what the benefits will be, but they're going to be significant, they'll be large, and they'll be meaningful. It's going to be an operating plan. One of the concerns about the data center investments that has been raised has been what happens after construction in terms of the actual jobs created. Not that worried about with the data centers because the investments are so large that the construction periods are. I think I saw the Meta construction just on the current investment is not scheduled to be complete until 2031. Still have a number of years to go there.

When you think about the spaceport with SpaceX, that's an ongoing operation that will employ individuals for a long time and have other ancillary industry developments as vendors and other experts choose to co-locate in the area. I think that's one that will be meaningful for a long period of time. We feel like we're well placed to be an active participant in that development. Really, I don't remember in my lifetime, and I'm a lifelong Louisiana resident, 52, and I don't remember a time in which there was as much excitement about the economic opportunity here in Louisiana.

Christopher Marinac: Great, Jude. Thank you for sharing all that background. I appreciate it. Thanks for hosting the call today.

Jude Melville: Yeah. Thank you.

Operator: There are no further questions at this time. That concludes the question and answer session. I will now turn the call back over to Jude Melville for closing comments.

Jude Melville: Sure. I just want to mention that I appreciate the North Louisiana integration process that we just went through, and the smoothness of it speaks to the teammates that we inherited and to our own team in terms of their proactive and positive jumping into the opportunity. While the Progressive teammates have been teammates since the beginning of the year when we formally closed the acquisition, it is exciting to share a name and share processes and truly operate as a team. Again, I want to thank them for the positivity which they jumped in. I also want to reiterate my appreciation for the Tyler team that took the risk to come join us, and look forward to supporting them.

Again, I will get to see some of them tomorrow, in fact, and look forward to that. I would say the things that, just in closing, the things that we have been working on, again, are working and it is nice to have some optionality. When you think about our focus on growing tangible book. I know on a percentage basis, as Greg said, we did not grow significantly, but it was positive, and we would have actually grown significantly more, I think over 14% tangible book if they had not had the AOCI impact and if we had not done share buyback.

It is nice to have that optionality when you think about the difference in our balance sheet, in our P&L today versus a year ago. You can kind of summarize it in saying that we have built in more optionality, whether that be from a healthier funding base, diversification of earning assets, or profitability leading to a situation in that we are growing capital faster than we are deploying it, even though we are deploying it at a healthy rate. So I love that optionality and plan on continuing to maximize that opportunity in the coming quarters and years. It really was a little bit of a boring quarter in some ways, if you think about it.

It is exciting to be boring in a way because we are a bank, and so we like that, and I want to continue that. I appreciate everybody's time and everybody's efforts over time that have led us to this spot, and excited about continuing. Look forward to visiting with you again. Matt, you had something you wanted to add?

Matt Sealy: Might have one more, it looks like. Looks like someone has got a follow-up question here. I want to see if we could get them in, if possible. Feddie, I do not know if that was you, is what it looked like it might be. I want to make sure we get all questions addressed. Let us see. Operator, could you potentially open up Feddie Strickland's line with Hovde Group?

Operator: One moment, please.

Jude Melville: No?

Operator: One moment, please.[audio distortion] Okay, Feddie Strickland with Hovde Group. Your line is open. Please go ahead.

Feddie Strickland: A late follow-up here, not sure if you can hear me. But just wanted to ask about credit. It seems like there is still credit improvement on the horizon here. Maybe some items just took a little longer to get to the finish line than you expected. Just how should we think about the workouts and overall level of NPAs the next couple quarters?

Greg Robertson: Yeah, thanks. Thanks, Feddie. We still expect to reduce NPAs in the fourth quarter. I think they will continue to work. As resolutions happen in that type of business, sometimes they are delayed as you work through the process. We feel pretty confident that some of those delays in the third quarter will pull through into the fourth quarter and you will start seeing reductions upwards of $15 million in the fourth quarter in those. And then that will continue to move throughout the first half of next year. Maybe not at that clip, but they will continue to move down with our target range of having that NPL percentage of loans being 50 basis points or less.

Feddie Strickland: Perfect. That would do it. Thank you so much.

Greg Robertson: Yeah. I think one thing that we talk about that impacts performance, and then we feel like the fourth quarter, Jude's always about, since the beginning of the year, our ROAA performance. Third quarter was evidence of the kind of plan pulling forward. NPAs are a part of that as you start putting those assets back online. We do expect, we have a glide path to get in the fourth quarter to that 1.25% goal that we've talked about all year. I think each component, whether it be margin, loan growth, deposit funding, the cost of that funding, has to fall in line, kind of like they did in the third quarter.

But I think if those components continue to play out, I think we'll be pleased with fourth quarter results and have a way to get to that 1.25% as well. Non-performing assets is a part of that.

Jude Melville: Yeah, I think everything is we've. Go ahead.

Feddie Strickland: Sorry, just 1.25% ROAA. Is that?

Greg Robertson: Yes. Yeah. That's it.

Feddie Strickland: Got it.

Jude Melville: Yeah. As we've said earlier in the year, that means we have to be able to perform on all cylinders, and things have to work out. But right now, we believe we can do that. We certainly plan on continuing the upward trajectory from our 1.17% in the third quarter. Where exactly we end up, we'll have to see. But we do know that it'll be significantly better from a long-term structural profitability standpoint, wherever it ends up than we began the year, which really should be our goal every year, right? All right. With that, I won't subject you all to a repeat of my closing statement.

But do want to thank everybody for being with us and for following. I am happy to answer any follow-up questions offline should you have any. So thank you all again. Have a good week.

Operator: This concludes today's conference call. Thank you all for joining, and you may now disconnect.

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