Business First Bancshares, Inc. Aktie

Hello, and welcome to the Annual Meeting of Shareholders of Business First Bancshares, Inc. Please note that today's meeting is being recorded. During the meeting, we will have a Q&A session. [Operator Instructions] It is now my pleasure to turn today's meeting over to Jude Melville, Chairman of the Board. Mr. Melville, the floor is yours.

Good morning, ladies and gentlemen, and welcome to the 2026 Annual Meeting of Shareholders of Business First Bancshares. I'm Jude Melville, Chairman of the Board of Business First Bancshares, and I will act as Chairman of this meeting. Being able to hear from our shareholders is important to us. Although our shareholders who are attending virtually will not be able to speak verbally during the meeting today, you have 2 ways to ask questions or make statements. First, when you registered to participate in a virtual meeting, you were given an opportunity to submit a question writing. If any questions were submitted to the extent appropriate, we'll read them aloud to them later in the meeting. Second, you can submit a question writing during this meeting through the Q&A function on the virtual meeting website. We will also use the Q&A function to receive seconds to motions to the extent not received in person in the boardroom. As with the questions submitted during the registration process, we will read and respond to appropriate questions later in the meeting. A couple of other housekeeping announcements.

First, there are several documents that you may want to access during the meeting. When you registered, you should have received a copy of the agenda and rules of conduct for today's meeting. The company's proxy statement and annual report are located on your screen now, and you can click on each document to access it.

We ask that in fairness to all shareholders attending this meeting, you honor the rules of conduct. Please take a moment to familiarize yourself with the rules. In accordance with the notice of this meeting that was previously delivered to all of our shareholders, I hereby call this meeting to order. There are 3 items of business on this morning's agenda: number one, to elect 16 directors to serve on the Board of Directors of the company until the company's 2027 Annual Meeting of Shareholders or until their successors are duly elected and qualified; two, to approve on a nonbinding advisory basis, the compensation of the company's NEOs say-on-pay proposal; and number three, to ratify the appointment of Forvis Mazars LLP as the independent registered public accounting firm of the company for the year ending December 31, 2026.

Before we proceed with the formal business of this meeting, I'd like to make a few introductions. First, I would like to introduce to you the directors of our holding company and bank in addition to me, all of whom have joined this meeting today, either virtually or in person. As I mentioned earlier, I'm Jude Melville, I'm Chairman, President and Chief Executive Officer of our holding company and Chairman and Chief Executive Officer of B1 Bank.

Also joining us are George W. Cummings III; Ricky D. Day; John P. Ducrest, Mark Philip Folse; William G. Hall, J. Vernon Johnson; Rolfe Hood McCollister Jr.; Patrick E. Mockler; David A. Montgomery Jr.; Arthur J. Price, Aimee Quirk, Alejandro Sanchez, Zeenat Sidi, Keith A. Tillage; Steven G. White; Next, I'd like to introduce the bank's executive officers who are attending this meeting. Greg Robertson, Executive Vice President and Chief Financial Officer; Jerome Vascocu, Executive Vice President and President; Philip Jordan, Executive Vice President and Chief Banking Officer; Keith Mansfield, Executive Vice President and Chief Operations Officer; Kathryn Manning, Executive Vice President and Chief Risk Officer; Warren McDonald, Executive Vice President and Chief Credit Officer; Saundra Strong, Executive Vice President, General Counsel and Corporate Secretary Chad Carter, Executive Vice President, Correspondent Banking; Heather Roemer, Executive Vice President and Chief Administrative Officer. We appreciate the hard work and dedication of all of our directors and employees.

Finally, I would like to also introduce our guests that have been invited to attend today's meeting. Matthew Cannon and Stephen Cory with Forvis Mazars, LLP, our independent auditors; and Tammie Marshall for Computershare Trust Company, our transfer agent. Following the formal part of this meeting, there will be a question-and-answer session. We will now proceed with the formal business of this meeting. Saundra Strong will act as Secretary of this meeting, and I will announce the tabulation of the -- or excuse me, she will announce the tabulation of the votes. Saundra Strong and Tammie Marshall of Computershare have been appointed and agreed to serve as vote inspectors for this meeting and will conduct the formal tabulation of the votes.

All persons who are shareholders of record as of March 27, 2026, the record date for this meeting, are entitled to vote at this meeting. Ms. Strong, as Secretary of this meeting, please report on the notice of this meeting and the affidavits of mailing.

Mr. Chairman, I present to the meeting the following documents. The first is a certified list of the shareholders of the company as of the close of business on the record date. The second is an affidavit as to the mailing on or about April 8, 2026, the first a notice of this meeting; and second, a notice of Internet availability of proxy materials.

I'm pleased to report that at least a majority of the outstanding shares of Business First Bancshares common stock are represented either in person or by proxy at this meeting. And accordingly, a quorum is present, and we are authorized to proceed with the business of this meeting.

Thank you, Saundra. Please file these materials with the minutes of the meeting. Secretary has reported the existence of a quorum at this meeting. Accordingly, we will proceed with the formal business. I now declare the polls open for voting at this 2026 Annual Meeting of Shareholders. If you wish to vote at the meeting and have not yet done so, you should do so now. If you have previously submitted a proxy, then your vote has already been recorded, and you do not need to vote during this meeting unless you wish to change your vote. Polls will remain open until immediately after any discussion on today's proposals. First item on the agenda for this meeting is the election of 16 individuals to serve as directors of Business First Bancshares. I now call on Saundra Strong, company's General Counsel and Secretary of this meeting to identify the proposal.

Mr. Chairman, I present to the meeting the following proposal, which is described in the proxy statement dated April 8, 2026, and is presented at this meeting by the Board of Directors. The proposal is to elect the following 16 nominees to serve as directors of Business First Bancshares with terms expiring at the 2027 Annual Meeting of Shareholders. George W. Cummings III; Ricky D. Day, John P. Ducrest, Mark P. Folse, William G. Hall, J. Vernon Johnson; Rolfe Hood McCollister Jr.; David R. Melville, III; Patrick E. Mockler, David A. Montgomery, Jr.; Arthur J. Price, Aimee Quirk, Alejandro Sanchez, Zeenat Sidi, Keith A. Tillage and Steven G. White.

Our Board of Directors has recommended that these individuals be elected as directors of Business First Bancshares. Is there a motion?

Moved.

Do I hear a second? Is there any discussion on the proposal? There being no other nominations properly made in accordance with our bylaws, I declare the nominations closed. Is there any discussion on the proposal? Okay. Thank you. There being no further discussion or no discussion, I now call on Saundra Strong to identify the second proposal.

Mr. Chairman, I present to the meeting the following proposal, which is described in the proxy statement dated April 8, 2026, and is presented at this meeting by the Board of Directors. The proposal is to approve on a nonbinding advisory basis, the compensation for the company's named executive officers or NEOs...

Our Board of Directors has recommended the approval on a nonbinding advisory basis of the compensation of the company's NEOs. Is there a motion?

Moved.

Do I hear a second? Is there any discussion on the proposal? Thank you. There being no discussion, I now call on Saundra Strong to identify the third proposal.

Mr. Chairman, I present to the meeting the following proposal, which is described in the proxy statement dated April 8, 2026, and is presented at this meeting by the Board of Directors. The proposal is to ratify the appointment of Forvis Mazars LLP as the auditor of...

Company for the year ending December 31, 2026. The Board has recommended that the appointment be ratified by our shareholders at this meeting. Do I hear a motion that the appointment of Forvis Mazars LLP be ratified by the shareholders?

I moved.

Is there any discussion on the proposal? There being no discussion, we will now proceed with voting on the proposals. Will Secretary please identify the voting required on the proposals.

Mr. Chairman, with respect to the proposal to elect directors, our directors will be elected by a majority vote. Therefore, each of the 16 nominees, they will be elected to our Board of Directors if they receive at least a majority of the votes cast either in person or by proxy at this meeting.

The proposal to approve on a nonbinding advisory basis, the compensation of the company's NEOs will be adopted if votes cast in favor of the proposal exceeds the votes cast against the proposal. The ratification of Forvis Mazars LLP as our independent auditor for the year ending December 31, 2026, requires the approval of at least a majority of the votes cast either in person or by proxy at this meeting.

Unless there are any questions regarding the voting procedures, we will close the polls shortly. So if you wish to vote and have not done so, now is the time to vote either in person or through the virtual website meeting. If you previously voted and do not wish to change your vote, you do not need to vote at this meeting.

If you've not yet voted, now is your last chance to vote in person or by using the voting function on the virtual meeting website. If there are any questions regarding the voting procedures, please use the Q&A function to ask them now. There being no further discussion of the proposals, we will now close the polls. Please vote now if you've not already voted. Unless we receive a request through the Q&A function of the virtual meeting website to extend the period for casting ballots within the next 30 seconds, we will close the voting polls. Now I'll pause for 30 seconds.

[Voting]

I now declare the polls closed. I'll now ask that our vote inspectors complete the tabulation of the votes.

Madam Secretary, have the vote inspectors completed the tabulation of voting?

Mr. Chairman, based on the voting of shareholder proxies received prior to the meeting, plus the vote inspectors tabulation of proxies and ballots voted at this meeting in person, I'm pleased to report the following results. The 16 individuals nominated to serve as directors of Business First Bancshares, Inc. have been duly elected. The compensation for the company's NEOs have duly approved on a nonbinding advisory basis and the proposal to ratify the appointment of Forvis Mazars, LLP as our auditor for 2026 has been duly approved. Official voting results will be posted in a current report on Form 8-K to be filed with the SEC within 4 days following this meeting.

Thank you. Following the conclusion of the business portion of this meeting, we'll provide an opportunity for a question-and-answer session. I'm aware of no other business that should be brought before this meeting. I hereby move that we adjourn the meeting.

Is there a second?

Second

I'd like to thank all of you for attending the 2026 Annual Meeting of Shareholders. I'd also like to express my appreciation to all the shareholders who submitted their proxies but were not able to attend the meeting. The directors, officers and employees of Business First Bancshares appreciate the loyalty and confidence of all of our shareholders. Business portion of this meeting is hereby adjourned. Heather, do we have any questions on the portal? I'd like to open the floor for anybody in person to ask any questions. Okay. This concludes the 2026 Annual Meeting of Shareholders. Thank you all for your participation this morning.

Thank you.

This concludes the meeting. You may now disconnect.

Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Business First Bancshares First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Matt Sealy, Director of Corporate Strategy. Please go ahead.

Thank you. Good morning, and thank you all for joining. Earlier today, we issued our first quarter 2026 earnings press release, a copy of which is available on our website, along with the slide presentation that we'll reference during today's call.

Please refer to Slide 3 of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com. Please also note our safe harbor statements are available on Page 6 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 morning by Business First Bancshares CEO and Chairman, Jude Melville; Chief Financial Officer, Greg Robertson; Chief Banking Officer, Philip Jordan; and President of b1BANK, Jerry Vascocu. After the presentation, we'll be happy to address any questions you may have. And with that, I'll turn the call over to you, Jude.

Okay. Thanks, Matt. Good morning, and thank you for joining us today. We know there are plenty of things you all could be doing on a Monday morning in a world environment as complex as the one in which we find ourselves, and we appreciate you choosing to spend this time with us.

This was one of, if not the best, first quarters that we have had as a company. We continue to improve earnings, strengthen capital levels and improve quality of our liquidity posture while consummating our second material acquisition in the past 3 years and making a number of nonacquisitive investments that will pay off over the course of the next few years.

A highlight for the quarter was the addition of a substantial number of new teammates. As I just mentioned, we closed the Progressive transaction on January 1. In balance sheet terms, the acquisition adds over $700 million in assets and 9 branches across North Louisiana, deepening our footprint in an area in which we were already a market leader. Asset quality of the acquired portfolio is stellar as is the makeup of the expanded client base.

On a very promising note, since we announced the acquisition, construction on the meta data center project in Northeast Louisiana has accelerated and been expanded, and we expect tens of billions of dollars of private investment in a region in which we are as well situated to capture the benefits of any financial institution, large or small. The morale among our former Progressive teammates is high, and the working partnership is off to a smooth start as any acquisition that we've had the honor to participate in, which bodes well for our ability to operate as one team over the course of this year, even before conversion is executed.

We also added a material number of bankers organically. In our last call, I mentioned the addition of John Heine, our new market President in Houston, former Market President from Veritex Bank. To date, John has attracted an additional 11 teammates, including 7 production officers, the majority of which are also former Veritex bankers.

Also in Houston, we are honored to add Ben Marmon to lead our corporate banking activities in Texas. Ben was a long-time banker for IBERIA and then First Horizons, serving in leadership capacities across South Louisiana and for the past 5 years as President of the FHN Financial's Houston market. These new partners have already begun building a pipeline of opportunities, and we anticipate them contributing meaningfully to our growth in the second half of the year as we seek to take advantage of M&A-led disruption in the Houston market.

We announced and have begun a partnership with Covecta, a provider of Agentic AI capabilities. I include this in my discussion on new teammates because over time, we anticipate this partnership leading to both our more efficiently leveraging the talent we have on board and to are minimizing hiring as we continue to grow. We are beginning this effort focused on our consumer workflows in which we have already identified over 300 policy rules for potential automation and anticipate expanding utilization of the partnership across broader use cases throughout the bank, including deposits and credit.

This effort will take time to unfold, but we are more confident with each day that the potential is actionable and will prove to be meaningful. It's important to note that as we explore the potential of Agentic AI, we remain focused on governance, validation and human oversight so that as models, policies and industry requirements change, we retain our ability to manage that evolution in a disciplined and controlled way.

A very positive note for the quarter is that even as we grow the team, we remain focused on cost control with noninterest expenses for the quarter lower than anticipated. After accounting for the increased costs associated with the Progressive current run rate, our core expenses were essentially flat quarter-over-quarter as well as in comparison to last year's first quarter. We do anticipate the cost of the new hires adding incrementally to our expense rate over the second quarter, but note that the super majority of the hires were production-oriented, which should lead to further operating leverage improvements.

As a key component of our positive earning results, we are pleased to note the contribution of our noninterest income, primarily through the Financial Services group and in particular, the work providing interest rate swaps and SBA loan gains on sale. As you know, we've been working in the past 3 years on diversifying our revenue streams with investments in this arena, in part so that we might be able to continue to produce consistent earnings even in quarters in which our spread income was not as strong as we hoped.

The potential of this effect was put to test in the first quarter as loan volumes were lower than anticipated due primarily to heightened loan payoffs and paydowns. In addition to the contribution to current earnings, we utilized the Financial Services group to successfully complete a fully self-managed private placement of subordinated debt just after quarter end, raising $85 million within our cohort of correspondent banking relationships. Of the $85 million raised, we utilized $67 million to redeem existing sub debt, some of which crossed the 5-year mark and already lost about $10 million in capital treatment.

The successful debt raise is important in and of itself, but I'm most excited about the way in which we accomplished it, both utilizing and contributing to our growing network of community bank partners. In closing, we feel very positive about the first quarter on a number of fronts and anticipated to be the start of a solid full year.

We reiterate full year loan guidance on loan growth based on our sooner-than-expected hiring of production officers, and we continue to forecast a 1.25% ROA end of year run rate. One of our guiding principles is belief in the compounding power of our incremental improvement, and we see that principle in action in our first quarter results. Thank you again for being with us. And with that, I'll turn it over to Greg.

Thank you, Jude, and good morning, everyone. As always, I'll spend a few minutes reviewing our results and we'll discuss our updated outlook before we open up to Q&A.

First quarter GAAP net income and EPS available to common shareholders was $22.2 million and $0.68 and included $2.2 million merger-related expenses, $28,000 gain on former bank premises and $80,000 gain on sale of securities. Excluding the noncore items, non-GAAP core net income and EPS available to common holders was $24 million and $0.73 per share.

From our perspective, first quarter results marked another quarter of strong financial performance, generating a 1.10 core ROAA and a core efficiency ratio of 62% for the quarter. Our first quarter earnings results were highlighted by continued discipline on the expense side and a meaningful contribution from our financial services and correspondent banking group that Jude mentioned.

Also during the quarter, we completed the acquisition of North Louisiana-based Progressive Bank, which closed on January 1 of this year and added $774 million in total assets and 9 new locations. From a balance sheet perspective, total loans held for investment increased $494.8 million or 32% annualized on a linked quarter basis.

Excluding the acquired Progressive loans, total loans held for investment declined to $102.7 million or 6.2% annualized. Excluding acquired Progressive loans, organic commercial and commercial real estate loans decreased $58.6 million and $23 million, respectively, compared to the linked quarter. Texas-based loans ended the first quarter at 35% of total loans. This was anticipated due to the closing of the Progressive Bank transaction in early January.

The lower-than-expected loan growth was driven primarily by an overall increase in loan paydowns and payoffs. Specifically, total paydowns and payoffs during the first quarter totaled $579 million, which compares to the total new and renewed loan production of $476 million during the quarter. If you recall, in the previous quarter, we experienced slightly higher new and renewed loan production at $500 million, while paydowns and payoffs during the quarter were lower at just $332 million.

Total deposits increased $766.4 million due to increases in interest-bearing deposits and noninterest-bearing deposits of $513.3 million and $253 million, respectively. The increase in interest-bearing deposits was largely driven by approximately $325 million in commercial money market accounts and $185 million in personal money market accounts. Excluding acquired Progressive deposits, organic deposit growth was $81.5 million or 4.4% annualized on a linked quarter basis.

Lastly, on the funding side of the balance sheet, we took advantage of the improved liquidity position from softer overall net loan growth and repaid FHLB balances and broker deposits. Total FHLB borrowings decreased $170.4 million and broker deposits were reduced by $112.5 million from the linked quarter.

Moving on to the margin. Our GAAP reported first quarter net interest margin decreased 6 basis points linked quarter to 3.65%, while the non-GAAP core net interest margin, excluding purchase accounting accretion, decreased 4 basis points from 3.64% to 3.60% for the quarter ended March 31. A driver to the lower-than-expected margin performance during the quarter was loan discount accretion falling lower than expected at $1.1 million, which is primarily caused by the lower actual rate marks from the Progressive acquisition.

We would expect quarterly loan discount accretion to be in the low $1 million range for the balance of 2026. On a linked quarter basis, cost of deposits decreased 18 basis points, while total loan yields decreased 27 basis points. Core loan yields, excluding loan discount accretion for the first quarter were 6.54%, down 24 basis points from the prior quarter.

Total cost of deposits for the month ended March was 2.33%, which compared to the weighted average of the first quarter was 2.34%. We are pleased with our ability to hold the line on new loan yields during the quarter with a weighted average new and renewed loan yield of 7.20% for the quarter.

I would like to make a note of a few takeaways on Slide 19 in our investor presentation. We continue to see 45% to 55% overall deposit betas as achievable regarding any future rate cuts. I would also like to point out overall core CD balance retention rate was 81% during Q1. This impressive statistic reflects on our team's continued focus on maintaining core deposit relationships.

Our baseline assumption is that we do not receive any further rate cuts in 2026. We have worked hard to manage our balance sheet in a relatively neutral position and believe we can achieve modest margin improvement in a slightly down or up rate environment.

Moving on to the income statement. GAAP noninterest expense was $57.5 million and included $2.2 million in acquisition-related expense. Core noninterest expense for the first quarter was $55.2 million, up $5 million from the prior quarter and included a full quarter impact of the progressive expense base mentioned earlier.

Core expenses for the first quarter did come in lower than we expected, mostly due to the timing of certain investments and marketing spend not hitting in the quarter, which we do expect to recognize going forward. We also did recognize a small amount of the Progressive cost saves during the quarter. As a reminder, we should recognize remaining potential cost saves post conversion, which is scheduled for late third quarter this year.

First quarter GAAP and core noninterest income was $14.1 million and $13.9 million, respectively. GAAP results did include $80,000 gain on sale of securities and a $28,000 gain on former bank premises. Core noninterest income results for the first quarter were slightly better than we expected, primarily due to continued strong swap fee revenue and gain on sale from SBA activity.

Lastly, I'd like to provide some context to the credit migration during the first quarter. Total loans past due 30 days or more, excluding nonaccruals as a percentage of total loans held for investment decreased from 0.64% to 0.42% at March 31. The ratio of nonperforming loans compared to loans held for investment increased 29 basis points to 1.53% at the end of the first quarter, while the ratio of nonperforming assets compared to total assets increased 29 basis points to 1.38% compared to the linked quarter.

That concludes my prepared remarks. I'll hand the call back over to you, Matt, and we'll open it up for questions.

Yes. Thanks. I think we will go ahead and open up to Q&A now.

[Operator Instructions] Our first question comes from the line of Feddie Strickland with Hovde Group.

Just wanted to start on credit. I just wanted to ask, you mentioned in the release you expect the migration we saw this quarter to be resolved over the next couple of quarters. And can you just help us understand kind of the full opportunity set maybe here and how much we could maybe see NPAs come down by year-end, assuming no further migration?

Yes. Thanks, Feddie. Good question. So we think in the near term, let's talk about just specifically what we think will happen in Q2 and then more so during the later parts of the year. I'll caveat all that by saying we've kind of been talking about some of these credits for almost a year now and the process through moving them to resolution is sometimes precarious and moves at different speeds.

So Q2, we think about 30% of the current NPA list will go through to resolution. So as we move past that, we would see it kind of breaking up into third as we go through the rest of the year. So I think another pretty decent amount of it in the third quarter and hopefully some resolution with maybe only a few pieces hanging over past year-end.

Got it. And then the increase this quarter, I apologize, I cut out for a second when you were mentioning this in your opening comments. Was that the Houston medical facility? Or which credits contributed to the higher NPAs?

We had about $25 million increase this quarter, which were mostly attributable to we have a relationship with one client. It's about $16 million of exposure. Those are varying types of collateral and the timing of that resolution on that, some of it could be imminent. Some of it could last 2, 3 quarters to resolve it. So that was the majority of the increase this quarter. The previously mentioned medical facility was already in the list.

Got it. And just one quick follow-up on the margin. I saw you paid down the FHLB in the broker this quarter, but you also issued the sub debt. Should we expect the margin to -- I guess, the GAAP margin to still directionally move higher in the second quarter? Or is more flat your expectation?

No. We think we're going to -- we think low to mid-single-digit margin expansion as we move forward. Part of that will be reliant on moving some of those NPAs back into accruing assets as well. But that's a little trickier to forecast. But we do think that just the core margin should tick up low to mid-single digits. If you look at the spread we had during the quarter, spread was relatively flat quarter-over-quarter. And we think with the increase in loan volumes, we should get a little bit of pickup.

Our next question comes from the line of Matt Olney with Stephens.

Just want to follow up on the credit discussion. I think, Greg, you mentioned expectations of some resolution in the next few quarters. That's great to hear. Any thoughts as far as loss recognition, what kind of allowances do you have on some of these credits? Just trying to anticipate if we should anticipate the charge-offs being a little bit higher in the near term.

Yes. So far, Matt, it's a good question. So far, we are seeing reserves versus loss recognition going forward to remain pretty consistent with what the Street has forecast for us from a loss standpoint. All of that is kind of incremental as we move on. But so far, what we're seeing, we feel like we'll be in line.

If you look at the main driver that gives us a little comfort with that is moving past dues back down below 50 basis points. We feel like that the stuff that we've been talking about is kind of in the list, and we'll just move forward with hopefully no change from that.

Okay. And then going back to the loan balances. Greg, I think you mentioned some higher paydowns this quarter. Any more color on those paydowns, whether by loan type or by market? Or just any color as far as what you're hearing from your customers given some of the volatility in the market right now?

Yes. I think it was -- the majority of our paydowns were in the Texas franchise. And I think that's -- you could really draw a line back to some of our larger growth years, the '22, '23 years, '22, '23, some of those projects came to end. Some of them, we just made the decision, whether it rate or credit to move away from relationships. So it's kind of a mixed bag.

But I think that's the general guidance is it's more commercial stuff probably in the Dallas first in the Houston markets.

Yes. I think it's not a small thing that we've really dramatically downshifted our exposure to construction. And so we're not -- we don't have the same large dollar construction projects coming up as we as some of these older construction projects come off the books. And so there's not a replacement there for that particular type of credit, which we feel comfortable with. We want to have a diversified portfolio and minimize our concentrations.

And then I would also say that Greg mentioned our loan yields staying pretty flat quarter-over-quarter, which we certainly are prioritizing the need to get paid for what we do over just loan growth. And so I would echo his thoughts about that was part of the rationale there, but just from a competitive standpoint, seem to be disciplined on pricing, which I think is the right choice to make.

Our next question comes from the line of Michael Rose with Raymond James.

Just wanted to kind of dig back on to the expenses as we move from here. So on the one hand, obviously, this quarter on a core basis, good expense control. But I think, Jude, in the press release, you talked about some additional hires by the end of the quarter. And then in your prepared comments, I think you mentioned even a few more. I assume you're continuing to hire.

So how should we expect those expenses to -- from a timing and magnitude perspective to layer in? And then as you kind of think about the layering in of the cost saves from Progressive, understanding that the systems conversion will happen late in the quarter. Just trying to frame out the expense outlook over the next few quarters.

Yes. Thanks, Michael. I think in the near term, Q2, we would expect the mid- to upper 50s and then migrating slightly from there. I think the cost saves, if we continue to have success hiring teammates, some of the cost saves will be offset by the hiring. But I think we would see that trickle up into the upper 50s as we move through the end of the year.

We still remain confident in our projections on the cost saves around the Progressive acquisition, achieving most of them in the fourth quarter. Craig, I think out of the $21 million Progressive run rate, we expect to achieve about $11 million -- that's on an annualized basis on cost. So certainly, still anticipate recognizing the benefits of that -- those efficiencies, primarily in the fourth quarter.

Perfect. And then maybe just following up on some of the initial and the final marks on the portfolio. It looks like the accretion is going to be less kind of as we move forward. So can you just walk us through maybe some of the purchase accounting adjustments from initial to when it actually closed?

Yes. I think it was just mainly that when we announced the yield curve was a lot different by the time we closed. So the interest rate piece of it was less credit still the same. So we felt like from a total dilutive standpoint for us, I think it is a little bit different, but I think it's all relative.

We had forecasted about 44 basis points of tangible book value dilution, $0.44 and it ended up being ex AOCI about $0.04. So we feel really good about the way everything kind of shook out now.

So it will be less accretion going forward the trade-off is that we had less dilution than we modeled. So it's a good thing, Yes. So I did want to mention real quick since we're talking about tangible book value. We last raised capital in October of '22. And beginning with the end of '22 going to now, we've grown tangible book value at about 16% annualized rate.

So we remain focused on growing tangible book value, and we've done so during that period. We've consummated 2 acquisitions and grown assets by about $2 billion. And so the news on the accretion front versus tangible book value dilution on the Progressive deal is good. And then we look forward to continuing in future quarters to grow tangible book of ours. And so we're pleased with that result.

Michael, will be about $1 million going forward for accretion per quarter.

Yes. heard that. And maybe if I could just sneak one last in on the -- just as it relates to the tangible book value growth and the focus there. The buybacks this quarter were a little bit higher than I think I was looking for. How should we balance that now with a little bit higher starting capital just from the change in marks from the deal? Could we expect you guys to continue to be active with repurchases? Or is now a time to kind of recoup and build tangible book value and capital?

Yes. I think it's a balance between the 2, the market -- if we feel the market is undervaluing our work, then we do have the -- we've now built our capital levels and our book value to a level that we can take advantage of that perceived discrepancy. And so we felt like in the first quarter, we had probably a little more opportunity there than we might have guessed at the beginning of the quarter.

So I think our average TPV multiple of the buybacks was about 119. And so we felt like that was certainly an undervaluation relative to the worth of the franchise, and we'll continue to look for opportunities there. We're not going to -- we don't have mandatory buybacks and not going to do it just for the sake of doing it. But when we do see opportunities in that kind of sub $120 level, we do believe we're in a position to take advantage of it. And that will be a higher priority than seeking out M&A opportunities in the near term.

[Operator Instructions] Our next question comes from the line of Gary Tenner with D.A. Davidson.

I want to ask about your -- I just want to ask about your commentary around loan growth. I think you're kind of sticking to the mid-single-digit growth outlook at this point. And I'm just wondering how much of that is -- kind of what's the balance between that projection on the production versus payoff? -- perspective, do you have a lot more visibility into kind of a reduction in payoffs just as construction projects are maturing? Or maybe just walk us through kind of how you're looking at the next couple of quarters from a net growth perspective?

Yes, I think from a net growth perspective, as we get further away from kind of the impacts of bringing on '22 and '23 deals in those years, as we move through the year, we should see payoffs slightly reduce. I think the way we're thinking about net loan growth as we go forward with the addition of the new teammates, we're thinking about high single digits to 10% maybe in the second and third quarter, which would end up offsetting kind of the slow first quarter with the mid-single digits, 6% to 8% or 5% to 6% range loan growth on an annualized basis.

I'll just add, this is -- things aren't always smooth lines. And you'll remember in the third quarter of last year, if I remember correctly, that we had elevated paydowns and lower growth in the third quarter, but then we had a -- I don't want to say a record fourth quarter loan growth, but it was a strong quarter, fourth quarter. And if you balance the 2, it ended up being kind of at this about 6% range.

And we had more paydowns in the third quarter than we did in the fourth quarter. And I would anticipate that same effect helping us from a net loan growth over the remainder of the year. Greg is right that there will be a point at which those larger dollar construction projects don't -- aren't material in terms of their continued impact on the portfolio.

And then again, we've hired, I think, to date, about 11 new producers and more production-oriented staff, and we'll continue to look for talent as we see the opportunity. So -- and none of their pipelines, obviously, have been manifested in terms of actual loan growth yet. And so we anticipate seeing some of that in the second quarter, but really the third and fourth quarters being reflective of that additional strength.

Got it. Appreciate that. And just on the construction segment topic just for another second, where do you see that segment kind of bottoming out or stabilizing as a percentage of the overall portfolio? You're right over 10% right now. Where do you see that trending? Like where is your appetite and comfort level with that?

I think we're getting close to the bottom now. I think you can see it bounce in the high single digits to 10% range on a go-forward basis would be comfort...

Our next question comes from the line of Matt Olney with Stephens.

Just want to go back to the net interest margin. And I'm trying to appreciate if there's any more noise in that margin in this quarter. I went back to my notes last quarter, and it looks like there was that interest reversal that impacted the margin by about $1 million in the fourth quarter from that Houston that we discussed. Was there any kind of interest reversal again this quarter with the uptick of nonaccruals? Yes, I'll just leave it there.

Yes. Yes, you're right. There was some noise. I think when you think about relative to the nonaccruals, there was about $1.2 million in interest reversal. That was probably attributable to 6 or 7 basis points impact on the margin. That was due to the movement of about $25 million in loans to NPL during the quarter and the reversal.

Kind of as we go forward, I think we'll start inching back toward reclaiming some of that as an earning asset. But as I mentioned, I think earlier, the timing of how that comes back to an earning or converts back to an earning asset is a little bit tricky because we're still having to resolve these in real time and the twists and turns sometimes of a conflict resolution of some of these credits, it's a little bit unpredictable. But we see some opportunity on the horizon with that for sure.

And at this time, we have no further questions. That concludes our Q&A session. I will now turn the call back over to Jude Melville for closing remarks.

Okay. Well, again, I appreciate everybody being with us and the questions and the attention and energy that you're giving to our calls. We again feel very positive about the first quarter and not only the performance in the first quarter, but also some of the investments and additions that we've made in the first quarter, which will lead to even more positive results in the future.

We like our footprint. We like our people and -- and I just look forward to turning the wheels over the course of the year and showing some of that incremental progress, which will lead to increased ROA and ultimately, tangible book value. We just keep doing what we do.

So I appreciate our team for all their effort. And again, I appreciate your attention this morning. Feel free to reach out if you want to talk any more detail about anything. Thank you all. Have a good week.

This concludes today's conference call. You may now disconnect your lines at this time. Thank you for your participation, and have a pleasant day.

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Business First Bancshares Q4 2025 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Matt Sealy. You may begin.

Good afternoon, and thank you all for joining. Earlier today, we issued our fourth quarter 2025 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 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 6 of our earnings press release that was filed with the SEC today. All comments made during today's call are subject to the safe harbor statements in our slide presentation and earnings release. I'm joined this afternoon by Business First Bancshares Chairman and CEO, Jude Melville; Chief Financial Officer, Greg Robertson; Chief Banking Officer, Philip Jordan; and President of b1Bank, Jerry Vascocu. After the presentation, we'll be happy to address any questions you may have. And with that, I'll turn the call over to you, Jude.

Okay. Thanks, Matt. Good afternoon, everybody. We thank you all for being with us today. I'd like to begin our conversation with a brief high-level review of the work our team accomplished in 2025, which turned out to be, in my opinion, one of the most meaningful and positive years our franchise has experienced. I'll start with a few of the nonfinancial highlights.

While they don't contribute much to the short-term modeling that this call invariably centers around, they are what enables future opportunity and therefore, representative of the most important work that we do. Over the course of '25, we conducted 2 major core conversions and implemented a number of software platforms designed to prepare us for managing at this and future scale. We continue to develop multiple internal divisions focused on preventing and mitigating fraud, internal loan review audit and various CRM capabilities, contributing to both our ability to operate safely and maintenance of a positive regulatory relationship. We continued our practice of incrementally evolving our footprint, closing 3 banking centers and opening one.

We made big strides developing our correspondent banking initiative into a significant part of the bank, contributing meaningful noninterest income, growing the client base to over 175 community banks. We announced and then at the turn of the year, closed the acquisition of Progressive Bank in North Louisiana. We -- and this may sound out a place on the call such as this, but we learned some lessons by working through credit issues for the first time in a number of years, things that will ultimately make us better providers and managers of credit in the future.

And for the fifth year in a row, we are one of the winners of the American Banker's Best Banks to Work for award voted on by employees and therefore, one of my favorite awards to win. These nonfinancial accomplishments are important, and I'm proud of them, but they, of course, aren't alone sufficient. 2025 was also a year of accomplishment from a balance sheet perspective. Over the past 12 months, we bolstered our capital ratios with tangible common equity increasing by 90 basis points and consolidated CET1 capital increasing 50 basis points year-over-year. We grew tangible book value 17.3%. We have as balanced a balance sheet as we have ever had with limited concentrations in any lending category and significant geographic diversification.

We grew loans and deposits in tandem, particularly in the fourth quarter as we got through some of the bigger nonfinancial projects and return with more focus to production. We began purchasing shares back for the first time in almost 6 years and positioned ourselves to have that tool as a viable option in the future. We increased our common stock dividend for the seventh year in a row. Now we recognize that all this nonfinancial and balance sheet activity needs to lead up to something else, something tangible. And over the course of 2025, we delivered strong P&L improvement beyond what we or the analysts forecasted. We grew ROAA beyond our stated 1% goal to a 1.06% core ROAA for the year and a 1.16% core ROAA in the fourth quarter. We delivered a 14% increase in EPS over the course of the year and in the fourth quarter, a 20% year-over-year improvement.

We grew our full year core margin beyond our stated goals of 3.5% to 3.63%, and we held noninterest expense growth relatively flat while growing revenue, generating positive operating leverage, posting a sub-60% efficiency ratio in the fourth quarter. In sum, we are turning the investments we've made over the past few years into momentum, which leads me to believe that even though 2025 was a pivotal year for b1, 2026 will be even more fruitful. With our major systems implementations behind us, we will focus more on optimizing the systems, which will lead to greater efficiencies. With a healthy footprint in place, we will focus less on expanding it and more on deepening it.

By the way, over the past few weeks, we are pleased to begin to take advantage of some of the disruption in the Houston market by recruiting Jon Heine, formerly at Veritex to be our new market leader, and he's already been able to add a couple of impressive rank bankers to the foundational team we have in place. Finally, we will focus less in 2026 on embarking upon new major projects and more on daily execution. We have a good team. We're in good markets, and we're focused on the right things: sustainable ROAA, tangible book value accretion, EPS enhancement, noninterest revenue giving us greater revenue optionality and noninterest expense discipline leading to continued efficiency ratio improvement. It's an exciting time, and we look forward to discussing it further over the course of the call. I thank you all again for your attention, and I'll turn it over to Greg.

Thank you, Jude, and good afternoon, everyone. As always, I'll spend a few minutes reviewing our results, and then we'll discuss our updated outlook before we open up to Q&A. Fourth quarter GAAP net income and EPS available to common shareholders was $21 million and $0.71 per share and included $2.2 million in merger and core conversion-related expense, $995,000 loss on former bank premises and $35,000 gain on sale of securities. Excluding these noncore items and non-GAAP core net income and EPS available to common shareholders was $23.5 million and $0.79 per share.

From our perspective, fourth quarter results marked another quarter of strong financial performance, generating, as Jude mentioned, a 1.16% core ROAA with our core efficiency ratio falling to 59.7% for the quarter. A notable impact during the fourth quarter included continuing meaningful contribution from our correspondent banking group. Also, as Jude mentioned, we added several new slides to our earnings presentation. I'll start on Slide 24, a new overview slide from our loan portfolio. Total loans held for investment increased $168.4 million or 11.1% annualized on a linked-quarter basis. The higher-than-expected loan growth was driven by an overall improved demand and a slowing in paydown and payoffs.

Specifically, new and renewed loan production of approximately $500 million during the fourth quarter compares to slower scheduled and nonscheduled paydowns and payoffs of $332 million. Recall in the previous quarter, we experienced a slight decrease in net loan production, which was a result of $395 million in paydowns and payoffs, only offset by $368 million new and renewed loan production during the third quarter. On a linked quarter basis, owner-occupied CRE loans increased $76 million or 28% annualized, while nonowner-occupied CRE loans increased $77 million or 23.9% annualized. Based on unpaid principal balances, Texas-based loans slightly -- declined slightly from 39% as of December 31, 2025.

We expect that percentage of the Texas loans to further decline with the closing of the Progressive Bank to approximately 36% in the first quarter. Moving back to Slide 16. Total deposits increased $191.7 million, mostly due to net increase in interest-bearing deposits of $236.2 million on a linked-quarter basis, somewhat offset by a net decrease in noninterest-bearing deposits of $44.5 million from the prior quarter. The increase in interest-bearing deposits was largely driven by approximately $105 million in public funds and $60.8 million in commercial money market accounts.

We do expect somewhat of an outflow of the public funds markets during the first quarter, consistently with prior year's Q1 seasonality. Moving to the margin. Our GAAP reported fourth quarter net interest margin increased 3 basis points linked quarter to 3.71%, while the non-GAAP core net interest margin, excluding purchase accounting accretion, increased 1 basis point from 3.63% to 3.64% for the quarter ended in December. The margin performance during the quarter was driven by elevated loan discount accretion due to a single large acquired loan paying off sooner than we expected. Loan discount accretion during the quarter was elevated at $1.4 million, including the addition of Progressive, we expect quarterly accretion in 2026 of approximately $1.8 million. On a linked quarter basis, cost of total deposits decreased 15 basis points, while total loan yields decreased 13 basis points.

Core loan yields, excluding loan discount accretion for the fourth quarter was 6.78% down 15 basis points from the prior quarter. The total cost of deposits for the month ended December was 2.44%, which compared to the weighted average of the fourth quarter of 2.51%. We are pleased with our ability to hold the line in new loan yields during the quarter with a weighted average new and renewed loan yield of 6.97% for the fourth quarter. However, with the interest rate cuts we experienced during the fourth quarter, we did start seeing some pressure from overall loan pricing. I'd like to take a moment to explain some of the movement in the margin during the fourth quarter.

We recognized $1 million of interest income reversal for a nonaccrual loan. This translated to about 5 basis points in the fourth quarter net interest margin. That is to say we had -- had we not recognized this accrual reversal, our Q4 margin would have been 5 basis points higher. It is of note until we find resolution on that credit that was primarily responsible for the income adjustment, we would expect this somewhat of a drag to remain. We are pleased with our ability to manage funding costs for the quarter with the weighted average rate of all new interest-bearing deposit accounts during December of 3.51%, down from September's weighted average rate of new interest-bearing deposit accounts of 3.66%. I'd like to make a note of a few takeaways on Slide 22 in our investor deck as we continue to see 45% to 55% of overall deposit betas achievable regarding any future rate cuts.

I would also like to point out, overall core CD balance retention rate was about 83% during the fourth quarter. That statistic reflects our team's continued focus on maintaining and retaining core deposit relationships. Our baseline assumption is that we do not receive any further rate cuts in 2026. We have worked hard to manage our balance sheet to a relatively neutral position, and we believe we can achieve modest margin improvement in a slightly down rate environment. Lastly, on the topic of net interest margin, I'd like to mention a new slide we created and added to the quarterly slide presentation. Slide 20 is a combination of 2 prior slides and shows our GAAP and core net interest margin in the context of the volatility in the Fed funds rate since 2020. We're proud of our ability over the years to maintain the margin with a relatively tight range. This slide also shows our ability to hold the line on overall loan yields in a declining rate environment while managing funding costs downward.

Moving on to the income statement. GAAP noninterest expense was $52.4 million and included $1.4 million acquisition-related expense and $796,000 conversion-related expense. Core net interest expense for the fourth quarter of $50.2 million was up slightly from the prior quarter, but we do expect an increase in Q1 -- in the Q1 core expense base, primarily due to the closing of the Progressive acquisition and timing of various first quarter annual expense resets. As a reminder, we should begin to recognize the impact of Progressive cost saves post conversion, which should occur in the third quarter of this year. Fourth quarter GAAP and core noninterest income was about $12.2 million and $13.2 million, respectively. GAAP results did include a $35,000 gain on sale of securities and a $995,000 loss on former bank premises.

Core noninterest income results for the fourth quarter were better than we expected, primarily due to swap fee revenue, which was about $1 million higher than expected. Also included in core noninterest income was $312,000 gain on OREO. We expect near-term quarterly noninterest income to be in the mid- to high $13 million range, which includes approximately $1 million quarterly contribution from the Progressive Bank acquisition closed on January 1.

Lastly, I'd like to provide some context to the credit migration during the fourth quarter. Total loans past due 30 days or more, excluding nonaccruals as a percentage of total loans held for investment increased from 27 basis points to 64% at December 31. The ratio of nonperforming loans compared to loans held for investment increased 42 basis points to 1.24% at December 31, while the ratio of nonperforming assets compared to total assets increased 26 basis points to 1.09% compared to the linked quarter. The increases in the nonperforming loans and assets ratio over the linked quarter were largely attributable to the deterioration of a single $25.8 million commercial real estate relationship. With that, that will conclude my prepared remarks, and I'll hand it back over to Jude so he can wrap up the conversation.

Okay. Thanks, Greg. I just want to take one moment to welcome our new Progressive -- former Progressive Bank shareholders and employees as well if you're listening, excited about that partnership. And I feel like everything that we've worked on thus far is ahead of schedule in terms of -- from our getting the approvals that we needed to get to close it to all the social integration work that we've already done and enjoyed over the past couple of weeks being able to spend time with a number of the employees and the former Board members. And just really excited about incorporating that into our already existing strong North Louisiana franchise. It's an important part of our footprint, important part of the state and look forward to continuing to make a significant contribution to the economy and our role as a community bank in that area.

So with that, I'd be happy to turn it over to the answer -- question-and-answer period and do our best to answer any questions you might have.

[Operator Instructions]. Our first question comes from the line of Matt Olney with Stephens.

I want to start on the loan growth front. It sounds like the paydowns that have been a challenge over the last few quarters weren't as much of a challenge this quarter. Any more color you can add to that as far as the fourth quarter growth and then the outlook for organic loan growth from here?

I think, Matt, this is Greg. You're right. I think we did have a great quarter. I think some of that was just a little bit of pent-up demand that we've been working on for a while. So the bankers did a good job of landing it. And then just a little bit of downshift in the payoffs that we've seen kind of created that really great quarter. As far as going forward, we still feel very comfortable with the mid-single-digit loan growth throughout the balance of 2026.

And Greg, just to follow up on that comment. Does the mid-single digits, does that imply a more balanced view of the paydowns that have kind of ebbed and flowed throughout '25? Or any commentary kind of what that assumes with the paydowns?

Yes, that's a more balanced view would be a good way of putting it. If you think about -- we're kind of coming out of the -- if you roll back the clock to the quarters where we were producing extremely high loan growth, double-digit to almost 20% annualized loan growth quarters, 2, 3 years ago, I think we're unwinding out of that. And so having a more reasonable loan growth expectation might be a little bit easier to achieve without the headwinds from the payoffs.

Okay. That's helpful...

Matt, just a little more color on the loan growth in the fourth quarter. It was nice to see that it was kind of led by Southwest Louisiana and North Louisiana. We worked hard to build a footprint that's diversified. And you think about that first from a credit perspective, but you also want to think about diversification from a production standpoint. And it's interesting to track that over time and I certainly want to give those areas they're due for contributing so much to the strong quarter on the production side.

And Texas is an important investment for us and will continue to be. And we're hovering around 40% of our exposure there, which is a good healthy number. But that doesn't mean that there aren't a lot of good things happening in Louisiana as well. And a lot of investments up and down the Mississippi River and Meta making the major investment up in North Louisiana. And so it's nice to see some of that paying off in terms of increased demand, and we look forward to a balanced production throughout our footprint over the next couple of years.

Okay. Great. And then I guess shifting over to the credit side. Any more details you can disclose behind that relationship that went to nonperforming? What drove the downgrade? It looks like a pretty decent sized loan. Where does that loan rank among your large relationships you have with the bank? And then, Jude, I think you mentioned in the prepared remarks, there were some lessons learned when it comes to credits. I didn't know if that was speaking to this specific credit or just more broadly, if you could just expand on that.

Yes. Matt, the credit that we identified was this commercial real estate medical facility in the Houston area. And we've been really -- we've been dealing with it for the balance of the year. Got real close to resolution on it. We feel like we've marked it down to where the loss from here on out would be immaterial at this point. But we just have moved that forward. And I don't know that there's anything more to say about it than that. We've just been working with it for a while and thought we had a real resolution in hand, and it kind of kept dragging on. So we decided to do the prudent thing and move it over.

And where does that rank size-wise?

Size-wise, I would say that's one of our larger, if not one of the largest single commercial real estate exposures.

Yes. I think it's the largest single that's for which we hold the exposure on our books. As you know, we try to actively participate exposures, particularly when they get to the $20 million, $25 million level and certainly at this level -- at anything above this level. So yes, it's one of the larger ones. And if you think about lessons learned or things to continue to work with, I do think the biggest lesson in banking is just concentration risk and exposure risk. You can do everything right, and there's going to be something that happens to certain credits.

And if you look at banks that have failed or just been in serious trouble over the past 15 years, generally it comes down to a relatively small number of outsized credits. And so one of the reasons that our metrics have moved around a little bit more than we would like have been more volatile is because the loans that we've had something happen on have been slightly bigger. And so not necessarily representative of the entire portfolio. It just feels worse when it hits the different stages of the life cycle of a credit that you're working through.

So I think a reinforcement of the idea that we want to -- even as we continue to grow, we want to keep our individual loan exposures to manageable levels. And then we also want to make sure that on our concentrations from an industry perspective or a geography perspective that we don't get too over reliant upon any one particular type of loan. I think -- and these are just generic. We've been -- we've had a long period here where we haven't had to really run many credit issues through any kind of process. And so just as we kind of remember how to do that, if you will, there kind of be lessons learned about how aggressive you are when you see warning signs and how you do from a monitoring standpoint along the way and not so much with this particular credit as much as just -- those are just general things that I think whatever stumbles we've had credit-wise over the past 12, 15 months will benefit us as we continue to make credit decisions along the way and continue to refine our processes as we continue to get bigger.

Our next question comes from the line of Michael Rose with Raymond James.

Jude, you mentioned in the prepared remarks that the focus this year is going to be more so on daily execution versus any sort of major projects. I don't want to put any words in your mouth, but I might take that to mean or someone might take that to mean that maybe additional M&A opportunities may not be in the cards. Obviously, you've been fairly acquisitive here lately, but just wanted to get a better sense of kind of what that comment means.

And maybe if you can remind us on some of the projects that you've recently completed and maybe just what that daily execution would mean. I know there's a lot in there, but hopefully, you can provide some context.

Yes, sure. I appreciate you asking that, actually. We had a busy year, busy number of years. But in particular, this year, in addition to consummating -- or integrating an acquisition in Dallas and then consummating an acquisition in North Louisiana, we also did a lot of process improvement internally. And although we've talked about on these calls a few times the number of projects that we took on that are technology related. So we -- not only did we convert another bank, Oakwood over the course of the year, we actually converted ourselves to a new platform, a new core platform, which was a 2-year project and involved pretty much everybody in the bank. So it's a big deal.

And we also had 3 or 4 others, 5 or 6 in total implementations, which does take a certain amount of bandwidth and takes a certain amount of energy. And there are things that we felt like we needed to do to be able to manage and run more effectively at $9 billion in size over 2 states and a significant geography versus what we could manage and run when we knew everybody, follow our -- all the employees and most of the clients that the exec team had the relationships with.

As you scale, you need better processes. And so we -- and you want better visibility into numbers and managing by those things, including pricing software as we're thinking about credit exposure, thinking in a more sophisticated way about what kind of profitability that incremental client adds to the bank's overall profitability is something that we're better at than we were before because of some of these implementations. So what I meant in my comments was don't really -- although we'll always be incrementally upgrading and incrementally adding, we don't have any implementations that in the aggregate will be as substantial as we had last year, and we'll focus more this year on making sure that we're maximizing the output from the implementation process last year.

So it's one thing to do it. It's another to then use it in an optimal manner. And so we want to focus on making sure that we're actually making better decisions because of the data that we have. We want to make sure that we're providing better client service because of the systems that we've invested in. And we want to make sure that our employees' efficiency and happiness around doing their job is enhanced. And that, we believe, involves taking a little bit of a breath and just making sure that we're maximizing the investments we've already made. On the M&A front, we're not prioritizing seeking another M&A alternative now. We've made a number of really what we believe to be really good investments and partners throughout the years.

And we're beginning to see -- we believe we have the opportunity now to demonstrate why those good partners not only give us greater opportunity over time and diversify our risk, but also have been good financial partners leading to increased profitability. And sometimes the only way you can really demonstrate that is to pause the M&A for a second and kind of let the good things percolate and catch up with you. So we saw significant improvement in ROAA over the course of 2024 -- or excuse me, 2025. And I shared with you last time that we intended to -- we intend to be over 1.2% ROAA last half of this year, 2026. And so that's become more of a focus for us than seeking to expand.

We want to deepen the relationships that we have, which will, in turn, lead to greater profitability, which leads to greater tangible book value, which should lead to an enhanced share price. And that gives you more optionality for M&A down the road. And so that's kind of -- we're kind of at that point where we believe we've made a number of investments over the years, and we want to be able to demonstrate what we know, which is that they were good investments that we've done well, and we want to be able to prove that out a little bit through increased financial performance before we take on other initiatives.

So we're going to execute. We're going to work on the investments that we've made, and we're going to be good bankers day-to-day, and that will translate into increased profitability that will be sustainable, and that will give us more optionality to embark upon future projects down the road.

Appreciate the comprehensive answer. Maybe just following up on one of those aspects on the capital front. It was good to see the buyback announcement you guys execute on it. How should we think about that going forward? You guys are trading at about 1.2x tangible. The earn-back on the buyback is, I would characterize as fairly attractive. Capital is really going to start to appear once the deals are fully integrated and the cost saves realized. Should we think about you guys, at least in the near term, is kind of a regular way buyer, just given where you are? Or just trying to frame up the capital discussion.

That's a great question. And obviously, something we're talking about at the Board level, and we'll continue to talk about. We were able to buy back about 150,000 shares in the fourth quarter and what proved to be attractive prices, $24.70 kind of range. And those were more in the 110% to 115% ROAA range or tangible book value multiple range. So I think we certainly -- I would certainly agree with your characterization of 120 still being a reasonable and even cheap price. And over the course of the year, we'll -- we have more optionality on what we do with capital than we did last year.

And last year, we had more than we had the year before because we've been building up those capital levels. So we will definitely continue to look for opportunities on a quarterly basis. I don't see us just setting it and letting it go and saying we're going to buyback this number of shares no matter what. We do want to be want to pick and choose when the right moments are. But certainly, I would think over the long run, anything below 120 would be an attractive price.

One thing I'd add, Mike is that when you think about Q1, we're going to take a little bit of a step back in tangible book on a per share basis with Progressive closing. So it would be, I guess, an effective kind of slightly higher multiple right now than just 120. There's something we're thinking about when we evaluate buybacks.

Perfect. Got it. At the outset, they said keep it to. I have 2 follow-up questions, so I'm going to use that one. Just as we kind of think about hiring from here and the opportunity set, just given some of the dislocation you mentioned Jon Heine was hired as new Houston market President. Can you just frame up what you see as kind of the opportunity to hire? I think we've heard mixed messages from some banks are being fairly aggressive. Some are saying like take a wait-and-see approach. Just wanted to see how we should think about the opportunity set for you guys. Is it just more opportunistic making kind of a full court press here?

Yes. I think the answer actually is probably similar to the answer I just gave you on stock buybacks, right? I think it's kind of -- we're prepared to hire and would like to hire if they're the right people. We don't feel any need to hit our -- in order to hit our profitability targets and our growth targets, we don't necessarily have to hire to do that.

But we do know that there are good people out there and they're living in a more disruptive world than they were a year ago. And we know that we also are a different bank than we were a year or 2 years and 3 years ago in terms of our capabilities, which also means in terms of our attractiveness as an employer. So we want to continue to have conversations. I would expect that we will add another 2 or 3 in Houston over the next couple of months as we've got some conversations and we'd like to bring those to fruition.

And beyond that, it will really be on a kind of case-by-case basis. We don't have to hire every banker in the world to do what we want to do in terms of financial performance. We just need to hire the right bankers. And so we'll focus on evaluating that on a case-by-case basis as the opportunities arise. But I do think there will be opportunities, and we will be thoughtful about. One reason we can afford to be a little less aggressive on M&A is that we believe that in our footprint, organic growth is going to be possible. And part of that is growing with our current staff, but part of that is incrementally adding some additional team members, teammates. And so for the near future, we believe that's a more likely and profitable use of our capital than M&A.

Next question comes from the line of Feddie Strickland with Hovde Group.

Just wanted to start on the DDAs. I understand the public flows have an impact here, but I do still think they're down a little bit year-over-year. Can you talk through maybe what the opportunity might be to kind of grow those on a year-over-year basis, trying to account for some of the seasonality in those public funds flows?

Yes. I think good question. I think what we still see some migration from some of those noninterest-bearing accounts to interest-bearing. So not a huge piece of that business is actually account we're losing accounts. I think it's more of a migration. That has slowed over the course of 2025. With the addition of our Progressive Bank partnership, they have a nice amount of their deposit base is noninterest-bearing. So we should get some lift from that in the first quarter.

We still have plans to continue to focus on elevating deposit gathering through treasury and noninterest-bearing sources. So it's something that we are looking at in '26 as a big part of our plan of operation, but there has been some movement.

Got it. That's really helpful. And just wanted to step back into the fees. I appreciate the guidance there. But obviously, the star of the show was the swap fees and you saw brokerage commission fees, I think, up a little bit as well. What's kind of the level of opportunity in each of those areas and I guess, contributions from SSW and the FIG group as well?

Yes. We see opportunity in 2026 for that to continue to expand. I think it's going to be like we've kind of really messaged for the last few quarters that it will be a bumpy upward sloping trajectory, though, just like this last quarter was with the swap fees being outsized. I think the -- what we're excited about is the continued integration of our SBA group, Waterstone out of the Houston area. There's some opportunity we feel like in that to continue to grow, not only with our bankers becoming more comfortable with SBA production, just the rate environment with SBA lending becoming economically more stable with a lower rate environment.

So we're excited about that. I think you -- also, we think the SSW Group and the brokerage piece of our business, so to speak, we do continue to see it scaling. We've been investing over the last few years in more talent in that area, and I think we'll continue to invest. So we do look at upside for that. So I think noninterest income as a whole, we feel like that will be in the mid- to upper $13 million per quarter with the addition of the Progressive Group. So we're comfortable understanding that it may be rocky going upward, but I think the trajectory is still -- we're excited about the upward slope.

And one more if I could squeeze it in, just on the loan growth and the growth in general coming from Southwest and Southeast Louisiana. Jude, I think you touched on that a little bit earlier on. But just curious, I mean, is it going to be a more balanced pace of growth you feel like going forward that it's going to be sort of evenly balanced between Southern Louisiana and the Texas markets? Or is it just going to kind of differ from quarter-to-quarter depending on what's in the pipeline? I'm just curious whether that's a deliberate part of the strategy or that's just kind of how it shook out this quarter.

Well, the deliberate part of the strategy was building the footprint that we knew that not every market had to hit every moment in order to move forward. And delivering -- building a footprint that didn't rely upon one market to carry load all the time. I do think just based on demographics and differentials between economies that there's more upward growth opportunity in Dallas and Houston. That's just -- they're just faster-growing cities, and we have enough of a footprint in both that we'll be able to take advantage of that.

But we've got good core consistent growth in most of the Louisiana markets. So that in a quarter in which one of our larger markets slowed down a little bit for whatever reason that is, Dallas was slower this quarter then we'll have our more consistent markets across Louisiana there to give us some more predictability as we try to forecast out from a balance sheet perspective over time. So yes, I guess the answer to your question is, did we specifically say we need to grow Southwest Louisiana and North Louisiana faster in the fourth quarter than the other markets? No. But we did specifically try to build a constructive footprint in which we could have different parts of the footprint experiencing greater success at different times, which hopefully, over time, leads to a good consistent moderate growth pace for the bank as a whole.

Feddie, I think if you think about 2025 as a whole, we had both North Louisiana and Southwest Louisiana grow over $100 million in loans and deposits each and we're excited about Southwest Louisiana now is over $2 billion in deposits, which is a large part of our deposit base and an important part of that. North Louisiana with that kind of growth as well, $100 million in deposits. They are now over $1 billion or approaching $1 billion in deposits with the addition of our Progressive partners, that will be approaching $2 billion. So we're excited about those areas. And...

As I said, in the Southwest Louisiana, Dallas comparison is an intriguing one because one of the thesis behind the construction of our footprint was that not only with different areas produced differently at different times, but that we could be a little more thoughtful about funding generation versus loan generation depending upon what type of market -- so as Greg mentioned, the Southwest Louisiana has been able to be more aggressive on deposits over the past 2 or 3 years, partly because we knew we had growth in the Dallas loan environment.

And so Dallas is actually our largest market as measured by loan volume. And in Southwest Louisiana, it might be our largest market based on deposit volume, and they've both been able to be slightly more aggressive because the other supports the other. So it's a symbiotic relationship. And I know a lot of banks over time have talked about the rural versus the urban mix of their footprint and trying to get the best of both worlds. And I think we have some real-world examples of where that's working, which is again, I think bodes well for the future.

Yes. I'd like to add one thing when it really...

This is Jerry, by the way.

Yes. Jerry -- by here, Feddie. Just an important part of this is I want to call out, a lot of this growth is coming from adding new clients. It's not just legacy client base. It's tenured, strong bankers in our footprint, new bankers, bringing in new clients is accounting for quite a bit of that growth, which is really nice to see in these markets that we've got such strength with them.

Yes. And Feddie, this is Phil. I'll just add also, obviously, we're excited with the addition of Jon and the horsepower that he's going to bring in the Houston market. But in North Louisiana, where we're excited, the Progressive addition and the opportunity, as Jude talked about in '26, deepening our existing relationships, Progressive being able to deepen those relationships with a bigger balance sheet.

Next question comes from the line of Gary Tenner with D.A. Davidson.

So my questions have largely been answered, but I wanted to just ask about the swap business again. As you think about that business, if and when we get to more of a steady-state rate environment, how do you see that business kind of trending in that sort of environment?

Yes. I think one of the things that the rate environment could provide some challenges. But I think as we continue to scale and understand our philosophy around pricing and fixed rate loan pricing with long duration we would like to and I think our bankers are becoming accustomed to taking some of that -- those rate bets off the table with longer duration deals.

So I think as we continue to integrate that process, and it's a very new process within our bank being only a little over a year old. But I think as we integrate that process with our bankers and our new bankers, and they understand that we would like to manage that rate risk on longer maturity fixed rate loans through the swap vehicle, I think that gives us even in a rate environment that may be more challenging than what it has been, more opportunity.

Yes. So that's a good point. It's not just about the economic opportunity for the fee generation. It's also an opportunity to offer the client more options even while we put ourselves in a better place to manage our interest rate risk. We -- it's -- one reason we added that chart that Matt described earlier, I believe, maybe it was [ Craig ], described earlier, the chart showing the pretty consistent NIM over time was we don't believe that we should be taking significant interest rate risk, and we manage not only the bank's entire balance sheet, but our investment portfolio, in particular, we manage it for cash flow as consistent predictable cash flow as opposed to yield.

And I think we've had good results, not trying to guess on rates. And so this enables us to give the client what they might want in terms of longer-term predictability of rates, but still enables us to have more flexibility in the construction of our ALCO posture. I would also say, although certainly, the lower rates mean that maybe less swap activity, more SBA activity. The other dynamic for us is that we don't just do these things for ourselves, for our own clients, but we also do them for other banks.

And so with the swap product, we are just now -- I think just yesterday, in fact, we closed one for one of our first ones for the client of another bank, another institution in our community bank network. Over the end of last year, we actually closed a couple of swaps for other banks, not for their clients, but for their own balance sheets. And so as we are able to discuss with and educate our banker partners on the opportunities to provide more optionality to their clients, I would think that we would continue to see success growing the volume of swaps, even if it ends up faster rate of growth off our balance sheet as opposed to with our direct clients.

Our next question.

I was going to say real quick on the correspondent banking. I think our biggest opportunity, we have about a little over 175, 180 clients. And -- but with most of them, we just do probably just one thing for the vast majority. And so part of our biggest opportunity there that we've been working on is having more of a unified sales approach so that we can actually increase the share of wallet, if you will, and have multiple -- provide multiple opportunities. So most of the folks that we've done SBA with, we haven't done swaps with and vice versa or the other products that we offer.

Our largest one actually and our original one was through our affiliate SSW, who manages other banks' investment portfolios. We have $6 billion to $7 billion in assets under management. And being able to cross-sell the different products that we've been working on adding to our tool set, I think, is the biggest opportunity that we have regardless of the demographic or economic changes in the environment.

And our next question comes from the line of Christopher Marinac with Janney Montgomery Scott.

I want to go back to the reserve. What should be the reserve ratio over time? Just looking at kind of annualized losses this quarter, last quarter and just thinking at the 3.5, 4-year average life, should the reserve be higher over time even if we included the discount that you have on the deck?

Yes. I think that's a great question, Chris. I think what we talk about internally is continuing to move that reserve to 1% or higher. I think the charge-offs that we had in this quarter took it down a few basis points. But I think internally, we're reserving at a rate of 120% on every new loan we make. So over time, we would like that to be above 1%.

I think that's our intentions as well. And especially when you add the credit marks in there, I think we're currently all in about 106 like we show in the deck, and that will continue to move up with the closing of the Progressive transaction.

Got it. And should annualized losses be somewhere kind of in the mid-teens or 20%? Or do you have a thought about that?

Yes. We would think those would be somewhere in the lower teens to mid-teens next year. I think 10 to 12 basis points of annualized losses is what we're kind of thinking. We ended up the year at about 19 basis points. And so we've kind of -- as we work through some of those NPLs, we've identified paths to move those off with minimal to no loss. So it's just a matter of time unwinding some of those.

We took some losses on them last year and have some specific reserves as well.

There can be a bit of a drag in terms of the actual recoveries. So gross, to Greg's point, is maybe in the mid-teens at kind of lower to low double digits annualized.

Chris, I think the days of us operating in the 4 to 5 basis points of charge-offs. That's going to be tough going forward. I think it's just for the industry as a whole.

Great. And the last question just has to do with kind of efficiency goals over time. If you look at expenses to assets, you've made a little bit of progress in the last year. Obviously, you've got integrating with Progressive. But just in the big picture, do you think we'll see more leverage going through the platform this next 12 to 18 months?

Yes. I think our plan is to continue to improve operating leverage. I think as we -- as Jude mentioned, we're moving toward being able to have a run rate of fourth quarter of 120 run rate. I think if that's achieved, then I think that thing gets close to 60% on an annualized basis. And then you'll probably start seeing on a monthly basis into the 50s post integration of Progressive here and there as we continue to prove -- improve performance and earnings throughout the balance of the second half of the year. As we get into '27, we would expect that our goal is to have that into the 50s. And I think there's -- once you kind of achieve those third quarter, fourth quarter '26 ROAA targets that we've been talking about, then there's a pretty natural glide path into the 50s. And I think that we feel like it's very achievable.

That concludes the question-and-answer session. I would like to turn the call back over to Jude Melville for closing remarks.

Okay. Well, thanks again, everybody, for joining us. I realize you have choices to make on your time and your attention, and I appreciate you spending this hour with us. Very pleased with the quarter and how we ended the year, and it matched up well with our expectations of building momentum over the course of the year and look forward to seeing that momentum continue in 2026. So thank you all again, and hope you have a great end of the week.

Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.

Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to Business First Bancshares Q3 2025 Earnings Call. [Operator Instructions]

I would now like to turn the call over to Matt Sealy. You may begin.

Thank you. Good afternoon, and thank you all for joining. Earlier today, we issued our third quarter 2025 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 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 7 of our earnings press release that was filed with the SEC today. All comments made during today's call are subject to the safe harbor statements in our slide presentation and earnings release.

I'm joined this afternoon by Business First Bancshares' Chairman and CEO, Jude Melville; Chief Financial Officer, Greg Robertson; Chief Banking Officer, Philip Jordan; and President of b1BANK, Jerry Vascocu. After the presentation, we'll be happy to address any questions you might have.

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

Okay. Thanks, Matt, and good afternoon, and thank you all for being with us today. It was another solid working day quarter for our company. Greg will follow my remarks with specific numbers that I know you're eager to dive into, but I'd like to use my time to highlight three themes on which we are focused.

First, we continue to show incremental quality earnings improvement. And importantly, that improvement has been driven in large part by our strong expense control. To be specific, 3 quarters of essentially flat core noninterest expenses. We've made significant investment over the past few years in our effort to reach a meaningful asset size, distributed over what we consider to be an attractive footprint. And having done so, have been pivoting our focus to the generation of operating leverage and expect it to remain there.

As a result, our aggregate earnings, our capital ratios, our tangible book value levels and our efficiency ratio all showed material improvement over the quarter and year-to-date, trends we expect to continue.

Second, our team has executed magnificently on the operational challenges we committed to this year, converting our entire core bank at the end of the second quarter to a new processor. And following quickly behind that, converting Oakwood Bank to the new system at the end of the third quarter. Although this aspect of performance doesn't easily fit into an earnings model, it's critical to our ongoing performance as an institution, preparing to be better as we get bigger, creates value that unfortunately may only be recognized over time, but I want to be sure to congratulate our team now on job excellently done.

In addition to system-wide efficiencies, operational excellence is also what allows us to feel confident that we can reap the financial potential associated with our two current M&A initiatives. We expect to see much more of the all-in economic benefit from the Oakwood transaction achieved by the first quarter of 2026.

We also remain on pace to close the Progressive Bank transaction early in the first quarter and scheduled to convert that asset in August, enabling us to fully incorporate both institutions and demonstrate unified post-integration financials in full for the fourth quarter of '26. We are focused on execution as we optimize the partnerships and opportunities on our plate.

Third, we have included a new chart in our deck on Page 15, illustrating the momentum we are experiencing in revenue generation from our young correspondent banking unit. We have about 175 banks that we partner with in some form and expect to generate over $17 million in revenue this year, leading to the unit contributing roughly $5 million towards our combined net income over the course of the year.

We're only getting started on this front and believe the investments we've made towards this initiative will lead to even more capital-efficient earnings production as we grow operating leverage within the unit, much as we're beginning to see the efficiency benefit of scale across our entire bank.

So our job for the next few quarters is relatively straightforward and clear, remain committed to effective expense control, fully execute on our recent acquisitions, maintain our historically stable and relatively strong net interest margin as we grow within our retained capital, and continue the progress we've been building -- as we've been building an alternate source of noninterest income through the building of our correspondent banking unit.

As we execute on these priorities, we're confident the combined effect will create the steady profitability and tangible book value increases over the course of 2026 in both aggregate and per share basis with visibility into our roughly 1.2% core ROAA run rate by the end of the fourth quarter. It's an exciting time, and we look forward to answering any questions you might have.

With that, I'll turn it over to Greg.

Thank you, Jude, and good afternoon, everyone. As always, I'll spend a few minutes reviewing our results, and we'll discuss our updated outlook before we open up to Q&A.

Third quarter GAAP net income and EPS available to common shareholders was $21.5 million and $0.73 per share, and included $1.6 million merger in core conversion-related expense, $2.0 million employee retention tax credit and a $77,000 gain on sale of securities. Excluding these noncore items, non-GAAP core net income and EPS available to common shareholders was $21.2 million and $0.72.

From our perspective, third quarter results marked another solid quarter of consistent profitability, generating a 1.06% core ROAA with our core efficiency ratio falling to 60.45% for the quarter.

From a corporate perspective, we were active during the quarter with a successful core conversion of the Oakwood bank systems, which occurred at the end of September. Additionally, in conjunction with our announcing our third quarter results, we announced an increase in our quarterly common stock dividend by $0.01.

Starting on the balance sheet. Total loans held for investment declined $26.6 million or 1.7% annualized on a linked-quarter basis. Scheduled and nonscheduled paydowns and payoffs accelerated somewhat during the third quarter totaling $479 million, while new loan production was $452 million during the quarter.

On a linked-quarter basis, residential 1-4 family and C&D loans increased $47.6 million and $38.6 million, respectively. This was offset by total CRE loans decreasing $71.1 million, while total C&I loans declined $40.2 million from the second quarter of 2025. Based on unpaid principal balances, Texas-based loans remained flat at approximately 40% of the overall portfolio as of September 30, 2025.

Total deposits increased $87.2 million, mostly due to a net increase in interest-bearing deposits of $131.4 million on a linked-quarter basis, somewhat offset by a net decrease in noninterest-bearing deposits of $44.15 million from the prior quarter. The net decrease in noninterest-bearing balances was not unexpected. As you might recall, at the end of the prior quarter, we experienced a large $60 million influx related to a single noninterest-bearing account relationship. This was a temporary deposit, which was expected to withdraw in early Q3. This withdrawal did, in fact, occur, which pressured overall growth during the third quarter.

I think it's worth mentioning, in spite of the Q3 outflow, net growth in noninterest-bearing deposits since March 31, 2025, was $58.2 million, this represents approximately 9% annualized growth in noninterest-bearing deposits. As of the end of the third quarter of 2025, noninterest-bearing deposits represent 21.0% of total deposits compared to the 20.3% at the end of Q1.

Lastly, on the funding side of the balance sheet, FHLB borrowings decreased $125.5 million from the prior quarter, which was a deliberate decision to reduce those excess borrowings.

Moving over to the margin. Our GAAP reported third quarter net interest margin remained unchanged, linked quarter, at 3.68%, while the non-GAAP core net interest margin, excluding purchase accounting accretion, declined 1 basis point from 3.64% to 3.63% for the quarter ended September 30. The margin performance during the third quarter was driven by lower net loan growth during the third quarter and the influx of interest-bearing deposits, coupled with the outflow of the noninterest-bearing deposits mentioned before.

Loan discount accretion during the quarter was slightly elevated at $1.1 million, which we expect to drop back into the $800,000 to $900,000 range going forward.

On a linked-quarter basis, cost of total deposits increased 3 basis points, while total loan yields increased 5 basis points. Core loan yields, excluding loan discount accretion for the third quarter, was 6.94%. Total cost of deposits for the month ended September 2025 was 2.65%, which compared to the weighted average of the third quarter at 2.67%.

We are pleased with our ability to hold the line in new loan yields during the quarter with a weighted average of new and renewed loan yield at 7.46% for the third quarter. We are equally pleased with our ability to manage funding costs for the quarter with the weighted average rate on all new accounts during September of 3.32%, down from June's weighted average rate on new accounts at 3.34%.

I'd like to make a note of a few takeaways to Slide 23 in our investor presentation. We continue to see the 45% to 55% overall deposit betas as achievable regarding any future rate cuts. I would also like to point out, overall, core CD balance retention rate was at 83% during September. These impressive statistics reflects our team's continued focus on maintaining and retaining core deposit relationships.

As you will see on Slide 24 (sic) [ Slide 23 ] in our presentation, we have approximately $3 billion in floating rate loans at approximately 7.33% weighted average rate, but also have approximately $646 million in fixed rate loans maturing over the next 12 months at a weighted average of 6.30%, which we would expect to reprice in the mid- to low 7% range.

Lastly, on the topic of net interest margin, I'd like to mention a new slide we created and added to the quarterly slide presentation on Page 22 (sic) [ Page 21 ] of our investor presentation. It includes a longer-term look at our GAAP and core net interest margin in the context of the volatility of the Fed funds rate since 2020. We're proud of our ability over the years to maintain the margin with a relatively tight range with the core margin peaking at 3.99% at the end of 2020 and bottoming out at 3.27% in the beginning of 2024.

Moving on to the income statement. GAAP noninterest expense was $48.9 million and included $1.16 million acquisition-related expense and $439,000 in conversion-related expense and $2 million in employee retention tax benefit, which ran through payroll taxes and employee salaries.

Core noninterest expense for the third quarter of $49.3 million was down slightly from the prior quarter. We do expect this to increase modestly in Q4 just primarily due to the timing of various investments hitting in Q4. We do expect to recognize partial quarter impact of the Oakwood cost saves during the current quarter.

Third quarter GAAP and core noninterest income was $11.7 million and $11.6 million, respectively. GAAP results did include $77,000 gain on the sale of securities, noninterest income results for the third quarter were relatively in line with our expectations. And over the long run, we continue to expect to build on our trend in core noninterest income, although the trajectory may be bumpy as we've mentioned, from quarter-to-quarter.

Lastly, I'd like to provide some context of the credit migration from the second quarter. Total loans past due 30 days or more, excluding nonaccruals, as a percentage of total loans held for investment decreased from 0.89% to 0.27%, roughly $38 million at September 30, 2025. The ratio of nonperforming loans compared to loans held for investment decreased 15 basis points from 0.82% in September -- to 0.82% on September 30. While the ratio of nonperforming assets compared to total assets slightly increased 7 basis points to 0.83% compared to the linked quarter. The increase in the nonperforming assets ratio over the linked quarter was attributable to the transfer of some nonaccrual loans to other real estate owned.

And that includes my prepared remarks for today. I'll hand it back over to you, Jude, for anything you'd like to add before opening up to Q&A.

I think, I'm good. We'll go and answer your questions. I will mention real quick that Greg mentioned the $0.01 dividend increase, and I will mention that we started paying a dividend in 2015. So this marks our ninth year in a row of increasing the dividend, we're proud of and we still have a very strong retail shareholder base, about 50-50 retail versus institutional and with a diverse set of interests and reasons for being partners with us. And I know the steady increase of that dividend over the years has been important, and we remain committed to trying to keep doing that. So excited about that news and wanted to be sure we highlighted that.

So with that, I'm certainly ready to answer any questions that we might have in the queue.

[Operator Instructions] And your first question comes from the line of Matt Olney with Stephens Inc.

I want to ask about expectations around the core margin for the fourth quarter in light of the recent September Fed cut and your expectations of any impact from additional Fed cuts that we could see as well in coming weeks?

And then on deposit cost side, Greg, you disclosed the September interest-bearing deposit costs. I appreciate that. It sounds like there's some good momentum there. Just any other general commentary you can share with us within your marketplace with respect to deposit pricing competition?

I'll answer your first question first on the margin. We expect to pick up a couple of bps in the fourth quarter in margin for that to expand again. And primarily because of the momentum on the deposit side, but we also think that the loan growth will come back and normalize.

I think it's worth pointing out, I mentioned in the remarks that the paydowns were about $479 million against originations of $452 million for the quarter. So the origination for the third quarter was very strong. And really, that was about an elevated payoff-paydown quarter of about $100 million more from the previous 2 quarters. So we feel like that with the normalization of loan growth and our management of deposit cost, we feel like we'll have a little margin expansion.

We're seeing deposit cost is still competitive in the markets in all of the markets we're in. So I would think we'll continue to have to be nimble and be aware of the competition set out there. We do a pretty deep dive on evaluating competition in our markets every week. So we'll continue that.

Okay. I appreciate that, Greg. And then on loan growth, it sounds like, like you just mentioned, you think loan growth will rebound in the fourth quarter. Are you seeing some evidence of this in the first few weeks of the fourth quarter? Just trying to appreciate kind of what you're seeing that gives you the conviction.

Yes. I think a little bit of both. I think as I mentioned, we had a pretty steady clip of originations that slightly built over the years. I think Page 25 on our investor presentation kind of highlights that. But we had a little bit of early -- some early success in the quarter that lead us to believe we'll be back to the low to mid-single-digit loan growth in the fourth quarter.

We also had some success with unfunded line commitments in the third quarter that wouldn't have shown up in our net numbers. And we will see -- we'll have the opportunity to see some of that come to fruition in the fourth quarter.

And your next question comes from the line of Feddie Strickland with Hovde Group.

I just wanted to touch back on the noninterest income piece again real quick. It sounds like you've still got some momentum there from the various businesses. It sounds like it's still going to grow, but Greg, I think you said it will be a little bumpy. As we think about the fourth quarter, do you think that you can kind of grow it quarter-over-quarter? And it sounds like you definitely think you can grow it year-over-year in 2026, considering you also have the deal in there as well, right?

Yes. I'll take you back to Slide 15 in our presentation, kind of to give you a little bit more insight into that. But specifically on the fourth quarter, we feel like the momentum is building with a little bit of caveat. The government shutdown greatly impacts the ability to sell the guaranteed portion of SBA loans. So there could be some influence on our performance in the fourth quarter with that. Now outside of that, we feel comfortable that our performance will continue to grow in those other areas. But I just want to note that.

So because of that, might be more realistic to think that, that noninterest income quarter-over-quarter may be flat. We're approaching -- quickly approaching the midway point of the quarter and the government still hasn't resolved their issues.

Which still gives us an annual number that's over 20% above last year and no reason to think at this point that we wouldn't be able to achieve a similar level of accelerated growth over the course of next year. It's just a little harder to predict on a quarter-by-quarter basis than the spread businesses.

Understood. That makes sense. And then just shifting gears more strategically. Now you have Oakwood behind you, Progressive on the horizon, do you still anticipate doing additional M&A near term in the next 12 to however many months? Or do you really feel like organic growth and integrating these as maybe a little bit more of the priority?

And a follow-on to that is, is there the opportunity to maybe do share repurchases down the road if the stock price doesn't pick up as much?

Yes. So that was essentially the point that I was attempting to make in my opening comments that I feel like we have a pretty exciting path, just executing on what we already have on the table and making sure that we're focused on not only following through on the acquisitions, but also our organic opportunities, which I think are only growing as others do M&A. In a number of our markets, particularly Dallas, there's been a lot of M&A. And I think that provides an opportunity for us from a recruitment standpoint and from a just production standpoint. So we want to -- I think our priority will be to let that play out.

I'm not saying never would we consider just a perfect acquisition that gets us some core deposits in market, low risk, but we're not aggressively looking for anything. We're not even looking for anything. So we'll see what opportunities just come to our door, but we believe we have great opportunities in front of us just to do what it is that we do and to keep seeking operating leverage and to make sure that we're more focused on profitability than we are on growth just for growth's sake. So that will be our priority for the next -- for the foreseeable future. We like our footprint. We want to be deeper in our footprint, and we want to be more productive in our footprint.

As far as capital allocation decisions go, we are pleased that we've been able to increase our capital ratios at a pretty good clip over the past year, really a couple of years. And if you think about the last time that we raised capital back in 2022, we have since then put on -- by the time we finish with the Progressive acquisition, we will have put on a little over $2 billion worth of assets, and we'll actually have higher capital ratios than we did at the end of that last capital raise. So we feel good about the accretion of capital that we've been able to prioritize, and that ultimately gives us more optionality on how to deploy that capital, more freedom to consider options, including potentially buybacks.

So I do think that we are entering a period in which we could contemplate that over the next few years, and that's certainly been one of our goals as an organization to get our capital levels back up to a spot at which we have maximum optionality and that ought to be one of the options. So I would say we are open to considering that as we continue to think about organic growth within the construct of our retained earnings, which should lead to further capital accretion over the next few quarters.

And the thing that also makes it attractive is it makes that worthwhile thinking about is that we feel like we are trading at a very attractive price. And one of the things that you have to consider when it comes to M&A is pricing, right? And when you think about M&A opportunities at certain prices versus the price that we find ourselves trading at, I like where we are. And that's certainly -- I shouldn't say I like where we are. I like the attractiveness of the price if I'm considering buybacks over time. And so that certainly heightens the need to give that some serious consideration over the coming quarters.

And your next question comes from the line of Christopher Marinac with Janney Montgomery Scott.

Greg and Jude and team, I just wanted to ask a little bit more about kind of pricing new loans and from your standpoint, as interest rates fall in months ahead, can you still get pricing for risk? Do you have to look at that differently as we move along?

Yes. I think, we have a pricing model we stick to that values our risk-adjusted capital. And so pricing for risk is part of the equation. So I think as rates continue to move, we'll have to be competitive, and we'll have to understand pricing relative to the type of credits we want. So that's logical that, that's going to move down from the, let's just say, the mid-7s, where we are today, into the lower 7s to high 6s as the rate environment moves and the competition set moves as well.

And have you had any, I guess, feedback from your customers just in recent weeks? Are they feeling more bullish about the next few quarters? Or is there more caution, I mean perhaps just a little bit of a temperature check, comparing now with earlier in the year.

Yes. I would say that the feedback we're getting from our markets is the customers, I think, with interest rates moving downward, it gives them a little bit of hope. I don't know that they're bullish would be quite the word, but maybe more optimistic with the lower rate environment or the prospects of rates continuing to fall.

Yes, they remain active. I mean, we see a lot of forward planning from the client base as they forecast their own interest rate environment.

And your next question comes from the line of Michael Rose with Raymond James.

Just wanted to touch on expenses. Core expenses flat, really good expense control this quarter. I believe last quarter, you guys had talked about kind of somewhere in the low 50s. So just trying to better appreciate the delta there.

And then more broadly, if you can discuss hiring plans, it seems like a lot of banks are out there trying to hire lenders. Just wanted to see if there's been any shift in your strategy at this point and how that could maybe translate into an early read on expenses for next year.

Yes. I would say in the first part of the question, Michael. We just -- for the -- as Jude mentioned in his comments or opening remarks, I think this year, we really made a concerted effort as a company to really evaluate our expense base. And the largest part of that in this business is personnel.

And so just being thoughtful about those positions, I think, is something we've done all year. And I think the third quarter was really just a continuation of that of being mindful in when we talk about employees and roles and efficiency in those roles. I think the fourth quarter will be slightly increase. The fourth quarter is typically noisy anyway. But I do think that we'll continue to look at investments in ways to continue to bolster production.

I will say as far as '26 goes with the disruption in the markets, mainly in Texas, I think it would be easy to understand that if the opportunity presented itself, we would want to hire good bankers.

Yes. And I think having discipline along the way, does two things. One, it means that hopefully, we don't ever reach a point where we have to think of expenses as being on the edge of the cliff. And if we can kind of make good decisions along the way, whether it be not hiring as much or just automatically replacing people or it means thinking about the life cycle of branches, we've shown a pretty good record of closing branches over time even outside the time frame of an acquisition, if we can keep doing that, then we don't have to make drastic cuts.

But also on the flip side, it gives us the opportunity to be poised to be able to take advantage of opportunities, as Greg alluded to, when they show up. And we have had a lot of disruption and particularly in the Texas markets where we now have a solid footprint and foundation. Dallas is actually our largest market. And so we feel that we'll get our fair shot at opportunities in some of the aftermath of M&A that's taken place there.

And so we'll be ready for that, but it won't be -- because we're exercising discipline along the way, and we'll continue to do that. And those kind of decisions won't be kind of [ at the ] year decisions, so to speak, normal taking care of business type investments. But we certainly want to position ourselves to take advantage of the organic opportunities that will be out there in the next few years, and we think they are.

Michael, one other thing that I'd add, as you know, there's a bit of a correlation just between the balance sheet dynamics and the kind of the overall expense investments. And I think we were expecting a little bit more of a balance sheet growth during the third quarter that didn't quite come through on a net basis.

So part of that kind of speaks to the -- to just a lower overall expense build in the third quarter. And then the other thing is I think that we started seeing a little bit more in the way of the Oakwood cost saves coming through. So a combination of those things helped in expenses being flat, down just very slightly in the third quarter.

And then there's, lastly, a little bit of timing in certain IT investments that just didn't necessarily hit in the third quarter, which could come around in the fourth quarter.

Really appreciate all that color, really frames it out. Maybe just a follow-up. It did look like some of the paydown activity did happen in Dallas and Houston, if I look at the -- one of the beginning slides versus last quarter. Obviously, loan production was up a little bit Q-on-Q, about 4.5%. But any sort of competitive dynamics there that maybe drove those paydowns just being [indiscernible] or just trying to get more color on this quarter's paydowns.

I think, Michael, the biggest driver of the paydowns in the quarter or a big portion of the paydowns, it also had a corollary to past dues at the end of the second quarter, was a fairly large relationship that was past due that we commented on last time we talked. That did effectively pay down during the quarter. So that was an outsized example of things like that. But I don't know that...

And we had a couple of strong C&I relationships that -- the company was sold to another company. So I don't think -- I wouldn't say that we've lost much in either of those markets or any of our markets through competitive pressures. I think it's been more of the kind of natural life cycle of the good credits, you often want them to pay off eventually because that means they've been successful, and the bad credits you want to pay off because it means we don't have to deal with it anymore. So it's more of that than it was than any kind of material competitive posture, I would say.

And your next question comes from the line of -- again, with Matt Olney with Stephens Inc.

Greg, I think it was your comment around the SBA sales that could potentially slow in the fourth quarter, should this government shutdown be extended. I'm looking at that slide deck, and it looks like the SBA sales has been around just over $3 million so far this year. So call it, $1 million per quarter. Is that the right way to think about the risk under the scenario of government shutdown for most of the quarter?

And then if that's the case, help us appreciate, is it -- does this just delay the SBA sales, so it's more of a delayed income into the first quarter? Or is that not the right way to think about that?

No, you're exactly right. That just delays the income stream into -- potentially into the first quarter. Those are loans that are closed that are really waiting to be sold. So it just delays the revenue opportunity.

And Matt, we've got a pretty good pipeline of loans that can't get approved until they open back up, right? So there's some kind of demand for sure.

And then one other thing to point out on the slide, that $3.3 million is annualized through 9 months, through the 3 quarters. So it's a little bit -- it's not exactly $1 million per quarter. That's just the annualized figure.

Okay. I see that now. Okay. And then also, I just want to ask about Progressive Bank. Any updates on recent trends you're seeing or hearing there? And then just update on the M&A application process and expectations of deal closing.

Yes. I think all positive, and they've been doing what they said they would do in terms of continuing to incrementally improve profitability over the course of the year, in line with their budgets and our projections. And so I feel very good about that. We feel really good about the people interaction. We've had the opportunity to spend a lot of time with them and I'm more excited today than we were originally, and that's all going well.

They did achieve a positive shareholder vote last week. So that's one of the hurdles that you have to get over to get a deal. So we were excited about the positive reception [ afforded ] the opportunity by the shareholders of Progressive and excited about the trust in the management team and Board's judgment. So it's a big step.

We're in the process of having our regulatory application reviewed and feel really good about that and confident about the positive outcome there in the next few weeks as well. So we feel like we're still on pace to close early January as we've been projecting. So excited about that. Okay. Thanks, Matt.

We also -- I think I mentioned in my opening remarks, that we have a conversion date of August for the Progressive bank. So as we think about projecting out the economic benefits, that might be valuable information to you as well.

There is no further questions at this time. I will now turn the call back over to Jude Melville for closing remarks. Jude?

Okay. We appreciate all the questions, and we appreciate everybody's time. As I started off by saying it's just a good solid kind of grinded out quarter. And a lot of ways, those are the ones that you're proudest of and most excited about. We're taking care of business on a daily basis. And love to see the -- one of our core values is built around incremental improvement. And so we certainly are doing that and look to continue that and believe we have a clear track to significantly increase profitability over the next few quarters as we capitalize and optimize some of the opportunities that we have in front of us.

So thanks again to all of you, and thanks to all of our partners. Look forward to seeing you and talking to you in a few months.

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

Thank you for standing by. Hello, and welcome to the Business First Bancshares Q2 2025 Earnings Conference Call. Please note that this call is being recorded.

I would now like to turn the call over to Matt Sealy, Senior Vice President, Director of Corporate Strategy and FP&A. Please go ahead, sir.

Thank you. Good morning, and thank you all for joining. Earlier today, we issued our second quarter 2025 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 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 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 morning by Business First Banchares Chairman and CEO, Jude Melville; Chief Financial Officer, Greg Robertson; Chief Banking Officer, Phil Jordan and President of b1BANK, Jerry Vascocu.

After the presentation, we'll be happy to address any questions you may have. And with that, I'll turn it over to you, Jude.

Okay. Thanks, Matt. Good morning, and thanks, as always, to everyone for prioritizing this call. I know you have plenty to do on a Monday morning, and we appreciate you participating with us.

I'd like to start by explaining that we chose a later the normal release date out of an abundance of caution, given the core system conversion we conducted over the past few weeks, wanting to err on the side of giving our team ample time to close out the quarter, we were successful. And going forward, I expect we will revert to our normal release date in time.

Four things I'd like to highlight before I turn it over to Greg to offer a more detailed analysis of our performance. First, the quarter was successful today. We again posted 1% ROAA earnings, but maintained our net interest margin. We increased our capital levels. As well as increasing our tangible book value by almost 15% any loss. These have been our primary goals over the past few quarters, and we're pleased to accomplish them despite an extra busy quarter. We also originated phones at a healthy pace even while continuing to decrease our C&D concentration levels as well as improving the makeup of our funding base, growing noninterest-bearing accounts quarter-over-quarter.

Second, the quarter was successful operationally. We embarked 2 years ago on a project to upgrade our core processing system to IPS, the FIS large bank platform and after thousands of man hours in preparation and then an action pack Memorial Day weekend, executed successfully, positioning ourselves for more efficient processing for the foreseeable future. We're excited about this partnership and believe it will lead to a more efficient organic and inorganic or operational effectiveness.

We also continue to work on our cultivating our branch footprint, teaming with a local community bank in the sale of one of our legacy branches. We're proud to again deliver on a win-win proposition for the local market and our local employees, leaving them in secure hands while we position our broader footprint for future operational savings approaching $750,000 a year. These operational decisions require significant work to execute by large numbers of our teammates, and I'm proud of the way they've done so.

Third, we announced a partnership with Progressive Bank, a $750 million community bank in the North Louisiana area of our footprint. We've known the team at Progressive for many years and have felt for some time that they have made good partners. I'm very proud that they chose to join with us on this next stage of our journey. They have excellent asset quality, strong long-term client relationships and a team that will fit in day 1 with in the B1 culture.

Between continued integration of the Oakwood Bank footprint, with conversion scheduled for late in the third quarter and incorporation of Progressive with the projected close of the first of the new year. We entered 2026, projecting meaningful upside earnings accretion added by our fruitful M&A activity.

Fourth, though our asset quality metrics trended negatively during the quarter. That's partly a function of successful work navigating through the process on a handful of relationships that have been previously identified. We've not been identifying new relationships through which we have to work, experiencing a decline in our watch list over the past 2 quarters. We believe we are adequately reserved against the nonperforming relationships and all borrowers continue to work with us towards resolution.

And while we don't expect we won't suffer any losses over the remainder of the year as we bring the subject credits to their conclusion. The quarter as with most all our recent quarters, exhibited exemplary net charge-offs at 0.01%. We are preparing to enter 2026 with a stronger balance sheet as positive a go-forward P&L opportunity has diversified geographic footprint and as much operational capacity, I can remember during my time as CEO, and I'm excited to see our team continue to perform.

With that, I'll turn it over to Greg. Thanks again.

Thank you, Jude, and good morning, everyone. As always, I'll spend a few minutes reviewing our results, and we'll discuss our updated outlook before we open up for Q&A. Second quarter GAAP net income and EPS available to common shareholders was $20.8 million and $0.70 and included a $3.36 million gain on the sale of a branch, which we closed April 4. GAAP results included a $570,000 acquisition-related expense and $1 million core conversion expense.

Excluding these noncore items, non-GAAP core net income and EPS available to common shareholders was $19.5 million and $0.66 per share. From our perspective, second quarter results marked another solid quarter with consistent profitability, generating a one-on-one core ROAA.

From a corporate perspective, we were active during the quarter with successful core conversion, which occurred over Memorial Day weekend. We also sold 1 location in South Louisiana, in early April, as Jude mentioned, and finally announced the acquisition of North Louisiana-based Progressive Bank. The actual merger announcement occurred earlier this month, however, we were obviously busy in the months leading up to the announcement.

Starting with the balance sheet. Total loans held for investment increased 4.5% annualized on a linked-quarter basis, up $66.7 million from Q1. Scheduled and nonscheduled paydowns and payoffs slowed somewhat during the second quarter, totaling $365 million, while new loan production was $432 million during the quarter.

Loan growth was driven primarily by C&I and CRE, which increased $98.8 million and $61.6 million from the linked quarter. This growth was partially offset by decreases in construction and residential of $33.4 million and $54.5 million, respectively. Based on unpaid principal balances, texted based loans remain relatively flat at approximately 40% of the overall loan portfolio as of June 30.

Total deposits decreased $38.5 million, mostly due to a net decrease in interest-bearing deposits of $140.9 million on a linked-quarter basis. The net decline was primarily driven by withdrawals from financial institution accounts and the branch sale earlier quarter that we mentioned. The decline in our interest-bearing deposits during the quarter was somewhat strategic in nature as the weighted average cost of these outflows averaged 4.45% and was replaced with more efficient source of brokerage CDs and deposits.

Excluding the $50.7 million in deposits transferred from the branch sale during the quarter, net deposit growth would have been $12.1 million for the linked quarter. I think it's worth noting, this includes bringing on to the balance sheet and replacing over $100 million in high-cost deposit balances with the Oakwood acquisition that we previously mentioned as our strategy.

Net interest-bearing deposits increased -- noninterest-bearing deposits, excuse me, increased $102 million or 7.8% on a linked quarter basis, driven by a smart short-term inflow of approximately $60 million, which subsequently withdrawn after the quarter end. Lastly on the funding side of the balance sheet, bank borrowings increased $179 million from the prior quarter or approximately 41%. The large increase was due primarily to an increase in short-term FHLB inventions, which was utilized at quarter end to facilitate the transition of our correspondent banking relationship, which was aligned with our core conversion.

Moving on to the margin. Our GAAP reported second quarter net interest margin remained unchanged in the linked quarter at 3.68%. While the non-GAAP core net interest margin, excluding purchase accounting accretion, also remained unchanged from the prior quarter at 3.64%. Interest-earning asset growth during the second quarter was offset by excess funding utilized during the core conversion and incremental funding to replace the deposits transferred in the branch sale. The lower cost deposits divested from our branch sale equated to approximately 2 basis points drag in the second quarter margin.

Additionally, the excess liquidity carried during the second quarter accounted for about 3 bps drag on the margin. We expect going forward to continue to maintain somewhat elevated liquidity levels, at least in the near term, assuming no rate cuts over the next 2 quarters, we would expect deposit costs to remain relatively flat in the near term, but we will be affected by our ability to retain and attract lower cost noninterest-bearing deposit accounts.

We are pleased with our ability to manage our deposit rates, total interest-bearing deposit cost declined 4 basis points from the linked quarter, highlighted by a 26 basis point quarter-over-quarter reduction in overall cost of money market deposits and a 17 basis point reduction in overall cost of time deposits, notably, the weighted average total cost of deposits for the first quarter 2.64%, down 6 basis points from the linked quarter, while June weighted average cost of total deposits was 2.62%.

With further improvements in funding costs are subject to the Fed's interest rate decisions, we remain encouraged by this trajectory. I'd like to make note of a few takeaways to slide on Page 22 in our investment presentation. We continue to see 45% through 55% of overall deposit betas as achievable regarding rate cuts. I would also like to point out our overall core CD balance retention rate was 96% during June. This impressive statistics reflects on our team's continued focus on maintaining and retaining core deposit relationships.

As you would see on these 23, we have approximately $2.8 billion in floating rate loans approximately at 7.56% weighted average rate, but also have approximately $611 million fixed rate loans maturing over the next 12 months at a weighted average of 6.18%, which we would expect to reprice in the mid-7% range. Last thing I would add is our expectations for loan discount accretion to average approximately $750,000 to $800,000 per quarter going forward.

Moving on to the income statement. GAAP noninterest expense was $51.2 million and included $570,000 of acquisition-related expense and $1 million conversion-related expense. Core noninterest expense for the quarter of $49.6 million was relatively unchanged from the linked quarter. We do expect a modest increase in Q3 in the core expense base, primarily due to the timing of various investments hitting in Q3 and Q4. However, we should start seeing partial quarter impact of the Oakwood cost savings after the conversion in the fourth quarter.

Second quarter GAAP and core noninterest income was $14.4 million and $11.1 million, respectively. GAAP results did include the $3.36 million gain on the branch sale that we mentioned previously and $47,000 loss on the sale of securities. Noninterest income results for the quarter -- second quarter were relatively in line with our expectations, however, I would like to mention our SBIC pass-through income of a negative $246,000 during the quarter was approximately $500,000 lower than what we had expected.

This particular component of fee income can be difficult to predict. However, we would expect some normalization going forward. Over the long run, we continue to expect an upward trend in our core noninterest income although the trajectory may be bumpy as we mentioned from quarter-to-quarter.

Lastly, I'd like to provide some context of the credit migration during the second quarter. Q2 NPLs increased 0.28% from 0.69% in Q1, 0.97% in Q2. With the increase driven by negative migration of 3 separate loan relationships rerenting total outstanding principal balances of $23.7 million. Annualized net charge-offs decreased from 0.2% -- 0.02% from 0.07% in Q1 to 0.05% in Q2. Of the 3 previously mentioned credits, we are 34% reserved on 1 credit, 14% reserved on the other and adequately reserved on the final third credit. We expect to find a resolution on these credits during the third and fourth quarter of the year with the reserve on the one that has 34% possibly settled in next year.

That concludes my prepared remarks. I'll hand the call back over to you, Jude, for anything you'd like to add before opening up for Q&A.

Good. Thanks, Greg. I don't have anything to add. Yes, why don't we jump into questions.

[Operator Instructions]. Our first question comes from the line of Feddie Strickland from Hovde Group.

I wanted to drill down on the excess liquidity piece related to the core conversion. I guess the first way I read that was that maybe that go away. But Greg, it sounds like in your prepared comments, you're going to hang on to that excess liquidity for a little bit longer?

Yes. Good question. What we we're using liquidity for in the core conversion as we were transferring from a correspondent bank that we've used for a while to direct to fed relationship. So during that process, where we're clearing in 2 different places. So we needed the additional liquidity. I think we'll continue to carry some of that liquidity as we go forward until we get past the core conversion with the Oakwood franchise because we're helping them manage their balance sheet in real time, too.

So having that additional liquidity, which we kind of had all year long, it's partly been for the conversion, specifically in the second quarter, but also now we're looking at Oakwood's conversion until we get beyond that and just handling everything on 1 balance sheet, so to speak. We feel that's the right thing to do.

Got it. That's helpful. And just so I understand the credit moves this quarter, this was simply a migration from substandard nonaccrual and you mostly reserved for this, what it sounds like, given some of your prepared comments?

Yes. The 1 credit was on their last quarter. I think we moved it to nonaccrual last quarter. We have, like we mentioned, about a 35% reserve on that credit. It's a C&I relationship where we're continuing to evaluate the collateral on that. So that's kind of a moving through the process of our trying to get the resolution with that has been cooperative on that one.

The other 2 more recent moves is -- one of them is a commercial real estate piece. The other is only occupied piece. The commercial real estate piece, we put up $1.6 million reserve on it, we move through resolution for that one and then the owner-occupied piece, we're very close to resolution on that one.

So I think we're just -- those are moving at different paces, but we think we're -- from what the information we have right now, we think for the risk we have, we kind of reserve where we think is appropriate. And we'll continue to move toward resolution.

And I'll just emphasize that none of those are surprises. We're just kind of working its way through the system over the course of the year. With each step, you label it something different and it doesn't necessarily change the underlying risk parameters. So feel good about the progress on working our way through that.

And as Greg said, we're benefiting from good client communication and we're working towards resolution together as opposed to bank being any stand off. And so as a bank, that's what you hope for when you have an issue of that you can work with your borrower to get to a good resolution and we feel like those things are happening.

One follow-up on that. I mean, all else equal, given you feel like you're close to getting resolution on these. I mean, could we see NPAs probably drop some in the back half of the year, all else equal?

I think if those 3 credits are 50% of NPLs. So I think as they start resolving or we get to resolution I think the number will start dropping. The most immediate resolution is the smaller one. It's about $4.5 million of the $23.7 million, and that one is imminent.

And then as we work through the other 2. And I think you'll see those numbers dropped pretty significantly, and that would be back to where we've operated over the last 8 quarters, let's just say.

I don't know, that's a third quarter thing, I mean, hopefully, the direction moves correctly, but it's kind of through the rest of the year forecast. These things take a while even if you're working together.

Our next question comes from the line of Michael Rose from Raymond James.

Just wanted to start on just wanted to start on the expense outlook, looks like you were basically flattish quarter-on-quarter on an operating basis. Obviously, you have the systems conversion with Oakwood here coming up cost savings realization. So just trying to get a sense for that $49.6 million this quarter.

How should we think about the next quarter or 2 from a progression point of view? I know there's lots of moving pieces, and you guys have been pretty busy behind the scenes with the FIS conversion and soon to be the Oakwood conversion?

I think we manage good from an expense standpoint, managed to a good spot in the second quarter with a lot of activity going on. I think in the third quarter, some of our expected investments, you'll probably see that shift up into the low $50 million range.

And I do want to remind in the fourth quarter, we're set to close or convert the Oakwood franchise on September 20, so the weekend of September 27. So that effectively, the way we usually schedule those as we will only pick up a couple of months of the impact of any kind of cost saves in the fourth quarter. So I would think for the remainder of Q3 specifically, it would be in the low $50 million range is what we expect for the run rate.

All right. And then it sounds like a little bit higher in the fourth quarter. All right. Appreciate it. And then maybe just going to the margin, certainly, I understand the excess liquidity and the other impacts. But is it fair that we should -- I know you're going to hold some of the excess liquidity.

So as we're thinking about the core margin, would it have a little bit upward trajectory from here? I know there's some puts and takes, just obviously with -- I think loan yields were down Q-on-Q, but you did have some deposit costs come down as well. So just trying to get a kind of a starting point for the margin and how the asset sensitivity could change with the progress deal as we think about next year?

Yes. I think the way we think about margin from here on out is really for the balance of the remainder of the year. So we think we can improve margin, as I say, in the 4 to 6 basis points range from here on out for the rest of the year.

Now I think it's probably going to trend to maybe be flatter in Q3 and up in Q4. But the timing of that is going to be a little bit tricky based on how we handle the excess liquidity and the deals on the fixed rate maturities that are coming due and the timing of which some of those price up. So we think that we'll have margin improvement for the rest of the year. The timing of that may be a little tricky as we move forward.

Okay. Great. Maybe just one last one, if I could.

The loan growth was about 4% -- 4.5% annualized this quarter. I know you previously talked about kind of low single digits. Obviously, the industry, we're seeing better pull-through rates and a little bit more optimism.

Can you just talk about kind of the puts and takes to that prior outlook? I mean it seems like it should be at least modestly improved just given the backdrop that we're seeing, but would just love to hear from your perspective how we should think about growth in the nearer term.

Yes. I think we think that the mid-single-digit growth for the rest of the year is we're having -- starting to have -- as you mentioned, we're starting to have more requests the pipeline is building. But I think from our standpoint, the tangible book value growth and the capital accretion that we've been experiencing with our financial performance we're going to maintain some discipline as we go forward and kind of stick to that plan.

I think the other thing is we've made great strides on decreasing some of our concentration risk. And so we want to continue to be diversified. And that typically means trying to focus more on C&I growth, which -- and owner-occupied kind of stuff, which tend to be a little harder to get and a little smaller for a bank like ours. So I think the range that we've articulated previously kind of the mid-single digits, 4% to 6%, maybe we end up near the high end of that range versus the low end.

But I don't think it's a fundamental shift in and where we end up growth-wise, partly because it's not just about growth, as Greg said, it's about or things to margins and tangible book value capital appreciation, concentration risk. And so we want to make sure that we're participating in the growth, but we want to do so in a way that at least to the best kind of incremental outcome for our shareholders. And we think that means balance. So I would say the range is still accurate. We just think we'll be at the higher end of the range as opposed to the lower end, which is a positive thing.

Our next question comes from the line of Matt Olney from Stephens.

I want to go back to the discussion around the loan yields, and you made a lot of progress there over the last several quarters, but that momentum slowed this quarter. Just looking pretty more color on kind of what drove the softness in 2Q? And then as you look forward, any more commentary about expectations as far as repricing some of these fixed rate loans we've talked about over the last few quarters.

Yes. I think what we saw, the balance or the average weighted rate as we stated in the 3.60% range. I think the spot rate at the end of June was more around 3.40% -- Excuse me, 7.40%. We feel our pricing deals in the mid- to low 7s. We think that that's -- obviously, you'd like to get as much yield as you could. But I think competition is driving some of that, and we won't be in the mix from a competitive standpoint.

And so far, the deals that we're seeing price they're still holding up in the mid- to low 7s, on most of the deals we're looking at, and there's a few that we passed on because of pricing, but we feel like at this time, that's kind of where we want to be.

And Matt, one thing that I'd add to is this is a readily available from the press release. But the breakdown within the loan portfolio quarter-over-quarter, we had deferred loan fees and our business manager factoring light product that we offer those fees that segment was lower to the tune of about $1 million quarter-over-quarter.

And so that just all rolls up in the aggregate loan interest income. And so that's a little flavor for where some of that drag might be coming from. But by product type, C&I and CRE, those individual loan item categories were still up quarter-over-quarter.

Okay. Thanks, Matt -- Greg and Matt.

And then on the -- Greg, you mentioned I think in the prepared remarks, FHLB borrowings moved higher in the second quarter and remained elevated at quarter end.

Will those also remain elevated in the near term, similar to your commentary about just overall liquidity in the next quarter or 2? Or have those already came down?

So we use some of that from -- with the liquidity build that I mentioned. I think the reality is that we're going to continue to evaluate the best avenues of funding both in the near and the long term. And at this point -- at that point, the thing that made the most sense was the using utilization of the FHLB availability, that was all on the short end.

I provide a little context to funding. We've talked about it on these calls or in meetings or since the announcement of the Oakwood acquisition that we were going to manage their balance sheet kind of in a systematic fashion of looking at higher price funding and moving that -- using our balance sheet or using other sources of funding to reposition that.

And over -- since 12/31 of this year, we've been able to manage down or move away about $140 million of deposits that had a weighted average of about 5% or a little higher than that. We're using different funding sources to systematically kind of manage through that. And I would expect us to continue to do that for the back half of the year as well.

So to answer your question, Greg, it could move up and down. I think from a quarter-over-quarter in a point in time, it may move, it may not move at all. from an optics standpoint, but that doesn't mean we're not moving it up and down intra-quarter to take advantage of some pricing opportunities.

Okay. That's great context, Greg. And then my last question, just going back to the core conversion you guys did recently at the bank.

Just any early feedback on that newer platform? And just remind us how much of that switch is a more of a near-term cost savings for the bank versus just longer-term savings, more efficient -- more efficiency around future growth?

Yes. I think it's probably a little too early to have much of a judgment in terms of people's feelings about the new system, I think it just takes a little while to get used to it. And we had a very successful execution in terms of getting it done, the weekend of and -- there was a lot of preparation for that, obviously.

And now we're in the -- let's get used to it base, which clearly change management takes a little while. And so it's too early to offer big-picture summation experience. But I think all the reasons that we chose to move to that system still hold true, and I think we'll end up being very excited about it.

One of the things that -- one of the reasons that we move was that we feel like it better prepared us to take advantage of efficient growth in the future and still have every reason I think that's true. I don't know that we'll see a lot of savings immediately. Partly because we're making allowing us to make some other investments in technology.

You know that we've talked quite a bit about preparing to be a $10 billion and making sure that we have the right systems to be able to report and to manage. And so the aggregate package is going to end up being similar in cost to costs we already have with our capability, not only on the core, but in other technological systems should be increased. But that, of course, is our decisions that will be out over the next couple of years. I do think that one of the advantages to the system is that not only should it make organic growth more efficient, but it also allows us to contemplate M&A activity with a little more aggression, which not that we haven't had a question before, given our track record, but you have the confidence that we can get on a calendar to be able to convert new partners is important and also the fact that we can, with assurance offer them a good core partnership as bankers think about partnering with other bankers, they think about their systems, and the system, I think, will get more confidence than the one that we had before.

So a lot of reasons to embark upon it even absent a day 1 financial gain. We do you think that over time, there'll be a lot of financial benefits to being on the system. And again, it will take a few months to change management to get used to it. And that's not a bad thing, that's just part of it. And I look forward to in 2026, cycling through, and I think all of our employees and our clients will be appreciative of the change at that point.

Our next question comes from the line of Christopher Marinac from Janney Montgomery Scott.

I wanted to drill down on Smith Shellnut and just get a sense from you of kind of where do you think you are in the evolution of the business. I know it's made a lot of progress. It's got $6 billion of AUM. Just curious kind of where you think they are in terms of how much more that can go in the next 12 to 24 months.

Yes. Good. Thanks, Chris. Appreciate that.

And that is a part of our business that didn't get quite as much attention and partly because it hasn't been around as long. But it's part that we're very excited about and not just Smith Shellnut Wilson taken in isolation, but very excited about the correspondent banking function in general, and that's one of a handful of products that we're offering and to our client base, which is probably 120 banks who are doing business with us in some form or fashion today.

I think when we bought SSW and began that process, they had about 40 banks, maybe 45. So we've been able to grow that ships and I don't see any reason that we won't be able to continue to grow that. I will say that I think growth can mean different things. And it doesn't just mean AUM, although we have been having over double the AUM SSW has over doubled the AUM since joining up with us.

And we expect that we'll be able to continue to grow that number. But we're also focused on things that aren't AUM related, such as providing swabs for our client banks, which is beginning to generate some fee income. And SBA work, which again doesn't increase your AUM, but it does increase your fee income and I want to continue to -- we believe we'll continue to have opportunities to grow that part of the business.

We've made some significant changes in personnel. So for the first time this year, we have a senior executive who is full-time job is to coordinate the multiple parts of our correspondent banking network. And I think we're feeling really good about the progress that he's making part of it is we've had a number of products that have run independently and they haven't really coordinated a lot in terms of their sales efforts. And so we're in the process of making sure that we have a unified sales effort.

And I'll have to say, I think, as Greg says every quarter, and as I say, when I talk about it, I think it's going to be -- continue to be a little rocky in terms of the magnitude each quarter. But if you look at it over time, I think we expect to continue to grow that income in the next 12, 24 months albeit surprised if we don't double its impact by the end of that time period.

We think that there's a lot of potential there. And lot of momentum building internally that doesn't quite show up in the numbers, particularly a little bit messed this time because if you just think about our fee income in general because of that SBIC drag, but the actual underlying growth in fee income relative to the correspondent banking function is moving in the right direction, and we feel excited about it.

Great. I appreciate it. And then just a quick capital question as it relates to kind of Progressive and kind of the data you shared a few days ago.

So as we think about that 10%, 10.2%, excluding marks after Progressive. Is there a North Star on capital ratios that you look for as you think about organic growth plus any other external opportunities that come down the road?

We think that by the end of this year, before we close the acquisition, TCE will be close to 8.50% total risk base close to 13.30%, $13.40% range. We think in those 2 ratios kind of the north store for us would be on a risk-based scenario somewhere in the 13.75% area.

We think approaching 14% would probably give us enough capital to be opportunistic and ready to deploy the capital right way if the opportunity presents itself. I think on the TCE front, that's in the 9% range, low 9% range somewhere in that ballpark. Probably what we talk about being our normal over time or what we aspire to be.

Yes, I would say, I certainly think that's the direction we want to move in over time, but we've also been operating at a level lower than that and still being able to take advantage of opportunities over the past couple of years in particular. So we certainly think there's an optimal level, but we also think there's a practical level and you kind of have to balance those 2. And so we don't feel like we have to put things on hold, not necessarily to get to 9% as long as we're doing the right things to increase incremental levels of income at the right pace, which, over time, ultimately generate a higher capital ratio and higher tangible book value ratio.

So 9%, I like that number for kind of an aspirational goal, as Greg said, but I also don't think that we need to not take advantage of opportunities along the way as we've done a good job of over the past 2, 3 years when those levels have been -- were considerably lower, really pleased with the movement of things and that's partly some of these investments pay off.

Thanks, Chris. Our next question comes from the line of Manuel Navas from D.A. Davidson.

A lot of my questions have been asked and answered, but I just want to get a little more specific on the loan growth. Is that mid-single-digit guide just the back half of the year? Or is that 4% to 6% for the whole year? And talk about -- it seems like you're demanded here, but can you just talk about the sentiment on the borrower base as well?

Yes. Well, I think I'll answer your first question. So we think that for the whole year, it's probably going to be in the low 4%, 4.5% range, just based on the production in the first quarter we still started. Slow start of the year dragging us down, but we think going forward from here, like Jude mentioned, it could be in the 4% to 6% looks like maybe trending towards the higher part of that range. On a run rate.

On a run rate per quarter. And annualized per quarter.

Yes. That's really helpful. Is that your appetite? Or is it -- do you sense seeing an improved sentiment? Can you talk about that for a moment as well?

I think it's a little bit of both. I mean we are in a little different position than we were a year ago in terms of our capital levels and kind of what we were talking about earlier, we want to continue to increase those levels, but we also feel like there's room to take advantage of opportunities.

And so we want to be sure that we're selective when we do it, but we want to be sure we take advantage of our opportunities. And particularly, the downward transition that we made in our construction concentration levels over the past couple of years have really impacted our loan growth overtime. But then also they've put us in a better spot now. So we can do some more construction again, being selective and not getting back in a position where we feel like we have too much exposure, but we can kind of incrementally add, pick and choose where we add some exposure there, which we might not have felt as much flexibility to do so a year ago.

So a little bit our own. I do think that just anecdotally, you definitely feeling like there's a little more activity out there in general. I think the year has been somewhat muted by just uncertainty around what's going to happen with tariffs, what's going to happen with the Big Beautiful Bill and things of that nature.

But I think we're starting to either get some clarity on that or people are just starting to say, hey, we got to keep moving on with our lives and taking care of business much as they have done over the past 5, 6 years despite numerous uncertainties. And at some point, particularly the small businesses that we deal with, they just have to keep on keeping on.

And so I think you're seeing a little bit of that little resolution of whatever the external circumstances are, we're going to continue to do our thing internally. And I think you're feeling a little bit of positive momentum across our markets as we round up the year and move into 2026. So I don't see anybody at the table have any different opinion or is that...

I have to agree with that.

I think you're also starting to see other banks be a little more aggressive, and that's one reason for the or competition on the loan yield side is that they're feeling the need and opportunity to get out there and do some things.

And we've tried to be fairly consistent in how we operate in the past couple of years and not get too hot, not get too light is kind of down the middle of the road. And I think here are some other banks that maybe shut down a little more, but then are now starting back up. And they're obviously seeing some of that same positive sentiment that we're seeing. And it's exciting. We want to -- we're here to do business. So excited about the industry being in the same mindset.

I appreciate that commentary.

I just wanted to switch to fees for a moment. I definitely heard the confidence in the Smith Shellnut Wilson team. The Smith factor this quarter was that pass-through loss. What are the lines you have like kind of more near-term composite that can kind of just build across the back half of the year, getting more looking at the fee income line specifically?

Yes. There are 2 ones to really take hold leave been -- or beginning to take hold or the SBA loan service providing. We do that through Waterstone out of Houston and I think we're definitely seeing they've, I believe, added 4 bank clients over the past quarter in addition to seeing our internal participation in SBA origination growing. Again, not a huge needle mover yet but I think moving in the right direction to be so in the future. And so I'm excited about that.

And I don't -- regardless of the political lens, I think there's I think if you were to try to list the governmental programs that have the most bipartisan support. I think SBA has to be up there near the top of the list. So we've we feel like that opportunity will only grow over time, and we're excited about that.

We're also seeing quite a bit of momentum in the derivatives business that we have serving our clients and other bank clients by offering interest rate swaps as a way to tailor their pricing on their loans. And we're starting to see more and more wins come through the celebration channel. I don't know what the right word is for it. But as we talk about what we're doing, I'm seeing a greater pace of swap victories.

And I think that says our bankers become more comfortable with it, they can help our clients be more comfortable with it and make sure that we're offering it when it makes sense. But we haven't -- we've only just now begun offering that to other banks. We've been -- what we like to do is for a lot of these noninterest -- or excuse me, fee income sources of income. The goal relates to provide it to our own clients. Make sure that we're comfortable in doing so and then offer it to clients.

And each of our partnerships, we pick on, whether that be SSW or a Waterstone or now the derivatives business, we have begun by partnering with folks that could serve our own clients and then we branch out and try to offer that to community bank clients and it's only just begun doing that with the derivatives business.

And so we look forward to some opportunities, particularly again in '26, '27, picking up there. But the pace of which I'm hearing of victories is increasing and gives us confidence that those would be a couple of areas that we can count on being additive to our earnings over the next couple of years.

Greg, do you want to mention anything else?

No, I think you touched on Waterstone in the beginning. I think our from our February 1 acquisition last year, we've increased the number of banks that they do busy with, and that's -- because they are -- they work on prequalification underwriting packaging post-closing servicing all the way to if you have a problem loan, they help the dialogue with the SBA. That is a valuable tool for these banks that they're doing business with, and that is approaching doubling since we've taken over.

So I think that we're excited about that with a very robust pipeline for the back half of '25 for them. So very comfortable with that and excited about it.

And I think over time, we'll look to add some of these product capabilities. You know there are correspondent banks who do a really good job for these banks, but there aren't a lot of corresponding banks that offer some of these slightly more complicated, sophisticated products.

And we believe that's a role that we can serve. So we'll continue, particularly that some of the governmental lending stuff is are areas that we want to look for further opportunity in.

Thank you. There are no further questions. I'll now turn the call back over to Jude for closing remarks.

Okay. Good. Well, again, I appreciate everybody joining us today, and it seems like a pretty positive in earnings season for us as a bank. And then for the community banking industry as a whole. So starting to see that positivity and hope to continue building on it.

Banking is -- it's a lot about just consistent incremental improvement pruning out quarter-to-quarter and then being prepared for opportunity. And I think we've done a good job of that, particularly over the past couple of years, incremental improvement and then when an opportunity for an Oakwood partnership or for a Progressive partnership comes up, we're prepared to take it on from a capital standpoint and from an institutional knowledge standpoint and now from a technological standpoint, and we'll continue to make those investments and be focused on the little things, which add up to big things over time.

So I appreciate your support, and hopefully, we'll talk to you all again in about 3 months. Take care.

The meeting has now concluded. Thank you all for joining. You may now disconnect.