Business First Bancshares, Inc. Q3 FY2023 Earnings Call

Hello and welcome to the Business First Bancshares' Q3 2023 Earnings Call. I will now hand the conference over to Matt Sealy, Senior Vice President, Director of Corporate Strategy and FTNA. Please proceed.

Good afternoon and thank you all for joining. Earlier today, we issued our third quarter 2023 earnings press release, a copy of which is available on our website, along with the slide presentation that we will reference during today's call. Please refer to Slide 3 of our presentation, which includes our safe harbor disclosures 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 we filed with the SEC today. All comments made during today's call are subject to the safe harbor statements in our slide presentation and earnings release. I'm joined this afternoon by Business First Bancshares’ President and CEO, Jude Melville; Chief Financial Officer, Greg Robertson; Chief Banking Officer, Philip Jordan; and Chief Administrative Officer, Jerry Vascocu. After the presentation, we'll be happy to address any questions you may have. And with that, I'll turn the call over to you, Jude.

All right, thanks, Matt. And thanks, everybody, for joining us. I know it's a busy time and we certainly appreciate you prioritizing this conversation. During the third quarter, we continued to deliver solid fundamental shareholder or unit operating performance, generating a core ROAA of 1.1% by exercising discipline around expenses and maintaining good margin stability, even as we grew organic deposits. Included in our core operating results for several non-run rate items, which I'll let Greg expand on in his section. However, even adjusting for these items, we still tag our run rate EPS, ROAA, and efficiency ratio at $0.67, 1.03%, and 62.4%, respectively. Our third quarter was highlighted by balance sheet management, which yielded another quarter of solid capital accretion, strong deposit generation, margin stability, expense management, and continued healthy credit quality trends, all of which put us in position to be able to increase our dividend by $0.02 per share for the quarter, something we've been able to do for five years in a row now. I'd like to highlight a couple of specific accomplishments. First, we've been particularly focused over the past few quarters on managing growth within our capital structure, and I'm pleased to report that our results are again accretive to tangible, excuse me, to TRBC to TCE, and TBVPS, even factoring in the headwinds of additional AOCI. But not counting the impact of AOCI, we grew tangible book value per share at a $0.67 annualized rate of 20%. We slowed loan growth during the quarter to 1.7% annualized, which reflects some slowing demand and continued selectiveness on our part, as well as unusually high paydowns and payoffs. We do still expect full year 2023 loan growth of 7% to 8%. I'm most pleased to report growth in deposits of $176 million and about 14% annualized in the quarter. And we accomplished this without causing material damage to our margin. Core NIM was down three basis points, but that factors in again a $455,000 loan recovery from a previous charge-off, and the decision to hold an additional $150 million in excess liquidity at the cost of six basis points to the margin. Factoring out those two elements, our core margin would have been flat, even while we demonstrated continuing improvement in our loan-to-deposit ratio. Asset quality continued to improve in the third quarter with nonperforming loans as a percent of total loans declining to 0.33%, down from 0.36% in quarter two. The improvement was largely attributed to the resolution of two non-accrual loans through current period charge-off to $2.4 million. Both loans were previously assessed for credit losses and fully reserved. I'd like to point out a few branch movements as we continue on our ongoing efforts to optimize our footprint. During the quarter, we opened our fifth Dallas-Fort Worth location with a new full-service location in McKinney, Texas. As they recently held the ribbon cutting, and our team is very excited about the opportunities as we expand further into North Texas. With locations in McKinney and Frisco, we are present in two of the three fastest-growing communities in Texas. We also turned our LPO in Ruston, Louisiana, another fast-growing community, into a branch and moved a branch to a more growth-oriented part of Monroe, Louisiana. Finally, we also sold our Leesville, Louisiana location, recognizing a $932,000 gain on sale, attributed to the divestiture. I'll note we have added a couple of new slides to our deck that I think would be worth your focus and enhanced a couple others, particularly around our successful M&A track record, loan repricing opportunities, and composition of our CRD and office portfolios. One I want to particularly point you towards is found on page nine, which speaks to the consistent improvements we've made in various earnings-focused metrics over the past five years. EPS has increased by 81%, net income by 292%, while core efficiency has improved by 571 basis points. Importantly, we show tangible book value per share after adjusting for AOCI, growing by 33%, even while we have made the investments necessary to grow overall asset size by a factor of three over that time period through acquisitions, team lift-outs, and strong organic growth. This growth requires investment, and those investments are paying off. We aren't yet where we plan to be, but we are clearly headed in the right direction. That concludes my big picture remarks. Thank you so much for your time. And I'll now turn it over to Greg for his commentary on the quarter and then look forward to opening the call up to Q&A.

Thank you, Jude. Good afternoon, everyone. I'd like to spend just a few minutes reviewing our Q3 highlights, including some balance sheet and income statement trends and also discuss our updated thoughts on the current outlook. Third quarter non-GAAP core net income and EPS available to common shareholders was $17.96 million and $0.71 a share. It came in better than we expected and was driven really by number one, expense management, and two lower loan loss expense and continued stable credit trends and slightly lower loan growth, as Jude mentioned. A stable net interest margin is slightly better than expected loan discount accretion. Before I dive into the more of the specifics of the quarter, I'd like to take a moment to call out a few of the items that might not be readily identifiable, but are really important to put context into the quarter. The third quarter GAAP net income and EPS available to common shareholders was $19.1 million and $0.76 a share and benefited from two fee income-related items that Jude mentioned earlier: the $932,000 gain on the sale of our Leesville location and, as a side note, that location we sold those deposits for a 7% deposit premium. And also the $517,000 gain on extinguishing of the Texas Citizens sub debt that we acquired in that acquisition. Excluding these items, our core non-interest income was $8.4 million, and this $8.4 million figure is a fairly clean run rate figure for the quarter. We see that as a stable figure for a run rate for ‘24. A little bit of the explanation of that is that run rate for ‘24 is stable because we experienced in ‘23 some one-off one-time income items for that we don't feel will be repeatable in ‘24, but we do feel like noninterest income will grow throughout the balance of the year to stabilize. Third quarter GAAP noninterest expense was $38.6 million and included just $2,000 of merger-related expense. However, included in this $38.6 million was a figure of about $500,000 in MasterCard rebate, which we don't expect to reoccur going forward. The third quarter noninterest expense also benefited from $200,000 unusually low in FDIC assessment and $200,000 unusually low other noninterest-related interest expense items. The Q3 run rate for noninterest expense figures closer to $39.5 million as we expect the FDIC assessment and the $200,000 lower expense items to kind of normalize going forward. As far as ‘24, we feel like the noninterest expense will experience a mid to high single-digit run rate going forward for the base case for the balance of ‘24. Spread income also continued to grow and be strong in performance, which we attributed to the loan discount accretion of $2.4 million coming in $500,000 higher than expected and as well as the decision to hold on more balance sheet liquidity that Jude mentioned earlier boosted our net interest income. I'll provide more color on these dynamics a little bit later in the discussion on the margin. On the surface, the optics of credit quality appeared mixed but as Jude mentioned, we feel like that our credit quality is stable and improving with those two previously discussed charge-offs that we had discussed in prior quarters that we're fully marked and we resolved them during this quarter. As far as the balance sheet, the balance sheet tended to remain healthy during the quarter and loans that were held for investment grew about 1.7% annualized, a little lower than expected but also consistent with our strategy of loan growth and as Jude mentioned we feel like we'll round out the year at about 7% to 8% in annualized loan growth. We are proud of the fact that our loan growth for the quarter was really headlined by a continued loan yield of 8.6% on new and renewed loans for the quarter and that is helping us continue to hold the margin in place. Deposits increased, as Jude mentioned, to $176 million. If we include the Leesville deposits that we sold in that branch, that number would be closer to $200 million in gross deposit growth for the quarter. The $157 million in new deposits that we generated through a couple of different CD and money market specials during the quarter were very well received by the customers and our production staff did a really good job of pushing those through. During the quarter, another highlight is we were able to generate about $43 million in total new noninterest-bearing deposit accounts. That added to our $14.3 million in the month average that we've been operating on for the last few months. We also managed to open $82 million in non-maturity deposits during the quarter at a weighted average offering rate of 4.25%. The September numbers for offering rates for all non-maturity interest-bearing deposit accounts was 4.36%. Noninterest-bearing deposits remain a challenge and we will continue to put our efforts into that area as we move forward into 2024. Our noninterest-bearing deposits ended the quarter at 27.2% for total deposits. Capital increased nicely during the second quarter as Jude mentioned, TCE to TA up 3 basis points and total risk-based capital up 22 basis points for the quarter. The tangible value of $0.16, excluding AOCI. Borrowings, as we mentioned earlier, decreased during the quarter by about $152 million and that was really a result of our deposit-gathering campaigns that allowed us to pay off all of our short-term overnight borrowings with FHLB, which were currently priced in the 570 to 575 range. We also made, as Jude mentioned, the decision to hold the extra $150 million in liquidity on the balance sheet as we continue to take advantage of the BTFP funding program earlier in the year, drawing down $300 million of that fund early in quarter one. That $150 million that we carry is really doing two things for us. It's continuing to hold liquidity levels in a range where we feel comfortable in this time and also preparing us to be able to pay off that maturity coming forward next March. Q3 GAAP net interest margin was 3.61%, which included $2.4 million in loan discount accretion, which was about $500,000 higher than what we expected, but we expect that accretion to drop back closer to a $1 million quarter run rate. The Q3 core net interest margin excluding the loan discount accretion contracted three basis points from 3.49 to 3.46, as Jude mentioned earlier. He was alluding to the adjustments for the quarter and also the six basis points drag that we experienced from holding that excess liquidity. Looking forward into Q4, we expect the margin to remain flat, just like the down, maybe a single basis point due to modest continued liquidity build and continued funding pressures. A little color on the second point here. We have over $100 million in lower cost FHLB borrowings that mature early in the quarter. We will work on refinancing a piece of it and paying down a piece of it so that may negatively impact the margin as we go forward in the quarter. We, as I mentioned earlier, are very proud of the production side of the bank with our continued loan yields coming in on new renewed averaging between 850 and 860, and our deposit gathering that helps us maintain our margins. Now to cover some of the betas from the quarter, I will turn it over to Matt.

Sure, thanks. So funding betas did increase during the quarter as expected. Cycle to date total deposit beta and interest-bearing deposit beta was 41% and 56% respectively, which was slightly ahead of what we had anticipated by about 1%. This is really functioning better than expected deposit growth during the quarter. Looking ahead to Q4, I'd expect the cycle to date deposit betas to increase roughly 4%, which is down slightly from the year-to-date quarterly beta increases of about 5% to 6%. So still increasing, but at a slower pace. On the loan side, we continue to hold cycle to date betas on new loan yields at about 85%. We are at 84% for Q3 and expect to maintain that. This reflects a weighted average new loan origination yield of 855 during the quarter. And with that, I believe that concludes our prepared remarks and I think we're ready to open up Q&A.

The first question comes from Matt Olney from Stephens.

Hi, Matt. I want to talk more about the funding strategy over the next few quarters. You grew loans, I'm sorry, you grew deposits quite a bit this quarter replacing the FHLB and sounds like that’s going to be the strategy again in the next few quarters, all along replacing some other wholesale volumes out there. Can you just talk more about deposit growth from here and kind of expectations to match the loan growth? Thanks.

Yes. Thanks, Matt. We're continuing to run internal campaigns for deposits really relying on the production side of the bank to continue to generate deposit growth. As we mentioned earlier, the 14% we experienced this quarter was really good. And we're happy with that now. As you well know, across the industry right now, deposits are still in battle every day. So it's something we're continuing to talk about and focus on. If we experience the same success going forward, then we'll really start to systematically unwind some of the higher costing liabilities, for example, like the FHLB. We've really tried to focus over the last year or so of really segmenting those higher-cost funding sources into buckets for lack of a better word to where we can have optionality each quarter to try to unwind that and improve the margin. But that is reliant on us continuing to gather deposits. We will experience, as we do seasonally, the end of the quarter, the beginning of the first quarter, some municipality bills from a deposit standpoint. So we do expect that to come in over the later part of the fourth quarter and the beginning of the first quarter that would give us more optionality on top of our typical deposit growth. One of the things that gives us kind of hope is we really consistently not only gather deposits, but really gathered noninterest-bearing in the face of the whole industry experiencing a runoff in that noninterest-bearing sector. So experiencing good account openings in numbers and in dollars gives us hope that we could continue to move that way.

Okay. Appreciate the commentary. And just to follow up on the outlook for the margin, I think, Greg, you mentioned flat to slightly down. I assume that was with respect to the core margin excluding some of that accretion income. Is that fair?

Yes, that's fair. And that's all really a function of the deposit flow that we bring in. We've really been experiencing pretty stable on the top end loan yield side. Still have a good pipeline with good volume. One of the things that is worth noting is our loan growth this quarter was really kind of muted by an outsized quarter of payoffs. We had a little over $100 million in payoffs, all for good reasons: projects wrapping up or companies selling projects. So if we didn't expect that and if we didn't have that, we still feel like our loan pipeline is in good shape, and our growth would have been up around the 4% or 5% range, maybe at this quarter without that. But those yields, like I said, 850, 860 coming in at that number. So the big factor for the margin with the renewals that we have and what we see in forecast from a renewal strategy is really relying on what our deposit base does and how that growth continues to grow.

Okay, I appreciate that. And I guess if I think about the debt margin in the first half of next year, I know there's several puts and takes that we've discussed before, but I guess what you're saying also is the liquidity could build in anticipation of the payoffs of the bank term funding program, I think that you said was in early 2Q. Is that fair?

That's correct. One of the things that we think will help you is our slide on page 21 of the deck that we put in there that really gives clarity into what we're going to see as far as fixed rate and loan maturity coming forward in the next few quarters. So we think with that we should be slightly accretive in the margin next year because of that.

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

Hey, guys. Good afternoon. I wanted to start off on the A&B book and just was curious if you were hoping to get the concentration below 100% and just how you kind of think about that piece of the portfolio going forward, where you see demand and appetite from your perspective.

Yes. I'm guessing you're referring to the C&D, the construction development book?

Yes.

We believe it is moving in line with our expectations and is currently below 100%. We have not been originating any new construction and development loans recently. Reflecting on our production from last year in the second and third quarters, we are now experiencing the peak of funding since each loan takes about 12 to 18 months to cycle through. We are nearing the wrap-up phase for some of these loans, which will either transition out of the bank or become owner-occupied or income-producing. Therefore, we do not anticipate it going back above 100%. We think it will continue to trend down and remain in that range for a while. We are not eliminating construction and development loans from our portfolio; we just recognized we needed to adjust our balance a bit a couple of quarters ago. We definitely want to stay below 100%, and based on our internal projections, we are on track to maintain that level. A significant portion of our growth last year came from construction and development, and by slowing that down, we are looking forward to healthy, normalized loan portfolio growth over the course of 2024.

Yes, Brett, and I'll give you a little bit of color, a data point that we included on slide 26. We've got about $298 million C&D maturing over the next 12 months of that $700 million total portfolio just under $300 million maturing now. Obviously, a lot of that's going to come back on balance sheet to remain on balance sheet, but I think that's a bullet point that kind of talks to some of those loans rolling off at some point over the next 12 months.

Okay, that's helpful. And then speaking of slide 26. I'm just sitting here looking at it and you've got those three charts at the bottom, the C&D by geography, owner-occupied and income producing, and there's 42%, a little over half on the owner-occupied CRE that are in all other geographies. Can you talk about those pieces? Are they still in Texas and Louisiana, but just not in one of the primary markets or what can you give guidance or give color on around?

Yes, yes, absolutely. So the other geography label there that's not to be construed as outside our core geographies or core footprint. All of that is within Texas and Louisiana. And it's simply, we picked the top 10 geographies by loan balances or by outstanding balances. And then the kind of catch-all, the other would be just everything else within our existing footprint. So we don't have anything outside of our kind of core Louisiana-Texas footprint. But the reason that we have those geographies listed above is it's simply force ranking the top 10 geographies by loan balance. So everything within our footprint.

Just think of it, Brett, as outside the listed one for every other market that we serve in bank today. It just speaks to the diversification of geographic locations, which we believe in diversity of geography. And I think that number shows how well spread out we are over our footprint.

Okay. And then just one last question regarding funding. I missed the gross DDA growth number you mentioned, but it's clear that you're managing to maintain healthy DDA balances compared to other institutions that may be experiencing more declines. What was that number? Additionally, do you think there will still be a shift in the mix from here, or do you believe you can grow the DDA in a way that keeps concentration levels stable?

Yes, the number was $43 million in total, new noninterest-bearing deposits gross for the quarter. And the second number I gave to that was that number helped us have an average of about $14 million per month so far, year-to-date. I do agree with your statement. That has allowed us to keep that noninterest-bearing level like a lot of our peers have experienced that noninterest-bearing just declining even further. So we're playing a little bit of offense and defense on that.

Okay. And then, Jude, comment on the outlook for that. Do you think you can continue to keep that flat? Or what's your thought on funding composition from here?

Yes, I think Greg mentioned that we are done with the quarter. I recall being at around 27% noninterest-bearing, and we expected to lose a percent or two by the end of the year, consistent with what we discussed last quarter and possibly the quarter before. However, we believe we'll close the year at approximately 25% noninterest-bearing, maybe even 26%. This is an important focus for us, and as Greg pointed out, we are opening many new accounts and branches, which gives us a chance to reach out to new clients. Our objective is to maintain that 25% over time, if not improve it.

Our next question comes from the line of Graham Dick with Piper Sandler.

Hey, good evening, guys. So I just wanted to circle back to the loan growth front. I apologize if I missed this. But I heard there's a lot of payoffs this quarter. You're still in some pretty good markets. Dallas needs to be growing pretty substantially still. How are you guys thinking about loan growth going into 2024? Is it going to be a pretty steady, 7%, 8%, kind of like what you're looking at this year? Or do you think there will be a step down, maybe as the rate environment continues to work its way through bars? Appetite for new credit?

We think we'll return to kind of a 7%-8% range for next year. Our pipeline and connectivity are still strong. We've purposely chosen to manage capital and manage margin, which has meant that we've done fewer loans than we could. As we continue to work on earnings and grow within those earnings, that gives us more room for growth in our loan book. It hasn't been a question of demand just dropping off a cliff. There is some slowdown in demand, but we also have been selective. We feel confident that we can, again, we'll have to have a little uptick in the fourth quarter to equal our 7%-8% projection for the year. An uptick would be, I think, in the 5%-6% range, maybe 4%-5% range. But then we feel well positioned to be able to kind of maintain that 7%-8% over the course of the year. Again, to Greg's point, we would have been at that 4%-5% without the unexpected payoffs. I would emphasize the unexpected payoffs were all for good reasons. We just had developers that sold projects that came to fruition, which is how it's supposed to work. So we are pleased about that.

Right. Yes, got it. You mentioned on capital building internally, kind of if you guys have managed to this year, how are you thinking about capital priorities right now when it comes to, I guess a couple options? First, being organic growth. And then the second, maybe a bond restructuring type transaction. We've seen a lot of that recently. And then I guess third, you did put in that new slide on M&A. So just wondering what your thoughts are on that front as well. So do you guys have a way you're thinking about capital allocation right now as it relates to those items?

Yes, I think number one priority is funding organic growth at a good moderate but healthy base when it grows within our capital stack and within our retained earnings. We do analyze opportunities to restructure the investment portfolio from time to time, and when that option seems to make sense, we will take advantage of that. We haven't decided to pull the trigger obviously on that yet but it doesn't mean that we're not open to it. And then on M&A while it's not our priority in terms of how to spend capital, we do believe there will be opportunities for us to review and partnerships for us to consider and we're prepared to do that under the right circumstances but don't feel like we need to do it. We'll just do it if it makes a lot of sense for our strategic plans but number one priority is funding the organic growth.

Okay, got it, helpful and then I guess the last one for me another I guess sort of big picture question, but it looks like the 1% ROA target is within reach this year. Is there anything you're looking at for next year or the year after, any new sort of level you guys are targeting or new metric you guys are looking at achieving?

I think it's probably a little early. We're in the budgeting process just started it and probably with the amount of uncertainty that's out there now I think it would be a little bit too early to make any forecast of improvement there. I mean we're going to, that's our goal. We want to keep managing that and over a multiple year period at one reason we put in the chart about five-year improvement and across all the profitability metrics is that we wanted to show that we're committed to that being the key driver of how we make decisions over time and so we'll continue to work. We do believe that over the long run, we'll move closer to that 1.15%, 1.20% ROAA but in the short run, it's a little hard to predict given all the moving parts and again, we're just beginning the budgetary process. We feel like this year was a big step in terms of achieving that 1% kind of baseline and we'll continue to work to build from there. I didn't, we didn't put the M&A chart into necessarily signal that we were getting ready to do M&A, we did it just to show that over time the M&A that we have done along with other decisions that we've made have led to improved performance and I know from an institutional investor standpoint or from an analyst standpoint because we were quite active on the M&A front, I think there was some concern that maybe we were just doing deals to do deals. I'm being a little dramatic here, but we take it as a point of pride that the deals that we have done have made us a stronger franchise. And so we felt like we had enough information now to do a little look back and prove out the case for our combined M&A and organic growth strategies. We'll continue to make capital decisions with those longer-term goals in mind.

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

Hey, everyone. Good evening. First, I want to address a quick point because I was trying to follow along with you as best as I could, Greg, but I’m finding it a bit harder as I get older. You mentioned that the fee revenue base of 8.4 is a clean run rate and a good benchmark for the future. Is that correct?

Yes, that's correct. A little bit of nuance that I may not have conveyed, but we think that's probably a clean run rate for ‘24 because we had some one-off SBIC, for example, and there was unexpected revenue in ‘23 that really we expect that noninterest income number to grow, but because we're going to back out that, for example, $2 million out of that run rate that we experienced in ‘23 holding that 8.4 flat really is a growth number for us.

Got it. Okay, that's good clarity. And then on expenses, you made the point that 39.5 is a better run rate, right? And there were, and then in ‘24 more like mid to high single digit off of that. Is that, and I know you went through a couple of nuances from expenses, MasterCard, FDIC, assessment.

Yes, that's right. That's the right thing in the 39.5 is the kind of launching point and then that percentage that I mentioned is right.

Okay, great. And then it might make, maybe it's, I don't know if it's something you're just looking at right now, but given what's still a challenging revenue environment on the expense side, is there anything specific you guys are looking at or in terms of moves or is it more just an everyday battle on the expense side?

Yes, I think as far as interest expense, yes, it’s, we're just working hard every day to try to gather those deposits and those expand customer relationships that ultimately help us win and reduce, like I mentioned, our reliance on borrower or broker, those kinds of things. We think we've set up the balance sheet to where as we keep winning on the deposit side, we'll have the optionality to pay that off and help us overall. Certainly, your question was also, though, about noninterest expense.

Yes. I think it's more of just a daily decision making. There's not a part of our franchise that we feel like we need to cut off in order to save expenses. One reason I mentioned the branches earlier is that we have a slide in the deck that speaks to this, but I think we’ve done a great job of continuing to rationalize that network over time as opposed to allowing branches that we bought which have become obsolete or our legacy branches as opposed to letting that kind of hang out there, or we have to come back and do a 10% reduction. I think we've done a good job of every quarter analyzing our infrastructure and figuring out where we might, if not cut, maybe redeploy into more productive growth-oriented locations. So we'll continue doing that real-time on a quarterly basis. That's kind of how we view hiring as well. One of the reasons that we've displayed good expense control this past quarter and the quarter before that is that we made some decisions about hiring or putting off hiring until we felt comfortable that the revenue would justify it. We'll continue on a quarterly basis to think hard about investments in infrastructure and in people. We did in 2022, 2021, we made quite a few hires of bankers. We feel like there's still some capacity there in terms of portfolio and workload, particularly at this kind of slower loan growth rate. As we've kind of transitioned over to focusing more on deposits as well, I feel like we've got a staff that is capable of continuing to incrementally build. I think that's a good spot for us to be in right now versus embarking upon a particularly really expensive growth option. So expense control is something that we ought to be thinking about on a daily basis as opposed to ignoring it until we have to, I guess, and that's the way we try to approach it.

Yes, okay, thanks Jude. And one last quick one from me on the subject of deposits, you guys called out the Financial Institutions Group for contributing, just curious if that was more something deliberate you guys were pushing or was it more just the behavior of the client banks themselves in terms of giving deposits over to you guys. Thanks.

No, I think our approach to FIG in general is we want to make sure that that's a relationship with banks that also are looking at other pieces of our product offering, and for example, loan sales, customer relationships with our SSW group. So it's not, we are looking for deposits, but I think it's not a deposit stall call strategy, we're looking for more of a relationship with all of those bank clients.

That's about $200 million right now. So it's still a fairly small part of our balance sheet.

The last question comes from the line of Feddie Strickland with Janney Montgomery Scott.

Hey, good evening, gentlemen. Just curious as we look into 2024 and beyond, are there markets outside your footprint you'd be interesting expanding to, it’s organic, more like an organic in the near term and maybe longer-term M&A or do you feel like you have plenty of opportunity within the footprint you have now.

I don't really view it as a binary choice, I guess, is the way that I would say it. I mean, I think our priority and most immediate opportunity is certainly within our existing footprint and enough opportunity there to say grace over for many years. So if that's what we choose to do, I do think that as we gain momentum and brand recognition, one of the, that's not just among the client base, but it's also amongst potential teammates and employees that may be attracted to a bank such as ours. If we come across the right employees, then we would be open to moving to other geographies. If it’s a right fit, we've always, but we have a general thrust to where we want to invest. We also have been very banker-specific in terms of the specific markets that we've, it's been more about the banker than has been the location. For example, the McKinney operation that we just opened, although certainly on a numerical basis when you think about the demographics, McKinney is a very attractive place to be. We wouldn't have opened a McKinney if we didn't find a banker and a banking team that we felt were the right teammates in that market and that we trusted to help us grow our franchise. As we think about future geographies, I do think we'll look in other places in the Southeast over time, most likely the Southeast. But their order of preference will be determined by the quality of partnership that we feel we can put together. And so if that happens, that happens. If it doesn't, we feel like we can deploy capital constructively over time within our current footprint.

I would, this is still if I would just add as far as the McKinney hire is concerned. We are very excited about that opportunity, but he's actually been on staff over a year and came to our Frisco office immediately built up a portfolio. So when we did open McKinney, it wasn't a cold open. I said sorry, paid for itself.

Appreciate that. That's a great additional color, and I get it. It's all about finding the banker first. Just one last one for me. As we look forward in 2024, appreciate talking about all the moving parts: ROAA, everything else. But do you think we could see an efficiency ratio, core efficiency ratio below 60% potentially in the back half of ‘24?

Yes, I think that's what we're striving for. I think looking at that, as you will know, really the deposit gathering and deposit costs would be key to that. But that is our goal. I think that's probably a fair enough way to answer that.

The final question comes from the line of Michael Rose with Raymond James.

Hey, guys, thanks for taking my questions. Just a few quick ones. Greg, I was hoping you could kind of give a range or kind of quantify what the impact of the seasonal municipal deposits is and what we should expect.

Yes, that's, we usually see $150 million to $200 million come in over this course of a quarter. That does impact the margin negatively because of the costs of those funds that come in that are mostly interest-bearing. But I think that the biggest part that we usually struggle with forecasting is that it is tax money. So it's all dependent on the speed at which it comes in. For example, last year it came in very, very late, at the end of Q4 and balance of Q1. It just really depends on when the taxpayers bring the tax payments in. But it's about $200 million in total.

Got it, helpful. And then it seems like loan growth is going to kind of reaccelerate here as we move into next year. You guys have done a good job on the deposit side. Now the loan to deposit ratio has gotten down into the mid-90s. But it seems like maybe that's going to go up again. I assume the target is to kind of keep that sub 100%. Is that what we're thinking? And I know you talked about some of the deposit stuff earlier. But is there anything more that you're looking at to grow some of the core funding? Thanks.

Yes, I think definitely we'd like to stay below 100%. One of the reasons for the excess liquidity is to balance that fund, but it's also just to make sure we have some liberality in terms of liquidity so that we can do that even if we have certain relationships that we feel need to take advantage of. The governors on the loan growth though will be capital retained earnings, capitalizing that growth and then deposit generation. We would love to be able to generate deposits at a rate slightly greater than loans. That may not hold true every single quarter, but over the course of the year we feel like with our focus and results that we've demonstrated this year. It's one thing to have the deposit growth, but it's another to actually demonstrate internally that the more balanced approach to growth pays off in terms of higher earnings. That's a positive thing for us to be able to demonstrate. We have demonstrated it over the course of the year and as we talk internally, as we think about incentive programs, as we think about continuing to build upon the cultural aspect of placing importance on deposits. I don't see any reason that the improvements that we've demonstrated this year won't continue into the future. We certainly, we've not talked before about three and a half, four years ago, three years ago, we set a five-year plan. And part of that was achieving a certain level of growth in asset size, which we felt was kind of a sweet spot to be in as we've come close to that now in our own pace to get there over within the five-year plan. That means, as I've talked about in the previous quarter, recalls that it's a bit more of a focus on not growth, but on healthy, profitable growth. And so that means that we're not going to, we won't return to as high a level of loan growth in the near future focusing on balanced growth, which would imply that we want to maintain that below 100% loan deposit ratio. We certainly feel like the 7%, 8% loan growth next year we feel we could do, needs to be accompanied by a similar level of deposit growth. And that's what the work to do.

Very helpful. And that ducktails into my final question. It just seems like putting together all the pieces. Looks like you guys should be able to eke out some positive operating levers next year. Is that the way we should think about it?

That's the goal. I think that we've been doing that in the last couple quarters and I'm certainly want to continue to do that. So, yes, I'll be disappointed if we don't.

Hey, Michael. One other thing, your point about seasonality and the tax funds coming in reminded me of some seasonality and our expense base in Q4. I just want to be sure we highlight Q4 seasonally higher, about $1 million, a little over a $1 million on the expense side. So, just wanted to make sure we didn't lose sight of that. All right. Can we get, any more questions?

Yes. I think we've lost our operator.

It looks like there are no further questions at this time. I would like to turn the call over to Matt Sealy.

I think I'll take it to Jude for any closing remarks that you might have.

Yes. Thanks, Matt. Well, I appreciate everybody's time today. We were very pleased with the quarter. I mean, from capital accretion to the earnings improvement to the focus on adding liquidity in an environment in which liquidity is hard to come by and doing so at fair prices that weren't damaging to our margins. I think from an operating standpoint, we had a great operating quarter, and I think continuing to do that over time will justify stock appreciation as the market normalizes at some point, which I know it seems like it's been a long time and it could potentially be a while, but at some point, banks will be in favor and we feel like we're positioning ourselves to be one of the higher fliers in that market. We'll keep grinding out operationally, also pride of our team and appreciate the interest. Happy to have any follow-up calls that we need to have. Happy night.

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