Business First Bancshares - Earnings Call - Q2 2025

Executive Summary

• BFST delivered solid Q2 2025 results: GAAP diluted EPS of $0.70 (+$0.05 q/q), core diluted EPS of $0.66 (+$0.01 q/q), and stable NIM at 3.68%; non-GAAP margin excluding accretion held at 3.64%.
• EPS beat Wall Street consensus by ~$0.06 ($0.642 consensus vs $0.70 actual); revenue was modestly above consensus ($78.94M consensus vs $79.23M actual)*. Expectation-sensitive drivers included branch-sale gain (+$3.36M) and conversion costs (~$1.0M), both disclosed and adjusted in core results.
• Credit migrated negatively: NPLs/Loans rose to 0.97% (from 0.69% in Q1); management stressed reserves and imminent resolution on key relationships, with net charge-offs at 0.01%.
• Strategic catalysts: completed FIS core conversion; announced Progressive Bancorp acquisition (expected close early Q1’26); continued deposit cost management and noninterest income initiatives (SBA, swaps).
• Trading narrative catalysts: EPS beat and margin trajectory into H2 (mgmt guiding +4–6 bps for rest of year), credit resolution pace, Progressive accretion path, and disciplined deposit beta (45–55%).

What Went Well and What Went Wrong

• What Went Well

  • Margin resilience and deposit cost control: NIM 3.68% with overall cost of funds down 4 bps q/q; non-GAAP NIM ex. accretion flat at 3.64% despite conversion liquidity drag (~3 bps) and branch-sale replacement cost (~2 bps).
  • Operational execution: FIS core conversion completed; “positions us for more efficient processing… and future growth,” CEO Jude Melville stated.
  • Strategic progress: Signed definitive agreement to acquire Progressive Bancorp; strengthens North Louisiana franchise and deposit profile.

• What Went Wrong

  • Credit metrics worsened: NPLs/Loans rose 28 bps q/q to 0.97%; NPAs/Assets rose 21 bps to 0.76% as several relationships migrated to nonaccrual.
  • Funding optics: Borrowings increased $179M (+41%) on short-term FHLB advances to facilitate conversion and correspondent bank transition.
  • Noninterest income mix volatility: SBIC pass-through income was -$246k (~$500k below expectations), offset by $3.36M branch-sale gain; underscores lumpy nature of fee lines.

Transcript

Operator (participant)

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 at FP&A. Please go ahead, sir.

Matt Sealey (Senior VP, Director of Corporate Strategy, and FP&A)

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 three of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com. Please also note our safe harbor statements are available on page seven of our earnings press release that was filed with the SEC today. All comments made during today's call are subject to those safe harbor statements in our slide presentation and earnings release.

I'm joined this morning 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. With that, I'll turn it over to you, Jude.

Jude Melville (Chairman and CEO)

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 than 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 and 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 financially. We again posted 1% ROAA earnings. We maintained our net interest margin.

We increased our capital levels, as well as increasing our tangible book value by almost 15% annualized. 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 loans 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 non-interest-bearing accounts quarter over quarter. Second, the quarter was successful operationally. We embarked two years ago on a project to upgrade our core processing system to IBS, the FIS large bank platform, and after thousands of man-hours of preparation and then an action-packed 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 more efficient organic and inorganic operational effectiveness.

We also continue to work on 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've 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 one within 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 a projected close of the first of the new year, we enter 2026 projecting meaningful upside earnings accretion added by our fruitful M&A activity. Fourth, our asset quality metrics trended negatively during the quarter, and 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 watchlist over the past two quarters. We believe we are adequately reserved against the non-performing relationships, and all borrowers continue to work with us towards resolution.

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 as strong of a balance sheet, as positive a go-forward P&L opportunity, as diversified a geographic footprint, and as much operational capacity as I could remember during my time as CEO. I'm excited to see our team continue to perform. With that, I'll turn it over to Greg. Thanks again.

Greg Robertson (CFO)

Thank you, Jude. 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 a sale of a branch, which we closed April 4. GAAP results also included a $570,000 acquisition-related expense and a $1 million core conversion expense. Excluding these non-core 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 1.01% 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 one 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 non-scheduled 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 a 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, Texas-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 in the 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 a more efficient source of brokered 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 onto 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, non-interest-bearing deposits, excuse me, increased $102 million, or 7.8% on a linked quarter basis, driven by a short-term inflow of approximately $60 million, which subsequently was withdrawn after the quarter ended. Lastly, on the funding side of the balance sheet, bank borrowings increased to $179 million from the prior quarter, or approximately 41%. The large increase was due primarily to an increase in short-term FHLB advances, 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 two basis points drag in the second quarter margin. Additionally, the excess liquidity carried during the second quarter accounted for about three 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 two 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 non-interest-bearing deposit accounts. We are pleased with our ability to manage our deposit rates. Total interest-bearing deposit costs declined four 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 was 2.64%, down six basis points from the linked quarter, while June weighted average cost of total deposits was 2.62%. While 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 any future rate cuts. I would also like to point out our overall core CD balance retention rate was 96% during June. This impressive statistic reflects on our team's continued focus on maintaining and retaining core deposit relationships. As you will see on page 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-seven range. Last thing I would add is our expectations for loan discount accretion to average approximately $750,000-$800,000 per quarter going forward.

Moving on to the income statement, GAAP non-interest expense was $51.2 million and included $570,000 of acquisition-related expense and $1 million conversion-related expense. Core non-interest 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 non-interest 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. Non-interest income results for the 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 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 non-interest income, although the trajectory may be bumpy, as we mentioned, quarter to quarter. Lastly, I'd like to provide some context to the credit migration during the second quarter. Q2 NPLs increased 0.28% from 0.69% in Q1 to 0.97% in Q2. The increase is driven by a negative migration of three separate loan relationships, representing total outstanding principal balances of $23.7 million. Annualized net charge-offs decreased 0.02% from 0.07% in Q1 to 0.05% in Q2.

Of the three previously mentioned credits, we are 34% reserved on one credit, 14% reserved on the other, and adequately reserved on the final third credit. We expect to find 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 the 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.

Jude Melville (Chairman and CEO)

Good. Thanks, Greg. I don't have anything to add yet. Why don't we jump into questions? Thanks.

Operator (participant)

Thank you. If you'd like to ask a question, please press star and the number one on your telephone keypad. Again, that is star and the number one on your telephone keypad. Our first question comes from the line of Feddie Strickland from Hovde Group. The line's open.

Feddie Strickland (Director of Equity Research)

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

Greg Robertson (CFO)

Yeah, good question. What we were using liquidity for in the core conversion is we were transferring from a correspondent bank that we've used for a while to a direct-to-Fed relationship. During that process, we're clearing two 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 hoping to manage their balance sheet in real time too. Having that additional liquidity, which we kind of had all year long, has 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 are just handling everything on one balance sheet, so to speak, we feel that's the right thing to do.

Feddie Strickland (Director of Equity Research)

Got it. That's helpful. Just so I understand the credit moves this quarter, this was simply migration from substandard to non-accrual, and you mostly reserved for this, is what it sounds like, given some of your prepared comments?

Greg Robertson (CFO)

Yeah, the one credit was on there last quarter. I think we moved it to non-accrual last quarter. We have, like we'd mentioned, about a 35% reserve on that credit. It's a C&I relationship where we're continuing to evaluate the collateral on that. That's kind of moving through the process of our trying to get to resolution with that. The borrowers have been cooperative on that one. The other two more recent moves, one of them is a commercial real estate piece, the other is an owner-occupied piece. The commercial real estate piece, we put up a $1.6 million reserve on it as we move to resolution for that one. The owner-occupied piece, we're very close to resolution on that one.

I think those are moving at different paces, but from the information we have right now, we think for the risk we have, we've kind of reserved where we think it's appropriate. We'll continue to move toward resolution.

Jude Melville (Chairman and CEO)

I just emphasize that none of those are surprises. We are 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. I feel good about the progress on working our way through that. As Greg said, we're benefiting from good client communication and working towards resolution together as opposed to there being any standoff. As a bank, that's what you hope for when you have an issue pop up, that you can work with your borrower to get to a good resolution. I feel like those things are happening.

Feddie Strickland (Director of Equity Research)

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

Greg Robertson (CFO)

I think if you know those three credits are 50% of NPLs. I think as they start resolving or we get to resolution, 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's imminent. As we work through the other two, I think you'll see those numbers drop pretty significantly. That would be back to where we've operated over the last eight quarters, let's just say.

Feddie Strickland (Director of Equity Research)

Got it. Thanks for taking my question.

Jude Melville (Chairman and CEO)

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

Operator (participant)

Thank you. Our next question comes from the line of Michael Rose from Raymond James. The line's open.

Michael Rose (Managing Director of Equity Research)

Hey, good morning, guys. Thanks for taking my questions. I 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. Just trying to get a sense for that $49.6 million this quarter. How should we think about the next quarter or two 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. Thanks.

Greg Robertson (CFO)

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

Michael Rose (Managing Director of Equity Research)

All right. It sounds like a little bit higher in the fourth quarter. All right. Appreciate it. Maybe just going to the margin, certainly understand the excess liquidity and the other impacts. Is it fair that we should, I know you're going to hold some of the excess liquidity. As we're thinking about the core margin, would it have a little bit of upward trajectory from here? I know there's some puts and takes, just obviously with, I think loan yields were down. You have Q1 Q, but you did have some deposit costs come down as well. Just trying to get a kind of a starting point for the margin and how the asset sensitivity could change with the progress deals we think about next year.

Greg Robertson (CFO)

Yeah. I think the way we think about margin from here on out is really for the balance of the remainder of the year. We think we can improve margin, let's just say in the four to six basis points range from here on out for the rest of the year. 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. 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.

Michael Rose (Managing Director of Equity Research)

Okay, great. Maybe just one last one, if I could. The loan growth was about 4%, 4.5% annualized this quarter. I know you'd 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 you know the backdrop that we're seeing, but we'd just love to hear from your perspective about how we should think about growth you know in the nearest term. Thanks.

Jude Melville (Chairman and CEO)

Yeah. I think we think that the mid-single-digit growth for the rest of the year is, we're 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 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. You know.

I think the other thing is we've made great strides on decreasing some of our concentration risk. We want to continue to be diversified, and that typically means trying to focus more on C&I growth and owner-occupied kind of stuff, which tend to be a little harder to get and a little smaller for a bank like ours. I think the range that we've articulated previously, kind of that mid-single digits, 4%-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 where we end up growth-wise, partly because it's not just about growth, as Greg said. It's about other things too: margin, tangible book value, capital appreciation, concentration risk.

We want to make sure that we're participating in the growth, but we want to do so in a way that leads to the best kind of incremental outcome for our shareholders. We think that means balance. 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.

Michael Rose (Managing Director of Equity Research)

Makes sense. Thanks for taking all my questions. I'll step back.

Jude Melville (Chairman and CEO)

Thank you.

Greg Robertson (CFO)

Thanks, Michael.

Operator (participant)

Thank you. Our next question comes from the line of Matt Olney from Stephens. The line's open.

Matt Olney (Equity Research Analyst)

Hey, thanks. Good morning, everybody. Want to go back to the discussion around the loan yields, and you've made a lot of progress there over the last several quarters, but that momentum slowed this quarter. Just looking for any more color on what drove the softness in Q2. 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?

Greg Robertson (CFO)

Yeah, 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%. I mean, excuse me, 7.40%. We still are pricing deals in the mid to low sevens, and we think that that's, you know, obviously, you'd like to get as much yield as you could, but I think, you know, competition is driving some of that, and we want to be in the mix from a competitive standpoint. So far, the deals that we're seeing priced are still holding up in the mid to low sevens on most of the deals we're looking at. There's a few that we've passed on because of pricing, but we feel like at this time, that's kind of where we want to be.

Matt Sealey (Senior VP, Director of Corporate Strategy, and FP&A)

Matt, one thing that I'd add too is this isn't 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. That just all rolls up in the aggregate loan interest income. That's a little flavor for where some of that drag might be coming from. By product type, C&I and CRE, those individual loan item categories were still up quarter-over-quarter.

Matt Olney (Equity Research Analyst)

Thanks for that, Greg and Matt. Greg, you mentioned, I think, in prepared remarks, the 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 two, or have those already come down?

Greg Robertson (CFO)

We used some of that with the liquidity bill 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. At that point, the thing that made the most sense was the utilization of FHLB availability. That was all on the short end. I'll provide a little context to funding. We've talked about it on these calls or in meetings since the announcement of the Oakwood acquisition that we were going to manage their balance sheet 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.

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 manage through that. I would expect us to continue to do that for the back half of the year as well. To answer your question directly, it could move up and down. I think from a quarter-over-quarter and a point in time, it may move, it may not move at all from an optic standpoint, but that doesn't mean we're not moving it up and down interquarter to take advantage of some pricing opportunities.

Matt Olney (Equity Research Analyst)

Okay. That's great context, Greg. Thanks for that. 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 more of a near-term cost savings for the bank versus just a longer-term savings, more efficient, more efficiency around future growth. Thanks.

Jude Melville (Chairman and CEO)

Yeah, 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. 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. Now we're in the let's get used to it phase, which clearly, change management takes a little while. It's too early to offer any big picture summation on experience. 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 reasons that we moved was that we feel like it better prepared us to take advantage of efficient growth in the future, and still have every reason to think that's true. We don't know that we'll see a lot of savings immediately, partly because it's allowing us to make some other investments in technology. We've talked quite a bit about preparing to be $10 billion and making sure that we have the right systems to be able to report and to manage. The aggregate package is going to end up being similar in cost to costs we already had, but our capability not only on the core, but on other technological systems should be increased. 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 aggression before given our track record, but the confidence that we can get on a calendar to be able to convert new partners is important. 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. This system, I think, will give more confidence than the one that we had before. There are a lot of reasons to embark upon it even absent a day-one financial gain. We do think that over time there'll be a lot of financial benefits to being on the system.

Again, it'll take a few months of change management to get used to it. That's not a bad thing. That's just part of it. I look forward to in 2026 cycling through. I think all of our employees and our clients will be appreciative of the change at that point.

Matt Olney (Equity Research Analyst)

Okay. Thank you, Jude. Thanks for all the commentary. I'll step back.

Jude Melville (Chairman and CEO)

Sure thing.

Operator (participant)

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

The line's open.

Christopher Marinac (Director of Research)

Hey, thanks. Good morning. I wanted to drill down on Smith Shellnut and just get a sense from you, where do you think you are in the evolution of the business? I know it's made a lot of progress. It's got $5 billion, $6 billion of AUM. Just curious, where do you think they are in terms of how much more that can go in the next 12 to 24 months?

Jude Melville (Chairman and CEO)

Yeah. Good. Thanks, Chris. Appreciate that. You know that is a part of our business that doesn't get quite as much attention and partly because it hadn't been around as long. It's a part that we're very excited about, not just Smith Shellnut Wilson taken in isolation, but we're very excited about the correspondent banking function in general. That's one of a handful of products that we're offering 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 Smith Shellnut Wilson and began that process, they had about 40 banks, maybe 45. We've been able to grow those relationships and 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 doesn't just mean AUM.

Although we have been happy to over double the AUM. Smith Shellnut Wilson has over doubled their AUM since joining up with us. We expect that we'll be able to continue to grow that number. We're also focused on things that aren't AUM related, such as providing swaps 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. 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. For the first time this year, we have a Senior Executive whose full-time job is to coordinate the multiple parts of our correspondent banking network. 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, but they haven't really coordinated a lot in terms of their sales efforts. We're in the process of making sure that we have a unified sales effort. All that to say, I think, as Greg says every quarter, and as I say when I talk about it, I think it's going to continue to be a little rocky in terms of the magnitude each quarter. If you look at it over time, I think we expect to continue to grow that income in the next 12, 24 months. I'll be 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 a 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. 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.

Christopher Marinac (Director of Research)

Great. Thank you for all that background. I appreciate it. Just a quick capital question as it relates to Progressive and the data you shared a few days ago. As we think about that, you know, 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?

Greg Robertson (CFO)

Yeah, we think that by the end of this year, before we close the acquisition, TCE will be close to 8.50%, total risk-based close to 13.30%, 13.40% range. We think in those two ratios, kind of the North Star 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 the right way if the opportunity presents itself. I think on the TCE front, you know that's in the 9% range, low 9% range, somewhere in that ballpark. Probably what we talk about being our normal over time, over what we aspire to be.

Jude Melville (Chairman and CEO)

Yeah, I would just say, you know 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. 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 two. We don't feel like we have to put things on hold necessarily to get to nine 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.

Nine, you know 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 two, three years when those levels have been considerably lower. Really pleased with the movement of things, and that's partly some of these investments paying off.

Christopher Marinac (Director of Research)

Great, Jude. Thank you so much. Thank you, Greg, as well. I appreciate it.

Jude Melville (Chairman and CEO)

Thanks, Chris.

Christopher Marinac (Director of Research)

Thank you.

Operator (participant)

Our next question comes from the line of Manuel Navas from D.A. Davidson. The line's open.

Manuel Navas (Senior Research Analyst and Managing Director)

Hey, good morning. A lot of my questions have been asked and answered, but I just wanted 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%-6% for the whole year? It seems like your demand is higher, but can you just talk about the sentiment and the borrower base as well?

Greg Robertson (CFO)

I think I'll answer your first question. 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 started the year dragging us down, but we think going forward from here, like you mentioned, it could be in the 4%-6%. It looks like maybe trending toward the higher part of that range.

Jude Melville (Chairman and CEO)

On a run rate per quarter.

Greg Robertson (CFO)

Annualized per quarter, yeah.

Manuel Navas (Senior Research Analyst and Managing Director)

That's really helpful. Is that your appetite, or are you sensing an improved sentiment? Can you talk about that for a moment as well?

Jude Melville (Chairman and CEO)

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. We want to be sure that we're selective when we do it, but we want to be sure we take advantage of opportunities. Particularly, the downward transition that we made in our construction concentration levels over the past couple of years has really impacted our loan growth over time. They've also put us in a better spot now.

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 had, might not have felt as much flexibility to do so a year ago. A little bit our own. I do think that just anecdotally, you're 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, things of that nature.

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 five, six years just by numerous uncertainties. At some point, particularly the small businesses that we deal with, they just have to keep on keeping on. I think you're seeing a little bit of that, a little resolution of, "Hey, whatever the external circumstances are, we're going to continue to do our thing internally." I think you're feeling a little bit of positive momentum across our markets as we round up the year and move into 2026. I don't think anybody at the table has any different opinion or is that.

Greg Robertson (CFO)

I agree with that.

Jude Melville (Chairman and CEO)

I think you're also starting to see other banks be a little more aggressive. That's one reason for the more competition on the loan yield side, is that they're feeling that need and an opportunity to get out there and do some things. We've tried to be fairly consistent in how we operated the past couple of years and not get too hot, not get too light, just kind of down the middle of the road. I think there's some other banks that maybe shut down a little more, but then are now starting back up. They're obviously seeing some of that same positive sentiment that we're seeing. It's exciting. We want to, we're here to do business. Yeah, excited about the industry being in that same mindset.

Manuel Navas (Senior Research Analyst and Managing Director)

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 swing factor this quarter was that pass-through loss. What other lines do you have like kind of more near-term confidence that can kind of just build across the back half of the year? Getting more looking at the fee income line specifically.

Jude Melville (Chairman and CEO)

Yeah, our two ones that have really taken hold lately have been or beginning to take hold are the SBA loan service providing. You know we do that through Waterstone out of Houston. I think we're definitely seeing they've, I believe, added four 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. I'm excited about that. 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. We feel like that opportunity will only grow over time and are 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 the pricing on their loans. 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. I think that as 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. We haven't, we've only just now begun offering that to other banks.

What we like to do is for a lot of these fee income sources of income, the goal really is to provide it to our own clients, make sure that we're comfortable doing so, and then offer it to other bank clients. Each of our partnerships we've begun, whether that be Smith Shellnut Wilson or it be Waterstone or now the derivatives business, we've begun by partnering with folks that could serve our own clients. Then we branch out and try to offer that to community bank clients. We've only just begun doing that with the derivatives business. We look forward to some opportunities, particularly again in 2026, 2027, picking up there. The pace at which I'm hearing of victories is increasing and gives us confidence that those will be a couple of areas that we can count on being additive to our earnings over the next couple of years.

Greg, you want to mention anything else?

Greg Robertson (CFO)

No, I think you touched on Waterstone in the beginning. I think from our February 1st acquisition last year, we've increased the number of banks that they do business with. That is because they work on pre-qualification, 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. I think that we're excited about that with a very robust pipeline for the back half of 2025 for them. I'm very comfortable with that and excited about it.

I think over time, we'll look to add some of these product capabilities. There are correspondent banks that do a really good job for these banks, but there aren't a lot of correspondent banks that offer some of these slightly more complicated, sophisticated products. We believe that's a role that we serve. We'll continue, particularly as some of the governmental lending stuff is, are areas that we want to look for further opportunity in.

Manuel Navas (Senior Research Analyst and Managing Director)

I appreciated the commentary. Thank you.

Jude Melville (Chairman and CEO)

Thank you.

Greg Robertson (CFO)

Thanks, Manuel.

Manuel Navas (Senior Research Analyst and Managing Director)

Thank you.

Operator (participant)

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

Jude Melville (Chairman and CEO)

Okay, good. I appreciate everybody joining us today. It seemed like a pretty positive earning season for us as a bank and for the immediate banking industry as a whole. Excited to see that positivity and hope to continue building on it. You know, banking is a lot about just consistent incremental improvement, grinding it out quarter to quarter, and being prepared for opportunity. I think we've done a good job of that, particularly over the past couple of years, incremental improvement. 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. We'll continue to make those investments and be focused on the little things, which add up to big things over time. I appreciate your support.

Hopefully, we'll talk to you all again in about three months. Take care.

Operator (participant)

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