BFST Q2 2024: NIM to Rise ~50–60bps as 48% of Loans Reprice
- Easing Deposit Cost Pressure: Management highlighted a trend of declining deposit costs, driven by increased noninterest-bearing deposits and competitive money market deposit rates, which help boost net interest margins.
- Attractive Acquisition & Partnership Opportunities: The orderly progress of the Oakwood acquisition coupled with the promising Waterstone partnership is expected to enhance the loan sale pipeline and fee income, supporting a stronger revenue profile.
- Robust Loan Repricing & Growth Potential: With nearly 48% of loans (about $2+ billion) set to reprice over the next 12 months at higher yields—even in a rate cut scenario—and a strategic focus on quality C&I relationships, the bank is well positioned for sustained margin expansion.
- Reliance on non-recurring earnings boosts: The Q&A highlighted that significant parts of recent earnings were driven by unique items (e.g., a $1.9 million gain on a USDA loan sale and $1.7 million in loan discount accretion) which are not expected to be regular, raising concerns about sustainable earnings going forward.
- Rising noninterest expense pressures: Executives noted expectations for 2-3% growth in noninterest expense in upcoming quarters due to factors such as seasonal bonuses and sustained wage pressures, which could compress future profitability.
- Integration risks with upcoming acquisition: Despite positive preliminary feedback on Oakwood Bank’s performance, there remains uncertainty regarding the integration process and timing, which could introduce operational challenges and affect margins.
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Margin Outlook
Q: What is your near-term NIM outlook?
A: Management expects core NIM to improve by low to mid-single digits over the next few quarters with loan discount accretion stabilizing at about $700K per quarter, supporting strong margins overall. -
Repricing Impact
Q: How will rate cuts affect repricing?
A: Even with rate cuts, the existing loan repricing—covering about 48% of loans—will still deliver roughly 50–60 basis points of margin pickup as lower funding costs offset moderated loan yield growth. -
Acquisition Outlook
Q: How is Oakwood performing and what is the timeline?
A: Oakwood’s preliminary Q2 results are in line with BFST’s expectations, and the acquisition is on track to close in Q4, with integration planned for next year, signaling a strong strategic fit. -
Deposit Costs
Q: What are the trends in deposit costs?
A: Deposit costs eased, with the weighted average rate on new money market deposits falling from 4.88% in March to 4.65% in June, while growth in noninterest-bearing deposits helps reduce overall funding pressure. -
Commercial Pipeline
Q: How is your commercial loan pipeline?
A: The pipeline is healthy, expecting around 6% annualized loan growth, and management anticipates steady demand even if rate cuts occur, reflecting a cautious yet robust approach to capital allocation. -
Loan Growth Mix
Q: What shift are you seeing in your loan mix?
A: There is a strategic transition away from construction-heavy portfolios toward C&I lending and enhanced noninterest income, a move designed to lower concentration risk and foster sustainable growth over time. -
Noninterest Expense
Q: What is your noninterest expense outlook?
A: Managed expectations indicate a modest rise in noninterest expenses, targeting about $175 million by year-end driven primarily by personnel investments and seasonal bonus-related costs. -
Deposit Maturation
Q: What deposit maturities create cost-saving opportunities?
A: With roughly $66 million in brokered deposits and $450 million in customer CDs maturing before the end of the year, BFST sees clear opportunities to reduce funding costs as these roll off at lower prevailing rates. -
Loan Sale & AUM
Q: What are the trends in loan sale gains and AUM?
A: The loan sale business is gaining traction—excluding the one-off USDA gain—and while AUM under SSW has trended lower, it reflects portfolio restructurings rather than a loss in business, maintaining strong client relationships. -
DDA Growth
Q: What drives DDA growth?
A: Growth in demand deposit accounts is fueled by active C&I relationship development as well as robust consumer participation in money market accounts, demonstrating a balanced approach to deposit gathering. -
CRE Special Mention
Q: Why did CRE special mention increase?
A: The rise from 2.4% to 7.5% reflects a more detailed risk-rating approach and some cash flow caution amid tightening rate conditions, though overall asset quality remains solid. -
Loan Discount Accretion
Q: How will loan discount accretion evolve?
A: The accretion is expected to decline from $1.7 million to approximately $700K per quarter, a level anticipated to sustain for the next 12 months, ensuring stable income flow.