The First Bancshares - Q1 2024

Executive Summary

• Q1 2024 delivered diluted EPS of $0.65, up from $0.35 in Q4 2023 and $0.52 in Q1 2023; operating diluted EPS was $0.65 versus $0.59 in Q4, with net income of $20.6M driven by lower non-interest expense (-$1.0M QoQ) and zero provision (down $1.3M QoQ), while NIM compressed 8 bps to 3.20% and core NIM fell 4 bps.
• Deposits rose $247.5M (+3.8% QoQ) to $6.710B, largely from $256.9M in public funds; excluding public funds, deposits fell $9.4M (-0.2%), and noninterest-bearing deposits declined to 27.4% of total.
• Loans decreased $30.1M (-0.6% QoQ) to $5.140B, reflecting $23.1M SBA loan sales and end-of-quarter payoffs; management highlighted a ~50% increase in pipelines and stable credit with NPAs/total assets at 0.23% and net charge-offs at 0.01%.
• Near-term margin headwinds persist given deposit competition; catalysts include remixing ~$210M securities cash flows (~1.80% yield) into higher-yield assets, expense discipline (~$44M/quarter), and potential additional securities restructuring.

What Went Well and What Went Wrong

• What Went Well

  • Operating earnings increased 10.1% QoQ to $20.6M as non-interest expense fell $1.0M and provision dropped $1.3M; CEO: “Operating income increased 10% quarter over quarter due to reduced operating expenses and some stabilization in the margin.”.
  • Deposit base expanded by $247.5M (+3.8% QoQ), bolstered by public funds inflows; CFO detailed public fund seasonality and noted liquidity remains strong with ample borrowing capacity.
  • Credit metrics remained robust: NPAs/total assets improved to 0.23% and annualized net charge-offs were 0.01%; Chief Credit Officer: “NPAs declined…almost 9%…loan recoveries exceeded loan charge-offs by $106,000.”.

• What Went Wrong

  • Margin compression continued: NIM down 8 bps to 3.20% and core NIM down 4 bps, with cost of deposits rising 24 bps QoQ to 1.78% amid competitive pricing pressures.
  • Loan balances fell $30.1M QoQ due to SBA loan sales and several large payoffs late in the quarter; average loans rose but period-end balances were lower.
  • Noninterest-bearing deposits % dipped to 27.4% from 28.6% prior quarter due to interest-bearing public fund inflows, marginally increasing funding costs.

Transcript

Operator (participant)

Good day and thank you for standing by and welcome to the review of the first quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Hoppy Cole, Chairman and CEO.

Hoppy Cole (Chairman and CEO)

Morning everyone and welcome to our first quarter earnings call. We've got several of our team members with us today. We have Dee Dee Lowery, our CFO; J.J. Fletcher, our Chief Lending Officer; and George Noonan, our Chief Credit Officer. And each of those will give us some color on their respective areas after I cover a few highlights for the quarter. Let's go ahead and dive right in. I thought it was a great quarter and a really good start to the year, a strong beginning point for 2024. Operating earnings were up 10% quarter-over-quarter to $20.6 million, and that was due to reduced operating expenses and reduced provision expense. And we did see some stabilization in the margin. Our core margin was only down 4 basis points compared to 19 basis points last quarter.

Loan balances at quarter-end decreased, but actually average balances were up for the quarter. We got some unexpected payoffs on a few large loans right at the end of the quarter. We also had some SBA loan sales, but pipelines grew pretty substantially, and J.J. will give us a lot more in-depth color on that in his report. Credit quality remained strong, continuing to do well with low past dues at 26 basis points. We had an improvement in NPAs and charge-offs were low at 1 basis point, so credit quality continues to perform extremely well. We grew our tangible book value during the quarter by $0.35 or 2% on a quarterly basis. We increased our quarterly dividend by $0.01 a share to $0.25 per share per quarter or $1 per year, which has been an internal goal for quite some time.

So all in all, we thought it was a really strong start to the year. Pleased with where we are and pleased with what the progress looks like for the rest of the year. So Dee Dee would you like to give us an update on the financial performance for the quarter?

Dee Dee Lowery (CFO)

Sure. Thanks, Hoppy. Obviously, as Hoppy mentioned, a great quarter and first time in several, several quarters that we had really no non-operating items, so very, very few thousand dollars. So it's great to not have all that noise in there for y'all to have to go through and explain. But on an operating basis, I do have to do that because the last quarter we had several things, but earnings did increase $1.9 million, which was $0.06 per diluted share, up to $20.6 million from $18.7 million. So very pleased with that. And as Hoppy mentioned, most of that was driven by a decrease in our non-interest expenses by $1 million and then the no provision needed this quarter. So provision expense was down $1.3 million, and we're still at an ACL reserve of 105. So those two were the big drivers.

Our net interest income was basically flat down about right at $300,000 for the quarter. Our cost of deposits increased 24 basis points for the quarter to 178 basis points, still a really good number based on our granularity and our deposit portfolio. Our interest-bearing deposit cost increased 27 basis points to 245, and that drove our beta up to 43 from 38 last quarter, so about 5 basis points. Our yield on our earning assets increased eight basis points, but we also had an increase, obviously, in our interest-bearing liabilities of 18 basis points.

And so as Hoppy mentioned, that we did have a decrease in our core margin of 4 basis points, which is obviously less than we had last quarter and kind of what we kind of led to for this quarter, that we would see compression this quarter and then into the next quarter and hopefully mid-year maybe stabilize. And this was pretty good. 4 basis points is pretty good, staying stable. I think we'll still see a little more compression into the second quarter, but we're talking about here a few basis points. So I think it's depending on a few factors could go either way on that. But if no change in rates from the Fed, I think we're still going to see our cost of deposits go up some this next quarter just from the competition we're still facing.

With the Fed not cutting, we're still having to reprice, and we're still having to match competition. Our specials, we had in the fourth quarter expired at the end of the year, but we're still offering higher rates close to what we were for those specials because of what's out there in the competition. We're still having to have increased costs. Until we see a cut on that, I think our deposit costs are still going to be increasing a little bit as we go, but hopefully can start bringing that down some. Our loans, as Hoppy mentioned, did decrease $30.1 million, but our average loans actually increased $12.8 million. That was great on average for the quarter. J.J. will give some more information on that. Deposits increased $247.5 million for the quarter, and $256 million of that was public funds.

So if you exclude the public funds, we were down about $9 million, which really is basically flat for the quarter overall, a small decrease. If you recall, this is our public funds season where we're increasing our public funds for a large amount, as we've talked about in the past, anywhere from $2 million to $300 million, and then we'll see that spend out through the remaining part of the year. So be expecting that as we go forward. We also paid down our borrowings during the quarter by $280 million, and so we're down to $110 million, still at the Bank Term Funding Program that will expire in December. And then also I wanted to talk a little bit about our non-interest-bearing deposit portfolio. You notice that decreased this quarter.

It was 28.6 last quarter, and it was 27.4% of total deposits this quarter, so down just a little over 1%. But a big piece of that, almost all of that, is because the increase in deposits was from public funds, which is interest-bearing. If we had just remained the same, basically without all the influx of interest-bearing, our non-interest-bearing would have been about the same. So on our liquidity, our liquidity position still remains strong. Our ratios are well above our limits. Our loan deposit ratio is 77%. We have a borrowing capacity at the Federal Home Loan Bank of $2.5 billion, and then we have about 28% of our securities are unpledged, which is about $480 million. Over the next four quarters, our securities portfolio estimated cash flows coming out of that is about $210 million, and that's coming out at about 180 basis points.

So part of it kind of we've been talking about the last really several quarters is just kind of the restructuring of the balance sheet. I think we'll continue to see that this year. As these cash flows come off at that 180, it'll go in Fed funds or loans, and so we'll definitely see pickup and some yield from that, but still kind of remixing the balance sheet this year is the plan. Our ratios for the quarter, ROA, was 103%, and our return on average tangible common was 13.48%, and then our efficiency ratio was 61%. All of our capital ratios were in line from last quarter: 8.1 TCE, a leverage ratio of 9.7, and a total risk-based of 15.2. So all in line with last quarter and overall very pleased with where we're sitting today. That's all from me, Hoppy.

Hoppy Cole (Chairman and CEO)

Thank you, Dee Dee. Appreciate that report. J.J., would you like to give us some color on this lending?

J.J. Fletcher (CLO)

Yes, sir. Thank you, Hoppy. As Dee Dee and Hoppy both alluded to, we did have a slight decrease in net loans, but behind that, there were a lot of positive factors that happened during the quarter. First of all, again, the SBA division had a record quarter in terms of loans sold in the secondary market, about $23 million. And really, we're happy to see that because the legacy HSBI SBA group, which we did not have at the first, we began integrating that through the company. And so that was really a result of a lot of referrals from legacy First Bank and then also loans from HSBI that had seasoned either construction or matured to be able to be sold in the first quarter. So really happy to see that and the income that came from that.

The other thing we did have, as Hoppy said, a couple of large payoffs at the end of the quarter, but on a positive note, about $35 million were made up in three credits, and the majority of that were priced at 3.25%. So we'll be able to redeploy that in this quarter at much higher rates. And one of those credits, the largest one, was in the hospitality sector, which will give us some additional capacity in that area. So again, net decrease, but a lot of positive attributes to those numbers. Average yield did decline a little bit from 826 to 812, but again, if you look deeper into that number, we had two large credits in a very modest origination quarter that amounted to $35 million, one of which is a large C&I credit.

The other, one of our top development groups that we have full relationship with, that we were real competitive on those two deals, absent of those two, our yield would have been about 830 for the quarter. We did begin to see some pressure though, through all the regions as the Fed signaled to pause potentially decreased in rates in 2024.

Some banks did start pricing in the sevens, so we're seeing that more often in the mid-sevens on average in several markets. So we'll be looking at that on a go-forward basis. Probably the most positive thing from the quarter, Hoppy alluded to, pipelines. We had a slight contraction at the end of the year, but at the end of the quarter, we were up almost 50% in total pipelines. And really, across the board, there was no one area that had that substantial increase.

It was really averaged out throughout the complete footprint. So we're looking very forward to that in the second and third quarter from a pipeline standpoint. Other than that, it was a pretty uneventful quarter regionally. Everybody had modest production but pretty consistent. And then lastly, I would say that we've made a lot of progress in our systems. We always talk about that. George and his team were rolling out a beta test for a Small Business Express Loan for $100,000 and below, which will help our commercial team quickly respond to those needs. And then our centralized consumer underwriting platform should be integrated. George may have more color on this, but really this month or by the end of next month, so by the end of this quarter, that'll be fully integrated, which will add to our efficiency there on the consumer side.

All in all, even though a net negative number on loan growth, a lot of positives came out of the quarter from a lending standpoint, so. All right. Thank you, Hoppy.

Hoppy Cole (Chairman and CEO)

Thanks for that report. George, credit quality?

George Noonan (Chief Credit Officer)

Thank you, Hoppy. We continued to see acceptable and generally improving trends for most of our credit quality metrics through the first quarter. Our leading early indicator metric, 30-day delinquencies, was certainly favorable. We finished, as Hopi said earlier, 30-day past dues at 26 basis points. That tracks really 12 basis points under our annual average in 2023, so good movement there. Asset quality, I think, reflected stability when compared to quarter 4 2023. Our loans on non-accrual were up minimally by $270,000, but very manageable there. NPAs declined by $1.9 million in the quarter. That's a decrease in NPAs of almost 9%. NPAs as a percentage of total loans and OREO remain level at 40 basis points for the second consecutive quarter. We're still in positive territory for loan recoveries exceeding loan charge-offs by $106,000 for the quarter.

When just looking at the loan charge-off net piece, we're at a minus 0.02%, excluding DDK charge-offs there. ACL ratio remained level at 105. ACL as a percentage of NPLs increased favorably from 456% to 463% there. CRE concentration over time decreased a little bit by one basis point from 207% to 206% of risk-based capital, and that's comfortably below our 300% interagency guidance level. There was an uptick of 29 basis points for classified loans as a percentage of capital plus ACL. This resulted in a small manageable increase in the ratio from 676 to 705. That increase was really comprised of a handful of small mid-size relationships and really no delinquencies among them from a problematic standpoint. Overall, as you see in the pie charts, our overall loan portfolio continues to reflect a strategic balance by our major loan types.

Owner-occupied CRE still stands at 25% of total loans. Non-owner-occupied CRE, 21%, one- to four-family, 19%, C&I at 15%, and C&D at 12%. Managing this segment continues to be a high priority from both production and the credit side, especially with respect to CRE and C&D segments. Our four major segments in C&D exposure, land development at 30%, multifamily 21%, other at 20%, and residential at 18%, reflect pretty stable trends for the last year or so, really. In CRE, only two segments of our portfolio exceed 15% of the overall CRE portfolio pie chart: professional office at 25%—excuse me, 24%—retail center at 16%. Average loan size in the portfolio continues to remain conservative. We're at $228,000 for our average loan size bankwide. From a portfolio stack ranking, the largest single loan outstanding is at an outstanding of $28.6 million.

The top 20 loans in the bank represent only 6% of the total portfolio. At a borrower relationship level, top 75 borrower relationships comprise 24.1% of total loans, and that ranges from relationships of $43 million down to the $10 million level. Professional office quality continues to perform well with an average loan size of $726,000 in professional office. We think we're positioned well with relatively no exposure to the metro office tower segment or buildings with heights over two to three floors. We continue to see minimal lease renewal issues, acceptable tenant stability, and very few credit issues in our office loan portfolio. We talked about this a little bit last quarter, though. We have seen insurance costs escalating across not only office but all CRE segments. We're continuing to monitor those closely for operating margin compression across our markets.

Substandard office loans were unchanged at 4.2% of our total office loans. Combined owner-occupied and non-owner-occupied professional office loans make up about 9.4% of our total loan portfolio. I think of particular note, at the close of quarter one, professional office loans with 30-day delinquencies represented less than one basis point of our total outstanding professional office loans. We like that trend. In summary, asset and credit quality continues to demonstrate solid borrower resiliency across our markets. Recently, risk management enhancements have been added with a new internal loan review function within the bank. We think combined with our ongoing external loan review process, that will certainly help us augment our continued credit quality improvement initiatives for 2024 and beyond.

Hoppy Cole (Chairman and CEO)

Thank you, George. Great report. Credit quality remains strong and resilient in the face of maybe some stresses out there in the market, so great report. Appreciate that. That concludes our prepared comments. We'd open it up for questions now.

Operator (participant)

And thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by. We compile the Q&A roster. And one moment for our first question. And our first question comes from Brett Rabatin from Hovde Group. Your line is now open.

Brett Rabatin (Managing Director and Head of Equity Research)

Hey. Good morning, everybody.

Hoppy Cole (Chairman and CEO)

Hey. Good morning, Brett.

Brett Rabatin (Managing Director and Head of Equity Research)

Wanted to start on the deposits again and just thinking about the DDA. It seems like it's gotten to a level of stabilization, but it could have also been somewhat seasonal. Any thoughts on the DDA levels and then just the strong growth you had in the NOW and other, what you would attribute that to, if anything?

Hoppy Cole (Chairman and CEO)

Well, DDAs, yeah, there is some stabilization, and there's some seasonality to it because now we'll be coming into we've got a pretty good market share in tourist markets, particularly in South Mississippi, South Alabama, Panhandle of Florida, Tampa markets. So those markets will be into their seasons now, and we'll see an increase or should see some increase in non-interest-bearing DDAs as those monies cycle through the season. So we were at our low point probably at the beginning of the first quarter, and so we'll begin to see that stabilize a bit as we move forward. Now, Dee Dee, you want to talk about the public inflows?

Dee Dee Lowery (CFO)

Yes, sir. The NOW and other, really a big portion of that was our public funds. They're considered in that NOW account, and that was $256 million, I believe, was in the public fund inflow. So that's really most of that.

Brett Rabatin (Managing Director and Head of Equity Research)

The rate on that portfolio?

Dee Dee Lowery (CFO)

Oh, yeah. The rate on the overall public fund book of business is about 270.

Brett Rabatin (Managing Director and Head of Equity Research)

Okay. That's helpful. And then it sounds like the loan pipeline is building, and I think a lot of banks are talking about mid-single-digit growth this year. Can you talk maybe about your expectations for loan growth and then how much remix we might see from securities to loans this year?

J.J. Fletcher (CLO)

I don't know that we've changed guidance recently. We had this little dip this quarter. Again, it's hard to tell one quarter over another, but currently, the pipeline's really had a nice growth. I don't really know where that goes the rest of the year. We'll just have to kind of see.

Hoppy Cole (Chairman and CEO)

I think we're still thinking, "Brett, our budget's still mid-single digits," as you mentioned. That's our budget for the year, and a lot of that remix will be coming out of securities portfolios. So that's essentially using up all of that cash flow out of the securities portfolio remixed into loan.

Dee Dee Lowery (CFO)

Yep. Yes.

Brett Rabatin (Managing Director and Head of Equity Research)

Okay. And then just last one, if I can sneak this one in on expenses. It's good to see the expense management. Are there pressure points from here relative to the 1Q level, or can you keep that fairly flat throughout the year?

Dee Dee Lowery (CFO)

I think that will be fairly flat. Usually, our fourth quarter, we have some kind of an uptake. Usually, end-of-the-year approvals are needed, but I think the consensus out there is $178 million for the year, and I think that's a pretty good number, which would be a little bit of an increase from this $43.4 million we had this quarter. But overall, I think I've been kind of talking about $44 million or so a quarter, so.

Brett Rabatin (Managing Director and Head of Equity Research)

Okay. That's helpful. Thanks for all the color.

Dee Dee Lowery (CFO)

All right, sir. Thanks, Brett.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Matt Olney from Stephens. Your line is now open.

Matt Olney (Managing Director)

Hey. Thanks, guys. Good morning.

Dee Dee Lowery (CFO)

Morning.

Matt Olney (Managing Director)

Hey. I want to ask more about these deposit costs and the competition around that. And curious what you're seeing in your markets in recent weeks. I think in prepared remarks, you mentioned just a handful of competitors still with some higher promotional rates. I think you mentioned that back in January as well. Just looking to see if there's any change in that in recent weeks, or still the same level of pressure?

Dee Dee Lowery (CFO)

I think it's changed a little, but we're still with the pressure of the competition. They're still running their specials. We ended, as I mentioned, we had that six months, 5.25% was our special last fall, and what we've dropped it to now is we have a three-month at 5%. But what we're seeing out there from big names is five months, eight months at 5% and 5.25%. So we had the one-offs, as I mentioned, last quarter from some smaller banks and different markets that are running a little bit higher. But I think it's and we still have a little bit of money market pressure. We had that the special for the money markets was six-month guaranteed rate. It was 5% for six months, and then it was going to drop.

And so what we had set up as those come due or that six-month period ends for them, they're cycling into the tiered-rate product that we have. And so depending on their balance, that's anywhere from 3.5%-4.25%. But as you know, when they're coming out, "Well, I just had 5%, and I need to be close to 5% because so-and-so has this." So we're still having to face a little bit of that repricing pressure, but some will obviously reprice into these tiers that I mentioned, but.

J.J. Fletcher (CLO)

I don't think it's quite as bad as the fourth quarter, though.

Dee Dee Lowery (CFO)

Oh, definitely not fourth quarter.

Hoppy Cole (Chairman and CEO)

Fourth quarter, yeah. Compared to fourth quarter, it was really an intense battle, but it seems like there's a little pressure, a little less pressure, I think. Is that fair, Dee Dee? You're hearing that from your folks?

J.J. Fletcher (CLO)

That's what we hear throughout the regions. Yeah. I agree.

Matt Olney (Managing Director)

Okay. Thanks for the commentary there. And then in preparatory remarks, you mentioned the seasonality in the first quarter. Can you just remind us of the seasonality that we should be forecasting for the second quarter, just the overall size of balance sheet? I think we've seen some contraction on the average balances of the last two years in 2Q. Just curious kind of what you expect for the overall size of balance sheet in 2Q of this year.

Dee Dee Lowery (CFO)

Well, I didn't look back at last year's 2Q, but I think we'll start. Usually, we still kind of get, if you're talking about public funds on that seasonality, we get a little bit still in April, maybe May, and then they'll start spending that. But we also have the seasonality that Hoppy mentioned from our customers that are in the destination places that will pick up their balances. So I mean, I'm kind of thinking we'll kind of be where we are. Those kind of things kind of offset each other.

Hoppy Cole (Chairman and CEO)

Yeah. Kind of flat. Then you really kind of see it in the third quarter more so in the fourth quarter when you got sort of double things going. You got public funds spending out the money, plus you've got the tourist markets are out of their season. So they're spending up the money they've earned during the summer months. So you see probably the biggest contraction in the fourth quarter, Matt.

Matt Olney (Managing Director)

Okay. That's helpful. Thanks for that. And then just lastly, on the securities yields, I think we saw some of the benefits in the first quarter of that restructuring from a few months ago. Curious just what the appetite is for additional security sales and repurchases like you did previously. Kind of the appetite there, and then as you look at the market, the financials of such a trade, is it reasonable to assume a similar trade today or given the markets and the yield curve? Just curious kind of what you're seeing there.

Dee Dee Lowery (CFO)

Well, actually, we were talking about it yesterday and starting to run the numbers on that process to see if we can do the same kind of trade and get the same pickup. We did have some treasuries that we were able to sell that had been purchased in the past for kind of short term. They were kind of Fed funds alternatives back when rates were lower, and so we were able to sell those before and have a bigger gain. So we're running the numbers, and obviously, if it makes sense and we can do something similar, we will do it again, I would say, in this quarter. But we're running the numbers now for that, so.

Hoppy Cole (Chairman and CEO)

Absolutely.

Matt Olney (Managing Director)

Okay. Thank you.

Hoppy Cole (Chairman and CEO)

Thanks, everybody.

Dee Dee Lowery (CFO)

Thanks, Matt.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Catherine Mealor from KBW. Your line is now open.

Catherine Mealor (Managing Director)

Thanks. Good morning. Morning.

Hoppy Cole (Chairman and CEO)

Good morning, Catherine.

Catherine Mealor (Managing Director)

I wanted to ask on the buyback. You announced the authorization earlier this quarter. Just curious your thoughts on how active you think you'll be on that.

Hoppy Cole (Chairman and CEO)

So we did announce it earlier in the quarter and got it renewed. We still look to use that as one of our capital management tools. Stock price at $25 is not as attractive. If it gets down in the lower $20s, Catherine, I think it makes a lot more sense for us.

Catherine Mealor (Managing Director)

Yeah. Okay. Great. More price-sensitive than anything. Then.

Dee Dee Lowery (CFO)

I think so, yeah.

Catherine Mealor (Managing Director)

Yeah. And then on the margin, how should we think about so you gave guidance for the margin to be down just a little bit more this next quarter. How do you think about if we don't see rate cuts in the back half of the year, how do you think your margin will trend? Do you see more downside as just deposit costs keep pricing up, or is there a scenario we could see your NIM actually start to expand even in a higher-for-longer environment?

Dee Dee Lowery (CFO)

Yeah. I think part of what we kind of have been talking about was looking at our modeling and our projections on looking forward, and that's higher single-digit increase in margin, but that also has the two cuts, a July and a November cut, built in. So I think we'll still see we'll still see pickup in yield on our loans.

There's still some room there. In those repriced, the cash flows out of that, and new loans that are going on? We'll see some pickup in that. I don't think as much as we have seen the past few quarters as it has been increasing on the loan yields, but I still see pickup from that. I see pickup from whether it's in the loan yields or in just deposits from the cash flow coming out of the investment book. We'll see pickup in yield on that. So those may offset what I think if there is no change in rates, some of the deposit pressure because we're still repricing a few things. People, believe it or not, after how many years has this been now with the rate cuts going, 2.5 years, are just now saying, "Hey, I'm only earning this much.

I need a better rate." And you're thinking, "Where have they been?" Which I'm glad, but. So we have an occasional one of those come up. But I think hopefully, we're just kind of maintaining, and it looks like looking at when you look at the deck on the deposit costs, when we label it out for you per month, January, February, March, and then looking at April, April's trending pretty much in line with March. So I think that we shouldn't see a whole lot of difference, but I'm still always leaning toward a little bit of compression just because we are still facing some competition in pricing a few things. So I'm always going to be on that side.

Hoppy Cole (Chairman and CEO)

I think it's going to stabilize it a bit.

Dee Dee Lowery (CFO)

I think so. Yeah. It's just a lot of little moving pieces there, but it seems very positive, I think. And with just being down 4 basis points, that's.

Hoppy Cole (Chairman and CEO)

That's positive time to reprice up the curve for the renewing loans, but then also the cash flow coming out of it. So seeing the substantial increase in loan pipelines really gives me some comfort around helping the margin in the back half of the year because we'll be able to use that cash flow coming out of the bond portfolio at 181 basis points, reprice that back up the curve, hopefully, something with an eight in front of it for the most part, so.

Catherine Mealor (Managing Director)

Yeah. That makes sense. And then on loan yields, I mean, you've seen really nice increase in loan yields the past couple of quarters. So you're saying, Dee Dee, that should moderate a little bit in the next couple of quarters until growth picks up.

Hoppy Cole (Chairman and CEO)

I think so, Catherine. Yeah.

Catherine Mealor (Managing Director)

Yeah. Yeah. Okay. That makes sense. Okay. Great. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Christopher Marinac from Janney Montgomery Scott, LLC.

Christopher Marinac (Director of Research)

Hey. Thanks. Good morning. Just want to drill down on the office portfolio just for a second. So Hoppy, we should be thinking of this holistically as the combination of your construction office, the non-owner-occupied, and then a residual component in the owner-occupied. Is that correct to get us to that total number that was cited in the slides?

George Noonan (Chief Credit Officer)

Yes. That would include all of those components.

Christopher Marinac (Director of Research)

Okay. Great. Just want to clarify. And then can you walk us through kind of the process for debt service coverage and stressing those? And to what extent is that already done, or would that be kind of something that may adjust on criticized classifieds as this year unfolds?

George Noonan (Chief Credit Officer)

We're stressing right now. We're still using essentially a 300 basis point shot in most of our stress methodology, realizing that we're probably at the top of the curve at this point, but that's still the shot bandwidth, if you will, that we use. And of course, with all renewals, and we're looking at a similar every loan approval has a similar rate shock up to 300 basis points as we're looking at those from an approval standpoint. So really, it had not changed our methodology there.

Christopher Marinac (Director of Research)

Great. Thanks for that. Just, I guess, a similar question on the multifamily side. Just what are you seeing in multifamily for either construction or for permanent that you are keeping on the balance sheet and just any trends that are different there?

George Noonan (Chief Credit Officer)

We still have, I think, eight or 10 projects to move over from construction into perm. The most recent of those are right on track for their absorption forecasts. We're in some very good markets in multifamily and are seeing good occupancy. A lot of our apartment complexes are not necessarily in the larger metropolitan areas where competition tends to be maybe more predominant. And so there are fewer options. And when you're the newest shiny object complex in a smaller market, I think it helps shorten the absorption period. So we're not really seeing any problems there. Most of our permanent loans, as we look at those around the footprint, we don't see rent concessions being made among our multifamily developers and things that you see in some of your larger, maybe oversaturated, larger metropolitan markets.

Christopher Marinac (Director of Research)

Got it. Great. Thank you for that background. And then Hoppy, just, I guess, a quick question for you from a strategic standpoint. Do you find that other banks are more willing to engage with you now than the past, or is that sort of just conversation still the same?

Hoppy Cole (Chairman and CEO)

I think conversations are kind of still. I think people are thinking about it, but again, the math is somewhat challenging, and there's a lot of uncertainty in the market. And gosh, you saw the new guidance that came out or the new proposal that came out from the FDIC, I guess, on so things they'll be using to decide mergers on application approval. So I don't know. It doesn't. There's not a ton or we haven't seen a ton of conversations going on right now.

Christopher Marinac (Director of Research)

Great. Thank you for taking all my questions.

Hoppy Cole (Chairman and CEO)

Thanks, Chris.

Dee Dee Lowery (CFO)

Thanks, Chris.

Operator (participant)

Thank you. I'm showing no further questions. I would now like to turn the call back over to Hoppy Cole for closing remarks.

Hoppy Cole (Chairman and CEO)

Well, good. Well, thanks, everyone. We appreciate you participating this morning. Again, we think we had a really good quarter and a strong start to the year and really good position for the balance of the year. So if there are no further questions, that'll conclude our call for this morning for this quarter.

Operator (participant)

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