Business First Bancshares, Inc. (NASDAQ:BFST) Q3 2023 Earnings Call Transcript

Business First Bancshares, Inc. (NASDAQ:BFST) Q3 2023 Earnings Call Transcript October 26, 2023

Business First Bancshares, Inc. beats earnings expectations. Reported EPS is $0.71, expectations were $0.62.

Operator: Hello. And welcome to the Business First Bancshares’ Q3 2023 Earnings Call. [Operator Instructions] I would now turn the conference over to Matt Sealy, Senior Vice President, Director of Corporate Strategy and FTNA. Please go ahead.

Matt Sealy: 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.

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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.

Jude Melville: 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 continue 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. Including in our core operating results for several non-run rate items, which I’ll let Greg expand on 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 a tangible book value per share, $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 in 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’re recently for 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, recognized at $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 low 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 is required 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.

Greg Robertson: 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, $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, this $8.4 million figure is a fairly clean run rate figure for the quarter. And 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 that we don’t feel like that will be repeatable in ‘24, but we do feel like noninterest income will grow throughout the balance of the year to make that stabilized.

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 rated 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 the ‘24, we feel like the noninterest expense will be 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 the performance in which we attributed to the long 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 discussed in prior quarter prior to now that we’re fully marked and we resolve them during this quarter. As far as the balance sheet, the balance sheet tends to remain healthy during the quarter and loans that were held for investment grew about 1.7% annualized, a little lower than expected that were but also consistent with our strategy of loan growth and as Jude mentioned we feel like that 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 deposit and gross deposit growth for the quarter. The $157 million in the new deposits that we generated through a couple of CD, 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, an 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 remains 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 the 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, ex AOCI.

Borrowings, as we mentioned earlier, decreased during the quarter about $152 million and that was really as 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 on 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 there in this time and also preparing us to be able to pay off that maturity coming forward in next March.

Q3 GAAP net interest margin was 3.61% that 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 $1 million quarter run rate. The Q3 core net interest margin excluding the loan discount accretion contracted three bps to 3.49 as Jude — 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 are experienced for holding that excess liquidity. Looking forward into Q4, we expect the margin to remain flat, just like the down, maybe a single basis points due to modest continued liquidity bill and continued funding pressures. Little color on the second point here.

We have over $100 million in lower cost FHLB borrowings that mature early in the quarter. And 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, we are very proud of the production side of the bank with our continued loan yields coming in on new renewed as average 160 and our deposit gathering that help us maintain our margins. And now to cover some of the betas from the quarter, I will turn it over to Matt.

Matt Sealy: 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%. And this is really functioning better than expected deposit growth during the quarter. Looking ahead to Q4, I’d expect to 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. 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.

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Q&A Session

Operator: [Operator Instructions] The first question comes from a line of Matt Olney from Stephens.

Matt Olney: 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 talked more about deposit growth from here and kind of expectations to match the loan growth. Thanks.

Greg Robertson : 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, it’s just deposits are still in battle every day. So it’s something we’re continuing to talk about and focus on. And if we experience the same success as going forward, then we’ll really start to systematically start to 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 give us kind of hope is we really consistently not only gather deposits, but really gathered noninterest-bearing kind of in the face of the whole industry experiencing a runoff in that noninterest-bearing sector. So experiencing good account on being both in numbers and in dollars give us hope that we could continue to move that way.

Matt Olney: 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?

Greg Robertson : 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. I think 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.

Matt Olney: Okay, I appreciate that. And I guess if I think about 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?

Greg Robertson : That’s correct. And one of the things that we think that 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 is 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.

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

Brett Rabatin: 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.

Greg Robertson : Yes. I’m guessing you’re referring to the C&D, the construction development book?

Brett Rabatin: Yes.

Greg Robertson : Yes. Okay. We think it is trending exactly where we thought it would go, and trending down below 100%. We don’t see, we really haven’t been originating any new C&D loans. So, if you think back at our production last year in Q2 and Q3 of last year, really, we’re kind of at the experience right now the peak of the funding because each of those loans is a 12 to 18 month cycle. So we’re getting to a point where we’re a year out on some of them getting towards the kind of wrap up phase of those where they’ll be transitioning out of the bank or into owner occupied or income producing. So we don’t expect that to be back up over 100. We think it’s going to — it’s trending down and going to be right there in that space for a while.

We’re not eradicating C&D from our portfolio. We just felt like we were a little bit unbalanced a couple quarters ago and felt like we needed to right size that a little bit. So definitely want to stay below 100 and looks like we’re from our internal projections where we’re on pace to do that and stay there. A lot of our outsize growth last year, a portion of it was C&D and if we slowdown the C&D we should be able to look forward to just a pretty healthy normalized loan portfolio growth over the course of ’24.

Matt Sealy: Yes, Brett, and I’ll give you a little bit of color, a data point that we include 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.

Brett Rabatin: 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?

Jude Melville: Yes, yes, absolutely. So the other geography label there that’s not to be construed it as outside of our core geographies or core footprint. All of that’s 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.

Greg Robertson : 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.