Business First Bancshares, Inc. (NASDAQ:BFST) Q4 2023 Earnings Call Transcript

Business First Bancshares, Inc. (NASDAQ:BFST) Q4 2023 Earnings Call Transcript January 23, 2024

Business First Bancshares, Inc. beats earnings expectations. Reported EPS is $0.66, expectations were $0.6. BFST isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Business First Bancshares Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Matt Sealey, Senior Vice President, Director of Corporate Strategy and FP&A. Matt, you may begin your conference.

Matthew Sealy: Thank you, Krista. Good afternoon, everyone, and thank you all for joining. Earlier today, we issued our fourth 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 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 7 of our earnings press release that was filed at the SEC today. All comments made during today’s call are subject to the safe harbor statements in our slide presentation and earnings release.

I’m joined this afternoon by Business First’s 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: Okay, thanks Matt, and thank you everybody for joining us. We understand the demands of the season and appreciate your prioritizing this conversation with us. I’ll briefly overview our fourth quarter highlights and then take a step back to place the year in a broader context. Our team closed out an eventful year positively with another quarter of solid and consistent fundamental performance. Greg will go into detail in a few minutes on our non-core adjustments, but once they’re shipped out, we generate a core ROAA of 1.03%, core ROAE of 12.27%, a core efficiency ratio of 62.6%, and the core EPS is $0.66, all exceeding consensus expectations. We accomplished this in a similar manner to our last couple quarters by managing expenses prudently, by maintaining excellent credit quality and by funding responsible loan growth through internally generated capital and the [Indiscernible].

Again, Greg will go into detail on some of the non-core items from the quarter, but I’d like to specifically mention two items that I consider highlight worthy. First, you’ll remember last quarter we hired a seasoned individual to bring in-house to swaps capabilities. This quarter we experienced our first meaningful pickup of nearly a million dollars to non-interest income through this nascent swaps line of business. While we don’t expect to replicate this large of an income number on a consistent basis in the near-term, we encouraged by the successful execution and the resulting client satisfaction, perhaps more important than the fee income generated, swap enabled us to close a significant credit worthy loan in terms that we might not have been as interested in accepting from asset liability management perspective without the swap protection, which enabled us to match both our and the client perspective client’s needs, but winning combination.

Second, our finance team with the aid of our asset management firms, Smith Shellnut Wilson, repositioned a portion of our investment portfolio by divesting $71.5 million of securities. While we recognized the $2.5 million pre-tax in sales, we’re also able to reinvest the full amount at a rate generating a projected 1.1-year earn back. It was another example of in-house capabilities, allowing us to conduct transactions for our own balance sheet at a lower cost and with more control than if we had relied on outside vendors. Between this transaction improvement in AOCI through movement and yield curve-based valuations and the accumulation of capital through earnings, we created 14 basis points to consolidated TRBC and a 52 basis points to TCE in the quarter, increasing our TCE levels to 7.28%.

All in all, the fourth quarter was a solid closing to a successful challenging year. We finished the year in a strengthened capital position with solid asset quality, ample diverse and granular liquidity, and arguably most important an employee base that’s been through and grown from the challenges of 2023, just as over the course of our time together as institution, we’ve gone through and grown from the pandemic and its aftermath, various energy crashes and the great financial crisis. While we’ve been successful crisis managers. Stepping back to the 10,000 foot view, I’d like to call your attention to Pages 9 and 10 of the deck, which illustrates the success we’ve had, not just playing defense, but also going on the offensive and sustaining those efforts over time.

On Page 9, you’ll note the consistency of our core ROAA performance over 1% in each of the past five years. We’ve also grown our ROACE over that time period with a five-year average of 11.46% and roughly 12.5% for each of the past three. This page details our consistent balanced growth and loans in deposits with each up 190% over the past five years, more specifically for loans, you’ll note that we have during that time over doubled our exposure in our original markets in Louisiana, while growing our Texas based exposure by multiple of nearly 8x, leaving us as well balanced geographically as we’ve ever been and approaching 40% of our exposure in Texas, Dallas, and Houston specifically. Moreover, we’ve accomplished this without sacrificing credit quality with very similar metrics across the whole of our footprint.

On page 10, we detail a near 4x our increase in aggregate core earnings and near doubling of core earnings on a per share basis even with dilution accumulated from multiple M&A opportunities, the increased scale at which we now operate has resulted in a 500 basis point decline in our efficiency ratio over that time period. Most important, our tangible book value per share at ex-AOCI, even with the investments required to fund this growth has grown 36% with a 9.3 CAGR over the past three years as returns have begun to accelerate. Further results are important, but franchises are built over time and these results clearly demonstrate that our team has been doing the right things in the right ways over time. Despite this lengthening track record, we enter 2024, excited not so much by past results as by the potential we’ve positioned ourselves to achieve in upcoming years.

Thank you again for your time and attention. I’ll now turn the microphone over to our CFO, Greg Robertson to review the results in greater detail.

Greg Robertson : Thank you, Jude, and good afternoon everyone. I’ll spend in just a few minutes reviewing our Q4 highlights, including some of the balance sheet and income statement trends and all, and we’ll also discuss our updated thoughts on the current outlook. Fourth quarter GAAP net income and EPS available common shareholders was $14.47 million and $0.57 and included several noncore items, including $2.5 million pretax loss on sale of securities, as Jude mentioned, in the 13th — and also the $13,000 gain on sale of our bank branch closure in Leesville in the third quarter. The $432,000 write-down on former bank premises and a $63,000 acquisition-related expense. Excluding these non-core items, non-GAAP core net income and EPS available to common shareholders was $16.8 million of $0.66 per share EPS, and came in better than we expected, driven by solid expense management, strong non-interest revenue and lower loan loss reserve expense.

There were several items included in our core results that we would consider outside of our run rate earnings figure. However, these items essentially offset. So we feel like the Q4 ’23 fee income and expense figures are relatively clean run rates when thinking about 2024. I would, however, like to mention our fourth quarter loan loss expense figure of $119,000, was roughly $600,000 lower than you would expect from us during the quarter where we generated $70 million in net loan growth. But looking at 2023 more holistically, the Q4 provision translates into 116 basis points of reserve for the full year net loan growth, which is above our long-term target of 1% for every new loan generated. Fourth quarter non-GAAP core non-interest expense was $39.2 million, and we feel like this is a fairly clean number.

However, I want to point out a couple of factors to consider regarding our 2024 non-interest expense outlook. Just an example, to give you some color here. Q4 did benefit from lower seasonal accruals to payroll tax and 401(k) match, also our salaries figure will increase from our annual merit and cost of living increases, which were implemented during the first quarter of each year. Regarding salaries and personnel, we’ll — we will continue with our philosophy of investing in talent with a few new hires coming in online in Q1. So in summary, we do expect Q1 non-interest expense to experience an increase due to accrual resets and salary increases. I think somewhere in the 6% to 8% increase off the Q4 non-interest expense base is probably a fair estimate for the first quarter.

Moving on to non-interest income. Fourth quarter GAAP non-interest income of $6.4 million included $2.5 million of the pre-tax loss on sale of securities we mentioned earlier, and a $13,000 gain on the sale of the bank branch. Excluding these items, non-core non-interest income was $8.9 million. We feel like this core $8.9 million figure is a fairly good run rate. As Jude mentioned earlier, we are very excited about our swap platform potential. It’s too early to claim the $900,000 is a good run rate for the swap unit, but we are optimistic about the future. In terms of our outlook, I would say, 6% to 8% growth off of our core Q4 base is a good range to consider for 2024’s fee income. If I can direct you to Slide 20, I’d like to show you that credit quality remained solid during the fourth quarter with NPLs, NPAs, and net charge-offs stable to improve when compared to the prior quarter.

On loss provision expense during the fourth quarter was $119,000. Going forward, we’ll continue to target our 1% loan loss reserve on net new loan growth. I should, however, point out that we did adopt CECL in the first quarter of 2023, which distorts some of our credit metrics when comparing to prior years. For example, full year 2023 reported net charge-offs were 11 basis points. Adjusting for CECL, net charge-offs would have come in just 6 basis points due to the adjustment related to purchase acquired credits and the marks assigned to each of those credits. Moving on to the balance sheet. Please reference Slide 14 in the investor presentation, where we include some information about our recent securities repositioning initiative mentioned earlier.

We sold $70 million of investment securities at or 8.13% of our total portfolio at a weighted average book yield of 1.98% and reinvested at a new weighted average book yield of 5.17%. We then recognize $2.5 million pre-tax loss with an estimated 1.1-year earn-back. This strategy helped us achieve improved profitability while extending the overall portfolio life to only 0.3-years. As far as loan growth goes with the balance sheet, the trends remained healthy during the quarter with loans growing $72.5 million or 5.85% annualized, which translates to $386.6 million for the full year of 2023, with or 8.4%, which is right in line with our longer-term target to achieve high-single-digits growth. Growth was driven by our Dallas market with just over 50% of the growth coming from Dallas during the fourth quarter.

As of year-end 2023, Texas represents 37% of our total loans, as Page 9 illustrates. We are not only pleased with the geographic distribution of our loan growth, but also the mix shift in our growth away from C&D throughout 2023 and more weighted towards C&I and CRE. For example, during 2023, C&I and CRE loan portfolios increased $200 million each, whereas the C&D loan portfolio decreased about $50 million during the year. We are pleased with the fact that C&D loans drop below 100% of regulatory capital during the fourth quarter. More specifically, we ended the year at 92% of regulatory capital. Deposits increased about $58.1 million during Q4 or 4.4% annualized. We continued in our success in Q4 with our money market special, which generated about $160 million of new deposit production during the quarter and added to the total of $350 million during the year.

Noninterest-bearing deposits continue to remain a challenge. We ended Q4 with our noninterest-bearing deposits representing 24.8% of our total deposits, which is relatively consistent with our previous outlook to year-ended 2023 at 25%. Q4 GAAP net interest margin of 3.5% included $1.9 million in loan discount accretion, which was $400 higher than what we expected. We expect accretion to drop back closer to $1 million per quarter going forward. Fourth quarter core net interest margin, excluding loan discount accretion contracted 8 bps from 346 in Q3 to 3.38 in Q4. Looking ahead in Q1, we expect the core margin to remain stable, but do anticipate modest expansion through the full year. I’d also like to mention Slide 22. This is a slide where we reworked last quarter, and it depicts the repricing opportunity within our loan portfolio.

As you’ll see, even if we do get a couple of rate cuts next year, we have $446 million of fixed rate loans sitting on the books at an average 5.9% weighted average rate. When you consider our new and renewed loan yields coming on in the mid-8% range, even if we do get a couple of rate cuts, this portfolio should reset 200 to 250 basis points higher. We feel the outlook for core NIM to be flat in Q1 and expand modestly for full year 2024 is reasonable, even conservative considering the repricing tailwinds and new origination yields we have conservatively assumed is largely offset by continued funding pressure. However, we think our ability to control funding pressure will be helped by our efforts to become more liability sensitive over the last six months.

While 2023 was a challenging year for the industry, we are pleased to ultimately generate a strong 1.05% ROAA for the second year in a row, all things considered. We are very pleased with that level of profitability and consistency over the challenging prior two years. And with that, I’ll hand the call back over to Jude for anything he’d like to add.

Jude Melville: Nothing to add at this time, happy to answer any questions that I might have.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Matt Olney from Stephens Incorporated.

Matthew Olney: Thanks for all the good commentary there. I’ll start on that core margin commentary that Greg just mentioned. I think I heard stable in the first quarter and then moving higher throughout the year. Can you help us appreciate the sensitivity of both the margin and the NII with respect to short-term rates and if the Fed doesn’t move this year versus moved a few times? Just help us appreciate how much that could swing the margin and the NII?

Greg Robertson: I think what my kind of last comment, Matt, with that, was we’ve been working real hard over the last six to nine months of trying to become move the bank’s asset sensitivity position to more neutral. So we — as of the end of the fourth quarter, had achieved that. And we feel like will the rates stay flat or they go down 25 basis points or 50 basis points at this point, it’s hard to guess. We’re in a position to where the margin will be held pretty stable. Obviously, in a down rate environment, we should be able to move the liability side with some degree with all the money market accounts that we brought on the books. And then also as I mentioned, that repricing on the fixed rate maturities, we feel like there’s some pickup in that area. So lot of moving parts. But all that said, we feel pretty confident that we should be able to keep it stable to slightly increasing even if rates stay where they are or go down either aspect because our neutrality.

Matthew Olney: And then you mentioned those loan yields in the fourth quarter, it looks like the core loan yields moved up, I think it was 8 basis points this quarter. Is that in line with your expectations that we just saw? Any more color on that number? And as you reprice some of these fixed rate loans higher. Any general update you can share as far as conversations or discussions with borrowers and any kind of pushback you’re receiving?

Greg Robertson: I’ll start, and I think December’s new and originated loan yields were 863, so still holding in there quite nicely. Once — in the beginning of the quarter, we did see a little bit lower loan yield origination yields down closer to 830. And I would say that, that was influenced by a larger deal that you mentioned, with our swap capability. We took the floating side of a pretty large transaction on there that will help us in the future from an asset sensitivity standpoint, but it did influence the early part of the quarter, but we did — December, those headlines were 863 on new and renewed. So we’re pleased with that. And that’s why I made the comment of even if we get a rate cut or two with that $446 million of loans that are maturing in 2024. The average weighted rate on that is 5.93%. So we think we should be able to pick up 200 to 250 basis points for that group that should help us offset any headwinds by the variable book pricing downward.

Unidentified Company Representative : Matt, one thing that I’d add to that is looking ahead over the next 12-months, the book that’s going to reprice that roughly $2.3 billion that’s sitting on the books at 7.89% weighted average rate right now. If we’re looking at mid-to-high 8% new and renewed yield on that. That’s a 76 basis point pickup, which translates to about 28 basis points pickup in earning asset yields. So that’s kind of the starting point on the left-hand side of the balance sheet and the repricing opportunity. And so when we look to the right-hand side of the balance sheet, the question is, what are the funding pressures? How do those persist? And what are the assumed betas on that? And a little color on what we’re assuming those funding pressures translate to is about a 13% increase in cycle-to-date interest-bearing deposit betas over 2024.

That compares to about a 24% increase in cycle-to-date interest-bearing deposit betas in 2023. So digging one step deeper into that. The December month end interest-bearing deposit costs were only 4 basis points higher than the total Q4 interest-bearing cost of deposits. So I mentioned that because that’s a pretty decent step back and step down and the delta between months end for the quarter and full quarter interest-bearing deposit cost. So it feels like funding pressures are slowing some, and that’s why I feel like if we’re assuming the increase in cycle-to-date betas, it’s still a 13% increase compared to a 24% increase during 2023, where I feel like we got the majority of the repricing kind of baked in. I feel like that’s a pretty conservative beta assumption.

And to Greg’s point, how the 28 basis point pickup in earning asset yields on just the 12-months repricing portion of the loan book. Basically assuming that a large part of that gets absorbed by the repricing and the new funding costs. It’s conservative because we hope that we can kind of manage and use the December month end and the Q4 quarter end as the launching point, those trends move in the right direction where there’s not much of a delta between month end and quarter end, to manage funding costs through the balance of 2024 and actually experience some pickup and good accretion in the margin for the balance of the year.