The First Bancshares, Inc. (NASDAQ:FBMS) Q3 2023 Earnings Call Transcript

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

Hoppy Cole: [Call Starts Abruptly] I’ll give a few high level highlights of the quarter and then turn it over to other members of our teams in their respective areas. This morning I’ve got Dee Dee Lowery, our CFO with us; George Noonan, our Chief Credit Officer, and J.J. Fletcher, our Chief Lending Officer. Generally, the quarter we thought was a solid quarter given what everyone knows, a very difficult operating environment. We had talked last quarter about some of the seasonality of our deposits as some of the loan growth we expected and some of that materialized this quarter. Our GAAP net income for the quarter increased 2.5% to $24.4 million. However, operating income decreased $2.8 million or 10% due to some one-time items that were associated with the GAAP net income increase.

An array of ATM’s in a bustling city, indicative of the company’s banking services.

Core net interest margin compressed about 16 basis points and we talked about that last quarter that we felt like there’d be some compression the back half of the year. As many of you know, we have a seasonal deposit portfolio in terms of our public monies, and so part of that is that and also we felt like we have to be a bit more aggressive on deposits given what we thought would be our loan growth profile for the quarter, and that did materialize. So loans grew $78.9 million or 6.3% on annualized basis for the quarter, and J.J. will give us more color on that during his part of the presentation. Our credit metrics remain really strong with low pass dues, low non-performers, low charge-offs. George will talk about some of the credit quality indicators and metrics and dig into some detail in the credit administration portion of our meeting this morning.

We also, during the quarter received a $6.2 million grant from CDFI Fund Economic Recovery Program brand and that’s COVID relief monies to further our CDFI and CRA investments in some of the more impacted markets from COVID around the Southeast. And then finally, if you look back over the last 12 months or so, we’ve been able to grow actually, over the last 12 months we’ve been able to grow our tangible book value by over 4%. But given fact that we closed the largest acquisition we’ve ever done in January of this year $1.7 billion of the Heritage Southeast merger. We also have had increased marks on the interest rate marks on the bond portfolio, which would deduct from tangible book value. But then we also increased our dividends 21% from $0.76 to $0.92 last quarter.

So given all that, we’re pretty pleased with the fact we were able to even continue to grow our tangible book value over the last 12 months. So with that, again, we felt like it was a fairly solid quarter. We knew there would be some compression, margin compression, some deposit headwinds due to the seasonality of our deposit book and some of the loan growth we experienced. So with that, I’ll turn over to Dee Dee for a little more color on our financials.

Dee Dee Lowery: Great. Thanks, Hoppy. Yes, as Hoppy mentioned, we are pleased with the quarter and I felt it was a solid quarter and with the expectation of the increased deposit cost we could see coming, we feel good about it. We did have noise again, as he mentioned, a small amount of acquisition expenses, but with the grant, the ERP grant from the treasury of $6.2 million and then the associated expenses $5.2 million related to that, and that is in the form of advertising, consulting and contributions that will be spent from that money to further our mission with the – as a CDFI. And so those expenses are in the numbers as well. But for the quarter we did report earnings of $24.4 million, $0.77 per share that was up $600,000 from last quarter or $0.02 per share.

On an operating basis, when you exclude those acquisition charges of $400,000 net of tax and then the grant net of the associated expenses, that’s about $800,000 to that number. So earnings were $24 million on operating basis or $0.76 per share and that compared to $26.8 million or $0.85 per share for the second quarter of 2023 and that was a decrease of $2.8 million. And that decrease of $2.8 million in operating earnings compared to last quarter can be summed up in a couple of things. If you remember last quarter we had the increase in accretion, income related to the acquisition from Heritage and loading that on our system that was up $2.3 million. And then our increase in our deposit cost specific well in our interest expense, but specifically in our deposit cost was $4.8 million.

So those two items really are the big drivers of our decrease in operating earnings for the quarter. Expenses were $47.7 million for the quarter, but when you back out those one-time expenses, that brings that down to $41.9 million, which is a lot more in line with where we talked about last quarter. And if you recall from our last quarter’s call, we did expect margin to compress the third and fourth quarter, this year partially due to the seasonality of our deposit book as well as we have runoff in our public funds, which we normally talk about. That happens part of the year and usually leads to additional borrowings, which is our typical behavior pattern because of the seasonality of those public funds that run out the last part of the year and then start coming back in late first quarter of next year.

We also talked about the increase in deposit cost if we were to be more aggressive, in our deposit gathering due to funding loan growth and loans did increase, as Hoppy mentioned, $78.9 million or 6.3% annualized about 30% of those loans were booked to late in the quarter. So our average loan growth for the quarter was $56.6 million. So you can see a big chunk went on right at the end of the quarter that’ll help and obviously go forward to next quarter. We also initiated deposit gathering campaign. We had talked a little bit about that last quarter that we were working on getting that together and so we have that. And as well as we’re still playing some defense with some a little bit more aggressive deposit pricing in our markets and so both of those actions are reflected in that increased deposit cost.

Our core net interest margin decreased 16 basis points to 3.27%. And we do expect, obviously, this kind of trend to continue into the fourth quarter just with the increased deposit cost, with the campaign, and then still with the competitive pressures that we’re seeing. We want to play defense and obviously keep our customers, our core customers. Our yield – a couple of notes due to the accretion, our yield on earning assets reflects in our release a two basis points decline. But if you back out that extra accretion that we talked about last quarter, that was from Heritage, we actually had an increase of 16 basis points to 2.95% – to 4.95% from 4.79%. In that same scenario, obviously, when you look at the loan yield, it actually increased 18 basis points up to 5.92% from 5.74%.

And that’s – when you just kind of go back and take that out of that last quarter’s number. So good increases in both of those sections for the quarter. Our deposit cost, or our cost of deposits though, increased 30 basis points for the quarter. Our interest bearing deposit cost increased 44 basis points to 1.76%. And then our cumulative beta since the beginning of the cycle is 31% and that was up from 22% last quarter. Our deposit cost increased from 91 basis points to 120 basis points. So it was a 30 basis point increase. But we still feel that’s a pretty good number given our granular deposit base and happy right now with that number. Our loans, as I mentioned, did increase 78.9% or 6.3 annualized. J.J. will give you a little more information about that.

Our deposit runoff declined this quarter from last with a decrease of $12.2 million. But when you look at that, we actually acquired some brokerage CDs during the quarter of $110 million. The actual deposit decline was $122.2 million or 1.9%, which – that has been in line with our prior quarters when we have discussed each quarter in and taking out some of the broker deposits that we’ve had. So that’s still kind of in line with where we’ve been. The public funds and some seasonality in some of our accounts accounted for $51.7 million of that decline. So leaving just about $70 million in runoff. Our non-interest bearing deposit portfolio did decrease slightly from 32% to 30% from last quarter end. And part of that is due to some of the seasonality in our deposit base as well.

Our liquidity position remains strong; our ratios are well above our limits. Loan-to-deposit ratio is right at 79%. Our borrowing capacity is $2.2 billion, and then we still have about 39% of our investment portfolio is unpledged, which is about $700 million. And out of our investment or securities book, we have about 230 million that will cash flow in over the next four quarters. So that will be generated from our portfolio. And then the following ratios, we kind of highlighted in there for the quarter on an operating basis, our ROA was 1.22%. Our return on average tangible common equity was 17.7% and efficiency ratio was 56%. Our capital ratios are all still in line from last quarter with a TCE of 7.3%. Our common equity tier one was 12%, our leverage was 9.6% and our total risk base was 15.1%.

All in line with prior quarter. So I think I’ll turn it back to over to you, Hoppy.

Hoppy Cole: Thank you, Dee Dee. Thanks [indiscernible]. J.J., would you like to talk about the loan portfolio a little bit?

J.J. Fletcher: Yes, sir. Thank you, Hoppy. I think we’ve heard now three or four times that we were very pleased with the overall net loan growth of almost $79 million for the quarter. And just historically, if you recall, that’s up $36 million in the first quarter and about $41 million in the second quarter. Again finished the high note on the quarter in September with about $115 million in originations. And one thing to note too, we also had an increase in actual funded loans in September of about 70% of overall originations compared to about 55% to 60% which we’ve seen in prior months. So that really helped us get those outstandings up for the end of the quarter. Unfunded construction backlog remained strong and in line with previous quarters.

Pipelines did contract about 10% at the end of this quarter, but relatively speaking remain healthy and within historical averages. Regionally, the legacy Mississippi team had a great quarter, as did the Tampa market. We also began to see positive contribution from the New Orleans team that was hired in during the second quarter. Private bank division continues to be a strong performer, particularly in the specialty healthcare division. As to yields and Dee Dee mentioned on an uptick here in September, we finished the month of September at 798, at the end of the first quarter 736, and the second quarter 762. So we continue to see improvement in our loan yields month-to-month, outside the numbers continue improved workflow and process management with the acquired HSBI team.

We’ve recently integrated our small business platform with that entire group and proud to say we’ve got upwards of 90% retention in the lending staff of HSBI and also just brought on new mortgage and treasury groups to support that team. So overall very pleased with the quarter and I’ll turn it back over to you, Hoppy.

Hoppy Cole: Thank you, Dee Dee, appreciate that. George, you turn to credit administration.

George Noonan: Thank you, Hoppy. We continued to see, I think, real stability in our credit metrics for the quarter. Throughout most measurements, delinquencies remained very manageable. We ended the quarter with 31 basis point finish at the end of September and that tracks actually 10 basis points below our year-to-date average of 41 basis points. So a good positive trend in delinquencies year-to-date loan recoveries. We moved out of the red into the black on an annual basis or year-to-date basis with loan recoveries now exceeding charge-offs by about 4%. So pleased with that. Total criticized and classified loans were reduced over the prior quarter by 15.6 million. So a good trend in criticized and classified assets that improved to 8.94% of capital plus ACL compared to 957 at the end of quarter two.

And as we mentioned last quarter, we did continue to see a positive trend in actual payoffs of a number of our CNC loans. We had borrowers pay off some 9.6 million in criticized and classified loans during the quarter. So very pleased with that trend. Again, evidence of good liquidity still out there enabling some borrowers to move those loans or pay them off. So again, positive, all NPAs did tick up slightly from 43.3 bps at quarter two to 44.1. That was really mostly attributable to one larger credit and we expect that to start a liquidation process in the coming weeks. And we really do not expect any material loss in that credit if it goes through a liquidation process. NPAs outside of that were pretty well flat. In your deck, you have pie charts showing kind of the segments of the C&D and non-owner occupied CRE slides.

I’m referring to Page 16. But as a percentage of total loans, I think we still continue to maintain a nice balance in our CRE categories. Retail centers are one of the larger segments. That’s 6.61% of total loans followed by hotels at 515. Our owner occupied professional office is 540 of total loans whereas non-owner occupied 410 and then warehouse industrial just under 4%. So some nice balance across all those categories that we probably most closely track. For one that we do most closely track, definitely non-owner occupied professional office, again not particularly typified by larger loans. The average loan size in that category is 737,000. We’ve got a manageable maturity range in terms of preparing for pricing resets with about 15% of that portfolio maturing through 2025.

So some good stratification in the maturities there, an acceptable credit quality in the non-owner occupied office segment. We currently have about a 4.4% of the loans in that category rated substandard. And again, as we’ve talked about in prior calls, we really have an absence of mid and higher rise office buildings in our portfolio central business district type office loans. Most of ours are suburban or smaller, rural and mid market situations. So we are just not in that category of larger office towers. Concentration management in CRE and C&D remains well maintained with a range of 208% of risk based capital across the year. And our credit risk management group continues to manage ongoing stress analysis within the CRE portfolio. Heightened focus on not only rate movement, but occupancy levels and OpEx, especially escalating insurance expenses.

That’s one thing that is really on our radar across many of our markets. Now, to make sure that we’re providing some mitigation for rising insurance cost, as we see that in most markets right now. And then additionally, our annual term loan credit update on all income producing properties of a million and a half or more requires updated cash flow and coverage analysis. So we’re continuing to do that on a regular basis to keep a good handle on possible stresses. So, in closing continuing to monitor all aspects which could be considered early indicators in our credit weaknesses responding accordingly. Fortunately, we have seen very little evidence of that. We hope to see the same trends continue throughout the balance of the year and 2024. Thank you.

Hoppy Cole: Thank you, George. Appreciate it. That concludes our prepared remarks and commentary about the quarter. We’d open up for questions. Nancy [ph]?

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Will Jones with KBW. Your line is now open.

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Q&A Session

Will Jones: Hey, great. Thanks. Good morning.

Hoppy Cole: Good morning.

Will Jones: Hey so, Dee Dee, I just wanted to start on maybe deposit beta expectations here. I know last quarter we talked maybe landing in the third quarter around the 26% to 27%, but that’s obviously now a little closer to 30% as we stand, but understanding that the deposit environment remains challenged. And you guys had that promo that was really running all quarter, but just hoping to get a sense of where you feel like we might ultimately land on deposit betas. Following this kind of expected catch up we saw this quarter.

Dee Dee Lowery: Well, I think kind of probably generally maybe the same kind of increase we had this quarter. Like you said, I was kind of calculating and thinking that we might be around 26%. That was giving really no change for the campaign and to be aggressive for the long growth. So I think that this will continue because we’re really kind of running our special right now throughout this quarter. So I think we’ll see kind of a repeat of the same quarter.

Will Jones: Okay, great. That’s helpful. Maybe just on flip side loan yields. Just hoping to get a sense of where you feel like the trajectory of loan yields goes from here. I know loan betas, if you will, still remain relatively low, but I know you guys have a larger piece of fixed rate loans and relatively short term. So just hoping to get an idea of maybe scheduling of what’s coming due in this coming year and where you see some opportunity to reprice. I think the hope is maybe this turns into a tailwind as we move into next year.

Dee Dee Lowery: Right. And I think you will see kind of that consistent pricing because of so much more we have in the fixed rate portfolio over the floating. And then when you look kind of at our ALM modeling and what it’s showing currently, it’s showing about a margin expansion next year by the end of next year of about eight basis points from our most recent run. So I think that’s kind of consistent with what you’re saying this could turn into, because we’re still obviously putting new loans on at higher yields, but still repricing because we have so much of a fixed book you want to add Hoppy?

Hoppy Cole: Well, I was going to say this will keep in mind, I know we talk about it, but if you look back at the seasonality of our margin, we kind of see a similar pattern. Dee alluded to in her comments as we prepared comments, but we’ll continue to see public money run off this quarter. So we have to replace that funding with higher cost funding because our current cost on our public deposit book is 242. So then that money will turn around and come back in over the first quarter and second quarter. So we would expect margin expansion during that quarter, all things remaining consistent because there’ll be an influx of funds that comes in. So really looking at the margin over a four quarter average is really more indicative than just kind of picking one quarter, I guess.

Will Jones: So the messaging is really like, maybe next quarter we see a bit of a bottom and then just to grind higher as we kind of run through 2024. Is that the right way to think about it?

Hoppy Cole: I think so, yeah, that’s where we’re thinking about it.

Will Jones: Okay, awesome. That’s great. Thank you for that. And then just on expenses, Dee Dee, I know we talked about lower expenses last quarter and we kind of saw that, especially if you really kind of normalize for a jump in FTSE premiums. Do you still expect given next quarter what we’ll see an even further reduction in the expense base as we kind of see the last tranche of cost savings come through? So maybe we exit the year at our lowest expense run rate.

Dee Dee Lowery: I don’t think so. I am looking ahead at where we are and looking at that 41.9 pretty consistent with the increased FTSE premiums in their quarter, I think, we’ll see that same amount for next quarter. So I’m thinking that 41.9 could be increased just a little bit because of kind of year end. Sometimes it’s just different things. You will have expenses in the fourth quarter, personnel related issues. I think that could be just a little bit. It could be $400,000, $500,000 over this quarter.

Will Jones: Okay, that’s very helpful. Thanks for the questions.

Dee Dee Lowery: Sure. Thank you.

Operator: Thank you so much. One moment for our next question. All right, our next question comes from the line of Kevin Fitzsimmons with D.A. Davidson. Your line is now open.

Kevin Fitzsimmons: Hey, good morning, everyone. Hey.

George Noonan: Good morning, Kevin.

Kevin Fitzsimmons: Just wondering, we’ve had some banks announce bond restructuring transactions, which I think it’s all about what that earnback is, and can you reprice or reallocate those proceeds quicker than waiting for them to come? And I acknowledge it’s not always the right thing to do, there’s a lot of different variables to that. But just wondering, is that something you guys are looking at contemplating on the radar? How would you describe that? Thanks.

George Noonan: It absolutely is. We are in the process of analyzing that, running our numbers right now, Kevin. It’s something that we’re taking a look at. Although we’ve got – we’ve got good liquidity, but to your point, the earnback look like and what is the impact on them. So that’s something we definitely are considering.

Kevin Fitzsimmons: And I guess when you look at it, is it something where it’s better to pay down borrowings or better to reinvest at higher rates or, it’s either or.

George Noonan: I think it’s either or Kevin. Depending on what the level of borrowings are, we’ll pay those down and then reinvest at higher rates and really potentially use it to fund some of the loan growth we feel like is coming.

Kevin Fitzsimmons: Okay, great. And can you remind us, with the CDFI grant – so are there going to be more of those coming? What kind of frequency? And what’s the ability for what you can do with that? Is it pretty much pretty open in terms of funding loans, buying back stock, or a number of different options?