The First Bancshares, Inc. (NASDAQ:FBMS) Q4 2023 Earnings Call Transcript

The First Bancshares, Inc. (NASDAQ:FBMS) Q4 2023 Earnings Call Transcript January 28, 2024

The First Bancshares, Inc. 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 day, and thank you for standing by. Welcome to the review of Fourth Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please be advised that today’s conference call is being recorded. I would now like to hand the call over to Hoppy Cole, CEO. Please go ahead.

Milton Cole: Good morning, everyone, and welcome. I’ve got several team members with us today in room. I’ve got Dee Dee Lowery, our CFO; George Noonan, our Chief Credit Officer; JJ Fletcher, our Chief Lending Officer. I’ll cover a few high-level items for the quarter and the year and then turn it over to each of the respective team members for more color in their respective area. Fourth quarter of 2023 operating earnings were lower than third quarter. We expected some margin compression during the quarter, and we experienced that about 13 basis points of core margin compression primarily due to the deposit campaign that we talked about in the previous earnings call associated with being a bit more aggressive towards the end of the year to support our loan growth and stem deposit outflows.

Credit was solid again for the quarter. We had $80 million of net loan growth It’s on a 6.3% on an annualized basis. Credit quality metrics remained strong, where we had 6 basis points of charge-offs, $2 million reduction in NPAs and past dues at a pretty low 23 basis points. Dee Dee also talked about in her presentation, we did a bond restructure during the quarter in order to reposition a portion of the portfolio to improve our yield, improve our EPS. For the full year of 2023, the company performed extremely well. As you remember, we closed our acquisition of Heritage Southeast Bank on January 1 of last year at about $1.7 billion in assets in the overall organization. During the year, our operating income increased 41.6% to $96 million payment of an ROA for the year of 1.22% and a return on tangible common equity of 17.5%.

We grew our tangible book value by 7% during the year to $19.35 at year-end, we increased our dividend 21%, $0.74 a share to $0.90 a share for our shareholders. All in all, a good year, good growth here, a good year in terms of profitability. And with that, I’ll turn it over to Dee Dee Lowery for a financial presentation.

Donna Lowery: Thanks, Hoppy, and welcome, everyone. And I’d just like to say I kind of reiterate as well that I think we did have a very solid quarter despite the increased costs on our deposits that we knew were coming, we had great loan growth, as Hoppy mentioned, 6.3% annualized which was the same as the third quarter, both consistent there. And then also, our deposits were basically flat when you back out the public fund. So this is the first quarter I guess, in the past four that we basically maintained our deposits and that obviously is due to the deposit special, and we’ll talk a little bit more about that. But we did have a couple of, obviously, nonoperating items this quarter, acquisition charges as well as the loss on the securities from the restructure, and we’ll talk about that in a minute.

But — when you look at our reported earnings, it was $11 million or $0.35, which was down $13.3 million from last quarter. But on an operating basis, when we back out the acquisition charges that were about $400,000 net of tax. And then the loss on the sale of the securities was $7.3 million net of tax. Earnings were $18.7 million or $0.59 per share. And this compared to $24 million or $0.76 per share for the quarter ended September, which was a decrease of about $5.3 million. And when you look at that $5.3 million decrease compared to last quarter, it could really be summed up from basically interest expense and obviously increasing more than our interest income. Interest income did increase $3 million for the quarter, but our interest expense increased $6.1 million with about $1 million in non deposit-related interest expense.

But excluding the securities loss, our noninterest income was basically flat, down $1 million, mostly related to interchange fee income, which was elevated last quarter with onetime fee income. But is in line with the first and second quarters of the year. So noninterest income very comparable. Expenses were up from — they were — $44 million. They were up $1.8 million from the previous quarter. If you back out all the expenses that we mentioned last quarter related to the grant money that was expensed last quarter. So that $1.8 million is represented by $1 million related to salary expense, and that is our year-end accrual and also sold vacation expense as well, which is a onetime item at the end of the year. I had given estimates basically last quarter about where expenses might fall, and these are a little bit more than that.

I believe I said it could be up to $43 million. So this was just a little over that for the fourth quarter. And as Hoppy mentioned, and if you recall from our call last quarter, we did expect our margin to compress for the fourth quarter. Obviously, due to the couple of things, the runoff in our public funds, it normally happens in the fall and especially in the fourth quarter, which usually leads to additional borrowings and then as well as our increased deposit costs related to the deposit gathering campaign and also as well as market competition, we still have competition for deposits in our markets. Some banks still running some higher-priced CD specials. So we’re still facing that competition as well. Our specials ended at the end of the year.

And to remind you, we had a 5.25% 6-month CD and a 5% 6-month rate guarantee on a money market account with — and you had to have noninterest-bearing accounts with us as well to have those specials. But we did bring in about $183 million in new money over the course of, I guess, four months or so when we ran the campaign. And then obviously, both of those items we’ve talked about led to the increased deposit cost for the quarter. And as we talked about that last quarter, we would be on aggressive side with the campaigns due to the loan growth, which we had both quarters, I believe, was $150 million to $160 million in loan growth for the two quarters combined. So our core margin did decrease 13 basis points down to 3.14%. I expect to see compression again in the first quarter.

And then looking at hopefully that’s stabilizing in the second quarter of the year. We’ve got still with these market competition on these specials were still repricing some deposits. But then obviously, the — all these specials will be coming due throughout the next six months. We had a lot of folks got on those specials in September and October and then again in December, right before we ended. So we could see all of that pricing through, I guess, really through the second quarter. But as those come in, and reprice, obviously hoping that reprice is down because we’re not running those same specials and be able to — so that’s kind of what we’re looking at as far as hopefully the stabilization will be in the second quarter due to that. We did have a yield on our interest-bearing assets, did increase 15 basis points for the quarter, but our rate on interest rate liabilities increased 42 basis points.

Our cost of deposits increased 33 basis points for the quarter 100 basis points to 154 basis points, still a respectable number due to our granular deposit portfolio. And compared to some of our peers, our interest-bearing deposit costs did increase 42 basis points to 218, and that drove our beta to 38%, which was up from 31% through last quarter. As I mentioned, the deposit runoff obviously declined this quarter from our previous quarters to basically almost flat. It was down $17 million, but public funds was right at $15 million of that. So just a couple of million dollars. So that was a very good number for us for the fourth quarter. Our noninterest-bearing deposit portfolio changed 1 basis point. We were 29 basis points to total deposits, down from 30 last month.

So overall, still very happy with those numbers as well. On a year-to-date basis, a couple of just highlights, I think, to point out, operating earnings for the year increased $28.4 million. That was — right at 42%, up to $96.7 million. Our loans, excluding the acquisition of Heritage on one increased 6.3% for the entire year, which was $237 million. Assets overall grew $1.5 billion up to $8 billion and our cost of our deposits averaged 109 basis points for the year. And then our net interest margin on a fully tax equivalent basis on a year-over-year basis actually increased 40 basis points. Just a couple of notes on the bond sale. We did put on a case you did see that I’ll go over really quick for you. But we did have a $9.7 million loss on $123 million bonds that we sold.

They had a weighted average book yield of 1.12% and an average life of three years. So $92 million of that was reinvested, yielding estimated 5.33% and then we paid off $30 million of our bank term funding program that had a rate of 4.82%. So overall, with that shifting of balance sheet, we earned — the earn back will take 2.1 years. That’s expected $4.7 million increase in our net interest income and then about 8 basis points related to margin improvement. A couple of notes just in general and other. Our liquidity position remains strong. Loan deposit ratio is 80%. We still have about $2.2 billion in our borrowing capacity and 40% of our securities are unpledged, which is about $680 million. Over the next — this year, really 2024, we have about $205 million in cash flow that will generate out of our bond portfolio.

And then our capital ratios were in line, TCE 7.9%, leveraging about 9.7% and total risk-based 15%, all in line basically with the last quarter. Our return on average assets operating was 95 basis points and efficiency ratio was 62 basis points. So all in all, overall, I think it was solid. It’s just deposit increase. Deposit costs were up as expected and moving forward. Thanks, Hoppy.

Milton Cole: Appreciate that. JJ will give us some [indiscernible]

JJ Fletcher: Thank you, Hoppy. I think for the third time, I’ll mention about $80.2 million in loan growth. So very happy to see that and as Dee Dee and Hoppy both mentioned, in line with third quarter, so about 6.3% annualized really for the whole back half of the year. So I think we’re encouraged with loan production really for the second half of the year. December finished on a high note, which you never know at the end of the year, how things are going to pan out, but we had over $100 million in originations and also saw an uptick in our actual funded loans as compared to bank for future construction at about 70% were funded in December. That historically has been 50% to 60%. So that gave us a boost at the end of the year.

Unfunded construction commitments, however, remained steady and virtually unchanged since quarter 3. So we still have enough underfunded commitments to run out for 2024. So we’re encouraged by that as well. Small contraction in pipelines at the end of the year, I think we did close a lot by December 31. But anecdotally, at the end of the year and into the first couple of weeks of January, a lot of conversation about new credits. So very encouraged about where we’re starting 2024. Regionally, I just want to mention Louisiana had a great quarter. We talked about on our last call, the integration of the new team there in New Orleans. They actually contributed about $38 million in net loan growth for the quarter, just in that market. So very encouraging there.

Tampa and Private Bank, as I usually say, had great quarters as well. And then we also saw a pretty nice uptick in our cash value lending program in the Heritage legacy market really for the first time, had a nice increase in the outstandings in the fourth quarter. So as Dee Dee mentioned, average yields for the quarter continued to tick up. We got to 8.26% for the quarter — for the fourth quarter. We finished the third quarter at 7.67%. We have a pretty rigid pricing model nowadays with hurdle rates and anything above certain rates have to go to myself or Hoppy. So I think we’ve been diligent in our pricing the last quarter, actually the last couple of quarters. And then regarding personnel, a lot of exciting movement in the fourth quarter.

We had a couple of hires, one, particularly in our North Atlanta market that we’re very excited about, bringing a lot of experience in the commercial and construction market to augment that team. And then we actually had four offers out before the end of the year, three of which have been onboarded as of the date of this call. So we’re very excited there. Most strategically, a new regional executive for the Tampa site peak market, and that gentleman brings about 40 years of experience in that market with a high level of experience in commercial, wealth management and private banking. So we’re very excited about 2024 in Tampa. Lastly, George may correspond on this, we had migrated the rest of the HSBI team to our LOS platform. And then with George’s help continue to add efficiency to our small business lending group during the quarter.

So a very encouraging quarter, and I think 2024 hopefully starting out as well. So turn it back over to you, Hoppy.

Milton Cole: Thank you, JJ. George, can you talk about credit quality?

George Noonan: Thank you, Hoppy. We continue to see acceptable and moderately improving trends for most of all of our credit quality metrics during the year and certainly in the fourth quarter. The leading indicator metric for credit quality trend balances, 30-day delinquencies reflected the year-end improvement to 23 basis points of the best quarter finish of the year and nicely below our annual average of 38.4 basis points. So good trend there. Asset quality continued to show improvement throughout the year. And using the end of quarter one as a benchmark as that was the first full quarter operating post-merger with HSB. Loans on nonaccrual approved from $17.3 million down to $10.7 million at the end of quarter 4. That’s an improvement of 38% in nonaccrual loans for the three quarters full operating post HSB merger.

Over the same time period, NPA assets as a percentage of total loans improved from 45.1 bps at the end of Q1 to 39.3 bps at quarter end, quarter 4. Net loan charge-offs, as Hoppy mentioned, we’re 6 bps total criticized and classified loans also tracked very positively reflected by a reduction from Q1 at $143 million down to $107 million at year-end. We saw a decrease quarter-over-quarter at the end of quarter four of $11.2 million over quarter three. That included payoffs of $5.8 million in criticized and classified loans. So as a percentage of capital plus ACL, the C&C loan ratio improved year-over-year from 15% down to 12.39%. Again, a strong emphasis on our balance in our loan portfolio mix on our occupied CRE at 25%; nonowner-occupied CRE at 21%; 1-4 family at 19; C&I at 15 and C&D at 12%.

Those represent the major categories in the balance and continued focus on that. In CRE, we do continue to place a lot of emphasis on maintaining our balance there. As the exposure chart on Page 18 of your debt illustrates in the note professional office at 24% of CRE does represent both the owner-occupied and nonowner-occupied categories. Of course, retail center, retail stand-alone hotel, warehouse and industrial round out our top CRE categories. It’s depicted in that. A closely watched asset class, of course, our professional office credit quality has held up very well throughout the year. Substandard office loans were 4.2% of our total office portfolio with an average loan size of $733,000 in the nonowner-occupied office category. Our preference to stake was smaller and minimally vertically constructed building types under four floors across both our legacy as well as our acquired markets has served us very well.

We’ve noted in the past that even in our nonowner-occupied loan portfolio, a number of office property loans in that category have a fairly sizable borrower related entity owner occupancy presence about them. So even in that category, there’s a good mix of owner invested ownership. We’ve seen minimal lease renewal issues in office, acceptable tenant quality and B2B credit issues in our office loan portfolio, though insurance costs have had an impact for some borrowers that issue will be watched very closely for our operating margin progression throughout the year and as one item to really provide some focus on this year. In dollar terms, with only 14% of the office portfolio maturing through 2025, the majority of the office portfolio will likely be maturing in a more favorable rate environment in terms of borrower coverage capacity.

So not that big of a slice, if you will, at 14% in the next two years. And in summary, asset and credit quality really did reflect a strong resiliency for the year and by applying the same principles and management through our credit approval and administrative processes into 2024. We look forward to supporting the bank in a similar fashion.

Milton Cole: Thank you, George. That concludes our prepared comments. I think we’ll open it up for questions now.

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Q&A Session

Operator: [Operator Instructions] The first question that we have for today is coming from Catherine Mealor of KBW.

Catherine Mealor: I will start with the margin. And as you mentioned, it was a little bit more compression this quarter than expected. But honestly, the cost of interest-bearing deposits was it really that much higher than where you were thinking the year number. I think I had in my notes last quarter, you thought it’d be somewhere between 210 and 215. We came in at 218. So you’re just a little bit above that. Was there anything else within kind of — maybe the balance sheet or the margin — the composition of your margin that really drove the greater compression this quarter. And then curious how you’re thinking about how the margin is going to react over the course of the year if we get rate cut. I think last quarter, you also had said you thought the margin can get back to 3.60% by the end of the year, and that’s a much bigger delta from where we are today. So just curious what you think that potential upside could be as we work through the year.

Donna Lowery: Yes. On the start, I think we had kind of indicated that we could kind of have the same amount of compression in the fourth quarter that we did in the third quarter. And I really think probably a little higher than what it was, was just more of the repricing of our current book with that special. We had a lot of the non-new money that reprice during the quarter really, I think, drove that more than we probably expected that would reprice. On the margin compression, I mean, on the comment for the margin for — I’m sorry, what was the second question?

Milton Cole: Was the — getting the margin up back to…

Donna Lowery: Yes, yes. I’m sorry. yes. I’m sorry, what I had said last quarter.

Catherine Mealor: I had a long-winded question for Dee Dee. So it’s not your fault.

Donna Lowery: [indiscernible] I’m sorry. Anyways, what we had said last quarter was our modeling was showing that for 2024, we could have expansion of 8 basis points or so in our current modeling and our ALM modeling.

Milton Cole: That was prior to the bond restructure.

Donna Lowery: That was prior to bond restructuring, yes, that was just what our current modeling was showing for 2024. And we had kind of indicated that we felt like that would be in the latter part of the year with getting — when we started maybe having some expansion, but that 8 basis points or so would be later in the year. So I believe that’s kind of what we indicated.

Catherine Mealor: Okay. And that’s with or without rate cuts?

Donna Lowery: That’s without rate cuts. That’s just what we’re modeling right now. I believe our modeling has no change built in right now.

Catherine Mealor: So still the 8 bps up guide, but maybe we’re coming from a lower base — the thing you add in the bond, but then you add in the bond restructure, so maybe your net not the same.

Donna Lowery: Right. And so I indicated a little bit our net interest margin fully tax equivalent at $3.52 last quarter, guess you’re adding eight to that for $3.60. But I’m still looking at our modeling is showing about 8 basis points. Next year, December in yet, but through November, it was still showing about 8%. So yes, obviously, it’s off a lower base. So I don’t think the $3.60 is where that will be.

Catherine Mealor: And how do you think your balance sheet will react when we start to get rate cuts?

Milton Cole: I think that we’ll have more opportunity on the deposit side to increase our rates that hopefully on the loan side, hopefully, it’s pressured on the loan side with that given our fixed rate — fixed rate nature of our portfolio that we’ll be able to reprice deposits quicker than repricing loan rates down. So I suppose a little bit more liability.

Catherine Mealor: Yes, for sure because [indiscernible] momentum.

Donna Lowery: Yes. So I would say it’s kind of like it’s been on the SI. We’ve been slower as the rates went up to increase on the asset side just because of the fixed nature of the portfolio. So I think that definitely be slower and more opportunity on the deposit side.

Catherine Mealor: Okay. Great. So still enough momentum on the fixed rate side to offset to kind of help the margin and when yields move up even with rate cuts.

Milton Cole: Can you say that again — say that one more time.

Catherine Mealor: Even with rate cut, there’s enough momentum in your back book to reprice upwards to still push the margin higher?

Donna Lowery: I think so yes, because [indiscernible] those are coming out of , yes. for sure.

Catherine Mealor: Great. Okay. And I think last quarter, you had said you had about $100 million of fixed rate loans repricing each quarter. Is that still where you stand for 2024?

JJ Fletcher: We just were looking at that. That sounds reasonable. We’re pulling that right now for next week. Yes.

Catherine Mealor: And about — as we model that about where is your — I mean, I know I can look at your entire loan book, and it’s been around 6%. But is there a way to think about where the current fixed rate loan book is and where that’s repricing up to?

JJ Fletcher: So we’re actually George and I were talking about that this morning. I could get you that data more specifically. But what it has been the last couple of quarters, the renewals are in the mid-5% range because these are typically five years back, so before the rate cuts. So typically in that 5%, 5.5% and those are all really going into the 8-plus% range right now, unless on an exception basis.