Business First Bancshares Inc (BFST) 2024 Q2 法說會逐字稿

Thank you for standing by. My name is Mandeep and I'll be your operator today. At this time, I'd like to welcome everyone to the Business First Bancshares Q2 2024 earnings call. (Operator Instructions)

Thank you. I would now like to turn the call over to Matt Sealy, Senior Vice President, Director of Corporate Strategy and FP&A. You may begin.

Good afternoon, and thank you all for joining. Earlier today, we issued our second quarter 2024 earnings press release, a copy of which is available on our website, along with the slide presentation that we'll reference during today's call.

Please refer to slide three 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 at our website at www.b1bank.com. Please also note our safe harbor statements are available on page seven of our earnings press release that was filed with the SEC today. All comments made during our call today are subject to safe harbor statements in our slide presentation and earnings release.

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 that you may have.

And with that, I'll turn the call over to you, Jude.

Okay, thanks, Matt. Good afternoon, and thanks, everybody, for taking time out of your schedule to have this conversation with us. The quarter was, for us, relatively straightforward and generally positive. Our team produced a healthy rebound in net interest margins and an appropriate amount of loan growth, an improvement in the composition of our deposit base, an increase in the capital level to intangible book value, and our asset quality remained consistent, an all-around solid quarter.

In the last quarter, I noted that in our world, still small on a relative basis, there are always a handful of things that can go either way based on a limited number of relationships. None of these individually make or break a quarter, but sometimes they happen to line up in the same direction, and when they do, they produce outsized movement in the aggregate quarterly results, even though they may not be truly indicative of the larger health of the franchise.

In the first quarter, you'll remember we had a number of elements go the wrong way concurrently, and that led to weaker-than-desired quarterly results, even though the franchise, when viewed from a broader time horizon, continued to move in the right direction. In this quarter, we had something of the opposite effect. The health and direction of the franchise remained strong, but we also had a handful of events leading to outsized positive results. I'd like to highlight a couple of the most material items so that you'll be aware that, while real earnings, they may not yet be repeatable on a regular basis.

First, we benefited from the sale of a newly originated USDA-guaranteed loan, which produced a gain of $1.9 million. While our pace of government-guaranteed loan production is accelerating, we don't expect to have very many of these kind of lumpy opportunities at this stage of our development, so it does offer a window into what's possible down the road as we continue to build out our capacity.

Second, our core earnings benefited from about $1.7 million in loan discount accretion, which is roughly $900,000 higher than that of the prior quarter, or $700,000 higher than market expectations, which are generally reflective of our normal run rate, at least until we close the Oakwood acquisition.

While I'm pleased to have these earnings, and certainly prefer things going our way as opposed to the opposite, I think it's important to not give the impression that they are easily replicated. And so I'd like to point out that after adjusting for these unique movements, we estimate the core profitability for the quarter at closer to $14.3 million. Still quite positive in excess of consensus expectations.

Beyond short-term earnings, I'd like to emphasize our longer-term success transitioning our balance sheet. As you know from our communication over time, we decided nearly two years ago to slow loan production in order to effectively manage growth through retained earnings, while also relieving pressure on the funding side of our balance sheet.

With each quarter, we've improved a degree or two, and I'm pleased that in the current quarter, we both have created capital, about 10 basis points, and continue to improve the composition of our deposit base. For the first time in a number of quarters, increasing both the absolute and relative level of non-interest bearing deposits, and continuing our trend of paying down levels of wholesale funding.

This has paid off in the form of a more stable margin, which I was proud of our team for actually growing over the course of the second quarter, first time in seven quarters. Finally, I'd like to mention that we are currently on pace to consummate the acquisition of Dallas-based Oakwood Bank, and should do it in the fourth quarter.

Having gotten to know our future teammates better since the announcement with the earnings last quarter, we're even more excited about the partnership than we were when we announced it. I believed at the time they'd be a good cultural fit, and now I know it. So, congratulations to our team for what was a solid second quarter, highlighted by improved metrics essentially across the board.

Thanks again to our listeners today for prioritizing us, and I'll now turn the call over to Greg Robertson, our CFO, to review results in greater detail.

Thank you, Jude, and good afternoon, everyone. I'll be brief in my comments, as we believe the second quarter results were relatively straightforward. Second quarter GAAP net-income and EPS available to common shareholders was $15.9 million and $0.62, and included $419,000 of pre-tax acquisition-related expense. Excluding this non-core item, non-GAAP core net income and EPS available to common shareholders was $16.3 million and $0.64.

As Jude mentioned, there were a couple larger items that drove our strong core operating results. However, adjusting for these items, we still feel like our core run rate results for the quarter were very favorable and still better than we had expected. Our GAAP reported net interest margin of 3.45 benefited from $1.7 million in loan discount accretion, which was higher than expected.

Core NIM, excluding accretion of 3.34 was also a little better than we were expecting. The 7 basis points linked quarter expansion in the core NIM benefited from continued strong new and renewed loan yields, repricing tailwinds and moderating funding pressure. A little context there, our weighted average new and renewed loan yields for the second quarter was north of 8.50 while our quarter-over-quarter increase in total deposit cost was just 10 basis points, which, comparing to the trailing eight-quarter average quarterly increase in deposits, a cost of 33 basis points.

While deposit costs did continue to increase during the quarter, that rate of increase slowed considerably. The alleviation of these funding pressures was driven by net growth in non-interest bearing deposits of $15 million during the quarter and net growth in core money market deposit accounts of $130 million. The positive momentum in core deposit generation allowed us to repay $75 million in higher cost broker deposits during the quarter. Non-interest bearing deposits as a percent of total deposits increased slightly from 23.2% last quarter to 23.5% this quarter.

Moving on to the income statement, GAAP non-interest expense was $43.1 million and included $419,000 of acquisition-related expense. Core non-interest expense of $42.7 million increased $900,000 or 2.1% from the prior quarter, which was in line with our expectations. While we continue to track and retain top talent, broader wage pressures remain elevated and we are expected to drive increases in future quarters non-interest expense. We view the Q2 core non-interest expense figure of $42.7 million as a relatively good run rate to build off of going forward.

Second quarter GAAP in core non-interest income was $12.2 million as there were no non-core items recognized during the second quarter and as previously mentioned, the core non-interest income did benefit from the $1.9 million gain on sale from a newly originated USDA loan.

In addition to greater originations and sales in SBA related to our recent acquisition of Waterstone. While we expect meaningful contributions from our fee income business lines going forward, we would not expect the unusually high gain on sale from Q2 to continue in the immediate future.

Moving on to the balance sheet, total loans held for investment increased for $74.0 million or 5.9% annualized during the second quarter. Loan growth was largely attributable to the net growth in the C&I portfolio of $93.4 million, somewhat offset by $24.6 million in reduction in our C&D portfolio and also $17.1 million reduction in the investment CRE portfolio.

I'm proud of our team's continued focus to drive production through key commercial relationship wins. The North Louisiana region accounted for 60% of our net loan growth during the quarter while our capital and Bayou regions each produced 21% of our Q2 loan growth. Our Texas-based loans represent approximately 36% of our overall loan portfolio as the end of Q2, which we do not expect to increase meaningfully. We do expect to increase that meaningfully with our pending Oakwood acquisition. And that concludes my prepared remarks.

I'll hand the call back over to Jude for anything you'd like to add or we will open up the Q&A.

Thanks, Greg. I don't really need to add anything. We'll jump to Q&A..

(Operator Instructions) Matt Olney with Stephens.

Thanks. Good afternoon. Great quarter. I wanted to ask more about deposit costs. You mentioned the deposit costs, the pressure starting to ease in the second quarter. I'm just curious if you could provide some more details around deposit costs, pressure, just more broadly in your markets.

It seems like the pressure should be easing quite a bit, given the expectations of a Fed cut here around the corner. But I guess we're hearing some mixed data points on that. So I'd appreciate any commentary on deposit costs, pricing pressure within your core markets.

Thanks, Matt. I think the deposit cost is really a two-fold answer for us. If you think about the success we've been having in the money market space, that weighted average rate for those new balances coming on, or new deposits, in March was about 5.2. In June, that weighted average was about 4.88. The spot rate for a new deposit in June, just for a new deposit in that money market category, is about 4.65. We are seeing that come down slightly over time.

I think the caveat to that, and the second part of the question for us is the increased or consistent gathering of those non-interest bearing deposits that we had mentioned a few minutes ago. For the first time in quite some time, that percentage of non-interest bearing deposits did show some slight growth. Although not a lot, but I think it's important to see that flatten out and slightly uptick for us, because that's a huge component of funding costs as well.

I appreciate the cover there. Maybe I'll also ask about the pending acquisition of Oakwood. I think you had some expectations of Oakwood seeing some improved profitability on their own on their core fundamentals before deal closing. Any color you can provide about what they're seeing in their recent results, and then secondly, just a bit of thoughts around the timing of the deal closing. Thanks.

I'll start. I think their results are similar to ours. They've shown some of the same pressures that we had in the first quarter on margins and growth, but I've had a strong second quarter, and they haven't published their results yet, but I think they've improved in many of the same ways that we have. There seem to be some similarities in the performance of the portfolios, and I would say that's true from an asset quality standpoint as well.

It speaks well to the potential integration that we're preparing for. Nothing remarkable to address other than that. We're still on pace to do the fourth quarter legal close, and then we'll do the integration from a computer system standpoint at some point next year. Not quite sure yet what date that'll be. Still kind of coordinating the different providers, but as of now, acquisition as we were going to model it seems to be playing out the way we would like it to.

I would add a little bit more context on their Q2 financial performance. We're not going to go into any details, but we did receive preliminary results from them, and from a modeling financial outlook perspective, they're very much still on track with our initial forecast and modeling at time of acquisition. Balance sheet trends remain strong. Profitability trending in the right trajectory and direction as we initially anticipated.

Thanks for the color on the Oakwood deal. Maybe lastly, on the loan growth front, we saw some of the paydowns in the construction book, some really nice growth in the C&I. I think this is that mix shift you've been talking about now for the last few quarters.

Is this something we should just continue to see as far as a mix shift of some growth in C&I offset by some construction paydowns? Is this just kind of the expectation we should have along with that loan growth of mid-to-high single-digit growth overall? Thanks.

This is really kind of the next act in a longer play, and we've been transitioning the balance sheet. I mentioned it generally in my opening, but -- one of the specific elements that I didn't mention was the decrease in concentration exposure to C&D and CRE that we've been able to accomplish over the past five quarters or so. I think over about a five-quarter period, we've moved from about 120% capital, tangible capital, in construction exposure down to the low 80%-wise now, so pretty dramatic movement.

That comes after a significant amount of coordination and work, everything from talking about it culturally to making sure that it worked for us financially in terms of shift to thinking about incentive plans. None of those were done as short-term fixes.

This is a long-term cultural approach that we would like to run at a lower concentration level on construction and on C&D. The way to be able to do that and still earn money is to work on your other types of lending, which includes C&I, and on your non-interest income. There's ways in which we've been working to offset some of the pullback and exposure to construction that seems to be working. I would consider that a longer-term part of our model as opposed to a short-term movement.

Okay. Thanks for the color, guys. Great quarter.

Thank you.

Michael Rose with Raymond James.

Hey. Good afternoon, guys. I hope everything is well. I just wanted to ask on the fees. In the loan sale gains, if I back out the $1.9 million, you still had pretty good gain on sale loans. I just wanted to get a sense now that Waterstone has been in the fold for about a quarter.

How would you size that opportunity, and how should we think about the trajectory of loan sales as that business continues to grow and ramp? Separately, I wanted to ask about SSW. Looking at slide 16, it looks like there's been just generally a downtrend in AUM. That kind of goes against what we're seeing in other similar types of businesses out there. I just wanted to get some color and context. Thanks.

I'll start. I think that the -- Waterstone partnership is just getting started. We really have focused more on Waterstone's ability to impact our internal SBA generation, which we're showing significant traction there in picking up days. I think the loan sales that you'll see -- not including that outsized one, are probably representative of the beginning of the trend that we see shaping up.

I would expect that not to take off in the next couple quarters, but I would think it would be incrementally stronger. Certainly by next year, we hope for that to be a more meaningful part of the business. I have not grown a lot on the non-P1 side of their franchise yet. Part of that, I think, is just that we're spending a lot of time pursuing opportunities internally, which is a good problem to have.

On the SSW, the thing that does make our company different from most of the asset management companies that you might compare it to is that it's almost all fixed income. The core of their business is serving other banks, helping to manage their investment portfolios. Michael, as you know, pretty much every bank has suffered a diminution in their assets and investment portfolios due to AOCI.

Many of them, as they are turning those investments to liquidity or trying to put the work in, are doing well. The bank portfolios in general, or at least community bank portfolios that would be our natural client base, do have smaller portfolios. SSW continues to serve the same number, if not more clients than they did pre-shift and interest rate exposure.

I would say we have more clients and I don't know the exact number, but the average size bank investment portfolio in our portfolio is smaller. So it's not indicative of losing any business, it's just smaller client investment portfolios, which as rates turn around, you begin to see AOCI impacts lessening. I think it would be natural to see that AUM begin to come again. They are paid on a fee that's based on the size of AUM, so that does hurt their earnings, but nobody's going to think that that's a long-term problem. Greg, I don't know if you want to give more data on the expectations for the gain on sale.

Michael, two things. The gain on sale, if you back out the one-time USDA, I think our run rate that we feel is pretty good for Q3 is about 10.4 and maybe incrementally higher, a couple hundred thousand higher for Q4. I think that's a good spot -- good run rate for that.

One more note on the SSW. Jude's comments were exactly right. When the rate environment changed in the end of Q1, beginning of Q2 and '22, they increased their bank coverage universe or their bank clients significantly.

I think here lately, part of the move of the assets under management on a downward direction, they've had a handful of clients that they've advised securities portfolio restructurings, and those clients chose to pay off broker deposits with that or put back in the loan portfolio and not reinvest in the securities portfolio. Outside of AOCI, they were advising the client to do the right thing and it caused their assets under management to go down. They still manage those banks' portfolios, but they are smaller because of that.

And well, one other thing, Michael, I'd point out that we added this quarter to the SSW slide the number of bank clients over time. We added a trend line over that graph. To Greg's point, you can see the increase in the pickup right before and as rates started to move up. More notably recently, while AUM has trended down over the past six, eight quarters, we've managed to maintain the actual number of bank clients around 50.

A very detailed response. I appreciate all the color. Maybe just one more for me. Greg, I think last quarter you talked about a very similar non-interest expense starting point and then 2% to 3% growth on top of that over the next few quarters. Is that still the thought process and what would be some of the drivers of that growth? If you could just remind us. Thanks.

Yeah, we think $175 million at the end of the year is still the end point. Those numbers we talked about last time still remain consistent. I think we're still looking at continuing to invest in the franchise from a personnel standpoint and then you've got the back half of the year with some seasonal bonus related expense I think is really going to be the drivers of those.

Thanks for all the color. I appreciate it. Thanks, Mark.

Thanks, Mike.

Feddie Strickland, Hovde Group.

Hey, good afternoon, everybody.

Hey, Feddie. Welcome back.

Thank you. Just wanted to go back into deposits. You mentioned in the deck you had some strategic decision to let some brokered roll off. If we get some rate cuts sometime soon here, can you talk about how much opportunity you have on the liability side to move some of that down, whether it's brokered CDs or customer CDs?

I think what we've done and worked real hard over the last year, the first answer to your question would be we have about [$1 billion] now on the balance sheet today, maybe slightly higher than that, in money market accounts. If we can control that pricing with some rate cuts that's one thing we've worked to get the balance sheet in a more neutral position. That's been a big driver for us.

I think the second part of your question is in the third quarter we have about $66 million in brokered that is maturing. Then in consumer, customer related CDs we have about $450 million maturing before the end of the year. I think the weighted average on both of those are elevated from where we're seeing spot rates coming in today.

There are some opportunities for us to improve in a downward rate environment with even one rate cut. We feel pretty good about that. We'll keep managing that opportunistically. I think we've worked real hard to make sure every month and within the quarter and every quarter we have the ability and some optionality from a funding standpoint in regards to price.

Appreciate that. That's helpful. Then kind of along the same lines is it fair to assume a lot of the [DA] growth you're seeing is coming from success on the C&I side with new operating accounts or is there another factor driving that?

I think it's twofold. That first part you're exactly right. I think our bankers are doing a great job of bringing on those new meaningful C&I relationships that bring those deposits. I think the second part is the structure of this money market account requires to get that highest rate, it requires a meaningful non-interest bearing deposit account. That means there has to be a certain amount of activity, debit card action, those kind of things. I think it's twofold both on the retail and the commercial side of the bank. The bankers are doing a great job.

Got it. One last question from me. I noticed the CRE special mention percentage went up. I think it was 2.4 to 7.5, if I remember correctly, in the deck this quarter. Can you talk a little bit about the drivers behind that? I understand the more adversely classified actually went down, which is a positive, but just wanted to understand what was the driver for that jump in special mention in the CRE book?

Yeah, I think we've got a couple of things. I think there are some credits that in this rate environment, you can obviously see there's maybe some cash flow issues. Those loans are still paying as agreed. I think the other part of that is as we continue to grow as a bank, and you'll probably hear us talking about this more in the future, part of that growth and continuing to grow is looking at our risk ratings on loans and going through a process of essentially re-risk rating to get more granularity.

So I think that's probably twofold. The interest rate environment, the economic environment is driving part of it. Part of it is on us trying to be a little more granular, identifying credits. But we still remain in good shape. We feel good about the portfolio.

Got it. Thanks, guys. Congrats on a great quarter.

Thanks, Eddie.

Manuel Navas, D.A. Davidson.

Hey, good evening, guys. Can you talk a little bit about your near-term NIM outlook as the kind of loan discount, think of it as both reported and core as that loan discount kind of normalizes? Can you just talk through that a bit?

I'll jump in first, and maybe Matt could fill in some of the gaps. We feel like the core NIM we're looking at low single-digits to mid-single-digit improvement over the next few quarters. We think that's, we feel like loan yields we expect to continue to see mid-850 on the loan yield side and if deposits continue to flatten, we think we'll be able to achieve that. As far as the GAAP numbers, directionally the same. I think the accretion income should stabilize here going out to about $700,000 per quarter. Is that right?

Yeah, I'll give a little bit more call-out to core and we've got, I think we spoke in the past about around a $3.50 kind of core margin outlook in the somewhat near-to- intermediate-term future. We have a slide in the presentation that details the repricing opportunities within the loan portfolio that turns over in the next 12 months. About 48% of loans are a little over $2 billion that's going to reprice.

I'm happy to circle up offline and kind of walk through what that implies. A big picture directionally over the next 12 months that implies that we should be able to hit that $3.50 core margin by springtime-ish next year and more near-term, like Greg had mentioned, low to mid-single-digit basis point pickup on the core margin and then that might accelerate to a few more basis points early next year and then on the GAAP margin side, I think that accretion drops down from $1.7 to probably $700,000. All that, obviously, before Oakwood as well.

Right. What's the pace of that $700,000 dropping off? Will that kind of diminish this year a bit or more next year? Make sure it gets replenished by Oakwood. I understand that, but I'm saying just this accretion percent part.

Right. I think that that $700,000 would sustain at that level at least for the next couple quarters, probably the next 12 months. Honestly, we could see an average around $700,000 per quarter.

And then I guess this is what I was leading with some of these questions. Because of the repricing opportunity, you should see that grind higher, actually just straight expansion through the first couple rate cuts. Is that the right way to think about it?

You mean on the loan repricing side in a rate cut scenario?

In a rate cut scenario, your MIM will continue to expand.

Correct, yes. We still see repricing opportunity with the existing books even if we got some cuts. Just for some context, that repricing slide, the 48% that are repriced in the next 12 months, about $2.4 billion, that's sitting currently on the books at a weighted average rate of 8%. We're doing loans right now in the mid-8%. I think the beta on new loan yields in a cut scenario would not be 100% by any means. We're still going to get some tail lift on the repricing side even in a rate cut scenario.

I would say just directionally speaking, the magnitude of the net impact from that repricing in a flat rate environment would probably hold as we're relatively neutral now because of the benefit coming from lower funding costs that would match whatever the incrementally lower upside from the repricing on the loan side. It's about 50 basis points to 60 basis points pickup on that portfolio that would reprice in the next 12 months in a flat rate environment. That goes down a little bit, but then obviously so would funding cost pressures.

I appreciate that. What does your commercial pipeline look like and do you sense some potential excitement from your customer base if there are rate cuts? Would that potentially increase your desire for loan growth and the borrower desire to take out loans? Are you seeing that in the pipeline?

I think our pipeline is still quite healthy. We had outsized payoffs this quarter and still grew almost 6% annualized. I think we had about $200 million in payoffs. That wasn't necessarily folks going to the banks. It was people who had projects that sold or matured for other reasons as well. I would assume that if rates go down that there would be increased demand as more projects become workable.

I will say though that our pace of growth is really based on our internal decisioning around use of capital and wanting to grow within our retained earnings. I wouldn't anticipate necessarily skyrocketing our growth percentage on loans just because rates go down. I think we're going to continue to be selective and make sure that we're serving the best relationships in the best way we can. I wouldn't necessarily see a big movement in our growth just because rates go down.

We've reached -- as I've talked about on past quarters, we did have some size ambitions four years ago when we started our most recent five-year plan. We've achieved that particularly with Oakwood. and for now it's less about size and more about allocation of capital and making the most of the resources that we have. Those will factor into our growth rates just as much as demand will.

I would say also just another tool that we have is our participation network. We started this quarter thinking we might have to sell more than we did. With those outside sales we throttled that back. It was the first time that we really tested that market in a couple of quarters. We found that there was some demand there too. We're going to keep the pipeline open. (technical difficulty)

I would envision that might actually be a more likely outcome if we're able to offer more to our bank network that we've been developing through these different non-interest income streams.

That's really great commentary. Thank you so much. I'll step back into the queue.

Thank you.

There are no further questions. I would now like to turn the call back to Jude Melville for closing remarks.

I really can't add that much to that. I'm proud of our team for a good solid quarter. We've been grinding it out for a while and it's nice to see those efforts be rewarded with good returns. And we feel the past couple of years in particular have seen us improve the quality of our franchise and I look forward to continuing to do that.

I'm excited about the future no matter what macroeconomic surprises may or may not result. We're getting used to some volatility there and I think we're doing a good job of managing through them regardless. I look forward to visiting with you all again next quarter. Thanks everybody for dialing in.

This concludes today's call. You may now disconnect