Business First Bancshares, Inc. (NASDAQ:BFST) Q1 2024 Earnings Call Transcript April 26, 2024

Business 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: Thank you for standing by. My name is Mandeep, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Business First Bancshares Q1 2024 Earnings 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]. Thank you. I will now turn the conference over to Matt Sealey, SVP, Director of Corporate Strategy and FP&A. You may begin.

Matthew Sealy: Thank you. Good afternoon, everyone, and thank you all for joining. Earlier today, we issued our first quarter 2024 earnings press release, a copy of which is available on our website along with the slide presentation that we will reference to on today's call. Please refer to Slide three of our presentation, which includes the 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 seven 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: Great, thanks Matt, and thanks everyone for making us a priority this afternoon. We know you have a lot on your plate. We appreciate your interest. We have a lot to discuss today and want to leave time for questions, so I'll jump right in. To begin, we were disappointed by the headline profitability for the quarter. First quarter of the year tends to be our softest, but it was a little softer than normal this year because of greater than anticipated margin pressure and some expense timing. Core ROAA is 0.77%. Core ROAE is 8.9%, and core EPS is $0.50. Greg will provide more detailed specifics. The big picture I would say there wasn't one single quarter moving event that occurred. It was more an accumulation of small impacts.

We've been fortunate in that many quarters a number of small things have added up to outperformance. Sometimes the opposite occurs, and that was the case here. We've already taken a number of steps to remedy these relatively small things and anticipate a relative flattening of both margin and expenses over the remainder of the year, leading to improved profitability, which remains a priority. Margin movement in particular was positive in March, which leads us to believe some of these adjustments are working. Again, I'll ask Greg to get into further detail in a bit, but first I will take a moment to survey a few of the things that I consider most important about the quarter, not all of which will be reflected in the short-term results. First, the significant part of the margin miss was due to outside success and raising liquidity.

As you know, we've been working in particular over the past seven or eight quarters to transition from a company whose priority was loan growth to one that is more balanced and robust than its production expectations. We grew loans by approximately 8% annualized, a healthy rate of growth, and that growth was led by C&I relationships and growth in relationships in Texas. By comparison, we grew deposits by an annualized rate of 24%. The positive sign that the work we've undertaken to shift our purchases is undoubtedly taking hold. While we grew M&A accounts significantly, we also stemmed the tide for the first time in seven quarters of outflow of non-interest bearing accounts, remaining essentially flat, and experiencing an uptick the last half of the quarter.

Funded accounts show compositions of the deposit base, and we're pleased with improvement in the mix of funding sources. In present circumstances, if we're going to miss, my preference is to miss by gathering too much liquidity rather than too little, particularly given some of the opportunities we have on the horizon to continue putting those funds to work, and the fact that these deposits are relational. We conducted successful funding campaigns over the quarter, but the upside surprise is primarily the result of increases within existing accounts as we continue to grow with our clients. Second, another of our priorities in coming years and quarters is to increase non-interest income. This quarter, we were able to consummate the acquisition of Waterstone, a loan service provider of SBA products.

This partnership gives us more internal capability for generation of SBA opportunities, who are already beginning to see an uptick in the pipeline for SBA eligible credits. Waterstone also serves other banks, and we look forward to incorporating their work into our nascent correspondent banking function, along with investment portfolio management, loan participation in deposit collections, and an internal swap desk. We shifted some management positions around to be certain we're given the opportunity proper attention, and look forward to seeing this portion of our revenue stream grow over the coming quarters. The acquisition had an unprojected impact this quarter on tangible capital and earnings, and we're excited about that investment. Finally, we're pleased to announce the acquisition of Oakwood Bank in Dallas, Texas.

There's an in-market transaction of approximately $830 million in assets, and a similar culture and client focus. We believe the partnership to be a very logical next step in the continued development of our now meaningful presence in the North Texas market, bringing our total credit exposure in Texas to 44% of our loan book, and 31% of our deposit base. More important than the immediate impact, we believe the positions as well for accelerated future growth in one of America's strongest markets, both through physical presence, and through the addition of substantial talent, bolstering our commercial banking leadership in the market. This acquisition fits in squarely with the longer-term plans we've discussed with you on previous calls. Efficiency through scale, risk mitigation through diversity of the portfolio, and increased profitability through accretive growth.

I'm honored that the Oakwood team would agree to partner with us and would note the terms of the deal, leave our teams and our shareholders in linked arm alignment as we work together to continue development of our potential-filled franchise. It was a meaningful and positive quarter for B1 Bank, and I thank our team for all the effort they went into it. With that, I'll turn it over to Greg for further details for our Q&A period.

Greg Robertson: Thank you, Jude, and good afternoon, everyone. I'll spend just a few minutes reviewing our Q1 highlights, including some of the balance sheet and income statement trends, and we'll also discuss our updated thoughts on the current outlook. On slide 17 of our investor presentation, the first quarter GAAP net income and EPS available to common shareholders was $12.2 million and $0.48 per share, and included $715,000 of pre-tax acquisition-related expense and $50,000 of pre-tax gain on a former bank premises and equipment. Excluding these non-core items, non-GAAP core net income and EPS available to common shareholders was $12.8 million and $0.50 per share. As Jude mentioned, these results were softer than anticipated due to continued margin pressures and an elevated non-interest expense.

I'll start on the margin, as there are several items to unpack here. Our reported core net interest margin of 3.27% was down 11 basis points from the linked quarter, primarily due to three factors. Strong deposit production within our money market deposit product, which weighed on the margin from both a volume and a rate perspective. As we have mentioned in the past, we have been working to establish the balance sheet in a more great neutral position by attracting a high volume of non-maturity deposit accounts. Our goal has been to work the loan to deposit ratio closer to the low to mid 90% range, but admittedly we did not anticipate getting there as quickly as we did. The combination of higher volume and the current market rate environment weighed on the NIM.

First quarter total core loan yields continued to increase on a linked quarter basis. Results were driven by Q1, new and renewed loan yields of 8.50%, which fell short of our expectations at about 8.65%. We also benefited from a large municipality credit during the quarter, which came with a tax component and a $26 million in low cost deposits. The headline rate was about 7% on the relationship, which we were comfortable with, given the deposit side of the relationship that did pressure overall Q1 loan yields. I'd like to point out some trends that throughout the first quarter on the margin that should be helpful in understanding where we've been and where we think we're going. Our core net interest margin was down the first two months of the quarter by 14 basis points.

Then in March, we actually picked up three basis points to end the quarter down 11. This was partially due to the fact that the overall total new deposit costs have been declining each month since December, which appears to have had more of an impact in the later part of the first quarter. We also benefited late in the quarter from an inflow of non-interest bearing deposit relationships, the quarterly impact of which was more muted during the quarter. Dovetailing off this last point, I think it's important that early in the first quarter, we experienced impactful outflows of non-interest bearing funding starting off like that, behind the curve was a challenge from a margin perspective. That said, we certainly are encouraged to see some solid traction in lower cost and non-interest bearing account wins during the first part of the second quarter.

We are pleased with the early Q2 relationship gathering efforts that continue on the funding side and we continue to see upside to the overall funding base and composition in the near term. The intermediate long-term, we aim to operate around a 350 or 350 basis point core NIM, which we view as realistic and sustainable in a higher for longer rate environment. Moving to the income statement, non-interest expense was elevated during the first quarter due to the Waterstone acquisition, which contributed to about $500,000 in additional expense during the first quarter. Additionally, we had a million dollars of incremental bonus related items during the quarter. And I would say, it was more related to the ending point of the fourth quarter being down and the first quarter being up to more normalized levels.

We also had a few IT related expenses in the quarter that we've been mentioning on calls that we have agreed to certain IT enhancements, and we brought those online sooner than anticipated. We view the core non-interest expense figure of $41.8 million as relatively good run rate going forward, and we would expect a modest increase from 2% to 2.5%, 3% each quarter for the remainder of the year. First quarter GAAP non-interest income was about $9.4 million with core non-interest income of $9.3 million, which exclude the small gain on former bank premises and a loss on the sale of security. Well, this is a fairly clean run rate going forward. There were several areas that came in lower than we expected, and therefore anticipate Q2 revenue from our fee income business segments to contribute in a more meaningful way going forward.

Now, if I could direct you to slide 19 on our investor presentation, pass-through loans did increase during the first quarter primarily due to one credit. That credit was about a $10 million exposure that we seem to today have resolved, so that would push those pass-through loans back to a more normalized $10 million a quarter in removal of that credit. Non-performing loans did tick up slightly, and they were really attributable to two loans that we have. Both of those relationships were reviewed, and we don't see any loss given default exposure in those relationships. The overall credit book remains, still remains very stable, with no outlier, with no movement, systemic movements other than those two outlier credit instances that I gave. Moving on to the balance sheet, total loan sale for investment increased to $96.1 million, or 7.7% annualized during the quarter.

Loan growth was largely attributable to the net growth in the C&I portfolio of $68 million, and then the residential real estate portfolio of $34.6 million somewhat offset by a $7.8 million reduction in the C&D portfolio. Proud of our team's continued focus on the drive and production through the key commercial relationship wins. DFW region accounted for 44% of the net loan growth for the quarter, while our Southwest Louisiana region produced about 29% of that loan growth, and Capital region produced 14% of the loan growth in Q1. Texas-based loans, as Jude mentioned earlier, represent approximately 37% of our balance sheet today of the overall portfolios at the end of the quarter. Deposit production exceeded our expectations during the first quarter, with total deposits increasing $324 million from the prior quarter, representing almost 25% annualized loan growth of deposit growth.

Non-interest-bearing deposits remained relatively stable both in terms of balances and in percentage of total deposits. We're pleased with the composition of our non-interest-bearing deposits and have held us at 23.2%, which compares to the prior quarter of 24.8%, and our prior outlook to hold in a low 20% range, while still early in the second quarter we encouraged by the level of core low-cost deposit gathering we've experienced in the first month of the quarter. Overall, we remain highly encouraged and optimistic in the prospects ahead. That concludes my prepared remarks. I'll hand it back over to Jude to wrap up.

Jude Melville: Good. Well, thanks, Greg. I think with that, we'll just jump to Q&A. We have a lot of movement in the quarter, and of course, we just announced the acquisition. I know people maybe haven't had time yet to digest it, but I look forward to answering any questions on that front as well.

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