Business First Bancshares Inc
NASDAQ:BFST
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Earnings Call Analysis
Summary
Q2-2024
The company reported a strong second quarter, achieving a GAAP net income of $15.9 million or $0.62 per share. Excluding noncore items, net income was $16.3 million or $0.64 per share. Key drivers included a 3.45% net interest margin benefiting from $1.7 million in loan discount accretion, and improved loan yields. Deposit costs are stabilizing, leading to strategic repayment of higher-cost broker deposits. Looking ahead, the company is optimistic about their fourth-quarter acquisition of Oakwood Bank and anticipates continuous growth in fee income and loan portfolios, despite a cautious outlook on extraordinary gains in the near term.
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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]
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 a slide presentation that we'll 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 at 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 with the SEC today. All comments made during our call today are subject to the 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 margin, an appropriate amount of loan growth, an improvement in the composition of our deposit base, accretion to capital levels and intangible book value and our asset quality remained consistent. An all-around solid quarter.
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, continue to move in the right direction. In this quarter, we had something of the opposite track. The health and direction of the franchise remains 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 and $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 get 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 and 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 2 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 accreted capital about 10 basis points and continued 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 noninterest-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 7 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 announcement with earnings last quarter, we're even more excited about the partnership than we were when we announced it. I believe 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 details.
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 pretax acquisition-related expense. Excluding this noncore item, non-GAAP core net income and EPS available to common shareholders was $16.3 million and $0.64. As Jude mentioned, there are a couple of 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 when comparing to the trailing 8-quarter average quarterly increase in deposits at cost of 33 basis points.
While deposit costs did continue to increase during the quarter, that rate of increase slowly -- slowed considerably. The alleviation of these funding pressures was driven by net growth in noninterest-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. Noninterest-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 noninterest expense was $43.1 million and included $419,000 of acquisition-related expense. Core noninterest 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 attract and retain top talent, broader wage pressures remain elevated, and we are expected to drive -- and are expected to drive increases in future quarters noninterest expense. We view the Q2 core noninterest expense figure of $42.7 million as a relatively good run rate to build off of going forward.
Second quarter GAAP and core noninterest income was $12.2 million as there were no noncore items recognized during the second quarter. And as previously mentioned, the core noninterest 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 $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 and 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 at the end of Q2, which we do not expect to increase meaningfully. We do expect to increase that meaningfully with our 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 for Q&A.
Thanks, Greg. I don't really need to add anything. I will turn to Q&A. Looking forward to hearing your questions.
[Operator Instructions] Our first question comes from the line of Matt Olney with Stephens.
Great quarter. I wanted to ask more about deposit costs. You mentioned the deposit costs, the pressure starting to ease in the second quarter. Just curious if you could provide some more details around deposit cost 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 appreciate any commentary on deposit costs, pricing pressure within your core markets.
Yes. Thanks, Matt. I think the deposit cost is really a twofold 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, our new deposits in March was about $502 million. In June, that weighted average about 4.88%. The spot rate for new deposit in June just for new deposit in that money market category is about 4.65%. So 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 noninterest-bearing deposits that we had mentioned a few minutes ago. For the first time in quite some time, that percentage of noninterest-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 cost as well.
Okay. Appreciate the color there. And then 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 the core fundamentals before deal closing. Any color you can provide about kind of what they're seeing in their recent results? And then secondly, just a bit of thoughts around the timing of the deal closing.
Sure. I'll start. Matt, I think that their results are kind of similar to ours. We -- they've shown some -- they showed some of the same pressures that we had in the first quarter on margin a little bit and growth, but they've had a strong second quarter. And they're -- 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.
So it just speaks well to the potential integration that we're preparing for. Nothing remarkable to address other than that. They -- we are still on pace to do the fourth quarter label close, and then we'll do the integration from a computer system standpoint at some point next year. We're not quite sure yet what that will be. So kind of coordinating the different providers. But as of now, the acquisition as we originally modeled it, it seems be playing out the way we would like it to.
Matt, I would have 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 kind of initially anticipated.
Okay. Thanks for the color on the Oakwood deal. And then just 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 kind of 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? And is this just kind of the expectation we should have along with that loan growth of high single -- mid- to high single-digit growth overall?
Yes. 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 5 quarters or so. I think over about a 5-quarter period, we've moved from about 120% of capital -- tangible capital in construction exposure and down to the low 80s percent wise now. So pretty dramatic movement.
And that comes after a significant amount of coordination and work, everything from talking about it culturally and making sure they work for us financially in terms of shift to thinking about incentive plans. And those are all -- none of those were done as short-term fixes. This is a long-term cultural approach. So we would like to run at a lower concentration level on construction.
I don't see 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 noninterest income. So there's ways in which we've been working to offset some of the pullback and exposure to construction that seems to be working. But I would consider that a longer-term part of our model as opposed to short-term movements.
Our next question comes from the line of Michael Rose with Raymond James.
I hope everything is well. Just wanted to ask on the fees, if I -- in the loan sale gains. If I back out the $1.9 million, you still had pretty good gain on sale loans. And 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 kind of the trajectory of loan sales as that business continues to grow and ramp? And then separately, I wanted to ask about SSW. Looking at Slide 16, it looks like there's been just generally a downtrend in AUM, and that kind of goes against kind of what we're seeing in other similar types of businesses out there. So just wanted to get some color and context.
I'll start. I mean I think that the Oakwood -- I'm sorry, the Waterstone partnership is just getting started. I mean we really have focused more on Waterstone's ability to impact our internal SBA generation, which we're showing significant traction there and picking up base. And I think the loan sales that you'll see -- we've seen not including that outsized one probably represented the beginning of the trend that we begin to see shaping up. So I would expect that not to take off in the next couple of quarters, but I would think it'd be incrementally stronger. And then certainly, by next year, we hope for that to be a more meaningful part of the business. Have not grown a lot on the non-b1 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 one -- the thing that does make our company different from most of the asset management companies that we might be compared to is that it's almost all fixed income. They're the core of their bank -- or the core of their business is serving other banks, helping to manage their investment portfolios. And Michael, as you know, pretty much everything has suffered diminution in their assets in the investment portfolio due to AOCI. And then many of them, as they are turning those investments to liquidity or try to work in higher-yielding loans. So the bank portfolios in general, all these community bank portfolios that would be our natural client base do have smaller portfolios.
So we have -- SSW continues to serve the same number, if not more clients than they did pre-shift in interest rate exposure. But obviously, we have more clients. I don't have 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 and we begin to see AOCI impacts lessening, I think it would be natural to see that AUM begin to climb again. They are paid on a fee that's based on the size of AUM. So that does put pressure to earnings. But obviously, we 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 portion of that question.
Yes, Michael, 2 things. The gain on sale, if you back out the onetime USDA, I think our run rate that we feel like pretty good for Q3 is about 10.4 and maybe incrementally higher, a couple of hundred thousand higher for Q4. So I think that's a good spot or a good run rate for that. And 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.
And I think here lately, the 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. So that's an example of outside of AOCI that they're advising the client to do the right thing, and it calls our assets under management to go down. They still manage those banks' portfolios, but they are smaller because of that.
And one other thing, Michael, I'd point out that we added this quarter to the SSW slide is the number of main clients over time. We had a trend line over that graph. And to Greg's point, you can see the increase and the pickup kind of right before and as rates started to move up. But more notably, recently, while AUM has kind of trended down over the past 6 to 8 quarters, we've managed to maintain the actual number of bank clients around 50.
Very detailed response. Appreciate all the color. Maybe just one more for me. Greg, I think last quarter, you talked about a very similar kind of noninterest expense starting point and then kind of 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.
Yes. We think $175 million at the end of the year, still the endpoint that we're going. So that -- 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 got the back half of the year with some seasonal bonus-related expense, I think, is really going to be the drivers of those.
Our next question comes from the line of Feddie Strickland with Hovde Group.
Just wanted to go back into deposits. I saw you mentioned in the deck, you had some strategic decision to let some broker 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?
Yes. I think what we've done and worked real hard over the last year -- or the first answer to your question would be we have about $1 billion on the balance sheet today, maybe slightly higher than that in money market accounts. So we can control that pricing with some rate cuts. So that's one thing we 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. And then in consumer customer-related CDs, we have about $450 million maturing before the end of the year. So I think the weighted average on both of those are elevated from where we're seeing spot rates coming in today.
So there are some opportunities for us to improve in a downward rate environment with even one rate cut. So 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. And then kind of along the same lines, is it fair to assume a lot of the DDA 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. The 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 noninterest-bearing deposit account. And that means there has to be a certain amount of activity, debit card action, those kind of things. So 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 for me. I noticed the CRE special mention percentage went up. I think it was from 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.
Yes. 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 we're -- 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, home loans and going through a process of essentially rerisk 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 past dues remain in good shape. We feel good about the portfolio.
Our next question comes from the line of Manuel Navas with D.A. Davidson.
Can you talk a little bit about your near-term NIM outlook and -- 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?
Yes. I'll jump in first, and then maybe Matt could fill in some of the gaps. But 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 8.50% 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?
Yes, right. Yes, yes. I'll give a little bit more color on the core. And we've got -- I think we spoke in the past about around 3.50% kind of core margin outlook in the somewhat near to intermediate term pieces. And we have a slide in the investor presentation that details the repricing opportunities within the loan portfolio that turns over in the next 12 months. It's about 48% of loans, a little over $2 billion, that's going to reprice. And I'm happy to circle up offline and kind of walk through what that implies.
But big picture, directionally over the next 12 months, that implies that we should be able to hit that 3.50% core margin by spring time this 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, yes, on the GAAP margin side, I think that accretion drops down from $1.7 million to probably $700,000-ish. 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? And make sure it's replenished by Oakwood, I understand that, but I'm saying just this accretion percent part.
Right. I think that, that $700,000-ish would be -- would sustain at that level at least for the next couple of quarters, probably in the next 12 months. Honestly, we could see average around $700,000 per quarter.
Okay. And then I guess this is what I was leading with some of these questions, is because of the repricing opportunity, you should see that grind higher -- actually, just trade expansion through the first couple of 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 NIM will continue to expand.
Correct. Yes. We still see a repricing opportunity with the existing book even if we got some cuts. So just for some context, that repricing side, 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%. And we're doing loans right now in the mid-8s. I think the beta on new loan yields in a cut scenario would not be 100% by any means. So we're still going to get some tail lift on the repricing side even in a rate cut scenario.
And 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 cost that we kind of match whatever the incrementally lower upside from the repricing on the loan side. So it's about 50 to 60 basis point 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 the funding cost pressures.
Yes. I appreciate that. Is -- 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? And are you seeing that in the pipeline?
I think our pipeline is so far healthy. And we had outsized payoffs this quarter and still grew almost 6% annualized. I think we had about $200 million in payoffs. And that wasn't necessarily folks going to the banks with projects that are sold or mature. So what is there, 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.
So 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. So I wouldn't necessarily see a big movement in our growth just because rates go down.
We've reached, as I talked about in future -- on past quarters, we did have some size ambitions 4 years ago when we started our 5-year plan, most recent 5-year plan. And we've achieved that particularly with Oakwood, and so now it's less about size and more about allocation of capital and making the most of the resources that we have. So those will factor into our growth rates just as much as the demand will.
I would say also just another tool that we have is our participation network. We started this quarter I think we might have to sell more than we did and with those outsized payoffs. Throttle that back, but it was the first time that we really tested that market in a couple of quarters, and we found that there was some demand there, too. So we're going to keep the pipeline open, and I think we sold -- I think we sold over $30 million in loans -- between $20 million and $30 million. But definitely, we're seeing -- 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 noninterest income streams.
There are no further questions. I would now like to turn the call back to Jude Melville for closing remarks.
Sure. I really can't add -- that much to add. 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 we look forward to continuing to do that. And I'm excited about the future no matter what macroeconomic surprises may or may not result. We're getting kind of used to some volatility there, and I think we're doing a good job of managing through them regardless. And look forward to visiting with you all again next quarter. Thanks, everybody, for dialing in.
This concludes today's call. You may now disconnect.