First Bancshares Inc (Mississippi)

NYSE:FBMS

Earnings Call Analysis

Strong loan growth, steady financial performance

In Q2 2024, the company demonstrated robust loan growth of $111 million, an 8.6% annualized increase. Net earnings were $19.7 million, slightly down due to a $1.7 million loan growth provision. Pre-tax pre-provision income rose 2.9% to $27.4 million. Core margin improved by 9 basis points to 3.19%, while deposit costs stabilized at 1.78%. Despite a deposit decrease of $84.2 million, liquidity remained strong, with a loan-to-deposit ratio of 79%. Credit quality was solid, with minimal net charge-offs and nonperforming assets under control. The company expects steady loan growth and a stable margin for the remainder of the year.

Sustained Growth and Profitability

In the second quarter of 2024, the company demonstrated a robust performance with loans increasing by $111 million, translating to a growth rate of 8.6% on an annualized basis. This notable growth was matched by a corresponding rise in profitability metrics. The net earnings stood at $19.7 million, or $0.62 per diluted share, despite a slight decline due to a $1.7 million provision expense related to loan growth. The key takeaway here is that the core profitability remains strong, with the pretax pre-provision operating earnings rising 2.9% to $27.4 million compared to the first quarter.

Margin Improvements

Margin expansion was a significant highlight, with an overall increase of 6 basis points, driven primarily by a 9 basis point rise in the core margin to 3.19%. This indicates effective management of interest income and costs, even though the cost of deposits remained unchanged at 1.78%. As a reflection of strategic financial practices, the company is likely to maintain similar margin levels moving forward barring unexpected market conditions.

Credit Quality Indicators

Credit quality continues to show stability, characterized by only 4 basis points of net charge-offs and a slight 3 basis points increase in non-performing assets (NPAs). This suggests a solid loan portfolio management and good borrower capacity, as evidenced by $5.8 million in substandard loan payoffs during the quarter. Such metrics are essential for assessing long-term sustainability and risk management within the company’s lending operations.

Robust Loan Originations

Loan origination activity was exceptionally strong, with figures reaching $450 million, a significant increase from $253 million in the previous quarter. The company remains competitive, successfully capturing market share from peers while maintaining a well-diversified portfolio with robust contributions from construction lending. Loan growth expectations for the second half of 2024 are optimistic, with a forecasted mid-single-digit growth rate.

Outlook on Expenses and Revenue Guidance

Expenses are projected to hover around $176 million for the full year, with slight increases expected in the upcoming quarters. Specifically, third-quarter operating expenses are anticipated to be around $44 million. The company’s steady handling of operational costs against a backdrop of revenue growth sets a positive outlook for profitability margins going forward, positioning the firm for resilience even amidst potential economic fluctuations.

Managing Deposit Dynamics

Deposits witnessed a net decrease of $84.2 million due to seasonal patterns, particularly linked to public funds. However, the liquidity position of the company remains robust with a loan-to-deposit ratio of 79% and significant cash flow from securities expected over the next year. The management has indicated an ongoing trend of decreasing deposits but asserts that this decline is manageable and expected given current economic trends.

Future Strategic Considerations

Looking ahead, management remains open to merger and acquisition opportunities, capitalizing on favorable valuations in the banking sector. Such strategic maneuvers could further enable growth and enhance market competitiveness, although no direct action is confirmed at this stage. The focus remains on organic growth supported by existing strong market presence and capable financial infrastructure.

Earnings Call Transcript 2024-Q2

[Operator]

Good day and thank you for standing by. Welcome to the review of the Second Quarter 2024 Financial Results. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your speaker today, Hoppy Cole, CEO, please go ahead.

[Milton Cole, executive]

Thank you and good morning, everyone. Welcome to our Second Quarter Conference Call. As it's our custom, we'll start with several prepared remarks this morning and open up to questions at the end. We've got several team members with us this morning: Dee Dee Lowery, our CFO; JJ Fletcher, our Chief Lending Officer; and George Noonan, our Chief Credit Officer.

So for the second quarter, we were very pleased with the performance of the company in terms of growth, profitability and credit quality. Loans grew by $111 million, so they were up about 8.6% on an annualized basis. Our markets continue to provide us ample growth opportunities. We are able to see margin expansion, and our margin expanded 6 basis points, and our core margin was up, actually 9 basis points.

Credit quality remains strong with only 4 basis points of net charge-offs and 3 basis points migration in NPAs. And although net income was down a little bit, it was down primarily due to the $1.7 million provision that we took associated with the loan growth. Actually, pretax pre-provision income was up $800,000 or 2.9%. So again, we were very pleased with the performance of the company and sort of all around. Dee Dee would you like to talk about our financial performance in a little more detail?

[Donna Lowery, executive]

Sure. Hoppy. Thanks. And as Hoppy had already said, we're very pleased with the quarter and I very happy with all around solid results. But we did report net earnings of $19.7 million, which was $0.62 on a diluted share. That was down $900,000 from first quarter, but we did record a $1.7 million provision expense this quarter and 0 for last quarter. So that is basically accounting for the difference there.

Pretax pre-provision operating earnings totaled $27.4 million compared to $26.6 million. So we did have a 2.9% increase for the quarter when you look at pretax pre-provision. As Hoppy mentioned, our core margin did increase 9 basis points to 3.19%. The cost of deposits remained the same at 1.78%, which we like, [ woohoo ]. Anyways, we feel like we're there finally, on our deposits.

[Milton Cole, executive]

[ How did you call that? ]

[Donna Lowery, executive]

Yes. Our yield on our earning assets increased 1 basis point. And then, of course, on our interest rate liabilities, we had a decrease of 3 basis points. So our noninterest-bearing portfolio actually increased both in dollars and percent this quarter, back to 28%. And -- our interest-bearing deposit cost increased 1 basis point to 2.46%, and our cumulative beta stayed the same at 43% for this quarter. Our deposits did decrease this quarter at $84.2 million, which was about 1.3%, with $38.3 million of that was related to public funds. And as you know, following us, we will continue to see a decrease in deposits throughout the rest of the year because of our public fund portfolio. So that was expected.

On our liquidity position, still remain very strong. Our ratios are well above our limits. Our loan deposit ratio is 79%. We have 2 point -- I mean, $2 billion available at the Home Loan Bank for borrowing, and we have about 38% of our securities portfolio unpledged. So we're pleased with all of those numbers. And actually, over the next 4 quarters, we have about $266 million in cash flows coming off the securities book into cash over the next 4 quarters.

And then our ratios for the quarter, looking at operating ratios, we had an ROAA of 1.01%, and our return on average tangible common equity of 12.76%, an efficiency ratio of 60.65%. And then our capital ratios, TCE, increased to 8.3%. Our leverage ratio was 10% and our total risk base was 15.3%, which all were in line with last quarter. So overall, we're very pleased.

[Milton Cole, executive]

Thank you, ma'am. Great report. JJ would you like to talk about, give us a little color on loan portfolio, loan originations for the quarter?

[JJ Fletcher, executive]

Yes, sir. Thank you, Hoppy. As Hoppy said, we had a great quarter, second quarter in terms of loan growth, net increase of about $111 million. Originations were very robust at about $450 million, up from about $253 million in the first quarter. Construction lending and lines continued at a solid pace, with approximately 40% of those loans being originated reserved for future funding. After a large increase in the first quarter, you all remember in the pipeline, we did see a modest decrease, which is expected based on originations in the first quarter. I would note that we do track the amount to be funded at origination, and at the end of the second quarter, that number was actually higher than the first quarter. So bodes well entering the back half of the year, we think.

Our average yield did contract slightly from 8.12% to 7.92% for the quarter. But overall, we're at 7.99% or basically 8% year-to-date. Regionally, the Mississippi team had an incredible quarter. They actually had 35% of the entire Bank's production; and Georgia, for the first time since our merger, had their strongest showing and they accounted for about a 1/4 of all new originations. So we're glad to see that.

Lastly, operationally we've migrated the rest of the legacy branches into the centralized consumer platform. And then, George may speak to this too, but we're continuing to refine our small business platform, expanding that, and plan to have the 1071 implementation done by the end of the year, ahead of schedule. So overall, great quarter. Appreciate all the lending staff, lenders and all support folks to make that happen and I couldn't be more pleased with the quarter.

[Milton Cole, executive]

Great. Thanks, JJ. Great report. George, [ can you update ] us on credit quality?

[George Noonan, executive]

Thank you, Hoppy. We did continue to see good performance across most all of our credit metrics. The leading indicator 30-day past dues were manageable. We did see a slight uptick over quarter 1, but I think still very acceptable at 40 basis points at the quarter-end. Year-to-date average continues to be good at 35.5 bps.

Most of the metrics, as I said, we did see some moderate movement, few upticks here and there. Nonaccrual were up 5 bps. All total NPAs ticked up about 3 bps to 26 bps. That's a very manageable level for us, we believe. Net charge offs at 4 bps, as Dee Dee has already alluded to. And then $1.7 million provision kept our ACL at 1.05% as it was in last quarter.

Our CRE concentrations ticked up a little bit, 9 bps but still at 215% of RBC. We think that's a comfortable margin below the 300% interagency guidance level, and we saw C&D actually come down a bit. So we're at 69% of RBC and that's well below the 100% level. Classified loans as a percentage of capital plus ACL. They did move up about 47 bps but still manageable at 7.52%. When you combine those with Criticized, we actually came down by 4 bps and I would note that we continue to see borrower capacity in our substandard loans to payoff loans. We actually had almost $5.8 million in substandard loans payoff in the second quarter. So that has continued a trend that we've been seeing quarter-after-quarter.

Overall loan portfolio continues to reflect the strategic balance that we see. Owner-occupied CRE at 24%, nonowner-occupied at 22%. 1-4 family 19%; and then 13% and 12%, respectively, for C&I and C&D. We continue to try to balance all of our subsets. C&D exposure is very evenly apportioned among 4 major categories as you see in the deck: land development represents only 3.68% total loans, multifamily construction 2.4%; and then other construction and residential construction under 4% as well.

Kind of the same trend for CRE. Our professional office is at 9.1% of total loans, but that's pretty well evenly split between owner-occupied and nonowner-occupied. Retail Center at 6.29%, Hotel at 5.53% and Warehouse Industrial at 4.33 of total loans. So we monitor these categories very closely. Nonowner-occupied office is at 3.75% of total loans. And we've seen our average nonoffice loan balance remain pretty constant over the last year, $713,000 is the average size in our nonowner-occupied office category. And we see about approximately 18.32% of office loans maturing in the next 18 months. So we think that's a very manageable horizon for that. Our largest single loan continues to hover at about $28.5 million. Top 20 loans represent only about 6.35% of our total portfolio and top 75 borrower relationships comprise about 1/4 of the loan portfolio.

In the CRE category, we have continued to see very really minimal lease renewal and turnover issues. We've seen good tenant stability and very few credit issues in our office loan portfolio, thank goodness. But we have witnessed, as all banks have, insurance cost escalations or putting some pressure on OpEx expense for some borrowers. But we're monitoring that very closely across the markets as well as multiple CRE segments. So in summary, we're witnessing some nominal basis point increases across some of the categories due to the tighter rate environment and OpEx pressures. But we've really been very fortunate to see very few troublesome issues with delinquencies, charge-offs or unacceptable risk migration. So we really expect to see similar outcomes for the balance of the year and into 2025. So thank you, Hoppy.

[Milton Cole, executive]

Thank you, George. Great report. That concludes our prepared comments. We would open it up for questions now.

[Operator]

[Operator Instructions] One moment for our first question. And our first question will be coming from Matt Olney of Stephens.

[Matt Olney, analyst]

I'll start on the loan growth front, really strong loan growth trends. A good report overall. If I take a step back and just look at loan growth the first half the year, I think we're at about a 3% annualized pace. Just curious if this is a reasonable pace we should expect for the back half of the year? It sounds like the report from earlier, it sounds like the pipeline still look really strong even after the 2Q results. So just curious on expectations for loan growth the back half of the year?

[Milton Cole, executive]

Yes, I think so, Matt. I think that the expectations for level loan growth of what we saw this last quarter would be about that mid single-digit range. I think, if you take the 2 quarters together, I'm just saying we had a lot of stuff that kind of got pushed early into the second quarter. Kind of level it out at that 4% tight range I think is fair.

[Matt Olney, analyst]

Okay, that's helpful. And then on the deposit cost side, really encouraging to see some of that pressure ease up quite a bit in 2Q. Would love to hear any more color, whether it's by month or kind of what you saw, any kind of an inflection? Just any color at all on deposit cost pressure easing and then same thing, expectations for the back half of the year?

[Donna Lowery, executive]

I mean we are still seeing some pressure in our markets with some specials. We're still, as Hoppy said, a while ago when I was celebrating a little. And it still out there [ hand-in-hand battle ] market going through and matching some things. But we had, when you look at it kind of monthly when we had looked at the first quarter and kind of talked about where -- it was looking like we were kind of there through April and May. And so, when you look at that it -- April was 1.77%, May was 1.82% and June was down to 1.74%. So it looks like, I think we'll be tracking around where we are now.

We do have a couple of things in play. As I mentioned about the public fund, we will continue to have runoff the rest of the year for that. And then also we do have some brokered CDs that I have mentioned, and those -- a group of those are maturing tomorrow and we're replacing those and adding a little bit to it, the same cost that was, but just some additional dollars. So I feel like overall with those couple of things that I really feel like that just not just the deposit cost, but kind of the margin should kind of stay right where we are. I would say give or take a couple basis points, just kind of projecting forward, projecting those decrease in public funds, the reduction in Home Loan Bank borrowings, and then the brokered CDs. So I feel like kind of projecting those forward. We should kind of stay where we are.

[Matt Olney, analyst]

Okay. That's helpful, Dee Dee. So it sounds like margin relatively stable from what we saw in 2Q. You mentioned some of the balance sheet movements in the third quarter and also public funds could be a little bit lower. Any color on just the overall average earning assets in the third quarter? Are we going to see earning asset levels move down a little bit? I guess, given some of the puts and takes that you mentioned?

I think some of those -- really what I was talking about on the liability side, really kind of wash a little bit on that side. So we could see some increase in earning assets depending on what the loan book does for the third quarter with what the expectations are for there, because we would probably more than likely end up funding it from cash flows out of securities book. So that could fund some of that. So you could see a slight increase or just flat.

[Operator]

And one moment for our next question, which will be coming from Brett Rabatin of Hovde Group.

[Brett Rabatin, analyst]

I wanted to ask first on the, I think if I heard it correctly, $450 million of loan originations. Is that a function, as you see -- as you see it of customers looking to draw lines or do projects or are you guys maybe moving some market share from competitors?

[JJ Fletcher, executive]

So those are new originations. Really, I think, moving from competitors. And again, we've got that legacy, really strong book of business. A lot of that is still internally generated by our clients doing new projects or making acquisitions. It's kind of a -- and we also have the new lending teams. I know, we talked about that for 2 quarters, but don't lose sight of it. We're still getting new credits coming over from those groups, too. So it's really a combination of all those factors, I think. But a lot of new originations are new projects that are being funded.

[Milton Cole, executive]

[ They are funded. ]

[JJ Fletcher, executive]

Yes. And we've had some refinances out of nonrecourse market and those for good longstanding customers. So it's been a combination.

[Brett Rabatin, analyst]

Okay. That's helpful. And then any thoughts on -- obviously with stocks higher, I think people are going to talk about M&A more. Hoppy, any thoughts on M&A and just how you see that playing out for you guys over the back half the year? If you think you might be looking to acquire or what you're seeing out there?

[Milton Cole, executive]

Well, so valuation certainly help that as everybody. So we always keep our optionality open. We're always having conversations. There's a number of interesting banks out there that would fit in our profile, but we always talk, we're always developing relationships.

[Brett Rabatin, analyst]

Okay. And then just lastly, back on the margin. Wanted to make sure I understood. So, Dee Dee, the margin is expected to be flattish in the back half of the year, and that's a function of the brokered CDs that you're going to need to use to replace public funds offsetting some additional improvement in earning asset yields? Just want to make sure I understood the narrative on that.

[Donna Lowery, executive]

Right. I was basically kind of looking at those 3 things as far as on the balance sheet side, what the impact of additional funding on the brokerage CDs, paying down the Home Loan Bank advances and then some of the public funds running out, just trying to see kind of what that looked like and really not giving any credit to the earning asset side as far as increase in loans, those kind of things. But really kind of looking at what that cost was going to do to us is kind of what I was more -- [ JJ is ] going to get that loan book rolling and they are going to do their thing.

[Milton Cole, executive]

Conservative forecast.

[Donna Lowery, executive]

I have to look at the conservative side. What is -- what am I adding to where we currently are and what does that impact? So that's kind of what I was looking at. So, I mean, we obviously always hope that we'll do a little better and always try to model more conservative on the cost side, so.

[Brett Rabatin, analyst]

Okay, that's helpful. It's good to see the cost of funds flatten out. That's nice.

[Operator]

One moment for our next question. Our next question will be coming from Catherine Mealor of KBW.

[Catherine Mealor, analyst]

One follow-up on the margin, I noticed that yield on loans just was down a little bit this quarter. Any outlook on just the pace of loan yield increases in the back half of the year? And also maybe what drove the decline this quarter.

[Donna Lowery, executive]

Some of that decline, Catherine, I'll let JJ add about the loan yield piece, but some of that was driven by some late fees, decrease in some fees. So I don't expect -- I really don't expect that to continue. That was a little bit of a kind of a one-time deal during the quarter. So JJ can address the actual loan yield piece. Mine was more on the fees.

[JJ Fletcher, executive]

Yes. And Captain Hoppy and I were talking about that this morning. If you looked at our notes from the first quarter, we kind of guided to that we were seeing pressure and most of the markets going into the 7%-s, we've been in the 8%-s pretty consistently for several quarters. So I think really it's competition. Maybe the potential rate cuts are driving some banks to start pricing in early, but to get good competitive deals -- and of course there's a lot of banks that are sort of on the sidelines right now, but the ones that do have liquidity, I think they're pricing the strong deals. And we only really try to stay in the A+ credit markets. As you all know, we don't cut on credit. So I just think we're seeing pressure there. Hoppy, I think that's what we're seeing at committee every week. Seems like.

[Milton Cole, executive]

No, there's no question about it. But now your new originations came on just about under 8%, about 7.90%.

[JJ Fletcher, executive]

Yes, yes. Still close to 8%.

[Milton Cole, executive]

Still close to 8% on new originations. So for the quarter, the real quarter-to-quarter comparison had more to do with the late fee accrual than it did actual loan yield.

[Catherine Mealor, analyst]

Okay. That makes sense. And then would you say there's still enough fixed rate repricing opportunity? And then, I mean if your new loans are still coming on 7.90%, even if that comes down a little bit, I mean the portfolio is at 5.86%. So it's still fair to assume that the overall portfolio still continues to move higher over the next couple of quarters?

[JJ Fletcher, executive]

Yes. We've got roughly $250 million rest of the year in fixed rate and those are going to be in the lower 6%-s. So we'll get some bump there on the, on the existing book as well.

[Catherine Mealor, analyst]

Okay. Great. And then just back to the deposit growth commentary that you made, Dee Dee. I know that public funds fluctuate. It feels like we're hearing from other banks there's kind of more of an effort to push higher cost public funds out of the Bank, but it's a bigger business for you all. Is there any way to size the amount of decline you expect this year out of public funds?

And then as we model next year, do you think the peak will be as high? Or is there less reliance on that deposit type?

[Donna Lowery, executive]

It seems the overall, when you kind of look back that we continue -- that peak continues to increase every year. And really COVID was a big increase and then at post that, on public funds, but I think we usually run $200 million to $300 million increase and so -- I mean, decrease over the course of the year. So I can't remember exactly off the top of my head what first quarter was, but with this $38 million, I mean, I think we still have -- I mean, we still could have $100-plus million the rest of the year decrease.

[Milton Cole, executive]

Right. But it's been a good source of funding for us. And it's still, I think the last report was just under, like $272 million.

[Donna Lowery, executive]

Right. Our overall cost of all -- the cost of public fund deposits was $270 million. $270 million and some change, so we're not trying. We're not particularly trying to run it off.

[Milton Cole, executive]

We're not out there aggressively, [ didn't do money ] either.

[Donna Lowery, executive]

No. Right.

[Milton Cole, executive]

So what you see is more of a seasonality and not a replacement of new money.

[Donna Lowery, executive]

Yes.

[Catherine Mealor, analyst]

Right. Okay. That makes sense. Okay. Great. And then maybe one more on just outlook for fees? I'm sorry, not fees -- excuse me, outlook for expenses.

[Donna Lowery, executive]

I think, Catherine, looking at where we are, I think we're still pretty much in line. I've kind of given $176 million for the year. And so I think we were at $43.4 million last quarter and $43.7 million. And as we go through the year, that'll tick up a little bit, but I still think we're in line to be around that $176 million, $177 million for the year.

[Catherine Mealor, analyst]

Okay. Perfect. Yes. That's usually very steady for you all.

[Operator]

One moment for our next question. Our next question will be coming from Christopher Marinac of Janney Montgomery Scott LLC.

[Christopher Marinac, analyst]

I just want to drill down on expenses a little further. What's your thought on this expense rate as a guide going into the next couple of quarters? And just maybe any kind of inflationary expense we should expect next year?

[Donna Lowery, executive]

I think, just kind of was talking a little bit about that. I think, we were kind of showing $176 million, $177 million for the year. So I think we'll be in the $44 million some change on operating expenses the next 2 quarters. Because typically the fourth quarter [ of the ] year when things true up. So I think we'll be $44 million some change third quarter and then fourth quarter as well. And then I think we usually budget an increase of 3% or 4%, so I think that's what we're looking at for next year.

[Christopher Marinac, analyst]

Great. That's helpful. And Hoppy, just want to follow back up on the deposit cost conversation from earlier. Do you -- or did you see any deposit campaigns by other midsize or bigger banks that happened maybe in June that would have happened below the surface and didn't necessarily impact you, but we're out there just for the team to kind of have to work with?

[Milton Cole, executive]

Not as much pressure out there, Chris, as there has been. We didn't see as many of those campaigns, it was more kind of a one-off matching than an actual campaign.

[Christopher Marinac, analyst]

Okay. And I guess the same would be true for Credit Unions, where they impact you in various markets?

[Milton Cole, executive]

Yes. We just didn't see much out of Credit Unions.

[Christopher Marinac, analyst]

Great. Thank you very much for all the background this morning.

[Operator]

And one moment for our next question. And our next question will come from Matt Olney of Stephens.

[Matt Olney, analyst]

Lucky me, I guess. I wanted to follow up with George. I think George mentioned something interesting about the borrower capacity to pay down substandard loans, in some cases. Any more color on kind of those examples? Are these just guarantors adding additional equity to the project? Or any more color on that topic would be interesting.

[George Noonan, executive]

It's sort of a variety, Matt. But I would say in several specific instances, actually the assets were sold. And so, there was an outside buyer that had negotiated a deal, and it was sufficient enough. The loans were seasoned enough that the principal balances had been reduced. So I would say probably of this past quarter, that was the predominant exit, if you will, were just asset sales, even though we had already marked down the risk rate a little bit. So that was the main driver this past quarter.

[Matt Olney, analyst]

Okay. All right, George. And then maybe just if I could sneak in one more, I'd be curious about the Bank's appetite for any kind of securities restructuring. I think, you guys completed something maybe late last year or first part of this year? Rates have moved down a little bit lower over the last few weeks. Just curious about the Bank's appetite to sell some securities and reinvest that.

[Donna Lowery, executive]

Yes. We did actually get the sale accomplished at the last week of December, and then purchased those bonds in January of this year. So we are talking about it and looking at it running the numbers. So I think if we can do something that kind of looks like that, as far as the loss on the [ iron back, ] we would consider doing it again. So probably something about the same size. We're not -- nothing big, and just we're looking at running the numbers. If it makes sense, we'll obviously, we'll pull the trigger on it.

[Matt Olney, analyst]

Okay. All right. Great quarter.

[Operator]

I'm showing no further questions. I would now like to turn the call back to Hoppy for closing remarks.

[Milton Cole, executive]

Well, thanks, everyone. Appreciate your attendance this morning. Again, a good quarter. Very pleased with what -- the performance during the quarter, and we'll circle back up next quarter. Thank you.

[Donna Lowery, executive]

Thanks.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.