Business First Bancshares (NASDAQ:BFST) Q1 2026 Earnings Call

0:00 Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Business First Bancshares First Quarter twenty twenty six Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Matt Sealy, Director of Corporate Strategy. Please go ahead. Thank you. Good morning, and thank you all for joining. Earlier today, we issued our first quarter twenty twenty six 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.

0:45 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 on our website at ww.b1bank.com. Please also note our Safe Harbor statements are available on Page six of our earnings press release that was filed with 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 morning by Business First Bancshares' CEO and Chairman, Jude Melville Chief Financial Officer, Greg Robertson Chief Banking Officer, Philip Jordan and President of B1 Bank, Jerry Vasquez. After the presentation, we'll be happy to address any questions you may have.

1:31 And with that, I'll turn the call over to you, Jude. Okay. Thanks, Matt. Good morning and thank you for joining us today. We know there are plenty of things you all could be doing on a Monday morning in a world environment as complex as the one in which we find ourselves. And we appreciate you choosing to spend this time with us. This was one of, if not the best, first quarters that we have had as a company. We continue to improve earnings, strengthen capital levels, and improve quality of our liquidity posture, while consummating our second material acquisition in the past three years and making a number of non acquisitive investments that will pay off over the course of the next few years. A highlight for the quarter was the addition of a substantial number of new teammates. As I just mentioned, we closed the Progressive transaction on January 1. In balance sheet terms, the acquisition adds over $700,000,000 in assets in nine branches across North Louisiana, deepening our footprint in an area in which we were already a market leader.

2:24 Asset quality of the acquired portfolio is stellar, as is the makeup of the expanded client base. On a very promising note, since we announced the acquisition, construction on the Meta Data Center project in Northeast Louisiana has accelerated and been expanded, and we expect tens of billions of dollars of private investment in a region in which we are as well situated to capture the benefits as any financial institution, large or small. The morale among our former progressive teammates is high, and the working partnership is off to a smooth start as any acquisition that we've had the honor to participate in, which bodes well for our ability to operate as one team over the course of this year, even before conversion is executed. We also added a material number of bankers organically. In our last call I mentioned the addition of John Heiney, our new Market President in Houston, former market president from Vertex Bank.

3:15 To date John has attracted an additional 11 teammates, including seven production officers, the majority of which are also former Vertex bankers. Also in Houston, are honored to add Ben Marmon to lead our corporate banking activities in Texas. Ben was a long time banker for Iberia and First Horizons, serving in leadership capacities across South Louisiana and for the past five years as President of the FHN Financials Houston market. These new partners have already begun building a pipeline of opportunities and we anticipate them contributing meaningfully to our growth in the second half of the year as we seek to take advantage of M and A led disruption in the Houston market. We announced and have begun a partnership with CoVecca, a provider of AgenSciK AI capabilities. I include this in my discussion on new teammates because over time we anticipate this partnership leading to both our more efficiently leveraging the talent we have on board and to our minimizing hiring as we continue to grow.

4:10 We are beginning this effort focused on our consumer workflows in which we have already identified over 300 policy rules for potential automation, and anticipate expanding utilization of the partnership across broader use cases throughout the bank, including deposits and credit. This effort will take time to unfold, but we are more confident with each day that the potential is actionable and will prove to be meaningful. It's important to note that as we explore the potential of AgenScik AI, remain focused on governance, validation, and human oversight, so that as models, policies, and industry requirements change, we retain our ability to manage that evolution in a disciplined and controlled way. A very positive note for the quarter is that even as we grow the team, we remain focused on cost control, with non interest expenses for the quarter lower than anticipated.

4:57 After accounting for the increased costs associated with the progressive current run rate, our core expenses were essentially flat quarter over quarter, as well as in comparison to last year's first quarter. We do anticipate the cost of the new hires adding incrementally to our expense rate over the second quarter, but note that the super majority of the hires were production oriented, which should lead to further operating leverage improvements. As a key component of our positive earnings results, we are pleased to note the contribution of our non interest income, primarily through the Financial Services Group, and in particular their work providing interest rate swaps and SBA loan gains on sale. As you know, we've been working the past three years on diversifying our revenue streams with investments in this arena, in part so that we might be able to continue to produce consistent earnings even in quarters in which our spread income was not as strong as we hoped.

5:45 The potential of this effect was put to test in the first quarter as loan volumes were lower than anticipated, due primarily to heightened loan payoffs and pay downs. In addition to the contribution to current earnings, we utilized the Financial Services Group to successfully complete a fully self managed private placement of subordinated debt just after quarter end, raising $85,000,000 within our cohort of correspondent banking relationships. Of the $85,000,000 raised, we utilized $67,000,000 to redeem sub debt, some of which had crossed the five year mark and had already lost about $10,000,000 in capital treatment. The successful debt raise is important in and of itself, but I'm most excited about the way in which we accomplished it, both utilizing and contributing to our growing network of community bank partners.

6:32 In closing, we feel very positive about the first quarter on a number of fronts and anticipated to be the start of a solid full year. We reiterate full year loan guidance on loan growth based on our sooner than expected hiring of production officers, and we continue to forecast a 1.25% ROA end of year run rate. One of our guiding principles is belief in the compounding power of incremental improvement, and we see that principle in action in our first quarter results. Thank you again for being with us. And with that, I'll turn it over to Greg. Thank you, Jude, and good morning, everyone. As always, I'll spend a few minutes reviewing our results and we'll discuss our updated outlook before we open up to Q and A. First quarter GAAP net income and EPS available to common shareholders was 22,200,000 and $68 and included $2,200,000 merger related expenses, dollars 28,000 gain on former bank premises and $80,000 gain on sale of securities.

7:31 Excluding the non core items, non GAAP core net income and EPS available to common holders was 24.73 per share. From our perspective, first quarter results marked another quarter of strong financial performance, generating a 1.10 core ROAA and a core efficiency ratio of 62% for the quarter. Our first quarter earnings results were highlighted by continued discipline on the expense side and a meaningful contribution from our Financial Services Correspondent Banking Group, as Jude mentioned. Also during the quarter, we completed the acquisition of North Louisiana based Progressive Bank, which closed on January one of this year and added $774,000,000 in total assets in nine new locations.

8:19 From a balance sheet perspective, total loans held for investment increased $494,800,000 or 32% annualized on a linked quarter basis. Excluding the acquired Progressive loans, total loans held for investment declined $102,700,000 or 66.2% annualized. Excluding acquired progressive loans, organic commercial and commercial real estate loans decreased 58,600,000 and $23,000,000 respectively, compared to the linked quarter. Texas based loans ended the first quarter at 35% of total loans. This was anticipated due to the closing of the Progressive Bank transaction in early January. The lower than expected loan growth was driven primarily by an overall increase in loan paydowns and payoffs. Specifically, total pay downs and payoffs during the first quarter totaled $579,000,000 which compares to the total new and renewed loan production of $476,000,000 during the quarter.

9:20 If you recall, in the previous quarter, we experienced slightly higher new and renewed loan production at $500,000,000 while pay downs and payoffs during the quarter were lower at just $332,000,000 Total deposits increased $766,400,000 due to increases in interest bearing deposits and non interest bearing deposits of $513,300,000 and $253,000,000 respectively. The increase in interest bearing deposits was largely driven by approximately $325,000,000 in commercial money market accounts and $185,000,000 in personal money market accounts. Excluding acquired progressive deposits, organic deposit growth was $81,500,000 or 4.4% annualized on a linked quarter basis.

10:07 Lastly, on the funding side of the balance sheet, we took advantage of the improved liquidity position from softer overall net loan growth and repaid FHLB balances and broker deposits. Total FHLB borrowings decreased $170,400,000 and broker deposits were reduced by $112,500,000 from the linked quarter. Moving on to the margin. Our GAAP reported first quarter net interest margin decreased six basis points linked quarter to 3.65%, while the non GAAP core net interest margin, excluding purchase accounting accretion, decreased four basis points from 3.64 to three sixty for the quarter ended March 31.

10:54 A driver to the lower than expected margin performance during the quarter was loan discount accretion falling lower than expected at $1,100,000 which is primarily caused by the lower actual rate marks from the Progressive acquisition. We would expect quarterly loan discount accretion to be in the low $1,000,000 range for the balance of 2026. On a linked quarter basis, cost of deposits decreased 18 basis points, while total loan yields decreased 27 basis points. Core loan yields, excluding loan discount accretion for the first quarter, were 6.54, down 24 basis points from the prior quarter. Total cost of deposits for the month ended March was 2.33%, which compared to the weighted average of the first quarter was 2.34%.

11:44 We are pleased with our ability to hold line in new loan yields during the quarter with a weighted average new and renewed loan yield of 7.20% for the quarter. I would like to make a note of a few takeaways on Slide 19 in our investor presentation. We continue to see 45 to 55% overall deposit betas as achievable regarding any future rate cuts. I would also like to point out overall core CD balance retention rate was 81% during Q1. This impressive statistic reflects on our team's continued focus on maintaining core deposit relationships. Our baseline assumption is that we do not receive any further rate cuts in 2026. We have worked hard to manage our balance sheet in a relatively neutral position and believe we can achieve modest margin improvement in a slightly down or up rate environment.

12:38 Moving on to the income statement, GAAP non interest expense was $57,500,000 and included $2,200,000 in acquisition related expense. Core non interest expense for the first quarter was $55,200,000 up $5,000,000 from the prior quarter and included a full quarter impact of the progressive expense base mentioned earlier. Core expenses for the first quarter did come in lower than we expected, mostly due to the timing of certain investments marketing spend not hitting in the quarter, which we do expect to recognize going forward. We also did recognize a small amount of the progressive cost saves during the quarter. As a reminder, we should recognize remaining potential cost saves post conversion, which is scheduled for late third quarter this year. First quarter GAAP and core non interest income was $14,100,000 and 13,900,000 respectively.

13:31 GAAP results did include $80,000 gain on sale of securities and a $28,000 gain on former bank premises. Core non interest income results for the first quarter were slightly better than we expected, primarily due to continued strong swap fee revenue and gain on sale from SBA activity. Lastly, I'd like to provide some context to the credit migration during the first quarter. Total loans past due thirty days or more excluding nonaccruals as a percentage of total loans held for investment decreased from 0.64 to 0.42 at March 31. The ratio of nonperforming loans compared to loans held for investment increased 29 basis points to 1.53 at the end of the first quarter, while the ratio of non performing assets compared to total assets increased 29 basis points to 138 compared to the linked quarter.

14:29 That concludes my prepared remarks. I'll hand the call back over to you, Matt, and we'll open it up for questions. Yes. Thanks, guys. I think we will go ahead and open up to Q and A now. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of Eddie Strickland with The Hovde Group. Please go ahead. Hey, good morning, everybody. Just wanted to start on credit. Just wanted to ask, you mentioned in the release you expect the migration we saw this quarter to be resolved over the next couple of quarters. And can you just help us understand kind of the full opportunity set maybe here of how much we could maybe see NPAs come down by year end, assuming no further migration?

15:26 Yes. Thanks, Betty. Good question. So we think in the near term, let's talk about just specifically we think will happen in Q2 and then more so during the later parts of the year. I'll caveat all that by saying, we've kind of been talking about some of these credits for almost a year now and the process through moving them to resolution is sometimes precarious and moves at different speeds. So Q2, we think about 30% of the current NPA list will go through to a resolution. So as we move past that, we would see it kind of breaking up into thirds as we go through the rest of the year.

16:12 So I think another pretty decent amount of it in the third quarter and hopefully some resolution with maybe only a few pieces hanging over past year end. Got it. And then the increase this quarter, I apologize, I cut out for a second when you were mentioning this in your opening comments. Was that the Houston Medical facility or which credits contributed to the higher NPAs? No, we had about $25,000,000 increase this quarter, which were mostly attributable to we have a relationship with one client. It's about $16,000,000 of exposure. Those are varying types of collateral and the timing of that resolution on that, some of it could be imminent, some of it could last two, three quarters to resolve it. So that was the majority of the increase this quarter.

17:07 Previously mentioned medical facility was already in the list. Got it. And just one quick follow-up on the margin. I saw you pay down the FHLB and the broker this quarter, but you also issued the sub debt. Should we expect the margin to I guess, the GAAP margin to still directionally move higher in the second quarter? Or is more flat your expectation? No, we think we're going to we think mid low to mid single digit margin expansion as we move forward. Part of that will be reliant on moving some of those NPAs back into accruing assets as well. But that's a little trickier to forecast. But we do think that just the core margin should tick up mid to low to mid single digits.

17:59 If you look at the spread we had during the quarters, spread was relatively flat quarter over quarter and we think with the increase in loan volume we should get a little bit of pickup. Great. Thanks. I'll step back. Thank you. Our next question comes from the line of Matt Olney with Stephens. Please go ahead. Hey, thanks. Good morning. Just want to follow-up on the credit discussion. I think, Greg, you mentioned expectations and some resolutions over the next few quarters. That's great to hear. Any thoughts as far as loss recognition? What kind of allowances do you have on some of these credits? Just trying to anticipate if we should anticipate charge offs being a little bit higher in the near term. Thanks.

18:49 Yes, so far Matt, it's a good question. So far we are seeing reserves versus loss recognition going forward to remain pretty consistent with what the street has forecast for us from a loss standpoint. All of that is kind of incremental as we move along. But so far what we're seeing, we feel like we'll be in line. If you look at the main driver that gives us a little comfort with that is moving past dues back down below 50 basis points. We feel like that the stuff that we've been talking about is kind of in the list and we'll just move forward with hopefully no change from that.

19:40 Okay. Thank you for clarifying that. And then going back to the loan balances. Greg, I think you mentioned some higher pay downs this quarter. Any more color on those pay downs, whether by loan type or by market? Or just any color as far as what you're hearing from your customers given some of the volatility in the market right now? Yes. I think it was the majority of our pay downs were in the Texas franchise. And I think that's you could really draw a line back to some of our larger growth years, the 2022, 2023 years 2022, 2023, some of those projects came to end. Some of them, we just made the decision whether a rate or credit to move away from a relationship.

20:26 So it's kind of a mixed bag. But I think that's the general guidance is it's more commercial stuff probably in the Dallas version than the Houston markets. Yeah, I think it's not a small thing that we've really dramatically downshifted our exposure to construction and so we don't have the same large dollar construction projects coming up as some of these older construction projects come off the books. And so there's not a replacement there for that particular type of credit which we feel comfortable with. We want to have a diversified portfolio and minimize our concentrations.

21:12 And then I would also say that Greg mentioned our loan yields staying pretty flat quarter over quarter, which we certainly are prioritizing the need to get paid for what we do over just loan growth. And so I echo his thoughts about that was part of the rationale there, but just from a competitive standpoint, seem to be disciplined on pricing, which I think is the right choice to make. Yep. Okay. Well, I appreciate the color. That's all from me. Our Thanks, next question comes from the line of Michael Rose with Raymond James. Please go ahead.

21:58 Hey, good morning, guys. Thanks for taking my questions. Just wanted to kind of dig back on to the expenses as we move from here. So on the one hand, obviously, this quarter on a core basis, good expense control. But I think, Jude, in the press release, you talked about some additional hires by the end of the quarter. And then in your prepared comments, I think you mentioned even a few more. I assume you're continuing to hire. So how should we expect those expenses to from a timing and magnitude perspective to layer in? And then as you kind of think about the layering in of the cost saves from Progressive, understanding that the systems conversion will happen late in the quarter? Just trying to frame out the expense outlook over the next few quarters. Thanks.

22:45 Yes. Thanks, Michael. I think in the near term Q2, we would expect the mid to upper 50s and then migrating slightly from there. I think the cost saves, if we continue to have success hiring teammates, some of the cost saves will be offset by the hiring. But I think we would see that trickle up into the upper 50s as we move through the end of the year. But we still remain confident in our projections on the cost saves around the progressive acquisition, achieving most of them in the fourth quarter. Greg, I think out of the $21,000,000 progressive run rate we expect to achieve about $11,000,000 on an annualized basis on cost.

23:40 Certainly still anticipating recognizing the benefits of that those efficiencies primarily in fourth quarter. Perfect, thanks for that Jude. And then maybe just following up on some of the initial and the final marks on the portfolio, it looks like the accretion is going to be less kind of as we move forward. So can you just walk us through maybe some of the purchase accounting adjustments from initial to when it actually closed? Thanks. Yeah, think it was just mainly that when we announced the yield curve was a lot different by the time we closed. So the interest rate mark piece of it was less, credit still the same.

24:26 So we felt like from a total dilutive standpoint for us, I think this is a little bit different, but I think it's all relative. We have forecasted about 44 basis points of tangible book value dilution dollars $4.04 and it ended up being ex AOCI about $0.04 So we feel really good about the way everything kind of shook out. So it will be less accretion going forward because the trade off is that we had less dilution than we modeled. It's a good thing, John. I'm proud of the fact that we've had. Yeah, so I did want to mention real quick since we're talking about tangible book value, we last raised capital in October of 'twenty two, and beginning with end of 'twenty two, running to now, we've grown tangible book value at about 16% annualized rate.

25:28 So we remain focused on growing tangible book value, and we've done so during that period. We've consummated two acquisitions and grown assets by about $2,000,000,000 So the news on the accretion front versus tangible book value dilution on the Progressive deal is good. And then we look forward to continuing to grow the annual book of ours. And so we're pleased with that result. Michael will be about $1,000,000 going forward for accretion per quarter. Yes, heard that. And maybe if I could just sneak one last in on the just as it relates to the tangible book value growth and the focus there.

26:18 The buybacks this quarter were a little bit higher than I think I was looking for. How should we balance that now with a little bit higher starting capital just from the change in March from the deal? Could we expect you guys to continue to be active with repurchases? Or is now a time to kind of recoup and build tangible book value and capital? Thanks. Yes. I think it's a balance between the two. It's the market. If we feel the market is undervaluing our worth, then we do have the we've now built our capital levels and our tangible book value to a level that we can take advantage of that perceived discrepancy. And so we felt like in the first quarter, we had probably a little more opportunity there than we might have guessed at the beginning of the quarter. And so I think our average TPV multiple of the buybacks was about 119.

27:17 And so we felt like that was certainly an undervaluation relative to the worth of the franchise, and we'll continue to look for opportunities there. We're not going to we don't have mandatory buybacks and not going to do it just for the sake of doing it. But when we do see opportunities in that kind of sub-one 120 level, we do believe we're in a position to take advantage of it. That will be a higher priority than seeking out M and A opportunities in the near term. All right, perfect. I'll step back. Thanks for taking my questions. Thank you. Thank you. Our next question comes from the line of Gary Tenner with D. A. Davidson. Please go ahead.

28:08 Good morning. Just wanted to ask about your commentary around loan growth. I think you're kind of sticking to the mid single digit growth outlook at this point. And I'm just wondering how much of that is kind of what's the balance between that projection on the production versus payoff perspective? Do you have a lot more visibility into kind of a reduction of payoffs just as construction projects are maturing? Or maybe just walk us through kind of how you're looking at the next couple of quarters from a net growth perspective? Yes, think from a net growth perspective, as we get further away from kind of the impacts of bringing on twenty twenty two and 2023 deals in those years.

28:57 As we move through the year, we should see payoffs slightly reduce. I think the way we're thinking about net loan growth as we go forward with the addition of the new teammates, we're thinking about high single digits to 10% maybe in the second and third quarter, which would end up offsetting kind of the slow first quarter with the mid single digits, 6% to 8% or five percent to 6% range loan growth on an annualized basis. I'll just add you, this is things aren't always smooth lines and you'll remember in the third quarter of last year, if I remember correctly that we had elevated pay downs and lower growth in the third quarter, but then we had I don't want to say a record fourth quarter loan growth but it was a strong quarter, fourth quarter. And if you balance the two it ended up being kind of at this about 6% range and we had more pay downs in third quarter than we did the fourth quarter and I would anticipate that same effect helping us from a net loan growth over the remainder of the year. Greg's right, there will be a point at which those larger dollar construction projects don't aren't material in terms of their continued impact on portfolio.

30:16 And then again, we've hired, I think to date about 11 producers and more production oriented staff, and we'll continue to look for talent as we see the opportunity. And none of their pipelines obviously have been manifested in terms of actual loan growth yet, and so we anticipate seeing some of that in the second quarter, but really the third and fourth quarters being reflective of that additional strength. Got it. Appreciate that. And just on the construction segment topic, just for another second, where do you see that segment kind of bottoming out or stabilizing as a percentage of the overall portfolio? You're right over 10% right now.

31:05 Where do you see that trending? Like where's your appetite and comfort level with that? Yes, I think we're getting close to the bottom now. I think you can see it bouncing the high single digits to 10% range on a go forward basis would be kind of the comfort spot for us. Got it. Thank you. Thank you. Our next question comes from the line of Matt Boldy with Stephens. Please go ahead. Hey, thanks for taking the follow-up guys. Just want to go back to the net interest margin and I'm trying to appreciate if there's any more noise in that margin in this quarter. I went back to my notes last quarter and it looks like there was that interest reversal that impacted the margin by about $1,000,000 in the fourth quarter from that Houston loan that we discussed. Was there any kind of interest reversal again this quarter with the uptick of non accruals?

32:03 Yes, I'll just leave it there. Yes, you're right. There was some noise. I think when you think about relative to the non accruals, there was about 1,000,000 in interest reversal. That was probably attributable to six or seven basis points impact on the margin. That was due to the movement of about $25,000,000 of loans to NPL during the quarter and the reversal. Kind of as we go forward, I think we'll start inching back toward reclaiming some of that as an earning asset. But as I mentioned, I think earlier, the timing of how that comes back to an earning or converts back to an earning asset is a little bit tricky because we're still having to resolve these in real time and the twist and turn sometimes of conflict resolution with some of these credits. It's a little bit unpredictable, but we see some opportunity on horizon with that for sure.

33:09 Okay. Okay. That's all for me. Thank you. Yes, ma'am. Thank you. And at this time, we have no further questions. That concludes our Q and A session. I will now turn the call back over to Jude Melville for closing remarks. Okay. Well, again, I appreciate everybody being with us and the questions and the attention and energy that you're giving to our cause. You know we again feel very positive about the first quarter and not only the performance in the first quarter but also some of the investments and additions that we've made in the first quarter which will lead to even more positive results in the future. We like our footprint, we like our people and just look forward to turning the wheels over the course of the year and showing some of that incremental progress which will lead to increased ROA and ultimately tangible book value. We just keep doing what we do. So appreciate our team for all their effort, and again appreciate your attention this morning. Feel free to reach out if you want talk in any more detail about anything. Thank you all. Have a good week.

34:20 This concludes today's conference call. You may now disconnect your lines at this time. Thank you for your participation, and have a pleasant day.