Business First Bancshares: TBV Per Share Has Stalled Since 2019 (NASDAQ:BFST)

Business First Bancshares, Inc. (NASDAQ:BFST) was founded in 2006 and is based in Baton Rouge, Louisiana. A few days ago there was the release of Q4 2023 and the results were encouraging regarding the outlook for NIM, but some doubts remain related to the evolving macroeconomic scenario. EPS estimates were beaten, but revenues were not:

• Q4 Non-GAAP EPS of $0.66 beat by $0.06.
• Revenue of $60.17M (-6.5% Y/Y) missed by $2.28M.

Loans and securities portfolio

Gross loans reached $4.99 billion, up 8.47% from last year. Notably, the majority of loans (62.84%) came from Louisiana, but growth was mainly driven by Texas. In fact, compared to 2022 in Louisiana loans grew by only 6.10%, and in Texas by 14.19%.

From this graph, we can see another important aspect, namely that since 2019 loan growth has been supported by as many growing deposits. In detail, the former grew by 192%, the latter by 195%: the difference allowed for a slight reduction in the LTD ratio. Today it is at 95%; in 2019 it was at 96%.

Management’s goal is to bring it to 90%, however, in the short term, it is unlikely to happen, in fact, new deposits should finance new loans. So, the bank is not willing to stop its growth and give up new lending at current market rates. Very unlikely that it can originate many loans and have a declining LTD ratio: this would imply an unexpectedly large inflow of low-cost deposits.

Several regional banks have LTD ratios even above 100%, yet their operations are obviously limited unless they find a reasonable way to increase deposits. In BFST’s case, we are not at those levels, but an LTD of 95% is still not synonymous with financial flexibility.

In light of these considerations, repricing will probably be the main driver for BFST’s growth in 2024.

As we can see from this image, 45.80% of the loans will mature in the next 12 months, about $2.30 billion. So, the biggest opportunity will be to reprice almost half the portfolio at a higher rate as long as the Fed Funds Rate is not reduced too much. At that point, the potential for repricing would be greatly reduced, and the NIM would fail to improve.

It has been about nine months since the bank has been trying to gradually reduce its asset sensitivity in favor of greater neutrality.

We’ve been working real hard over the last six to nine months of trying to move the bank’s asset sensitivity position to more neutral. So as of the end of the fourth quarter, we had achieved that. And we feel like will the rates stay flat or they go down 25 basis points or 50 basis points at this point, it’s hard to guess. We’re in a position to where the margin will be held pretty stable.

CFO Greg Robertson

Finally, to conclude the topic of loans, BFST has better credit quality than its peers. In fact, NPLs account for 0.34% compared to 0.46% for peers. At least for the time being, the rate hike has not brought any particular economic distress to its borrowers.

The AFS securities portfolio consists of high quality securities but purchased at the wrong price. The Fed Funds rate increase generated a significant amount of unrealized losses, amounting to $66.60 million, about 10% of equity. Certainly, there are banks that are in a worse situation, but this problem should not be overlooked for BFST. After all, TBV per share grew slowly because of AOCI.

If we did not consider AOCI, TBV per share would have increased in any year from 2020 onward, but including AOCI, the current TBV per share of $18.62 is not that far from the pre-pandemic $17.31. As long as the securities are held there are no material losses, however, some were sold in the last quarter. Securities worth $70 million were sold with an average yield of 1.98%, resulting in a pre-tax loss of $2.50 million. This was about 8.13% of the total securities portfolio, and the proceeds were reinvested at a new weighted average book yield of 5.17%. In essence, in order not to lose the opportunity to invest at current money market rates, the company decided to sacrifice a small portion of the low-yielding securities held.

Not much was said about the securities portfolio during the conference call, so we cannot know whether this process of selling low-yield securities to buy high-yield securities will continue in the next quarter. What we do know is that AOCI will probably not rise too much as interest rates are expected to fall based on market and Fed expectations. Even in a “higher for longer” scenario, AOCI would remain stable. Moreover, the more time passes, the more low-yielding bonds will mature; as a result, AOCI will decline regardless.

Deposits and net interest margin

Total deposits reached $5.24 billion, an increase of 8.90% from last year. Since 2018, deposits have had a CAGR of 24.80%, but this is reduced to 16% if acquired deposits are excluded. Due to the current macroeconomic environment, the composition of deposits has changed for the worse, in fact, compared to 2022 non-interest-bearing deposits decreased by $263 million, and time deposits increased by $429 million. The overall result is an increase in total deposits but also in their cost.

As we can see from this image, once again the total cost of deposits increased faster than the yield on loans, which resulted in a decrease in the NIM. The latter reached 3.55% and this is the fourth quarter in a row that it has decreased.

According to management’s expectations, as early as the next few quarters could be the first improvements, mainly due to the aforementioned repricing opportunities. Yields on new and originated loans in December were at 8.63%, which would imply at least 200-250 basis points more than the yield on some loans in the portfolio. For example, loans worth $446 million will mature in 2024 with a weighted average rate of 5.93%. Even if the Fed reduced rates by 75 basis points in 2024, there would still be good opportunities for repricing and increasing NIM.

The only problem would be if the Fed cut rates too much. Since BFST’s loan portfolio is heavily exposed to floating rates maturing below a year, repricing opportunities would be scaled back. At the same time, it is not certain that the cost of deposits would begin to fall as fast as the Fed Funds Rate. The result would be a NIM in clear trouble.

Conclusion

Business First Bancshares is a small bank operating mainly in Louisiana and Texas and managed to weather the banking crisis of 2023 without too much consequence. However, extending the performance over multiple years shows a TBV per share with very slow growth starting in 2019, which is why the price per share has stalled. Once the unrealized losses are wiped out, there could be the right boost to revive the stock, but it could take years before that happens. At present, the only driver that needs to be relied on to boost TBV per share is retained earnings.

Although declining, the outlook for NIM looks good, assuming the Fed does not cut interest rates too much. At the same time, strong growth in Texas may continue but it will be important not to raise the LTD ratio too much: it is already high. Finally, the cost of deposits will probably continue to rise in the coming quarters but repricing opportunities could more than offset this negative factor.