Business First Bancshares, Inc. Q3 FY2022 Earnings Call

Thank you, Jack, and thank you all for joining. Yesterday afternoon, we issued our third quarter 2022 earnings press release, a copy of which is available on our website, along with the slide presentation that we will refer to during today's call. Please refer to Slide 3 of our presentation, which includes our safe harbor statements regarding forward-looking statements, and these are non-GAAP financial measures. Those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com. Please also note that our safe harbor statements are available on Page 8 of our earnings press release that we have filed with the SEC yesterday. All comments made during today's call are subject to the safe harbor statements in our slide presentation and earnings release. I'm joined this afternoon by Business First Bancshares President and CEO, Jude Melville, and Chief Financial Officer, Greg Robertson. After the presentation, we'll be happy to address any questions you may have. I will now turn the call over to you.

Thank you, Matt, and welcome everyone. I'm excited to be here for our first public call. We’re joined by Philip Jordan, our Chief Banking Officer. I’ll provide a brief overview for those who may not be familiar with our story, and then we can move to the Q&A session, which I look forward to. b1BANK is a 16-year-old bank based in Louisiana but also operates in Texas. Our primary focus is on small businesses. We are the leading bank headquartered in Louisiana in terms of deposits, and around one third of our assets are in Dallas and Houston. We manage about $6 billion through our RIA called SSW. A few years ago, we initiated a five-year plan with three main components: growth, asset diversity, and earnings. We started with about $3.7 billion in assets and aimed to reach $7.5 billion by the end of the plan. We also wanted to diversify our assets from a little under 10% outside Louisiana to around 50%. Regarding earnings, we aimed to increase our ROA from under 1% to approximately 1.25%. I’m pleased to report that we are ahead of schedule in all areas of our plan. We expect to finish the quarter with about $5.8 billion in assets. Our asset diversity has improved, with around 34% now in Texas, and our earnings have reached a 1.5% ROA. The third quarter showcased the returns on several investments we’ve made in recent years, including M&A, new branches, and organic growth. We finished the third quarter with a record profit and our seventh consecutive quarter of over 20% annualized loan growth, specifically achieving 30% for the last two quarters. About 60% of this loan growth is from the Dallas and Houston regions. Importantly, we also maintained solid asset quality. I’m excited that our investments are starting to pay off, and we see significant capacity for continued growth. We’ve hired around 25 bankers in the past six quarters, and while their production is increasing, we believe there’s still potential for growth. Additionally, we've brought in a lot of talent overall and are enthusiastic about our team. This year, we also received recognition from American Banker Magazine as one of the best places to work for our institutions, which is something we’re proud of. I won’t go into further details during the introductory part of the call, especially since we had a capital raise recently where we shared our information with many of you. So, I’d like to open the floor to Q&A for anyone with questions.

Yes. Well, thanks for doing this public call. I think this will serve us all well. I appreciate that. Jude, you mentioned the success you've had on the new hires. Recently, I think you quoted 25 bankers over the last six quarters, and we're now seeing this pay off over the last few quarters in terms of the revenue. I'm curious where we are in this recruiting cycle? Are you continuing to recruit at the same level at this point? Or in other words, can we see another 25 bankers over the next six quarters? Or could this pace slow from what we've seen more recently?

Good question. Yes. No, we don't expect to see the same level of recruitment over the next six quarters. We've hired two bankers this past quarter, and I think two or three bankers a quarter is probably a good run rate for us over the next 1.5 years or so. We feel like we want to let our men and women that we hired have a little room to work. And I want to make sure we're also not getting ahead of ourselves in terms of operational capabilities. And of course, with a certain measure of uncertainty in the air for next year, I want to make sure that we're growing prudently. So we'll continue to add when we find good teammates but not at the pace at which we've done over the past 1.5 years or so.

And then just following up on that, your thinking about geography, I think over the last two years, it's been mostly DFW and New Orleans. Should we expect a similar type of geographic mix in the next two years?

For hiring, you mean?

Yes, yes.

Yes, my assumption is that most of the hiring will likely take place in Dallas and Houston, but we will also make hires when we find strong candidates in Louisiana. Our New Orleans area accounted for about one-third of the hires we've made in the past year and a half, and we are confident in the quality of the team there. We will probably continue to add bankers in the Dallas region. As you know, we completed our acquisition of Texas Citizens earlier this year, and we converted them over the summer. We are very pleased with their growth in the third quarter, having added approximately $40 million in loans, which surpassed our expectations. As our brand becomes more recognized, we believe we will have additional opportunities to bring in more bankers in that area.

Okay. And then I guess on the expense side, we've seen expenses ramp up over the last few quarters. You mentioned the Texas Citizens deal. That's now in the numbers and some of the new bankers. Any guideposts you'd point us towards for the fourth quarter or as we look towards 2023 for operating expenses?

Yes. I'll let Greg weigh in on that.

Matt, thanks. Good question. We think the $37 million quarterly run rate is a pretty good rate. And now we think, going forward, in Q4, that there'll probably be about $1 million to $250,000 higher just for some seasonal expenses, true-ups, some accruals and that sort of thing. But the $37 million point from there on out seems to be a good run rate.

Okay. The last topic I want to discuss is deposit betas. I believe you reported an interest-bearing deposit beta in the mid-30s for the third quarter. Many of your peers are indicating that deposit betas will increase as we move into the fourth quarter due to heightened competition. I would like to know your expectations for deposit betas going forward.

Good question, Matt. One of the things before we talk about the betas, I think that we're kind of proud of is we started out the year at about 31% noninterest-bearing, and we're almost 36% at the end of the quarter. So when you apply that to the overall beta, it makes that closer to 20%. We do think it's going to trend higher probably towards 30% all in as we move forward, maybe slightly higher than that.

So just looking at Slide 9 on the footprint of the deck, and it looks like you've been able to raise even more deposits than loans in Houston. Does the contribution on the deposit side start to rise in Dallas over time to something similar to Houston? Or is the strategy in Dallas more to deploy the deposits from some of the Louisiana regions, just given the competition in that market?

I'll say it's a mixture of both. I mean, certainly, part of our game plan is to take full advantage of the diversified footprint that we have. We wouldn't have been able to grow where we are in loan lines in Dallas without the contributions of some of our more established deposit-rich areas, including Southwest Louisiana. We certainly want to continue to focus on growing deposits in Louisiana and the work wherever that makes sense. I also would say that our Dallas footprint is maturing, and we expect that they would contribute to that effort as well. We just opened our fourth spot there. We have a pretty good established foothold. I will say that I'm very pleased with our deposit mix that we've grown in balance. Of the $270 million cost, a good 60% is noninterest-bearing. While they're not self-funding, they're certainly making a contribution, which speaks to the business orientation in the larger markets and our focus on our treasury personnel as well as lenders. So I would say that I'm pleased with the deposit growth in the Dallas area. But certainly, we hope not only to continue but, as we get increasingly established there, to diversify that mix of deposits in balance.

Got it. That's helpful. I was wondering if you could talk a little more about SSW, the opportunities you see for growing that business, and how it interacts with the core bank.

Sure. Page 11 of the deck gives us an overview of SSW. We've been very successful growing it since they joined our team by about 70% in assets under management, and that's after taking into account the drop in the market. So they have grown nicely since they became part of the team, and the synergies seem to be working well. The bulk of that is made up of clients of other financial institutions. So I think we have a couple of opportunities. One is we've been working on developing a network of financial institutions that we serve not only through SSW but also through our core bank group who sales, loan participations and average deposits from other financial institutions, and they are about $300 million in each of those categories. SSW provides an additional network for us to tap into, and that works both ways. We're also able to use our core bank group to recommend financial institutions to SSW, so we certainly hope to continue to grow that as a source of deposits and a source of risk mitigation with our loan exposure. The other opportunity that we have with SSW is to grow the retail presence, and we've been so busy growing the financial institutions group that we really haven't tapped into yet the ability to use that RIA capability across our footprint with our other clients in their businesses and their executive teams. So over the next 2, 3, 4 years, I think we'll see a more balanced mix between the retail and the financial institution group. The retail business is higher margin, so we'll look forward to being able to work that into our earnings. Still early in the game, just 1.5 years in, but very excited about SSW contributing not only to noninterest income on the bank side but we've also continued to grow that network of banks. We're up to about 100 banks that we serve in some way, whether that be advising them on their investment portfolios or through loans or through deposits. Earlier this year, we did a preferred equity raise. We were able to do that in-house, and about half of the participants actually came from our bank network. There are some other kind of ancillary benefits that we've enjoyed through the affiliation.

I’m curious about the significant loan growth we've experienced, which has brought our loan-to-deposit ratio close to 97%. I'm assuming, Jude, that we won't maintain a growth rate of 30% in the long term. It also seems like it might be challenging for the industry as a whole to keep deposits stable. Could you share your perspective on that ratio and where you believe it should ideally be?

Sure. I'll start, and I'll let Greg give some detail. I think you're right that it's unrealistic to assume that we would continue to grow at 30% annualized. We're looking at more kind of 15-ish kind of mid-teens growth for the rest of the year and then probably into 2023, which ought to give us a little better shot at catching up with deposit growth. We are kind of seasonal when it comes to our deposit base, so the fourth and first quarters tend to be our best deposit gathering quarters. We're optimistic about that from an end-of-the-year impact to our loan-to-deposit ratio. We've actually already started the quarter off positively and been able to pay down some of the borrowings and switch to deposits. We're pleased with the growth. We think we can achieve kind of high single digits for growth on the deposit side this quarter and at the beginning of next year. So still a little bit of gap to make up. We also have relatively low exposure to wholesale deposits at this point, which we can use to help fill in the gaps while we continue to work on our deposit gathering capability. I will say that we've been pleased overall with the growth in noninterest-bearing deposits from our banking centers and from our commercial clients, and some of that's obscured by the fact that we've had such strong loan growth. We've also put more of an emphasis over the past couple of months, in particular, on revamping some of our deposit incentive programs and just kind of center of our production conversations that we're having. We have a history of achieving what we set out to achieve and we're focused on that side of the balance sheet, so I'm still confident that we'll be successful. In terms of your specific question, I think the low 90s, 91, 92 is probably more where we want to be on a regular basis. Greg, do you want to add detail to that?

Yes, Kevin. As June mentioned, for Q4, we're looking at about 15% annualized growth, which translates to around $170 million based on this part of the quarter. We're on track for that. Regarding deposits, we're beginning to see positive trends this quarter. We've had some success in gathering deposits so far, and I believe you mentioned high single-digit deposit growth for the fourth quarter. Additionally, we anticipate receiving between $200 million and $250 million from four-star municipalities in the fourth quarter or the early part of the first quarter. We also expect a significant portion of our agricultural book to pay down approximately $80 million in the fourth quarter, which should convert to cash and remain off the balance sheet for some time. With the update to the incentive plan and these seasonal factors, we believe we have several liquidity options moving forward.

Okay. Great. Just wondering on the margin front, if you could help us on how to think about the trajectory going forward. Any help you could provide if you happen to have handy maybe the September margin or a range you might expect for the fourth quarter? I think a lot of banks are talking about there being additional expansion but not at the pace seen in the third quarter and then kind of plateauing at some point in 2023 in the first half and fighting to keep it stable thereafter. Just any kind of color or outlook on that front?

Yes. Good question, Kevin. As you remember from our release, we had about five basis points inflows to our margin at quarter end from the nonaccrual that we collected the first part of the quarter. The margin in the fourth quarter, we expect we closed out the quarter with the weighted average yield on new loans at about 610 basis points. We think that that's going to improve somewhere around 50 to 60 basis points in the fourth quarter, which, with our seasonality in the deposit front, along with the five basis points that we're not going to get, that was a one-time deal. We should be steady on the margin or slightly decline in the fourth quarter. Looking out from there in 2023, we should start to pick up that six to eight basis points per quarter after that.

To answer your question about the September month ending, it was around 83 core, and that's based on an actual accounting utilization basis.

Okay. And just that plus 6 to 8 basis points per quarter in '23, is that just more of the ongoing repricing of the loan book but then holding the line on the positive pricing from there? Is that how to look at it?

Yes, that's exactly right. We'll continue repricing the loan book, and that should be the driver of that.

Wanted to talk about the loan portfolio from a repricing perspective. On July 17, you did a great job in sort of laying out the picks versus floating of the portfolio. Of the 65% that are fixed rate, and you've got 13% of those that mature within the next 12 months, what would be the remainder of that fixed rate portfolio? What would be the duration maybe on that portfolio aside from that 13%? Any visibility on when the rest of that fixed rate book reprices?

Yes, Brett, that's a great question. Our portfolio has an average life of approximately 48 months. Therefore, the fixed assets will be influenced by that timeframe. Typically, we see about 25% of the fixed rate portfolio adjust every year. To provide additional context, the loan yield for the current quarter is between 65% and 70%. We anticipate that in the fourth quarter, it will be around 75% and expect this trend to continue.

That's a shorter duration than I would have expected for that fixed piece. I wanted to ask if you believe your growth will remain higher than that of some industry peers. Do you think that a significant portion of the growth next year might come from Texas? I know you haven't provided guidance on that, but can you share any insights on your loan growth outlook? Is Texas likely to be the primary driver compared to Louisiana?

We've observed that in the past two or three quarters, approximately 65% to 70% of our loan production has come from Texas compared to Louisiana. While we anticipate our overall growth rate will moderate to the mid-teens, I expect those percentages to remain consistent. Therefore, around 60% to two-thirds of the loan growth will likely continue to originate from Houston and Dallas, which are our key markets. If we manage to add a bank this quarter, particularly from these areas, it's possible that this percentage could increase slightly. We see some disruption in the market, especially in Houston and Dallas, with the recent activity of Iberia, First Horizon, and TD Bank, which may present opportunities for us to recruit experienced commercial bankers in South Louisiana as well. Regardless of the new hires, we believe there will be client opportunities in our markets. While I’m optimistic about prospects in Louisiana, I foresee the majority of our loan growth being driven by Dallas and Houston, in the range of 60% to 70%.

Okay. That's great insight, Jude. Lastly, I wanted to ask about Slide 23, which highlights industries that have faced similar questions over the past two years, such as hotels, hospitality, and retail. Are there any loan segments that you are looking to downplay or avoid growth in, like construction? Is there anything you're steering clear of in this environment?

Yes, we are focusing on acquiring strong clients, and we have maintained a balanced approach in our exposures, successfully navigating through the pandemic without significant losses. There isn't a specific area we are withdrawing from. Over the years, we have reduced our portfolio's exposure to energy, which is now at 4.2%. I anticipate this will continue to decline to the 2% to 3% range in the coming years. We are not refusing business, but I expect that other sectors of our portfolio will likely expand more rapidly. Regarding construction and development, despite experiencing a 30% annualized loan growth in the third quarter, our actual exposure in dollar terms decreased slightly. This will not be a primary growth area for us as we aim for continued balanced growth. Greg or Phil, do you have any additional insights to share?

Nothing.

The only real pushback I heard from investors following the capital raise a few weeks ago was questioning did the bank raise enough capital, especially given the strong loan growth pipelines that you're seeing. So I just want to give you a chance to respond to that. How did you arrive at how much capital to raise? It seems like you're getting closer to accreting capital. Just curious kind of how close you think you are at this point?

Yes. Thanks. It's a balance when you raise capital, particularly in this environment and the pricing that the market is currently at. We wanted to make sure that while we enhanced our capital position, we didn't do so in a way that was detrimental to the current shareholders. We felt like given the $50 million that we raised, added to the $72 million that we registered for preferred equity about a month before that, increasing our capital base by roughly 30% made sense for us. If you take the additional capital and take our projected earnings over the next couple of years, we feel like it gets us through our five-year plan. Barring some outsized opportunity or M&A opportunity at which point we'll discuss at that time, but we feel like we are on the verge of being able to accrete capital with our increased earnings and our slightly slower growth rate next year. I think in the second quarter, we have models to begin accreting capital, so our plan is in line with raising the appropriate amount of capital at this time given the market.

Yes, Matt. One other thing I'll add to that. When we raised the preferred last quarter, we did not push $20 million of that down in the bank. It's important to remember that we kind of let some dry powder at the holdco to service those holdco obligations over the next six to twelve months. So that's just something to keep in mind as you think about our capital position going forward.

Okay. We appreciate your attention and interest. We are firmly happy to answer follow-up questions down the road if you want to contact us directly. Since Matt brought up the capital raise, we want to be sure to thank everyone on the line that participated in that, either through their roles as analysts or investment bankers or as equity investors. We look forward to giving you a bit of return on it and are excited about what the next few quarters will bring. Thank you all, and have a good afternoon.

This concludes today's conference call. We thank you for your participation. You may now disconnect.