Earnings Call Transcript - BFST Q4 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Business First Bancshares Fourth Quarter 2024 Earnings Conference 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, Senior Vice President, Director of Corporate Strategy and FP&A. Matt, you may begin.

Matt Sealy, Senior Vice President, Director of Corporate Strategy and FP&A

Thank you. Good morning, and thank you all for joining. Earlier today, we issued our fourth quarter 2024 earnings press release, a copy of which is available on our website along with the slide presentation that we will 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 joined by phone, please note the slide presentation is available on 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 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 CEO and President, Jude Melville, Chief Financial Officer, Greg Robertson, Chief Banking Officer, Philip Jordan, and President of B1Bank, Jerry Vascocu. After the presentation, we'll be happy to address any questions you may have. And with that, I'll turn the call over to you, Jude.

Jude Melville, CEO and President

Thanks, Matt. Good afternoon, everybody. I'd like to begin by saying thank you to everyone listening in today or reading the transcript at some future date. We know you have choices to make when it comes to allocating your attention, and we appreciate your prioritizing our company. 2024 was a significant year for us, one in which we not only made but numerically demonstrated material progress towards goals that we've articulated in this forum over past quarters. And the fourth quarter was a particularly nice capstone to our efforts over the course of the year. Over 2024, we grew our client base while exercising disciplined loan and deposit pricing, generating another quarter of double-digit basis point expansion of our net interest margin, which topped off on nearly 30 basis point expansion since our trough in the first quarter, helping us to achieve a sustainable over 3.5% or NIM sooner than expected. We continued our focus on expense management, leading to greater structural profitability, even while continuing to invest in key technology platforms, and adding seasoned employees as we prepare internally for a responsible approach towards $10 billion in assets over the next few years. We funded our portfolio of increasingly diversified loans with even stronger core deposit growth. Improving the mix of both sides of the balance sheet, reducing CRE and C&D concentrations markedly, while also maintaining strong asset quality, increasing our loan loss reserve to 0.98%, not including our remaining loan discount from previous acquisitions. Even while we diversify by type of credit asset, we also continued to diversify geographically with over 40% of our exposure now in the Dallas and Houston markets. We demonstrated traction in our various non-interest income revenue sources, including building out the infrastructure of our correspondent banking function serving over 100 bank clients, growing income from SBA and interest rate swap provisioning. In addition to normal organic operations, over the course of the year, we successfully took advantage of opportunities to complete two mergers: a whole bank acquisition of Oakwood Bank in Dallas and a non-bank transaction and SBA loan service provider out of Houston. In both cases, we're either on track or ahead of forecast on earnings impact, employee and client retention earnback periods, and minimization of tangible book value dilution. We accomplished both these acquisitions without the need for additional capital and finished the year with a higher TCE ratio, higher TBV per share, higher Tier 1 leverage ratio, and a stable total risk-based capital ratio. It was a solid contributive quarter and a solid constructive year, and I congratulate our team for all the work that went into it. What I'd like to emphasize in closing is that while this was a solid year, it was not a unique year in terms of our priorities, which will continue to be our points of emphasis into 2025 and beyond. Healthy diversified growth within our capacity for capital generation, a focus on liquidity and capital accretion. Continued focus on developing a growing set of robustly served clients in preparation through investments, prioritization of regulatory relationships, reputation and balance sheet structuring so that we may continue seizing opportunities as they present themselves as we're confident they will. With that, I'll turn it back over to you, Matt.

Matt Sealy, Senior Vice President, Director of Corporate Strategy and FP&A

Great. I will give you the floor to discuss the financials in more detail.

Greg Robertson, Chief Financial Officer

Thank you, Matt. Thank you, Jude, and good afternoon, everyone. As Jude mentioned, the fourth quarter was a strong finish to a productive year. I will take a few minutes to review our results and discuss our updated outlook before we open the floor for questions. In the fourth quarter, GAAP net income and EPS available to common shareholders were $15.1 million. This included a $4.8 million one-time CECL provision related to the Oakwood closing, a $168,000 merger-related expense, a $463,000 core conversion-related expense, and a $21,000 gain on securities sales. Excluding these non-core items, non-GAAP core net income and EPS available to common shareholders were $19.5 million and $0.66. We saw notable core margin expansion, disciplined expense management, continued success in the noninterest revenue segment, and stable balance sheet growth. Total loans held for investment rose by $761.3 million, or 58% annualized, during the fourth quarter. If we exclude the loans acquired from Oakwood, organic growth was $62.8 million, or 4.8% annualized. The growth in loans from the previous quarter came mainly from $54.3 million in the C&I portfolio and $20.8 million in the residential 1-4 family portfolio, while construction loans decreased by $31.9 million from the prior quarter. Our organic production was driven by the Southwest Louisiana and Greater New Orleans region, which accounted for all the net loan growth in the linked quarter. Based on unpaid principal balances, loans from Texas made up about 41% of the overall loan portfolio as of December 31, 2024. Total deposits increased by $870.4 million, or 61.4% annualized quarter-over-quarter. Excluding the deposits acquired from Oakwood, organic deposit growth for the quarter was $156.8 million, or 11.1% annualized. This growth in organic deposits included $51.8 million in money market deposits and $33.3 million in net growth in non-interest-bearing deposits, with the rest attributed to seasonal municipality deposits. Fourth-quarter funding costs benefited from the full quarter impact of the Federal Reserve's September rate cut and partial impacts from November and December rate cuts. We are pleased with how we managed to lower our deposit rates while still achieving positive deposit growth and reducing our loan-to-deposit ratio. Total interest-bearing deposit costs decreased by 29 basis points from the prior quarter, primarily due to a 44 basis point reduction in the cost of NOW accounts and a 41 basis point reduction in the cost of money market accounts. Notably, the weighted average total cost of deposits in the fourth quarter was 21%, down 13 basis points from the linked quarter, while the December weighted average cost of total deposits stood at 2.68%. We are optimistic about this trend as we move into the New Year. Total non-interest-bearing deposits represented 20.8% of total deposits as of December 31, 2024, slightly down from 21.1% in the prior quarter, but in line with our expectations at the end of 2024, where we aim to maintain this percentage in the low 20% range. We believe the proportion of non-interest-bearing deposits should remain stable in that range for the foreseeable future. Our GAAP reported fourth-quarter net interest margin improved by 10 basis points from 3.51 to 3.61, while the non-GAAP core net interest margin, excluding purchase accounting accretion, also rose by 10 basis points to 3.56%. The fourth-quarter net interest income and net interest margin reflect the first full quarter impact of Oakwood's balance sheet. Both GAAP and core margins expanded more than we anticipated due to improved funding costs and disciplined pricing on new loans. It's important to note that our overall deposit beta for the fourth quarter, considering only the September rate cut, was 51%. With the full effect of the late Q4 rate cuts, we expect deposit costs to keep declining in the near term, but this will depend on our ability to retain and attract lower-cost deposits and noninterest-bearing deposits. I would like to highlight a few key points from Slide 21 in our investor presentation. Including Oakwood, we believe maintaining an overall deposit beta of 45% to 55% is achievable. Additionally, the overall core CD balance retention rate improved from 90% to 90% in December, up from 83% in September. This is a reflection of our team's dedication to maintaining and retaining core deposit relationships. As indicated in Slide 22, we have around $2.5 billion in floating-rate loans with a weighted average rate of approximately 7.75%, along with approximately $600 million in fixed-rate loans maturing over the next year at a weighted average rate of 6.43%, which we expect to reprice in the mid-7% range. Lastly, I want to mention that we anticipate discount accretion to average about $700,000 to $800,000 per quarter going forward. Turning to the income statement, GAAP non-interest expense was $49.6 million, which included $168,000 in acquisition-related expenses and $463,000 in conversion-related expenses. Core non-interest expense for the fourth quarter was $48.9 million, increasing by approximately $7.3 million from the previous quarter due to the full impact of Oakwood's expenses and seasonal factors at year-end. We expect core expenses to keep rising in the first quarter due to additional seasonality associated with year-end. We believe the current consensus outlook for core expenses in the low $50 million per quarter range is reasonable. However, I want to remind everyone that due to the anticipated conversion of our franchise in late 2025, we do not expect significant cost savings during the year. Fourth-quarter GAAP and core non-interest income were $11.9 million and $11.8 million, respectively, with GAAP results reflecting a $21,000 gain on securities sales. Non-interest income for the third quarter was slightly better than we had anticipated, driven by our newly formed customer swap business line, which generated about $1.3 million in revenue for the quarter. The fourth quarter also benefited from a one-time debt-related gain of $300,000. We see Q3 core non-interest income as a good baseline moving forward, as well as Q4, and we expect non-interest income to continue on an upward trajectory, albeit with some bumps along the way. That concludes my prepared remarks, and I'll turn it back over to you.

Jude Melville, CEO and President

We're prepared to take questions now. It's been a good solid year that we're proud of, and we're as excited about 2025 as we've ever been.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Matt Olney with Stephens. Please go ahead.

Matt Olney, Analyst

Hey, thanks. Good afternoon, guys. I'll start on the margin, really good momentum on that core margin in the fourth quarter results both on reported and core. Based on that commentary that Greg provided around deposit costs, competition and loan yield, it feels like this momentum can continue, at least the first few quarters of 2025. But would love to hear any additional thoughts you have around the margin in the next few quarters.

Greg Robertson, Chief Financial Officer

Thank you for the question, Matt. I agree with you. Our plan is to aim for low to mid-single digit margin expansion throughout the year, possibly seeing a bit more in the earlier part of the year since we haven't fully experienced the effects of the last rate cut yet. The main focus is to keep attracting and growing deposits organically. If we achieve that while maintaining stable loan rates, we should see continued expansion.

Matt Olney, Analyst

Okay. And then I guess also looking for any kind of commentary you have around loan yields, loan pricing, just the competition out there. I would think at some point this year, we'll see some other banks get more aggressive on some of their loan pricing. Is that something you're seeing yet any signs of that thus far?

Greg Robertson, Chief Financial Officer

I'll talk about what kind of what we've seen so far, and maybe I'll let Phillip or Jerry make a comment about what they're seeing with the pipeline. Our weighted average for production new and renewed for the fourth quarter was about $758 million. So still holding in line nicely with where we think we should be. I would expect you're right. The challenge will be in the competition; some of our competitors may decide to get more aggressive, and we'll have to deal with that on a one-off basis. And I don't think that changes our focus on growing relationships and making sure the whole relationship is priced the right way. But I'll let Jerry and Philip.

Unidentified Company Representative, Company Representative

Yeah. I would say, Matt, obviously, it's always a very competitive environment, and now is no different. But I do think that we have been pretty consistent with the year. We have some new software as far as our pricing capabilities, where we're able to, as Greg said, take into consideration the entire relationship. So those with significant deposit relationships, et cetera, we're able to be very competitive in retaining those relationships. So our bankers do a good job of pulling on deals.

Jude Melville, CEO and President

Yeah. I would just add, I think this year was a good illustration of our willingness to exercise discipline when it comes to trade-offs between growth and margin. And we certainly will continue growing and plan to continue growing and want to grow. But we also recognize that over the long term, we create more value by maintaining pricing discipline even while we grow, even if it's at a more moderate pace. So it's not just what will the market give us. It's also how we allocate our capital. And I think we are more prepared than ever, both in terms of our mindset and in terms of our data availability, given the technological advancements that we've made to be able to think through those choices. And so we certainly will continue to grow and plan on being a large organization in the future of what we want to do it the right way. And I think this year has been a good transition for us, mindset-wise, and we'll look to continue to think through those trade-offs.

Matt Olney, Analyst

Yeah. Okay. And then just lastly for me, I guess on the fee income side. We just saw some really strong growth throughout the year from several different sources. I think you mentioned this past quarter, it was a customer swap group that contributed nicely. I guess, I just kind of want to look forward to 2025. And Greg, in your commentary, I think you said that the third quarter run rate is the best quarter to kind of consider for our forecast. Did I hear that right? And then any general commentary about what drivers you expect with different groups and teams you expect to drive that fee income growth in 2025.

Greg Robertson, Chief Financial Officer

Matt, I think what we could expect is that I may have said Q3, but I think it's Q3 and then the bill at the Q4, $11.8 million in Q4 is what we produced. And I think that's a good run rate to think about how we're going to go forward. I think somewhere you're going to see from $40 million to $50 million for year-end to '25. As we've mentioned, it might be bumpy getting there because there's going to be different contributors along the way as those build businesses kind of build out and continue to round out. But I think ending the year between 40 and 50, maybe closer to 50 is probably what the non-interest income target would be.

Jude Melville, CEO and President

Yeah. The important thing for us here is what we're trying to do is build an infrastructure that provides multiple opportunities for that growth. So that no one product set or no one function has to consistently outperform, but we can kind of work together on how we get to where we want to go. And I think the SBA platform and the swaps are a good example of maybe even different reactions to interest rate movements. As rates come down a little more and are more stable, maybe the SBA has more of an opportunity to pick up, whereas in a higher rate environment, that begins to limit some of the SBA opportunities. But perhaps the swap opportunities aren't as great in a more comfortable interest rate environment for everybody. So hopefully we're adding enough different components to our non-interest income that in any given quarter, we'll see continued increase. But as Greg said, it's harder to predict than interest rate margins. And so I might see a little volatility, but we feel really bullish on our opportunity when it comes to non-interest income over the course.

Unidentified Company Representative, Company Representative

Yeah. I would add one thing. I think our markets and our bankers out there really gathered a really good command of the shipping rate environment, and a little more normalized yield curve creates new and different opportunities. So I think it's nice to have the tools we've got via SBA swaps kind of driving some opportunities for clients. So it's been nice to watch the strategy kind of take hold as we prepare for a normalized rate.

Jude Melville, CEO and President

And on a similar vein with thinking about our bankers that are out there, I think this was a good year in terms of confidence building in the product set. So these are new tools, and they're not new to the industry, but a focus on them is new to us, and that's really been a six to eight-quarter journey. And so I think by the end of 2024, we begin to see bankers think about it more ultimately and begin to recognize that there are incentive opportunities. And there are ways that we can serve clients more robustly than they might have thought two or three years ago. So partly, it's the yield curve does make a difference, as Jerry pointed out. But I think also our institutional knowledge and our institutional confidence will lead to more business in 2025 regardless.

Matt Olney, Analyst

Okay, guys. Appreciate the commentary. And congrats on the year.

Jude Melville, CEO and President

Thanks, Matt.

Michael Rose, Analyst

Hey, good afternoon. Thanks for taking my questions. Just wanted to get a little more color on this quarter's C&I growth. It was really strong on an organic basis. Just trying to understand if that was more kind of line-driven or just customer growth. And then if you can kind of shape up the pipelines for us. And maybe, Jude, if you can just discuss kind of competition within the different regions and if there's any hiring plans as we kind of contemplate a 2025 loan growth outlook. Thanks.

Unidentified Company Representative, Company Representative

Yeah. I would say, Greg mentioned that we had some success in our Southwest and New Orleans market. And actually, volume was a little low. If I heard your first part of your question correctly, I would say that there was a little bit of both. We had some deepening of some existing relationships on C&I, but I think we also picked up some new customers, but definitely a focus on that as we transition and downshifted more on our focus on that C&I, but some really good growth.

Jude Melville, CEO and President

I want to clarify that our Commercial and Industrial (C&I) sector hasn't increased as much as it seems when looked at in comparison. Six quarters ago, we discussed a slight reduction in growth, primarily due to a diminished emphasis on construction and commercial real estate (CRE). However, we anticipated that our core C&I business would continue to thrive, and that's what we've observed. The entire year has shown that C&I has remained relatively stable in production. The shift in focus has played a significant role in this stability. As a business bank, it's vital to offer a comprehensive range of services, not solely relying on real estate, although we're certainly comfortable engaging in that as well. We are optimistic about the opportunities ahead. Our aim has always been to concentrate on C&I to reap the rewards of building strong deposit relationships. A considerable part of our success in generating deposits this year, especially in the fourth quarter, has stemmed from our C&I relationships, focusing on the overall banking relationship rather than just specific loans. We believe we stand out from other community banks in our capability to manage this type of business effectively. We've invested in internal auditing capabilities, recognizing the unique risks involved, and we want to ensure we're undertaking this work because we excel at it, not merely for the sake of doing it. This gives us a competitive edge since many community banks are not making the same level of investment in this area. Historically, there's been frequent discussion about C&I lending, but not much has changed, whereas we have committed to investments in systems that others have overlooked.

Greg Robertson, Chief Financial Officer

At the end of Q1 2023, we had about 120% of our capital concentrated in C&D. By the end of the fourth quarter, that concentration dropped to around 78%. This decline in the C&D bill and the total CRE number from $2.75 billion to $2.54 billion during the same period emphasizes that our focus hasn't changed. We're just in the process of reducing the C&D book, which we've noted in previous quarters, and that has been part of our strategy.

Jude Melville, CEO and President

I would say also, Michael, the second part of your question about hiring, we don't have the aggressive hiring goals this year. We feel like we've got capacity internally. We'll continue to add bankers when we think they're a good future fit, and we'll continue to have those conversations. But we believe that our growth opportunities exist within our current set of bankers with some incremental additions over the course of the year. But there was a point maybe three years ago where we were growing 25, 30 bankers a year, and we feel like we've achieved a certain level of platform from which we're able to grow more by adding support staff and making sure that our processes and procedures are adapting as we grow. And so we think we have more institutional capability to grow without necessarily going on the hiring spree in order to do so. But with that said, we're always looking for good partners and certainly, we'll continue to have that conversation and do so when it's right and not just because we need to grow.

Michael Rose, Analyst

I appreciate a lot of color. Sorry, I asked a couple of questions in one there. I think last quarter, you kind of talked about a mid-single-digit loan growth forecast. Any reason that, that would change just given some of the momentum that you mentioned? And, yeah, I'll just stop there.

Jude Melville, CEO and President

No, no, I think you can still count on that. Again, it's one thing to be able to produce the loans, but it's another thing to think about how that relates to your capital structure and how it relates to your organic core deposit growth, and we want to measure that we maintain balance between all 3 components. So that's still our intention for the year.

Michael Rose, Analyst

Okay, great. And then maybe just one quick final one for me. Just on the cost savings related to the deal. Any changes in expectations there? Or is it all kind of status quo?

Greg Robertson, Chief Financial Officer

It's all status quo. We're doing our core conversion in May, and we won't convert them until September. So we're not anticipating any significant cost savings for 2025 from the Oakwood acquisition that should prepare us for 2026 to achieve what we presented at the announcement.

Feddie Strickland, Analyst

Hey, good afternoon. Just wanted to start on the borrowing. I saw you reduced borrowings by about $10.3 million this quarter. Can you just talk about how you think about those going forward and whether there's any major upcoming maturities that you potentially pay down or kind of how you want to use borrowings and wholesale funding in general over the course of the next year or so?

Greg Robertson, Chief Financial Officer

I see some opportunities with borrowings, which I will transition into discussing other wholesale funding. We believe there's a chance to pay down about $50 million of FHLB maturities this coming year, provided we continue to grow deposits organically as we have over the past year. Successfully executing this would lead to significant improvement in our margin. Regarding broker deposits, we also anticipate similar opportunities in 2024, though with less impact on the expense side of those deposits as we intend to restructure them due to upcoming maturities every quarter. There are opportunities to reprice both FHLB and broker deposits, contingent on the current rate environment remaining stable and our continued success. If everything aligns, we will look to pay down those borrowings as opportunities arise, similar to what we did in the fourth quarter.

Feddie Strickland, Analyst

Got it. Thanks for that. I'm curious about the details in the presentation regarding the loans up for renewal. Do you have a general idea of how many of these loans you're retaining compared to what has rolled off? I'm trying to understand the potential for repricing and how much will remain with the bank.

Greg Robertson, Chief Financial Officer

We experienced about $200 million in loan maturities or renewals in the fourth quarter, which was higher than the other three quarters this year. I believe we have managed our relationships effectively during this time. However, it is challenging to pinpoint an exact figure for the $600 million we expect to renew since market conditions fluctuate daily. That said, we feel optimistic about our chances. Even with the current weighted average, any increase would be beneficial. I understand this isn't a straightforward answer, but it's a difficult question to address.

Jude Melville, CEO and President

The point of the repricing opportunity is not just about adjusting existing loans; it's also about the potential to reprice new loans. The key concern is whether the funding will be allocated to maintaining existing relationships at a new rate or to establishing new relationships at a new rate, with the new rate being crucial. While it's generally preferable to retain a relationship, we want to ensure we maintain discipline regarding margins.

Greg Robertson, Chief Financial Officer

Yeah. And Feddie, when I think about it from us to bring your point home I'm thinking about it. If we say we're going to grow 5% or 6% or whatever the number is in loans next year, I'm thinking about the net and the repricing of new and renewed. So the challenge for our bankers is just to make sure that we get to the number. Sometimes that's many different ways of how we get to the number.

Jude Melville, CEO and President

Another way to consider the repricing opportunity is by evaluating potential repricing cliffs. We were concerned that during a specific quarter, significant repricing might coincide with the pressures of higher rates compared to when the loans were initially set. This raised questions about potential asset quality issues. However, it has been interesting to observe that we haven't encountered such problems; any fluctuations have stemmed more from typical banking credit risk rather than interest rate risk. The encouraging part is that we've been effectively managing that portfolio, whether by maintaining relationships and repricing or guiding clients to find alternatives. From a credit standpoint, this has been very positive. Additionally, we have the chance to reprice for higher income, but our primary motivation for monitoring this year was to assess credit exposure.

Greg Robertson, Chief Financial Officer

We are not just focusing on adjusting loan prices; we are also considering the liabilities on the balance sheet. This includes examining time deposit maturities that are due in the next 90 to 120 days, which represent a significant amount that is nearly on par with the fixed-rate loans being repriced. This creates an opportunity for us. We assess the net impact of both sides to improve our relationships at better rates with existing clients, and at times, we seek to leverage that capital for new client relationships as well.

Unidentified Company Representative, Company Representative

Feddie, I want to provide some context regarding betas in the current declining rate environment. In contrast to the previous rising rate environment, we've observed an approximately 85% beta on new and renewed loan yields. This trend remains consistent in the current situation. Additionally, we are nearing a 100% beta on the new offering rates for our interest-bearing deposit accounts, although there's still a small spread in the asset-liability management. On the loan repricing front, while we can easily quantify the yield perspective from the beta, I would estimate that we are approaching 100% in terms of renewal dollars.

Feddie Strickland, Analyst

Thanks for the information, everyone. I just have one quick question. I noticed that a larger portion of the loans originated from the Louisiana area rather than Texas this quarter, excluding Oakwood. What should we anticipate going forward regarding the source of loans from our footprint? Is the pipeline potentially leaning more towards Louisiana than it has in the past? I'm just curious about that.

Jude Melville, CEO and President

I think each quarter will bring a slightly different mix, and we have a history that supports this approach. This is one reason we have diverse geographies, which benefits us from both a credit and production standpoint. Currently, our size allows for different outcomes in various regions to impact our overall results in distinct ways. The shift in focus away from construction in recent quarters likely affects Dallas more because it had a larger construction presence compared to Louisiana, given the growth and development patterns. Therefore, it is not surprising to see some rebalancing in our bookings. As we establish a more stable concentration in construction exposure, we should experience less negative impact from the shift away from construction. However, we will always adapt, and we continue to invest in Louisiana while also investing in Texas and other strong growth areas. Would you like to add anything?

Unidentified Company Representative, Company Representative

I wanted to mention that the volume we discuss represents the net growth rate. To Jude's point, these large construction and development loans are being repaid. We are also issuing new loans in Dallas at a strong rate to replace them. Additionally, the acquisition has a strong market, which we will also build upon.

Greg Robertson, Chief Financial Officer

The amount of production required to counteract natural amortization in that book, due to significant growth over the years, is considerable. There is still a lot of activity and production in Dallas, which is needed to maintain moderate growth.

Jude Melville, CEO and President

We want to ensure that we maintain a detailed understanding of our relationships, even as our overall asset size increases. It’s important that our individual credit evaluations do not align too closely with our overall balance sheet growth. We intend to focus on our core area, which involves taking on slightly smaller loans that tend to be more profitable and healthier for credit in the long run. However, this also means we need to increase the number of loans we issue to achieve the same dollar amount. Notably, commercial and industrial loans tend to be more profitable over time compared to construction loans due to the overall nature of the relationships, and we are optimistic about this. We will continue to work on reducing risk as we expand.

Feddie Strickland, Analyst

Got it. Thanks for all the color, guys. I’ll step back.

Jude Melville, CEO and President

Thanks, Feddie.

Emmanuel Navas, Analyst

Good afternoon.

Jude Melville, CEO and President

Hey, good afternoon. Thanks for calling in.

Emmanuel Navas, Analyst

I appreciate the quarterly NIM guidance of low single digits to mid-single digits per quarter growth. What type of rate environment is behind that assumption?

Greg Robertson, Chief Financial Officer

I'm sorry, I didn't hear the last part of that. Could you repeat?

Jude Melville, CEO and President

What rate assumptions have you made in terms of further decreases in the Fed funds rate?

Greg Robertson, Chief Financial Officer

Yeah. So we're forecasting a flat rate environment. We think the work we've done on our balance sheet becoming more neutral, that's the most conservative way to approach it.

Emmanuel Navas, Analyst

What would be the impact if there were additional cuts? How would that change the projection?

Greg Robertson, Chief Financial Officer

The base is one or two for every cut going forward.

Emmanuel Navas, Analyst

Okay. If we remain flat, could you achieve, let's say, 3 basis points per quarter? Could you reach $375 million in the fourth quarter of '25?

Greg Robertson, Chief Financial Officer

I think that would be an optimistic view. A range of 3.65% to 3.75% would likely be acceptable for us. It goes back to what I mentioned earlier, in this environment, our success will depend on attracting deposits and pricing loans appropriately. The current yield curve, particularly the longer end, presents challenges.

Jude Melville, CEO and President

I'll provide you with some additional insights. The 3.74% is still within the realm of possibility. It's important to remember our business manager factoring life business, where fees are included in the margin but do not affect the earning asset base. These fees, as mentioned last quarter, may be somewhat elevated depending on how certain clients progress throughout the year. This could impact our core margin more than expected, as there are no actual earning assets influencing the margin calculation. Therefore, 3.70% is not entirely out of the question.

Emmanuel Navas, Analyst

And then the broker deposit and FHLB borrowing opportunity, is that assumed to happen? Or is that if you get the excess deposit growth, you pay those?

Greg Robertson, Chief Financial Officer

I would say also the deposit growth, it would look a lot like what we did in the third and fourth quarter, where we were able to pay those down. They would reprice, but you wouldn't get the full benefit of the difference in the repricing from an organic deposit standpoint.

Emmanuel Navas, Analyst

Okay. So that's not necessarily in core NIM guidance, but it is a potential positive?

Greg Robertson, Chief Financial Officer

Correct. Yes. It's an opportunity. Yeah.

Emmanuel Navas, Analyst

Got it. Got it. Just was trying to see what's in and what isn't. I like that opportunity. It's a very nice one. Stepping over to net charge-offs, they stepped up a bit just this quarter. Any thoughts on how net charge-offs or provision should extend across the next year? Is it just kind of a modest split and will normalize back down? What are your kind of thoughts of progression across the next year?

Greg Robertson, Chief Financial Officer

Yeah. I would say the fourth quarter for us was a little higher. I think it's a cleanup quarter for a few credits that we had outstanding settlement of one, I would call those kind of outliers. I think what we're expecting is to just continue to plod along like we have been in the past quarters. No material decline in the book at audio.

Jude Melville, CEO and President

We are big enough though, that we will have an occasional one-off and always try to caveat this conversation with that, then these things are going to happen. But we're not seeing any systemic issues, and we're not seeing any blanket degradation. But certainly, our special assets team is on the case and active and working through situations did over the course of 2024 successfully and anticipate continuing that. But we need to stay vigilant because there will be one-off events. But I would actually agree with Greg from a full portfolio point of view is confident in 2025 as we did in 2024.

Unidentified Company Representative, Company Representative

One thing circling back to the margin. I realize that we have failed to mention the accretion outlook. And so in 2025, we see around $800,000 a quarter, a little over $3 million for the full year, which compares to a little over $4 million for 2024.

Emmanuel Navas, Analyst

What was it in '24? I'm sorry, I didn't hear that.

Greg Robertson, Chief Financial Officer

Little over $4 million, not quite $4.5 million.

Emmanuel Navas, Analyst

In '24. Okay. I appreciate this. I appreciate all the commentary. Just the last thing on the credit. These are really low levels, but on the reserve did step up a bit. Are we likely to kind of stay at that level for now?

Greg Robertson, Chief Financial Officer

We're going to reserve at 120 of every new loan produced. So we think that, that will at least stay at that level and maybe slightly per it takes to move it 1 percentage point in our size, it takes $100,000 more in the model, so almost $1 million more. So I think it's a pretty big needle mover to get it to move up. But I think we're going to try.

Jude Melville, CEO and President

We are very pleased with the return to normality in our overall loss provision, which is now nearly at one. Due to our history of acquisitions, it has been some time since we have reached this level. As you know, we had the loan loss provision and credit marks linked to acquired assets that do not appear in the provision for off-balance-sheet items. We have made efforts to clearly present the calculations for everyone, showing that the effective loan loss reserve is approximately 20 basis points today above the loan loss ratio. We have finally found a positive aspect in the CECL accounting rules. With the Oakwood transaction, we were able to relocate the reserve, allowing us to benefit from a lower normalization. We are excited about this and aim to maintain this range, if not slightly exceed it, over the next year.

Emmanuel Navas, Analyst

I appreciate the commentary.

Jude Melville, CEO and President

Okay. Good. Well, thanks, everybody, again, for participating, and thanks to our team for a great year. I think just in closing, we spend so much time particularly on this call thinking about the metrics and the numbers and they are in the models, and they're certainly very important, but I do like when I can to point out that first and foremost, we're still a relationship business. And if I think about the work that we did in 2024, and the good things that we accomplished, a lot of it really has to do with the building of relationships, whether that be a core set of investors that we didn't know before or analyst relationships that we've enjoyed growing over time or our regulatory relationships or our employees. We have over 800 now, which is a lot compared to the 200 or so that we had four or five years ago. And to be able to manage through that and feel really good about the culture that's developing here, that's all about the relationships, and all those relationships lead to clients, and we have more than we've ever had. And so if I'm thinking about things we're proud of in 2024 and things that we're excited about in 2025, it really comes down to deepening and expanding those relationships, and we appreciate you all being a key component of that. So thank you for your time.

Operator, Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.