Earnings Call Transcript - BFST Q4 2022

Operator, Operator

Thank you for joining us for the Business First Bancshares Q4 2022 Earnings Call. It is now my pleasure to turn the conference over to Matthew Sealy, SVP, Director of Corporate Strategy and FP&A. Mr. Sealy, please proceed.

Matthew Sealy, SVP, Director of Corporate Strategy and FP&A

Thank you. Good morning, thank you all for joining. Yesterday afternoon, we issued our fourth 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 use of non-GAAP financial measures. For 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 7 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 morning by Business First Bancshares President and CEO, Jude Melville, Chief Financial Officer, Greg Robertson and Chief Banking Officer, Philip Jordan. 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, President and CEO

All right, thanks Matt. And thank you everybody for joining us this morning. We know you have choices about where to be, and we appreciate you deciding to prioritize being here with us. I'll keep the remarks brief so we can jump into questions. I do want to go over some of the notable trends from the quarter and then some four-year highlights. Fourth quarter was a successful fourth quarter we were pleased with where we ended the year of non-GAAP core net income of $16.4 million and $0.66 per share available to common holders, better than we expected and for good positive reasons. Primarily, we continued to have strong loan growth at almost 16% annualized, and one of the things that I was excited about was to see that it was diversified across our regions. And then also, there was a good balance between commercial and CRE credits as well. Second, the positive impacts on the numbers also included higher loan accretion than we expected. We were able to sell a couple of loans, which we felt was good timing for us. Additionally, we had a large payoff as well; those loans had accounting marks related to them that we were able to benefit from. We benefited slightly from non-interest income through SBIC revenue. You'll remember that we have investments in SBICs, which occasionally surprised on the upside, and this was one of the quarters in which we had about $400,000 above budgeted SBIC income. We continued to focus on efficiencies. We are proud of the fact that our non-interest expense came in just below expectations. So, certainly, given the environment we are in, maintaining discipline on expenses is important. Even though we were able to keep our expenses lower than we anticipated, we also made several key hires, including Jerry Vascocu, who joined us as our Chief Administrative Officer after 17, 18 years at Iberia and First Horizon. We’re excited to have the contribution of the experience that he brings, as part of growth organizations. We felt like we’re well established for where we need to be from the senior leadership perspective over the next few years, as we begin to approach the $10 billion mark in assets. We did have an elevated loan loss provision relative to our expectations. We took two specific reserves on loans, and we can discuss that more in the Q&A. But we consider them to be isolated and one-off incidents, one of which involved fraud. Our overall credit metrics reflect that. If you adjust the quarterly results for backing out the additional loan discount accretion and the higher loan loss provision, we would have had about $15.4 million for the fourth quarter, which is still slightly ahead of expectations. So we feel very positive about that. Although it’s a challenge, and probably the challenge going forward over the next two or three quarters, we actually were not pleased with our performance on the NIM side of the ledger. We did drop down 13 basis points on our core NIM. As we mentioned in our last quarter, our third quarter was artificially inflated by about five basis points, and we expected to have five or six basis points drop modeled on top of that. So we came in really close to what we've modeled and feel good about our modeling going forward. It’s important to take a step back; it’s not just quarter to quarter, but comparing the first half of the year to the second half of the year, we had a 20 basis point increase in margin even with that drop. We feel like we're in a better place entering this year than we were last year. We thought the fourth quarter was a little bit of a catch-up phase where we held off on some great moves, and we’re now catching up. We believe we can stay about flat for this quarter and then have some slight increases over the rest of the year, which we can discuss in the Q&A. So I’m pleased with where we are from a margin perspective. Looking at the full year, it was a record year in many ways for us. We achieved a record quarter net income of $57.6 million for the year, which was about 10% above what we finished last year. The previous year included a sizable positive impact from selling our PPP portfolio, so we actually generated significantly more income this year. We feel poised to take on 2023 with the nonmonetary accomplishments that we had over the past year, which includes integrating the Texas Citizens transaction out of Houston and integrating several banking teams that we picked up at the beginning of the year. These are like mini acquisitions and take effort and time; we feel good about their success and don’t believe they are yet at capacity. We also opened our fourth full-service location in Uptown Dallas and experienced a lot of activity there, which we’re excited about. We crossed over a billion dollars in loans in Dallas this past quarter, and when combining our Dallas and Houston operations, about 35% of our credit portfolio is located in those two large and fast-growing metro areas. One of our goals is to get closer to 50% of our exposure outside of Louisiana so we can achieve diversification, and we took big steps towards that this year. Finally, we feel good about fortifying our balance sheet. We raised $122 million in equity over the second half of 2022, including $72 million in a self-managed preferred equity raise. This quarter was our first quarter to pay the dividend on that preferred equity raise, which we were able to do without yet putting in all the work. I feel that’s another positive. We also conducted a $50 million common equity raise. Therefore, we feel well-placed to take on the opportunities we believe exist this next year. Our clients remain quite positive and confident. Certainly, there will be some challenges, but overall, with the strongest asset quality we've had as well as a solid balance sheet and a stronger team than ever, we feel well positioned to take on 2023. I appreciate your time and happy to answer any questions you might have.

Operator, Operator

Feddie Strickland with Janney Montgomery Scott, your line is open.

Feddie Strickland, Analyst

Hey, good morning everybody.

Jude Melville, President and CEO

Hey Feddie.

Feddie Strickland, Analyst

So it was pretty impressive you guys were able to replace FHLB borrowings with deposits in this environment. Do you think you'll need to return to the FHLB later in the year? Or do you feel like there's enough deposit opportunities out there that you can avoid wholesale funding for the near future?

Jude Melville, President and CEO

Well, I think one of the reasons that we maintain access to the line is so that we can have it as backup. We certainly would prefer to raise core funding, and we feel we have some good activity and had success in the fourth quarter. We certainly feel like first quarter will be even stronger than the fourth quarter. Over the course of the remainder of the year, we would certainly prefer to rely on core deposits. One reason we paid down the line is to ensure we maintain access to that secondary source of liquidity. Hopefully, we don't have to use it, but if the opportunities make sense for us from a growth perspective, we would certainly utilize them. So we're going to try not to, but if we need to, we will. It's nice to have enough tools in the toolbox as we navigate through the next year.

Feddie Strickland, Analyst

Got it. That makes sense. More broadly on the margin, what should we expect moving forward? It was slightly better than we anticipated this quarter, partly due to loan accretion income. Can we discuss where you see the core margin, which I believe was 375, going from here? It's encouraging to see yields increase and the loan beta exceed the deposit beta. However, I'm curious if that trend will continue.

Jude Melville, President and CEO

Great. I'll let Greg talk in detail about the margin.

Gregory Robertson, Chief Financial Officer

Yes. Thanks, Feddie. I think what gives us an optimistic outlook is if you look at the margin month by month in the quarter, we started out with a margin in October of $3.71 and by November, we moved to $3.72, and in December, $3.83. We had some pickup in the margin within the quarter, driven by the top line loan yields that we were able to manage. September loan yields were around new loans, and then the December new loan origination yields were 7.62. We continue to update our pricing model weekly and manage that process. We feel like as Jude mentioned earlier, we were a little aggressive on moving up our deposit rates late in the third quarter and early in the fourth quarter to position ourselves to generate some of those deposits and increase core funding. We believe this will continue, and we also think we’ll be able to push those loan deals forward. What we're thinking for the first quarter is flat to maybe up one or two basis points on the margin. And then as the year goes on, maybe up five to seven basis points each quarter thereafter. So we're going to continue with the pricing model and manage it that way.

Feddie Strickland, Analyst

Got it. And is the 5% to 7% each quarter; is that on the core of the GAAP margin or both?

Gregory Robertson, Chief Financial Officer

That would be on the core.

Feddie Strickland, Analyst

The core. Got it.

Jude Melville, President and CEO

Yes. Feddie, one thing that I'd add, if we look at the loan beta during the quarter, some of the data was up 75% on new loan yields. The total portfolio betas were around 30%. I think what you saw was not as much repricing in the fourth quarter, which we expect to accelerate as that fixed rate portfolio turns over throughout the year, but we still expect 60% plus loan betas on new loan yields.

Feddie Strickland, Analyst

Got it. No, that makes a lot of sense. And then one more for me, and I'll step back in the queue. Just loan growth outlook. It seems like you had another strong quarter here. Do we see things starting to slow down a little bit from here? Or do you think you can continue the growth rate that you saw in the fourth quarter?

Jude Melville, President and CEO

So we're anticipating kind of low double digits, kind of low teens. We had a strong fourth quarter, but definitely a slowdown in growth on a percentage basis from the third and second quarters. Some of that was slow down, but some of it was us managing our decisions. Part of the positive loan data on new loans is the result of our more disciplined pricing. We'll continue to do that. I think over the next year it will be kind of an important trade-off where rates are growth versus pricing, and we want to manage that. We still feel we're in the right markets, not just Texas but also our North Louisiana market is performing well. Our capital region, we are the strongest local bank here in New Orleans. We feel good about our teams that we picked up earlier in 2022; they are functioning well, and we see more capacity with them. So we feel confident about our ability to continue to grow low to mid-teens. It is unlikely we will see the 34%, 35% organic loan growth that we had over the past year, but we believe it will still be productive and moving in the right direction.

Feddie Strickland, Analyst

Got it. Thanks guys for taking the questions and congrats on a great quarter.

Operator, Operator

Graham Dick with Piper Sandler. Your line is open.

Graham Dick, Analyst

Hi, good morning gentlemen.

Jude Melville, President and CEO

Good morning Dick.

Graham Dick, Analyst

I just wanted to circle back to the NIM, specifically on the deposit side of things. I think you guys talked about a 30% total deposit beta previously. Obviously, you said you guys locked in some funding this quarter, and it seemed to accelerate closer to 40% specifically in this quarter. So I just wanted to hear any updated thoughts you guys have here on where the cumulative beta might shake out by the time rate hikes are done. And then also, what kind of trends around noninterest-bearing deposit balances are embedded in those assumptions?

Jude Melville, President and CEO

Yes. What we saw in the betas during the fourth quarter was about a 40% beta. It really was made up of three categories of now money markets and time deposits. Those were around 60% beta in those three select categories, resulting in the 40% total beta. We think going forward in Q1, because of the way we priced progressively in Q3 and early Q4, those would come down to more in the 40% to 50% range on our now money market rate, while the time deposit betas will probably remain in the 50% range for Q1. I'll let Matt discuss the betas for the balance of the year.

Matthew Sealy, SVP, Director of Corporate Strategy and FP&A

Yes, Graham. As we hit on earlier, deposit growth was strong and expected, which is going to drive up the cost a little bit more. But what I think we were quoting when we talked about 30% betas was typically the way we talk about cycle-to-date betas. Over the fourth quarter, the beta was 40%. However, cycle to date through the fourth quarter since the Fed started moving was 25%. So when we look at it that way, we’re still right in line with where we think the betas are going to trend over time. I believe through the balance of this year, we’ll see that creep up a little closer to 30%. Quarterly gets a little choppy, depending on Fed actions and forward curve moves.

Jude Melville, President and CEO

Depending on the timing within the quarter.

Matthew Sealy, SVP, Director of Corporate Strategy and FP&A

Correct. Yes. Yes.

Graham Dick, Analyst

Okay, great. That's helpful. Thanks for the clarification there. On noninterest-bearing deposits, do you guys expect to see, I don't know, up down, way down? Or what’s the outlook there on that part of the funding base?

Jude Melville, President and CEO

Yes, I think we grew year-over-year in non-interest bearing. We continue for that to be a huge focus for us to continue that growth. That will be a challenge as liquidity is an issue across all banks. It will continue to be our focus. We understand that accumulating customers, particularly those focused on C&I, will help with that noninterest-bearing aspect of their balance sheet. As we've discussed previously, we’ve geared some of our incentive plans toward noninterest-bearing, and we’ve made a number of hires in the treasury management department over the past year. We believe we are making the right investments and taking the right actions. We’ll just have to see how the economy interacts for us, but we have prioritized it.

Matthew Sealy, SVP, Director of Corporate Strategy and FP&A

I would just add that we do see the balances increasing during the first quarter. However, the composition might remain flat or even potentially down, as interest-bearing offers more low-hanging fruit and opportunities. We do see aggregate balances going up in the first quarter for noninterest-bearing.

Jude Melville, President and CEO

Part of the reason the composition might change is, as we mentioned last quarter, the first quarter is typically when we see inflow in municipal-related deposits, many of which are interest-bearing. So, that would help explain why even if we had an increase in noninterest-bearing, it may still fall back as a percentage, but that would be a fair trade-off for us.

Graham Dick, Analyst

Okay. And then, I guess, just one more on expenses. They're pretty well marshaled this quarter. What lift are you expecting to see over the course of this year? I know you guys are still building out the franchise and investing in it, trying to get a sense of kind of the leverage you may drive out of the expense base this year.

Jude Melville, President and CEO

Yes. In the first quarter, we expect to see a 4% to 5% increase over Q4 due to some seasonality and other factors. However, if we look at the balance of the year, we will likely have a normalized path after Q1, likely looking at a 10% growth track throughout the year.

Matthew Sealy, SVP, Director of Corporate Strategy and FP&A

And just for a bit more context, that 4% is quarterly, not an annualized figure. It’s important to remember that Q4 had some seasonality, and Q1 will also have some seasonality due to payroll accruals and true-ups. Also, we have a partial quarter impact from payroll increases for the year. So that results in an incremental seasonal pickup in Q1. Then, the 10% annualized growth rate thereafter accounts for inflationary pressures and continuing normal course increases.

Jude Melville, President and CEO

Yes. The key areas we’re going to continue focusing on are opportunities to invest in technology and personnel, and as every bank is experiencing currently, the FDIC's assessment has grown across the board, which factors into those numbers.

Graham Dick, Analyst

Okay. Great. Thanks guys.

Operator, Operator

Jordan Jen with Stephens, you may proceed.

Unidentified Analyst, Analyst

Hey, good morning guys.

Jude Melville, President and CEO

Good morning, Jordan.

Unidentified Analyst, Analyst

So kind of just following up on the expenses and aligning with what you're talking about with having more capacity and adding personnel. What are your guys' expectations for hiring in 2023? And do you think it's going to be more toward loan producers or deposit gatherers? Any color on that would be great. Thank you.

Jude Melville, President and CEO

Sure. I would expect that we feel the teams have been well integrated but still have capacity. We don't plan to be overly aggressive in hiring lenders this year. Instead, we aim to provide them with the right support staff to enhance their capabilities and relationships, especially in our faster-growing areas. I foresee some hiring on the production side, but it will focus more on support staff. The Dallas team is strong and capable of maintaining productivity throughout the year. We are pleased with the integration of the Houston team and believe we could add a bank or two to continue progressing. Therefore, we will likely prioritize hiring support staff over lenders. Additionally, we will keep expanding our treasury capabilities by hiring individuals focused on deposits.

Unidentified Analyst, Analyst

Perfect. Thanks. One more question regarding the acquired loan payoff. Do you guys anticipate similar levels of payoff in the near term or is that just a one-off situation?

Jude Melville, President and CEO

That was more of a one-off situation. We had these two legacy-originated loans, one in the timber industry and the other being a receivables line for a contractor doing some government jobs and other various work. On the timber loan specifically, we started seeing potential fraud with multiple sources of collateral pieces. We believed it would be prudent to put a reserve up, allowing us to take our time on the collection pieces, expecting to recover some funds eventually. The other loan, also involved in a dispute regarding a governmental contract, impacted the borrowing base due to the removal of that disputed contract. We put the reserve against the contract, and while we do not anticipate it being a total loss, there's uncertainty regarding the time frame for resolution. We may not recover 100% on that, but still expect to get some funds back. Overall, I feel we have about $20 million to $25 million in accretion of credit mark remaining, but I would expect that to return to its normal rate. It's important to note that our loan loss provision has increased to $0.83, higher than it has been this year, but still low relative to peers. The fair value discount should be factored into overall loan loss provision results.

Unidentified Analyst, Analyst

Perfect, thanks for answering that question.

Jude Melville, President and CEO

Sure. Thanks for being here.

Operator, Operator

We do have a follow-up with Feddie Strickland with Janney Montgomery Scott. Your line is open.

Feddie Strickland, Analyst

Hey sorry guys. Just had one more question. I appreciate the disclosure on growth by region. You noted that Texas is about 35% of the portfolio and some balances now. Jude, could you tell us your longer-term thinking there? Does that grow toward 50%? Do you have a target number, or does it depend on future growth?

Jude Melville, President and CEO

A couple of years ago, we stated our latest five-year plan. Some components of this plan included achieving growth to double our loan book within those five years. As we grew, we wanted increased diversification. A primary goal of the five-year plan was to allocate 50% of our credit exposure outside of Louisiana. We recognize the benefits of diversification, especially regarding how the market perceives exposure to energy in South Louisiana. While we did not struggle through that period, we understand the need to be perceived as strong in addition to actual strength. As a result, building toward 50% credit exposure outside of Louisiana was a goal. We didn’t specify Texas explicitly, but given our investment choices a couple of years back, it felt right to do so. Based on our success there, we believe in building on that success. While we have moved to 35% from 6% or 7% at the beginning of our five-year plan, we are ahead of schedule concerning our goal. We anticipate achieving this outside-Louisianna target before the five-year mark; the 50% non-Louisiana exposure we expect will mainly be in the Dallas and Houston areas.

Feddie Strickland, Analyst

Got it. Thanks Jude. One more question. Is Texas going to be your primary market in the future, or would you consider adjacent markets like Alabama or Arkansas? Or will it primarily be Texas and Louisiana going forward?

Jude Melville, President and CEO

Again, it depends on the time frame. We see opportunities across the Southeast over time. When those opportunities make sense, we will pursue them. We are not in any rush to do that. There are still significant opportunities in Texas, specifically in Dallas and Houston; we could capitalize on those for some time. Our future expansions, once we deem the timing right, will follow the same banker-driven philosophy we've used in the past. We don't just open a branch and hope to draw in customers; we seek partnerships with banking teams. If the right banking partners emerge, we would consider them. However, those conditions are probably down the road, not something we are contemplating for 2023. We have strong potential ahead in our current markets and aim to find a balance between growth and efficiency.

Feddie Strickland, Analyst

Makes sense to me. Thanks, Jude.

Jude Melville, President and CEO

Thank you.

Operator, Operator

Our final question is a follow-up from Graham Dick with Piper Sandler. Your line is open.

Graham Dick, Analyst

Hey guys. I just wanted to follow up on fee income really quick. It looks like Smith Shellnut Wilson had a pretty solid quarter, and then there's also the SBIC income. Do you think the income is probably going to drop back to around $7.5 million? Or do you think this $7.8 million; $7.9 million rate is sustainable?

Jude Melville, President and CEO

No, I think you're right, Graham. We expect a $7.5 million run rate going forward.

Gregory Robertson, Chief Financial Officer

Yes, the SBIC contributed about $400,000 more than we had expected.

Graham Dick, Analyst

Okay. Awesome. And then one more quick one. I guess, just on the two credits that received specific reserves. I know you said one was due to fraud. I was just wondering if you could provide some color on each of those, like what industry they're in, the type of collateral on each, and then maybe the overall size of each credit as well.

Jude Melville, President and CEO

Yes, Greg. What we had were two legacy-originated loans. One was in the timber industry, and the other was a receivables line for a contractor doing work for the government and other various projects. We started seeing potential fraud in the timber loan with multiple sources of collateral. It was prudent to put a reserve up now, allowing us to manage the collection process that could take a long time. Regarding that specific loan, it is about $1.4 million, and we marked it at around 80% of the loan in total. The second loan in receivables is under dispute with a governmental contract. There’s a chance of elongated settlement regarding that, and we expect about 50% of the total exposure to be under-reserved. We don’t expect total loss on that contract, so we will manage each case prudently.

Graham Dick, Analyst

Okay. That's very helpful. Thanks guys.

Operator, Operator

There are no further questions at this time. I'll now turn the call back over to the presenters for closing remarks.

Matthew Sealy, SVP, Director of Corporate Strategy and FP&A

Okay. We appreciate you spending your time with us. We felt like it was a very positive fourth quarter. Many of the investments we've made over the past two to three years are coming to fruition. Certainly, Q1 is noisy from a seasonality standpoint, but we feel optimistic about 2023 and look forward to visiting with you all in three months. Thank you all.

Operator, Operator

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