Thank you for standing by, and welcome to the Business First Bancshares Q3 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star one. Thank you. It is now my pleasure to turn the conference over to Matthew Sealy, SVP, Director of Corporate Strategy and FP&A. Mr. Sealy, please go ahead.
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 three of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of Non-GAAP financial measures. 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 eight 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'll now turn the call over to you, Jude.
Okay, thanks, Matt, and welcome everybody. Excited to be here for our first public call. We're also joined by Philip Jordan, who is our Chief Banking Officer. Just I'll give you a quick overview, assuming some of you may not be that familiar with our story, and we'll go into a Q&A session, and I look forward to that. b1BANK, 16-year-old bank in Louisiana, headquartered in Louisiana, but also a presence in Texas. We're focused on small businesses as our primary clientele. We're the number one bank headquartered in Louisiana as measured by Louisiana deposits, and we have about a third of our assets in Dallas and Houston.
We also have about $6 billion under management in an RIA called SSW. A couple years ago, we started on a five-year plan, our most recent five-year plan and had three major components. One is growth. We were about $3.7 billion, and at the end of the five years, we wanted to be about $7.5 billion. Second component of the five-year plan was asset diversity. We were a little under 10% outside of the state of Louisiana. By the end of the five-year plan, we wanted to be about 50%. Finally, earnings. We were at under one ROA, and by the end of the five years, want to be solidly at 1.25 as a ongoing run rate for ROA.
Pleased to report that we're ahead of schedule on all three legs of our five-year plan. Growth-wise, we finished the quarter at about $5.8 billion in assets. From a diversity standpoint, we're up to about 34% of our assets in Texas. From the earnings standpoint, we're at a 1.15 ROA, so pleased with the progress. Specifically, the third quarter really highlighted payoff of a number of investments that we've made over the past few years, including M&A and de novo and organic growth. We finished the third quarter with record profit. It's also our seventh quarter in a row with over 20% annualized growth in loans. We're actually at 30% for the second quarter in a row on loan growth. About 60% of that loan growth is in the Dallas and Houston areas.
Most importantly, we also finished the quarter with solid asset quality. What I'm really excited about is that these investments are beginning to pay off, but we feel like there's still lots of capacity to continue on the journey that we embarked upon a couple years ago. Part of that is that we hired about 25 bankers over the past six quarters and believe that although their production has certainly kicked in, we'll have room to go there.
Even outside the production officers, we've been able to add quite a bit of talent to our staff, and excited about the people portion of our list of assets, and proud to announce that this year we again won American Banker Magazine's one of the best places to work for our institution. Excited about that. I'm not gonna go into great detail in the intro call or the intro portion of the call, partly because with our capital raise a couple weeks ago, we had a chance to talk to many of you and put our information out there. I really would be open to turning it over now to Q&A for anybody that has any questions.
At this time, if you'd like to ask a question, please press star one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Again, that is star one on your telephone keypad. Matt Olney with Stephens, your line is open.
Hey, guys. How are you?
Good, Matt.
Good, Matt. Thanks for calling in.
Yeah. Well, thanks for doing this public call. I think this will serve us all well. 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 payoff over the last few quarters in terms of revenue. I'm curious, where are we in this recruiting cycle, and are you continuing to recruit at the same level at this point? Or in other words, could we see another 25 bankers over the next six quarters, or could this pace slow from what we've seen more recently? Thanks.
Good question. Yeah, 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 year and a half or so. We feel like we wanna let our men and women that we hired have a little room to work and wanna make sure we're also not getting ahead of ourselves in terms of operational capabilities. Of course, with a certain measure of uncertainty in the air for next year, wanna make sure that we're growing prudently. We'll continue to add when we find good teammates, but not at the pace at which we've done over the past year and a half or so.
Just following up on that, Jude, 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 the next two years?
For hiring, you mean?
Yes. Yes.
Yeah, I don't. You know, my assumption it would probably be more Dallas than Houston. We certainly will fill in when we have good bankers in our Louisiana footprint as well. Our New Orleans footprint was about a third of the hiring that we did over the past year and a half, so we feel really good about the quality of the team there. Most likely, we'll continue to add bankers in the Dallas and Houston areas. You know, as you know, we consummated our M&A of Texas Citizens earlier this year, and then we converted over the summer. Very pleased with their growth in the third quarter. They added about $40 million in loans, which exceeded our expectations. As we get more established there and our brand becomes more well-known, we think we'll have other opportunities to add some bankers there.
Okay. Thanks for that. I guess on the expense side, we've seen expenses ramp over the last few quarters. You mentioned the Texas Citizens deal, that's now in 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?
Yeah. I'll let Greg weigh in on that.
Hey, Matt. Thanks. Good question. We think the $37 million quarterly run rate's a pretty good rate. We think going forward in Q4 that it'll probably be about $1.25 million higher, just for some seasonal expenses, true up some accruals and that sort of thing. The $37 million point from there on out seems to be a good run rate.
Okay. Thanks for that, Greg. I guess the last topic I wanna dig in on is gonna be on deposit betas.
Sure.
I think you guys reported deposit beta, interest-bearing deposit beta. I'm getting maybe the mid-30s% in the third quarter. I think most of your peers are talking about increasing or higher deposit betas as you move into the fourth quarter just from increased competition. I'm curious what the expectations are from you guys as far as deposit betas from here. Thanks.
Yeah. 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% non-interest bearing, and we're almost 36% at the end of the quarter. When you apply that to the overall beta, it makes that closer to 20. We do think it's gonna trend higher, up to probably 30 all in as we move forward, maybe slightly higher than that.
Okay. Thanks, guys. Appreciate your help.
Sure. Thank you.
Thank you.
Fedie Strickland with Janney, your line is open.
Hey, good afternoon, everybody.
Hey, Fedie.
Hey, Fedie.
Just looking at slide nine, on the footprint of the deck. 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 deposits from some of the Louisiana regions, just given the competition in that market?
I would 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 to where we are loan-wise in Dallas without the contribution of some of our more established deposit rich areas including Southwest Louisiana and the Bayou region. We certainly wanna continue to focus on growing deposits in Louisiana and put them to work wherever that makes sense. I also would say that our Dallas footprint is maturing, and we would expect that they would contribute to that effort as well. We just opened our fourth spot there and so we thought we have a pretty good established foothold.
I will say that I'm very pleased with our deposit mix that we have grown in Dallas. Of the $270-ish million that we've got, a good 60% is non-interest-bearing. While they're not self-funding, they're certainly making a contribution. That kind of speaks to the business orientation in the larger markets and our focus on our treasury personnel as well as lenders. I would say that I'm pleased with the deposit growth in the Dallas area, but certainly we hope to not only continue, but as we get increasingly established there, be able to diversify that mix of deposits in Dallas.
Got it. That's helpful. Just one more for me. I was wondering if you could just talk a little bit more about SSW. What kind of opportunity you see to grow that business? Kind of how or if you could remind us how it interplays with the core bank.
Sure. What page is that, Greg? It's on page 11. Page 11 of the deck gives an overview of SSW. A couple things. One is that we have been very successful growing it since they joined our team up by about 70% in assets under management, and that's after taking into account the drop in the market. They have grown nicely since they became part of the team, so the synergy seems to be working well. The bulk of that is, as you know, made up of clients of other financial institutions. 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 FIG group and our core bank FIG group, who sells loan participations and gathers deposits for us from other financial institutions. They're about $300 million in each of those categories. SSW provides an additional network for us to tap into. That works both ways. We're also able to use our FIG group to recommend financial institutions to SSW. 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.
Because we've been so busy there growing the financial institutions group, we really haven't tapped into yet the ability to use that RIA capability across our footprint with our other clients and their businesses and their executive teams. The next two, three, four years, I think we'll see a more balanced mix between the retail and the financial institution group. The retail business is higher margin. We'll look forward to being able to work that into our earnings. Still early in the game, just a year and a half in, but very excited about SSW's ability to contribute not only to non-interest income on the bank side, but to also continuing to grow that network of banks.
We're up to about 100 banks that we serve in some way, whether that be through advising them on their investment portfolios or through loans or through deposits. We also, earlier this year, did a preferred equity raise. As you know, we were able to do that in-house. 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.
Got it. That's very helpful. Thanks so much. I'll step back in the queue.
Kevin Fitzsimmons with D.A. Davidson, your line is open.
Hey, good afternoon, everyone.
Hey, Kevin.
Just wondering, with the substantial, you know, loan growth we saw pretty quickly, we got the loan-to-deposit ratio up to almost 97%. Just wondering, you know, and that's got two components, obviously, with loans. I would assume, Jude, that we're not gonna be at a 30% clip sustainably going forward. It's probably a struggle just, you know, industry-wide to keep deposits stable. Just wondering how you're looking at that ratio, what you think is normalized, where you wanna see it go. Thanks.
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. You know, 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 year impact to our loan deposit ratio.
We've actually already started the quarter off positively and been able to pay down some of the borrowings and switching to deposits. We're pleased with the growth. You know, we think we can be kind of in the high single digits for growth on the deposit side. This quarter and beginning of next year. Still a little bit of gap to make up, but we also have a relatively low exposure to wholesale deposits at this point, which we can use to help us 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 non-interest-bearing deposits from our banking centers and from our commercial clients.
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 months in particular on revamping some of our deposit incentive programs and just kind of tenor of our production conversations that we're having. We have a history of achieving what we set out to achieve and a little more focus on that side of the balance sheet. I feel confident that we'll be successful. In terms of your specific question, I think the low 90s%, you know, 91%-92% is probably more where we wanna run on a regular basis. Greg, you wanna add detail to that?
Yeah. Yeah, Kevin, it looks like Jude had mentioned for Q4, we're looking at about 15%, annualized, which would be about $170 million. Seems through this part of the quarter, we're right on pace for that. Also on the deposit front, we're seeing you know some early signs in the quarter. We're having some successes with deposit gathering so far. I think like Jude said, high single-digit deposit growth in the fourth quarter.
Then of course our municipalities should come in in the fourth quarter, first part of the first quarter, somewhere in the $200-$250 million range. We will also have a large part of our ag book in the fourth quarter that pays down about $80 million, that should turn to cash and stay on balance sheet for a while. We between the revamping of the incentive plan and those seasonal things, we think we'll have some liquidity options going forward.
Okay, great. Thank you. Just wondering, you know, on the margin front, if you could help us how to think of 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 fourth quarter. I think a lot of banks are talking about there being additional expansion, but not at the pace seen in third quarter and then kind of plateauing at some point in 2023, in the first half and then fighting to keep it stable thereafter. Just any kind of color or outlook on that front. Thanks.
Yeah. Good question, Kevin. We, as you remember from our release, we had about 5 basis points influenced our margin at quarter-end from the nonaccrual that we collected first part of the quarter. The margin in the fourth quarter we expect we closed out the quarter with a weighted average yield on new loans at about 6.10.
We think that that's gonna improve somewhere around 50-60 basis points in the fourth quarter, which with our seasonality in the deposit front, a lot of those municipals that'll start coming in will be interest-bearing along with the 5 basis points that we're not gonna get. That was a one-time. We should be hold steady on the margins, slightly decline in the fourth quarter. Looking out from there, in 2023, we should start to pick up at that 6-8 basis points clip per quarter after that.
Kevin, to answer your question about the September month-end, it was around a 383 core, and that's based on an actual day count annualization basis.
Okay. Just that plus 6-8 basis points per quarter in 2023, is that just more the, like, ongoing repricing of the loan book, but then holding the line on deposit pricing from there? Is that how to look at it?
Yeah, that's exactly right. We'll keep repricing the loan book, and that should be the driver of that.
Great. Thanks, everyone.
Thanks, Kevin.
Brett Rabatin with Hovde Group, your line is open.
Hey, good afternoon, everyone.
Hey, Brett. Can you hear me fine? Hey, Brett.
Wanted to talk about the loan portfolio from a repricing perspective. You know, on slide 17, you do a great job in sort of laying out the fixed versus floating of the portfolio. You know, 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? You know, what would be the duration maybe on that portfolio, aside from that 13%? You know, any visibility on when the rest of that fixed rate book reprices?
Yeah, Brett, good question. We have about an average life of our portfolio is about 48 months.
That fixed book's gonna track up on that. We really experience about a quarter of the fixed rate portfolio that reprices every year is what we traditionally see. Give you a little more context, we had a quarter to date beta on the loan yield of about between 65% and 70%. We think Q4, that's gonna be about 75%. It should track like that going forward.
Okay. That's a little shorter duration than maybe I would've thought on that fixed piece. Okay. Wanted to ask, you know. I think relative to some peers, your growth is gonna continue to maybe stay at a higher level than some of the industry. Wanted just to hear, you know, do you think half of the growth next year might just. I know you haven't given guidance on that, and maybe this is tough to answer, but when we think about the next year or so, is the growth next year, do you think it'll be a majority in Texas? Or can you give us any color on how you think about the loan growth outlook and if Texas kind of drives that more so than Louisiana?
Yeah. Well, we've been the past 2 - 3 quarters, we've been at about 65%, 60%-70%, kind of, one in the range or the other. In terms of loan production in Texas versus Louisiana. Even though we believe that our overall growth rate will slow to a mid-teen level, I would expect that those percentages would still be about that. I would assume that 60% to two-thirds of the loan growth would probably continue to come from Houston and Dallas. I do think it's important to note it's not just Texas in general, it's those two primary major markets.
You know, if we are able to add a bank or two a quarter, and most of those come from those two markets, then certainly possible that that percentage could go up a little bit. You know, we do think that there is some disruption out there in the market. Certainly plenty in Houston and Dallas, but also with the IBERIABANK, First Horizon, TD Bank trade closing, sounds like sooner rather than later, then that might provide some opportunities for us to pick up a handful of experienced quality commercial bankers in South Louisiana as well.
Regardless of the bankers, I think there'll be opportunity for clients in our home market. I'm not down about the opportunity in Louisiana. I still think the majority of the growth in the loan book will come from Dallas and Houston. Probably, I think that two-thirds is probably a pretty good 60%-70% is probably a pretty good estimate.
Okay. That continues. Okay. That's great color, Jude. Then just lastly for me, just wanted to, you know, you got on slide 23, so we got what I guess I would call the pandemic slide with the industries that, you know, have been somewhat questioned in the past two years, hotels, hospitality, retail. Are there any loan segments that maybe you're trying to de-emphasize or you're not interested in growing construction? Is there anything that you guys are steering away from in this environment?
Yeah. I wouldn't. You know, we're trying to bank good clients and we're pretty balanced in our exposures and have had a good track record even through the pandemic of not losing a lot of money in those areas. I don't think there's an area per se that we're stepping out of. As you know, over the years, we've worked to decrease our percentage exposure of the portfolio in energy. You know, we've continued to add good clients where we've had the opportunity, but we're down to 4.2%. I would expect that would continue to trend down more over the next couple of years into the 2%-3% range.
Again, not turning down business, but I think the other areas of our portfolio will probably grow faster. I will say for C&D, in the third quarter, even though we had the 30% annualized loan growth, our actual dollars of exposure to C&D actually went down a little bit. I think that's not gonna be an area of growth for us necessarily. I'm not saying it'll continue to go down in terms of actual dollars. You know, if you had to pick another sector that we wanted to maybe have a lower % of the portfolio as a whole, it'd probably be C&D.
I will, as always, do point out, though, with the C&D, a lot of that is in Dallas. We think that, you know, even if a recession occurs next year, that the reasons that the market has been strong in Dallas could continue. You know, if you think about the main driver being in migration, we certainly haven't heard any of any slowdown in the migration rate from our bankers that are on the ground.
I think you could probably make the argument that if the country is in recession, that it might even make Dallas a more attractive place for certain people to be. We do feel good about where most of our exposure is, either in Dallas or some long-time clients in Louisiana as well. Feel pretty good about C&D, but we also wanna make sure that as we continue to grow, we grow in a balanced way. Greg, you have anything, or Phil, you have anything you wanna add to that?
Nothing. We're set.
Okay. Okay, great. That's fantastic, y'all. I appreciate that. Okay.
Again, if you'd like to ask a question, please press star one on your telephone keypad. We have a follow-up from Matt Olney with Stephens. Your line is open.
Yeah, thanks for taking the follow-up question. I'd say 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. Just wanna give you a chance to respond to that and, you know, how did you arrive at how much capital to raise? It seems like you're getting closer to accreting capital. Just curious kinda how close you think you are at this point. Thanks.
Yeah, thanks. You know, it's a balance when you raise capital, particularly in this environment and at the pricing that the market's 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 raised through the preferred equity about a month before that we felt like increasing our capital base about, you know, roughly 30% would make sense for us.
If you take the additional capital and take our projected earnings over the next couple years, we feel like it gets us through our five-year plan. You know, barring some outsized opportunity or M&A opportunity, at which point we'll just have to assess at that time. We do 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 right now, we have models to begin accreting capital. All goes as planned, and feel like that's the appropriate amount of capital for us to raise at the time, given where the market is.
Yep.
Yeah, Matt, one other thing that I'll add to that. You know, when we raised the preferred last quarter, we did not push $20 million of that down to the bank. When you look at the discrepancy between bank level capital and holdCo consolidated capital, I think it's important to remember that we kind of left some dry powder at the holdCo to service those holdCo obligations over the next 6-12 months or so. That's just something to keep in mind as you think about our capital position going forward.
Yep. Okay. Thanks, guys.
All right. Thank you.
I'll now turn the call back over to the management team for final remarks.
Okay. Well, we appreciate your attention and interest, and certainly happy to answer follow-up questions down the road if y'all wanna contact us directly. Since Matt brought up the capital raise, I do wanna be sure to thank everyone on the line that participated in that, either through their role as analysts or investment bankers or as equity investors. We look forward to giving you a good return on it and 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.