Thank you for standing by and welcome to the Business First Bancshares Q4 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 one on your telephone keypad. If you'd like to withdraw your question, again, press star one . Thank you. It is now my pleasure to turn the conference over to Matthew Sealy, Senior Vice President and Director of Corporate Strategy and FP&A. Mr. Sealy, please go ahead.
Thank you. Good morning, and 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 three of our presentation, which includes our Safe H arbor statement regarding forward-looking statements and the 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 our Safe H arbor statements are available on page seven of our earnings press release that we filed with the SEC yesterday. All comments made during today's call are subject to the Safe H arbor 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. With that, I'll turn the call over to you, Jude.
All right. Thanks, Matt, and thanks, everybody, for joining us this morning. We know you have other choices about where to be, and we appreciate you deciding to prioritize being here with us. We'll I'll keep the remarks kind of brief so we can jump into questions. I do wanna go over some of the notable trends from the quarter and then some full year highlights, and then we'll get into the Q&A. Fourth quarter. Successful fourth quarter. We were pleased with where we ended the year up. non-GAAP core net income was $16.4 million and $0.66 per share available to common holders better than we expected and for good positive reasons.
First, primarily, we continue to have good, strong loan growth and almost 16% annualized. One of the things that I was excited about was to see that that was diversified. We had it across our regions. Also a good balance between commercial and CRE credits as well. Second kind of positive impact to the numbers was we had higher loan accretion than we expected. We were able to sell a couple of loans that we felt was good timing for us. 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 all remember that we have a number of investments in SBICs, which occasionally surprise on the upside, and this was one of the quarters in which we had about $400,000 above budgeted SBIC income. We continue to focus on efficiency, we're proud of the fact that our non-interest expense came in just below expectations. Certainly, given the environment that we're in, being able to have discipline on expenses is important. Even though we were able to keep our expenses lower than we anticipated, we also made a number of key hires, including Jerry Vascocu, who joined us as our Chief Administrative Officer, after 17, 18 years at IBERIABANK and First Horizon.
We're excited to A, have the contribution of the experience that he's had, being a part of growth organizations and certainly the contact base, but also excited in that it fills out our exec team. We're we feel like we're well established for where we need to be from a 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 talk more about that in the Q&A. We certainly consider them to be isolated and one-off incidents, one of which involved fraud.
So we don't feel like that's representative of any anything more systemic across the portfolio, and our overall credit metrics certainly reflect that. If you adjust the quarterly results for the backing out the additional loan discount accretion and the higher loan loss provision, we would've hit about $15.4 million for the fourth quarter, which is still slightly ahead of expectations. We feel very positive about that. Also, although it's a challenge, and probably the challenge going forward over the next two or three quarters, we actually were not unpleased with our performance on the NIM side of the ledger.
We did drop down 13 basis points on our core NIM. You'll remember in our last quarter, we talked about the fact that our third quarter was artificially inflated by about 5 basis points, and we expected to have a 5 or 6 basis point drop, modeled on top of that. We came in really close to what we had modeled, and we feel good about our modeling going forward. We feel like. Well, before I say that, I think it's important to take a step back. It's not just quarter to quarter, but first half of the year versus 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 going into next year or this year, I guess we are now, versus where we were next year. We also feel like the fourth quarter was a little bit of a catch-up phase, and we had modeled that where we had kinda held off on some rate moves and we're kinda catching up and we feel like we'll be able to stay about flat for this quarter and then have some slight increases over the rest of the year. We'll talk a little more about that when we hit the Q&A. Not unpleased with the with where we are from a margin perspective.
Taking a step back and looking at the full year in review, it was a record year in many ways for us. Achieved a record core net income of $57.6 million for the year, which was about 10% above what we finished at last year. Last year, you'll remember, included a sizable positive impact of selling our PPP portfolio. We actually generated significantly more income this year and feel well poised to take on 2023 with some of the non-monetary accomplishments that we had over the course of the year, which includes integrating the Texas Citizens transaction out of Houston.
It includes integrating a number of banking teams that we picked up at the beginning of the year. Those are, those are kind of like mini acquisitions in a way, and they take effort and judgment and time. Feel really good about the success that they're having and don't feel that they are yet at capacity, so we should continue to see good things coming from those teams. We also opened our fourth full-service location in Uptown Dallas and experienced a lot of activity there we're excited about. We actually crossed over $1 billion in loans in Dallas this past quarter.
When you combine the Dallas and Houston operations, we're at about 35% of our credit portfolio as a whole is in those two large and fast-growing metro areas. As we have talked about, one of our goals is getting closer to 50% of our exposure outside of Louisiana so we can be diversified, and we took really big steps towards that this year. Finally, I would just say that we feel good about fortifying our balance sheet.
We raised $122 million in equity over the second half of 2022, $72 million in a self-managed preferred equity raise, which this quarter was our first quarter to pay the dividend on that preferred equity raise, which to be able to pay that dividend without yet putting it all to work, can still beat our numbers, is something that I feel is another positive. We also did the $50 million common equity raise. We feel well-placed to take on the opportunities that we feel are out there in this next year. Our clients remain highly positive and confident. Certainly there will be some challenges.
All in all, with the strongest asset quality that we've had and a fortified balance sheet, and then, a stronger team than we've ever had, we feel well-positioned to take on 2023. Appreciate your time, and happy to answer any questions, that y'all might have.
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. Feddie Strickland with Janney Montgomery Scott, your line is open.
Hey, good morning, everybody.
Morning, Feddie.
Hey, Feddie.
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 kind of avoid wholesale funding for your future?
I think one of the reasons that we maintain access to the line is so that we can have it as a backup. You know, we certainly would prefer to do the core funding raise, and we feel we have some good activity. It had some success in the fourth quarter, and we certainly feel like the first quarter will be even stronger perhaps than the fourth quarter. Over the course of the remainder of the year, we certainly would prefer to do core deposits, but one reason we pay down the line is because we wanna make sure that we maintain access to that secondary source of liquidity.
Hopefully, we don't have to use it, but, you know, if the opportunities make sense for us from a growth perspective to fund them through the FHLBs, then, we certainly would utilize them if it made sense.
No, that's okay.
We're gonna try not to, but if we do, we do, I guess, is the way to, the way to put it. It's nice to have enough tools in the, in the, in the, in the tool belt, as we navigate over the next year.
Got it. That makes sense. Then just kind of more broadly on the margin, you know, what should we expect from here? It came in a little better than we were expecting this quarter. You know, part of that sounds like it was related to loan accretion income. Can we just talk through kind of where I think the core margin was 3.75%, if I remember correctly. Can we talk about where you see that going from here? I mean, it's been good to see the yields come up, and the loan beta outpace the deposit beta. Just, I guess I'm wondering, does that continue from here?
Great. I'll let Greg talk in detail about the margin.
Thanks, Feddie. I think what gives us an optimistic outlook is if you look at the margin kind of by month, by month in the quarter, we started out the margin in October at 3.71%, and November, we moved it to 3.72%, in December, 3.83%. We had some pickup in the margin within the quarter, really driven by the top- line loan yields that we were able to manage through. Just to put that in context, September loan yields were at 6.10% on new loans, and then the December new loan origination yields were at 7.62%. We continue to update our pricing model every week. We've managed that process.
We felt like, as Jude mentioned a little bit earlier, we were a little aggressive on moving up our deposit rates, late third quarter, early fourth quarter to position ourselves to be able to generate some of those deposits and increase core funding. We think that's gonna continue. We also think we'll be able to push those loan yields forward. What we're thinking in the first quarter is a flat to maybe up a basis point or 2 basis points on the margin. Then as the year goes on, maybe up 5 to 7 basis points each quarter thereafter. We're gonna continue with the pricing model the way we have it and manage it that way.
Got it. is the 5 to 7 basis points each quarter, is that on the core or the GAAP margin, or both?
That'd be on the core.
On the core. Got it.
Feddie, one thing that I'd add, if we, if we look at the loan betas during the quarter, cycle to date were about 75% on new loan yields. We look at the total portfolio betas, they were around 30%. I think what you saw on some level is not as much repricing in the fourth quarter, which we do expect to accelerate as that fixed rate portfolio turns over through the balance of the year. We do still expect 60% plus loan betas on new loan yields.
Got it. No, that makes a lot of sense. One more for me, and I'll step back in the queue. Just loan growth outlook. You know, it seems like, you know, you had another strong quarter here. Do we see things start to slow down a little bit from here? Do you think you can continue kind of the growth rate that you saw in the fourth quarter?
We're anticipating kind of low double digits, kind of low, low teens. You know, we had a strong fourth quarter, but definitely a slowdown for growth on a percentage basis from the third and second. Some of that was slowdown, but some of it also was us managing, making decisions. You know, part of the positive loan beta on new loans is the result of us being maybe more disciplined on pricing, we'll continue to do that. We think it's over the next year, it's a little bit of a more important trade-off with where rates are, growth versus pricing, we wanna manage that.
We still feel like we have, we're in the right markets, you know, not just Texas, but also, our North Louisiana market is doing really well. Our capital region, we're the strongest local bank here, and New Orleans is catching on. We feel like. As I mentioned in my opening comments, the teams that we picked up earlier in 2022, are clicking, and we feel like there's more capacity there as well. We feel good about our ability to continue to grow, low to mid-teens, and then it'll be kind of a question of what's the best use of our balance sheet.
It's unlikely you'll see the 35%, 34%, 35% organic loan growth that we had over the past year. I think it'll still be productive and moving in the right direction.
Got it. Thanks, guys, for taking my questions, and congrats on a great quarter.
Thanks, Feddie.
Graham Dick with Piper Sandler, your line is open.
Hey, good morning, gentlemen.
Morning, Graham.
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, as you said, you guys locked in some funding this quarter, and it seemed to accelerate closer to 40% specifically in this quarter. 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. Then also what kind of trends around non-interest bearing deposit balances are embedded in those assumptions?
Yeah. What we saw in the betas, you're right, over the fourth quarter was about a 40% beta. Really was made up of really 3 categories. The now category of money markets and time deposits. Those were around 60% beta in those three select categories. That was the driver, obviously, of the 40% beta. We think going forward in Q1, because of the way we price aggressively in Q3 and certainly in Q4, those should start to come down more in the 40%-50% range going up now on the money market. Beta is and still the time deposit betas, because of the nature of the market, still probably gonna remain in the 60% range for Q1.
Then I'll let Matt talk about really the betas for the balance of the year, what we're seeing.
Yeah. Yeah, Graham. Like we hit on earlier, deposit growth was strong, unexpected, that's gonna drive up the cost a little bit more. What I think we were quoting when we were talking about 30% betas previously, and typically the way that we'll tend to talk about things are cycle to date betas. You're right, for the fourth quarter, just the quarter was 40% total deposit betas. However, cycle to date through the fourth quarter since the Fed started moving was 25%. When we look at it that way, we're still right in line with where we think the betas are gonna trend up over time. Through the balance of this year, I think that we'll see that creep up a little bit closer to 30%.
That cycle to date beta is very much in line with what we had thought previously. Quarterly gets a little choppy because, you know, when you look at quarter-over-quarter, depending on what the Fed does and how their forward curve moves, that can be a little misleading depending on how you're looking at it.
What a time in the quarter.
Correct. Yeah. Yeah.
Okay, great. That's helpful. thanks for the clarification there. On non-interest bearing deposits, are you guys expecting to see, I don't know, up, down, way down? What's kind of your outlook there on that part of the funding base?
I think we grew from year-over-year in non-interest bearing. We continued for that to be a huge focus for us to continue that growth path. That will be a challenge as the whole marketplace liquidity is an issue through all banks. It will continue to be our focus, but we understand there's a challenge ahead of us. Accumulating customers that are C&I focused for us that have that non-interest bearing part of their balance sheet is a priority.
We, you know, as we've talked about previously, we've certainly geared some of our incentive plans towards non-interest bearing. We've also made a number of hires in the treasury management department over the past year. That's the goal there, and we feel like we're making the right investments and doing the right things. We'll just have to see how the economy as a whole interacts for us in that regard. We certainly have it as a number one priority,
I would say. 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, there's just more low-hanging fruit, more opportunity on the interest-bearing side.
We do see the aggregate balances going up in the first quarter of non-interest bearing.
Part of the reason the composition might change a little bit is, as we spoke about last quarter, the first quarter is typically when we see an inflow in municipal related deposits, many of which are interest bearing. That would partially help explain, even if we had an increase in non-interest bearing, we may still fall back a little bit as a percentage. That'll be a fair trade-off for us.
Okay. I guess just one more. Turning to expenses, they're pretty well marshaled this quarter. What kind of lift are you guys expecting to see, I guess, over the course of this year? You know, I know you guys are still, you know, building out the franchise and investing in it. Trying to get a sense of, kind of, leverage maybe we'll drive out of it, out of the expense base this year.
Yeah. I think in the first quarter, what we expect to see is a 4% or 4%-5% increase over Q4. Still some seasonality in some things from that standpoint. If you look at the balance of the year, I think you'll have a more normalized path after Q1 and probably looking at a 10% growth track throughout the year.
Yeah, a little bit more color there. That's 4% quarterly, not an annualized figure. It's important to remember that there is seasonality in Q4, but there's also seasonality in Q1, with for similar reasons, payroll accruals, and true ups. We also have a partial quarter impact from payroll increases for the year. That does get you know, kind of an incremental seasonal pickup in the first quarter. Then to Greg's point, about a 10% annualized growth rate thereafter, which should account for inflationary pressures and just kind of continued, you know, normal course of business increases. Yeah.
Yeah, I think the key areas that we're gonna continue to look at, opportunities to invest in technology, personnel, and then as every bank's experiencing right now is the FDIC's assessment has grown across the board kinda. That's factored into those numbers.
Okay, great. Thanks, guys.
Again, if you'd like to ask a question, please press star one on your telephone keypad. Jordan Ghent with Stephens, your line is open.
Hey, good morning, guys.
Morning.
Morning, Jordan.
Hey, kind of just following up on the expenses and kind of more in line with what you're talking about of having more capacity and adding personnel. What are you guys's expectations for hiring in 2023? Kind of what do you think Is it gonna be more towards loan producers or deposit gathering? If you could just kind of give more color on that'd be great. Thank you.
Sure. I would anticipate, that's one of the reasons that I pointed out that we feel like those teams have been well integrated, but still have capacity. Don't feel like we need to be ultra aggressive this year in terms of hiring lenders. What we would plan on doing is making sure that they have the right support staff around them to maximize their capabilities and their relationships. That's particularly true in our faster growing areas. I would anticipate that we would do some hiring on the production side, but it would tend to be more support staff.
You know, Dallas has a strong team that certainly capable of continuing to produce over the course of the year. We've been pleased with the Houston team integration, but we do feel like we could add a banker or two there, just to continue moving forward. We'll probably seek to do that. On balance, across our footprint, a little more hiring on the support staff versus the actual bankers. We would continue to add treasury capability as well, to your point about hiring deposit-oriented folks.
Perfect. Thanks. Maybe just one more, kind of going on that, acquired loan payoff. Do you guys, anticipate similar levels of payoff in the near- term, or was that just kind of a one-off situation?
That was I would call that more of a one-off situation. Just we happened to have the two loans in the same quarter. It's not one that we hadn't been working on and kind of figuring out over the course of multiple quarters. The timing was just right. It also happened to be one that had a lower interest rate for a longer period. That obviously becomes a little more punitive today than it was even three quarters ago. Just a one-off business decision that we made, but I wouldn't anticipate that we would have a wholesale recapture of the accretion on the acquired loans.
We'll just take them, make the right business decision, on an individual basis. I think we still have, what Greg, about $20 million-$25 million in accretion.
Yep.
Or credit mark remaining. I would anticipate that that would go back to kind of its normal normal rate. I did wanna take just a moment to point out, because unless you look at our deck, you wouldn't be aware, just based on the, on the, on the screens, that our loan loss provision has increased to 0.83%, which is higher than it's been over the course of the year, but still low relative to peers. On page 17 of the deck, you can see the fair value discount.
When you add that into the overall loan loss provision, you get an effective loan loss provision of $141 million, which is well- situated, we believe, relative to our peers and relative to the exposure in our books. I feel like each quarter, we need to kind of reintroduce the idea that we have a fair value discount built in on top of the loan loss provision. The loan loss provision, of course, is what screens when you compare banks, the fair value discount you have to get from our deck. That was that 20% and change accretion number hanging out there that I'm, that I talked about, does materially impact our preparation for any adverse incidents over the next year.
Perfect. Thanks for the answering the question.
Sure. Thanks for being here.
We do have a follow-up with, Feddie Strickland with Janney Montgomery Scott. Your line is open.
Hey, sorry guys, just had one more question. Appreciate the disclosure on the growth by region. You noted that Texas is about 35% of unpaid loans and balances now. Jude, could you just tell us kinda what your thinking is over the longer term there? You know, does that grow towards 50%? Do you have a target number? Does it just kinda depend on, you know, where growth is in the future?
A couple years ago, we set on our latest 5-year plan. A couple of the components of the plan were, you know, A, to grow. We wanted to double our loan book over the 5 years. As we grew, we wanted to increase diversification. Another primary goal of the five-year plan was to have to end up with 50% of our credit exposure outside of Louisiana. Not anything being wrong with Louisiana, but we just, we believe in diversification, and in particular. Learning a little bit about the market reaction to perceived exposure to energy in South Louisiana. We certainly felt like there were some benefits.
Although we did not struggle, through that period, we also recognize that we have an obligation to try to be perceived as strongly as we can, in addition to being as strong as we can. Part of that is diversification, and part of that was, a goal of being 50% outside of Louisiana. We didn't say Texas specifically, but, given the, choice of investments we could make, two or three years ago, we felt like that was the right place to do that. Given the success that we've had there, we feel like building on that success makes sense.
I would say the bulk of that 50% non-Louisiana exposure that we expect to reach at the conclusion of our five-year plan would most likely be in the Dallas and Houston areas. Certainly we've had some success there, moving to 35%. I believe we were at 6% or 7% when we began the five-year plan. We're ahead of schedule, hopefully we'll have that within range prior to hitting that 5-year mark. I will say the one thing that could... I'm talking over time here, not tomorrow, but over time. You know, if an M&A opportunity in Louisiana made sense for funding purposes, there obviously will also be some credit, a credit book associated with that bank.
The only likelihood I see of taking a step back from the 35 temporarily or whatever number we happen to be at, would be because we've made the business decision to partner with somebody that can help us with core deposits, which would ultimately help us in our overall growth goals. I'm not saying that we'll get to the 50% in a straight line, but so far over the past couple of years, we're ahead of target and would anticipate continuing that strategy, reinvesting in those Texas markets to make the system as a whole stronger.
Got it. Thanks, Jude. Actually, I had one more as you say that.
Sure.
Is Texas gonna be pretty much the market for you? Would you consider, as far as being outside of Louisiana, would you consider another adjacent market, whether it's Alabama or Arkansas or wherever? Is there just so many opportunities in Texas that it's kind of probably be Texas and Louisiana going forward?
You know, it is again, it depends on time frame, right? We certainly think we have opportunities across the southeast over time. When those make sense to pursue, we feel like what we've done in Texas kind of shows our capability of doing that kind of thing. We're not in any rush to do that. We feel like we do have plenty of opportunity in Texas, really just in Dallas and Houston, not even the rest of Texas. You could work quite a bit for quite a bit of time, maximizing that. Our future expansion, once we feel like the time is right, will be as our previous expansion has been, will be banker-driven.
It's our philosophy that we don't just open up a shop and hope somebody comes. We find a good group of bankers to partner with, and typically, we'll do an LPO, and then once we feel established, we'll grow from there. I certainly think if we found the right banking partners, we would be open to that idea. Most likely that's down the road and not something to contemplate in 2023. We have a lot of good potential ahead of us in the markets in which we're currently operating and feel like achieving a balance between growth and efficiency is something that we have an opportunity to do in a way that we haven't in the past, and are excited about that.
Makes sense to me. Thanks, Jude.
Thank you.
Our final question is a follow-up from Graham Dick with Piper Sandler. Your line is open.
Hey, guys. I just wanted to follow up on fee income really quick. Looks like Smith Shellnut Wilson had a pretty solid quarter, and then there was also the SBIC income. Do you think that fee income's probably gonna drop back to, you know, like $7.5 million? Or do you think this $7.8 million-$7.9 million rate is sustainable? Thanks.
No, I think you're right on, Graham. What we expect is that $7.5 million run rate going forward.
Yeah. SBIC contributed about $400,000 more than we had expected.
Okay. Awesome. 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, just like, you know, what industry they're in, the type of collateral on each, and then maybe the overall size of each credit as well.
Yeah. Great. What we had these two legacy originated, Louisiana originated loans. One of them was in the timber industry. The other one is a receivables line that is a contractor and does some work, government jobs and other various things like that.
On the timber loan specifically, you know, that loan, what we started seeing was potential fraud in there with multiple sources of our collateral pieces. We thought about as we were looking at it, and we've been talking about this loan for quite some time, we thought the prudent thing to do, because it looks like a pretty long runway to settlement on this thing because of the fraud nature, but also just the numerous pieces of collateral that we have to deal with. The right thing to do would be for us to put a reserve up now, that way we could be prudent, take our time on the collection pieces, and we think we'll get some of that as back as recovered. On the other loan-
What percentage?
The, the loan size on that one is about $1.4 million. On, on the other loan, and we marked that at about 80% of the loan in total. On the other loan, the, the receivables line, the customer is in dispute with on a contract. Because of that-
On a governmental contract.
On a governmental contract, right. Because of that, they're, we think the path to settlement on that is gonna be elongated. It, it puts a line under water, and the borrowing base kinda out of trust because we have to remove that disputed contract. We really put the reserve up against that contract. We don't think the contract will be a total loss. What we did was. That's about 50% of the whole exposure of that credit. We think over time, that will shake out. We'll get some recovery, and they'll get paid. May not be 100%, but at this time, there's a lot of uncertainty, and it looks like a long runway on that one as well.
The borrowers are cooperative in working with us?
Yeah.
Okay. That's very helpful. Thanks, guys.
Sure.
There are no further questions at this time. I now turn the call back over to the presenters for closing remarks.
Okay. Well, we appreciate you spending your time with us, and we felt like it was a very positive fourth quarter. That many of the investments that we've been making over the past two, three years are coming to fruition. You know, certainly the first quarter's noisy from a seasonality standpoint, but we feel very optimistic about approaching 2023 and look forward to visiting with you all in three months. Thank you all.
This concludes today's call. We thank you for your participation. You may now disconnect.