Q4 2022 Business First Bancshares Inc Earnings Call
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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 1. Thank you. It is now my pleasure to turn the conference over to Matthew Seeley, SVP, Director of Corporate Strategy and FP&A. Mr. Seeley, 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 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 our Safe Harbor statements are available on page 7 of our earnings press release that we 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 Bank Chair's 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.
All right, thanks Matt and thanks everybody for joining us this morning. We know you have a lot of choices about where to be and we appreciate you deciding to prioritize being here with us. I'll keep the remarks kind of brief so we can jump into questions. I do want to go over some of the notable trends from the quarter and.
And then some four 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 of. non-GAAP core net income of $16.4 million and 66 cents 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.
And then also a good balance between commercial and NCRE credits as well.
Second, 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, and then we had a large payoff as well. And those loans hit a dot.
had accounting marks related to them that we were able to benefit from.
We benefited slightly from non-interest income through SBIC revenue. We all remember that we have a
number of investments in SBICs, which occasionally surprised on the upside. This was one of the quarters in which we had about 400,000 above budgeted SBIC income.
We continue to focus on efficiency, so we're proud of the fact that our non-interest expense came in just below expectations. So 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 up a number of key hires, including Jerry Baskapew, who joined us as our Chief Administrative Officer after 17, 18 years at Iberia and First Horizons. 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 that it fills out our exec team. So we feel 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 dollar 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, but we certainly considered them to be isolated and one-off incidents, one of which involved fraud. This is new to our join up list.
So we don't feel like that's representative of anything more systemic across the portfolio, and our overall credit metrics certainly reflect that.
So if you adjust the quarterly results for backing out the additional loan, disc
And also, although it's a challenge, probably the challenge going forward over the next...
two or three quarters We actually were not on pleased with our performance on the name side of the of the of the ledger We did drop down 13 basis points on our core name But you'll remember in our last quarter we talked about the fact that that
Our third quarter was artificially inflated by about five basis points, and we expected to have five or six basis point drop modeled on top of that. So we came in really close to what we had modeled and we filled.
good about our modeling going forward. We feel like, well before I say that, so I think it's important to take a step back. It's not just quarter-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. And so 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've also thought the fourth quarter was a little bit of a catch-up phase, we've modeled that, where we had kind of held off on some rate moves and we're kind of catching up.
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. So we'll talk a little more about that when we hit the Q&A, but not unpleased 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. We achieved a record coordinate income of $57.6 million per year, which is a pretty good thing.
It was about 10% above what we finished at last year, but last year you'll remember included a sizable
positive impact of selling our PPP portfolio. So 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. So those are kind of like mini acquisitions in a way, and they take effort and judgment and time. So I feel really good about it.
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, excited about. We actually crossed over a billion dollars in loans in Dallas this past quarter. And when you combine the Dallas and Houston operations, we've had a lot of activity there.
We're at about 35 percent of our credit portfolio as a whole, as in those two large and fast-growing metro areas. So as we have talked about, one of our goals is getting closer to 50 percent of our exposure outside of Louisiana so we can be diversified. So we took really big steps.
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.
and still be at our numbers is something that I feel is another positive. And then we also did the $50 million comment at the array. So we feel well placed to take on the opportunities that we fill out there this next year. Our clients remain highly positive and confident.
Certainly, there will be some challenges, but all in all, with…
with the strongest asset quality that we've had and a 45 balance sheet, and then a stronger team than we've ever had. We feel well positioned to take on 2023. So, appreciate your time and happy to answer any questions that you might have.
and a 45 balance sheet, and then a stronger team than we've ever had. We feel well positioned to take on 2023. So, appreciate your time and happy to answer any questions that you might have.
At this time, if you'd like to ask a question, please press star 1 on your telephone keypad. We'll pause for a moment to compile the Q&A roster.
Feddy Strickland with Janney Montgomery's stop. Your line is open.
Hey, good morning everybody.
Very, very, very.
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 kind of avoid wholesale funding for the near future?
Well, 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 that we are prepared for that truth more than anything else.
We have some good activity. It has some success in the fourth quarter and we certainly feel like the first quarter will be Even stronger perhaps in the fourth quarter And over the course of the remainder of the year We certainly would prefer to do four deposits But one reason we pay down the line is because we want to make sure that we maintain Access to that second.
their source of liquidity. So hopefully we don't have to use it, but you know, the opportunities.
make sense for us from a growth perspective to fund them through the FHLB. And I would certainly
would utilize them if it made sense.
You know that has it every.
So we're going to try not to, but if we do, we do, I guess is the way to put it. It was nice to have enough tools in the tool belt as we navigate over the next year.
Got it. That makes sense. And then just kind of more broadly on the margin, you know, what, 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, but.
Can we just talk through kind of where I think the core margin was 375 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 data outpaced the deposit data. I guess I'm wondering does that continue from here.
Great. I'll let Greg talk in detail about the margin. Thanks, Barry. I think what gives us an optimistic outlook is...
If you look at the margin kind of month by month in the quarter, we started out the margin in October at 371 and November we moved it to 372 in December 383. So we had some pickup in the margin.
within the court, really driven by the top line loan yields that we were able to manage through. So just to put that in context, September loan yields were at $610 on new loans, and then the December new loan origination yields were at $762.
So 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 going to continue, and 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 two on the margin, and then as the year goes on, maybe up five to seven basis points each quarter thereafter. So, what we're looking at is our asset and a balance of comma and then when we have yes, and no, no, it's preferred that, it's right next to?! Why? Well, we're trying to get in this position.
We're going to continue with the pricing model the way we have it and manage it that way.
Got it. Is the 5 to 7 inch quarter, is that on the core or the gap margin?
Or both. That'd be a horrible one.
Of course, got it.
Cool. Got it. Yeah, Betty, one thing that I'd add.
If we look at the loan betas during the quarter, the cycles of date were about 75% on new loan yields. And we look at the total portfolio betas, they were around 30%. So I think what you saw some of was 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. But we do still expect 60% plus loan betas on new loan yields.
Got it. That makes a lot of sense. And then one more for me, and I'll step back in the queue.
Got it. That makes a lot of sense. And then one more for me, and I'll step back in the queue. Just longer without looking, it seems like…
you know, you had another strong quarter here. Do we see things start to slow down a little bit from here? Or do you think you can continue kind of the growth rate that you saw in the fourth quarter?
So we're anticipating kind of low double digits, kind of low teens.
You know, we had a strong fourth quarter, but definitely a slowdown on a percentage basis from the third and second. And some of that was slowdown, but some of it also was us managing and making decisions, you know, part of the...
a positive loan beta on new loans is the result of us being
maybe more disciplined on pricing. And so we'll continue to do that. We think it's over the next year, it's a little bit of a.
important trade-offs with where rates are growth versus versus pricing and we want to manage that but we still feel like we have
We're in the right markets, 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. So we feel like, as I mentioned in my opening comments, we've actually hit a Hay Week spot with
the teams that we picked up earlier in 2022 are clicking and we feel like there's more capacity there as well. So we feel good about our ability to continue to grow loaded mid-teens and then it'll be kind of a question of what's the best use of our balance sheet. So you're not going to – it's unlikely you'll see the 35.
Thank you.
Graham <expletive> with Piper Sandler, your line is open.
Graham <expletive> with Piper Sandler your line is open. Hey, good morning gentlemen.
Morning.
I just wanted to circle back to the NIMS specifically on the deposit side of things.
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 non-inflating deposit balances are embedded in those assumptions. Yeah, what we saw in the betas right over the fourth quarter was about a 40% beta. It really was made up of really three categories. So now, category, money markets, and time deposits.
Those are around 60% beta in those three select categories, and that was the driver, obviously, of the 40% beta. We think going forward with NQ1, because of the way we price progressively in Q3 and certainly in Q4, those do come down more in the 40-50% range on the money market.
The positive growth was strong and expected, so that's gonna drive up the cost a little bit more. But 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. And so you're right, for the fourth quarter,
Just the quarter was 40% total deposit betas. However, cycle the 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 up over time. And through the balance of this year, I think that we'll
I see that creep up a little bit closer to 30%. But that cycle that they made is very much in line with what we had thought previously. Quarterly gets a little choppy because when you look at quarter over quarter, depending on what the Fed does and how their forward curve moves. Someone else were in the story as well.
that can be a little misleading, depending on how you're looking at it. And what time in the quarter? Yeah, yeah.
Okay, great. That's helpful. Thanks for the clarification there. On non-experient deposits, are you guys expecting to see up, down, way down, or what's your outlook there on that part of the funding base?
I think we grew from year over year, non-interest-bearing, we continued for that to be a huge focus for us to continue to grow. That will be a challenge as the whole...
marketplace liquidity is an issue through all banks, so it will continue to be our focus, but we understand there's a challenge ahead of us, but accumulating customers that are that are C&I focused for us.
that have that non-interest bearing part of their balance sheet is a priority.
As we've talked about previously, we're certainly geared to more incentive plans towards non-interest bearing and then we've also made a number of hires in the treasury management.
department over the past year. And so that's.
the goal there and we feel like we're making the right investments and Doing right. Thanks. So we'll have to see how them
the economy as a whole interacts for us in that regard, but we certainly have it as a number one priority, I would say.
And 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 is just more low hanging fruit and more opportunity on the interest bearing side. But 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 invisible-related deposits, many of which are interest-bearing. So 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 percent. But –
how to be a fair tradeoff for us.
Okay, and then I guess just one more, but 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? I know you guys are still building out the franchise and investing in it, trying to get a sense of kind of leveraging a little drive out of the expense base this year.
Yeah, I think in the first course what we expect to see is a 4 or 5 percent increase of Q4. So some seasonality and some things from that standpoint.
But 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.
And a little bit more color there. That's 4%.
quarterly, not an annualized figure. And it's important to remember that there is seasonality in Q4, but there's also seasonality in Q1, which for similar reasons, payroll accruals and true-ups, but then we also have a partial quarter impact from payroll increases for the year. So that that does get you, you know.
kind of an incremental seasonal pickup in the first quarter and and 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 basis increases. Yeah, I think the thing that the key areas that we're going to continue to look at is opportunity.
Okay, great. Thanks, guys.
Again, if you'd like to ask a question, please press star one on your telephone keypad. Jordan Gent with Stevens, your line is open.
Hey, good morning, guys.
Morning, Jordan. Hey, so 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' expectations for hiring in 2023 and kind of changing things such as for you and how they get involved.
What do you think is gonna is it gonna be more towards loan producers or deposit gathering or if you could just kind of give more color on that that'd be great. Thank you.
I would anticipate, and 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 As a team.
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. So, that's what we're going to do.
particularly true in our faster growing areas. So I would anticipate that we would do some hiring on the production side, but it would tend to be more support staff. Dallas has a strong team that I'm certainly capable of continuing to produce over the course of the year. Two
We've been pleased with the Houston team integration, but we do feel like we could get out of Vancouver to there just to continue moving forward.
Probably seek to do that, but on balance, so across our footprint, a little more hiring on the support staff versus the actual bankers.
and we would continue to add Treasury capability as well. On to your point about our deposit oriented folks.
Perfect, thanks. And then 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 is that just kind of a one-off situation?
That was a—I would call that more of a one-off situation, just—and we happen to have the two loans in the same quarter, but—
I would call that more of a one-off situation, just we happen to have the two loans in the same quarter. We are Com Dough Full of the interviews on figure out what those six things are, stuff
It's not one that we hadn't been working on and kind of figuring out over the course of multiple quarters and the timing was just right. It also happened to be one that...
had a lower interest rate for a longer period. And so that obviously becomes a little more punitive today than it was even three-quarters ago. So just a one-off business decision that we made, but I wouldn't anticipate that we would have a wholesale.
recapture of the...
of the accretion on the 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
$25 million in accretion or credit mark remaining.
But I would anticipate that that would go back to kind of its normal rate. I did want to take just a moment to point out because unless you look at our deck you wouldn't be aware just based on the...
but I would anticipate that that would go back to kind of its normal rate. I did want to 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 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. But on page 17 of the deck, you can see the fair value discount when you add that into it.
So overall loan loss provision, you get an effective loan loss provision of 141, which is well situated, we believe, relative to our peers and relative to the exposure in our book. So 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, and the loan loss provision, of course, is what it is. So, I think you'll have a really good place to start, and you know about £ claimants
what screens when you compare banks, the fair value discount you have to get from our deck. So that was that 20 and change accretion number hanging out there that I talked about. Does materially impact our preparation for any adverse incidents over the next year.
Thanks for answering your questions.
Thanks for being here.
We do have a follow-up with Fede Strickland with Janie Montgomery Stark. 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 parental balances now. Jude, could you just tell us...
kind of what you're thinking is over the longer term there, you know, does that grow towards 50%? Do you have a target number or does it just kind of depend on?
you know, where growth is in the future. So a couple of years ago, we set on our latest five year plan and a couple of the components of the plan were age of growth. So we wanted to double our loan book over the five years. But as we grew, we wanted to increase diversification. So that.
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 a obligation to try to be perceived as strongly as we can in addition to being as strong as we can. So 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. And then given the success that we've had there.
We feel like building on that success makes sense. So 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. And so certainly we've had some success there moving to 35%. I believe
The one thing that could I'm talking over time here not not tomorrow but over time You know if 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. And and so the only
I see it 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. So I'm not saying that we'll get to the 50% in a straight line. Ryan Roberts Stlitman Vera
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. I should say that.
Texas, Louisiana going forward.
Again, it depends on time frame, right? So we certainly think we have opportunities across the southeast of town.
And so 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. We could work 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.
So we it's our philosophy that we don't just open up the 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. But most likely, that's down the road and not something to contemplate. In 2023, we have a lot of good...
I think if we found the right banking partners, we would be open to that idea. But 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.
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 <expletive> with Piper Sandler. Your line is open. Hey guys, I just wanted to follow up on fee income really quick. Looks like Snish on that Wilson had a pretty solid quarter and then there's also the SBIC income. Do you think that the income is going to be a little bit higher than the SBIC income?
probably going to drop back to seven and a half million or do you think this 7.8, 7.9 million rate is sustainable? Thanks.
I think you're right on Graham, that what we expect is a seven and a half million run rate going forward.
Yeah, the SBIC contributed about 400,000 more than we had expected.
Okay, awesome. And then 1 more quick 1, I guess, just on the 2 credits that received specific reserves. And they said 1 was due to fraud. I just wondering if you could provide some color on 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.
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, that loan what we started seeing was potential fraud in there with multiple sources of collateral pieces. So we thought as we were looking at it, and we've been talking about this loan for quite some time, we thought it was a 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 we have to deal with. The right thing to do would be for us to put a reserve up now.
And then that way we can be proven to take our time on the collection pieces, and we think we'll get some of that as back as we come.
On the other loan, the loan size on that one is about 0.04. So on the other loan, we mark that at about 80% of the loan.
What percent? The loan size on that one is about May 4th. So, on the other loan, we mark that at about 80% of the loan in total.
On the other loan, the receivables line, the customer is in dispute on a contract. And so because of that, on a governmental contract, right. And because of that, we think.
The path to settlement on that is going to be elongated. It puts the line under water and the bar base kind of out of trust because we have to remove that disputed contract. So we really put the reserve up against that contract. And we don't think the contract will be total loss.
So what we did was, and that's about 50% of the whole exposure of that credit. So 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. But the powers are cooperating and working with it.
Okay, that's very helpful. Thanks guys.
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. Many of the investments that we've been making over the past two, three years are coming to fruition, and certainly the first quarter's noisy from the seasonality standpoint, but we feel very optimistic about.