Business First Bancshares, Inc. (NASDAQ:BFST) Q1 2023 Earnings Call Transcript

Business First Bancshares, Inc. (NASDAQ:BFST) Q1 2023 Earnings Call Transcript April 29, 2023

Operator: Good afternoon. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the Business First Bancshares’ Q1 2023 Earnings Conference Call. Matt Sealy, you may begin your conference.

Matt Sealy: Thank you, Christy. Good afternoon and thank you all for joining. Earlier today, we issued our first quarter 2023 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 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 harbor statements are available on Page 7 of our earnings press release that we filed earlier today with the SEC. 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, Chief Financial Officer, Greg Robertson; Chief Banking Officer, Philip Jordan; and Chief Administrative Officer, Jerry Vascocu. After the presentation, we’ll be happy to address any questions you may have. And with that, I’ll turn the call over to you, Jude.

Jude Melville: Okay. Thanks, Matt, and thanks, everybody, for joining us. We recognize it takes energy and effort and commitment, particularly as we near the end of a busy earnings season. And we appreciate the opportunity to provide color to our story. Before we get into the details of the quarter and thoughts about future projections, I’d like to take just a second to zoom out to a big picture perspective. Ultimately, we’re not working to put up a number for a quarter or 2. We’re working to build a sustainable franchise that produces value for our multiple constituents over time. We’ve made a number of investments over the past few years with ascend in mind. And I want to give you an update on where we are relative to our longer term goals.

Particularly on the significant progress we’ve made over the past year. And we’ve been working towards 3 primary objectives: First, diversification of risk; second, growth to a meaningful size; and third, increasing our earnings power. On diversification of risk, we’ve primarily chosen to accomplish this through geographic expansion into Texas, not a retreat from Louisiana, where we’re still the largest domicile bank as measured by deposits, but an expansion into Texas. We’ve had significant success in organic development of the Dallas market growing to almost $1.3 billion in loans, which makes it our largest single metro area by exposure and nearly $300 million in deposits over 4 locations. We’re for real in the country’s most vibrant market at a greater scale than we imagined when we did 5 years ago.

Additionally, over the past year, we successfully integrated our Houston acquisition into a meaningful part of our team, growing the acquired asset base, securing and integrating the team, while achieving our projected cost savings along the way. With the 2 markets combined, our Texas exposure is now 37% of their credit book ahead of our timeline. As we’ve all been reminded over the past few weeks, though risk is not just asset-based, it’s also found in the makeup of our liabilities. With that in mind, I’d point out the work we’ve done on a new slide in our deck, #9, Slide #9, in which we detail our liquidity profile, low uninsured levels, high granularity of accounts and no measurable slippage over the recent volatile times. This is our longer term strategy of combining growth of credit in the west with stability of deposits in the east and its working.

Second, meaningful size, all of the current pressures point towards the importance of scale. And it’s likely that even more scale will be required to maintain efficiencies required to offset the cost of managing with higher levels of liquidity. Slide 10 demonstrates our approach toward achievement of scale is a combination of organic and acquired assets. We’re sometimes labeled a roll-up story. But that’s really a function perhaps of our not telling our story clearly enough. And hopefully, this slide will help with that. We do look to partner with certain institutions when the time is right for both parties. But those efforts are complementary to our organic efforts, not a replacement for them. You’ll see on Slide 10 that our annualized deposit CAGR since 2015 is 26%, a large number, but our un-acquired growth has been 16%, also a very healthy number.

More to the point of the current period, you’ll see that the number of accounts we’ve grown is heavily weighted towards smaller accounts at a ratio of nearly 50:1. When we set out on our most recent 5-year plan, we aim to double in size to $7.4 billion in assets, at $6.2 billion at the end of this quarter were ahead of schedule and we’ve done it in what we believe to be the right way. Finally, profitability, our first quarter is traditionally our least profitable quarter. So there’s been a light and expected step back in profitability relative to the fourth quarter of 2022, but year-over-year, we’ve increased tangible book value. We’ve increased pre-provision pretax income considerably. And we’ve increased EPS even while adding shares to the Texas Citizens Acquisition and the capital — raised in the fall.

We expect to be capital accretive next quarter. And now that we’ve achieved a footprint of enough size and geographic diversity that we can be certain of our staying power. We expect to prioritize increasing our returns relative to capital over the coming quarters and years. So a big picture, I’d argue we’ve accomplished a tremendous amount of franchise building over the past year and years. And I want to make sure our team knows how proud I am with those efforts beginning to come to fruition. With that said, I’ll focus briefly on quarterly highlights before turning it over to Greg for more detail and questions. First quarter non-GAAP net income and EPS were $13.8 million and $0.55, respectively, both better than expected. These results were driven by good expense management, some green shoots and noninterest income, including development of our SBA offerings, continued loan growth and higher loan discount accretion than expected from previous acquisitions.

Our lenders have done a good job of charging for new loans with current new loan yields topping 8%. Obviously, we’ve been impacted by the dramatic shift in posture towards deposits the market has experienced over the past few weeks as with most banks, offsetting some of the gains by increased deposit and borrowings costs. But our margin, while down for the quarter is still up year-over-year and has historically been quite consistent in this range. Two last things of note. One, implementation of CECL causes us to recognize differently the asset quality of acquired impaired loans. So as our reported asset quality level, while still excellent appears to have degraded slightly. It’s a function of accounting rules and non-practical change in risk.

If anything, our underlying asset quality is measured apples-to-apples pre-CECL versus post-CECL has improved quarter-over-quarter, as Greg will explain in more detail. Second, well, one final new slide, #27, speaks to our CRE C&D and in particular, our office exposure and granularity. We feel good about the geographic diversity of our exposure as well as the manageable pace of renewals that we’ll face over the next 2 years. And we’ll be happy to address that in greater detail, should there be questions. Again, thanks much for your time. And now, I’ll turn it over to Greg.

Greg Robertson: Thank you, Jude. Good afternoon, everyone. I’ll spend a few minutes on the financial highlights for quarterly results and provide some updates around our outlook. As Jude mentioned, Q1 of ’23 was highlighted by solid core expense management and improving core net interest income. We’re happy to provide some more color in the Q&A on our outlook and around expenses and fee income parallel. We feel like Q1 ’23’s core results are in directionally in a good run rate for the next couple of quarters. And we should see our core expenses flat to up a little bit in the Q1 base and noninterest income flat to down a little bit. A strong core earnings during the quarter were somewhat offset by funding pressures driving our 21% compression in our core NIM on a linked-quarter basis.

I’d like really to go into detail on Slide 20 in our presentation, which you’ll see our Q1 GAAP net interest margin of 3.75% included 2.9% in loan accretion, which was about $1.7 million higher than we expected and was due to some payoffs and the final CECL adjustments for the quarter once we adopted. Our updating outlook assumes accretion would drop back in line, more in line with our normalized levels of about $1.4 million in Q2 and thereon after. While headline margins do tend to appear negative during the quarter, I do want to take a minute to highlight some of the more positive aspects of the margin during the quarter. As Jude had mentioned earlier, we are proud of our efforts reflected in our newly originated loans with the weighted average beta on those new loan yields was 85% during the first quarter, up from 74% in Q4 of ’22.

Q1 loan yields experienced a steady decline throughout the quarter. And we ended March with a weighted average yield on new loans of $812 million, up nicely from December of ’22 as a new yield of $762 million. And really a little more granularity into that, which is important for us in the coming quarters, a weighted average rate of $820 million on our renewals in Q1 of 2023 as well. While funding betas did increase during the quarter, Q1 interest bearing deposit betas of 73% appears to be in line or slightly better than public peer-banks with assets less than $10 billion. Core NIM remained relatively stable throughout the quarter. March core NIM was 3.54%, which was in line with the Q1 overall core NIM. We expect some modest compression in Q2 core NIM, down single digits in terms of basis points before stabilizing.

And we think that the second half of ’23, the core NIM will inflect and increase slightly. I think it’s important for me to cover, and I’ll cover in a little more detail on another slide. But our other borrowings increased due to utilization of the new bank term funding program, which allowed us to lock in a lower funding cost on these balances. We were able to position ourselves on a day where the funding had dropped down to 4.38%, which allowed us to pick up 62 basis points annualized net savings on the $310 million that we converted to that fund program. Turning back to the income statement. Q1 loan loss provision was quite slightly elevated due to the resolution of an impaired previously more credit acquired in March of ’23, which resulted in a charge-off of $1.9 million.

I think it’s worth us moving to Slide 19 for me to kind of walk through our credit quality performance. And we’ll be able to elaborate a little more on the adoption of our CECL conversion during the first quarter, which increased the allowance for credit losses and unfunded commitments resulting in about $1 million pretax decrease in shareholders’ equity. As Jude mentioned earlier, the optics around some of those credit metrics appeared skewed. But when comparing to the prior quarter, from the adoption of CECL, they really were quite nice. The improvement was quite nice. And I think I’ll stop here and really walk everyone through that conversion of CECL and how they impacted not only past dues, but NPLs and charge-offs on Page 19 of the slide.

So if you look at our past dues for the quarter, they were $10.4 million or 22% for the quarter. I think upon conversion of CECL, the big uniqueness for us is these acquired previously acquired credits where we have credit marks specifically against those credits. Under the old loan loss reserve model did not appear in our past dues. Our NPLs are in the charge-offs. And now they do with the seasonal conversion. They do after in those numbers. So to put that in perspective, if you’re comparing apples-to-apples from Q4 to Q1, the $10.4 million if you remove the PICs or the purchase impaired credits from that number would really be $4.2 million. So those pure pass dues would be down from the previous quarter. Same impact when you walk forward to the nonperforming loans for the quarter, that $17.1 million was really impacted by about $9.5 million in purchase acquired credits.

So the actual nonperforming total would be $7.6 million in nonperforming loans down from the previous quarter at $11.4 when comparing quarter-over-quarter under the same metrics. Same principal applies to charge-offs. We had the acquired loan that we settled in the quarter that had a significant reserve against it, actually a net positive for us from an income standpoint. And that was $0.04 of the $0.05 in charge-offs for the quarter. So charge-offs again at an all-time low, which I thought was worth walking everyone through to the — to talk about credit quality in the same vein when we talk about the conversion from CECL. Now the adoption for CECL for us, we feel like going forward, our loan loss reserve should be at about 1% going forward from here on out at our normalized loan with loan volume.

We can move to Slide 23. I think that we’ll do a good job of talking about the balance sheet. Moving to the balance sheet. The linked quarter growth, $197 million loans or $17.3 million in annualized loan growth was really driven by strong C&I loan demand, which was really headlined by our Houston market. $85 million of that growth for the quarter was in C&I, which we’re very proud of. This represents about 43% of the first quarter of loan growth. C&I was a significant contributor during the quarter. While we feel like those deposits or deposits have been a challenge in the quarter, we feel like the C&I growth will put us in a position with these commercial relationships should materialize into additional deposits going forward. Our revised outlook on loans assumes that loan growth continues to slow gradually through the year and with target around 10% at year-end loan growth for the year.

Deposits remained relatively stable for the quarter. Jude had mentioned Slide 11 earlier. I think that does a really good job of describing our not only deposit, but our liquidity going forward. We think talking about the initial liquidity and deposits in force important core deposits represent about 88.3% of our total deposits. As mentioned earlier, we utilized $310 million of the bank term funding program availability really strategically to reduce the cost of borrowing funds. We don’t really look at that as an additional source of secondary liquidity. We use that to really strategically manage the rate difference between that and FHLB. One thing of note, as we do note on Slide 11 that at the end of the quarter, we were successful in converting additional loan pledging that was unutilized at FHLB to the Fed discount window, creating about $950 million on additional secondary sources of liquidity to now put us just over $2.7 million in additional sources of secondary liquidity.

And rounding out capital really remained stable during the quarter. TPD was down just 4 basis points from Q4. And on a year-over-year basis, TPD ratio increased about 17 basis points. And with lower loan growth forecasted throughout the year, we expect capital levels to steadily build for the remainder of the year, which would be in line with our projections, as I mentioned earlier. And with that, I will hand the call back over to you, Jude, for anything you’d like to add.

Jude Melville: I think I said what I wanted to say. We’ll be happy to answer any questions that anyone might want to ask.

Q&A Session

Operator: Your first question comes from the line of Thomas Wendler with Stephens.

Thomas Wendler: I just wanted to go back to deposits. Your new slide, Slide 9, you have listed that you have $90.5 million in average monthly deposit generation over the past 12 months. Can you just give us an idea of how that figure is trending throughout 1Q?

Jude Melville: Yes, it’s a great question, Thomas. We’re very excited about that. Actually, in Q1, it’s trended up to slightly over $100 million. And for example, in March, the noninterest-bearing open was about $22 million over 700 accounts just in noninterest-bearing with about slightly over $100 million in interest-bearing accounts in the same month.

Thomas Wendler: And then just sticking with deposits, the FIG deposit base decreased $29 million last quarter. Can you give us any color there?

Greg Robertson: Yes. I think — so our FIG group has deposits from about 50 banks across the region and varying sizes in the middle of a volatile time. I won’t say crisis because for most of us, it wasn’t actually a crisis. But for the volatile time, there was some kind of pullback on the big deposit base, which is understandable as bank’s kind of their first move is to bring their money home. But we’ve seen since then a number of significant amounts of that gap come back to the bank as we kind of pass through that volatile time and certainly haven’t seen any more decline. And that typically has been — so you’ll remember that our FIG group in conjunction with our SSW Group serves banks in multiple ways. And what we were pleased to find is that banks that we have multiple relationships with deposits and participations or investment advice.

We didn’t see any movement in that in the liquidity. So it really was in some accounts where we just had some banks that were parking it there temporarily or not with the full relationship. So I think it’s a little bit — it kind of proves out the model in terms of our wanting to have multiple touch points with those banks that we service and will be a positive. But certainly in the heart of the volatility, we did have a little bit of pullback there. And the FIG deposit base is a relatively small percentage of our overall deposit base at this point. And the money that we temporarily lost was about 15%, I believe, of the FIG base. But FIG base itself is about $150 million out of our $4.6 billion to $4.8 billion deposit base. So it’s — while we hope to grow it over time, I realize we’ll have to manage it differently than other forms of liquidity.

Today, it’s really not a large enough portion to have moved our needle negatively during that time.

Jude Melville: Yes. Thomas, it’s about 2.87% of our deposit base right now at quarter end.

Thomas Wendler: I appreciate all the color there. And if I could just squeeze in one more. We saw a bit more SBA activity in 1Q ’23. Can you just give me an idea of your plans around the SBA moving forward?

Greg Robertson: Sure. We picked up some SBA capability with our Texas Citizens acquisition. And we had certainly been planning to be more aggressive in that area prior to the acquisition. But the acquisition gave us a little bit of some wind in our sales. And so we’ve seen this was really the first quarter that we saw an uptick in the number of closings and our pipeline is filling off. And so we expect to have similar results over the course of the year and hopefully a little bit improving. We have a good partnership with an LSP a loan service provider for the SBA that helps us with all — make sure we’re doing it right. That’s the thing about SBA it’s only valuable if you’re doing it right. And so we definitely spend some time making sure that we’re handling the back office side of it and have that infrastructure in place and are beginning to put a greater emphasis on it in our markets. Jude, if you want to add anything to that or?

Jude Melville: Yes. I would just say we started focusing on it probably really for first quarter last year and took most of last year working through the kinks. So the first quarter is a good indication this year of where we hope to take it, but we’re pleased with the result.

Greg Robertson: I do think that we have to be mindful of the fact that the higher rates tend to mean lower premiums. So even with a higher volume, that won’t necessarily be on a one-for-one basis with higher income in the short run. But again, this is a part of our franchise building over time as a bank that services businesses, we feel like this is an important tool in our — arrow in our quiver.

Jude Melville: Well, I was just going to say, one of our initiatives over time is certainly a focus on developing various sources of noninterest income. And part of the rationale for our acquisition of SSW was wealth management as a source of income, investment management for other financial institutions as a source of income. SBA is kind of the next — the other most logical combination for us given our focus on small businesses. And so all 3 of those are areas that we think can move the needle over the long run for us. And as we seek to move from being profitable to highly profitable, I think that noninterest component is a key part of that. And so it’s still early days on all 3 of those initiatives. But we like the direction that we’re moving in.

Operator: Your next question comes from the line of Kevin Fitzsimmons with D.A. Davidson.

Kevin Fitzsimmons: What I got, I was trying to keep up with you when you were talking margins. So it sounds like you’re saying stable — March was stable with the full quarter on a core margin basis. So — but you do expect some incremental impression in second quarter, I guess, from funding cost pressure have been able to up after that? Is that — did I hear that right?

Jude Melville: No, you’re exactly right. We think given where we are today, I think we’ll continue to fight some headwinds on the cost side from the deposit standpoint. We do re-price our loan pricing software every week. So that’s allowed us. As I mentioned, to keep the top line loan yield kind of walking in step, but we’re fighting like everybody else’s deposit pressure. So we do think slightly compressed in Q2 and then we think the pace of renewals that we experienced just kind of seasonally in Q3 and Q4 will help some expansion in the later quarters.

Kevin Fitzsimmons: Okay. And I think you said like single-digit right, in second quarter?

Jude Melville: Right.

Kevin Fitzsimmons: Okay. And is — the comment about slowing loan growth, it’s not surprising. I’m just curious about the drivers in terms of maybe if what kind of proportion is coming from the economy slowing and therefore, demand and pipelines falling versus you all may be getting much tighter on — with it being more expensive to fund that loan growth and maybe with concerns about credit. Is it how much is more deliberate versus the market?

Jude Melville: I would say more deliberate than the market today. We have a lot of great relationships. And even if we didn’t weren’t sourcing loans from new clients, just our current clients still have activity and robust. So we are trying to be disciplined though on a couple of fronts. One is the obvious, the increased cost of deposits incrementally. We want to make sure that we are making it worth using liquidity for that growth. And so we’re spending a lot more time thinking about the profitability of those loan opportunities versus the volume of those loan opportunities, which makes sense given the — we think, given the liquidity concerns. And then secondly, as I’ve explained in my introduction, we feel like we’ve reached a little different level in terms of our maturity as a company and a little different foundation from which to work.

And at this point, we have most of the pieces of the puzzle in place and we just need to grow it appropriately from there. And a lot of that needs to be determined by capital allocation versus just growth for growth sake. And so we’ve become more cognizant, I suppose, or more determined in our efforts to make sure that we are growing within our retained earnings and that we’re accretive from a capital perspective. So we certainly have enjoyed shareholders trust funding the investments that we’ve made over the past few years. And we feel like we’ve done a really good job of doing what we said we would do in terms of establishing our footprint. And now that we’re there, I think our priority to — and our responsibility to that investor group is to begin making sure that profitability gets a higher priority than growth.

So part of that is making sure that we slow down our loan growth so that it’s right fit to our capital base. And so we feel like over the long run, a 10% loan growth, plus or minus a couple of points based on the economy and where we are as a company is a healthy target both for this year and for coming years when we’re healthier. If we can do that consistently while accreting capital at a higher ROE then I think we’ll all be pleased with that outcome. So that was a long way of saying. It’s a more deterministic approach to the allocation of capital versus a big run-up in demand. One thing we’re finding is that demand is actually increasing in some areas just because there is a tightening in credit in the system. So that means that we have to be even more conscious of the choices that we’re making as we allocate that pool of loans.

Greg Robertson: I will say it’s not easy when you spent a number of years building a ship that’s moving in one direction, it’s not as easy as it may sound to turn the ship. And so we’ve been working on this for a while and 17% annualized loan growth in the first quarter, sounds like a large number, but not compared to the 20% the quarter before or the 25%. I think 30% the quarter before that and the 30% the quarter before that. So it is going to take us a couple more quarters to get down to where we want to be. But that growth that we are experiencing, we’re probably advertising current clients and making sure that we’re making sure we’re adding the right relationships for the long run.

Kevin Fitzsimmons: No, that’s very helpful. And that 10% loan growth figure is not like a full year growth number. That’s more like by the end of the year, maybe by fourth quarter, you’re growing loans that much. Is that right?

Jude Melville: No, we hope to be a little bit less than that in the fourth quarter just to kind of quick catch up this year with our growth. Our goal is to be more in the 10% range, plus or minus a couple of points for the year and feel like we can do that given the pipeline and given the maturities of the current book.

Kevin Fitzsimmons: Okay. Okay. And I know you guys said it’s a small piece. The FIG group is a small piece when you were talking about deposits. But — so I don’t know how big — it’s probably not a needle mover. But I remember in June, you’re talking in the past about the FIG Group being helpful for you on the loan side, too, in terms of being able to distribute some loans that you don’t have to keep everything on your balance sheet. There may be bank clients out there that are deposit rich that are looking for loans. Is that something that can helpful?

Jude Melville: Yes, absolutely. And really, in our mind, although when we originally began the FIG group, it probably was a little more about deposits. But over time, it’s kind of evolved into being a safety valve force in essence, on the credit side so that as our clients succeed, we can grow with them without necessarily taking all the risk on our balance sheet. And then for new clients, you’re right, maybe we can be more attractive to deposit-rich ones. I’ll let Jerry talk. Jerry is actually in charge of working with Jess Jackson, who you know for the FIG Group and SSW and might want to add some color on the FIG group’s purchase.

Jerry Vascocu: Thank you, Jude. A comment I wanted to add was what’s been an interesting and intentional effort. Over the last couple of months has been really a great teamwork between the FIG Group and the markets, building relationships, kind of building that prospect database of where we have contacts throughout the bank client universe. And kind of defining the universe that’s the term we talk about is the reach of the FIG Group and what does it look like. So our team, Jessie’s leading the effort is building up the network, partnering with SSW guys. And the data available out there relative to that community bank universe is something we’ve been able to strike on and got a pretty new go-forward business plan for the rest of this year to work directly with our market teams on the loan participation side.

Jude Melville: And we’re at our portfolio that’s participated is up to about $350 million, which has been extremely helpful in terms of our being able to continue servicing clients. But also over time, we would expect that we would eventually be able to benefit from a not insignificant servicing arrangement for maintaining those loans. So there are a number of ways that the FIG group will ultimately benefit our growth.

Operator: Your next question comes from the line of Feddie Strickland with Janney Montgomery Scott.

Feddie Strickland: I just want to be clear that I understand — I know you covered this some. But it sounds like the bank term funding program was more of an opportunistic move when rates were low relative to some FHLB you already had. And just now that it’s given — it’s more or less in line, you’d probably tap FHLB before you go back to bank term funding. Is that right?

Jude Melville: Yes, that’s right, Feddie. We had availability and then on that we were watching the rates and that — those particular days, it was about a 62 basis point spread between FHLB. So we decided, studied the program to ease in and out the penalty, 1-year commitment on that rate. So we decided to take action. But you’re correct. Rates have gotten a lot tighter with FHLB. So we still have availability with the bank term fund right now that we have in access because of that.

Feddie Strickland: No, that makes sense. I mean lower rate, why not. And then I think I asked the same question last quarter, Jude, but I’m going to ask it again. Do you feel like there’s still some low-hanging fruit in terms of branch network optimization or is that more or less kind of already been baked in at this point? Just curious what you’re seeing there.

Jude Melville: No, we actively think about in the slide in here. In fact, it kind of shows the migration over time of our branch network. I don’t remember the exact number. But we continue to analyze opportunities. Sometimes it’s rationalization through cutting back. But sometimes it’s repositioning in terms of moving branches so that we can make better use of the system where it is and trying to tap into some higher growth areas. And over time, we’ve done, I think, a good job of not just having fewer branches and our average deposit base in our branch network is close to $100 million on average per branch. I feel good about the progress we’ve made there. But we’ve also managed to in my opinion relocate them to areas that have more growth potential.

So we feel like there’s still opportunities to increase the deposit base from that branch system. So we’ll continue to rationalize. We got movement of a location in Houston that we did over recently and we’ll have a couple more. I don’t think we have a wholesale opportunity of 10%, 15%. But I do think we’ve got incremental opportunities that remain. And hopefully, we’ll always consider that an evolving process as opposed to only doing that around acquisitions. We need to keep evaluating and keeping — keep looking for opportunities, not just to close, but also to open in the right locations. We also have been experimental in terms of use of ITMs. And over time, particularly, I hope that there might be a little regulatory transition in terms of approval of ITMs. Right now, the ITM has approved as a full branch application.

And I think I’ve heard some talk about maybe changing that, which would make it even easier to utilize that as a way to supplement our existing branch network, so always thinking about it. And I do think there’s some opportunity for us to continue to evolve and make sure we’re making the most of that branch network.

Operator: Your next question comes from the line of Michael Rose with Raymond James.

Michael Rose: Most have been asked and answered. But just wanted to get some color on the credit that was charged off this quarter. And then if you could give some color on the uptick in nonaccrual loans. I’m just trying to get a sense for credit in general. And obviously, the CECL adoption helped the reserve a little bit, but just about some general thoughts on credit, too.

Jude Melville: Yes. Thanks, Michael. It’s a great question. The charge-off this quarter was for a previously marked credit in the TCB acquisition last year. We decided to resolve that, which resulted in a net gain of about $250,000. That — because of the CECL adoption, 4 basis points, so the 5 basis points in charge-offs on the chart on Page 19 is really attributable to that credit specifically. So charge-offs remained low. The same thing with past dues and NPLs. The CECL adoption, because we have been acquisitive, we still have about credit marks out there from our last 4 acquisitions that are really attributable to about $9.5 million of that $17.1 million NPL that’s showing up there. So if you normalize that to pre-CECL adoption, then that really is $7.6 million, which shows NPLs screening down about $4 million quarter-over-quarter. So we think the credit book is in great shape, still performing nicely.

Michael Rose: Any changes in criticized and classified?

Jude Melville: No, nothing material.

Michael Rose: Okay, great. And then just wanted to touch on SSW, AUM continues to figure out. Obviously, the market was up a bit in the first quarter, but now down. I just wanted to get any thoughts on any sort of efforts there to continue to build out that business?

Jude Melville: Yes. Well, Jerry, I’ll let you answer that as part of your SSW kind of plans.

Jerry Vascocu: Yes. That group is very active in the development of new relationships and expanding existing relationships. And it’s been something being fairly new to the team, myself. That group, I can assure you this high energy and developing. They’ve got — they’re adding banks this quarter. They brought on their relationships this quarter. They’re helpful across the array of services dipping into the — even the loan participation side of some of those relationships as well. So that team is on the road and I think you’ll continue to see growth in that business.

Jude Melville: Yes. We’re excited about their energy levels and the reception that they’ve received. When we did the transaction, the biggest concern was probably being affiliated with the bank with that caused concern to their client base and it has not. And in fact, they’ve actually — there’s one reason their AUM has gone up is that their client base has gone up considerably since we partnered out. So we see opportunities to continue to expand that geographically as well as just a number of banks and that we’ve got 3 or 4 individuals in Memphis as part of that team. And we just — we’re excited about the opportunities, not just for the number of banks but the quality advice that we’re given. And we think we’re helping make a contribution to Community Banking.

One of the differences between the way that SSW guides its clients and the way that we have constructed our investment portfolio relative to some of the banks that have struggled and close, is really focused on cash flow return versus yield chasing. And if you look at SSW’s portfolio of clients, less duration risk, less extension of duration during the uptick in rates and really just a healthier corpus. And so being able to — what we think the fact that that has occurred over the past year should be — should make for good talking points and good sales points with additional clients down the road. So looking forward to seeing how that continues to develop. We also think that over time, there will potentially be opportunities to add other services and other products.

And so I won’t get into anything specific today. But I think over time that as we continue to gain the trust of those clients, we’ll have other opportunities to diversify the revenue streams.

Michael Rose: Maybe just finally for me. I’m sorry if I missed this at the beginning. But did you guys give any sort of updated expectations for cumulative deposit beta and then mix of NIB. I think you guys NIB mix is?

Jude Melville: Yes. I don’t know that we called it out specifically, but we’ll let Matt, Matt do that now.

Matt Sealy: Yes, sure, Michael. So on the deposit composition going forward, the way we’re thinking about that is noninterest-bearing being down a little bit. I’d say somewhere in the vicinity of 1%, 1.5%, just as a total mix of the composition by year-end. So relatively stable in makeup of the deposit base. As far as the betas go, so in the first quarter, we got interest-bearing, I’ll kind of talk about interest-bearing betas. Total interest-bearing during the first quarter, 73% obviously, an increase from the fourth quarter. But looking ahead, I will kind of shift the — shift the dialogue or the outlook to be based more on cycle to date just because of the uncertainties around exactly what the size is going to do. It looks like it will be relatively flat Fed funds for the balance of the year.

And if that’s the case, we’re still going to experience an increase in funding costs throughout the year. So on a cycle-to-date basis, during the first quarter we were at 45% cycle to-date interest-bearing deposit betas. That’s probably going to increase steadily throughout the year. And that’s really just a function of a continuous catch-up of the right moves that we’ve had over the past 6, 12 months. So that 45% would likely creep up maybe 5 percentage points on a quarterly basis to end the year somewhere in the high 60% range. So if you kind of apply that to a flat or some kind of forward curve outlook that would be our cycle to date beta assumptions on interest-bearing deposits. On total funding, interest-bearing liability betas, I’d say there’s a very similar trajectory on how those are going to progress as well.

That was a 50% total interest-bearing liability beta in the first quarter cycle to date. Again, that probably ratchets up about 5 percentage points each quarter through the balance of the year.

Operator: Your next question comes from the line of Brett Rabatin with Hovde Group.

Brett Rabatin: I wanted to just go back to expenses and make sure I understood the guidance. If I heard Greg correctly, the guidance was for the expenses to be down a little bit linked quarter in 2Q. And then it wasn’t clear to me, following that, you talked some about how you’ve built out the platform you need and scale is important now. So it sounds like maybe expense growth might be fairly moderate or minimal over the next year, excluding anything else that might come up from an opportunity perspective. So I just want to make sure I had that right and just get any other clarity on the path from here on that line.

Greg Robertson: Yes, Brett, what we’re going to — what we’re seeing in flat to up slightly in Q2. And then we will — that’s because of some full quarter impact of March salary increases. But then we expect to not see expenses increase materially after that, so flattish after that for the balance of the year.

Jude Melville: The only thing that I would add is, as you recall, there’s typically some seasonality in the expense base in the fourth quarter, year-end in terms of catch-ups. And so on a core basis, yes, I think flat thereafter, but that seasonality is going to be there in the fourth quarter in all likelihood.

Brett Rabatin: And then on the classified criticized decrease linked quarter. Was that due to maybe some credits leaving the bank or I didn’t quite catch the linked quarter decline. What might have driven that 40 basis point watch list decrease?

Greg Robertson: Yes. I think it’s — some credits leaving the bank. The credit we settled that had a mark against it. It was probably the big driver in that, Brett.

Brett Rabatin: Okay. That’s helpful. And then just lastly, I appreciate the slide on the Slide 21, just showing the repricing opportunity on loans. For the fixed rate loans, which is like 56% with a weighted average rate of 4.7, any idea of the piece that might be here 1 to 2? Or what a good duration might be on the loans that are longer than 1 year.

Greg Robertson: Yes. So generally, the way we think about this, Brett, is our portfolio turns over about 4.8 years on total. And the fixed rate piece of that is about — that’s the fixed rate piece. So I think just thinking about it in that perspective, those fixed rates, 8.8% maturing in less than a year and then the balance of that really kind of evenly scattered out over the course of that 5-year horizon basically.

Jude Melville: Brett, I’m anxious to see what your title is going to be here. You’re a pretty creative titler of your reports.

Operator: Your next question comes from the line of Graham Dick with Piper Sandler.

Graham Dick: So I appreciate all the color you all have given and most of my stuff has been asked and answered. But I did want to circle back to deposits, just one last time. So correct me if I’m wrong. But I think that we had kind of talked about this quarter as being a stronger growth quarter for you guys seasonally, just 4Q and 1Q typically are and then kind of growth slowing, I guess, throughout 2023. Obviously, 1Q is unprecedented on the funding side. But I just wanted to hear from you guys kind of what you saw. I mean you look at the $90 million number every month being made. I mean, obviously, on a net basis, there had to be some outflows. So I just wanted to hear what you guys saw in March in terms of maybe customers calling up or anything like that?

And then also how that activity and the activity right now plays into your projections for the rest of the year? And then maybe how that fits into the loan-to-deposit ratio piece, where I know we had talked about trying to stay under 100%. I’m just wondering if that’s still a goal for you guys and how you might try and get there if so.

Greg Robertson: Thanks, Graham. I’ll start off, and I’ll let Jude follow up. I think what we typically see in the first quarter, you are right, with some seasonal deposits mainly from municipalities. What we really experienced this year, which was different than we have in years past. The same amount of dollars came in. But they flowed in and out during the quarter as opposed to hanging on longer. And I think that was just a function of the economy and the rate environment and really the inflation and just money moved out of that faster than we have seen in the past. As far as inflows and outflows go, what we’ve seen and we’ve monitored this really for the last 12 months, but more specifically in the last quarter. New account openings continued to outpace account closing.

So our originations still remained high. I think the problem that every bank is dealing with is outflows or repositioning of existing accounts, noninterest-bearing accounts into interest-bearing accounts. But through our monitoring over the last year, that seems to have started to draw closer and closer. I think it’s worth noting for us specifically over the course of 2022, some of those deposit balances were higher, some of because of COVID. But for us, more specifically, we had back-to-back years with hurricanes that impacted different parts of the state, so about $193 million of deposits rolled out from 2 of our different regions last year, specifically. So dealing with that and continuing to grow deposits, numbers of accounts. As I mentioned earlier, we opened about 700 accounts for — or about $22 million in noninterest-bearing deposits in the first quarter.

So we do see signs of continued growth with account openings and progress in that area. The outflows are challenging. I think that is part of the economy that we’re going to continue to deal with. But the focus is definitely on continuing to grow that deposit base.

Jude Melville: Yes. I think I would just add that certainly, we still want to manage towards that below 100% loan-to-deposit ratio. I think it got a little harder over this quarter given everything has happened. So we’re just going to have to work through like bankers and figure out ways to do it. We — that involve incremental changes to incentive plans for deposit gathering, for example. And it involves slowing down the loan growth, as I was talking about earlier to kind of right-size with make sure we we’re responsible from an incremental cost basis for deposits to fund that growth and just be something that as with all banks, we’ll have to clearly those that have experienced strong growth over the past 2 or 3 years. We’ll have to grind through making that happen.

But certainly, we haven’t changed our goals in terms of where we want to be from a loan-to-deposit ratio. And I would expect that over the next few years, we’ll have to all banks will have to probably run a little bit, not all banks because some banks are already lower. But we’ll certainly have to recalibrate to run a little bit lower on the loan-to-deposit ratio than we have historically. But it’s going to take a few quarters to get there. And good news is we’ve got plenty of contingent liquidity. And we’ve got plenty of good inflow and new deposit account opening. We just need to make sure we’re doing all we can to make sure the outflow doesn’t equal that influence. So there’s, some opportunities there that we’ll take advantage of. But it will take time, and it’s going to be a challenging year for everybody that we’ll run through.

But I think ultimately, it will end up making us better.

Graham Dick: That’s really helpful, guys. And then, Greg, this is just a quick one. But I was just wondering if you guys had the rates on interest-bearing deposits at the end of the quarter, kind of like what you gave on loan yields so like the end of this quarter and then the end of last quarter, just a comparison on where you saw?

Greg Robertson: We posted interest-bearing at the end of the quarter was 3.89%. And that was up from about 3.40% at the end of December.

Jude Melville: By the way, Dick, I’ll add. You did ask about — Grande. You did ask about client interaction through the volatile period there. And I’ll say that we came through that feeling very confident in the strength of our relationships and never had a day where we felt like there was a growing concern across the client base for the health of our bank. We certainly get questions about the way the system works and insurance and are there other ways for — to feel even more secure, including some of the promontory products that’s out there in ICS product set. But overall, conversations were more positive about how are we doing and are we okay? And really, we’re not in alignment with what you heard in the national media. And I think that’s probably pretty common across the community banking space that the CNBC reports in the morning were not reflective of life on the ground for most community banks, including us.

Graham Dick: Absolutely, I agree with that. And then, Greg, just quickly back to that deposit spot rate. You said 3.89%. Is that CDs or is that — I was just looking for more of the blended average, I guess, of the whole?

Greg Robertson: That’s the weighted average rate. Yes, that’s the weighted average rate for our interest-bearing deposits opened in March.

Operator: And there are no further questions at this time. I’d like to turn the call back over to Jude Melville, for closing remarks.

Jude Melville: Well, we appreciate everybody’s time. And this is our third call, I believe, and hopefully, we’re improving at this just as everything can do story, not just for the quarter, but for the long run. We’re pleased with where we are, and we think this year is going to be challenging. I think that’s probably pretty self-evident, maybe isn’t too obvious. But we feel well prepared to take on that challenge and look forward to making sure that we’re there for our clients should that end up being something that they need versus just the banking issues that we’re facing. So feel free to reach out in between calls if you want to talk about anything further and I appreciate your time. Thanks.

Operator: This concludes today’s Business First Bancshares Q1 2023 Earnings Conference Call. You may now disconnect.