Good afternoon. My name is Christie. 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. 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 would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. Matt Seely, you may begin your conference.
Thank you, Christie. 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'll re-refer to during today's call. Please refer to slide three of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. 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 seven 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 presentations 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. With that, I'll turn the call over to you, Jude.
Okay, thanks, Matt, 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, 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 two. 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 this end in mind, 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.
We've been working towards three primary objectives. First, diversification of risk. Second, growth to a meaningful size. 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 domiciled 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 four locations. We're for real in the country's most vibrant market at a greater scale than we imagined when we did Novo Den about five years ago.
Additionally, over the past year, we've 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 two markets combined, our Texas exposure is now 37% of the 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, number nine, slide number nine, 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, it's working. Second, meaningful size. All of the current pressures point towards the importance of scale, 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 as a combination of organic and acquired assets. We're sometimes labeled a roll-up story, that's really a function perhaps of our not telling our story clearly enough, hopefully this slide will help with that. We do look to partner with certain institutions when the time is right for both parties, 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 unacquired 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- one. When we set out on our most recent five-year plan, we aimed to double in size to $6.4 billion in assets. At $6.2 billion at the end of this quarter, we're 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 setback in profitability relative to the fourth quarter of 2022.
Year-over-year, we've increased tangible book value, we've increased pre-provision, pre-tax income considerably, and we've increased EPS, even while adding shares through the Texas Citizens acquisition and the capital raise in the fall. We expect to be capital accretive next quarter. 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. 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 of 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 non-interest 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. Our margin, while down for the quarter, is still up year-over-year, and it's historically been quite consistent in this range. Two last things to note.
Implementation of CECL causes us to recognize differently the asset quality of acquired impaired loans. As our reported asset quality level, while still excellent, appears to have degraded slightly, it's a function of accounting rules and not 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. One final new slide, number 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 two years, we'll be happy to address that in greater detail should there be questions. Thanks so much for your time, now I'll turn it over to Greg.
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 2023 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. However, we feel like Q1 2023's core results are indirectly 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 non-interest income flat to down a little bit. Our strong core earnings during the quarter were somewhat offset by funder-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 million 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 1 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 is 85% during the first quarter, up from 74% in Q4 of 2022. Q1 loan yields experienced a steady climb throughout the quarter, we ended March with a weighted average yield on new loans of 8.12, up nicely from December of 2022 as a new yield of 7.62. Really a little more granularity into that, which is important for us in the coming quarters, a weighted average rate of 8.20 on our renewals in Q1 of 2023 as well. Our 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 term of basis points before stabilizing, and we think that the second half of 2023, the core NIM will inflect and increase slightly. I think it's important for me to cover, and I'll cover 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 slightly elevated due to the resolution of an impaired, previously marked credit, acquired credit, in March of 2023, 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 a $1 million pre-tax decrease in shareholders' equity. As Jude mentioned earlier, the optics around some of those credit metrics appear skewed, but when comparing them 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 that impacted not only past dues but NPLs and charge-offs on page 19 of the slide.
If you look at our past dues for the quarter, they were $10.4 million or 22% for the quarter. I think if 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 reserving model, did not appear in our past dues or NPLs or in the charge-offs. Now they do with the CECL conversion. They do appear in those numbers. To put that in perspective, if you're comparing apples to apples from Q4- Q1, the $10.4 million, if you remove the PICs or the purchase impaired credits from that number, would really be $4.2 million. Those pure past 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 $9.5 million in purchase acquired credits. The actual nonperforming total would be $7.6 million in nonperforming loans, down from the previous quarter at $11.4 million when comparing quarter-over-quarter under the same metrics. Same principle 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. That was 0.04 of the 0.05 in charge-offs for the quarter.
Charge-offs, again, at an all-time low, which I thought was worth walking everyone through to talk about credit quality in the same vein when we talk about the conversion from CECL. The adoption for CECL for us, we feel like going forward, our loan loss reserve should be at about a 1% going forward from here on out at our normalized loan with loan volume. We can move to slide 23. I think that will do a good job of talking about the balance sheet. Moving to the balance sheet, linked quarter growth of $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's loan growth. C&I was a significant contributor during the quarter. While we feel like those deposits are deposits have been a challenge in the quarter, we feel like the C&I growth will put us in a position where these commercial relationships should materialize into additional deposits going forward. Our revised outlooks on loans assumes that loan growth continues to slow gradually through the year and with targeting 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 liquidity and deposits and sources of liquidity are important. Core deposits represent about 88.43% 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 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 in additional secondary sources of liquidity to now put us just over $2.7 million in additional sources of secondary liquidity. Rounding out capital really remained stable during the quarter. TCE to TAA was down just four basis points from Q4. On a year-over-year basis, TCE ratio increased about 17 basis points. 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.
With that, I will hand the call back over to you, Jude, for anything you'd like to add.
I think I've said what I wanted to say, but we'll be happy to answer any questions that anyone might wanna ask.
At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Your first question comes from the line of Thomas Wendler with Stephens.
Hey, good afternoon, everyone.
Hey, Thomas. Good afternoon.
I just wanted to go back to, deposits, your new slide nine. 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?
Yeah, it's a great question, Thomas . We're very excited about that. Actually, in Q1, it's trended up to slightly over $100 million. For example, in March, the non-interest bearing opened was about $22 million, over 700 accounts, just in non-interest bearing with about slightly over $100 million in interest-bearing accounts in the same month.
Great. Thank you. Just sticking with deposits, the FIG deposit pace, decreased $29 million last quarter. Can you give us any color there?
I think, so our FIG group has deposits from about 50 banks across the region and, you know, varying sizes and, in the middle of the volatile time, I won't say crisis because for most of us it wasn't actually a crisis. For the volatile time, there was some kind of pullback on the FIG deposit base, which is understandable as banks kind of their first move is to bring their money home. We've seen since then, a number of significant amount of that gap come back to the bank, as we kind of passed through that volatile time and, certainly haven't seen any more decline. That typically has been...
You'll remember that our FIG group in conjunction with our SSW group serves banks in multiple ways. 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. It really was in some accounts where we just had some banks that were parking it there temporarily or not with the full relationship. 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. You know, the FIG deposit base is a relatively small percentage of our overall deposit base at this point. The monies that we temporarily lost were about 15%, I believe, of the FIG base. The FIG base itself is about $150 million out of our $4.8 billion deposit base. It's, 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.
Yeah, Thomas, it's about 2.87% of our deposit base right now or quarter end.
Thanks. I appreciate all the color there. If I could just squeeze in one more. We saw a bit more SBA activity in 1Q 2023. Can you just give me an idea of your plans around the SBA moving forward?
Sure. We picked up some SBA capability with our Texas Citizens acquisition, and we had certainly been kind of planning to be more aggressive in that area prior to the acquisition. The acquisition gave us a little bit of some wind in our sails. So we've seen this is really the first quarter that we saw an uptick in the number of closings and our pipeline is filling up. So we expect to have a similar result 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 the make sure we're doing it right. Right.
That's the thing about SBA is that, it's only valuable if you're doing it right. We, we definitely spent 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. Phil, do you want to add anything to that or?
Yeah, 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. The first quarter is a good indication this year of where we hope to take it, but we're pleased with the progress.
You know, I do think that we have to be mindful of the fact that the higher rates tend to mean lower premiums. Even with a higher volume, that won't necessarily be on a one-for-one basis with higher income in the short run. 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 or arrow in our quiver.
All right. Thank you for answering my questions. Oh, go ahead.
Well, I was just gonna say, you know, one of our initiatives over time is certainly a focus on developing various sources of non-interest income. 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. All three of those are areas that we think can move the needle over the long run for us. As we seek to move from being profitable to highly profitable, I think that non-interest component is a key part of that.
it's still early days on all three of those initiatives, but, we like the direction that we're moving in.
All right. Thank you for answering my questions and great quarter guys.
Thanks.
Your next question comes from the line of Kevin Fitzsimmons with D.A. Davidson.
Okay, good evening guys.
Hey, Kevin.
Kevin.
Greg, I was trying to keep up with you when you were talking margins. It sounds like you're saying stable March was stable with the full quarter on a core margin basis. You do expect some incremental compression in second quarter, I guess, from funding cost pressure...
Yeah.
stable to up after that. Did I hear that right?
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 reprice our loan pricing software every week. That's allowed us, as I mentioned, to keep the top line loan yield kind of walking in step. We, you know, we're fighting like everybody else, deposit pressure. We do think, slightly compressed in Q2, and then we think the pace of renewals that we experience just kind of seasonally in Q3 and Q4 will help some expansion in the later quarters.
Okay. I think you said like single digit.
Yeah.
Compression, right? In second quarter.
That's correct.
Okay. The comment about slowing loan growth, it's not surprising. I'm just curious about, you know, the drivers in terms of how, you know, 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, you know, 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?
I would say more deliberate than the market today. We, you know, we have a lot of great relationships. Even if we didn't weren't sourcing loans from new clients, just our current clients have still have activity and requests. We are trying to be disciplined, though, on a couple of fronts. You know, one is the obvious, the increased cost of deposits incrementally. We want to make sure that we are making it worth using the liquidity for that growth. 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 we think, given the liquidity concerns.
Secondly is that, as I've explained in my introduction, you know, we feel like we've reached a different level in terms of our maturity as a company and a little different foundation from which to work. At this point, we have most of the pieces of the puzzle in place, and we just need to grow it appropriately from there. A lot of that needs to be determined by capital allocation versus just growth for growth's sake. 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.
You know, we certainly have enjoyed shareholders' trust, funding the investments that we've made over the past few years. We feel like we've done a really good job of doing what we said we would do in terms of establishing our footprint. Now that we're there, I think our priority and our responsibility to that investor group is to begin making sure that profitability is gives a higher priority than growth. Part of that is making sure that we slow down our loan growth so that it's right fit to our capital base.
We feel like over the long run, a 10% loan growth ± 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. 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.
That means that we have to be even more conscious of the choices that we're making, as we allocate that pool of loans. Now, I will say it's not easy when you've 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 that ship. We've been working on this for a while. 17% annualized loan growth in the first quarter sounds like a large number, but not compared to the 20 the quarter before, and the 25, or I think 30 the quarter before that, and the 30 before the quarter before that. It is gonna take us a couple more quarters to get down to where we wanna be.
That growth that we are experiencing, we're prioritizing, current clients and making sure we're adding the right relationships, for the long run.
No, that's very helpful. That 10% loan growth figure is not like a full year growth number. That's more like by the end of the year, by maybe by fourth quarter, you're growing loans that much. Is that right?
No, we hope to be a little bit less than that in the fourth quarter just to kind of like catch up this year with our.
All right. The 10% all year.
Our goal is to be more in the 10% range, plus or minus a couple points for the year. I feel like we can do that given the pipeline and given the maturities of the current book.
Okay. Okay. I know you guys said it's a small piece, the FIG group is a small piece when you were talking about deposits. I don't know how big, it's probably not a needle mover, but I remember, Jude, you 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 be helpful?
Yeah, absolutely. Really in our mind, although, you know, when we originally began the FIG group, it probably was a little more about deposits. Over time, it's kind of evolved into being a safety valve for us, 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. Then for new clients, you're right, maybe we can be more attractive to deposit rich ones. I'll let Jerry talk. Jerry's actually in charge of working with Jesse Jackson, who you know, for the FIG group and SSW, might want to add some color on the FIG group's purpose.
Sure. Thank you, Jude. A comment I wanted to add was, you know, what's been an interesting and intentional effort over the last couple 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 a term we talk about is the reach of the FIG group and what does it look like. Our team, Jesse's leading the effort that's building up the network, partnering with the SSW guys, and the data available out there relative to the community bank universe is something we've been able to strike on.
Got a pretty neat go forward business plan for the rest of this year to work directly with our market teams on the loan participation side.
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. Also over time, we would expect that we would eventually be able to benefit from from a not insignificant servicing arrangement for maintaining those loans. There are a number of ways that the FIG group will ultimately benefit our growth.
Okay, great. Thank you, guys.
Thanks, Kevin.
Your next question comes from the line of Feddie Strickland with Janney Montgomery Scott.
Hey, good evening, everybody.
Hey, Feddie. How are you?
I'm good. I'm good. 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. Just now that it's more or less in line, you'd probably tap FHLB before you go back to Bank Term Funding. Is that right?
Yeah, that's right, Feddie. We had availability. On that, we were watching the rates and that those particular days, it was about a 62 basis point spread between FHLB. We decided, study the program, the ease in and out, no penalty, 1 year commitment on that rate. We decided to take action. You're correct. Rates have gotten a lot tighter with FHLB. We still have availability with the Bank Term Fund right now that we haven't accessed because of that.
Got it. No, that makes sense. I mean, you know, lower rate, why not? Then I think I asked this 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 opt-optimization? Or has that more or less kind of already been baked in at this point? Just curious what you're seeing there.
No, we actively think about it. There's a slide in here, in fact, that kind of shows the migration over time, of our branch network. I don't remember the exact number, but 14. We continue to analyze opportunities. You know, you know, 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. 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.
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 to increase the deposit base from that branch system. We'll, we'll continue to to rationalize. You know, we got movement of a 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. Hopefully we always consider that an evolving process as opposed to only doing that around acquisitions. We need to keep evaluating and 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. Over time, particularly, I hope that there might be a little regulatory transition in terms of approval of ITMs. Right now, the ITM has to be approved as a full branch application. 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. 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.
Got it. Thanks, guys. Congrats on the great quarter.
Thank you.
Thanks, Fed.
Your next question comes from the line of Michael Rose with Raymond James.
Hey, good afternoon, everyone. Thanks for taking my questions. Most have been asked and answered, just wanted to get some color on the credit that was charged off this quarter. If you could give some color on the uptick in nonaccrual loans. I'm just trying to get a sense for, you know, credit in general, and obviously, the CECL adoption helped the reserve a little bit, but just would love some general thoughts on credit, too. Thanks.
Yeah. 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, four basis points of the five basis points in charge-off on the chart on page 19 is really attributable to that credit specifically. Charge-offs remain low. The same thing with past dues and NPLs. The CECL adoption, because we've been acquisitive, we still have about credit marks out there from our last four acquisitions that are really attributable to about $9.5 billion of that $17.1 NPL that's showing up there.
If you normalize that to pre-CECL adoption, then that really is $7.6 million, which shows NPL screening down, you know, about $4 million quarter-over-quarter. We think the credit book's in great shape, still performing at nicely.
Any changes in criticized and classified?
No, not nothing material.
Okay, great. Just wanted to touch on SSW. AUM continues to grow. Obviously, the market was up a bit in the first quarter, but now down. Just wanted to, you know, get any thoughts on any sort of efforts there to continue to build out that business. Thanks.
Yeah. There. Well, Jerry, I'll let you answer that. Is this part of your purview, the SSW kind of plans?
Sure. Yeah, that group is very active in the development of new relationships and expanding existing relationships. It's been something being fairly new to the team myself, that group, I can assure you, is high energy in developing. They're adding banks this quarter. They've brought on new relationships this quarter. They're helpful, and across the array of services dipping into the, even the loan participation side with some of those relationships as well. That team is on the road, and I think you'll continue to see growth in that business. Yeah, we're excited about their energy levels and their the reception that they've received.
You know, when we did the transaction, the biggest concern was probably being affiliated with a bank. Would that cause concern to their client base? It has not. In fact, they've actually, one reason their AUM has gone up is that their client base has gone up considerably since we partnered up. We see opportunities to continue to expand that geographically as well as just number of banks. That we've got three or four individuals in Memphis as part of that team. We just, we're excited about the opportunities, not just for the number of banks, but the quality advice that we're given. We think we're helping make a contribution to community banking.
You know, 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 closed, is really focused on cash flow return versus yield chasing. If you look at SSW's portfolio of clients, less duration risk, less expansion of duration during the uptick in rates and really just a healthier corpus. 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. 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. 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.
Great. 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, you know, somewhere in the 30% range.
I don't know that we called it out specifically, but we'll let Matt.
Yeah.
Matt do that now.
Yeah, sure, Michael. On the deposit composition going forward, the way we're thinking about that is non-interest bearing being down a little bit, I'd say somewhere in the vicinity of 1%, 1.5%, just as a total, a total mix of the composition by year-end. Relatively, you know, stable in makeup of the deposit base. As far as the betas go, 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.
Looking ahead, I will kind of shift the dialogue or the outlook to be based more on cycle to date just because of the uncertainties around exactly what the Fed is gonna do. It looks like it'll be relatively flat Fed funds for the balance of the year. If that's the case, we're still gonna experience an increase in funding costs throughout the year. 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 rate moves that we've had over the past six, 12 months.
That 45% would likely creep up maybe five percentage points on a quarterly basis, to end the year somewhere in the high 60% range. 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 gonna 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 five percentage points each quarter through the balance of the year.
Great. I appreciate all the color. Thanks.
Thank you.
Your next question comes from the line of Brett Rabatin with Hovde Group.
Hey, guys. Good afternoon.
Hey, Brett.
Hi, Jude. Wanted just to 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 it wasn't clear to me, you know, following that. You talked some about how you've built out the platform you need and scale is important now. It sounds like maybe expense growth might be fairly moderate or minimal, you know, over the next year, excluding anything else that might come up from an opportunity perspective. I just wanted to make sure I had that right and just get any other clarity on the path from here on that line.
Yeah. Brett, what we're seeing in, is, flat to up slightly in Q2.
Okay. Flat to up. Okay.
Yeah. That's because of some full quarter impact of March salary increases. We expect to not see expenses increase materially after that, flattish after that for the balance of the year.
Okay.
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 true ups, catch-ups. On a core basis, yes, I think flat thereafter, but that seasonality is going to be there in the fourth quarter in all likelihood.
Okay. On the classified criticized decrease linked quarter, was that due to maybe some credits leaving the bank? I didn't quite catch the linked quarter decline. You know, what might have driven that 40 basis point watchlist decrease?
Yeah. I think it's some credits leaving the bank. The credit we settled, that had a mark against it, was probably the big driver in that, Brett.
Okay. That's helpful. 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 4.87%, any idea of the piece that might be, you know, year one- two or what a good duration might be on the loans that are longer than one year?
Generally, the way we think about this, Brett, is our portfolio turns over about 4.8 years, the on total, and the fixed rate piece of that is that's the fixed rate piece. I think, just thinking about it in that perspective, those fixed rates, you know, 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 five-year horizon, basically.
Okay. Okay. Great. Appreciate the color.
Thanks, Brett.
All right. Thanks, Brett. Brett, I'm anxious to see what your titling is going to be. You're a pretty creative titler of your reports, so. You don't have it figured out yet, do you?
You don't have it figured out yet, do you?
I guess he's gone already.
Your next question comes from the line of Graham Dick with Piper Sandler.
Hey, guys. Good evening.
Hey, Graham.
Hey, Graham.
I, you know, I appreciate all the color you all have given, and most of my stuff's been asked and answered, I did want to circle back to deposits just one last time. I, correct me if I'm wrong, I think that we had kind of talked about this quarter as being a, you know, a stronger growth quarter for you guys seasonally, just four Q and one Q typically are. Kind of growth slowing, I guess, throughout 2023. You know, obviously, one Q is unprecedented on the funding side. 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.
I just wanted to hear what you guys saw in March in terms of, you know, maybe customers calling up or anything like that. Also how that activity and the activity right now plays into your projections for the rest of the year. 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.
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. 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 had 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, more specifically in the last quarter, new account openings continue to outpace account closing. Our originations still remain high. I think the problem that every bank is dealing with is outflows or repositioning of existing accounts, non-interest-bearing accounts into interest-bearing accounts. 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 balance were higher, some of it because of COVID. For us, more specifically, we had back-to-back years with hurricanes that impacted different parts of the state.
About $193 million of deposits rolled out from two of our different regions last year, specifically. Dealing with that and continuing to grow deposits, numbers of accounts, as I'd mentioned earlier, we opened about 700 accounts for about $22 million in non-interest-bearing deposits in the first quarter. We do see signs of continued growth with account openings and progress in that area. The outflows are challenging. I think that's, you know, it's part of the economy that we're going to continue to deal with. The focus is definitely on continuing to grow that deposit base.
Yeah. I think I would just add that, you know, 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 that's happened. We're just gonna have to work through it like bankers and figure out ways to do it. We that involves incremental changes to incentive plans for deposit gathering, for example. It involves slowing down the loan growth, as I was talking about earlier, to kind of right size with make sure we're responsible from an incremental cost basis for deposits to fund that growth.
Just be something that, as with all banks, we'll have to, particularly those that have experienced strong growth over the past two or three years, we'll have to grind through making that happen. Certainly we haven't changed our goals in terms of where we want to be from a loan-to-deposit ratio. I would expect that over the next few years, we'll have to, as all banks, we'll 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. It's going to take a few quarters to get there.
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 inflow. There, there's some opportunities there that we'll take advantage of. It will take time, and it's gonna be a challenging year for everybody that we'll run through. I think ultimately, it will, it will end up making us better.
Yeah, absolutely. That's really helpful, guys. Thank you for that. 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, kinda like what you gave on loan yields. Like the end of this quarter and then the end of last quarter, just a comparison on, where you saw.
Yeah.
increase in that.
We posted interest-bearing at the end of the quarter was $389. That was up from about $340 at the end of December.
Okay. All right, I appreciate it. Thanks, guys.
Thank you. By the way, Dick, I'll add, you know, you did ask about... I mean, Graham. I'm sorry. Graham Dick. You did ask about client interaction through the volatile period there. I'll say that we came through that feeling very confident in the strength of our relationships. Never had a day where we felt like there was a growing concern across the client base for the health of our bank. You know, we certainly get questions about the way the system works and insurance and are there other ways to feel even more secure, including some of the Promontory product set that's out there and ICS product set.
Overall, conversations were more positive about how are we doing and are we okay? Really we're not in alignment with what you heard in the national media. 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.
No, absolutely. I agree with that. Greg, just quickly back to that deposit spot rate. You said 389. Is that CDs or is that the. I was just looking for more the blended average, I guess, of the whole interest-bearing deposits.
No, that's the weighted average rate. Yeah, that's the weighted average rate for all interest-bearing deposits, opened in March.
Oh, opened. Okay, cool. All right, I appreciate it. Thank you, guys.
Thank you.
Thank you.
As a reminder, if you would like to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. There are no further questions at this time. I'd like to turn the call back over to Jude Melville for closing remarks.
Okay. Well, we appreciate everybody's time and this is our third call, I believe, and hopefully we're improving at this just as we've improved everything to do with our story, not just for a quarter but for the long run. We're pleased with where we are and we think this year is gonna be challenging. I think that's probably pretty self-evident, maybe even 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. Feel free to reach out in between calls if you wanna talk about anything further, and I appreciate your time. Thanks.
This concludes today's Business First Bancshares Q1 2023 Earnings Conference Call. You may now disconnect.