Business First Bancshares Inc. Q1 2023 Earnings Call

Good afternoon. My name is <unk> 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. All lines have been placed on mute to prevent any background noise. After the speakers' 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 Sealy you may begin your conference.

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 were referred to during today's call. Please.

Please refer to slide three of our presentation, which includes our safe Harbor statements regarding forward looking statements and the use of non-GAAP financial measures.

Those of you joining by phone. Please note. The slide presentation is available on our website at www dot be one bank dot 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 presentation and earnings release.

I'm joined this afternoon by business first bankshares, President and CEO Jude Melville.

<unk> Financial Officer, Greg Robinson, Chief Banking Officer, Jordan, and Chief administrative officer, Jerry back to you.

After the presentation, we'll be happy to address any questions you may have and with that I will turn the call over to you did.

Okay. Thanks, Matt and thanks, Thanks, everybody for joining us we recognize it takes energy and effort and commitment, particularly as we near the end of a busy earning season and we appreciate the opportunity to provide color to our story.

Before we get into the details of the quarter and talks 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 where we're working to build a sustainable franchise.

Produces value for our multiple constituents overtime we've.

We've made a number of investments over the past few years with ascend in mind and I wanted 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 three primary objectives first diversification of risk second growth to a meaningful size and third increasing our earnings power.

Oh on diversification of risk with primarily chosen to accomplish this through geographic expansion in the 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.

The largest single Metro area by exposure and nearly 300 million in deposits over four locations where for real in the country's most vibrant market at a greater scale than we imagine when we de novo down about five 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.

But the two 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 base. It's also found in the makeup of our liabilities.

That in mind I'd point out to work was down 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 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 it's 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 earn out 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.

On slide 10 that our annualized deposit CAGR since 2015 is 26% a large number.

But are unaware of 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 to one.

When we set out on our most recent five 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 theres been a light and unexpected unexpected setback in profitability relative to the fourth quarter of 2022.

But 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 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 the 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 big picture I would argue we've accomplished a tremendous amount of franchise building over the past year in 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 detailed questions.

First quarter non-GAAP net income and EPS were $13 8 million and 55, respectively.

With better than expected.

These results were driven by good expense management, some green shoots in 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 borrowing costs, but our margin while down for the quarter still up year over year in its history.

Eric we have been quite consistent in this range.

Two last things of note one implementation of seasonal causes us to recognize differently the asset quality of acquired impaired loans. So as our reported asset quality level was still excellent appears to have degraded slightly.

As a function of accounting rule is it not practical change in risk.

Our underlying asset quality is measured apples to apples <unk> versus post DSO has improved quarter over quarter as Greg will explain in more detail.

Second one final new slide number 27 speaks to our CRE CND and in particular office exposure and granularity.

We feel good about the geographic diversity of our exposure as well as the manageable pace of renewals that will face over the next two years and we will be happy to address that in greater detail should there be questions again. Thanks. So much for your time and now I'll turn it over to Greg.

Thank you Judy and good afternoon, everyone I'll spend a few minutes on the financial highlights of our quarterly results and provide some updates around our outlook.

As Jude mentioned Q1 of 'twenty three was highlighted by solid core expense management and improving core net interest income we are happy to provide some more color in the Q&A on our outlook around expenses and fee income.

We feel like Q1, 'twenty threes core results are in Directionally in a good run rate for the next couple of quarters, and we should see a core expenses flat to up a little bit in the Q1 base in noninterest income flat to down a little bit.

Our strong core earnings during the quarter were somewhat somewhat offset by funders funding pressures driving our 21% compression in our core NIM.

The linked quarter basis, like really to go into detail on slide 20 in our presentation, which you will see our Q1 GAAP net interest margin of 375 included two.

$2 9 million and loan accretion, which was about $1 seven higher than we expected and was due to some payoffs in the final seasonal adjustments for the quarter once we adopted our.

We are updating outlook outlook assumes accretion will drop back in line.

More in line with our normalized level of about $1 4 million in Q2 and their own after.

While headline margins do.

Tim to appear negative during the quarter I do want to take a minute to highlight some of the positive aspects of the margin during the quarter.

As Judy mentioned earlier, we are proud of our efforts reflected in our newly originated loans with a weighted average beta on those new loan yields is 85% during the first quarter up from 74% in Q4 of 22.

Q1 loan yields experienced a steady climb throughout the quarter and we ended March with a weighted average yield on new loans of 812.

Nicely from December of 'twenty, two is a <unk>.

<unk> yield of 762.

And really a little more granularity into that which is important for us in the coming quarters.

The weighted average rate of 820 on our renewals in Q1.

2023 as well.

While funding betas did increase during the quarter Q1 interest bearing deposit betas.

73% appears to be in line or slightly better than public peer banks with assets less than $10 billion.

Okay.

Core NIM remained relatively stable throughout the quarter.

March coordinate almost $3 54, which was in line with the Q Q1 overall core NIM.

We expect some modest compression in Q2.

Core down.

<unk> single digits in terms of basis points before stabilizing and we think that the second half of 'twenty three that core NIM will inflect and increase slightly.

It is important for me to cover.

And I'll cover a little more detail on another slide but.

Other borrowings increased due to the 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 to position ourselves on a day, where the funding and dropped in Q2 down to 438, which allowed us to pick up 62 basis points.

Annualized net savings.

The $310 million that we converted to that fund.

Program.

Yes.

Turning back to the income statement Q1 loan loss provision was slightly.

Slightly elevated due to the resolution of impaired.

Let's see more credit.

Acquired.

In March of 'twenty three.

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 seasonal conversion during the first quarter, which increased the allowance for credit losses, and unfunded commitments, resulting in about a $1 million pretax decrease in.

Shareholders' equity.

As <unk> mentioned earlier, the opex around some of those credit metrics appears skewed when comparing them to the prior quarter.

Adoption of seasonal they really were.

We're quite nice the improvement was quite nice and I think I'll I'll stop here and really walk everyone through that conversion of Cecil and how that 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 at $10 4 million.

22%.

For the quarter.

I think if.

Thats helpful and conversion of seasonal the big uniqueness for US as these acquired previously acquired credits, where we have credit Mark specifically against those credits.

Under the old loan loss reserving model did not appear in our past dues are npls ore and the charge offs and now they do with the seasonal conversion. They do appear in those numbers so to put that in perspective, if youre comparing apples to apples from Q4 to Q1.

$10 4 million if you remove the picks for all of the purchase impaired credits from that from that number would really be $4 2 million. So those pure past dues.

Would be down from the previous quarter same impact when you when you walk forward to the to the nonperforming loans for the quarter at $17 1 million was really impacted by seven.

But $9 5 million.

And purchase acquired credits so the actual nonperforming total would be $7 6 million in nonperforming loans down from the previous quarter at $11 four when comparing quarter over quarter under the same metrics.

The same principle applies to charge offs we.

We had the.

Acquired loan that we settled in the quarter that had a significant reserve against it actually a net net positive for us from an income standpoint and that was.

Zero four 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 seasonal now the adoption for seasonal for us.

We feel like going forward.

Our loan loss reserve should be.

About a 1% going forward from here on out at our normalized.

Loan.

With loan volume.

Okay.

We can move to slide 23, I think that will do a good job of talking about the.

The balance sheet.

Moving to the balance sheet.

Linked quarter growth.

197 million loans of $17 3 million in annualized loan growth was really driven by <unk> 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.

Our deposits have been a challenge in the quarter, we feel like that the C&I growth will put us in a position with these commercial relationships should materialize into additional deposits going forward.

Our revised outlooks on loans assumed that loan growth continues to slow gradually through the year and with the.

Targeted around 10% a 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 that and you say liquidity and deposits enforces the importance of core deposits represent about 88, 3% or four 3% of our total deposits as mentioned earlier, we utilized $310 million of that of the bank term funding program.

Availability really strategically to reduce the cost of our 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 <unk>.

One thing of note as we do note on slide 11.

At the end of the quarter.

We're successful in converting.

Additional loan pledging that was unutilized at FHA Ob to the fed discount window, creating about $950 million and 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.

<unk> was down just four basis points from Q4.

And 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.

And with that I will.

Hand, the call back over to you Jude, creating you'd like to add.

I think I've said, what I want and favorable.

Happy to answer any questions.

Anyone who might want to 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 window Wendler with Stephens.

Hey, good afternoon, everyone.

Hi, Carlos how are you.

I just wanted to go back to.

Deposits your new slide slide nine you have lifted that you have $95 million and average monthly deposit generation over the past 12 months can you just give us an idea of how that figure is trending throughout <unk>.

Yes, it's great question Thomas.

We're excited about that actually in Q1, it's trended up to slightly over $100 million.

And.

For example.

In March.

The noninterest bearing opened was about $22 million over 700 accounts.

Just a noninterest bearing with about slightly over $100 million in interest bearing accounts in the same month.

Great. Thank you.

And then just sticking with deposits the big deposit pace decreased $29 million last quarter can you give us any color there.

Yes, I think.

So our Fig group has.

As deposits from about 15.

<unk> across the region in varying sizes.

In the middle of the.

The volatile Tom I want to say crisis, because for most of 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 banks kind of their first move is to bring their money home.

Okay.

But we've seen since then.

A number of sniffing.

A significant amount of that gap come back to the bank.

As we kind of pass through that volatile time.

Certainly havent seen any more decline and that typically has been so youll remember that our fig.

Group in conjunction with our Ssw crew served banks in multiple ways.

And what we were pleased to find is that banks that we have multiple relationships with deposit Tam participations.

Or investment advice.

We didn't see any movement in that and the liquidity. So it really was in some accounts, where we just had some banks that were parking at there temporarily hurt or not with the full relationship. So I think it's a little bit.

Okay.

Proves out the model in terms of our wanting to have multiple.

Hi, touch points with those banks that we service.

There will be a positive but certainly in the <unk>.

And the heart of the <unk>.

Volatility, we did have a little bit of pullback Erin.

The big deposit base is a relatively small percentage of our overall deposit base at this point.

And money's estimated temporary less growth.

15% I believe of Chegg base, but big base itself is about $150 million out of our.

4.648 to $4 8 billion of our deposit base. So.

While we hope to grow it over time I realize we will have to manage it differently than other forms of liquidity.

Today, we today, it's really not a large enough portion too.

To move our needle negatively during that time that Thomas that's about $2, 87% of our deposit base right now per quarter.

Thanks, I appreciate all the color there and then if I could just squeeze in one more.

A bit more SBA activity in <unk> 'twenty three 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 acquisitions, and we had certainly been.

And are planning to.

To be more aggressive in that area prior to the acquisition, but the acquisition gave us a little bit of.

The wind in our sales and.

So.

We've seen this is really the first quarter that we saw.

An uptick in the number of closings in our pipeline.

As.

Filling up.

So we expect to have.

And similar results over the course of the year and hopefully a little bit improving.

We have a good partnership with and LSP loan service provider for the SBA that helps us with all the make sure we're doing it right minus the thing about SBA.

It's only.

Only valuable if youre 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 and.

In our markets.

Phil do you want to add anything to that or yes, I would just say we started focusing on it probably really for the first quarter last year.

Most of last year, working with orthopedic Inc. So the first quarter is a good indication of this year.

Where we hope to take it but we're pleased with the progress.

I do think.

We have to be mindful of the fact that the higher rates tend to mean lower premiums so even with the higher volume that won't necessarily be on a one for one basis with higher income in the short run but.

Again this is part of our franchise building over time as the bank debt services businesses, we feel like this is an important.

Tool and our arrow in our quiver.

Alright, Thank you for answering my questions and go ahead.

Well I was 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 was out.

Wealth management as a source of income.

<unk> management for other financial institutions as a source of income.

As kind of the next the other most logical.

Combination for us given our focus on small businesses.

So all three of those are.

Okay.

Areas that we think can move the needle over the long run for us in Japan.

As we seek to move from being.

Profitable highly profitable I think that noninterest component is a key part of that and so it's still early days on all three of those initiatives but.

We like the direction that we're moving in.

Yes.

Alright, 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.

Hey, good evening guys.

And Kevin Kevin.

Greg I was trying to keep up with you. When we were talking you were talking margins. So it sounds like you're saying stable March was stable with the full quarter on a core more core margin basis.

But you do expect some incremental.

Crushing in second quarter, I guess for funding.

Cost pressure.

Stable to up after that is that did I hear that right now.

No youre exactly right we think.

Given.

Where we are today I think we will continue to face some headwinds on the cost side from the deposit standpoint, we do reprice.

Our loans pricing software every week.

So that's a lot of US has allowed us as I mentioned to keep the topline young loan yield kind of walking in step but.

We're fighting like everybody else deposit pressure, so we do think slightly compressed.

Q2, and then we think.

The pace of renewals that we experience just kind of seasonally in Q3 and Q4 withheld some expansion in the later quarters.

Okay, and I think you said like single digit.

Yes.

Alright.

Quarter.

Okay.

And is.

The comment about slowing loan growth, it's not surprising I am 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.

Which are being in more expensive funding that loan growth and maybe with concerns about credit.

How much is more deliberate versus the market.

Okay.

I would say more deliberate than the market today.

We have a lot of great relationships and even if we didn't or in sourcing loans from new clients. Just are current clients of.

Still have activity and request so.

We are trying to be.

Disciplined though.

On a couple fronts one is the obvious.

The increased cost of deposits incrementally.

We want to make sure that we are making it more do you think the liquidity for that growth and so we're.

We're spending a lot more time thinking about.

The profitability of those of those loan opportunities versus the volume of those loan opportunities, which makes sense given.

Given the liquidity concerns and then secondly is that as I explained.

Explained in our in my introduction, we feel like we've reached all.

So a different level in terms of our maturity as a company.

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's sake and so.

We've become.

More cognizant of I suppose are more determined in our efforts to make sure that.

That we are growing within our retained earnings that were accretive from a capital perspective. So.

We certainly have enjoyed shareholders' trust.

Yes.

Funding the investments that we've made over the past few years and we feel like we've done them.

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.

Two in our responsibility to the Investor group is too.

Began making sure the debt.

Profitability is a higher priority and growth. So part of that is making sure that we slow down our loan growth so that it's.

Great fit to our capital base and so we.

We feel like over the long run.

10%.

Loan growth plus or minus a couple points based on.

The economy, and where we are as a company.

Is it a healthy target both for this year and four for coming years from were healthier. If we can do that consistently work are creating capital at a higher ROE than I think we will 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.

Ralph and 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 that the choices that we're making as we allocate.

That pool of loans.

Now I will say, it's not easy, but when you spent a number of years.

Building a ship.

Thats moving in one direction is not as easy as it may sound to the turn the ship and so we've been working on this for.

Sure.

For a while and a 17% annualized loan growth in the first quarter. It sounds like a large number of but now compared to the 20% quarter before the 25, I think 30% quarter before that in the third and fourth quarter for that so so.

It is going to take us a couple more quarters to get down to where.

We want to be but.

With that growth that we are experiencing we're prioritizing.

Current clients and making sure that they were.

Yes.

We're making sure we're adding the right relationships for the long run so.

No.

That's very helpful.

That 10% loan growth figure is not full.

Full year growth number that's more like by the end of the year by maybe by fourth quarter, you are growing loans that much is that right.

Now, we hope to be a little bit less than that in the fourth quarter just to kind of catch up this year with our so alright, so the 10% a year.

Our goal is to be more in the 10% range plus or minus a couple <unk>.

<unk> for the year end.

Feel like we can do that given the pipeline and given the maturities of the of the current book.

Okay. Okay.

I know you guys said, it's a small piece of the Fig group is a small piece when you were talking about deposits, but so I don't know how big it is probably not a needle mover, but I remember Jude you talked 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.

You don't have to keep everything on your balance sheet that may be.

Bank clients out there that are deposit rich better looking for loans is that something that yes, no thats helpful.

Absolutely and really in our mind although.

When we originally began to say group are probably was a little more about deposits over time, it's kind of evolved into.

And two being a safety valve for us in essence on the credit side, so that as our clients succeed.

We can and 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 devise enrichment I'll, let Jerry Taj area is actually in charge working with Jesse Jackson, who you know.

One four.

For the <unk> group, and Ssw and might want to add some color on the big groups partners. Thank you.

Yes, the comment I wanted to add was whats been interesting an intentional effort.

Over the last couple of months has been really.

Great teamwork between the <unk> group in the markets.

Building relationships cannot build in that prospect databases of.

Where we have contacts throughout the bank client universe kind of defining the universe of term we talk about is.

The reach of the <unk> group and what does it look like.

Our team is leading the effort.

Building up the network.

Partnering with Ssw gas.

And.

The data are available out there relative to that.

To that.

Community banking versus something we've been able to strike on it.

Got pretty neat go forward business plan for the <unk>.

Rest of this year.

To work directly with our market teams on the loan participations out.

And we're up to our portfolio. That's participated is up to about $350 million.

Which.

Has been extremely helpful. In terms of our payable to continue servicing clients, but also over time, we would expect that we would eventually.

Be able to add.

Benefited from.

Okay.

Not insignificant servicing arrangement for May.

Maintaining those loans so.

Number of ways that the <unk> group will ultimately benefit our growth.

Okay, great. Thank you guys.

Thanks, Kevin.

Your next question comes from the line that is strictly with Janney Montgomery Scott.

Hey, good evening everybody.

Hey, Patrick how are you.

Good I'm good.

Just wanted to be clear that I understand I think you've covered this somewhat it sounds like the banks.

Yes.

Move on rates for low relative to some FX Shelby you already had and just know that it's given it's more or less in line you probably tap I think Shelby before you would go back to bank term funding is that right.

Yes, that's right.

We had availability and on that we were watching the rates in that those particular days. It was about a 62 basis point spread between <unk>. So we decided.

Study the program the ease in and out no penalty.

One year commitment on that right. So we decided to take action, but youre correct rates have gotten a lot tighter.

With <unk>. So we still have availability with the turn fund right now that we have in excess because of that.

Got it no that makes sense.

Lower rate why not.

And then I think I asked the same question last quarter do you, but I'm going to ask it again in Q feel like Theres still some low hanging fruit.

Terms of branch network Optimist optimization.

Is that more or less kind of already been baked in at this point.

I'm just curious what's your what youre seeing there.

No. We are we actively think about it is 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 it's a 14th.

But we continue to analyze opportunities.

Yes, sometimes it rationalization through cutting back, but sometimes its 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.

We've done a I think a good job of.

Of.

Not just having fewer branches and our average.

Deposit base at our in our branch network is close to $100 million.

On average per branch up I feel good about the progress we've made there but we've also managed to my opinion relocate them to areas that have more growth potential.

We feel like Theres still opportunities too.

To increase the deposit base from that from that branch system. So we'll continue to.

Two to rationalize we got movement.

Our location in Houston that we did over recently and we will 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 will always.

Consider that in an evolving process as opposed to only doing that around acquisitions, we need to keep up keep evaluating and keeping.

Keep looking for opportunities not just closed but also to open in the right locations.

We also.

Have been experimental in terms of use of Atms.

And over time, particularly I hope that there might be a little regulatory.

Transition in terms of approval of ITM.

Right now the ITM has been removed as a full branch application.

I think I've heard some talk about maybe it may be changing that which would make it even easier.

To utilize that as a way to supplement our existing branch network. So how are we 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 a great quarter.

Thank you thanks for that.

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

Hey, good afternoon, everyone. Thanks for taking my questions.

<unk> been asked and answered but.

I 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 non.

Non accrual loans I'm, just trying to get a sense for.

Credit in general and obviously the seasonal adoption helped the reserve a little bit, but just some general thoughts on credit too. Thanks.

<unk>.

Thanks, Michael its great question.

Charge offs. This quarter was for a previously marked credit and the <unk> acquisition last year.

We decided to resolve that which resulted in a net gain of about 250000.

That because of the seasonal adoption.

Four basis points of the five basis points in charge offs on the chart on page 19 is really attributable to that credit specifically, so charge offs remain low the same thing with past dues and npls.

The seasonal 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 nine five.

<unk>.

Of that $17 one NPL, that's that's showing up there. So if you if you normalize that to pre seasonal adoption than that that really is $7 6 million, which shows NPL screening down about.

About $4 million quarter over quarter. So we think the credit books in great shape, so performing nicely.

And any changes in criticized and classified.

No not.

Nothing material.

Okay, Great and then.

Just wanted to touch on Ssw AUM continues to grow obviously the market was up a bit in the first quarter, but now down I just wanted to.

Yes, again any thoughts on any sort of efforts there to to continue to.

Build out that business. Thanks.

Yes, there Jerry I'll, let you I'll, let you.

To answer that as part of your appropriate ssw plants.

Yes, that's 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 assure you as high energy in developing they've got they're adding banks this quarter. They brought on new relationships this quarter.

They are helpful.

Across the.

The array of services dividend or even the loan participations out with some of those relationships as well so that team is.

<unk> is on the road and I think Youll continue to see growth in that business.

Yes, we're excited about.

Their energy levels in there.

The reception that they've received when we did the transaction. The biggest concern was probably of being affiliated with a bank with that.

With that cause concern to their client base and it has not and in fact they've actually.

On the reef one raise scenario.

Gone up is that their client base has gone up considerably since since we've partnered out so.

We see opportunities to continue to expand that geographically as well as just number of banks.

We've got three or four individuals in Memphis as part of that team and we're just we're excited about the opportunities not just for.

The number of banks with their quality advice that we're giving and we think we're helping make a contribution to community banking one of the.

The differences between the way that ssw guys. Its clients in the way we have constructed our investment portfolio relative to some of the banks that have struggled.

Yes.

<unk> closed his is really focused on.

Cash flow return versus yield chasing.

If you look at Ssw's portfolio of clients.

Less duration risk less extension of duration during.

During the.

Chicken and rates in 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.

It should make for good is 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 will have other opportunities to diversify the revenue streams.

Yes.

Great and maybe just finally for me Im sorry, if I missed this at the beginning.

Did you guys give any sort of updated expectations for cumulative deposit beta and then Mexico.

I think you guys said it'd be mix, yes.

Yes, yes.

We called it out specifically, but I will let Matt Matt do that now yes sure Michael So on the deposit composition going forward. The way we are thinking about that is noninterest bearing being down a little bit I would say somewhere in the vicinity of a percent of Senate have just as a total.

Total mix composition by year end.

So relatively stable.

In makeup of the deposit base.

As far as the betas go yes.

Yes, so in the first quarter, we got interest bearing I'll kind of talk about interest bearing.

Total interest bearing during the first quarter, 73%.

Obviously, an increase from the fourth quarter, but looking ahead, our kind of <unk>.

<unk> B.

Shift the dialogue or the outlook to be based.

Cycle to date, just because of the uncertainties around exactly what the fed 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.

Increase in funding costs throughout the year, so on a cycle to date beta 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 Thats really just a function of a continuous catch up of the rate moves that we've had over the past.

Six to 12.

Months, so that 45%.

Likely creep up maybe five 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. Our total funding interest bearing liability basis, I'd say, they're 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 five percentage points.

Each quarter.

Balance of the year.

Okay.

Great I appreciate all the color. Thanks.

Okay.

Your next question comes from the line of Brett Robinson with hub.

Hey, guys good afternoon.

Hey, Brett.

Thank you wanted to go back to expenses and make sure I understood. The guidance if I, if I heard Gregg correctly. The guidance was for the expenses to be down a little bit linked quarter and <unk> and then it wasn't clear to me following that you talk some about how you've built out the platform we need.

And scale is important now some it sounds like.

Maybe expense growth might be fairly moderate or minimal.

And over the next year, excluding anything else that might come up from an opportunity perspective. So I just wanted to I want to make sure I had that right and just get any other clarity on the path from here on that line.

Yes, Brett.

What we're going to what we're seeing in the.

Flat to up slightly in Q2.

And then.

Yes, we will.

Because of some full quarter impact of March salary increases, but then we expect to not see.

<unk> expenses increased materially after that so flattish after that for the balance of the year.

Okay.

The only thing that I would add is as.

As you recall is typically seasonality in the expense base in the fourth quarter.

Year end catch ups.

And so.

On a core basis.

Yes, I think.

Flat thereafter, but.

That seasonality is going to see that in the fourth quarter in all likelihood.

Okay.

Yes.

And then on the classified criticized decrease linked quarter was that gives you.

Can you maybe some credits, leaving the bank or I didn't quite catch the linked quarter decline.

What what might have driven that 40 basis point watch lists.

Decrease.

Yes, I think it's some credits, leaving the bank the credit we settled that.

That had a mark against it it was probably the big driver in that.

Okay.

Helpful and then just lastly.

I appreciate the slide.

Yes.

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 447.

Any idea of the piece that might be year, one to two or what.

What a good duration might be on the loans that are longer than one year.

Yeah. So so generally the way we think about this spread as are our portfolio turns over about four eight years.

On total and.

In the fixed rate piece of that is.

Is about.

Thats fixed rate piece so.

Thank.

Just thinking about it in that perspective, those fixed rates.

Eight 8%.

Maturing in less than a year and then the balance of that really kind of evenly scattered out over the course of that.

<unk>.

Five year horizon basically.

Okay.

Okay.

Great I appreciate the color.

Thanks, Alright, thanks, Brett.

Alright, I'm anxious to see what your timeline is going to be.

Pretty creative Tyler of your report.

Sure.

Yes.

You guys have gone already.

Sure.

Your next question comes from the line of Graham <expletive> with Piper Sandler.

Hey, guys good evening.

Hey, Graham Graham.

So I appreciate all the color you all have given in and most of my stuff's been asked and answered, but I did want to circle back to deposits.

One last time.

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 <unk> and <unk> typically are.

And then kind of growth slowing I guess throughout 2023.

<unk> is unprecedented.

On the funding side, but I just wanted to.

We 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 in 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 I know, we had talked about China.

Trying to stay under 100% Im just wondering if that's still.

Our goal for you guys and how you might try and get there if so.

Thanks, Karen I'll start off and I'll, let you follow up I think what we <unk>.

Typically see in the first quarter, you are right with some seasonal deposits mainly from municipalities foot, but we really experienced this year, which was different than we have in years past the same amount of dollars came in.

But they flowed it float in and out during the quarter as opposed to hanging on longer and I think that was just.

It's a function of the two.

The economy in the rate environment.

And really the inflation just money moved out.

Out of that faster than we had seen in the past.

As far as inflows and outflows go what 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 continue to outpace account closings. So so our origination still remain 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 monarch.

Stirring 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.

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 two of our different regions.

Last year, specifically, so dealing with.

Dealing with that and continue to grow deposits numbers of accounts as I had mentioned earlier, we opened about 700.

Accounts.

For about $222 million in noninterest bearing deposits in the first quarter.

So we do see signs of.

Of continued growth with account openings and in progress in that area. The outflows are challenging.

As 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.

Yes, I think I would just add certainly we still want to manage towards that below a 100% loan to deposit ratio.

Okay got it a little harder over this quarter given given everything that's happened so we're.

We're just going to have to work through like bankers.

And figure out ways to do it.

That involves.

Incremental changes to incentive plans for deposit gathering for example, and it involves slowing down the loan growth as I was talking about earlier that kind.

Kind of right size with mixture.

We're responsible from an incremental cost basis for deposits to fund that growth.

I'll just be something that as with all banks will have to particularly those that have experienced.

Strong growth over the past two or three years.

We will have to grind through.

Making that happen, but certainly we haven't.

<unk> higher goals in terms of where we want to be from a loan to deposit ratio and I would expected.

Over the next few years, we'll have to as all banks will have to probably run a little bit not all banks because some banks are already lower.

I have two.

Recalibrate to run a little bit lower on a loan to deposit ratio than we have historically.

It's going to take a few quarters to get there and good news is we've got it.

Plenty of contingent liquidity in <unk>.

Plenty of good inflow of new deposit account opening which is stopped.

We need to make sure we're doing all we can to.

Two.

Make sure the outflow doesn't equal that influence so that there is some opportunities there that will take advantage of.

But it will take time, and it's going to be a challenging year.

For everybody that will grind through it but I think ultimately of oil.

We'll end up making us better.

Yeah, absolutely that's really helpful guys. Thank you for that 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 just like the end of this quarter and in the end of last quarter. Just the comparison on an App where you saw.

Yes.

We posted.

Just bearing at the end of the quarter was $3 89.

And.

That was up from <unk>.

About three.

$3 40 at the end of December .

Okay.

Alright I appreciate it.

Thanks, guys.

By the way you did ask about Graham on <unk>.

You did ask about client interaction.

Yes.

Through the volatile period, there and 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.

I think there was.

A growing concern across the client base for the health of our bank, we certainly I get questions about the way the system works and insurance and are there other ways for us to fill even more secure including some of the.

<unk>.

Promontory.

Product set that's out there in Ics product set but.

But overall.

Conversations were more positive about how are we do understand are we okay and.

Really were.

And not in alignment with what you heard in the National Media and I think that's probably a pretty common across the community banking space.

CNBC reports in the morning, where not.

Reflective of.

Life on the ground curve for most community banks, including us.

No absolutely I agree with that and then Greg just quickly back to that that deposit spot rate. You said $3 89 is that is that Cds or is that.

I was just looking for more the blended average I guess of the hall.

Weighted average rate, yes, that's the weighted average rate for our interest bearing deposits.

<unk> and <unk>.

March.

Open 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.

Yes.

And there are no further questions at this time I would 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 it.

Just as we've gone through it every day.

Stores.

Im not just first quarter, but for the long run.

Sure.

Pleased with where we are and we think this year is going to be challenging.

Yes, probably.

Pretty self evident and maybe even two 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.

Appreciate your time thanks.

This concludes today's this virus Bancshares Q1, 2023 earnings Conference call you may now disconnect.

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