Business context and reporting period
Business First Bancshares, Inc., through b1BANK and subsidiaries, provides community banking services in Louisiana and the Dallas/Fort Worth and Houston markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $53.3 | $49.6 | $106.1 | $90.0 |
| Net income available to common shareholders | $18.4 | $13.8 | $32.1 | $22.5 |
| Diluted EPS | $0.73 | $0.61 | $1.27 | $1.03 |
| Provision for credit losses | $0.5 | $2.9 | $3.8 | $4.6 |
| Noninterest income | $12.0 | $7.0 | $20.3 | $12.9 |
| Noninterest expense | $39.7 | $36.4 | $78.4 | $70.1 |
- Earnings and margins: Q2 common earnings increased about 34%; first-half common earnings rose 42.6%. First-half return on average assets was 1.04% (0.88% prior year) and return on average equity was 12.39% (10.12%). Net interest margin was 3.63% in Q2 (3.99% prior year) and 3.69% for the first half (3.78%). Higher loan yields were offset by sharply higher deposit and borrowing costs.
- Balance sheet at June 30: Assets were $6.45 billion, loans held for investment $4.90 billion, deposits $5.01 billion, and shareholders’ equity $601.0 million. Loans grew 6.4% from year-end; deposits grew 4.0% based on the balance-sheet amounts. Commercial and real-estate loans were 26.7% and 72.0% of loans, respectively.
- Credit: Allowance for loan losses was $42.0 million, about 0.86% of loans; the broader allowance including unfunded commitments was $45.6 million, or 0.93%. Nonperforming loans were $17.5 million, 0.36% of loans, versus $11.4 million and 0.25% at year-end. First-half net charge-offs were $2.8 million, 0.06% of average loans. Adoption of CECL on January 1 reduced retained earnings by $0.8 million after tax.
- Liquidity and funding: Cash and due from banks plus federal funds sold totaled $354.8 million, compared with $168.3 million at year-end. The bank had $300 million outstanding under the Federal Reserve Bank Term Funding Program (BTFP), $362.2 million of FHLB borrowings, and no federal funds purchased outstanding. It reported $1.4 billion of remaining FHLB availability, $154 million of correspondent-bank lines, and $991.3 million of undrawn Federal Reserve discount-window lines. Uninsured deposits were $1.9 billion, or 38.1% of deposits.
- Cash flow, six months: Operating activities provided $48.7 million; investing activities used $440.2 million, including $286.5 million of net loan growth; financing activities provided $419.7 million, including $300 million of BTFP proceeds. Cash and cash equivalents increased $28.2 million.
- Capital and securities: Company Common Equity Tier 1 was 8.71%, Tier 1 leverage 9.35%, and total risk-based capital 12.49%. The bank was classified as well-capitalized. Available-for-sale securities had $877.8 million fair value versus $980.2 million amortized cost, with $102.5 million gross unrealized losses; management attributed losses to interest rates, not credit, and reported no credit-loss allowance.
Material changes, outlook, risks and unusual items
- Revenue growth reflected higher loan yields and balances; interest income rose 58% in Q2 year over year, while interest expense rose much faster as deposit and borrowing costs repriced. First-half net interest income increased 17.8%.
- Q2 noninterest income included a $0.9 million gain on extinguishment of acquired subordinated debt and $2.8 million of pass-through investment income. First-half noninterest expense increased 11.8%; Q2 data-processing expense included $715,000 in charges related to a processor billing-system error.
- The bank called an acquired subordinated-debt tranche and extinguished $5.7 million during Q2, recognizing a $941,000 gain. The BTFP borrowing is $300 million, fixed at 4.38%, and matures March 22, 2024.
- Management provided no quantified earnings or growth guidance. It described ongoing interest-rate, credit, funding and liquidity risks, and cautioned that interim results are not necessarily indicative of full-year results. Key stated risks include deposit outflows or higher funding costs, weaker local economies, real-estate collateral declines, loan deterioration, interest-rate changes, and geographic and energy-industry concentration.
- A branch sale in Leesville, Louisiana, was expected to close August 31, 2023; the company planned to retain the branch’s loan accounts. The filing also identifies recent bank failures and potential impacts on depositor confidence, liquidity, funding costs and capital-market access as a risk.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting. Routine legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile the deposit-growth disclosure: the balance sheet shows deposits rising from $4.82 billion to $5.01 billion, while the financial-highlights bullet calls the $194.1 million, 4.0% change a decrease. The balance-sheet figures and MD&A narrative indicate an increase.
- Track uninsured deposit levels, deposit mix and cost, and use of BTFP, FHLB and discount-window funding—particularly the BTFP’s 2024 maturity.
- Monitor nonperforming loans, criticized credits, charge-offs and reserve adequacy, noting that CECL adoption changed comparability with prior periods and brought previously excluded acquired loans into nonaccrual reporting.
- Assess the persistence of margin pressure and noninterest income, including pass-through investment income, and distinguish recurring results from the debt-extinguishment gain and processor billing charge.
- Review unrealized securities losses, available liquidity and capital ratios under potential deposit, interest-rate and credit stress.