Business context and reporting period
Business First Bancshares, Inc. (NASDAQ: BFST) is a Louisiana-based financial holding company operating through b1BANK, with banking markets in Louisiana, Dallas/Fort Worth and Houston. This unaudited Form 10-Q covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022, and income and cash-flow comparisons are with Q1 2022.
Q1 2022 included the Texas Citizens Bancorp acquisition from March 1 onward, so year-over-year comparisons reflect both a larger business and changes in rates and operating conditions.
Financial performance and condition
- Earnings: Net income was $15.0 million, versus $8.7 million; net income available to common shareholders was $13.7 million after $1.35 million of preferred dividends. Basic and diluted EPS were $0.55 and $0.54, compared with $0.42 and $0.41.
- Interest income and margins: Net interest income rose 30.3% to $52.7 million. Net interest margin increased to 3.75% from 3.56%, while net interest spread declined to 2.96% from 3.40%. Average loan yield was 6.34% versus 4.81%; average interest-bearing deposit cost increased to 2.30% from 0.32%. Management attributed the higher funding costs primarily to Federal Reserve rate increases.
- Other income and expenses: Noninterest income increased 42.3% to $8.4 million, including higher deposit service charges and loan-sale gains. Noninterest expense rose 14.7% to $38.7 million, mainly reflecting higher salaries and benefits, including acquisition-related staffing. Provision for credit losses was $3.2 million versus $1.6 million.
- Returns: Annualized return on average assets was 0.91% versus 0.72%; return on average equity was 10.73% versus 7.94%.
- Balance sheet: Total assets were $6.29 billion, up 5.0% from year-end. Loans held for investment grew 4.3% to $4.80 billion; deposits decreased 0.3% to $4.81 billion. Noninterest-bearing deposits declined 4.8% to $1.48 billion.
- Credit quality: Nonperforming assets were $18.5 million, up from $12.8 million; nonperforming loans were $17.1 million, or 0.36% of loans, versus $11.4 million, or 0.25%. The allowance for loan losses was $41.8 million (0.87% of loans); total allowance for credit losses, including unfunded commitments, was $45.7 million (0.95%). Net charge-offs were $2.2 million, or 0.05% of average loans. Management said the rise in nonperforming assets was primarily related to CECL adoption and the resulting treatment of acquired impaired loans.
- Liquidity and funding: Cash and federal funds sold totaled $264.0 million at quarter-end. Borrowings included $310 million under the Bank Term Funding Program (BTFP) and $395.1 million of FHLB advances. The company reported $1.4 billion of remaining FHLB availability and $154 million of correspondent-bank federal funds lines, of which $14.6 million was drawn. Total uninsured deposits were $1.5 billion, or 30.7% of deposits.
- Cash flows: Reported operating cash flow was $22.9 million, investing cash flow was negative $289.4 million and financing cash flow was positive $273.5 million; cash and cash equivalents increased $7.0 million to $159.8 million. The company’s cash-flow statement presents federal funds sold separately.
- Capital and securities: Shareholders’ equity rose 3.0% to $597.7 million. Business First’s CET1 and total risk-based capital ratios were 8.59% and 12.61%, respectively, versus 8.68% and 12.75% at year-end; b1BANK was classified as well-capitalized. Available-for-sale securities had $87.5 million of gross unrealized losses at quarter-end, although management attributed these losses to market interest rates rather than credit deterioration. Accumulated other comprehensive loss improved to $68.0 million from $74.2 million.
Material changes, outlook and risks
- Effective January 1, 2023, the company adopted CECL, replacing the incurred-loss model with expected lifetime credit-loss estimates. Adoption reduced retained earnings by $827,000 after tax and increased the opening total credit-loss allowance by $5.9 million. Comparisons of credit metrics with 2022 are affected by the accounting change and reclassification of acquired impaired loans.
- The company drew $310 million under the BTFP in March. It pledged securities with $319.4 million par value and $290.7 million fair value as collateral. After quarter-end, it opened two Federal Reserve discount-window credit lines totaling $949.5 million, collateralized by commercial and agricultural loans; neither had been drawn as of the report date.
- Management provided no specific earnings or financial guidance. It cautioned that interim results are not necessarily indicative of full-year results and that actual outcomes may differ from estimates.
- Key risks include deposit outflows and funding costs, particularly amid reduced customer confidence following Silicon Valley Bank and Signature Bank failures; interest-rate changes and securities valuations; credit deterioration in commercial, real-estate and construction lending; and economic concentration in Louisiana and Texas. The company also cited acquisition integration, energy-sector exposure and competition as risks.
- Off-balance-sheet commitments included approximately $1.29 billion to extend credit and $43.4 million of standby and commercial letters of credit. The filing notes these commitments may expire unused. Management reported no pending legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors other than industry developments.
- Non-GAAP core net income available to common shareholders was $13.8 million, versus $10.3 million. The filing’s reconciliation excludes specified items; investors should distinguish these measures from GAAP results.
Important facts for investors to verify
- How deposit balances, uninsured deposits and deposit pricing evolve, and whether contingent borrowing capacity remains available on acceptable terms.
- Whether loan growth is accompanied by deterioration in delinquencies, nonaccrual loans, criticized credits, charge-offs or CECL allowance assumptions.
- The cost and duration of BTFP and FHLB funding, collateral pledged, and any subsequent use of the discount-window lines.
- Whether higher funding costs continue to pressure net interest spread and margin, and how rate changes affect securities values and earnings.
- The effect of CECL adoption and the 2022 TCBI acquisition on comparability of credit, earnings and growth trends.
- Capital ratios, including the decline in holding-company CET1 and total risk-based ratios, and the capacity to support growth and dividends.