Business context and reporting period
Business First Bancshares, Inc. 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 quarter and six months ended June 30, 2022. On March 1, 2022, the Company acquired Texas Citizens Bancorp, Inc. (TCBI), expanding its Texas operations; therefore, balance-sheet growth and some year-over-year operating comparisons reflect the acquisition.
Financial performance and condition
Amounts below are in millions except per-share data and ratios.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $49.6 | $37.9 | $90.0 | $78.2 |
| Provision for loan losses | $2.9 | $2.2 | $4.6 | $5.6 |
| Noninterest income | $7.0 | $17.2 | $12.9 | $22.0 |
| Noninterest expense | $36.4 | $30.9 | $70.1 | $57.6 |
| Net income | $13.8 | $17.4 | $22.5 | $29.8 |
| Diluted EPS | $0.61 | $0.84 | $1.03 | $1.43 |
| Net interest margin | 3.98% | 3.87% | 3.75% | 4.05% |
- Growth and funding: At June 30, total assets were $5.53 billion, loans held for investment $4.11 billion, and deposits $4.66 billion, up 17.0%, 29.0%, and 14.3%, respectively, from year-end 2021. Noninterest-bearing deposits were $1.70 billion. Loans were 88.3% of deposits, compared with 78.2% at year-end.
- Profitability and margins: Q2 net income fell 21.1% year over year; first-half income fell 24.4%. First-half NIM declined 30 basis points despite higher net interest income, reflecting lower asset yields, including reduced PPP-related income. Q2 NIM improved 11 basis points year over year. First-half return on average assets was 0.87% and return on average equity was 10.03%, versus 1.37% and 14.23% in 2021.
- Cash flow and liquidity: For the six months, operating cash flow was $37.5 million, investing cash use $225.4 million, and financing cash inflow $274.2 million; cash and cash equivalents increased $86.3 million to $154.7 million. Management reported cash and cash equivalents including federal funds sold of $165.5 million, versus $295.4 million at year-end. The Company had $154.0 million of correspondent-bank federal funds lines available and undrawn. The filing identifies no material known future cash requirements or capital expenditures.
- Credit and allowance: The allowance was $32.3 million, or 0.79% of loans, versus 0.91% at year-end. Nonperforming loans were $17.1 million (0.42% of loans), compared with $13.1 million (0.41%); nonperforming assets totaled $18.2 million. The increase was attributed mainly to a $6.3 million hurricane-damaged loan placed on nonaccrual; it was paid in full from insurance proceeds in July 2022. First-half net charge-offs were $1.4 million.
- Securities and equity: Available-for-sale securities had fair value of $934.7 million and gross unrealized losses of $80.7 million at quarter-end, versus $9.5 million of losses at year-end 2021. The after-tax first-half other comprehensive loss was $61.6 million, contributing to a decline in book value per share to $19.73 from $21.24. Shareholders’ equity was $445.5 million.
- Debt and capital: Borrowings totaled $393.6 million, versus $187.6 million at year-end, including $254.0 million of FHLB advances and $111.1 million of subordinated debt. A $200 million, seven-day FHLB advance was outstanding at 1.66% and due in July 2022. Company Tier 1 risk-based capital was 8.23%; the bank’s was 10.30%. The bank remained “well-capitalized.”
Material changes, outlook and risks
- TCBI was acquired for approximately $55.0 million in stock and other consideration; it added approximately $535.5 million of assets and $477.3 million of deposits at acquisition. The transaction generated $28.9 million of goodwill. Pro forma financial information was not provided because management said it was impracticable to prepare.
- Lower reported noninterest income chiefly reflects the absence of the prior-year $9.2 million gain on PPP loan sales and lower SBIC partnership income. First-half fee and brokerage commissions increased, partly reflecting SSW, acquired in 2021. Higher salaries and benefits and merger/conversion costs increased expenses, primarily in connection with TCBI and additional staffing.
- Management provided no specific numerical earnings or growth guidance. It cited loan growth, acquisition integration, interest-rate volatility, regional economic conditions and credit quality as factors affecting results. It noted exposure to Louisiana and Texas markets and to energy-related borrowers and collateral.
- Interest-rate simulations showed estimated one-year net interest income changes of -1.2%, -2.2% and -3.7% under +100, +200 and +300 basis-point shocks, respectively; estimated fair value of equity changes were +0.28%, +0.41% and +0.50%. Model estimates depend on assumptions and are not forecasts.
- The parent company’s Tier 1 capital ratio did not meet the 2.5% capital conservation buffer at quarter-end. Until the ratio exceeds 8.50%, distributions, repurchases and discretionary bonuses are limited to 60% of eligible retained income; management said it did not expect a material effect on dividend capacity. The board declared a $0.12-per-share quarterly dividend in July.
- CECL was scheduled for adoption in January 2023; the Company had begun parallel model runs and cautioned adoption could materially affect its financial statements. The filing also reports $1.13 billion of commitments to extend credit and $36.5 million of standby and commercial letters of credit. Management reported no pending legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- How much future loan and deposit growth is organic versus attributable to TCBI, and whether integration costs and expected benefits develop as planned.
- Whether the decline in first-half NIM persists as rates change, and the effect of funding costs and the large short-term FHLB advance’s maturity.
- Credit performance in the expanded portfolio, including commercial real estate exposure, criticized loans, nonaccrual trends and the adequacy of the allowance.
- The duration and potential capital implications of unrealized securities losses, alongside the Company’s progress toward restoring the capital conservation buffer.
- The eventual CECL transition impact and the extent to which outstanding credit commitments become funded.