Business First Bancshares, Inc. quarterly report, Q3 FY2023

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Business context and reporting period

Business First Bancshares, Inc. is a Louisiana-based financial holding company operating through b1BANK, with community banking markets in Louisiana, Dallas/Fort Worth and Houston. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023. Unless noted, amounts below are in millions of dollars.

Financial performance and condition

  • Quarterly earnings: Third-quarter net income was $20.5 million; net income available to common shareholders was $19.1 million, or $0.76 per basic and diluted share, versus $13.8 million, or $0.61 per share, a year earlier.
  • Nine-month earnings: Net income was $55.2 million and income available to common shareholders was $51.2 million, or $2.04 basic and $2.02 diluted EPS, compared with $36.3 million and $1.65 basic and $1.64 diluted EPS in 2022. Return on average assets was 1.09% versus 0.91%; return on average common equity was 13.00% versus 10.87%.
  • Interest income and margins: Third-quarter net interest income was $55.3 million versus $53.5 million; net interest margin fell to 3.61% from 4.01%. For nine months, net interest income rose 12.4% to $161.4 million, while margin declined to 3.66% from 3.87%. Management attributed higher funding costs to rising rates; overall cost of funds increased 182 basis points in the quarter and 180 basis points for the nine-month period year over year.
  • Other income and expenses: Nine-month noninterest income rose 43.4% to $30.2 million, including gains on the Leesville branch sale and debt extinguishment, and higher investment pass-through income. Noninterest expense increased 5.3% to $117.0 million, including higher salaries and benefits, partly offset by lower acquisition-related expenses.
  • Assets, loans and deposits: Total assets were $6.49 billion, up 8.3% from year-end 2022. Loans held for investment were $4.92 billion, up 6.8%; deposits were $5.19 billion, up 7.7% from $4.82 billion. Noninterest-bearing deposits fell 8.8% to $1.41 billion. Uninsured deposits were $2.0 billion, or 38.6% of deposits.
  • Credit quality: Allowance for credit losses, including unfunded commitments, was $44.5 million; the loan-loss allowance was $41.1 million, or 0.84% of loans held for investment. Nonperforming loans were $16.3 million, or 0.33% of loans, versus $11.4 million and 0.25% at year-end 2022. Nine-month net charge-offs were $4.5 million, or 0.09% of average loans.
  • Securities and equity: Available-for-sale securities had fair value of $849.7 million and gross unrealized losses of $118.8 million. Accumulated other comprehensive loss widened to $94.2 million from $74.2 million at year-end. Management attributed securities losses to market interest rates, reported no credit-loss allowance, and said it did not intend to sell the securities or expect to be required to sell before recovery of amortized cost.
  • Cash flow and liquidity: Nine-month operating cash flow was $71.1 million, investing cash outflow was $488.7 million and financing cash inflow was $456.3 million. Cash and cash equivalents increased $38.7 million to $191.5 million; cash plus federal funds sold totaled $388.1 million at quarter-end. The bank had $300 million outstanding under the Bank Term Funding Program (BTFP), $214.2 million of FHLB advances, $1.6 billion of remaining FHLB availability and $1.0 billion of Federal Reserve discount-window availability; it had not drawn on the discount-window lines.
  • Debt and capital: Total shareholders’ equity was $604.4 million. Business First’s Tier 1 leverage, Common Equity Tier 1, Tier 1 risk-based and total risk-based capital ratios were 9.31%, 8.97%, 10.28% and 12.71%, respectively. b1BANK was reported well-capitalized. The $300 million BTFP borrowing matures March 22, 2024; $1.4 billion of time deposits were contractually due within one year.

Material changes versus comparable periods

  • Higher loan yields and asset growth lifted interest income, but deposit and borrowing costs rose sharply; net interest margin compressed despite higher net interest income.
  • Loan growth was concentrated in commercial lending: commercial loans increased 15.5% from year-end 2022, while construction loans declined 1.8%.
  • Nonperforming loans and assets increased from year-end. Management said the comparison was affected in part by CECL adoption and the related removal of prior purchased-impaired-loan accounting.
  • CECL was adopted January 1, 2023, resulting in an $827,000 after-tax reduction to retained earnings. The reported loan allowance was $41.1 million; the broader allowance including unfunded commitments was $44.5 million.

Outlook, commentary, risks and unusual items

  • The filing provides no quantified earnings or margin guidance. Management described ongoing sensitivity to rates, funding availability and deposit behavior; results for interim periods are not necessarily indicative of full-year results.
  • Liquidity and funding risks include competition for deposits, the 38.6% uninsured-deposit share, increased deposit costs and reliance on wholesale funding. The BTFP borrowing is a material near-term maturity.
  • Other cited risks include credit deterioration, commercial real estate and construction exposure, geographic concentration, changing collateral values, economic conditions and interest-rate volatility. Management’s rate-sensitivity model estimated that a 300-basis-point increase would reduce one-year net interest income 7.50%; model outcomes rely on uncertain assumptions.
  • Unusual items included a $932,000 pre-tax gain from the Leesville branch sale, a $1.5 million nine-month gain on extinguishment of subordinated debt, and $173,000 of nine-month acquisition-related expenses. The company also reported a $20.0 million nine-month other comprehensive loss, primarily reflecting after-tax securities valuation changes.
  • The company disclosed no material pending legal proceedings and no material changes to previously reported risk factors except for risks related to adverse developments in the financial services industry and their potential effect on confidence, deposits, liquidity, earnings and access to funding. Disclosure controls were reported effective.

Important facts for investors to verify

  1. Deposit disclosure inconsistency: The balance sheet and MD&A show deposits increased $370.4 million, or 7.7%, from December 31, 2022; the financial highlights instead state deposits decreased 7.7%. Confirm the correct presentation.
  2. Review deposit mix, uninsured balances, upcoming certificate maturities and actual deposit pricing and retention trends.
  3. Assess the credit trends behind rising nonperforming loans, charge-offs and the allowance, including the impact of CECL on comparability.
  4. Evaluate the BTFP’s March 2024 maturity, pledged collateral, alternative funding capacity and securities’ unrealized losses.
  5. Distinguish recurring earnings from gains on the branch sale and debt extinguishment, and monitor margin trends as funding costs adjust.