UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
BUSINESS FIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| | |
| (Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | | ☒ |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company | |
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of July 28, 2023, the issuer has outstanding
BUSINESS FIRST BANCSHARES, INC.
| 4 | ||
| Item 1. |
4 | |
| Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022 |
4 | |
| 5 | ||
| 6 | ||
| 7 | ||
| 9 | ||
| 11 | ||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
34 |
| Item 3. |
64 | |
| Item 4. |
64 | |
| 65 | ||
| Item 1. |
65 | |
| Item 1A. |
65 | |
| Item 2. |
65 | |
| Item 3. |
65 | |
| Item 4. |
65 | |
| Item 5. |
65 | |
| Item 6. |
66 | |
| 67 | ||
PART I – FINANCIAL INFORMATION
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
| June 30, 2023 | December 31, | |||||||
| (Unaudited) | 2022 | |||||||
| ASSETS | ||||||||
| Cash and Due from Banks | $ | $ | ||||||
| Federal Funds Sold | ||||||||
| Securities Available for Sale, at Fair Values (Amortized Cost of $ at June 30, 2023 and $ at December 31, 2022) | ||||||||
| Mortgage Loans Held for Sale | ||||||||
| Loans and Lease Receivable, Net of Allowance for Loan Losses of $ at June 30, 2023 and $ at December 31, 2022 | ||||||||
| Premises and Equipment, Net | ||||||||
| Accrued Interest Receivable | ||||||||
| Other Equity Securities | ||||||||
| Other Real Estate Owned | ||||||||
| Cash Value of Life Insurance | ||||||||
| Deferred Taxes | ||||||||
| Goodwill | ||||||||
| Core Deposit and Customer Intangible | ||||||||
| Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Noninterest Bearing | $ | $ | ||||||
| Interest Bearing | ||||||||
| Total Deposits | ||||||||
| Federal Funds Purchased | ||||||||
| Securities Sold Under Agreements to Repurchase | ||||||||
| Short Term Borrowings | ||||||||
| Bank Term Funding Program | ||||||||
| Federal Home Loan Bank Borrowings | ||||||||
| Subordinated Debt | ||||||||
| Subordinated Debt - Trust Preferred Securities | ||||||||
| Accrued Interest Payable | ||||||||
| Other Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (See Note 11) | ||||||||
| SHAREHOLDERS' EQUITY | ||||||||
|
| ||||||||
| Preferred Stock, Par Value; Shares Authorized; Shares ($ Liquidation Preference) Issued at both June 30, 2023 and December 31, 2022, respectively | ||||||||
| Common Stock, $ Par Value; Shares Authorized; and Shares Issued and Outstanding at June 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional Paid-in Capital | ||||||||
| Retained Earnings | ||||||||
| Accumulated Other Comprehensive Loss | ( | ) | ( | ) | ||||
| Total Shareholders' Equity | ||||||||
| Total Liabilities and Shareholders' Equity | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Interest Income: | ||||||||||||||||
| Interest and Fees on Loans | $ | $ | $ | $ | ||||||||||||
| Interest and Dividends on Non-taxable Securities | ||||||||||||||||
| Interest and Dividends on Taxable Securities | ||||||||||||||||
| Interest on Federal Funds Sold and Due From Banks | ||||||||||||||||
| Total Interest Income | ||||||||||||||||
| Interest Expense: | ||||||||||||||||
| Interest on Deposits | ||||||||||||||||
| Interest on Borrowings | ||||||||||||||||
| Total Interest Expense | ||||||||||||||||
| Net Interest Income | ||||||||||||||||
| Provision for Credit Losses | ||||||||||||||||
| Net Interest Income after Provision for Credit Losses | ||||||||||||||||
| Other Income: | ||||||||||||||||
| Service Charges on Deposit Accounts | ||||||||||||||||
| Loss on Sales of Securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on Sales of Loans | ||||||||||||||||
| Other Income | ||||||||||||||||
| Total Other Income | ||||||||||||||||
| Other Expenses: | ||||||||||||||||
| Salaries and Employee Benefits | ||||||||||||||||
| Occupancy and Equipment Expense | ||||||||||||||||
| Other Expenses | ||||||||||||||||
| Total Other Expenses | ||||||||||||||||
| Income Before Income Taxes | ||||||||||||||||
| Provision for Income Taxes | ||||||||||||||||
| Net Income | ||||||||||||||||
| Preferred Stock Dividends | ||||||||||||||||
| Net Income Available to Common Shareholders | $ | $ | $ | $ | ||||||||||||
| Earnings Per Common Share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these financial statements.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Consolidated Net Income | $ | $ | $ | $ | ||||||||||||
| Other Comprehensive Income (Loss): | ||||||||||||||||
| Unrealized Loss on Investment Securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Unrealized Gain (Loss) on Share of Other Equity Investments | ( | ) | ( | ) | ||||||||||||
| Reclassification Adjustment for Losses on Sale of AFS Investment Securities Included in Net Income | ||||||||||||||||
| Income Tax Effect | ||||||||||||||||
| Other Comprehensive Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Consolidated Comprehensive Income (Loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
The accompanying notes are an integral part of these financial statements.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2023 AND 2022
(Dollars in thousands, except per share data)
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Preferred | Common | Paid-In | Retained | Comprehensive | Shareholders' | |||||||||||||||||||
| Stock | Stock | Capital | Earnings | Loss | Equity | |||||||||||||||||||
| Balances at March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Comprehensive Income: | ||||||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||
| Other Comprehensive Loss | ( | ) | ( | ) | ||||||||||||||||||||
| Cash Dividends Declared on Common Stock, $ Per Share | ( | ) | ( | ) | ||||||||||||||||||||
| Stock Issuance | ||||||||||||||||||||||||
| Stock Based Compensation Cost | ||||||||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Balances at March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Comprehensive Income: | ||||||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||
| Other Comprehensive Loss | ( | ) | ( | ) | ||||||||||||||||||||
| Cash Dividends Declared on Preferred Stock, $ Per Share | ( | ) | ( | ) | ||||||||||||||||||||
| Cash Dividends Declared on Common Stock, $ Per Share | ( | ) | ( | ) | ||||||||||||||||||||
| Stock Based Compensation Cost | ||||||||||||||||||||||||
| Balances at June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
The accompanying notes are an integral part of these financial statements.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Dollars in thousands, except per share data)
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Preferred | Common | Paid-In | Retained | Comprehensive | Shareholders' | |||||||||||||||||||
| Stock | Stock | Capital | Earnings | Loss | Equity | |||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Comprehensive Income: | ||||||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||
| Other Comprehensive Loss | ( | ) | ( | ) | ||||||||||||||||||||
| Cash Dividends Declared on Common Stock, $ Per Share | ( | ) | ( | ) | ||||||||||||||||||||
| Stock Issuance | ||||||||||||||||||||||||
| Stock Based Compensation Cost | ||||||||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Cumulative Effect of Change in Accounting Principle for Credit Losses | ( | ) | ( | ) | ||||||||||||||||||||
| Comprehensive Income: | ||||||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||
| Other Comprehensive Loss | ( | ) | ( | ) | ||||||||||||||||||||
| Cash Dividends Declared on Preferred Stock, $ Per Share | ( | ) | ( | ) | ||||||||||||||||||||
| Cash Dividends Declared on Common Stock, $ Per Share | ( | ) | ( | ) | ||||||||||||||||||||
| Stock Based Compensation Cost | ||||||||||||||||||||||||
| Balances at June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
The accompanying notes are an integral part of these financial statements.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Consolidated Net Income | $ | $ | ||||||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||
| Provision for Credit Losses | ||||||||
| Depreciation and Amortization | ||||||||
| Net Accretion of Purchase Accounting Adjustments | ( | ) | ( | ) | ||||
| Stock Based Compensation Cost | ||||||||
| Net Amortization of Securities | ||||||||
| Loss on Sales of Securities | ||||||||
| Gain on Sale of Loans | ( | ) | ( | ) | ||||
| Income on Other Equity Securities | ( | ) | ( | ) | ||||
| Gain on Sale of Other Real Estate Owned, Net of Writedowns | ( | ) | ( | ) | ||||
| Increase in Cash Value of Life Insurance | ( | ) | ( | ) | ||||
| Deferred Income Tax Expense (Benefit) | ( | ) | ||||||
| Changes in Assets and Liabilities: | ||||||||
| (Increase) Decrease in Accrued Interest Receivable | ( | ) | ||||||
| (Increase) Decrease in Other Assets | ( | ) | ||||||
| Increase (Decrease) in Accrued Interest Payable | ( | ) | ||||||
| Increase in Other Liabilities | ||||||||
| Net Cash Provided by Operating Activities | ||||||||
| Cash Flows From Investing Activities: | ||||||||
| Purchases of Securities Available for Sale | ( | ) | ( | ) | ||||
| Proceeds from Maturities / Sales of Securities Available for Sale | ||||||||
| Proceeds from Paydowns of Securities Available for Sale | ||||||||
| Net Cash Received in Acquisition | ||||||||
| Purchases of Other Equity Securities | ( | ) | ( | ) | ||||
| Redemption of Other Equity Securities | ||||||||
| Purchase of Life Insurance | ( | ) | ( | ) | ||||
| Net Increase in Loans | ( | ) | ( | ) | ||||
| Net Purchases of Premises and Equipment | ( | ) | ( | ) | ||||
| Loss on Disposal of Premises and Equipment | ||||||||
| Proceeds from Sales of Other Real Estate | ||||||||
| Net (Increase) Decrease in Federal Funds Sold | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
(CONTINUED)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Financing Activities: | ||||||||
| Net Increase in Deposits | ||||||||
| Net Increase (Decrease) in Securities Sold Under Agreements to Repurchase | ( | ) | ||||||
| Net Decrease in Federal Funds Purchased | ( | ) | ||||||
| Net Advances (Repayments) on Federal Home Loan Bank Borrowings | ( | ) | ||||||
| Net Proceeds on Bank Term Funding Program | ||||||||
| Issuance of Short Term Borrowings | ||||||||
| Repayment of Subordinated Debt | ( | ) | ||||||
| Gain on Extinguishment of Debt | ( | ) | ||||||
| Proceeds from Issuance of Common Stock | ||||||||
| Payment of Dividends on Preferred Stock | ( | ) | ||||||
| Payment of Dividends on Common Stock | ( | ) | ( | ) | ||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Increase in Cash and Cash Equivalents | ||||||||
| Cash and Cash Equivalents at Beginning of Period | ||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | ||||||
| Supplemental Disclosures for Cash Flow Information: | ||||||||
| Cash Payments for: | ||||||||
| Interest on Deposits | $ | $ | ||||||
| Interest on Borrowings | $ | $ | ||||||
| Income Tax Payments | $ | $ | ||||||
| Supplemental Schedule for Noncash Investing and Financing Activities: | ||||||||
| Change in the Unrealized Loss on Securities Available for Sale | $ | ( | ) | $ | ( | ) | ||
| Change in the Unrealized Gain (Loss) on Equity Securities | $ | ( | ) | $ | ||||
| Change in Deferred Tax Effect on the Unrealized Loss on Securities Available for Sale | $ | $ | ||||||
| Transfer of Loans to Other Real Estate | $ | $ | ||||||
| Acquisitions: | ||||||||
| Fair Value of Tangible Assets Acquired | $ | $ | ||||||
| Other Intangible Assets Acquired | ||||||||
| Liabilities Assumed | ||||||||
| Net Identifiable Assets Acquired Over Liabilities Assumed | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation –
The unaudited consolidated financial statements include the accounts of Business First Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, b1BANK (the “Bank”), and the Bank’s wholly-owned subsidiaries, Business First Insurance, LLC and Smith Shellnut Wilson, LLC. The Bank operates out of full-service banking centers and loan production offices in markets across Louisiana, the Dallas/Fort Worth metroplex and Houston, Texas. As a state bank, it is subject to regulation by the Office of Financial Institutions (“OFI”), State of Louisiana, and the Federal Deposit Insurance Corporation (“FDIC”) and undergoes periodic examinations by these agencies. The Company is also regulated by the Federal Reserve and is subject to periodic examinations.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial results for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.
These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) have been omitted or abbreviated. These interim financial statements should be read in conjunction with the audited consolidated financial statements and footnote disclosures for the Company’s previously filed Form 10-K for the year ended December 31, 2022.
Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Critical accounting estimates that are particularly susceptible to significant change for the Company include the determination of the acquired loans and allowance for credit losses and purchase accounting adjustments (other than loans). Other estimates include goodwill, fair value of financial instruments, investment securities and the assessment of income taxes. Management does not anticipate any material changes to estimates in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, economic conditions in the Company’s markets, and changes in applicable banking regulations. Actual results may ultimately differ from estimates.
Accounting Standards Adopted in Current Period
Effective January 1, 2023, the Company adopted ASU 2016-13, Financial Instrument – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments related to the impairment of financial instruments. This guidance, commonly referred to as Current Expected Credit Loss (“CECL”), changes impairment recognition to a model that is based on expected losses rather than incurred losses. The allowance for credit losses is established for current expected credit losses on the Company’s loan portfolio, including unfunded credit commitments. Prior to January 1, 2023, the allowance for credit losses was established based on an incurred loss model. Upon the adoption of CECL, certain loan classification and segmentation categories were changed to align with the requirements of the standard and more effectively model the CECL estimate. The updated CECL segmentation is reflected in the disclosures beginning January 1, 2023, and prior period classifications have been adjusted to reflect CECL segmentations. Results from periods prior to January 1, 2023, are presented using the previously applicable GAAP.
Upon adoption of the guidance on January 1, 2023, the Company recognized an $
The adoption of this guidance did not have a material impact on the Company’s available-for-sale securities as most of this portfolio consists of U.S. treasury and agency securities as well as highly rated residential agency mortgage-backed, corporate, and municipal securities. However, any subsequent estimated credit losses are required to be recognized through an allowance for credit losses associated with the applicable securities.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company also adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023. The standard modifies the criteria for identification of troubled debt restructurings as well as enhancing disclosure requirements. Additionally, the guidance requires vintage table disclosures and presentation of gross write-offs during the current period by year of origination for financing receivables within scope of the standard. The implementation of the standard did not have a material impact of the identification of troubled debt restructurings and the vintage and charge-off disclosures have been presented in the footnotes below.
Allowance for Credit Losses
The Company calculates its allowance for credit losses utilizing a CECL methodology. CECL requires management’s estimate of credit losses over the full remaining expected life of loans and other financial instruments and for the Company, CECL applies to loans, unfunded commitments, and available for sale securities. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs, inclusive of recoveries. Management evaluates the appropriateness of the allowance for credit losses on a quarterly basis. The allowance considers expected losses for the remaining lives of the applicable assets. Forecasted economic scenarios are considered over a reasonable and supportable forecast period, currently one year, which incorporates Company and peer historical losses. After the forecast period, the Company reverts to long-term historical loss experience on a straight-line basis over a one-year period, adjusted for the composition of the current loan portfolio, to estimate losses over the remaining lives of the portfolio. The economic scenarios are updated at least quarterly and are designed to provide estimates that take into consideration the customer base of our loan portfolio. Loss estimates also consider factors affecting credit losses not reflected in the model, including trends in the portfolio, credit management and underwriting practices and economic conditions affecting our operating footprint.
The allowance recorded for loan losses utilizes forward-looking expected loss models to consider a variety of factors affecting lifetime credit losses. These factors include loan and borrower characteristics, such as internal risk ratings, delinquency status, collateral type and available valuation information, and the remaining term of the loan, adjusted for expected prepayments. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses. For each loan portfolio, model estimates are adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions that would affect the accuracy of the model. The results of the analysis are evaluated quarterly to confirm the estimates are appropriate for each loan portfolio. Expected loan loss estimates also include consideration of expected cash recoveries on loans previously charged-off, or expected recoveries on collateral dependent loans where recovery is expected through sale of the collateral. The allowance recorded for individually evaluated loans is based on an analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or when repayment is expected through the sale of collateral, the fair value of the collateral, less selling costs, for collateral-dependent loans.
The Company has elected to exclude accrued interest receivable from the amortized cost basis on its loan portfolio. The Company has also elected to not measure an allowance for credit losses on accrued interest for loans held-for-investment based on its policy to write off uncollectible interest in a timely manner, which occurs when a loan is placed on nonaccrual status. Generally, such elections are made no later than 90 days after a loan has become past due, although certain loans accrue interest after 90 days based on management’s evaluation of the borrower’s ability to continue making contractual payments. Such write-offs are recognized as a reduction of interest income. Accrued interest receivable for the loan portfolio is included within accrued interest receivable in the consolidated balance sheets.
Purchased Loans
Beginning January 1, 2023, when a loan portfolio is purchased, an allowance is established for those loans considered purchased with more-than-insignificant credit deterioration (“PCD”), and those not considered purchased with more-than-insignificant credit deterioration (“non-PCD”). The allowance established utilizes the same risk factors discussed above for our non-acquired allowance. The allowance established for non-PCD loans is recognized through provision expense upon acquisition, whereas the allowance established for loans considered PCD at acquisition is offset by an increase in the basis of the acquired loans. Any subsequent increases and decreases in the allowance related to acquired loans are recognized through provision expense, with future charge-offs recorded to the allowance.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company also assesses the credit risk associated with off-balance sheet loan commitments and letters of credit. The liability for off-balance sheet credit exposure related to loan commitments and other credit guarantees is included in other liabilities. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments.
The adoption of this guidance did not have a material impact on the Company’s available-for-sale securities as most of this portfolio consists of U.S. treasury and agency securities as well as highly rated residential agency mortgage-backed, corporate and municipal securities. However, any subsequent estimated credit losses are required to be recognized through an allowance for credit losses associated with the applicable securities.
Allowance for Credit Losses on Securities
In conjunction with the adoption of CECL, the Company also evaluates its securities portfolio for credit losses, as the CECL update modifies the debt security credit impairment model to recognize an allowance for estimated credit losses. Similar to the election on the loan portfolio, the Company has elected to exclude accrued interest receivable from the amortized cost basis of its investment portfolio analysis. Based on our assessments, expected credit losses were negligible and therefore, no allowance for credit losses was recorded.
Beginning January 1, 2023, the Company evaluates its available for sale securities portfolio on a quarterly basis for potential credit-related impairment. The Company assesses potential credit impairment by comparing the fair value of a debt security to its amortized cost basis. If the fair value of a debt security is greater than the amortized cost basis, no impairment is recognized. If the fair value is less than the amortized costs basis, the Company reviews the factors to determine if the impairment is credit-related or noncredit-related. For debt securities the Company intends to sell or is more likely than not required to sell, before the recovery of their amortized cost basis, the difference between fair value and amortized cost is impaired and is recognized through earnings. For debt securities the Company does not intend to sell or is not more likely than not required to sell, prior to expected recovery of amortized cost basis, the credit portion of the impairment is recognized through earnings, with a corresponding entry to an allowance for credit losses, and the noncredit portion is recognized through accumulated other comprehensive income.
Accounting Standards Not Yet Adopted
None
Note 2 – Reclassifications –
Certain reclassifications may have been made to conform to the classifications adopted for reporting in 2023. These reclassifications have no material effect on previously reported shareholders’ equity or net income.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Mergers and Acquisitions –
Texas Citizens Bancorp, Inc.
On March 1, 2022, the Company consummated the merger of Texas Citizens Bancorp, Inc. (“TCBI”), headquartered in Pasadena, Texas, with and into the Company, pursuant to the terms of that certain Agreement and Plan of Reorganization (the “Reorganization Agreement”), dated as of October 20, 2021, by and between the Company and TCBI (the “Merger”). Also on March 1, 2022, TCBI’s wholly-owned banking subsidiary, Texas Citizens Bank, National Association, was merged with and into b1BANK. Pursuant to the terms of the Reorganization Agreement, upon consummation of the Merger, the Company issued
The following table reflects the consideration paid for TCBI’s net assets and the identifiable assets purchased and liabilities assumed at their fair values as of March 1, 2022.
Cost and Allocation of Purchase Price for Texas Citizens Bancorp, Inc. (TCBI):
(Dollars in thousands, except per share data)
| Purchase Price: | ||||
| Shares Issued to TCBI's Shareholders on March 1, 2022 | ||||
| Closing Stock Price on February 28, 2022 | $ | |||
| Total Stock Issued | $ | |||
| Other Consideration, Including Equity Awards | ||||
| Total Purchase Price | $ | |||
| Net Assets Acquired: | ||||
| Cash and Cash Equivalents | $ | |||
| Securities Available for Sale | ||||
| Loans and Leases Receivable | ||||
| Premises and Equipment, Net | ||||
| Cash Value of Life Insurance | ||||
| Core Deposit Intangible | ||||
| Other Assets | ||||
| Total Assets | ||||
| Deposits | ||||
| Borrowings | ||||
| Other Liabilities | ||||
| Total Liabilities | ||||
| Net Assets Acquired | ||||
| Goodwill Resulting from Merger | $ |
The Company has recorded approximately $
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following is a description of the methods used to determine the fair values of significant assets acquired and liabilities assumed presented above.
Cash and Cash Equivalents: The carrying amount of these assets was a reasonable estimate of fair value based on the short-term nature of these assets.
Securities Available for Sale: Fair values for securities were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that were not in an active market or other inputs that were observable in the market. In the absence of observable inputs, fair value was estimated based on pricing models/estimations.
Loans and Leases Receivable: Fair values for loans were based on a discounted cash flow methodology that considered factors including, but not limited to, loan type, classification status, remaining term, prepayment speed, and current discount rates. The discount rates used for loans were based on current market rates for new originations of comparable loans and included adjustments for any liquidity concerns. The discount rate did not include an explicit factor for credit losses, as that was included within the estimated cash flows.
Core Deposit Intangible (“CDI”): The fair value for core deposit intangible assets was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, net maintenance cost of the deposit base, including interest cost, and alternative cost of funds. The CDI is being amortized over
Deposits: The fair values used for the demand and savings deposits, by definition, equal the amount payable on demand at the acquisition date. Fair values for time deposits were estimated using a discounted cash flow analysis, that applied interest rates currently being offered to the contractual interest rates on such time deposits.
Borrowings: Fair values for borrowings were based on estimated market rates over the remaining terms of the subordinated debt issuances.
Pro forma tables for TCBI were impractical to include due to the cost versus benefit of including such disclosures.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Earnings per Common Share –
Basic earnings per share (“EPS”) represents income available to common shareholders divided by the weighted average number of common shares outstanding; no dilution for any potentially convertible shares is included in the calculation. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The potential common shares that may be issued by the Company relate to outstanding stock options and unvested restricted stock awards (“RSAs”), excluding any that were antidilutive. In addition, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of EPS pursuant to the two-class method.
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Less: Preferred Stock Dividends | ||||||||||||||||
| Net Income Available to Common Shares | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| Weighted Average Common Shares Outstanding | ||||||||||||||||
| Dilutive Effect of Stock Options and RSAs | ||||||||||||||||
| Weighted Average Dilutive Common Shares | ||||||||||||||||
| Basic Earnings Per Common Share From Net Income Available to Common Shares | $ | $ | $ | $ | ||||||||||||
| Diluted Earnings Per Common Share From Net Income Available to Common Shares | $ | $ | $ | $ | ||||||||||||
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Securities –
The amortized cost and fair values of securities available for sale as of June 30, 2023, and December 31, 2022 are summarized as follows:
| June 30, 2023 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| U.S. Treasury Securities | $ | $ | $ | $ | ||||||||||||
| U.S. Government Agencies | ||||||||||||||||
| Corporate Securities | ||||||||||||||||
| Mortgage-Backed Securities | ||||||||||||||||
| Municipal Securities | ||||||||||||||||
| Total Securities Available for Sale | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| U.S. Treasury Securities | $ | $ | $ | $ | ||||||||||||
| U.S. Government Agencies | ||||||||||||||||
| Corporate Securities | ||||||||||||||||
| Mortgage-Backed Securities | ||||||||||||||||
| Municipal Securities | ||||||||||||||||
| Total Securities Available for Sale | $ | $ | $ | $ | ||||||||||||
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following tables present a summary of securities with gross unrealized losses and fair values at June 30, 2023 and December 31, 2022, aggregated by investment category and length of time in a continued unrealized loss position.
| June 30, 2023 | ||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| U.S. Treasury Securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| U.S. Government Agencies | ||||||||||||||||||||||||
| Corporate Securities | ||||||||||||||||||||||||
| Mortgage-Backed Securities | ||||||||||||||||||||||||
| Municipal Securities | ||||||||||||||||||||||||
| Total Securities Available for Sale | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| U.S. Treasury Securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| U.S. Government Agencies | ||||||||||||||||||||||||
| Corporate Securities | ||||||||||||||||||||||||
| Mortgage-Backed Securities | ||||||||||||||||||||||||
| Municipal Securities | ||||||||||||||||||||||||
| Total Securities Available for Sale | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
As of June 30, 2023, no allowance for credit losses was recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to credit quality. This determination is based on the Company’s analysis of the underlying risk characteristics including credit ratings, historical loss experience, and other qualitative factors. Further, the securities continue to make principal and interest payments under their contractual terms and management does not have the intent to sell any of the securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of amortized cost basis. Therefore, the Company has determined the unrealized losses are due to changes in market interest rates compared to rates when the securities were acquired.
For the period ended December 31, 2022, management evaluated securities for other than temporary impairment. Consideration was given to the extent and length of time the fair value had been below cost, the reasons for the decline in value, and the Company’s intent to sell a security or whether it was more likely than not that the Company would be required to sell the security before the recovery of its amortized cost. The Company utilized a process to identify securities that could potentially have a credit impairment that was other than temporary. The process involved evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. The Company determined no other than temporary impairment existed at December 31, 2022.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair values of securities available for sale as of June 30, 2023, by contractual maturity are shown below. Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties.
| Amortized | Fair | |||||||
| Cost | Value | |||||||
| (Dollars in thousands) | ||||||||
| Less Than One Year | $ | $ | ||||||
| One to Five Years | ||||||||
| Over Five to Ten Years | ||||||||
| Over Ten Years | ||||||||
| Total Securities Available for Sale | $ | $ | ||||||
At June 30, 2023, the Company had pledged securities with a fair value of $
At June 30, 2023 and December 31, 2022, accrued interest receivable on securities was $
Note 6 – Loans and the Allowance for Loan Losses –
Loans receivable at June 30, 2023 and December 31, 2022 are summarized as follows:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Dollars in thousands) | ||||||||
| Real Estate Loans: | ||||||||
| Commercial | $ | $ | ||||||
| Construction | ||||||||
| Residential | ||||||||
| Total Real Estate Loans | ||||||||
| Commercial | ||||||||
| Consumer and Other | ||||||||
| Total Loans Held for Investment | ||||||||
| Less: | ||||||||
| Allowance for Loan Losses | ( | ) | ( | ) | ||||
| Net Loans | $ | $ | ||||||
The performing 1-4 family residential, multi-family residential, and commercial real estate, are pledged, under a blanket lien, as collateral securing advances from the FHLB at June 30, 2023 and December 31, 2022. Commercial and agricultural loans are pledged against the Federal Reserve Banks’ (“FRB”) discount window as of June 30, 2023.
Net deferred loan origination fees were $
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Bank is the lead lender on participations sold, without recourse, to other financial institutions which amounts are not included in the consolidated balance sheets. The unpaid principal balances of mortgages and other loans serviced for others were approximately $
The Bank grants loans and extensions of credit to individuals and a variety of businesses and corporations located in its general market areas throughout Louisiana and Texas. Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for credit losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
Portfolio Segments and Risk Factors
The loan portfolio is disaggregated into portfolio segments and then further disaggregated into classes for certain disclosures. GAAP defines a portfolio segment as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally a disaggregation of a portfolio segment. The Company's loan portfolio segments are Real Estate, Commercial, and Consumer and Other. The classes and risk characteristics of each segment are discussed in more detail below. The segmentation and disaggregation of the portfolio is part of the ongoing credit monitoring process.
Real Estate Portfolio Segment
Real Estate: Commercial loans are extensions of credit secured by owner-occupied and non-owner-occupied collateral. Repayment is generally dependent on the successful operations of the property. General economic conditions may impact the performance of these types of loans, including fluctuations in the value of real estate, vacancy rates, and unemployment trends. Real estate commercial loans also include farmland loans that can be, or are, used for agricultural purposes. These loans are usually repaid through permanent financing, cash flow from the borrower’s ongoing operations, development of the property, or sale of the property.
Real Estate: Construction loans include loans to small-to-midsized businesses to construct owner-occupied properties, loans to developers of commercial real estate investment properties and residential developments and, to a lesser extent, loans to individual clients for construction of single-family homes in the Company’s market areas. Risks associated with these loans include fluctuations in the value of real estate, project completion risk and changes in market trends. The Company is also exposed to risk based on the ability of the construction loan borrower to finance the loan or sell the property upon completion of the project, which may be affected by changes in secondary market terms and criteria for permanent financing since the time that the Company funded the loan.
Real Estate: Residential loans include first and second lien 1-4 family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences. The Company is exposed to risk based on fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness, or other personal hardship. Real estate residential loans also include multi-family residential loans originated to provide permanent financing for multi-family residential income producing properties. Repayment of these loans primarily relies on successful rental and management of the property.
Commercial Portfolio Segment
Commercial loans include general commercial and industrial, or C&I, loans, including commercial lines of credit, working capital loans, term loans, equipment financing, asset acquisition, expansion, and development loans, borrowing base loans, letters of credit and other loan products, primarily in the Company’s target markets that are underwritten based on the borrower’s ability to service the debt from income. Commercial loan risk is derived from the expectation that such loans generally are serviced principally from the operations of the business, and those operations may not be successful. Any interruption or discontinuance of operating cash flows from the business, which may be influenced by events not under the control of the borrower such as economic events and changes in governmental regulations, could materially affect the ability of the borrower to repay the loan.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consumer and Other Portfolio Segment
Consumer and other loans include a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. The risk is based on changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship, and fluctuations in the value of the real estate or personal property securing the consumer loan, if any.
The following table sets forth, as of June 30, 2023, the balance of the allowance for credit losses by loan portfolio segment. The allowance for credit losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.
Allowance for Credit Losses and Recorded Investment in Loans Receivable
| June 30, 2023 | ||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Real Estate: | Real Estate: | Real Estate: | Consumer | |||||||||||||||||||||
| Commercial | Construction | Residential | Commercial | and Other | Total | |||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Adoption of ASU 2016-13 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Beginning Balance After Adoption | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision | ||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Reserve for Unfunded Loan Commitments: | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Adoption of ASU 2016-13 | ||||||||||||||||||||||||
| Beginning Balance After Adoption | ||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total Allowance for Credit Losses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Included within the above allowance are loans which management has individually evaluated to determine an allowance for credit losses. The following table summarizes, by segment, the loan balance and specific allowance allocation for those loans which have been individually evaluated.
| June 30, 2023 | January 1, 2023 | |||||||||||||||
| Loan Balance | Specific Allocations | Loan Balance | Specific Allocations | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Real Estate Loans: | ||||||||||||||||
| Commercial | $ | $ | $ | $ | ||||||||||||
| Construction | ||||||||||||||||
| Residential | ||||||||||||||||
| Total Real Estate Loans | ||||||||||||||||
| Commercial | ||||||||||||||||
| Consumer and Other | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth, as of December 31, 2022 (prior to the adoption of ASU 2016-13), the balance of the allowance for credit losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually. The allowance for credit losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.
| December 31, 2022 | ||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Real Estate: | Real Estate: | Real Estate: | Consumer | |||||||||||||||||||||
| Commercial | Construction | Residential | Commercial | and Other | Total | |||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision | ||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually Evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively Evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Purchased Credit Impaired | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Loans Receivable: | ||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually Evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively Evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Purchased Credit Impaired | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Credit Quality Indicators
We utilize a risk grading matrix to assign a risk grade to each of our commercial loans. Loans are graded on a scale of 10 to 80. Individual loan officers review updated financial information for all pass grade loans to reassess the risk grade, generally on at least an annual basis. When a loan has a risk grade of 60, it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” and subject to additional and more frequent monitoring by both the loan officer and senior credit and risk personnel. When a loan has a risk grade of 70 or higher, a special assets officer monitors the loan on an on-going basis.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the credit quality indicators, disaggregated by loan segment, as of June 30, 2023:
| June 30, 2023 | ||||||||||||||||||||||||||||
| Criticized | ||||||||||||||||||||||||||||
| Pass | Special Mention | Substandard | Doubtful | Loss | Current Period Charge- | |||||||||||||||||||||||
| (Risk Grade 10-45) | (Risk Grade 50) | (Risk Grade 60) | (Risk Grade 70) | (Risk Grade 80) | Total | offs | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Real Estate: Commercial | ||||||||||||||||||||||||||||
| Originated in 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Originated in 2022 | ||||||||||||||||||||||||||||
| Originated in 2021 | ||||||||||||||||||||||||||||
| Originated in 2020 | ||||||||||||||||||||||||||||
| Originated in 2019 | ||||||||||||||||||||||||||||
| Originated Prior to 2019 | ||||||||||||||||||||||||||||
| Revolving | ||||||||||||||||||||||||||||
| Revolving Loans Converted to Term | ||||||||||||||||||||||||||||
| Total Real Estate: Commercial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Real Estate: Construction | ||||||||||||||||||||||||||||
| Originated in 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Originated in 2022 | ||||||||||||||||||||||||||||
| Originated in 2021 | ||||||||||||||||||||||||||||
| Originated in 2020 | ||||||||||||||||||||||||||||
| Originated in 2019 | ||||||||||||||||||||||||||||
| Originated Prior to 2019 | ||||||||||||||||||||||||||||
| Revolving | ||||||||||||||||||||||||||||
| Revolving Loans Converted to Term | ||||||||||||||||||||||||||||
| Total Real Estate: Construction | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Real Estate: Residential | ||||||||||||||||||||||||||||
| Originated in 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Originated in 2022 | ||||||||||||||||||||||||||||
| Originated in 2021 | ||||||||||||||||||||||||||||
| Originated in 2020 | ||||||||||||||||||||||||||||
| Originated in 2019 | ||||||||||||||||||||||||||||
| Originated Prior to 2019 | ||||||||||||||||||||||||||||
| Revolving | ||||||||||||||||||||||||||||
| Revolving Loans Converted to Term | ||||||||||||||||||||||||||||
| Total Real Estate: Residential | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||
| Originated in 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Originated in 2022 | ||||||||||||||||||||||||||||
| Originated in 2021 | ||||||||||||||||||||||||||||
| Originated in 2020 | ||||||||||||||||||||||||||||
| Originated in 2019 | ||||||||||||||||||||||||||||
| Originated Prior to 2019 | ||||||||||||||||||||||||||||
| Revolving | ||||||||||||||||||||||||||||
| Revolving Loans Converted to Term | ||||||||||||||||||||||||||||
| Total Commercial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Consumer and Other | ||||||||||||||||||||||||||||
| Originated in 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Originated in 2022 | ||||||||||||||||||||||||||||
| Originated in 2021 | ||||||||||||||||||||||||||||
| Originated in 2020 | ||||||||||||||||||||||||||||
| Originated in 2019 | ||||||||||||||||||||||||||||
| Originated Prior to 2019 | ||||||||||||||||||||||||||||
| Revolving | ||||||||||||||||||||||||||||
| Revolving Loans Converted to Term | ||||||||||||||||||||||||||||
| Total Consumer and Other | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Total Loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the credit quality indicators, disaggregated by loan segment, as of December 31, 2022 (prior to the adoption of ASU 2016-13):
| December 31, 2022 | ||||||||||||||||||||
| Pass | Special Mention | Substandard | Doubtful | |||||||||||||||||
| (Risk Grade 10-45) | (Risk Grade 50) | (Risk Grade 60) | (Risk Grade 70) | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Construction | ||||||||||||||||||||
| Residential | ||||||||||||||||||||
| Total Real Estate Loans | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Consumer and Other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The above classifications follow regulatory guidelines and can generally be described as follows:
| ● | Pass loans are of satisfactory quality. |
| ● | Special mention loans have an existing weakness that could cause future impairment, including the deterioration of financial ratios, past due status, questionable management capabilities and possible reduction in the collateral values. |
| ● | Substandard loans have an existing specific and well-defined weakness that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary. |
| ● | Doubtful loans have specific weaknesses that are severe enough to make collection or liquidation in full highly questionable and improbable. |
As of June 30, 2023, and December 31, 2022, loan balances outstanding more than 90 days past due and still accruing interest amounted to $
The following tables provide an analysis of the aging of loans and leases as of June 30, 2023, and December 31, 2022. For the year ended December 31, 2022, past due and nonaccrual loan amounts exclude acquired impaired loans, even if contractually past due or if the Company does not expect to receive payment in full, as prior to the adoption of CECL, the Company accreted interest income over the expected life of the loans. With the adoption of CECL and deconstruction of acquired impaired accounting, those amounts are no longer excluded for the period ended June 30, 2023. All loans greater than 90 days past due are generally placed on nonaccrual status.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Aged Analysis of Past Due Loans Receivable
| June 30, 2023 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Recorded | ||||||||||||||||||||||||||||
| Greater | Investment Over | |||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | Than 90 Days | Total | Total Loans | 90 Days Past Due | |||||||||||||||||||||||
| Past Due | Past Due | Past Due | Past Due | Current | Receivable | and Still Accruing | ||||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||
| Total Real Estate Loans | ||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||
| Consumer and Other | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Recorded | ||||||||||||||||||||||||||||
| Greater | Investment Over | |||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | Than 90 Days | Total | Total Loans | 90 Days Past Due | |||||||||||||||||||||||
| Past Due | Past Due | Past Due | Past Due | Current | Receivable | and Still Accruing | ||||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||
| Total Real Estate Loans | ||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||
| Consumer and Other | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Upon adoption of ASU 2016-13, the Company eliminated the pooling of purchased impaired credit loans. As a result, $
| June 30, | January 1, | December 31, | ||||||||||
| 2023 | 2023 | 2022 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Real Estate Loans: | ||||||||||||
| Commercial | $ | $ | $ | |||||||||
| Construction | ||||||||||||
| Residential | ||||||||||||
| Total Real Estate Loans | ||||||||||||
| Commercial | ||||||||||||
| Consumer and Other | ||||||||||||
| Total | $ | $ | $ | |||||||||
Accrued interest receivable of $
At June 30, 2023 and December 31, 2022, accrued interest receivable on loans was $
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Long Term Debt –
On March 1, 2022, the Company assumed, in connection with the TCBI acquisition, three tranches of subordinated debt with an aggregate principal balance outstanding of $
Note 8 – Bank Term Funding Program (“BTFP”) –
On March 12, 2023, the Federal Reserve Board developed the BTFP, which offers loans to banks with a term of up to year. The loans are secured by pledging the banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and any other qualifying assets. These pledged securities will be valued at par for collateral purposes. The Bank participated in the BTFP and had outstanding debt of $
Note 9 – Federal Home Loan Bank (“FHLB”) Borrowings –
The Company had outstanding advances from the FHLB of $
One fixed rate loan with an original principal balance of $
One short term, overnight, fixed rate loan of $
On short term, overnight, fixed rate loan of $
One fixed rate loan of $
One fixed rate loan of $
One fixed rate loan of $
One fixed rate loan of $
One fixed rate loan of $
One short term, -day, fixed rate loan of $
The Company had an additional $
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 10 – Leases –
The Bank leases certain branch offices through non-cancelable operating leases with terms that range from to years and contain various renewal options for certain of the leases. Certain leases provide for increases in minimum monthly rental payments as defined by the lease agreement. Rental expense under these agreements was $
Future minimum lease payments under these leases are as follows:
| (Dollars in thousands) | ||||
| July 1, 2023 through June 30, 2024 | $ | |||
| July 1, 2024 through June 30, 2025 | ||||
| July 1, 2025 through June 30, 2026 | ||||
| July 1, 2026 through June 30, 2027 | ||||
| July 1, 2027 through June 30, 2028 | ||||
| July 1, 2028 and Thereafter | ||||
| Total Future Minimum Lease Payments | ||||
| Less Imputed Interest | ( | ) | ||
| Present Value of Lease Liabilities | $ | |||
Note 11 – Commitments and Contingencies –
In the normal course of business, the Bank is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of credit which are not included in the accompanying financial statements. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual amount of those instruments. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. The Bank uses the same credit policies in making such commitments and conditional obligations as it does for instruments that are included in the balance sheet. In the normal course of business, the Bank has made commitments to extend credit of approximately $
In the normal course of business, the Bank is involved in various legal proceedings. In the opinion of management and counsel, the disposition or ultimate resolution of such proceedings would not have a material adverse effect on the Bank’s financial statements.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Preferred Stock –
On September 1, 2022, the Company entered into a securities purchase agreement with certain investors pursuant to which the Company offered and sold shares of its 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with
Note 13 – Fair Value of Financial Instruments –
Fair Value Disclosures
The Company groups its financial assets and liabilities measured at fair value in three levels. Fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 – Includes the most reliable sources and includes quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 – Includes observable inputs. Observable inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) as well as inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). |
| ● | Level 3 – Includes unobservable inputs and should be used only when observable inputs are unavailable. |
Recurring Basis
Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service. This pricing service provides information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications.
The fair values of loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the balance of assets and liabilities measured on a recurring basis as of June 30, 2023, and December 31, 2022. The Company did record any liabilities at fair value for which measurement of the fair value was made on a recurring basis. The Company transferred $
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| June 30, 2023 | ||||||||||||||||
| Available for Sale: | ||||||||||||||||
| U.S. Treasury Securities | $ | $ | $ | $ | ||||||||||||
| U.S. Government Agency Securities | ||||||||||||||||
| Corporate Securities | ||||||||||||||||
| Mortgage-Backed Securities | ||||||||||||||||
| Municipal Securities | ||||||||||||||||
| Loans Held for Sale | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Available for Sale: | ||||||||||||||||
| U.S. Treasury Securities | $ | $ | $ | $ | ||||||||||||
| U.S. Government Agency Securities | ||||||||||||||||
| Corporate Securities | ||||||||||||||||
| Mortgage-Backed Securities | ||||||||||||||||
| Municipal Securities | ||||||||||||||||
| Loans Held for Sale | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Nonrecurring Basis
The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. The Company did record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the impaired loans is measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are Level 3 assets measured using appraisals from external parties of the collateral less any prior liens and adjusted for estimated selling costs. Adjustments may be made by management based on a customized internally developed discounting matrix. Repossessed assets are initially recorded at fair value less estimated cost to sell, which is generally
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| June 30, 2023 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Impaired Loans | $ | $ | $ | $ | ||||||||||||
| Servicing Rights | ||||||||||||||||
| Other Nonperforming Assets | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Impaired Loans | $ | $ | $ | $ | ||||||||||||
| Servicing Rights | ||||||||||||||||
| Other Nonperforming Assets | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Fair Value Financial Instruments
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. In accordance with GAAP, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Short-Term Investments – For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities – Fair value of securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans – The fair value for loans is estimated using discounted cash flow analyses, with interest rates currently being offered for similar loans to borrowers with similar credit rates. Loans with similar classifications are aggregated for purposes of the calculations. The allowance for credit losses, which was used to measure the credit risk, is subtracted from loans.
Cash Value of Bank-Owned Life Insurance (“BOLI”) – The carrying amount approximates its fair value.
Other Equity Securities – The carrying amount approximates its fair value.
Deposits – The fair value of demand deposits and certain money market deposits is the amount payable at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses, with interest rates currently offered for deposits of similar remaining maturities.
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Borrowings – The fair value of FHLB advances and other long-term borrowings is estimated using the rates currently offered for advances of similar maturities. The carrying amount of short-term borrowings maturing within ninety days approximates the fair value.
Commitments to Extend Credit and Standby and Commercial Letters of Credit – The fair values of commitments to extend credit and standby and commercial letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure.
The estimated approximate fair values of the Bank’s financial instruments as of June 30, 2023, and December 31, 2022 are as follows:
| Carrying | Total | |||||||||||||||||||
| Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| June 30, 2023 | ||||||||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and Short-Term Investments | $ | $ | $ | $ | $ | |||||||||||||||
| Securities | ||||||||||||||||||||
| Loans Held for Sale | ||||||||||||||||||||
| Loans - Net | ||||||||||||||||||||
| Servicing Rights | ||||||||||||||||||||
| Cash Value of BOLI | ||||||||||||||||||||
| Other Equity Securities | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | |||||||||||||||
| Borrowings | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| Carrying | Total | |||||||||||||||||||
| Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and Short-Term Investments | $ | $ | $ | $ | $ | |||||||||||||||
| Securities | ||||||||||||||||||||
| Loans Held for Sale | ||||||||||||||||||||
| Loans - Net | ||||||||||||||||||||
| Servicing Rights | ||||||||||||||||||||
| Cash Value of BOLI | ||||||||||||||||||||
| Other Equity Securities | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | |||||||||||||||
| Borrowings | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 14 – Subsequent Events –
In April 2023, the Company entered into a Branch Purchase and Assumption Agreement (“Purchase Agreement”) with Merchants and Farmers Bank & Trust Company in Leesville, Louisiana, to sell its Leesville, Louisiana branch location. The Company will retain the loan accounts held and relocate them to other nearby branches. As of June 30, 2023, total deposits were $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
When we refer in this Form 10-Q to “we,” “our,” “us,” the “Company” and “Business First,” we are referring to Business First Bancshares, Inc. and its consolidated subsidiaries, including b1BANK, which we sometimes refer to as “the Bank,” unless the context indicates otherwise.
The information contained in this Form 10-Q is accurate only as of the date of this form and the dates specified herein.
All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q (this “Report”) and other periodic reports filed by the Company, and other written or oral statements made by us or on our behalf, are “forward-looking statements,” as defined by (and subject to the “safe harbor” protections under) the federal securities laws. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and the banking industry in general. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions of a future or forward-looking nature. These statements involve estimates, assumptions, and risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements.
We believe these factors include, but are not limited to, the following:
| ● |
risks related to the integration of any other acquired businesses, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, risks related to entering a new geographic market, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the ability to retain key employees and maintain relationships with significant customers, the need for additional capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions; |
| ● |
changes in the strength of the United States (“U.S.”) economy in general and the local economy in our local market areas adversely affecting our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral; |
| ● |
economic risks posed by our geographic concentration in Louisiana, the Dallas/Fort Worth metroplex and Houston; |
| ● |
the ability to sustain and continue our organic loan and deposit growth, and manage that growth effectively; |
| ● |
market declines in industries to which we have exposure, such as the volatility in oil prices and downturn in the energy industry that impact certain of our borrowers and investments that operate within, or are backed by collateral associated with, the energy industry; |
| ● |
volatility and direction of interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations; |
| ● |
interest rate risk associated with our business; |
| ● |
changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio; |
| ● |
increased competition in the financial services industry, particularly from regional and national institutions and emerging non-bank competitors; |
| ● |
increased credit risk in our assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of our total loan portfolio; |
| ● |
changes in the value of collateral securing our loans; |
| ● |
deteriorating asset quality and higher loan charge-offs, and the time and effort required to resolve problem assets; |
| ● |
the failure of assumptions underlying the establishment of and provisions made to our allowance for credit losses; |
| ● |
changes in the availability of funds resulting in increased costs or reduced liquidity; |
| ● |
our ability to maintain important deposit customer relationships and our reputation; |
| ● |
a determination or downgrade in the credit quality and credit agency ratings of the securities in our securities portfolio; |
| ● |
increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios; |
| ● |
our ability to prudently manage our growth and execute our strategy; |
| ● |
risks associated with our acquisition and de novo branching strategy; |
| ● |
the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels; |
| ● |
legislative or regulatory developments, including changes in the laws, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters; |
| ● |
government intervention in the U.S. financial system; |
| ● |
changes in statutes and government regulations or their interpretations applicable to us, including changes in tax requirements and tax rates; |
| ● |
natural disasters and adverse weather, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, epidemics and pandemics such as coronavirus, and other matters beyond our control; and |
| ● |
other risks and uncertainties listed from time to time in our reports and documents filed with the U.S. Securities and Exchange Commission (“SEC”). |
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. Additional information on these and other risk factors can be found in Item 1A. “Risk Factors” of this Report and in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC.
In the event that one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BUSINESS FIRST
The following discussion and analysis focuses on significant changes in the financial condition of Business First and its subsidiaries from December 31, 2022 to June 30, 2023, and its results of operations for the three and six months ended June 30, 2023. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this report and should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and the notes thereto (the “Notes”) and (ii) our Annual Report on Form 10-K for the year ended December 31, 2022, including the audited consolidated financial statements and notes thereto, management’s discussion and analysis, and the risk factor disclosures contained therein. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that Business First believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Business First assumes no obligation to update any of these forward-looking statements.
Overview
We are a registered financial holding company headquartered in Baton Rouge, Louisiana. Through our wholly-owned subsidiary, b1BANK, a Louisiana state chartered bank, we provide a broad range of financial services tailored to meet the needs of small-to-midsized businesses and professionals. Since our inception in 2006, our priority has been and continues to be creating shareholder value through the establishment of an attractive commercial banking franchise in Louisiana and across our region. We consider our primary market to include the State of Louisiana, the Dallas/Fort Worth metroplex, and Houston. We currently operate out of banking centers and loan production offices across Louisiana and Texas. As of June 30, 2023, we had total assets of $6.5 billion, total loans of $4.9 billion, total deposits of $5.0 billion, and total shareholders’ equity of $601.0 million.
As a financial holding company operating through one reportable operating segment, community banking, we generate most of our revenues from interest income on loans, customer service and loan fees, and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest-earning assets and expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets.
Changes in the market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions, and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in our markets and across our region, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our markets.
Other Developments
Acquisition of Texas Citizens Bancorp, Inc. (“TCBI”)
On October 20, 2021, we entered into a definitive agreement to acquire TCBI, the parent bank holding company for Texas Citizens Bank, National Association, headquartered in Pasadena, Texas. The acquisition was consummated on March 1, 2022. At February 28, 2022, TCBI reported $534.2 million in total assets, $349.5 million in loans and $477.2 million in total deposits.
Preferred Stock Issuance
On September 1, 2022, we entered into a securities purchase agreement with certain investors pursuant to which we offered and sold shares of our 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with no par value, for an aggregate purchase price of $72.0 million. The preferred stock was structured to qualify as additional Tier 1 capital under applicable regulatory capital guidelines. Holders of the preferred stock will be entitled to receive, if, when, and as declared by our board of directors (the “Board”), non-cumulative cash dividends at a rate of 7.50% for the first five years following issuance and thereafter at a variable rate equal to the then current 3-month secured overnight financing rate (“SOFR”), reset quarterly, plus 470 basis points. The preferred stock has a perpetual term and may not be redeemed, except under certain circumstances, under the first five years of issuance.
Public Offering
On October 12, 2022, we entered into an underwriting agreement with Stephens, Inc., a representative of several underwriters, to issue and sell 2,500,000 shares of our common stock, $1.00 par value per share, in an underwritten public offering and a public offering price of $20.00 per share. After deducting underwriting discounts, commissions and offering expenses, the net proceeds of the offering was $47.2 million.
Bank Term Funding Program (“BTFP”)
On March 12, 2023, the Federal Reserve developed the BTFP, which offers loans to banks with a term of up to one year. The loans are secured by pledging the banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and other qualifying assets. These pledged securities are valued at par for collateral purposes. The Bank participated in the BTFP and pledged securities with a remaining par value of $428.9 million as of June 30, 2023. The Bank had outstanding BTFP debt of $300.0 million at June 30, 2023.
Federal Reserve Bank’s Discount Window
On April 11, 2023, the Bank opened two new lines of credit for additional contingent liquidity, totaling $991.3 million as of June 30, 2023, through the Federal Reserve discount window. The Bank has not yet drawn on either of the lines of credit as of the date of this report.
Changes in Critical Accounting Policies and Critical Accounting Estimates
Effective January 1, 2023, the Company adopted ASU 2016-13, Financial Instrument – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments related to the impairment of financial instruments. This guidance, commonly referred to as Current Expected Credit Loss (“CECL”), changes impairment recognition to a model that is based on expected losses rather than incurred losses. The allowance for credit losses is considered a critical accounting policy and a critical accounting estimate. The allowance for credit losses is established for current expected credit losses on the Company’s loan portfolio, including unfunded credit commitments. Prior to January 1, 2023, the allowance for credit losses was established based on an incurred loss model. Upon the adoption of CECL, certain loan classification and segmentation categories were changed to align with the requirements of the standard and more effectively model the CECL estimate. The updated CECL segmentation is reflected in the disclosures beginning January 1, 2023, and prior period classifications have been adjusted to reflect CECL segmentations. Results from periods prior to January 1, 2023, are presented using the previously applicable GAAP. For more information see Note 1 and Note 6 to the consolidated financial statements contained in this report.
Financial Highlights
The financial highlights as of and for the three and six months ended June 30, 2023, include:
| • |
Total assets of $6.5 billion, a $464.2 million, or 7.7%, increase from December 31, 2022. |
| • |
Total loans held for investment of $4.9 billion, a $292.6 million, or 6.4%, increase from December 31, 2022. |
| • |
Total deposits of $5.0 billion, a $194.1 million, or 4.0%, decrease from December 31, 2022. |
| • |
Net income available to common shareholders of $32.1 million for the six months ended June 30, 2023, a $9.6 million, or 42.6%, increase from the six months ended June 30, 2022. |
| • |
Net interest income of $106.1 million for the six months ended June 30, 2023, an increase of $16.0 million, or 17.8%, from the six months ended June 30, 2022. |
| • |
Allowance for loan losses of 0.86% of total loans held for investment, compared to 0.83% as of December 31, 2022, and a ratio of nonperforming loans to total loans held for investment of 0.36%, compared to 0.25% as of December 31, 2022. |
| • |
Earnings per common share for the first six months of 2023 of $1.28 per basic common share and $1.27 per diluted common share, compared to $1.03 per basic and diluted common share for the first six months of 2022. |
| • |
Return on average assets of 1.04% over the first six months of 2023, compared to 0.88% for the first six months of 2022. |
| • |
Return on average equity of 12.39% over the first six months of 2023, compared to 10.12% for the first six months of 2022. |
| • |
Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 9.35%, 8.71%, 10.03% and 12.49%, respectively, compared to 9.49%, 8.68%, 10.07% and 12.75% at December 31, 2022. |
| • |
Book value per common share of $20.87, an increase of 3.1% from $20.25 at December 31, 2022. |
Results of Operations for the Three and Six Months Ended June 30, 2023, and 2022
Performance Summary
For the three months ended June 30, 2023, net income available to common shareholders was $18.4 million, or $0.73 per basic and diluted common share, compared to net income of $13.8 million, or $0.61 per basic and diluted common share, for the three months ended June 30, 2022. Return on average assets, on an annualized basis, increased to 1.18% for the three months ended June 30, 2023, from 1.03% for the three months ended June 30, 2022. Return on average equity, on an annualized basis, increased to 13.99% for the three months ended June 30, 2023, as compared to 12.25% for the three months ended June 30, 2022.
For the six months ended June 30, 2023, net income available to common shareholders was $32.1 million, or $1.28 per basic common share and $1.27 per diluted common share, compared to net income of $22.5 million, or $1.03 per basic and diluted common share, for the six months ended June 30, 2022. Return on average assets, on an annualized basis, increased to 1.04% for the six months ended June 30, 2023, from 0.88% for the six months ended June 30, 2022. Return on average equity, on an annualized basis, increased to 12.39% for the six months ended June 30, 2023, as compared to 10.12% for the six months ended June 30, 2022.
Net Interest Income
Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest sensitive assets and liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact net interest income. The variance driven by the changes in the amount and mix of interest-earning assets and interest-bearing liabilities is referred to as a “volume change.” Changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds are referred to as a “rate change.”
To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. We calculate average assets, liabilities, and equity using a monthly average, and average yield/rate utilizing an actual 365-day count convention.
For the three months ended June 30, 2023, net interest income totaled $53.3 million, and net interest margin and net interest spread were 3.63% and 2.75%, respectively, compared to $49.6 million, 3.99%, and 3.81%, respectively, for the three months ended June 30, 2022. The average yield on the loan portfolio was 6.54% for the three months ended June 30, 2023, compared to 5.11% for the three months ended June 30, 2022, and the average yield on total interest-earning assets was 5.84% for the three months ended June 30, 2023, compared to 4.35% for the three months ended June 30, 2022. For the three months ended June 30, 2023, overall cost of funds (which includes noninterest-bearing deposits) increased 195 basis points compared to the three months ended June 30, 2022, primarily due to the federal reserve increasing rates during 2022 and 2023.
For the six months ended June 30, 2023, net interest income totaled $106.1 million, and net interest margin and net interest spread were 3.69% and 2.85%, respectively, compared to $90.0 million, 3.78%, and 3.61%, respectively, for the six months ended June 30, 2022. The average yield on the loan portfolio was 6.44% for the six months ended June 30, 2023, compared to 4.98% for the six months ended June 30, 2022, and the average yield on total interest-earning assets was 5.75% for the six months ended June 30, 2023, compared to 4.12% for the six months ended June 30, 2022. For the six months ended June 30, 2023, overall cost of funds (which includes noninterest-bearing deposits) increased 180 basis points compared to the six months ended June 30, 2022, primarily due to the federal reserve increasing rates during 2022 and 2023.
The following tables present, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the three and six months ended June 30, 2023, and 2022, interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield. The average total loans reflected below are net of deferred loan fees and discounts. Acquired loans were recorded at fair value at acquisition and accrete/amortize discounts and premiums as an adjustment to yield. Prior to January 1, 2023, and the adoption of ASU 2016-13, acquired impaired loans accreted interest income based on their estimated expected cash flows. Averages presented in the table below, and throughout this report, are month-end averages.
| For the Three Months Ended June 30, |
||||||||||||||||||||||||
| 2023 |
2022 |
|||||||||||||||||||||||
| Average Outstanding Balance |
Interest Earned/Interest Paid |
Average Yield/Rate |
Average Outstanding Balance |
Interest Earned/Interest Paid |
Average Yield/Rate |
|||||||||||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Total loans |
$ | 4,861,783 | $ | 79,223 | 6.54 | % | $ | 3,894,899 | $ | 49,639 | 5.11 | % | ||||||||||||
| Securities |
916,421 | 5,097 | 2.23 | 966,960 | 4,143 | 1.72 | ||||||||||||||||||
| Interest-bearing deposits in other banks |
117,086 | 1,528 | 5.23 | 122,175 | 232 | 0.76 | ||||||||||||||||||
| Total interest-earning assets |
5,895,290 | 85,848 | 5.84 | 4,984,034 | 54,014 | 4.35 | ||||||||||||||||||
| Allowance for loan losses |
(42,010 | ) | (29,945 | ) | ||||||||||||||||||||
| Noninterest-earning assets |
421,376 | 417,550 | ||||||||||||||||||||||
| Total assets |
$ | 6,274,656 | $ | 85,848 | $ | 5,371,639 | $ | 54,014 | ||||||||||||||||
| Liabilities and Shareholders' Equity |
||||||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing deposits |
$ | 3,405,221 | $ | 23,680 | 2.79 | % | $ | 2,981,613 | $ | 2,557 | 0.34 | % | ||||||||||||
| Subordinated debt |
108,619 | 1,251 | 4.62 | 111,107 | 1,300 | 4.69 | ||||||||||||||||||
| Subordinated debt - trust preferred securities |
5,000 | 108 | 8.66 | 5,000 | 52 | 4.17 | ||||||||||||||||||
| Bank Term Funding Program |
384,816 | 4,309 | 4.49 | - | - | - | ||||||||||||||||||
| Advances from FHLB |
298,324 | 3,038 | 4.08 | 171,224 | 506 | 1.19 | ||||||||||||||||||
| First National Bankers Bank ("FNBB") Line of Credit |
- | - | - | 3,333 | 21 | 2.53 | ||||||||||||||||||
| Other borrowings |
22,109 | 136 | 2.47 | 24,927 | 16 | 0.26 | ||||||||||||||||||
| Total interest-bearing liabilities |
4,224,089 | 32,522 | 3.09 | 3,297,204 | 4,452 | 0.54 | ||||||||||||||||||
| Noninterest-bearing liabilities: |
||||||||||||||||||||||||
| Noninterest-bearing deposits |
1,410,983 | 1,596,174 | ||||||||||||||||||||||
| Other liabilities |
40,329 | 27,830 | ||||||||||||||||||||||
| Total noninterest-bearing liabilities |
1,451,312 | 1,624,004 | ||||||||||||||||||||||
| Shareholders' equity: |
||||||||||||||||||||||||
| Common shareholders' equity |
527,325 | 450,431 | ||||||||||||||||||||||
| Preferred equity |
71,930 | - | ||||||||||||||||||||||
| Total shareholders' equity |
599,255 | 450,431 | ||||||||||||||||||||||
| Total liabilities and shareholders' equity |
$ | 6,274,656 | $ | 5,371,639 | ||||||||||||||||||||
| Net interest rate spread (1) |
2.75 | % | 3.81 | % | ||||||||||||||||||||
| Net interest income |
$ | 53,326 | $ | 49,562 | ||||||||||||||||||||
| Net interest margin (2) |
3.63 | % | 3.99 | % | ||||||||||||||||||||
| Overall cost of funds |
2.31 | % | 0.36 | % | ||||||||||||||||||||
(1) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(2) Net interest margin is equal to net interest income divided by average interest-earning assets.
| For the Six Months Ended June 30, |
||||||||||||||||||||||||
| 2023 |
2022 |
|||||||||||||||||||||||
| Average Outstanding Balance |
Interest Earned/Interest Paid |
Average Yield/Rate |
Average Outstanding Balance |
Interest Earned/Interest Paid |
Average Yield/Rate |
|||||||||||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Total loans |
$ | 4,790,843 | $ | 152,991 | 6.44 | % | $ | 3,640,470 | $ | 89,822 | 4.98 | % | ||||||||||||
| Securities |
921,958 | 9,879 | 2.16 | 986,107 | 7,987 | 1.63 | ||||||||||||||||||
| Interest-bearing deposits in other banks |
87,282 | 2,470 | 5.71 | 171,662 | 327 | 0.38 | ||||||||||||||||||
| Total interest-earning assets |
5,800,083 | 165,340 | 5.75 | 4,798,239 | 98,136 | 4.12 | ||||||||||||||||||
| Allowance for credit losses |
(41,772 | ) | (29,602 | ) | ||||||||||||||||||||
| Noninterest-earning assets |
440,549 | 377,235 | ||||||||||||||||||||||
| Total Assets |
$ | 6,198,860 | $ | 165,340 | $ | 5,145,872 | $ | 98,136 | ||||||||||||||||
| Liabilities and Shareholders' Equity |
||||||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing deposits |
$ | 3,372,358 | $ | 42,608 | 2.55 | % | $ | 2,932,228 | $ | 4,820 | 0.33 | % | ||||||||||||
| Subordinated debt |
109,634 | 2,640 | 4.86 | 101,231 | 2,415 | 4.81 | ||||||||||||||||||
| Subordinated debt - trust preferred securities |
5,000 | 206 | 8.31 | 5,000 | 94 | 3.79 | ||||||||||||||||||
| Bank Term Funding Program |
207,411 | 4,689 | 4.56 | - | - | - | ||||||||||||||||||
| Advances from FHLB |
410,348 | 8,880 | 4.36 | 125,800 | 729 | 1.17 | ||||||||||||||||||
| FNBB Line of Credit |
- | - | - | 1,667 | 21 | 2.54 | ||||||||||||||||||
| Other borrowings |
21,502 | 242 | 2.27 | 22,297 | 20 | 0.18 | ||||||||||||||||||
| Total interest-bearing liabilities |
4,126,253 | 59,265 | 2.90 | 3,188,223 | 8,099 | 0.51 | ||||||||||||||||||
| Noninterest-bearing liabilities: |
||||||||||||||||||||||||
| Noninterest-bearing deposits |
1,442,084 | 1,483,095 | ||||||||||||||||||||||
| Other liabilities |
36,601 | 26,338 | ||||||||||||||||||||||
| Total noninterest-bearing liabilities |
1,478,685 | 1,509,433 | ||||||||||||||||||||||
| Shareholders' equity: |
||||||||||||||||||||||||
| Common shareholders' equity |
521,992 | 448,216 | ||||||||||||||||||||||
| Preferred equity |
71,930 | - | ||||||||||||||||||||||
| Total shareholders' equity |
593,922 | 448,216 | ||||||||||||||||||||||
| Total liabilities and shareholders' equity |
$ | 6,198,860 | $ | 5,145,872 | ||||||||||||||||||||
| Net interest rate spread (1) |
2.85 | % | 3.61 | % | ||||||||||||||||||||
| Net interest income |
$ | 106,075 | $ | 90,037 | ||||||||||||||||||||
| Net interest margin (2) |
3.69 | % | 3.78 | % | ||||||||||||||||||||
| Overall cost of funds |
2.15 | % | 0.35 | % | ||||||||||||||||||||
(1) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(2) Net interest margin is equal to net interest income divided by average interest-earning assets.
The following tables present information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For the purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
| For the Three Months Ended June 30, 2023 compared to the Three Months Ended June 30, 2022 |
||||||||||||
| Increase (Decrease) due to change in |
||||||||||||
| Volume |
Rate |
Total |
||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||
| Interest-earning assets: |
||||||||||||
| Total loans |
$ | 15,755 | $ | 13,829 | $ | 29,584 | ||||||
| Securities |
(281 | ) | 1,235 | 954 | ||||||||
| Interest-bearing deposits in other banks |
(66 | ) | 1,362 | 1,296 | ||||||||
| Total increase in interest income |
$ | 15,408 | $ | 16,426 | $ | 31,834 | ||||||
| Interest-bearing liabilities: |
||||||||||||
| Interest-bearing deposits |
$ | 2,946 | $ | 18,177 | $ | 21,123 | ||||||
| Subordinated debt |
(29 | ) | (20 | ) | (49 | ) | ||||||
| Subordinated debt - trust preferred securities |
- | 56 | 56 | |||||||||
| Bank Term Funding Program |
4,309 | - | 4,309 | |||||||||
| Advances from FHLB |
1,294 | 1,238 | 2,532 | |||||||||
| FNBB Line of Credit |
- | (21 | ) | (21 | ) | |||||||
| Other borrowings |
(17 | ) | 137 | 120 | ||||||||
| Total increase in interest expense |
8,503 | 19,567 | 28,070 | |||||||||
| Increase (decrease) in net interest income |
$ | 6,905 | $ | (3,141 | ) | $ | 3,764 | |||||
| For the Six Months Ended June 30, 2023 compared to the Six Months Ended June 30, 2022 |
||||||||||||
| Increase (Decrease) due to change in |
||||||||||||
| Volume |
Rate |
Total |
||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||
| Interest-earning assets: |
||||||||||||
| Total loans |
$ | 36,736 | $ | 26,433 | $ | 63,169 | ||||||
| Securities |
(687 | ) | 2,579 | 1,892 | ||||||||
| Interest-bearing deposits in other banks |
(2,388 | ) | 4,531 | 2,143 | ||||||||
| Total increase in interest income |
$ | 33,661 | $ | 33,543 | $ | 67,204 | ||||||
| Interest-bearing liabilities: |
||||||||||||
| Interest-bearing deposits |
$ | 5,561 | $ | 32,227 | $ | 37,788 | ||||||
| Subordinated debt |
202 | 23 | 225 | |||||||||
| Subordinated debt - trust preferred securities |
- | 112 | 112 | |||||||||
| Bank Term Funding Program |
4,689 | - | 4,689 | |||||||||
| Advances from FHLB |
6,158 | 1,993 | 8,151 | |||||||||
| FNBB Line of Credit |
- | (21 | ) | (21 | ) | |||||||
| Other borrowings |
(9 | ) | 231 | 222 | ||||||||
| Total increase in interest expense |
16,601 | 34,565 | 51,166 | |||||||||
| Increase (decrease) in net interest income |
$ | 17,060 | $ | (1,022 | ) | $ | 16,038 | |||||
Provision for Credit Losses
Our provision for credit losses is a charge to income in order to bring our allowance for credit losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for credit losses see “—Financial Condition—Allowance for Credit Losses.” The provision for credit losses was $538,000 for the three months ended June 30, 2023, and $2.9 million for the same period in 2022. For the six months ended June 30, 2023, and 2022, the provision for credit losses was $3.8 million and $4.6 million, respectively. The lower provision for the both the three and six months ended June 30, 2023, compared to the same periods in 2022 relates primarily to lower loan growth in 2023.
Noninterest Income (“Other Income”)
Our primary sources of noninterest income are service charges on deposit accounts, debit card and automated teller machine (“ATM”) fee income, income from bank-owned life insurance, fees and brokerage commissions and pass-through income from other investments (small business investment company (“SBIC”) partnerships and fintech technology (“Fintech”) funds). The following tables present, for the periods indicated, the major categories of noninterest income:
| For the Three Months Ended June 30, |
||||||||||||
| 2023 |
2022 |
Increase (Decrease) |
||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||
| Noninterest income: |
||||||||||||
| Service charges on deposit accounts |
$ | 2,413 | $ | 2,086 | $ | 327 | ||||||
| Debit card and ATM fee income |
1,646 | 1,657 | (11 | ) | ||||||||
| Bank-owned life insurance income |
547 | 475 | 72 | |||||||||
| Gain on sales of loans |
494 | 186 | 308 | |||||||||
| Loss on sales of investment securities |
(61 | ) | (8 | ) | (53 | ) | ||||||
| Fees and brokerage commissions |
1,791 | 1,749 | 42 | |||||||||
| Mortgage origination income |
56 | 161 | (105 | ) | ||||||||
| Correspondent bank income |
94 | 10 | 84 | |||||||||
| Gain on sales of other real estate owned |
14 | 10 | 4 | |||||||||
| Gain on sales / disposals of other assets |
14 | - | 14 | |||||||||
| Gain on extinguishment of debt |
941 | - | 941 | |||||||||
| Pass-through income from other investments |
2,812 | 52 | 2,760 | |||||||||
| Other |
1,197 | 643 | 554 | |||||||||
| Total noninterest income |
$ | 11,958 | $ | 7,021 | $ | 4,937 | ||||||
| For the Six Months Ended June 30, |
||||||||||||
| 2023 |
2022 |
Increase (Decrease) |
||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||
| Noninterest income: |
||||||||||||
| Service charges on deposit accounts |
$ | 4,694 | $ | 3,891 | $ | 803 | ||||||
| Debit card and ATM fee income |
3,216 | 3,158 | 58 | |||||||||
| Bank-owned life insurance income |
1,071 | 844 | 227 | |||||||||
| Gain on sales of loans |
1,105 | 251 | 854 | |||||||||
| Loss on sales of investment securities |
(62 | ) | (39 | ) | (23 | ) | ||||||
| Fees and brokerage commissions |
3,604 | 3,584 | 20 | |||||||||
| Mortgage origination income |
130 | 370 | (240 | ) | ||||||||
| Correspondent bank income |
131 | 14 | 117 | |||||||||
| Gain on sales of other real estate owned |
223 | 18 | 205 | |||||||||
| Gain (loss) on sales of other assets |
9 | (717 | ) | 726 | ||||||||
| Gain on extinguishment of debt |
941 | - | 941 | |||||||||
| Pass-through income from other investments |
2,985 | 167 | 2,818 | |||||||||
| Other |
2,299 | 1,376 | 923 | |||||||||
| Total noninterest income |
$ | 20,346 | $ | 12,917 | $ | 7,429 | ||||||
Total noninterest income increased $4.9 million, or 70.3%, from the three months ended June 30, 2022. The increase was primarily due to the increase in service charges of $327,000, or 15.7%, the increase in the gain on sales of loans of $308,000, or 165.6%, primarily due to the sale of small business administration (“SBA”) loans, the gain on extinguishment of debt of $941,000 related to the redemption of subordinated debt, and the increase in pass-through income from other equity investments of $2.8 million.
Total noninterest income increased $7.4 million, or 57.5%, from the six months ended June 30, 2022. The increase was primarily due to the increase in service charges of $803,000, or 20.6%, the increase in the gain on sales of loans of $854,000, or 340.2%, primarily due to the sale of small business administration (“SBA”) loans, the gain on extinguishment of debt of $941,000 related to the redemption of subordinated debt, and the increase in pass-through income from other equity investments of $2.8 million, offset by the reduction of $717,000 relating to the disposal of former branch equipment in 2022.
Noninterest Expense (“Other Expense”)
Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships, and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization, professional and regulatory fees, including Federal Deposit Insurance Corporation (“FDIC”) assessments, data processing expenses, and advertising and promotion expenses, among others.
The following tables present, for the periods indicated, the major categories of noninterest expense:
| For the Three Months Ended June 30, |
||||||||||||
| 2023 |
2022 |
Increase (Decrease) |
||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||
| Salaries and employee benefits |
$ | 22,339 | $ | 21,408 | $ | 931 | ||||||
| Non-staff expenses: |
||||||||||||
| Occupancy of bank premises |
2,406 | 2,422 | (16 | ) | ||||||||
| Depreciation and amortization |
1,720 | 1,734 | (14 | ) | ||||||||
| Data processing |
3,035 | 1,886 | 1,149 | |||||||||
| FDIC assessment fees |
1,092 | 661 | 431 | |||||||||
| Legal and professional fees |
961 | 735 | 226 | |||||||||
| Advertising and promotions |
1,226 | 703 | 523 | |||||||||
| Utilities and communications |
720 | 822 | (102 | ) | ||||||||
| Ad valorem shares tax |
965 | 812 | 153 | |||||||||
| Directors' fees |
270 | 212 | 58 | |||||||||
| Other real estate owned expenses and write-downs |
39 | 35 | 4 | |||||||||
| Merger and conversion related expenses |
68 | 615 | (547 | ) | ||||||||
| Other |
4,861 | 4,352 | 509 | |||||||||
| Total noninterest expense |
$ | 39,702 | $ | 36,397 | $ | 3,305 | ||||||
| For the Six Months Ended June 30, |
||||||||||||
| 2023 |
2022 |
Increase (Decrease) |
||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||
| Salaries and employee benefits |
$ | 45,515 | $ | 41,111 | $ | 4,404 | ||||||
| Non-staff expenses: |
||||||||||||
| Occupancy of bank premises |
4,703 | 4,474 | 229 | |||||||||
| Depreciation and amortization |
3,430 | 3,303 | 127 | |||||||||
| Data processing |
4,520 | 4,002 | 518 | |||||||||
| FDIC assessment fees |
2,025 | 1,404 | 621 | |||||||||
| Legal and professional fees |
1,574 | 1,278 | 296 | |||||||||
| Advertising and promotions |
2,374 | 1,234 | 1,140 | |||||||||
| Utilities and communications |
1,441 | 1,601 | (160 | ) | ||||||||
| Ad valorem shares tax |
1,930 | 1,625 | 305 | |||||||||
| Directors' fees |
539 | 414 | 125 | |||||||||
| Other real estate owned expenses and write-downs |
169 | 49 | 120 | |||||||||
| Merger and conversion related expenses |
171 | 1,426 | (1,255 | ) | ||||||||
| Other |
9,990 | 8,196 | 1,794 | |||||||||
| Total noninterest expense |
$ | 78,381 | $ | 70,117 | $ | 8,264 | ||||||
Total noninterest expense increased $3.3 million, or 9.1%, from the three months ended June 30, 2022, primarily attributed to a $931,000, or 4.3%, increase in salaries and employee benefits, and a $1.1 million, or 60.9%, increase in data processing expenses. The increase in data processing costs was attributable to $715,000 in charges paid in the second quarter of 2023 due to an error identified by our data processor in their billing system.
Total noninterest expense increased $8.3 million, or 11.8%, from the six months ended June 30, 2022, primarily attributed to a $4.4 million, or 10.7%, increase in salaries and employee benefits, a $1.1 million, or 92.4%, increase in advertising and promotions, and partially offset by the reduction of $1.3 million, or 88.0%, in merger and conversion related expenses.
Income Tax Expense
The amount of income tax expense is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
For the three months ended June 30, 2023, income tax expense totaled $5.3 million, an increase of $1.8 million, or 52.3%, compared to $3.5 million for the same period in 2022. For the six months ended June 30, 2023, income tax expense totaled $9.5 million, an increase of $3.7 million, or 64.4%, compared to $5.8 million for the same period in 2022. Our effective tax rates for the three months ended June 30, 2023, and 2022 were 21.2% and 20.2%, respectively. For the six months ended June 30, 2023, and 2022, our effective tax rates were 21.5% and 20.5%, respectively.
Financial Condition
Our total assets increased $464.2 million, or 7.7%, from December 31, 2022, to June 30, 2023, due primarily from the increase in our loan portfolio.
Loan Portfolio
Our primary source of income is interest on loans to individuals, professionals and small-to-midsized businesses located in our markets. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning asset base.
As of June 30, 2023, total loans, excluding mortgage loans held for sale, were $4.9 billion, an increase of $292.6 million, or 6.4%, compared to $4.6 billion as of December 31, 2022. The increase was primarily due to our Dallas/Fort Worth, North Louisiana and New Orleans regions which accounted for 88.2% of the loan growth based on unpaid principal balances. Additionally, $435,000, and $304,000 in loans were classified as loans held for sale as of June 30, 2023, and December 31, 2022, respectively.
Total loans held for investment as a percentage of total deposits were 97.7% and 95.6% as of June 30, 2023, and December 31, 2022, respectively. Total loans held for investment as a percentage of total assets were 75.9% and 76.9% as of June 30, 2023, and December 31, 2022, respectively.
The following table summarizes our loan portfolio by type of loan as of the dates indicated:
| As of June 30, 2023 (Unaudited) |
As of December 31, 2022 |
|||||||||||||||
| Amount |
Percent |
Amount |
Percent |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Real Estate Loans: |
||||||||||||||||
| Commercial |
$ | 2,132,044 | 43.5 | % | $ | 2,020,406 | 43.9 | % | ||||||||
| Construction |
719,080 | 14.7 | 722,074 | 15.7 | ||||||||||||
| Residential |
675,462 | 13.8 | 656,378 | 14.2 | ||||||||||||
| Total Real Estate Loans |
3,526,586 | 72.0 | 3,398,858 | 73.8 | ||||||||||||
| Commercial |
1,309,222 | 26.7 | 1,153,873 | 25.0 | ||||||||||||
| Consumer and Other |
62,929 | 1.3 | 53,445 | 1.2 | ||||||||||||
| Total loans held for investment |
$ | 4,898,737 | 100.0 | % | $ | 4,606,176 | 100.0 | % | ||||||||
SBA Paycheck Protection Program (“PPP”) loans accounted for $1.4 million and $2.8 million of the commercial portfolio as of June 30, 2023, and December 31, 2022, respectively.
Real Estate: Commercial loans are extensions of credit secured by owner-occupied and non-owner-occupied collateral. Repayment is generally dependent on the successful operations of the property. General economic conditions may impact the performance of these types of loans, including fluctuations in the value of real estate, vacancy rates, and unemployment trends. Real estate commercial loans also include farmland loans that can be, or are, used for agricultural purposes. These loans are usually repaid through permanent financing, cash flow from the borrower’s ongoing operations, development of the property, or sale of the property.
Real Estate: Commercial loans increased $111.6 million, or 5.5%, to $2.1 billion as of June 30, 2023, from $2.0 billion as of December 31, 2022.
Real Estate: Construction loans include loans to small-to-midsized businesses to construct owner-occupied properties, loans to developers of commercial real estate investment properties and residential developments and, to a lesser extent, loans to individual clients for construction of single-family homes in our market areas. Risks associated with these loans include fluctuations in the value of real estate, project completion risk and changes in market trends. We are also exposed to risk based on the ability of the construction loan borrower to finance the loan or sell the property upon completion of the project, which may be affected by changes in secondary market terms and criteria for permanent financing since the time we funded the loan.
Real Estate: Construction loans decreased $3.0 million, or 0.4%, to $719.1 million as of June 30, 2023, from $722.1 million as of December 31, 2022.
Real Estate: Residential loans include first and second lien 1-4 family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences. The Company is exposed to risk based on fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness, or other personal hardship. Real estate residential loans also include multi-family residential loans originated to provide permanent financing for multi-family residential income producing properties. Repayment of these loans primarily relies on successful rental and management of the property.
Real Estate: Residential loans increased $19.1 million, or 2.9%, to $675.5 million as of June 30, 2023, from $656.4 million as of December 31, 2022.
Commercial loans include general commercial and industrial, or C&I, loans, including commercial lines of credit, working capital loans, term loans, equipment financing, asset acquisition, expansion, and development loans, borrowing base loans, letters of credit and other loan products, primarily in the Company’s target markets that are underwritten based on the borrower’s ability to service the debt from income. Commercial loan risk is derived from the expectation that such loans generally are serviced principally from the operations of the business, and those operations may not be successful. Any interruption or discontinuance of operating cash flows from the business, which may be influenced by events not under the control of the borrower such as economic events and changes in governmental regulations, could materially affect the ability of the borrower to repay the loan.
Commercial loans increased $155.3 million, or 13.5%, to $1.3 billion as of June 30, 2023, from $1.2 billion as of December 31, 2022.
Consumer and other loans include a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. The risk is based on changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship, and fluctuations in the value of the real estate or personal property securing the consumer loan, if any.
Consumer and other loans increased $9.5 million, or 17.7%, to $62.9 million as of June 30, 2023, from $53.4 million as of December 31, 2022.
The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range as of the date indicated are summarized in the following tables:
| As of June 30, 2023 |
||||||||||||||||||||
| One Year or Less |
One Through Five |
Five Through Fifteen Years |
After Fifteen Years |
Total |
||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||
| Real Estate Loans: |
||||||||||||||||||||
| Commercial |
$ | 238,328 | $ | 1,135,550 | $ | 649,450 | $ | 108,716 | $ | 2,132,044 | ||||||||||
| Construction |
311,374 | 327,254 | 66,924 | 13,528 | 719,080 | |||||||||||||||
| Residential |
75,755 | 387,489 | 149,030 | 63,188 | 675,462 | |||||||||||||||
| Total Real Estate Loans |
625,457 | 1,850,293 | 865,404 | 185,432 | 3,526,586 | |||||||||||||||
| Commercial |
529,472 | 535,774 | 243,184 | 792 | 1,309,222 | |||||||||||||||
| Consumer and Other |
32,903 | 25,542 | 4,278 | 206 | 62,929 | |||||||||||||||
| Total loans held for investment |
$ | 1,187,832 | $ | 2,411,609 | $ | 1,112,866 | $ | 186,430 | $ | 4,898,737 | ||||||||||
| Fixed rate loans: |
||||||||||||||||||||
| Real Estate Loans: |
||||||||||||||||||||
| Commercial |
$ | 133,531 | $ | 967,705 | $ | 504,331 | $ | 14,454 | $ | 1,620,021 | ||||||||||
| Construction |
99,165 | 208,961 | 35,882 | 6,970 | 350,978 | |||||||||||||||
| Residential |
47,313 | 339,488 | 92,042 | 13,401 | 492,244 | |||||||||||||||
| Total Real Estate Loans |
280,009 | 1,516,154 | 632,255 | 34,825 | 2,463,243 | |||||||||||||||
| Commercial |
139,881 | 316,396 | 162,296 | - | 618,573 | |||||||||||||||
| Consumer and Other |
23,591 | 18,443 | 3,314 | 163 | 45,511 | |||||||||||||||
| Total fixed rate loans |
$ | 443,481 | $ | 1,850,993 | $ | 797,865 | $ | 34,988 | $ | 3,127,327 | ||||||||||
| Floating rate loans: |
||||||||||||||||||||
| Real Estate Loans: |
||||||||||||||||||||
| Commercial |
$ | 104,797 | $ | 167,845 | $ | 145,119 | $ | 94,262 | $ | 512,023 | ||||||||||
| Construction |
212,209 | 118,293 | 31,042 | 6,558 | 368,102 | |||||||||||||||
| Residential |
28,442 | 48,001 | 56,988 | 49,787 | 183,218 | |||||||||||||||
| Total Real Estate Loans |
345,448 | 334,139 | 233,149 | 150,607 | 1,063,343 | |||||||||||||||
| Commercial |
389,591 | 219,378 | 80,888 | 792 | 690,649 | |||||||||||||||
| Consumer and Other |
9,312 | 7,099 | 964 | 43 | 17,418 | |||||||||||||||
| Total floating rate loans |
$ | 744,351 | $ | 560,616 | $ | 315,001 | $ | 151,442 | $ | 1,771,410 | ||||||||||
| As of December 31, 2022 |
||||||||||||||||||||
| One Year or Less |
One Through Five |
Five Through Fifteen Years |
After Fifteen Years |
Total |
||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||
| Real Estate Loans: |
||||||||||||||||||||
| Commercial |
$ | 229,679 | $ | 1,024,273 | $ | 645,257 | $ | 121,197 | $ | 2,020,406 | ||||||||||
| Construction |
274,027 | 381,218 | 59,813 | 7,016 | 722,074 | |||||||||||||||
| Residential |
69,444 | 370,483 | 157,849 | 58,602 | 656,378 | |||||||||||||||
| Total Real Estate Loans |
573,150 | 1,775,974 | 862,919 | 186,815 | 3,398,858 | |||||||||||||||
| Commercial |
455,809 | 462,414 | 235,333 | 317 | 1,153,873 | |||||||||||||||
| Consumer and Other |
23,391 | 24,823 | 5,021 | 210 | 53,445 | |||||||||||||||
| Total loans held for investment |
$ | 1,052,350 | $ | 2,263,211 | $ | 1,103,273 | $ | 187,342 | $ | 4,606,176 | ||||||||||
| Fixed rate loans: |
||||||||||||||||||||
| Real Estate Loans: |
||||||||||||||||||||
| Commercial |
$ | 124,261 | $ | 885,532 | $ | 508,455 | $ | 9,339 | $ | 1,527,587 | ||||||||||
| Construction |
95,358 | 242,554 | 35,137 | 3,674 | 376,723 | |||||||||||||||
| Residential |
41,512 | 321,796 | 96,648 | 12,341 | 472,297 | |||||||||||||||
| Total Real Estate Loans |
261,131 | 1,449,882 | 640,240 | 25,354 | 2,376,607 | |||||||||||||||
| Commercial |
146,321 | 286,908 | 164,383 | - | 597,612 | |||||||||||||||
| Consumer and Other |
15,113 | 19,147 | 3,884 | 164 | 38,308 | |||||||||||||||
| Total fixed rate loans |
$ | 422,565 | $ | 1,755,937 | $ | 808,507 | $ | 25,518 | $ | 3,012,527 | ||||||||||
| Floating rate loans: |
||||||||||||||||||||
| Real Estate Loans: |
||||||||||||||||||||
| Commercial |
$ | 105,418 | $ | 138,741 | $ | 136,802 | $ | 111,858 | $ | 492,819 | ||||||||||
| Construction |
178,669 | 138,664 | 24,676 | 3,342 | 345,351 | |||||||||||||||
| Residential |
27,932 | 48,687 | 61,201 | 46,261 | 184,081 | |||||||||||||||
| Total Real Estate Loans |
312,019 | 326,092 | 222,679 | 161,461 | 1,022,251 | |||||||||||||||
| Commercial |
309,488 | 175,506 | 70,950 | 317 | 556,261 | |||||||||||||||
| Consumer and Other |
8,278 | 5,676 | 1,137 | 46 | 15,137 | |||||||||||||||
| Total floating rate loans |
$ | 629,785 | $ | 507,274 | $ | 294,766 | $ | 161,824 | $ | 1,593,649 | ||||||||||
Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is generally reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due, or interest may be recognized on a cash basis as long as the remaining book balance of the loan is deemed collectible. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
We have several procedures in place to assist in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our bankers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and the timely resolution of problem assets. We had $19.1 million and $12.8 million in nonperforming assets as of June 30, 2023, and December 31, 2022, respectively. We had $17.5 million in nonperforming loans as of June 30, 2023, compared to $11.4 million as of December 31, 2022. The increase in nonperforming assets from December 31, 2022, to June 30, 2023, is primarily due to the adoption of CECL and the elimination of ASC 310-30 which excluded purchased impaired loans accreting interest income.
The following tables present information regarding nonperforming assets at the dates indicated:
| As of June 30, 2023 (Unaudited) |
As of December 31, 2022 |
|||||||
| (Dollars in thousands) |
||||||||
| Nonaccrual loans |
$ | 17,006 | $ | 11,054 | ||||
| Accruing loans 90 or more days past due |
468 | 335 | ||||||
| Total nonperforming loans |
17,474 | 11,389 | ||||||
| Other nonperforming assets |
29 | 62 | ||||||
| Other real estate owned: |
||||||||
| Commercial real estate, construction, land and land development |
1,199 | 1,199 | ||||||
| Residential real estate |
388 | 173 | ||||||
| Total other real estate owned |
1,587 | 1,372 | ||||||
| Total nonperforming assets |
$ | 19,090 | $ | 12,823 | ||||
| Ratio of nonperforming loans to total loans held for investment |
0.36 | % | 0.25 | % | ||||
| Ratio of nonperforming assets to total assets |
0.30 | 0.21 | ||||||
| Ratio of nonaccrual loans to total loans held for investment |
0.35 | 0.24 | ||||||
| As of June 30, 2023 (Unaudited) |
As of December 31, 2022 |
|||||||
| (Dollars in thousands) |
||||||||
| Nonaccrual loans by category: |
||||||||
| Real Estate Loans: |
||||||||
| Commercial |
$ | 3,081 | $ | 2,644 | ||||
| Construction |
2,423 | 992 | ||||||
| Residential |
7,034 | 4,080 | ||||||
| Total Real Estate Loans |
12,538 | 7,716 | ||||||
| Commercial |
4,235 | 3,150 | ||||||
| Consumer and Other |
233 | 188 | ||||||
| Total |
$ | 17,006 | $ | 11,054 | ||||
Potential Problem Loans
From a credit risk standpoint, we classify loans in one of four categories: pass, special mention, substandard or doubtful. Loans classified as loss are charged-off. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. Ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk of loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk of loss).
Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.
Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.
Credits rated doubtful have all the weaknesses inherent in those rated substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The following tables summarize our internal ratings of loans held for investment as of the dates indicated. See Note 6 of the consolidated financial statements for the presentation of loans in their credit quality categories that is in compliance with the CECL standard.
| As of June 30, 2023 |
||||||||||||||||||||
| Pass |
Special Mention |
Substandard |
Doubtful |
Total |
||||||||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||||||||||
| Real Estate Loans: |
||||||||||||||||||||
| Commercial |
$ | 2,093,233 | $ | 27,893 | $ | 9,485 | $ | 1,433 | $ | 2,132,044 | ||||||||||
| Construction |
714,797 | 605 | 3,333 | 345 | 719,080 | |||||||||||||||
| Residential |
663,461 | 2,447 | 8,875 | 679 | 675,462 | |||||||||||||||
| Total Real Estate Loans |
3,471,491 | 30,945 | 21,693 | 2,457 | 3,526,586 | |||||||||||||||
| Commercial |
1,279,081 | 20,086 | 7,918 | 2,137 | 1,309,222 | |||||||||||||||
| Consumer and Other |
62,554 | 2 | 373 | - | 62,929 | |||||||||||||||
| Total |
$ | 4,813,126 | $ | 51,033 | $ | 29,984 | $ | 4,594 | $ | 4,898,737 | ||||||||||
| As of December 31, 2022 |
||||||||||||||||||||
| Pass |
Special Mention |
Substandard |
Doubtful |
Total |
||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||
| Real Estate Loans: |
||||||||||||||||||||
| Commercial |
$ | 1,972,611 | $ | 35,054 | $ | 10,478 | $ | 2,263 | $ | 2,020,406 | ||||||||||
| Construction |
716,071 | 3,496 | 2,157 | 350 | 722,074 | |||||||||||||||
| Residential |
643,763 | 3,780 | 7,925 | 910 | 656,378 | |||||||||||||||
| Total Real Estate Loans |
3,332,445 | 42,330 | 20,560 | 3,523 | 3,398,858 | |||||||||||||||
| Commercial |
1,137,555 | 6,646 | 6,960 | 2,712 | 1,153,873 | |||||||||||||||
| Consumer and Other |
53,041 | - | 404 | - | 53,445 | |||||||||||||||
| Total |
$ | 4,523,041 | $ | 48,976 | $ | 27,924 | $ | 6,235 | $ | 4,606,176 | ||||||||||
Allowance for Credit Losses
We maintain an allowance for credit losses, which includes both our allowance for loan losses and reserves for unfunded commitments, that represents management’s best estimate of the credit losses and risks inherent in the loan portfolio. In determining the allowance for credit losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for credit losses is based on internally assigned risk classifications of loans, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical credit loss rates. For additional information, see Note 6 to the consolidated financial statements.
In connection with our review of the loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:
| • |
for Real Estate: Commercial loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral, and the volatility of income, property value and future operating results typical for properties of that type; |
| • |
for Real Estate: Construction loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, the experience and ability of the developer, and the loan to value ratio; |
| • |
for Real Estate: Residential real estate loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan to value ratio, and the age, condition and marketability of the collateral; and |
| • |
for Commercial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category, and the value, nature and marketability of collateral; |
As of June 30, 2023, the allowance for credit losses totaled $45.6 million, or 0.93%, of total loans held for investment. As of December 31, 2022, the allowance for credit losses totaled $38.8 million, or 0.84%, of total loans held for investment.
The following tables present, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data:
| As of and For the Six Months Ended June 30, 2023 (Unaudited) |
As of and For the Year Ended December 31, 2022 |
|||||||
| (Dollars in thousands) |
||||||||
| Average loans outstanding (1) |
$ | 4,790,843 | $ | 4,020,436 | ||||
| Gross loans held for investment outstanding end of period |
$ | 4,898,737 | $ | 4,606,176 | ||||
| Allowance for credit losses at beginning of period |
$ | 38,783 | $ | 29,936 | ||||
| Adoption of ASU 2016-13 |
5,857 | - | ||||||
| Provision for credit losses |
3,760 | 10,667 | ||||||
| Charge-offs: |
||||||||
| Real Estate: |
||||||||
| Commercial |
1,827 | 51 | ||||||
| Construction |
1 | 16 | ||||||
| Residential |
42 | 191 | ||||||
| Total Real Estate |
1,870 | 258 | ||||||
| Commercial |
373 | 2,139 | ||||||
| Consumer and other |
724 | 424 | ||||||
| Total charge-offs |
2,967 | 2,821 | ||||||
| Recoveries: |
||||||||
| Real Estate: |
||||||||
| Commercial |
16 | 50 | ||||||
| Construction |
- | 25 | ||||||
| Residential |
7 | 20 | ||||||
| Total Real Estate |
23 | 95 | ||||||
| Commercial |
82 | 739 | ||||||
| Consumer and other |
102 | 167 | ||||||
| Total recoveries |
207 | 1,001 | ||||||
| Net charge-offs |
2,760 | 1,820 | ||||||
| Allowance for credit losses at end of period |
$ | 45,640 | $ | 38,783 | ||||
| Ratio of allowance for credit losses to end of period loans held for investment |
0.93 | % | 0.84 | % | ||||
| Ratio of net charge-offs to average loans |
0.06 | 0.05 | ||||||
| Ratio of allowance for credit losses to nonaccrual loans |
268.38 | 350.85 | ||||||
(1) Excluding loans held for sale
| As of and For the Six Months Ended June 30, 2023 (Unaudited) |
As of and For the Year Ended December 31, 2022 |
As of and For the Six Months Ended June 30, 2022 (Unaudited) |
||||||||||||||||||||||
| Net Charge-offs |
Percent of Average |
Net Charge-offs |
Percent of Average |
Net Charge-offs |
Percent of Average |
|||||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||||||
| Real estate: |
||||||||||||||||||||||||
| Commercial |
$ | 1,811 | 0.04 | % | $ | 1 | 0.00 | % | $ | 22 | 0.00 | % | ||||||||||||
| Construction |
1 | 0.00 | % | (9 | ) | 0.00 | % | (12 | ) | 0.00 | % | |||||||||||||
| Residential |
35 | 0.00 | % | 171 | 0.00 | % | - | 0.00 | % | |||||||||||||||
| Total Real Estate Loans |
1,847 | 0.04 | % | 163 | 0.00 | % | 10 | 0.00 | % | |||||||||||||||
| Commercial |
291 | 0.01 | % | 1,400 | 0.04 | % | 1,235 | 0.03 | % | |||||||||||||||
| Consumer and Other |
622 | 0.01 | % | 257 | 0.01 | % | 112 | 0.01 | % | |||||||||||||||
| Total net charge-offs (recoveries) |
$ | 2,760 | 0.06 | % | $ | 1,820 | 0.05 | % | $ | 1,357 | 0.04 | % | ||||||||||||
Although we believe that we have established our allowance for loan losses in accordance with U.S. generally accepted accounting principles (“GAAP”) and that the allowance for loan losses was adequate to provide for known and estimated losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in our loan portfolio. If we experience economic declines or if asset quality deteriorates, material additional provisions could be required.
The following table shows the allocation of the allowance for credit losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for credit losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category.
| As of June 30, 2023 (Unaudited) |
As of December 31, 2022 |
As of June 30, 2022 (Unaudited) |
||||||||||||||||||||||
| Amount |
Percent to Total |
Amount |
Percent to Total |
Amount |
Percent to Total |
|||||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||||||
| Real estate: |
||||||||||||||||||||||||
| Commercial |
$ | 18,448 | 40.4 | % | $ | 14,922 | 38.5 | % | $ | 13,073 | 39.6 | % | ||||||||||||
| Construction |
10,019 | 22.0 | 5,905 | 15.2 | 5,135 | 15.6 | ||||||||||||||||||
| Residential |
5,484 | 12.0 | 5,367 | 13.8 | 5,197 | 15.8 | ||||||||||||||||||
| Total real estate |
33,951 | 74.4 | 26,194 | 67.5 | 23,405 | 71.0 | ||||||||||||||||||
| Commercial |
11,258 | 24.7 | 11,950 | 30.8 | 8,925 | 27.1 | ||||||||||||||||||
| Consumer and Other |
431 | 0.9 | 639 | 1.7 | 627 | 1.9 | ||||||||||||||||||
| Total allowance for credit losses |
$ | 45,640 | 100.0 | % | $ | 38,783 | 100.0 | % | $ | 32,957 | 100.0 | % | ||||||||||||
Securities
We use our securities portfolio to provide a source of liquidity, an appropriate return on funds invested, manage interest rate risk, meet collateral requirements, and meet regulatory capital requirements. As of June 30, 2023, the carrying amount of investment securities totaled $877.8 million, a decrease of $13.0 million, or 1.5%, compared to $890.8 million as of December 31, 2022. The decrease was primarily due to unrealized losses in the first six months of 2023. Securities represented 13.6% and 14.9% of total assets as of June 30, 2023, and December 31, 2022, respectively.
Our investment portfolio consists entirely of securities classified as available for sale. As a result, the carrying values of our investment securities are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. The following tables summarize the amortized cost and estimated fair value of investment securities as of the dates shown:
| As of June 30, 2023 |
||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||||||
| U.S. treasury securities |
$ | 32,731 | $ | - | $ | 2,508 | $ | 30,223 | ||||||||
| U.S. government agencies |
50,253 | - | 2,821 | 47,432 | ||||||||||||
| Corporate bonds |
49,383 | - | 6,559 | 42,824 | ||||||||||||
| Mortgage-backed securities |
501,470 | 38 | 57,472 | 444,036 | ||||||||||||
| Municipal securities |
346,333 | 37 | 33,111 | 313,259 | ||||||||||||
| Total |
$ | 980,170 | $ | 75 | $ | 102,471 | $ | 877,774 | ||||||||
| As of December 31, 2022 |
||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| U.S. treasury securities |
$ | 32,783 | $ | - | $ | 2,668 | $ | 30,115 | ||||||||
| U.S. government agencies |
50,288 | - | 2,916 | 47,372 | ||||||||||||
| Corporate bonds |
48,475 | 25 | 2,496 | 46,004 | ||||||||||||
| Mortgage-backed securities |
506,671 | 267 | 55,213 | 451,725 | ||||||||||||
| Municipal securities |
347,382 | 11 | 31,858 | 315,535 | ||||||||||||
| Total |
$ | 985,599 | $ | 303 | $ | 95,151 | $ | 890,751 | ||||||||
All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio.
We evaluate our available for sale securities portfolio on a quarterly basis for potential credit-related impairment. We assess potential credit impairment by comparing the fair value of a debt security to its amortized cost basis. If the fair value of a debt security is greater than the amortized cost basis, no impairment is recognized. If the fair value is less than the amortized cost basis, we review the factors to determine if the impairment is credit-related or noncredit-related. For debt securities we intend to sell or are more likely than not required to sell, before the recovery of their amortized cost basis, the difference between fair value and amortized cost is impaired and is recognized through earnings. For debt securities we do not intend to sell or are more likely than not required to sell, prior to expected recovery of amortized cost basis, the credit portion of the impairment is recognized through earnings, with a corresponding entry to an allowance for credit losses, and the noncredit portion is recognized through accumulated other comprehensive income.
The following tables set forth the fair value, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized cost of the securities portfolio as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures.
| As of June 30, 2023 |
||||||||||||||||||||||||||||||||||||||||
| Within One Year |
After One Year but Within Five Years |
After Five Years but Within Ten Years |
After Ten Years |
Total |
||||||||||||||||||||||||||||||||||||
| Amount |
Yield |
Amount |
Yield |
Amount |
Yield |
Amount |
Yield |
Total |
Yield |
|||||||||||||||||||||||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||||||||||||||||||||||||||||||
| U.S. treasury securities |
$ | 9,759 | 1.50 | % | $ | 20,464 | 0.77 | % | $ | - | - | % | $ | - | - | % | $ | 30,223 | 1.00 | % | ||||||||||||||||||||
| U.S. government agencies |
- | - | % | 47,432 | 1.89 | % | - | - | % | - | - | % | 47,432 | 1.89 | % | |||||||||||||||||||||||||
| Corporate bonds |
28 | - | % | 667 | 3.46 | % | 42,129 | 4.61 | % | - | - | % | 42,824 | 4.59 | % | |||||||||||||||||||||||||
| Mortgage-backed securities |
2,529 | 1.19 | % | 50,566 | 1.77 | % | 158,305 | 1.96 | % | 232,636 | 2.22 | % | 444,036 | 2.07 | % | |||||||||||||||||||||||||
| Municipal securities |
15,448 | 1.70 | % | 98,757 | 1.51 | % | 122,822 | 1.89 | % | 76,232 | 2.36 | % | 313,259 | 1.88 | % | |||||||||||||||||||||||||
| Total |
$ | 27,764 | 1.58 | % | $ | 217,886 | 1.59 | % | $ | 323,256 | 2.28 | % | $ | 308,868 | 2.26 | % | $ | 877,774 | 2.08 | % | ||||||||||||||||||||
| As of December 31, 2022 |
||||||||||||||||||||||||||||||||||||||||
| Within One Year |
After One Year but Within Five Years |
After Five Years but Within Ten Years |
After Ten Years |
Total |
||||||||||||||||||||||||||||||||||||
| Amount |
Yield |
Amount |
Yield |
Amount |
Yield |
Amount |
Yield |
Total |
Yield |
|||||||||||||||||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||||||||||||||||||||||
| U.S. treasury securities |
$ | - | - | % | $ | 30,115 | 1.00 | % | $ | - | - | % | $ | - | - | % | $ | 30,115 | 1.00 | % | ||||||||||||||||||||
| U.S. government agencies |
- | - | % | 47,372 | 1.63 | % | - | - | % | - | - | % | 47,372 | 1.63 | % | |||||||||||||||||||||||||
| Corporate bonds |
151 | - | % | 2,500 | 4.08 | % | 43,353 | 4.49 | % | - | - | % | 46,004 | 4.45 | % | |||||||||||||||||||||||||
| Mortgage-backed securities |
2,458 | 0.97 | % | 41,738 | 1.65 | % | 172,301 | 1.69 | % | 235,228 | 1.94 | % | 451,725 | 1.81 | % | |||||||||||||||||||||||||
| Municipal securities |
15,299 | 1.76 | % | 97,064 | 1.44 | % | 120,905 | 1.79 | % | 82,267 | 2.13 | % | 315,535 | 1.77 | % | |||||||||||||||||||||||||
| Total |
$ | 17,908 | 1.64 | % | $ | 218,789 | 1.49 | % | $ | 336,559 | 2.08 | % | $ | 317,495 | 1.99 | % | $ | 890,751 | 1.90 | % | ||||||||||||||||||||
The contractual maturity of mortgage-backed securities, collateralized mortgage obligations and asset-backed securities is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and asset-backed securities are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly paydowns on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 4.56 years with an estimated effective duration of 3.80 years as of June 30, 2023.
As of June 30, 2023, and December 31, 2022, we did not own securities of any one issuer for which aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity as of such respective dates.
As of June 30, 2023, and December 31, 2022, the Company held other equity securities of $34.8 million and $37.5 million, respectively, comprised mainly of FHLB stock, small business investment companies (“SBICs”) and financial technology (“Fintech”) fund investments.
Deposits
We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits.
Total deposits as of June 30, 2023, were $5.0 billion, an increase of $194.1 million, or 4.0%, compared to $4.8 billion as of December 31, 2022. Total uninsured deposits were $1.9 billion, or 38.1%, of total deposits as of June 30, 2023 compared to $1.5 billion, or 31.9%, of total deposits as of December 31, 2022.
Noninterest-bearing deposits as of June 30, 2023, were $1.4 billion compared to $1.5 billion as of December 31, 2022, a decrease of $120.0 million, or 7.7%.
Average deposits for the six months ended June 30, 2023, were $4.8 billion, an increase of $266.6 million, or 5.9%, over the full year average for the year ended December 31, 2022, of $4.5 billion. The average rate paid on total interest-bearing deposits increased over this period from 0.81% for the year ended December 31, 2022, to 2.55% for the six months ended June 30, 2023. The increase in average rates was driven by the federal reserve raising rates during the year ended December 31, 2022, and continuing in the six months ended June 30, 2023. In addition, the stability of noninterest-bearing demand accounts served to reduce the cost of deposits to 1.78% for the six months ended June 30, 2023, compared to 0.54% for the year ended December 31, 2022.
The following table presents the daily average balances and weighted average rates paid on deposits for the periods indicated:
| For the Six Months Ended June 30, 2023 |
For the Year Ended December 31, 2022 |
|||||||||||||||
| Average Balance |
Average Rate |
Average Balance |
Average Rate |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Interest-bearing demand accounts |
$ | 475,307 | 3.31 | % | $ | 298,845 | 1.31 | % | ||||||||
| Negotiable order of withdrawal ("NOW") accounts |
500,331 | 1.17 | % | 536,742 | 0.30 | % | ||||||||||
| Limited access money market accounts and savings |
1,413,666 | 2.30 | % | 1,483,763 | 0.81 | % | ||||||||||
| Certificates and other time deposits > $250k |
383,581 | 3.51 | % | 208,661 | 1.03 | % | ||||||||||
| Certificates and other time deposits < $250k |
599,473 | 3.07 | % | 479,871 | 0.98 | % | ||||||||||
| Total interest-bearing deposits |
3,372,358 | 2.55 | % | 3,007,882 | 0.81 | % | ||||||||||
| Noninterest-bearing demand accounts |
1,442,084 | - | % | 1,539,938 | - | % | ||||||||||
| Total deposits |
$ | 4,814,442 | 1.78 | % | $ | 4,547,820 | 0.54 | % | ||||||||
The ratio of average noninterest-bearing deposits to average total deposits for the six months ended June 30, 2023, and the year ended December 31, 2022, was 30.0% and 33.9%, respectively.
The following table sets forth the contractual maturities of certain certificates of deposit at June 30, 2023:
| Certificates of Deposit More Than $250,000 |
Certificates of Deposit of $100,000 Through $250,000 |
|||||||
| (Dollars in thousands) (Unaudited) |
||||||||
| 3 months or less |
$ | 31,809 | $ | 141,164 | ||||
| More than 3 months but less than 6 months |
164,042 | 125,340 | ||||||
| More than 6 months but less than 12 months |
179,353 | 123,155 | ||||||
| 12 months or more |
220,043 | 66,924 | ||||||
| Total |
$ | 595,247 | $ | 456,583 | ||||
Federal Funds Purchased Lines of Credit Relationships
We maintain Federal Funds Purchased Lines of Credit Relationships with the following correspondent banks and limits as of June 30, 2023:
| Fed Funds Purchase Limits |
||||
| (Dollars in thousands) |
||||
| TIB National Association |
$ | 45,000 | ||
| PNC Bank |
38,000 | |||
| FNBB |
35,000 | |||
| First Horizon Bank |
17,000 | |||
| ServisFirst Bank |
10,000 | |||
| South State Bank |
9,000 | |||
| Total |
$ | 154,000 | ||
We had $14.1 million in outstanding balances at December 31, 2022 and no outstanding balance as of June 30, 2023.
Liquidity and Capital Resources
Liquidity
Liquidity involves our ability to utilize funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the six months ended June 30, 2023, and the year ended December 31, 2022, liquidity needs were primarily met by core deposits, security and loan maturities, and amortizing investment and loan portfolios. In addition, we also utilize brokered deposits, purchased funds from correspondent banks, bank term funding program, and overnight advances from the FHLB. As of June 30, 2023, and December 31, 2022, we maintained six federal funds purchased lines of credit with correspondent banks which provided for extensions of credit with an availability to borrow up to an aggregate of $154.0 million. There was $14.1 million drawn under these lines of credit at December 31, 2022 and none drawn at June 30, 2023. We had an additional $1.4 billion and $1.3 billion of availability through the FHLB at June 30, 2023, and December 31, 2022, respectively.
The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the periods indicated. Average total assets equaled $6.2 billion and $5.5 billion for the six months ended June 30, 2023, and the year ended December 31, 2022, respectively.
| For the Six Months |
For the Year Ended |
|||||||
| Source of Funds: |
||||||||
| Deposits: |
||||||||
| Noninterest-bearing |
23.3 | % | 28.1 | % | ||||
| Interest-bearing |
54.4 | 55.0 | ||||||
| Subordinated debt (excluding trust preferred securities) |
1.8 | 1.9 | ||||||
| Advances from FHLB |
6.6 | 4.9 | ||||||
| Other borrowings |
0.4 | 0.6 | ||||||
| Bank Term Funding Program |
3.3 | - | ||||||
| Other liabilities |
0.6 | 0.7 | ||||||
| Shareholders' equity |
9.6 | 8.8 | ||||||
| Total |
100.0 | % | 100.0 | % | ||||
| Uses of Funds: |
||||||||
| Loans, net of allowance for loan losses |
76.6 | % | 72.9 | % | ||||
| Securities available for sale |
14.9 | 17.5 | ||||||
| Interest-bearing deposits in other banks |
1.4 | 2.1 | ||||||
| Other noninterest-earning assets |
7.1 | 7.5 | ||||||
| Total |
100.0 | % | 100.0 | % | ||||
| Average noninterest-bearing deposits to average deposits |
30.0 | % | 33.9 | % | ||||
| Average loans to average deposits |
99.5 | 88.4 | ||||||
Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average net loans increased 31.5% for the six months ended June 30, 2023, compared to the same period in 2022, impacted by significant growth in our Dallas/Fort Worth region. We predominantly invest excess deposits in overnight deposits with the Federal Reserve, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth. Our securities portfolio had a weighted average life of 4.56 years and an effective duration of 3.80 years as of June 30, 2023. As of December 31, 2022, our securities portfolio had a weighted average life of 4.88 years and an effective duration of 4.09 years.
As of June 30, 2023, we had outstanding $1.3 billion in commitments to extend credit and $45.1 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2022, we had outstanding $1.3 billion in commitments to extend credit and $45.6 million in commitments associated with outstanding standby and commercial letters of credit. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. See “Off Balance Sheet Items” below for additional information.
As of June 30, 2023, and December 31, 2022 we had cash and cash equivalents, including federal funds sold, of $354.8 million and $168.3 million, respectively. We had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature for either period.
Capital Resources
Total shareholders’ equity increased to $601.0 million as of June 30, 2023, compared to $580.5 million as of December 31, 2022, an increase of $20.5 million, or 3.5%. This increase was primarily due to net income of $34.8 million offset with other comprehensive losses of $7.1 million resulting from the after-tax effect of unrealized losses in our investment securities portfolio, and dividends paid on preferred stock and common stock of $8.8 million.
On July 27, 2023, our Board declared a quarterly dividend in the amount of $18.75 per preferred share to the preferred shareholders of record as of August 15, 2023. The dividend is to be paid on August 31, 2023, or as soon as practicable thereafter.
On July 27, 2023, our Board declared a quarterly dividend based upon our financial performance for the three months ended June 30, 2023, in the amount of $0.12 per common share to the common shareholders of record as of August 15, 2023. The dividend is to be paid on August 31, 2023, or as soon as practicable thereafter.
The declaration and payment of dividends to our shareholders, as well as the amounts thereof, are subject to the discretion of the Board and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board. As a holding company, our ability to pay dividends is largely dependent upon the receipt of dividends from our subsidiary, b1BANK. There can be no assurance that we will declare and pay any dividends to our shareholders.
Capital management consists of providing equity to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the holding company and bank levels. As of June 30, 2023, and December 31, 2022, we and b1BANK were in compliance with all applicable regulatory capital requirements, and b1BANK was classified as “well-capitalized,” for purposes of prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all applicable regulatory capital standards applicable to us.
The following table presents the actual capital amounts and regulatory capital ratios for us and b1BANK as of the dates indicated.
| As of June 30, 2023 (Unaudited) |
As of December 31, 2022 |
|||||||||||||||
| Amount |
Ratio |
Amount |
Ratio |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Business First |
||||||||||||||||
| Total capital (to risk weighted assets) |
$ | 727,734 | 12.49 | % | $ | 704,840 | 12.75 | % | ||||||||
| Tier 1 capital (to risk weighted assets) |
584,116 | 10.03 | % | 557,088 | 10.07 | % | ||||||||||
| Common Equity Tier 1 capital (to risk weighted assets) |
507,186 | 8.71 | % | 480,158 | 8.68 | % | ||||||||||
| Tier 1 Leverage capital (to average assets) |
584,116 | 9.35 | % | 557,088 | 9.49 | % | ||||||||||
| b1BANK |
||||||||||||||||
| Total capital (to risk weighted assets) |
$ | 701,950 | 12.06 | % | $ | 657,588 | 11.91 | % | ||||||||
| Tier 1 capital (to risk weighted assets) |
656,310 | 11.27 | % | 618,805 | 11.20 | % | ||||||||||
| Common Equity Tier 1 capital (to risk weighted assets) |
656,310 | 11.27 | % | 618,805 | 11.20 | % | ||||||||||
| Tier 1 Leverage capital (to average assets) |
656,310 | 10.51 | % | 618,805 | 10.55 | % | ||||||||||
Preferred Stock
On September 1, 2022, we entered into a securities purchase agreement with certain investors pursuant to which we offered and sold shares of our 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with no par value, for an aggregate purchase price of $72.0 million. The preferred stock was structured to qualify as additional Tier 1 capital under applicable regulatory capital guidelines. Holders of the preferred stock will be entitled to receive, if, when, and as declared by our Board, non-cumulative cash dividends at a rate of 7.50% for the first five years following issuance and thereafter at a variable rate equal to the then current 3-month secured overnight financing rate (“SOFR”), reset quarterly, plus 470 basis points. The preferred stock has a perpetual term and may not be redeemed, except under certain circumstances, under the first five years of issuance.
Long Term Debt
During the year ended December 31, 2022, as part of the acquisition of TCBI, we assumed $26.4 million in subordinated debt. As part of this debt, we recorded a fair value adjustment premium in the amount of $3.4 million, to accrete over five-to-seven years, with a remaining adjustment of $1.7 million as of June 30, 2023. We recognized $941,000 in gains on the extinguishment of debt during the three months ended June 30, 2023.
FHLB Advances
Advances from the FHLB totaled approximately $362.2 million and $410.1 million at June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, and December 31, 2022, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 4.22% and 3.88%, respectively, and mature within five years. At June 30, 2023, $145.0 million in advances were short term with a rate of 5.37% to 5.50%. At December 31, 2022, $262.0 million in advances were short term with a rate of 4.55%.
Bank Term Funding Program (“BTFP”)
On March 12, 2023, the Federal Reserve launched the BTFP, which offers loans to banks with a term of up to one year. The loans are secured by pledging the banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and any other qualifying assets. These pledged securities will be valued at par for collateral purposes. The Bank participated in the BTFP and had outstanding debt of $300.0 million at June 30, 2023.
Contractual Obligations
The following tables summarize contractual obligations and other commitments to make future payments as of June 30, 2023, and December 31, 2022 (other than non-maturity deposit obligations), which consist of future cash payments associated with our contractual obligations pursuant to our FHLB advances, subordinated debt, revolving line of credit, and non-cancelable future operating leases. Payments related to leases are based on actual payments specified in underlying contracts. Advances from the FHLB totaled approximately $362.2 million and $410.1 million at June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, and December 31, 2022, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 4.22% and 3.88%, respectively, and mature within five years. We participated in the BTFP in March 2023 and as of June 30, 2023, had outstanding debt of $300.0 million, at a fixed rate of 4.38% and set to mature on March 22, 2024. The subordinated debt totaled $103.8 million and $110.7 million at June 30, 2023 and December 31, 2022, respectively. Of this subordinated debt, $25.0 million bears interest at a fixed rate of 6.75% through December 31, 2028 and a floating rate, based on a benchmark rate plus 369 basis points, thereafter through maturity in 2033, $52.5 million of this subordinated debt bears interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031, $3.9 million of this subordinated debt bears interest at a fixed rate of 4.75% through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031. We acquired three separate notes as part of the TCBI acquisition totaling $26.4 million. Of those notes, $10.0 million bears interest at a fixed rate of 6.25% until April 11, 2023, then will reset to a floating interest rate based on a benchmark plus 350 basis points, adjusting quarterly until maturity on April 11, 2028, $7.5 million bears a fixed rate of 6.38% until December 13, 2023, then will reset to a floating interest rate based on a benchmark rate plus 350 basis points, adjusting quarterly, until maturity on December 13, 2028, $8.9 million was called on May 1, 2023 and as of such date, no longer bears interest. Of this $8.9 million note, $5.7 million was extinguished during the three months ended June 30, 2023. As part of valuing these three subordinated notes from TCBI, we incurred a fair value adjustment premium of $3.4 million that will accrete over five-to-seven years, with $1.7 million and $2.9 million remaining at June 30, 2023 and December 31, 2022, respectively. We recognized $941,000 in gains on the extinguishment of this debt during the three months ended June 30, 2023.
| As of June 30, 2023 |
||||||||||||||||||||
| 1 year or less |
More than 1 year but less than 3 years |
3 years or more but less than 5 years |
5 years or more |
Total |
||||||||||||||||
| (Dollars in thousands) (Unaudited) |
||||||||||||||||||||
| Non-cancelable future operating leases |
$ | 1,863 | $ | 5,915 | $ | 3,908 | $ | 4,112 | $ | 15,798 | ||||||||||
| Time deposits |
916,853 | 288,824 | 44,469 | 21 | 1,250,167 | |||||||||||||||
| Subordinated debt (including premium) |
3,947 | 460 | 439 | 98,976 | 103,822 | |||||||||||||||
| Advances from FHLB |
145,000 | 50,875 | 166,287 | - | 362,162 | |||||||||||||||
| BTFP |
300,000 | - | - | - | 300,000 | |||||||||||||||
| Subordinated debt - trust preferred securities |
- | - | - | 5,000 | 5,000 | |||||||||||||||
| Securities sold under agreements to repurchase |
23,230 | - | - | - | 23,230 | |||||||||||||||
| Standby and commercial letters of credit |
40,769 | 4,275 | 71 | 25 | 45,140 | |||||||||||||||
| Commitments to extend credit |
649,315 | 327,993 | 150,485 | 126,196 | 1,253,989 | |||||||||||||||
| Total |
$ | 2,080,977 | $ | 678,342 | $ | 365,659 | $ | 234,330 | $ | 3,359,308 | ||||||||||
| As of December 31, 2022 |
||||||||||||||||||||
| 1 year or less |
More than 1 year but less than 3 years |
3 years or more but less than 5 years |
5 years or more |
Total |
||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||
| Non-cancelable future operating leases |
$ | 3,725 | $ | 5,915 | $ | 3,908 | $ | 4,112 | $ | 17,660 | ||||||||||
| Time deposits |
601,980 | 145,606 | 38,971 | 20 | 786,577 | |||||||||||||||
| Subordinated debt (including premium) |
613 | 1,227 | 9,839 | 99,070 | 110,749 | |||||||||||||||
| Advances from FHLB |
262,000 | 875 | 147,225 | - | 410,100 | |||||||||||||||
| Subordinated debt - trust preferred securities |
- | - | - | 5,000 | 5,000 | |||||||||||||||
| Securities sold under agreements to repurchase |
20,208 | - | - | - | 20,208 | |||||||||||||||
| Standby and commercial letters of credit |
18,706 | 26,468 | 377 | - | 45,551 | |||||||||||||||
| Commitments to extend credit |
654,067 | 342,844 | 200,971 | 147,288 | 1,345,170 | |||||||||||||||
| Total |
$ | 1,561,299 | $ | 522,935 | $ | 401,291 | $ | 255,490 | $ | 2,741,015 | ||||||||||
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized in the tables above. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. The credit risk to us in issuing letters of credit is essentially the same as that involved in extending loan facilities to our customers.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer.
Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. Other than back-to-back customer interest rate swaps, we do not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial futures contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Our exposure to interest rate risk is reviewed by the asset-liability committee of b1BANK, in accordance with policies approved by our board of directors. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.
We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as prepayment assumptions, maturity data and call options within the investment portfolio. Average lives of non-maturity deposit accounts are based on standard regulatory decay assumptions and are also incorporated into the model. Model assumptions are revised and updated as more accurate information becomes available. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various management strategies.
On at least a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Internal policy regarding interest rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 5% for a 100 basis point shift, 10% for a 200 basis point shift, and 12.5% for a 300 basis point shift. Internal policy regarding interest rate simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated fair value of equity at risk for the subsequent one-year period should not decline by more than 10% for a 100 basis point shift, 15% for a 200 basis point shift, and 25% for a 300 basis point shift.
The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated:
| As of June 30, 2023 |
As of December 31, 2022 |
||||||||||||||||
| Change in Interest Rates (Basis Points) |
Percent Change in Net Interest Income |
Percent Change in Fair Value of Equity |
Percent Change in Net Interest Income |
Percent Change in Fair Value of Equity |
|||||||||||||
| +300 |
(4.40 | %) | (4.31 | %) | (8.60 | %) | (5.55 | %) | |||||||||
| +200 |
(2.90 | %) | (2.66 | %) | (5.90 | %) | (3.65 | %) | |||||||||
| +100 |
(1.50 | %) | (1.04 | %) | (3.50 | %) | (1.94 | %) | |||||||||
| Base |
- | % | - | % | - | % | - | % | |||||||||
| -100 | (0.40 | %) | 1.25 | % | (0.70 | %) | 1.76 | % | |||||||||
| -200 | (2.50 | %) | 2.27 | % | (2.30 | %) | 3.38 | % | |||||||||
The results are primarily due to the balance sheet mix and behavior of demand, money market and savings deposits during such rate fluctuations. The model also assumes no management intervention. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various strategies.
Impact of Inflation
Our consolidated financial statements and related notes included elsewhere in this statement have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.
Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.
Non-GAAP Financial Measures
Our accounting and reporting policies conform to GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.
This discussion and analysis section includes certain non-GAAP financial measures (e.g., referenced as “core” or “tangible”) intended to supplement, not substitute for, comparable GAAP measures. These measures typically adjust income available to common shareholders for certain significant activities or transactions that in management’s opinion can distort period-to-period comparisons of Business First’s performance. Transactions that are typically excluded from non-GAAP measures include realized and unrealized gains/losses on former bank premises and equipment, gains/losses on sales of securities, and acquisition-related expenses (including, but not limited to, legal costs, system conversion costs, severance and retention payments, etc.). The measures also typically adjust goodwill and certain intangible assets from book value and shareholders’ equity.
Management believes presentations of these non-GAAP financial measures provide useful supplemental information that is essential to a proper understanding of the operating results of the Company’s core business. These non-GAAP disclosures are not necessarily comparable to non-GAAP measures that may be presented by other companies. You should understand how such other banking organizations calculate their financial metrics or with names similar to the non-GAAP financial measures we have discussed in this statement when comparing such non-GAAP financial measures.
Core Net Income. Core net income available to common shareholders, which excludes certain income and expenses, for the three months ended June 30, 2023, was $17.7 million, or $0.70 per diluted common share, compared to core net income available to common shareholders of $14.6 million, or $0.64 per diluted common share, for the three months ended June 30, 2022. Notable noncore events impacting earnings for the three months ended June 30, 2023, included $941,000 in a gain on the extinguishment of debt due to the premium associated with the debt from the TCBI acquisition in 2022, which was attributed to the $5.7 million subordinated debt redemption, compared to $708,000 in acquisition-related expenses and $270,000 in expenses attributable to storm repairs (primarily related to storms in 2021) for the same period in 2022.
For the six months ended June 30, 2023, core net income available to common shareholders was $31.5 million, or $1.25 per diluted common share, compared to core net income available to common shareholders of $24.8 million, or $1.14 per diluted common share, for the six months ended June 30, 2022. Notable noncore events impacting earnings for the six months ended June 30, 2023, included $941,000 in a gain on the extinguishment of debt due to the premium associated with the debt from the TCBI acquisition in 2022, which was attributed to the $5.7 million subordinated debt redemption and $171,000 in acquisition-related expenses, compared to the six months ended June 30, 2022, included the incurrence of losses of $717,000 on disposals of former bank premises and equipment included in other income, $1.5 million in acquisition-related expenses and $501,000 in expenses attributable to storm repairs (primarily related to storms in 2021) for the same period in 2022.
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| (Dollars in thousands, except per share data) (Unaudited) |
||||||||||||||||
| Interest Income: |
||||||||||||||||
| Interest income |
$ | 85,848 | $ | 54,014 | $ | 165,340 | $ | 98,136 | ||||||||
| Core interest income |
85,848 | 54,014 | 165,340 | 98,136 | ||||||||||||
| Interest Expense: |
||||||||||||||||
| Interest expense |
32,522 | 4,452 | 59,265 | 8,099 | ||||||||||||
| Core interest expense |
32,522 | 4,452 | 59,265 | 8,099 | ||||||||||||
| Provision for Credit Losses: |
||||||||||||||||
| Provision for credit losses |
538 | 2,945 | 3,760 | 4,562 | ||||||||||||
| Core provision expense |
538 | 2,945 | 3,760 | 4,562 | ||||||||||||
| Other Income: |
||||||||||||||||
| Other income |
11,958 | 7,021 | 20,346 | 12,917 | ||||||||||||
| Losses on former bank premises and equipment |
- | - | - | 717 | ||||||||||||
| Losses on sale of securities |
61 | 8 | 62 | 39 | ||||||||||||
| Gain on extinguishment of debt |
(941 | ) | - | (941 | ) | - | ||||||||||
| Core other income |
11,078 | 7,029 | 19,467 | 13,673 | ||||||||||||
| Other Expense: |
||||||||||||||||
| Other expense |
39,702 | 36,397 | 78,381 | 70,117 | ||||||||||||
| Acquisition-related expenses (2) |
(68 | ) | (708 | ) | (171 | ) | (1,519 | ) | ||||||||
| Occupancy and bank premises - storm repair |
- | (270 | ) | - | (501 | ) | ||||||||||
| Core other expense |
39,634 | 35,419 | 78,210 | 68,097 | ||||||||||||
| Pre-Tax Income: |
||||||||||||||||
| Pre-tax income |
25,044 | 17,241 | 44,280 | 28,275 | ||||||||||||
| Losses on former bank premises and equipment |
- | - | - | 717 | ||||||||||||
| Losses on sale of securities |
61 | 8 | 62 | 39 | ||||||||||||
| Gain on extinguishment of debt |
(941 | ) | - | (941 | ) | - | ||||||||||
| Acquisition-related expenses (2) |
68 | 708 | 171 | 1,519 | ||||||||||||
| Occupancy and bank premises - storm repair |
- | 270 | - | 501 | ||||||||||||
| Core pre-tax income |
24,232 | 18,227 | 43,572 | 31,051 | ||||||||||||
| Provision for Income Taxes: (1) |
||||||||||||||||
| Provision for income taxes |
5,305 | 3,484 | 9,516 | 5,787 | ||||||||||||
| Tax on losses on former bank premises and equipment |
- | - | - | 151 | ||||||||||||
| Tax on losses on sale of securities |
13 | 2 | 13 | 9 | ||||||||||||
| Tax on gain on extinguishment of debt |
(199 | ) | - | (199 | ) | - | ||||||||||
| Tax on acquisition-related expenses (2) |
14 | 126 | 20 | 174 | ||||||||||||
| Tax on occupancy and bank premises - storm repair |
- | 57 | - | 106 | ||||||||||||
| Core provision for income taxes |
5,133 | 3,669 | 9,350 | 6,227 | ||||||||||||
| Preferred Dividends |
||||||||||||||||
| Preferred dividends |
1,350 | - | 2,700 | - | ||||||||||||
| Core preferred dividends |
1,350 | - | 2,700 | - | ||||||||||||
| Net Income Available to Common Shareholders: |
||||||||||||||||
| Net income available to common shareholders |
18,389 | 13,757 | 32,064 | 22,488 | ||||||||||||
| Losses on former bank premises and equipment , net of tax |
- | - | - | 566 | ||||||||||||
| Losses on sale of securities, net of tax |
48 | 6 | 49 | 30 | ||||||||||||
| Gain on extinguishment of debt, net of tax |
(742 | ) | - | (742 | ) | - | ||||||||||
| Acquisition-related expenses (2), net of tax |
54 | 582 | 151 | 1,345 | ||||||||||||
| Occupancy and bank premises - storm repair, net of tax |
- | 213 | - | 395 | ||||||||||||
| Core net income available to common shareholders |
$ | 17,749 | $ | 14,558 | $ | 31,522 | $ | 24,824 | ||||||||
| Diluted Earnings Per Common Share: |
||||||||||||||||
| Diluted earnings per common share |
$ | 0.73 | $ | 0.61 | $ | 1.27 | $ | 1.03 | ||||||||
| Losses on former bank premises and equipment , net of tax |
- | - | - | 0.03 | ||||||||||||
| Losses on sale of securities, net of tax |
- | - | - | - | ||||||||||||
| Gain on extinguishment of debt, net of tax |
(0.03 | ) | - | (0.03 | ) | - | ||||||||||
| Acquisition-related expenses (2), net of tax |
- | 0.02 | 0.01 | 0.06 | ||||||||||||
| Occupancy and bank premises - storm repair, net of tax |
- | 0.01 | - | 0.02 | ||||||||||||
| Core diluted earnings per common share |
$ | 0.70 | $ | 0.64 | $ | 1.25 | $ | 1.14 | ||||||||
| (1) |
Tax rates, exclusive of certain nondeductible acquisition-related expenses and goodwill, utilized were 21% for both 2023 and 2022. These rates approximate the marginal tax rates for the applicable periods. |
| (2) |
Includes merger and conversion-related expenses and salary and employee benefits. |
Tangible Book Value Per Common Share. Tangible book value per common share is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as shareholders’ equity less preferred stock, goodwill, and core deposit and customer intangible assets, net of accumulated amortization, and (2) tangible book value per common share as tangible common equity divided by shares of common stock outstanding. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share.
The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and presents tangible book value per common share compared to book value per common share:
| As of June 30, 2023 |
As of December 31, 2022 |
|||||||
| (Dollars in thousands, except per share data) (Unaudited) |
||||||||
| Tangible Common Equity |
||||||||
| Total shareholders' equity |
$ | 600,968 | $ | 580,481 | ||||
| Preferred stock |
(71,930 | ) | (71,930 | ) | ||||
| Total common shareholders' equity |
529,038 | 508,551 | ||||||
| Adjustments: |
||||||||
| Goodwill |
(88,543 | ) | (88,543 | ) | ||||
| Core deposit and customer intangibles |
(12,993 | ) | (14,042 | ) | ||||
| Total tangible common equity |
$ | 427,502 | $ | 405,966 | ||||
| Common shares outstanding (1) |
25,344,168 | 25,110,313 | ||||||
| Book value per common shares (1) |
$ | 20.87 | $ | 20.25 | ||||
| Tangible book value per common shares (1) |
16.87 | 16.17 | ||||||
| (1) |
Excludes the dilutive effect, if any, of 237,021 and 184,015 shares of common stock issuable upon exercise of outstanding stock options and restricted stock awards as of June 30, 2023 and December 31, 2022, respectively. |
Tangible Common Equity to Tangible Assets. Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit and customer intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common shareholders’ equity to total assets.
The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and total assets to tangible assets:
| As of June 30, 2023 |
As of December 31, 2022 |
|||||||
| (Dollars in thousands, except per share data) (Unaudited) |
||||||||
| Tangible Common Equity |
||||||||
| Total shareholders' equity |
$ | 600,968 | $ | 580,481 | ||||
| Preferred stock |
(71,930 | ) | (71,930 | ) | ||||
| Total common shareholders' equity |
529,038 | 508,551 | ||||||
| Adjustments: |
||||||||
| Goodwill |
(88,543 | ) | (88,543 | ) | ||||
| Core deposit and customer intangibles |
(12,993 | ) | (14,042 | ) | ||||
| Total tangible common equity |
$ | 427,502 | $ | 405,966 | ||||
| Tangible Assets |
||||||||
| Total Assets |
$ | 6,454,649 | $ | 5,990,460 | ||||
| Adjustments: |
||||||||
| Goodwill |
(88,543 | ) | (88,543 | ) | ||||
| Core deposit and customer intangibles |
(12,993 | ) | (14,042 | ) | ||||
| Total tangible assets |
$ | 6,353,113 | $ | 5,887,875 | ||||
| Common Equity to Total Assets |
8.2 | % | 8.5 | % | ||||
| Tangible Common Equity to Tangible Assets |
6.7 | 6.9 | ||||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Risk identification and management are essential elements for the successful management of our business. In the normal course of business, we are subject to various types of risk, including interest rate, credit, and liquidity risk. We control and monitor these risks with policies, procedures, and various levels of managerial and board oversight. Our objective is to optimize profitability while managing and controlling risk within board approved policy limits. Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets and liabilities. We use our asset liability management policy to control and manage interest rate risk. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensibility and Market Risk” for additional discussion of interest rate risk.
Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors. We use our asset liability management policy and contingency funding plan to control and manage liquidity risk.
Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities, and entering into certain off-balance sheet loan funding commitments. Our primary credit risk is directly related to our loan portfolio. We use our credit policy and disciplined approach to evaluate the adequacy of our allowance for credit losses to control and manage credit risk. Our investment policy limits the degree of the amount of credit risk that we may assume in our investment portfolio. Our principal financial market risks are liquidity risks and exposures to interest rate movements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on such evaluation, our principal executive officer and principal financial officer concluded our disclosure controls and procedures were effective as of the end of the period covered by this Report to provide reasonable assurance that the information we are required to disclose in reports that are filed or furnished under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, including to ensure that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The effectiveness of our, or any, system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, we cannot assure you that our disclosure controls and procedures will detect all errors or fraud.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Management evaluates our exposure to these claims and proceedings individually, and in the aggregate, and provides for potential losses on such litigation if the amount of the loss is estimable and the loss is probable. We are not currently involved in any pending legal proceedings other than routine, nonmaterial proceedings occurring in the ordinary course of business.
In addition to the other information set forth in this Report, we refer you to Item 1A. “Risk Factors” of our Annual Report on Form 10-K for December 31, 2022, filed with the SEC. Other than the risk factors set forth below, there have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for December 31, 2022.
Adverse developments affecting the financial services industry.
Recent bank failures involving Silicon Valley Bank and Signature Bank have resulted in negative market volatility, especially in the financial services sector, which could continue to negatively impact the market price of our stock in the foreseeable future. The failures have also adversely impacted customer confidence in the soundness of smaller community and regional banks. In response, customers may choose to maintain deposits with larger financial institutions or invest their excess cash elsewhere. Significant withdrawals of deposits could stress our liquidity, funding capacity, earnings, and capital. These factors could also limit our access to capital markets and/or significantly increase the pricing of such sources. In addition, these events may result in adverse changes in laws or regulations that govern our operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| (a) |
Not applicable. |
| (b) |
Not applicable. |
| (c) |
Not applicable. |
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
| (a) | Not applicable. |
| (b) | Not applicable. |
| (c) | During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading agreement,” as each term is defined in Item 408(a) of Regulation S-K. |
| Number |
Description |
| 2.1 |
|
| 3.1 |
|
| 3.2 |
|
| 4.1 |
|
| 4.2 |
|
| 31.1 |
|
| 31.2 |
|
| 32.1 |
|
| 101.INS |
Inline XBRL Instance Document* |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document* |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document* |
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document* |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document* |
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * |
Filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant hereby duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BUSINESS FIRST BANCSHARES, INC. |
|
| August 3, 2023 |
/s/ David R. Melville, III |
| David R. Melville, III |
|
| President and Chief Executive Officer |
|
| August 3, 2023 |
/s/ Gregory Robertson |
| Gregory Robertson |
|
| Chief Financial Officer |