bfbi20230630_10q.htm
 
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
  ☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2023
 
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: 001-38447
 
 
BUSINESS FIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
 
 
Louisiana
20-5340628
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
   
500 Laurel Street, Suite 101
Baton Rouge , Louisiana
70801
(Address of principal executive offices)
(Zip Code)
 
( 225 )   248-7600
(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
Common Stock, par value $1.00 per share
BFST
NASDAQ Global Select Market
 
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.     Yes   ☒    No   ☐
 
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).     Yes   ☒    No  ☐
 
 
Table of Contents
 
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
☐
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   ☐     No  ☒
 
As of July 28, 2023, the issuer has outstanding 25,344,168 shares of common stock, par value $1.00 per share.
 
 
 
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BUSINESS FIRST BANCSHARES, INC.
 
PART I - FINANCIAL INFORMATION
4
 
 
 
Item 1.
Financial Statements
4
 
 
 
 
Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022
4
 
 
 
 
Unaudited Consolidated Statements of Income for the three and six months ended June 30, 2023, and 2022
5
 
 
 
 
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023, and 2022
6
 
 
 
 
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2023, and 2022
7
 
 
 
 
Unaudited Consolidated Statements of Cash Flows for the three and six months ended June 30, 2023, and 2022
9
 
 
 
 
Notes to Unaudited Consolidated Financial Statements
11
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
64
 
 
 
Item 4.
Controls and Procedures
64
 
 
PART   II   - OTHER INFORMATION
65
 
 
 
Item 1.
Legal Proceedings
65
 
 
 
Item 1A.
Risk Factors
65
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
65
 
 
 
Item 3.
Defaults Upon Senior Securities
65
 
 
 
Item 4.
Mine Safety Disclosures
65
 
 
 
Item 5.
Other Information
65
 
 
 
Item 6.
Exhibits
66
 
 
Signatures
67
 
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PART I – FINANCIAL INFORMATION
 
Item   1.           Financial Statements
 
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
  $ 180,972     $ 152,740  
Federal Funds Sold
    173,850       15,606  
Securities Available for Sale, at Fair Values (Amortized Cost of $ 980,170 at June 30, 2023 and $ 985,599 at December 31, 2022)
    877,774       890,751  
Mortgage Loans Held for Sale
    435       304  
Loans and Lease Receivable, Net of Allowance for Loan Losses of $ 42,013 at June 30, 2023 and $ 38,178 at December 31, 2022
    4,856,724       4,567,998  
Premises and Equipment, Net
    63,037       63,177  
Accrued Interest Receivable
    26,861       25,666  
Other Equity Securities
    34,824       37,467  
Other Real Estate Owned
    1,587       1,372  
Cash Value of Life Insurance
    95,302       91,958  
Deferred Taxes
    31,553       31,194  
Goodwill
    88,543       88,543  
Core Deposit and Customer Intangible
    12,993       14,042  
Other Assets
    10,194       9,642  
Total Assets
  $ 6,454,649     $ 5,990,460  
                 
LIABILITIES
 
Deposits:
               
Noninterest Bearing
  $ 1,429,376     $ 1,549,381  
Interest Bearing
    3,585,067       3,270,964  
Total Deposits
    5,014,443       4,820,345  
Federal Funds Purchased
    -       14,057  
Securities Sold Under Agreements to Repurchase
    23,230       20,208  
Short Term Borrowings
    9       9  
Bank Term Funding Program
    300,000       -  
Federal Home Loan Bank Borrowings
    362,162       410,100  
Subordinated Debt
    103,822       110,749  
Subordinated Debt - Trust Preferred Securities
    5,000       5,000  
Accrued Interest Payable
    7,666       2,092  
Other Liabilities
    37,349       27,419  
Total Liabilities
    5,853,681       5,409,979  
                 
Commitments and Contingencies (See Note 11)
                   
                 
SHAREHOLDERS' EQUITY
 
 
               
Preferred Stock, No Par Value; 5,000,000 Shares Authorized; 72,010 Shares ($ 1,000 Liquidation Preference) Issued at both June 30, 2023 and December 31, 2022, respectively
    71,930       71,930  
Common Stock, $ 1 Par Value; 50,000,000 Shares Authorized; 25,344,168 and 25,110,313 Shares Issued and Outstanding at June 30, 2023 and December 31, 2022, respectively
    25,344       25,110  
Additional Paid-in Capital
    395,875       393,690  
Retained Earnings
    189,115       163,955  
Accumulated Other Comprehensive Loss
    ( 81,296 )     ( 74,204 )
Total Shareholders' Equity
    600,968       580,481  
Total Liabilities and Shareholders' Equity
  $ 6,454,649     $ 5,990,460  
 
The accompanying notes are an integral part of these financial statements.
 
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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
  $ 79,223     $ 49,639     $ 152,991     $ 89,822  
Interest and Dividends on Non-taxable Securities
    1,101       1,080       2,166       2,124  
Interest and Dividends on Taxable Securities
    3,996       3,063       7,713       5,863  
Interest on Federal Funds Sold and Due From Banks
    1,528       232       2,470       327  
Total Interest Income
    85,848       54,014       165,340       98,136  
Interest Expense:
                               
Interest on Deposits
    23,680       2,557       42,608       4,820  
Interest on Borrowings
    8,842       1,895       16,657       3,279  
Total Interest Expense
    32,522       4,452       59,265       8,099  
Net Interest Income
    53,326       49,562       106,075       90,037  
Provision for Credit Losses
    538       2,945       3,760       4,562  
Net Interest Income after Provision for Credit Losses
    52,788       46,617       102,315       85,475  
Other Income:
                               
Service Charges on Deposit Accounts
    2,413       2,086       4,694       3,891  
Loss on Sales of Securities
    ( 61 )     ( 8 )     ( 62 )     ( 39 )
Gain on Sales of Loans
    494       186       1,105       251  
Other Income
    9,112       4,757       14,609       8,814  
Total Other Income
    11,958       7,021       20,346       12,917  
Other Expenses:
                               
Salaries and Employee Benefits
    22,339       21,408       45,515       41,111  
Occupancy and Equipment Expense
    5,112       4,914       10,113       9,327  
Other Expenses
    12,251       10,075       22,753       19,679  
Total Other Expenses
    39,702       36,397       78,381       70,117  
Income Before Income Taxes
    25,044       17,241       44,280       28,275  
Provision for Income Taxes
    5,305       3,484       9,516       5,787  
Net Income
    19,739       13,757       34,764       22,488  
Preferred Stock Dividends
    1,350       -       2,700       -  
Net Income Available to Common Shareholders
  $ 18,389     $ 13,757     $ 32,064     $ 22,488  
Earnings Per Common Share:
                               
Basic
  $ 0.73     $ 0.61     $ 1.28     $ 1.03  
Diluted
  $ 0.73     $ 0.61     $ 1.27     $ 1.03  
 
The accompanying notes are an integral part of these financial statements.
 
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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
  $ 19,739     $ 13,757     $ 34,764     $ 22,488  
                                 
Other Comprehensive Income (Loss):
                               
Unrealized Loss on Investment Securities
    ( 15,612 )     ( 30,201 )     ( 7,611 )     ( 79,186 )
Unrealized Gain (Loss) on Share of Other Equity Investments
    ( 1,309 )     1,104       ( 1,443 )     1,079  
Reclassification Adjustment for Losses on Sale of AFS Investment Securities Included in Net Income
    61       8       62       39  
Income Tax Effect
    3,562       6,109       1,900       16,511  
Other Comprehensive Loss
    ( 13,298 )     ( 22,980 )     ( 7,092 )     ( 61,557 )
Consolidated Comprehensive Income (Loss)
  $ 6,441     $ ( 9,223 )   $ 27,672     $ ( 39,069 )
 
The accompanying notes are an integral part of these financial statements.
 
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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
  $ -     $ 22,565     $ 345,858     $ 128,168     $ ( 39,754 )   $ 456,837  
Comprehensive Income:
                                               
Net Income
    -       -       -       13,757       -       13,757  
Other Comprehensive Loss
    -       -       -       -       ( 22,980 )     ( 22,980 )
Cash Dividends Declared on Common Stock, $ 0.12 Per Share
    -       -       -       ( 2,693 )     -       ( 2,693 )
Stock Issuance
    -       9       242       -       -       251  
Stock Based Compensation Cost
    -       5       282       -       -       287  
Balances at June 30, 2022
  $ -     $ 22,579     $ 346,382     $ 139,232     $ ( 62,734 )   $ 445,459  
                                                 
Balances at March 31, 2023
  $ 71,930     $ 25,320     $ 394,677     $ 173,761     $ ( 67,998 )   $ 597,690  
Comprehensive Income:
                                               
Net Income
    -       -       -       19,739       -       19,739  
Other Comprehensive Loss
    -       -       -       -       ( 13,298 )     ( 13,298 )
Cash Dividends Declared on Preferred Stock, $ 18.75 Per Share
    -       -       -       ( 1,350 )     -       ( 1,350 )
Cash Dividends Declared on Common Stock, $ 0.12 Per Share
    -       -       -       ( 3,035 )     -       ( 3,035 )
Stock Based Compensation Cost
    -       24       1,198       -       -       1,222  
Balances at June 30, 2023
  $ 71,930     $ 25,344     $ 395,875     $ 189,115     $ ( 81,296 )   $ 600,968  
 
The accompanying notes are an integral part of these financial statements.
 
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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
  $ -     $ 20,400     $ 292,271     $ 121,874     $ ( 1,177 )   $ 433,368  
Comprehensive Income:
                                               
Net Income
    -       -       -       22,488       -       22,488  
Other Comprehensive Loss
    -       -       -       -       ( 61,557 )     ( 61,557 )
Cash Dividends Declared on Common Stock, $ 0.24 Per Share
    -       -       -       ( 5,130 )     -       ( 5,130 )
Stock Issuance
    -       2,079       53,167       -       -       55,246  
Stock Based Compensation Cost
    -       100       944       -       -       1,044  
Balances at June 30, 2022
  $ -     $ 22,579     $ 346,382     $ 139,232     $ ( 62,734 )   $ 445,459  
                                                 
Balances at December 31, 2022
  $ 71,930     $ 25,110     $ 393,690     $ 163,955     $ ( 74,204 )   $ 580,481  
Cumulative Effect of Change in Accounting Principle for Credit Losses
    -       -       -       ( 827 )     -       ( 827 )
Comprehensive Income:
                                               
Net Income
    -       -       -       34,764       -       34,764  
Other Comprehensive Loss
    -       -       -       -       ( 7,092 )     ( 7,092 )
Cash Dividends Declared on Preferred Stock, $ 37.50 Per Share
    -       -       -       ( 2,700 )     -       ( 2,700 )
Cash Dividends Declared on Common Stock, $ 0.24 Per Share
    -       -       -       ( 6,077 )     -       ( 6,077 )
Stock Based Compensation Cost
    -       234       2,185       -       -       2,419  
Balances at June 30, 2023
  $ 71,930     $ 25,344     $ 395,875     $ 189,115     $ ( 81,296 )   $ 600,968  
 
The accompanying notes are an integral part of these financial statements.
 
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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
  $ 34,764     $ 22,488  
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
               
Provision for Credit Losses
    3,760       4,562  
Depreciation and Amortization
    2,381       2,319  
Net Accretion of Purchase Accounting Adjustments
    ( 4,208 )     ( 2,770 )
Stock Based Compensation Cost
    2,419       1,044  
Net Amortization of Securities
    2,200       3,191  
Loss on Sales of Securities
    62       39  
Gain on Sale of Loans
    ( 288 )     ( 251 )
Income on Other Equity Securities
    ( 3,552 )     ( 72 )
Gain on Sale of Other Real Estate Owned, Net of Writedowns
    ( 223 )     ( 18 )
Increase in Cash Value of Life Insurance
    ( 1,071 )     ( 844 )
Deferred Income Tax Expense (Benefit)
    1,762       ( 772 )
Changes in Assets and Liabilities:
               
(Increase) Decrease in Accrued Interest Receivable
    ( 1,195 )     58  
(Increase) Decrease in Other Assets
    ( 552 )     4,470  
Increase (Decrease) in Accrued Interest Payable
    5,574       ( 865 )
Increase in Other Liabilities
    6,908       4,920  
Net Cash Provided by Operating Activities
    48,741       37,499  
                 
Cash Flows From Investing Activities:
               
Purchases of Securities Available for Sale
    ( 36,215 )     ( 77,278 )
Proceeds from Maturities / Sales of Securities Available for Sale
    10,445       29,597  
Proceeds from Paydowns of Securities Available for Sale
    28,936       52,059  
Net Cash Received in Acquisition
    -       163,460  
Purchases of Other Equity Securities
    ( 12,873 )     ( 8,982 )
Redemption of Other Equity Securities
    17,625       2,527  
Purchase of Life Insurance
    ( 2,273 )     ( 15,000 )
Net Increase in Loans
    ( 286,502 )     ( 582,892 )
Net Purchases of Premises and Equipment
    ( 2,241 )     ( 6,412 )
Loss on Disposal of Premises and Equipment
    -       717  
Proceeds from Sales of Other Real Estate
    1,126       609  
Net (Increase) Decrease in Federal Funds Sold
    ( 158,244 )     216,227  
Net Cash Used in Investing Activities
    ( 440,216 )     ( 225,368 )
 
(CONTINUED)
 
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    For the Six Months Ended
 
    June 30,
 
    2023
    2022
 
Cash Flows From Financing Activities:
               
Net Increase in Deposits
    194,098       103,645  
Net Increase (Decrease) in Securities Sold Under Agreements to Repurchase
    3,022       ( 644 )
Net Decrease in Federal Funds Purchased
    ( 14,057 )     -  
Net Advances (Repayments) on Federal Home Loan Bank Borrowings
    ( 47,938 )     171,114  
Net Proceeds on Bank Term Funding Program
    300,000       -  
Issuance of Short Term Borrowings
    -       5,000  
Repayment of Subordinated Debt
    ( 5,700 )     -  
Gain on Extinguishment of Debt
    ( 941 )     -  
Proceeds from Issuance of Common Stock
    -       203  
Payment of Dividends on Preferred Stock
    ( 2,700 )     -  
Payment of Dividends on Common Stock
    ( 6,077 )     ( 5,130 )
Net Cash Provided by Financing Activities
    419,707       274,188  
Net Increase in Cash and Cash Equivalents
    28,232       86,319  
Cash and Cash Equivalents at Beginning of Period
    152,740       68,375  
Cash and Cash Equivalents at End of Period
  $ 180,972     $ 154,694  
                 
Supplemental Disclosures for Cash Flow Information:
               
Cash Payments for:
               
Interest on Deposits
  $ 41,079     $ 5,508  
Interest on Borrowings
  $ 12,612     $ 3,237  
Income Tax Payments
  $ 4,291     $ 2,127  
                 
Supplemental Schedule for Noncash Investing and Financing Activities:
               
Change in the Unrealized Loss on Securities Available for Sale
  $ ( 7,549 )   $ ( 79,147 )
Change in the Unrealized Gain (Loss) on Equity Securities
  $ ( 1,443 )   $ 1,079  
Change in Deferred Tax Effect on the Unrealized Loss on Securities Available for Sale
  $ 1,900     $ 16,511  
Transfer of Loans to Other Real Estate
  $ 1,118     $ 154  
Acquisitions:
               
Fair Value of Tangible Assets Acquired
  $ -     $ 531,658  
Other Intangible Assets Acquired
    -       3,875  
Liabilities Assumed
    -       509,438  
Net Identifiable Assets Acquired Over Liabilities Assumed
  $ -     $ 26,095  
 
The accompanying notes are an integral part of these financial statements.
 
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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 $ 827,000 reduction to retained earnings, after recording the related deferred tax asset adjustment at our effective tax rate. The Company and  b1BANK  are subject to various regulatory capital requirements.  Although the federal banking regulatory agencies have provided relief for an initial capital decrease at adoption of the CECL standard, the Company does  not  intend to opt into the relief as the impact of adoption was  not significant to the Company’s regulatory capital.
 
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.
 
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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.
 
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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.
 
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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 2,069,532 shares of its common stock to the former shareholders of TCBI.  At February 28, 2022, TCBI reported $ 534.2 million in total assets, $ 349.5 million in loans and $ 477.2 million in deposits.
 
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
    2,069,532  
Closing Stock Price on February 28, 2022
  $ 26.19  
Total Stock Issued
  $ 54,201  
Other Consideration, Including Equity Awards
    842  
Total Purchase Price
  $ 55,043  
Net Assets Acquired:
       
Cash and Cash Equivalents
  $ 163,460  
Securities Available for Sale
    370  
Loans and Leases Receivable
    338,027  
Premises and Equipment, Net
    2,776  
Cash Value of Life Insurance
    12,146  
Core Deposit Intangible
    3,875  
Other Assets
    14,731  
Total Assets
    535,385  
         
Deposits
    477,277  
Borrowings
    30,708  
Other Liabilities
    1,006  
Total Liabilities
    508,991  
Net Assets Acquired
    26,394  
Goodwill Resulting from Merger
  $ 28,649  
 
The Company has recorded approximately $ 171,000 and $ 5.2 million of acquisition-related costs within merger and conversion-related expenses and salaries and benefits for the six months ended June 30, 2023, and year ended December 31, 2022.
 
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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  10 years based upon the period over which estimated economic benefits are estimated to be received.
 
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.
 
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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
  $ 19,739     $ 13,757     $ 34,764     $ 22,488  
Less: Preferred Stock Dividends
    1,350       -       2,700       -  
Net Income Available to Common Shares
  $ 18,389     $ 13,757     $ 32,064     $ 22,488  
Denominator:
                               
Weighted Average Common Shares Outstanding
    25,101,683       22,459,603       25,041,124       21,746,973  
Dilutive Effect of Stock Options and RSAs
    231,689       196,571       237,021       169,668  
Weighted Average Dilutive Common Shares
    25,333,372       22,656,174       25,278,145       21,916,641  
                                 
Basic Earnings Per Common Share From Net Income Available to Common Shares
  $ 0.73     $ 0.61     $ 1.28     $ 1.03  
                                 
Diluted Earnings Per Common Share From Net Income Available to Common Shares
  $ 0.73     $ 0.61     $ 1.27     $ 1.03  
 
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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
  $ 32,731     $ -     $ 2,508     $ 30,223  
U.S. Government Agencies
    50,253       -       2,821       47,432  
Corporate Securities
    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 Securities Available for Sale
  $ 980,170     $ 75     $ 102,471     $ 877,774  
 
    December 31, 2022
 
    (Dollars in thousands)
 
            Gross
    Gross
         
    Amortized
    Unrealized
    Unrealized
    Fair
 
    Cost
    Gains
    Losses
    Value
 
U.S. Treasury Securities
  $ 32,783     $ -     $ 2,668     $ 30,115  
U.S. Government Agencies
    50,288       -       2,916       47,372  
Corporate Securities
    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 Securities Available for Sale
  $ 985,599     $ 303     $ 95,151     $ 890,751  
 
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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
  $ -     $ -     $ 30,223     $ 2,508     $ 30,223     $ 2,508  
U.S. Government Agencies
    -       -       47,432       2,821       47,432       2,821  
Corporate Securities
    26,587       3,791       16,237       2,768       42,824       6,559  
Mortgage-Backed Securities
    41,314       1,597       391,178       55,875       432,492       57,472  
Municipal Securities
    49,608       3,201       251,202       29,910       300,810       33,111  
Total Securities Available for Sale
  $ 117,509     $ 8,589     $ 736,272     $ 93,882     $ 853,781     $ 102,471  
 
    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
  $ 9,702     $ 374     $ 20,413     $ 2,294     $ 30,115     $ 2,668  
U.S. Government Agencies
    24,405       595       22,967       2,321       47,372       2,916  
Corporate Securities
    19,564       1,359       6,385       1,137       25,949       2,496  
Mortgage-Backed Securities
    115,692       7,473       324,043       47,740       439,735       55,213  
Municipal Securities
    143,035       10,206       131,944       21,652       274,979       31,858  
Total Securities Available for Sale
  $ 312,398     $ 20,007     $ 505,752     $ 75,144     $ 818,150     $ 95,151  
 
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.
 
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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
  $ 28,306     $ 27,764  
One to Five Years
    235,160       217,886  
Over Five to Ten Years
    363,195       323,256  
Over Ten Years
    353,509       308,868  
Total Securities Available for Sale
  $ 980,170     $ 877,774  
 
At June 30, 2023, the Company had pledged securities with a fair value of $ 386.3 million against our public deposit and repurchase agreements, and $ 394.6 million against our Bank Term Funding Program facility.
 
At June 30, 2023 and December 31, 2022, accrued interest receivable on securities was $ 4.6 million and $ 4.4 million, respectively, and included within accrued interest receivable on the consolidated balance sheets.
 
 
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
  $ 2,132,044     $ 2,020,406  
Construction
    719,080       722,074  
Residential
    675,462       656,378  
Total Real Estate Loans
    3,526,586       3,398,858  
Commercial
    1,309,222       1,153,873  
Consumer and Other
    62,929       53,445  
Total Loans Held for Investment
    4,898,737       4,606,176  
                 
Less:
               
Allowance for Loan Losses
    ( 42,013 )     ( 38,178 )
Net Loans
  $ 4,856,724     $ 4,567,998  
 
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 $ 13.7 million and $ 13.1 million at June 30, 2023 and December 31, 2022, respectively, and are netted in their respective loan categories above.  In addition to loans issued in the normal course of business, the Company considers overdrafts on customer deposit accounts to be loans and reclassifies overdrafts as loans in its consolidated balance sheets.  At both June 30, 2023 and December 31, 2022, overdrafts of $ 2.0 million, have been reclassified to loans.
 
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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 $ 736.4 million and $ 683.3 million at June 30, 2023 and December 31, 2022, respectively.  The Company had servicing rights of $ 1.4 million and $ 1.7 million recorded as of June 30, 2023, and December 31, 2022, respectively, and is recorded within other assets.
 
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.
 
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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
  $ 14,702     $ 5,768     $ 5,354     $ 11,721     $ 633     $ 38,178  
Adoption of ASU 2016-13
    4,823       933       ( 365 )     ( 2,483 )     ( 248 )     2,660  
Beginning Balance After Adoption
    19,525       6,701       4,989       9,238       385       40,838  
Charge-offs
    ( 1,827 )     ( 1 )     ( 42 )     ( 373 )     ( 724 )     ( 2,967 )
Recoveries
    16       -       7       82       102       207  
Provision
    449       1,269       293       1,282       642       3,935  
Ending Balance
  $ 18,163     $ 7,969     $ 5,247     $ 10,229     $ 405     $ 42,013  
                                                 
Reserve for Unfunded Loan Commitments:
                                               
Beginning Balance
  $ 220     $ 137     $ 13     $ 229     $ 6     $ 605  
Adoption of ASU 2016-13
    116       2,113       190       657       121       3,197  
Beginning Balance After Adoption
    336       2,250       203       886       127       3,802  
Provision
    ( 51 )     ( 200 )     34       143       ( 101 )     ( 175 )
Ending Balance
  $ 285     $ 2,050     $ 237     $ 1,029     $ 26     $ 3,627  
                                                 
Total Allowance for Credit Losses
  $ 18,448     $ 10,019     $ 5,484     $ 11,258     $ 431     $ 45,640  
 
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
  $ 1,345     $ -     $ 3,008     $ 1,915  
Construction
    2,348       553       1,424       513  
Residential
    1,601       -       1,558       3  
Total Real Estate Loans
    5,294       553       5,990       2,431  
Commercial
    2,911       1,760       6,096       1,779  
Consumer and Other
    -       -       -       -  
Total
  $ 8,205     $ 2,313     $ 12,086     $ 4,210  
 
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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
  $ 10,515     $ 4,498     $ 4,565     $ 9,016     $ 518     $ 29,112  
Charge-offs
    ( 51 )     ( 16 )     ( 191 )     ( 2,139 )     ( 424 )     ( 2,821 )
Recoveries
    50       25       20       739       167       1,001  
Provision
    4,188       1,261       960       4,105       372       10,886  
Ending Balance
  $ 14,702     $ 5,768     $ 5,354     $ 11,721     $ 633     $ 38,178  
Ending Balance:
                                               
Individually Evaluated for Impairment
  $ 59     $ 21     $ 99     $ 2,020     $ 15     $ 2,214  
Collectively Evaluated for Impairment
  $ 14,643     $ 5,747     $ 5,255     $ 9,701     $ 618     $ 35,964  
Purchased Credit Impaired
  $ -     $ -     $ -     $ -     $ -     $ -  
Loans Receivable:
                                               
Ending Balance
  $ 2,020,406     $ 722,074     $ 656,378     $ 1,153,873     $ 53,445     $ 4,606,176  
Ending Balance:
                                               
Individually Evaluated for Impairment
  $ 3,053     $ 992     $ 4,028     $ 6,442     $ 192     $ 14,707  
Collectively Evaluated for Impairment
  $ 1,989,831     $ 720,129     $ 637,195     $ 1,141,957     $ 52,570     $ 4,541,682  
Purchased Credit Impaired
  $ 27,522     $ 953     $ 15,155     $ 5,474     $ 683     $ 49,787  
 
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.
 
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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
  $ 97,431     $ -     $ -     $ -     $ -     $ 97,431     $ -  
Originated in 2022
    737,026       1,709       -       -       -       738,735       -  
Originated in 2021
    454,027       6,098       74       -       -       460,199       357  
Originated in 2020
    160,247       3,699       11       -       -       163,957       -  
Originated in 2019
    153,506       9,976       454       948       -       164,884       1,447  
Originated Prior to 2019
    421,120       6,411       8,742       485       -       436,758       23  
Revolving
    69,876       -       204       -       -       70,080       -  
Revolving Loans Converted to Term
    -       -       -       -       -       -       -  
Total Real Estate: Commercial
  $ 2,093,233     $ 27,893     $ 9,485     $ 1,433     $ -     $ 2,132,044     $ 1,827  
                                                         
Real Estate: Construction
                                                       
Originated in 2023
  $ 58,661     $ -     $ -     $ -     $ -     $ 58,661     $ -  
Originated in 2022
    366,332       -       65       -       -       366,397       -  
Originated in 2021
    142,951       -       997       -       -       143,948       -  
Originated in 2020
    51,701       32       -       -       -       51,733       -  
Originated in 2019
    22,193       -       1,760       -       -       23,953       -  
Originated Prior to 2019
    24,106       573       511       345       -       25,535       1  
Revolving
    48,853       -       -       -       -       48,853       -  
Revolving Loans Converted to Term
    -       -       -       -       -       -       -  
Total Real Estate: Construction
  $ 714,797     $ 605     $ 3,333     $ 345     $ -     $ 719,080     $ 1  
                                                         
Real Estate: Residential
                                                       
Originated in 2023
  $ 37,466     $ -     $ -     $ -     $ -     $ 37,466     $ -  
Originated in 2022
    169,873       447       255       17       -       170,592       -  
Originated in 2021
    110,897       -       715       -       -       111,612       11  
Originated in 2020
    71,502       385       598       163       -       72,648       1  
Originated in 2019
    63,027       439       977       126       -       64,569       22  
Originated Prior to 2019
    109,050       1,176       5,896       373       -       116,495       7  
Revolving
    101,625       -       434       -       -       102,059       1  
Revolving Loans Converted to Term
    21       -       -       -       -       21       -  
Total Real Estate: Residential
  $ 663,461     $ 2,447     $ 8,875     $ 679     $ -     $ 675,462     $ 42  
                                                         
Commercial
                                                       
Originated in 2023
  $ 163,250     $ 142     $ 10     $ -     $ -     $ 163,402     $ -  
Originated in 2022
    294,438       380       671       -       -       295,489       97  
Originated in 2021
    159,627       5,958       836       16       -       166,437       15  
Originated in 2020
    63,467       4,523       682       46       -       68,718       27  
Originated in 2019
    39,600       920       1,447       1,669       -       43,636       33  
Originated Prior to 2019
    65,902       4,443       3,611       378       -       74,334       -  
Revolving
    492,797       3,720       661       28       -       497,206       201  
Revolving Loans Converted to Term
    -       -       -       -       -       -       -  
Total Commercial
  $ 1,279,081     $ 20,086     $ 7,918     $ 2,137     $ -     $ 1,309,222     $ 373  
                                                         
Consumer and Other
                                                       
Originated in 2023
  $ 6,288     $ -     $ -     $ -     $ -     $ 6,288     $ -  
Originated in 2022
    9,430       -       18       -       -       9,448       12  
Originated in 2021
    4,941       -       62       -       -       5,003       20  
Originated in 2020
    2,512       -       107       -       -       2,619       5  
Originated in 2019
    2,805       -       66       -       -       2,871       3  
Originated Prior to 2019
    17,144       2       103       -       -       17,249       58  
Revolving
    19,329       -       17       -       -       19,346       626  
Revolving Loans Converted to Term
    105       -       -       -       -       105       -  
Total Consumer and Other
  $ 62,554     $ 2     $ 373     $ -     $ -     $ 62,929     $ 724  
                                                         
Total Loans
  $ 4,813,126     $ 51,033     $ 29,984     $ 4,594     $ -     $ 4,898,737     $ 2,967  
 
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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
  $ 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  
 
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 $ 468,000 and $ 335,000 , respectively.  As of June 30, 2023, and December 31, 2022, loan balances outstanding on nonaccrual status amounted to $ 17.0 million and $ 11.1 million, respectively.  The Bank considers all loans more than 90 days past due as nonperforming loans.
 
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. 
 
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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
  $ 1,742     $ 78     $ 2,538     $ 4,358     $ 2,127,686     $ 2,132,044     $ -  
Construction
    2,364       206       2,145       4,715       714,365       719,080       138  
Residential
    1,938       1,192       3,050       6,180       669,282       675,462       43  
Total Real Estate Loans
    6,044       1,476       7,733       15,253       3,511,333       3,526,586       181  
Commercial
    2,148       29       3,989       6,166       1,303,056       1,309,222       263  
Consumer and Other
    258       27       213       498       62,431       62,929       24  
Total
  $ 8,450     $ 1,532     $ 11,935     $ 21,917     $ 4,876,820     $ 4,898,737     $ 468  
 
    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
  $ 1,491     $ 210     $ 1,681     $ 3,382     $ 2,017,024     $ 2,020,406     $ 98  
Construction
    320       41       638       999       721,075       722,074       -  
Residential
    1,590       423       1,781       3,794       652,584       656,378       -  
Total Real Estate Loans
    3,401       674       4,100       8,175       3,390,683       3,398,858       98  
Commercial
    1,183       1,934       2,186       5,303       1,148,570       1,153,873       222  
Consumer and Other
    295       28       182       505       52,940       53,445       15  
Total
  $ 4,879     $ 2,636     $ 6,468     $ 13,983     $ 4,592,193     $ 4,606,176     $ 335  
 
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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, $ 7.0 million of purchased credit deterioration loans were recognized as non-accrual loans as of January 1, 2023.  The following table presents non-accrual loans by segment as of June 30, 2023, January 1, 2023, and December 31, 2022, respectively. 
 
    June 30,
    January 1,
    December 31,
 
    2023
    2023
    2022
 
    (Dollars in thousands)
 
Real Estate Loans:
                       
Commercial
  $ 3,081     $ 5,847     $ 2,644  
Construction
    2,423       2,421       992  
Residential
    7,034       6,518       4,080  
Total Real Estate Loans
    12,538       14,786       7,716  
Commercial
    4,235       3,045       3,150  
Consumer and Other
    233       257       188  
Total
  $ 17,006     $ 18,088     $ 11,054  
 
Accrued interest receivable of $ 4.7 million and $ 5.4 million was outstanding as of June 30, 2023, and December 31, 2022, respectively, for all loan deferrals, primarily attributable to the COVID- 19 pandemic and, to a much lesser extent, hurricanes which occurred in 2020 and 2021.   These loans are no longer within their deferral periods.  The accrued interest on the loans is due at their maturity.
 
At June 30, 2023 and December 31, 2022, accrued interest receivable on loans was $ 22.2 million and $ 21.2 million, respectively, and included within accrued interest receivable on the consolidated balance sheets.
 
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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 $ 26.4 million.  One tranche in the amount of $ 10.0 million bears interest at a fixed rate of 6.25 % until April 11, 2023, at which point the notes become redeemable at the Company’s option, then will reset to a floating interest rate based on a benchmark rate plus 350 basis points, adjusting quarterly, until maturity on April 11, 2028.  Another tranche in the amount of $ 7.5 million bears a fixed rate 6.38 % until December 13, 2023, at which point the notes become redeemable at the Company’s option, 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.  The third tranche in the amount of $ 8.9 million bears an adjustable interest rate plus 595 basis points, based on a benchmark rate, until maturity on March 24, 2027.  The $ 8.9 million tranche was called on May 1, 2023 by the Company, of which $ 5.7 million has been extinguished.  The Company recognized a $ 941,000 gain on the extinguishment of this debt during the second quarter of 2023.   These notes carry an aggregate $ 1.7 million fair value adjustment as of June 30, 2023.
 
 
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 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 and pledged securities totaling a fair value of $ 394.6 million at June 30, 2023.  The securities pledged had a collateral value of $ 422.6 million.
 
 
Note 9 – Federal Home Loan Bank ( “ FHLB ” ) Borrowings –
 
The Company had outstanding advances from the FHLB of $ 362.2 million and $ 410.1 million as of June 30, 2023, and December 31, 2022, respectively, consisting of:
 
One fixed rate loan with an original principal balance of $ 60.0 million.  The loan was made in 2021 and the balance at June 30, 2023 and December 31, 2022 was $ 41.3 million and $ 47.2 million, respectively, with interest at 0.89 %.  Principal and interest payments are due monthly and the loan matures in November 2026.
 
One short term, overnight, fixed rate loan of $ 120.0 million at June 30, 2023, with interest at 5.37 %.  Principal and interest was due, paid and renewed, at maturity in July 2023.
 
On short term, overnight, fixed rate loan of $ 25.0 million at June 30, 2023, with interest at 5.50 %.  Principal and interest was due, and paid, at maturity in July 2023.
 
One fixed rate loan of $ 875,000 at both June 30, 2023, and December 31, 2022, that was acquired during the TCBI acquisition, with interest at 4.88 % paid monthly.  Principal is due at maturity in April 2025.
 
One fixed rate loan of $ 100.0 million at both June 30, 2023, and December 31, 2022, with interest at 3.53 % paid monthly.  Principal is due at maturity in October 2027.  This advance has put options beginning in October 2023.
 
One fixed rate loan of $ 25.0 million at June 30, 2023, with interest at 4.89 % paid monthly.  Principal is due at maturity in July 2025.
 
One fixed rate loan of $ 25.0 million at June 30, 2023, with interest at 4.65 % paid monthly.  Principal is due at maturity in January 2026.
 
One fixed rate loan of $ 25.0 million at June 30, 2023, with interest at 4.56 % paid monthly.  Principal is due at maturity in July 2026.
 
One short term, seven -day, fixed rate loan of $ 262.0 million at December 31, 2022, with interest at 4.55 %.  Principal and interest was due, paid and renewed, at maturity in January 2023. This loan was rolled into the $ 230.0 million short term, overnight, fixed rate loan outstanding at March 31, 2023, which was paid off during the second quarter of 2023.
 
The Company had an additional $ 1.4 billion remaining on the FHLB line availability at June 30, 2023.
 
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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 one to ten 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 $ 2.8 million and $ 2.2 million for the six months ended June 30, 2023, and 2022, respectively.  At June 30, 2023, the Company had a weighted average lease term of 5.7 years and a weighted average discount rate of 2.66 %.
 
Future minimum lease payments under these leases are as follows:
 
    (Dollars in thousands)
 
July 1, 2023 through June 30, 2024
  $ 2,059  
July 1, 2024 through June 30, 2025
    3,761  
July 1, 2025 through June 30, 2026
    2,735  
July 1, 2026 through June 30, 2027
    2,182  
July 1, 2027 through June 30, 2028
    2,066  
July 1, 2028 and Thereafter
    4,297  
Total Future Minimum Lease Payments
    17,100  
Less Imputed Interest
    ( 1,302 )
Present Value of Lease Liabilities
  $ 15,798  
 
 
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 $ 1.3 billion and $ 1.3 billion, and standby and commercial letters of credit of approximately $ 45.1 million and $ 45.6 million at June 30, 2023 and December 31, 2022, respectively. As discussed in Note 6, we have a reserve for unfunded loan commitments of $ 3.6 million and $ 605,000 at June 30, 2023 and December 31, 2022, respectively.
 
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.
 
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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 no par value, for an aggregate purchase price of $ 72.0 million.  Holders of the preferred stock will be entitled to receive, if, when, and as declared by the Company’s board of directors, non-cumulative cash dividends at a rate of 7.50 % per share 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. The preferred stock is non-convertible and dividends equivalent to $ 37.50 per share and $ 18.75 per share were paid during the six months ended June 30, 2023, and the year ended December 31, 2022, respectively.
 
 
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.
 
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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 not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.  The Company transferred $ 23.4 million of securities from Level 3 to Level 2 fair value measurement designation for the quarter ended June 30, 2023.  Prior to 2023, the securities were not valued using observable market data.
 
    Fair Value
    Level 1
    Level 2
    Level 3
 
    (Dollars in thousands)
 
June 30, 2023
                               
Available for Sale:
                               
U.S. Treasury Securities
  $ 30,223     $ -     $ 30,223     $ -  
U.S. Government Agency Securities
    47,432       -       47,432       -  
Corporate Securities
    42,824       -       42,824       -  
Mortgage-Backed Securities
    444,036       -       444,036       -  
Municipal Securities
    313,259       -       313,259       -  
Loans Held for Sale
    435       -       435       -  
Total
  $ 878,209     $ -     $ 878,209     $ -  
                                 
                                 
December 31, 2022
                               
Available for Sale:
                               
U.S. Treasury Securities
  $ 30,115     $ -     $ 30,115     $ -  
U.S. Government Agency Securities
    47,372       -       47,372       -  
Corporate Securities
    46,004       -       27,004       19,000  
Mortgage-Backed Securities
    451,725       -       451,725       -  
Municipal Securities
    315,535       -       280,767       34,768  
Loans Held for Sale
    304       -       304       -  
Total
  $ 891,055     $ -     $ 837,287     $ 53,768  
 
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 not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis.
 
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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 10 %.  The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available.  As such, the Bank records repossessed assets as Level 3.
 
    Fair Value
    Level 1
    Level 2
    Level 3
 
    (Dollars in thousands)
 
June 30, 2023
                               
Assets:
                               
Impaired Loans
  $ 7,733     $ -     $ -     $ 7,733  
Servicing Rights
    2,303       -       2,303       -  
Other Nonperforming Assets
    1,616       -       -       1,616  
Total
  $ 11,652     $ -     $ 2,303     $ 9,349  
                                 
December 31, 2022
                               
Assets:
                               
Impaired Loans
  $ 16,816     $ -     $ -     $ 16,816  
Servicing Rights
    2,327       -       2,327       -  
Other Nonperforming Assets
    1,434       -       -       1,434  
Total
  $ 20,577     $ -     $ 2,327     $ 18,250  
 
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.
 
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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
  $ 354,822     $ 354,822     $ 354,822     $ -     $ -  
Securities
    877,774       877,774       -       877,774       -  
Loans Held for Sale
    435       435       -       435       -  
Loans - Net
    4,856,724       4,725,441       -       -       4,725,441  
Servicing Rights
    1,437       2,303       -       2,303       -  
Cash Value of BOLI
    95,302       95,302       -       95,302       -  
Other Equity Securities
    34,824       34,824       -       -       34,824  
Total
  $ 6,221,318     $ 6,090,901     $ 354,822     $ 975,814     $ 4,760,265  
                                         
Financial Liabilities:
                                       
Deposits
  $ 5,014,443     $ 5,005,851     $ -     $ -     $ 5,005,851  
Borrowings
    794,223       764,387       -       764,387       -  
Total
  $ 5,808,666     $ 5,770,238     $ -     $ 764,387     $ 5,005,851  
 
    Carrying
    Total
                         
    Amount
    Fair Value
    Level 1
    Level 2
    Level 3
 
    (Dollars in thousands)
 
December 31, 2022
                                       
Financial Assets:
                                       
Cash and Short-Term Investments
  $ 168,346     $ 168,346     $ 168,346     $ -     $ -  
Securities
    890,751       890,751       -       836,983       53,768  
Loans Held for Sale
    304       304       -       304       -  
Loans - Net
    4,567,998       4,443,577       -       -       4,443,577  
Servicing Rights
    1,712       2,327       -       2,327       -  
Cash Value of BOLI
    91,958       91,958       -       91,958       -  
Other Equity Securities
    37,467       37,467       -       -       37,467  
Total
  $ 5,758,536     $ 5,634,730     $ 168,346     $ 931,572     $ 4,534,812  
                                         
Financial Liabilities:
                                       
Deposits
  $ 4,820,345     $ 4,810,263     $ -     $ -     $ 4,810,263  
Borrowings
    560,123       544,564       -       544,564       -  
Total
  $ 5,380,468     $ 5,354,827     $ -     $ 544,564     $ 4,810,263  
  
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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 $ 22.5 million and were included with consolidated deposits on the balance sheet.  A deposit premium per the Purchase Agreement is 7.00 % of total deposits and accrued interest.   The sale is expected to take place as of the close of business on August 31, 2023.
 
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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;
 
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●
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.
 
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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.
 
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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.
 
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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.
 
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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.                
 
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Table of Contents
 
 
 
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.                
 
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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.
 
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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.
 
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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.
 
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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.
 
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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.
 
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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
Years
 
 
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
 
 
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As of December 31, 2022
 
 
 
One Year or Less
 
 
One Through Five
Years
 
 
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.
 
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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.
 
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Table of Contents
 
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.
 
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Table of Contents
 
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
(Recoveries)
 
 
Percent of Average
Loans
 
 
Net Charge-offs
(Recoveries)
 
 
Percent of Average
Loans
 
 
Net Charge-offs
(Recoveries)
 
 
Percent of Average
Loans
 
 
 
(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.
 
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Table of Contents
 
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.
 
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Table of Contents
 
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.
 
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Table of Contents
 
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
(Unaudited)
 
 
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
 
 
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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.
 
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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
Ended June 30,
2023 (Unaudited)
 
 
For the Year Ended
December 31,
2022
 
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.
 
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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%.
 
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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.
 
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Table of Contents
 
 
 
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.
 
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Table of Contents
 
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.
 
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Table of Contents
 
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.
 
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Table of Contents
 
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.
 
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Table of Contents
 
 
 
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.
 
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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
 
 
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Table of Contents
 
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.
 
64
Table of Contents
 
PART II. OTHER INFORMATION
 
Item   1.           Legal Proceedings
 
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.
 
Item   1A.        Risk Factors
 
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.
 
 
Item   5.           Other Information
 
(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.
 
65
Table of Contents
 
Item   6.           Exhibits
 
Number
Description
 
 
2.1
Agreement and Plan of Reorganization, dated October 20, 2021, by and between Business First Bancshares, Inc., and Texas Citizens Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on October 21, 2021).
 
 
3.1
Restated Articles of Incorporation of Business First Bancshares, Inc., adopted October 27, 2022 (incorporated by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, filed by Business First Bancshares, Inc. on November 3, 2022).
 
 
3.2
Amended and Restated Bylaws of Business First Bancshares, Inc., adopted April 23, 2020 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on April 28, 2020).
 
 
4.1
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 filed by Business First Bancshares, Inc. on November 12, 2014).
 
 
4.2
Form of Series A Preferred Stock (incorporated by reference to Exhibit A to Exhibit 10.1 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on September 1, 2022).
 
 
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
32.1
Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
 
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.
 
66
Table of Contents
 
SIGNATURES
 
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
 
67
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.