Business First Bank(BFST) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Business First Bancshares, Inc. and its subsidiaries, including balance sheets, income statements, comprehensive income, changes in shareholders' equity, and cash flows, along with detailed notes explaining accounting policies, significant transactions, and financial instrument valuations Consolidated Balance Sheets The consolidated balance sheets show the financial position of Business First Bancshares, Inc. and its subsidiaries as of March 31, 2023, and December 31, 2022, highlighting key asset, liability, and equity changes Consolidated Balance Sheets | Metric | March 31, 2023 (Thousands) | December 31, 2022 (Thousands) | | :-------------------------- | :------------------------- | :---------------------------- | | Total Assets | $6,289,981 | $5,990,460 | | Total Deposits | $4,806,178 | $4,820,345 | | Total Liabilities | $5,692,291 | $5,409,979 | | Total Shareholders' Equity | $597,690 | $580,481 | - Total assets increased by $299.5 million (5.0%) from December 31, 2022, to March 31, 2023[68] - Total deposits decreased by $14.2 million (0.3%) from December 31, 2022, to March 31, 2023[45] Unaudited Consolidated Statements of Income The unaudited consolidated statements of income detail the company's revenues, expenses, and net income for the three months ended March 31, 2023, and 2022, showing significant growth in net interest income and overall profitability Unaudited Consolidated Statements of Income | Metric | Three Months Ended March 31, 2023 (Thousands) | Three Months Ended March 31, 2022 (Thousands) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total Interest Income | $79,492 | $44,122 | | Total Interest Expense | $26,743 | $3,647 | | Net Interest Income | $52,749 | $40,475 | | Provision for Credit Losses | $3,222 | $1,617 | | Total Other Income | $8,388 | $5,896 | | Total Other Expenses | $38,679 | $33,720 | | Income Before Income Taxes | $19,236 | $11,034 | | Provision for Income Taxes | $4,211 | $2,303 | | Net Income | $15,025 | $8,731 | | Net Income Available to Common Shareholders | $13,675 | $8,731 | | Basic Earnings Per Common Share | $0.55 | $0.42 | | Diluted Earnings Per Common Share | $0.54 | $0.41 | - Net income increased by $4.9 million (56.6%) to $13.7 million for the three months ended March 31, 2023, compared to the same period in 2022[90] - Net interest income increased by $12.3 million (30.3%) to $52.7 million for the three months ended March 31, 2023, compared to the same period in 2022[275] Unaudited Consolidated Statements of Comprehensive Income (Loss) The unaudited consolidated statements of comprehensive income (loss) show the net income and other comprehensive income (loss) components for the three months ended March 31, 2023, and 2022 Unaudited Consolidated Statements of Comprehensive Income (Loss) | Metric | Three Months Ended March 31, 2023 (Thousands) | Three Months Ended March 31, 2022 (Thousands) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net Income | $15,025 | $8,731 | | Other Comprehensive Income (Loss) | $6,206 | $(38,577) | | Total Comprehensive Income (Loss) | $21,231 | $(29,846) | - Other comprehensive income for the three months ended March 31, 2023, was $6.2 million, a significant improvement from a loss of $38.6 million in the prior year, primarily due to unrealized gains in the investment securities portfolio[143][398] Unaudited Consolidated Statements of Changes in Shareholders' Equity This statement outlines the changes in shareholders' equity for the three months ended March 31, 2023, and 2022, reflecting net income, other comprehensive income, dividends, and stock-based compensation Unaudited Consolidated Statements of Changes in Shareholders' Equity | Metric | December 31, 2022 (Thousands) | March 31, 2023 (Thousands) | | :-------------------------------------- | :---------------------------- | :------------------------- | | Total Shareholders' Equity (Beginning) | $580,481 | $580,481 | | Net Income | - | $15,025 | | Other Comprehensive Income | - | $6,206 | | Preferred Stock Dividends | - | $(1,350) | | Common Stock Dividends | - | $(3,042) | | Stock Based Compensation Cost | - | $1,197 | | Cumulative Effect of Change in Accounting Principle for Credit Losses | - | $(827) | | Total Shareholders' Equity (Ending) | $580,481 | $597,690 | - Total shareholders' equity increased by $17.2 million (3.0%) to $597.7 million as of March 31, 2023, driven by net income and other comprehensive income, partially offset by dividends[398] Unaudited Consolidated Statements of Cash Flows The unaudited consolidated statements of cash flows present the cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2023, and 2022 Unaudited Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2023 (Thousands) | Three Months Ended March 31, 2022 (Thousands) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net Cash Provided by Operating Activities | $22,938 | $19,462 | | Net Cash Used in (Provided by) Investing Activities | $(289,412) | $92,197 | | Net Cash Provided by Financing Activities | $273,501 | $102,040 | | Net Increase in Cash and Cash Equivalents | $7,027 | $213,699 | | Cash and Cash Equivalents at End of Period | $159,767 | $282,074 | - Net cash used in investing activities significantly increased to $(289.4) million in Q1 2023 from a net cash provided of $92.2 million in Q1 2022, primarily due to net increase in loans[146] - Net cash provided by financing activities increased to $273.5 million in Q1 2023, largely due to $310.0 million from the Bank Term Funding Program, compared to $102.0 million in Q1 2022[148] Notes to Unaudited Consolidated Financial Statements These notes provide detailed explanations and disclosures for the unaudited consolidated financial statements, covering accounting policies, recent accounting standard adoptions, mergers and acquisitions, earnings per share, securities, loans, long-term debt, and fair value measurements Note 1 – Basis of Presentation This note details the basis of presentation for the unaudited consolidated financial statements, including the entities covered, adherence to SEC rules and GAAP, and the adoption of new accounting standards like CECL and ASU 2022-02, which impact credit loss measurement and disclosures - Effective January 1, 2023, the Company adopted ASU 2016-13 (CECL), changing impairment recognition from incurred losses to expected losses for loans and other financial instruments[129][154] - The adoption of CECL resulted in an $827,000 reduction to retained earnings, after deferred tax asset adjustment, but did not materially impact regulatory capital[179] - ASU 2022-02, adopted January 1, 2023, modified criteria for troubled debt restructurings and enhanced disclosure requirements, including vintage table disclosures, without material impact on identification of troubled debt restructurings[131] Note 2 – Reclassifications This note states that certain reclassifications were made to conform to 2023 reporting classifications, with no material effect on previously reported shareholders' equity or net income - Certain reclassifications were made to conform to 2023 reporting classifications, with no material effect on previously reported shareholders' equity or net income[187] Note 3 – Mergers and Acquisitions This note details the acquisition of Texas Citizens Bancorp, Inc. (TCBI) on March 1, 2022, including the purchase price, net assets acquired, and the methods used to determine fair values of acquired assets and assumed liabilities - On March 1, 2022, the Company completed the merger with Texas Citizens Bancorp, Inc. (TCBI), issuing 2,069,532 shares of common stock to former TCBI shareholders[188] TCBI Acquisition Financials | Metric | Amount (Thousands) | | :-------------------------- | :----------------- | | Total Purchase Price | $55,043 | | Net Assets Acquired | $26,394 | | Goodwill Resulting from Merger | $28,649 | - Acquisition-related costs were approximately $103,000 for the three months ended March 31, 2023, and $5.2 million for the year ended December 31, 2022[190] Note 4 – Earnings per Common Share This note provides the calculation of basic and diluted earnings per common share, detailing the numerator (net income available to common shareholders) and denominator (weighted average common shares outstanding and dilutive effects) Earnings Per Common Share | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Income Available to Common Shares | $13,675 (Thousands) | $8,731 (Thousands) | | Weighted Average Common Shares Outstanding | 24,979,955 | 21,019,716 | | Dilutive Effect of Stock Options and RSAs | 242,353 | 142,766 | | Basic Earnings Per Common Share | $0.55 | $0.42 | | Diluted Earnings Per Common Share | $0.54 | $0.41 | - Diluted EPS increased to $0.54 for Q1 2023 from $0.41 for Q1 2022, reflecting higher net income available to common shareholders[168] Note 5 – Securities This note provides a summary of securities available for sale, including their amortized cost, gross unrealized gains and losses, and fair values as of March 31, 2023, and December 31, 2022, disaggregated by investment category and contractual maturity Securities Available for Sale - March 31, 2023 | Investment Category | March 31, 2023 (Thousands) | | :------------------------------ | :------------------------- | | Amortized Cost | $990,792 | | Gross Unrealized Gains | $616 | | Gross Unrealized Losses | $87,463 | | Fair Value | $903,945 | Securities Available for Sale - December 31, 2022 | Investment Category | December 31, 2022 (Thousands) | | :------------------------------ | :---------------------------- | | Amortized Cost | $985,599 | | Gross Unrealized Gains | $303 | | Gross Unrealized Losses | $95,151 | | Fair Value | $890,751 | - At March 31, 2023, the Company had pledged securities with a fair value of $397.8 million against public deposit and repurchase agreements, and $290.7 million against the Bank Term Funding Program facility[174] - No allowance for credit losses was recognized on available for sale securities in an unrealized loss position as management determined unrealized losses were due to market interest rate changes, not credit quality[229] Note 6 – Loans and the Allowance for Loan Losses This note details the composition of the loan portfolio, the methodology for determining the allowance for credit losses (CECL), and an analysis of credit quality indicators, including past due and nonaccrual loans Loan Portfolio Composition | Loan Type | March 31, 2023 (Thousands) | December 31, 2022 (Thousands) | | :-------------------------- | :------------------------- | :---------------------------- | | Real Estate: Commercial | $2,055,500 | $2,020,406 | | Real Estate: Construction | $787,634 | $722,074 | | Real Estate: Residential | $659,967 | $656,378 | | Commercial | $1,239,333 | $1,153,873 | | Consumer and Other | $60,626 | $53,445 | | Total Loans Held for Investment | $4,803,060 | $4,606,176 | | Less: Allowance for Loan Losses | $(41,830) | $(38,178) | | Net Loans | $4,761,230 | $4,567,998 | - Total loans held for investment increased by $196.9 million (4.3%) from December 31, 2022, to March 31, 2023[303] Allowance for Credit Losses | Metric | March 31, 2023 (Thousands) | December 31, 2022 (Thousands) | | :-------------------------------------- | :------------------------- | :---------------------------- | | Allowance for Loan Losses (Ending Balance) | $41,830 | $38,178 | | Reserve for Unfunded Loan Commitments (Ending Balance) | $3,857 | $605 | | Total Allowance for Credit Losses | $45,687 | $38,783 | - Nonaccrual loans increased to $17.0 million at March 31, 2023, from $11.1 million at December 31, 2022, partly due to the adoption of ASU 2016-13[214][248] Note 7 – Long Term Debt This note outlines the Company's outstanding advances from the FHLB and subordinated debt, including interest rates, maturity dates, and fair value adjustments - Outstanding FHLB advances were $395.1 million at March 31, 2023, down from $410.1 million at December 31, 2022[48] - The Company assumed $26.4 million in subordinated debt during the TCBI acquisition, with various fixed-to-floating interest rates and maturity dates[219] - A $2.8 million fair value adjustment was recorded for the assumed subordinated debt as of March 31, 2023[219] Note 8 – Bank Term Funding Program ("BTFP") This note describes the Company's participation in the Federal Reserve Board's Bank Term Funding Program (BTFP), including outstanding debt and pledged securities - The Bank participated in the BTFP, with $310.0 million in outstanding debt and pledged securities with a fair value of $290.7 million at March 31, 2023[22] - The BTFP loans have a term of up to one year and are secured by U.S. treasuries, agency securities, and agency mortgage-backed securities valued at par[22] Note 9 – Federal Home Loan Bank ("FHLB") Borrowings This note details the Company's FHLB borrowings, including specific loan terms, interest rates, and remaining availability on the FHLB line - Outstanding FHLB advances were $395.1 million at March 31, 2023, and $410.1 million at December 31, 2022[48] - The Company had an additional $1.4 billion remaining on the FHLB line availability at March 31, 2023[280] Note 10 – Leases This note provides information on the Bank's non-cancelable operating leases for branch offices, including future minimum lease payments and weighted average lease terms Future Minimum Lease Payments | Period | Future Minimum Lease Payments (Thousands) | | :----------------------------------- | :---------------------------------------- | | April 1, 2023 through March 31, 2024 | $3,098 | | April 1, 2024 through March 31, 2025 | $3,761 | | April 1, 2025 through March 31, 2026 | $2,735 | | April 1, 2026 through March 31, 2027 | $2,182 | | April 1, 2027 through March 31, 2028 | $2,065 | | April 1, 2028 and Thereafter | $4,298 | | Total Future Minimum Lease Payments | $18,139 | | Less Imputed Interest | $(1,407) | | Present Value of Lease Liabilities | $16,732 | - Rental expense for operating leases was $1.4 million for the three months ended March 31, 2023, compared to $881,000 for the same period in 2022[281] Note 11 – Commitments and Contingencies This note discloses the Bank's off-balance sheet financial instruments, including commitments to extend credit and standby and commercial letters of credit, and discusses legal proceedings - Commitments to extend credit were approximately $1.3 billion at both March 31, 2023, and December 31, 2022[282] - Standby and commercial letters of credit were approximately $43.4 million at March 31, 2023, and $45.5 million at December 31, 2022[282] - Management believes the disposition of legal proceedings would not have a material adverse effect on the Bank's financial statements[25] Note 12 – Preferred Stock This note describes the Company's 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, including its issuance, dividend terms, and qualification as additional Tier 1 capital - On September 1, 2022, the Company sold $72.0 million of 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock[26] - Dividends of $18.75 per share were paid during the three months ended March 31, 2023, and the year ended December 31, 2022[26] - The preferred stock qualifies as additional Tier 1 capital under regulatory guidelines[43] Note 13 – Fair Value of Financial Instruments This note details the Company's fair value measurements for financial instruments, categorizing them into Level 1, Level 2, and Level 3 based on input observability, and describes the valuation methodologies used - The Company groups financial assets and liabilities measured at fair value into three levels based on input observability: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[225][284][27] Fair Value of Financial Instruments - March 31, 2023 | Financial Instrument (March 31, 2023) | Carrying Amount (Thousands) | Total Fair Value (Thousands) | Level 1 (Thousands) | Level 2 (Thousands) | Level 3 (Thousands) | | :------------------------------------ | :-------------------------- | :--------------------------- | :------------------ | :------------------ | :------------------ | | Cash and Short-Term Investments | $264,017 | $264,017 | $264,017 | $- | $- | | Securities | $903,945 | $903,945 | $- | $902,955 | $990 | | Loans - Net | $4,761,230 | $4,648,503 | $- | $- | $4,648,503 | | Deposits | $4,806,178 | $4,800,250 | $- | $- | $4,800,250 | | Borrowings | $852,030 | $828,928 | $- | $828,928 | $- | - The Company transferred $33.2 million of securities from Level 3 to Level 2 fair value measurement designation for the quarter ended March 31, 2023, as they became valued using observable market data[286] Note 14 – Subsequent Events This note discloses subsequent events, specifically the Company's participation in the Federal Reserve Bank's discount window after the reporting period - On April 11, 2023, the Company opened two lines of credit totaling $949.5 million through the Federal Reserve Bank's discount window, collateralized by commercial and agricultural loans[36] - As of the date of the report, the Company had not drawn on these lines of credit[36] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive discussion and analysis of the Company's financial condition as of March 31, 2023, and results of operations for the three months ended March 31, 2023 and 2022, including an overview of business, financial highlights, detailed performance analysis, and insights into liquidity, capital, and off-balance sheet items Forward-Looking Statements This section highlights that the report contains forward-looking statements, which involve estimates, assumptions, risks, and uncertainties that could cause actual results to differ materially from projections. It advises against undue reliance on these statements and lists various risk factors - Forward-looking statements are subject to risks and uncertainties, including the ability to sustain loan and deposit growth, changes in loan prepayments, deteriorating asset quality, and legislative/regulatory developments[295][38] - Other risks include economic conditions in local markets, interest rate volatility, increased credit risk, changes in funding availability, and the ability to maintain deposit customer relationships[296][62][63][64] Overview This overview introduces Business First Bancshares, Inc. as a financial holding company providing community banking services in Louisiana and Texas, highlighting its primary revenue sources and key financial metrics as of March 31, 2023 - Business First Bancshares, Inc. is a financial holding company headquartered in Baton Rouge, Louisiana, operating through b1BANK in Louisiana and Texas[300] - Primary revenues are generated from interest income on loans, customer service and loan fees, and interest income from securities[42] Key Financial Metrics | Metric | March 31, 2023 (Billions) | | :-------------------------- | :------------------------ | | Total Assets | $6.3 | | Total Loans | $4.8 | | Total Deposits | $4.8 | | Total Shareholders' Equity | $597.7 (Millions) | Other Developments This section covers recent significant events, including the acquisition of TCBI, a public offering of common stock, the issuance of preferred stock, and participation in the Bank Term Funding Program (BTFP) - The acquisition of Texas Citizens Bancorp, Inc. (TCBI) was consummated on March 1, 2022, adding $534.2 million in total assets, $349.5 million in loans, and $477.2 million in total deposits[66] - On October 12, 2022, the Company completed an underwritten public offering of 2,500,000 shares of common stock at $20.00 per share, generating net proceeds of $47.2 million[67] - On September 1, 2022, the Company sold $72.0 million of 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, structured to qualify as additional Tier 1 capital[43] - The Bank participated in the Federal Reserve's BTFP, with $310.0 million in outstanding debt and $319.4 million in pledged securities (par value) as of March 31, 2023[302] Financial Highlights This section summarizes key financial performance indicators for the three months ended March 31, 2023, compared to December 31, 2022, and March 31, 2022, highlighting growth in assets, loans, net income, and capital ratios Financial Highlights | Metric | March 31, 2023 | December 31, 2022 | YoY Change (Q1 2023 vs Q1 2022) | | :-------------------------------------- | :------------- | :---------------- | :------------------------------ | | Total Assets | $6.3 billion | $6.0 billion | +5.0% | | Total Loans Held for Investment | $4.8 billion | $4.6 billion | +4.3% | | Total Deposits | $4.8 billion | $4.8 billion | -0.3% | | Net Income | $13.7 million | N/A | +56.6% | | Basic EPS | $0.55 | N/A | +31.0% | | Diluted EPS | $0.54 | N/A | +31.7% | | Return on Average Assets | 0.91% | N/A | +0.19 pp | | Return on Average Equity | 10.73% | N/A | +2.79 pp | | Allowance for Loan Losses to Total Loans | 0.87% | 0.83% | +0.04 pp | | Nonperforming Loans to Total Loans | 0.36% | 0.25% | +0.11 pp | | Book Value Per Common Share | $20.77 | $20.25 | +2.6% | Results of Operations for the Three Months Ended March 31, 2023, and 2022 This section analyzes the Company's operating performance for the three months ended March 31, 2023, compared to the same period in 2022, focusing on net interest income, provision for credit losses, noninterest income, noninterest expense, and income tax expense Net Interest Income Net interest income significantly increased due to higher interest rates and loan portfolio growth, despite an increase in the cost of funds Net Interest Income Performance | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Net Interest Income | $52.7 million | $40.5 million | | Net Interest Margin | 3.75% | 3.56% | | Net Interest Spread | 2.96% | 3.40% | | Average Yield on Loan Portfolio | 6.34% | 4.81% | | Average Yield on Total Interest-Earning Assets | 5.65% | 3.88% | | Overall Cost of Funds | 1.97% | 0.33% | - The increase in net interest income was primarily driven by a $33.6 million increase in interest income from total loans, partially offset by a $16.7 million increase in interest expense on interest-bearing deposits[309] - The overall cost of funds increased by 164 basis points, primarily due to Federal Reserve rate increases[324] Provision for Credit Losses The provision for credit losses increased significantly, mainly due to loan portfolio growth and the adoption of the CECL accounting standard Provision for Credit Losses | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Provision for Credit Losses | $3.2 million | $1.6 million | - The higher provision for credit losses in Q1 2023 was primarily due to an increase in the loan portfolio and the change in accounting methodology with the adoption of the CECL standard[75] Noninterest Income ("Other Income") Total noninterest income increased, driven by higher service charges on deposit accounts, gains on loan sales, and a reduction in losses from asset disposals Noninterest Income | Metric | Three Months Ended March 31, 2023 (Thousands) | Three Months Ended March 31, 2022 (Thousands) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Service Charges on Deposit Accounts | $2,281 | $1,805 | | Gain on Sales of Loans | $611 | $65 | | Loss on Sales of Investment Securities | $(1) | $(31) | | Loss on Sales / Disposals of Other Assets | $(5) | $(717) | | Total Noninterest Income | $8,388 | $5,896 | - Total noninterest income increased by $2.5 million (42.3%) from Q1 2022, primarily due to a $476,000 increase in service charges (TCBI acquisition) and a $546,000 increase in gain on sales of loans (SBA loans)[311] Noninterest Expense ("Other Expense") Total noninterest expense increased, mainly due to higher salaries and employee benefits resulting from the TCBI acquisition and additional staffing Noninterest Expense | Metric | Three Months Ended March 31, 2023 (Thousands) | Three Months Ended March 31, 2022 (Thousands) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Salaries and Employee Benefits | $23,176 | $19,703 | | Occupancy of Bank Premises | $2,297 | $2,052 | | Data Processing | $1,485 | $2,116 | | Advertising and Promotions | $1,148 | $531 | | Merger and Conversion Related Expenses | $103 | $811 | | Total Noninterest Expense | $38,679 | $33,720 | - Total noninterest expense increased by $5.0 million (14.7%) from Q1 2022, primarily due to a $3.5 million increase in salaries and employee benefits[78] Income Tax Expense Income tax expense increased significantly, influenced by higher pre-tax income and shortfalls related to restricted stock awards, partially offset by tax-exempt income Income Tax Expense | Metric | Three Months Ended March 31, 2023 (Thousands) | Three Months Ended March 31, 2022 (Thousands) | | :--------------------- | :-------------------------------------------- | :-------------------------------------------- | | Income Tax Expense | $4,211 | $2,303 | | Effective Tax Rate | 21.9% | 20.9% | - Income tax expense increased by $1.9 million (82.8%) from Q1 2022, impacted by shortfalls related to restricted stock awards and tax-exempt income from municipal securities and bank-owned life insurance[79] Financial Condition This section analyzes the Company's financial condition, focusing on the loan portfolio composition and growth, nonperforming assets, allowance for credit losses, securities portfolio, deposit trends, and overall liquidity and capital resources Loan Portfolio The loan portfolio experienced growth, primarily in commercial and construction real estate loans, with a detailed breakdown by loan type and contractual maturity Loan Portfolio Composition | Loan Type | March 31, 2023 (Thousands) | December 31, 2022 (Thousands) | | :-------------------------- | :------------------------- | :---------------------------- | | Real Estate: Commercial | $2,055,500 | $2,020,406 | | Real Estate: Construction | $787,634 | $722,074 | | Real Estate: Residential | $659,967 | $656,378 | | Commercial | $1,239,333 | $1,153,873 | | Consumer and Other | $60,626 | $53,445 | | Total Loans Held for Investment | $4,803,060 | $4,606,176 | - Total loans held for investment increased by $196.9 million (4.3%) from December 31, 2022, to March 31, 2023, with Dallas/Fort Worth and New Orleans regions accounting for 67.3% of the growth[316] - Real Estate: Commercial loans increased by $35.1 million (1.7%) to $2.1 billion, and Real Estate: Construction loans increased by $65.6 million (9.1%) to $787.6 million[81][102] Nonperforming Assets Nonperforming assets and loans increased, primarily due to the adoption of CECL and the reclassification of purchased impaired loans Nonperforming Assets | Metric | March 31, 2023 (Thousands) | December 31, 2022 (Thousands) | | :-------------------------- | :------------------------- | :---------------------------- | | Nonaccrual Loans | $16,952 | $11,054 | | Accruing Loans 90+ Days Past Due | $127 | $335 | | Total Nonperforming Loans | $17,079 | $11,389 | | Total Nonperforming Assets | $18,501 | $12,823 | | Ratio of Nonperforming Loans to Total Loans Held for Investment | 0.36% | 0.25% | | Ratio of Nonperforming Assets to Total Assets | 0.29% | 0.21% | - The increase in nonperforming assets is primarily attributed to the adoption of CECL and the elimination of ASC 310-30, which previously excluded purchased impaired loans accreting interest income[347] - The Bank classifies loans into pass, special mention, substandard, or doubtful categories based on credit risk, with loans rated loss being charged-off[332] Allowance for Credit Losses The allowance for credit losses increased, reflecting management's estimate of credit losses inherent in the loan portfolio, influenced by CECL adoption and portfolio growth Allowance for Credit Losses Analysis | Metric | March 31, 2023 (Thousands) | December 31, 2022 (Thousands) | | :-------------------------------------- | :------------------------- | :---------------------------- | | Allowance for Credit Losses at End of Period | $45,687 | $38,783 | | Provision for Credit Losses | $3,222 | $10,667 | | Net Charge-offs | $2,175 | $1,820 | | Ratio of Allowance for Credit Losses to End of Period Loans Held for Investment | 0.95% | 0.84% | | Ratio of Allowance for Credit Losses to Nonaccrual Loans | 269.51% | 350.85% | - The allowance for credit losses increased to $45.7 million (0.95% of total loans held for investment) at March 31, 2023, from $38.8 million (0.84%) at December 31, 2022[352] - The increase in the allowance is partly due to the adoption of ASU 2016-13, which added $5.9 million to the allowance at the beginning of the period[379] Securities The securities portfolio increased in carrying amount, primarily due to unrealized gains, and consists entirely of available-for-sale securities, with no credit-related impairment recognized Securities Portfolio | Metric | March 31, 2023 (Thousands) | December 31, 2022 (Thousands) | | :-------------------------- | :------------------------- | :---------------------------- | | Carrying Amount | $903,945 | $890,751 | | Gross Unrealized Gains | $616 | $303 | | Gross Unrealized Losses | $87,463 | $95,151 | | Securities as % of Total Assets | 14.4% | 14.9% | - The carrying amount of investment securities increased by $13.2 million (1.5%) from December 31, 2022, to March 31, 2023, primarily due to unrealized gains[382] - The portfolio consists entirely of available-for-sale securities, with no credit-related impairment recognized, as unrealized losses are attributed to market interest rate changes[383][342] Deposits Total deposits experienced a slight decrease, while the average rate paid on interest-bearing deposits increased due to rising interest rates. Noninterest-bearing deposits also saw a decrease Deposit Trends | Metric | March 31, 2023 (Thousands) | December 31, 2022 (Thousands) | | :-------------------------- | :------------------------- | :---------------------------- | | Total Deposits | $4,806,178 | $4,820,345 | | Noninterest-bearing Deposits | $1,475,782 | $1,549,381 | | Total Uninsured Deposits | $1.5 billion | $1.5 billion | | Uninsured Deposits as % of Total Deposits | 30.7% | 31.9% | - Total deposits decreased by $14.2 million (0.3%) from December 31, 2022, to March 31, 2023[362] - The average rate paid on total interest-bearing deposits increased from 0.81% for the year ended December 31, 2022, to 2.30% for the three months ended March 31, 2023, driven by Federal Reserve rate increases[363] Liquidity and Capital Resources The Company maintains strong liquidity through core deposits and various funding sources, while also complying with regulatory capital requirements and managing capital to support growth - Liquidity needs are met by core deposits, security and loan maturities, brokered deposits, purchased funds from correspondent banks, BTFP, and FHLB advances[367] - As of March 31, 2023, the Company had $264.0 million in cash and cash equivalents, including federal funds sold, and $1.4 billion in FHLB availability[370][367] Capital Ratios (Business First) | Capital Ratio (Business First) | March 31, 2023 | December 31, 2022 | | :----------------------------- | :------------- | :---------------- | | Total Capital | 12.61% | 12.75% | | Tier 1 Capital | 9.93% | 10.07% | | Common Equity Tier 1 Capital | 8.59% | 8.68% | | Tier 1 Leverage Capital | 9.31% | 9.49% | - Both the Company and b1BANK were in compliance with all applicable regulatory capital requirements and b1BANK was classified as 'well-capitalized' as of March 31, 2023[372] Contractual Obligations This section summarizes the Company's contractual obligations and other commitments, including leases, time deposits, subordinated debt, FHLB advances, and BTFP debt, detailing their maturities and interest rates Contractual Obligations by Maturity | Obligation Type | 1 year or less (Thousands) | 1-3 years (Thousands) | 3-5 years (Thousands) | 5+ years (Thousands) | Total (Thousands) | | :------------------------------ | :------------------------- | :-------------------- | :-------------------- | :------------------- | :---------------- | | Non-cancelable Operating Leases | $2,797 | $5,915 | $3,908 | $4,112 | $16,732 | | Time Deposits | $782,144 | $138,623 | $47,078 | $21 | $967,866 | | Subordinated Debt | $614 | $1,227 | $9,743 | $99,012 | $110,596 | | Advances from FHLB | $250,000 | $875 | $144,259 | $- | $395,134 | | BTFP | $310,000 | $- | $- | $- | $310,000 | - FHLB advances totaled $395.1 million at March 31, 2023, with a weighted average stated rate of 4.17% and maturities within five years[404] - BTFP debt of $310.0 million at March 31, 2023, has a fixed rate of 4.38% and matures on March 22, 2024[404] Off-Balance Sheet Items This section details the Company's off-balance sheet financial instruments, including commitments to extend credit and standby and commercial letters of credit, and their associated credit and interest rate risks - Commitments to extend credit were $1.3 billion and standby and commercial letters of credit were $43.4 million at March 31, 2023[396] - These commitments involve credit and interest rate risk, but the total outstanding amounts do not necessarily reflect future cash funding requirements as many may expire unused[433][407] Interest Rate Sensitivity and Market Risk This section discusses the Company's exposure to interest rate volatility and its management strategies, including simulation models and policy limits for changes in net interest income and fair value of equity under various interest rate shock scenarios - The Company manages interest rate risk through its asset liability and funds management policy, monitoring net interest rate sensitivity[408] - Simulation models test the impact on net interest income and fair value of equity from instantaneous parallel and non-parallel yield curve shifts[410] Interest Rate Sensitivity Analysis - March 31, 2023 | Change in Interest Rates (Basis Points) | March 31, 2023: % Change in Net Interest Income | March 31, 2023: % Change in Fair Value of Equity | | :-------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | | +300 | (8.60%) | (6.35%) | | +200 | (6.10%) | (4.07%) | | +100 | (3.90%) | (2.16%) | | -100 | (0.70%) | 1.90% | | -200 | (1.70%) | 3.54% | Impact of Inflation This section explains that interest rates have a more significant impact on the Company's performance than general inflation, as most assets and liabilities are monetary in nature, though operating expenses do reflect inflation - Interest rates have a more significant impact on the Company's performance than general inflation, as substantially all assets and liabilities are monetary[412] - Operating expenses, however, do reflect general levels of inflation[412] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, such as core net income and tangible book value per common share, which management uses to supplement GAAP measures for better period-to-period performance comparisons - Non-GAAP financial measures (e.g., 'core' or 'tangible') are used to supplement GAAP measures, adjusting for significant activities or transactions that can distort period-to-period comparisons[442] Core Net Income Reconciliation | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Core Net Income Available to Common Shareholders | $13,773 (Thousands) | $10,266 (Thousands) | | Core Diluted Earnings Per Common Share | $0.55 | $0.49 | Tangible Book Value Reconciliation | Metric | March 31, 2023 (Thousands) | December 31, 2022 (Thousands) | | :-------------------------------------- | :------------------------- | :---------------------------- | | Total Tangible Common Equity | $423,700 | $405,966 | | Tangible Book Value Per Common Share | $16.73 | $16.17 | | Tangible Common Equity to Tangible Assets | 6.8% | 6.9% | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the Company's primary market risk, which is interest rate volatility, and outlines its strategies for managing this risk through asset-liability management policies, simulation models, and established policy limits for net interest income and fair value of equity - The primary component of market risk is interest rate volatility, which impacts income, expense, and market value of assets and liabilities[408][436] - The Company uses interest rate risk simulation models and shock analysis to test the sensitivity of net interest income and fair value of equity to changes in interest rates[437] - Internal policy specifies limits for instantaneous parallel shifts of the yield curve: estimated net interest income at risk should not decline by more than 5% for a 100 bps shift, 10% for 200 bps, and 12.5% for 300 bps[410] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures as of March 31, 2023, and states that there were no material changes in internal controls over financial reporting during the period - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of March 31, 2023, to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[451] - There were no changes in internal control over financial reporting during the period that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[468] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section states that the Company is not currently involved in any material legal proceedings beyond routine matters occurring in the ordinary course of business - The Company is not currently involved in any pending legal proceedings other than routine, nonmaterial proceedings occurring in the ordinary course of business[470] Item 1A. Risk Factors This section highlights new risk factors related to recent bank failures and their potential impact on market volatility, customer confidence, liquidity, funding capacity, and regulatory changes for smaller community and regional banks - Recent bank failures (Silicon Valley Bank and Signature Bank) have caused negative market volatility in the financial services sector, potentially impacting the Company's stock price[454] - These failures have adversely impacted customer confidence, potentially leading to deposit withdrawals that could stress the Company's liquidity, funding capacity, earnings, and capital[454] - Such events may also limit access to capital markets, increase funding costs, or result in adverse changes in banking laws or regulations[454] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report for the period - This item is not applicable for the reporting period[472] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities to report for the period - This item is not applicable for the reporting period[473] Item 4. Mine Safety Disclosures This section indicates that there are no mine safety disclosures to report for the period - This item is not applicable for the reporting period[473] Item 5. Other Information This section indicates that there is no other information to report for the period - This item is not applicable for the reporting period[473] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, stock certificates, agreements, and certifications - The exhibits include the Agreement and Plan of Reorganization, Restated Articles of Incorporation, Amended and Restated Bylaws, Specimen Common Stock Certificate, Form of Series A Preferred Stock, Supplemental Executive Retirement Participation Agreement, Change in Control Agreement, and various certifications (302 and 906)[460] SIGNATURES SIGNATURES This section contains the signatures of the Company's authorized officers, certifying the filing of the report - The report is signed by David R. Melville, III, President and Chief Executive Officer, and Gregory Robertson, Chief Financial Officer, on May 4, 2023[476][462]