Business First Bancshares Q2 2026 Earnings Call Transcript

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Provided by Quartr
July 23, 2026

Key Takeaways

  • Positive Sentiment: Management said Q2 was a solid quarter, with net interest margin expanding 8 bps and core earnings showing strong profitability metrics, including a 105 core ROAA and 63.9% core efficiency ratio.
  • Positive Sentiment: The bank made notable progress on credit quality, with non-performing loans down about 30% and management expecting further improvement through the rest of the year as problem credits continue to resolve.
  • Neutral Sentiment: Loan growth was temporarily masked by a sizable loan sale, but management expects to redeploy the proceeds and build on a strong pipeline, especially in Houston, with high single-digit annualized loan growth targeted in coming quarters.
  • Neutral Sentiment: Deposits declined in the quarter due to a mix of seasonal outflows and a deliberate reduction in higher-cost brokered deposits, and management said balances had already begun to recover in July.
  • Positive Sentiment: Management highlighted multiple growth catalysts, including the upcoming Progressive Bank conversion, expected expense savings later in the year, and a long-term opportunity from major Louisiana economic investment tied to data centers and related infrastructure.
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Earnings Conference Call
Business First Bancshares Q2 2026
00:00 / 00:00

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Operator

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Business First Bancshares Second Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, press the star one. I would now like to turn the call over to Mr. Matt Sealy, Senior Vice President, Director of Corporate Strategy and FP&A. You may begin.

Matt Sealy
Matt Sealy
SVP and Director of Corporate Strategy and FP&A at Business First Bancshares

Good afternoon. Thank you all for joining. Earlier today, we issued our second quarter 2026 earnings press release, a copy of which is available on our website along with the slide presentation that we will reference during today's call. Please refer to slide three of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com. Please also note our safe harbor statements are available on page six of our earnings press release that was filed with the SEC today. All comments made during today's call are subject to the safe harbor statements in our slide presentation and earnings release.

Matt Sealy
Matt Sealy
SVP and Director of Corporate Strategy and FP&A at Business First Bancshares

I'm joined this afternoon by Business First Bancshares Chairman, CEO, Jude Melville, Chief Financial Officer Greg Robertson, Chief Banking Officer Philip Jordan, and President of b1BANK, Jerry Vascocu. After the presentation, we'll be happy to address any questions you may have. With that, I'll turn the call over to you, Jude.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Okay. Thanks, Matt. Good afternoon, thank you all for joining us today. b1BANK had an encouragingly solid second quarter, one that met or exceeded the progress we've been articulating for you over the past few quarters, and one that positions us well for a strong second half of 2026. As an example, we returned to our normalized rate of loan production, driving a healthy increase in net interest income. In addition to the production in the second quarter, which came in a relatively balanced way across our footprint, we built a significant pipeline, particularly in the Houston area, that we expect will translate into sustained growth for the remainder of the year. Margin expanded by eight basis points during the quarter, driven partly by disciplined loan and deposit pricing.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

We also executed a relatively sizable loan sale that we believe will create additional margin opportunity as we redeploy those proceeds into higher earning assets over the next two quarters. Our team made meaningful progress on the credit front, reducing Non-Performing Loans by about 30%, in line with the progress we forecasted at the beginning of the quarter. We anticipate continued improvement on that front over the remainder of the year. Revenue from our financial services group is running roughly 20% ahead of last year's pace at the halfway mark of the year. Near the end of the quarter, we added a new partner and product, Jeff Fair with American Planning Corp, which provides CFO-type consulting services to community banks within our footprint.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

I say new, but Jeff is actually a 20-year collaborator with us, which gives us great confidence in partnering to offer his services under the SSW umbrella, bringing the number of banks we serve through our financial services group platform to over 200. If there was a headline disappointment in the quarterly numbers, it was in two areas. First, deposits. I'd point out, however, that a quarter of the decline was purposeful, reflecting our pay-down of higher cost broker deposits. Our non-interest-bearing accounts were positive for the quarter, leading to a slight decrease in overall deposit costs, and the movement was largely seasonal, something we see every second quarter, with deposits already beginning to move back in materially over the course of July. Second, expenses ran a little higher than normal, but there's important detail beneath the headline worth exploring.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

The cost we expect to be recurring, including salaries and related expenses, were flat, with the increase tied to upfront marketing spend and elevated legal fees connected to the resolution of a large non-performing credit. Two costs that while core, we don't expect to see again at this scale in the third quarter. I'll get out of the weeds now, as I'm sure we'll cover this in more detail during Greg's portion of the call, but I wanted you to know that all in all, the quarter was a positive step towards increased profitability through earning asset growth, expense control, and continued asset quality improvement over the course of the year. Finally, wrapping up my list of positive developments this quarter, we remain on track for a successful conversion of our Progressive Bank partnership on August 10th.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

On that subject, I'd like to mention something that I don't know that we've highlighted directly in this forum before. We tend to get more questions about, and therefore talk more about, our investments in Dallas and Houston, and they certainly warrant the attention. I'd like to point out that there are also significant and positive things happening in Louisiana right now, creating incredible tailwinds for that part of our footprint. The state has attracted roughly $150 billion in announced capital investments over the past 18 months, anchored by Meta's data center project in Richland Parish, which the company expanded just last week to 5 GW of capacity and more than $50 billion in total investment, up from its initial $28 billion commitment, making it one of the largest data center developments in the world.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

The expansion is expected to support roughly 7,500 construction jobs and about 1,000 permanent operations positions. Meta also announced more than $1 billion in related infrastructure investment for roads, water, and wastewater systems, along with a new energy agreement with Entergy Louisiana projected to save customers more than $2 billion over 20 years. The state's seeing a broader wave of activity in AI, data infrastructure, and advanced manufacturing that's driving construction activity, job creation, and demand for commercial banking services across our markets. We view this sustained investment as a meaningful long-term positive for the communities we serve and for our growth opportunity as a bank. Particularly since the largest of these investments sits in the heart of Northeast Louisiana. We're combining the Progressive footprint with our legacy locations. We will have the largest branch network of any community bank in the area.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

We will continue to invest in the region, including just this morning, concluding an agreement to serve as the official banking partner for the University of Louisiana Monroe's athletic department. Congratulations to our team for a solid quarter. We look forward to maximizing the investments we've made to continue building this franchise on behalf of our shareholders, our employees, our regulatory partners, and the communities we serve. With that, I'll turn it over to Greg to walk through the financial results in more detail, and look forward to your questions.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Thank you, Jude. Good afternoon, everyone. As always, I'll spend a few minutes reviewing our results and discuss our updated outlook before we open up for Q&A. Second quarter GAAP net income and EPS available to common shareholders was $22.8 million and $0.70, and included a $1.2 million merger-related expense, a $545,000 gain on extinguishment of debt, and a $6,000 loss on sale of securities. Excluding these non-core items, non-GAAP, core net income, and EPS available to common shareholders was $23.3 million and $0.71 per share. From my perspective, second quarter results marked another quarter of strong financial performance, generating a 105 core ROAA and a core efficiency ratio of 63.9% for the quarter. Our second quarter earnings results were highlighted by better-than-expected mortgage expansion, improved credit metrics for resolutions on previously identified troubled loans, and building capital levels from disciplined balance sheet management.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Also, during the quarter, we completed the fully self-managed private placement of $85 million of 6.5% fixed to floating rate supported subordinated debt notes due in 2036. Total loans held for investment decreased $24.8 million or 1.5% annualized on a linked-quarter basis. Excluding the Progressive loan sale mentioned and resolution of certain non-performing loans during Q2, total loans held for investment increased $96.4 million or 5.8% annualized. Based on unpaid principal balances, Texas-based loans were unchanged from the prior quarter at 35%. Total deposits decreased to $229.4 million, as a $237.9 decrease in interest-bearing deposits was slightly offset by $8.5 million increase in non-interest-bearing deposits. The decrease in interest-bearing deposits was largely driven by approximately $72 million in commercial money market accounts and $63 million in broker deposits.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

On the funding side of the balance sheet, the total FHLB borrowings increased to $181.7 million from prior quarter in anticipation of upcoming loan fundings. Lastly, on April 2nd, we completed the issuance of the $85 million previously mentioned subordinated debt with partial use of proceeds, utilization to redeem our $52 million issuance that became callable. The net impact from the capital raise was 50 basis points to the Q2 2026 consolidated total risk-based capital measure. Our GAAP reported second quarter net interest margin increased eight basis points linked quarter to 3.73%, while the non-GAAP core net interest margin, excluding any purchase accounting accretion, increased eight basis points as well from 3.60%-3.68% for the quarter ended June 30. The margin performance during the second quarter was driven by improvement in loan yields and securities and continued reduction in deposit costs.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

It is worth mentioning that the second quarter GAAP and core margin did not experience any interest income reversal, which did weigh on the first quarter margin. Recall the prior quarter core and GAAP net interest margin included about a six basis points drag from the interest income reversal on increased NPLs. Loan discount accretion during the second quarter of a million was relatively in line with expectations and directionally what we can expect the next couple of quarters. On a linked quarter basis, cost of deposits decreased seven basis points while total loan yields increased three basis points. Core loan yields, excluding loan discount accretion for the second quarter, was 6.58%, up four basis points from the prior quarter. Total cost of deposits for the month ended June 2026 was 2.26%, which was consistent for the Q2 full quarter weighted average rate.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

We are pleased with our ability to hold the line on these loan yields during the quarter with a weighted average new and renewed loan yield of 7.21% for the second quarter. I'd like to make a note of a few takeaways to slide 19, our investor presentation. We continue to see 45%-55% overall deposit betas as achievable regarding any future rate cuts. I would also like to point out overall core CD deposit retention rate was 83% during Q2. This impressive statistic reflects our team's continued focus on maintaining and retaining core deposit relationships. Our baseline assumption is that we don't receive any further interest rate cuts during 2026. We have worked hard to manage our balance sheet in a relatively neutral position, and we believe we can achieve modest margin improvement in a slightly down or slightly up rate environment.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Moving on to the income statement, GAAP non-interest expense was $59.5 million and included $1.2 million in acquisition-related expenses. Core non-interest expense for the second quarter was $58.4 million, up $3.1 million from the prior quarter. This was slightly higher than our expectation for the quarter and mostly due to elevated marketing and advertising spend. Recall during the prior quarter, our marketing and advertising spend was lower than expected. When we consider the entire first half of the year, we could consider overall core marketing expenses to be in line with expectations. Going forward, we do expect expenses to be lower as we recognize cost saves in the fourth quarter from the Progressive acquisition. As a reminder, that core conversion for Progressive is scheduled for mid-August. Second quarter GAAP and core non-interest income was $14 million and $13.4 million respectively.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

GAAP results did include $6,000 loss on sale of securities and a $545,000 gain on extinguishment of debt. Core non-interest income results for the second quarter were relatively consistent with our expectations, primarily due to slower swap fee revenue. As we have mentioned in the past, some of our non-interest revenue business can be lumpy from quarter to quarter, but overall, in the intermediate and long-term, we do expect to steady build an overall contribution. Lastly, I'd like to highlight the improvement in credit quality that we saw during the second quarter. The ratio of non-performing loans compared to loans held for investment decreased 27 basis points to 1.26% to June 30th. While the ratio of non-performing assets compared to total assets decreased 15 basis points to 1.23% for linked core.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

This was largely driven by the resolution of certain previously identified CRE commercial business relationships during the second quarter. We are pleased with the improvement and progress in credit resolution during the quarter, as we expect to continue improvement over the next couple of quarters. That concludes my prepared remarks, and I'll hand the call back over to you, Jude, for anything you'd like to add before I open it up for Q&A.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Great. Thanks, Greg. I think we're ready to move to Q&A. Thank you.

Operator

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone or your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. Our first question comes from the line of Matt Olney with Stephens. Your line is open.

Matt Olney
Matt Olney
Managing Director at Stephens

Hey, guys. Good afternoon.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Good afternoon.

Matt Olney
Matt Olney
Managing Director at Stephens

I want to ask more about the balance sheet repositioning that you guys disclosed. It seems like this will give you some excess liquidity that you want to redeploy to the back half of the year. Just any more color on how you expect this to play out and what this means for margin and average earning assets and interest income the back half of the year? Thanks.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Yeah, good question. Thanks, Matt. First of all, the transaction happened in just the last few days of the quarter. Really no impact other than the assets being lower at the end of the quarter on a point-in-time basis. We had started at the closing of the Progressive transaction, started kind of running analytics on this and finally came to an agreement. Going forward, we expect to pick up about four basis points go forward impact to the margin in the quarter. That's just at a very minimal, just applying that liquidity to borrowings or anything like that. I think that's a pretty reasonable expectation.

Matt Olney
Matt Olney
Managing Director at Stephens

Greg, just to follow up there, given the timing of the loan sale, should we anticipate average earning assets would move lower in the near-term, so a little bit of drag on the NII?

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

I don't think so. I think we should have had a replacement for that in Q3 with asset growth with the loan pipeline. I don't know that there'd be a material impact to it.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

We continue to expect, with the build in the pipeline, a high single-digit annualized increase in both the third and fourth quarters. We would anticipate putting that liquidity to work, ballpark, you could say half in the third quarter and half in the fourth quarter.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Yeah.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

No, we don't expect Clearly, we ended the quarter with the loan growth being hidden somewhat by the sale. We expect based on our pipeline, to be able to put that to work pretty quickly.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

The other part of that, Matt, is we have about a $21 million reduction in non-performing loans. Actually, we resolved about $35 million during the quarter. $31 of that paydowns and about $4 million of that ballpark moved to OREO. Those two things combined should give us a little bit of margin expansion, but also we have the ability with the pipeline that we're seeing to put those to work pretty quickly.

Matt Olney
Matt Olney
Managing Director at Stephens

Okay. I guess, switching gears to the funding side. I think Jude mentioned part of the deposit decline in 2Q was strategic and part of it was seasonal. Just want to dig more into that. I would assume borrowings this quarter that went up just had a more favorable cost than some of the-

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Yeah

Matt Olney
Matt Olney
Managing Director at Stephens

brokered deposits. Any more color there and expectations for the back half of the year on deposit?

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Yeah. I'll touch on each of it, I think they're kind of independent from each other. The deposit outflow, $237 million in interest-bearing outflows. Majority of that was from municipals and commercial money market accounts, $77 specifically to commercial money market accounts. Good news is we've seen a lot of that so far this quarter come back in. We feel like that is pretty seasonal actually, Matt. We had a smaller balance sheet a year ago, but that same on a percentage basis, the same outflow year-over-year. The broker that we paid down looked slightly over $60 million in broker. That was weighted average above 4%. We felt that was the right thing to do that and had the cash on balance sheet to do it.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

I think the borrowings is more forward-looking in price relative to the pipeline build, I think, and gives us a little bit of optionality as we go forward.

Matt Olney
Matt Olney
Managing Director at Stephens

Okay. Thanks for the color. I'll step back.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Thanks.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

I think, Matt, just a little more color on the Excuse me one second. Just a little more color on the seasonality. We just tend to have a lot more seasonality around tax payments. Also, we have a number of long, long-term relationships with municipalities and governmental authorities, not only with b1BANK, but some of our predecessor institutions that we've partnered with through acquisition. They tend to reach a low point in the second quarter as well and then begin building back up. It's mainly due to the composition of some of our larger clients that seasonality occurs.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

As Greg said, on a proportional basis, this year was essentially the same from an impact standpoint as last year and the year before that and really the general movement that we've seen for a good 10 years now.

Matt Olney
Matt Olney
Managing Director at Stephens

Thank you.

Operator

Our next question comes from the line of Feddie Strickland with Hovde Group. Your line is open.

Feddie Strickland
Feddie Strickland
Director of Equity Research at Hovde Group

Hey, good afternoon, gentlemen. Greg, I just wanted to go back to your comments on expenses. You understand the cost saves in the fourth quarter from the systems conversion was Progressive. In the third quarter, are you saying we'll see the advertising line and maybe some of these professional legal fees drop down, maybe closer to what you had in the first quarter? Or how should I think about, I guess, the expense cadence going into the third quarter here?

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Yeah, I would say the directional way to see it is slightly down in the third quarter, closer to 58 third quarter, closer to 57 in the fourth quarter, is the way we think.

Feddie Strickland
Feddie Strickland
Director of Equity Research at Hovde Group

Okay, got it. Just wanted to ask to switch into the capital side. I mean, it looks like share repurchases picked up some this quarter. With Progressive behind you at this point, is that something we could see more of over the next couple quarters, or was that maybe a little bit more opportunistic?

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Yeah, I think we think at the price we're at, as long as it stays above $120, that's kind of where we started doing the math on the value based on our other capital opportunities. I think the other two capital opportunities we have, obviously one would be our organic growth opportunities with our Houston team that we recently hired, and just the other loan pipeline opportunities we have would be the first, as far as capital use primary. The second thing we have in the near-term is the callable event of our preferred stock next year in September. We have the ability to pay that down in part or whole next September. I think that would be another useful opportunity for the capital. Those are kind of in the order we've been thinking about them right now.

Feddie Strickland
Feddie Strickland
Director of Equity Research at Hovde Group

Got it.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Matt can probably give you a little bit of a projection for where we expect to end the year capital ratio-wise.

Matt Sealy
Matt Sealy
SVP and Director of Corporate Strategy and FP&A at Business First Bancshares

Yeah. Capital-wise, consolidated total risk base in just under 14%, around 13.9%. On CET1, just under 10.6% probably on a consolidated basis to end the year. TCE likely to reach about 9%, and that's assuming mid eight-ish percent annualized loan growth next couple quarters, kind of steady balance sheet growth and like Greg Robertson mentioned early, continued margin expansion.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

We'll enter 2027 with as much capital optionality as we've had in a number of years from a position of relative capital strength compared to hitting its low, I guess, in 2022 is probably when we hit our low. Looking forward to reinvesting that primarily in organic growth, as Greg Robertson mentioned, but it'll be nice to be able to have some savings projected through the refi of the preferred equity near the end of the year as well.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Feddie, we'll continue to have our plan in place to look and be opportunistic with repurchases. We did 176,000 shares, about $4.8 million in the second quarter. If the opportunity arises, we'll be ready for that as well.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Yeah. Hey, Feddie, congratulations on your second baby, by the way.

Feddie Strickland
Feddie Strickland
Director of Equity Research at Hovde Group

Oh, it's number one, but I appreciate it.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Oh, number one. Well, fuck that. It feels like two.

Feddie Strickland
Feddie Strickland
Director of Equity Research at Hovde Group

Thank you very much.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

All right, double congratulations.

Feddie Strickland
Feddie Strickland
Director of Equity Research at Hovde Group

Thank you. I'll step back.

Operator

Next question comes from the line of Gary Tenner with D.A. Davidson. Your line is open.

Gary Tenner
Gary Tenner
Managing Director and Senior Research Analyst at D.A. Davidson

Thanks. Good morning. Excuse me, good afternoon. Just wanted to ask on the deposits, you talked about the seasonality and the outflows of some of the commercial money market that's come back in this quarter. With that money coming back in, which I assume is coming in a little bit higher than kind of the average cost was in the quarter, does that put any pressure on deposit costs? Or are there other levers to pull within the deposit portfolio to continue to push costs down?

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Gary, there's two components to that. We were up in non-interest bearing about $8 million quarter-over-quarter, and we continue to see that build. We've had some early success in the quarter with that. That gives us a little bit of pricing optionality as well. Then I think the second part that I've been surprised about is the inflows we've seen have been coming back in pretty much matching the average weighted rate for Q2. Hadn't really experienced any lift yet, but it's early. We're optimistic about that.

Gary Tenner
Gary Tenner
Managing Director and Senior Research Analyst at D.A. Davidson

Got it. Just as it relates to the CD book, the weighted average rate 330 in the quarter, is there room to push that down? Or are we now sort of at stasis on the funding side without any Fed action?

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

No, we've got some opportunities with both broker and organic CDs in the third and the fourth quarter to reprice those down. We'll hopefully, if rates stay where they are, we may be able to take advantage of that.

Gary Tenner
Gary Tenner
Managing Director and Senior Research Analyst at D.A. Davidson

Okay. I may have missed it if you noted it in your prepared remarks, but in terms of the swap fees and the decline there quarter-over-quarter, could you just talk about the dynamics around that?

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Yeah. I think the dynamics about that naturally was we had a really good second quarter in those swap fees for the second quarter. They were down, but probably closer to inline with the forecast for the year. I think we've already got some indications, some pretty good wins in the third quarter. I think we'll see that come back up closer to Q2 levels.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Really good. Really strong first quarter.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Yeah, strong first quarter.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

In comparison, they were down, but they really were in line with our expectations. I think also, it's a relatively nascent business, these newer businesses can be lumpy. Just a couple happening or not happening quarter-over-quarter can make a difference to the top line that's still material. As we mature it, as has happened with all of our lines of business over the years, we'll be able to de-lumpy it. I'm not sure that's a word, but we'll hopefully kind of smooth it out a little bit. It's still young enough that just a couple deals do make a difference in a given quarter. Same with our SBA business and really our financial services group as a whole, which is still a fairly new entrepreneurial endeavor.

Gary Tenner
Gary Tenner
Managing Director and Senior Research Analyst at D.A. Davidson

Thank you.

Operator

Our next question comes from the line of Christopher Marinac with Green Capital. Your line is open.

Christopher Marinac
Christopher Marinac
Analyst at Janney Montgomery Scott

Hey, good afternoon. Wanted to dig a little bit further into criticized asset trends and kind of what you were seeing there and maybe how that may look a few quarters out.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Yeah. Chris, we're happy with the resolutions we got in the second quarter that I mentioned. As we look out into Q3, I think seeing that we ended at $80 million point for Q2, we're working toward possibly a 10%-20% resolution again, and we think that's achievable in Q3 in NPLs, and also reduction in OREO, possibly 10%-15% of that as well. We feel like that's achievable in Q3. We think that'll continue to maybe slightly down from there in Q4. We think that it's achievable to end the year closer to $50 million or slightly below. Historically for us, that has been an area that's been pretty normal, so $40 million-$50 million in NPLs.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

The good news from a credit front are two things, I think, that have kind of when you start pulling the curtain back a little more is past dues for us for the first quarter and the second quarter continue to be more in line with our historical expectations below 50 basis point or one half of 1%. I think the other thing is if you look at the watch list, specifically what we call 45 and 50 credits, those are the ones that we start watching that haven't made it to non-performer yet or classified. At the end of the year, that was about $450 million. That's down to about $330 million at the end of June.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Those two things from a forward-looking perspective, along with we haven't seen any major build in NPLs, give us kind of outlook on the future that we think we've kind of gotten past the little lumpy period that we had with those few problem credits we talked about probably for three or four quarters, and then started resolving last quarter.

Christopher Marinac
Christopher Marinac
Analyst at Janney Montgomery Scott

Great. That's really helpful, Greg. Thank you for that background. Does any of this give you relief on the allowance going forward, or would you just assume kind of grow into what you have at this moment?

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

I think our plan is to try to grow into what we have. We're pretty flat quarter-over-quarter. As the improvement with some of the classified, criticized loans move out, I think it gives us the opportunity just to continue to bolster the good books within the pool and continue our plan to try to reserve 1.20x all new loan growth, because we feel like we'd like to continue to grow it.

Christopher Marinac
Christopher Marinac
Analyst at Janney Montgomery Scott

Great. Thanks again for hosting us today.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

Thanks.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Thank you.

Operator

Next question comes from the line of Michael Rose with Raymond James. Your line is open.

Michael Rose
Michael Rose
Analyst at Raymond James

Hey, good afternoon, guys. Thanks for taking my questions. Most of them have been asked and answered. Jude, you spent some time in the prepared remarks talking about the Meta investment in Louisiana in general. Can you size what that kind of means for you guys from an opportunity perspective? I assume you're not making loans to Meta or doing data center loans or things like that. What does that really mean in the context of the ability to grow both loans and maybe some of the fee products? Would just love some color there. Thanks.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Yeah, no, you're right. In fact, we had a good discussion in our board meeting today about that. We're certainly not camping out next door expecting to bank the data center itself. When you have an entity that large, there are an awful lot of vendors, service providers that need to operate there on a regular basis. That would be our initial opportunity to bank small businesses that are doing work for the data center. Even after the construction period, there will be maintenance, there will be materials needed. There'll be transportation requirements and things of that nature. What we're finding is that not only is there opportunity specifically in that geography, but the investment is so large that they're needing to bring in vendors from contiguous geographies.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

We've actually seen that some of our client base in Baton Rouge and Lafayette and Lake Charles and even Houston are actually generating work related directly to the data center development in the Rayville area. That's one thing I would say. Second thing I would say is that what we anticipate happening is the dollars that are being spent there will trickle throughout the community and will show up in a more dispersed way than just the company that's investing there and just the companies doing business there. A good example is recently, the Richland Parish School Board gave each of their teachers a $50,000 bonus for last year's work. The tax implications of that was made possible because of taxes surrounding the data center investment.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

There will be opportunities for reinvestment by the municipalities and the other governmental entities in the region that will ultimately benefit a wider array of citizens. We now, although we began with a very limited branch network focused primarily on small businesses, over time, we've grown to be the largest Louisiana-headquartered bank as measured by Louisiana assets. Number five in Louisiana in number of locations. As the positive economic impact trickles down to the communities throughout Louisiana, we feel like we're as well-placed as any entity to take advantage of that general economic positive turn. It's really not anything that's magic per se about banking the data center itself. By the way, there are other data centers underway in other parts of the state, including where we are, including Bossier Parish.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

We don't anticipate all of a sudden doing major macro loan deals with the data centers themselves. As the economic benefits trickle down, we believe again, that we're well-placed to do traditional community banking across our footprint. As long as we put in the effort and put in the work and treat the clients right, then we should be a prime beneficiary of that trickle-down effect. Exciting.

Michael Rose
Michael Rose
Analyst at Raymond James

Oh, go ahead, sorry.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

I was going to say it's exciting not just for the data center itself, but for the wider potential effects that will take a little while to play out. That's not a third quarter thing, right? I mean, there is activity there. There's work there. We are seeing some loan demand increase because of the businesses that we bank that are doing business there. I think the longer-term effects are what is really exciting about the opportunity, both for us and for the citizens of Louisiana.

Michael Rose
Michael Rose
Analyst at Raymond James

Very helpful commentary. Maybe just one follow-up on top of that. As we think about the second half of the year, you mentioned the loan growth pipeline, redeploying the loan sale proceeds. You obviously talked about credit continuing to get better. You got the cost saves from Progressive coming, and then you just talked about Meta in Louisiana and all that stuff. What do you think investors are under-appreciating most about the story at this point, and maybe where do you see potential upside to where expectations currently are? I know it's a long, maybe tough question, but maybe just a couple of points would be, I think, helpful because it seems like there's a fair amount of tailwinds here. Thanks.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Sure, thank you. I think a couple things. One is that I think that historically, investors and analysts have not appreciated. I shouldn't say appreciated. I think they haven't turned to Louisiana for growth, right? Louisiana has historically been a stable place and had a couple of periods where we were too concentrated and showed up in a couple of energy crises. I think that over time, investors really haven't spent a lot of time looking at or thinking about Louisiana, particularly relative to the more exciting headline news from our neighbor to the west. If you just compare the two over the past 10, 15 years, it's pretty clear why investors would spend more time thinking about Dallas and Houston, which is good for us as well. It means that Louisiana, I think, just hadn't gotten a lot of attention.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

My first point would be, I don't know that it's what are they missing? I think it's just that they're only now beginning to realize that they should look harder at Louisiana than they might have over the past 10, 15 years when the news wasn't as growthy as it potentially is now. Second of all, I would say some of the news is recent. The increase in the investment in Meta that I just mentioned literally happened in the last 10 days. I think Sunday night last was the pre-announcement, and they announced it on Monday. It really isn't realistic to expect that investors would pick up on that quickly.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

I think some of the news, the data center in Bossier, for example, and the one near St. Francisville, which is north of Baton Rouge, I just think it's all a bit new, and I think as a country, we're still figuring out exactly what data center development is going to look like, right? What the actual impact is going to be. One reason that I feel comfortable that it's going to be extremely positive here is that we haven't had those significant growth opportunities. On a relative basis, we have more room to grow than some other places do. Whatever the development is, whether it's a quarter of what it sounds like it's going to be, or whether it's 50%, or whether it's 100%, it's going to be significant.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

I think unless you've already been paying attention here, it might be hard to put that in the proper context. I think it's moving quickly. I think that there are still some unknowns nationally about the economic flow and transfer and the trickle-down effect. We'll all have to kind of learn that together. I do believe, given our starting point in Louisiana, that it's hard to imagine that it won't be a net very positive outcome.

Michael Rose
Michael Rose
Analyst at Raymond James

I appreciate all the color. I'll step back. Thanks, guys.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Okay.

Operator

Our last question comes from the line of Matt Olney with Stephens. Your line is open.

Matt Olney
Matt Olney
Managing Director at Stephens

Hey, guys. A few follow-ups here. On the credit front, Greg, you mentioned some more resolutions the back half of the year. Any color as far as anticipated charge-offs from these resolutions?

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

I would say what we would expect. It's hard to say back to historical because our historical charge-offs were very low, almost nothing. I think high single digits would be something we expect on an annualized basis in a normal quarter in these next two quarters, possibly. Then we kind of go from there. If we have something that pops up and we have to take more of a loss, it might look more like what this quarter did.

Matt Olney
Matt Olney
Managing Director at Stephens

Okay.

Greg Robertson
Greg Robertson
CFO at Business First Bancshares

We think we're working them close to where they're not going to be any significant losses. We're in the risk business, it's hard to say no losses, Matt.

Matt Olney
Matt Olney
Managing Director at Stephens

Understood. Thanks for the color. Then market disruption in your marketplace. I know we've talked a lot about this over the last year, you've had some nice wins, nice announcements from some new hires. Didn't know if there was any other announcements or updates to any more benefits of market disruption.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

We were able to add two or three members to the team in Houston in the second quarter. We feel like for now, we want to kind of consider that our team, and we want to begin producing and making sure that that's clicking the way that it should. I do anticipate, as we have success, that there will be other opportunities to add to that team. I know our market leader there As regular, is called upon regularly by folks that are interested in talking. Again, I think we're kind of where we want to be for the short run.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

I do think over the long run, our biggest opportunity, and it's one of the biggest reasons that I mentioned earlier, Greg mentioned the primary use for our capital in the upcoming quarters is likely to be organic because we do believe there is continued opportunity around that disruption. I don't see that tailing off in the near-term. We're having a few conversations in Dallas. We're not quite as aggressive in Dallas as we are in Houston just because of the relative size of our franchise in each. We feel like Houston. We made that investment in Texas Citizens a few years ago, and we want to be sure that we invest properly in that market. We do still need to be tempered in our salary expectations. We've made commitments to you and to ourselves about our increased structural profitability.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

We want to be sure that we follow through on those even while we're taking advantage of the opportunities. We do see continued opportunities on the disruption front. If you think about the banks that have our kind of range of size and capability, there aren't very many of us in Louisiana and in Texas, and in particular in Dallas and Houston. We see that not only disruption as a possibility in terms of employees coming over, but also in terms of types and sizes of businesses that are looking for a bank that is a community bank in attitude but is a larger bank in terms of capabilities. We're most excited about the potentials for our franchise, given that disruption, which we think will continue to be an opportunity.

Matt Olney
Matt Olney
Managing Director at Stephens

Yep.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

I started rambling a little bit. I think I answered your question. Did I answer your question, Matt?

Matt Olney
Matt Olney
Managing Director at Stephens

You answered it and then some. Appreciate all the great color as always.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Okay, good. I answered your follow-on question too.

Matt Olney
Matt Olney
Managing Director at Stephens

Well, just one last one from me here. We've talked a lot about the ROA goal, the 125 exiting the year in the fourth quarter, and would love to hear any more commentary about that with respect to this quarter, especially the balance sheet repositioning. I would think that would be supportive of the ROA given the lower yielding nature of those loans that were sold. Anyway, just love any commentary from that. Thanks.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Yeah. Well, that's kind of what I generally was starting off with in my prepared remarks, just about this being a good step along the plan that we've been articulating for you all over the past few quarters and our intention to increase our structural profitability even as we have growth. We feel like we are on plan. It doesn't mean that it's a slam dunk, it doesn't mean that it's automatic that we'll be able to get to the 125 ROA, we still believe if we perform and execute and things go our way, that is a credible opportunity for us to kind of reset our structural profitability. That's the goal for the rest of the year. Even if we were to not quite get there, we've still made material improvement and still plan to continue to have that focus next year as well.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

We'll continue working on it. That's our primary goal. Yes, I think to get there, it is going to require that this pipeline comes to fruition to a certain extent. I think it also requires some margin expansion, which to your point, the restructuring is a significant boost to those efforts as well as the loan growth. It requires continued discipline on expenses. We've had really flat salary cost over the past four quarters essentially, and anticipate that continuing over the next couple certainly. Our team has been improving its ability to be productive. We're significantly larger than we were a year and a half ago, two years ago, and have a very similar number of people at the bank. I'm proud of that. It's certainly a part of our daily conversation.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

How can we help our employees be the most they can be, which helps us be the most we can be from a production and a profitability standpoint. Yes, that's still our target, and we do need to execute, and things need to go our way, but we feel like that's a realistic path that we're focused on achieving. A little bit of a stretch when we laid it out last year, but if you don't stretch yourself, then you don't get anywhere. We're excited about that. I do think that it's time for us to produce at that level of profitability as a franchise. We're 20 years old.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

If you go through the different list of things that we've accomplished, the list is pretty long, and we've checked a lot of boxes in terms of our ability to grow, in terms of our ability to do M&A, in terms of our ability to see through asset quality challenges, our ability to see through loan concentrations that have evolved over the years. As with all banks that are our age, to see through a number of macro crises that have occurred even while we've grown to non-billion. We're very proud of all that, but that only really matters at the end of the day if we then end up providing the right return to shareholders, and that means turning these investments into consistent profitability, which is our goal. I think we're well on our way towards doing that.

Matt Olney
Matt Olney
Managing Director at Stephens

Okay, that's perfect. Thank you, Jude.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Thank you. I want to mention, just on the same subject, we did get a written-in question about dividends and our intentions there. We did declare a dividend that we announced in the press release, and it was a consistent dividend with where we were last quarter. We've now, I believe, seven years in a row, once we started paying a dividend, we have increased it seven years in a row. We'd still like for that to be our goal. We feel like we have 50% of our shareholders who are retail investors that have partnered with us and stuck with us through these acquisitions, and the dividend's important to them as it is to us. We'll continue the dividend path, and the goal would be to incrementally increase on an annual basis. Not on a quarterly basis, but on an annual basis.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Anyway, I wanted to take an opportunity since we were talking about that. We've historically kind of targeted about 20% of earnings. That's roughly where we are now. As our earnings power appreciates, then there's no reason to think that to some degree, our opportunity to reward shareholders with dividends would track that increased shareholder profitability, as has the ability to buy back shares. Which again, we've only this year begun to strike opportunistically on that front. That's the result of our earnings leading to increases in capital, which gives us that optionality. We assume that that opportunity will continue as well as we're focused on building tangible book value, and again, that structural earnings increase in our profile. Thanks for letting me answer that other question with your question, Matt.

Operator

That concludes the question-and-answer session. I would now like to turn the call back over to Jude Melville for closing remarks.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Great. Well, thank you. I appreciate, again, all of y'all joining. I think I had a pretty good opportunity to articulate the things that are important to us and that we're working on, that what we see as opportunities, all of which should turn into accumulating tangible book value and providing a good return on everybody's investment. I would like to take just a final thought or a final moment to wish our team good luck. In August, we'll do the conversion, as both Greg Robertson and I mentioned. Although we have had experience now and have done it successfully a number of times, it's still a stressful and critical weekend preparing for that. I want to thank and wish the best of luck to not only the former Progressive employees that are now b1 employees, but also our ops teams and everyone that's involved in that process.

Jude Melville
Jude Melville
Chairman, President, and CEO at Business First Bancshares

Our first acquisition that we did a long time ago now, I guess about 11 years ago, we learned a lot of lessons. We've worked hard to invest in that process. I'm really proud of that side of the bank in terms of their ability to execute. We anticipate, particularly based on the positivity with which the Progressive teams have tackled the opportunity, probably as positive as any partners that we've had from that perspective. We're confident that we will succeed on the conversion weekend. We will be ready to go in terms of helping provide capital to the communities that we're honored to serve in North Louisiana and, of course, across our footprint. Thank you all very much, and hope everybody has a good end of the week.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Executives
    • Matt Sealy
      Matt Sealy
      SVP and Director of Corporate Strategy and FP&A
    • Jude Melville
      Jude Melville
      Chairman, President, and CEO
    • Greg Robertson
      Greg Robertson
      CFO
Analysts
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