Business First Bancshares, Inc. quarterly report, Q3 FY2022

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Business context and reporting period

Business First Bancshares, Inc. is a Louisiana-based bank holding company operating through b1BANK, with markets in Louisiana, Dallas/Fort Worth and Houston. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods unless otherwise noted. The March 1, 2022 acquisition of Texas Citizens Bancorp (TCBI) materially expanded the company. Dollar figures below are in millions unless stated otherwise.

Financial performance and position

  • Third-quarter earnings: Net interest income was $53.5 million, up 43.4%; net income was $13.8 million, up 33.8%. Diluted EPS was $0.61 versus $0.50. Net interest margin was 4.05%, compared with 3.71%.
  • Nine-month results: Net interest income rose 24.2% to $143.5 million, while net income declined 9.4% to $36.3 million. Diluted EPS was $1.64 versus $1.94. Net interest margin was 3.86%, down from 3.93%.
  • Revenue and expenses: Nine-month total interest income increased to $161.6 million from $128.1 million, and interest expense rose to $18.1 million from $12.6 million. Noninterest income fell 25.2% to $21.0 million, mainly because 2021 included a $9.2 million gain on PPP loan sales. Noninterest expense rose 27.7% to $111.1 million, including $5.0 million of acquisition-related costs.
  • Assets and loans: Total assets were $5.81 billion, up 22.9% from year-end 2021. Loans held for investment were $4.43 billion, up 38.9%, largely reflecting TCBI and market growth; nonfarm nonresidential real estate loans were 41.1% of the portfolio.
  • Deposits and liquidity: Deposits totaled $4.59 billion, up 12.5%; noninterest-bearing deposits increased 25.0% to $1.61 billion. Cash and cash equivalents, including federal funds sold, were $163.8 million, down from $295.4 million at year-end. The company reported $154 million of correspondent-bank credit lines available and undrawn.
  • Funding and debt: FHLB advances increased to $534.1 million from $82.0 million, including a $483 million seven-day advance bearing 3.12% at quarter-end. Subordinated debt was $110.9 million, in addition to $5.0 million of trust preferred securities. The $5.0 million FNBB line was outstanding and scheduled to mature in November 2022.
  • Credit quality: The allowance for loan losses was $35.2 million, or 0.79% of loans, versus 0.91% at year-end. Nonperforming loans were $11.0 million, or 0.25% of loans, compared with $13.1 million and 0.41%. Nine-month provision expense was $7.8 million, up from $6.7 million; net charge-offs were $1.7 million, or 0.05% of average loans.
  • Capital and securities: Shareholders’ equity was $508.0 million, including $72.0 million of preferred stock issued in September. Company Common Equity Tier 1 capital was 7.81%, down from 9.04% at year-end; b1BANK’s was 10.76%. Available-for-sale securities had fair value of $885.0 million against amortized cost of $993.1 million, with $108.1 million of gross unrealized losses. Nine-month other comprehensive loss was $83.5 million after tax.
  • Cash flow: For the first nine months, operating activities provided $58.2 million; investing activities used $529.0 million, mainly reflecting loan growth; financing activities provided $555.1 million, including FHLB advances and preferred-stock proceeds.

Material changes versus comparable periods

  • Quarterly earnings improved year over year, supported by higher loan interest income and margin expansion. For the nine-month period, earnings and EPS declined despite higher net interest income, as 2021 included substantial PPP loan-sale gains and 2022 had higher operating and acquisition-related expenses.
  • Higher market rates lifted asset yields but also increased funding costs. Third-quarter overall cost of funds, including noninterest-bearing deposits, was 0.77% versus 0.44% a year earlier; the nine-month measure was 0.50% versus 0.43%.
  • TCBI added loans, deposits, assets, goodwill and assumed debt. The company recorded $28.6 million of goodwill from the acquisition and reported approximately $5.0 million in acquisition-related costs for the first nine months of 2022.
  • Book value per common share fell to $19.29 from $21.24 at year-end, reflecting, among other factors, the securities-related accumulated comprehensive loss. Tangible book value per common share was $14.73 versus $17.71.

Outlook, risks and unusual items

  • The filing gives no quantitative earnings or growth guidance. Management says loan growth was driven partly by TCBI and expansion in Dallas/Fort Worth and New Orleans; it expects deposits to remain the primary funding source and loans the principal use of funds.
  • Interest-rate simulations show estimated 12-month net interest income falling 4.7%, 6.7% and 9.0% under instantaneous increases of 100, 200 and 300 basis points, respectively. The filing cautions that model assumptions are uncertain and actual results may differ.
  • The company identifies risks including rate and funding-cost changes, liquidity and deposit retention, credit deterioration, real estate and commercial borrower exposure, geographic and energy-sector concentrations, and acquisition integration. Management states the allowance is based on estimates and further provision may be required if economic conditions or asset quality worsen.
  • TCBI integration and conversion costs were a significant expense item. The company also reported storm-related expenses and insurance reimbursements in its non-GAAP core earnings reconciliation.
  • Management considered securities’ unrealized losses temporary at September 30, 2022. The company reported a substantial increase in those losses as market rates rose; actual realization and the ability to hold securities are relevant considerations.
  • Commitments included approximately $1.34 billion to extend credit and $44.1 million of standby and commercial letters of credit; amounts may expire unused. Management said routine legal proceedings were not expected to have a material adverse effect, and reported no material changes to previously disclosed risk factors.
  • CECL credit-loss accounting was scheduled for adoption in January 2023. The company was running parallel models and said adoption could materially affect its financial statements.
  • After quarter-end, the company issued 2.5 million common shares at $20 per share on October 17, expecting net proceeds of approximately $46.8 million. The board declared a $0.12-per-share common dividend on October 26. Disclosure controls were reported effective; no material change in internal control over financial reporting was reported.

Most important facts for investors to verify

  1. Whether loan growth, deposit growth and customer retention continue without materially increasing reliance on short-term FHLB funding, and how funding costs respond to further rate changes.
  2. Whether securities-related unrealized losses remain temporary and how their market value affects equity, liquidity and capital.
  3. Credit performance in the large nonfarm nonresidential and commercial portfolios, including migration in criticized loans, charge-offs and required allowance levels.
  4. TCBI integration progress, realization of expected benefits, and the effect of acquisition costs and assumed debt on future earnings.
  5. The outcome of CECL implementation and any resulting changes to the allowance, earnings or capital; also confirm the effects of the post-quarter common-stock issuance and preferred-stock terms on per-share measures and capital.