Business context and reporting period
Business First Bancshares, Inc. (NASDAQ: BFST) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. Through b1BANK, it operates a community banking business across Louisiana and the Dallas/Fort Worth area. Unless noted otherwise, dollar amounts below are in millions.
At quarter-end, the company reported $4.405 billion in assets, $3.066 billion in loans held for investment, $3.768 billion in deposits and $430.2 million in shareholders’ equity. The 2020 comparison is affected by the May 2020 Pedestal acquisition; 2021 also includes the April 2021 acquisition of Smith Shellnut Wilson (SSW).
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net income | $10.3 in 2021; $9.6 in 2020 | $40.1 in 2021; $16.2 in 2020 |
| Diluted earnings per share | $0.50; $0.46 | $1.94; $0.93 |
| Net interest income | $37.3; $36.9 | $115.5; $88.1 |
| Provision for loan losses | $1.1; $2.5 | $6.7; $9.3 |
| Noninterest income | $6.3; $4.2 | $28.8; $12.0 |
| Noninterest expense | $29.6; $27.0 | $87.6; $71.4 |
| Net interest margin | 3.71%; 4.06% | 3.93%; 3.97% |
For the first nine months, return on average assets was 1.23% versus 0.67%, and return on average equity was 12.60% versus 6.30%. Reported nine-month earnings included a $9.2 million gain from selling most of the SBA Paycheck Protection Program (PPP) loan portfolio. Management’s non-GAAP core net income was $42.2 million for the 2021 period versus $23.3 million in 2020; the filing’s reconciliation identifies adjustments including acquisition expenses, hurricane repairs and asset-sale items.
For the nine months, operating cash flow was $41.8 million, investing cash flow was negative $312.8 million and financing cash flow was positive $203.3 million. Cash and cash equivalents at period-end were $81.4 million, down from $149.1 million at year-end 2020. Cash, federal funds sold and due from banks totaled $86.0 million at September 30, versus $323.3 million at December 31, 2020.
Deposits increased 4.2% from year-end 2020; loans held for investment increased 2.5%. Available-for-sale securities rose 61.5% to $1.034 billion, as excess cash was invested. Interest-bearing funding costs declined, but the quarterly net interest margin fell 35 basis points year over year. Management said it expects continued margin and spread pressure under the then-current yield curve.
The allowance for loan losses was $28.1 million, or 0.92% of loans held for investment, versus $22.0 million, or 0.74%, at year-end 2020. Nonperforming loans were $13.7 million (0.45% of loans), compared with $10.6 million (0.35%) at year-end; nonperforming assets were $16.5 million versus $20.0 million. Bank regulatory capital ratios included 11.36% Tier 1 and Common Equity Tier 1 and 12.13% total risk-based capital; b1BANK was classified as well-capitalized.
Subordinated debt was $81.4 million, up from $25.0 million at year-end, following a $52.5 million issuance and $3.9 million issued in connection with the SSW acquisition. Total borrowings, including subordinated debt, were $177.7 million. The company reported $854.1 million in commitments to extend credit and $35.3 million in standby and commercial letters of credit; these off-balance-sheet commitments may not be fully drawn.
Material changes and unusual items
- In June, the company sold approximately 2,000 PPP loans with a $243.6 million balance, recognizing a $9.2 million gain. Remaining PPP loans totaled $9.7 million at September 30.
- SSW, an investment adviser with approximately $3.5 billion in assets under management, was acquired on April 1. The company recorded $6.5 million of goodwill and $4.3 million of customer intangibles.
- Loan growth in construction and land and nonfarm nonresidential categories was partly offset by the PPP loan sale; commercial loans declined 18.4% from year-end 2020.
- On October 1, after quarter-end, the company sold its Oak Grove banking center, including $3.7 million in loans and $18.7 million in deposits, with an estimated $495,000 pretax gain.
- On October 20, after quarter-end, the company agreed to acquire Texas Citizens Bancshares, which had $516.9 million in assets, $365.7 million in loans and $452.0 million in deposits as of September 30. Completion and integration are subject to risks and conditions.
- The company repurchased $10.9 million of common stock during the first nine months and declared $0.34 per share in dividends for that period. A $0.12 per-share quarterly dividend was declared after quarter-end.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management cited continued net interest margin pressure as a possibility. Risks highlighted include COVID-19 effects on customers and credit quality; economic and energy-sector weakness; interest-rate, liquidity and securities valuation exposure; loan concentrations in Louisiana and the Dallas/Fort Worth region; and execution, integration, customer-retention and cost risks related to acquisitions, including the proposed TCBI transaction. Hurricane Ida-related repair expenses were $1.5 million for the first nine months.
The company reported that no COVID-19-modified loans remained in payment deferral at September 30, although it had previously granted deferrals on approximately 1,800 loans with $656.2 million in aggregate balances. Management stated that the modifications qualified for CARES Act relief from troubled-debt-restructuring treatment. The filing also describes routine legal proceedings that management did not expect to have a material adverse effect. Adoption of the current expected credit losses standard is scheduled for 2023; management said adoption may materially affect the financial statements.
Important facts for investors to verify
- How much of nine-month earnings growth is sustainable apart from the $9.2 million PPP sale gain and other noncore items; compare reported results with management’s non-GAAP core measures.
- Whether margin pressure continues, given the quarterly margin decline to 3.71% and management’s outlook.
- Trends in nonaccrual loans and criticized credit ratings, particularly as nonperforming loans increased from year-end despite lower nonperforming assets.
- Liquidity and funding needs after the decline in cash balances, alongside deposit trends, borrowings and the size of undrawn credit commitments.
- Regulatory capital effects and integration costs or benefits from SSW and the proposed TCBI acquisition; confirm the latter’s closing status and terms in subsequent filings.
- The eventual impact of CECL adoption and the treatment of hurricane-related expenses and other unusual items.