Business First Bancshares, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2019; balance-sheet comparisons are to December 31, 2018. Business First is a Louisiana-based community bank holding company operating 25 banking centers across Louisiana and Dallas, Texas, with a focus on small and medium-sized businesses and professionals. The filing notes that interim results are not necessarily indicative of full-year results.
Year-over-year comparisons reflect the November 2018 acquisition of Richland State Bancorp (RSBI), as well as organic growth; they are not strictly like-for-like.
Financial performance and condition
| Metric | Q3 2019 / Sep. 30, 2019 | Comparable period / prior date |
|---|---|---|
| Net interest income | $20.3 million for the quarter; $59.6 million for nine months | $15.6 million and $45.1 million, respectively, in 2018 |
| Net income | $5.5 million for the quarter; $18.0 million for nine months | $3.9 million and $10.6 million, respectively, in 2018 |
| EPS | Quarter: $0.41 basic, $0.40 diluted; nine months: $1.35 basic, $1.32 diluted | Quarter: $0.34 basic, $0.33 diluted; nine months: $0.99 basic, $0.95 diluted |
| Net interest margin | 4.10% for both the quarter and nine-month period | 4.05% and 4.00%, respectively, in 2018 |
| Net interest spread | 3.66% for the quarter; 3.68% for nine months | 3.70% and 3.72%, respectively, in 2018 |
| Total assets | $2.221 billion | $2.095 billion at Dec. 31, 2018 |
| Loans held for investment | $1.695 billion | $1.528 billion at Dec. 31, 2018 |
| Total deposits | $1.733 billion | $1.734 billion at Dec. 31, 2018 |
| Cash and cash equivalents | $63.4 million; federal funds sold were an additional $43.7 million | $96.1 million in cash and cash equivalents at Dec. 31, 2018 |
| Shareholders’ equity | $280.3 million; book value per share $21.12 | $260.1 million and $19.68, respectively, at Dec. 31, 2018 |
For the first nine months, return on average assets was 1.14% versus 0.87% in 2018, and return on average equity was 8.88% versus 7.45%. The allowance for loan losses was $12.1 million, or 0.71% of loans held for investment, compared with 0.73% at year-end 2018. Nonperforming loans were $11.9 million, or 0.70% of loans, versus $13.6 million, or 0.89%, at year-end.
Nine-month cash flow: operating activities provided $21.5 million; investing activities used $166.0 million, including $172.2 million of net loan growth and $17.4 million paid in the branch sale; financing activities provided $111.8 million, including $73.0 million of net FHLB advances. Cash and cash equivalents decreased $32.7 million over the period.
At September 30, borrowings included $128.0 million of FHLB advances, $31.0 million of repurchase agreements and $25.0 million of subordinated debt. FHLB borrowing capacity was $617.3 million, with $128.0 million outstanding; six bank credit lines provided up to $126.0 million, with none drawn. The company and bank met applicable regulatory capital requirements; the bank was classified as well-capitalized. Consolidated ratios were 10.59% Tier 1 leverage, 11.50% CET1 and Tier 1 risk-based, and 13.42% total risk-based capital.
Material changes versus comparable periods
- Quarterly net income rose 41.3% year over year; nine-month net income rose to $18.0 million from $10.6 million. Loan growth and higher asset yields increased net interest income, while higher deposit and borrowing costs absorbed part of the benefit.
- Nine-month total interest income increased to $76.8 million from $54.6 million; interest expense increased to $17.2 million from $9.5 million. Average loan yield increased to 5.87% from 5.48% for the nine-month comparison, while the average rate on interest-bearing liabilities rose to 1.61% from 1.13%.
- Noninterest expense increased 20.7% for nine months to $43.2 million, primarily reflecting RSBI-related staffing and operating costs. Salaries and benefits rose to $26.1 million from $20.4 million. The company had 346 full-time equivalent employees, versus 253 a year earlier.
- Provision for loan losses was $2.4 million for nine months versus $1.5 million in 2018, attributed primarily to a previously identified impaired loan and higher loan balances. Net charge-offs were $1.5 million, compared with net recoveries of $65,000 in 2018.
- Deposits were essentially flat from year-end despite growth in noninterest-bearing deposits, partly because the company sold its Mangham, Louisiana branch and $24.9 million of associated deposits. FHLB advances increased from $55.0 million to $128.0 million.
- Unrealized securities gains improved accumulated other comprehensive income to $2.7 million from a $3.5 million loss at year-end. The securities portfolio’s fair value decreased to $288.2 million from $309.5 million.
Outlook, commentary, risks and unusual items
- Management anticipated continued pressure on net interest margin and spread, citing the yield curve, despite significant loan growth. No quantified earnings or growth guidance is provided.
- The nine-month increase in noninterest income included $581,000 gain on sale of a banking center and $1.4 million of SBIC partnership pass-through income, largely related to a dividend recapitalization. A $650,000 loss on disposal of other assets was largely related to rebuilding the Port Allen branch. Management’s non-GAAP core measure excludes selected noncore items; nine-month core net income was $18.5 million versus GAAP net income of $18.0 million.
- The June 2019 sale of a branch acquired from RSBI reduced goodwill and core deposit intangible by $1.3 million and generated a $581,000 gain. A separate $650,000 disposal loss was reported in noninterest income; investors should review the detailed accounting and reconciliation of these items.
- Credit exposure includes commercial real estate and commercial lending; nonfarm nonresidential loans were 36.6% of loans at quarter-end. Management identifies economic conditions in Louisiana and Dallas/Fort Worth, oil-price and energy-sector volatility, collateral values, acquisition integration, loan growth, funding costs, liquidity and interest-rate changes as risks.
- Interest-rate simulations estimated that a 100-basis-point increase would raise one-year net interest income 3.0%, while a 100-basis-point decrease would reduce it 3.5%. These are model estimates, subject to assumptions and not forecasts.
- Off-balance-sheet commitments included $341.1 million to extend credit and $22.8 million in standby and commercial letters of credit; these may expire unused. Management said routine legal proceedings were not expected to have a material adverse effect. CECL adoption was expected after 2020, with the company anticipating the delay applicable to smaller reporting companies; management cautioned adoption may materially affect the financial statements.
- Subsequent events disclosed November 2019 executive employment and change-in-control agreements. The CEO agreement provides for a minimum $500,000 annual base salary and potential severance tied to salary and incentive compensation.
Important facts for investors to verify
- How much of reported loan and earnings growth is organic versus attributable to RSBI, and whether integration benefits will offset ongoing costs.
- Whether rising funding costs, deposit repricing and the yield curve constrain net interest margin as management expects.
- Credit trends within the growing commercial real estate and commercial portfolios, including criticized loans, delinquencies, charge-offs and adequacy of the allowance.
- Cash and funding needs given loan growth, the decline in cash balances, increased FHLB borrowing and $363.8 million of credit and letter-of-credit commitments.
- The recurring contribution of SBIC income and the precise classification and earnings effect of branch-sale and asset-disposal items; compare GAAP results with management’s non-GAAP core measures.
- Capital headroom as assets grow, and the eventual financial impact and implementation timing of CECL.