Business context and reporting period
Business First Bancshares, Inc. is a Louisiana-based bank holding company operating b1BANK across Louisiana and Dallas, Texas. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. Results include Pedestal Bancshares from its May 1, 2020 acquisition; comparisons with 2019 are therefore affected by a materially larger business.
Financial performance and condition
Unless otherwise indicated, dollar amounts below are in millions.
- Second-quarter results: Net interest income was $30.9, up 53.1% from $20.2 a year earlier. Net interest margin fell to 3.89% from 4.19%. Net income was $2.1, down 70.0% from $6.8; diluted EPS was $0.11 versus $0.50.
- First-half results: Net interest income was $51.1 versus $39.3; net income was $6.6 versus $12.5. Basic and diluted EPS were both $0.42, compared with $0.94 basic and $0.91 diluted in 2019. Return on average assets was 0.46% versus 1.20%; return on average equity was 4.13% versus 9.38%.
- Credit costs and expenses: Provision for loan losses was $5.4 in Q2 and $6.8 for the first half, compared with $1.3 and $1.9, respectively, in 2019. Noninterest expense rose to $27.8 in Q2 from $14.6 and to $44.4 for the first half from $28.4, primarily reflecting Pedestal-related operating costs and acquisition expenses. The company reported $6.6 of Q2 and $7.8 of first-half acquisition-related expenses. Excluding specified items, management reported Q2 core net income of $7.4 versus $6.6.
- Balance sheet: At June 30, total assets were $3.96 billion, loans held for investment were $2.995 billion, deposits were $3.251 billion, and shareholders’ equity was $386.3. From December 31, 2019, assets grew 74.2%, loans 75.1%, and deposits 82.4%, largely due to the acquisition and PPP activity.
- Asset quality: The allowance for loan losses was $18.7, or 0.62% of loans, versus $12.1, or 0.71%, at year-end. Nonperforming loans were $11.8, or 0.39% of loans, compared with $9.0, or 0.53%, at year-end. Nonperforming assets were $19.6 versus $13.2.
- Cash flow and liquidity: First-half operating cash flow was negative $6.7 versus positive $15.7 in 2019; investing cash flow was negative $298.5 and financing cash flow positive $331.8. Cash and cash equivalents ended the period at $116.0, up from $89.4. Deposit growth and acquisition proceeds funded substantial loan growth and other investing uses.
- Funding, debt and capital: Total deposits included $985.5 of noninterest-bearing deposits. Balance-sheet borrowings totaled approximately $294.6, versus $186.0 at year-end; this included $107.1 borrowed through the Federal Reserve’s PPP Liquidity Facility at 0.35%, secured by PPP loans. The company reported a 9.18% Community Bank Leverage Ratio and said it and the bank met applicable capital requirements; b1BANK was classified as well capitalized. Tangible common equity to tangible assets was 8.3%, down from 10.4%.
Material changes and notable events
- On May 1, 2020, the company completed its Pedestal Bancshares merger, issuing 7.6 million shares with a stated purchase price of $98.7. Pedestal reported $1.4 billion of assets, $935.8 million of loans, and $1.2 billion of deposits at April 30. The acquisition added $893.3 million of loans and $1.177 billion of deposits at fair value; provisional goodwill was $5.2.
- The company funded approximately 2,800 PPP loans totaling $395.4. PPP loans were reported as $389.9 in commercial and $5.5 in consumer loans at quarter-end.
- Approximately 2,600 loans with balances of $938.5, or 31.3% of loans held for investment, received temporary COVID-19 payment deferrals. Management said the qualifying modifications were not treated as troubled debt restructurings under applicable guidance.
- Book value per share declined to $18.69 from $21.47 at year-end, while outstanding shares increased materially following the merger.
Outlook, risks and contingencies
The filing provides no specific earnings or growth guidance. Management anticipated continued pressure on net interest margin and spread given the prevailing yield curve. It cited the uncertain duration and severity of COVID-19 and its potential effects on borrowers, collateral values, loan losses, liquidity, operations and capital. Sectors flagged for additional monitoring included energy, hotels, restaurants, retail and residential real estate. Management also warned that some borrowers may struggle to resume payments after deferrals expire.
PPP participation carries potential litigation, regulatory and SBA-guaranty risks, including the possibility that the SBA could deny or seek recovery of a guaranty if it identifies deficiencies. The company disclosed $621.8 of commitments to extend credit and $23.5 of standby and commercial letters of credit; actual funding may be lower because commitments can expire unused. Management said routine legal proceedings were not expected to have a material adverse effect. It also identified acquisition-integration, interest-rate, credit, liquidity, geographic-concentration and remote-work/cybersecurity risks.
The board declared a $0.10-per-share quarterly dividend on July 23, payable August 31, 2020, subject to the stated record-date terms. The company noted that future dividends remain at the board’s discretion.
Important facts for investors to verify
- Whether borrowers representing the $938.5 of deferred loans resume scheduled payments, and how deferrals and sector exposures evolve.
- Subsequent credit performance, allowance adequacy, charge-offs and nonperforming assets, including acquired loans.
- PPP forgiveness, fee economics, servicing costs, and any SBA or litigation issues affecting loan guarantees.
- Post-merger integration costs, realized synergies, acquired-asset fair-value adjustments and the effect of share issuance on per-share results and tangible capital.
- Net interest margin trends, deposit pricing and liquidity as rates and funding needs change.