Business context and reporting period
Business First Bancshares, Inc. (NASDAQ: BFST) is a Louisiana-based financial holding company operating b1BANK across Louisiana and Dallas, Texas. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020. Unless noted, amounts below are in millions of dollars.
On May 1, 2020, the company completed its acquisition of Pedestal Bancshares, adding approximately $1.4 billion in assets, $935.8 million in loans and $1.2 billion in deposits at April 30. Business First issued 7.6 million shares as consideration. As a result, comparisons with 2019 are not fully like-for-like.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $36.9 | $20.3 | $88.1 | $59.6 |
| Provision for loan losses | $2.5 | $0.5 | $9.3 | $2.4 |
| Noninterest income | $4.2 | $1.9 | $12.0 | $8.5 |
| Noninterest expense | $27.0 | $14.9 | $71.4 | $43.2 |
| Net income | $9.6 | $5.5 | $16.2 | $18.0 |
| Diluted EPS | $0.46 | $0.40 | $0.93 | $1.32 |
| Net interest margin | 4.06% | 4.10% | 3.97% | 4.10% |
Balance sheet, liquidity and capital at September 30, 2020
- Total assets were $3.95 billion, up 73.9% from year-end 2019; loans held for investment were $3.08 billion, up 80.2%; deposits were $3.24 billion, up 81.6%.
- Cash and cash equivalents were $103.9 million; federal funds sold were another $8.4 million. Loans equaled 95.3% of deposits. The company reported $126 million of available correspondent-bank credit lines, with none drawn.
- Total shareholders’ equity was $398.1 million. The company reported a Community Bank Leverage Ratio of 8.74% on a consolidated basis and 9.13% for b1BANK; it said it complied with applicable capital requirements and the bank was well-capitalized.
- Reported borrowings totaled approximately $290.7 million, including $107.1 million drawn under the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF). The PPPLF advances bear 0.35% interest and are collateralized by PPP loans. Subordinated debt included $25 million of notes and $5 million of trust preferred securities.
- Operating cash flow for the first nine months was $15.1 million, versus $21.5 million in 2019. Investing activities used $312.9 million, while financing activities provided $312.3 million; cash and cash equivalents increased $14.5 million.
Material changes versus comparable periods
- Q3 net income rose 74.4% year over year, while nine-month net income declined 10.3%. Nine-month diluted EPS fell to $0.93 from $1.32; the share count increased substantially following the Pedestal stock issuance.
- Q3 net interest income increased 82.3%, principally reflecting higher average loan balances, including acquired loans and PPP lending. Nine-month net interest income rose 47.8%. Despite lower funding costs, net interest margin declined year over year in both periods; management cited lower asset yields and anticipated further margin pressure.
- Provision for loan losses increased to $9.3 million for the first nine months, from $2.4 million, reflecting loan growth and qualitative adjustments for COVID-19 economic conditions. The allowance rose to $20.3 million, or 0.66% of loans, from $12.1 million, or 0.71%, at year-end 2019.
- Noninterest expense increased 65.1% for the nine months, primarily due to Pedestal-related staffing, branches, systems and merger/conversion costs. The company reported approximately $9.0 million in acquisition-related costs through September 30.
- Nonperforming loans were $10.0 million, or 0.32% of loans, versus $9.0 million, or 0.53%, at year-end. Total nonperforming assets rose to $21.4 million from $13.2 million, mainly due to Pedestal; other real estate owned increased to $11.0 million.
Outlook, risks and unusual items
- No quantitative earnings or financial guidance was provided. Management expected continued pressure on net interest margin and spread given the prevailing yield curve.
- COVID-19 remains a significant uncertainty. The company had granted payment deferrals on approximately 2,400 loans totaling $908.5 million; 245 loans with $184.3 million of principal remained within deferral periods, including $149.4 million of strategic interest-only modifications to seasoned, highly rated clients. Management warned that some borrowers may not resume normal payments when deferrals end.
- For Hurricane Laura, the company granted 60-day principal and interest deferrals on loans totaling $85.8 million. Management said these and qualifying COVID-19 modifications were not troubled debt restructurings. Accrued interest on COVID-19 and hurricane-related deferrals totaled $8.8 million.
- The bank originated approximately 2,800 PPP loans totaling $397.7 million. The filing identifies potential PPP litigation, regulatory and SBA-guaranty risks; forgiveness delays or disallowance could affect returns or expose the bank to losses. PPP balances were $397.7 million originated, while $397.7 million is not necessarily the period-end balance; period-end commercial and consumer portfolio disclosures total $397.7 million.
- Other risks include borrower and collateral deterioration, Louisiana and Texas economic and energy-sector exposure, acquisition integration, interest-rate changes, deposit outflows, operational and cybersecurity risks, and possible increases in credit-loss provisions. Management described routine legal proceedings as nonmaterial and reported effective disclosure controls.
- On October 22, 2020, the board declared a $0.10-per-share quarterly dividend and approved a new stock repurchase authorization of up to $30 million through December 31, 2021. No shares were repurchased during Q3.
Important facts for investors to verify
- Track deferral expirations, borrower performance and migration in criticized, delinquent and nonperforming loans; assess whether the allowance remains adequate as economic conditions evolve.
- Review PPP forgiveness, SBA reimbursement and compliance outcomes, including potential legal or regulatory exposure.
- Separate acquired growth from organic performance and monitor integration costs, realized cost savings and purchase-accounting effects.
- Assess the sustainability of net interest margin, deposit pricing and funding costs, alongside the impact of rate changes and PPP loan runoff.
- Confirm capital ratios, liquidity availability, borrowing needs and the effects of dividends and share repurchases as the enlarged balance sheet evolves.