Business context and reporting period
Business First Bancshares, Inc. is a Louisiana bank holding company operating through Business First Bank, with banking centers in Louisiana and Dallas, Texas. It focuses on community banking, particularly services to small and midsize businesses and professionals. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless noted.
Financial performance and condition
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $25.9 | $18.1 | $50.5 | $35.3 |
| Net interest income | $20.2 | $15.0 | $39.3 | $29.5 |
| Provision for loan losses | $1.3 | $0.5 | $1.9 | $0.9 |
| Noninterest income | $4.2 | $2.0 | $6.5 | $3.7 |
| Noninterest expense | $14.6 | $12.0 | $28.4 | $24.0 |
| Net income | $6.8 | $3.6 | $12.5 | $6.7 |
| Diluted EPS | $0.50 | $0.33 | $0.91 | $0.62 |
Q2 net interest margin was 4.19%, up from 3.98%; six-month margin was 4.11%, up from 3.97%. Six-month net interest spread was 3.69%, down from 3.72%. Six-month annualized return on average assets was 1.20% versus 0.83%, and return on average equity was 9.38% versus 7.35%. Management attributed stronger net interest income principally to loan growth and higher asset yields, while higher deposit costs and the December 2018 subordinated debt issuance raised funding costs.
At June 30, 2019, total assets were $2.154 billion, loans held for investment were $1.643 billion, deposits were $1.703 billion, and shareholders’ equity was $277.5 million. Loans grew 7.5% from year-end 2018; deposits declined 1.8%, partly because the company sold a branch with $24.9 million of associated deposits. Loans were 96.5% of deposits, versus 88.2% at year-end.
Cash and due from banks was $64.0 million, down from $96.1 million at year-end; federal funds sold were a further $20.8 million. For the six months, operating cash flow was $15.7 million, investing cash outflow was $97.5 million, and financing cash inflow was $49.8 million. Net cash decreased $32.0 million.
Total borrowings were $149.1 million, including $108.0 million of FHLB advances, $25.0 million of subordinated debt, and $16.1 million of repurchase agreements. FHLB advances increased $53.0 million from year-end. The company reported $603.1 million of FHLB borrowing capacity and $126.0 million available under bank credit lines, with no outstanding balances on those lines. Consolidated Tier 1 leverage, Common Equity Tier 1, Tier 1 risk-based, and total risk-based capital ratios were 10.74%, 11.73%, 11.73%, and 13.69%; the bank was classified as well-capitalized.
Material changes, outlook, and risks
- Growth reflected both organic lending and the November 2018 Richland State Bancorp acquisition. Average loans were up 31.8% year over year for the first six months, and total assets rose 2.8% from year-end.
- Noninterest income included a $593,000 gain on the sale of a banking center and $1.266 million of SBIC partnership pass-through income, largely related to a dividend recapitalization. The company also reported a $58,000 securities gain. Management’s non-GAAP core net income was $6.6 million for Q2 and $12.2 million for the six-month period; the company cautions that its non-GAAP measures may not be comparable with other firms’ measures.
- Provision for loan losses increased to $1.9 million for the first half from $948,000, attributed primarily to a previously identified impaired loan and higher loan balances. The allowance was $11.6 million, or 0.71% of loans, versus 0.73% at year-end. Nonperforming loans declined to $10.1 million from $13.6 million, and nonperforming assets to $12.4 million from $15.5 million.
- Management anticipates continued pressure on net interest margin and spread, despite loan growth. The filing provides no quantified earnings or growth guidance. The Board declared a $0.10-per-share quarterly dividend on July 23, payable August 31, 2019, subject to the stated conditions.
- Key risks include interest-rate and funding-cost changes, credit deterioration and collateral values, economic and energy-sector conditions, geographic concentration in Louisiana and the Dallas/Fort Worth area, acquisition integration, and sustaining growth. Management stated that adoption of the new CECL credit-loss standard, effective for the company in 2020, may materially affect the financial statements; its impact was still under evaluation.
- Off-balance-sheet commitments at June 30 included $329.7 million to extend credit and $22.9 million in standby and commercial letters of credit; amounts may expire unused. Management said routine legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether loan growth remains supported by stable deposits, and how the higher loans-to-deposits ratio affects funding needs and costs.
- Credit quality, especially commercial and commercial-real-estate exposures, charge-offs, criticized loans, and whether the allowance remains adequate as the portfolio expands.
- How much earnings depend on nonrecurring or variable items, including SBIC partnership income and branch-sale gains, versus recurring core operations.
- Whether deposit repricing and interest-rate movements produce the margin pressure management anticipates.
- The eventual CECL adoption impact, capital ratios as assets grow, and the capacity to fund outstanding commitments and obligations.