Business context and reporting period
Business First Bancshares, Inc. is a Louisiana-based bank holding company serving Louisiana and the Dallas, Texas market through 25 banking centers. This unaudited Form 10-Q covers the three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. The company reports one segment, community banking. Results versus Q1 2018 reflect a different acquisition base: Richland State Bancorp was acquired in November 2018.
Financial results and key metrics
Unless otherwise noted, dollar amounts are in millions.
| Metric | Q1 2019 / March 31, 2019 | Comparable / prior period |
|---|---|---|
| Total assets | $2,101.4 | $2,094.9 at Dec. 31, 2018 |
| Loans held for investment | $1,586.2 | $1,528.5 at Dec. 31, 2018 |
| Total deposits | $1,744.4 | $1,733.9 at Dec. 31, 2018 |
| Net interest income | $19.1 | $14.5 in Q1 2018 |
| Net income | $5.7; $0.43 basic and $0.41 diluted EPS | $3.1; $0.30 basic and $0.29 diluted EPS |
| Net interest margin / spread | 4.01% / 3.61% | 3.97% / 3.75% in Q1 2018 |
| Return on average assets / equity | 1.09% / 8.62% | 0.77% / 6.94% in Q1 2018 |
| Operating cash flow | $8.8 | $4.3 in Q1 2018 |
Interest income was $24.6 million and interest expense $5.5 million, versus $17.2 million and $2.7 million, respectively, in Q1 2018. The provision for loan losses was $0.6 million, compared with $0.5 million. Noninterest income increased to $2.3 million from $1.7 million; noninterest expense rose to $13.8 million from $11.9 million. The filing reports core net income, a non-GAAP measure, of $5.6 million versus $3.6 million, and core diluted EPS of $0.41 versus $0.34.
Cash and cash equivalents were $52.6 million at quarter-end, down from $96.1 million at year-end. Investing cash outflow was $36.9 million and financing cash outflow $15.4 million; net cash declined $43.5 million. Shareholders’ equity was $269.1 million, up from $260.1 million. Book value per share was $20.14; tangible book value per share was $15.86.
Material changes versus prior periods
- Net income increased 82.1% year over year; net interest income increased 31.9%. Average interest-earning assets and loan balances were substantially higher, with acquisition activity and organic growth contributing to comparisons.
- Average loan yield increased to 5.79% from 5.32%, while average cost of interest-bearing deposits increased to 1.42% from 0.90%. Management said the subordinated debt issued in December 2018 contributed to higher overall funding costs.
- Net interest margin edged up 4 basis points, but net interest spread declined 14 basis points. Management anticipates continued pressure on both.
- Loans grew 3.8% from year-end, led by commercial and nonfarm nonresidential real estate lending. Deposits increased 0.6%; noninterest-bearing deposits grew 3.8%.
- Nonperforming assets were $15.0 million, down from $15.5 million at year-end; nonperforming loans were $13.3 million versus $13.6 million. The nonperforming-loan ratio improved to 0.84% from 0.89%.
- Capital ratios declined from year-end: consolidated Tier 1 leverage was 10.45% versus 11.66%, and total risk-based capital was 13.66% versus 13.91%. The bank remained classified as well-capitalized and in compliance with requirements.
Liquidity, debt, outlook and risks
At March 31, borrowings included $30.0 million of FHLB advances, $25.0 million of subordinated debt and $11.1 million of repurchase agreements. The subordinated debt is due in 2033 and bears a 6.75% fixed-to-floating rate. The company reported $652.1 million of available FHLB borrowing capacity and $126.0 million available under bank credit lines, with no outstanding balance on those lines. Management said core deposits, security and loan maturities, and amortizing portfolios are its principal liquidity sources.
Off-balance-sheet commitments included $343.7 million to extend credit and $22.7 million in standby and commercial letters of credit. These amounts may not be fully drawn. The allowance for loan losses was $11.8 million, or 0.75% of loans held for investment, versus $11.2 million, or 0.73%, at year-end. Management cautioned that economic deterioration or weaker asset quality could require additional provisions.
No numeric earnings or growth guidance was provided. Management cited expected net interest margin and spread pressure. Key disclosed risks include interest-rate changes, credit quality and collateral values, economic conditions in Louisiana and the Dallas/Fort Worth area, volatility in oil prices and energy-related exposures, deposit retention, liquidity, and acquisition integration. The company stated that CECL accounting, effective for it in 2020, may materially affect its financial statements; implementation impact was still being evaluated.
Unusual and subsequent items: merger and conversion expense was a $254,000 credit in Q1 2019, including a $469,000 downward adjustment to a merger-related termination fee. The company adopted lease accounting in 2019 and recorded approximately $11.9 million of right-of-use assets and lease liabilities. On May 3, 2019, it agreed to transfer a branch acquired from Richland State Bank, with approximately $28.3 million in deposits and $4.7 million in loans; management did not expect net impairment or loss. The board declared a $0.10 per-share quarterly dividend, payable May 31, 2019. Management described pending legal matters as routine and nonmaterial.
Most important facts for investors to verify
- How much reported earnings growth reflects the Richland acquisition versus organic growth, and whether integration-related benefits and costs persist.
- Whether deposit pricing and funding costs continue to rise faster than asset yields, pressuring net interest margin and spread.
- Credit trends in commercial and commercial real estate portfolios, including past-due loans, criticized loans, charge-offs and adequacy of the allowance.
- Liquidity and capital headroom as loan growth continues, including potential drawdowns of the $366.4 million in credit and letter-of-credit commitments.
- The eventual impact of CECL adoption and the terms and economics of the branch transfer announced after quarter-end.