Business context and reporting period
Business First Bancshares, Inc. is a Louisiana-based bank holding company serving businesses and professionals in Louisiana and Texas. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018. Amounts below are in millions of dollars unless noted.
On January 1, 2018, the company acquired Minden Bancorp (MBI) for $56.2 million in cash. MBI’s results are included from the acquisition date, so year-over-year comparisons reflect a larger company. In June, Business First agreed to acquire Richland State Bancorp (RSBI); the transaction had not closed by September 30, and its operating results are excluded.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $15.6 | $10.5 | $45.1 | $32.8 |
| Provision for loan losses | $0.5 | $0.2 | $1.5 | $1.9 |
| Noninterest income | $1.5 | $1.2 | $5.3 | $4.1 |
| Noninterest expense | $11.9 | $9.2 | $35.8 | $27.1 |
| Net income | $3.9 | $1.7 | $10.6 | $5.7 |
| Diluted EPS | $0.33 | $0.23 | $0.95 | $0.78 |
At September 30, total assets were $1,678.2 million, net loans $1,287.7 million, deposits $1,354.1 million, and shareholders’ equity $213.0 million. Compared with December 31, 2017, assets rose 27.0%, loans held for investment 33.1%, and deposits 28.3%; acquisition and organic growth were principal factors.
Net interest margin was 4.05% in Q3 versus 3.82% a year earlier, and 4.00% for the first nine months versus 4.06%. Q3 net interest income rose 48.4%; nine-month net interest income rose 37.6%. Management reported higher loan yields, but also higher funding costs and continuing margin pressure. Return on average assets and equity for the first nine months were 0.87% and 7.45%, respectively, versus 0.65% and 6.51% in 2017.
Operating cash flow was $16.6 million for the first nine months. Investing used $139.1 million, including $49.8 million net cash paid in the MBI merger and $129.3 million net loan growth; financing provided $60.9 million, including $27.7 million from common-stock issuance. Cash and cash equivalents ended at $45.9 million, down from $107.6 million at year-end, principally due to the MBI cash purchase.
Total liabilities were $1,465.2 million. Deposits were $1,354.1 million; FHLB borrowings were $85.0 million, repurchase-agreement balances $14.3 million, and other reported short- and long-term borrowings $3.3 million. The company reported $118.5 million of available capacity across six bank credit lines, with none drawn. FHLB borrowing capacity was $513.1 million, of which $85.0 million was outstanding. Consolidated total risk-based capital was 13.04%; the Bank was classified as well-capitalized.
Material changes versus comparable periods
- Q3 net income increased 131.9% from $1.7 million; nine-month net income increased to $10.6 million from $5.7 million. Management attributed the gains primarily to MBI, loan growth, and the lower corporate tax rate under the Tax Cuts and Jobs Act.
- Expense growth was substantial: nine-month noninterest expense increased 32.3%, including $1.4 million of merger/conversion-related expenses, higher staffing and operating costs, and expenses associated with MBI. Q3 merger and conversion expenses were $0.1 million.
- The effective tax rate declined to 18.8% for the first nine months from 28.0% in 2017. The filing also identifies tax-exempt municipal-security and bank-owned life insurance income as influences.
- Allowance for loan losses increased to $10.3 million, but declined as a share of loans to 0.79% from 0.90% at year-end. Nonperforming loans were $11.6 million, or 0.89% of loans, versus $12.7 million and 1.30% at year-end.
- Unrealized securities losses widened: accumulated other comprehensive loss was $5.4 million versus $1.6 million at year-end. The available-for-sale portfolio had $6.9 million of gross unrealized losses; management considered these temporary.
- Book value per share increased to $18.46 from $17.58 at year-end, while tangible book value per share decreased to $15.30 from $16.72, in part reflecting acquisition goodwill and intangibles.
Outlook, risks, contingencies and unusual items
No numerical earnings or full-year guidance was provided. Management said it anticipates and is actively managing net interest margin and spread pressure from loan growth and competitive deposit pricing. The filing cautions that interim results may not indicate full-year results.
Key disclosed risks include acquisition integration and realizing expected benefits; credit quality and allowance-estimation uncertainty; local economic and geographic concentration, including Louisiana and Dallas/Fort Worth; energy-sector and oil-price exposure; interest-rate volatility; funding costs and liquidity; and managing growth and capital. A 100-basis-point rate decline was modeled to reduce one-year net interest income 4.20%; a 300-basis-point increase was modeled to raise it 4.50%. These are simulations, not forecasts.
Off-balance-sheet commitments at September 30 included $274.0 million to extend credit and $11.3 million of standby and commercial letters of credit; amounts may expire unused. Management said ordinary-course legal proceedings were not expected to have a material adverse effect and reported no other pending material legal proceedings. The board declared a $0.08-per-share quarterly dividend in October, payable November 30, 2018 to holders of record November 15.
Other notable items include a $29.0 million gross common-stock offering in June to support the RSBI transaction, a $56,000 net loss on branch buildings transferred to other real estate owned, and restructuring-related brokerage commissions that fell year over year. Three branches closed during the first nine months; the Dallas and New Orleans loan-production offices converted to full-service branches. MBL Bank’s system conversion was completed in July without reported disruption.
Important facts for investors to verify
- Track completion, financing, integration costs, and expected benefits of the proposed RSBI acquisition, and distinguish it from MBI’s already-consolidated results.
- Assess whether deposit pricing and funding costs continue to outpace asset-yield improvement and pressure net interest margin.
- Review loan growth, concentrations, criticized/classified credits, delinquency trends, nonperforming assets, charge-offs, and whether the 0.79% allowance remains adequate.
- Monitor capital ratios, liquidity and cash levels, reliance on FHLB and other borrowings, and the maturity of the FNBB revolving line, extended to November 29, 2018.
- Evaluate securities valuation and accumulated unrealized losses, along with the effect of interest-rate changes on earnings and equity.
- Compare GAAP earnings with management’s non-GAAP “core” results, which exclude specified acquisition and other items, and consider the filing’s cautions that such measures may not be comparable across companies.