Business context and reporting period
Business First Bancshares, Inc. is a Louisiana-based bank holding company operating through b1BANK, with 43 banking centers across Louisiana and Texas, including the Dallas/Fort Worth market. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021. Unless otherwise noted, financial amounts below are in millions of dollars. Comparisons with 2020 are affected by the May 2020 Pedestal acquisition and are not fully like-for-like.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $37.9 | $30.9 | $78.2 | $51.1 |
| Provision for loan losses | $2.2 | $5.4 | $5.6 | $6.8 |
| Noninterest income | $17.4 | $5.0 | $22.5 | $7.8 |
| Noninterest expense | $31.1 | $27.8 | $58.1 | $44.4 |
| Net income | $17.4 | $2.1 | $29.8 | $6.6 |
| Diluted EPS | $0.84 | $0.11 | $1.43 | $0.42 |
- Revenue drivers: Q2 total interest income was $42.4 million and noninterest income was $17.4 million. The six-month amounts were $86.6 million and $22.5 million, respectively.
- Margins and returns: Q2 net interest margin was 3.87%, versus 3.89% a year earlier; six-month margin was 4.05%, versus 3.91%. Net interest spread was 3.68% for Q2 and 3.87% for the first half. Six-month return on average assets was 1.37% and return on average equity was 14.23%.
- Balance sheet at June 30: Assets were $4.324 billion; loans held for investment were $2.855 billion gross and $2.828 billion net; deposits were $3.724 billion; and shareholders’ equity was $431.0 million.
- Credit and liquidity: The allowance for loan losses was $26.7 million, or 0.94% of loans held for investment, compared with 0.74% at year-end 2020. Nonperforming loans were $11.5 million (0.40% of loans), compared with $10.6 million (0.35%) at year-end. Cash and due from banks plus federal funds sold totaled $363.2 million.
- Cash flow, first half: Operating activities provided $29.7 million; investing activities used $180.7 million; and financing activities provided $132.7 million. Cash and cash equivalents were $130.8 million at period-end, down $18.4 million from year-end.
- Debt and capital: Balance-sheet borrowings totaled approximately $140.3 million, including $81.4 million of subordinated debt. The company issued $52.5 million of subordinated debt for cash and $3.9 million in connection with the SSW acquisition. June 30 regulatory ratios included 8.23% Tier 1 leverage, 9.99% Common Equity Tier 1, and 13.24% total risk-based capital. The Bank was reported well-capitalized and both the company and Bank were in compliance with applicable requirements.
Material changes versus comparable periods
- Reported net income rose to $17.4 million in Q2 from $2.1 million; first-half net income rose to $29.8 million from $6.6 million. A major contributor was the $10.0 million gain on loan sales, principally from selling approximately 2,000 SBA Paycheck Protection Program loans with $243.6 million aggregate balance in June.
- Net interest income increased 22.7% in Q2 and $27.1 million for the first half. Lower funding costs and larger average balances contributed, while average yields on loans excluding PPP loans and on total interest-earning assets were lower year over year.
- Total assets increased $163.6 million, or 3.9%, from December 31, 2020. Deposits rose $107.5 million, or 3.0%, while loans held for investment declined $136.5 million, or 4.6%, mainly following the PPP loan sale. Securities increased $242.2 million, or 37.8%, as excess cash was invested.
- The allowance increased from $22.0 million at year-end to $26.7 million. Nonperforming assets decreased to $18.0 million from $20.0 million, primarily due to sales of other real estate owned; nonaccrual loans, however, increased to $10.6 million from $9.1 million.
- The April 1, 2021 acquisition of registered investment adviser Smith Shellnut Wilson added $3.9 million of cash consideration? No: the filing reports $7.3 million cash consideration plus $3.9 million subordinated debt, and recorded $6.5 million goodwill and $4.3 million of customer intangibles. SSW reported approximately $3.5 billion in assets under management.
Outlook, commentary, risks and unusual items
- Management anticipated continued pressure on net interest margin and spread under the then-current yield curve; no specific earnings or financial guidance was provided.
- The PPP loan sale materially boosted reported noninterest income and earnings. Management also identified $1.3 million of first-half hurricane-related occupancy and premises expenses and $540,000 of losses on sales of former premises and equipment. Management’s non-GAAP core net income was $31.3 million for the first half, compared with GAAP net income of $29.8 million.
- COVID-19 remains a credit and business-continuity risk. By June 30, deferrals had been granted on approximately 2,000 loans totaling $720.5 million; 16 loans with $29.9 million principal remained in deferral periods, including $19.9 million of interest-only modifications to seasoned, highly rated clients. Management said pandemic-related modifications meeting applicable CARES Act criteria were not classified as troubled debt restructurings.
- Management highlighted economic and credit risks, including exposure to energy, hotels, restaurants, retail and residential real estate, as well as regional concentration in Louisiana and Dallas/Fort Worth. A $1.9 million energy loan transferred to nonaccrual in Q1 required $1.4 million of additional reserves.
- Commitments to extend credit were $814.5 million and standby and commercial letters of credit were $35.4 million. These are off-balance-sheet commitments and may not be fully drawn.
- The company’s interest-rate simulation showed a 2.0% decline in projected net interest income under a 100-basis-point rate decrease and a 6.2% increase in fair value of equity; management cautioned that model estimates are uncertain. CECL adoption was deferred to January 2023, and the company said implementation could materially affect its financial statements.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, no material change in previously disclosed risk factors, and no pending material legal proceedings.
Most important facts for investors to verify
- How much of earnings growth is repeatable after excluding the PPP loan-sale gain and other unusual items.
- Whether credit quality, nonaccrual loans, energy exposure and remaining COVID-related deferrals improve or deteriorate.
- Whether deposit growth and funding costs can support earnings as loan yields and net interest margins face pressure.
- How the SSW acquisition contributes to recurring fee income and whether integration costs or purchase-accounting effects change results.
- Capital and liquidity capacity relative to subordinated debt obligations, off-balance-sheet commitments and potential future credit losses.