Business First Bancshares, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparative results are for 2014. This is an annual report, not a standalone fourth-quarter earnings report. Business First is a Louisiana bank holding company focused on commercial and community banking through Business First Bank.
Business context and major event
On March 31, 2015, the company completed its acquisition of American Gateway Financial Corporation (AGFC). The transaction added 10 branches, approximately $372 million of assets, $143.2 million of loans and $283.3 million of deposits at acquisition. Results include AGFC only from the acquisition date. Integration and conversion costs were incurred during 2015.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets at year-end | $1.076 billion | $684.5 million |
| Loans at year-end | $772.4 million | $558.4 million |
| Deposits at year-end | $904.2 million | $587.3 million |
| Net interest income | $34.2 million | $23.5 million |
| Net interest margin | 3.68% | 3.55% |
| Provision for loan losses | $1.2 million | $0.7 million |
| Noninterest income | $3.2 million | $1.7 million |
| Noninterest expense | $30.5 million | $19.2 million |
| Net income | $4.1 million | $4.0 million |
| Basic / diluted EPS | $0.61 / $0.59 | $0.76 / $0.72 |
| Cash and cash equivalents at year-end | $40.9 million | $26.0 million |
| Operating cash flow | $3.4 million | $6.9 million |
Return on average assets declined to 0.41% from 0.58%, and return on average equity to 3.89% from 5.49%. The company attributed the declines mainly to the larger post-acquisition asset and equity bases. Net interest income rose 45.2%, while net income increased only 1.6%; higher operating costs and the expanded share count diluted earnings per share.
Cash flow from investing activities was negative $14.1 million, versus positive $16.0 million in 2014; financing activities provided $25.6 million, versus a $6.9 million outflow. The filing reports year-end borrowings of $49.1 million from the Federal Home Loan Bank and $3.0 million under a holding-company credit line, plus $2.4 million of securities sold under repurchase agreements.
Material changes and asset quality
- Assets increased 57.2%, loans 38.3%, and deposits 54.0%, primarily reflecting AGFC and continued growth in Louisiana.
- Nonperforming loans increased to $8.0 million from $3.0 million; nonperforming assets rose to $10.0 million from $6.1 million. The company attributed the increase primarily to acquired AGFC loans.
- The allowance for loan losses was $7.2 million, or 0.94% of loans, versus $6.6 million, or 1.19%, in 2014. The lower coverage ratio partly reflects acquisition accounting: acquired loans were initially recorded at fair value with estimated credit losses embedded, rather than a corresponding allowance.
- Real estate-related loans represented about 72.2% of total loans; commercial real estate loans were about 57.6%. Management also disclosed exposure to Louisiana energy and oil-and-gas markets and cited declining oil prices as a risk.
- The investment securities portfolio grew to $210.9 million from $74.5 million and had a net unrealized loss of approximately $1.2 million at year-end.
Liquidity, capital and outlook
Deposits were the primary funding source; the year-end loan-to-deposit ratio was 85.4%, down from 95.1%. The company reported $40.9 million in cash and cash equivalents, $83.7 million of available correspondent-bank lines with no year-end balance, and $317.9 million of FHLB borrowing capacity. Outstanding commitments to extend credit were $176.8 million, with $9.2 million of standby and commercial letters of credit.
At year-end, Business First Bank was classified as well capitalized. Its Tier 1 leverage, CET1, Tier 1 risk-based and total risk-based capital ratios were 10.17%, 11.41%, 11.41% and 12.17%, respectively. The company reported consolidated ratios of 10.08%, 11.30%, 11.30% and 12.06%.
No formal earnings or revenue guidance is provided. Management anticipated continued pressure on net interest margin and spread as new loan yields and runoff of higher-yielding balances weigh on returns. Its interest-rate model estimated that a 100-basis-point rise would increase 12-month net interest income by 1.4%, while a 100-basis-point decline would reduce it by 2.4%; model results depend on assumptions and are not forecasts.
The board had made a preliminary decision to begin quarterly dividends in the first quarter of 2016, but no dividends had been paid through 2015 and future payments remained subject to board discretion, regulatory restrictions and the bank’s ability to distribute funds. The company also described possible New Orleans market expansion but reported no immediate plans for additional acquisitions or new-market expansion.
Risks, contingencies and unusual items
- AGFC appraisal litigation: Holders of 53,094 unsettled shares disputed the company’s estimated $155-per-share cash value and sought $263 per share. A trial was set for May 2016; the ultimate settlement could not be reasonably estimated at the reporting date.
- Integration and expenses: 2015 included $1.1 million of nonrecurring merger and conversion costs; management identified integration, customer retention and realization of expected cost savings as ongoing execution risks.
- Credit and regional concentration: A downturn in Louisiana, particularly in real estate or energy, could impair borrowers and collateral values. The company also cited concentrations in commercial real estate and large borrower relationships.
- Funding and interest rates: Deposit competition, changing funding costs and rate movements could affect liquidity and net interest income. Management described the balance sheet as asset sensitive at year-end.
- Other risks: The filing identifies regulatory and compliance burdens, cybersecurity and third-party system risks, severe weather, key-person retention, and possible goodwill impairment following the acquisition.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. The filing states that management found disclosure controls effective; an auditor attestation on internal control was not included under the transition relief available to the company.
Most important facts for investors to verify
- Whether AGFC integration delivers the anticipated efficiencies and how reported costs and earnings develop after the acquisition year.
- Subsequent trends in nonperforming loans, criticized loan categories, charge-offs, and allowance coverage, especially in real estate and energy-related exposures.
- Whether the company’s net interest margin holds up as funding costs, loan repricing and purchase-accounting accretion change.
- The resolution and final cost of the AGFC appraisal dispute, including any effect on purchase accounting or goodwill.
- Liquidity and capital after growth, commitments, and any future dividends; common shares have no established public trading market, limiting liquidity for shareholders.