Business context and reporting period
Business First Bancshares, Inc. is a Louisiana community bank holding company serving small and midsized businesses and professionals. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015. Unless noted, dollar amounts below are in millions.
The March 31, 2015 merger with American Gateway Financial Corporation (AGFC) materially changed the company’s scale. AGFC added 10 branches; its results are included from April 1, 2015. Consequently, reported year-over-year comparisons include acquired operations only for part of 2015 and are not fully comparable.
Financial performance and condition
| Metric | Period or date | Reported value | Comparison |
|---|---|---|---|
| Total assets | June 30, 2015 | $1,106.7 | Up 61.7% from December 31, 2014 |
| Loans held for investment | June 30, 2015 | $732.9 | Up 31.3% from year-end |
| Total deposits | June 30, 2015 | $926.1 | Up 57.7% from year-end |
| Net income | Q2 2015 | $1.023 | Q2 2014: $1.033 |
| Net income | Six months 2015 | $2.156 | Six months 2014: $2.172 |
| Net interest income | Q2 2015 | $8.562 | Up 48.0% year over year |
| Net interest income | Six months 2015 | $14.728 | Up $2.930 million year over year |
| Net interest margin | Q2 / six months 2015 | 3.28% / 3.41% | 2014: 3.54% / 3.59% |
| Allowance for loan losses | June 30, 2015 | $7.049; 0.96% of loans | Year-end: $6.632; 1.19% of loans |
| Nonperforming loans | June 30, 2015 | $8.248; 1.13% of loans | Year-end: $3.028; 0.54% |
| Nonperforming assets | June 30, 2015 | $11.750; 1.06% of assets | Year-end: $6.056; 0.88% |
| Cash and short-term investments | June 30, 2015 | $119.9 | Year-end: $26.8 |
| Total borrowings | June 30, 2015 | $62.2 | Includes $55.5 million FHLB advances and $6.8 million repurchase agreements |
| Stockholders’ equity | June 30, 2015 | $112.6 | Year-end: $78.8 |
Q2 total interest income was $9.793 million and total other income was $0.981 million. Six-month amounts were $16.895 million and $1.410 million, respectively. Net income was nearly flat against 2014 despite growth in net interest income; noninterest expense rose to $7.984 million for Q2 and $12.866 million for the first half, substantially reflecting the merger and related operating costs.
Six-month operating cash flow was $2.091 million, compared with $5.120 million in 2014. Investing activities provided $20.886 million, including $87.377 million of net cash received in the merger, while financing activities provided $57.516 million. The cash flow statement reports $106.508 million of cash and cash equivalents at period-end; management reports $119.9 million including short-term investments.
Bank regulatory capital at June 30 included a 9.52% Tier 1 leverage ratio, 11.56% Common Equity Tier 1 and Tier 1 risk-based ratios, and a 12.33% total risk-based ratio. The bank was classified as well capitalized and the company and bank reported compliance with applicable capital requirements. Book value per share was $15.63.
Material changes versus prior periods
- The AGFC merger drove much of the increase in assets, loans, deposits, securities, borrowings, equity, and operating expenses. Acquired assets were reported at $372.0 million, including $143.2 million of loans, $108.4 million of securities, and $283.3 million of deposits. The estimated purchase price was $44.166 million and remained subject to refinement, including unresolved appraisal rights.
- Q2 net interest income rose 48.0%, while net interest margin declined 26 basis points to 3.28%. For the first half, margin declined 18 basis points to 3.41%. Management attributed margin pressure chiefly to lower loan yields and said growth in lower-yielding new loans and runoff of higher-yielding loans could continue to weigh on margins.
- Noninterest income increased to $0.981 million in Q2 and $1.410 million for the first half, mainly due to the merger, deposit service charges, and other income. Noninterest expense rose 72.3% in Q2 and 38.4% for the first half, with higher staffing, occupancy, professional fees, and other merger-related costs.
- Net income was slightly lower year over year, while reported diluted EPS declined to $0.14 for Q2 from $0.19 and to $0.33 for the first half from $0.39. The merger increased weighted-average shares, so per-share comparisons reflect dilution as well as operating results.
- Loans rated substandard or doubtful totaled $45.7 million at June 30, versus $23.6 million at year-end. Nonperforming loans rose, which the company attributed to the AGFC merger. Net recoveries for the first half were $0.117 million.
- Available-for-sale securities had $3.036 million of gross unrealized losses at June 30. The six-month other comprehensive loss was $1.047 million, primarily reflecting securities valuation changes; management characterized identified unrealized losses as temporary.
Outlook, risks, and other notable items
- The filing provides no specific earnings or growth guidance. Management expects continued pressure on net interest margin and spread, citing loan pricing and portfolio runoff.
- Principal disclosed risks include economic and borrower weakness, collateral values, interest-rate and market-price changes, deposit competition, liquidity and funding costs, credit quality, concentration and growth effects on capital, regulatory changes, and the accuracy of allowance estimates.
- Credit quality warrants attention: $8.248 million of loans were nonaccrual; $12.772 million of loans were individually evaluated for impairment, and $12.042 million of troubled debt restructurings were outstanding after modification at June 30. The allowance was lower as a share of loans partly because acquired loans are initially recorded at fair value with estimated credit losses reflected in purchase accounting.
- Outstanding commitments to extend credit were $214.227 million and standby and commercial letters of credit were $10.058 million. These commitments may expire unused and do not necessarily represent future cash funding needs. The company also reported $10.195 million of future operating lease payments.
- Interest-rate simulations estimated that a 300-basis-point increase would raise one-year net interest income by 8.70% but reduce fair value of equity by 12.37%; a 100-basis-point decline would reduce modeled net interest income by 1.50%. Management cautioned that model assumptions are uncertain and actual results may differ.
- The merger purchase-price allocation was provisional, and appraisal-rights consideration had not been finalized. Management identified the loan-loss allowance and deferred taxes as estimates especially susceptible to change; it did not anticipate material near-term estimate changes.
- Management reported effective disclosure controls as of quarter-end and no significant changes in internal control over financial reporting. Legal proceedings were described as arising in the ordinary course; the filing identifies no specific material proceeding.
Important facts for investors to verify
- Track post-merger expense levels, integration progress, and whether acquired operations contribute to earnings as expected; distinguish reported results from the filing’s unaudited pro forma merger presentation.
- Monitor margin trends, loan yields, deposit costs, and the effect of new loan growth and higher-yielding loan runoff.
- Review nonperforming loans, criticized loan classifications, troubled debt restructurings, acquired-credit-loan performance, and allowance coverage as the combined portfolio seasons.
- Assess funding and liquidity, including deposit mix and retention, FHLB borrowing levels and costs, and the conversion of credit commitments into funded loans.
- Confirm final merger accounting and appraisal-rights amounts, and evaluate capital ratios and per-share results after the substantial increase in shares outstanding.