Business context and reporting period
Business First Bancshares, Inc. is a Louisiana bank holding company operating through Business First Bank. This Form 10-K reports the fiscal year ended December 31, 2016, with comparisons primarily to 2015. The 2015 comparison includes American Gateway Financial Corporation (AGFC) only from its March 31, 2015 acquisition date, limiting direct year-over-year comparability.
At year-end, the company reported $1.106 billion in assets, $811.1 million in loans, $932.8 million in deposits and $113.6 million in stockholders’ equity. It operated 16 banking centers, a loan production office and a wealth solutions office, all in Louisiana.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Total assets, year-end | $1.106 billion | $1.076 billion |
| Total loans, year-end | $811.1 million | $772.4 million |
| Total deposits, year-end | $932.8 million | $904.2 million |
| Net interest income | $37.6 million | $34.2 million |
| Net income | $5.1 million | $4.1 million |
| Basic / diluted EPS | $0.73 / $0.70 | $0.61 / $0.59 |
| Net interest margin | 3.64% | 3.68% |
| Return on average assets | 0.45% | 0.41% |
| Return on average equity | 4.42% | 3.89% |
- Net interest income rose 10.1%, primarily with growth in earning assets. Net interest margin declined four basis points; management cited lower yields on new loans and a nine-basis-point increase in overall funding costs. The average loan yield fell from 5.03% to 4.96%.
- Noninterest income increased 70.5% to $5.4 million, including higher deposit and debit-card fees, $657,000 of brokerage commissions, a $204,000 correspondent-bank credit and a $152,000 increase in bank-owned life insurance income, partly reflecting a death benefit.
- Noninterest expense increased 14.9% to $35.1 million. Salaries and benefits rose $3.3 million, largely reflecting AGFC-related staffing, new hires and merit increases. 2015 included $1.1 million of nonrecurring merger and conversion costs.
- The provision for loan losses was $1.2 million in both years. The allowance increased to $8.2 million, or 1.01% of loans held for investment, from $7.2 million, or 0.94%. Net charge-offs were $302,000, or 0.04% of average loans, versus $588,000, or 0.08%.
- Nonperforming assets declined to $8.5 million from $10.0 million; nonperforming loans were $7.3 million, or 0.90% of loans, versus $8.0 million, or 1.03%. Management attributed the improvement mainly to workouts of larger borrowers.
- Cash provided by operating activities was $8.1 million; investing activities used $33.3 million and financing activities provided $26.5 million. Cash and due from banks was $42.2 million at year-end, with a further $2.6 million in federal funds sold.
- Year-end borrowings included $47.1 million of FHLB advances, $3.0 million of long-term borrowing and $862,000 of short-term borrowing; securities sold under repurchase agreements added $2.7 million. The company reported $109.5 million of available commercial-bank credit lines, with none drawn at year-end.
- Capital ratios remained above regulatory minimums. Consolidated Tier 1 leverage, CET1, Tier 1 risk-based and total risk-based ratios were 9.67%, 10.81%, 10.81% and 11.63%, respectively. The bank was classified as well capitalized.
Material changes versus the prior comparable period
- Assets rose 2.8%, loans 5.0% and deposits 3.2% from year-end 2015. Average loans increased 13.5%; average deposits increased 15.0%.
- Loan mix shifted: commercial loans increased to $213.1 million from $185.3 million, while nonfarm nonresidential real estate loans declined to $298.1 million from $312.2 million. Real-estate-related loans remained 68.3% of loans; commercial real estate alone represented 52.3%.
- Net income grew 24.8%, but margin compression and higher operating expense partially offset increased net interest income and fee income.
- The fair value of available-for-sale securities fell to $198.3 million from $210.9 million. The portfolio had $3.5 million of net unrealized losses, compared with $1.2 million of net unrealized gains in 2015; accumulated other comprehensive loss increased to $2.3 million.
- Stockholders’ equity increased 1.0% to $113.6 million. Book value per share rose to $16.42 from $15.98, while tangible book value per share edged down to $15.10 from $15.14.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or growth guidance. Management anticipates continued pressure on net interest margin and spread as new loan yields remain below yields on loans running off.
- Key exposures include Louisiana’s regional economy, energy and oil-and-gas conditions, real estate values, commercial real estate concentrations, large borrower relationships, interest-rate movements and competition for deposits. The 2016 historic Louisiana flooding caused branch demolition and cleanup costs.
- Management warns that a relatively young loan portfolio may not yet reflect seasoned credit performance. The company expects to implement the current expected credit loss (CECL) standard in 2020; management said it was too early to assess the impact and noted that the model could increase allowances and earnings volatility.
- 2016 included a $789,000 BOLI income item, partly due to a former AGFC employee death benefit; a $232,000 gain on securities sales; and $3.4 million of cash consideration settlement to former AGFC shareholders. Two senior executives who left during 2016 received reported severance of $400,000 and $181,799, respectively.
- The company began quarterly dividends in 2016, declaring $0.05 per share in each of the second, third and fourth quarters. Future dividends remain subject to board discretion, bank-level earnings and regulatory restrictions. The company repurchased 125,740 shares in the fourth quarter, including a 100,000-share transaction facilitating a shareholder’s charitable contribution.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2016. The auditor issued an unqualified opinion on the financial statements and internal controls. Management said ordinary-course litigation was not expected to have a material adverse effect, while noting that litigation outcomes remain uncertain.
Important facts for investors to verify
- Whether loan growth and improving nonperforming asset measures persist, particularly across Louisiana real estate, commercial real estate and energy-linked borrowers.
- The composition and migration of special-mention, substandard and doubtful credits, and whether the $8.2 million allowance adequately reflects portfolio risks.
- Whether deposit growth is sustainable and how the increasing use of brokered deposits and time deposits affects funding costs and liquidity.
- The future path of net interest margin as rates, loan repricing, deposit costs and purchase-accounting accretion change.
- The realized or unrealized effects of securities valuation changes, and the eventual allowance, capital and earnings effects of CECL.
- Dividend sustainability, share repurchase activity and capital needs; common stock has no established public trading market and is thinly traded.