Business context and reporting period
Business First Bancshares, Inc. is a Louisiana-based bank holding company serving businesses and professionals through Business First Bank. This unaudited Form 10-Q covers the quarter ended March 31, 2016. Unless otherwise noted, dollar amounts below are in millions.
Results reflect the April 1, 2015 acquisition of American Gateway Financial Corporation (AGFC), including 10 branches. Consequently, year-over-year comparisons are affected by the acquired business being included only from the acquisition date in 2015.
Financial performance and position
- Income: Net interest income was $9.43 million, up 53.0% from $6.17 million in Q1 2015. Total interest income was $10.71 million; provision for loan losses was $0.67 million versus $0.15 million. Noninterest income was $1.44 million, up from $0.43 million, while noninterest expense rose to $8.40 million from $4.88 million.
- Profit: Pretax income was $1.80 million versus $1.56 million; net income was $1.40 million, up 23.9% from $1.13 million. Basic and diluted EPS were $0.20 and $0.19, respectively, compared with $0.21 and $0.20. The larger share count following the merger affected per-share comparisons.
- Margins: Net interest margin was 3.69% versus 3.59%, and net interest spread was 3.53% versus 3.43%. Average loan yield increased to 4.97% from 4.63%; management cited purchase-discount accretion on acquired loans as a positive factor.
- Cash flow: Operating activities provided $2.51 million; investing activities used $44.25 million, including loan growth and increased federal funds sold; financing activities provided $74.18 million, mainly from deposit growth. Cash and cash equivalents increased $32.44 million to $73.35 million.
- Balance sheet and liquidity: Total assets were $1.156 billion, up 7.4% from year-end. Loans were $789.4 million, up 2.2%; deposits were $978.3 million, up 8.2%. The loan-to-deposit ratio was 80.7%. The company reported $206.9 million of available-for-sale securities and $106.2 million of unused bank credit-line availability.
- Debt and capital: FHLB borrowings were $48.6 million; a $3.0 million FTN line was also outstanding. Stockholders’ equity was $115.0 million. Company regulatory ratios included Tier 1 leverage of 9.65%, Common Equity Tier 1 of 10.81%, and total risk-based capital of 11.55%. The bank was classified as well capitalized.
- Credit quality: The allowance for loan losses was $7.21 million, or 0.91% of loans. Nonperforming loans were $9.09 million (1.15% of loans), and nonperforming assets were $11.53 million (1.00% of assets), both higher than at December 31, 2015. Net charge-offs were $0.70 million for the quarter.
Material changes versus comparable periods
- Growth in net interest income and other income was substantially influenced by the AGFC merger and related larger average balances. Management attributed much of the increase in fees and operating costs to the acquired branches, accounts, and employees.
- Provision for loan losses increased to $0.67 million; management said the increase was to strengthen general reserves for energy-sector exposure.
- Noninterest income included a $0.175 million securities-sale gain and $0.353 million of bank-owned life-insurance income, which included a death benefit related to a former AGFC employee.
- Noninterest expense increased 72.1% year over year, including higher salaries, occupancy, data processing, professional fees, and other costs. Management also cited legal costs related to the AGFC appraisal litigation.
- Accumulated other comprehensive income improved, with $1.02 million of other comprehensive income for the quarter, primarily related to unrealized securities gains.
Outlook, risks, and contingencies
- Management anticipates continued pressure on net interest margin and spread, citing loan growth and runoff of higher-yielding loans. No specific earnings or balance-sheet guidance was provided.
- Management identifies economic conditions, lower oil prices and energy-sector exposure, interest-rate changes, deposit competition, credit quality, liquidity, and regulatory developments as material risks. It cautions that actual results may differ from forward-looking statements.
- AGFC appraisal-rights litigation remained unresolved at quarter-end, with a trial scheduled for late May 2016. The company recorded $3.45 million in other liabilities for estimated additional consideration; the ultimate settlement amount was unknown.
- At March 31, commitments to extend credit totaled $173.8 million and letters of credit totaled $9.2 million. The filing notes these commitments may expire unused and therefore may not equal future cash requirements.
- On April 15, 2016, the company declared a $0.05-per-share dividend, payable May 16, 2016, to shareholders of record April 29.
Important facts for investors to verify
- How much of year-over-year earnings growth is attributable to the AGFC acquisition versus underlying organic growth, and how acquisition-related costs and purchase-accounting accretion will evolve.
- Whether energy-related credit deterioration continues, including movements in nonperforming loans, criticized loans, charge-offs, and the adequacy of the allowance.
- The outcome and financial impact of the AGFC appraisal litigation relative to the $3.45 million accrual.
- Whether deposit growth remains stable and cost-effective, particularly given increased pricing on larger certificates of deposit and the decline in noninterest-bearing deposits.
- Whether margin pressure, elevated expenses, and the lower regulatory capital ratios affect future profitability or growth capacity.