Business context and reporting period
Business First Bancshares, Inc. is a Louisiana-based bank holding company serving businesses and professionals in Louisiana and Texas. This unaudited Form 10-Q covers the three months ended March 31, 2018; income and cash-flow comparisons are with Q1 2017, while balance-sheet comparisons are with December 31, 2017. The January 1, 2018 acquisition of Minden Bancorp, Inc. (MBI) materially affects period-over-period comparisons.
Key financial results
- Revenue and earnings: Interest income was $17.2 million, net interest income was $14.5 million, and noninterest income was $1.7 million. Net income rose 57.3% to $3.1 million from $2.0 million. Diluted EPS was $0.29, versus $0.27.
- Margins: Net interest margin was 3.97%, down from 4.04% in Q1 2017; net interest spread was 3.75%, versus 3.84%. Management noted that the prior-year measures included a $1.1 million gain in interest income from selling a participation in an impaired credit. Excluding that transaction, management cited prior-year net interest margin of 3.60% and net interest income of $9.4 million.
- Expenses and taxes: Noninterest expense increased 36.3% to $11.9 million, including $512,000 of MBI-related expenses. The effective tax rate fell to 18.6% from 28.0%, primarily following the Tax Cuts and Jobs Act.
- Cash flow: Operating activities provided $4.3 million; investing activities used $54.3 million and financing activities used $19.9 million. Cash and cash equivalents ended at $37.6 million, compared with $107.6 million at year-end; the company attributed the decline primarily to the $56.2 million cash consideration paid for MBI.
- Balance sheet and funding: Total assets were $1.588 billion, loans held for investment were $1.191 billion, and deposits were $1.308 billion. Deposits included $297.8 million of noninterest-bearing deposits. Borrowings and repurchase agreements totaled approximately $94.0 million, including $75.0 million of FHLB advances.
- Credit quality: The allowance for loan losses was $9.6 million, or 0.81% of loans held for investment, compared with 0.90% at year-end. Nonperforming loans were $15.1 million, or 1.27% of loans, versus $12.7 million and 1.30%; nonperforming assets were $16.4 million, or 1.04% of assets, versus $12.9 million and 0.98%.
- Capital and shareholder measures: Consolidated regulatory capital ratios declined from year-end: Tier 1 leverage was 9.36% versus 13.53%, and total risk-based capital was 11.25% versus 15.23%. The Bank remained classified as well-capitalized. Book value per share was $17.52, versus $17.58; tangible book value per share was $13.90, versus $16.72.
Material changes versus comparable periods
- MBI added substantial scale: assets increased 20.2%, loans 22.2%, and deposits 23.9% from December 31, 2017. MBI contributed approximately $317.1 million in assets and $192.7 million in loans at acquisition; the transaction generated $26.0 million of goodwill.
- Reported net interest income increased 37.3% year over year, driven mainly by volume growth, while deposit and borrowing costs rose and reported margin narrowed. Management said loan growth and runoff of higher-yielding loans were expected to keep pressure on margin and spread.
- Noninterest income increased 33.1%, including higher deposit and ATM fees, rental income, and a $47,000 gain related to buildings transferred to other real estate owned after two branch closures. Noninterest expense increased 36.3%, reflecting MBI operations, staffing, and merger costs.
- Other comprehensive loss was $2.7 million in Q1 2018, compared with $1.1 million of comprehensive income in Q1 2017, largely reflecting a larger unrealized loss on available-for-sale securities. Gross unrealized securities losses rose to $5.8 million from $2.5 million at year-end; management considered the losses temporary.
Outlook, risks, contingencies, and unusual items
- The filing provides no formal earnings or revenue guidance. Management anticipated continued net interest margin and spread pressure and identified growth management, acquisition integration, and maintaining liquidity and capital as important considerations.
- Key disclosed risks include acquisition integration and realization of expected benefits; credit deterioration and collateral values; Louisiana and Dallas/Fort Worth economic concentration; energy-sector and oil-price volatility; interest-rate changes; funding costs and liquidity; competition; and regulatory or tax changes.
- At March 31, 2018, the Bank had $279.8 million of commitments to extend credit and $10.1 million of standby and commercial letters of credit. These may expire unused. Management said routine legal proceedings were not expected to have a material adverse effect; no material pending nonroutine proceeding was reported.
- The MBI acquisition, the prior-year impaired-credit participation sale, and 2018 merger expenses are significant comparability items. Core net income, a company-defined non-GAAP measure, was $3.6 million, or $0.34 per diluted share, versus $1.2 million, or $0.17, in Q1 2017.
- The company’s common stock began trading on the Nasdaq Global Select Market on April 9, 2018. On April 19, the Board declared a quarterly dividend of $0.08 per share, payable May 31, 2018, to shareholders of record May 15.
Important facts for investors to verify
- Whether MBI integration delivers the anticipated benefits and how much reported growth reflects acquisition versus organic activity.
- Whether margin pressure and rising deposit costs continue, and how funding mix and liquidity evolve after the acquisition-related cash outflow.
- Whether nonperforming loans, classified credits, and the allowance remain manageable as the acquired portfolio seasons.
- How available-for-sale securities valuations and accumulated other comprehensive loss affect reported equity and capital.
- Whether consolidated capital ratios remain adequate as assets and loans grow; distinguish the holding company ratios from the Bank’s ratios.
- How reported earnings compare with the company’s adjusted “core” non-GAAP results, including the treatment of merger costs and prior-period unusual income.