Business context and reporting period
Business First Bancshares, Inc. is a Louisiana bank holding company operating through Business First Bank and related subsidiaries. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016. The bank operated 18 offices across seven Louisiana markets. Results include the continuing effects of the March 2015 American Gateway Financial Corporation (AGFC) merger; comparisons with 2015 are therefore not fully like-for-like.
Financial performance and position
Unless otherwise stated, amounts are in millions of dollars. Per-share data is in dollars.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Interest income | 11.279 | 11.051 | 32.567 | 27.946 |
| Net interest income | 9.742 | 9.916 | 28.274 | 24.644 |
| Provision for loan losses | 0.100 | 0.150 | 0.920 | 0.450 |
| Noninterest income | 1.368 | 0.804 | 4.079 | 2.214 |
| Noninterest expense | 9.156 | 9.254 | 26.707 | 22.120 |
| Net income | 1.380 | 0.939 | 3.625 | 3.095 |
| Diluted EPS | 0.19 | 0.12 | 0.49 | 0.45 |
- Margins: Net interest margin was 3.78% in Q3 versus 4.04% a year earlier; nine-month margin was 3.64% versus 3.50%. Nine-month net interest spread was 3.48% versus 3.35%. Management attributed recent quarterly margin pressure to lower loan yields and higher funding costs.
- Balance sheet at September 30: Assets were $1.107 billion, up 2.9% from December 31, 2015; loans held for investment were $811.5 million, up 5.1%; deposits were $929.7 million, up 2.8%. Securities available for sale were $209.7 million, slightly below year-end.
- Cash flow, nine months: Operating activities provided $6.660 million, investing activities used $38.173 million and financing activities provided $24.342 million. Cash and cash equivalents fell $7.171 million to $33.740 million. The 2015 comparison included $87.377 million of net cash received in the AGFC merger.
- Liquidity and debt: Cash and cash equivalents were $33.7 million. Borrowings included $47.6 million of FHLB advances, $3.0 million of long-term FNBB borrowing and $3.1 million of repurchase agreements; no short-term borrowing was outstanding. The company reported $109.5 million of available bank credit lines, with none drawn.
- Credit quality: Nonperforming loans were $6.287 million, or 0.77% of loans, versus $7.957 million, or 1.03%, at year-end 2015. Nonperforming assets were $7.868 million, or 0.71% of assets, versus $9.990 million, or 0.93%. The allowance was $7.746 million, 0.95% of loans; nine-month net charge-offs were $418,000.
- Capital and shareholder returns: Stockholders’ equity was $117.6 million, up 4.5% from year-end. Company regulatory ratios were 9.60% Tier 1 leverage, 10.81% Common Equity Tier 1 and 11.59% total risk-based capital; the bank was reported well capitalized. Book value per share was $16.69. A $0.05-per-share quarterly dividend was declared October 27, payable November 30, 2016.
Material changes versus comparable periods
- Q3 net income increased 47.0% year over year, while net interest income declined 1.8%. Higher noninterest income and slightly lower noninterest expense supported quarterly earnings.
- Nine-month net income rose 17.1% and net interest income rose 14.7%. Average earning assets grew, but interest expense also increased; the provision for loan losses more than doubled to $920,000.
- Nine-month noninterest income increased $1.865 million, including higher deposit-service charges, brokerage commissions, correspondent-bank income, securities-sale gains and bank-owned life insurance income.
- Nine-month noninterest expense increased $4.587 million, notably from salaries and benefits, occupancy, data processing, advertising and communications. Management cited AGFC-related staffing and branch network costs, as well as hires and growth investments.
- Loan mix shifted: commercial loans grew to $226.4 million from $185.3 million at year-end, while nonfarm nonresidential real estate loans declined to $286.0 million from $312.2 million. Management attributed the latter decline to amortization and borrower refinancing.
- Capital ratios were lower than at December 31, 2015, though the company and bank remained compliant with applicable requirements.
Outlook, commentary, risks and unusual items
- No formal earnings guidance is provided. Management anticipates continued pressure on net interest margin and spread as new loan yields are below yields on loans amortizing or paying off; AGFC purchase-discount accretion partly offset this pressure during the period.
- Management said the higher nine-month loan-loss provision reflected additional general reserves for energy-sector exposure. The filing highlights risk from lower crude oil prices and borrower or collateral exposure to the oil and gas industry.
- Other identified risks include Louisiana and U.S. economic conditions, borrower repayment and collateral values, interest-rate changes, deposit and loan competition, liquidity, credit quality, regulatory changes, and the August 2016 south Louisiana flooding. Flood-related branch demolition and cleanup costs contributed to higher quarterly occupancy expense.
- Unusual or period-specific items included a bank-owned life insurance death benefit related to a former AGFC employee, $231,000 of securities-sale gains during the nine months, a $24,000 gain on a building sale, correspondent-bank earnings credits, and due-diligence costs for an unsuccessful acquisition bid. Legal fees also included defense costs related to appraisal claims by former AGFC shareholders.
- Management reported effective disclosure controls and no significant changes in internal control over financial reporting. It reported no pending legal proceedings other than routine, nonmaterial matters.
Important facts for investors to verify
- Whether loan yields and deposit funding costs continue to pressure quarterly net interest margin, and how much purchase-discount accretion remains.
- Trends in energy-related credit exposure, criticized and classified loans, charge-offs, nonperforming assets and the adequacy of the loan-loss allowance.
- How much of earnings growth reflects recurring fees and core operations versus the death benefit, securities gains, correspondent income and other nonrecurring items.
- Deposit pricing and mix, liquidity needs, and the effects of growth in higher-rate certificates of deposit and commitments to extend credit.
- Capital headroom, dividend sustainability and the implications of the variable-rate FNBB borrowing and pledged bank-stock collateral.
- Costs or operational effects associated with the Louisiana flooding, the AGFC appraisal litigation, and any future acquisition activity.