Business context and reporting period
Business First Bancshares, Inc. is a Louisiana-based bank holding company serving small and midsize businesses and professionals through Business First Bank and related subsidiaries. It operated 19 offices in Louisiana and Texas. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless stated otherwise.
Financial performance and condition
Amounts below are in millions of dollars unless noted. Quarter-end balance-sheet comparisons are to December 31, 2016.
| Metric | Q2 / June 30, 2017 | Comparable period / prior date |
|---|---|---|
| Interest income | $13.40 Q2 | $10.58 Q2 2016 |
| Net interest income | $11.69 Q2; $22.25 first half | $9.10 Q2; $18.53 first half 2016 |
| Net income | $2.05 Q2; $4.03 first half | $0.84 Q2; $2.25 first half 2016 |
| Diluted EPS | $0.28 Q2; $0.56 first half | $0.11 Q2; $0.31 first half 2016 |
| Net interest margin | 4.34% Q2; 4.19% first half | 3.47% Q2; 3.58% first half 2016 |
| Total assets | $1,169.1 | $1,105.8 at Dec. 31, 2016 |
| Loans held for investment | $874.5 | $811.0 at Dec. 31, 2016 |
| Total deposits | $972.0 | $932.8 at Dec. 31, 2016 |
| Shareholders’ equity | $118.8 | $113.6 at Dec. 31, 2016 |
- Quarterly net interest spread was 4.11%, compared with 3.30% a year earlier; first-half spread was 3.99%, versus 3.42%. Management reported NIM excluding the acquired-loan discount recognized on a participation sale at 3.86% for Q2 and 3.73% for the first half.
- Provision for loan losses was $1.31 million in Q2 and $1.66 million for the first half, versus $0.15 million and $0.82 million, respectively, in 2016. First-half net charge-offs were $0.65 million; allowance for loan losses was $9.18 million, or 1.05% of loans held for investment.
- Noninterest income was $1.60 million in Q2 and $2.90 million in the first half. Noninterest expense was $9.11 million and $17.88 million, respectively. First-half effective tax rate was 28.3%, versus 21.8% in 2016.
- Cash and cash equivalents were $45.2 million at June 30. First-half operating cash flow was $3.86 million, investing cash outflow was $58.37 million, and financing cash inflow was $57.55 million; cash increased $3.03 million.
- Borrowings totaled approximately $72.4 million, including $66.0 million in FHLB advances, $3.0 million in long-term FNBB advances, and $0.86 million on an FNBB revolving line. FHLB advances increased from $47.1 million at year-end. FHLB borrowing capacity was $332.5 million; the company reported $113.5 million of aggregate availability on bank credit lines and no amounts drawn on those lines at June 30.
- Regulatory capital ratios for the company were 9.46% Tier 1 leverage, 10.06% Common Equity Tier 1 and Tier 1 risk-based, and 10.90% total risk-based. The bank was classified as well-capitalized and both bank and holding company were in compliance with applicable requirements.
Material changes versus comparable periods
- Q2 net income increased to $2.05 million from $0.84 million; first-half net income rose to $4.03 million from $2.25 million. Net interest income increased in both periods, supported by loan growth and higher loan yields.
- A sale of participation interests in an impaired AGFC-acquired credit generated $1.3 million of purchase-discount accretion in Q2 and $2.4 million for the first half. These amounts materially lifted reported interest income and margins; management’s adjusted NIM figures excluding the discount were lower.
- From year-end 2016, assets rose 5.7%, loans 7.8%, and deposits 4.2%. Loans-to-deposits increased to 90.0% from 87.0%.
- Nonperforming loans increased to $11.16 million, or 1.28% of loans, from $7.29 million, or 0.90%, at year-end. Management attributed the increase primarily to two relationships placed on nonaccrual in Q1, one in energy and one in gaming. Nonperforming assets rose to $12.39 million from $8.48 million.
- Provision expense increased as management raised general reserves for commercial and energy-sector exposure. Special mention loans were $39.7 million, compared with $37.5 million at year-end; doubtful loans were $11.1 million, compared with $7.1 million.
- First-half noninterest expense increased 1.9%; salaries and benefits rose 6.8%, partly offset by lower legal and professional costs. The 2016 comparison included costs related to litigation with former AGFC shareholders.
- Accumulated other comprehensive loss improved to $0.30 million from $2.33 million, largely reflecting securities valuation changes. Available-for-sale securities declined to $192.1 million from $198.3 million.
Outlook, commentary, risks and unusual items
- Management expects continued pressure on net interest margin and spread, citing new loan yields below yields on loans amortizing or paying off, alongside higher funding costs. Deposit pricing was increased to attract and retain customers and improve liquidity; the average cost of interest-bearing deposits rose to 0.79% for the first half from 0.66% in the first half of 2016.
- The participation sale and related purchase-discount recognition are unusual contributors to reported earnings and margins. Investors should distinguish these effects from recurring performance.
- Credit risks include local economic weakness, commercial and real-estate exposures, energy-sector borrowers affected by low crude prices, possible collateral-value declines, higher charge-offs, and uncertainty in estimating the allowance. The filing reports $3.3 million of troubled debt restructurings that subsequently defaulted during the first half of 2017.
- Interest-rate, liquidity, deposit competition, and funding-cost risks are discussed. The company’s interest-rate simulation estimated that a 300-basis-point increase would raise one-year net interest income 1.30% and reduce fair value of equity 7.32%; model assumptions are inherently uncertain.
- Commitments to extend credit were $255.3 million and standby and commercial letters of credit were $11.1 million at June 30. These may expire unused and do not necessarily represent future cash outflows.
- On July 27, 2017, the board declared a $0.06-per-share quarterly dividend, payable August 31 to shareholders of record August 15. Management cautioned that future dividends are subject to board discretion and bank dividend capacity.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no pending legal proceedings other than routine, nonmaterial matters. The interim results are unaudited and are not necessarily indicative of full-year results.
Important facts for investors to verify
- Reconcile the $1.3 million Q2 and $2.4 million first-half acquired-loan discount accretion from participation sales to reported interest income, earnings, and margin; assess sustainable results excluding it.
- Track nonperforming loans, troubled debt restructurings and defaults, charge-offs, and the adequacy of the allowance, particularly for energy, gaming, commercial, and real-estate exposures.
- Assess whether loan growth can be funded by deposits without further increases in deposit pricing, borrowings, or pressure on liquidity and margins.
- Review concentration and collateral risks in the loan portfolio, as well as potential cash needs from the $255.3 million of lending commitments and other contractual obligations.
- Monitor capital ratios, FHLB and other borrowing maturities, and the ability of the bank to support holding-company dividends as the balance sheet grows.