Business First Bancshares, Inc. quarterly report, Q3 FY2015

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Business context and reporting period

Business First Bancshares, Inc. is a Louisiana bank holding company focused on community banking for small and midsize businesses and professionals. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014. Unless indicated otherwise, dollar amounts below are in millions.

Results reflect the American Gateway Financial Corporation (AGFC) merger, completed after close on March 31, 2015, with acquired operations included from April 1. The merger added 10 branches and substantially changed the company’s scale, making year-over-year comparisons less directly comparable.

Financial results and position

  • Third-quarter earnings: Interest income was $11.05 million versus $6.84 million a year earlier; net interest income was $9.92 million versus $5.83 million. Net income declined 8.8% to $0.94 million from $1.03 million. Diluted EPS was $0.12 versus $0.19.
  • Nine-month results: Net interest income rose to $24.64 million from $17.62 million, while net income declined to $3.10 million from $3.20 million. Diluted EPS was $0.45 versus $0.58.
  • Margins: Third-quarter net interest margin was 4.04% versus 3.48% in 2014; nine-month margin was 3.50% versus 3.56%. Management attributed the quarterly improvement partly to higher average loan yields and lower borrowing costs, but expected continued margin pressure from new loan growth and runoff of higher-yielding loans.
  • Noninterest income and expense: Third-quarter noninterest income increased to $0.80 million from $0.64 million. Noninterest expense nearly doubled to $9.25 million from $4.67 million, including $0.883 million of post-merger and conversion costs in the quarter. Nine-month noninterest expense rose to $22.12 million from $13.97 million, contributing to lower earnings despite higher net interest income.
  • Balance sheet at September 30: Assets were $1,066.8 million, loans held for investment $745.3 million, deposits $864.3 million, and stockholders’ equity $112.1 million. Compared with year-end 2014, assets increased 55.9%, loans 33.5%, and deposits 47.2%, primarily due to the merger and ongoing business growth.
  • Credit quality: Nonperforming loans were $7.7 million, or 1.03% of loans, versus $3.0 million and 0.54% at year-end; management attributed the increase to acquired AGFC loans. Nonperforming assets were $11.5 million, or 1.08% of assets. The allowance for loan losses was $7.2 million, or 0.96% of loans, down from 1.19% at year-end; acquired loans are initially recorded at fair value and generally do not receive an acquisition-date allowance. Nine-month net recoveries were $0.089 million.
  • Cash flow and liquidity: Nine-month operating cash flow was $2.50 million, investing cash flow $1.52 million, and financing cash flow $15.92 million. Cash and cash equivalents ended at $45.97 million, up from $26.02 million; investing cash flow included $87.38 million received in the merger. The company reported $83.7 million of available capacity under five bank credit lines, with none drawn at quarter-end.
  • Borrowings and capital: Balance-sheet borrowings included $79.66 million of FHLB advances, $3.0 million under a one-year unsecured FTN line, and $2.35 million of repurchase-agreement obligations. The company reported Tier 1 leverage, Common Equity Tier 1, Tier 1 risk-based, and total risk-based capital ratios of 10.00%, 11.22%, 11.22%, and 11.97%, respectively. The bank was classified as well capitalized. Book value per share was $15.93; tangible book value per share was $15.05.

Material changes versus comparable periods

  • Third-quarter net interest income rose 70.2% year over year, but net income fell 8.8% as operating expenses increased substantially.
  • For the first nine months, interest income and net interest income grew with the larger acquired and organically expanded balance sheet, while net income and diluted EPS were below the prior-year period.
  • Compared with December 31, 2014, securities available for sale increased to $214.0 million from $74.5 million, and FHLB advances increased to $79.7 million from $15.0 million, largely reflecting the AGFC merger.
  • Nonperforming loans and assets rose from year-end levels, also primarily due to acquired loans. The share of loans graded substandard or doubtful increased in absolute amount; monitor the acquired portfolio and subsequent performance.

Outlook, risks and unusual items

  • No formal earnings or financial guidance was provided. Management anticipated continued pressure on net interest margin and spread as new loan yields and runoff of higher-yielding loans affect results.
  • The estimated AGFC purchase price was $44.4 million and remained subject to refinement; appraisal-rights payments were not finalized, with 53,094 appraisal-rights shares unsettled at September 30. The company recorded $3.6 million of goodwill and a $2.6 million core deposit intangible.
  • Key stated risks include economic weakness affecting borrowers and collateral, interest-rate changes, competition for loans and deposits, credit-loss estimate uncertainty, liquidity and funding availability, regulatory changes, and integration of the acquired business. Management noted that actual results may differ materially from forward-looking statements.
  • Management said securities unrealized losses were considered temporary at the reporting date. The filing describes ordinary-course legal claims but provides no clear quantified material contingency. Disclosure controls were assessed as effective, with no significant changes in internal control over financial reporting reported.

Most important facts for investors to verify

  1. Whether AGFC integration costs and other acquisition-related expenses decline, and whether the merger produces expected operating benefits.
  2. Trends in nonperforming and criticized loans, charge-offs, acquired-credit performance, and allowance adequacy as the loan portfolio seasons.
  3. Whether net interest margin stabilizes or continues to face pressure from loan pricing, asset yields, deposit costs, and interest-rate changes.
  4. Funding and liquidity needs, including the maturity and cost of FHLB advances and the FTN line, and the extent to which commitments to extend credit are drawn.
  5. Capital ratios after balance-sheet growth and any further share repurchases; the company repurchased 170,000 shares for $2.805 million during the nine months, including a negotiated September transaction.