Business context and reporting period
Business First Bancshares, Inc. is a Louisiana bank holding company focused on community banking for businesses and professionals. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016. The company operated 16 banking centers, a loan production office and a wealth solutions office in Louisiana. Results versus 2015 reflect, in part, the March 2015 acquisition of American Gateway Financial Corporation (AGFC), which added 10 branches.
Financial performance and position
Amounts are in millions of dollars unless stated otherwise. Income comparisons are with the corresponding 2015 period; balance-sheet comparisons are with December 31, 2015.
| Metric | Q2 / June 30, 2016 | Prior comparable / change |
|---|---|---|
| Total assets | $1,174.1 | Up $98.1, or 9.1%, since year-end |
| Loans, gross | $797.9 | Up $25.5, or 3.3%, since year-end |
| Deposits | $998.7 | Up $94.4, or 10.4%, since year-end |
| Net interest income | Q2: $9.1; six months: $18.5 | Q2 up 6.3%; six months up 25.8% |
| Net income | Q2: $0.841; six months: $2.245 | Q2 down 17.8%; six months up 4.1% |
| Diluted earnings per share | Q2: $0.11; six months: $0.31 | 2015: $0.14 and $0.33, respectively |
| Net interest margin | Q2: 3.47%; six months: 3.58% | 2015: 3.28% and 3.41%, respectively |
| Stockholders’ equity | $116.1 | Up $3.7, or 3.3%, since year-end |
- For the six months, interest income was $21.3 million and interest expense was $2.8 million. Noninterest income was $2.7 million, up $1.3 million year over year; noninterest expense was $17.6 million, up $4.7 million. The quarter’s noninterest expense was $9.2 million, up $1.2 million.
- Provision for loan losses was $0.82 million for the first half, versus $0.30 million in 2015; the Q2 provision was $0.15 million in both years. Management attributed the first-half increase to higher general reserves related to energy-sector exposure.
- Six-month operating cash flow was $4.4 million, investing cash flow was negative $50.4 million, and financing cash flow was $93.5 million. Cash and cash equivalents ended the period at $88.5 million. Investing outflows included $25.8 million of net loan growth and $25.8 million of increased federal funds sold; financing inflows included $94.4 million of deposit growth.
- At June 30, cash and due from banks was $88.5 million and federal funds sold were $28.3 million. Funded obligations included $48.1 million of FHLB advances, $3.0 million on the FTN line and $2.5 million of repurchase agreements. The $3.0 million FTN line was fully drawn.
- Regulatory capital ratios at the holding company were 9.21% Tier 1 leverage, 10.73% Common Equity Tier 1 and Tier 1 risk-based, and 11.47% total risk-based. The bank was classified as well capitalized. Book value per share was $16.50.
Material changes and credit quality
- Deposit growth exceeded loan growth; loans-to-deposits fell to 79.9% from 85.4% at year-end. Management said deposit growth reflected stronger local-market penetration and higher rates on certificates of deposit over $100,000.
- Commercial loans rose 11.1% since year-end to $205.8 million, while nonfarm nonresidential real estate loans fell 6.9% to $290.7 million, mainly from amortization and borrower refinancing. Consumer loans increased to $43.6 million from $29.1 million.
- Nonperforming loans were $9.1 million, or 1.14% of loans, versus $8.0 million and 1.03% at year-end. Nonperforming assets were $11.0 million, or 0.94% of assets. Management linked the increase mainly to one energy-sector loan participation and said it was being monitored jointly with the lead bank.
- The allowance for loan losses was $7.38 million, or 0.92% of loans, versus $7.24 million, or 0.94%, at year-end. First-half net charge-offs were $0.684 million, compared with $0.588 million for full-year 2015; these periods are not directly comparable.
- Other comprehensive income was $1.6 million for the first half, mainly reflecting improved unrealized values on available-for-sale securities; accumulated other comprehensive income was $0.8 million at June 30, versus a $0.8 million loss at year-end.
Outlook, risks and unusual items
- Management expected continued pressure on net interest margin and spread, citing lower yields on new loan originations and runoff of higher-yielding loans. Purchase-discount accretion on AGFC loans partly supported first-half loan yields. No quantified earnings or growth guidance was provided.
- Management identified economic and borrower repayment conditions in Louisiana, oil-price declines affecting energy-related borrowers and investments, interest-rate movements, deposit competition, liquidity, credit quality, and regulatory changes as material risks. The company cautioned that allowance estimates are sensitive to economic conditions and that its relatively young loan portfolio may not yet reflect seasoned loss experience.
- Unusual or nonrecurring contributors included $0.231 million of securities-sale gains in the first half and $0.180 million more bank-owned life insurance income year over year, primarily due to a death benefit. First-half expenses also included $0.162 million of statutory interest associated with settlement of dissenting former AGFC shareholders’ appraisal litigation. The filing reports no pending legal proceedings other than routine, nonmaterial matters.
- The board declared a $0.05-per-share quarterly dividend on July 28, 2016, payable August 31 to shareholders of record August 15. Dividend payments remain subject to board discretion and the bank’s ability to pay dividends to the holding company.
Important facts for investors to verify
- Whether energy-sector credit exposure, the identified loan participation and nonperforming loan trends worsen, and whether the allowance remains adequate.
- Whether expense growth moderates after AGFC-related integration and other added operating costs, and whether earnings improve despite Q2 net income and EPS declines.
- Whether deposit pricing and funding costs further pressure margins, given management’s warning of continued margin pressure.
- How much of first-half noninterest income and earnings depended on securities gains, the insurance death benefit and AGFC purchase-accounting accretion.
- Whether deposit growth, capital ratios, liquidity facilities and loan commitments remain supportive as lending and funding needs change.