Business context and reporting period
Business First Bancshares, Inc. is a Louisiana bank holding company operating through Business First Bank and related subsidiaries. It provides community banking services in Louisiana and Texas through 19 offices. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are to December 31, 2016. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest income | $12.4 | $11.3 | $37.9 | $32.6 |
| Net interest income | $10.5 | $9.7 | $32.8 | $28.3 |
| Provision for loan losses | $0.25 | $0.10 | $1.91 | $0.92 |
| Noninterest income | $1.2 | $1.4 | $4.1 | $4.1 |
| Noninterest expense | $9.2 | $9.2 | $27.1 | $26.7 |
| Net income | $1.7 | $1.4 | $5.7 | $3.6 |
| Diluted EPS | $0.23 | $0.19 | $0.78 | $0.49 |
- Q3 net interest margin was 3.82% and spread 3.56%; nine-month figures were 4.06% and 3.84%. Management said purchase-discount accretion from sales of interests in acquired impaired credits boosted these results. Excluding the reported accretion, nine-month margin and spread were 3.72% and 3.50%; management anticipated continued pressure on margin and spread.
- At September 30, total assets were $1,213.8, loans held for investment were $937.8, deposits were $1,015.1, and shareholders’ equity was $120.1. Assets grew 9.8%, loans 15.7%, and deposits 8.8% from year-end 2016. The filing also describes total loans of $938.1, including loans held for sale.
- For the nine months, operating cash flow was $7.2; investing activities used $113.1, principally reflecting $124.5 of net loan growth; financing activities provided $100.0, including deposit growth and FHLB advances. Cash and cash equivalents ended at $36.2, down $6.0 from year-end.
- Borrowings totaled approximately $72.0, including $65.5 of FHLB advances. FHLB capacity was $336.8, and six bank credit lines provided aggregate availability of $113.5 with no drawn balance at quarter-end. Loans-to-deposits were 92.4%; the allowance was 0.99% of loans held for investment.
- Regulatory capital ratios for the holding company were 9.47% Tier 1 leverage, 9.83% Common Equity Tier 1 and Tier 1 risk-based, and 10.64% total risk-based. The Bank was reported as well-capitalized. Book value per share was $17.32.
Material changes versus prior periods
- Q3 net income increased 21.9% year over year; nine-month net income rose to $5.7 from $3.6. Nine-month net interest income increased $4.5, supported by loan growth and higher yields, while interest expense also rose as funding costs increased.
- Nonperforming loans rose to $13.5 from $7.3 at year-end 2016; nonperforming assets increased to $13.7 from $8.5. The nonperforming-loan ratio rose to 1.44% from 0.90%. Management attributed deterioration mainly to three relationships placed on nonaccrual, including energy-sector exposures.
- The nine-month loan-loss provision more than doubled; management cited increased general reserves for commercial and energy-sector exposure. Net charge-offs were $0.83 for the nine months, versus $0.30 for full-year 2016.
- Noninterest income was nearly flat for nine months, with higher brokerage commissions and SBIC partnership income offset in part by lower BOLI income, securities gains, and losses on OREO sales. Salaries and benefits rose 7.9% as staffing increased to 226 FTEs from 202.
- Available-for-sale securities declined to $186.1 from $198.3. Their net unrealized loss improved to $0.6 from $3.5 at year-end 2016; management considered the unrealized losses temporary.
Outlook, risks, contingencies and unusual items
- No formal earnings or financial guidance is provided. Management said it expected continued pressure on net interest margin and spread, despite loan growth.
- On October 5, 2017, the Company agreed to acquire Minden Bancorp, whose reported assets were $318.2, loans $192.1, and deposits $249.3. The transaction contemplated aggregate consideration of approximately $76.1 and was expected to close in Q1 2018, subject to shareholder and regulatory approvals and other conditions.
- A private placement closed October 12, 2017: 3,299,925 shares at $20 each, for approximately $66.0 gross and estimated $62.5 net proceeds, intended partly to fund the acquisition and for general corporate purposes. The issuance creates dilution risk.
- The Board declared a $0.06-per-share quarterly dividend in October 2017, payable November 30 to shareholders of record November 15. Prior-year dividends were $0.10 per share for the first nine months; 2017 dividends declared through September totaled $0.17 per share.
- Credit risks include deterioration in borrower and collateral conditions, commercial real estate and energy exposure, higher provisions or charge-offs, and $3.3 of troubled debt restructurings that subsequently defaulted during the nine months. Commitments to extend credit were $251.5 and standby/commercial letters of credit $9.6; these may not be fully drawn.
- Interest-rate, liquidity, deposit-cost, competition, regulatory and acquisition-integration risks are discussed. Management reported effective disclosure controls, no material change in internal controls, and no pending legal proceedings other than routine, nonmaterial matters.
- Unusual items included $2.8 of purchase-discount income recognized on sales of participation interests in acquired impaired credits during the nine months, and a $0.34 Q3 loss on sale of a long-held OREO property.
Most important facts for investors to verify
- Whether loan growth can be sustained without further deterioration in credit quality, particularly in energy and commercial exposures; monitor nonaccruals, criticized loans, TDR defaults, charge-offs and reserve coverage.
- How much reported earnings and margins depend on purchase-discount accretion, and the ongoing impact of rising deposit and borrowing costs.
- Completion terms, regulatory and shareholder approvals, financing, integration costs and expected benefits of the Minden Bancorp acquisition.
- Final net proceeds and share dilution from the private placement, and the combined company’s post-transaction capital and liquidity position.
- Cash availability and funding capacity as loans and off-balance-sheet commitments grow, including deposit pricing and FHLB reliance.