Business Context and Reporting Period
Business First Bancshares, Inc. is a Louisiana bank holding company operating b1BANK, serving small and midsized businesses, professionals and individuals across Louisiana and Dallas, Texas through 26 banking centers. This Form 10-K reports the fiscal year ended December 31, 2019, with comparisons to 2018; it does not provide a clear standalone fourth-quarter results summary. The 2019 comparison reflects a full year of Richland State Bancorp (RSBI), acquired at the end of November 2018.
Financial Performance and Condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets at year-end | $2.274 billion | $2.095 billion |
| Total loans held for investment | $1.710 billion | $1.528 billion |
| Total deposits | $1.782 billion | $1.734 billion |
| Net interest income | $80.2 million | $62.2 million |
| Net interest margin | 4.10% | 4.02% |
| Net income | $23.8 million | $14.1 million |
| Diluted EPS | $1.74 | $1.22 |
| Return on average assets / equity | 1.11% / 8.70% | 0.84% / 7.04% |
- Growth and earnings: Assets rose 8.5%, loans 11.9%, deposits 2.8%, net interest income 28.9% and net income 68.7%. Management attributed improved profitability primarily to RSBI and loan growth. Average earning assets increased substantially; loan growth drove most of the increase in interest income.
- Margins and expenses: Net interest spread eased to 3.67% from 3.71%. Average loan yield increased to 5.86% from 5.55%, while the average cost of interest-bearing deposits rose to 1.50% from 1.12%. Noninterest income increased 37.7% to $10.7 million; noninterest expense increased 16.3% to $58.4 million. Salaries and benefits rose 26.1% to $35.1 million, primarily reflecting hiring, RSBI-related costs and merit increases.
- Credit quality: Nonperforming loans declined to $9.0 million, or 0.53% of loans, from $13.6 million, or 0.89%. Nonperforming assets were $13.2 million, versus $15.5 million. The allowance for loan losses was $12.1 million, or 0.71% of loans, compared with $11.2 million, or 0.73%. Net charge-offs were $1.7 million versus net recoveries of $65,000 in 2018.
- Cash flow and liquidity: Operating cash flow was $24.4 million; investing activities used $192.3 million, principally reflecting loan growth; financing activities provided $161.2 million. Cash and cash equivalents ended the year at $89.4 million, down from $96.1 million. The bank also had $61.4 million in federal funds sold. Loans held for investment were 96.0% of deposits, up from 88.2%.
- Debt and capital: Year-end borrowings included $93.0 million of FHLB advances, $68.0 million in repurchase-agreement liabilities and $25.0 million of subordinated notes bearing 6.75% fixed interest through 2028. Consolidated total risk-based capital was 13.30%, Tier 1 leverage was 10.56%, and shareholders’ equity was $285.1 million. The bank was categorized as well capitalized; capital ratios declined from 2018 levels.
Material Changes, Outlook, Risks and Unusual Items
- Growth in loans and net interest income benefited from RSBI-related scale as well as organic loan expansion; year-over-year comparisons therefore are not purely organic. Loans grew faster than deposits, and the loan-to-deposit ratio increased.
- Noninterest income included $1.6 million of SBIC partnership pass-through income, largely driven by a 2019 dividend recapitalization, a $581,000 gain on a banking-center sale, and a $774,000 loss on disposal of other assets, largely associated with renovations and rebranding. Acquisition-related expenses were $750,000, down from $3.6 million in 2018.
- On January 22, 2020, the Company agreed to acquire Pedestal Bancshares, which operates 22 branches in southern Louisiana. The filing provides no specific financial guidance or quantified forecast for the transaction or for 2020; completion is subject to applicable approvals and other conditions.
- Management described disciplined organic growth and selective acquisitions as strategic priorities. Key risks include concentration in Louisiana and Dallas, commercial real estate and other real-estate-backed lending, exposure to energy and local economic conditions, rising deposit costs, and integration and execution risks from acquisitions.
- Funding risks include $302.2 million of public-body deposits, which can fluctuate seasonally, and $389.9 million of unfunded credit commitments plus $24.4 million of standby and commercial letters of credit. These commitments may require funding, although some may expire unused.
- The Company noted that CECL adoption could materially affect financial statements; as a smaller reporting company, it anticipated electing the delayed effective date of January 2023. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting, which was reported effective. Management stated there were no material legal proceedings and assessed the likelihood of a material adverse outcome from ordinary-course proceedings as remote.
Most Important Facts for Investors to Verify
- How much of 2019 earnings and balance-sheet growth reflects RSBI versus sustainable organic growth, and whether the reported profitability gains persist after integration costs.
- Credit trends in commercial real estate, construction and land development, and commercial lending; the adequacy of the allowance; and the implications of higher 2019 net charge-offs.
- Deposit retention and pricing, especially public-body and other rate-sensitive deposits, as well as liquidity coverage for loan commitments and other funding needs.
- The effect of the higher loan-to-deposit ratio and increased repurchase-agreement and FHLB funding on margins, liquidity and capital.
- Pedestal acquisition terms, regulatory approvals, integration costs, expected benefits and any impact on capital or tangible book value; also verify subsequent developments after the filing date.
- Timing and estimated financial impact of CECL adoption, and the sensitivity of earnings to interest-rate, local economic and real-estate conditions.