Business context and reporting period
Business First Bancshares, Inc. is a Louisiana-based bank holding company serving small and midsized businesses, professionals and individuals through Business First Bank. It operated 25 banking centers across Louisiana and Dallas, Texas. This is the fiscal-year 2018 Form 10-K, for the year ended December 31, 2018—not a standalone fourth-quarter report. The company completed the Minden Bancorp acquisition on January 1 and the Richland State Bancorp acquisition on November 30, 2018.
Financial performance and condition
| Metric | 2018 | 2017 / change |
|---|---|---|
| Total assets at year-end | $2.095 billion | $1.321 billion; up 58.6% |
| Loans held for investment | $1.528 billion | $975.3 million; up 56.7% |
| Total deposits | $1.734 billion | $1.056 billion; up 64.3% |
| Net interest income | $62.2 million | $44.4 million; up 40.2% |
| Net interest margin / spread | 4.02% / 3.71% | 4.01% / 3.77% |
| Net income | $14.1 million; $1.22 diluted EPS | $4.8 million; $0.61 diluted EPS |
| Return on average assets / equity | 0.84% / 7.04% | 0.40% / 3.68% |
| Operating cash flow | $19.3 million | $8.0 million |
| Cash and cash equivalents at year-end | $96.1 million | $107.6 million |
Net interest income after loan-loss provision was $59.8 million. Noninterest income was $7.8 million, up 38.5%; noninterest expense was $50.2 million, up 36.5%. Provision for loan losses declined to $2.4 million from $4.2 million. Average loan yield rose to 5.55% from 5.33%, while the average rate on interest-bearing liabilities increased to 1.21% from 0.90%. Management reported continued expected pressure on net interest margin and spread.
Asset quality indicators improved year over year: nonperforming loans were 0.89% of loans held for investment versus 1.30%; nonperforming assets were 0.74% of assets versus 0.98%. The allowance for loan losses was $11.2 million, or 0.73% of loans, compared with $8.8 million, or 0.90%. Net charge-offs were negative $65,000 (net recoveries), versus $3.6 million of net charge-offs in 2017. Commercial real estate represented 53.3% of loans; loans with real estate as primary or secondary collateral represented 71.0%.
Year-end shareholders’ equity was $260.1 million, up 44.5%; book value per share was $19.68, up from $17.58. Consolidated capital ratios were 11.66% leverage, 11.83% CET1, 11.83% Tier 1 risk-based and 13.91% total risk-based, all lower than 2017 as the balance sheet expanded. The Bank’s corresponding ratios were 12.08%, 12.26%, 12.26% and 12.90%; it remained well capitalized. Year-end borrowings included $55 million of FHLB advances, $25 million of subordinated debt issued in December at a stated 6.75% fixed-to-floating rate and $12.2 million of securities sold under repurchase agreements. Cash and federal funds sold totaled about $137.9 million. The company also reported $126 million of available correspondent-bank lines with no balance outstanding and approximately $351.6 million of unused FHLB advance and letter-of-credit capacity.
Cash flow from investing activities was negative $170.3 million, primarily reflecting loan growth; financing activities provided $139.5 million. Cash and cash equivalents declined $11.5 million during the year. Outstanding commitments to extend credit were $322.5 million, in addition to $11.5 million of standby and commercial letters of credit; the filing notes these commitments may not be fully drawn.
Material changes versus the prior comparable period
- Growth in assets, loans and deposits largely reflected the Minden and Richland acquisitions, alongside organic growth. The acquisitions added roughly $317 million of assets each at acquisition; Minden was funded with cash consideration of about $56.2 million, while Richland consideration was about $42.5 million in shares.
- Net income rose substantially, reflecting the larger franchise, loan growth and a lower effective tax rate. The 2017 comparison included a $1.7 million one-time deferred-tax charge related to the Tax Cuts and Jobs Act; excluding that charge, 2017 income tax expense was $2.4 million. Effective tax rates were 18.9% in 2018 and 27.2% in 2017.
- Acquisition and conversion expenses increased to $3.0 million from $129,000; total acquisition-related expenses were $3.6 million on the company’s non-GAAP core-income reconciliation. Salaries and benefits rose 29.7%, partly due to acquired operations, hiring, and retention and severance costs.
- Noninterest income included $402,000 of net gains associated with branch closures and property transfers; three branches were closed. Management’s non-GAAP core net income was $16.8 million versus $3.1 million, but this measure excludes items and is not directly comparable to GAAP income.
- The allowance ratio declined despite portfolio growth; the company attributed the lower 2018 provision partly to the prior-year reserve addition for two energy-related impaired relationships.
Outlook, commentary, risks and contingencies
Management emphasized continued organic growth and selective expansion, while saying it would consider acquisitions but had no formal or informal acquisition arrangements at the filing date. It anticipated ongoing net interest margin and spread pressure. No quantified earnings or financial guidance was provided.
Key disclosed risks include geographic concentration in Louisiana and Dallas, commercial real estate and other real-estate collateral exposure, energy-sector sensitivity, interest-rate and deposit-pricing competition, growth and acquisition integration, and reliance on public-fund deposits. Public-body deposits were $294.7 million, approximately 17% of total deposits, and may fluctuate seasonally or be rate-sensitive. Brokered and wholesale deposits were 11.4% of total deposits. Management also identified liquidity risk from potential commitment drawdowns and changing funding availability.
Interest-rate simulations estimated net interest income would increase 1.1% under an instantaneous +100 basis-point shock and decline 4.4% under a −100 basis-point shock; the model is assumption-dependent and actual results may differ. The company expected adoption of the CECL credit-loss standard on January 1, 2020, but could not reasonably estimate the impact. It expected lease-standard adoption in 2019 to increase reported assets and liabilities.
Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2018. The auditor issued an unqualified opinion on the financial statements and internal controls. The company reported no material legal proceedings; management considered ordinary-course claims unlikely to have a material adverse effect.
Most important facts for investors to verify
- How much 2018 earnings growth persists after acquisition contributions, acquisition costs, branch-related gains and the prior-year tax adjustment.
- Whether deposit costs, including rates on time deposits, public funds and brokered or wholesale funding, continue to rise relative to loan yields and pressure margins.
- Credit performance and reserve adequacy as the acquired and rapidly grown loan portfolio seasons, particularly commercial real estate, construction and energy exposures.
- Integration outcomes, realized acquisition synergies, goodwill and intangible-asset balances, and the effect of future growth on capital ratios.
- Liquidity capacity if municipal deposits decline or a larger share of the $322.5 million in credit commitments is drawn.
- The eventual CECL impact, and the assumptions behind interest-rate sensitivity estimates and available liquidity capacity.