Business context and reporting period
Business First Bancshares, Inc. is a Louisiana bank holding company focused on small and midsized businesses, commercial lending, and relationship banking. This Form 10-K covers the fiscal year ended December 31, 2017; the financial statements do not include Minden Bancorp, acquired January 1, 2018. The company operated across Louisiana and had opened a Dallas loan production office in 2017.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets | $1.321 billion | $1.106 billion |
| Total loans held for investment | $975.3 million | $811.0 million |
| Total deposits | $1.056 billion | $932.8 million |
| Shareholders’ equity | $179.9 million | $113.6 million |
| Net interest income | $44.4 million | $37.6 million |
| Net income | $4.8 million | $5.1 million |
| Basic / diluted EPS | $0.63 / $0.61 | $0.73 / $0.70 |
| Net interest margin | 4.01%; 3.76% excluding $2.8 million purchase-discount income | 3.64% |
| Return on average assets / equity | 0.40% / 3.68% | 0.45% / 4.42% |
| Cash and cash equivalents at year-end | $107.6 million | $42.2 million |
Operating cash flow was $8.0 million; investing cash flow was negative $153.4 million, largely reflecting $164.4 million of net loan growth; financing cash flow was positive $210.9 million, including $62.5 million of net private-placement proceeds and $122.7 million of deposit growth. Year-end borrowings included $75.0 million of FHLB advances, $3.6 million of FNBB advances, and $1.9 million under repurchase agreements. The Bank had $113.5 million of unused correspondent-bank credit lines; the filing reports no balances outstanding on those lines.
Noninterest income was $5.6 million and noninterest expense was $36.8 million. The allowance for loan losses was $8.8 million, or 0.90% of loans; net charge-offs were $3.6 million, or 0.41% of average loans. Nonperforming loans were $12.7 million, 1.30% of loans, versus $7.3 million and 0.90% in 2016. The Bank’s year-end capital ratios were 10.24% total risk-based, 9.50% Tier 1 risk-based, and 8.78% leverage; it remained classified as well capitalized.
Material changes versus the prior comparable period
- Assets increased 19.5%, loans 20.3%, and deposits 13.2%. Loan growth was concentrated in construction and land, commercial, and residential lending.
- Net interest income rose 18.0%; reported net interest margin increased from 3.64% to 4.01%. Management attributed much of the reported margin improvement to purchase-discount income on participations sold; excluding that $2.8 million item, margin was 3.76%.
- Net income declined 5.1%, despite higher net interest income and pretax income. The allowance provision increased to $4.2 million from $1.2 million, including a $2.2 million fourth-quarter addition following impairment of two energy-related loan relationships. Net charge-offs also rose substantially.
- Income tax expense increased to $4.1 million from $1.6 million, including a $1.7 million charge to revalue deferred tax assets after enactment of the Tax Cuts and Jobs Act.
- Equity increased 58.5%, principally from the October 2017 private placement of 3.30 million shares at $20 per share, generating $62.5 million net proceeds. Those proceeds were raised partly to fund the subsequent Minden acquisition.
Outlook, commentary, risks and unusual items
- Management anticipated continued pressure on net interest margin and spread, alongside continued loan growth; the filing provides no quantified earnings or growth guidance.
- Minden Bancorp closed on January 1, 2018 for approximately $56.2 million in cash. At December 31, 2017, Minden had $315.4 million of assets, $193.3 million of net loans, and $264.0 million of deposits. Integration, acquired credit quality, and realizing expected benefits are key execution risks.
- Commercial real estate and real-estate-secured loans were material concentrations. Construction, land development, and other land loans equaled 127.5% of Bank risk-based capital; the broader CRE measure was 288.3%, within the 300% supervisory guideline but above the 100% guideline for the construction/land measure. Management cited timing of project draws and stated that monitoring controls were in place.
- Funding risks include public-body deposits of approximately 16.2% of deposits, brokered deposits, and dependence on deposit growth. Unfunded commitments to extend credit were $256.9 million, with an additional $9.5 million of standby and commercial letters of credit.
- Other disclosed risks include geographic and energy-sector exposure, real-estate collateral values, higher credit losses, interest-rate and deposit-pricing pressure, liquidity, competition, regulation, cybersecurity, and hurricanes or other natural disasters. The company described itself as asset-sensitive, but its modeled net interest income declined 2.2% under a 100-basis-point rate decrease.
- The company reported no material legal proceedings. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
- The common stock had no established public trading market as of the filing; Nasdaq listing was expected in late first quarter or early second quarter 2018, subject to approval. Quarterly dividends were $0.06 per share in the fourth quarter of 2017, but future dividends are discretionary and subject to regulatory limits.
- CECL was scheduled to become effective for the company on January 1, 2020; management had not yet estimated its financial impact.
Important facts for investors to verify
- Whether the increase in nonperforming loans, energy-related impairments, and net charge-offs leads to further provisions or charge-offs.
- How much of reported margin and earnings performance is recurring, particularly the $2.8 million purchase-discount income and the $1.7 million tax-related deferred-tax write-down.
- Post-close Minden integration results, acquisition accounting, and effects on capital, credit quality, and earnings.
- Loan and deposit growth quality, including CRE concentration, public-fund deposit stability, and the potential drawdown of $256.9 million in credit commitments.
- Progress toward the proposed Nasdaq listing and any subsequent changes to capital, dividends, or share count.