Business context and reporting period
Business First Bancshares, Inc. (Nasdaq: BFST), parent of Louisiana-chartered b1BANK, provides commercial and community banking services, primarily to small and midsized businesses. This Form 10-K covers the fiscal year ended December 31, 2021. It reports annual results; standalone fourth-quarter financial results are not clearly provided in the filing text.
The company operated across Louisiana and the Dallas/Fort Worth area. It acquired registered investment adviser Smith Shellnut Wilson (SSW) on April 1, 2021. Texas Citizens Bancorp (TCBI), which had $547.2 million in assets, $359.1 million in loans and $482.8 million in deposits at year-end, was acquired on March 1, 2022, adding six Houston locations.
Financial performance and condition
| Metric | 2021 | Prior comparable period |
|---|---|---|
| Total assets | $4.726 billion at year-end | $4.160 billion; up 13.6% |
| Loans held for investment | $3.190 billion at year-end | $2.991 billion; up 6.6% |
| Total deposits | $4.077 billion at year-end | $3.617 billion; up 12.7% |
| Net interest income | $153.9 million | $127.6 million; up 20.6% |
| Net interest margin | 3.84% | 4.06% |
| Net income | $52.1 million; diluted EPS $2.53 | $30.0 million; diluted EPS $1.64 |
| Return on average assets / equity | 1.18% / 12.25% | 0.88% / 8.42% |
| Allowance for loan losses | $29.1 million; 0.91% of loans held for investment | $22.0 million; 0.74% |
Interest income was $170.4 million and interest expense was $16.6 million. Provision for loan losses was $8.0 million, down from $11.4 million. Noninterest income increased 65.9% to $35.8 million; noninterest expense increased 15.9% to $117.1 million. The effective tax rate was 19.2%, compared with 18.5%.
Cash flow and liquidity: Operating activities provided $56.4 million, investing activities used $675.4 million, and financing activities provided $538.2 million. Cash and due from banks ended the year at $68.4 million, down from $149.1 million; federal funds sold were separately reported at $227.0 million. The bank reported $154 million of available correspondent-bank credit lines, with none drawn at year-end. Loans were 78.2% of deposits, versus 82.7% a year earlier.
Debt and capital: Year-end borrowings included $82.0 million of FHLB advances, $81.4 million of subordinated debt, $5.0 million of trust preferred securities and $19.1 million of securities sold under repurchase agreements. The holding company’s capital ratios were 8.14% Tier 1 leverage, 9.04% common equity Tier 1, 9.17% Tier 1 risk-based and 11.94% total risk-based. The bank was categorized as well capitalized. Shareholders’ equity was $433.4 million, up 5.7%.
Material changes versus 2020
- Net income rose 73.8%; net interest income increased with asset growth and lower funding costs, although net interest margin contracted by 22 basis points.
- Average loans increased 16.2% and average deposits 36.2%. The loan book grew in Dallas/Fort Worth, New Orleans and Baton Rouge; securities holdings increased to $1.021 billion from $640.6 million.
- Noninterest income growth included a $9.2 million gain from selling most of the SBA Paycheck Protection Program (PPP) portfolio and increased brokerage and advisory fees, including SSW-related business.
- Noninterest expense rose, including higher staffing, occupancy and data-processing costs, partly reflecting the Pedestal acquisition. Acquisition-related expenses fell to $515,000 from $9.6 million.
- Nonperforming assets declined to $14.5 million from $20.0 million, largely due to sales of other real estate owned; nonperforming loans rose to $13.1 million from $10.6 million, and their ratio to loans increased to 0.41% from 0.35%.
Outlook, commentary, risks and unusual items
Management said it expected continued pressure on net interest margin and spread based on the prevailing yield curve; the filing gives no specific earnings or growth guidance. The company described its interest-rate position as asset sensitive, but its simulation showed net interest income increasing only 0.5% under a 100-basis-point rate rise and declining 1.0% under a 300-basis-point rise. Results depend on actual rate changes and customer deposit behavior.
COVID-19 remained a credit and operating risk. Loans with $522.0 million in aggregate balances had been modified under the company’s deferral assistance program by year-end; management said it would monitor borrowers as they resumed payments. The company sold approximately 2,000 PPP loans with $243.6 million in balances for a $9.2 million gain and retained $5.4 million of PPP loans. Management identified energy, hospitality, retail and healthcare among sectors requiring additional monitoring.
Material risks include the concentration of lending in real estate and regional markets, borrower and collateral deterioration, interest-rate and funding-cost changes, competition, acquisition integration, municipal deposit fluctuations, cybersecurity and regulation. Commercial real estate secured approximately 58.9% of loans; real estate was a primary or secondary component of collateral for approximately 73.5%. Public-body deposits were $585.8 million, or about 14.4% of deposits. Construction and land lending exceeded the regulatory guidance threshold cited by management, although the company said it had monitoring controls.
Unusual items included a $1.1 million loss on sale of seven properties held for potential expansion, a $492,000 gain on the Oak Grove banking-center sale, and $1.6 million in hurricane-repair expenses. The allowance’s qualitative factors were identified as a critical audit matter. The auditor issued unqualified opinions on the financial statements and internal control; management and auditor reported effective internal control. The company said it expected to adopt the CECL credit-loss standard in 2023 and that adoption could materially affect its financial statements. Management reported no material legal proceedings and considered ordinary-course litigation outcomes unlikely to materially affect results.
Important facts for investors to verify
- How the $522.0 million of COVID-modified loans performed after payment deferrals ended, and whether any required additional provisions or became nonperforming.
- Whether loan growth, credit quality and the $29.1 million allowance remain appropriate given real-estate concentration and rising nonperforming loans.
- How deposit pricing, funding mix and actual rate movements affect net interest margin, particularly in light of management’s margin-pressure warning and sensitivity simulations.
- Whether the SSW and TCBI transactions deliver expected growth and efficiencies, and how the Houston integration affects expenses, capital and asset quality.
- How much reported earnings depended on PPP loan-sale gains and other unusual items; compare GAAP net income with management’s non-GAAP core net income of $53.9 million.