(EDGAR Online via COMTEX) -- ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This discussion presents management's analysis of our results of operations and financial condition over each of the last two most recent fiscal years. The discussion should be read in conjunction with our financial statements and the notes related thereto which appear elsewhere in this Report.
The following discussion and analysis is to focus on significant changes in the financial condition of Business First and its subsidiaries from December 31, 2019 to December 31, 2020 and its results of operations for the year ended December 31, 2020. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this Report, particularly the consolidated financial statements and related notes appearing in Item 8. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that Business First believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under "Forward-Looking Statements," "Risk Factors" and elsewhere in this statement, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Business First assumes no obligation to update any of these forward-looking statements.
We are a registered bank holding company headquartered in Baton Rouge, Louisiana. Through our wholly-owned subsidiary, b1BANK, a Louisiana state chartered bank, we provide a broad range of financial services tailored to meet the needs of small-to-midsized businesses and professionals. Since our inception in 2006, our priority has been and continues to be creating shareholder value through the establishment of an attractive commercial banking franchise in Louisiana and across our region. We consider our primary market to include the State of Louisiana and the Dallas/Fort Worth metroplex. We currently operate out of 42 banking centers in markets across Louisiana and Texas. As of December 31, 2020, we had total assets of $4.2 billion, total loans of $3.0 billion, total deposits of $3.6 billion, and total shareholders' equity of $410.0 million.
As a bank holding company operating through one reporting segment, community banking, we generate most of our revenues from interest income on loans, customer service and loan fees, and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest-earning assets and expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets.
Changes in the market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders' equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions, and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in our markets and across our region, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our markets.
While we continue to prioritize organic growth, we also seek to capitalize upon other opportunities as they arise. Below is a summary of recent transactions that have contributed to our growth. For additional information about these transactions, See "Note 3 - Mergers and Acquisitions" in our audited consolidated financial statements included in Item 8 of this Report.
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Private Placement and Acquisition of Minden Bancorp, Inc.
On October 5, 2017, we entered into a definitive agreement to acquire Minden Bancorp, Inc., or MBI, and its banking subsidiary MBL Bank. In connection with the acquisition of MBI, on October 12, 2017 we completed the issuance and sale of 3,299,925 shares of our common stock in a private placement offering at a price of $20.00 per share. The aggregate offering price totaled $66.0 million, and the aggregate placement agent fee and commission was $3.3 million.
The acquisition of MBI was consummated on January 1, 2018. At December 31, 2017, MBI had fair values of approximately $317.4 million in total assets, $192.7 million in net loans, $264.0 million in total deposits, and $30.6 million in total shareholders' equity.
Acquisition of Richland State Bancorp, Inc.
On June 4, 2018, we entered into a definitive agreement to acquire Richland State Bancorp, Inc., or RSBI, and its banking subsidiary Richland State Bank. The acquisition of RSBI was consummated on November 30, 2018. At November 30, 2018, RSBI had fair values of approximately $316.4 million in total assets, $190.8 million in net loans, $290.0 million in total deposits, and $25.4 million in total shareholders' equity.
Acquisition of Pedestal Bancshares, Inc.
On January 22, 2020, we entered into an agreement and plan of reorganization to acquire Pedestal Bancshares, Inc., and its banking subsidiary Pedestal Bank. The acquisition of Pedestal was consummated on May 1, 2020. At April 30, 2020, Pedestal had fair values of approximately $1.3 billion in total assets, $893.3 million in net loans, $1.2 billion in total deposits, and $93.3 million in total shareholders' equity.
Recent Developments Related to COVID-19
The COVID-19 pandemic has caused extensive disruptions to the global, national and regional economy. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief.
We have taken a number of actions in response to the COVID-19 pandemic:
? In anticipation of credit losses expected as a result of the COVID-19 pandemic, we recorded additional provisions for loan losses during the year ended December 31, 2020;
? We instituted a COVID-19 Deferral Assistance Program, described in further detail below, under which we have agreed to allow borrowers to defer certain payments on loans;
? We participated in the SBA PPP and Federal Reserve's MSLP, as described in further detail below;
? We amended our bylaws to allow for shareholders to participate in our annual and special meetings by means of remote communication; and we held our annual meeting in the form of a virtual meeting;
? We have analyzed our portfolio to determine which sectors we believe may be particularly impacted by the pandemic-such as energy, hotels, restaurants, 1-4 family and retail-and have flagged those sectors for additional monitoring;
? In sensitivity to our customers, we have waived certain service fees, such as late fees, excessive withdrawal fees, etc. and increased daily limits on ATM withdrawals; and
? We have monitored our liquidity.
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COVID-19 and Hurricane Laura Deferral Assistance Program
Beginning on March 25, 2020, we have taken proactive measures to help customers impacted by COVID-19 by deferring principal and/or interest payments. As of December 31, 2020, we had agreed to deferrals on 2,259 loans with an aggregate outstanding balance of $829.1 million. We had 121 loans with outstanding principal balances of $98.1 million still in their deferral periods as of December 31, 2020, although $94.8 million were interest-only modifications to seasoned, highly rated clients.
In accordance with FASB and interagency regulatory guidance issued in March 2020, loans that are modified under the terms of our COVID-19 Deferral Assistance Program will not be considered as troubled debt restructurings to the extent that they meet the terms of such guidance under Section 4013 of the CARES Act.
We also granted $131.5 million in 60-day deferrals of principal and interest to certain clients due to the impact of Hurricane Laura during the year ended December 31, 2020, of which $20.6 million are still in their deferral periods as of December 31, 2020. We determined these were not troubled debt restructurings.
SBA PPP Participation
For the year ended December 31, 2020, we funded approximately 2,800 PPP loans with an aggregate balance of $397.7 million. As of December 31, 2020, we had outstanding PPP loans of $315.5 million. We also utilized the Paycheck Protection Program Liquidity Facility ("PPPLF"), drawing $107.1 million from the PPPLF to help fund PPP loans during the year ended December 31, 2020. The facility was paid down to zero in December 2020.
For the year ended December 31, 2020, we funded approximately 45 loans with an aggregate originated loan principal balance of $327.8 million. As of December 31, 2020, we had transferred/sold 95%, or $311.4 million, of the principal balance of the MSLP loans to a MSLP special purpose vehicle entity and retained $16.4 million of the outstanding principal balance.
The financial highlights as of and for the year ended December 31, 2020 include:
Total assets of $4.2 billion, a $1.9 billion, or 83.0%, increase from December 31, 2019.
Total loans held for investment of $3.0 billion, a $1.3 billion, or 74.9%, increase from December 31, 2019.
Total deposits of $3.6 billion, a $1.8 billion, or 103.0%, increase from December 31, 2019.
Net income of $30.0 million, a $6.2 million, or 26.2%, increase from the year ended December 31, 2019.
Net interest income of $127.6 million, a $47.4 million, or 59.2%, increase from the year ended December 31, 2019.
An allowance for loan and lease losses of 0.74% of total loans held for investment, compared to 0.71% as of December 31, 2019, and a ratio of nonperforming loans to total loans held for investment of 0.35%, compared to 0.53% as of December 31, 2019.
Earnings per share for the year ended December 31, 2020 of $1.65 per basic share and $1.64 per diluted share, compared to $1.79 per basic share and $1.74 per diluted share for the year ended December 31, 2019.
Return on average assets of 0.88% compared to 1.11% for the year ended December 31, 2019.
Return on average equity of 8.42% compared to 8.70% for the year ended December 31, 2019.
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Capital Bank Leverage Ratio as of December 31, 2020 was 8.79%, as we opted in to adopt the CBLR framework, compared to Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 10.56%, 11.43%, 11.43% and 13.30%, respectively as of December 31, 2019.
Book value per share of $19.88, an increase of 7.4% from $21.47 at December 31, 2019.
Results of Operations for the Years Ended December 31, 2020 and 2019
For the year ended December 31, 2020, net income was $30.0 million, or $1.65 per basic share and $1.64 per diluted share, compared to net income of $23.8 million, or $1.79 per basic share and $1.74 per diluted share, for the year ended December 31, 2019. Return on average assets decreased to 0.88% for the year ended December 31, 2020 from 1.11% for the year ended December 31, 2019. Return on average equity decreased to 8.42% for the year ended December 31, 2020, as compared to 8.70% for the year ended December 31, 2019.
Net Interest Income
Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest sensitive assets and liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact net interest income. The variance driven by the changes in the amount and mix of interest-earning assets and interest-bearing liabilities is referred to as a "volume change." Changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds are referred to as a "rate change."
To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders' equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. We calculate average assets, liabilities, and equity using a monthly average, and average yield/rate utilizing a 30/360 day convention.
For the year ended December 31, 2020, net interest income totaled $127.6 million, and net interest margin and net interest spread were 4.06% and 3.77%, respectively. For the year ended December 31, 2019 net interest income totaled $80.2 million and net interest margin and net interest spread were 4.10% and 3.67%, respectively. The average yield on the loan portfolio was 5.60%, excluding SBA PPP loans, for the year ended December 31, 2020, compared to 5.86% for the year ended December 31, 2019, and the average yield on total interest-earning assets was 4.76% for the year ended December 31, 2020, compared to 5.29% for the year ended December 31, 2019. For the year ended December 31, 2020, overall cost of funds (which includes noninterest-bearing deposits) decreased 53 basis points compared to the year ended December 31, 2019, primarily due to the federal funds rate cuts during the second half of 2019 and first quarter of 2020, along with lower yielding deposits and increased deposit and borrowing accretion from the Pedestal acquisition. While we experienced significant loan growth in average loan balances, we anticipate continued pressure on our net interest margin and net interest spread in future periods based on the current yield curve.
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The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however the balances are reflected in average outstanding balances for the period. For the years ended December 31, 2020 and 2019, interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield. The average total loans reflected below is net of deferred loan fees and discounts. Acquired loans were recorded at fair value at acquisition and accrete interest income over the remaining lives of the respective loans.
For the Years Ended December 31, 2020 2019 Interest Interest Average Earned/ Average Average Earned/ Average Outstanding Interest Yield/ Outstanding Interest Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) Assets Interest-earning assets: Total loans (excluding SBA PPP loans) $ 2,342,034 $ 131,208 5.60 % $ 1,628,803 $ 95,433 5.86 % SBA PPP loans 271,388 9,251 3.41 % - - - Securities available for sale 483,976 8,952 1.85 % 300,038 7,225 2.41 % Interest-bearing deposits in other banks 48,345 344 0.71 % 27,878 809 2.90 % Total interest-earning assets 3,145,743 149,755 4.76 % 1,956,719 103,467 5.29 % Allowance for loan losses (16,540 ) (11,762 ) Noninterest-earning assets 296,917 191,124 Total assets $ 3,426,120 $ 149,755 $ 2,136,081 $ 103,467 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing deposits $ 1,978,295 $ 17,562 0.89 % $ 1,316,896 $ 19,753 1.50 % Subordinated debt 25,000 1,688 6.75 % 25,000 1,688 6.75 % Subordinated debt - trust preferred securities 3,341 121 3.62 % - - - Advances from FHLB 113,999 1,945 1.71 % 69,183 1,581 2.29 % Paycheck Protection Program Liquidity Facility ("PPPLF") 65,857 237 0.36 % - - - Other borrowings 43,286 556 1.28 % 29,419 247 0.84 % Total interest-bearing liabilities 2,229,778 22,109 0.99 % 1,440,498 23,269 1.62 % Noninterest-bearing liabilities: Noninterest-bearing deposits 812,332 402,147 Other liabilities 27,671 20,231 Total noninterest-bearing liabilities 840,003 422,378 Shareholders' equity 356,339 273,205 Total liabilities and shareholders' equity $ 3,426,120 $ 2,136,081 Net interest rate spread(1) 3.77 % 3.67 % Net interest income $ 127,646 $ 80,198 Net interest margin(2) 4.06 % 4.10 % Overall cost of funds 0.73 % 1.26 %
(2) Net interest margin is equal to net interest income divided by average interest-earning assets.
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The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities, and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of these tables, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019 Increase (Decrease) due to change in Volume Rate Total (Dollars in thousands) Interest-earning assets: Total loans (excluding SBA PPP) $ 39,957 $ (4,182 ) $ 35,775 SBA PPP loans 9,251 - 9,251 Securities available for sale 3,402 (1,675 ) 1,727 Interest-earning deposits in other banks 146 (611 ) (465 ) Total increase (decrease) in interest income $ 52,756 $ (6,468 ) $ 46,288 Interest-bearing liabilities: Interest-bearing deposits $ 5,871 $ (8,062 ) $ (2,191 ) Subordinated debt - - - Subordinated debt - trust preferred securities 121 - 121 Advances from FHLB 765 (401 ) 364 PPPLF 237 - 237 Other borrowings 178 131 309 Total increase (decrease) in interest expense 7,172 (8,332 ) (1,160 ) Increase (decrease) in net interest income $ 45,584 $ 1,864 $ 47,448
Provision for Loan Losses
Our provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for loan losses see "-Financial Condition-Allowance for Loan Losses." The provision for loan losses was $11.4 million and $2.6 million for the years ended December 31, 2020 and 2019, respectively. The provision during the year ended December 31, 2020 compared to the same period in 2019 relates primarily to loan growth and the impact of the COVID-19 pandemic, which was recorded through qualitative adjustments based on economic factors.
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Noninterest Income ("Other Income")
Our primary sources of noninterest income are service charges on deposit accounts, debit card and automated teller machine ("ATM") fee income, income from bank-owned life insurance, and pass-through income from small business investment company ("SBIC") partnerships. The following table presents, for the periods indicated, the major categories of noninterest income:
For the Years Ended December 31, Increase 2020 2019 (Decrease) (Dollars in thousands) Noninterest income: Service charges on deposit accounts $ 5,358 $ 4,035 $ 1,323 Debit card and ATM fee income 4,320 1,847 2,473 Bank-owned life insurance income 940 687 253 Gain on sales of loans 4,597 230 4,367 Gain on sales of investment securities 135 106 29 Brokerage commissions 970 73 897 Mortgage origination income 572 421 151 Correspondent bank income 235 418 (183 ) Rental income 72 490 (418 ) Gain on sales of other real estate owned 227 20 207 Gain on sale of banking center - 581 (581 ) Loss on sale / disposal of other assets (576 ) (774 ) 198 Pass-through income (loss) from SBIC partnerships 2,538 1,553 985 Other 2,176 1,021 1,155 Total noninterest income $ 21,564 $ 10,708 $ 10,856
Noninterest income for the year ended December 31, 2020 increased $10.9 million, or 101.4%, to $21.6 million compared to noninterest income of $10.7 million for the same period in 2019. The components of noninterest income with significant fluctuations compared to the prior year period were as follows:
Service charges on deposit accounts. We earn fees from our customers for deposit-related services, and these fees constitute a significant and predictable component of our noninterest income. Service charges on deposit accounts were $5.4 million for the year ended December 31, 2020 as compared to $4.0 million for the same time period in 2019, an increase of $1.3 million, or 32.8%. The increase was primarily due to increases in deposit balances and accounts from the acquisition of Pedestal and organic growth. The increase was muted due to waivers of service charges to customers as a result of the impact of COVID-19 and hurricanes hitting the Louisiana coast.
Debit card and ATM fee income. We earn fees from our customers based upon card activity, and these fees constitute a significant recurring component of our noninterest income. Fee income was $4.3 million and $1.8 million for the years ended December 31, 2020 and 2019, respectively, representing an increase of $2.5 million, or 133.9%. The increase was primarily due to the additional accounts and ATMs from the acquisition of Pedestal and organic growth.
Gain on sales of loans. We had gains on sales of loans of $4.2 million from the Main Street Lending Program established by the Federal Reserve. We were able to originate 45 loans with an aggregate original principal balance of $327.8 million resulting in a gain of $4.2 million related to the transfer of 95% of . . .
Mar 05, 2021
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