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Business First Bancshares, Inc. - Quarter Report: 2017 June (Form 10-Q)

bfbi20170630_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


  

FORM 10-Q

  


(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

or

 

 

TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number: 333-200112

 


 

BUSINESS FIRST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 


 

Louisiana

20-5340628

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

   

500 Laurel Street, Suite 101

Baton Rouge, Louisiana

70801

(Address of principal executive offices)

(Zip Code)

 

(225) 248-7600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

       

Non-accelerated filer

(Do not check if a smaller reporting company)

 
       
   

Smaller reporting company

       
   

Emerging growth company

 

If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

As of August 4, 2017, the issuer has outstanding 6,932,570 shares of common stock, par value $1.00 per share.

 



 

 

 

 

 

BUSINESS FIRST BANCSHARES, INC. 

 

PART I - FINANCIAL INFORMATION

 

     

Item 1.

Financial Statements

 

     

 

Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016

3
     

 

Unaudited Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016

4
     

 

Unaudited Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016

5
     

 

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2017 and 2016

6
     

 

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

7
     

 

Notes to Unaudited Consolidated Financial Statements

9
     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

58
     

Item 4.

Controls and Procedures

58
   

PART II - OTHER INFORMATION

 

     

Item 1.

Legal Proceedings

59
     

Item 1A.

Risk Factors

59
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59
     

Item 3.

Defaults Upon Senior Securities

59
     

Item 4.

Mine Safety Disclosures

59
     

Item 5.

Other Information

59
     

Item 6.

Exhibits

60
   

Signatures

61

 

2

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

   

June 30, 2017

   

December 31,

 
   

(Unaudited)

   

2016

 

ASSETS

               

Cash and Due from Banks

  $ 45,204     $ 42,173  

Federal Funds Sold

    7,090       2,556  

Securities Available for Sale, at Fair Values

    192,058       198,342  

Mortgage Loans Held for Sale

    167       180  

Loans and Lease Receivable, Net of Allowance for Loan

               

Losses of $9,177 at June 30, 2017 and $8,162 at December 31, 2016

    865,329       802,789  

Premises and Equipment, Net

    9,132       9,281  

Accrued Interest Receivable

    3,574       3,384  

Other Equity Securities

    7,065       6,120  

Other Real Estate Owned

    1,227       1,187  

Cash Value of Life Insurance

    22,876       22,567  

Goodwill

    6,824       6,824  

Core Deposit Intangible

    2,141       2,279  

Other Assets

    6,399       8,159  
                 

Total Assets

  $ 1,169,086     $ 1,105,841  
                 

LIABILITIES

LIABILITIESLIABILITIESLIABILITIES
               
                 

Deposits:

               

Noninterest Bearing

  $ 243,745     $ 223,705  

Interest Bearing

    728,271       709,090  
                 

Total Deposits

    972,016       932,795  
                 

Securities Sold Under Agreements to Repurchase

    2,533       2,720  

Short Term Borrowings

    862       862  

Long Term Borrowings

    3,000       3,000  

Federal Home Loan Bank Borrowings

    66,007       47,064  

Accrued Interest Payable

    821       920  

Other Liabilities

    5,034       4,921  
                 

Total Liabilities

    1,050,273       992,282  
                 

SHAREHOLDERS' EQUITY

               
                 

Common Stock, $1.00 Par Value; 10,000,000 Shares Authorized; 6,932,570 and 6,916,673 Shares Issued and Outstanding at June 30, 2017 and December 31, 2016, respectively

    6,933       6,917  

Additional Paid-in Capital

    85,066       85,133  

Retained Earnings

    27,115       23,839  

Accumulated Other Comprehensive Loss

    (301 )     (2,330 )
                 

Total Shareholders' Equity

    118,813       113,559  
                 

Total Liabilities and Shareholders' Equity

  $ 1,169,086     $ 1,105,841  

 

The accompanying notes are an integral part of these financial statements.

 

3

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

 

   

For The Three Months

   

For The Six Months

 
   

Ended June 30,

   

Ended June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Interest Income:

                               

Interest and Fees on Loans

  $ 12,398     $ 9,570     $ 23,539     $ 19,267  

Interest and Dividends on Securities

    972       929       1,919       1,903  

Interest on Federal Funds Sold and Due From Banks

    30       77       47       118  

Total Interest Income

    13,400       10,576       25,505       21,288  
                                 

Interest Expense:

                               

Interest on Deposits

    1,501       1,317       2,849       2,424  

Interest on Borrowings

    209       158       406       332  

Total Interest Expense

    1,710       1,475       3,255       2,756  
                                 

Net Interest Income

    11,690       9,101       22,250       18,532  
                                 

Provision for Loan Losses

    1,305       150       1,660       820  
                                 

Net Interest Income after Provision for Loan Losses

    10,385       8,951       20,590       17,712  
                                 

Other Income:

                               

Service Charges on Deposit Accounts

    525       489       1,037       983  

Gain on Sales of Securities

    -       56       -       231  

Other Income

    1,075       725       1,867       1,497  

Total Other Income

    1,600       1,270       2,904       2,711  
                                 

Other Expenses:

                               

Salaries and Employee Benefits

    5,397       5,027       10,381       9,723  

Occupancy and Equipment Expense

    1,191       1,021       2,359       2,124  

Other Expenses

    2,526       3,102       5,140       5,704  

Total Other Expenses

    9,114       9,150       17,880       17,551  
                                 

Income Before Income Taxes

    2,871       1,071       5,614       2,872  
                                 

Provision for Income Taxes

    819       230       1,586       627  
                                 

Net Income

  $ 2,052     $ 841     $ 4,028     $ 2,245  
                                 

Earnings Per Share:

                               
                                 

Basic

  $ 0.30     $ 0.12     $ 0.58     $ 0.32  

Diluted

  $ 0.28     $ 0.11     $ 0.56     $ 0.31  

 

The accompanying notes are an integral part of these financial statements.

 

4

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

 

   

For The Three Months

   

For The Six Months

 
   

Ended June 30,

   

Ended June 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Consolidated Net Income

  $ 2,052     $ 841     $ 4,028     $ 2,245  
                                 

Other Comprehensive Income:

                               

Unrealized Gain on Investment Securities

    1,372       831       3,075       2,201  

Reclassification Adjustment for Gains included in Net Income

    -       56       -       231  

Income Tax Effect

    (467 )     (302 )     (1,046 )     (827 )
                                 

Other Comprehensive Income

    905       585       2,029       1,605  
                                 

Consolidated Comprehensive Income

  $ 2,957     $ 1,426     $ 6,057     $ 3,850  

 

The accompanying notes are an integral part of these financial statements.

 

5

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(Dollars in thousands, except per share data)

 

                           

Accumulated

         
           

Additional

           

Other

   

Total

 
   

Common

   

Paid-In

   

Retained

   

Comprehensive

   

Shareholders'

 
   

Stock

   

Capital

   

Earnings

   

Income (Loss)

   

Equity

 
                                         

Balances at December 31, 2015

  $ 7,036     $ 85,913     $ 20,289     $ (789 )   $ 112,449  

Comprehensive Income:

                                       

Net Income

    -       -       2,245       -       2,245  

Other Comprehensive Income

    -       -       -       1,605       1,605  

Cash Dividends Declared, $0.05 Per Share

    -       -       (352 )     -       (352 )

Stock Based Compensation Cost

    -       156       -       -       156  

Exercise of Stock Warrants

    1       14       -       -       15  

Balances at June 30, 2016

  $ 7,037     $ 86,083     $ 22,182     $ 816     $ 116,118  
                                         

Balances at December 31, 2016

  $ 6,917     $ 85,133     $ 23,839     $ (2,330 )   $ 113,559  

Comprehensive Income:

                                       

Net Income

    -       -       4,028       -       4,028  

Other Comprehensive Income

    -       -       -       2,029       2,029  

Cash Dividends Declared, $0.11 Per Share

    -       -       (761 )     -       (761 )

Stock Based Compensation Cost

    18       (27 )     -       -       (9 )

Stock Repurchase

    (2 )     (40 )     9       -       (33 )

Balances at June 30, 2017

  $ 6,933     $ 85,066     $ 27,115     $ (301 )   $ 118,813  

 

The accompanying notes are an integral part of these financial statements.

 

6

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

   

For The Six Months

 
   

Ended June 30,

 
   

2017

   

2016

 

Cash Flows From Operating Activities:

               

Consolidated Net Income

  $ 4,028     $ 2,245  

Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:

               

Provision for Loan Losses

    1,660       820  

Depreciation and Amortization

    630       636  

Amortization of Purchase Accounting Valuations

    (3,378 )     (936 )

Noncash Compensation Expense

    (9 )     156  

Net Amortization of Securities

    917       928  

Gain on Sales of Securities

    -       (231 )

Noncash (Income) Loss on Other Equity Securities

    (208 )     33  

Gain on Sale of Premises and Equipment

    -       (24 )

Gain on Sale of Other Real Estate Owned, Net of Writedowns

    (4 )     (3 )

Increase in Cash Value of Life Insurance

    (309 )     (490 )

Provision for Deferred Income Taxes

    833       62  

Changes in Assets and Liabilities:

               

Increase in Accrued Interest Receivable

    (190 )     (122 )

(Increase) Decrease in Other Assets

    (128 )     476  

Increase (Decrease) in Accrued Interest Payable

    (99 )     160  

Increase in Other Liabilities

    113       731  

Net Cash Provided by Operating Activities

    3,856       4,441  
                 
                 

Cash Flows From Investing Activities:

               

Purchases of Securities Available for Sale

    (4,596 )     (35,881 )

Proceeds from Maturities / Sales of Securities Available for Sale

    2,859       29,836  

Proceeds from Paydowns of Securities Available for Sale

    10,179       11,109  

Purchases of Other Equity Securities

    (873 )     (866 )

Redemption of Other Equity Securities

    136       2  

Life Insurance Proceeds

    -       560  

Net Increase in Loans

    (61,252 )     (25,799 )

Proceeds from Sale of Premises and Equipment

    -       68  

Purchases of Premises and Equipment

    (306 )     (665 )

Proceeds from Sales of Other Real Estate

    13       584  

Improvements to Other Real Estate

    -       (102 )

Consideration Settlement to Former AGFC Shareholders

    -       (3,448 )

Net Increase in Federal Funds Sold

    (4,534 )     (25,792 )

Net Cash Used in Investing Activities

    (58,374 )     (50,394 )

 

(CONTINUED)

 

7

 

 

   

For The Six Months

 
   

Ended June 30,

 
   

2017

   

2016

 

Cash Flows From Financing Activities:

               

Net Increase in Deposits

    39,221       94,422  

Net Increase (Decrease) in Securities Sold Under Agreements to Repurchase

    (187 )     106  

Net Advances (Repayments) on Federal Home Loan Bank Borrowings

    19,309       (669 )

Repurchase of Common Stock

    (33 )     -  

Proceeds from Exercise of Stock Warrants

    -       15  

Payment of Dividends on Common Stock

    (761 )     (352 )

Net Cash Provided by Financing Activities

    57,549       93,522  
                 

Net Increase in Cash and Cash Equivalents

    3,031       47,569  
                 

Cash and Cash Equivalents at Beginning of Period

    42,173       40,911  
                 

Cash and Cash Equivalents at End of Period

  $ 45,204     $ 88,480  
                 
                 

Supplemental Disclosures for Cash Flow Information:

               

Cash Payments for:

               

Interest on Deposits

  $ 2,951     $ 2,238  
                 

Interest on Borrowings

  $ 403     $ 358  
                 

Income Tax Payments

  $ 900     $ -  
                 
                 

Supplemental Schedule for Noncash Investing and Financing Activities:

               

Change in the Unrealized Gain on Securities Available for Sale

  $ 3,075     $ 2,432  
                 

Change in Deferred Tax Effect on the Unrealized Gain on Securities Available for Sale

  $ (1,046 )   $ (827 )
                 

Transfer of Loans to Other Real Estate

  $ 215     $ 365  
                 

Transfer of Other Real Estate to Premises and Equipment

  $ 175     $ -  

 

The accompanying notes are an integral part of these financial statements.

 

8

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1 Basis of Presentation

 

The unaudited consolidated financial statements include the accounts of Business First Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, Business First Bank (the “Bank”), and its wholly-owned subsidiaries, Business First Insurance, LLC and American Gateway Insurance Agency, LLC. The Bank operates out of nineteen offices, including sixteen full service banking centers, two loan production offices, and one wealth solutions office in markets across Louisiana and Texas. As a state bank, it is subject to regulation by the Louisiana Office of Financial Institutions and the Federal Deposit Insurance Corporation, and undergoes periodic examinations by these agencies. The Company is also regulated by the Federal Reserve and is subject to periodic examinations.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial results for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.

 

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) have been omitted or abbreviated.

 

Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for loan losses, useful lives for depreciation and amortization, fair value of financial instruments, deferred taxes, and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for loan losses and the assessment of deferred tax assets and liabilities and, therefore, are critical accounting policies. Management does not anticipate any material changes to estimates in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, economic conditions in our markets, and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.

 

Note 2 – Reclassifications –

 

Certain reclassifications may have been made to conform to the classifications adopted for reporting in 2017. These reclassifications have no effect on previously reported net income.

 

9

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 3Mergers and Acquisitions

 

After the close of business on March 31, 2015, the Company merged with American Gateway Financial Corporation (“AGFC”), parent bank holding company for American Gateway Bank, pursuant to which the operations of AGFC merged with the Company. Prior to the merger, AGFC was a full service bank with ten branches located in the Baton Rouge, Louisiana metro region. Shareholders of AGFC received merger consideration of $10.00 in cash and 11.88 shares of the Company’s common stock in exchange for each share of AGFC common stock, representing an aggregate purchase price of $47.9 million. Including the effect of purchase accounting adjustments, assets acquired from AGFC totaled $371.5 million, which included loans of $143.2 million, securities available for sale of $108.4 million, and cash of $98.5 million. The Company also recorded a core deposit intangible asset of $2.8 million and goodwill of $6.8 million relating to the acquisition. The Company assumed liabilities totaling $330.5 million, which included $283.3 million in deposits, $41.2 million in Federal Home Loan Bank (“FHLB”) advances, and $4.3 million in securities sold under agreements to repurchase.

 

Note 4 – Earnings per Common Share –

 

Basic earnings per share (“EPS”) represents income available to common shareholders divided by the weighted average number of common shares outstanding; no dilution for any potentially convertible shares is included in the calculation. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The potential common shares that may be issued by the Company relate to outstanding stock warrants and stock options.

 

   

For The Three Months

   

For The Six Months

 
   

Ended June 30,

   

Ended June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands, except per share data)

 

Numerator:

                               

Net Income Available to Common Shares

  $ 2,052     $ 841     $ 4,028     $ 2,245  
                                 

Denominator:

                               

Weighted Average Common Shares Outstanding

    6,932,570       7,037,413       6,923,692       7,037,207  

Dilutive Effect of Stock Options and Warrants

    271,902       311,308       271,902       311,308  

Weighted Average Dilutive Common Shares

    7,204,472       7,348,721       7,195,594       7,348,515  
                                 

Basic Earnings Per Common Share From Net Income Available to Common Shares

  $ 0.30     $ 0.12     $ 0.58     $ 0.32  
                                 

Diluted Earnings Per Common Share From Net Income Available to Common Shares

  $ 0.28     $ 0.11     $ 0.56     $ 0.31  

 

10

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 5Securities –

 

The amortized cost and fair values of securities available for sale as of June 30, 2017 and December 31, 2016 are summarized as follows:

 

   

June 30, 2017

 
   

(Dollars in thousands)

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

U.S. Government Agencies

  $ 8,380     $ 57     $ 29     $ 8,408  

Corporate Securities

    13,134       71       15       13,190  

Mortgage-Backed Securities

    91,274       9       1,005       90,278  

Municipal Securities

    78,906       771       168       79,509  

Other Securities

    820       -       147       673  

Total Securities Available for Sale

  $ 192,514     $ 908     $ 1,364     $ 192,058  

 

   

December 31, 2016

 
   

(Dollars in thousands)

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

U.S. Government Agencies

  $ 7,580     $ 36     $ 50     $ 7,566  

Corporate Securities

    11,148       31       52       11,127  

Mortgage-Backed Securities

    101,766       20       2,414       99,372  

Municipal Securities

    80,559       210       1,133       79,636  

Other Securities

    820       -       179       641  

Total Securities Available for Sale

  $ 201,873     $ 297     $ 3,828     $ 198,342  

 

11

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following tables present a summary of securities with gross unrealized losses and fair values at June 30, 2017 and December 31, 2016, aggregated by investment category and length of time in a continued unrealized loss position. Due to the nature of these investments and current prevailing market prices, these unrealized losses are considered a temporary impairment of the securities.

 

   

June 30, 2017

 
   

Less Than 12 Months

   

12 Months or Greater

   

Total

 
   

(Dollars in thousands)

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

U.S. Government Agencies

  $ 3,005     $ 29     $ -     $ -     $ 3,005     $ 29  

Corporate Securities

    2,023       14       2,498       1       4,521       15  

Mortgage-Backed Securities

    72,199       789       10,899       216       83,098       1,005  

Municipal Securities

    20,544       155       1,385       13       21,929       168  

Other Securities

    -       -       673       147       673       147  
                                                 

Total Securities Available for Sale

  $ 97,771     $ 987     $ 15,455     $ 377     $ 113,226     $ 1,364  

 

   

December 31, 2016

 
   

Less Than 12 Months

   

12 Months or Greater

   

Total

 
   

(Dollars in thousands)

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

U.S. Government Agencies

  $ 4,535     $ 50     $ -     $ -     $ 4,535     $ 50  

Corporate Securities

    2,010       31       4,515       21       6,525       52  

Mortgage-Backed Securities

    86,091       1,974       9,885       440       95,976       2,414  

Municipal Securities

    54,533       1,128       207       5       54,740       1,133  

Other Securities

    -       -       641       179       641       179  
                                                 

Total Securities Available for Sale

  $ 147,169     $ 3,183     $ 15,248     $ 645     $ 162,417     $ 3,828  

 

 

Management evaluates securities for other than temporary impairment when economic and market conditions warrant such evaluations. Consideration is given to the extent and length of time the fair value has been below cost, the reasons for the decline in value, and the Company’s intent to sell a security or whether it is more likely than not that the Company will be required to sell the security before the recovery of its amortized cost. The Company has developed a process to identify securities that could potentially have a credit impairment that is other than temporary. This process involves evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. When the Company determines that a security is deemed to be other than temporarily impaired, an impairment loss is recognized.

 

12

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The amortized cost and fair values of securities available for sale as of June 30, 2017 by contractual maturity are shown below. Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties.

 

   

Amortized

   

Fair

 
   

Cost

   

Value

 
   

(Dollars in thousands)

 

Less Than One Year

  $ 8,417     $ 8,429  

One to Five Years

    47,225       47,515  

Over Five to Ten Years

    63,958       63,888  

Over Ten Years

    72,914       72,226  

Total Securities Available for Sale

  $ 192,514     $ 192,058  

 

 

Note 6 – Loans and the Allowance for Loan Losses –

 

Loans receivable at June 30, 2017 and December 31, 2016 are summarized as follows:

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

Real estate loans:

               

Construction and land

  $ 112,199     $ 94,426  

Farmland

    10,524       9,217  

1-4 family residential

    139,398       129,052  

Multi-family residential

    23,039       22,737  

Nonfarm nonresidential

    304,278       298,057  

Commercial

    238,924       213,120  

Consumer

    46,144       44,342  

Total loans held for investment

    874,506       810,951  
                 

Less:

               

Allowance for loan losses

    (9,177 )     (8,162 )

Net loans

  $ 865,329     $ 802,789  

 

13

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The performing 1-4 family residential, multi-family residential, commercial real estate, and commercial loans are pledged, under a blanket lien, as collateral securing advances from the FHLB at June 30, 2017 and December 31, 2016.

 

Net deferred loan origination fees were $1.2 million and $761,000 at June 30, 2017 and December 31, 2016, respectively, and are netted in their respective loan categories above. In addition to loans issued in the normal course of business, the Company considers overdrafts on customer deposit accounts to be loans, and reclassifies overdrafts as loans in its consolidated balance sheets. At June 30, 2017 and December 31, 2016, overdrafts of $155,000 and $232,000, respectively, have been reclassified to loans.

 

The Bank is the lead lender on participations sold, without recourse, to other financial institutions which are not included in the consolidated balance sheets. The unpaid principal balances of mortgages and other loans serviced for others were approximately $64.3 million and $55.5 million at June 30, 2017 and December 31, 2016, respectively.

 

The Bank grants loans and extensions of credit to individuals and a variety of businesses and corporations in markets across Louisiana and Texas. Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.

 

Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans and, therefore, no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent the calculated loss is greater than the remaining unaccreted discount, an allowance is recorded for such difference.

 

14

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Acquired loans are those associated with our acquisition of AGFC. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses.

 

Total loans held for investment at June 30, 2017 includes $54.3 million of loans acquired in an acquisition that were recorded at fair value as of the acquisition date. Included in the acquired balances at June 30, 2017 were acquired impaired loans accounted for under the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”) with a net carrying amount of $749,000 and acquired performing loans not accounted for under ASC 310-30 totaling $55.6 million with a related purchase discount of $2.0 million.

 

Total loans held for investment at December 31, 2016 includes $65.3 million of loans acquired in an acquisition that were recorded at fair value as of the acquisition date. Included in the acquired balances at December 31, 2016 were acquired impaired loans with a net carrying amount of $1.8 million and acquired performing loans totaling $65.9 million with a related purchase discount of $2.4 million.

 

The following tables set forth, as of June 30, 2017 and December 31, 2016, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

 

Allowance for Credit Losses and Recorded Investment in Loans Receivable

 

   

June 30, 2017

 
   

(Dollars in thousands)

 
   

Real Estate:

           

Real Estate:

   

Real Estate:

   

Real Estate:

                         
   

Construction

   

Real Estate:

   

1-4 Family

   

Multi-family

   

Nonfarm

                         
   

and Land

   

Farmland

   

Residential

   

Residential

   

Nonresidential

   

Commercial

   

Consumer

   

Total

 

Allowance for credit losses:

                                                               

Beginning Balance

  $ 933     $ 75     $ 1,228     $ 172     $ 2,314     $ 3,039     $ 401     $ 8,162  

Charge-offs

    (2 )     -       (20 )     -       (617 )     (53 )     (30 )     (722 )

Recoveries

    1       -       14       -       1       30       31       77  

Provision

    255       13       320       13       745       326       (12 )     1,660  

Ending Balance

  $ 1,187     $ 88     $ 1,542     $ 185     $ 2,443     $ 3,342     $ 390     $ 9,177  
                                                                 

Ending Balance:

                                                               

Individually evaluated for impairment

  $ 22     $ -     $ 416     $ -     $ 112     $ 482     $ -     $ 1,032  
                                                                 

Collectively evaluated for impairment

  $ 1,165     $ 88     $ 1,092     $ 185     $ 2,331     $ 2,860     $ 390     $ 8,111  
                                                                 

Purchased Credit Impaired (1)

  $ -     $ -     $ 34     $ -     $ -     $ -     $ -     $ 34  
                                                                 

Loans receivable:

                                                               

Ending Balance

  $ 112,199     $ 10,524     $ 139,398     $ 23,039     $ 304,278     $ 238,924     $ 46,144     $ 874,506  
                                                                 

Ending Balance:

                                                               

Individually evaluated for impairment

  $ 133     $ -     $ 2,916     $ -     $ 3,049     $ 4,927     $ 235     $ 11,260  
                                                                 

Collectively evaluated for impairment

  $ 112,053     $ 10,524     $ 136,270     $ 23,039     $ 300,705     $ 233,997     $ 45,909     $ 862,497  
                                                                 

Purchased Credit Impaired (1)

  $ 13     $ -     $ 212     $ -     $ 524     $ -     $ -     $ 749  

 

(1) Purchased credit impaired loans are evaluated for impairment on an individual basis.

 

15

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

   

December 31, 2016

 
   

(Dollars in thousands)

 
   

Real Estate:

           

Real Estate:

   

Real Estate:

   

Real Estate:

                         
   

Construction

   

Real Estate:

   

1-4 Family

   

Multi-family

   

Nonfarm

                         
   

and Land

   

Farmland

   

Residential

   

Residential

   

Nonresidential

   

Commercial

   

Consumer

   

Total

 

Allowance for credit losses:

                                                               

Beginning balance

  $ 600     $ 30     $ 1,021     $ 101     $ 1,416     $ 3,618     $ 458     $ 7,244  

Charge-offs

    (484 )     -       (162 )     -       (473 )     (667 )     (3 )     (1,789 )

Recoveries

    10       -       140       -       1,258       33       46       1,487  

Provision

    807       45       229       71       113       55       (100 )     1,220  

Ending Balance

  $ 933     $ 75     $ 1,228     $ 172     $ 2,314     $ 3,039     $ 401     $ 8,162  
                                                                 

Ending Balance:

                                                               

Individually evaluated for impairment

  $ -     $ -     $ 252     $ -     $ 98     $ 501     $ 36     $ 887  
                                                                 

Collectively evaluated for impairment

  $ 933     $ 75     $ 943     $ 172     $ 2,216     $ 2,538     $ 365     $ 7,242  
                                                                 

Purchased Credit Impaired (1)

  $ -     $ -     $ 33     $ -     $ -     $ -     $ -     $ 33  
                                                                 

Loans receivable:

                                                               

Ending Balance

  $ 94,426     $ 9,217     $ 129,052     $ 22,737     $ 298,057     $ 213,120     $ 44,342     $ 810,951  
                                                                 

Ending Balance:

                                                               

Individually evaluated for impairment

  $ 143     $ -     $ 3,263     $ -     $ 1,073     $ 7,332     $ 198     $ 12,009  
                                                                 

Collectively evaluated for impairment

  $ 94,117     $ 9,217     $ 125,573     $ 22,737     $ 295,590     $ 205,788     $ 44,144     $ 797,166  
                                                                 

Purchased Credit Impaired (1)

  $ 166     $ -     $ 216     $ -     $ 1,394     $ -     $ -     $ 1,776  

 

(1) Purchased credit impaired loans are evaluated for impairment on an individual basis.

 

Management further disaggregates the loan portfolio segments into classes of loans, which are based on the initial measurement of the loan, risk characteristics of the loan and the method for monitoring and assessing the credit risk of the loan.

 

16

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

As of June 30, 2017 and December 31, 2016, the credit quality indicators, disaggregated by class of loan, are as follows:

 

Credit Quality Indicators

   

June 30, 2017

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands)

 

Real Estate Loans:

                                       

Construction and land

  $ 109,643     $ 2,001     $ 409     $ 146     $ 112,199  

Farmland

    10,524       -       -       -       10,524  

1-4 family residential

    129,819       5,270       1,916       2,393       139,398  

Multi-family residential

    22,997       -       42       -       23,039  

Nonfarm nonresidential

    288,548       10,561       1,765       3,404       304,278  

Commercial

    209,394       21,211       3,392       4,927       238,924  

Consumer

    45,213       673       23       235       46,144  

Total

  $ 816,138     $ 39,716     $ 7,547     $ 11,105     $ 874,506  

 

 

   

December 31, 2016

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands)

 

Real Estate Loans:

                                       

Construction and land

  $ 92,951     $ 932     $ 300     $ 243     $ 94,426  

Farmland

    9,217       -       -       -       9,217  

1-4 family residential

    118,891       4,782       2,658       2,721       129,052  

Multi-family residential

    22,685       -       52       -       22,737  

Nonfarm nonresidential

    280,398       14,531       1,927       1,201       298,057  

Commercial

    186,197       16,783       7,377       2,763       213,120  

Consumer

    43,414       505       225       198       44,342  

Total

  $ 753,753     $ 37,533     $ 12,539     $ 7,126     $ 810,951  

 

The above classifications follow regulatory guidelines and can generally be described as follows:

 

 

Pass loans are of satisfactory quality.

 

 

Special mention loans have an existing weakness that could cause future impairment, including the deterioration of financial ratios, past due status, questionable management capabilities and possible reduction in the collateral values.

 

 

Substandard loans have an existing specific and well defined weakness that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.

 

 

Doubtful loans have specific weaknesses that are severe enough to make collection or liquidation in full highly questionable and improbable.

 

17

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following tables reflect certain information with respect to the loan portfolio delinquencies by loan class and amount as of June 30, 2017 and December 31, 2016. All loans greater than 90 days past due are generally placed on non-accrual status.

 

Aged Analysis of Past Due Loans Receivable

 

   

June 30, 2017

 
   

(Dollars in thousands)

 
                                                   

Recorded

 
                   

Greater

                           

Investment Over

 
   

30-59 Days

   

60-89 Days

   

Than 90 Days

   

Total

           

Total Loans

   

90 Days Past Due

 
   

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Current

   

Receivable

   

and Still Accruing

 

Real Estate Loans:

                                                       

Construction and land

  $ 37     $ 4     $ 137     $ 178     $ 112,021     $ 112,199     $ -  

Farmland

    -       -       -       -       10,524       10,524       -  

1-4 family residential

    781       151       1,031       1,963       137,435       139,398       -  

Multi-family residential

    -       -       -       -       23,039       23,039       -  

Nonfarm nonresidential

    241       3,260       330       3,831       300,447       304,278       -  

Commercial

    2,690       -       3,682       6,372       232,552       238,924       55  

Consumer

    6       -       224       230       45,914       46,144       -  

Total

  $ 3,755     $ 3,415     $ 5,404     $ 12,574     $ 861,932     $ 874,506     $ 55  

 

   

December 31, 2016

 
   

(Dollars in thousands)

 
                                                   

Recorded

 
                   

Greater

                           

Investment Over

 
   

30-59 Days

   

60-89 Days

   

Than 90 Days

   

Total

           

Total Loans

   

90 Days Past Due

 
   

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Current

   

Receivable

   

and Still Accruing

 

Real Estate Loans:

                                                       

Construction and land

  $ 465     $ -     $ 106     $ 571     $ 93,855     $ 94,426     $ -  

Farmland

    -       -       -       -       9,217       9,217       -  

1-4 family residential

    989       579       963       2,531       126,521       129,052       117  

Multi-family residential

    -       -       -       -       22,737       22,737       -  

Nonfarm nonresidential

    1,370       173       532       2,075       295,982       298,057       -  

Commercial

    45       372       262       679       212,441       213,120       51  

Consumer

    66       -       149       215       44,127       44,342       -  

Total

  $ 2,935     $ 1,124     $ 2,012     $ 6,071     $ 804,880     $ 810,951     $ 168  

 

18

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following is a summary of information pertaining to impaired loans as of June 30, 2017 and December 31, 2016. Acquired non-impaired loans are placed on nonaccrual status and reported as impaired using the same criteria applied to the originated portfolio. Purchased impaired credits are excluded from this table. The interest income recognized for impaired loans was $57,000 and $138,000 for the six months ending June 30, 2017 and 2016, respectively.

 

   

June 30, 2017

 
   

(Dollars in thousands)

 
           

Unpaid

           

Average

 
   

Recorded

   

Principal

   

Related

   

Recorded

 
   

Investment

   

Balance

   

Allowance

   

Investment

 

With an allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ 89     $ 89     $ 22     $ 60  

Farmland

    -       -       -       -  

1-4 family residential

    989       1,069       415       808  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    693       708       112       422  

Other Loans:

                               

Commercial

    596       617       483       487  

Consumer

    -       -       -       10  

Total

  $ 2,367     $ 2,483     $ 1,032     $ 1,787  
                                 

With no allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ 44     $ 54     $ -     $ 77  

Farmland

    -       -       -       -  

1-4 family residential

    1,927       2,290       -       2,309  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    2,356       2,406       -       2,009  

Other Loans:

                               

Commercial

    4,331       5,575       -       5,598  

Consumer

    235       266       -       124  

Total

  $ 8,893     $ 10,591     $ -     $ 10,117  
                                 

Total Impaired Loans:

                               

Real Estate Loans:

                               

Construction and land

  $ 133     $ 143     $ 22     $ 137  

Farmland

    -       -       -       -  

1-4 family residential

    2,916       3,359       415       3,117  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    3,049       3,114       112       2,431  

Other Loans:

                               

Commercial

    4,927       6,192       483       6,085  

Consumer

    235       266       -       134  

Total

  $ 11,260     $ 13,074     $ 1,032     $ 11,904  

 

19

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

   

December 31, 2016

 
   

(Dollars in thousands)

 
           

Unpaid

           

Average

 
   

Recorded

   

Principal

   

Related

   

Recorded

 
   

Investment

   

Balance

   

Allowance

   

Investment

 

With an allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ -     $ -     $ -     $ 655  

Farmland

    -       -       -       -  

1-4 family residential

    440       470       252       372  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    368       368       98       31  

Other Loans:

                               

Commercial

    695       709       501       1,252  

Consumer

    36       36       36       12  

Total

  $ 1,539     $ 1,583     $ 887     $ 2,322  
                                 

With no allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ 143     $ 152     $ -     $ 124  

Farmland

    -       -       -       -  

1-4 family residential

    2,823       3,276       -       3,296  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    705       729       -       3,730  

Other Loans:

                               

Commercial

    6,637       7,826       -       3,680  

Consumer

    162       162       -       43  

Total

  $ 10,470     $ 12,145     $ -     $ 10,873  
                                 

Total Impaired Loans:

                               

Real Estate Loans:

                               

Construction and land

  $ 143     $ 152     $ -     $ 779  

Farmland

    -       -       -       -  

1-4 family residential

    3,263       3,746       252       3,668  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    1,073       1,097       98       3,761  

Other Loans:

                               

Commercial

    7,332       8,535       501       4,932  

Consumer

    198       198       36       55  

Total

  $ 12,009     $ 13,728     $ 887     $ 13,195  

 

20

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The Company elected to account for certain loans acquired in the AGFC merger as acquired impaired loans under ASC 310-30 due to evidence of credit deterioration at acquisition and the probability that the Company will be unable to collect all contractually required payments. The expected cash flows approximated fair value as of the date of merger and, as a result, no accretable yield was recognized at acquisition for the AGFC purchased impaired credits.

 

The following table presents the changes in the carrying amount of the purchased impaired credits accounted for under ASC 310-30 for the periods presented.

 

   

Purchased 

 
   

Impaired Credits

 
   

(Dollars in thousands)

 
         

Carrying amount - December 31, 2015

  $ 3,634  

Payments received, net of discounts realized

    (1,181 )

Charge-offs

    (352 )

Transfer to other real estate

    (325 )

Carrying amount - December 31, 2016

    1,776  

Payments received, net of discounts realized

    (871 )

Purchased impaired credit participation interest sales proceeds, net of discount realized

    444  

Charge-offs

    (600 )

Carrying amount - June 30, 2017

  $ 749  
         

 

The Bank seeks to assist customers that are experiencing financial difficulty by renegotiating loans within lending regulations and guidelines. The Bank makes loan modifications, primarily utilizing internal renegotiation programs via direct customer contact, that manage customers’ debt exposures held only by the Bank. Additionally, the Bank makes loan modifications with customers who have elected to work with external renegotiation agencies and these modifications provide solutions to customers’ entire unsecured debt structures. During the periods ended June 30, 2017 and December 31, 2016, the concessions granted to certain borrowers included extending the payment due dates, lowering the contractual interest rate, reducing accrued interest, and reducing the debt’s face or maturity amount.

 

Once modified in a troubled debt restructuring, a loan is generally considered impaired until its contractual maturity. At the time of the restructuring, the loan is evaluated for an asset-specific allowance for credit losses. The Bank continues to specifically reevaluate the loan in subsequent periods, regardless of the borrower’s performance under the modified terms. If a borrower subsequently defaults on the loan after it is restructured, the Bank provides an allowance for credit losses for the amount of the loan that exceeds the value of the related collateral.

 

21

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following tables present informative data regarding troubled debt restructurings as of June 30, 2017 and December 31, 2016. The Bank had $3.3 million in troubled debt restructurings that had subsequently defaulted during the six months ended June 30, 2017 and none that had subsequently defaulted during the year ended December 31, 2016.

 

Modifications as of June 30, 2017:

                       
           

Pre-Modification

   

Post-Modification

 
   

Number

   

Outstanding

   

Outstanding

 
   

of

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

 
   

(Dollars in thousands)

 

Troubled Debt Restructuring

                       

Real Estate Loans:

                       

1-4 family residential

    3     $ 870     $ 591  

Other Loans:

                       

Commercial

    3       5,144       3,991  

Total

    6     $ 6,014     $ 4,582  

 

 

Modifications as of December 31, 2016:

                       
           

Pre-Modification

   

Post-Modification

 
   

Number

   

Outstanding

   

Outstanding

 
   

of 

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

 
   

(Dollars in thousands)

 

Troubled Debt Restructuring

                       

Real Estate Loans:

                       

1-4 family residential

    3     $ 870     $ 608  

Other Loans:

                       

Commercial 

    6       6,880       5,323  

Total

    9     $ 7,750     $ 5,931  

 

22

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 7 – Fair Value of Financial Instruments –

 

Fair Value Disclosures

 

The Company groups its financial assets and liabilities measured at fair value in three levels. Fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

 

Level 1 – Includes the most reliable sources, and includes quoted prices in active markets for identical assets or liabilities.

 

 

Level 2 – Includes observable inputs. Observable inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) as well as inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

 

 

Level 3 – Includes unobservable inputs and should be used only when observable inputs are unavailable.

 

 

Recurring Basis

 

Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service. This pricing service provides information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications.

 

23

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following tables present the balance of assets and liabilities measured on a recurring basis as of June 30, 2017 and December 31, 2016. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

 

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

June 30, 2017

                               

Available for Sale:

                               

U.S. Government Agency Securities

  $ 8,408     $ -     $ 8,408     $ -  

Corporate Securities

    13,190       -       13,190       -  

Mortgage-Backed Securities

    90,278       -       90,278       -  

Municipal Securities

    79,509       -       79,509       -  

Other Securities

    673       -       673       -  

Total

  $ 192,058     $ -     $ 192,058     $ -  
                                 
                                 

December 31, 2016

                               

Available for Sale:

                               

U.S. Government Agency Securities

  $ 7,566     $ -     $ 7,566     $ -  

Corporate Securities

    11,127       -       11,127       -  

Mortgage-Backed Securities

    99,372       -       99,372       -  

Municipal Securities

    79,636       -       79,636       -  

Other Securities

    641       -       641       -  

Total

  $ 198,342     $ -     $ 198,342     $ -  

 

Nonrecurring Basis

 

The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the tables below. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis.

 

24

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The fair value of the impaired loans is measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are Level 2 assets measured using appraisals from external parties of the collateral less any prior liens. Repossessed assets are initially recorded at fair value less estimated cost to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Bank records repossessed assets as Level 2.

 

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

June 30, 2017

                               

Assets:

                               

Impaired Loans

  $ 10,943     $ -     $ 10,943     $ -  

Repossessed Assets

    1,227       -       1,227       -  

Total

  $ 12,170     $ -     $ 12,170     $ -  
                                 

December 31, 2016

                               

Assets:

                               

Impaired Loans

  $ 12,865     $ -     $ 12,865     $ -  

Repossessed Assets

    1,196       -       1,196       -  

Total

  $ 14,061     $ -     $ 14,061     $ -  

 

Fair Value Financial Instruments

 

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. In accordance with generally accepted accounting principles, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

Cash and Short-Term Investments – For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Securities – Fair value of securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

 

25

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Loans – The fair value for loans is estimated using discounted cash flow analyses, with interest rates currently being offered for similar loans to borrowers with similar credit rates. Loans with similar classifications are aggregated for purposes of the calculations. The allowance for loan losses, which was used to measure the credit risk, is subtracted from loans.

 

Cash Value of Bank-Owned Life Insurance (“BOLI”) – The carrying amount approximates its fair value.

 

Other Equity Securities – The carrying amount approximates its fair value.

 

Deposits – The fair value of demand deposits and certain money market deposits is the amount payable at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses, with interest rates currently offered for deposits of similar remaining maturities.

 

Borrowings – The fair value of FHLB advances and other long-term borrowings is estimated using the rates currently offered for advances of similar maturities. The carrying amount of short-term borrowings maturing within ninety days approximates the fair value.

 

Commitments to Extend Credit and Standby and Commercial Letters of Credit – The fair values of commitments to extend credit and standby and commercial letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure.

 

The estimated approximate fair values of the Bank’s financial instruments as of June 30, 2017 and December 31, 2016 are as follows:

 

   

Carrying

   

Total

                         
   

Amount

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

June 30, 2017

                                       

Financial Assets:

                                       

Cash and Short-Term Investments

  $ 52,294     $ 52,294     $ 52,294     $ -     $ -  

Securities

    192,058       192,058       -       192,058       -  

Mortgage Loans Held for Sale

    167       167       -       167       -  

Loans - Net

    865,329       852,604       -       -       852,604  

Cash Value of BOLI

    22,876       22,876       -       22,876       -  

Other Equity Securities

    7,065       7,065       -       -       7,065  

Total

  $ 1,139,789     $ 1,127,064     $ 52,294     $ 215,101     $ 859,669  
                                         

Financial Liabilities:

                                       

Deposits

  $ 972,016     $ 948,873     $ -     $ -     $ 948,873  

Borrowings

    72,402       72,452       -       72,452       -  

Total

  $ 1,044,418     $ 1,021,325     $ -     $ 72,452     $ 948,873  

 

26

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

                                         
   

Carrying

   

Total

                         
   

Amount

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

December 31, 2016

                                       

Financial Assets:

                                       

Cash and Short-Term Investments

  $ 44,729     $ 44,729     $ 44,729     $ -     $ -  

Securities

    198,342       198,342       -       198,342       -  

Mortgage Loans Held for Sale

    180       180       -       180       -  

Loans - Net

    802,789       796,400       -       -       796,400  

Cash Value of BOLI

    22,567       22,567       -       22,567       -  

Other Equity Securities

    6,120       6,120       -       -       6,120  

Total

  $ 1,074,727     $ 1,068,338     $ 44,729     $ 221,089     $ 802,520  
                                         

Financial Liabilities:

                                       

Deposits

  $ 932,795     $ 912,702     $ -     $ -     $ 912,702  

Borrowings

    53,646       53,706       -       53,706       -  

Total

  $ 986,441     $ 966,408     $ -     $ 53,706     $ 912,702  

 

 

Note 8Recently Issued Accounting Pronouncements

 

In January 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-16, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The provisions of this ASU require equity investments to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment. This ASU also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. It also eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities, and eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. ASU No. 2016-16 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. It also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU requires separate presentation of financial assets and financial liabilities by category and form on the balance sheet or the accompanying notes to the financial statements. In addition, this ASU clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in the update are effective for fiscal years beginning after December 15, 2017, including interim periods. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

27

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), Conforming Amendments Related to Leases. This ASU amends the codification regarding leases in order to increase transparency and comparability.  The ASU requires companies to recognize lease assets and liabilities on the statement of condition and disclose key information about leasing arrangements. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. The ASU is effective for annual and interim periods beginning after December 15, 2018. The adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The ASU amends the codification to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The amendments also allow an accounting policy election to account for forfeitures as they occur. This ASU is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The Company elected an accounting policy to account for forfeitures as they occur upon adoption of this ASU. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments introduce an impairment model that is based on current expected credit losses (“CECL”), rather than incurred losses, to estimate credit losses on certain types of financial instruments (ex. loans and held to maturity securities), including certain off-balance sheet financial instruments (ex. commitments to extend credit and standby letters of credit that are not unconditionally cancellable). The CECL should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Financial instruments with similar risk characteristics may be grouped together when estimating the CECL. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial estimate of expected credit loss would be recognized through an allowance for credit losses with an offset (i.e. increase) to the purchase price at acquisition. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. The ASU also amends the current available for sale security impairment model for debt securities whereby credit losses relating to available for sale debt securities should be recorded through an allowance for credit losses. This ASU is effective for fiscal years beginning after December 31, 2019. The amendments will be applied through a modified retrospective approach, resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently planning for the implementation of this ASU. It is too early to assess the impact this guidance will have on the Company’s consolidated financial statements.

 

28

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

On January 26, 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) which simplifies the accounting for goodwill impairment. The guidance in this ASU removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. The goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective for calendar year-end ending in 2020 for public business entities. Early adoption is permitted for any impairment tests performed after January 1, 2017. The adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU implements a common revenue standard and clarifies the principles used for recognizing revenue. The amendments of the ASU clarify that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The entity should identify the contract with the customer, identify the performance obligation, determine the transaction price, allocate that transaction price to the performance obligation, and recognize revenue when, or as, the entity satisfies the performance obligation. The amendments of the ASU will be effective for the Company beginning January 1, 2018. The Company intends to adopt the amendments beginning January 1, 2018 and does not expect a significant impact to the Company’s consolidated financial statements.

 

29

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

NOTE: When we refer in this Form 10-Q to “we,” “our,” “us,” the “Company” and “Business First,” we are referring to Business First Bancshares, Inc. and its subsidiaries, unless the context indicates otherwise.

 

All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q (this “Report”) and other periodic reports filed by the Company, and other written or oral statements made by us or on our behalf, are “forward-looking statements,” as defined by (and subject to the “safe harbor” protections under) the federal securities laws. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and the banking industry in general. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions of a future or forward-looking nature. These statements involve estimates, assumptions, and risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements.

 

We believe these factors include, but are not limited to, the following:

 

 

changes in the strength of the United States (“U.S.”) economy in general and the local economy in our local market areas adversely affecting our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral;

 

 

the ability to sustain and continue our organic loan and deposit growth, and manage that growth effectively;

 

 

market declines in industries to which we have exposure, such as the continuing low crude oil prices that impact certain of our borrowers and investments that operate within, or are backed by collateral associated with, the oil and gas industry;

 

 

changes in interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations;

 

 

changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;

 

 

increased competition for deposits and loans adversely affecting rates and terms;

 

 

increased credit risk in our assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of our total loan portfolio;

 

 

deteriorating asset quality and higher loan charge-offs, and the time and effort required to resolve problem assets;

 

 

the failure of assumptions underlying the establishment of and provisions made to our allowance for credit losses;

 

 

changes in the availability of funds resulting in increased costs or reduced liquidity;

 

 

a determination or downgrade in the credit quality and credit agency ratings of the securities in our securities portfolio;

 

 

increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;

 

 

the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;

 

 

legislative or regulatory developments, including changes in laws and regulations concerning taxes, banking, securities, insurance and other aspects of the financial securities industry, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and the extensive rule making required to be undertaken by various regulatory agencies under the Dodd-Frank Act;

 

 

government intervention in the U.S. financial system;

 

30

 

 

 

changes in statutes and government regulations or their interpretations applicable to us, including changes in tax requirements and tax rates;

 

 

acts of terrorism, an outbreak of hostilities or other international or domestic calamities, weather, including the historic Louisiana flood of 2016, or other acts of God and other matters beyond our control; and

 

 

other risks and uncertainties listed from time to time in our reports and documents filed with the U.S. Securities and Exchange Commission (“SEC”).

 

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

31

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BUSINESS FIRST

 

The following discussion and analysis focuses on significant changes in the financial condition of Business First from December 31, 2016 to June 30, 2017, and its results of operations for the three and six months ended June 30, 2017. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this Report and should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and the notes thereto (the “Notes”) and (ii) our Annual Report on Form 10-K for the year ended December 31, 2016, including the audited consolidated financial statements and notes thereto, management’s discussion and analysis, and the risk factor disclosures contained therein. 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 Report, 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.

 

Overview

 

We are a registered bank holding company headquartered in Baton Rouge, Louisiana. Through our wholly-owned subsidiary, Business First Bank, a Louisiana state chartered bank, we provide a broad range of financial services tailored to meet the needs of small to medium-sized 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. We currently operate out of nineteen offices, including sixteen full-service banking centers, two loan production offices, and one wealth solutions office in markets across Louisiana and Texas. As of June 30, 2017, we had total assets of $1.2 billion, total loans of $874.7 million, total deposits of $972.0 million, and total shareholders’ equity of $118.8 million.

 

While we continue to prioritize organic growth, we also seek to capitalize upon other opportunities as they arise. After the close of business on March 31, 2015, we merged with American Gateway Financial Corporation (“AGFC”), parent bank holding company for American Gateway Bank, pursuant to which the operations of AGFC were merged with us and ten former American Gateway Bank branches were added to our branch network. Total assets acquired were $371.5 million, which included loans of $143.2 million, securities available for sale of $108.4 million, and deposits of $283.3 million. Shareholders of AGFC received merger consideration of $10.00 in cash and 11.88 shares of our common stock in exchange for each share of AGFC common stock.

 

As a bank holding company operating through one market 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 Louisiana, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target market and throughout the state of Louisiana.

 

 

Financial Highlights

 

The financial highlights as of June 30, 2017 include:

 

 

Total assets of $1.2 billion, a $63.2 million or 5.7% increase from December 31, 2016.

 

 

Total loans of $874.7 million, a $63.5 million or 7.8% increase from December 31, 2016.

 

 

Total deposits of $972.0 million, a $39.2 million or 4.2% increase from December 31, 2016.

 

 

Net income for the three months ended June 30, 2017 of $2.1 million, a $1.2 million or 144.0% increase from the three month period ended June 30, 2016.

 

32

 

 

 

Net interest income of $11.7 million for the three months ended June 30, 2017, a year-over-year increase of $2.6 million or 28.4%, from the three month period ended June 30, 2016.

 

 

An allowance for loan and lease losses of 1.05% of total loans held for investment and a ratio of non-performing loans to total loans held for investment of 1.28% as of June 30, 2017.

 

 

Return on average assets of 0.70% over the first six months of 2017.

 

 

Return on average equity of 6.96% over the first six months of 2017.

 

 

Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 9.46%, 10.06%, 10.06% and 10.90%, respectively as of June 30, 2017.

 

 

Book value per share of $17.14 as of June 30, 2017, an increase of 4.4% from $16.42 at December 31, 2016.

 

Results of Operations for the Three and Six Months Ended June 30, 2017 and 2016

 

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 capital using a monthly average.

 

For the three months ended June 30, 2017, net interest income totaled $11.7 million, and net interest margin and net interest spread were 4.34% and 4.11%, respectively. For the three months ended June 30, 2016, net interest income totaled $9.1 million and net interest margin and net interest spread were 3.47% and 3.30%, respectively. The positive change in net interest margin and net interest spread was primarily due two factors: 1) the sale of an additional 49% participation interest in one of our impaired credits acquired from AGFC, and 2) the change in the rate environment. Excluding the $1.3 million purchase discount included in interest income which was recognized upon the sale of the 49% participation interest during the quarter ended June 30, 2017, net interest margin and net interest spread were 3.86% and 3.64%, respectively, with an average yield on our loan portfolio of 5.12% and an average yield on total interest-earning assets of 4.50%. In addition, we experienced an overall increase in cost of funds of thirteen basis points. For the six months ended June 30, 2017, net interest income totaled $22.3 million, and net interest margin and net interest spread were 4.19% and 3.99%, respectively. For the six months ended June 30, 2016, net interest income totaled $18.5 million and net interest margin and net interest spread were 3.58% and 3.42%, respectively. The positive change in net interest margin and net interest spread was primarily due to the sale of a 98% participation interest in one of our impaired credits acquired from AGFC, and to a lesser extent, to the change in the rate environment. Excluding the $2.4 million purchase discount included in interest income which was recognized upon the sale of the 98% participation interest during the six months ended June 30, 2017, net interest margin and net interest spread were 3.73% and 3.53%, respectively, with an average yield on our loan portfolio of 4.96% and an average yield on total interest-earning assets of 4.35%. In addition, we experienced an overall increase in cost of funds of thirteen basis points during the six months ended June 30, 2017 compared to the prior year period. While we experienced significant growth in average loan balances, the market yields on new loan originations were below the average yield of amortizing or paid-off loans. Due to the continued impact of new loan growth and the runoff of higher yielding loan balances, we anticipate continued pressure on our net interest margin and net interest spread.

 

33

 

 

 

The following tables present, 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 tables also set 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 three and six months ended June 30, 2017 and 2016, 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 Three Months Ended June 30,

 
   

2017

   

2016

 
   

Average
Outstanding
Balance

   

Interest
Earned/
Interest
Paid

   

Average
Yield/
Rate

   

Average
Outstanding
Balance

   

Interest
Earned/
Interest
Paid

   

Average
Yield/
Rate

 
   

(Dollars in thousands) (Unaudited)

 

Assets

                                               

Interest-earning assets:

                                               

Total loans

  $ 867,528     $ 12,398       5.72 %   $ 791,964     $ 9,570       4.83 %

Securities available for sale

    197,782       972       1.97 %     207,965       929       1.79 %

Interest-bearing deposits in other banks

    12,219       30       0.98 %     49,630       77       0.62 %
                                                 

Total interest-earning assets

    1,077,529       13,400       4.97 %     1,049,559       10,576       4.03 %

Allowance for loan losses

    (8,314 )                     (7,200 )                

Noninterest-earning assets

    104,227                       119,325                  

Total assets

  $ 1,173,442     $ 13,400             $ 1,161,684     $ 10,576          
                                                 

Liabilities and Shareholders’ Equity

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 724,880     $ 1,501       0.83 %   $ 758,851     $ 1,317       0.69 %

Advances from Federal Home Loan Bank (“FHLB”)

    66,494       170       1.02 %     48,347       133       1.10 %

Other borrowings

    6,315       39       2.47 %     6,013       25       1.66 %

Total interest-bearing liabilities

    797,689       1,710       0.86 %     813,211       1,475       0.73 %
                                                 

Noninterest-bearing liabilities:

                                               

Noninterest-bearing deposits

    252,299                       224,480                  

Other liabilities

    5,564                       8,665                  

Total noninterest-bearing liabilities

    257,863                       233,145                  

Shareholders’ equity

    117,890                       115,328                  

Total liabilities and shareholders’ equity

  $ 1,173,442                     $ 1,161,684                  

Net interest rate spread(1)

                    4.11 %                     3.30 %

Net interest income

          $ 11,690                     $ 9,101          

Net interest margin(2)

                    4.34 %                     3.47 %

                              

(1)

Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

(2)

Net interest margin is equal to net interest income divided by average interest-earning assets.

 

34

 

 

   

For the Six Months Ended June 30,

 
   

2017

   

2016

 
   

Average
Outstanding
Balance

   

Interest
Earned/
Interest
Paid

   

Average
Yield/
Rate

   

Average
Outstanding
Balance

   

Interest
Earned/
Interest
Paid

   

Average
Yield/
Rate

 
   

(Dollars in thousands) (Unaudited)

 

Assets

                                               

Interest-earning assets:

                                               

Total loans

  $ 850,680     $ 23,539       5.53 %   $ 786,112     $ 19,267       4.90 %

Securities available for sale

    199,883       1,919       1.92 %     211,626       1,903       1.80 %

Interest-bearing deposits in other banks

    10,782       47       0.87 %     38,765       118       0.61 %

Total interest-earning assets

    1,061,345       25,505       4.81 %     1,036,503       21,288       4.11 %

Allowance for loan losses

    (8,258 )                     (7,266 )                

Noninterest-earning assets

    101,109                       102,497                  

Total assets

  $ 1,154,196     $ 25,505             $ 1,131,734     $ 21,288          
                                                 

Liabilities and Shareholders’ Equity

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 718,007     $ 2,849       0.79 %   $ 735,960     $ 2,424       0.66 %

Advances from Federal Home Loan Bank (“FHLB”)

    65,048       326       1.00 %     53,553       280       1.05 %

Other borrowings

    6,706       80       2.39 %     6,166       52       1.69 %

Total interest-bearing liabilities

    789,761       3,255       0.82 %     795,679       2,756       0.69 %
                                                 

Noninterest-bearing liabilities:

                                               

Noninterest-bearing deposits

    242,841                       214,546                  

Other liabilities

    5,776                       6,922                  

Total noninterest-bearing liabilities

    248,617                       221,468                  

Shareholders’ equity

    115,818                       114,587                  

Total liabilities and shareholders’ equity

  $ 1,154,196                     $ 1,131,734                  
                                                 

Net interest rate spread(1)

                    3.99 %                     3.42 %

Net interest income

          $ 22,250                     $ 18,532          

Net interest margin(2)

                    4.19 %                     3.58 %

                               

(1)

Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

(2)

Net interest margin is equal to net interest income divided by average interest-earning assets.

 

35

 

 

The following tables present 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 this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

 

   

For the Three Months Ended June 30, 2017
compared to the Three Months Ended
June 30, 2016

 
   

Increase (Decrease) due to change in

 
   

Volume

   

Rate

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Interest-earning assets:

                       

Total loans

  $ 1,080     $ 1,748     $ 2,828  

Securities available for sale

    (50 )     93       43  

Interest-earning deposits in other banks

    (92 )     45       (47 )

Total increase in interest income

  $ 938     $ 1,886     $ 2,824  
                         

Interest-bearing liabilities:

                       

Interest-bearing deposits

  $ (70 )   $ 254     $ 184  

Advances from FHLB

    46       (9 )     37  

Other borrowings

    2       12       14  

Total increase in interest expense

    (22 )     257       235  

Increase in net interest income

  $ 960     $ 1,629     $ 2,589  

 

   

For the Six Months Ended June 30, 2017
compared to the Six Months Ended
June 30, 2016

 
   

Increase (Decrease) due to change in

 
   

Volume

   

Rate

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Interest-earning assets:

                       

Total loans

  $ 1,787     $ 2,485     $ 4,272  

Securities available for sale

    (113 )     129       16  

Interest-earning deposits in other banks

    (122 )     51       (71 )

Total increase in interest income

  $ 1,552     $ 2,665     $ 4,217  
                         

Interest-bearing liabilities:

                       

Interest-bearing deposits

  $ (71 )   $ 496     $ 425  

Advances from FHLB

    58       (12 )     46  

Other borrowings

    6       22       28  

Total increase in interest expense

    (7 )     506       499  

Increase in net interest income

  $ 1,559     $ 2,159     $ 3,718  

 

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 $1.3 million for the three months ended June 30, 2017 and $150,000 for the same period in 2016. For the six months ended June 30, 2017 and 2016, the provision for loan losses was $1.6 million and $820,000, respectively. The higher provision during the first six months of 2017 was to increase our general reserves related to our exposure to the commercial and energy sectors.

 

Noninterest Income 

 

Our primary sources of noninterest income are service charges on deposit accounts, debit card fee income, income from bank-owned life insurance, and brokerage commissions.

 

36

 

 

The following tables present, for the periods indicated, the major categories of noninterest income:

 

   

For the Three Months Ended
June 30,

   

Increase

 
   

2017

   

2016

   

(Decrease)

 
   

(Dollars in thousands) (Unaudited)

 

Noninterest income:

                       

Service charges on deposit accounts

  $ 525     $ 489     $ 36  

Debit card fee income

    169       159       10  

Automated Teller Machine (“ATM”) fees

    48       44       4  

Bank-owned life insurance income

    159       137       22  

Gain on sales of investment securities

          56       (56 )

Brokerage commissions

    237       201       36  

Correspondent bank income

    99       65       34  

Pass-through income (loss) from SBIC partnerships

    190       (44 )     234  

Other

    173       163       10  

Total noninterest income

  $ 1,600     $ 1,270     $ 330  

 

   

For the Six Months Ended
June 30,

   

Increase

 
   

2017

   

2016

   

(Decrease)

 
   

(Dollars in thousands) (Unaudited)

 

Noninterest income:

                       

Service charges on deposit accounts

  $ 1,037     $ 983     $ 54  

Debit card fee income

    332       312       20  

Automated Teller Machine (“ATM”) fees

    98       89       9  

Bank-owned life insurance income

    309       490       (181 )

Gain on sales of investment securities

          231       (231 )

Brokerage commissions

    443       272       171  

Correspondent bank income

    165       71       94  

Pass-through income (loss) from SBIC partnerships

    190       (44 )     234  

Other

    330       307       23  

Total noninterest income

  $ 2,904     $ 2,711     $ 193  

 

Noninterest income for the three months ended June 30, 2017 increased $330,000 or 26.0% to $1.6 million compared to noninterest income of $1.3 million for the same period in 2016. Noninterest income for the six months ended June 30, 2017 increased $193,000 or 7.1% to $2.9 million compared to noninterest income of $2.7 million for the same period in 2016. The primary components of noninterest income 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 $525,000 for the three months ended June 30, 2017, an increase of $36,000 over the same period in 2016. For the six months ended June 30, 2017, service charges on deposit accounts were $1.0 million, an increase of $54,000 over the same period in 2016. The increase for both the three and six months ended June 30, 2017, over the same period in 2016, was primarily due to continued deposit penetration in our market area and the resulting increase in fee income.

 

Debit card fee income. We earn fees from our customers based upon debit card activity, and these fees constitute a significant recurring component of our noninterest income. Debit card fee income was $169,000 and $159,000 for the three months ended June 30, 2017 and 2016, respectively, representing an increase of $10,000 or 6.3%. For the six months ended June 30, 2017 and 2016, debit card fee income was $332,000 and $312,000, respectively, representing an increase of $20,000 or 6.4%. Both increases were primarily due to the continued growth of our deposit base.

 

37

 

 

Bank-owned life insurance (“BOLI”) income. We invest in BOLI due to its attractive nontaxable return and protection against the loss of our key employees. We record income based on the growth of the cash surrender value of these policies as well as the annual yield. Income from BOLI was $159,000 for the three months ended June 30, 2017 as compared to $137,000 for the same time period in 2016, an increase of $22,000. For the six months ended June 30, 2017 and 2016, income was $309,000 and $490,000, respectively. The decrease for the six months ended June 30, 2017, over the same period in 2016, was primarily due to receipt of a death benefit related to a former AGFC employee during the first quarter of 2016.

 

Brokerage commissions. We earn commissions from brokerage services provided by our Wealth Solutions Group. Brokerage commissions totaled $237,000 and $201,000 for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, commissions totaled $443,000 and $272,000, respectively. The increase of $36,000 or 17.9% for the three months ended June 30, 2017 and $171,000 or 62.9% for the six months ended June 30, 2017, over the prior year periods, was primarily due to recruiting a 4-person advisory team in 2016 and completing the conversion of their book of business from the prior broker-dealer to Business First.

 

Correspondent bank income. During the first half of 2016 we renegotiated certain of our correspondent banking relationships. We received earnings credit income of $99,000 and $65,000 for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, we received earnings credit income of $165,000 and $71,000, respectively.

 

Pass-through income from SBIC partnerships. We are an investor in several SBIC programs, which are joint ventures between various investors with venture capital, the Small Business Administration (“SBA”), and small business borrowers. During 2016, the programs in which we have invested venture capital were still in the start-up phase. Those programs are maturing and becoming profitable in 2017. Pass-through income from SBIC partnerships was $190,000 for both the three and six months ended June 30, 2017, compared to a loss of $44,000 for both the three and six months ended June 30, 2016.

 

Other. This category includes a variety of other income producing activities, including wire transfer fees, mortgage-related income, insurance commissions, credit card income, participation fee income and rental income. Other income increased $10,000 or 6.1% for the three months ended June 30, 2017, compared to the same period in 2016. For the six months ended June 30, 2017, compared to the same period in 2016, other income increased $23,000 or 7.5%.

 

Noninterest Expense

 

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships, and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization, professional and regulatory fees, including Federal Deposit Insurance Corporation (“FDIC”) assessments, data processing expenses, and advertising and promotion expenses.

 

The following table presents, for the periods indicated, the major categories of noninterest expense:

 

   

For the Three Months Ended
June 30,

   

Increase

 
   

2017

   

2016

   

(Decrease)

 
   

(Dollars in thousands) (Unaudited)

 

Salaries and employee benefits

  $ 5,397     $ 5,027     $ 370  

Non-staff expenses:

                       

Occupancy of bank premises

    626       486       140  

Depreciation and amortization

    378       385       (7 )

Data processing

    381       358       23  

FDIC assessment fees

    189       193       (4 )

Legal and other professional fees

    300       693       (393 )

Advertising and promotions

    333       281       52  

Utilities and communications

    258       232       26  

Ad valorem shares tax

    165       181       (16 )

Directors’ fees

    80       81       (1 )

Other real estate owned expenses and write-downs

    16       54       (38 )

Other

    991       1,179       (188 )

Total noninterest expense

  $ 9,114     $ 9,150     $ (36 )

  

38

 

 

   

For the Six Months Ended
June 30,

   

Increase

 
   

2017

   

2016

   

(Decrease)

 
   

(Dollars in thousands) (Unaudited)

 

Salaries and employee benefits

  $ 10,381     $ 9,723     $ 658  

Non-staff expenses:

                       

Occupancy of bank premises

    1,247       1,100       147  

Depreciation and amortization

    768       773       (5 )

Data processing

    760       733       27  

FDIC assessment fees

    366       357       9  

Legal and other professional fees

    584       1,058       (474 )

Advertising and promotions

    663       565       98  

Utilities and communications

    491       511       (20 )

Ad valorem shares tax

    330       361       (31 )

Directors’ fees

    241       170       71  

Other real estate owned expenses and write-downs

    39       145       (106 )

Other

    2,010       2,055       (45 )

Total noninterest expense

  $ 17,880     $ 17,551     $ 329  

 

 

Noninterest expense for the three months ended June 30, 2017 decreased $36,000 or 0.4% to $9.1 million compared to noninterest expense of $9.2 million for the same period in 2016. For the six months ended June 30, 2017, noninterest expense increased $329,000 or 1.9% to $17.9 million, compared to noninterest expense of $17.6 million for the same period in 2016. The most significant components were as follows:

 

Salaries and employee benefits. Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $5.4 million for the three months ended June 30, 2017, an increase of $370,000 or 7.4% compared to the same period in 2016. For the six months ended June 30, 2017, salaries and benefits were $10.4 million, an increase of $658,000 of 6.8% compared to the same period in 2016. The increase was primarily due to promotions and / or additional hires for new positions, our merit increase cycle, and higher commissions paid as a result of the increase in our brokerage services activity. As of June 30, 2017, we had 213 full-time equivalent employees compared to 212 as of June 30, 2016. Salaries and employee benefits included stock-based compensation expense of $70,000 and $50,000 for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, salaries and benefits included stock-based compensation income of $84,000 and expense of $156,000, respectively. We had net stock-based compensation income for the six months ended June 30, 2017 due to the forfeiture of vested stock options for certain employees during the first quarter 2017.

 

Occupancy of bank premises. Expenses associated with occupancy of premises was $626,000 and $486,000 for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, occupancy and bank premises expenses totaled $1.2 million and $1.1 million, respectively. The increase for both the three and six months ended June 30, 2017, compared to the prior year periods, may be attributed primarily to increased rent expense due to new lease commitments as a result of the third quarter 2016 relocation of our corporate offices to downtown Baton Rouge and entering into the Dallas, Texas market in 2017, as well as a second quarter 2016 property insurance refund related to the AGFC properties for policies prepaid through December 31, 2015, but cancelled at the time of the merger.

 

Legal and other professional fees. Other professional fees include audit, loan review, compliance, and other consultants. Legal and other professional fees were $300,000 and $693,000 for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, legal and other professional fees were $584,000 and $1.1 million, respectively. Legal and other professional fees were $393,000 or 56.7% lower during the three months ended June 30, 2017 and $474,000 or 44.8% lower during the six months ended June 30, 2017, compared to the same periods in 2016, primarily due to the fees incurred in 2016 in our defense of the litigation related to the dissenting former AGFC shareholders who exercised their statutory rights of appraisal.

 

Directors’ fees. Directors’ fees were $80,000 and $81,000 for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, directors’ fees were $241,000 and $170,000, respectively. The increase for the six months ended June 30, 2017 of $71,000, or 41.8%, was primarily due to the March 31, 2017 issuance of an aggregate 4,410 shares of our common stock valued at $75,000 to our non-employee directors as non-cash compensation for their board service to Business First.

 

39

 

 

Other. This category includes operating and administrative expenses including business development expenses (i.e. travel and entertainment, donations and club dues), insurance, supplies and printing, equipment rent, and software support and maintenance. Other noninterest expense decreased $188,000 for the three months ended June 30, 2017 compared to the same period in 2016. For the six months ended June 30, 2017, other noninterest expense decreased $45,000 compared to the same period in 2016. The decrease in other expenses for the three months ended June 30, 2017, compared to the same period in 2016, was primarily due to the $162,000 statutory interest paid as a result of the litigation settlement with the dissenting former AGFC shareholders who exercised their statutory rights of appraisal.

 

Income Tax Expense 

 

The amount of income tax expense is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

For the three months ended June 30, 2017, income tax expense totaled $819,000, an increase of $589,000 or 256.1% compared to $230,000 for the same period in 2016. For the six months ended June 30, 2017, income tax expense totaled $1.6 million, an increase of $959,000 or 153.0% compared to $627,000 for the same period in 2016. For both periods presented, the increase in income tax expense may be attributed primarily to a higher level of taxable income. Our effective tax rates for the three months ended June 30, 2017 and 2016 were 28.5% and 21.5%, respectively. For the six months ended June 30, 2017 and 2016, our effective tax rates were 28.3% and 21.8%, respectively. Our effective tax rate for both periods was affected primarily by tax-exempt income generated by municipal securities and BOLI and by other nondeductible expenses.

 

Financial Condition 

 

Our assets increased $63.2 million or 5.7% from December 31, 2016 to June 30, 2017, primarily due to loan growth.

 

Loan Portfolio

 

Our primary source of income is interest on loans to individuals, professionals and small to medium-sized businesses located in Louisiana. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in our primary market area. Our loan portfolio represents the highest yielding component of our earning asset base.

 

As of June 30, 2017, total loans were $874.7 million, an increase of $63.6 million compared to $811.1 million as of December 31, 2016. The increase was primarily due to our continued loan penetration in our primary market area. Of these amounts, $167,000 and $180,000 in loans were classified as loans held for sale as of June 30, 2017 and December 31, 2016, respectively.

 

Total loans as a percentage of deposits were 90.0% and 87.0% as of June 30, 2017 and December 31, 2016, respectively. Total loans as a percentage of assets were 74.8% and 73.3% as of June 30, 2017 and December 31, 2016, respectively.

 

 

The following table summarizes our loan portfolio by type of loan as of the dates indicated:

 

   

As of June 30, 2017

   

As of December 31, 2016

 
   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in

thousands)

(Unaudited)

   

(Dollars in

thousands)

 

Commercial

  $ 238,924       27.3 %   $ 213,120       26.3 %

Real estate:

                               

Construction and land

    112,199       12.8 %     94,426       11.6 %

Farmland

    10,524       1.2 %     9,217       1.1 %

1-4 family residential

    139,398       16.0 %     129,052       15.9 %

Multi-family residential

    23,039       2.6 %     22,737       2.8 %

Nonfarm nonresidential

    304,278       34.8 %     298,057       36.8 %

Consumer

    46,144       5.3 %     44,342       5.5 %

Total loans held for investment

  $ 874,506       100 %   $ 810,951       100 %

 

40

 

 

Commercial loans. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. These loans are made based primarily on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally include personal guarantees.

 

Commercial loans increased $25.8 million or 12.1% to $238.9 million as of June 30, 2017 from $213.1 million as of December 31, 2016, primarily due to the efforts of our bankers who attracted new clients and leveraged existing bank relationships to fund expansion and growth opportunities.

 

Construction and land. Construction and land development loans are comprised of loans to fund construction, land acquisition and land development construction. The properties securing the portfolio are located primarily throughout Louisiana and are generally diverse in terms of type.

 

Construction and land loans increased $17.8 million or 18.8% to $112.2 million as of June 30, 2017 from $94.4 million as of December 31, 2016, primarily due to the opportunities to fund small residential land development projects with proven developers, who are existing customers of the Bank and have demonstrated a successful track record for many years.

 

1-4 family residential. Our 1-4 family residential loan portfolio is comprised of loans secured primarily by single family homes, which are both owner-occupied and investor owned. Our 1-4 family residential loans have a relatively small average balance spread between many individual borrowers.

 

1-4 family residential loans increased $10.3 million or 8.0% to $139.4 million as of June 30, 2017 from $129.1 million as of December 31, 2016, primarily due to both the conversion of residential construction to in-house financed owner-occupied term debt and new financing of existing 1-4 family residential.

 

Nonfarm nonresidential. Nonfarm nonresidential loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the portfolio are located throughout Louisiana and are generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry.

 

Nonfarm nonresidential loans increased $6.2 million or 2.1% to $304.3 million as of June 30, 2017 from $298.1 million as of December 31, 2016, primarily due to the continued penetration into our market area by our bankers who attracted new clients and leveraged existing relationships to finance growth and expansion opportunities, net of regularly scheduled principal amortization of the portfolio and loans that were refinanced by borrowers with other financial institutions.

 

Other loan categories. Other categories of loans included in our loan portfolio include farmland and agricultural loans made to farmers and ranchers relating to their operations, multi-family residential loans, and consumer loans. None of these categories of loans represent a significant portion of our total loan portfolio.

 

 

41

 

 

The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range as of date indicated are summarized in the following tables:

 

   

As of June 30, 2017

 
   

One Year
or Less

   

One
Through
Five Years

   

After Five
Years

   

Total

 
   

(Dollars in thousands)(Unaudited)

 

Commercial

  $ 72,425     $ 125,537     $ 40,962     $ 238,924  

Real estate:

                               

Construction and land

    46,794       50,923       14,482       112,199  

Farmland

    1,106       6,953       2,465       10,524  

1-4 family residential

    17,624       46,016       75,758       139,398  

Multi-family residential

    6,592       5,265       11,182       23,039  

Nonfarm nonresidential

    30,378       124,132       149,768       304,278  

Consumer

    10,601       26,347       9,196       46,144  

Total loans held for investment

  $ 185,520     $ 385,173     $ 303,813     $ 874,506  

Amounts with fixed rates

  $ 81,270     $ 272,854     $ 212,222     $ 566,346  

Amounts with floating rates

  $ 104,250     $ 112,319     $ 91,591     $ 308,160  

 

   

As of December 31, 2016

 
   

One Year
or Less

   

One
Through
Five Years

   

After Five
Years

   

Total

 
   

(Dollars in thousands)

 

Commercial

  $ 76,596     $ 98,037     $ 38,487     $ 213,120  

Real estate:

                               

Construction and land

    45,403       39,346       9,677       94,426  

Farmland

    779       5,973       2,465       9,217  

1-4 family residential

    14,509       51,557       62,986       129,052  

Multi-family residential

    12,335       5,268       5,134       22,737  

Nonfarm nonresidential

    30,371       120,082       147,604       298,057  

Consumer

    14,560       23,437       6,345       44,342  

Total loans held for investment

  $ 194,553     $ 343,700     $ 272,698     $ 810,951  

Amounts with fixed rates

  $ 81,929     $ 252,718     $ 176,540     $ 511,187  

Amounts with floating rates

  $ 112,624     $ 90,982     $ 96,158     $ 299,764  

 

Nonperforming Assets 

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

We have several procedures in place to assist in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our bankers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

 

We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We had $12.4 million and $8.5 million in nonperforming assets as of June 30, 2017 and December 31, 2016, respectively. We had $11.2 million in nonperforming loans as of June 30, 2017 compared to $7.3 million as of December 31, 2016. The increase in nonperforming assets and nonperforming loans from December 31, 2016 to June 30, 2017 is primarily due to two relationships placed on nonaccrual status during the quarter ended March 31, 2017, one of which is in the energy sector and the other is in the gaming industry.

 

42

 

 

The following tables present information regarding nonperforming loans at the dates indicated:

 

   

As of June 30,
2017
(Dollars in
thousands)
(Unaudited)

   

As of December 31,
2016

(Dollars in
thousands)

 

Nonaccrual loans

  $ 11,105     $ 7,126  

Accruing loans 90 or more days past due

    55       168  

Total nonperforming loans

    11,160       7,294  

Nonaccrual debt securities

           

Other real estate owned:

               

Commercial real estate, construction, land and land development

    1,186       1,187  

Residential real estate

    41        

Total other real estate owned

    1,227       1,187  

Total nonperforming assets

  $ 12,387     $ 8,481  

Restructured loans-nonaccrual

  $ 4,024     $ 816  

Restructured loans-accruing

  $ 557     $ 5,115  

Ratio of nonperforming loans to total loans held for investment

    1.28 %     0.90 %

Ratio of nonperforming assets to total assets

    1.06 %     0.77 %

 

   

As of June 30,
2017
(Dollars in
thousands)
(Unaudited)

   

As of December 31,
2016
(Dollars in
thousands)

 

Nonaccrual loans by category:

               

Real estate:

               

Construction and land

  $ 146     $ 243  

1-4 family residential

    2,393       2,721  

Multi-family residential

           

Nonfarm nonresidential

    3,404       1,201  

Commercial

    4,927       2,763  

Consumer

    235       198  

Total

  $ 11,105     $ 7,126  

 

Potential Problem Loans 

 

From a credit risk standpoint, we classify loans in our portfolio in one of four categories: pass, special mention, substandard or doubtful. Loans classified as loss are charged-off. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit as of each monthly reporting period. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

 

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. These credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.

 

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

 

43

 

 

The following tables summarize our internal ratings of loans held for investment as of the dates indicated.

 

   

As of June 30, 2017

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Real estate:

                                       

Construction and land

  $ 109,643     $ 2,001     $ 409     $ 146     $ 112,199  

Farmland

    10,524                         10,524  

1-4 family residential

    129,819       5,270       1,916       2,393       139,398  

Multi-family residential

    22,997             42             23,039  

Nonfarm nonresidential

    288,548       10,561       1,765       3,404       304,278  

Commercial

    209,394       21,211       3,392       4,927       238,924  

Consumer

    45,213       673       23       235       46,144  

Total

  $ 816,138     $ 39,716     $ 7,547     $ 11,105     $ 874,506  

 

   

As of December 31, 2016

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands)

 

Real estate:

                                       

Construction and land

  $ 92,951     $ 932     $ 300     $ 243     $ 94,426  

Farmland

    9,217                         9,217  

1-4 family residential

    118,891       4,782       2,658       2,721       129,052  

Multi-family residential

    22,685             52             22,737  

Nonfarm nonresidential

    280,398       14,531       1,927       1,201       298,057  

Commercial

    186,197       16,783       7,377       2,763       213,120  

Consumer

    43,414       505       225       198       44,342  

Total

  $ 753,753     $ 37,533     $ 12,539     $ 7,126     $ 810,951  

 

Allowance for Loan Losses 

 

We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in the loan portfolio. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. For additional information, see Note 6.

 

In connection with our review of the loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:

 

 

for commercial and industrial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category, and the value, nature and marketability of collateral;

 

 

for commercial mortgage loans and multifamily residential loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner occupied properties, the loan to value ratio, the age and condition of the collateral, and the volatility of income, property value and future operating results typical for properties of that type;

 

 

for 1-4 family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan to value ratio, and the age, condition and marketability of the collateral; and

 

 

for construction, land development and other land loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, the experience and ability of the developer, and the loan to value ratio.

 

 

As of June 30, 2017, the allowance for loan losses totaled $9.2 million or 1.05% of total loans held for investment. As of December 31, 2016, the allowance for loan losses totaled $8.2 million or 1.01% of total loans held for investment.

 

44

 

 

The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:

 

   

As of and

For the Six Months
Ended
June 30, 2017
(Dollars in thousands)
(Unaudited)

   

As of and For the Year

Ended December 31,
2016
(Dollars in thousands)

 

Average loans outstanding(1)

  $ 850,680     $ 795,625  
                 

Gross loans held for investment outstanding at end of period(1)

  $ 874,506     $ 810,951  
                 

Allowance for loan losses at beginning of period

    8,162       7,244  

Provision for loan losses

    1,660       1,220  

Charge-offs:

               

Real estate:

               

Construction, land and farmland

    2       484  

Residential

    20       162  

Nonfarm non-residential

    617       473  

Commercial

    53       667  

Consumer

    30       3  

Total charge-offs

    722       1,789  

Recoveries:

               

Real estate:

               

Construction, land and farmland

    1       10  

Residential

    14       140  

Nonfarm non-residential

    1       1,258  

Commercial

    30       33  

Consumer

    31       46  

Total recoveries

    77       1,487  

Net charge-offs

    645       302  

Allowance for loan losses at end of period

  $ 9,177     $ 8,162  

Ratio of allowance to end of period loans held for investment

    1.05 %     1.01 %

Ratio of net charge-offs to average loans

    0.08 %     0.04 %

                          

(1)

Excluding loans held for sale.

 

Although we believe that we have established our allowance for loan losses in accordance with U.S. generally accepted accounting principles (“GAAP”) and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in our loan portfolio. If we experience economic declines or if asset quality deteriorates, material additional provisions could be required.

 

45

 

 

The following table shows the allocation of the allowance for loan losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for loan losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category.

 

   

As of June 30,
2017

   

As of December 31,
2016

 
   

Amount

   

Percent
to Total

   

Amount

   

Percent
to Total

 
   

(Dollars in
thousands)
(Unaudited)

   

(Dollars in
thousands)

 

Real estate:

                               

Construction and land

  $ 1,187       12.9 %   $ 933       11.4 %

Farmland

    88       1.0 %     75       0.9 %

1-4 family residential

    1,542       16.8 %     1,228       15.1 %

Multi-family residential

    185       2.0 %     172       2.1 %

Nonfarm nonresidential

    2,443       26.6 %     2,314       28.4 %

Total real estate

    5,445       59.3 %     4,722       57.9 %

Commercial

    3,342       36.4 %     3,039       37.2 %

Consumer

    390       4.3 %     401       4.9 %

Total allowance for loan losses

  $ 9,177       100 %   $ 8,162       100 %

 

Securities 

 

We use our securities portfolio to provide a source of liquidity, an appropriate return on funds invested, manage interest rate risk, meet collateral requirements, and meet regulatory capital requirements. As of June 30, 2017, the carrying amount of investment securities totaled $192.1 million, a decrease of $6.3 million or 3.2% compared to $198.3 million as of December 31, 2016. Securities represented 16.4%, and 17.9% of total assets as of June 30, 2017 and December 31, 2016, respectively.

 

Our investment portfolio consists entirely of securities classified as available for sale. As a result, the carrying values of our investment securities are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. The following tables summarize the amortized cost and estimated fair value of investment securities as of the dates shown:

 

   

As of June 30, 2017

 
   

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair Value

 
   

(Dollars in thousands) (Unaudited)

 

U.S. government agencies

  $ 8,380     $ 57     $ 29     $ 8,408  

Corporate bonds

    13,134       71       15       13,190  

Municipal securities

    78,906       771       168       79,509  

Mortgage-backed securities

    91,274       9       1,005       90,278  

Other securities

    820             147       673  

Total

  $ 192,514     $ 908     $ 1,364     $ 192,058  

 

   

As of December 31, 2016

 
   

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair Value

 
   

(Dollars in thousands)

 

U.S. government agencies

  $ 7,580     $ 36     $ 50     $ 7,566  

Corporate bonds

    11,148       31       52       11,127  

Municipal securities

    80,559       210       1,133       79,636  

Mortgage-backed securities

    101,766       20       2,414       99,372  

Other securities

    820             179       641  

Total

  $ 201,873     $ 297     $ 3,828     $ 198,342  

 

46

 

 

All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As of June 30, 2017, the investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.

 

Management evaluates securities for other-than-temporary impairment, at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

 

The following tables set forth the fair value, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized cost of the securities portfolio as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures.

 

   

As of June 30, 2017

 
   

Within One
Year

   

After One Year
but
Within Five Years

   

After Five Years but
Within Ten Years

   

After Ten
Years

   

Total

 
   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Total

   

Yield

 
   

(Dollars in thousands) (Unaudited)

 

U.S. government agencies

  $ 1,011       0.96 %   $ 1,005       1.11 %   $ 6,392       2.46 %   $       %   $ 8,408       2.12 %

Corporate bonds

          %     6,569       2.53 %     6,621       3.63 %           %     13,190       3.08 %

Municipal securities

    7,410       1.53 %     34,700       1.90 %     19,168       2.16 %     18,231       2.72 %     79,509       2.11 %

Mortgage-backed securities

    8       0.75 %     5,241       1.67 %     31,707       1.43 %     53,322       1.81 %     90,278       1.67 %

Other securities

          %           %           %     673       2.65 %     673       2.65 %

Total

  $ 8,429       1.45 %   $ 47,515       1.94 %   $ 63,888       1.98 %   $ 72,226       2.05 %   $ 192,058       1.97 %

 

 

 

   

As of December 31, 2016

 
   

Within One
Year

   

After One Year
but
Within Five Years

   

After Five Years but
Within Ten Years

   

After Ten
Years

   

Total

 
   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Total

   

Yield

 
   

(Dollars in thousands)

 

U.S. government agencies

  $       %   $ 2,025       1.03 %   $ 5,541       2.42 %   $       %   $ 7,566       2.05 %

Corporate bonds

          %     6,525       2.26 %     4,602       1.99 %           %     11,127       2.15 %

Municipal securities

    7,348       1.78 %     35,213       1.74 %     19,806       2.26 %     17,269       2.53 %     79,636       2.04 %

Mortgage-backed securities

    1       2.24 %     4,571       1.77 %     30,550       1.33 %     64,250       1.62 %     99,372       1.54 %

Other securities

          %           %           %     641       2.34 %     641       2.34 %

Total

  $ 7,349       1.78 %   $ 48,334       1.78 %   $ 60,499       1.78 %   $ 82,160       1.82 %   $ 198,342       1.80 %

 

The contractual maturity of mortgage-backed securities, collateralized mortgage obligations and asset backed securities is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and asset-backed securities are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to pre-pay. Monthly pay downs on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 5.00 years with an estimated effective duration of 44.41 months as of June 30, 2017.

 

As of June 30, 2017 and December 31, 2016, we did not own securities of any one issuer for which aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity as of such respective dates.

 

47

 

 

Deposits

 

We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits.

 

Total deposits as of June 30, 2017 were $972.0 million, an increase of $39.2 million compared to $932.8 million as of December 31, 2016, primarily due to an increase in the offering rates on interest-bearing demand accounts and certificates of deposit, in order to attract and retain deposit customers and thereby continue deposit penetration in our primary market area.

 

Noninterest-bearing deposits as of June 30, 2017 were $243.7 million compared to $223.7 million as of December 31, 2016, an increase of $20.0 million or 9.0%.

 

Average deposits for the six months ended June 30, 2017 were $960.8 million, an increase of $15.8 million or 1.7% over the full year average for the year ended December 31, 2016 of $945.0 million. The average rate paid on total interest-bearing deposits increased over this period from 0.71% for the year ended December 31, 2016 to 0.79% for the six months ended June 30, 2017. The increase in average rates during the six months ended June 30, 2017 was primarily due to a strategic increase in deposit pricing in order to improve liquidity. In addition, the stability and the continued growth of noninterest-bearing demand accounts served to reduce the cost of deposits to 0.59% for the six months ended June 30, 2017 and 0.55% for the year ended December 31, 2016.

 

 

The following table presents the daily average balances and weighted average rates paid on deposits for the periods indicated:

 

   

For the Six months
Ended June 30, 2017

   

For the Year Ended December 31,
2016

 
   

Average
Balance

   

Average
Rate

   

Average
Balance

   

Average
Rate

 
   

(Dollars in thousands)

                 
   

(Unaudited)

   

(Dollars in thousands)

 

Interest-bearing demand accounts

  $ 36,111       0.45 %   $ 36,200       0.19 %

Negotiable order of withdrawal (“NOW”) accounts

    119,924       0.23 %     109,763       0.24 %

Limited access money market accounts and savings

    221,905       0.44 %     241,577       0.41 %

Certificates and other time deposits > $250k

    68,180       1.56 %     55,678       1.33 %

Certificates and other time deposits < $250k

    271,887       1.19 %     280,778       1.10 %

Total interest-bearing deposits

    718,007       0.79 %     723,996       0.71 %

Noninterest-bearing demand accounts

    242,841       %     221,047       %

Total deposits

  $ 960,848       0.59 %   $ 945,043       0.55 %

 

The ratio of average noninterest-bearing deposits to average total deposits for the six months ended June 30, 2017 and the year ended December 31, 2016 was 25.3% and 23.4%, respectively.

 

The following table sets forth the amount of certificates of deposit that are greater than $250,000 by time remaining until maturity:

 

   

As of
June 30, 2017
(Unaudited)

   

As of December 31,
2016

 
   

(Dollars in thousands)

 

1 year or less

  $ 53,828     $ 54,866  

More than 1 year but less than 3 years

    8,740       9,451  

3 years or more but less than 5 years

    13,300       9,029  

5 years or more

           

Total

  $ 75,868     $ 73,346  

 

Borrowings 

 

We utilize short-term and long-term borrowings to supplement deposits in funding our lending and investment activities. In addition, we use short-term borrowings to periodically repurchase outstanding shares of our common stock and for general corporate purposes. Each of these relationships are discussed below.

 

48

 

 

FHLB advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of June 30, 2017 and December 31, 2016, total borrowing capacity of $332.5 million and $321.1 million, respectively, was available under this arrangement, and $66.0 million and $47.1 million, respectively, was outstanding with a weighted average stated interest rate of 2.18% as of June 30, 2017 and 2.64% as of December 31, 2016. Our current FHLB advances mature within two years. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio.

 

As a result of the merger with AGFC, we assumed the outstanding FHLB advances of American Gateway Bank. These advances were recorded at fair value as of acquisition and totaled $41.2 million, resulting in a market value adjustment of $2.0 million which will be accreted over the life of the respective advances as a reduction of interest expense on borrowings.

 

 

The following table presents our FHLB borrowings at the dates indicated.

 

   

FHLB
Advances

 
   

(Dollars in

Thousands)

 

June 30, 2017 (Unaudited)

       

Amount outstanding at quarter-end

  $ 66,007  

Weighted average stated interest rate at quarter-end

    2.18 %

Maximum month-end balance during the quarter

  $ 66,360  

Average balance outstanding during the quarter

  $ 66,494  

Weighted average interest rate during the quarter

    1.02 %
         

December 31, 2016

       

Amount outstanding at year-end

  $ 47,064  

Weighted average stated interest rate at year-end

    2.64 %

Maximum month-end balance during the year

  $ 80,973  

Average balance outstanding during the year

  $ 53,516  

Weighted average interest rate during the year

    1.05 %

 

 

First National Bankers Bank (“FNBB”) long term advances. On September 12, 2016, we borrowed $3.0 million from FNBB with a maturity date of September 12, 2026. This advance is due in nine annual principal payments of $300,000 beginning on September 12, 2017 and one final principal and interest payment of $303,000 due on September 12, 2026. This advance is secured by a pledge of and security interest in the common stock of our wholly-owned subsidiary, Business First Bank. The balance outstanding was $3.0 million at both June 30, 2017 and December 31, 2016. This advance carries a variable interest equal to the Wall Street Journal Prime rate. The rate was 4.00% and 3.75% at June 30, 2017 and December 31, 2016, respectively, and adjusts quarterly. This FNBB long term advance was established for the purpose of paying off the revolving line of credit with FTN.

 

The following table presents the FNBB long term advances at the dates indicated.

 

   

FNBB
Long Term Advances

 
   

(Dollars in

Thousands)

 

June 30, 2017 (Unaudited)

       

Amount outstanding at quarter-end

  $ 3,000  

Weighted average stated interest rate at quarter-end

    4.00 %

Maximum month-end balance during the quarter

  $ 3,000  

Average balance outstanding during the quarter

  $ 3,000  

Weighted average interest rate during the quarter

    3.80 %
         

December 31, 2016

       

Amount outstanding at year-end

  $ 3,000  

Weighted average stated interest rate at year-end

    3.75 %

Maximum month-end balance during the year

  $ 3,000  

Average balance outstanding during the year

  $ 910  

Weighted average interest rate during the year

    3.54 %

 

49

 

 

FNBB revolving advances. FNBB allows us to borrow on a revolving basis up to $5.0 million. This line of credit, established on September 12, 2016, is secured by a pledge of and security interest in the common stock of our wholly-owned subsidiary, Business First Bank. The balance on this line of credit was $862,000 at both June 30, 2017 and December 31, 2016. The line of credit bears a variable interest equal to the Wall Street Journal Prime rate. The rate was 4.00% and 3.75% at June 30, 2017 and December 31, 2016, respectively, and adjusts quarterly. This FNBB line matures on September 12, 2017 and was established for the purpose of repurchasing shares of our common stock from certain of our shareholders and for general corporate purposes.

 

The following table presents the FNBB short term advances at the dates indicated.

 

   

FNBB
Short Term Advances

 
   

(Dollars in

Thousands)

 

June 30, 2017 (Unaudited)

       

Amount outstanding at quarter-end

  $ 862  

Weighted average stated interest rate at quarter-end

    4.00 %

Maximum month-end balance during the quarter

  $ 862  

Average balance outstanding during the quarter

  $ 862  

Weighted average interest rate during the quarter

    3.80 %
         

December 31, 2016

       

Amount outstanding at year-end

  $ 862  

Weighted average stated interest rate at year-end

    3.75 %

Maximum month-end balance during the year

  $ 862  

Average balance outstanding during the year

  $ 24  

Weighted average interest rate during the year

    3.75 %

 

 

First Tennessee Bank National Association (“FTN”) advances. FTN allowed us to borrow on a revolving basis up to $3.0 million. This line of credit, established on September 3, 2015, was unsecured, but we agreed that we would not pledge any of the capital stock of our wholly-owned subsidiary, Business First Bank, to secure any other obligation. The line of credit was established for the purpose of repurchasing shares of our common stock from certain of our shareholders and for general corporate purposes. This line of credit was paid off on September 12, 2016.

 

The following table presents the FTN advances at the dates indicated.

 

   

FTN
Advances

 
   

(Dollars in

Thousands)

 

December 31, 2016

       

Amount outstanding at year-end

  $  

Weighted average stated interest rate at year-end

    %

Maximum month-end balance during the year

  $ 3,000  

Average balance outstanding during the year

  $ 2,098  

Weighted average interest rate during the year

    3.10 %

 

50

 

 

Correspondent Bank Federal Funds Purchased Relationships

 

We maintain Federal Funds Purchased Relationships with the following financial institutions and limits as of June 30, 2017:

 

   

(Dollars in

Thousands)

 

The Independent Banker’s Bank

  $ 25,000  

FTN

  $ 17,000  

FNBB

  $ 30,000  

Compass Bank

  $ 22,500  

ServisFirst Bank

  $ 10,000  

Center State Bank

  $ 9,000  

 

 

The following table represents combined Federal Funds Purchased for all relationships at the dates indicated.

 

   

Federal Funds
Purchased

 
   

(Dollars in

Thousands)

 

June 30, 2017 (Unaudited)

       

Amount outstanding at quarter-end

  $  

Weighted average interest rate at quarter-end

    %

Maximum month-end balance during the quarter

  $  

Average balance outstanding during the quarter

  $ 51  

Weighted average interest rate during the quarter

    1.98 %
         

December 31, 2016

       

Amount outstanding at year-end

  $  

Weighted average interest rate at year-end

    %

Maximum month-end balance during the year

  $ 2,385  

Average balance outstanding during the year

  $ 544  

Weighted average interest rate during the year

    1.35 %

 

Liquidity and Capital Resources

 

Liquidity 

 

Liquidity involves our ability to utilize funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the six months ended June 30, 2017 and the year ended December 31, 2016, liquidity needs were primarily met by core deposits, security and loan maturities, and amortizing investment and loan portfolios. Although access to brokered deposits, purchased funds from correspondent banks and overnight advances from the FHLB and our FNBB revolving line are available and have been utilized on occasion to take advantage of investment opportunities, we do not generally rely on these external funding sources. As of June 30, 2017 and December 31, 2016, we maintained six lines of credit, respectively, with commercial banks which provide for extensions of credit with an availability to borrow up to an aggregate $113.5 million as of June 30, 2017 and an aggregate $109.5 million as of December 31, 2016. There were no funds under these lines of credit outstanding as of June 30, 2017 and December 31, 2016.

 

51

 

 

The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the periods indicated. Average assets totaled $1.2 billion for the six months ended June 30, 2017 and $1.1 billion for the year ended December 31, 2016.

 

   

For the Six
Months Ended
June 30, 2017

   

For the Year
Ended
December 31,
2016

 
   

(Unaudited)

         

Sources of Funds:

               

Deposits:

               

Noninterest-bearing

    21.0 %     19.6 %

Interest-bearing

    62.2 %     64.2 %

Advances from FHLB

    5.7 %     4.7 %

Other borrowings

    0.6 %     0.6 %

Other liabilities

    0.5 %     0.6 %

Shareholders’ equity

    10.0 %     10.3 %

Total

    100 %     100 %
                 

Uses of Funds:

               

Loans

    73.0 %     69.9 %

Securities available for sale

    17.3 %     18.7 %

Interest-bearing deposits in other banks

    1.0 %     2.3 %

Other noninterest-earning assets

    8.7 %     9.1 %

Total

    100 %     100 %

Average noninterest-bearing deposits to average deposits

    25.3 %     23.4 %

Average loans to average deposits

    88.5 %     84.2 %

 

Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average loans increased 8.2% for the six months ended June 30, 2017 compared to the same period in 2016. We predominantly invest excess deposits in overnight deposits with the Federal Reserve, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth. Our securities portfolio had a weighted average life of 5.00 years and an effective duration of 44.41 months as of June 30, 2017. As of December 31, 2016, our securities portfolio has a weighted average life of 4.76 years and an effective duration of 44.72 months.

 

As of June 30, 2017, we had outstanding $255.3 million in commitments to extend credit and $11.1 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2016, we had outstanding $196.2 million in commitments to extend credit and $12.5 million in commitments associated with outstanding standby and commercial letters of credit. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

 

As of June 30, 2017 and December 31, 2016, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. As of June 30, 2017, we had cash and cash equivalents of $45.2 million compared to $42.2 million as of December 31, 2016.

 

Capital Resources

 

Total shareholders’ equity increased to $118.8 million as of June 30, 2017, compared to $113.6 million as of December 31, 2016, an increase of $5.3 million or 4.6%. This increase was primarily the result of $4.0 million in net income.

 

On July 27, 2017, our Board of Directors (the “Board”) declared a quarterly dividend based upon our financial performance for the three months ended June 30, 2017 in the amount of $0.06 per share to the common shareholders of record as of August 15, 2017. The dividend is to be paid on August 31, 2017, or as soon as practicable thereafter.

 

The declaration and payment of dividends to our shareholders, as well as the amounts thereof, are subject to the discretion of the Board and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board. As a bank holding company, our ability to pay dividends is largely dependent upon the receipt of dividends from our subsidiary, Business First Bank. There can be no assurance that we will declare and pay any dividends to our shareholders.

 

52

 

 

Capital management consists of providing equity to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank holding company and bank levels. As of June 30, 2017 and December 31, 2016, we and Business First Bank were in compliance with all applicable regulatory capital requirements, and Business First Bank was classified as “well-capitalized,” for purposes of prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all applicable regulatory capital standards applicable to us.

 

The following table presents the actual capital amounts and regulatory capital ratios for us and Business First Bank as of the dates indicated.

 

   

As of June 30, 2017

   

As of December 31, 2016

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 
   

(Unaudited)

                 
   

(Dollars in thousands)

 

Business First Bancshares, Inc.

                               

Total capital (to risk weighted assets)

  $ 119,370       10.90 %   $ 115,437       11.63 %

Tier 1 capital (to risk weighted assets)

    110,193       10.06 %     107,275       10.81 %

Common Equity Tier 1 capital (to risk weighted assets)

    110,193       10.06 %     107,275       10.81 %

Tier 1 Leverage capital (to average assets)

    110,193       9.46 %     107,275       9.67 %
                                 

Business First Bank

                               

Total capital (to risk weighted assets)

  $ 121,796       11.13 %   $ 117,909       11.89 %

Tier 1 capital (to risk weighted assets)

    112,619       10.30 %     109,747       11.07 %

Common Equity Tier 1 capital (to risk weighted assets)

    112,619       10.30 %     109,747       11.07 %

Tier 1 Leverage capital (to average assets)

    112,619       9.68 %     109,747       9.91 %

 

Long Term Debt 

 

For information on our borrowings from FNBB, please refer to “Borrowings.”

 

Contractual Obligations

 

The following tables summarize contractual obligations and other commitments to make future payments as of June 30, 2017 and December 31, 2016 (other than non-maturity deposit obligations), which consist of future cash payments associated with our contractual obligations pursuant to our FHLB advances, revolving line of credit, long-term borrowings, and non-cancelable future operating leases. Payments related to leases are based on actual payments specified in underlying contracts. Advances from the FHLB totaled approximately $66.0 million and $47.1 million as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017 and December 31, 2016, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 2.18% and 2.64%, respectively, and maturities ranging from 2017 through 2018. The advance under the FNBB long-term borrowing totaled $3.0 million at both June 30, 2017 and December 31, 2016. This advance was secured by a pledge of and security interest in the common stock of our wholly-owned subsidiary, Business First Bank, bearing interest at a variable rate of 4.00% and 3.75% at June 30, 2017 and December 31, 2016, respectively, and maturing in 2026. We also had a line of credit with FNBB with an outstanding balance of $862,000 at both June 30, 2017 and December 31, 2016. This line of credit was secured by a pledge of and security interest in the common stock of our wholly-owned subsidiary, Business First Bank, bearing interest at a variable rate of 4.00% and 3.75% at June 30, 2017 and December 31, 2016, respectively, and maturing in 2017.

 

   

As of June 30, 2017

 
   

1 year or less

   

More than 1
year but less
than 3 years

   

3 years or
more but less
than 5 years

   

5 years
or more

   

Total

 
   

(Unaudited) (Dollars in thousands)

 

Non-cancelable future operating leases

  $ 2,017     $ 3,401     $ 2,042     $ 5,512     $ 12,972  

Time deposits

    268,959       49,761       29,418       250       348,388  

Advances from FHLB

    51,007       15,000                   66,007  

Advances from FNBB

    1,162       600       600       1,500       3,862  

Securities sold under agreements to repurchase

    2,533                         2,533  

Standby and commercial letters of credit

    8,632       2,445       18             11,095  

Commitments to extend credit

    123,499       93,913       6,960       30,911       255,283  

Total

  $ 457,809     $ 165,120     $ 39,038     $ 38,173     $ 700,140  

 

53

 

 

   

As of December 31, 2016

 
   

1 year or less

   

More than 1
year but less
than 3 years

   

3 years or
more but less
than 5 years

   

5 years
or more

   

Total

 
   

(Dollars in thousands)

 

Non-cancelable future operating leases

  $ 1,591     $ 2,781     $ 1,776     $ 5,154     $ 11,302  

Time deposits

    239,062       77,963       20,937       250       338,212  

Advances from FHLB

    32,064       15,000                   47,064  

Advances from FNBB

    1,162       600       600       1,500       3,862  

Securities sold under agreements to repurchase

    2,720                         2,720  

Standby and commercial letters of credit

    9,439       3,081       18             12,538  

Commitments to extend credit

    100,204       72,283       3,409       20,305       196,201  

Total

  $ 386,242     $ 171,708     $ 26,740     $ 27,209     $ 611,899  

 

Off-Balance Sheet Items

 

In the normal course of business, we enter into various transactions which, in accordance with generally accepted accounting principles, or GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

 

Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized below. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

 

   

As of June 30, 2017

 
   

1 year or less

   

More than 1
year but less
than 3 years

   

3 years or
more but less
than 5 years

   

5 years
or more

   

Total

 
   

(Unaudited) (Dollars in thousands)

 

Standby and commercial letters of credit

  $ 8,632     $ 2,445     $ 18     $     $ 11,095  

Commitments to extend credit

    123,499       93,913       6,960       30,911       255,283  

Total

  $ 132,131     $ 96,358     $ 6,978     $ 30,911     $ 266,378  

 

   

As of December 31, 2016

 
   

1 year or less

   

More than 1
year but less
than 3 years

   

3 years or
more but less
than 5 years

   

5 years
or more

   

Total

 
   

(Dollars in thousands)

 

Standby and commercial letters of credit

  $ 9,439     $ 3,081     $ 18     $     $ 12,538  

Commitments to extend credit

    100,204       72,283       3,409       20,305       196,201  

Total

  $ 109,643     $ 75,364     $ 3,427     $ 20,305     $ 208,739  

 

Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. The credit risk to us in issuing letters of credit is essentially the same as that involved in extending loan facilities to our customers.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer.

 

54

 

 

 

Interest Rate Sensitivity and Market Risk

 

As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.

 

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

 

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial futures contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

 

Our exposure to interest rate risk is managed by the asset-liability committee of Business First Bank, in accordance with policies approved by our board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.

 

We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Average lives of non-maturity deposit accounts are based on standard regulatory decay assumptions and are also incorporated into the model. Model assumptions are revised and updated as more accurate information becomes available. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various management strategies.

 

On at least a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Internal policy regarding interest rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 5.0% for a 100 basis point shift, 10% for a 200 basis point shift, and 12.5% for a 300 basis point shift. Internal policy regarding interest rate simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated fair value of equity at risk for the subsequent one-year period should not decline by more than 10.00% for a 100 basis point shift, 15.00% for a 200 basis point shift, and 25.00% for a 300 basis point shift.

 

55

 

 

The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated:

 

     

As of June 30, 2017

   

As of December 31, 2016

 

Change in Interest

Rates (Basis Points)

   

Percent Change
in Net Interest
Income

   

Percent Change
in Fair Value of
Equity

   

Percent Change
in Net Interest
Income

   

Percent Change
in Fair Value of
Equity

 

+300

      1.30 %     (7.32% )     3.80 %     (9.03% )

+200

      1.20 %     (5.10% )     3.60 %     (5.27% )

+100

      1.30 %     (1.62% )     2.60 %     (2.73% )

Base

      0.00 %     0.00 %     0.00 %     0.00 %
-100       (0.20% )     (0.67% )     0.20 %     0.16 %

 

The results are primarily due to the behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various strategies.

 

Impact of Inflation

 

Our consolidated financial statements and related notes included elsewhere in this statement have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

 

Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

 

Non-GAAP Financial Measures

 

Our accounting and reporting policies conform to GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

 

The non-GAAP financial measures that we discuss should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this statement when comparing such non-GAAP financial measures.

 

Tangible Book Value Per Common Share. Tangible book value per common share is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as shareholders’ equity less goodwill and core deposit intangible and other intangible assets, net of accumulated amortization, and (2) tangible book value per common share as tangible common equity divided by shares of common stock outstanding. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share.

 

We believe this measure is important to many investors in the marketplace who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing tangible book value.

 

56

 

 

The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and presents tangible book value per common share compared to book value per common share:

 

 

   

As of June 30,

   

As of December 31,

 
   

2017

   

2016

   

2016

 
   

(Unaudited)

         
   

(Dollars in thousands, except per share data)

 

Tangible Common Equity

                       

Total shareholders’ equity

  $ 118,813     $ 116,118     $ 113,559  

Adjustments:

                       

Goodwill

    (6,824 )     (6,824 )     (6,824 )

Core deposit and other intangibles

    (2,141 )     (2,417 )     (2,279 )

Total tangible common equity

  $ 109,848     $ 106,877     $ 104,456  

Common shares outstanding(1)

    6,932,570       7,037,413       6,916,673  

Book value per common share

  $ 17.14     $ 16.50     $ 16.42  

Tangible book value per common share

  $ 15.85     $ 15.19     $ 15.10  

                              

(1)

Excludes the dilutive effect, if any, of 1,011,105, 1,088,505, and 1,086,105 shares of common stock issuable upon exercise of outstanding stock options and warrants as of June 30, 2017, June 30, 2016, and December 31, 2016, respectively.

 

Tangible Common Equity to Tangible Assets. Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit intangible and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common shareholders’ equity to total assets.

 

We believe this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total shareholders’ equity and assets while not increasing our tangible common equity or tangible assets.

 

 

The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and total assets to tangible assets:

 

   

As of June 30,

   

As of December 31,

 
   

2017

   

2016

   

2016

 
   

(Unaudited)

         
   

(Dollars in thousands, except per share data)

 

Tangible Common Equity

                       

Total shareholders’ equity

  $ 118,813     $ 116,118     $ 113,559  

Adjustments:

                       

Goodwill

    (6,824 )     (6,824 )     (6,824 )

Core deposit and other intangibles

    (2,141 )     (2,417 )     (2,279 )

Total tangible common equity

  $ 109,848     $ 106,877     $ 104,456  
                         

Tangible Assets

                       

Total assets

  $ 1,169,086     $ 1,174,142     $ 1,105,841  

Adjustments:

                       

Goodwill

    (6,824 )     (6,824 )     (6,824 )

Core deposit and other intangibles

    (2,141 )     (2,417 )     (2,279 )

Total tangible assets

  $ 1,160,121     $ 1,164,901     $ 1,096,738  

Common Equity to Total Assets

    10.2 %     9.9 %     10.3 %

Tangible Common Equity to Tangible Assets

    9.5 %     9.2 %     9.5 %

 

57

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

Risk identification and management are essential elements for the successful management of our business. In the normal course of business, we are subject to various types of risk, including interest rate, credit, and liquidity risk. We control and monitor these risks with policies, procedures, and various levels of managerial and board oversight. Our objective is to optimize profitability while managing and controlling risk within board approved policy limits. Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets and liabilities. We use our asset liability management policy to control and manage interest rate risk. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensibility and Market Risk” for additional discussion of interest rate risk.

 

Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors. We use our asset liability management policy and contingency funding plan to control and manage liquidity risk.

 

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities, and entering into certain off-balance sheet loan funding commitments. Our primary credit risk is directly related to our loan portfolio. We use our credit policy and disciplined approach to evaluate the adequacy of our allowance for loan losses to control and manage credit risk. Our investment policy limits the degree of the amount of credit risk that we may assume in our investment portfolio. Our principal financial market risks are liquidity risks and exposures to interest rate movements.

 

 

Item  4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on such evaluation, our principal executive officer and principal financial officer concluded our disclosure controls and procedures were effective as of the end of the period covered by this Report to provide reasonable assurance that the information we are required to disclose in reports that are filed or furnished under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, including to ensure that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, we cannot assure you that our disclosure controls and procedures will detect all errors or fraud.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

58

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Management evaluates our exposure to these claims and proceedings individually and in the aggregate, and provides for potential losses on such litigation if the amount of the loss is estimable and the loss is probable. We are not currently involved in any pending legal proceedings other than routine, nonmaterial proceedings occurring in the ordinary course of business.

 

 

Item 1A.

Risk Factors

 

In addition to the other information set forth in this Report, we refer you to Item 1A. “Risk Factors” of our Annual Report on Form 10-K for December 31, 2016 filed with the SEC.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)           Not applicable.

 

 

(b)

Not applicable.

 

 

(c)

Not applicable.

 

Item 3.     Defaults upon Senior Securities

 

Not applicable.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

Not applicable.

 

59

 

 

Item 6.

Exhibits

Number

Description

   

    3.1

Amended and Restated Articles of Incorporation of Business First Bancshares, Inc. (incorporated by reference to Exhibit 3.1 to Business First’s Registration Statement on Form S-4 on November 12, 2014 (File No. 333-200112)) http://www.sec.gov/Archives/edgar/data/1624322/000119312514408786/d812282dex31.htm

   

    3.2

Bylaws of Business First Bancshares, Inc. (incorporated by reference to Exhibit 3.2 to Business First’s Registration Statement on Form S-4 filed on November 12, 2014 (File No. 333-200112)) http://www.sec.gov/Archives/edgar/data/1624322/000119312514408786/d812282dex32.htm

   

    4.1

Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to Business First’s Registration Statement on Form S-4 filed on November 12, 2014 (File No. 333-200112)) http://www.sec.gov/Archives/edgar/data/1624322/000119312514408786/d812282dex41.htm

   

  31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

   

  31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

   

  32.1

Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

   

101.INS

XBRL Instance Document*

   

101.SCH

XBRL Taxonomy Extension Schema Document*

   

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document*

   

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document*

   

101.LAB

XBRL Taxonomy Extension Label Linkbase Document*

   

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document*

                              

*

Filed herewith.  

 

60

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant hereby duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

BUSINESS FIRST BANCSHARES, INC.

     

August 9, 2017

 

/s/ David R. Melville, III

 

 

David R. Melville, III

 

 

President and Chief Executive Officer

     

August 9, 2017

 

/s/ Gregory Robertson

 

 

Gregory Robertson

 

 

Chief Financial Officer

 

 

 

61