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Business First Bancshares, Inc. - Quarter Report: 2018 September (Form 10-Q)

bfbi20180930_10q.htm
 

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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 SECUTITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

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 November 8, 2018, the issuer has outstanding 11,533,721 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 September 30, 2018 (Unaudited) and December 31, 2017

4
     

 

Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017

5
     

 

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017

6
     

 

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2018 and 2017

7
     

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

8
     

 

Notes to Unaudited Consolidated Financial Statements

10
     

Item 2.

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

32
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

62
     

Item 4.

Controls and Procedures

62
   

PART II - OTHER INFORMATION

 

     

Item 1.

Legal Proceedings

63
     

Item 1A.

Risk Factors

63
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63
     

Item 3.

Defaults Upon Senior Securities

63
     

Item 4.

Mine Safety Disclosures

63
     

Item 5.

Other Information

63
     

Item 6.

Exhibits

63
   

Signatures

64

 

 

 

PART I – FINANCIAL INFORMATION

 

Item  1.

Financial Statements

  

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

   

September 30, 2018

   

December 31,

 
   

(Unaudited)

   

2017

 
ASSETS  

Cash and Due from Banks

  $ 45,941     $ 107,591  

Federal Funds Sold

    5,934       8,820  

Securities Available for Sale, at Fair Values

    243,585       179,148  

Mortgage Loans Held for Sale

    280       201  

Loans and Lease Receivable, Net of Allowance for Loan Losses of $10,273 at September 30, 2018 and $8,765 at December 31, 2017

    1,287,686       966,519  

Premises and Equipment, Net

    10,022       8,780  

Accrued Interest Receivable

    5,188       4,110  

Other Equity Securities

    10,339       8,627  

Other Real Estate Owned

    1,824       227  

Cash Value of Life Insurance

    24,442       23,200  

Deferred Taxes

    4,359       3,005  

Goodwill

    32,427       6,824  

Core Deposit Intangible

    4,103       2,003  

Other Assets

    2,065       2,201  

Total Assets

  $ 1,678,195     $ 1,321,256  
                 

LIABILITIES

 

Deposits:

               

Noninterest Bearing

  $ 311,170     $ 264,646  

Interest Bearing

    1,042,901       790,887  

Total Deposits

    1,354,071       1,055,533  

Securities Sold Under Agreements to Repurchase

    14,310       1,939  

Short Term Borrowings

    862       862  

Long Term Borrowings

    2,400       2,700  

Federal Home Loan Bank Borrowings

    85,000       75,000  

Accrued Interest Payable

    1,336       890  

Other Liabilities

    7,255       4,397  

Total Liabilities

    1,465,234       1,141,321  
                 

Commitments and Contingencies (See Note 7)

               
                 

SHAREHOLDERS' EQUITY

 

Preferred Stock, No Par Value; 5,000,000 Shares Authorized

    -       -  

Common Stock, $1 Par Value; 50,000,000 Shares Authorized; 11,533,721 and 10,232,495 Shares Issued and Outstanding at September 30, 2018 and December 31, 2017, respectively

    11,534       10,232  

Additional Paid-in Capital

    171,345       144,172  

Retained Earnings

    35,460       27,175  

Accumulated Other Comprehensive Loss

    (5,378 )     (1,644 )

Total Shareholders' Equity

    212,961       179,935  

Total Liabilities and Shareholders' Equity

  $ 1,678,195     $ 1,321,256  

 

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

 

   

For The Three Months Ended

September 30,

   

For The Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Interest Income:

                               

Interest and Fees on Loans

  $ 17,777     $ 11,433     $ 50,002     $ 34,972  

Interest and Dividends on Securities

    1,386       953       4,223       2,872  

Interest on Federal Funds Sold and Due From Banks

    162       38       417       85  

Total Interest Income

    19,325       12,424       54,642       37,929  

Interest Expense:

                               

Interest on Deposits

    3,127       1,665       7,980       4,514  

Interest on Borrowings

    562       226       1,550       632  

Total Interest Expense

    3,689       1,891       9,530       5,146  

Net Interest Income

    15,636       10,533       45,112       32,783  

Provision for Loan Losses

    503       247       1,451       1,907  

Net Interest Income after Provision for Loan Losses

    15,133       10,286       43,661       30,876  

Other Income:

                               

Service Charges on Deposit Accounts

    695       542       1,941       1,579  

Gain (Loss) on Sales of Securities

    -       31       -       31  

Other Income

    852       668       3,347       2,535  

Total Other Income

    1,547       1,241       5,288       4,145  

Other Expenses:

                               

Salaries and Employee Benefits

    7,190       5,559       20,418       15,940  

Occupancy and Equipment Expense

    1,522       1,139       4,342       3,498  

Other Expenses

    3,158       2,516       11,079       7,656  

Total Other Expenses

    11,870       9,214       35,839       27,094  

Income Before Income Taxes

    4,810       2,313       13,110       7,927  

Provision for Income Taxes

    910       631       2,464       2,217  

Net Income

  $ 3,900     $ 1,682     $ 10,646     $ 5,710  

Earnings Per Share:

                               

Basic

  $ 0.34     $ 0.24     $ 0.99     $ 0.82  

Diluted

  $ 0.33     $ 0.23     $ 0.95     $ 0.78  

 

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

 

   

For The Three Months Ended

September 30,

   

For The Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Consolidated Net Income

  $ 3,900     $ 1,682     $ 10,646     $ 5,710  
                                 

Other Comprehensive Income (Loss):

                               

Unrealized Gain (Loss) on Investment Securities

    (1,010 )     (166 )     (4,727 )     2,909  

Reclassification Adjustment for Gains (Loss) included in Net Income

    -       31       -       31  

Income Tax Effect

    212       46       993       (1,000 )

Other Comprehensive Income (Loss)

    (798 )     (89 )     (3,734 )     1,940  

Consolidated Comprehensive Income (Loss)

  $ 3,102     $ 1,593     $ 6,912     $ 7,650  

  

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(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, 2016

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

Comprehensive Income:

                                       

Net Income

    -       -       5,710       -       5,710  

Other Comprehensive Income (Loss)

    -       -       -       1,940       1,940  

Cash Dividends Declared, $0.17 Per Share

    -       -       (1,178 )     -       (1,178 )

Stock Based Compensation Cost

    18       43       -       -       61  

Stock Repurchase

    (2 )     (40 )     9       -       (33 )

Balances at September 30, 2017

  $ 6,933     $ 85,136     $ 28,380     $ (390 )   $ 120,059  
                                         

Balances at December 31, 2017

  $ 10,232     $ 144,172     $ 27,175     $ (1,644 )   $ 179,935  

Comprehensive Income:

                                       

Net Income

    -       -       10,646       -       10,646  

Other Comprehensive Income (Loss)

    -       -       -       (3,734 )     (3,734 )

Cash Dividends Declared, $0.22 Per Share

    -       -       (2,358 )     -       (2,358 )

Stock Issuance

    1,257       26,404       -       -       27,661  

Stock Based Compensation Cost

    49       851       -       -       900  

Surrendered Shares of Stock Based Compensation

    (4 )     (82 )     (3 )     -       (89 )

Balances at September 30, 2018

  $ 11,534     $ 171,345     $ 35,460     $ (5,378 )   $ 212,961  

 

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

   

For The Nine Months Ended

September 30,

 
   

2018

   

2017

 

Cash Flows From Operating Activities:

               

Consolidated Net Income

  $ 10,646     $ 5,710  

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

               

Provision for Loan Losses

    1,451       1,907  

Depreciation and Amortization

    853       911  

Net Accretion of Purchase Accounting Valuations

    (600 )     (3,933 )

Noncash Compensation (Income) Expense

    811       61  

Net Amortization of Securities

    1,574       1,347  

Gain on Sales of Securities

    -       (31 )

Noncash Income on Other Equity Securities

    (292 )     (224 )

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

    (14 )     336  

Increase in Cash Value of Life Insurance

    (501 )     (472 )

Provision (Credit) for Deferred Income Taxes

    (405 )     997  

Changes in Assets and Liabilities:

               

(Increase) Decrease in Accrued Interest Receivable

    77       (134 )

(Increase) Decrease in Other Assets

    1,523       (192 )

Increase (Decrease) in Accrued Interest Payable

    216       (18 )

Increase in Other Liabilities

    1,230       893  

Net Cash Provided by Operating Activities

    16,569       7,158  
                 

Cash Flows From Investing Activities:

               

Purchases of Securities Available for Sale

    (4,531 )     (8,104 )

Proceeds from Maturities / Sales of Securities Available for Sale

    8,843       6,579  

Proceeds from Paydowns of Securities Available for Sale

    24,817       15,342  

Net Cash Paid in Merger

    (49,796 )     -  

Purchases of Other Equity Securities

    (1,175 )     (2,440 )

Redemption of Other Equity Securities

    312       189  

Net Increase in Loans

    (129,308 )     (124,501 )

Purchases of Premises and Equipment

    (790 )     (429 )

Proceeds from Sales of Other Real Estate

    109       705  

Net (Increase) Decrease in Federal Funds Sold

    12,386       (415 )

Net Cash Used in Investing Activities

    (139,133 )     (113,074 )

 

(CONTINUED)

 

 

 

 

 

   

For The Nine Months Ended

September 30,

 
   

2018

   

2017

 

Cash Flows From Financing Activities:

               

Net Increase in Deposits

    34,587       82,299  

Net Decrease in Securities Sold Under Agreements to Repurchase

    (3,676 )     206  

Net Advances on Federal Home Loan Bank Borrowings

    5,000       18,959  

Net Proceeds (Repayments) from Long Term Borrowings

    (300 )     (300 )

Proceeds from Issuance of Common Stock

    27,661       -  

Repurchase of Common Stock

    -       (33 )

Payment of Dividends on Common Stock

    (2,358 )     (1,178 )

Net Cash Provided by Financing Activities

    60,914       99,953  

Net Increase (Decrease) in Cash and Cash Equivalents

    (61,650 )     (5,963 )

Cash and Cash Equivalents at Beginning of Period

    107,591       42,173  

Cash and Cash Equivalents at End of Period

  $ 45,941     $ 36,210  
                 

Supplemental Disclosures for Cash Flow Information:

               

Cash Payments for:

               

Interest on Deposits

  $ 7,564     $ 4,532  

Interest on Borrowings

  $ 1,520     $ 632  

Income Tax Payments

  $ 2,205     $ 1,350  
                 

Supplemental Schedule for Noncash Investing and Financing Activities:

               

Change in the Unrealized Gain (Loss) on Securities Available for Sale

  $ (4,727 )   $ 2,940  

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

  $ 993     $ (1,000 )

Transfer of Loans to Other Real Estate

  $ 319     $ 287  

Transfer of Premises and Equipment to Other Real Estate

  $ 1,373     $ 175  

 

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

 

 

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 the Bank’s wholly-owned subsidiary, Business First Insurance, LLC. The Bank operates out of branch locations in markets across Louisiana and Texas. As a state bank, it is subject to regulation by the Office of Financial Institutions, State of Louisiana, 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.

 

 

Note 2 – Reclassifications –

 

Certain reclassifications may have been made to conform to the classifications adopted for reporting in 2018. These reclassifications have no effect on previously reported net income.

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 3Mergers and Acquisitions

 

On January 1, 2018, the Company completed the acquisition of Minden Bancorp, Inc. (MBI), and its wholly-owned subsidiary, MBL Bank, located in Minden, Louisiana, further increasing its presence in the Northwest Louisiana region. The Company paid an aggregate cash consideration equal to $56.2 million, or approximately $23.20 in exchange for each share of MBI common stock outstanding immediately prior to the effective time of the acquisition. At December 31, 2017, MBI had approximately $317.1 million in total assets, $192.7 million in net loans, $264.0 million in total deposits, and $30.2 million in total shareholders’ equity, and was the leading financial institution in Webster Parish, part of the Shreveport-Bossier City MSA, through its two banking center locations.

 

Cost and Allocation of Purchase Price for Minden Bancorp, Inc. (MBI):

 

(Dollars in thousands, except per share data)

 

Purchase Price:

               

MBI Shares Outstanding at December 31, 2017

    2,407,627          

MBI Restricted Stock Awards Outstanding at December 31, 2017

    1,480          

MBI Shares Cashed Out Under Terms of Merger

            2,409,107  

Exchange Ratio

            23.20  

Cash Paid to Shareholders for Shares of Common Stock

          $ 55,891  

MBI Stock Options Outstanding at December 31, 2017 17,822 Shares at $31.50 Less Strike Price

               

Cash Paid on MBI Options

            296  

Total Purchase Price

          $ 56,187  

Net Assets Acquired:

               

Cash and Cash Equivalents

          $ 15,891  

Securities Available for Sale

            99,867  

Loans and Leases Receivable

            192,714  

Premises and Equipment, Net

            2,678  

Cash Value of Life Insurance

            741  

Core Deposit Intangible

            2,494  

Other Assets

            3,055  

Total Assets

            317,440  
                 

Deposits

            263,951  

Borrowings

            21,047  

Other Liabilities

            1,858  

Total Liabilities

            286,856  

Net Assets Acquired

            30,584  

Goodwill Resulting from Merger

          $ 25,603  

 

The following unaudited supplemental pro forma information is presented to reflect estimated results assuming MBI was acquired as of January 1, 2017. These unaudited pro forma results are not necessarily indicative of the operating results that the Company would have achieved had the acquisition been completed as of January 1, 2017 and should not be considered representative of future operating results.

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

   

For The Three Months Ended September 30,

   

For The Nine Months Ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 
   

(Dollars in thousands)

   

(Dollars in thousands)

 
   

(except per share data)

   

(except per share data)

 
                                 

Interest Income

  $ 19,325     $ 16,062     $ 54,642     $ 48,620  

Interest Expense

    3,689       2,259       9,530       6,246  

Net Interest Income

    15,636       13,803       45,112       42,374  

Provision for Loan Losses

    503       314       1,451       2,005  

Net Interest Income after Provision for Loan Losses

    15,133       13,489       43,661       40,369  

Noninterest Income

    1,547       1,140       5,288       4,439  

Noninterest Expense

    11,870       10,375       35,839       30,631  

Income Before Income Taxes

    4,810       4,254       13,110       14,177  

Income Tax Expense

    910       1,207       2,464       4,070  

Net Income

  $ 3,900     $ 3,047     $ 10,646     $ 10,107  
                                 

Earnings Per Common Share

                               

Basic

  $ 0.34     $ 0.30     $ 0.99     $ 0.99  

Diluted

  $ 0.33     $ 0.29     $ 0.95     $ 0.95  

 

On June 1, 2018, we entered into an Agreement and Plan of Reorganization (the “Reorganization Agreement”) with Richland State Bancorp, Inc. (“RSBI”), the holding company for Richland State Bank, Richland, Louisiana. In connection with the acquisition of RSBI, on June 4, 2018 we completed an offering of 1,207,500 shares of our common stock at a public offering price of $24.00 per share. The aggregate offering price totaled $29.0 million, and the aggregate underwriting discount and commission was $1.7 million. The operating results of RSBI are not included in the above pro forma results.

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 Ended

September 30,

   

For The Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 
   

(Dollars in thousands, except

per share data)

   

(Dollars in thousands, except

per share data)

 

Numerator:

                               

Net Income Available to Common Shares

  $ 3,900     $ 1,682     $ 10,646     $ 5,710  

Denominator:

                               

Weighted Average Common Shares Outstanding

    11,533,374       6,932,570       10,795,989       6,926,684  

Dilutive Effect of Stock Options and Warrants

    460,360       382,782       460,360       382,782  

Weighted Average Dilutive Common Shares

    11,993,734       7,315,352       11,256,349       7,309,466  
                                 

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

  $ 0.34     $ 0.24     $ 0.99     $ 0.82  
                                 

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

  $ 0.33     $ 0.23     $ 0.95     $ 0.78  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 5 – Securities –

 

The amortized cost and fair values of securities available for sale as of September 30, 2018 and December 31, 2017 are summarized as follows:

 

   

September 30, 2018

 
   

(Dollars in thousands)

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

U.S. Government Agencies

  $ 11,675     $ -     $ 323     $ 11,352  

Corporate Securities

    13,057       62       230       12,889  

Mortgage-Backed Securities

    135,218       2       4,919       130,301  

Municipal Securities

    89,651       78       1,406       88,323  

Other Securities

    791       -       71       720  

Total Securities Available for Sale

  $ 250,392     $ 142     $ 6,949     $ 243,585  

 

   

December 31, 2017

 
   

(Dollars in thousands)

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

U.S. Government Agencies

  $ 9,008     $ 13     $ 68     $ 8,953  

Corporate Securities

    13,074       59       92       13,041  

Mortgage-Backed Securities

    81,763       2       1,824       79,941  

Municipal Securities

    76,553       353       427       76,479  

Other Securities

    831       -       97       734  

Total Securities Available for Sale

  $ 181,229     $ 427     $ 2,508     $ 179,148  

 

 

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 September 30, 2018 and December 31, 2017, 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.

 

   

September 30, 2018

 
   

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

  $ 9,515     $ 253     $ 1,837     $ 70     $ 11,352     $ 323  

Corporate Securities

    2,020       2       2,273       228       4,293       230  

Mortgage-Backed Securities

    66,459       1,968       63,492       2,951       129,951       4,919  

Municipal Securities

    56,312       961       13,167       445       69,479       1,406  

Other Securities

    -       -       720       71       720       71  

Total Securities Available for Sale

  $ 134,306     $ 3,184     $ 81,489     $ 3,765     $ 215,795     $ 6,949  

 

   

December 31, 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

  $ 4,136     $ 56     $ 2,004     $ 12     $ 6,140     $ 68  

Corporate Securities

    4,448       69       2,007       23       6,455       92  

Mortgage-Backed Securities

    8,320       71       71,182       1,753       79,502       1,824  

Municipal Securities

    25,798       168       11,927       259       37,725       427  

Other Securities

    -       -       734       97       734       97  

Total Securities Available for Sale

  $ 42,702     $ 364     $ 87,854     $ 2,144     $ 130,556     $ 2,508  

 

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.

 

 

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 September 30, 2018 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

  $ 12,084     $ 12,055  

One to Five Years

    49,530       49,081  

Over Five to Ten Years

    118,010       114,140  

Over Ten Years

    70,768       68,309  

Total Securities Available for Sale

  $ 250,392     $ 243,585  

 

 

Note 6 – Loans and the Allowance for Loan Losses –

 

Loans receivable at September 30, 2018 and December 31, 2017 are summarized as follows:

 

   

September 30,

   

December 31,

 
   

2018

   

2017

 
   

(Dollars in thousands)

 

Real estate loans:

               

Construction and land

  $ 196,404     $ 143,535  

Farmland

    26,882       10,480  

1-4 family residential

    234,690       157,505  

Multi-family residential

    22,109       20,717  

Nonfarm nonresidential

    432,306       337,699  

Commercial

    317,889       254,427  

Consumer

    67,679       50,921  

Total loans held for investment

    1,297,959       975,284  
                 

Less:

               

Allowance for loan losses

    (10,273 )     (8,765 )

Net loans

  $ 1,287,686     $ 966,519  

 

 

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 September 30, 2018 and December 31, 2017.

 

Net deferred loan origination fees were $1.4 million and $1.3 million at September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017, overdrafts of $159,000 and $129,000, 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 $129.2 million and $82.4 million at September 30, 2018 and December 31, 2017, 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.

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Loans acquired in business combinations 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 September 30, 2018 includes $163.3 million of loans acquired in acquisitions that were recorded at fair value as of the acquisition date. Included in the acquired balances at September 30, 2018 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 $5.4 million and acquired performing loans not accounted for under ASC 310-30 totaling $160.6 million with a related purchase discount of $2.7 million.

 

Total loans held for investment at December 31, 2017 includes $46.1 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, 2017 were acquired impaired loans with a net carrying amount of $696,000 and acquired performing loans totaling $47.2 million with a related purchase discount of $1.8 million.

 

The following tables set forth, as of September 30, 2018 and December 31, 2017, 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

 

   

September 30, 2018

 
   

(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

  $ 1,421     $ 76     $ 1,284     $ 144     $ 2,323     $ 3,147     $ 370     $ 8,765  

Charge-offs

    (90 )     -       (290 )     -       -       -       (73 )     (453 )

Recoveries

    398       -       11       -       13       25       63       510  

Provision

    (95 )     26       528       1       236       668       87       1,451  

Ending Balance

  $ 1,634     $ 102     $ 1,533     $ 145     $ 2,572     $ 3,840     $ 447     $ 10,273  

Ending Balance:

                                                               

Individually evaluated for impairment

  $ -     $ -     $ 105     $ -     $ 54     $ 214     $ -     $ 373  

Collectively evaluated for impairment

  $ 1,634     $ 102     $ 1,428     $ 145     $ 2,518     $ 3,626     $ 447     $ 9,900  

Purchased Credit Impaired (1)

  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  

Loans receivable:

                                                               

Ending Balance

  $ 196,404     $ 26,882     $ 234,690     $ 22,109     $ 432,306     $ 317,889     $ 67,679     $ 1,297,959  

Ending Balance:

                                                               

Individually evaluated for impairment

  $ 7     $ -     $ 2,895     $ -     $ 4,123     $ 5,377     $ 103     $ 12,505  

Collectively evaluated for impairment

  $ 196,397     $ 26,882     $ 231,628     $ 22,109     $ 422,980     $ 312,512     $ 67,576     $ 1,280,084  

Purchased Credit Impaired (1)

  $ -     $ -     $ 167     $ -     $ 5,203     $ -     $ -     $ 5,370  

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

   

December 31, 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 )     -       (184 )     -       (617 )     (2,945 )     (36 )     (3,784 )

Recoveries

    1       -       48       -       23       40       38       150  

Provision

    489       1       192       (28 )     603       3,013       (33 )     4,237  

Ending Balance

  $ 1,421     $ 76     $ 1,284     $ 144     $ 2,323     $ 3,147     $ 370     $ 8,765  

Ending Balance:

                                                               

Individually evaluated for impairment

  $ 36     $ -     $ 125     $ -     $ 46     $ 329     $ -     $ 536  

Collectively evaluated for impairment

  $ 1,385     $ 76     $ 1,125     $ 144     $ 2,277     $ 2,818     $ 370     $ 8,195  

Purchased Credit Impaired (1)

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

Loans receivable:

                                                               

Ending Balance

  $ 143,535     $ 10,480     $ 157,505     $ 20,717     $ 337,699     $ 254,427     $ 50,921     $ 975,284  

Ending Balance:

                                                               

Individually evaluated for impairment

  $ 92     $ -     $ 2,817     $ -     $ 5,831     $ 4,268     $ 441     $ 13,449  

Collectively evaluated for impairment

  $ 143,443     $ 10,480     $ 154,480     $ 20,717     $ 331,380     $ 250,159     $ 50,480     $ 961,139  

Purchased Credit Impaired (1)

  $ -     $ -     $ 208     $ -     $ 488     $ -     $ -     $ 696  

 

(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.

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

As of September 30, 2018 and December 31, 2017, the credit quality indicators, disaggregated by class of loan, are as follows:

 

Credit Quality Indicators

 

   

September 30, 2018

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands)

 

Real Estate Loans:

                                       

Construction and land

  $ 193,894     $ 1,208     $ 1,295     $ 7     $ 196,404  

Farmland

    26,880       2       -       -       26,882  

1-4 family residential

    225,196       4,616       2,384       2,494       234,690  

Multi-family residential

    22,072       -       37       -       22,109  

Nonfarm nonresidential

    414,530       5,786       5,926       6,064       432,306  

Commercial

    303,204       3,960       8,052       2,673       317,889  

Consumer

    66,639       852       85       103       67,679  

Total

  $ 1,252,415     $ 16,424     $ 17,779     $ 11,341     $ 1,297,959  

 

   

December 31, 2017

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands)

 

Real Estate Loans:

                                       

Construction and land

  $ 141,128     $ 1,953     $ 362     $ 92     $ 143,535  

Farmland

    10,480       -       -       -       10,480  

1-4 family residential

    148,845       4,657       1,574       2,429       157,505  

Multi-family residential

    20,677       -       40       -       20,717  

Nonfarm nonresidential

    325,216       4,861       1,687       5,935       337,699  

Commercial

    228,157       20,681       1,951       3,638       254,427  

Consumer

    49,787       672       21       441       50,921  

Total

  $ 924,290     $ 32,824     $ 5,635     $ 12,535     $ 975,284  

 

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.

 

 

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 September 30, 2018 and December 31, 2017. All loans greater than 90 days past due are generally placed on non-accrual status.

 

Aged Analysis of Past Due Loans Receivable

 

   

September 30, 2018

 
   

(Dollars in thousands)

 
   

30-59 Days

Past Due

   

60-89 Days

Past Due

   

Greater

Than 90 Days Past Due

   

Total

Past Due

   

Current

   

Total Loans Receivable

   

Recorded Investment Over 90 Days Past Due and Still Accruing

 

Real Estate Loans:

                                                       

Construction and land

  $ 42     $ 20     $ 29     $ 91     $ 196,313     $ 196,404     $ 27  

Farmland

    -       -       -       -       26,882       26,882       -  

1-4 family residential

    1,251       356       1,175       2,782       231,908       234,690       122  

Multi-family residential

    -       -       -       -       22,109       22,109       -  

Nonfarm nonresidential

    251       -       3,514       3,765       428,541       432,306       -  

Commercial

    507       297       2,290       3,094       314,795       317,889       78  

Consumer

    119       71       107       297       67,382       67,679       29  

Total

  $ 2,170     $ 744     $ 7,115     $ 10,029     $ 1,287,930     $ 1,297,959     $ 256  

 

   

December 31, 2017

 
   

(Dollars in thousands)

 
   

30-59 Days

Past Due

   

60-89 Days

Past Due

   

Greater

Than 90 Days Past Due

   

Total

Past Due

   

Current

   

Total Loans Receivable

   

Recorded Investment Over 90 Days Past Due and Still Accruing

 

Real Estate Loans:

                                                       

Construction and land

  $ -     $ -     $ 91     $ 91     $ 143,444     $ 143,535     $ -  

Farmland

    -       -       -       -       10,480       10,480       -  

1-4 family residential

    470       319       939       1,728       155,777       157,505       73  

Multi-family residential

    -       -       -       -       20,717       20,717       -  

Nonfarm nonresidential

    2,344       103       3,329       5,776       331,923       337,699       -  

Commercial

    -       -       3,274       3,274       251,153       254,427       59  

Consumer

    6       -       367       373       50,548       50,921       -  

Total

  $ 2,820     $ 422     $ 8,000     $ 11,242     $ 964,042     $ 975,284     $ 132  

 

 

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 September 30, 2018 and December 31, 2017. 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 $186,000 and $257,000 for the nine months ended September 30, 2018 and 2017, respectively.

 

   

September 30, 2018

 
   

(Dollars in thousands)

 
           

Unpaid

           

Average

 
   

Recorded

   

Principal

   

Related

   

Recorded

 
   

Investment

   

Balance

   

Allowance

   

Investment

 

With an allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ -     $ -     $ -     $ 30  

Farmland

    -       -       -       -  

1-4 family residential

    372       452       105       289  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    463       509       54       339  

Other Loans:

                               

Commercial

    378       427       214       428  

Consumer

    -       -       -       -  

Total

  $ 1,213     $ 1,388     $ 373     $ 1,086  
                                 

With no allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ 7     $ 35     $ -     $ 12  

Farmland

    -       -       -       -  

1-4 family residential

    2,523       3,018       -       2,728  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    3,660       3,728       -       5,764  

Other Loans:

                               

Commercial

    4,999       6,857       -       5,689  

Consumer

    103       145       -       312  

Total

  $ 11,292     $ 13,783     $ -     $ 14,505  
                                 

Total Impaired Loans:

                               

Real Estate Loans:

                               

Construction and land

  $ 7     $ 35     $ -     $ 42  

Farmland

    -       -       -       -  

1-4 family residential

    2,895       3,470       105       3,017  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    4,123       4,237       54       6,103  

Other Loans:

                               

Commercial

    5,377       7,284       214       6,117  

Consumer

    103       145       -       312  

Total

  $ 12,505     $ 15,171     $ 373     $ 15,591  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

   

December 31, 2017

 
   

(Dollars in thousands)

 
           

Unpaid

           

Average

 
   

Recorded

   

Principal

   

Related

   

Recorded

 
   

Investment

   

Balance

   

Allowance

   

Investment

 

With an allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ 90     $ 90     $ 36     $ 74  

Farmland

    -       -       -       -  

1-4 family residential

    491       540       125       787  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    316       341       46       462  

Other Loans:

                               

Commercial

    539       572       329       502  

Consumer

    -       -       -       5  

Total

  $ 1,436     $ 1,543     $ 536     $ 1,830  
                                 

With no allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ 3     $ 9     $ -     $ 44  

Farmland

    -       -       -       -  

1-4 family residential

    2,325       2,744       -       2,188  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    5,515       5,653       -       3,402  

Other Loans:

                               

Commercial

    3,729       5,581       -       5,898  

Consumer

    441       472       -       243  

Total

  $ 12,013     $ 14,459     $ -     $ 11,775  
                                 

Total Impaired Loans:

                               

Real Estate Loans:

                               

Construction and land

  $ 93     $ 99     $ 36     $ 118  

Farmland

    -       -       -       -  

1-4 family residential

    2,816       3,284       125       2,975  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    5,831       5,994       46       3,864  

Other Loans:

                               

Commercial

    4,268       6,153       329       6,400  

Consumer

    441       472       -       248  

Total

  $ 13,449     $ 16,002     $ 536     $ 13,605  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The Company elected to account for certain loans acquired in business combinations 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 mergers and, as a result, no accretable yield was recognized at acquisition for the 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, 2016

  $ 1,776  

Payments received, net of discounts realized

    (924 )

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

    511  

Charge-offs

    (667 )

Carrying amount - December 31, 2017

    696  

Carrying amount of purchased impaired credits acquired in MBI acquisition

    4,814  

Payments received, net of discounts realized

    (140 )

Carrying amount - September 30, 2018

  $ 5,370  

 

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 September 30, 2018 and December 31, 2017, 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.

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following tables present informative data regarding troubled debt restructurings as of September 30, 2018 and December 31, 2017. The Bank had $3.3 million in troubled debt restructurings that had subsequently defaulted during the year ended December 31, 2017 and $79,000 that had subsequently defaulted during the nine months ended September 30, 2018.

 

Modifications as of September 30, 2018:

                       
           

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

    1     $ 524     $ 401  

Nonfarm nonresidential

    3       2,412       2,370  

Other Loans:

                       

Commercial

    7       5,924       3,602  

Total

    11     $ 8,860     $ 6,373  

 

Modifications as of December 31, 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

    2     $ 703     $ 455  

Other Loans:

                       

Commercial

    4       4,498       2,605  

Total

    6     $ 5,201     $ 3,060  

 

 

Note 7 – Commitments and Contingencies

 

In the normal course of business, the Bank is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of credit which are not included in the accompanying financial statements. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.

 

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual amount of those instruments. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. The Bank uses the same credit policies in making such commitments and conditional obligations as it does for instruments that are included in the balance sheet. In the normal course of business, the Bank has made commitments to extend credit of approximately $274.0 million and standby and commercial letters of credit of approximately $11.3 million at September 30, 2018.

 

The Bank leases certain branch offices through non-cancelable operating leases with terms that range from one to ten years and contain various renewal options for certain of the leases. Rental expense under these agreements was $1.8 million and $1.3 million for the nine months ended September 30, 2018 and 2017, respectively.

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Future minimum lease payments under these leases are as follows:

 

   

(Dollars in thousands)

 

October 1, 2018 through September 30, 2019

  $ 2,571  

October 1, 2019 through September 30, 2020

    1,506  

October 1, 2020 through September 30, 2021

    1,257  

October 1, 2021 through September 30, 2022

    1,068  

October 1, 2022 and Thereafter

    5,500  

Total Future Minimum Lease Payments

  $ 11,902  

 

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management and counsel, the disposition or ultimate resolution of such proceedings would not have a material adverse effect on the Company’s financial statements.

 

 

 

Note 8 – 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.

 

 

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 September 30, 2018 and December 31, 2017. The Bank had a maturity of $335,000 and paydowns of $293,000 on municipal securities in the Level 3 inputs during the nine months ended September 30, 2018. 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)

 

September 30, 2018

                               

Available for Sale:

                               

U.S. Government Agency Securities

  $ 11,352     $ -     $ 11,352     $ -  

Corporate Securities

    12,889       -       12,889       -  

Mortgage-Backed Securities

    130,301       -       130,301       -  

Municipal Securities

    88,323       -       80,289       8,034  

Other Securities

    720       -       720       -  

Total

  $ 243,585     $ -     $ 235,551     $ 8,034  
                                 
                                 

December 31, 2017

                               

Available for Sale:

                               

U.S. Government Agency Securities

  $ 8,953     $ -     $ 8,953     $ -  

Corporate Securities

    13,041       -       13,041       -  

Mortgage-Backed Securities

    79,941       -       79,941       -  

Municipal Securities

    76,479       -       67,817       8,662  

Other Securities

    734       -       734       -  

Total

  $ 179,148     $ -     $ 170,486     $ 8,662  

 

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.

 

 

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)

 

September 30, 2018

                               

Assets:

                               

Impaired Loans

  $ 17,503     $ -     $ 17,503     $ -  

Repossessed Assets

    1,834       -       1,834       -  

Total

  $ 19,337     $ -     $ 19,337     $ -  
                                 

December 31, 2017

                               

Assets:

                               

Impaired Loans

  $ 13,576     $ -     $ 13,576     $ -  

Repossessed Assets

    227       -       227       -  

Total

  $ 13,803     $ -     $ 13,803     $ -  

 

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.

 

 

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 September 30, 2018 and December 31, 2017 are as follows:

 

   

Carrying

   

Total

                         
   

Amount

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

September 30, 2018

                                       

Financial Assets:

                                       

Cash and Short-Term Investments

  $ 51,875     $ 51,875     $ 51,875     $ -     $ -  

Securities

    243,585       243,585       -       235,551       8,034  

Mortgage Loans Held for Sale

    280       280       -       280       -  

Loans - Net

    1,287,686       1,271,359       -       -       1,271,359  

Cash Value of BOLI

    24,442       24,442       -       24,442       -  

Other Equity Securities

    10,339       10,339       -       -       10,339  

Total

  $ 1,618,207     $ 1,601,880     $ 51,875     $ 260,273     $ 1,289,732  
                                         

Financial Liabilities:

                                       

Deposits

  $ 1,354,071     $ 1,344,936     $ -     $ -     $ 1,344,936  

Borrowings

    102,572       106,876       -       106,876       -  

Total

  $ 1,456,643     $ 1,451,812     $ -     $ 106,876     $ 1,344,936  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

   

Amount

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

December 31, 2017

                                       

Financial Assets:

                                       

Cash and Short-Term Investments

  $ 116,411     $ 116,411     $ 116,411     $ -     $ -  

Securities

    179,148       179,148       -       170,486       8,662  

Mortgage Loans Held for Sale

    201       201       -       201       -  

Loans - Net

    966,519       952,113       -       -       952,113  

Cash Value of BOLI

    23,200       23,200       -       23,200       -  

Other Equity Securities

    8,627       8,627       -       -       8,627  

Total

  $ 1,294,106     $ 1,279,700     $ 116,411     $ 193,887     $ 969,402  
                                         

Financial Liabilities:

                                       

Deposits

  $ 1,055,533     $ 1,046,096     $ -     $ -     $ 1,046,096  

Borrowings

    80,501       81,059       -       81,059       -  

Total

  $ 1,136,034     $ 1,127,155     $ -     $ 81,059     $ 1,046,096  

 

 

Note 9Recently Issued Accounting Pronouncements

 

In January 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-01, 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 did not have a material impact on the Company’s consolidated financial statements at September 30, 2018.

 

 

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 Company is currently assessing the amendment but does not anticipate it will have a material impact on its 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. Management is currently evaluating the potential impact of ASU 2016-13 on the Company’s consolidated financial statements. The adoption of this ASU may have a material effect on the Company’s consolidated financial statements

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which introduces amendments intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments will be applied prospectively and are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those periods. The adoption of this ASU is not expected to have a significant impact on the Company’s 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. Based on recent goodwill impairment tests, which did not require the application of Step 2, the Company does not expect the adoption of this ASU to have any immediate impact on the 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. This guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, which comprises a significant portion of our revenue stream. This ASU was effective on January 1, 2018. The Company did not identify any material changes to the timing of revenue recognition.

 

 

 

Item 2.

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

 

FORWARD-LOOKING STATEMENTS

 

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 consolidated subsidiaries, including Business First Bank, which we sometimes refer to as “the Bank”, unless the context indicates otherwise.

 

The information contained in this Form 10-Q is accurate only as of the date of this form and the dates specified herein.

 

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:

 

 

risks related to the integration of any acquired businesses, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the need for additional capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions;

 

 

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;

 

 

economic risks posed by our geographic concentration in Louisiana and the Dallas/Fort Worth metroplex;

 

 

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 volatility in oil prices and downturn in the energy industry that impact certain of our borrowers and investments that operate within, or are backed by collateral associated with, the energy industry;

 

 

volatility and direction of interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations;

 

 

interest rate risk associated with our business;

 

 

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

 

 

increased competition in the financial services industry, particularly from regional and national institutions;

 

 

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;

 

 

changes in the value of collateral securing our loans;

 

 

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;

 

 

our ability to maintain important deposit customer relationships and our reputation;

 

 

 

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;

 

 

our ability to prudently manage our growth and execute our strategy;

 

 

risks associated with our acquisition and de novo branching strategy;

 

 

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 the laws, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters;

 

 

government intervention in the U.S. financial system;

 

 

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

 

 

natural disasters and adverse weather, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, 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. Additional information on these and other risk factors can be found in Item 1A. “Risk Factors” of this Report and in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission, and in “Risk Factors” in the Company’s prospectus supplement filed with the SEC on June 5, 2018 under Registration Statement on Form S-3 (No. 333-224692) and prospectus filed with the SEC on October 23, 2018 under Registration Statement on Form S-4 (No. 333-227085).

 

In the event that 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.

 

 

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, 2017 to September 30, 2018, and its results of operations for the three and nine months ended September 30, 2018. 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, 2017, 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 and Dallas, Texas. We currently operate out of seventeen full-service banking centers in markets across Louisiana and Texas. On January 1, 2018, we completed the acquisition of Minden Bancorp, Inc., or MBI, and its banking subsidiary MBL Bank, to further increase our presence in the Northwest Louisiana region. As of September 30, 2018, we had total assets of $1.7 billion, total loans of $1.3 billion, total deposits of $1.4 billion, and total shareholders’ equity of $213.0 million.

 

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.

 

Branch Locations

 

In March 2018, we closed a banking center in each of Zachary and Erwinville, Louisiana, which is expected to have a minimal impact on operations and customers.

 

In May 2018, we converted our Dallas, Texas loan production office into a full service banking center.

 

In June 2018, we converted our New Orleans, Louisiana loan production office into a full service banking center.

 

In September 2018, we closed a banking center in Baton Rouge, Louisiana, which is expected to have a minimal impact on operations and customers.

 

 

Other Developments

 

On April 9, 2018, our common stock was listed for trading on the NASDAQ Global Select Market. Prior to that time, there was no active public market for our common stock. Our common stock is listed for trading under the symbol “BFST”.

 

On June 1, 2018, we entered into an Agreement and Plan of Reorganization (the “Reorganization Agreement”) with Richland State Bancorp, Inc. (“RSBI”), the holding company for Richland State Bank, Richland, Louisiana. In connection with the acquisition of RSBI, on June 4, 2018 we completed an offering of 1,207,500 shares of our common stock at a public offering price of $24.00 per share. The aggregate offering price totaled $29.0 million, and the aggregate underwriting discount and commission was $1.7 million. The results of this agreement are not included throughout this report.

 

In July 2018, we successfully completed the MBL Bank system conversion without disruption to business operations or customers.

 

Financial Highlights

 

The financial highlights as of and for the three and nine months ended September 30, 2018 include:

 

 

Total assets of $1.7 billion, a $357.0 million, or 27.0%, increase from December 31, 2017.

 

 

Total loans held for investment of $1.3 billion, a $322.7 million, or 33.1%, increase from December 31, 2017.

 

 

Total deposits of $1.4 billion, a $298.5 million, or 28.3%, increase from December 31, 2017.

 

 

Net income of $3.9 million, a $2.2 million, or 131.9%, increase from the quarter ended September 30, 2017.

 

 

Net interest income of $15.6 million, an increase of $5.1 million, or 48.4%, from the three months ended September 30, 2017.

 

 

Allowance for loan and lease losses of 0.79% of total loans held for investment, compared to 0.90% as of December 31, 2017, and a ratio of non-performing loans to total loans held for investment of 0.89%, compared to 1.30% as of December 31, 2017.

 

 

Return on average assets of 0.87% over the first nine months of 2018, compared to 0.65% for the first nine months of 2017.

 

 

Return on average equity of 7.45% over the first nine months of 2018, compared to 6.51% for the first nine months of 2017.

 

 

Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 11.11%, 12.35%, 12.35% and 13.04%, respectively, compared to 13.53%, 14.49%, 14.49%, and 15.23%, respectively as of December 31, 2017.

 

 

Book value per share of $18.46, an increase of 5.0% from $17.58 at December 31, 2017.

 

 

Results of Operations for the Three and Nine Months Ended September 30, 2018 and 2017

 

Performance Summary

 

For the three months ended September 30, 2018, net income was $3.9 million, or $0.34 per basic share and $0.33 per diluted share, compared to net income of $1.7 million, or $0.24 per basic share and $0.23 per diluted share, for the three months ended September 30, 2017. Return on average assets, on an annualized basis, increased to 0.94% for the three months ended September 30, 2018, from 0.57% for the three months ended September 30, 2017. Return on average equity, on an annualized basis, increased to 7.37% for the three months ended September 30, 2018, as compared to 5.61% for the three months ended September 30, 2017.

 

For the nine months ended September 30, 2018, net income was $10.6 million, or $0.99 per basic share and $0.95 per diluted share, compared to net income of $5.7 million, or $0.82 per basic share and $0.78 per diluted share, for the nine months ended September 30, 2017. Return on average assets, on an annualized basis, increased to 0.87% for the nine months ended September 30, 2018, from 0.65% for the nine months ended September 30, 2017. Return on average equity, on an annualized basis, increased to 7.45% for the nine months ended September 30, 2018, as compared to 6.51% for the nine months ended September 30, 2017. The increase in net income for both the three and nine months ended September 30, 2018, compared to the same time periods in 2017, can primarily be attributed to the acquisition of MBI, growth of the loan portfolio, and the enactment of the Tax Cuts and Jobs Act which lowered the effective corporate tax rate.

 

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 September 30, 2018, net interest income totaled $15.6 million, and net interest margin and net interest spread were 4.05% and 3.70%, respectively, compared to $10.5 million, 3.82%, and 3.56%, respectively, for the three months ended September 30, 2017. The average yield on the loan portfolio was 5.65%, compared to 5.08% for the three months ended September 30, 2017, and the average yield on total interest-earning assets was 5.01%, compared to 4.50% for the three months ended September 30, 2017. These metrics were impacted during the three months ended September 30, 2017 by the sale of a participation interest in an impaired credit acquired from American Gateway in 2015. For the three months ended September 30, 2018, overall cost of funds (which includes noninterest-bearing deposits) increased 31 basis points compared to the three months ended September 30, 2017.

 

For the nine months ended September 30, 2018, net interest income totaled $45.1 million, and net interest margin and net interest spread were 4.00% and 3.72%, respectively, compared to $32.8 million, 4.06%, and 3.84%, respectively, for the nine months ended September 30, 2017. The average yield on the loan portfolio was 5.48%, compared to 5.38% for the nine months ended September 30, 2017, and the average yield on total interest-earning assets was 4.85%, compared to 4.70% for the nine months ended September 30, 2017. These metrics were impacted during the nine months ended September 30, 2017 by the sale of a participation interest in an impaired credit acquired from American Gateway in 2015. For the nine months ended September 30, 2018, overall cost of funds (which includes noninterest-bearing deposits) increased 23 basis points compared to the nine months ended September 30, 2017. Due to the continued impact of new loan growth and competitive deposit pricing, management continues to anticipate, and actively manage, pressure on net interest margin and net interest spread.

 

 

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 nine months ended September 30, 2018 and 2017, 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. Averages presented in the tables below, and throughout this report, are monthly averages.

 

   

For the Three Months Ended September 30,

 
   

2018

   

2017

 
   

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

  $ 1,258,060     $ 17,777       5.65 %   $ 899,739     $ 11,433       5.08 %

Securities available for sale

    253,902       1,386       2.18       193,509       953       1.97  

Interest-bearing deposits in other banks

    31,858       162       2.03       11,125       38       1.37  

Total interest-earning assets

    1,543,820       19,325       5.01       1,104,373       12,424       4.50  

Allowance for loan losses

    (9,945 )                     (9,121 )                

Noninterest-earning assets

    132,242                       92,301                  

Total assets

  $ 1,666,117     $ 19,325             $ 1,187,553     $ 12,424          
                                                 

Liabilities and Shareholders’ Equity

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 1,028,412     $ 3,127       1.22 %   $ 735,371     $ 1,665       0.91 %

Advances from Federal Home Loan Bank (“FHLB”)

    85,000       506       2.38       65,710       182       1.11  

Other borrowings

    17,484       56       1.28       6,609       44       2.66  

Total interest-bearing liabilities

    1,130,896       3,689       1.31       807,690       1,891       0.94  
                                                 

Noninterest-bearing liabilities:

                                               

Noninterest-bearing deposits

    315,111                       253,866                  

Other liabilities

    8,479                       6,068                  

Total noninterest-bearing liabilities

    323,590                       259,934                  

Shareholders’ equity

    211,631                       119,929                  

Total liabilities and shareholders’ equity

  $ 1,666,117                     $ 1,187,553                  

Net interest rate spread

                    3.70 %                     3.56 %

Net interest income

          $ 15,636                     $ 10,533          

Net interest margin

                    4.05 %                     3.82 %

 

 

   

For the Nine Months Ended September 30,

 
   

2018

   

2017

 
   

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

  $ 1,216,395     $ 50,002       5.48 %   $ 867,036     $ 34,972       5.38 %

Securities available for sale

    254,035       4,223       2.22       197,759       2,872       1.94  

Interest-bearing deposits in other banks

    32,899       417       1.69       10,897       85       1.04  

Total interest-earning assets

    1,503,329       54,642       4.85       1,075,692       37,929       4.70  

Allowance for loan losses

    (9,516 )                     (8,545 )                

Noninterest-earning assets

    141,209                       98,178                  

Total assets

  $ 1,635,022     $ 54,642             $ 1,165,325     $ 37,929          
                                                 

Liabilities and Shareholders’ Equity

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 1,022,982     $ 7,980       1.04 %   $ 723,796     $ 4,514       0.83 %

Advances from Federal Home Loan Bank (“FHLB”)

    84,777       1,387       2.18       65,268       508       1.04  

Other borrowings

    18,478       163       1.18       6,705       124       2.47  

Total interest-bearing liabilities

    1,126,237       9,530       1.13       795,769       5,146       0.86  
                                                 

Noninterest-bearing liabilities:

                                               

Noninterest-bearing deposits

    309,526                       246,516                  

Other liabilities

    8,604                       6,101                  

Total noninterest-bearing liabilities

    318,130                       252,617                  

Shareholders’ equity

    190,655                       116,939                  

Total liabilities and shareholders’ equity

  $ 1,635,022                     $ 1,165,325                  

Net interest rate spread

                    3.72 %                     3.84 %

Net interest income

          $ 45,112                     $ 32,783          

Net interest margin

                    4.00 %                     4.06 %

 

 

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 September 30, 2018
compared to the Three Months Ended
September 30, 2017

 
   

Increase (Decrease) due to change in

 
   

Volume

   

Rate

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Interest-earning assets:

                       

Total loans

  $ 5,063     $ 1,281     $ 6,344  

Securities available for sale

    330       103       433  

Interest-earning deposits in other banks

    105       19       124  

Total increase in interest income

  $ 5,498     $ 1,403     $ 6,901  
                         

Interest-bearing liabilities:

                       

Interest-bearing deposits

  $ 891     $ 571     $ 1,462  

Advances from FHLB

    115       209       324  

Other borrowings

    35       (23 )     12  

Total increase in interest expense

    1,041       757       1,798  

Increase in net interest income

  $ 4,457     $ 646     $ 5,103  

 

 

   

For the Nine Months Ended September 30, 2018
compared to the Nine Months Ended
September 30, 2017

 
   

Increase (Decrease) due to change in

 
   

Volume

   

Rate

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Interest-earning assets:

                       

Total loans

  $ 14,361     $ 669     $ 15,030  

Securities available for sale

    936       415       1,351  

Interest-earning deposits in other banks

    279       53       332  

Total increase in interest income

  $ 15,576     $ 1,137     $ 16,713  
                         

Interest-bearing liabilities:

                       

Interest-bearing deposits

  $ 2,334     $ 1,132     $ 3,466  

Advances from FHLB

    319       560       879  

Other borrowings

    104       (65 )     39  

Total increase in interest expense

    2,757       1,627       4,384  

Increase in net interest income

  $ 12,819     $ (490 )   $ 12,329  

 

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 $503,000 for the three months ended September 30, 2018 and $247,000 for the same period in 2017. The higher provision for the three months ended September 30, 2018 compared to the same period in 2017 was generally attributable to higher loan growth and partially offset by increased credit quality. For the nine months ended September 30, 2018 and 2017, the provision for loan losses was $1.5 million and $1.9 million, respectively. The lower provision for the nine months ending September 30, 2018 compared to the same periods in 2017 was due to increasing our general reserves in 2017 related to our exposure in 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. The following tables present, for the periods indicated, the major categories of noninterest income:

 

   

For the Three Months Ended
September 30,

         
   

2018

   

2017

    Increase
(Decrease)
 
   

(Dollars in thousands) (Unaudited)

 

Noninterest income:

                       

Service charges on deposit accounts

  $ 695     $ 542     $ 153  

Debit card fee income

    219       159       60  

Automated Teller Machine (“ATM”) fees

    48       47       1  

Bank-owned life insurance income

    168       163       5  

Brokerage commissions

    (6 )     288       (294 )

Mortgage origination income

    77       61       16  

Correspondent bank income

    118       63       55  

Rental income

    166       139       27  

Loss on sale of other assets

    (103 )           (103 )

Gain (loss) on sales of other real estate owned

          (340 )     340  

Other

    165       119       46  

Total noninterest income

  $ 1,547     $ 1,241     $ 306  

 

   

For the Nine Months Ended
September 30,

         
   

2018

   

2017

    Increase
(Decrease)
 
   

(Dollars in thousands) (Unaudited)

 

Noninterest income:

                       

Service charges on deposit accounts

  $ 1,941     $ 1,579     $ 362  

Debit card fee income

    549       491       58  

Automated Teller Machine (“ATM”) fees

    223       145       78  

Bank-owned life insurance income

    502       472       30  

Brokerage commissions

    506       731       (225 )

Mortgage origination income

    191       161       30  

Correspondent bank income

    280       228       52  

Rental income

    495       184       311  

Loss on sale of other assets

    (56 )           (56 )

Gain (loss) on sales of other real estate owned

    23       (336 )     359  

Pass-through income (loss) from SBIC partnerships

    222       190       32  

Other

    412       300       112  

Total noninterest income

  $ 5,288     $ 4,145     $ 1,143  

 

Noninterest income for the three months ended September 30, 2018 increased $306,000, or 24.7%, to $1.5 million compared to noninterest income of $1.2 million for the same period in 2017. Noninterest income for the nine months ended September 30, 2018 increased $1.1 million, or 27.6%, to $5.3 million compared to noninterest income of $4.1 million for the same period in 2017. 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 $695,000 for the three months ended September 30, 2018, an increase of $153,000 over the same period in 2017. For the nine months ended September 30, 2018, service charges on deposit accounts were $1.9 million, an increase of $362,000 over the same period in 2017. The increase for both the three and nine months ended September 30, 2018, over the same periods in 2017, was primarily due to increases in deposit balances and accounts from the acquisition of MBI and organic growth.

 

 

ATM fees. We earn fee income as a result of noncustomer activity at our ATMs, and these fees represent a significant and predictable component of our noninterest income. ATM fees were $48,000 and $47,000 for the three months ended September 30, 2018 and 2017, respectively, representing an increase of $1,000, or 2.1%. For the nine months ended September 30, 2018 and 2017, ATM fees were $223,000 and $145,000, respectively, representing an increase of $78,000, or 53.8%. The increase was primarily due to the additional accounts from the acquisition of MBI.

 

Brokerage commissions. We earn commissions from brokerage services provided by our Wealth Solutions Group. Brokerage expense was $6,000 and commissions was $288,000 for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, commissions totaled $506,000 and $731,000, respectively. The decrease of $294,000 or 102.1% for the three months ended September 30, 2018 and $225,000 or 30.8% for the nine months ended September 30, 2018, over the prior year periods, was primarily due to restructuring our brokerage activities.

 

Rental income. We receive rental income from the sublease of our former corporate offices. Rental income totaled $166,000 and $139,000 during the three months ended September 30, 2018 and 2017, respectively, an increase of $27,000 over the prior year’s comparable period. For the nine months ended September 30, 2018 and 2017, rental income totaled $495,000 and $184,000, respectively, an increase of $311,000. The increase during both the three and nine months ended September 30, 2018, was primarily as a result of an additional sublease of our former corporate offices.

 

Loss on sales of other assets. During the first nine months of 2018, we closed three branch locations. As part of the process of closing those branches, we moved the buildings to other real estate owned and recognized $56,000 in net losses to mark the buildings to fair value.

 

Other. This category includes a variety of other income producing activities, including wire transfer fees, mortgage-related income, insurance commissions, credit card income and participation fee income. Other income increased $46,000, or 38.7%, for the three months ended September 30, 2018, compared to the same period in 2017. For the nine months ended September 30, 2018, compared to the same period in 2017, other income increased $112,000, or 37.3%. The increases in both the three and nine months ended September 30, 2018, compared to the same periods in 2017, is primarily due to increases in the use of these services by legacy MBI customers.

 

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 tables present, for the periods indicated, the major categories of noninterest expense:

 

   

For the Three Months Ended
September 30,

         
   

2018

   

2017

    Increase
(Decrease)
 
   

(Dollars in thousands) (Unaudited)

 

Salaries and employee benefits

  $ 7,190     $ 5,559     $ 1,631  

Non-staff expenses:

                       

Occupancy of bank premises

    914       617       297  

Depreciation and amortization

    417       351       66  

Data processing

    395       385       10  

FDIC assessment fees

    221       202       19  

Legal and other professional fees

    328       358       (30 )

Advertising and promotions

    290       271       19  

Utilities and communications

    294       242       52  

Ad valorem shares tax

    321       165       156  

Directors’ fees

    93       76       17  

Other real estate owned expenses and write-downs

          4       (4 )

Merger and conversion related expenses

    138             138  

Other

    1,269       984       285  

Total noninterest expense

  $ 11,870     $ 9,214     $ 2,656  

 

 

 

   

For the Nine Months Ended
September 30,

         
   

2018

   

2017

    Increase
(Decrease)
 
   

(Dollars in thousands) (Unaudited)

 

Salaries and employee benefits

  $ 20,418     $ 15,940     $ 4,478  

Non-staff expenses:

                       

Occupancy of bank premises

    2,632       1,864       768  

Depreciation and amortization

    1,246       1,119       127  

Data processing

    1,160       1,145       15  

FDIC assessment fees

    945       568       377  

Legal and other professional fees

    1,239       942       297  

Advertising and promotions

    817       934       (117 )

Utilities and communications

    835       733       102  

Ad valorem shares tax

    965       495       470  

Directors’ fees

    344       317       27  

Other real estate owned expenses and write-downs

    9       43       (34 )

Merger and conversion related expenses

    1,065             1,065  

Other

    4,164       2,994       1,170  

Total noninterest expense

  $ 35,839     $ 27,094     $ 8,745  

 

Noninterest expense for the three months ended September 30, 2018 increased $2.7 million, or 28.8%, to $11.9 million, compared to noninterest expense of $9.2 million for the same period in 2017. For the nine months ended September 30, 2018, noninterest expense increased $8.7 million, or 32.3%, to $35.8 million, compared to noninterest expense of $27.1 million for the same period in 2017. The most significant components of the increase 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, stock-based compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $7.2 million for the three months ended September 30, 2018, an increase of $1.6 million, or 29.3%, compared to the same period in 2017. For the nine months ended September 30, 2018, salaries and benefits were $20.4 million, an increase of $4.5 million, or 28.1%, compared to the same period in 2017. The increases were primarily due to additional hires for new positions, our merit increase cycle, higher commissions paid as a result of the increase in our brokerage services activity and the acquisition of MBI (including severance and retention payments related to the acquisition) and its legacy operations. As of September 30, 2018, we had 253 full-time equivalent employees, compared to 226 as of September 30, 2017.

 

Occupancy of bank premises. Expenses associated with occupancy of premises were $914,000 and $617,000 for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, occupancy and bank premises expenses were $2.6 million and $1.9 million, respectively. The increase for both the three and nine months ended September 30, 2018, compared to the same periods in 2017, is primarily due to increased rent expense on our corporate office location and the acquisition of MBI’s two legacy branch locations.

 

FDIC assessment fees. FDIC assessment fees were $221,000 and $202,000 for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, FDIC assessment fees were $945,000 and $568,000, respectively. The increase for both the three and nine months ended September 30, 2018, compared to the same periods in 2017, is primarily due to increased deposits from the acquisition of MBI and organic growth.

 

Legal and other professional fees. Other professional fees include audit, loan review, compliance, and other consultants. Legal and other professional fees were $328,000 and $358,000 for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, legal and other professional fees were $1.2 million and $942,000, respectively. Legal and other professional fees decreased $30,000, or 8.4%, during the three months ended September 30, 2018 due to legal fees in 2017 related to the acquisition of MBI. During the nine months ended September 30, 2018, legal and professional fees increased $297,000, or 31.5% compared to the same period in 2017, primarily due to the fees incurred in listing our common stock on NASDAQ, the acquisition of MBI and accompanying private placement of common stock, negotiation of the definitive agreement with Richland State Bancorp, Inc. and various other matters.

 

Advertising and promotions. Advertising and promotions expense was $290,000 and $271,000 for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, advertising and promotions expense was $817,000 and $934,000, respectively. The decrease for the nine months ended September 30, 2018 was primarily due to lower advertising costs, compared to the same period in 2017.

 

 

Ad valorem shares tax. Ad valorem shares tax expense was $321,000 and $165,000 for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, ad valorem shares tax expense was $965,000 and $495,000, respectively. The increase for both the three and nine months ended September 30, 2018, compared to the same period in 2017 was primarily due to our increased monthly accrual to compensate for anticipated higher taxes due to the acquisition of MBI and its legacy operations.

 

Merger and conversion related expenses. Merger and conversion related expenses for both the three and nine months ended September 30, 2018 were related to the acquisition of MBI and RSBI.

 

Other. This category includes various 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 increased $285,000 for the three months ended September 30, 2018 compared to the same period in 2017. For the nine months ended September 30, 2018, other noninterest expense increased $1.2 million compared to the same period in 2017. The increase in other expenses for the three months ended September 30, 2018, compared to the same period in 2017, was primarily due to the acquisition of MBI’s legacy operations. The increase in other expenses for the nine months ended September 30, 2018, compared to the same period in 2017, was primarily due to a $190,000 atypical franchise tax charge, NASDAQ listing fees of $166,000, and the acquisition of MBI’s legacy operations.

 

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 September 30, 2018, income tax expense totaled $910,000, an increase of $279,000, or 44.2%, compared to the same period in 2017. For the nine months ended September 30, 2018, income tax expense totaled $2.5 million, an increase of $247,000, or 11.1%, compared to the same period in 2017. Our effective tax rates for the three months ended September 30, 2018 and 2017 were 18.9% and 27.3%, respectively. For the nine months ended September 30, 2018 and 2017, our effective tax rates were 18.8% and 28.0%, respectively. The decrease in our effective tax rate for both the three and nine months ended September 30, 2018 is primarily due to a lower corporate tax rate from the enactment of the Tax Cuts and Jobs Act. Our effective tax rate for both periods was affected by tax-exempt income generated by municipal securities and BOLI and by other nondeductible expenses.

 

Financial Condition

 

Our total assets increased $356.9 million, or 27.0%, from December 31, 2017 to September 30, 2018, primarily due to the acquisition of MBI and organic growth.

 

Loan Portfolio

 

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

 

As of September 30, 2018, total loans held for investment were $1.3 billion, an increase of $322.7 million, or 33.1%, compared to December 31, 2017. The increase was primarily due to our continued loan penetration in our primary market areas and the acquisition of MBI. Additionally, $280,000 and $201,000 in mortgage loans were classified as loans held for sale as of September 30, 2018 and December 31, 2017, respectively.

 

Total loans held for investment as a percentage of total deposits were 95.9% and 92.4% as of September 30, 2018 and December 31, 2017, respectively. Total loans held for investment as a percentage of total assets were 77.3% and 73.8% as of September 30, 2018 and December 31, 2017, respectively.

 

 

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

 

   

As of September 30, 2018

(Unaudited)

   

As of December 31, 2017

 
   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 

Commercial

  $ 317,889       24.5 %   $ 254,427       26.1 %

Real estate:

                               

Construction and land

    196,404       15.1       143,535       14.7  

Farmland

    26,882       2.1       10,480       1.1  

1-4 family residential

    234,690       18.1       157,505       16.2  

Multi-family residential

    22,109       1.7       20,717       2.1  

Nonfarm nonresidential

    432,306       33.3       337,699       34.6  

Consumer

    67,679       5.2       50,921       5.2  

Total loans held for investment

  $ 1,297,959       100.0 %   $ 975,284       100.0 %

 

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 $63.5 million, or 24.9%, to $317.9 million as of September 30, 2018 from $254.4 million as of December 31, 2017, primarily due to the efforts of our bankers who attracted new clients and leveraged existing bank relationships to fund expansion and growth opportunities and from loans acquired from MBI.

 

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 Dallas, Texas, and are generally diverse in terms of type.

 

Construction and land loans increased $52.9 million, or 36.8%, to $196.4 million as of September 30, 2018 from $143.5 million as of December 31, 2017, primarily due to 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 and from loans acquired from MBI.

 

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 $77.2 million, or 49.0%, to $234.7 million as of September 30, 2018 from $157.5 million as of December 31, 2017, primarily due to loans acquired from MBI.

 

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 Texas 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 $94.6 million, or 28.0%, to $432.3 million as of September 30, 2018 from $337.7 million as of December 31, 2017, due to loans acquired from MBI and organic growth.

 

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.

 

 

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 September 30, 2018

 
   

One Year
or Less

   

One
Through
Five Years

   

After Five
Years

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Commercial

  $ 114,341     $ 148,926     $ 54,622     $ 317,889  

Real estate:

                               

Construction and land

    103,969       62,953       29,482       196,404  

Farmland

    9,441       15,754       1,687       26,882  

1-4 family residential

    34,842       113,153       86,695       234,690  

Multi-family residential

    1,654       10,032       10,423       22,109  

Nonfarm nonresidential

    49,931       235,578       146,797       432,306  

Consumer

    34,467       24,422       8,790       67,679  

Total loans held for investment

  $ 348,645     $ 610,818     $ 338,496     $ 1,297,959  

Amounts with fixed rates

  $ 129,515     $ 402,983     $ 234,786     $ 767,284  

Amounts with floating rates

    219,130       207,835       103,710       530,675  

 

   

As of December 31, 2017

 
   

One Year
or Less

   

One
Through
Five Years

   

After Five
Years

   

Total

 
   

(Dollars in thousands)

 

Commercial

  $ 89,665     $ 130,517     $ 34,245     $ 254,427  

Real estate:

                               

Construction and land

    59,003       59,109       25,423       143,535  

Farmland

    1,265       6,919       2,296       10,480  

1-4 family residential

    21,564       56,763       79,178       157,505  

Multi-family residential

    1,643       7,323       11,751       20,717  

Nonfarm nonresidential

    36,638       155,602       145,459       337,699  

Consumer

    10,362       29,191       11,368       50,921  

Total loans held for investment

  $ 220,140     $ 445,424     $ 309,720     $ 975,284  

Amounts with fixed rates

  $ 87,703     $ 299,688     $ 216,251     $ 603,642  

Amounts with floating rates

    132,437       145,736       93,469       371,642  

 

 

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 $13.4 million and $12.9 million in nonperforming assets as of September 30, 2018 and December 31, 2017, respectively. We had $11.6 million in nonperforming loans as of September 30, 2018 compared to $12.7 million as of December 31, 2017. The increase in nonperforming assets from December 31, 2017 to September 30, 2018 is primarily due to the acquisition of MBI and the closure of three of our branch locations, which resulted in those buildings being classified as other real estate owned.

 

 

 

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

 

   

As of September 30,
2018
(Unaudited)

   

As of December 31,
2017

 
   

(Dollars in thousands)

 

Nonaccrual loans

  $ 11,341     $ 12,535  

Accruing loans 90 or more days past due

    256       132  

Total nonperforming loans

    11,597       12,667  

Repossessed assets

    11        

Other real estate owned:

               

Commercial real estate, construction, land and land development

    1,824       227  

Residential real estate

           

Total other real estate owned

    1,824       227  

Total nonperforming assets

  $ 13,432     $ 12,894  

Restructured loans-nonaccrual

  $ 2,987     $ 2,008  

Restructured loans-accruing

    3,386       1,052  

Ratio of nonperforming loans to total loans held for investment

    0.89 %     1.30 %

Ratio of nonperforming assets to total assets

    0.80       0.98  

 

   

As of September 30,
2018
(Unaudited)

   

As of December 31,
2017

 
   

(Dollars in thousands)

 

Nonaccrual loans by category:

               

Real estate:

               

Construction and land

  $ 7     $ 92  

1-4 family residential

    2,494       2,429  

Multi-family residential

           

Nonfarm nonresidential

    6,064       5,935  

Commercial

    2,673       3,638  

Consumer

    103       441  

Total

  $ 11,341     $ 12,535  

 

 

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. Ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit. 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.

 

Credits rated doubtful have all the weaknesses inherent in those rated substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

 

 

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

 

   

As of September 30, 2018

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Real estate:

                                       

Construction and land

  $ 193,894     $ 1,208     $ 1,295     $ 7     $ 196,404  

Farmland

    26,880       2                   26,882  

1-4 family residential

    225,196       4,616       2,384       2,494       234,690  

Multi-family residential

    22,072             37             22,109  

Nonfarm nonresidential

    414,530       5,786       5,926       6,064       432,306  

Commercial

    303,204       3,960       8,052       2,673       317,889  

Consumer

    66,639       852       85       103       67,679  

Total

  $ 1,252,415     $ 16,424     $ 17,779     $ 11,341     $ 1,297,959  

 

   

As of December 31, 2017

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands)

 

Real estate:

                                       

Construction and land

  $ 141,128     $ 1,953     $ 362     $ 92     $ 143,535  

Farmland

    10,480                         10,480  

1-4 family residential

    148,845       4,657       1,574       2,429       157,505  

Multi-family residential

    20,677             40             20,717  

Nonfarm nonresidential

    325,216       4,861       1,687       5,935       337,699  

Commercial

    228,157       20,681       1,951       3,638       254,427  

Consumer

    49,787       672       21       441       50,921  

Total

  $ 924,290     $ 32,824     $ 5,635     $ 12,535     $ 975,284  

 

 

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 to the consolidated financial statements.

 

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 September 30, 2018, the allowance for loan losses totaled $10.3 million, or 0.79%, of total loans held for investment. As of December 31, 2017, the allowance for loan losses totaled $8.8 million, or 0.90%, of total loans held for investment.

 

 

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 Nine Months
Ended
September 30, 2018
(Unaudited)

   

As of and

For the Year

Ended

December 31,
2017

 
   

(Dollars in thousands)

 

Average loans outstanding(1)

  $ 1,216,395     $ 890,683  

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

  $ 1,297,959     $ 975,284  

Allowance for loan losses at beginning of period

  $ 8,765     $ 8,162  

Provision for loan losses

    1,451       4,237  

Charge-offs:

               

Real estate:

               

Construction, land and farmland

    90       2  

Residential

    290       184  

Nonfarm non-residential

          617  

Commercial

          2,945  

Consumer

    73       36  

Total charge-offs

    453       3,784  

Recoveries:

               

Real estate:

               

Construction, land and farmland

    398       1  

Residential

    11       48  

Nonfarm non-residential

    13       23  

Commercial

    25       40  

Consumer

    63       38  

Total recoveries

    510       150  

Net charge-offs (recoveries)

    (57 )     3,634  

Allowance for loan losses at end of period

  $ 10,273     $ 8,765  

Ratio of allowance to end of period loans held for investment

    0.79 %     0.90 %

Ratio of net charge-offs to average loans

          0.41  

 


(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.

 

 

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 September 30,
2018

(Unaudited)

   

As of December 31,
2017

 
   

Amount

   

Percent
to Total

   

Amount

   

Percent
to Total

 
   

(Dollars in thousands)

 

Real estate:

                               

Construction and land

  $ 1,634       15.9 %   $ 1,421       16.2 %

Farmland

    102       1.0       76       0.9  

1-4 family residential

    1,533       14.9       1,284       14.7  

Multi-family residential

    145       1.4       144       1.6  

Nonfarm nonresidential

    2,572       25.0       2,323       26.5  

Total real estate

    5,986       58.2       5,248       59.9  

Commercial

    3,840       37.4       3,147       35.9  

Consumer

    447       4.4       370       4.2  

Total allowance for loan losses

  $ 10,273       100.0 %   $ 8,765       100.0 %

 

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 September 30, 2018, the carrying amount of investment securities totaled $243.6 million, an increase of $64.4 million, or 36.0%, compared to $179.1 million as of December 31, 2017. Our securities portfolio represented 14.5% and 13.6% of total assets as of September 30, 2018 and December 31, 2017, 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 September 30, 2018

 
   

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair Value

 
   

(Dollars in thousands) (Unaudited)

 

U.S. government agencies

  $ 11,675     $     $ 323     $ 11,352  

Corporate bonds

    13,057       62       230       12,889  

Mortgage-backed securities

    135,218       2       4,919       130,301  

Municipal securities

    89,651       78       1,406       88,323  

Other securities

    791             71       720  

Total

  $ 250,392     $ 142     $ 6,949     $ 243,585  

 

   

As of December 31, 2017

 
   

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair Value

 
   

(Dollars in thousands)

 

U.S. government agencies

  $ 9,008     $ 13     $ 68     $ 8,953  

Corporate bonds

    13,074       59       92       13,041  

Mortgage-backed securities

    81,763       2       1,824       79,941  

Municipal securities

    76,553       353       427       76,479  

Other securities

    831             97       734  

Total

  $ 181,229     $ 427     $ 2,508     $ 179,148  

 

 

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 September 30, 2018, 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 September 30, 2018

 
   

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

  $ 996       1.11 %   $ 1,020       2.26 %   $ 9,336       2.84 %   $       %   $ 11,352       2.64 %

Corporate bonds

          %     8,611       3.54 %     4,278       5.22 %           %     12,889       4.09 %

Mortgage-backed securities

    771       1.69 %     8,378       1.82 %     69,166       1.87 %     51,986       2.42 %     130,301       2.09 %

Municipal securities

    10,288       1.73 %     31,072       1.98 %     31,360       2.17 %     15,603       2.78 %     88,323       2.16 %

Other securities

          %           %           %     720       3.84 %     720       3.84 %

Total

  $ 12,055       1.68 %   $ 49,081       2.23 %   $ 114,140       2.16 %   $ 68,309       2.52 %   $ 243,585       2.25 %

 

 

 

   

As of December 31, 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)

 

U.S. government agencies

  $ 1,004       0.96 %   $ 1,000       1.11 %   $ 6,949       2.46 %   $       %   $ 8,953       2.14 %

Corporate bonds

          %     6,580       2.73 %     6,461       4.28 %           %     13,041       3.50 %

Mortgage-backed securities

    12       0.20 %     6,033       1.67 %     39,619       1.50 %     34,277       1.93 %     79,941       1.70 %

Municipal securities

    7,651       1.52 %     34,373       1.92 %     17,434       2.27 %     17,021       2.74 %     76,479       2.14 %

Other securities

          %           %           %     734       3.03 %     734       3.03 %

Total

  $ 8,667       1.46 %   $ 47,986       1.98 %   $ 70,463       2.04 %   $ 52,032       2.21 %   $ 179,148       2.05 %

 

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 4.65 years with an estimated effective duration of 43.29 months as of September 30, 2018.

 

As of September 30, 2018 and December 31, 2017, 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.

 

 

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 September 30, 2018 were $1.4 billion, an increase of $298.5 million, or 28.3%, compared to $1.1 billion as of December 31, 2017, primarily due to deposits acquired from MBI and organic growth.

 

Noninterest-bearing deposits as of September 30, 2018 were $311.2 million, compared to $264.6 million as of December 31, 2017, an increase of $46.5 million, or 17.6%.

 

Average deposits for the nine months ended September 30, 2018 were $1.3 billion, an increase of $344,000, or 34.9%, over the average deposits for the year ended December 31, 2017 of $988.0 million. The average rate paid on total interest-bearing deposits increased over this period from 0.86% for the year ended December 31, 2017 to 1.04% for the nine months ended September 30, 2018. The increase in average rates during the nine months ended September 30, 2018 over the average for the year ended December 31, 2017 was primarily due to a strategic increase in deposit pricing in the latter part of 2017 in order to attract deposits and improve liquidity. In addition, the stability and continued growth of noninterest-bearing demand accounts served to reduce the cost of deposits to 0.80% for the nine months ended September 30, 2018 and 0.64% for the year ended December 31, 2017.

 

 

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

 

   

For the Nine Months
Ended September 30, 2018

(Unaudited)

   

For the Year Ended December 31,
2017

 
   

Average
Balance

   

Average
Rate

   

Average
Balance

   

Average
Rate

 
   

(Dollars in thousands)

 

Interest-bearing demand accounts

  $ 37,814       0.84 %   $ 35,258       0.65 %

Negotiable order of withdrawal (“NOW”) accounts

    179,608       0.49 %     116,296       0.25 %

Limited access money market accounts and savings

    346,575       0.67 %     236,766       0.51 %

Certificates and other time deposits > $250k

    150,290       1.53 %     75,801       1.55 %

Certificates and other time deposits < $250k

    308,695       1.56 %     269,143       1.27 %

Total interest-bearing deposits

    1,022,982       1.04 %     733,264       0.86 %

Noninterest-bearing demand accounts

    309,526             254,765        

Total deposits

  $ 1,332,508       0.80 %   $ 988,029       0.64 %

 

The ratio of average noninterest-bearing deposits to average total deposits for the nine months ended September 30, 2018 and the year ended December 31, 2017 was 23.2% and 25.8%, 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
September 30, 2018
(Unaudited)

   

As of December 31,
2017

 
   

(Dollars in thousands)

 

1 year or less

  $ 81,123     $ 52,402  

More than 1 year but less than 3 years

    46,087       21,198  

3 years or more but less than 5 years

    10,335       16,930  

5 years or more

           

Total

  $ 137,545     $ 90,530  

 

 

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.

 

 

FHLB advances. The Federal Home Loan Bank, or FHLB, allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2018 and December 31, 2017, total borrowing capacity of $513.1 million and $399.5 million, respectively, was available under this arrangement, and $85.0 million and $75.0 million, respectively, was outstanding with a weighted average stated interest rate of 2.42% as of September 30, 2018 and 1.96% as of December 31, 2017. Our current FHLB advances mature within five years. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio.

 

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

 

   

FHLB
Advances

 
   

(Dollars in

Thousands)

 

September 30, 2018

       

Amount outstanding at quarter-end

  $ 85,000  

Weighted average stated interest rate at quarter-end

    2.42 %

Maximum month-end balance during the quarter

  $ 85,000  

Average balance outstanding during the quarter

  $ 85,000  

Weighted average interest rate during the quarter

    2.36 %
         

December 31, 2017

       

Amount outstanding at year-end

  $ 75,000  

Weighted average stated interest rate at year-end

    1.96 %

Maximum month-end balance during the year

  $ 75,000  

Average balance outstanding during the year

  $ 65,513  

Weighted average interest rate during the year

    1.13 %

 

 

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 $2.4 million and $2.7 million at September 30, 2018 and December 31, 2017, respectively. This advance carries a variable interest equal to the Wall Street Journal Prime rate. The rate was 5.25% and 4.50% at September 30, 2018 and December 31, 2017, respectively, adjusts based on changes in the index rate. This FNBB long term advance was established for the purpose of paying off the revolving line of credit with First Tennessee National Association.

 

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

 

 

   

FNBB
Long Term Advances

 
   

(Dollars in

Thousands)

 

September 30, 2018

       

Amount outstanding at quarter-end

  $ 2,400  

Weighted average stated interest rate at quarter-end

    5.25 %

Maximum month-end balance during the quarter

  $ 2,700  

Average balance outstanding during the quarter

  $ 2,638  

Weighted average interest rate during the quarter

    5.01 %
         

December 31, 2017

       

Amount outstanding at year-end

  $ 2,700  

Weighted average stated interest rate at year-end

    4.50 %

Maximum month-end balance during the year

  $ 3,000  

Average balance outstanding during the year

  $ 2,924  

Weighted average interest rate during the year

    4.09 %

 

 

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 September 30, 2018 and December 31, 2017. The line of credit bears a variable interest rate equal to the Wall Street Journal Prime rate. The rate was 5.25% and 4.50% at September 30, 2018 and December 31, 2017, respectively, and adjusts based on changes in the index rate. This FNBB line matured on September 12, 2017 and renewed on September 29, 2017 for another one year term on the same terms. This FNBB line was extended on September 28, 2018 for three months on the same terms, and will mature on November 29, 2018. This FNBB line 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)

 

September 30, 2018

       

Amount outstanding at quarter-end

  $ 862  

Weighted average stated interest rate at quarter-end

    5.25 %

Maximum month-end balance during the quarter

  $ 862  

Average balance outstanding during the quarter

  $ 862  

Weighted average interest rate during the quarter

    5.01 %
         

December 31, 2017

       

Amount outstanding at year-end

  $ 862  

Weighted average stated interest rate at year-end

    4.50 %

Maximum month-end balance during the year

  $ 862  

Average balance outstanding during the year

  $ 862  

Weighted average interest rate during the year

    4.09 %

 

 

Correspondent Bank Federal Funds Purchased Relationships

 

We maintain Federal Funds Purchased Relationships with the following financial institutions with the limits set forth below as of September 30, 2018:

 

   

(Dollars in

Thousands)

 

FNBB

  $ 35,000  

The Independent Bankers Bank

  $ 25,000  

Compass Bank

  $ 22,500  

First Tennessee National Bank

  $ 17,000  

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)

 

September 30, 2018

       

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

  $  

Weighted average interest rate during the quarter

    %
         

December 31, 2017

       

Amount outstanding at year-end

  $  

Weighted average interest rate at year-end

    %

Maximum month-end balance during the year

  $  

Average balance outstanding during the year

  $ 190  

Weighted average interest rate during the year

    1.72 %

 

 

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 nine months ended September 30, 2018 and the year ended December 31, 2017, 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 September 30, 2018 and December 31, 2017, we maintained six lines of credit with commercial banks which provided for extensions of credit with an availability to borrow up to an aggregate of $118.5 million and $113.5 million, respectively. There were no funds under these lines of credit outstanding as of September 30, 2018 or December 31, 2017.

 

 

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 total assets equaled $1.6 billion and $1.2 billion for the nine months ended September 30, 2018 and the year ended December 31, 2017, respectively.

 

   

For the Nine
Months Ended
September 30, 2018

   

For the Year
Ended
December 31,
2017

 
   

(Unaudited)

         

Sources of Funds:

               

Deposits:

               

Noninterest-bearing

    18.9 %     21.2 %

Interest-bearing

    62.6 %     61.1 %

Advances from FHLB

    5.2 %     5.5 %

Other borrowings

    1.1 %     0.5 %

Other liabilities

    0.5 %     0.7 %

Shareholders’ equity

    11.7 %     11.0 %

Total

    100.0 %     100.0 %
                 

Uses of Funds:

               

Loans, net of allowance for loan losses

    73.8 %     73.5 %

Securities available for sale

    15.5 %     16.3 %

Interest-bearing deposits in other banks

    2.0 %     1.7 %

Other noninterest-earning assets

    8.7 %     8.5 %

Total

    100.0 %     100.0 %

Average noninterest-bearing deposits to average deposits

    23.2 %     25.8 %

Average loans to average deposits

    91.3 %     90.1 %

 

 

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 40.3% for the nine months ended September 30, 2018 compared to the same period in 2017, primarily due to the acquisition of MBI and organic growth. 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 4.65 years and an effective duration of 43.29 months as of September 30, 2018. As of December 31, 2017, our securities portfolio had a weighted average life of 4.78 years and an effective duration of 41.19 months.

 

As of September 30, 2018, we had outstanding $274.0 million in commitments to extend credit and $11.3 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2017, we had outstanding $256.9 million in commitments to extend credit and $9.5 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 September 30, 2018 and December 31, 2017, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. As of September 30, 2018, we had cash and cash equivalents of $45.9 million compared to $107.6 million as of December 31, 2017. The decrease in cash and cash equivalents was primarily due to the payment of $56.2 million in cash to MBI’s shareholders in connection with the acquisition.

 

Capital Resources

 

Total shareholders’ equity increased to $213.0 million as of September 30, 2018, compared to $179.9 million as of December 31, 2017, an increase of $33.0 million, or 18.4%. This increase was primarily due to a capital offering resulting in $27.2 million in net proceeds and $10.6 million in net income, offset with $3.7 million in the change in unrealized losses on our investment portfolio and $2.4 million in paid dividends.

 

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.

 

On October 18, 2018, our Board of Directors (the “Board”) declared a quarterly dividend based upon our financial performance for the three months ended September 30, 2018 in the amount of $0.08 per share to the common shareholders of record as of November 15, 2018. The dividend is to be paid on November 30, 2018, or as soon as practicable thereafter.

 

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 September 30, 2018 and December 31, 2017, 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 September 30, 2018

(Unaudited)

   

As of December 31, 2017

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 
   

(Dollars in thousands)

 

Business First Bancshares, Inc. (Consolidated)

                               

Total capital (to risk weighted assets)

  $ 191,851       13.04 %   $ 181,565       15.23 %

Tier 1 capital (to risk weighted assets)

    181,578       12.35 %     172,800       14.49 %

Common Equity Tier 1 capital (to risk weighted assets)

    181,578       12.35 %     172,800       14.49 %

Tier 1 Leverage capital (to average assets)

    181,578       11.11 %     172,800       13.53 %
                                 

Business First Bank

                               

Total capital (to risk weighted assets)

  $ 178,391       12.14 %   $ 120,806       10.24 %

Tier 1 capital (to risk weighted assets)

    168,118       11.44 %     112,041       9.50 %

Common Equity Tier 1 capital (to risk weighted assets)

    168,118       11.44 %     112,041       9.50 %

Tier 1 Leverage capital (to average assets)

    168,118       10.29 %     112,041       8.78 %

 

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 September 30, 2018 and December 31, 2017 (other than non-maturity deposit obligations), which consist of future cash payments associated with our contractual obligations pursuant to our FHLB short term 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 $85.0 million and $75.0 million at September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018 and December 31, 2017, the FHLB short term advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 2.42% and 1.96%, respectively, and maturities ranging from 2018 through 2022. The advance under the FNBB long-term borrowing totaled $2.4 million and $2.7 million at September 30, 2018 and December 31, 2017, respectively. 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 5.25% and 4.50% at September 30, 2018 and December 31, 2017, respectively, and maturing in 2026. We also had a line of credit with FNBB with an outstanding balance of $862,000 at both September 30, 2018 and December 31, 2017. 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 5.25% and 4.50% at September 30, 2018 and December 31, 2017, respectively. This line of credit matured in September 2017 and was renewed on the same terms for a one year term to mature on September 29, 2018. On September 28, 2018 this line was extended for three months on the same terms, and will mature on November 29, 2018.

 

   

As of September 30, 2018

 
   

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) (Unaudited)

 

Non-cancelable future operating leases

  $ 2,571     $ 2,763     $ 1,945     $ 4,623     $ 11,902  

Time deposits

    324,848       124,863       28,448             478,159  

Advances from FHLB

    55,000             30,000             85,000  

Advances from FNBB

    1,162       600       600       900       3,262  

Securities sold under agreements to repurchase

    14,310                         14,310  

Standby and commercial letters of credit

    8,589       2,453       209             11,251  

Commitments to extend credit

    151,946       89,871       9,005       23,150       273,972  

Total

  $ 558,426     $ 220,550     $ 70,207     $ 28,673     $ 877,856  

 

 

   

As of December 31, 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

 
   

(Dollars in thousands)

 

Non-cancelable future operating leases

  $ 2,354     $ 3,403     $ 2,150     $ 5,282     $ 13,189  

Time deposits

    252,493       67,298       34,468       150       354,409  

Advances from FHLB

    45,000             30,000             75,000  

Advances from FNBB

    1,162       600       600       1,200       3,562  

Securities sold under agreements to repurchase

    1,939                         1,939  

Standby and commercial letters of credit

    5,107       4,385                   9,492  

Commitments to extend credit

    132,269       88,307       6,144       30,149       256,869  

Total

  $ 440,324     $ 163,993     $ 73,362     $ 36,781     $ 714,460  

 

 

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 September 30, 2018

 
   

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) (Unaudited)

 

Standby and commercial letters of credit

  $ 8,589     $ 2,453     $ 209     $     $ 11,251  

Commitments to extend credit

    151,946       89,871       9,005       23,150       273,972  
                                         

Total

  $ 160,535     $ 92,324     $ 9,214     $ 23,150     $ 285,223  

 

   

As of December 31, 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

 
   

(Dollars in thousands)

 

Standby and commercial letters of credit

  $ 5,107     $ 4,385     $     $     $ 9,492  

Commitments to extend credit

    132,269       88,307       6,144       30,149       256,869  
                                         

Total

  $ 137,376     $ 92,692     $ 6,144     $ 30,149     $ 266,361  

 

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.

 

 

 

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.

 

 

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 September 30, 2018

   

As of December 31, 2017

 

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

      4.50 %     (2.33% )     3.00 %     (3.54% )

+200

      2.30 %     (1.68% )     1.50 %     (2.53% )

+100

      0.50 %     (0.54% )     0.30 %     (0.11% )

Base

      0.00 %     0.00 %     0.00 %     0.00 %
-100       (4.20% )     (0.07% )     (2.20% )     (1.28% )

 

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.

 

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.

 

This discussion and analysis section includes certain non-GAAP financial measures (e.g., referenced as “core” or “tangible”) intended to supplement, not substitute for, comparable GAAP measures. These measures typically adjust income available to common shareholders for certain significant activities or transactions that in management’s opinion can distort period-to-period comparisons of Business First’s performance. Transactions that are typically excluded from non-GAAP measures include realized and unrealized gains/losses on former bank premises and equipment, impaired loan sales, and acquisition-related expenses (including, but not limited to, legal costs, system conversion costs, severance and retention payments, etc.). The measures also typically adjust goodwill and intangible asset from book value and shareholders’ equity.

 

Management believes presentations of these non-GAAP financial measures provide useful supplemental information that is essential to a proper understanding of the operating results of the Company’s core business. These non-GAAP disclosures are not necessarily comparable to non-GAAP measures that may be presented by other companies. You should understand how such other banking organizations calculate their financial metrics or with names similar to the non-GAAP financial measures we have discussed in this statement when comparing such non-GAAP financial measures.

 

 

Core Net Income. Notable noncore events impacting earnings during the three and nine months ended September 30, 2017 includes the sale of a participation interest in an impaired credit acquired from American Gateway in 2015, which resulted in an increase in interest income of $317,000 and $2.8 million for the three and nine months ended September 30, 2017, respectively. We incurred $509,000 and $1.4 million in noninterest expenses related to acquisition-related activities (including, but not limited to, severance and retention, system conversion, legal costs, etc.) in the three and nine months ended September 30, 2018, respectively. We incurred $139,000 in losses associated with the closure of a banking center during the three and nine months ended September 30, 2018. We also incurred $118,000 in noninterest expenses associated with share awards granted to all nonexecutives for our NASDAQ listing commencement on April 9, 2018 for the nine months ended September 30, 2018. Core net income, which excludes noncore income and expenses, for the three months ended September 30, 2018 was $4.4 million, or $0.37 per diluted share, compared to core net income of $1.5 million, or $0.20 per diluted share, for the three months ended September 30, 2017. As adjusted, core return on average assets and core return on average equity, in each case on an annualized basis, were 1.06% and 8.37% for the three months ended September 30, 2018, compared to 0.50% and 4.91% for the three months ended September 30, 2017. Core net income for the nine months ended September 30, 2018 was $12.1 million, or $1.07 per diluted share, compared to core net income of $3.9 million, or $0.53 per diluted share, for the nine months ended September 30, 2017. As adjusted, core return on average assets and core return on average equity, in each case on an annualized basis, were 0.98% and 8.44% for the nine months ended September 30, 2018, compared to 0.45% and 4.44% for the nine months ended September 30, 2017.

 

   

For the Three Months Ended September 30,

(Unaudited)

   

For the Nine Months Ended September 30,

(Unaudited)

 
   

2018

   

2017

   

2018

   

2017

 
   

(Dollars in thousands, except per share data)

 

Core Net Income

                               

Net income

  $ 3,900     $ 1,682     $ 10,646     $ 5,710  

Adjustments (net of tax): (1)

                               

Sale of participation interest in impaired credit

          (209 )           (1,815 )

Employee share awards – NASDAQ listing

                93        

Gain/Loss on former bank premises and equipment

    110             110        

Acquisition-related expenses

    419             1,223        

Core net income

  $ 4,429     $ 1,473     $ 12,072     $ 3,895  
                                 

Average common shares outstanding

    11,533,374       6,932,570       10,795,989       6,926,684  

Average diluted shares outstanding

    11,993,734       7,315,352       11,256,349       7,309,466  

Core earnings per share - basic

  $ 0.38     $ 0.21     $ 1.12     $ 0.56  

Core earnings per share - diluted

    0.37       0.20       1.07       0.53  

Total quarterly / year-to-date average assets

    1,666,117       1,187,553       1,635,022       1,165,325  

Total quarterly / year-to-date average equity

    211,631       119,929       190,655       116,939  

Core return on average assets

    1.06 %     0.50 %     0.98 %     0.45 %

Core return on average equity

    8.37       4.91       8.44       4.44  

 


(1)

Tax rates, exclusive of certain merger-related expenses, utilized were 21% and 35%, respectively, for 2018 and 2017. These rates approximated the marginal tax rates for the applicable periods.

 

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.

 

 

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 September 30,

(Unaudited)

   

As of December 31,

 
   

2018

   

2017

   

2017

 
   

(Dollars in thousands, except per share data)

 

Tangible Common Equity

                       

Total shareholders’ equity

  $ 212,961     $ 120,059     $ 179,935  

Adjustments:

                       

Goodwill

    (32,427 )     (6,824 )     (6,824 )

Core deposit and other intangibles

    (4,103 )     (2,072 )     (2,003 )

Total tangible common equity

  $ 176,431     $ 111,163     $ 171,108  

Common shares outstanding(1)

    11,533,721       6,932,570       10,232,495  

Book value per common share

  $ 18.46     $ 17.32     $ 17.58  

Tangible book value per common share

    15.30       16.03       16.72  

 


(1)

Excludes the dilutive effect, if any, of 867,705, 1,011,105, and 918,705 shares of common stock issuable upon exercise of outstanding stock options and warrants as of September 30, 2018, September 30, 2017, and December 31, 2017, 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.

 

 

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 September 30,

(Unaudited)

   

As of

December 31,

 
    2018     2017     2017  
    (Dollars in thousands, except per share data)  

Tangible Common Equity

                       

Total shareholders’ equity

  $ 212,961     $ 120,059     $ 179,935  

Adjustments:

                       

Goodwill

    (32,427 )     (6,824 )     (6,824 )

Core deposit and other intangibles

    (4,103 )     (2,072 )     (2,003 )

Total tangible common equity

  $ 176,431     $ 111,163     $ 171,108  
                         

Tangible Assets

                       

Total assets

  $ 1,678,195     $ 1,213,831     $ 1,321,256  

Adjustments:

                       

Goodwill

    (32,427 )     (6,824 )     (6,824 )

Core deposit and other intangibles

    (4,103 )     (2,072 )     (2,003 )

Total tangible assets

  $ 1,641,665     $ 1,204,935     $ 1,312,429  

Common Equity to Total Assets

    12.7 %     9.9 %     13.6 %

Tangible Common Equity to Tangible Assets

    10.7       9.2       13.0  

 

 

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.

 

 

 

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, 2017 filed with the SEC, and in “Risk Factors” in the Company’s prospectus supplement filed with the SEC on June 5, 2018 under Registration Statement on Form S-3 (No. 333-224692) and prospectus filed with the SEC on October 23, 2018 under Registration Statement on Form S-4 (No. 333-227085).

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.

 

Item 3.     Defaults upon Senior Securities

 

Not applicable.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

Not applicable.

 

Item 6.

Exhibits

 

   

Number

Description

   

     2.1

Agreement and Plan of Reorganization by and between Business First Bancshares, Inc. and Richland State Bancorp, Inc., dated June 1, 2018 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on June 4, 2018 (File No. 001-38447)).

   

     3.1

Amended and Restated Articles of Incorporation of Business First Bancshares, Inc., adopted September 28, 2017 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on October 2, 2017 (File No. 333-200112)).

   

     3.2

Amended and Restated Bylaws of Business First Bancshares, Inc., adopted August 23, 2017 (incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 2017 filed by Business First Bancshares, Inc. on November 9, 2017 (File No. 333-200112)).

   

     4.1

Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 filed by Business First Bancshares, Inc. on November 12, 2014 (File No. 333-200112)).

   

   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.  

 

 

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.

     

November 9, 2018

 

/s/ David R. Melville, III

 

 

David R. Melville, III

 

 

President and Chief Executive Officer

     

November 9, 2018

 

/s/ Gregory Robertson

 

 

Gregory Robertson

 

 

Chief Financial Officer

 

64