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

bfbi20180630_10q.htm
 

 

Table of Contents



 

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 June 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 August 10, 2018, the issuer has outstanding 11,533,171 shares of common stock, par value $1.00 per share.

 



 

 

 

 

BUSINESS FIRST BANCSHARES, INC. 

 

PART I - FINANCIAL INFORMATION

 

     

Item 1.

Financial Statements

 

     

 

Consolidated Balance Sheets as of June 30, 2018 (Unaudited) and December 31, 2017

4
     

 

Unaudited Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017

5
     

 

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

6
     

 

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

7
     

 

Unaudited Consolidated Statements of Cash Flows for the six months ended June 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

61
     

Item 4.

Controls and Procedures

61
   

PART II - OTHER INFORMATION

 

     

Item 1.

Legal Proceedings

62
     

Item 1A.

Risk Factors

62
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62
     

Item 3.

Defaults Upon Senior Securities

62
     

Item 4.

Mine Safety Disclosures

62
     

Item 5.

Other Information

62
     

Item 6.

Exhibits

62
   

Signatures

63

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item  1.

Financial Statements

  

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

   

June 30, 2018

   

December 31,

 
   

(Unaudited)

   

2017

 
ASSETS  

Cash and Due from Banks

  $ 45,861     $ 107,591  

Federal Funds Sold

    32,522       8,820  

Securities Available for Sale, at Fair Values

    252,139       179,148  

Mortgage Loans Held for Sale

    -       201  

Loans and Lease Receivable, Net of Allowance for Loan Losses of $9,756 at June 30, 2018 and $8,765 at December 31, 2017

    1,224,275       966,519  

Premises and Equipment, Net

    10,537       8,780  

Accrued Interest Receivable

    5,268       4,110  

Other Equity Securities

    10,064       8,627  

Other Real Estate Owned

    1,273       227  

Cash Value of Life Insurance

    24,275       23,200  

Deferred Taxes

    3,888       3,005  

Goodwill

    32,552       6,824  

Core Deposit Intangible

    4,234       2,003  

Other Assets

    2,319       2,201  

Total Assets

  $ 1,649,207     $ 1,321,256  
                 

LIABILITIES

 

Deposits:

               

Noninterest Bearing

  $ 305,314     $ 264,646  

Interest Bearing

    1,024,179       790,887  

Total Deposits

    1,329,493       1,055,533  

Securities Sold Under Agreements to Repurchase

    13,604       1,939  

Short Term Borrowings

    862       862  

Long Term Borrowings

    2,700       2,700  

Federal Home Loan Bank Borrowings

    85,000       75,000  

Accrued Interest Payable

    1,197       890  

Other Liabilities

    5,722       4,397  

Total Liabilities

    1,438,578       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; 11,533,171 and 10,232,495 Shares Issued and Outstanding at June 30, 2018 and December 31, 2017, respectively

    11,533       10,232  

Additional Paid-in Capital

    171,193       144,172  

Retained Earnings

    32,483       27,175  

Accumulated Other Comprehensive Loss

    (4,580 )     (1,644 )

Total Shareholders' Equity

    210,629       179,935  

Total Liabilities and Shareholders' Equity

  $ 1,649,207     $ 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

June 30,

   

For The Six Months Ended

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Interest Income:

                               

Interest and Fees on Loans

  $ 16,549     $ 12,398     $ 32,225     $ 23,539  

Interest and Dividends on Securities

    1,414       972       2,837       1,919  

Interest on Federal Funds Sold and Due From Banks

    128       30       255       47  

Total Interest Income

    18,091       13,400       35,317       25,505  

Interest Expense:

                               

Interest on Deposits

    2,555       1,501       4,853       2,849  

Interest on Borrowings

    560       209       988       406  

Total Interest Expense

    3,115       1,710       5,841       3,255  

Net Interest Income

    14,976       11,690       29,476       22,250  

Provision for Loan Losses

    474       1,305       948       1,660  

Net Interest Income after Provision for Loan Losses

    14,502       10,385       28,528       20,590  

Other Income:

                               

Service Charges on Deposit Accounts

    636       525       1,246       1,037  

Other Income

    1,370       1,075       2,495       1,867  

Total Other Income

    2,006       1,600       3,741       2,904  

Other Expenses:

                               

Salaries and Employee Benefits

    6,524       5,397       13,228       10,381  

Occupancy and Equipment Expense

    1,402       1,191       2,820       2,359  

Other Expenses

    4,099       2,526       7,921       5,140  

Total Other Expenses

    12,025       9,114       23,969       17,880  

Income Before Income Taxes

    4,483       2,871       8,300       5,614  

Provision for Income Taxes

    845       819       1,554       1,586  

Net Income

  $ 3,638     $ 2,052     $ 6,746     $ 4,028  

Earnings Per Share:

                               

Basic

  $ 0.34     $ 0.30     $ 0.65     $ 0.58  

Diluted

  $ 0.33     $ 0.28     $ 0.62     $ 0.56  

 

 

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

June 30,

   

For The Six Months Ended

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Consolidated Net Income

  $ 3,638     $ 2,052     $ 6,746     $ 4,028  
                                 

Other Comprehensive Income (Loss):

                               

Unrealized Gain (Loss) on Investment Securities

    (247 )     1,372       (3,717 )     3,075  

Income Tax Effect

    52       (467 )     781       (1,046 )

Other Comprehensive Income (Loss)

    (195 )     905       (2,936 )     2,029  

Consolidated Comprehensive Income (Loss)

  $ 3,443     $ 2,957     $ 3,810     $ 6,057  

 

  

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 SIX MONTHS ENDED JUNE 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

    -       -       4,028       -       4,028  

Other Comprehensive Income (Loss)

    -       -       -       2,029       2,029  

Cash Dividends Declared, $0.11 Per Share

    -       -       (761 )     -       (761 )

Stock Based Compensation Cost

    18       (27 )     -       -       (9 )

Stock Repurchase

    (2 )     (40 )     9       -       (33 )

Balances at June 30, 2017

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

Balances at December 31, 2017

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

Comprehensive Income:

                                       

Net Income

    -       -       6,746       -       6,746  

Other Comprehensive Income (Loss)

    -       -       -       (2,936 )     (2,936 )

Cash Dividends Declared, $0.14 Per Share

    -       -       (1,435 )     -       (1,435 )

Stock Issuance

    1,257       26,527       -       -       27,784  

Stock Based Compensation Cost

    48       569       -       -       617  

Surrendered Shares of Stock Based Compensation

    (4 )     (75 )     (3 )     -       (82 )

Balances at June 30, 2018

  $ 11,533     $ 171,193     $ 32,483     $ (4,580 )   $ 210,629  

 

 

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 Six Months Ended June 30,

 
   

2018

   

2017

 

Cash Flows From Operating Activities:

               

Consolidated Net Income

  $ 6,746     $ 4,028  

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

               

Provision for Loan Losses

    948       1,660  

Depreciation and Amortization

    566       630  

Net Accretion of Purchase Accounting Valuations

    (464 )     (3,378 )

Noncash Compensation (Income) Expense

    535       (9 )

Net Amortization of Securities

    1,085       917  

Noncash Income on Other Equity Securities

    (258 )     (208 )

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

    (28 )     (4 )

Increase in Cash Value of Life Insurance

    (334 )     (309 )

Provision (Credit) for Deferred Income Taxes

    (146 )     833  

Changes in Assets and Liabilities:

               

Increase in Accrued Interest Receivable

    (3 )     (190 )

(Increase) Decrease in Other Assets

    1,144       (128 )

Increase (Decrease) in Accrued Interest Payable

    77       (99 )

Increase (Decrease) in Other Liabilities

    (303 )     113  

Net Cash Provided by Operating Activities

    9,565       3,856  
                 

Cash Flows From Investing Activities:

               

Purchases of Securities Available for Sale

    (2,015 )     (4,596 )

Proceeds from Maturities / Sales of Securities Available for Sale

    7,704       2,859  

Proceeds from Paydowns of Securities Available for Sale

    16,385       10,179  

Net Cash Paid in Merger

    (49,796 )     -  

Purchases of Other Equity Securities

    (818 )     (873 )

Redemption of Other Equity Securities

    196       136  

Net Increase in Loans

    (65,154 )     (61,252 )

Purchases of Premises and Equipment

    (694 )     (306 )

Proceeds from Sales of Other Real Estate

    123       13  

Net Increase in Federal Funds Sold

    (14,202 )     (4,534 )

Net Cash Used in Investing Activities

    (108,271 )     (58,374 )

 

 

(CONTINUED)

 

   

For The Six Months Ended June 30,

 
   

2018

   

2017

 

Cash Flows From Financing Activities:

               

Net Increase in Deposits

    10,009       39,221  

Net Decrease in Securities Sold Under Agreements to Repurchase

    (4,382 )     (187 )

Net Advances on Federal Home Loan Bank Borrowings

    5,000       19,309  

Proceeds from Issuance of Common Stock

    27,784       -  

Repurchase of Common Stock

    -       (33 )

Payment of Dividends on Common Stock

    (1,435 )     (761 )

Net Cash Provided by Financing Activities

    36,976       57,549  

Net Increase (Decrease) in Cash and Cash Equivalents

    (61,730 )     3,031  

Cash and Cash Equivalents at Beginning of Period

    107,591       42,173  

Cash and Cash Equivalents at End of Period

  $ 45,861     $ 45,204  
                 

Supplemental Disclosures for Cash Flow Information:

               

Cash Payments for:

               

Interest on Deposits

  $ 4,571     $ 2,951  

Interest on Borrowings

  $ 963     $ 403  

Income Tax Payments

  $ 1,240     $ 900  
                 

Supplemental Schedule for Noncash Investing and Financing Activities:

               

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

  $ (3,717 )   $ 3,075  

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

  $ 781     $ (1,046 )

Transfer of Loans to Other Real Estate

  $ 92     $ 215  

Transfer of Premises and Equipment to Other Real Estate

  $ 1,049     $ 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

            2,930  

Total Assets

            317,315  
                 

Deposits

            263,951  

Borrowings

            21,047  

Other Liabilities

            1,858  

Total Liablilites

            286,856  

Net Assets Acquired

            30,459  

Goodwill Resulting from Merger

          $ 25,728  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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.

 

   

For The Three Months Ended June 30,

   

For The Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 
   

(Dollars in thousands)

   

(Dollars in thousands)

 
   

(except per share data)

   

(except per share data)

 
                                 

Interest Income

  $ 18,091     $ 16,826     $ 35,317     $ 32,214  

Interest Expense

    3,115       2,073       5,841       3,987  

Net Interest Income

    14,976       14,753       29,476       28,227  

Provision for Loan Losses

    474       1,336       948       1,691  

Net Interest Income after Provision for Loan Losses

    14,502       13,417       28,528       26,536  

Noninterest Income

    2,006       1,797       3,741       3,299  

Noninterest Expense

    12,025       10,305       23,969       20,256  

Income Before Income Taxes

    4,483       4,909       8,300       9,579  

Income Tax Expense

    845       1,477       1,554       2,864  

Net Income

  $ 3,638     $ 3,432     $ 6,746     $ 6,715  
                                 

Earnings Per Common Share

                               

Basic

  $ 0.34     $ 0.34     $ 0.65     $ 0.66  

Diluted

  $ 0.33     $ 0.33     $ 0.62     $ 0.64  

 

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 June 30,

   

For The Six Months Ended June 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

  $ 3,638     $ 2,052     $ 6,746     $ 4,028  

Denominator:

                               

Weighted Average Common Shares Outstanding

    10,607,369       6,932,570       10,421,185       6,923,692  

Dilutive Effect of Stock Options and Warrants

    457,269       271,902       457,269       271,902  

Weighted Average Dilutive Common Shares

    11,064,638       7,204,472       10,878,454       7,195,594  
                                 

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

  $ 0.34     $ 0.30     $ 0.65     $ 0.58  
                                 

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

  $ 0.33     $ 0.28     $ 0.62     $ 0.56  

 

 

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 June 30, 2018 and December 31, 2017 are summarized as follows:

 

   

June 30, 2018

 
   

(Dollars in thousands)

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

U.S. Government Agencies

  $ 9,677     $ -     $ 246     $ 9,431  

Corporate Securities

    13,063       113       143       13,033  

Mortgage-Backed Securities

    143,419       3       4,510       138,912  

Municipal Securities

    90,984       136       1,079       90,041  

Other Securities

    793       -       71       722  

Total Securities Available for Sale

  $ 257,936     $ 252     $ 6,049     $ 252,139  

 

   

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 June 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.

 

   

June 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

  $ 7,539     $ 177     $ 1,892     $ 69     $ 9,431     $ 246  

Corporate Securities

    2,357       143       -       -       2,357       143  

Mortgage-Backed Securities

    74,691       1,753       63,789       2,757       138,480       4,510  

Municipal Securities

    54,857       731       11,423       348       66,280       1,079  

Other Securities

    -       -       722       71       722       71  

Total Securities Available for Sale

  $ 139,444     $ 2,804     $ 77,826     $ 3,245     $ 217,270     $ 6,049  

 

   

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 June 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

  $ 11,522     $ 11,519  

One to Five Years

    52,191       51,890  

Over Five to Ten Years

    108,296       105,150  

Over Ten Years

    85,927       83,580  

Total Securities Available for Sale

  $ 257,936     $ 252,139  

 

 

 

Note 6 – Loans and the Allowance for Loan Losses –

 

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

 

   

June 30,

   

December 31,

 
   

2018

   

2017

 
   

(Dollars in thousands)

 

Real estate loans:

               

Construction and land

  $ 204,099     $ 143,535  

Farmland

    15,173       10,480  

1-4 family residential

    224,986       157,505  

Multi-family residential

    22,511       20,717  

Nonfarm nonresidential

    399,166       337,699  

Commercial

    298,967       254,427  

Consumer

    69,129       50,921  

Total loans held for investment

    1,234,031       975,284  
                 

Less:

               

Allowance for loan losses

    (9,756 )     (8,765 )

Net loans

  $ 1,224,275     $ 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 June 30, 2018 and December 31, 2017.

 

Net deferred loan origination fees were $1.3 million at both June 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 June 30, 2018 and December 31, 2017, overdrafts of $451,000 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 $112.3 million and $82.4 million at June 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 June 30, 2018 includes $193.5 million of loans acquired in acquisitions that were recorded at fair value as of the acquisition date. Included in the acquired balances at June 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 $191.0 million with a related purchase discount of $2.9 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 June 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

 

   

June 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 )     -       (265 )     -       -       -       (65 )     (420 )

Recoveries

    398       -       8       -       -       13       44       463  

Provision

    24       1       435       11       24       363       90       948  

Ending Balance

  $ 1,753     $ 77     $ 1,462     $ 155     $ 2,347     $ 3,523     $ 439     $ 9,756  

Ending Balance:

                                                               

Individually evaluated for impairment

  $ -     $ -     $ 102     $ -     $ 46     $ 227     $ -     $ 375  

Collectively evaluated for impairment

  $ 1,753     $ 77     $ 1,326     $ 155     $ 2,301     $ 3,296     $ 439     $ 9,347  

Purchased Credit Impaired (1)

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

Loans receivable:

                                                               

Ending Balance

  $ 204,099     $ 15,173     $ 224,986     $ 22,511     $ 399,166     $ 298,967     $ 69,129     $ 1,234,031  

Ending Balance:

                                                               

Individually evaluated for impairment

  $ 9     $ -     $ 2,928     $ -     $ 8,329     $ 5,889     $ 333     $ 17,488  

Collectively evaluated for impairment

  $ 204,090     $ 15,173     $ 221,854     $ 22,511     $ 385,610     $ 293,078     $ 68,796     $ 1,211,112  

Purchased Credit Impaired (1)

  $ -     $ -     $ 204     $ -     $ 5,227     $ -     $ -     $ 5,431  

 

 

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

 

Credit Quality Indicators

 

   

June 30, 2018

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands)

 

Real Estate Loans:

                                       

Construction and land

  $ 201,360     $ 2,378     $ 352     $ 9     $ 204,099  

Farmland

    15,173       -       -       -       15,173  

1-4 family residential

    211,994       8,189       2,248       2,555       224,986  

Multi-family residential

    22,472       -       39       -       22,511  

Nonfarm nonresidential

    380,173       5,016       5,941       8,036       399,166  

Commercial

    284,257       6,900       4,859       2,951       298,967  

Consumer

    67,654       1,063       79       333       69,129  

Total

  $ 1,183,083     $ 23,546     $ 13,518     $ 13,884     $ 1,234,031  

 

 

   

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 June 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

 

   

June 30, 2018

 
   

(Dollars in thousands)

 
                                                   

Recorded

 
                   

Greater

                           

Investment Over

 
   

30-59 Days

   

60-89 Days

   

Than 90 Days

   

Total

           

Total Loans

   

90 Days Past Due

 
   

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Current

   

Receivable

   

and Still Accruing

 

Real Estate Loans:

                                                       

Construction and land

  $ 420     $ -     $ 3     $ 423     $ 203,676     $ 204,099     $ -  

Farmland

    -       -       -       -       15,173       15,173       -  

1-4 family residential

    1,091       363       1,100       2,554       222,432       224,986       37  

Multi-family residential

    -       39       -       39       22,472       22,511       -  

Nonfarm nonresidential

    276       84       3,336       3,696       395,470       399,166       -  

Commercial

    89       68       2,620       2,777       296,190       298,967       89  

Consumer

    120       22       327       469       68,660       69,129       4  

Total

  $ 1,996     $ 576     $ 7,386     $ 9,958     $ 1,224,073     $ 1,234,031     $ 130  

 

   

December 31, 2017

 
   

(Dollars in thousands)

 
                                                   

Recorded

 
                   

Greater

                           

Investment Over

 
   

30-59 Days

   

60-89 Days

   

Than 90 Days

   

Total

           

Total Loans

   

90 Days Past Due

 
   

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Current

   

Receivable

   

and Still Accruing

 

Real Estate Loans:

                                                       

Construction and land

  $ -     $ -     $ 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 June 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 $83,000 and $57,000 for the six months ending June 30, 2018 and 2017, respectively.

 

   

June 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

  $ -     $ -     $ -     $ 45  

Farmland

    -       -       -       -  

1-4 family residential

    232       271       102       314  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    428       465       46       337  

Other Loans:

                               

Commercial

    391       434       227       440  

Consumer

    -       -       -       -  

Total

  $ 1,051     $ 1,170     $ 375     $ 1,136  
                                 

With no allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ 9     $ 37     $ -     $ 13  

Farmland

    -       -       -       -  

1-4 family residential

    2,696       3,193       -       2,767  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    5,655       5,870       -       5,568  

Other Loans:

                               

Commercial

    5,498       7,308       -       6,015  

Consumer

    333       373       -       378  

Total

  $ 14,191     $ 16,781     $ -     $ 14,741  
                                 

Total Impaired Loans:

                               

Real Estate Loans:

                               

Construction and land

  $ 9     $ 37     $ -     $ 58  

Farmland

    -       -       -       -  

1-4 family residential

    2,928       3,464       102       3,081  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    6,083       6,335       46       5,905  

Other Loans:

                               

Commercial

    5,889       7,742       227       6,455  

Consumer

    333       373       -       378  

Total

  $ 15,242     $ 17,951     $ 375     $ 15,877  

 

 

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

    (79 )

Carrying amount - June 30, 2018

  $ 5,431  

 

The Bank seeks to assist customers that are experiencing financial difficulty by renegotiating loans within lending regulations and guidelines. The Bank makes loan modifications, primarily utilizing internal renegotiation programs via direct customer contact, that manage customers’ debt exposures held only by the Bank. Additionally, the Bank makes loan modifications with customers who have elected to work with external renegotiation agencies and these modifications provide solutions to customers’ entire unsecured debt structures. During the periods ended June 30, 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 June 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 none that had subsequently defaulted during the six months ended June 30, 2018.

 

Modifications as of June 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

    2     $ 703     $ 443  

Nonfarm nonresidential

    3       2,412       2,411  

Other Loans:

                       

Commercial

    8       5,944       4,179  

Total

    13     $ 9,059     $ 7,033  

 

 

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 $302.4 million and standby and commercial letters of credit of approximately $10.2 million at June 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 $1.2 million and $854,000 for the six months ended June 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)

 

July 1, 2018 through June 30, 2019

  $ 2,455  

July 1, 2019 through June 30, 2020

    1,758  

July 1, 2020 through June 30, 2021

    1,322  

July 1, 2021 through June 30, 2022

    1,123  

July 1, 2022 and Thereafter

    5,743  

Total Future Minimum Lease Payments

  $ 12,401  

 

In the normal course of business, the Bank 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 Bank’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 June 30, 2018 and December 31, 2017. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

 

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

June 30, 2018

                               

Available for Sale:

                               

U.S. Government Agency Securities

  $ 9,431     $ -     $ 9,431     $ -  

Corporate Securities

    13,033       -       13,033       -  

Mortgage-Backed Securities

    138,912       -       138,912       -  

Municipal Securities

    90,041       -       81,774       8,267  

Other Securities

    722       -       722       -  

Total

  $ 252,139     $ -     $ 243,872     $ 8,267  
                                 
                                 

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)

 

June 30, 2018

                               

Assets:

                               

Impaired Loans

  $ 20,265     $ -     $ 20,265     $ -  

Repossessed Assets

    1,309       -       1,309       -  

Total

  $ 21,574     $ -     $ 21,574     $ -  
                                 

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

 

   

Carrying

   

Total

                         
   

Amount

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

June 30, 2018

                                       

Financial Assets:

                                       

Cash and Short-Term Investments

  $ 78,383     $ 78,383     $ 78,383     $ -     $ -  

Securities

    252,139       252,139       -       243,872       8,267  

Mortgage Loans Held for Sale

    -       -       -       -       -  

Loans - Net

    1,224,275       1,202,215       -       -       1,202,215  

Cash Value of BOLI

    24,275       24,275       -       24,275       -  

Other Equity Securities

    10,064       10,064       -       -       10,064  

Total

  $ 1,589,136     $ 1,567,076     $ 78,383     $ 268,147     $ 1,220,546  
                                         

Financial Liabilities:

                                       

Deposits

  $ 1,329,493     $ 1,318,851     $ -     $ -     $ 1,318,851  

Borrowings

    102,166       92,042       -       92,042       -  

Total

  $ 1,431,659     $ 1,410,893     $ -     $ 92,042     $ 1,318,851  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

   

Carrying

   

Total

                         
   

Amount

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

December 31, 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 June 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).

 

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 June 30, 2018, and its results of operations for the three and six months ended June 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 eighteen 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 June 30, 2018, we had total assets of $1.6 billion, total loans of $1.2 billion, total deposits of $1.3 billion, and total shareholders’ equity of $210.6 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 their 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.

 

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.

 

Financial Highlights

 

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

 

 

Total assets of $1.6 billion, a $328.0 million, or 24.8%, increase from December 31, 2017.

 

 

Total loans held for investment of $1.2 billion, a $258.7 million, or 26.5%, increase from December 31, 2017.

 

 

Total deposits of $1.3 billion, a $274.0 million, or 26.0%, increase from December 31, 2017.

 

 

Net income of $3.6 million, a $1.5 million, or 77.3%, increase from the quarter ended June 30, 2017.

 

 

Net interest income of $15.0 million, an increase of $3.3 million, or 28.1%, from the three months ended June 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 1.14%, compared to 1.30% as of December 31, 2017.

 

 

Return on average assets of 0.83% for the six months ended June 30, 2018, compared to 0.70% for the six months ended June 30, 2017.

 

 

Return on average equity of 7.35% for the six months ended June 30, 2018, compared to 6.96% for the six months ended June 30, 2017.

 

 

Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 11.20%, 12.43%, 12.43% and 13.11%, respectively, compared to 13.53%, 14.49%, 14.49%, and 15.23%, respectively as of December 31, 2017.

 

 

Book value per share of $18.26, an increase of 3.9% from $17.58 at December 31, 2017.

 

Results of Operations for the Three and Six Months Ended June 30, 2018 and 2017

 

Performance Summary

 

For the three months ended June 30, 2018, net income was $3.6 million, or $0.34 per basic share and $0.33 per diluted share, compared to net income of $2.1 million, or $0.30 per basic share and $0.28 per diluted share, for the three months ended June 30, 2017. Return on average assets, on an annualized basis, increased to 0.90% for the three months ended June 30, 2018, from 0.70% for the three months ended June 30, 2017. Return on average equity, on an annualized basis, increased to 7.75% for the three months ended June 30, 2018, as compared to 6.96% for the three months ended June 30, 2017.

 

For the six months ended June 30, 2018, net income was $6.7 million, or $0.65 per basic share and $0.62 per diluted share, compared to net income of $4.0 million, or $0.58 per basic share and $0.56 per diluted share, for the six months ended June 30, 2017. Return on average assets, on an annualized basis, increased to 0.83% for the six months ended June 30, 2018, from 0.70% for the six months ended June 30, 2017. Return on average equity, on an annualized basis, increased to 7.35% for the six months ended June 30, 2018, as compared to 6.96% for the six months ended June 30, 2017. The increase in net income for both the three and six months ended June 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.

 

Notable noncore events impacting earnings during the three and six months ended June 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 $1.3 million and $2.4 million for the three and six months ended June 30, 2017, respectively. We incurred $415,000 and $927,000 in noninterest expenses related to the acquisition of MBI in the three and six months ended June 30, 2018, respectively. We 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 three months ended June 30, 2018. Core net income for the three months ended June 30, 2018 was $4.1 million, or $0.37 per diluted share, compared to core net income of $1.2 million, or $0.17 per diluted share, for the three months ended June 30, 2017. As adjusted, core return on average assets and core return on average equity, in each case on an annualized basis, were 1.00% and 8.69% for the three months ended June 30, 2018, compared to 0.41% and 4.08% for the three months ended June 30, 2017. Core net income, which excludes noncore income and expenses, for the six months ended June 30, 2018 was $7.6 million, or $0.70 per diluted share, compared to core net income of $2.4 million, or $0.34 per diluted share, for the six months ended June 30, 2017. As adjusted, core return on average assets and core return on average equity, in each case on an annualized basis, were 0.94% and 8.33% for the six months ended June 30, 2018, compared to 0.42% and 4.18% for the six months ended June 30, 2017.

 

 

Net Interest Income 

 

Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest sensitive assets and liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact net interest income. The variance driven by the changes in the amount and mix of interest-earning assets and interest-bearing liabilities is referred to as a “volume change.” Changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds are referred to as a “rate change.”

 

To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. We calculate average assets, liabilities, and capital using a monthly average.

 

For the three months ended June 30, 2018, net interest income totaled $15.0 million, and net interest margin and net interest spread were 3.98% and 3.70%, respectively, compared to $11.7 million, 4.34%, and 4.11%, respectively, for the three months ended June 30, 2017. The average yield on the loan portfolio was 5.46%, compared to 5.72% for the three months ended June 30, 2017, and the average yield on total interest-earning assets was 4.81%, compared to 4.97% for the three months ended June 30, 2017. These metrics were impacted during the three months ended June 30, 2017 by the sale of a participation interest in an impaired credit acquired from American Gateway in 2015. Excluding the effect of this transaction, for the three months ended June 30, 2017, net interest income was $10.4 million, net interest margin and net interest spread were 3.86% and 3.64%, respectively, and average yield on the loan portfolio and on total interest-earning assets were 5.12% and 4.50%, respectively. For the three months ended June 30, 2018, overall cost of funds increased 25 basis points compared to the three months ended June 30, 2017.

 

For the six months ended June 30, 2018, net interest income totaled $29.5 million, and net interest margin and net interest spread were 3.97% and 3.72%, respectively, compared to $22.3 million, 4.19%, and 3.99%, respectively, for the six months ended June 30, 2017. The average yield on the loan portfolio was 5.39%, compared to 5.53% for the six months ended June 30, 2017, and the average yield on total interest-earning assets was 4.76%, compared to 4.81% for the six months ended June 30, 2017. These metrics were impacted during the six months ended June 30, 2017 by the sale of a participation interest in an impaired credit acquired from American Gateway in 2015. Excluding the effect of this transaction, for the six months ended June 30, 2017, net interest income was $19.8 million, net interest margin and net interest spread were 3.73% and 3.53%, respectively, and average yield on the loan portfolio and on total interest-earning assets were 4.96% and 4.35%, respectively. For the six months ended June 30, 2018, overall cost of funds increased 22 basis points compared to the six months ended June 30, 2017. Due to the continued impact of new loan growth, runoff of higher yielding loan balances, and competitive deposit pricing, management anticipates continued 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 table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however the balances are reflected in average outstanding balances for the period. For the three and six months ended June 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 June 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

  $ 1,212,977     $ 16,549       5.46 %   $ 867,528     $ 12,398       5.72 %

Securities available for sale

    263,108       1,414       2.15       197,782       972       1.97  

Interest-bearing deposits in other banks

    29,204       128       1.75       12,219       30       0.98  

Total interest-earning assets

    1,505,289       18,091       4.81       1,077,529       13,400       4.97  

Allowance for loan losses

    (9,638 )                     (8,314 )                

Noninterest-earning assets

    128,544                       104,227                  

Total assets

  $ 1,624,195     $ 18,091             $ 1,173,442     $ 13,400          

Liabilities and Shareholders’ Equity

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 1,014,520     $ 2,555       1.01 %   $ 724,880     $ 1,501       0.83 %

Advances from Federal Home Loan Bank (“FHLB”)

    94,222       507       2.15       66,494       170       1.02  

Other borrowings

    16,220       53       1.31       6,315       39       2.47  

Total interest-bearing liabilities

    1,124,962       3,115       1.11       797,689       1,710       0.86  

Noninterest-bearing liabilities:

                                               

Noninterest-bearing deposits

    306,042                       252,299                  

Other liabilities

    5,427                       5,564                  

Total noninterest-bearing liabilities

    311,469                       257,863                  

Shareholders’ equity

    187,764                       117,890                  

Total liabilities and shareholders’ equity

  $ 1,624,195                     $ 1,173,442                  

Net interest rate spread

                    3.70 %                     4.11 %

Net interest income

          $ 14,976                     $ 11,690          

Net interest margin

                    3.98 %                     4.34 %

 

 

   

For the Six Months Ended June 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

  $ 1,195,564     $ 32,225       5.39 %   $ 850,680     $ 23,539       5.53 %

Securities available for sale

    254,104       2,837       2.23       199,883       1,919       1.92  

Interest-bearing deposits in other banks

    33,419       255       1.53       10,782       47       0.87  

Total interest-earning assets

    1,483,087       35,317       4.76       1,061,345       25,505       4.81  

Allowance for loan losses

    (9,301 )                     (8,258 )                

Noninterest-earning assets

    145,688                       101,109                  

Total assets

  $ 1,619,474     $ 35,317             $ 1,154,196     $ 25,505          

Liabilities and Shareholders’ Equity

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 1,020,266     $ 4,853       0.95 %   $ 718,007     $ 2,849       0.79 %

Advances from Federal Home Loan Bank (“FHLB”)

    84,665       880       2.08       65,048       326       1.00  

Other borrowings

    18,975       108       1.14       6,706       80       2.39  

Total interest-bearing liabilities

    1,123,906       5,841       1.04       789,761       3,255       0.82  

Noninterest-bearing liabilities:

                                               

Noninterest-bearing deposits

    306,733                       242,841                  

Other liabilities

    5,380                       5,776                  

Total noninterest-bearing liabilities

    312,113                       248,617                  

Shareholders’ equity

    183,455                       115,818                  

Total liabilities and shareholders’ equity

  $ 1,619,474                     $ 1,154,196                  

Net interest rate spread

                    3.72 %                     3.99 %

Net interest income

          $ 29,476                     $ 22,250          

Net interest margin

                    3.97 %                     4.19 %

 

 

The following tables present information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities, and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

 

   

For the Three Months Ended June 30, 2018
compared to the Three Months Ended
June 30, 2017

 
   

Increase (Decrease) due to change in

 
   

Volume

   

Rate

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Interest-earning assets:

                       

Total loans

  $ 4,713     $ (562 )   $ 4,151  

Securities available for sale

    351       91       442  

Interest-earning deposits in other banks

    74       24       98  

Total increase in interest income

  $ 5,138     $ (447 )   $ 4,691  

Interest-bearing liabilities:

                       

Interest-bearing deposits

  $ 729     $ 325     $ 1,054  

Advances from FHLB

    149       188       337  

Other borrowings

    32       (18 )     14  

Total increase in interest expense

    910       495       1,405  

Increase in net interest income

  $ 4,228     $ (942 )   $ 3,286  

 

 

   

For the Six Months Ended June 30, 2018
compared to the Six Months Ended
June 30, 2017

 
   

Increase (Decrease) due to change in

 
   

Volume

   

Rate

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Interest-earning assets:

                       

Total loans

  $ 9,296     $ (610 )   $ 8,686  

Securities available for sale

    605       313       918  

Interest-earning deposits in other banks

    173       35       208  

Total increase in interest income

  $ 10,074     $ (262 )   $ 9,812  

Interest-bearing liabilities:

                       

Interest-bearing deposits

  $ 1,438     $ 566     $ 2,004  

Advances from FHLB

    204       350       554  

Other borrowings

    70       (42 )     28  

Total increase in interest expense

    1,712       874       2,586  

Increase in net interest income

  $ 8,362     $ (1,136 )   $ 7,226  

 

 

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 $474,000 for the three months ended June 30, 2018 and $1.3 million for the same period in 2017. For the six months ended June 30, 2018 and 2017, the provision for loan losses was $948,000 and $1.7 million, respectively. The lower provision during the first three and six months of 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
June 30,

   

Increase

 
   

2018

   

2017

    (Decrease)  
   

(Dollars in thousands) (Unaudited)

 

Noninterest income:

                       

Service charges on deposit accounts

  $ 635     $ 525     $ 110  

Debit card fee income

    170       169       1  

Automated Teller Machine (“ATM”) fees

    85       48       37  

Bank-owned life insurance income

    165       159       6  

Brokerage commissions

    278       237       41  

Correspondent bank income

    81       99       (18 )

Rental income

    165       23       142  

Pass-through income (loss) from SBIC partnerships

    222       190       32  

Other

    205       150       55  

Total noninterest income

  $ 2,006     $ 1,600     $ 406  

 

   

For the Six Months Ended
June 30,

   

Increase

 
   

2018

   

2017

    (Decrease)  
   

(Dollars in thousands) (Unaudited)

 

Noninterest income:

                       

Service charges on deposit accounts

  $ 1,245     $ 1,037     $ 208  

Debit card fee income

    330       332       (2 )

Automated Teller Machine (“ATM”) fees

    175       98       77  

Bank-owned life insurance income

    334       309       25  

Brokerage commissions

    512       443       69  

Correspondent bank income

    162       165       (3 )

Rental income

    329       45       284  

Gain on sale of other assets

    47             47  

Pass-through income (loss) from SBIC partnerships

    222       190       32  

Other

    385       285       100  

Total noninterest income

  $ 3,741     $ 2,904     $ 837  

 

Noninterest income for the three months ended June 30, 2018 increased $406,000, or 25.4%, to $2.0 million compared to noninterest income of $1.6 million for the same period in 2017. Noninterest income for the six months ended June 30, 2018 increased $837,000, or 28.8%, to $3.7 million compared to noninterest income of $2.9 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 $635,000 for the three months ended June 30, 2018, an increase of $110,000 over the same period in 2017. For the six months ended June 30, 2018, service charges on deposit accounts were $1.2 million, an increase of $208,000 over the same period in 2017. The increase for both the three and six months ended June 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 $85,000 and $48,000 for the three months ended June 30, 2018 and 2017, respectively, representing an increase of $37,000 or 77.1%. For the six months ended June 30, 2018 and 2017, ATM fees were $175,000 and $98,000, respectively, representing an increase of $77,000 or 78.6%. The increase was primarily due to the additional accounts from the acquisition of MBI.

 

Rental income. We receive rental income from the sublease of our former corporate offices. Rental income totaled $165,000 and $23,000 during the three months ended June 30, 2018 and 2017, respectively, an increase of $142,000 over the prior year’s comparable period. For the six months ended June 30, 2018 and 2016, rental income totaled $329,000 and $45,000, respectively, an increase of $284,000. The increase during both the three and six months ended June 30, 2018, was primarily as a result of an additional sublease of our former corporate offices.

 

 

Gain on sales of other assets. During the first three months of 2018, we closed two branch locations. As part of the process of closing those branches, we moved the buildings to other real estate owned and recognized $47,000 in gains 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 $55,000, or 36.7%, for the three months ended June 30, 2018, compared to the same period in 2017. For the six months ended June 30, 2018, compared to the same period in 2017, other income increased $100,000, or 35.1%. The increases in both the three and six months ended June 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
June 30,

   

Increase

 
   

2018

   

2017

    (Decrease)  
   

(Dollars in thousands) (Unaudited)

 

Salaries and employee benefits

  $ 6,524     $ 5,397     $ 1,127  

Non-staff expenses:

                       

Occupancy of bank premises

    861       626       235  

Depreciation and amortization

    407       378       29  

Data processing

    355       381       (26 )

FDIC assessment fees

    331       189       142  

Legal and other professional fees

    509       300       209  

Advertising and promotions

    298       333       (35 )

Utilities and communications

    269       258       11  

Ad valorem shares tax

    322       165       157  

Directors’ fees

    92       80       12  

Other real estate owned expenses and write-downs

    7       16       (9 )

Merger and conversion related expenses

    415             415  

Other

    1,635       991       644  

Total noninterest expense

  $ 12,025     $ 9,114     $ 2,911  

 

 

   

For the Six Months Ended
June 30,

   

Increase

 
   

2018

   

2017

    (Decrease)  
   

(Dollars in thousands) (Unaudited)

 

Salaries and employee benefits

  $ 13,228     $ 10,381     $ 2,847  

Non-staff expenses:

                       

Occupancy of bank premises

    1,718       1,247       471  

Depreciation and amortization

    829       768       61  

Data processing

    765       760       5  

FDIC assessment fees

    724       366       358  

Legal and other professional fees

    911       584       327  

Advertising and promotions

    527       663       (136 )

Utilities and communications

    541       491       50  

Ad valorem shares tax

    644       330       314  

Directors’ fees

    251       241       10  

Other real estate owned expenses and write-downs

    9       39       (30 )

Merger and conversion related expenses

    927             927  

Other

    2,895       2,010       885  

Total noninterest expense

  $ 23,969     $ 17,880     $ 6,089  

 

Noninterest expense for the three months ended June 30, 2018 increased $2.9 million, or 31.9%, to $12.0 million, compared to noninterest expense of $9.1 million for the same period in 2017. For the six months ended June 30, 2018, noninterest expense increased $6.1 million, or 34.1%, to $24.0 million, compared to noninterest expense of $17.9 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 $6.5 million for the three months ended June 30, 2018, an increase of $1.1 million, or 20.9%, compared to the same period in 2017. For the six months ended June 30, 2018, salaries and benefits were $13.2 million, an increase of $2.8 million, or 27.4%, 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 and its legacy operations. As of June 30, 2018, we had 241 full-time equivalent employees, compared to 213 as of June 30, 2017.

 

Occupancy of bank premises. Expenses associated with occupancy of premises were $861,000 and $626,000 for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, occupancy and bank premises expenses were $1.7 million and $1.2 million, respectively. The increase for both the three and six months ended June 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 $331,000 and $189,000 for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, FDIC assessment fees were $724,000 and $366,000, respectively. The increase for both the three and six months ended June 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 $509,000 and $300,000 for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, legal and other professional fees were $911,000 and $584,000, respectively. Legal and other professional fees increased $209,000, or 69.7%, and $327,000, or 56.0%, during the three and six months ended June 30, 2018, respectively, compared to the same periods 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 $298,000 and $333,000 for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, advertising and promotions expense was $527,000 and $663,000, respectively. The decrease for both the three and six months ended June 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 $322,000 and $165,000 for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, ad valorem shares tax expense was $644,000 and $330,000, respectively. The increase for both the three and six months ended June 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 six months ended June 30, 2018 were related to the acquisition of MBI.

 

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 $644,000 for the three months ended June 30, 2018 compared to the same period in 2017. For the six months ended June 30, 2018, other noninterest expense increased $885,000 compared to the same period in 2017. The increase in other expenses for both the three and six months ended June 30, 2018, compared to the same periods in 2017, was primarily due to a $190,000 atypical franchise tax charge, NASDAQ listing fees of $166,000, of which $141,000 was from the three months ended June 30, 2018, 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 June 30, 2018, income tax expense totaled $845,000, an increase of $26,000, or 3.2%, compared to the same period in 2017. For the six months ended June 30, 2018, income tax expense totaled $1.6 million, a decrease of $32,000, or 2.0%, compared to the same period in 2017. Our effective tax rates for the three months ended June 30, 2018 and 2017 were 18.8% and 28.5%, respectively. For the six months ended June 30, 2018 and 2017, our effective tax rates were 18.7% and 28.3%, respectively. The decrease in our effective tax rate for both the three and six months ended June 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 $328.0 million, or 24.8%, from December 31, 2017 to June 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 June 30, 2018, total loans held for investment were $1.2 billion, an increase of $258.7 million, or 26.5%, 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, $201,000 in mortgage loans were classified as loans held for sale as of December 31, 2017 and none at June 30, 2018.

 

Total loans as a percentage of total deposits were 92.8% and 92.4% as of June 30, 2018 and December 31, 2017, respectively. Total loans as a percentage of total assets were 74.8% and 73.8% as of June 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 June 30, 2018

(Unaudited)

   

As of December 31, 2017

 
   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 

Commercial

  $ 298,967       24.2 %   $ 254,427       26.1 %

Real estate:

                               

Construction and land

    204,099       16.6       143,535       14.7  

Farmland

    15,173       1.2       10,480       1.1  

1-4 family residential

    224,986       18.2       157,505       16.2  

Multi-family residential

    22,511       1.8       20,717       2.1  

Nonfarm nonresidential

    399,166       32.4       337,699       34.6  

Consumer

    69,129       5.6       50,921       5.2  

Total loans held for investment

  $ 1,234,031       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 $44.5 million, or 17.5%, to $299.0 million as of June 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 $60.6 million, or 42.2%, to $204.1 million as of June 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 $67.5 million, or 42.8%, to $225.0 million as of June 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 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 $61.5 million, or 18.2%, to $399.2 million as of June 30, 2018 from $337.7 million as of December 31, 2017, primarily due to loans acquired from MBI.

 

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 June 30, 2018

 
   

One Year
or Less

   

One
Through
Five Years

   

After Five
Years

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Commercial

  $ 99,440     $ 153,496     $ 46,031     $ 298,967  

Real estate:

                               

Construction and land

    98,579       70,877       34,643       204,099  

Farmland

    5,423       7,454       2,296       15,173  

1-4 family residential

    36,575       101,131       87,280       224,986  

Multi-family residential

    2,018       9,519       10,974       22,511  

Nonfarm nonresidential

    57,567       211,301       130,298       399,166  

Consumer

    30,114       29,777       9,238       69,129  

Total loans held for investment

  $ 329,716     $ 583,555     $ 320,760     $ 1,234,031  

Amounts with fixed rates

  $ 122,176     $ 377,283     $ 225,517     $ 724,976  

Amounts with floating rates

    207,540       206,272       95,243       509,055  

 

   

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 $15.3 million and $12.9 million in nonperforming assets as of June 30, 2018 and December 31, 2017, respectively. We had $14.0 million in nonperforming loans as of June 30, 2018 compared to $12.7 million as of December 31, 2017. The increase in nonperforming assets and nonperforming loans from December 31, 2017 to June 30, 2018 is primarily due to the acquisition of MBI and the closure of two 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 June 30,
2018
(Unaudited)

   

As of December 31,
201
7

 
   

(Dollars in thousands)

 

Nonaccrual loans

  $ 13,884     $ 12,535  

Accruing loans 90 or more days past due

    130       132  

Total nonperforming loans

    14,014       12,667  

Repossessed assets

    36        

Other real estate owned:

               

Commercial real estate, construction, land and land development

    1,273       227  

Residential real estate

           

Total other real estate owned

    1,273       227  

Total nonperforming assets

  $ 15,323     $ 12,894  

Restructured loans-nonaccrual

  $ 3,311     $ 2,008  

Restructured loans-accruing

    3,722       1,052  

Ratio of nonperforming loans to total loans held for investment

    1.14 %     1.30 %

Ratio of nonperforming assets to total assets

    0.93       0.98  

 

   

As of June 30,
2018
(Unaudited)

   

As of December 31,
2017

 
   

(Dollars in thousands)

 

Nonaccrual loans by category:

               

Real estate:

               

Construction and land

  $ 9     $ 92  

1-4 family residential

    2,555       2,429  

Multi-family residential

           

Nonfarm nonresidential

    8,036       5,935  

Commercial

    2,951       3,638  

Consumer

    333       441  

Total

  $ 13,884     $ 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 as of each monthly reporting period. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

 

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

 

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

 

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 June 30, 2018

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Real estate:

                                       

Construction and land

  $ 201,360     $ 2,378     $ 352     $ 9     $ 204,099  

Farmland

    15,173                         15,173  

1-4 family residential

    211,994       8,189       2,248       2,555       224,986  

Multi-family residential

    22,472             39             22,511  

Nonfarm nonresidential

    380,173       5,016       5,941       8,036       399,166  

Commercial

    284,257       6,900       4,859       2,951       298,967  

Consumer

    67,654       1,063       79       333       69,129  

Total

  $ 1,183,083     $ 23,546     $ 13,518     $ 13,884     $ 1,234,031  

 

   

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 June 30, 2018, the allowance for loan losses totaled $9.8 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 Six Months
Ended
June 30, 2018
(Unaudited)

   

As of and For the Year

Ended December 31,
2017

 
   

(Dollars in thousands)

 

Average loans outstanding(1)

  $ 1,195,564     $ 890,683  

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

  $ 1,234,031     $ 975,284  

Allowance for loan losses at beginning of period

  $ 8,765     $ 8,162  

Provision for loan losses

    948       4,237  

Charge-offs:

               

Real estate:

               

Construction, land and farmland

    90       2  

Residential

    265       184  

Nonfarm non-residential

          617  

Commercial

          2,945  

Consumer

    65       36  

Total charge-offs

    420       3,784  

Recoveries:

               

Real estate:

               

Construction, land and farmland

    398       1  

Residential

    8       48  

Nonfarm non-residential

          23  

Commercial

    13       40  

Consumer

    44       38  

Total recoveries

    463       150  

Net charge-offs (recoveries)

    (43 )     3,634  

Allowance for loan losses at end of period

  $ 9,756     $ 8,765  

Ratio of allowance to end of period loans held for investment

    0.79 %     0.90 %

Ratio of net charge-offs (recoveries) 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 June 30,
2018

(Unaudited)

   

As of December 31,
2017

 
   

Amount

   

Percent
to Total

   

Amount

   

Percent
to Total

 
   

(Dollars in thousands)

 

Real estate:

                               

Construction and land

  $ 1,753       18.0 %   $ 1,421       16.2 %

Farmland

    77       0.8 %     76       0.9 %

1-4 family residential

    1,462       15.0 %     1,284       14.7 %

Multi-family residential

    155       1.6 %     144       1.6 %

Nonfarm nonresidential

    2,347       24.0 %     2,323       26.5 %

Total real estate

    5,794       59.4 %     5,248       59.9 %

Commercial

    3,523       36.1 %     3,147       35.9 %

Consumer

    439       4.5 %     370       4.2 %

Total allowance for loan losses

  $ 9,756       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 June 30, 2018, the carrying amount of investment securities totaled $252.1 million, an increase of $73.0 million, or 40.8%, compared to $179.1 million as of December 31, 2017. Our securities portfolio represented 15.3% and 13.6% of total assets as of June 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 June 30, 2018

 
   

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair Value

 
   

(Dollars in thousands) (Unaudited)

 

U.S. government agencies

  $ 9,677     $     $ 246     $ 9,431  

Corporate bonds

    13,063       113       143       13,033  

Mortgage-backed securities

    143,419       3       4,510       138,912  

Municipal securities

    90,984       136       1,079       90,041  

Other securities

    793             71       722  

Total

  $ 257,936     $ 252     $ 6,049     $ 252,139  

 

   

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 June 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 June 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

  $ 994       1.11 %   $ 1,151       2.27 %   $ 7,286       2.65 %   $       %   $ 9,431       2.44 %

Corporate bonds

          %     8,631       3.45 %     4,402       5.22 %           %     13,033       4.05 %

Mortgage-backed securities

    34       0.98 %     10,498       1.72 %     65,036       1.79 %     63,344       2.38 %     138,912       2.05 %

Municipal securities

    10,491       1.71 %     31,610       1.98 %     28,426       2.17 %     19,514       2.64 %     90,041       2.15 %

Other securities

          %           %           %     722       3.85 %     722       3.85 %

Total

  $ 11,519       1.66 %   $ 51,890       2.18 %   $ 105,150       2.10 %   $ 83,580       2.45 %   $ 252,139       2.21 %

 

 

 

   

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 4.71 years with an estimated effective duration of 42.79 months as of June 30, 2018.

 

As of June 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 June 30, 2018 were $1.3 billion, an increase of $274.0 million, or 26.0%, 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 June 30, 2018 were $305.3 million, compared to $264.6 million as of December 31, 2017, an increase of $40.7 million, or 15.4%.

 

Average deposits for the six months ended June 30, 2018 were $1.3 billion, an increase of $339,000, or 34.3%, 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 0.95% for the six months ended June 30, 2018. The increase in average rates during the six months ended June 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 0.73% for the six months ended June 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 Six Months
Ended June 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

  $ 38,524       0.81 %   $ 35,258       0.65 %

Negotiable order of withdrawal (“NOW”) accounts

    188,014       0.41 %     116,296       0.25 %

Limited access money market accounts and savings

    344,409       0.60 %     236,766       0.51 %

Certificates and other time deposits > $250k

    154,828       1.45 %     75,801       1.55 %

Certificates and other time deposits < $250k

    294,491       1.46 %     269,143       1.27 %

Total interest-bearing deposits

    1,020,266       0.95 %     733,264       0.86 %

Noninterest-bearing demand accounts

    306,733             254,765        

Total deposits

  $ 1,326,999       0.73 %   $ 988,029       0.64 %

 

The ratio of average noninterest-bearing deposits to average total deposits for the six months ended June 30, 2018 and the year ended December 31, 2017 was 23.1% 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
June 30, 2018
(Unaudited)

   

As of December 31,
2017

 
   

(Dollars in thousands)

 

1 year or less

  $ 83,983     $ 52,402  

More than 1 year but less than 3 years

    38,021       21,198  

3 years or more but less than 5 years

    13,740       16,930  

5 years or more

           

Total

  $ 135,744     $ 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 June 30, 2018 and December 31, 2017, total borrowing capacity of $498.4 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 2.34% as of June 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)

 

June 30, 2018

       

Amount outstanding at quarter-end

  $ 85,000  

Weighted average stated interest rate at quarter-end

    2.34 %

Maximum month-end balance during the quarter

  $ 105,000  

Average balance outstanding during the quarter

  $ 94,222  

Weighted average interest rate during the quarter

    2.16 %
         

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 $2.7 million at both June 30, 2018 and December 31, 2017. This advance carries a variable interest equal to the Wall Street Journal Prime rate. The rate was 5.00% and 4.50% at June 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)

 

June 30, 2018

       

Amount outstanding at quarter-end

  $ 2,700  

Weighted average stated interest rate at quarter-end

    5.00 %

Maximum month-end balance during the quarter

  $ 2,700  

Average balance outstanding during the quarter

  $ 2,700  

Weighted average interest rate during the quarter

    4.80 %
         

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 June 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 5.00% and 4.50% at June 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 and will mature on September 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)

 

June 30, 2018

       

Amount outstanding at quarter-end

  $ 862  

Weighted average stated interest rate at quarter-end

    5.00 %

Maximum month-end balance during the quarter

  $ 862  

Average balance outstanding during the quarter

  $ 862  

Weighted average interest rate during the quarter

    4.80 %
         

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 June 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)

 

June 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

  $ 289  

Weighted average interest rate during the quarter

    2.62 %
         

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 six months ended June 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 June 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 aggregateof  $118.5 million and $113.5 million, respectively. There were no funds under these lines of credit outstanding as of June 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 six months ended June 30, 2018 and the year ended December 31, 2017, respectively.

 

   

For the Six
Months Ended
June 30, 2018

   

For the Year
Ended
December 31,
201
7

 
   

(Unaudited)

         

Sources of Funds:

               

Deposits:

               
Noninterest-bearing     19.0 %     21.2 %

Interest-bearing

    63.0 %     61.1 %

Advances from FHLB

    5.2 %     5.5 %

Other borrowings

    1.2 %     0.5 %

Other liabilities

    0.3 %     0.7 %

Shareholders’ equity

    11.3 %     11.0 %

Total

    100.0 %     100.0 %

Uses of Funds:

               

Loans, net of allowance for loan losses

    73.2 %     73.5 %

Securities available for sale

    15.7 %     16.3 %

Interest-bearing deposits in other banks

    2.1 %     1.7 %

Other noninterest-earning assets

    9.0 %     8.5 %

Total

    100.0 %     100.0 %

Average noninterest-bearing deposits to average deposits

    23.1 %     25.8 %

Average loans to average deposits

    90.1 %     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 40.5% for the six months ended June 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 4.71 years and an effective duration of 42.79 months as of June 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 June 30, 2018, we had outstanding $302.4 million in commitments to extend credit and $10.2 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 June 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 June 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 $210.6 million as of June 30, 2018, compared to $179.9 million as of December 31, 2017, an increase of $30.7 million, or 17.1%. This increase was primarily due to a capital offering resulting in $27.2 million in net proceeds and $6.7 million in net income, offset with $2.9 million in the change in unrealized losses on our investment portfolio and $1.4 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 July 19, 2018, our Board of Directors (the “Board”) declared a quarterly dividend based upon our financial performance for the three months ended June 30, 2018 in the amount of $0.08 per share to the common shareholders of record as of August 15, 2018. The dividend is to be paid on August 31, 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 June 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 June 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)

  $ 188,099       13.11 %   $ 181,565       15.23 %

Tier 1 capital (to risk weighted assets)

    178,343       12.43 %     172,800       14.49 %

Common Equity Tier 1 capital (to risk weighted assets)

    178,343       12.43 %     172,800       14.49 %

Tier 1 Leverage capital (to average assets)

    178,343       11.20 %     172,800       13.53 %
                                 

Business First Bank

                               

Total capital (to risk weighted assets)

  $ 173,434       12.10 %   $ 120,806       10.24 %

Tier 1 capital (to risk weighted assets)

    163,678       11.42 %     112,041       9.50 %

Common Equity Tier 1 capital (to risk weighted assets)

    163,678       11.42 %     112,041       9.50 %

Tier 1 Leverage capital (to average assets)

    163,678       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 June 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 June 30, 2018 and December 31, 2017, respectively. As of June 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 2.34% and 1.96%, respectively, and maturities ranging from 2018 through 2022. The advance under the FNBB long-term borrowing totaled $2.7 million at both June 30, 2018 and December 31, 2017. 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 5.00% and 4.50% at June 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 June 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 5.00% and 4.50% at June 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.

 

   

As of June 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

  $ 2,455     $ 3,080     $ 2,021     $ 4,845     $ 12,401  

Time deposits

    334,373       105,408       33,357             473,138  

Advances from FHLB

    55,000             30,000             85,000  

Advances from FNBB

    1,162       600       600       1,200       3,562  

Securities sold under agreements to repurchase

    13,604                         13,604  

Standby and commercial letters of credit

    8,369       1,592       209             10,170  

Commitments to extend credit

    178,818       83,249       10,880       29,461       302,408  

Total

  $ 593,781     $ 193,929     $ 77,067     $ 35,506     $ 900,283  

 

   

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 June 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

  $ 8,369     $ 1,592     $ 209     $     $ 10,170  

Commitments to extend credit

    178,818       83,249       10,880       29,461       302,408  

Total

  $ 187,187     $ 84,841     $ 11,089     $ 29,461     $ 312,578  

 

 

   

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 June 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

      3.50 %     (3.10 %)     3.00 %     (3.54 %)

+200

      1.60 %     (2.15 %)     1.50 %     (2.53 %)

+100

      0.10 %     (0.92 %)     0.30 %     (0.11 %)

Base

      0.00 %     0.00 %     0.00 %     0.00 %
-100       (4.10 %)     0.27 %     (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.

 

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

 

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

 

 

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

 

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

 

 

   

As of June 30,

(Unaudited)

   

As of

December 31,

 
   

2018

   

2017

   

2017

 
   

(Dollars in thousands, except per share data)

 

Tangible Common Equity

                       

Total shareholders’ equity

  $ 210,629     $ 118,813     $ 179,935  

Adjustments:

                       

Goodwill

    (32,552 )     (6,824 )     (6,824 )

Core deposit and other intangibles

    (4,234 )     (2,141 )     (2,003 )

Total tangible common equity

  $ 173,843     $ 109,848     $ 171,108  

Common shares outstanding(1)

    11,533,171       6,932,570       10,232,495  

Book value per common share

  $ 18.26     $ 17.14     $ 17.58  

Tangible book value per common share

  $ 15.07     $ 15.85     $ 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 June 30, 2018, June 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.

 

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

 

 

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

 

   

As of June 30,

(Unaudited)

   

As of

December 31,

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

Tangible Common Equity

                       

Total shareholders’ equity

  $ 210,629     $ 118,813     $ 179,935  

Adjustments:

                       

Goodwill

    (32,552 )     (6,824 )     (6,824 )

Core deposit and other intangibles

    (4,234 )     (2,141 )     (2,003 )

Total tangible common equity

  $ 173,843     $ 109,848     $ 171,108  

Tangible Assets

                       

Total assets

  $ 1,649,207     $ 1,169,086     $ 1,321,256  

Adjustments:

                       

Goodwill

    (32,552 )     (6,824 )     (6,824 )

Core deposit and other intangibles

    (4,234 )     (2,141 )     (2,003 )

Total tangible assets

  $ 1,612,421     $ 1,160,121     $ 1,312,429  

Common Equity to Total Assets

    12.8 %     10.2 %     13.6 %

Tangible Common Equity to Tangible Assets

    10.8 %     9.5 %     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).

 

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.

     

August 10, 2018

 

/s/ David R. Melville, III

 

 

David R. Melville, III

 

 

President and Chief Executive Officer

     

August 10, 2018

 

/s/ Gregory Robertson

 

 

Gregory Robertson

 

 

Chief Financial Officer

 

63