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Business First Bancshares, Inc. - Quarter Report: 2019 September (Form 10-Q)

bfbi20190930_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 SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

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: 001-38447

 


 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $1.00 per share

BFST

NASDAQ Global Select Market

 

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 every Interactive Data File required to be submitted 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 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

Smaller reporting company

   

Emerging growth company

 

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

 

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

 

As of November 1, 2019, the issuer has outstanding 13,277,803 shares of common stock, par value $1.00 per share.

 



 

 

 

BUSINESS FIRST BANCSHARES, INC. 

 

PART I - FINANCIAL INFORMATION

 

     

Item 1.

Financial Statements

3

     

 

Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018

3
     

 

Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018

4
     

 

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018

5
     

 

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2019 and 2018

6
     

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018

8
     

 

Notes to Unaudited Consolidated Financial Statements

10
     

Item 2.

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

31
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

59
     

Item 4.

Controls and Procedures

59
   

PART II - OTHER INFORMATION

 

     

Item 1.

Legal Proceedings

60
     

Item 1A.

Risk Factors

60
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60
     

Item 3.

Defaults Upon Senior Securities

60
     

Item 4.

Mine Safety Disclosures

60
     

Item 5.

Other Information

61
     

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)

 

   

September 30, 2019

   

December 31,

 
   

(Unaudited)

   

2018

 
ASSETS  

Cash and Due from Banks

  $ 63,356     $ 96,072  

Federal Funds Sold

    43,705       41,836  

Securities Available for Sale, at Fair Values

    288,231       309,516  

Mortgage Loans Held for Sale

    256       58  

Loans and Lease Receivable, Net of Allowance for Loan Losses of $12,090 at September 30, 2019 and $11,220 at December 31, 2018

    1,682,637       1,517,249  

Premises and Equipment, Net

    27,092       15,114  

Accrued Interest Receivable

    7,513       8,223  

Other Equity Securities

    12,697       9,282  

Other Real Estate Owned

    2,326       1,909  

Cash Value of Life Insurance

    32,398       31,882  

Deferred Taxes

    2,674       3,848  

Goodwill

    48,333       49,488  

Core Deposit Intangible

    6,916       7,885  

Other Assets

    2,706       2,534  

Total Assets

  $ 2,220,840     $ 2,094,896  
                 
LIABILITIES  

Deposits:

               

Noninterest Bearing

  $ 406,146     $ 382,354  

Interest Bearing

    1,327,244       1,351,580  

Total Deposits

    1,733,390       1,733,934  

Securities Sold Under Agreements to Repurchase

    31,037       12,229  

Subordinated Debt

    25,000       25,000  

Federal Home Loan Bank Borrowings

    128,000       55,000  

Accrued Interest Payable

    1,837       1,374  

Other Liabilities

    21,236       7,301  

Total Liabilities

    1,940,500       1,834,838  
                 

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; 13,274,823 and 13,213,280 Shares Issued and Outstanding at September 30, 2019 and December 31, 2018, respectively

    13,275       13,213  

Additional Paid-in Capital

    212,104       212,332  

Retained Earnings

    52,265       37,982  

Accumulated Other Comprehensive Income (Loss)

    2,696       (3,469 )

Total Shareholders' Equity

    280,340       260,058  

Total Liabilities and Shareholders' Equity

  $ 2,220,840     $ 2,094,896  

 

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

 

   

For The Three Months Ended

September 30,

   

For The Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Interest Income:

                               

Interest and Fees on Loans

  $ 24,408     $ 17,777     $ 70,701     $ 50,002  

Interest and Dividends on Securities

    1,783       1,386       5,486       4,223  

Interest on Federal Funds Sold and Due From Banks

    129       162       616       417  

Total Interest Income

    26,320       19,325       76,803       54,642  

Interest Expense:

                               

Interest on Deposits

    5,050       3,127       14,845       7,980  

Interest on Borrowings

    1,012       562       2,387       1,550  

Total Interest Expense

    6,062       3,689       17,232       9,530  

Net Interest Income

    20,258       15,636       59,571       45,112  

Provision for Loan Losses

    479       503       2,414       1,451  

Net Interest Income after Provision for Loan Losses

    19,779       15,133       57,157       43,661  

Other Income:

                               

Service Charges on Deposit Accounts

    1,035       695       3,007       1,941  

Gain (Loss) on Sales of Securities

    26       -       84       -  

Other Income

    861       852       5,361       3,347  

Total Other Income

    1,922       1,547       8,452       5,288  

Other Expenses:

                               

Salaries and Employee Benefits

    8,793       7,190       26,101       20,418  

Occupancy and Equipment Expense

    2,135       1,522       5,913       4,342  

Other Expenses

    3,950       3,158       11,231       11,079  

Total Other Expenses

    14,878       11,870       43,245       35,839  

Income Before Income Taxes

    6,823       4,810       22,364       13,110  

Provision for Income Taxes

    1,312       910       4,351       2,464  

Net Income

  $ 5,511     $ 3,900     $ 18,013     $ 10,646  

Earnings Per Share:

                               

Basic

  $ 0.41     $ 0.34     $ 1.35     $ 0.99  

Diluted

  $ 0.40     $ 0.33     $ 1.32     $ 0.95  

 

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

 

   

For The Three Months Ended

September 30,

   

For The Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Consolidated Net Income

  $ 5,511     $ 3,900     $ 18,013     $ 10,646  
                                 

Other Comprehensive Income (Loss):

                               

Unrealized Gain (Loss) on Investment Securities

    605       (1,010 )     7,720       (4,727 )

Reclassification Adjustment for Gains (Loss) included in Net Income

    26       -       84       -  

Income Tax Effect

    (133 )     212       (1,639 )     993  

Other Comprehensive Income (Loss)

    498       (798 )     6,165       (3,734 )

Consolidated Comprehensive Income (Loss)

  $ 6,009     $ 3,102     $ 24,178     $ 6,912  

 

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 THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(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 June 30, 2018

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

Comprehensive Income:

                                       

Net Income

    -       -       3,900       -       3,900  

Other Comprehensive Income (Loss)

    -       -       -       (798 )     (798 )

Cash Dividends Declared, $0.08 Per Share

    -       -       (923 )     -       (923 )

Stock Issuance

    -       (123 )     -       -       (123 )

Stock Based Compensation Cost

    1       282       -       -       283  

Surrendered Shares of Stock Based Compensation

    -       (7 )     -       -       (7 )

Balances at September 30, 2018

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

Balances at June 30, 2019

  $ 13,361     $ 213,823     $ 48,087     $ 2,198     $ 277,469  

Comprehensive Income:

                                       

Net Income

    -       -       5,511       -       5,511  

Other Comprehensive Income (Loss)

    -       -       -       498       498  

Cash Dividends Declared, $0.10 Per Share

    -       -       (1,333 )     -       (1,333 )

Stock Issuance

    25       339       -       -       364  

Stock Based Compensation Cost

    -       384       -       -       384  

Stock Repurchase

    (111 )     (2,442 )     -       -       (2,553 )

Balances at September 30, 2019

  $ 13,275     $ 212,104     $ 52,265     $ 2,696     $ 280,340  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(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, 2017

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

Comprehensive Income:

                                       

Net Income

    -       -       10,646       -       10,646  

Other Comprehensive Income (Loss)

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

Cash Dividends Declared, $0.22 Per Share

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

Stock Issuance

    1,257       26,404       -       -       27,661  

Stock Based Compensation Cost

    49       851       -       -       900  

Surrendered Shares of Stock Based Compensation

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

Balances at September 30, 2018

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

Balances at December 31, 2018

  $ 13,213     $ 212,332     $ 37,982     $ (3,469 )   $ 260,058  

Comprehensive Income:

                                       

Net Income

    -       -       18,013       -       18,013  

Other Comprehensive Income (Loss)

    -       -       -       6,165       6,165  

Cash Dividends Declared, $0.28 Per Share

    -       -       (3,730 )     -       (3,730 )

Stock Issuance

    139       1,493       -       -       1,632  

Stock Based Compensation Cost

    44       919       -       -       963  

Surrendered Shares of Stock Based Compensation

    (10 )     (198 )     -       -       (208 )

Stock Repurchase

    (111 )     (2,442 )     -       -       (2,553 )

Balances at September 30, 2019

  $ 13,275     $ 212,104     $ 52,265     $ 2,696     $ 280,340  

 

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

   

For The Nine Months Ended

September 30,

 
   

2019

   

2018

 

Cash Flows From Operating Activities:

               

Consolidated Net Income

  $ 18,013     $ 10,646  

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

               

Provision for Loan Losses

    2,414       1,451  

Depreciation and Amortization

    1,223       853  

Net Accretion of Purchase Accounting Valuations

    (1,336 )     (600 )

Noncash Compensation Expense

    755       811  

Net Amortization of Securities

    1,268       1,574  

Gain on Sales of Securities

    (84 )     -  

Noncash Income on Other Equity Securities

    (1,495 )     (292 )

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

    (27 )     (14 )

Increase in Cash Value of Life Insurance

    (516 )     (501 )

Credit for Deferred Income Taxes

    (216 )     (405 )

Gain on Sale of Branch

    (581 )     -  

Changes in Assets and Liabilities:

               

Decrease in Accrued Interest Receivable

    710       77  

(Increase) Decrease in Other Assets

    (325 )     1,523  

Increase in Accrued Interest Payable

    463       216  

Increase in Other Liabilities

    1,235       1,230  

Net Cash Provided by Operating Activities

    21,501       16,569  
                 

Cash Flows From Investing Activities:

               

Purchases of Securities Available for Sale

    (24,162 )     (4,531 )

Proceeds from Maturities / Sales of Securities Available for Sale

    22,825       8,843  

Proceeds from Paydowns of Securities Available for Sale

    29,242       24,817  

Net Cash Paid in Merger

    -       (49,796 )

Net Cash Paid in Sale of Branch

    (17,448 )     -  

Purchases of Other Equity Securities

    (3,030 )     (1,175 )

Redemption of Other Equity Securities

    1,110       312  

Net Increase in Loans

    (172,190 )     (129,308 )

Net Purchases of Premises and Equipment

    (2,034 )     (790 )

Loss on Disposal of Premises and Equipment

    650       -  

Proceeds from Sales of Other Real Estate

    891       109  

Net (Increase) Decrease in Federal Funds Sold

    (1,869 )     12,386  

Net Cash Used in Investing Activities

    (166,015 )     (139,133 )

 

(CONTINUED)

 

 

   

For The Nine Months Ended

September 30,

 
   

2019

   

2018

 

Cash Flows From Financing Activities:

               

Net Increase in Deposits

    24,641       34,587  

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

    18,808       (3,676 )

Net Advances on Federal Home Loan Bank Borrowings

    73,000       5,000  

Net Proceeds (Repayments) from Long Term Borrowings

    -       (300 )

Proceeds from Issuance of Common Stock

    756       27,661  

Repurchase of Common Stock

    (2,553 )     -  

Proceeds from Exercise of Stock Warrants

    876       -  

Payment of Dividends on Common Stock

    (3,730 )     (2,358 )

Net Cash Provided by Financing Activities

    111,798       60,914  

Net Increase (Decrease) in Cash and Cash Equivalents

    (32,716 )     (61,650 )

Cash and Cash Equivalents at Beginning of Period

    96,072       107,591  

Cash and Cash Equivalents at End of Period

  $ 63,356     $ 45,941  
                 

Supplemental Disclosures for Cash Flow Information:

               

Cash Payments for:

               

Interest on Deposits

  $ 14,402     $ 7,564  

Interest on Borrowings

  $ 2,367     $ 1,520  

Income Tax Payments

  $ 4,500     $ 2,205  
                 

Supplemental Schedule for Noncash Investing and Financing Activities:

               

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

  $ 7,804     $ (4,727 )

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

  $ (1,639 )   $ 993  

Transfer of Loans to Other Real Estate

  $ 1,310     $ 319  

Transfer of Premises and Equipment to Other Real Estate

  $ -     $ 1,373  

 

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.  These interim financial statements should be read in conjunction with the audited consolidated financial statements and footnote disclosures for the Company’s previously filed Form 10-K for the year ended December 31, 2018.

 

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

 

 

 

Note 2 – Reclassifications –

 

Certain reclassifications may have been made to conform to the classifications adopted for reporting in 2019.  These reclassifications have no effect on previously reported net income.

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 3 – Mergers 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 fair values of approximately $317.4 million in total assets, $192.7 million in net loans, $264.0 million in total deposits, and $30.6 million in total shareholders’ equity, and was the leading financial institution in Webster Parish, part of the Shreveport-Bossier City MSA, through its two banking center locations.   

 

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

(Dollars in thousands, except per share data)

Purchase Price:

               

MBI Shares Outstanding at December 31, 2017

    2,407,627          

MBI Restricted Stock Awards Outstanding at December 31, 2017

    1,480          

MBI Shares Cashed Out Under Terms of Merger

            2,409,107  

Exchange Ratio

            23.20  

Cash Paid to Shareholders for Shares of Common Stock

          $ 55,891  

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

               

Cash Paid on MBI Options

            296  

Total Purchase Price

          $ 56,187  

Net Assets Acquired:

               

Cash and Cash Equivalents

          $ 15,891  

Securities Available for Sale

            99,867  

Loans and Leases Receivable

            192,714  

Premises and Equipment, Net

            2,678  

Cash Value of Life Insurance

            741  

Core Deposit Intangible

            2,494  

Other Assets

            3,055  

Total Assets

            317,440  
                 

Deposits

            263,951  

Borrowings

            21,047  

Other Liabilities

            1,858  

Total Liabilities

            286,856  

Net Assets Acquired

            30,584  

Goodwill Resulting from Merger

          $ 25,603  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

After the close of business on November 30, 2018, the Company completed the acquisition of Richland State Bancorp, Inc. (RSBI), and its wholly-owned subsidiary, Richland State Bank, located in Richland, Louisiana.  The Company issued 1,679,559 shares of its common stock to the RSBI shareholders for a purchase price of $42.4 million.  At November 30, 2018, RSBI had provisional fair values of approximately $316.5 million in total assets, $191.0 million in net loans, $290.0 million in total deposits, and $25.4 million in total shareholders’ equity.

 

Cost and Allocation of Purchase Price for Richland State Bancorp, Inc. (RSBI):

(Dollars in thousands, except per share data)

Purchase Price:

       

Shares Issued to RSBI Shareholders on December 1, 2018

    1,679,559  

Closing Stock Price on November 30, 2018

    25.29  

Total Purchase Price

  $ 42,476  

Net Assets Acquired:

       

Cash and Cash Equivalents

  $ 40,648  

Securities Available for Sale

    63,823  

Loans and Leases Receivable

    190,964  

Premises and Equipment, Net

    5,282  

Cash Value of Life Insurance

    7,260  

Core Deposit Intangible

    3,947  

Other Assets

    4,668  

Total Assets

    316,592  
         

Deposits

    289,979  

Other Liabilities

    1,074  

Total Liabilities

    291,053  

Net Assets Acquired

    25,539  

Goodwill Resulting from Merger

  $ 16,937  

 

On June 28, 2019, the Company sold a branch that was acquired from Richland State Bank.  The sale resulted in a net gain of $581,000 and reduced goodwill and core deposit intangible by $1.3 million.

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 4 – Earnings per Common Share –

 

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

 

   

For The Three Months Ended

September 30,

   

For The Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
   

(Dollars in thousands, except per share data)

 

Numerator:

                               

Net Income Available to Common Shares

  $ 5,511     $ 3,900     $ 18,013     $ 10,646  

Denominator:

                               

Weighted Average Common Shares Outstanding

    13,315,351       11,533,374       13,321,566       10,795,989  

Dilutive Effect of Stock Options and Warrants

    354,019       460,360       354,019       460,360  

Weighted Average Dilutive Common Shares

    13,669,370       11,993,734       13,675,585       11,256,349  
                                 

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

  $ 0.41     $ 0.34     $ 1.35     $ 0.99  
                                 

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

  $ 0.40     $ 0.33     $ 1.32     $ 0.95  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 5 – Securities –

 

The amortized cost and fair values of securities available for sale as of September 30, 2019 and December 31, 2018 are summarized as follows:

 

   

September 30, 2019

 
   

(Dollars in thousands)

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

U.S. Government Agencies

  $ 16,695     $ 439     $ 5     $ 17,129  

Corporate Securities

    22,531       90       247       22,374  

Mortgage-Backed Securities

    147,433       2,295       577       149,151  

Municipal Securities

    98,159       1,432       14       99,577  

Total Securities Available for Sale

  $ 284,818     $ 4,256     $ 843     $ 288,231  

 

   

December 31, 2018

 
   

(Dollars in thousands)

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

U.S. Government Agencies

  $ 17,529     $ 54     $ 144     $ 17,439  

Corporate Securities

    13,052       76       436       12,692  

Mortgage-Backed Securities

    168,854       328       3,564       165,618  

Municipal Securities

    114,472       250       955       113,767  

Total Securities Available for Sale

  $ 313,907     $ 708     $ 5,099     $ 309,516  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present a summary of securities with gross unrealized losses and fair values at September 30, 2019 and December 31, 2018, aggregated by investment category and length of time in a continued unrealized loss position.  Due to the nature of these investments and current prevailing market prices, these unrealized losses are considered a temporary impairment of the securities.

 

   

September 30, 2019

 
   

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

  $ 835     $ 5     $ -     $ -     $ 835     $ 5  

Corporate Securities

    1,965       47       4,310       200       6,275       247  

Mortgage-Backed Securities

    549       3       48,240       574       48,789       577  

Municipal Securities

    5,560       7       2,325       7       7,885       14  

Total Securities Available for Sale

  $ 8,909     $ 62     $ 54,875     $ 781     $ 63,784     $ 843  

 

   

December 31, 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

  $ 4,399     $ 28     $ 4,610     $ 116     $ 9,009     $ 144  

Corporate Securities

    6,274       260       2,324       176       8,598       436  

Mortgage-Backed Securities

    67,770       1,264       61,271       2,300       129,041       3,564  

Municipal Securities

    40,473       484       29,782       471       70,255       955  

Total Securities Available for Sale

  $ 118,916     $ 2,036     $ 97,987     $ 3,063     $ 216,903     $ 5,099  

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The amortized cost and fair values of securities available for sale as of September 30, 2019 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

  $ 21,184     $ 21,210  

One to Five Years

    53,754       54,333  

Over Five to Ten Years

    137,275       139,054  

Over Ten Years

    72,605       73,634  

Total Securities Available for Sale

  $ 284,818     $ 288,231  

 

 

 

Note 6 – Loans and the Allowance for Loan Losses –

 

Loans receivable at September 30, 2019 and December 31, 2018 are summarized as follows:

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 
   

(Dollars in thousands)

 

Real estate loans:

               

Construction and land

  $ 220,524     $ 211,054  

Farmland

    45,809       45,989  

1-4 family residential

    281,413       270,583  

Multi-family residential

    31,448       39,273  

Nonfarm nonresidential

    620,427       518,660  

Commercial

    415,163       363,640  

Consumer

    79,943       79,270  

Total loans held for investment

    1,694,727       1,528,469  
                 

Less:

               

Allowance for loan losses

    (12,090 )     (11,220 )

Net loans

  $ 1,682,637     $ 1,517,249  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The performing 1-4 family residential, multi-family residential, commercial real estate, and commercial loans are pledged, under a blanket lien, as collateral securing advances from the FHLB at September 30, 2019 and December 31, 2018.

 

Net deferred loan origination fees were $2.6 million and $1.7 million at September 30, 2019 and December 31, 2018, respectively, and are netted in their respective loan categories above.  In addition to loans issued in the normal course of business, the Company considers overdrafts on customer deposit accounts to be loans, and reclassifies overdrafts as loans in its consolidated balance sheets.  At September 30, 2019 and December 31, 2018, overdrafts of $1.5 million and $858,000, respectively, have been reclassified to loans.

 

The Bank is the lead lender on participations sold, without recourse, to other financial institutions which amounts are not included in the consolidated balance sheets.  The unpaid principal balances of mortgages and other loans serviced for others were approximately $145.8 million and $147.0 million at September 30, 2019 and December 31, 2018, respectively.

 

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

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Loans acquired in business combinations were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. 

 

Total loans held for investment at September 30, 2019 includes $221.6 million of loans acquired in acquisitions that were recorded at fair value as of the acquisition date.  Included in the acquired balances at September 30, 2019 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 $7.5 million and acquired performing loans not accounted for under ASC 310-30 totaling $216.4 million with a related purchase discount of $2.3 million. 

 

Total loans held for investment at December 31, 2018 includes $334.8 million of loans acquired in acquisitions that were recorded at fair value as of the acquisition date.  Included in the acquired balances at December 31, 2018 were acquired impaired loans with a net carrying amount of $10.7 million and acquired performing loans totaling $327.3 million with a related purchase discount of $3.2 million. 

 

The following tables set forth, as of September 30, 2019 and December 31, 2018, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually.  The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

 

Allowance for Credit Losses and Recorded Investment in Loans Receivable

 

   

September 30, 2019

 
   

(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

  $ 1,590     $ 104     $ 1,538     $ 236     $ 2,715     $ 4,453     $ 584     $ 11,220  

Charge-offs

    (2 )     (2 )     (54 )     -       (10 )     (1,544 )     (23 )     (1,635 )

Recoveries

    -       -       12       -       -       37       42       91  

Provision

    (111 )     84       321       (46 )     1,299       802       65       2,414  

Ending Balance

  $ 1,477     $ 186     $ 1,817     $ 190     $ 4,004     $ 3,748     $ 668     $ 12,090  

Ending Balance:

                                                               

Individually evaluated for impairment

  $ -     $ 4     $ 122     $ -     $ 46     $ 401     $ 101     $ 674  

Collectively evaluated for impairment

  $ 1,477     $ 182     $ 1,695     $ 190     $ 3,958     $ 3,347     $ 567     $ 11,416  

Purchased Credit Impaired (1)

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

Loans receivable:

                                                               

Ending Balance

  $ 220,524     $ 45,809     $ 281,413     $ 31,448     $ 620,427     $ 415,163     $ 79,943     $ 1,694,727  

Ending Balance:

                                                               

Individually evaluated for impairment

  $ 399     $ 186     $ 2,567     $ -     $ 4,078     $ 4,607     $ 389     $ 12,226  

Collectively evaluated for impairment

  $ 220,125     $ 45,390     $ 278,779     $ 31,448     $ 609,408     $ 410,280     $ 79,554     $ 1,674,984  

Purchased Credit Impaired (1)

  $ -     $ 233     $ 67     $ -     $ 6,941     $ 276     $ -     $ 7,517  

 

   

(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, 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 )     -       (294 )     -       -       -       (88 )     (472 )

Recoveries

    398       -       18       -       13       28       80       537  

Provision

    (139 )     28       530       92       379       1,278       222       2,390  

Ending Balance

  $ 1,590     $ 104     $ 1,538     $ 236     $ 2,715     $ 4,453     $ 584     $ 11,220  

Ending Balance:

                                                               

Individually evaluated for impairment

  $ -     $ -     $ 96     $ -     $ 47     $ 1,112     $ 25     $ 1,280  

Collectively evaluated for impairment

  $ 1,590     $ 104     $ 1,442     $ 236     $ 2,668     $ 3,341     $ 559     $ 9,940  

Purchased Credit Impaired (1)

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

Loans receivable:

                                                               

Ending Balance

  $ 211,054     $ 45,989     $ 270,583     $ 39,273     $ 518,660     $ 363,640     $ 79,270     $ 1,528,469  

Ending Balance:

                                                               

Individually evaluated for impairment

  $ 32     $ 112     $ 2,728     $ -     $ 4,155     $ 5,208     $ 125     $ 12,360  

Collectively evaluated for impairment

  $ 211,022     $ 45,713     $ 267,761     $ 39,273     $ 507,506     $ 354,985     $ 79,145     $ 1,505,405  

Purchased Credit Impaired (1)

  $ -     $ 164     $ 94     $ -     $ 6,999     $ 3,447     $ -     $ 10,704  

 

   

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

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

As of September 30, 2019 and December 31, 2018, the credit quality indicators, disaggregated by class of loan, are as follows:

 

Credit Quality Indicators

 

   

September 30, 2019

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands)

 

Real Estate Loans:

                                       

Construction and land

  $ 217,772     $ 1,199     $ 1,154     $ 399     $ 220,524  

Farmland

    43,700       1,771       51       287       45,809  

1-4 family residential

    271,963       4,062       3,001       2,387       281,413  

Multi-family residential

    31,415       -       33       -       31,448  

Nonfarm nonresidential

    598,332       12,067       4,125       5,903       620,427  

Commercial

    396,752       9,488       6,701       2,222       415,163  

Consumer

    77,923       1,502       129       389       79,943  

Total

  $ 1,637,857     $ 30,089     $ 15,194     $ 11,587     $ 1,694,727  

 

   

December 31, 2018

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands)

 

Real Estate Loans:

                                       

Construction and land

  $ 209,027     $ 718     $ 1,277     $ 32     $ 211,054  

Farmland

    45,563       153       161       112       45,989  

1-4 family residential

    260,325       4,601       2,929       2,728       270,583  

Multi-family residential

    39,237       -       36       -       39,273  

Nonfarm nonresidential

    494,698       14,421       3,510       6,031       518,660  

Commercial

    347,839       5,690       7,448       2,663       363,640  

Consumer

    77,731       1,180       234       125       79,270  

Total

  $ 1,474,420     $ 26,763     $ 15,595     $ 11,691     $ 1,528,469  

 

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

 

 

Pass loans are of satisfactory quality.

 

 

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

 

 

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

 

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables reflect certain information with respect to the loan portfolio delinquencies by loan class and amount as of September 30, 2019 and December 31, 2018.  All loans greater than 90 days past due are generally placed on nonaccrual status.

 

Aged Analysis of Past Due Loans Receivable

 

   

September 30, 2019

 
   

(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

  $ -     $ 6     $ 379     $ 385     $ 220,139     $ 220,524     $ -  

Farmland

    23       138       106       267       45,542       45,809       -  

1-4 family residential

    1,484       483       1,260       3,227       278,186       281,413       169  

Multi-family residential

    -       -       -       -       31,448       31,448       -  

Nonfarm nonresidential

    2,119       -       3,946       6,065       614,362       620,427       -  

Commercial

    295       104       1,780       2,179       412,984       415,163       30  

Consumer

    188       31       386       605       79,338       79,943       78  

Total

  $ 4,109     $ 762     $ 7,857     $ 12,728     $ 1,681,999     $ 1,694,727     $ 277  

 

   

December 31, 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

  $ 325     $ 13     $ 89     $ 427     $ 210,627     $ 211,054     $ 60  

Farmland

    -       96       -       96       45,893       45,989       -  

1-4 family residential

    1,596       588       1,400       3,584       266,999       270,583       270  

Multi-family residential

    36       -       -       36       39,237       39,273       -  

Nonfarm nonresidential

    2,437       -       3,967       6,404       512,256       518,660       450  

Commercial

    328       287       3,241       3,856       359,784       363,640       1,038  

Consumer

    237       89       106       432       78,838       79,270       58  

Total

  $ 4,959     $ 1,073     $ 8,803     $ 14,835     $ 1,513,634     $ 1,528,469     $ 1,876  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following is a summary of information pertaining to impaired loans as of September 30, 2019 and December 31, 2018.  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 $217,000 and $186,000 for the nine months ending September 30, 2019 and 2018, respectively.

 

   

September 30, 2019

 
   

(Dollars in thousands)

 
           

Unpaid

           

Average

 
   

Recorded

   

Principal

   

Related

   

Recorded

 
   

Investment

   

Balance

   

Allowance

   

Investment

 

With an allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ -     $ -     $ -     $ 1  

Farmland

    20       22       4       21  

1-4 family residential

    207       237       122       178  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    546       560       46       601  

Other Loans:

                               

Commercial

    796       865       401       1,127  

Consumer

    175       179       101       113  

Total

  $ 1,744     $ 1,863     $ 674     $ 2,041  
                                 

With no allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ 399     $ 423     $ -     $ 112  

Farmland

    166       170       -       177  

1-4 family residential

    2,360       3,008       -       2,562  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    3,533       3,800       -       3,693  

Other Loans:

                               

Commercial

    3,811       4,658       -       4,373  

Consumer

    213       266       -       163  

Total

  $ 10,482     $ 12,325     $ -     $ 11,080  
                                 

Total Impaired Loans:

                               

Real Estate Loans:

                               

Construction and land

  $ 399     $ 423     $ -     $ 113  

Farmland

    186       192       4       198  

1-4 family residential

    2,567       3,245       122       2,740  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    4,079       4,360       46       4,294  

Other Loans:

                               

Commercial

    4,607       5,523       401       5,500  

Consumer

    388       445       101       276  

Total

  $ 12,226     $ 14,188     $ 674     $ 13,121  

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

   

December 31, 2018

 
   

(Dollars in thousands)

 
           

Unpaid

           

Average

 
   

Recorded

   

Principal

   

Related

   

Recorded

 
   

Investment

   

Balance

   

Allowance

   

Investment

 

With an allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ -     $ -     $ -     $ 22  

Farmland

    -       -       -       -  

1-4 family residential

    363       451       96       303  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    447       501       47       367  

Other Loans:

                               

Commercial

    1,883       2,935       1,112       547  

Consumer

    25       25       25       2  

Total

  $ 2,718     $ 3,912     $ 1,280     $ 1,241  
                                 

With no allowance recorded:

                               

Real Estate Loans:

                               

Construction and land

  $ 32     $ 56     $ -     $ 15  

Farmland

    112       193       -       9  

1-4 family residential

    2,365       3,975       -       2,708  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    3,708       3,833       -       5,240  

Other Loans:

                               

Commercial

    3,325       4,198       -       5,350  

Consumer

    100       144       -       261  

Total

  $ 9,642     $ 12,399     $ -     $ 13,583  
                                 

Total Impaired Loans:

                               

Real Estate Loans:

                               

Construction and land

  $ 32     $ 56     $ -     $ 37  

Farmland

    112       193       -       9  

1-4 family residential

    2,728       4,426       96       3,011  

Multi-family residential

    -       -       -       -  

Nonfarm nonresidential

    4,155       4,334       47       5,607  

Other Loans:

                               

Commercial

    5,208       7,133       1,112       5,897  

Consumer

    125       169       25       263  

Total

  $ 12,360     $ 16,311     $ 1,280     $ 14,824  

 

 

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. 

 

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, 2017

  $ 696  

Carrying amount of purchased impaired credits acquired in MBI acquisition

    5,798  

Carrying amount of purchased impaired credits acquired in RSBI acquisition

    4,533  

Payments received, net of discounts realized

    (507 )

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

    210  

Charge-offs

    (26 )

Carrying amount - December 31, 2018

    10,704  

Payments received, net of discounts realized

    (3,187 )

Carrying amount - September 30, 2019

  $ 7,517  

 

The Bank seeks to assist customers that are experiencing financial difficulty by renegotiating loans within lending regulations and guidelines.  The Bank makes loan modifications, primarily utilizing internal renegotiation programs via direct customer contact, that manage customers’ debt exposures held only by the Bank.  Additionally, the Bank makes loan modifications with customers who have elected to work with external renegotiation agencies and these modifications provide solutions to customers’ entire unsecured debt structures.  During the periods ended September 30, 2019 and December 31, 2018, 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 specific allowance for credit losses.  The Bank continues to specifically reevaluate the loan in subsequent periods, regardless of the borrower’s performance under the modified terms.  If a borrower subsequently defaults on the loan after it is restructured, the Bank provides an allowance for credit losses for the amount of the loan that exceeds the value of the related collateral.

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present informative data regarding troubled debt restructurings as of September 30, 2019 and December 31, 2018.  The Bank had $79,000 in troubled debt restructurings that had subsequently defaulted during the year ended December 31, 2018 and none that had subsequently defaulted during the nine months ended September 30, 2019.

 

Modifications as of September 30, 2019:

 

           

Pre-Modification

   

Post-Modification

 
   

Number

   

Outstanding

   

Outstanding

 
   

of

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

 
   

(Dollars in thousands)

 

Troubled Debt Restructuring

                       

Real Estate Loans:

                       

1-4 family residential

    3     $ 235     $ 221  

Nonfarm nonresidential

    3       2,411       2,103  

Other Loans:

                       

Commercial

    6       5,914       2,814  

Consumer

    1       11       10  

Total

    13     $ 8,571     $ 5,148  

 

Modifications as of December 31, 2018: 

 

           

Pre-Modification

   

Post-Modification

 
   

Number

   

Outstanding

   

Outstanding

 
   

of

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

 
   

(Dollars in thousands)

 

Troubled Debt Restructuring

                       

Real Estate Loans:

                       

1-4 family residential

    1     $ -     $ -  

Nonfarm nonresidential

    3       2,412       2,308  

Other Loans:

                       

Commercial

    6       5,914       3,512  

Total

    10     $ 8,326     $ 5,820  

 

 

 

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 $341.1 million and standby and commercial letters of credit of approximately $22.8 million at September 30, 2019.

 

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 $2.3 million and $1.8 million for the nine months ended September 30, 2019 and 2018, 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)

 

3 months remaining in 2019

  $ 514  

2020

    1,949  

2021

    1,780  

2022

    1,620  

2023

    1,506  

After 2023

    6,932  

Total Future Minimum Lease Payments

    14,301  

Imputed Interest

    (1,811 )

Present Value of Lease Liabilities

  $ 12,490  

 

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.

 

The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics.

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present the balance of assets and liabilities measured on a recurring basis as of September 30, 2019 and December 31, 2018.  The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

 

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

September 30, 2019

                               

Available for Sale:

                               

U.S. Government Agency Securities

  $ 17,129     $ -     $ 17,129     $ -  

Corporate Securities

    22,374       -       22,374       -  

Mortgage-Backed Securities

    149,151       -       149,151       -  

Municipal Securities

    99,577       -       92,990       6,587  

Mortgage Loans Held for Sale

    256       -       256       -  

Total

  $ 288,487     $ -     $ 281,900     $ 6,587  
                                 
                                 

December 31, 2018

                               

Available for Sale:

                               

U.S. Government Agency Securities

  $ 17,439     $ -     $ 17,439     $ -  

Corporate Securities

    12,692       -       12,692       -  

Mortgage-Backed Securities

    165,618       -       165,618       -  

Municipal Securities

    113,767       -       105,383       8,384  

Mortgage Loans Held for Sale

    58       -       58       -  

Total

  $ 309,574     $ -     $ 301,190     $ 8,384  

 

Nonrecurring Basis

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

September 30, 2019

                               

Assets:

                               

Impaired Loans

  $ 18,635     $ -     $ 18,635     $ -  

Repossessed Assets

    2,331       -       2,331       -  

Total

  $ 20,966     $ -     $ 20,966     $ -  
                                 

December 31, 2018

                               

Assets:

                               

Impaired Loans

  $ 21,557     $ -     $ 21,557     $ -  

Repossessed Assets

    1,920       -       1,920       -  

Total

  $ 23,477     $ -     $ 23,477     $ -  

 

Fair Value Financial Instruments

 

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

 

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

 

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

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 

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

 

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

 

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

 

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

 

The estimated approximate fair values of the Bank’s financial instruments as of September 30, 2019 and December 31, 2018 are as follows:

 

   

Carrying

   

Total

                         
   

Amount

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

September 30, 2019

                                       

Financial Assets:

                                       

Cash and Short-Term Investments

  $ 107,061     $ 107,061     $ 107,061     $ -     $ -  

Securities

    288,231       288,231       -       281,644       6,587  

Mortgage Loans Held for Sale

    256       256       -       256       -  

Loans - Net

    1,682,637       1,677,482       -       -       1,677,482  

Cash Value of BOLI

    32,398       32,398       -       32,398       -  

Other Equity Securities

    12,697       12,697       -       -       12,697  

Total

  $ 2,123,280     $ 2,118,125     $ 107,061     $ 314,298     $ 1,696,766  
                                         

Financial Liabilities:

                                       

Deposits

  $ 1,733,390     $ 1,738,300     $ -     $ -     $ 1,738,300  

Borrowings

    184,037       202,089       -       202,089       -  

Total

  $ 1,917,427     $ 1,940,389     $ -     $ 202,089     $ 1,738,300  

 

 

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, 2018

                                       

Financial Assets:

                                       

Cash and Short-Term Investments

  $ 137,908     $ 137,908     $ 137,908     $ -     $ -  

Securities

    309,516       309,516       -       301,132       8,384  

Mortgage Loans Held for Sale

    58       58       -       58       -  

Loans - Net

    1,517,249       1,495,454       -       -       1,495,454  

Cash Value of BOLI

    31,882       31,882       -       31,882       -  

Other Equity Securities

    9,282       9,282       -       -       9,282  

Total

  $ 2,005,895     $ 1,984,100     $ 137,908     $ 333,072     $ 1,513,120  
                                         

Financial Liabilities:

                                       

Deposits

  $ 1,733,934     $ 1,717,698     $ -     $ -     $ 1,717,698  

Borrowings

    92,229       104,930       -       104,930       -  

Total

  $ 1,826,163     $ 1,822,628     $ -     $ 104,930     $ 1,717,698  

 

 

 

Note 9 – Recently Issued Accounting Pronouncements –

 

Accounting Standards Adopted in Current Period

 

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 was effective on January 1, 2019.  The Company recognized a right-of-use asset and lease liability of approximately $12.5 million as of September 30, 2019.  The right-of-use asset and lease liability are recorded within premises and equipment and other liabilities, respectively.

 

Accounting Standards Not Yet Adopted

 

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.  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.  On October 18, 2019, FASB approved an effective date delay applicable to smaller reporting companies until January 2023.  The Company anticipates electing the delay and implementing the standard sometime after 2020.  The adoption of this ASU may have a material effect 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.

 

 

 

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, 2018, filed with the Securities and Exchange Commission.

 

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, 2018 to September 30, 2019, and its results of operations for the three and nine months ended September 30, 2019. 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, 2018, 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 25 banking centers in markets across Louisiana and in Dallas, Texas. As of September 30, 2019, we had total assets of $2.2 billion, total loans of $1.7 billion, total deposits of $1.7 billion, and total shareholders’ equity of $280.3 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 markets.

 

Financial Highlights

 

The financial highlights as of and for the three and nine months ended September 30, 2019 include:

 

 

Total assets of $2.2 billion, a $125.9 million, or 6.0%, increase from December 31, 2018.

 

 

Total loans held for investment of $1.7 billion, a $166.3 million, or 10.9%, increase from December 31, 2018.

 

 

Total deposits of $1.7 billion, relatively unchanged from December 31, 2018.

 

 

Net income of $5.5 million, a $1.6 million, or 41.3%, increase from the three months ended September 30, 2018.

 

 

Net interest income of $20.3 million, an increase of $4.6 million, or 29.6%, from the three months ended September 30, 2018.

 

 

Allowance for loan and lease losses of 0.71% of total loans held for investment, compared to 0.73% as of December 31, 2018, and a ratio of nonperforming loans to total loans held for investment of 0.70%, compared to 0.89% as of December 31, 2018.

 

 

Earnings per share for the first nine months of 2019 of $1.35 per basic share and $1.32 per diluted share, compared to $0.99 per basic share and $0.95 per diluted share for the first nine months of 2018.

 

 

 

Return on average assets of 1.14% over the first nine months of 2019, compared to 0.87% for the first nine months of 2018.

 

 

Return on average equity of 8.88% over the first nine months of 2019, compared to 7.45% for the first nine months of 2018.

 

 

Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 10.59%, 11.50%, 11.50% and 13.42%, respectively, compared to 11.66%, 11.83%, 11.83%, and 13.91%, respectively as of December 31, 2018.

 

 

Book value per share of $21.12, an increase of 7.3% from $19.68 at December 31, 2018.

 

Results of Operations for the Three and Nine Months Ended September 30, 2019 and 2018

 

Performance Summary

 

For the three months ended September 30, 2019, net income was $5.5 million, or $0.41 per basic share and $0.40 per diluted share, compared to net income of $3.9 million, or $0.34 per basic share and $0.33 per diluted share, for the three months ended September 30, 2018. Return on average assets, on an annualized basis, increased to 1.02% for the three months ended September 30, 2019, from 0.94% for the three months ended September 30, 2018. Return on average equity, on an annualized basis, increased to 7.93% for the three months ended September 30, 2019, as compared to 7.37% for the three months ended September 30, 2018.

 

For the nine months ended September 30, 2019, net income was $18.0 million, or $1.35 per basic share and $1.32 per diluted share, compared to net income of $10.6 million, or $0.99 per basic share and $0.95 per diluted share, for the nine months ended September 30, 2018. Return on average assets, on an annualized basis, increased to 1.14% for the nine months ended September 30, 2019, from 0.87% for the nine months ended September 30, 2018. Return on average equity, on an annualized basis, increased to 8.88% for the nine months ended September 30, 2019, as compared to 7.45% for the nine months ended September 30, 2018.

 

Net Interest Income

 

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

 

To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. We calculate average assets, liabilities, and equity using a monthly average, and average yield / rate utilizing a 30/360 day count convention.

 

For the three months ended September 30, 2019, net interest income totaled $20.3 million, and net interest margin and net interest spread were 4.10% and 3.66%, respectively, compared to $15.6 million, 4.05%, and 3.70%, respectively, for the three months ended September 30, 2018. The average yield on the loan portfolio was 5.87% for the three months ended September 30, 2019, compared to 5.65% for the three months ended September 30, 2018, and the average yield on total interest-earning assets was 5.32% for the three months ended September 30, 2019, compared to 5.01% for the three months ended September 30, 2018. For the three months ended September 30, 2019, overall cost of funds (which includes noninterest-bearing deposits) increased 29 basis points compared to the three months ended September 30, 2018, primarily due to our issuance of subordinated debt in December 2018 and increasing rates. While we experienced significant loan growth in average loan balances, we anticipate continued pressure on our net interest margin and net interest spread in future periods based on the current yield curve.

 

For the nine months ended September 30, 2019, net interest income totaled $59.6 million, and net interest margin and net interest spread were 4.10% and 3.68%, respectively, compared to $45.1 million, 4.00%, and 3.72%, respectively, for the nine months ended September 30, 2018. The average yield on the loan portfolio was 5.87% for the nine months ended September 30, 2019, compared to 5.48% for the nine months ended September 30, 2018, and the average yield on total interest-earning assets was 5.29% for the nine months ended September 30, 2019, compared to 4.85% for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, overall cost of funds (which includes noninterest-bearing deposits) increased 37 basis points compared to the nine months ended September 30, 2018, primarily due to our issuance of subordinated debt in December 2018 and increasing rates.

 

 

The following tables present, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The tables also set forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however the balances are reflected in average outstanding balances for the period. For the three and nine months ended September 30, 2019 and 2018, interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield. The average total loans reflected below is net of deferred loan fees and discounts. Acquired loans were recorded at fair value at acquisition and accrete interest income over the remaining lives of the respective loans.

 

   

For the Three Months Ended September 30,

 
   

2019

   

2018

 
   

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

  $ 1,664,283     $ 24,408       5.87 %   $ 1,258,060     $ 17,777       5.65 %

Securities available for sale

    297,121       1,783       2.40       253,902       1,386       2.18  

Interest-bearing deposits in other banks

    16,070       129       3.21       31,858       162       2.03  

Total interest-earning assets

    1,977,474       26,320       5.32       1,543,820       19,325       5.01  

Allowance for loan losses

    (11,783 )                     (9,945 )                

Noninterest-earning assets

    191,068                       132,242                  

Total assets

  $ 2,156,759     $ 26,320             $ 1,666,117     $ 19,325          
                                                 

Liabilities and Shareholders’ Equity

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 1,300,740     $ 5,050       1.55 %   $ 1,028,412     $ 3,127       1.22 %

Subordinated debt

    25,000       422       6.75                    

Advances from Federal Home Loan Bank (“FHLB”)

    105,588       560       2.12       85,000       506       2.38  

Other borrowings

    23,718       30       0.51       17,484       56       1.28  

Total interest-bearing liabilities

    1,455,046       6,062       1.67       1,130,896       3,689       1.31  
                                                 

Noninterest-bearing liabilities:

                                               

Noninterest-bearing deposits

    398,748                       315,111                  

Other liabilities

    24,937                       8,479                  

Total noninterest-bearing liabilities

    423,685                       323,590                  

Shareholders’ equity

    278,028                       211,631                  

Total liabilities and shareholders’ equity

  $ 2,156,759                     $ 1,666,117                  
                                                 

Net interest rate spread(1)

                    3.66 %                     3.70 %

Net interest income

          $ 20,258                     $ 15,636          

Net interest margin(2)

                    4.10 %                     4.05 %

 


(1)

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

(2)

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

 

 

   

For the Nine Months Ended September 30,

 
   

2019

   

2018

 
   

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

  $ 1,605,423     $ 70,701       5.87 %   $ 1,216,395     $ 50,002       5.48 %

Securities available for sale

    303,374       5,486       2.41       254,035       4,223       2.22  

Interest-bearing deposits in other banks

    26,621       616       3.09       32,899       417       1.69  

Total interest-earning assets

    1,935,418       76,803       5.29       1,503,329       54,642       4.85  

Allowance for loan losses

    (11,625 )                     (9,516 )                

Noninterest-earning assets

    187,924                       141,209                  

Total assets

  $ 2,111,717     $ 76,803             $ 1,635,022     $ 54,642          
                                                 

Liabilities and Shareholders’ Equity

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 1,323,927     $ 14,845       1.50 %   $ 1,022,982     $ 7,980       1.04 %

Subordinated debt

    25,000       1,267       6.76                    

Advances from FHLB

    59,990       1,065       2.37       84,777       1,387       2.18  

Other borrowings

    16,863       55       0.43       18,478       163       1.18  

Total interest-bearing liabilities

    1,425,780       17,232       1.61       1,126,237       9,530       1.13  
                                                 

Noninterest-bearing liabilities:

                                               

Noninterest-bearing deposits

    396,452                       309,526                  

Other liabilities

    19,105                       8,604                  

Total noninterest-bearing liabilities

    415,557                       318,130                  

Shareholders’ equity

    270,380                       190,655                  

Total liabilities and shareholders’ equity

  $ 2,111,717                     $ 1,635,022                  
                                                 

Net interest rate spread(1)

                    3.68 %                     3.72 %

Net interest income

          $ 59,571                     $ 45,112          

Net interest margin(2)

                    4.10 %                     4.00 %

 


(1)

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

(2)

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

 

 

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 these tables, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

 

   

For the Three Months Ended September 30, 2019
compared to the Three Months Ended
September 30, 2018

 
   

Increase (Decrease) due to change in

 
   

Volume

   

Rate

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Interest-earning assets:

                       

Total loans

  $ 5,958     $ 673     $ 6,631  

Securities available for sale

    259       138       397  

Interest-earning deposits in other banks

    (127 )     94       (33 )

Total increase in interest income

  $ 6,090     $ 905     $ 6,995  
                         

Interest-bearing liabilities:

                       

Interest-bearing deposits

  $ 1,057     $ 866     $ 1,923  

Subordinated debt

    422             422  

Advances from FHLB

    109       (55 )     54  

Other borrowings

    8       (34 )     (26 )

Total increase in interest expense

    1,596       777       2,373  

Increase in net interest income

  $ 4,494     $ 128     $ 4,622  

 

   

For the Nine Months Ended September 30, 2019
compared to the Nine Months Ended
September 30, 2018

 
   

Increase (Decrease) due to change in

 
   

Volume

   

Rate

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Interest-earning assets:

                       

Total loans

  $ 17,132     $ 3,567     $ 20,699  

Securities available for sale

    892       371       1,263  

Interest-earning deposits in other banks

    (145 )     344       199  

Total increase in interest income

  $ 17,879     $ 4,282     $ 22,161  
                         

Interest-bearing liabilities:

                       

Interest-bearing deposits

  $ 3,374     $ 3,491     $ 6,865  

Subordinated debt

    1,267             1,267  

Advances from FHLB

    (440 )     118       (322 )

Other borrowings

    (5 )     (103 )     (108 )

Total increase in interest expense

    4,196       3,506       7,702  

Increase in net interest income

  $ 13,683     $ 776     $ 14,459  

 

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 $479,000 for the three months ended September 30, 2019 and $503,000 for the same period in 2018. For the nine months ended September 30, 2019 and 2018, the provision for loan losses was $2.4 million and $1.5 million, respectively. The higher provision for the nine months ended September 30, 2019 compared to the same periods in 2018 was generally attributable to a previously identified impaired loan as well as higher loan balances.

 

 

Noninterest Income

 

Our primary sources of noninterest income are service charges on deposit accounts, debit card and automated teller machine (“ATM”) fee income, income from bank-owned life insurance, and pass-through income from SBIC partnerships. The following tables present, for the periods indicated, the major categories of noninterest income:

 

   

For the Three Months Ended
September 30,

   

Increase

 
   

2019

   

2018

     (Decrease)  
   

(Dollars in thousands) (Unaudited)

 

Noninterest income:

                       

Service charges on deposit accounts

  $ 1,035     $ 695     $ 340  

Debit card and ATM fee income

    460       267       193  

Bank-owned life insurance income

    175       168       7  

Gain on sales of investment securities

    26             26  

Brokerage commissions

    15       (6 )     21  

Mortgage origination income

    120       77       43  

Correspondent bank income

    118       118        

Rental income

    159       166       (7 )

Gain on sale of banking center

    (12 )           (12 )

Loss on sale / disposal of other assets

    (650 )     (103 )     (547 )

Pass-through income from SBIC partnerships

    138             138  

Other

    338       165       173  

Total noninterest income

  $ 1,922     $ 1,547     $ 375  

 

   

For the Nine Months Ended
September 30,

   

Increase

 
   

2019

   

2018

     (Decrease)  
   

(Dollars in thousands) (Unaudited)

 

Noninterest income:

                       

Service charges on deposit accounts

  $ 3,007     $ 1,941     $ 1,066  

Debit card and ATM fee income

    1,397       772       625  

Bank-owned life insurance income

    517       502       15  

Gain on sales of investment securities

    84             84  

Brokerage commissions

    58       506       (448 )

Mortgage origination income

    308       191       117  

Correspondent bank income

    343       280       63  

Rental income

    488       495       (7 )

Gain on sale of banking center

    581             581  

Loss on sale / disposal of other assets

    (650 )     (56 )     (594 )

Pass-through income from SBIC partnerships

    1,404       222       1,182  

Other

    915       435       480  

Total noninterest income

  $ 8,452     $ 5,288     $ 3,164  

 

Noninterest income for the three months ended September 30, 2019 increased $375,000, or 24.2%, to $1.9 million compared to noninterest income of $1.5 million for the same period in 2018. Noninterest income for the nine months ended September 30, 2019 increased $3.2 million, or 59.8%, to $8.5 million compared to noninterest income of $5.3 million for the same period in 2018. 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 $1.0 million for the three months ended September 30, 2019, an increase of $340,000 over the same period in 2018. For the nine months ended September 30, 2019, service charges on deposit accounts were $3.0 million, an increase of $1.1 million over the same period in 2018. The increase for both the three and nine months ended September 30, 2019, over the same period in 2018, was primarily due to increases in deposit balances and accounts from the acquisition of Richland State Bancorp, Inc. (“RSBI”) in November 2018 and organic growth.

 

 

Debit card and ATM fee income. We earn fees from our customers based upon card activity, and these fees constitute a significant recurring component of our noninterest income. Fee income was $460,000 and $267,000 for the three months ended September 30, 2019 and 2018, respectively, representing an increase of $193,000, or 72.3%. For the nine months ended September 30, 2019 and 2018, fee income was $1.4 million and $772,000, respectively, representing an increase of $625,000, or 81.0%. The increase for both the three and nine months ended September 30, 2019, over the same period in 2018, was primarily due to the additional accounts from the acquisition of RSBI and organic growth.

 

Brokerage commissions. We earn commissions from brokerage services provided by our Wealth Solutions Group. Brokerage commissions were $58,000 and $506,000 for the nine months ended September 30, 2019 and 2018, respectively. The decrease for the nine months ended September 30, 2019 over the same period in 2018, was primarily due to restructuring our brokerage activities.

 

Gain on sale of banking center. We sold a banking center located in Mangham, Louisiana that resulted in a gain of $581,000 during the second quarter of 2019.

 

Loss on sale / disposal of other assets. The $650,000 loss for both the three months and nine months ended September 30, 2019 was largely attributable to the rebuilding of the Port Allen, Louisiana banking center.

 

Pass-through income from SBIC partnerships. During the second quarter of 2019, we recognized investment income (largely related to a dividend recapitalization) which increased our nine months ended September 30, 2019 income, compared to the same period in 2018.

 

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 $173,000, or 104.8%, for the three months ended September 30, 2019, compared to the same period in 2018. For the nine months ended September 30, 2019, other income increased $480,000, or 110.3%. The increase for both the three months and nine months ended September 30, 2019, compared to the same periods in 2018, was primarily due to increases in the use of these services by legacy RSBI customers. We also received a grant for the nine months ended September 30, 2019 in the amount of $113,000 that represented part of the increase.

 

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, among others.

 

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

 

   

For the Three Months Ended
September 30,

   

Increase

 
   

2019

   

2018

     (Decrease)   
   

(Dollars in thousands) (Unaudited)

 

Salaries and employee benefits

  $ 8,793     $ 7,190     $ 1,603  

Non-staff expenses:

                       

Occupancy of bank premises

    1,230       914       316  

Depreciation and amortization

    645       417       228  

Data processing

    380       395       (15 )

FDIC assessment fees

    (105 )     221       (326 )

Legal and other professional fees

    346       328       18  

Advertising and promotions

    544       290       254  

Utilities and communications

    397       294       103  

Ad valorem shares tax

    345       321       24  

Directors’ fees

    121       93       28  

Other real estate owned expenses and write-downs

    19             19  

Merger and conversion related expenses

    350       138       212  

Other

    1,813       1,269       544  

Total noninterest expense

  $ 14,878     $ 11,870     $ 3,008  

 

 

   

For the Nine Months Ended
September 30,

   

Increase

 
   

2019

   

2018

     (Decrease)  
   

(Dollars in thousands) (Unaudited)

 

Salaries and employee benefits

  $ 26,101     $ 20,418     $ 5,683  

Non-staff expenses:

                       

Occupancy of bank premises

    3,412       2,632       780  

Depreciation and amortization

    1,906       1,246       660  

Data processing

    1,572       1,160       412  

FDIC assessment fees

    293       945       (652 )

Legal and other professional fees

    1,017       1,239       (222 )

Advertising and promotions

    1,150       817       333  

Utilities and communications

    1,018       835       183  

Ad valorem shares tax

    1,035       965       70  

Directors’ fees

    451       344       107  

Other real estate owned expenses and write-downs

    118       9       109  

Merger and conversion related expenses

    331       1,065       (734 )

Other

    4,841       4,164       677  

Total noninterest expense

  $ 43,245     $ 35,839     $ 7,406  

 

Noninterest expense for the three months ended September 30, 2019 increased $3.0 million, or 25.3%, to $14.9 million, compared to noninterest expense of $11.9 million for the same period in 2018. For the nine months ended September 30, 2019, noninterest expense increased $7.4 million, or 20.7%, to $43.2 million, compared to noninterest expense of $35.8 million for the same period in 2018. The most significant components of the increases 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 $8.8 million for the three months ended September 30, 2019, an increase of $1.6 million, or 22.3%, compared to the same period in 2018. For the nine months ended September 30, 2019, salaries and benefits were $26.1 million, an increase of $5.7 million, or 27.8%, compared to the same period in 2018. The increases were primarily due to additional hires for new positions, our merit increase cycle, and the acquisition of RSBI (including severance and retention payments related to the acquisitions) and its legacy operations and employees. As of September 30, 2019, we had 346 full-time equivalent employees, compared to 253 as of September 30, 2018.

 

Occupancy of bank premises. Expenses associated with occupancy of premises were $1.2 million and $914,000 for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, occupancy and bank premises expenses were $3.4 million and $2.6 million, respectively. The increase for both the three and nine months ended September 30, 2019, compared to the same period in 2018, is primarily due to the acquisition of RSBI and its legacy branch locations.

 

Depreciation and amortization. Depreciation and amortization costs were $645,000 and $417,000 for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, depreciation and amortization costs were $1.9 million and $1.2 million, respectively. This category includes leasehold, furniture, fixtures and equipment depreciation totaling $423,000 and $286,000 for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, depreciation expense totaled $1.2 million and $852,000, respectively. The amortization of intangible assets was $222,000 and $131,000 for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, amortization of intangible assets was $683,000 and $394,000, respectively.

 

Data processing. Expenses associated with data processing were $380,000 and $395,000 for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, data processing expenses were $1.6 million and $1.2 million, respectively. The increase for the nine months ended September 30, 2019, compared to the same period in 2018, is primarily due to the acquisition of RSBI and operating on separate core systems until the conversion into one system in July 2019.

 

FDIC assessment fees. FDIC assessments was a net credit of $105,000 and fees of $221,000 for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, FDIC assessment fees were $293,000 and $945,000, respectively. The decrease for both the three months and nine months ended September 30, 2019, compared to the same period in 2018, is primarily due to increased capital ratios and a credit back to the bank in the third quarter.

 

 

Legal and other professional fees. Other professional fees include audit, loan review, compliance, and other consultants. For the nine months ended September 30, 2019 and 2018, legal and other professional fees were $1.0 million and $1.2 million, respectively. The decrease for the nine months ended September 30, 2019 was due to legal fees in 2018 related to acquisitions and our listing on the NASDAQ Global Select Market.

 

Advertising and promotions. Advertising and promotions costs were $544,000 and $290,000 for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, advertising and promotions costs were $1.2 million and $817,000, respectively. The increase for both the three and nine months ended September 30, 2019, compared to the same period in 2018, is largely attributable to one-time production costs for future advertising campaigns.

 

Merger and conversion related expenses. Merger and conversion related expenses for the three months and nine months ended September 30, 2019 and 2018 were related to the acquisitions of RSBI and Minden Bancorp, Inc. (“MBI”), respectively. During the three months ended September 30, 2019, we completed our conversion of RSBI’s core system into our core system and had costs associated with the conversion. During the nine months ended September 30, 2019, we had a merger related termination fee downward adjustment of $469,000 from the original estimate.

 

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 $544,000 for the three months ended September 30, 2019 compared to the same period in 2018. Other noninterest expense increased $677,000 for the nine months ended September 30, 2019. The increase in other expenses for both the three months and nine months ended September 30, 2019, compared to the same period in 2018, was primarily due to the acquisition of RSBI and its legacy operations.

 

Income Tax Expense

 

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

 

For the three months ended September 30, 2019, income tax expense totaled $1.3 million, an increase of $402,000, or 44.2%, compared to the same period in 2018. For the nine months ended September 30, 2019, income tax expense totaled $4.4 million, an increase of $1.9 million, or 76.6%, compared to the same period in 2018. Our effective tax rates for the three months ended September 30, 2019 and 2018 were 19.2% and 18.9%, respectively. For the nine months ended September 30, 2019 and 2018, our effective tax rates were 19.5% and 18.8%, respectively. The increase in our effective tax rate for both the three and nine months ended September 30, 2019 is primarily due to higher taxable income. 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 $125.9 million, or 6.0%, from December 31, 2018 to September 30, 2019.

 

Loan Portfolio

 

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

 

As of September 30, 2019, total loans held for investment were $1.7 billion, an increase of $166.3 million, or 10.9%, compared to December 31, 2018. The increase was primarily due to our continued loan penetration in our primary market areas. Additionally, $256,000 and $58,000 in mortgage loans were classified as loans held for sale as of September 30, 2019 and December 31, 2018, respectively.

 

Total loans held for investment as a percentage of total deposits were 97.8% and 88.2% as of September 30, 2019 and December 31, 2018, respectively. Total loans held for investment as a percentage of total assets were 76.3% and 73.0% as of September 30, 2019 and December 31, 2018, respectively.

 

 

 

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

 

   

As of September 30, 2019

(Unaudited)

   

As of December 31, 2018

 
   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 

Commercial

  $ 415,163       24.5 %   $ 363,640       23.8 %

Real estate:

                               

Construction and land

    220,524       13.0       211,054       13.8  

Farmland

    45,809       2.7       45,989       3.0  

1-4 family residential

    281,413       16.6       270,583       17.7  

Multi-family residential

    31,448       1.9       39,273       2.6  

Nonfarm nonresidential

    620,427       36.6       518,660       33.9  

Consumer

    79,943       4.7       79,270       5.2  

Total loans held for investment

  $ 1,694,727       100.0 %   $ 1,528,469       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 $51.5 million, or 14.2%, to $415.2 million as of September 30, 2019 from $363.6 million as of December 31, 2018, primarily due to the efforts of our bankers who attracted new clients and leveraged existing bank relationships to fund expansion and growth opportunities.

 

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

 

Construction and land loans increased $9.5 million, or 4.5%, to $220.5 million as of September 30, 2019 from $211.1 million as of December 31, 2018, 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.

 

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

 

1-4 family residential loans increased $10.8 million, or 4.0%, to $281.4 million as of September 30, 2019 from $270.6 million as of December 31, 2018.

 

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

 

Nonfarm nonresidential loans increased $101.8 million, or 19.6%, to $620.4 million as of September 30, 2019 from $518.7 million as of December 31, 2018.

 

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 the date indicated are summarized in the following tables:

 

   

As of September 30, 2019

 
   

One Year
or Less

   

One
Through
Five Years

   

After Five
Years

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Commercial

  $ 157,238     $ 198,994     $ 58,931     $ 415,163  

Real estate:

                               

Construction and land

    108,588       100,723       11,213       220,524  

Farmland

    9,070       28,509       8,230       45,809  

1-4 family residential

    37,683       161,393       82,337       281,413  

Multi-family residential

    5,944       11,691       13,813       31,448  

Nonfarm nonresidential

    87,039       362,304       171,084       620,427  

Consumer

    22,798       53,740       3,405       79,943  

Total loans held for investment

  $ 428,360     $ 917,354     $ 349,013     $ 1,694,727  

Amounts with fixed rates

  $ 162,439     $ 688,239     $ 265,075     $ 1,115,753  

Amounts with floating rates

    265,921       229,115       83,938       578,974  

 

   

As of December 31, 2018

 
   

One Year
or Less

   

One
Through
Five Years

   

After Five
Years

   

Total

 
   

(Dollars in thousands)

 

Commercial

  $ 137,581     $ 161,874     $ 64,185     $ 363,640  

Real estate:

                               

Construction and land

    104,033       74,730       32,291       211,054  

Farmland

    12,340       31,755       1,894       45,989  

1-4 family residential

    40,613       137,617       92,353       270,583  

Multi-family residential

    12,253       12,945       14,075       39,273  

Nonfarm nonresidential

    61,561       294,683       162,416       518,660  

Consumer

    36,129       37,161       5,980       79,270  

Total loans held for investment

  $ 404,510     $ 750,765     $ 373,194     $ 1,528,469  

Amounts with fixed rates

  $ 147,087     $ 541,076     $ 267,748     $ 955,911  

Amounts with floating rates

    257,423       209,689       105,446       572,558  

 

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 $14.2 million and $15.5 million in nonperforming assets as of September 30, 2019 and December 31, 2018, respectively. We had $11.9 million in nonperforming loans as of September 30, 2019 compared to $13.6 million as of December 31, 2018. The decrease in nonperforming assets from December 31, 2018 to September 30, 2019 is primarily due to the reduction in nonaccrual loans and loans past due 90 or more days.

 

 

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

 

   

As of September 30,
2019
(Unaudited)

   

As of December 31,
201
8

 
   

(Dollars in thousands)

 

Nonaccrual loans

  $ 11,577     $ 11,691  

Accruing loans 90 or more days past due

    277       1,876  

Total nonperforming loans

    11,854       13,567  

Repossessed assets

    5       11  

Other real estate owned:

               

Commercial real estate, construction, land and land development

    2,071       1,568  

Residential real estate

    255       341  

Total other real estate owned

    2,326       1,909  

Total nonperforming assets

  $ 14,185     $ 15,487  

Restructured loans-nonaccrual

  $ 2,967     $ 2,900  

Restructured loans-accruing

    2,181       2,920  

Ratio of nonperforming loans to total loans held for investment

    0.70 %     0.89 %

Ratio of nonperforming assets to total assets

    0.64       0.74  

 

   

As of September 30,
2019
(Unaudited)

   

As of December 31,
2018

 
   

(Dollars in thousands)

 

Nonaccrual loans by category:

               

Real estate:

               

Construction and land

  $ 399     $ 32  

Farmland

    287       112  

1-4 family residential

    2,387       2,728  

Multi-family residential

           

Nonfarm nonresidential

    5,903       6,031  

Commercial

    2,222       2,663  

Consumer

    379       125  

Total

  $ 11,577     $ 11,691  

 

Potential Problem Loans

 

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

 

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

 

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

 

 

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

 

 

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

 

   

As of September 30, 2019

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Real estate:

                                       

Construction and land

  $ 217,772     $ 1,199     $ 1,154     $ 399     $ 220,524  

Farmland

    43,700       1,771       51       287       45,809  

1-4 family residential

    271,963       4,062       3,001       2,387       281,413  

Multi-family residential

    31,415             33             31,448  

Nonfarm nonresidential

    598,332       12,067       4,125       5,903       620,427  

Commercial

    396,752       9,488       6,701       2,222       415,163  

Consumer

    77,923       1,502       129       389       79,943  

Total

  $ 1,637,857     $ 30,089     $ 15,194     $ 11,587     $ 1,694,727  

 

   

As of December 31, 2018

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands)

 

Real estate:

                                       

Construction and land

  $ 209,027     $ 718     $ 1,277     $ 32     $ 211,054  

Farmland

    45,563       153       161       112       45,989  

1-4 family residential

    260,325       4,601       2,929       2,728       270,583  

Multi-family residential

    39,237             36             39,273  

Nonfarm nonresidential

    494,698       14,421       3,510       6,031       518,660  

Commercial

    347,839       5,690       7,448       2,663       363,640  

Consumer

    77,731       1,180       234       125       79,270  

Total

  $ 1,474,420     $ 26,763     $ 15,595     $ 11,691     $ 1,528,469  

 

Allowance for Loan Losses

 

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

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

 

As of September 30, 2019, the allowance for loan losses totaled $12.1 million, or 0.71%, of total loans held for investment. As of December 31, 2018, the allowance for loan losses totaled $11.2 million, or 0.73%, of total loans held for investment.

 

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

 

   

As of and

For the Nine Months
Ended
September 30, 2019
(Unaudited)

   

As of and For the Year

Ended December 31,
2018

 
   

(Dollars in thousands)

 

Average loans outstanding(1)

  $ 1,605,423     $ 1,258,178  

Gross loans held for investment outstanding at end of period

  $ 1,694,727     $ 1,528,469  

Allowance for loan losses at beginning of period

  $ 11,220     $ 8,765  

Provision for loan losses

    2,414       2,390  

Charge-offs:

               

Real estate:

               

Construction, land and farmland

    4       90  

Residential

    54       294  

Nonfarm non-residential

    10        

Commercial

    1,544        

Consumer

    23       88  

Total charge-offs

    1,635       472  

Recoveries:

               

Real estate:

               

Construction, land and farmland

          398  

Residential

    12       18  

Nonfarm non-residential

          13  

Commercial

    37       28  

Consumer

    42       80  

Total recoveries

    91       537  

Net charge-offs (recoveries)

    1,544       (65 )

Allowance for loan losses at end of period

  $ 12,090     $ 11,220  

Ratio of allowance to end of period loans held for investment

    0.71 %     0.73 %

Ratio of net charge-offs (recoveries) to average loans

    0.10 %      

 


(1)

Excluding loans held for sale.

 

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

 

 

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

 

   

As of September 30,
2019

(Unaudited)

   

As of December 31,
2018

 
   

Amount

   

Percent
to Total

   

Amount

   

Percent
to Total

 
   

(Dollars in thousands)

 

Real estate:

                               

Construction and land

  $ 1,477       12.2 %   $ 1,590       14.2 %

Farmland

    186       1.6       104       0.9  

1-4 family residential

    1,817       15.0       1,538       13.7  

Multi-family residential

    190       1.6       236       2.1  

Nonfarm nonresidential

    4,004       33.1       2,715       24.2  

Total real estate

    7,674       63.5       6,183       55.1  

Commercial

    3,748       31.0       4,453       39.7  

Consumer

    668       5.5       584       5.2  

Total allowance for loan losses

  $ 12,090       100.0 %   $ 11,220       100.0 %

 

Securities

 

We use our securities portfolio to provide a source of liquidity, an appropriate return on funds invested, manage interest rate risk, meet collateral requirements, and meet regulatory capital requirements. As of September 30, 2019, the carrying amount of investment securities totaled $288.2 million, a decrease of $21.3 million, or 6.9%, compared to $309.5 million as of December 31, 2018. Our securities portfolio represented 13.0% and 14.8% of total assets as of September 30, 2019 and December 31, 2018, respectively.

 

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

 

   

As of September 30, 2019

 
   

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair Value

 
   

(Dollars in thousands) (Unaudited)

 

U.S. government agencies

  $ 16,695     $ 439     $ 5     $ 17,129  

Corporate bonds

    22,531       90       247       22,374  

Mortgage-backed securities

    147,433       2,295       577       149,151  

Municipal securities

    98,159       1,432       14       99,577  

Total

  $ 284,818     $ 4,256     $ 843     $ 288,231  

 

   

As of December 31, 2018

 
   

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair Value

 
   

(Dollars in thousands)

 

U.S. government agencies

  $ 17,529     $ 54     $ 144     $ 17,439  

Corporate bonds

    13,052       76       436       12,692  

Mortgage-backed securities

    168,854       328       3,564       165,618  

Municipal securities

    114,472       250       955       113,767  

Total

  $ 313,907     $ 708     $ 5,099     $ 309,516  

 

 

All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As of September 30, 2019, the investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.

 

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

 

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

 

   

As of September 30, 2019

 
   

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

  $ 995       2.88 %   $ 4,732       2.87 %   $ 10,720       2.89 %   $ 682       3.48 %   $ 17,129       2.91 %

Corporate bonds

    6,500       3.52 %     1,965       3.12 %     13,909       5.52 %           %     22,374       4.73 %

Mortgage-backed securities

    42       %     9,640       2.42 %     76,213       2.18 %     63,256       2.71 %     149,151       2.42 %

Municipal securities

    13,673       2.05 %     37,996       2.14 %     38,212       2.29 %     9,696       2.86 %     99,577       2.25 %

Total

  $ 21,210       2.54 %   $ 54,333       2.29 %   $ 139,054       2.60 %   $ 73,634       2.74 %   $ 288,231       2.57 %

 

 

   

As of December 31, 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)

 

U.S. government agencies

  $ 997       1.11 %   $ 6,915       2.85 %   $ 9,527       2.85 %   $       %   $ 17,439       2.75 %

Corporate bonds

          %     8,316       3.78 %     4,376       5.22 %           %     12,692       4.28 %

Mortgage-backed securities

    71       1.27 %     13,308       2.45 %     82,754       2.16 %     69,485       2.82 %     165,618       2.46 %

Municipal securities

    14,227       1.98 %     45,674       2.09 %     38,222       2.20 %     15,644       2.77 %     113,767       2.21 %

Total

  $ 15,295       1.92 %   $ 74,213       2.42 %   $ 134,879       2.32 %   $ 85,129       2.81 %   $ 309,516       2.46 %

 

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 4.39 years with an estimated effective duration of 38.26 months as of September 30, 2019.

 

As of September 30, 2019 and December 31, 2018, 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 decreased by $544,000 between December 31, 2018 and September 30, 2019 primarily due to the sale of our Mangham, Louisiana banking center and $24.9 million in associated deposits, which occurred in the second quarter of 2019.

 

Noninterest-bearing deposits as of September 30, 2019 were $406.1 million, compared to $382.4 million as of December 31, 2018, an increase of $23.8 million, or 6.2%.

 

Average deposits for the nine months ended September 30, 2019 were $1.7 billion, an increase of $348.8 million, or 25.4%, over the average deposits for the year ended December 31, 2018 of $1.4 billion. The average rate paid on total interest-bearing deposits increased over this period from 1.12% for the year ended December 31, 2018 to 1.50% for the nine months ended September 30, 2019. The increase in average rates during the nine months ended September 30, 2019 over the average for the year ended December 31, 2018 was primarily due to the increase in deposit pricing from rising interest rates. In addition, the stability and continued growth of noninterest-bearing demand accounts served to reduce the cost of deposits to 1.15% for the nine months ended September 30, 2019 and 0.86% for the year ended December 31, 2018.

 

 

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

 

   

For the Nine Months
Ended September 30, 2019

(Unaudited)

   

For the Year Ended December 31,
2018

 
   

Average
Balance

   

Average
Rate

   

Average
Balance

   

Average
Rate

 
   

(Dollars in thousands)

 

Interest-bearing demand accounts

  $ 35,152       1.35 %   $ 37,178       0.88 %

Negotiable order of withdrawal (“NOW”) accounts

    265,988       0.88 %     183,705       0.57 %

Limited access money market accounts and savings

    434,653       1.02 %     356,880       0.74 %

Certificates and other time deposits > $250k

    185,086       2.10 %     152,159       1.60 %

Certificates and other time deposits < $250k

    403,048       2.15 %     322,010       1.67 %

Total interest-bearing deposits

    1,323,927       1.50 %     1,051,932       1.12 %

Noninterest-bearing demand accounts

    396,452             319,623        

Total deposits

  $ 1,720,379       1.15 %   $ 1,371,555       0.86 %

 

The ratio of average noninterest-bearing deposits to average total deposits for the nine months ended September 30, 2019 and the year ended December 31, 2018 was 23.0% and 23.3%, respectively.

 

The following tables set forth the certificates of deposit by time remaining until maturity:

 

   

As of September 30, 2019

 
   

Certificates of

Deposit

More Than

$250,000

   

Certificates of

Deposit of $100,000

Through

$250,000

   

Certificates of

Deposit Less Than

$100,000

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

1 year or less

  $ 99,653     $ 246,810     $ 70,335     $ 416,798  

More than 1 year but less than 3 years

    60,726       89,058       36,403       186,187  

3 years or more but less than 5 years

    4,627       6,571       6,026       17,224  

5 years or more

                       

Total

  $ 165,006     $ 342,439     $ 112,764     $ 620,209  

 

 

   

As of December 31, 2018

 
   

Certificates of

Deposit

More Than

$250,000

   

Certificates of

Deposit of $100,000

Through

$250,000

   

Certificates of

Deposit Less Than

$100,000

   

Total

 
   

(Dollars in thousands)

 

1 year or less

  $ 89,045     $ 214,470     $ 71,097     $ 374,612  

More than 1 year but less than 3 years

    60,161       69,613       36,438       166,212  

3 years or more but less than 5 years

    10,939       12,226       7,121       30,286  

5 years or more

                       

Total

  $ 160,145     $ 296,309     $ 114,656     $ 571,110  

 

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 FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. As of September 30, 2019 and December 31, 2018, total borrowing capacity of $617.3 million and $544.0 million, respectively, was available under this arrangement, and $128.0 million and $55.0 million, respectively, was outstanding with a weighted average stated interest rate of 2.07% as of September 30, 2019 and 2.47% as of December 31, 2018. Our current FHLB advances mature within five years.

 

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

 

   

FHLB
Advances

 
   

(Dollars in

Thousands)

 

September 30, 2019

       

Amount outstanding at quarter-end

  $ 128,000  

Weighted average stated interest rate at quarter-end

    2.07 %

Maximum month-end balance during the quarter

  $ 128,000  

Average balance outstanding during the quarter

  $ 105,588  

Weighted average interest rate during the quarter

    2.12 %
         

December 31, 2018

       

Amount outstanding at year-end

  $ 55,000  

Weighted average stated interest rate at year-end

    2.47 %

Maximum month-end balance during the year

  $ 105,000  

Average balance outstanding during the year

  $ 84,187  

Weighted average interest rate during the year

    2.20 %

 

 

Subordinated Debt. On December 17, 2018 we entered into a subordinated note purchase agreement with EJF Capital, LLC providing for the issuance of $25.0 million in subordinated notes due in 2033. This subordinated debt is due at maturity with quarterly interest payments bearing a 6.75% fixed-to-floating rate. The balance outstanding at both September 30, 2019 and December 31, 2018 was $25.0 million. This subordinated note purchase agreement was established for the purpose of paying off our long term advance and line of credit with FNBB and to gain additional Tier 2 capital.

 

The following table presents the subordinated debt at the dates indicated.

 

   

Subordinated Debt

 
   

(Dollars in

Thousands)

 

September 30, 2019

       

Amount outstanding at quarter-end

  $ 25,000  

Weighted average stated interest rate at quarter-end

    6.75 %

Maximum month-end balance during the quarter

  $ 25,000  

Average balance outstanding during the quarter

  $ 25,000  

Weighted average interest rate during the quarter

    6.75 %
         

December 31, 2018

       

Amount outstanding at year-end

  $ 25,000  

Weighted average stated interest rate at year-end

    6.75 %

Maximum month-end balance during the year

  $ 25,000  

Average balance outstanding during the year

  $ 1,027  

Weighted average interest rate during the year

    6.75 %

 

 

Correspondent Bank Federal Funds Purchased Relationships

 

We maintain Federal Funds Purchased Relationships with the following financial institutions and limits as of September 30, 2019:

 

   

Fed Funds
Limits

 
   

(Dollars in

Thousands)

 

FNBB

  $ 35,000  

Compass Bank

  $ 30,000  

The Independent Bankers Bank

  $ 25,000  

FTN

  $ 17,000  

ServisFirst Bank

  $ 10,000  

CenterState Bank

  $ 9,000  

 

 

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

 

   

Fed Funds
Purchased

 
   

(Dollars in

Thousands)

 

September 30, 2019

       

Amount outstanding at quarter-end

  $  

Weighted average interest rate at quarter-end

    %

Maximum month-end balance during the quarter

  $ 975  

Average balance outstanding during the quarter

  $ 240  

Weighted average interest rate during the quarter

    2.02 %
         

December 31, 2018

       

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

  $ 114  

Weighted average interest rate during the year

    2.44 %

 

 

Liquidity and Capital Resources

 

Liquidity

 

Liquidity involves our ability to utilize funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the nine months ended September 30, 2019 and the year ended December 31, 2018, 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 have been utilized on occasion to take advantage of investment opportunities, we do not generally rely on these external funding sources. As of September 30, 2019 and December 31, 2018, we maintained six lines of credit with commercial banks which provided for extensions of credit with an availability to borrow up to an aggregate of $126.0 million. There were no funds under these lines of credit outstanding as of September 30, 2019 or December 31, 2018.

 

 

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 $2.1 billion and $1.7 billion for the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively.

 

   

For the Nine
Months Ended
September 30, 2019

   

For the Year
Ended
December 31,
201
8

 
   

(Unaudited)

         

Sources of Funds:

               

Deposits:

               

Noninterest-bearing

    18.8 %     19.0 %

Interest-bearing

    62.7 %     62.5 %

Subordinated debt

    1.2 %     0.1 %

Advances from FHLB

    2.8 %     5.0 %

Other borrowings

    0.8 %     1.1 %

Other liabilities

    0.9 %     0.4 %

Shareholders’ equity

    12.8 %     11.9 %

Total

    100.0 %     100.0 %
                 

Uses of Funds:

               

Loans, net of allowance for loan losses

    75.5 %     74.2 %

Securities available for sale

    14.4 %     15.3 %

Interest-bearing deposits in other banks

    1.2 %     1.9 %

Other noninterest-earning assets

    8.9 %     8.6 %

Total

    100.0 %     100.0 %

Average noninterest-bearing deposits to average deposits

    23.0 %     23.3 %

Average loans to average deposits

    93.3 %     91.7 %

 

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 32.0% for the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to the acquisition of RSBI 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 4.39 years and an effective duration of 38.26 months as of September 30, 2019. As of December 31, 2018, our securities portfolio had a weighted average life of 4.50 years and an effective duration of 44.69 months.

 

As of September 30, 2019, we had outstanding $341.1 million in commitments to extend credit and $22.8 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2018, we had outstanding $322.5 million in commitments to extend credit and $11.5 million in commitments associated with outstanding standby and commercial letters of credit. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

 

As of September 30, 2019 and December 31, 2018, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. As of September 30, 2019, we had cash and cash equivalents of $63.4 million compared to $96.1 million as of December 31, 2018.

 

 

Capital Resources

 

Total shareholders’ equity increased to $280.3 million as of September 30, 2019, compared to $260.1 million as of December 31, 2018, an increase of $20.3 million, or 7.8%. This increase was primarily due to $18.0 million in net income and a $6.2 million change in unrealized gains (losses) on our investment portfolio, offset with $3.7 million in paid dividends.

 

On October 17, 2019, our Board of Directors (the “Board”) declared a quarterly dividend based upon our financial performance for the three months ended September 30, 2019 in the amount of $0.10 per share to the common shareholders of record as of November 15, 2019. The dividend is to be paid on November 30, 2019, or as soon as practicable thereafter.

 

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

 

Capital management consists of providing equity to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank holding company and bank levels. As of September 30, 2019 and December 31, 2018, we and Business First Bank were in compliance with all applicable regulatory capital requirements, and Business First Bank was classified as “well-capitalized,” for purposes of prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all applicable regulatory capital standards applicable to us.

 

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

 

   

As of September 30, 2019

(Unaudited)

   

As of December 31, 2018

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 
   

(Dollars in thousands)

 

Business First Bancshares, Inc. (Consolidated)

                               

Total capital (to risk weighted assets)

  $ 259,357       13.42 %   $ 242,144       13.91 %

Tier 1 capital (to risk weighted assets)

    222,267       11.50 %     205,924       11.83 %

Common Equity Tier 1 capital (to risk weighted assets)

    222,267       11.50 %     205,924       11.83 %

Tier 1 Leverage capital (to average assets)

    222,267       10.59 %     205,924       11.66 %
                                 

Business First Bank

                               

Total capital (to risk weighted assets)

  $ 247,716       12.83 %   $ 224,356       12.90 %

Tier 1 capital (to risk weighted assets)

    235,626       12.20 %     213,136       12.26 %

Common Equity Tier 1 capital (to risk weighted assets)

    235,626       12.20 %     213,136       12.26 %

Tier 1 Leverage capital (to average assets)

    235,626       11.23 %     213,136       12.08 %

 

Long Term Debt 

 

For information on our borrowings for the subordinated debt, please refer to “Borrowings.”

 

Contractual Obligations 

 

The following tables summarize contractual obligations and other commitments to make future payments as of September 30, 2019 and December 31, 2018 (other than non-maturity deposit obligations), which consist of future cash payments associated with our contractual obligations pursuant to our FHLB short term advances, subordinated debt, 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 $128.0 million and $55.0 million at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019 and December 31, 2018, the FHLB short term advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 2.07% and 2.47%, respectively, and maturing within five years. The subordinated debt agreement totaled $25.0 million at both September 30, 2019 and December 31, 2018. This subordinated debt bears interest at a fixed rate of 6.75% through December 31, 2028 and a floating rate, based on a benchmark rate plus 369 basis points, thereafter through maturity in 2033.

 

 

   

As of September 30, 2019

 
   

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

  $ 1,614     $ 2,903     $ 2,455     $ 5,518     $ 12,490  

Time deposits

    416,887       186,098       17,224             620,209  

Subordinated debt

                      25,000       25,000  

Advances from FHLB

    45,000       30,000       53,000             128,000  

Securities sold under agreements to repurchase

    31,037                         31,037  

Standby and commercial letters of credit

    10,564       12,216                   22,780  

Commitments to extend credit

    193,356       97,223       25,190       25,281       341,050  

Total

  $ 698,458     $ 328,440     $ 97,869     $ 55,799     $ 1,180,566  

 

   

As of December 31, 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)

 

Non-cancelable future operating leases

  $ 2,366     $ 3,087     $ 2,294     $ 4,751     $ 12,498  

Time deposits

    374,612       166,212       30,286             571,110  

Subordinated debt

                      25,000       25,000  

Advances from FHLB

    25,000             30,000             55,000  

Securities sold under agreements to repurchase

    12,229                         12,229  

Standby and commercial letters of credit

    8,691       2,816                   11,507  

Commitments to extend credit

    171,113       113,441       16,696       21,216       322,466  

Total

  $ 594,011     $ 285,556     $ 79,276     $ 50,967     $ 1,009,810  

 

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 dates indicated are summarized below. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

 

   

As of September 30, 2019

 
   

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

  $ 10,564     $ 12,216     $     $     $ 22,780  

Commitments to extend credit

    193,356       97,223       25,190       25,281       341,050  

Total

  $ 203,920     $ 109,439     $ 25,190     $ 25,281     $ 363,830  

 

 

   

As of December 31, 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)

 

Standby and commercial letters of credit

  $ 8,691     $ 2,816     $     $     $ 11,507  

Commitments to extend credit

    171,113       113,441       16,696       21,216       322,466  

Total

  $ 179,804     $ 116,257     $ 16,696     $ 21,216     $ 333,973  

 

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% 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% for a 100 basis point shift, 15% for a 200 basis point shift, and 25% for a 300 basis point shift.

 

 

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

 

     

As of September 30, 2019

   

As of December 31, 2018

 

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

      8.90 %     (1.18 %)     5.20 %     (2.07 %)

+200

      5.90 %     (0.88 %)     3.10 %     (1.24 %)

+100

      3.00 %     (0.62 %)     1.10 %     (0.64 %)

Base

      0.00 %     0.00 %     0.00 %     0.00 %
-100       (3.50 %)     (0.39 %)     (4.40 %)     (0.29 %)

 

The results are primarily due to the behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis.

 

Impact of Inflation

 

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

 

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

 

Non-GAAP Financial Measures

 

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

 

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

 

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

 

Core Net Income. Core net income, which excludes noncore income and expenses, for the three months ended September 30, 2019 was $6.3 million, or $0.46 per diluted share, compared to core net income of $4.4 million, or $0.37 per diluted share, for the three months ended September 30, 2018. As adjusted, core return on average assets and core return on average equity, in each case on an annualized basis, were 1.16% and 9.01% for the three months ended September 30, 2019, compared to 1.06% and 8.37% for the three months ended September 30, 2018. Core net income, which excludes noncore income and expenses, for the nine months ended September 30, 2019 was $18.5 million, or $1.35 per diluted share, compared to core net income of $12.1 million, or $1.07 per diluted share, for the nine months ended September 30, 2018. As adjusted, core return on average assets and core return on average equity, in each case on an annualized basis, were 1.17% and 9.12% for the nine months ended September 30, 2019, compared to 0.98% and 8.44% for the nine months ended September 30, 2018. Notable noncore events impacting earnings for the three months ended September 30, 2019 include the incurrence of $594,000 in losses associated with the disposal of former bank premises and equipment in noninterest income and $288,000 related to acquisition-related activities (including, but not limited to, severance and retention, system conversion, legal costs, etc.) in noninterest expense. Notable noncore events impacting earnings for the nine months ended September 30, 2019 include the same noninterest income impact as the three months ended September 30, 2019 and additional noninterest income of $593,000 in gains on the sale of a banking center and noninterest expense of $386,000 related to acquisition-related activities (including, but not limited to, severance and retention, system conversion, legal costs, etc.). Notable noncore events impacting earnings for the quarter for the three months ended September 30, 2018 include noninterest expense of $509,000 related to acquisition-related activities (including, but not limited to, severance and retention, system conversion, legal costs, etc.) and $139,000 in losses associated with the closure of a banking center in noninterest income. Notable noncore events impacting earnings for the nine months ended September 30, 2018 include the same noninterest income impact as the three months ended September 30, 2018, and $118,000 incurred in noninterest expenses for share awards granted to all nonexecutives in connection with Business First Bancshares, Inc.’s listing on NASDAQ, and additional noninterest expense of $927,000 related to acquisition-related activities (including, but not limited to, severance and retention, system conversion, legal costs, etc.).

 

 

   

For the Three Months Ended

September 30,

(Unaudited)

   

For the Nine Months Ended

September 30,

(Unaudited)

 
   

2019

   

2018

   

2019

   

2018

 
   

(Dollars in thousands, except per share data)

 

Core Net Income

                               

Net income

  $ 5,511     $ 3,900     $ 18,013     $ 10,646  

Adjustments: (1)

                               

Noninterest Income

                               

Sale of Impaired Credit

                (91 )      

Tax impact

                19        

(Gains) Losses on Former Bank Premises and Equipment

    594       139       594       139  

Tax impact

    (125 )     (29 )     (125 )     (29 )

(Gains) Losses on Sale of Securities

    (26 )           (84 )      

Tax impact

    5             18        

(Gains) Losses on Sale of Banking Center

    12             (581 )      

Tax impact

    (3 )           122        

Noninterest Expense

                               

Early Lease Termination Penalty

    87             87        

Tax impact

    (18 )           (18 )      

Employee Share Awards – NASDAQ Listing

                      118  

Tax impact

                      (25 )

Acquisition-Related Expenses

    288       509       674       1,436  

Tax impact

    (60 )     (90 )     (135 )     (213 )

Core net income

  $ 6,265     $ 4,429     $ 18,493     $ 12,072  
                                 

Average common shares outstanding

    13,315,351       11,533,374       13,321,566       10,795,989  

Average diluted shares outstanding

    13,669,370       11,993,734       13,675,585       11,256,349  

Core earnings per share - basic

  $ 0.47     $ 0.38     $ 1.39     $ 1.12  

Core earnings per share - diluted

  $ 0.46     $ 0.37     $ 1.35     $ 1.07  

Total quarterly average assets

    2,156,759       1,666,117       2,111,717       1,635,022  

Total quarterly average equity

    278,028       211,631       270,380       190,655  

Core return on average assets

    1.16 %     1.06 %     1.17 %     0.98 %

Core return on average equity

    9.01 %     8.37 %     9.12 %     8.44 %

 


(1)

Tax rates, exclusive of certain nondeductible acquisition-related expenses, utilized were 21% for both 2019 and 2018. These rates approximated the marginal tax rates for the applicable periods.

 

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

 

 

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

 

   

As of

September 30,

2019

(Unaudited)

   

As of

December 31,

2018

 
   

(Dollars in thousands, except per share data)

 

Tangible Common Equity

               

Total shareholders’ equity

  $ 280,340     $ 260,058  

Adjustments:

               

Goodwill

    (48,333 )     (49,488 )

Core deposit and other intangibles

    (6,916 )     (7,885 )

Total tangible common equity

  $ 225,091     $ 202,685  
                 

Common shares outstanding(1)

    13,274,823       13,213,280  

Book value per common share(1)

  $ 21.12     $ 19.68  

Tangible book value per common share(1)

    16.96       15.34  

 


(1)

Excludes the dilutive effect, if any, of 729,840 and 867,705 shares of common stock issuable upon exercise of outstanding stock options and warrants as of September 30, 2019 and December 31, 2018, respectively.

 

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

 

 

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

 

   

As of

September 30,

2019

(Unaudited)

   

As of

December 31,

2018

 
   

(Dollars in thousands, except per

share data)

 
Tangible Common Equity                
Total shareholders’ equity   $ 280,340     $ 260,058  

Adjustments:

               

Goodwill

    (48,333 )     (49,488 )

Core deposit and other intangibles

    (6,916 )     (7,885 )

Total tangible common equity

  $ 225,091     $ 202,685  
                 

Tangible Assets

               

Total assets

  $ 2,220,840     $ 2,094,896  

Adjustments:

               

Goodwill

    (48,333 )     (49,488 )

Core deposit and other intangibles

    (6,916 )     (7,885 )

Total tangible assets

  $ 2,165,591     $ 2,037,523  
                 

Common Equity to Total Assets

    12.6 %     12.4 %

Tangible Common Equity to Tangible Assets

    10.4       9.9  

 

 

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, 2018 filed with the SEC.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceed

 

 

(a)

Not applicable.

 

 

(b)

Not applicable.

 

 

(c)

Business First purchased equity securities during the three months ended September 30, 2019 as follows:

 

 

 

 

 

 

 

Period

 

(a)

Total number

of shares

purchased

   

(b)

Average price

paid per share

   

(c)

Total number of shares

purchased as part of

publicly announced

plans or programs

   

(d)

Maximum number (or

approximate dollar

value) of shares that

may yet be purchased

under the plans or

programs

 

Month #1:

July 1 through July 31, 2019

                       

Month #2:

August 1 through August 31, 2019

    110,846     $ 23.00           $ 12,447,000  

Month #3:

September 1 through September 30, 2019

                       

Total

    110,846     $ 23.00           $ 12,447,000  

 

On December 14, 2018, the Company announced the approval of a stock repurchase program authorizing the Company to repurchase shares of its common stock with an aggregate purchase price of up to $15,000,000 from time to time, subject to certain limitations and conditions. The stock repurchase program was effective immediately and will continue for a period of 24 months.

 

Item 3.

Defaults upon Senior Securities

 

Not applicable.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

 

Item 5.

Other Information

 

Employment Agreement with Mr. Melville

 

On November 6, 2019, the Bank entered into an Amended and Restated Executive Employment Agreement with David R. Melville, III, which amends and restates the existing Executive Employment Agreement, dated August 6, 2009, by and between the Bank and Mr. Melville.  A copy of the employment agreement is attached hereto as Exhibit 10.1. The following summary of the key provisions of the employment agreement is qualified by the full text of the employment agreement.

 

The employment agreement with Mr. Melville provides for an initial five-year term, and thereafter the employment agreement automatically renews for a one-year term unless either the Bank or Mr. Melville gives notice to the other party at least 90 days prior to the end of the term that the agreement will not be renewed. The employment agreement provides for Mr. Melville to receive a base salary of not less than $500,000 annually, as well as for Mr. Melville’s participation in benefit plans and incentive bonus plans offered by the Bank. Mr. Melville is also entitled to paid vacation, a vehicle allowance, a country club membership, and health insurance.

 

If Mr. Melville’s employment is terminated by the Bank without cause (as defined in the employment agreement) during the term of the agreement or if Mr. Melville terminates his employment for good reason (as defined in the employment agreement), he will be entitled to payment of an amount equal to three times the sum of (a) his then current annual base salary, plus (b) his average incentive bonus compensation for the three previous years, plus certain continued benefits. In addition, if Mr. Melville is terminated by the Bank without cause or if he terminates his employment for good reason, either three months prior to a change in control (as defined in the employment agreement) of the Company or the Bank or within 24 months following such a change-in-control, Mr. Melville will be entitled to payment of an amount equal to three times the sum of (a) his then current annual base salary, plus (b) his average incentive bonus compensation for the three previous years, plus certain continued benefits.

 

During the two-year period following the expiration or termination of the employment agreement, Mr. Melville has agreed to certain non-solicitation and non-competition terms that inure to the benefit of the Bank. The employment agreement also contains other customary covenants and conditions.

 

Change in Control Agreements with Messrs. Robertson and Jordan

 

On November 6, 2019, the Company and the Bank entered into Change in Control Agreements with each of Messrs. Robertson and Jordan.  The Change in Control Agreements replaced the existing change in control agreements to which each of Messrs. Robertson and Jordan were a party.  Copies of the change in control agreements are attached hereto as Exhibits 10.2 and 10.3.  The following summary of the key provisions of the change in control agreements are qualified by the full text of the agreements.

 

Each agreement generally provides that, in the event that the officer is terminated by the Company or the Bank without cause (as defined in the change in control agreement), or if the officer terminates his employment for good reason (as defined in the change in control agreement), in either case during the period beginning three months before and ending 24 months after a change in control (as defined in the change in control agreement) of the Company or the Bank, the officer would be due a one-time payment equal to two times the sum of (a) the officer’s annual base salary, plus (b) the officer’s average incentive bonus compensation for the three previous years, plus certain continued benefits. The officer’ right to such a payment upon a change in control is subject to his compliance, during the two-year period following such change in control, with certain non-solicitation and non-competition terms that inure to the benefit of the Company and the Bank.  In the event the officer is terminated outside of the prescribed period, or if he is terminated with cause or terminates his employment without good reason during the prescribed period, the officer would not be entitled to such payment.

 

 

Item 6.

Exhibits

 

Number

Description

   

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)).

   

4.2

Form of 6.75% Fixed-to-Floating Subordinated Note due 2033 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on December 19, 2018 (File No. 001-38447)).

   
10.1 Amendment and Restated Executive Employment Agreement by and between Business First Bank and David R. Melville, III, dated November 6, 2019*.
   
10.3 Change in Control Agreement, dated November 6, 2019, between Business First Bank and Gregory Robertson*.
   
10.4 Change in Control Agreement, dated November 6, 2019, between Business First Bank and Philip Jordan*.
   

31.1

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

   

31.2

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

   

32.1

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

   

101.INS

XBRL Instance Document*

   

101.SCH

XBRL Taxonomy Extension Schema Document*

   

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document*

   

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document*

   

101.LAB

XBRL Taxonomy Extension Label Linkbase Document*

   

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document*

 


*

Filed herewith.  

 

 

SIGNATURES

 

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

 

     

 

 

BUSINESS FIRST BANCSHARES, INC.

     

November 7, 2019

 

/s/ David R. Melville, III

 

 

David R. Melville, III

 

 

President and Chief Executive Officer

     

November 7, 2019

 

/s/ Gregory Robertson

 

 

Gregory Robertson

 

 

Chief Financial Officer

 

 

 

  63