Business First Bancshares, Inc. - Quarter Report: 2020 March (Form 10-Q)

bfbi20200331_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 March 31, 2020

☐

TRANSITION REPORT PURSUANT 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 May 4, 2020, the issuer has outstanding 20,667,365 shares of common stock, par value $1.00 per share.

Table of Contents

BUSINESS FIRST BANCSHARES, INC.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and December 31, 2019	3

	Unaudited Consolidated Statements of Income for the three months ended March 31, 2020 and 2019	4

	Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019	5

	Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2020 and 2019	6

	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019	7

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57

Item 4.	Controls and Procedures	57

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61

Item 3.	Defaults Upon Senior Securities	61

Item 4.	Mine Safety Disclosures	61

Item 5.	Other Information	61

Item 6.	Exhibits	61

Signatures		63

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	March 31, 2020		December 31,
	(Unaudited)		2019
ASSETS
Cash and Due from Banks	$	80,109	$	89,371
Federal Funds Sold		29,135		61,372
Securities Available for Sale, at Fair Values		275,115		278,193
Mortgage Loans Held for Sale		868		251
Loans and Lease Receivable, Net of Allowance for Loan Losses of $13,319 at March 31, 2020 and $12,124 at December 31, 2019		1,758,061		1,698,141
Premises and Equipment, Net		29,656		29,280
Accrued Interest Receivable		7,724		8,025
Other Equity Securities		11,721		12,565
Other Real Estate Owned		3,281		4,036
Cash Value of Life Insurance		32,765		32,568
Deferred Taxes		1,800		2,145
Goodwill		48,495		48,495
Core Deposit Intangible		6,471		6,694
Other Assets		2,461		2,699
Total Assets	$	2,287,662	$	2,273,835

LIABILITIES
Deposits:
Noninterest Bearing	$	417,534	$	398,847
Interest Bearing		1,385,274		1,383,163
Total Deposits		1,802,808		1,782,010
Securities Sold Under Agreements to Repurchase		14,728		67,989
Short Term Borrowings		5,000		-
Subordinated Debt		25,000		25,000
Federal Home Loan Bank Borrowings		138,000		93,000
Accrued Interest Payable		1,573		1,533
Other Liabilities		18,523		19,206
Total Liabilities		2,005,632		1,988,738

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; 13,067,987 and 13,279,363 Shares Issued and Outstanding at March 31, 2020 and December 31, 2019, respectively		13,068		13,279
Additional Paid-in Capital		206,966		212,505
Retained Earnings		59,859		56,700
Accumulated Other Comprehensive Income		2,137		2,613
Total Shareholders' Equity		282,030		285,097
Total Liabilities and Shareholders' Equity	$	2,287,662	$	2,273,835

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

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

	For The Three Months Ended March 31,
	2020		2019
Interest Income:
Interest and Fees on Loans	$	24,143	$	22,423
Interest and Dividends on Securities		1,731		1,874
Interest on Federal Funds Sold and Due From Banks		142		290
Total Interest Income		26,016		24,587
Interest Expense:
Interest on Deposits		4,686		4,757
Interest on Borrowings		1,119		710
Total Interest Expense		5,805		5,467
Net Interest Income		20,211		19,120
Provision for Loan Losses		1,367		633
Net Interest Income after Provision for Loan Losses		18,844		18,487
Other Income:
Service Charges on Deposit Accounts		931		938
Gain on Sales of Securities		25		-
Other Income		1,848		1,373
Total Other Income		2,804		2,311
Other Expenses:
Salaries and Employee Benefits		9,435		8,552
Occupancy and Equipment Expense		1,891		1,894
Other Expenses		5,317		3,344
Total Other Expenses		16,643		13,790
Income Before Income Taxes		5,005		7,008
Provision for Income Taxes		506		1,349
Net Income	$	4,499	$	5,659
Earnings Per Share:
Basic	$	0.34	$	0.43
Diluted	$	0.34	$	0.41

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

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

	For The Three Months Ended March 31,
	2020			2019
Consolidated Net Income	$	4,499		$	5,659

Other Comprehensive Income (Loss):
Unrealized Gain (Loss) on Investment Securities		(627	)		3,973
Reclassification Adjustment for Gains included in Net Income		25			-
Income Tax Effect		126			(834	)
Other Comprehensive Income (Loss)		(476	)		3,139
Consolidated Comprehensive Income	$	4,023		$	8,798

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

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(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, 2018	$	13,213		$	212,332		$	37,982		$	(3,469	)	$	260,058
Comprehensive Income:
Net Income		-			-			5,659			-			5,659
Other Comprehensive Income		-			-			-			3,139			3,139
Cash Dividends Declared, $0.08 Per Share		-			-			(1,065	)		-			(1,065	)
Stock Issuance		114			1,154			-			-			1,268
Stock Based Compensation Cost		44			249			-			-			293
Surrendered Shares of Stock Based Compensation		(10	)		(198	)		-			-			(208	)
Balances at March 31, 2019	$	13,361		$	213,537		$	42,576		$	(330	)	$	269,144

Balances at December 31, 2019	$	13,279		$	212,505		$	56,700		$	2,613		$	285,097
Comprehensive Income:
Net Income		-			-			4,499			-			4,499
Other Comprehensive Loss		-			-			-			(476	)		(476	)
Cash Dividends Declared, $0.10 Per Share		-			-			(1,340	)		-			(1,340	)
Stock Issuance		332			3,029			-			-			3,361
Surrendered Shares of Options Exercised		(173	)		(4,148	)		-			-			(4,321	)
Stock Based Compensation Cost		65			145			-			-			210
Stock Repurchase		(435	)		(4,565	)		-			-			(5,000	)
Balances at March 31, 2020	$	13,068		$	206,966		$	59,859		$	2,137		$	282,030

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

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	For The Three Months Ended March 31,
	2020			2019
Cash Flows From Operating Activities:
Consolidated Net Income	$	4,499		$	5,659
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
Provision for Loan Losses		1,367			633
Depreciation and Amortization		378			398
Net Accretion of Purchase Accounting Valuations		(67	)		(282	)
Noncash Compensation Expense		210			85
Net Amortization of Securities		379			439
Gain on Sales of Securities		(25	)		-
Loss on Sale of Other Real Estate Owned, Net of Writedowns		46			56
Increase in Cash Value of Life Insurance		(197	)		(168	)
Provision (Credit) for Deferred Income Taxes		471			(63	)
Changes in Assets and Liabilities:
Decrease in Accrued Interest Receivable		301			1,169
(Increase) Decrease in Other Assets		238			(353	)
Increase in Accrued Interest Payable		40			665
Increase (Decrease) in Other Liabilities		(683	)		597
Net Cash Provided by Operating Activities		6,957			8,835

Cash Flows From Investing Activities:
Purchases of Securities Available for Sale		(21,398	)		(9,594	)
Proceeds from Maturities / Sales of Securities Available for Sale		13,537			9,828
Proceeds from Paydowns of Securities Available for Sale		9,983			8,694
Purchases of Other Equity Securities		(749	)		(46	)
Redemption of Other Equity Securities		1,593			820
Net Increase in Loans		(61,656	)		(58,057	)
Purchases of Premises and Equipment		(754	)		(432	)
Proceeds from Sales of Other Real Estate		751			170
Net Decrease in Federal Funds Sold		32,237			11,743
Net Cash Used in Investing Activities		(26,456	)		(36,874	)

(CONTINUED)

Table of Contents

	For The Three Months Ended March 31,
	2020			2019
Cash Flows From Financing Activities:
Net Increase in Deposits		20,798			10,529
Net Decrease in Securities Sold Under Agreements to Repurchase		(53,261	)		(1,159	)
Net Advances (Repayments) on Federal Home Loan Bank Borrowings		45,000			(25,000	)
Net Proceeds from in Short Term Borrowings		5,000			-
Proceeds from Issuance of Common Stock		3,361			392
Surrendered Shares of Options Exercised		(4,321	)		-
Repurchase of Common Stock		(5,000	)		-
Proceeds from Exercise of Stock Warrants		-			876
Payment of Dividends on Common Stock		(1,340	)		(1,065	)
Net Cash Provided by (Used in) Financing Activities		10,237			(15,427	)
Net Decrease in Cash and Cash Equivalents		(9,262	)		(43,466	)
Cash and Cash Equivalents at Beginning of Period		89,371			96,072
Cash and Cash Equivalents at End of Period	$	80,109		$	52,606

Supplemental Disclosures for Cash Flow Information:
Cash Payments for:
Interest on Deposits	$	4,654		$	4,498
Interest on Borrowings	$	1,111		$	304
Income Tax Payments	$	-		$	-

Supplemental Schedule for Noncash Investing and Financing Activities:
Change in the Unrealized Gain (Loss) on Securities Available for Sale	$	(602	)	$	3,973
Change in Deferred Tax Effect on the Unrealized (Gain) Loss on Securities Available for Sale	$	126		$	(834	)
Transfer of Loans to Other Real Estate	$	42		$	-

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

Table of Contents

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, b1BANK (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, 2019.

COVID-19, a global pandemic, has adversely impacted the broad economy, including most industries and sectors. The length and depth of the pandemic will ultimately determine the overall financial impact to the Company, but it could impair our customer’s ability to meet their financial obligations to us. Furthermore, while there has been no material impact to the Company’s employees to date, COVID-19 could potentially create business continuity issues for the Company.

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 2020. These reclassifications have no effect on previously reported net income.

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 3 – 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 options, excluding stock options that were antidilutive. Diluted EPS also includes unvested restricted stock awards (“RSAs”).

	For The Three Months Ended March 31,
	2020		2019
	(Dollars in thousands, except per share data)
Numerator:
Net Income Available to Common Shares	$	4,499	$	5,659
Denominator:
Weighted Average Common Shares Outstanding		13,313,154		13,287,560
Dilutive Effect of Stock Options and RSAs		54,122		365,565
Weighted Average Dilutive Common Shares		13,367,276		13,653,125

Basic Earnings Per Common Share From Net Income Available to Common Shares	$	0.34	$	0.43

Diluted Earnings Per Common Share From Net Income Available to Common Shares	$	0.34	$	0.41

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – Securities –

The amortized cost and fair values of securities available for sale as of March 31, 2020 and December 31, 2019 are summarized as follows:

	March 31, 2020
	(Dollars in thousands)
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Government Agencies	$	16,403	$	365	$	66	$	16,702
Corporate Securities		24,767		105		733		24,139
Mortgage-Backed Securities		144,278		4,643		288		148,633
Municipal Securities		86,962		141		1,462		85,641
Total Securities Available for Sale	$	272,410	$	5,254	$	2,549	$	275,115

	December 31, 2019
	(Dollars in thousands)
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Government Agencies	$	15,654	$	303	$	20	$	15,937
Corporate Securities		23,774		98		158		23,714
Mortgage-Backed Securities		137,817		2,139		497		139,459
Municipal Securities		97,641		1,447		5		99,083
Total Securities Available for Sale	$	274,886	$	3,987	$	680	$	278,193

Table of Contents

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 March 31, 2020 and December 31, 2019, 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.

	March 31, 2020
	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	$	4,956	$	66	$	-	$	-	$	4,956	$	66
Corporate Securities		7,557		207		1,974		526		9,531		733
Mortgage-Backed Securities		8,167		234		4,844		54		13,011		288
Municipal Securities		63,323		1,456		630		6		63,953		1,462
Total Securities Available for Sale	$	84,003	$	1,963	$	7,448	$	586	$	91,451	$	2,549

	December 31, 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	$	2,486	$	20	$	-	$	-	$	2,486	$	20
Corporate Securities		-		-		6,360		158		6,360		158
Mortgage-Backed Securities		950		4		44,366		493		45,316		497
Municipal Securities		948		4		1,261		1		2,209		5
Total Securities Available for Sale	$	4,384	$	28	$	51,987	$	652	$	56,371	$	680

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.

Table of Contents

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 March 31, 2020 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	$	23,463	$	23,381
One to Five Years		45,245		45,152
Over Five to Ten Years		132,248		132,951
Over Ten Years		71,454		73,631
Total Securities Available for Sale	$	272,410	$	275,115

Note 5 – Loans and the Allowance for Loan Losses –

Loans receivable at March 31, 2020 and December 31, 2019 are summarized as follows:

	March 31,			December 31,
	2020			2019
	(Dollars in thousands)
Real estate loans:
Construction and land	$	260,836		$	244,181
Farmland		53,900			48,681
1-4 family residential		295,876			293,142
Multi-family residential		32,859			36,454
Nonfarm nonresidential		623,114			612,608
Commercial		431,992			390,398
Consumer		72,803			84,801
Total loans held for investment		1,771,380			1,710,265

Less:
Allowance for loan losses		(13,319	)		(12,124	)
Net loans	$	1,758,061		$	1,698,141

Table of Contents

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 March 31, 2020 and December 31, 2019.

Net deferred loan origination fees were $3.2 million and $3.0 million at March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, overdrafts of $884,000 and $276,000, 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 $139.9 million and $129.7 million at March 31, 2020 and December 31, 2019, 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.

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Total loans held for investment at March 31, 2020 includes $151.6 million of loans acquired in acquisitions that were recorded at fair value as of the acquisition date. Included in the acquired balances at March 31, 2020 were acquired impaired loans accounted for under the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”) with a net carrying amount of $5.2 million and acquired performing loans not accounted for under ASC 310-30 totaling $148.3 million with a related purchase discount of $1.9 million.

Total loans held for investment at December 31, 2019 includes $180.0 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, 2019 were acquired impaired loans accounted for under ASC 310-30 with a net carrying amount of $5.0 million and acquired performing loans not accounted for under ASC 310-30 totaling $177.1 million with a related purchase discount of $2.0 million.

The following tables set forth, as of March 31, 2020 and December 31, 2019, 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

	March 31, 2020
	(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	$	1,868	$	229		$	1,888		$	226		$	3,882	$	3,414		$	617		$	12,124
Charge-offs		-		(2	)		(25	)		-			-		(164	)		(3	)		(194	)
Recoveries		-		-			2			-			1		15			4			22
Provision		240		80			225			(13	)		265		518			52			1,367
Ending Balance	$	2,108	$	307		$	2,090		$	213		$	4,148	$	3,783		$	670		$	13,319
Ending Balance:
Individually evaluated for impairment	$	-	$	3		$	49		$	-		$	40	$	440		$	61		$	593
Collectively evaluated for impairment	$	2,108	$	304		$	2,041		$	213		$	4,108	$	3,343		$	609		$	12,726
Purchased Credit Impaired (1)	$	-	$	-		$	-		$	-		$	-	$	-		$	-		$	-
Loans receivable:
Ending Balance	$	260,836	$	53,900		$	295,876		$	32,859		$	623,114	$	431,992		$	72,803		$	1,771,380
Ending Balance:
Individually evaluated for impairment	$	395	$	236		$	3,047		$	-		$	4,013	$	3,991		$	423		$	12,105
Collectively evaluated for impairment	$	260,441	$	53,529		$	292,769		$	32,859		$	614,276	$	427,833		$	72,380		$	1,754,087
Purchased Credit Impaired (1)	$	-	$	135		$	60		$	-		$	4,825	$	168		$	-		$	5,188

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

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	December 31, 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	)		(162	)		-			(51	)		(1,556	)		(52	)		(1,825	)
Recoveries		-			-			14			-			4			41			64			123
Provision		280			127			498			(10	)		1,214			476			21			2,606
Ending Balance	$	1,868		$	229		$	1,888		$	226		$	3,882		$	3,414		$	617		$	12,124
Ending Balance:
Individually evaluated for impairment	$	-		$	4		$	30		$	-		$	52		$	421		$	49		$	556
Collectively evaluated for impairment	$	1,868		$	225		$	1,858		$	226		$	3,830		$	2,993		$	568		$	11,568
Purchased Credit Impaired (1)	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Loans receivable:
Ending Balance	$	244,181		$	48,681		$	293,142		$	36,454		$	612,608		$	390,398		$	84,801		$	1,710,265
Ending Balance:
Individually evaluated for impairment	$	397		$	222		$	2,531		$	-		$	4,101		$	4,175		$	421		$	11,847
Collectively evaluated for impairment	$	243,784		$	48,324		$	290,549		$	36,454		$	603,891		$	386,027		$	84,380		$	1,693,409
Purchased Credit Impaired (1)	$	-		$	135		$	62		$	-		$	4,616		$	196		$	-		$	5,009

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

Portfolio Segment Risk Factors

Construction and land include loans to small-to-midsized businesses to construct owner-user properties, loans to developers of commercial real estate investment properties and residential developments and, to a lesser extent, loans to individual clients for construction of single-family homes in our market areas. Risks associated with these loans include fluctuations in the value of real estate, project completion risk and change in market trends. We are also exposed to risk based on the ability of the construction loan borrower to finance the loan or sell the property upon completion of the project, which may be affected by changes in secondary market terms and criteria for permanent financing since the time that we funded the loan.

Farmland loans are often for investments related to agricultural businesses and may include construction of facilities. These loans are usually repaid through permanent financing or the cashflow from the borrower’s ongoing operations.

One to four family residential include first and second lien one-to-four family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences. We are exposed to risk based on fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship.

Multifamily residential loans are generally originated to provide permanent financing for multifamily residential income producing properties. Repayment of these loans primarily relies on successful rental and management of the property.

Nonfarm nonresidential loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Repayment is generally relied upon from the successful operations of the property. General economic conditions may impact the performance of these types of loans, including fluctuations in the value of real estate, vacancy rates, and unemployment trends.

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Commercial loans include general commercial and industrial, or C&I, loans, including commercial lines of credit, working capital loans, term loans, equipment financing, asset acquisition, expansion and development loans, borrowing base loans, letters of credit and other loan products, primarily in our target markets that are underwritten on the basis of the borrower’s ability to service the debt from income. Commercial loan risk is derived from the expectation that such loans generally are serviced principally from the operations of the business, and those operations may not be successful. Any interruption or discontinuance of operating cash flows from the business, which may be influenced by events not under the control of the borrower such as economic events and changes in governmental regulations, could materially affect the ability of the borrower to repay the loan.

Consumer loans include a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. The risk is based on changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship, and fluctuations in the value of the real estate or personal property securing the consumer loan, if any.

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.

As of March 31, 2020 and December 31, 2019, the credit quality indicators, disaggregated by class of loan, are as follows:

Credit Quality Indicators

	March 31, 2020
	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Real Estate Loans:
Construction and land	$	258,126	$	757	$	1,558	$	395	$	260,836
Farmland		51,832		1,718		13		337		53,900
1-4 family residential		286,995		2,982		3,032		2,867		295,876
Multi-family residential		32,828		-		31		-		32,859
Nonfarm nonresidential		605,090		11,134		3,308		3,582		623,114
Commercial		413,869		11,192		5,226		1,705		431,992
Consumer		70,546		1,674		168		415		72,803
Total	$	1,719,286	$	29,457	$	13,336	$	9,301	$	1,771,380

	December 31, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Real Estate Loans:
Construction and land	$	241,519	$	1,141	$	1,124	$	397	$	244,181
Farmland		46,591		1,737		14		339		48,681
1-4 family residential		284,381		3,175		3,237		2,349		293,142
Multi-family residential		36,422		-		32		-		36,454
Nonfarm nonresidential		594,046		11,077		3,830		3,655		612,608
Commercial		374,500		9,219		4,854		1,825		390,398
Consumer		82,726		1,538		125		412		84,801
Total	$	1,660,185	$	27,887	$	13,216	$	8,977	$	1,710,265

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

The following tables reflect certain information with respect to the loan portfolio delinquencies by loan class and amount as of March 31, 2020 and December 31, 2019. All loans greater than 90 days past due are generally placed on nonaccrual status.

Aged Analysis of Past Due Loans Receivable

	March 31, 2020
	(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	$	458	$	-	$	844	$	1,302	$	259,534	$	260,836	$	465
Farmland		230		101		160		491		53,409		53,900		-
1-4 family residential		2,454		948		1,892		5,294		290,582		295,876		180
Multi-family residential		31		-		-		31		32,828		32,859		-
Nonfarm nonresidential		2,993		63		1,496		4,552		618,562		623,114		-
Commercial		1,817		122		1,333		3,272		428,720		431,992		71
Consumer		366		55		489		910		71,893		72,803		118
Total	$	8,349	$	1,289	$	6,214	$	15,852	$	1,755,528	$	1,771,380	$	834

	December 31, 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	$	483	$	17	$	379	$	879	$	243,302	$	244,181	$	-
Farmland		18		16		143		177		48,504		48,681		-
1-4 family residential		1,245		975		1,000		3,220		289,922		293,142		29
Multi-family residential		32		-		-		32		36,422		36,454		-
Nonfarm nonresidential		181		610		1,529		2,320		610,288		612,608		-
Commercial		126		142		1,311		1,579		388,819		390,398		-
Consumer		143		34		405		582		84,219		84,801		43
Total	$	2,228	$	1,794	$	4,767	$	8,789	$	1,701,476	$	1,710,265	$	72

Table of Contents

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 March 31, 2020 and December 31, 2019. Purchased performing loans are placed on nonaccrual status and reported as impaired using the same criteria applied to the originated portfolio. Purchased impaired loans (credits) are excluded from this table. The interest income recognized for impaired loans was $56,000 and $69,000 for the three months ending March 31, 2020 and 2019, respectively.

	March 31, 2020
	(Dollars in thousands)
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
With an allowance recorded:
Real Estate Loans:
Construction and land	$	-	$	-	$	-	$	-
Farmland		19		21		3		19
1-4 family residential		249		268		49		202
Multi-family residential		-		-		-		-
Nonfarm nonresidential		525		543		40		588
Other Loans:
Commercial		896		977		440		901
Consumer		146		149		61		151
Total	$	1,835	$	1,958	$	593	$	1,861

With no allowance recorded:
Real Estate Loans:
Construction and land	$	395	$	419	$	-	$	396
Farmland		217		223		-		217
1-4 family residential		2,798		3,442		-		2,750
Multi-family residential		-		-		-		-
Nonfarm nonresidential		3,488		3,828		-		3,447
Other Loans:
Commercial		3,095		3,948		-		3,128
Consumer		277		307		-		287
Total	$	10,270	$	12,167	$	-	$	10,225

Total Impaired Loans:
Real Estate Loans:
Construction and land	$	395	$	419	$	-	$	396
Farmland		236		244		3		236
1-4 family residential		3,047		3,710		49		2,952
Multi-family residential		-		-		-		-
Nonfarm nonresidential		4,013		4,371		40		4,035
Other Loans:
Commercial		3,991		4,925		440		4,029
Consumer		423		456		61		438
Total	$	12,105	$	14,125	$	593	$	12,086

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	December 31, 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		21		4		21
1-4 family residential		136		167		30		163
Multi-family residential		-		-		-		-
Nonfarm nonresidential		721		738		52		601
Other Loans:
Commercial		851		926		421		1,053
Consumer		120		123		49		116
Total	$	1,848	$	1,975	$	556	$	1,955

With no allowance recorded:
Real Estate Loans:
Construction and land	$	397	$	420	$	-	$	184
Farmland		202		207		-		177
1-4 family residential		2,395		3,041		-		2,531
Multi-family residential		-		-		-		-
Nonfarm nonresidential		3,381		3,693		-		3,644
Other Loans:
Commercial		3,323		4,173		-		4,157
Consumer		301		358		-		192
Total	$	9,999	$	11,892	$	-	$	10,885

Total Impaired Loans:
Real Estate Loans:
Construction and land	$	397	$	420	$	-	$	185
Farmland		222		228		4		198
1-4 family residential		2,531		3,208		30		2,694
Multi-family residential		-		-		-		-
Nonfarm nonresidential		4,102		4,431		52		4,245
Other Loans:
Commercial		4,174		5,099		421		5,210
Consumer		421		481		49		308
Total	$	11,847	$	13,867	$	556	$	12,840

Table of Contents

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, 2018	$	10,704
Payments received, net of discounts realized		(5,695	)
Carrying amount - December 31, 2019		5,009
Advances on purchased impaired credit		250
Payments received, net of discounts realized		(71	)
Carrying amount - March 31, 2020	$	5,188

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 March 31, 2020 and December 31, 2019, the concessions granted to certain borrowers generally included extending the payment due dates and offering below market contractual interest rate.

Once modified in a troubled debt restructuring, a loan is generally considered impaired until its contractual maturity. At the time of the restructuring, the loan is evaluated for an 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.

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following tables present informative data regarding troubled debt restructurings as of March 31, 2020 and December 31, 2019. The Bank had no troubled debt restructurings that had subsequently defaulted during the three months ended March 31, 2020 and the year ended December 31, 2019, respectively.

Modifications as of March 31, 2020:
		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	$	218
Nonfarm nonresidential	3		2,411		1,996
Other Loans:
Commercial	7		5,927		2,694
Consumer	1		11		7
Total	14	$	8,584	$	4,915

Modifications as of December 31, 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	$	219
Nonfarm nonresidential	3		2,411		2,044
Other Loans:
Commercial	6		5,914		2,755
Consumer	1		11		9
Total	13	$	8,571	$	5,027

For the quarter ended March 31, 2020, the Company modified approximately 150 loans with outstanding balances totaling $83.0 million by granting temporary payment deferrals of principal and/or interest. The payment deferrals were granted due to the effects of the COVID-19 pandemic. Based on the interpretive guidance released by the FASB and our regulators, the Company determined these modifications were not troubled debt restructurings.

Note 6 – Leases –

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. Certain leases provide for increases in minimum monthly rental payments as defined by the lease agreement. Rental expense under these agreements was $693,000 and $673,000 for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020, the Company had a weighted average lease term of 8.1 years and a weighted average discount rate of 3.10%.

Table of Contents

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)
April 1, 2020 through March 31, 2021	$	1,650
April 1, 2021 through March 31, 2022		1,990
April 1, 2022 through March 31, 2023		1,809
April 1, 2023 through March 31, 2024		1,701
April 1, 2024 and Thereafter		7,341
Total Future Minimum Lease Payments		14,491
Less Imputed Interest		(1,700	)
Present Value of Lease Liabilities	$	12,791

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 $400.3 million and standby and commercial letters of credit of approximately $23.2 million at March 31, 2020.

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.

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

The following tables present the balance of assets and liabilities measured on a recurring basis as of March 31, 2020 and December 31, 2019. 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)
March 31, 2020
Available for Sale:
U.S. Government Agency Securities	$	16,702	$	-	$	16,702	$	-
Corporate Securities		24,139		-		24,139		-
Mortgage-Backed Securities		148,633		-		148,633		-
Municipal Securities		85,641		-		79,421		6,220
Mortgage Loans Held for Sale		868		-		868		-
Total	$	275,983	$	-	$	269,763	$	6,220


December 31, 2019
Available for Sale:
U.S. Government Agency Securities	$	15,937	$	-	$	15,937	$	-
Corporate Securities		23,714		-		23,714		-
Mortgage-Backed Securities		139,459		-		139,459		-
Municipal Securities		99,083		-		92,496		6,587
Mortgage Loans Held for Sale		251		-		251		-
Total	$	278,444	$	-	$	271,857	$	6,587

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 table below. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis.

Table of Contents

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)
March 31, 2020
Assets:
Impaired Loans	$	16,288	$	-	$	16,288	$	-
Repossessed Assets		3,292		-		3,292		-
Total	$	19,580	$	-	$	19,580	$	-

December 31, 2019
Assets:
Impaired Loans	$	15,876	$	-	$	15,876	$	-
Repossessed Assets		4,196		-		4,196		-
Total	$	20,072	$	-	$	20,072	$	-

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.

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Loans – The exit price 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 March 31, 2020 and December 31, 2019 are as follows:

	Carrying		Total
	Amount		Fair Value		Level 1		Level 2		Level 3
	(Dollars in thousands)
March 31, 2020
Financial Assets:
Cash and Short-Term Investments	$	109,244	$	109,244	$	109,244	$	-	$	-
Securities		275,115		275,115		-		268,895		6,220
Mortgage Loans Held for Sale		868		868		-		868		-
Loans - Net		1,758,061		1,728,314		-		-		1,728,314
Cash Value of BOLI		32,765		32,765		-		32,765		-
Other Equity Securities		11,721		11,821		-		-		11,821
Total	$	2,187,774	$	2,158,127	$	109,244	$	302,528	$	1,746,355

Financial Liabilities:
Deposits	$	1,802,808	$	1,810,716	$	-	$	-	$	1,810,716
Borrowings		182,728		206,977		-		206,977		-
Total	$	1,985,536	$	2,017,693	$	-	$	206,977	$	1,810,716

Table of Contents

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, 2019
Financial Assets:
Cash and Short-Term Investments	$	150,743	$	150,743	$	150,743	$	-	$	-
Securities		278,193		278,193		-		271,606		6,587
Mortgage Loans Held for Sale		251		251		-		251		-
Loans - Net		1,698,141		1,696,470		-		-		1,696,470
Cash Value of BOLI		32,568		32,568		-		32,568		-
Other Equity Securities		12,565		12,565		-		-		12,565
Total	$	2,172,461	$	2,170,790	$	150,743	$	304,425	$	1,715,622

Financial Liabilities:
Deposits	$	1,782,010	$	1,782,692	$	-	$	-	$	1,782,692
Borrowings		185,989		202,863		-		202,863		-
Total	$	1,967,999	$	1,985,555	$	-	$	202,863	$	1,782,692

Note 9 – Subsequent Events –

On May 1, 2020, the Company consummated the merger of Pedestal Bancshares, Inc. (“Pedestal”), headquartered in Houma, Louisiana, with and into Business First, pursuant to the terms of that certain Agreement and Plan of Reorganization (the “Reorganization Agreement”), dated as of January 22, 2020, by and between Business First and Pedestal (the “Merger”). Also on May 1, 2020, Pedestal’s wholly owned banking subsidiary, Pedestal Bank, was merged with and into b1BANK. Pursuant to the terms of the Reorganization Agreement, upon consummation of the Merger, we issued 7,614,506 shares of our common stock to the former shareholders of Pedestal. At March 31, 2020, Pedestal reported $1.3 billion in total assets, $848.6 million in loans and $1.0 billion in deposits.

Note 10 – Recently Issued Accounting Pronouncements –

Accounting Standards Adopted in Current Period

None

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 has elected to delay implementation of the standard. The future adoption of this ASU may have a material effect on the Company’s consolidated financial statements.

Table of Contents

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

On January 26, 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) which simplifies the accounting for goodwill impairment. The guidance in this ASU removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. The goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective for calendar year-end ending in 2020 for public business entities. Early adoption is permitted for any impairment tests performed after January 1, 2017. Due to the recent COVID-19 pandemic, the future adoption of this ASU may have a material impact on the consolidated financial statements.

Table of Contents

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 b1BANK, 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:

●

the effects of the ongoing COVID-19 pandemic, including, among other effects: the impact of the public health crisis; the extent and duration of closures of businesses, including our branches, vendors and customers; the operation of financial markets; employment levels; market liquidity; the impact of various actions taken in response by the United States (“U.S.”) federal government, the Federal Reserve, other banking regulators, state and local governments; the adequacy of our allowance for loan losses in relation to potential losses in our loan portfolio; and the impact that all of these factors have on our borrowers, other customers, vendors and counterparties;

●

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 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;

Table of Contents

●

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, epidemics and pandemics such as coronavirus, 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, 2019, 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.

Table of Contents

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 and its subsidiaries from December 31, 2019 to March 31, 2020, and its results of operations for the three months ended March 31, 2020. 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, 2019, 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, b1BANK, 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 26 banking centers in markets across Louisiana and in Dallas, Texas. As of March 31, 2019, we had total assets of $2.3 billion, total loans of $1.8 billion, total deposits of $1.8 billion, and total shareholders’ equity of $282.0 million.

As a bank holding company operating through one market segment, community banking, we generate most of our revenues from interest income on loans, customer service and loan fees, and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest-earning assets and expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets.

Changes in the market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions, and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in our markets and across our region, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our markets.

Other Developments

Pedestal Merger

On May 1, 2020 we consummated the merger of Pedestal Bancshares, Inc. (“Pedestal”), headquartered in Houma, Louisiana, with and into Business First, pursuant to the terms of that certain Agreement and Plan of Reorganization (the “Reorganization Agreement”), dated as of January 22, 2020, by and between Business First and Pedestal (the “Merger”). At March 31, 2020, Pedestal reported $1.3 billion in total assets, $848.6 million in loans and $1.0 billion in deposits. Also on May 1, 2020, Pedestal’s wholly owned banking subsidiary, Pedestal Bank, was merged with and into b1BANK. Pursuant to the terms of the Reorganization Agreement, upon consummation of the Merger, we issued 7,614,506 shares of our common stock to the former shareholders of Pedestal. Upon consummation of the Merger and as contemplated by the Reorganization Agreement, we reconstituted the boards of directors, reducing the size of each to fourteen and appointing four former directors of Pedestal and Pedestal bank to the boards of directors of Business First and b1BANK.

Table of Contents

Recent Developments Related to COVID-19

We have taken a number of actions in response to the COVID-19 pandemic:

●

We instituted a COVID-19 Deferral Assistance Program, described in further detail below, under which we have agreed to allow borrowers to defer certain payments on loans;

●

We have limited access to our lobbies to appointment-only, while drive-thrus remain open;

●

Approximately 45% of our employees are working remotely, including approximately 90% of our back office employees;

●

We participated in the Paycheck Protection Program (“PPP”), as described in further detail below;

●

We amended our bylaws to allow for shareholders to participate in our annual and special meetings by means of remote communication; and, subject to compliance with Louisiana law, we plan to hold our annual meeting in the form of a virtual meeting;

●

We have analyzed our portfolio to determine which sectors we believe may be particularly impacted by the pandemic—such as energy, hotels, restaurants, 1-4 family and retail—and have flagged those sectors for additional monitoring;

●

In anticipation of credit losses expected as a result of the COVID-19 pandemic, we recorded a provision for loan losses in the first quarter of 2020;

●

In sensitivity to our customers, we have waived certain service fees, such as late fees, excessive withdrawal fees, etc. and increased daily limits on ATM withdrawals; and

●

We have monitored our liquidity, including on a pro forma basis after giving effect to the Pedestal merger.

COVID-19 Deferral Assistance Program

Beginning on March 25, 2020, we have taken proactive measures to help customers by deferring principal and/or interest payments. As of April 29, 2020, we had agreed to deferrals on approximately 1,350 loans with an aggregate outstanding balance of $623.3 million. Of these modifications, approximately 83.3% of loans (based on outstanding balance) received a 90-day deferral of principal and interest, with the remaining 16.7% continuing to pay interest only with all principal repayment deferred.

As of April 29, 2020, Pedestal had also agreed to deferrals on approximately 1,000 loans with an aggregate outstanding balance of $304.5 million. Of these modifications, approximately 48.8% of loans received a 90-day deferral of principal and interest, with the remaining 51.2% continuing to pay interest only with all principal repayment deferred.

In accordance with FASB and interagency regulatory guidance issued in March 2020, loans that are modified under the terms of our COVID-19 Deferral Assistance Program will not be considered as troubled debt restructurings to the extent that they meet the terms of such guidance.

PPP Participation

Additionally, through April 19, 2020, Business First funded approximately 1,050 PPP loans with an aggregate balance of $250 million and an average loan balance of approximately $240,000. In addition, we had an additional 370 applications for a total of $40 million in the pipeline for phase II of PPP, which opened on April 27, 2020.

Pedestal funded approximately 486 loans in phase I of PPP, for an aggregate balance of $83 million. As of April 27, 2020, Pedestal had a pipeline for phase II of PPP consisting of approximately 318 applicants seeking approximately $11 million in funding.

Table of Contents

Financial Highlights

The financial highlights as of and for the three months ended March 31, 2020 include:

•

Total assets of $2.3 billion, a $13.8 million, or 0.6%, increase from December 31, 2019.

•

Total loans held for investment of $1.8 billion, a $61.1 million, or 3.6%, increase from December 31, 2019.

•

Total deposits of $1.8 billion, a $20.8 million, or 1.2%, increase from December 31, 2019.

•

Net income of $4.5 million, a $1.2 million, or 20.5%, decrease from the three months ended March 31, 2019.

•

Net interest income of $20.2 million, an increase of $1.1 million, or 5.7%, from the three months ended March 31, 2019.

•

Allowance for loan and lease losses of 0.75% of total loans held for investment, compared to 0.71% as of December 31, 2019, and a ratio of nonperforming loans to total loans held for investment of 0.57%, compared to 0.53% as of December 31, 2019.

•

Earnings per share for the first three months of 2020 of $0.34 per basic and diluted share, compared to $0.43 per basic share and $0.41 per diluted share for the first three months of 2019.

•

Return on average assets of 0.80% over the first three months of 2020, compared to 1.09% for the first three months of 2019.

•

Return on average equity of 6.31% over the first three months of 2020, compared to 8.62% for the first three months of 2019.

•

Tier 1 leverage ratio for the three months ended March 31, 2020 was 10.27%, as we opted in to adopt the Community Bank Leverage Ratio (“CBLR”) framework, compared to Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital 10.56%, 11.43%, 11.43%, and 13.30%, respectively as of December 31, 2019.

•

Book value per share of $21.58, an increase of 0.5% from $21.47 at December 31, 2019.

Results of Operations for the Three Months Ended March 31, 2020 and 2019

Performance Summary

For the three months ended March 31, 2020, net income was $4.5 million, or $0.34 per basic share and $0.34 per diluted share, compared to net income of $5.7 million, or $0.43 per basic share and $0.41 per diluted share, for the three months ended March 31, 2019. Return on average assets, on an annualized basis, increased to 0.80% for the three months ended March 31, 2020, from 1.09% for the three months ended March 31, 2019. Return on average equity, on an annualized basis, increased to 6.31% for the three months ended March 31, 2020, as compared to 8.62% for the three months ended March 31, 2019.

Net Interest Income

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

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

Table of Contents

For the three months ended March 31, 2020, net interest income totaled $20.2 million, and net interest margin and net interest spread were 3.93% and 3.55%, respectively, compared to $19.1 million, 4.01%, and 3.61%, respectively, for the three months ended March 31, 2019. The average yield on the loan portfolio was 5.55% for the three months ended March 31, 2020, compared to 5.79% for the three months ended March 31, 2019, and the average yield on total interest-earning assets was 5.06% for the three months ended March 31, 2020, compared to 5.16% for the three months ended March 31, 2019. For the three months ended March 31, 2020, overall cost of funds (which includes noninterest-bearing deposits) decreased 1 basis point compared to the three months ended March 31, 2019, primarily due to the federal funds rate cuts during the second half of 2019 and first quarter of 2020. While we experienced significant loan growth in average loan balances, we anticipate continued downward pressure on our net interest margin and net interest spread in future periods based on the current yield curve.

The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however the balances are reflected in average outstanding balances for the period. For the three months ended March 31, 2020 and 2019, interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield. The average total loans reflected below is net of deferred loan fees and discounts. Acquired loans were recorded at fair value at acquisition and accrete interest income over the remaining lives of the respective loans. Averages presented in the table below, and throughout this report, are month-end averages.

	For the Three Months Ended March 31,
	2020								2019
	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	$	1,740,189		$	24,143		5.55	%	$	1,549,887		$	22,423		5.79	%
Securities available for sale		286,660			1,731		2.42			309,768			1,874		2.42
Interest-bearing deposits in other banks		28,754			142		1.98			45,215			290		2.57
Total interest-earning assets		2,055,603			26,016		5.06			1,904,870			24,587		5.16
Allowance for loan losses		(12,203	)							(11,390	)
Noninterest-earning assets		201,184								182,203
Total assets	$	2,244,584		$	26,016				$	2,075,683		$	24,587

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,342,213		$	4,686		1.40	%	$	1,335,413		$	4,757		1.42	%
Subordinated debt		25,000			422		6.75			25,000			416		6.66
Advances from Federal Home Loan Bank (“FHLB”)		98,323			497		2.02			37,527			281		3.00
Other borrowings		67,125			200		1.19			12,482			13		0.42
Total interest-bearing liabilities		1,532,661			5,805		1.52			1,410,422			5,467		1.55

Noninterest-bearing liabilities:
Noninterest-bearing deposits		406,035								393,816
Other liabilities		20,550								8,764
Total noninterest-bearing liabilities		426,585								402,580
Shareholders’ equity		285,338								262,681
Total liabilities and shareholders’ equity	$	2,244,584							$	2,075,683
Net interest rate spread⁽¹⁾							3.55	%							3.61	%
Net interest income				$	20,211							$	19,120
Net interest margin⁽²⁾							3.93	%							4.01	%
Overall cost of funds							1.20	%							1.21	%

(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.

Table of Contents

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

	For the Three Months Ended March 31, 2020 compared to the Three Months Ended March 31, 2019
	Increase (Decrease) due to change in
	Volume			Rate			Total
	(Dollars in thousands) (Unaudited)
Interest-earning assets:
Total loans	$	2,640		$	(920	)	$	1,720
Securities available for sale		(140	)		(3	)		(143	)
Interest-earning deposits in other banks		(81	)		(67	)		(148	)
Total increase (decrease) in interest income	$	2,419		$	(990	)	$	1,429

Interest-bearing liabilities:
Interest-bearing deposits	$	24		$	(95	)	$	(71	)
Subordinated debt		—			6			6
Advances from FHLB		307			(91	)		216
Other borrowings		163			24			187
Total increase (decrease) in interest expense		494			(156	)		338
Increase (decrease) in net interest income	$	1,925		$	(834	)	$	1,091

Provision for Loan Losses

Our provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for loan losses see “—Financial Condition—Allowance for Loan Losses.” The provision for loan losses was $1.4 million for the three months ended March 31, 2020 and $633,000 for the same period in 2019. The higher provision for the three months ended March 31, 2020 compared to the same period in 2019 relates primarily to the expected impact of the COVID-19 pandemic and recorded through a qualitative adjustment.

Table of Contents

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 small business investment company (“SBIC”) partnerships. The following table presents, for the periods indicated, the major categories of noninterest income:

	For the Three Months Ended March 31,					Increase
	2020		2019			(Decrease)
	(Dollars in thousands) (Unaudited)
Noninterest income:
Service charges on deposit accounts	$	931	$	938		$	(7	)
Debit card and ATM fee income		407		445			(38	)
Bank-owned life insurance income		197		168			29
Gain on sales of loans		177		—			177
Gain on sales of investment securities		25		—			25
Mortgage origination income		115		90			25
Correspondent bank income		109		208			(99	)
Rental income		31		164			(133	)
Gain (loss) on sales of other real estate owned		151		(56	)		207
Pass-through income from SBIC partnerships		380		—			380
Other		281		354			(73	)
Total noninterest income	$	2,804	$	2,311		$	493

Noninterest income for the three months ended March 31, 2020 increased $493,000, or 21.3%, to $2.8 million compared to noninterest income of $2.3 million for the same period in 2019. 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 $931,000 for the three months ended March 31, 2020, as compared to $938,000 for the same time period in 2019.

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 $407,000 and $445,000 for the three months ended March 31, 2020 and 2019, respectively, representing a decrease of $38,000, or 8.5%.

Gain on sales of loans. The $177,000 gain for the three months ended March 31, 2020 was attributable to the sale of three SBA loans.

Correspondent bank income. We receive earnings credit income on certain of our correspondent banking relationships. Correspondent bank income was $109,000 and $208,000 during the three months ended March 31, 2020 and 2019, respectively, representing a decrease of $99,000 or 47.6%. The decrease was attributed to a lower average balance and a decrease in rates.

Rental income. We received rental income from the sublease of our former corporate offices. The lease ended in September 2019. Rental income totaled $31,000 and $164,000 for the three months ended March 31, 2020 and 2019, respectively. The decrease of $133,000, or 81.1%, was primarily from the result of the subleases of our former corporate offices expiring in September 2019.

Gain (loss) on sales of other real estate owned. The $151,000 gain for the three months ended March 31, 2020 was largely attributable to the sale of the Erwinville, Louisiana banking center building.

Pass-through income from SBIC partnerships. We recognized $380,000 of investment income from our equity investments for the three months ended March 31, 2020. No amount was recorded for the three months ended March 31, 2019.

Other. This category includes a variety of other income producing activities, including wire transfer fees, mortgage-related income, insurance commissions, brokerage commissions, credit card income and participation fee income. Other income decreased $73,000, or 20.6%, for the three months ended March 31, 2020, compared to the same period in 2019. The decrease for the three months ended March 31, 2020, compared to the same periods in 2019, was primarily due to receiving a grant in the three months ended March 31, 2019 in the amount of $113,000 that we did not receive in 2020.

Table of Contents

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

	For the Three Months Ended March 31,					Increase
	2020		2019			(Decrease)
	(Dollars in thousands) (Unaudited)
Salaries and employee benefits	$	9,435	$	8,552		$	883
Non-staff expenses:
Occupancy of bank premises		1,060		1,103			(43	)
Depreciation and amortization		601		628			(27	)
Data processing		652		616			36
FDIC assessment fees		147		150			(3	)
Legal and other professional fees		394		318			76
Advertising and promotions		306		327			(21	)
Utilities and communications		317		298			19
Ad valorem shares tax		375		345			30
Directors’ fees		74		205			(131	)
Other real estate owned expenses and write-downs		253		27			226
Merger and conversion related expenses		1,148		(254	)		1,402
Other		1,881		1,475			406
Total noninterest expense	$	16,643	$	13,790		$	2,853

Noninterest expense for the three months ended March 31, 2020 increased $2.9 million, or 20.7%, to $16.6 million, compared to noninterest expense of $13.8 million for the same period in 2019. 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 $9.4 million for the three months ended March 31, 2020, an increase of $883,000, or 10.3%, compared to the same period in 2019. The increase was primarily due to additional hires for new positions, our merit increase cycle, and payroll taxes on stock option exercises. As of March 31, 2020, we had 367 full-time equivalent employees, compared to 346 as of March 31, 2019.

Depreciation and amortization. Depreciation and amortization costs were $601,000 and $628,000 for the three months ended March 31, 2020 and 2019, respectively. This category includes leasehold, furniture, fixtures and equipment depreciation totaling $378,000 and $398,000 for the three months ended March 31, 2020 and 2019, respectively. The amortization of intangible assets was $223,000 and $230,000 for the three months ended March 31, 2020 and 2019, respectively.

FDIC assessment fees. FDIC assessment fees were $147,000 and $150,000 for the three months ended March 31, 2020 and 2019, respectively. These assessments are relatively unchanged due to an assessment credit back to the Bank that was recognized over the last two quarters of 2019 and the first quarter of 2020, as well as increased capital ratios.

Legal and other professional fees. Other professional fees include audit, loan review, compliance, and other consultants. For the three months ended March 31, 2020 and 2019, legal and other professional fees were $394,000 and $318,000, respectively. The increase for the three months ended March 31, 2020 was due to increased audit fees and an increase in consultant fees.

Directors’ fees. Directors’ fees were $74,000 and $205,000 for the three months ended March 31, 2020 and 2019, respectively. The decrease for the three months ended March 31, 2020, compared to the same period in 2019, is attributable to the decrease in share-based compensation for the three months ended March 31, 2020.

Table of Contents

Other real estate owned expense and write-downs. Other real estate owned expenses were $253,000 and $27,000 for the three months ended March 31, 2020 and 2019, respectively. The increase for the three months ended March 31, 2020, compared to the same period in 2019, is largely attributable to two properties having write-downs of $197,000.

Merger and conversion related expenses. Merger and conversion related expenses for the three months ended March 31, 2020 were related to the anticipated acquisition of Pedestal. For the three months ended March 31, 2019, merger and conversion related expenses were related to the acquisition of RSBI. During the three months ended March 31, 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 $406,000 for the three months ended March 31, 2020 compared to the same period in 2019, in part due to $141,000 in additional loan collection expenses.

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 March 31, 2020, income tax expense totaled $506,000, a decrease of $843,000, or 62.5%, compared to $1.3 million for the same period in 2019. Our effective tax rates for the three months ended March 31, 2020 and 2019 were 10.1% and 19.2%, respectively. The decrease in our effective tax rate for the three months ended March 31, 2020 is primarily due to lower taxable income and stock option exercises. Our effective tax rate for both periods was affected by tax-exempt income generated by municipal securities, bank-owned life insurance and by other nondeductible expenses (including acquisition-related expenses).

Financial Condition

Our total assets increased $13.8 million, or 0.6%, from December 31, 2019 to March 31, 2020.

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 March 31, 2020, total loans held for investment were $1.8 billion, an increase of $61.1 million, or 3.6%, compared to $1.7 billion as of December 31, 2019. The increase was primarily due to our continued loan penetration in our primary market areas. Additionally, $868,000 and $251,000 in mortgage loans were classified as loans held for sale as of March 31, 2020 and December 31, 2019, respectively.

Total loans held for investment as a percentage of total deposits were 98.3% and 96.0% as of March 31, 2020 and December 31, 2019, respectively. Total loans held for investment as a percentage of total assets were 77.4% and 75.2% as of March 31, 2020 and December 31, 2019, respectively.

Table of Contents

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

	As of March 31, 2020 (Unaudited)					As of December 31, 2019
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial	$	431,992		24.4	%	$	390,398		22.8	%
Real estate:
Construction and land		260,836		14.7			244,181		14.3
Farmland		53,900		3.0			48,681		2.9
1-4 family residential		295,876		16.7			293,142		17.1
Multi-family residential		32,859		1.9			36,454		2.1
Nonfarm nonresidential		623,114		35.2			612,608		35.8
Consumer		72,803		4.1			84,801		5.0
Total loans held for investment	$	1,771,380		100.0	%	$	1,710,265		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 $41.6 million, or 10.7%, to $432.0 million as of March 31, 2020 from $390.4 million as of December 31, 2019, 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 $16.7 million, or 6.8%, to $260.8 million as of March 31, 2020 from $244.2 million as of December 31, 2019, 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 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 and are generally offered as accommodations to existing customers.

1-4 family residential loans increased $2.7 million, or 0.9%, to $295.9 million as of March 31, 2020 from $293.1 million as of December 31, 2019.

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 $10.5 million, or 1.7%, to $623.1 million as of March 31, 2020 from $612.6 million as of December 31, 2019.

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.

Table of Contents

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

	As of March 31, 2020
	One Year or Less		One Through Five Years		After Five Years		Total
	(Dollars in thousands) (Unaudited)
Commercial	$	163,520	$	214,440	$	54,032	$	431,992
Real estate:
Construction and land		124,390		124,746		11,700		260,836
Farmland		12,171		26,158		15,571		53,900
1-4 family residential		36,538		182,956		76,382		295,876
Multi-family residential		5,091		18,602		9,166		32,859
Nonfarm nonresidential		64,634		368,420		190,060		623,114
Consumer		23,254		47,766		1,783		72,803
Total loans held for investment	$	429,598	$	983,088	$	358,694	$	1,771,380
Amounts with fixed rates	$	172,789	$	744,300	$	285,939	$	1,203,028
Amounts with floating rates		256,809		238,788		72,755		568,352

	As of December 31, 2019
	One Year or Less		One Through Five Years		After Five Years		Total
	(Dollars in thousands)
Commercial	$	141,403	$	194,612	$	54,383	$	390,398
Real estate:
Construction and land		116,928		118,922		8,331		244,181
Farmland		8,428		31,982		8,271		48,681
1-4 family residential		37,418		171,235		84,489		293,142
Multi-family residential		5,994		16,130		14,330		36,454
Nonfarm nonresidential		70,862		370,951		170,795		612,608
Consumer		22,363		60,648		1,790		84,801
Total loans held for investment	$	403,396	$	964,480	$	342,389	$	1,710,265
Amounts with fixed rates	$	165,154	$	746,457	$	266,488	$	1,178,099
Amounts with floating rates		238,242		218,023		75,901		532,166

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 generally reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due, or interest may be recognized on a cash basis as long as the remaining book balance of the loan is deemed collectible. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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

We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We had $13.4 million and $13.2 million in nonperforming assets as of March 31, 2020 and December 31, 2019, respectively. We had $10.1 million in nonperforming loans as of March 31, 2020 compared to $9.0 million as of December 31, 2019. The increase in nonperforming assets from December 31, 2019 to March 31, 2020 is primarily due to the increase in nonaccrual loans and loans past due 90 or more days, partially offset by a decrease in other real estate owned.

Table of Contents

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

	As of March 31, 2020 (Unaudited)			As of December 31, 2019
	(Dollars in thousands)
Nonaccrual loans	$	9,301		$	8,977
Accruing loans 90 or more days past due		834			72
Total nonperforming loans		10,135			9,049
Repossessed assets		11			160
Other real estate owned:
Commercial real estate, construction, land and land development		3,053			3,808
Residential real estate		228			228
Total other real estate owned		3,281			4,036
Total nonperforming assets	$	13,427		$	13,245
Restructured loans-nonaccrual	$	2,067		$	2,106
Restructured loans-accruing		2,848			2,921
Ratio of nonperforming loans to total loans held for investment		0.57	%		0.53	%
Ratio of nonperforming assets to total assets		0.59			0.58

	As of March 31, 2020 (Unaudited)		As of December 31, 2019
	(Dollars in thousands)
Nonaccrual loans by category:
Real estate:
Construction and land	$	395	$	397
Farmland		337		339
1-4 family residential		2,867		2,349
Multi-family residential		—		—
Nonfarm nonresidential		3,582		3,655
Commercial		1,705		1,825
Consumer		415		412
Total	$	9,301	$	8,977

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. Such 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.

Table of Contents

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 March 31, 2020
	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands) (Unaudited)
Real estate:
Construction and land	$	258,126	$	757	$	1,558	$	395	$	260,836
Farmland		51,832		1,718		13		337		53,900
1-4 family residential		286,995		2,982		3,032		2,867		295,876
Multi-family residential		32,828		—		31		—		32,859
Nonfarm nonresidential		605,090		11,134		3,308		3,582		623,114
Commercial		413,869		11,192		5,226		1,705		431,992
Consumer		70,546		1,674		168		415		72,803
Total	$	1,719,286	$	29,457	$	13,336	$	9,301	$	1,771,380

	As of December 31, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Real estate:
Construction and land	$	241,519	$	1,141	$	1,124	$	397	$	244,181
Farmland		46,591		1,737		14		339		48,681
1-4 family residential		284,381		3,175		3,237		2,349		293,142
Multi-family residential		36,422		—		32		—		36,454
Nonfarm nonresidential		594,046		11,077		3,830		3,655		612,608
Commercial		374,500		9,219		4,854		1,825		390,398
Consumer		82,726		1,538		125		412		84,801
Total	$	1,660,185	$	27,887	$	13,216	$	8,977	$	1,710,265

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 5 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

Table of Contents

•

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 March 31, 2020, the allowance for loan losses totaled $13.3 million, or 0.75%, of total loans held for investment. As of December 31, 2019, the allowance for loan losses totaled $12.1 million, or 0.71%, 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 Three Months Ended March 31, 2020 (Unaudited)			As of and For the Year Ended December 31, 2019
	(Dollars in thousands)
Average loans outstanding⁽¹⁾	$	1,740,189		$	1,628,803
Gross loans held for investment outstanding at end of period	$	1,771,380		$	1,710,265
Allowance for loan losses at beginning of period	$	12,124		$	11,220
Provision for loan losses		1,367			2,606
Charge-offs:
Real estate:
Construction, land and farmland		2			4
Residential		25			162
Nonfarm non-residential		—			51
Commercial		164			1,556
Consumer		3			52
Total charge-offs		194			1,825
Recoveries:
Real estate:
Construction, land and farmland		—			—
Residential		2			14
Nonfarm non-residential		1			4
Commercial		15			41
Consumer		4			64
Total recoveries		22			123
Net charge-offs		172			1,702
Allowance for loan losses at end of period	$	13,319		$	12,124
Ratio of allowance to end of period loans held for investment		0.75	%		0.71	%
Ratio of net charge-offs to average loans		0.01			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.

Table of Contents

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 March 31, 2020 (Unaudited)					As of December 31, 2019
	Amount		Percent to Total			Amount		Percent to Total
	(Dollars in thousands)
Real estate:
Construction and land	$	2,108		15.8	%	$	1,868		15.4	%
Farmland		307		2.3			229		1.9
1-4 family residential		2,090		15.7			1,888		15.6
Multi-family residential		213		1.6			226		1.9
Nonfarm nonresidential		4,148		31.2			3,882		32.0
Total real estate		8,866		66.6			8,093		66.8
Commercial		3,783		28.4			3,414		28.1
Consumer		670		5.0			617		5.1
Total allowance for loan losses	$	13,319		100.0	%	$	12,124		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 March 31, 2020, the carrying amount of investment securities totaled $275.1 million, a decrease of $3.1 million, or 1.1%, compared to $278.2 million as of December 31, 2019. Securities represented 12.0% and 12.2% of total assets as of March 31, 2020 and December 31, 2019, 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 March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands) (Unaudited)
U.S. government agencies	$	16,403	$	365	$	66	$	16,702
Corporate bonds		24,767		105		733		24,139
Mortgage-backed securities		144,278		4,643		288		148,633
Municipal securities		86,962		141		1,462		85,641
Total	$	272,410	$	5,254	$	2,549	$	275,115

	As of December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
U.S. government agencies	$	15,654	$	303	$	20	$	15,937
Corporate bonds		23,774		98		158		23,714
Mortgage-backed securities		137,817		2,139		497		139,459
Municipal securities		97,641		1,447		5		99,083
Total	$	274,886	$	3,987	$	680	$	278,193

Table of Contents

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 March 31, 2020, 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 March 31, 2020
	Within One Year					After One Year but Within Five Years					After Five Years but Within Ten Years					After Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Total		Yield
	(Dollars in thousands) (Unaudited)
U.S. government agencies	$	—		—	%	$	1,910		2.59	%	$	14,183		2.58	%	$	609		3.51	%	$	16,702		2.62	%
Corporate bonds		6,448		3.06	%		1,948		2.66	%		15,743		5.33	%		—		—	%		24,139		4.51	%
Mortgage-backed securities		2,504		1.97	%		11,924		1.99	%		70,380		2.30	%		63,825		2.47	%		148,633		2.34	%
Municipal securities		14,429		2.15	%		29,370		2.22	%		32,645		2.37	%		9,197		2.98	%		85,641		2.35	%
Total	$	23,381		2.38	%	$	45,152		2.19	%	$	132,951		2.70	%	$	73,631		2.54	%	$	275,115		2.55	%

	As of December 31, 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)
U.S. government agencies	$	2,995		2.86	%	$	1,733		2.71	%	$	10,608		2.90	%	$	601		3.51	%	$	15,937		2.89	%
Corporate bonds		6,481		3.43	%		2,000		2.82	%		15,233		5.40	%		—		—	%		23,714		4.64	%
Mortgage-backed securities		2,340		1.89	%		10,906		2.09	%		68,686		2.29	%		57,527		2.56	%		139,459		2.38	%
Municipal securities		15,201		2.00	%		36,460		2.18	%		36,631		2.30	%		10,791		2.91	%		99,083		2.28	%
Total	$	27,017		2.43	%	$	51,099		2.20	%	$	131,158		2.70	%	$	68,919		2.62	%	$	278,193		2.56	%

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 4.32 years with an estimated effective duration of 44.93 months as of March 31, 2020.

As of March 31, 2020 and December 31, 2019, 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.

As of March 31, 2020 and December 31, 2019, the Company held other equity securities of $11.7 million and $12.6 million, respectively, comprised mainly of FHLB stock and small business investment companies (SBICs).

Table of Contents

Deposits

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

Total deposits as of March 31, 2020 were $1.8 billion, an increase of $20.8 million, or 1.2%, compared to $1.8 billion as of December 31, 2019.

Noninterest-bearing deposits as of March 31, 2020 were $417.5 million, compared to $398.8 million as of December 31, 2019, an increase of $18.7 million, or 4.7%.

Average deposits for the three months ended March 31, 2020 were $1.7 billion, an increase of $29.2 million, or 1.7%, over the full year average for the year ended December 31, 2019 of $1.7 billion. The average rate paid on total interest-bearing deposits decreased over this period from 1.50% for the year ended December 31, 2019 to 1.40% for the three months ended March 31, 2020. The decrease in average rates during the three months ended March 31, 2020 over the average for the year ended December 31, 2019 was primarily due to the federal funds rate cuts that occurred in the three months ended March 31, 2020. In addition, the stability and continued growth of noninterest-bearing demand accounts served to reduce the cost of deposits to 1.07% for the three months ended March 31, 2020 compared to 1.15% for the year ended December 31, 2019.

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

	For the Three Months Ended March 31, 2020 (Unaudited)					For the Year Ended December 31, 2019
	Average Balance		Average Rate			Average Balance		Average Rate
	(Dollars in thousands)
Interest-bearing demand accounts	$	39,432		1.09	%	$	35,444		1.37	%
Negotiable order of withdrawal (“NOW”) accounts		259,836		0.71	%		255,648		0.85	%
Limited access money market accounts and savings		437,989		0.76	%		432,186		0.99	%
Certificates and other time deposits > $250k		155,675		2.23	%		176,987		2.15	%
Certificates and other time deposits < $250k		449,281		2.16	%		416,631		2.16	%
Total interest-bearing deposits		1,342,213		1.40	%		1,316,896		1.50	%
Noninterest-bearing demand accounts		406,035		—			402,147		—	%
Total deposits	$	1,748,248		1.07	%	$	1,719,043		1.15	%

The ratio of average noninterest-bearing deposits to average total deposits for the three months ended March 31, 2020 and the year ended December 31, 2019 was 23.2% and 23.4%, respectively.

The following table sets forth the contractual maturities of certain certificates of deposit at March 31, 2020:

	Certificates of Deposit More Than $250,000		Certificates of Deposit of $100,000 Through $250,000
	(Dollars in thousands)
3 months or less	$	36,889	$	65,097
More than 3 months but less than 6 months		13,341		64,256
More than 6 months but less than 12 months		53,534		132,654
12 months or more		57,844		88,130
Total	$	161,608	$	350,137

Borrowings

We utilize short-term and long-term borrowings to supplement deposits to fund 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.

Table of Contents

FHLB advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of March 31, 2020 and December 31, 2019, total borrowing capacity of $642.6 million and $626.3 million, respectively, was available under this arrangement, and $138.0 million and $93.0 million, respectively, was outstanding with a weighted average stated interest rate of 1.50% as of March 31, 2020 and 2.06% as of December 31, 2019. Our current FHLB advances mature within five years. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio.

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

	FHLB Advances
	(Dollars in Thousands)
March 31, 2020
Amount outstanding at quarter-end	$	138,000
Weighted average stated interest rate at quarter-end		1.50	%
Maximum month-end balance during the quarter	$	138,000
Average balance outstanding during the quarter	$	98,323
Weighted average interest rate during the quarter		2.03	%

December 31, 2019
Amount outstanding at year-end	$	93,000
Weighted average stated interest rate at year-end		2.06	%
Maximum month-end balance during the year	$	128,000
Average balance outstanding during the year	$	69,183
Weighted average interest rate during the year		2.28	%

Subordinated Note Purchase Agreement (“Subordinated Debt”). In December 2018 we issued subordinated notes in the amount of $25.0 million. The subordinated notes bear a fixed rate of interest at 6.75% until December 31, 2028 and a floating rate thereafter through maturity in 2033. The balance outstanding at both March 31, 2020 and December 31, 2019 was $25.0 million. The subordinated notes were issued for the purpose of paying off our long term advance and line of credit with First National Bankers Bank (“FNBB”), for general corporate purposes and to provide Tier 2 capital. The subordinated notes are redeemable by the Company at its option beginning in 2028.

The following table presents the Subordinated Debt at the dates indicated.

	Subordinated Debt
	(Dollars in Thousands)
March 31, 2020
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, 2019
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	$	25,000
Weighted average interest rate during the year		6.75	%

FNBB revolving advances. FNBB allows us to borrow on a revolving basis up to $5.0 million. This line of credit, established on September 12, 2016, is secured by a pledge of and security interest in the common stock of our wholly-owned subsidiary, b1BANK. This line of credit did not have a balance at December 31, 2019. In March 2020, we borrowed the full line amount of $5.0 million, all of which was outstanding at March 31, 2020. This line of credit carries a variable interest rate equal to the Wall Street Journal Prime rate. This FNBB line currently matures in January 2021. This FNBB line was established for the purpose of repurchasing shares of our common stock from certain of our shareholders and for general corporate purposes.

Table of Contents

The following table presents our FNBB revolving advance at the date indicated.

	FNBB Revolving Advance
	(Dollars in Thousands)
March 31, 2020
Amount outstanding at quarter-end	$	5,000
Weighted average stated interest rate at quarter-end		4.25	%
Maximum month-end balance during the quarter	$	5,000
Average balance outstanding during the quarter	$	1,667
Weighted average interest rate during the quarter		4.25	%

December 31, 2019
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	$	—
Weighted average interest rate during the year		—	%

Correspondent Bank Federal Funds Purchased Relationships

We maintain Federal Funds Purchased Relationships with the following financial institutions and limits as of March 31, 2020:

	Fed Funds Purchased
	(Dollars in Thousands)
FNBB	$	35,000
Compass Bank		30,000
The Independent Bankers Bank		25,000
First Horizon Bank		17,000
ServisFirst Bank		10,000
CenterState Bank		9,000
Total	$	126,000

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

	Fed Funds Purchased
	(Dollars in Thousands)
March 31, 2020
Amount outstanding at quarter-end	$	—
Weighted average interest rate at quarter-end		—	%
Maximum month-end balance during the quarter	$	—
Average balance outstanding during the quarter	$	977
Weighted average interest rate during the quarter		2.05	%

December 31, 2019
Amount outstanding at year-end	$	—
Weighted average interest rate at year-end		—	%
Maximum month-end balance during the year	$	975
Average balance outstanding during the year	$	206
Weighted average interest rate during the year		2.77	%

Table of Contents

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 three months ended March 31, 2020 and the year ended December 31, 2019, 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 March 31, 2020 and December 31, 2019, 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 March 31, 2020 or December 31, 2019.

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 $2.2 billion and $2.1 billion for the three months ended March 31, 2020 and the year ended December 31, 2019, respectively.

	For the Three Months Ended March 31, 2020			For the Year Ended December 31, 2019
	(Unaudited)
Sources of Funds:
Deposits:
Noninterest-bearing		18.1	%		18.8	%
Interest-bearing		59.8			61.7
Subordinated debt		1.1			1.2
Advances from FHLB		4.4			3.2
Other borrowings		3.0			1.4
Other liabilities		0.9			0.9
Shareholders’ equity		12.7			12.8
Total		100.0	%		100.0	%

Uses of Funds:
Loans, net of allowance for loan losses		77.0	%		75.7	%
Securities available for sale		12.8			14.0
Interest-bearing deposits in other banks		1.3			1.3
Other noninterest-earning assets		8.9			9.0
Total		100.0	%		100.0	%
Average noninterest-bearing deposits to average deposits		23.2	%		23.4	%
Average loans to average deposits		99.5			94.8

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 12.3% for the three months ended March 31, 2020 compared to the same period in 2019, primarily due to 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 4.32 years and an effective duration of 44.93 months as of March 31, 2020. As of December 31, 2019, our securities portfolio had a weighted average life of 4.23 years and an effective duration of 40.64 months.

As of March 31, 2020, we had outstanding $400.3 million in commitments to extend credit and $23.2 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2019, we had outstanding $389.9 million in commitments to extend credit and $24.4 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. See “Off Balance Sheet Items” below for additional information.

Table of Contents

As of March 31, 2020 and December 31, 2019, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. As of March 31, 2020, we had cash and cash equivalents of $80.1 million compared to $89.4 million as of December 31, 2019.

Capital Resources

Total shareholders’ equity decreased to $282.0 million as of March 31, 2020, compared to $285.1 million as of December 31, 2019, a decrease of $3.1 million, or 1.1%. This decrease was primarily due to $5.0 million in repurchased shares, $1.3 million in paid dividends, $1.0 million in net shares surrendered from the exercise of stock options, offset with $4.5 million in net income.

On April 23, 2020, our Board of Directors (the “Board”) declared a quarterly dividend based upon our financial performance for the three months ended March 31, 2020 in the amount of $0.10 per share to the common shareholders of record as of May 15, 2020. The dividend is to be paid on May 31, 2020, 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, b1BANK. 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 March 31, 2020 and December 31, 2019, we and b1BANK were in compliance with all applicable regulatory capital requirements, and b1BANK 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. For the three months ended March 31, 2020, we elected to opt in to the CBLR framework. Pursuant to section 201(b) of EGRRCPA, the federal bank regulatory agencies adopted a final rule in 2019 imposing a minimum community bank leverage ratio requirement of 9.0%. On April 6, 2020, as mandated under the CARES Act, the federal bank regulatory agencies adopted an interim final rule that temporarily reduced the minimum community bank leverage ratio requirement to 8.0% and provided a two quarter grace period for banks with a leverage ratio between 7.0% and 8.0%. A transition interim final rule also adopted by the federal bank regulatory agencies on April 6, 2020 provides a graduated transition from the temporary 8.0% community bank leverage ratio requirement, to the 9.0% community bank leverage ratio requirement as established under the 2019 final rule. Specifically, the transition interim final rule provides that the community bank leverage ratio will be 8.0% in the second quarter through fourth quarter of calendar year 2020, 8.5% in calendar year 2021, and 9.0% thereafter.

The following table presents the actual capital amounts and regulatory capital ratios for us and b1BANK as of the dates indicated.

	As of March 31, 2020 (Unaudited)					As of December 31, 2019
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Business First Bancshares, Inc. (Consolidated)
Total capital (to risk weighted assets)		N/A		N/A		$	264,495		13.30	%
Tier 1 capital (to risk weighted assets)		N/A		N/A			227,265		11.43	%
Common Equity Tier 1 capital (to risk weighted assets)		N/A		N/A			227,265		11.43	%
Tier 1 Leverage capital (to average assets)	$	224,899		10.27	%		227,265		10.56	%

b1BANK
Total capital (to risk weighted assets)		N/A		N/A		$	254,520		12.80	%
Tier 1 capital (to risk weighted assets)		N/A		N/A			242,290		12.19	%
Common Equity Tier 1 capital (to risk weighted assets)		N/A		N/A			242,290		12.19	%
Tier 1 Leverage capital (to average assets)	$	238,835		10.91	%		242,290		11.27	%

Long Term Debt

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

Table of Contents

Contractual Obligations

The following tables summarize contractual obligations and other commitments to make future payments as of March 31, 2020 and December 31, 2019 (other than non-maturity deposit obligations), which consist of future cash payments associated with our contractual obligations pursuant to our FHLB advances, subordinated debt, revolving line of credit, 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 $138.0 million and $93.0 million at March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020 and December 31, 2019, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 1.50% and 2.06%, respectively, and maturing within five years. The subordinated debt totaled $25.0 million at both March 31, 2020 and December 31, 2019. 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. The revolving line of credit with FNBB had a balance of $5.0 million at March 31, 2020 and no outstanding balance at December 31, 2019. This line of credit is secured by a pledge of and security interest in the common stock of our wholly-owned subsidiary, b1BANK, and carries interest at a variable rate equal to the Wall Street Journal Prime rate.

	As of March 31, 2020
	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	$	1,803	$	3,136	$	2,707	$	5,145	$	12,791
Time deposits		438,921		166,412		15,873		8		621,214
Subordinated debt		—		—		—		25,000		25,000
Advances from FHLB		55,000		60,000		23,000		—		138,000
FNBB revolving line of credit		5,000		—		—		—		5,000
Securities sold under agreements to repurchase		14,728		—		—		—		14,728
Standby and commercial letters of credit		10,056		12,732		450		—		23,238
Commitments to extend credit		252,165		94,011		26,709		27,408		400,293
Total	$	777,673	$	336,291	$	68,739	$	57,561	$	1,240,264

	As of December 31, 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)
Non-cancelable future operating leases	$	1,820	$	3,194	$	2,779	$	5,449	$	13,242
Time deposits		408,926		170,808		15,722		—		595,456
Subordinated debt		—		—		—		25,000		25,000
Advances from FHLB		10,000		60,000		23,000		—		93,000
Securities sold under agreements to repurchase		67,989		—		—		—		67,989
Standby and commercial letters of credit		7,019		16,965		450		—		24,434
Commitments to extend credit		223,850		105,174		27,187		33,686		389,897
Total	$	719,604	$	356,141	$	69,138	$	64,135	$	1,209,018

Off-Balance Sheet Items

In the normal course of business, we enter into various transactions which, in accordance with 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.

Table of Contents

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

	As of March 31, 2020
	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	$	10,056	$	12,732	$	450	$	—	$	23,238
Commitments to extend credit		252,165		94,011		26,709		27,408		400,293
Total	$	262,221	$	106,743	$	27,159	$	27,408	$	423,531

	As of December 31, 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)
Standby and commercial letters of credit	$	7,019	$	16,965	$	450	$	—	$	24,434
Commitments to extend credit		223,850		105,174		27,187		33,686		389,897
Total	$	230,869	$	122,139	$	27,637	$	33,686	$	414,331

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 b1BANK, 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.

Table of Contents

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 March 31, 2020						As of December 31, 2019
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		12.10	%		0.22	%		8.40	%		2.32	%
+200		9.60	%		0.18	%		5.50	%		1.58	%
+100		6.50	%		0.39	%		2.80	%		0.79	%
Base		0.00	%		0.00	%		0.00	%		0.00	%
-100		1.00	%		2.77	%		(3.20%	)		(1.93%	)

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

Impact of Inflation

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

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

Non-GAAP Financial Measures

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

Table of Contents

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. Notable noncore events impacting earnings during the three months ended March 31, 2020 included the realization of $126,000 in gains associated with the disposal of former bank premises and equipment in other income and $1.2 million in acquisition-related expenses in other expenses. Core net income, which excludes noncore income and expenses, for the three months ended March 31, 2020 was $5.0 million, or $0.37 per diluted share, compared to core net income of $5.6 million, or $0.41 per diluted share, for the three months ended March 31, 2019.

	For the Three Months Ended March 31,
	2020			2019
	(Dollars in thousands, except per share data)
	(Unaudited)
Interest Income:
Interest income	$	26,016		$	24,587
Core interest income		26,016			24,587
Interest Expense:
Interest expense		5,805			5,467
Core interest expense		5,805			5,467
Provision for Loan Losses:
Provision for loan losses		1,367			633
Core provision expense		1,367			633
Other Income:
Other income		2,804			2,311
(Gains) on former bank premises and equipment		(126	)		-
(Gains) on sale of securities		(25	)		-
Core other income		2,653			2,311
Other Expenses:
Other expenses		16,643			13,790
Acquisition-related expenses (2)		(1,212	)		50
Stock option exercises - excess taxes		(71	)		-
Core other expenses		15,360			13,840
Pre-Tax Income:
Pre-tax income		5,005			7,008
(Gains) on former bank premises and equipment		(126	)		-
(Gains) on sale of securities		(25	)		-
Acquisition-related expenses (2)		1,212			(50	)
Stock option exercises - excess taxes		71			-
Core pre-tax income	$	6,137		$	6,958

Table of Contents

	For the Three Months Ended March 31,
	2020			2019
	(Dollars in thousands, except per share data)
	(Unaudited)
Provision for Income Taxes (1):
Provision for income taxes	$	506		$	1,349
Tax on (gains) on former bank premises and equipment		(26	)		-
Tax on (gains) on sale of securities		(5	)		-
Tax on sale of banking center		-			-
Tax on acquisition-related expenses (2)		91			(16	)
Tax on stock option exercises		602
Core provision for income taxes		1,167			1,333
Net Income:
Net income		4,499			5,659
(Gains) on former bank premises and equipment , net of tax		(100	)		-
(Gains) on sale of securities, net of tax		(20	)		-
Tax on sale of banking center		-			-
Acquisition-related expenses (2), net of tax		1,121			(34	)
Stock option exercises, net of tax		(531	)		-
Core net income	$	4,970		$	5,625
Diluted Earnings Per Share:
Diluted earnings per share	$	0.34		$	0.41
(Gains) on former bank premises and equipment , net of tax		(0.01	)		-
(Gains) on sale of securities, net of tax		(0.00	)		-
Tax on sale of banking center		-			-
Acquisition-related expenses (2), net of tax		0.08			(0.00	)
Stock option exercises		(0.04	)		-
Core diluted earnings per share	$	0.37		$	0.41

(1)	Tax rates, exclusive of certain nondeductible merger-related expenses and goodwill, utilized were 21% for both 2020 and 2019. These rates approximated the marginal tax rates for the applicable periods.

(2)	Includes merger and conversion-related expenses and salary and employee benefits.

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 March 31, 2020 (Unaudited)			As of December 31, 2019
	(Dollars in thousands, except per share data)
Tangible Shareholders’ (Common) Equity
Total shareholders’ equity	$	282,030		$	285,097
Adjustments:
Goodwill		(48,495	)		(48,495	)
Core deposit and other intangibles		(6,471	)		(6,694	)
Total tangible common equity	$	227,064		$	229,908
Common shares outstanding⁽¹⁾		13,067,987			13,279,363
Book value per common share⁽¹⁾	$	21.58		$	21.47
Tangible book value per common share⁽¹⁾		17.38			17.31

(1)	Excludes the dilutive effect, if any, of 395,300 and 725,300 shares of common stock issuable upon exercise of outstanding stock options and warrants as of March 31, 2020 and December 31, 2019, respectively.

Table of Contents

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 March 31, 2020 (Unaudited)			As of December 31, 2019
	(Dollars in thousands, except per share data)
Tangible Shareholders’ (Common) Equity
Total shareholders’ equity	$	282,030		$	285,097
Adjustments:
Goodwill		(48,495	)		(48,495	)
Core deposit and other intangibles		(6,471	)		(6,694	)
Total tangible common equity	$	227,064		$	229,908
Tangible Assets
Total assets	$	2,287,662		$	2,273,835
Adjustments:
Goodwill		(48,495	)		(48,495	)
Core deposit and other intangibles		(6,471	)		(6,694	)
Total tangible assets	$	2,232,696		$	2,218,646
Common Equity to Total Assets		12.3	%		12.5	%
Tangible Common Equity to Tangible Assets		10.2			10.4

Table of Contents

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.

Table of Contents

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, 2019 filed with the SEC. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for December 31, 2019 except for the risk factors listed below.

The COVID-19 pandemic, including the measures taken by governmental authorities, businesses and individuals in response, are adversely affecting our business, financial condition, and results of operations, and the ultimate impact will depend on future developments which are uncertain and cannot be predicted, including the scope and duration of the pandemic and the response to the pandemic.

The COVID-19 pandemic has caused extensive disruptions to the global, national and regional economy. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, prompted decreases in interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these implications continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Annual Report on Form 10-K could be exacerbated and such effects could have a material adverse effect on us in a number of ways related to credit, collateral, interest rate risk, profitability, operations, liquidity, and capital as described in more detail below.

Credit and Collateral Risk. Our business depends on our ability to successfully measure and manage credit risk. As a lender, we are exposed to the risk that our borrowers will be unable to repay their loans according to their terms, and the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. The creditworthiness of a borrower is affected by many factors including local market conditions and general economic conditions. These risks are particularly heightened as a result of the COVID-19 pandemic.

Concern about the spread of COVID-19 has caused and is expected to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability. All of these factors cause our customers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures, and credit losses, particularly if the available collateral is insufficient to cover our exposure.

The future effects of COVID-19 on economic activity could also negatively affect collateral values associated with our existing loans and our ability to liquidate such collateral. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making business decisions or may result in a delay in our taking certain remedial actions, such as foreclosure. All of these factors could cause the level of our nonperforming loans, charge-offs, and delinquencies to increase, potentially requiring significant additional provisions for credit losses.

Interest Rate and Profitability Risk. Our net interest income, lending activities, deposits, and profitability could be negatively affected by volatility in interest rates and other factors resulting from uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range of 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. This decrease in interest rates is expected to cause a decrease in our net interest income. Higher income volatility from changes in interest rates and spreads to benchmark indices could also cause a decrease in current fair market values of our assets. Fluctuations in interest rates will 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, which could, in turn, negatively affect our net income.

Table of Contents

In addition to risks resulting from changes in the interest rates, our profitability may be negatively affected by other aspects of our response to the COVID-19 pandemic. We have reduced or eliminated several of our normal customer service fees, which may decrease our noninterest income, and in turn, our net income. We also expect to experience lower than normal loan demand (other than PPP loans) because of reduced customer appetite for expansion, appraisal and other underwriting difficulties, and the focus from customers and our loan officers on PPP. These PPP loans may not be profitable for us; PPP loans have a maximum interest rate of 1% and our related fees may be offset by our cost for implementing the program, applying for forgiveness and servicing the loans.

Operational Risk. Our social-distancing measures and current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with social-distancing measures that include, among other precautions, limiting lobby access to customers on an appointment-only basis and requiring a portion of our employees to work remotely from their homes. We have done this while simultaneously experiencing a significant increase in our employees’ workloads due to increased customer needs and the necessity of allocating work of employees who have been affected by the virus or who have increased childcare and similar responsibilities as a result of the shutdown. Technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures and increased electronic interaction with our customers also introduce additional operational risk, including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability, and could seriously disrupt our operations and the operations of any effected customers.

Moreover, we rely on many third parties in our business operations, including appraisers of the real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools, providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. For example, mortgage loan origination could be delayed due to the limited availability of real estate appraisers for the collateral. Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain parishes, which slows the process for title work, mortgage and UCC filings in those parishes. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may materially and adversely affect our operations.

Liquidity Risk. Liquidity is essential to our business. Our most important source of funds is deposits because we use those deposits to fund operations. During the COVID-19 pandemic, we may experience enhanced liquidity risk. Customers may withdraw deposits to meet obligations during this time of business interruptions, or they may withdraw funds to keep cash on hand at home. Large depositors may withdraw funds in excess of FDIC deposit insurance limits as a result of economic concerns. During this challenging economic environment, our customers may also be more dependent on our credit commitments and increased draws under currently unfunded lines of credit could increase our need for liquidity. In addition, we have offered payment deferral accommodations on many of the loans in our portfolio. The resulting delay in our receipt of regularly scheduled payments will reduce available funding. Also, our investment securities provide an alternative source of funds. We invest excess funds in mortgage-backed securities and municipal bonds, among other securities. If mortgage refinancing declines due to job losses or appraisal issues, cash flows from mortgage-backed securities could decline. The municipal bond sector could also be affected due to changes in tax revenues. Any of these events could reduce our normal levels of liquidity.

Capital Risk. Adequate levels of capital enhance our ability to withstand periods of financial stress such as during the ongoing COVID-19 pandemic. For this reason, we are subject to significant regulatory capital requirements, and we currently satisfy all of those requirements. However, the ultimate impact of the pandemic is unknown. Prolonged pressures could deplete our reserves, requiring us to raise additional capital to provide sufficient resources and liquidity to meet applicable regulatory requirements, as well as to satisfy our commitments and business needs.

Our ability to raise additional capital depends on a number of factors, including without limitation our financial condition and performance, conditions in the capital markets, economic conditions, investor perceptions regarding the banking industry, and governmental activities. Many of these factors are beyond our control, and uncertainty relating to all of these factors has been significantly enhanced by the COVID-19 pandemic. In recent weeks, the pandemic has substantially increased economic and demand uncertainty and has led to disruption and volatility in capital markets. Government responses designed to curtail the spread of the virus continue to evolve and affect various aspects of the economy. The market price for securities of publicly traded financial institutions has dramatically declined, as has the public trading price of our common stock. If we need to raise additional capital in the current market environment, there is no assurance we will be successful, or that we will be able to raise capital on terms acceptable to us or without significant dilution to our existing shareholders. If we fail to maintain capital sufficient to meet regulatory requirements, we could be subject to enforcement actions or other regulatory consequences.

Table of Contents

Because there have been no recent global pandemics of comparable global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our social-distancing accommodation arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis and the pandemic’s enhancement of the various risks described above could have a material adverse effect on our business, financial condition, and results of operations.

As a participating lender in the PPP, we are subject to additional risks of litigation from our customers or other parties and regulatory enforcement regarding our processing of PPP loans, as well as risks that the SBA may not fund some or all PPP loan guaranties.

The CARES Act included a significant loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. We are participating as a lender in the PPP. The PPP became available on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there was and continues to be a significant amount of ambiguity in the laws, rules and guidance regarding requirements for eligibility, underwriting, origination, funding, and the terms for PPP loans. This ambiguity and the speed with which we were required to implement the program expose us to regulatory and legal risks relating to noncompliance with the PPP.

Since the opening of the PPP, several other banks have been subject to litigation regarding the process and procedures that those banks used in processing applications for the PPP. Further litigation is likely with respect to the forgiveness process and as a defense to suits by banks or the SBA seeking to enforce remedies upon defaults by PPP borrowers. We may be exposed to the risk of similar litigation, from both customers and non-customers that approached us regarding PPP loans, and regarding our procedures for processing applications and funding PPP loans. Litigation can be costly, regardless of the outcome. If any such litigation is initiated against us, it may result in significant financial liability, significant litigation costs, or adversely affect our reputation.

PPP loans are also subject to the regulatory requirements that require forbearance of loan payments for a specified time and that limit our ability to pursue all available remedies in the event of a loan default. If and to the extent that PPP borrowers fail to be approved for loan forgiveness, we will hold the remaining portion of the PPP loans at unfavorable interest rates.

We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to receive a PPP loan. Such deficiencies may or may not be related to the ambiguity in the laws, rules, and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has forgiven a portion of the loan or paid under the guaranty, seek recovery from us of any loss related to the deficiency. Any the above-described legal, regulatory and credit risks related to our participation in the PPP could have a material adverse effect on our business, financial condition, and results of operations.

Table of Contents

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 March 31, 2020 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: January 1 through January 31, 2020		—		—		—		—
Month #2: February 1 through February 29, 2020		—		—		—		—
Month #3: March 1 through March 31, 2020		434,781	$	11.50		—	$	7,447,018.50
Total		434,781	$	11.50		—	$	7,447,018.50

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

Not applicable.

Item 6.

Exhibits

Number	Description

2.5	Agreement and Plan of Reorganization, dated January 22, 2020, by and between Business First Bancshares, Inc., and Pedestal Bancshares, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on January 24, 2020 (File No. 001-38447)).

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

3.2	Amended and Restated Bylaws of Business First Bancshares, Inc., adopted April 23, 2020 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on April 28, 2020 (File No. 001-38447)).

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)).

Table of Contents

Number	Description

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))

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.

Table of Contents

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.

May 8, 2020	/s/ David R. Melville, III
	David R. Melville, III
	President and Chief Executive Officer

May 8, 2020	/s/ Gregory Robertson
	Gregory Robertson
	Chief Financial Officer