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Business First Bancshares, Inc. - Quarter Report: 2022 March (Form 10-Q)

bfbi20220331_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, 2022

 

or

 

 

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

(Registrants 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 April 29, 2022, the issuer has outstanding 22,564,607 shares of common stock, par value $1.00 per share.

 



 

 
 
 

BUSINESS FIRST BANCSHARES, INC.

 

PART I - FINANCIAL INFORMATION

4
     

Item 1.

Financial Statements

4
     
 

Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021

4
     
 

Unaudited Consolidated Statements of Income for the three months ended March 31, 2022 and 2021

5
     
 

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021

6
     
 

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2022 and 2021

7
     
 

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021

8
     
 

Notes to Unaudited Consolidated Financial Statements

10
     

Item 2.

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

33
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

59
     

Item 4.

Controls and Procedures

59
   

PART II - OTHER INFORMATION

60
     

Item 1.

Legal Proceedings

60
     

Item 1A.

Risk Factors

60
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60
     

Item 3.

Defaults Upon Senior Securities

60
     

Item 4.

Mine Safety Disclosures

60
     

Item 5.

Other Information

60
     

Item 6.

Exhibits

61
   

Signatures

62

 

 

 

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, 2022

  

December 31,

 
  

(Unaudited)

  

2021

 
ASSETS 

Cash and Due from Banks

 $282,074  $68,375 

Federal Funds Sold

  67,822   227,044 

Securities Available for Sale, at Fair Values

  961,358   1,021,061 

Mortgage Loans Held for Sale

  1,354   1,200 

Loans Held for Sale

  13,559   - 

Loans and Lease Receivable, Net of Allowance for Loan Losses of $29,245 at March 31, 2022 and $29,112 at December 31, 2021

  3,719,253   3,160,496 

Premises and Equipment, Net

  63,003   58,155 

Accrued Interest Receivable

  20,146   19,597 

Other Equity Securities

  23,034   16,619 

Other Real Estate Owned

  1,369   1,427 

Cash Value of Life Insurance

  72,896   60,380 

Deferred Taxes

  23,040   8,822 

Goodwill

  89,911   59,894 

Core Deposit and Customer Intangible

  15,617   12,203 

Other Assets

  7,799   11,105 

Total Assets

 $5,362,235  $4,726,378 
         

LIABILITIES

 

Deposits:

        

Noninterest Bearing

 $1,544,197  $1,291,036 

Interest Bearing

  3,113,541   2,786,247 

Total Deposits

  4,657,738   4,077,283 

Securities Sold Under Agreements to Repurchase

  23,345   19,121 

Short Term Borrowings

  20   20 

Federal Home Loan Bank Borrowings

  79,957   82,022 

Subordinated Debt

  111,209   81,427 

Subordinated Debt - Trust Preferred Securities

  5,000   5,000 

Accrued Interest Payable

  895   1,354 

Other Liabilities

  27,234   26,783 

Total Liabilities

  4,905,398   4,293,010 
         

Commitments and Contingencies (See Note 9)

          
         

SHAREHOLDERS' EQUITY

 

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

  -   - 

Common Stock, $1 Par Value; 50,000,000 Shares Authorized; 22,564,607 and 20,400,349 Shares Issued and Outstanding at March 31, 2022 and December 31, 2021, respectively

  22,565   20,400 

Additional Paid-in Capital

  345,858   292,271 

Retained Earnings

  128,168   121,874 

Accumulated Other Comprehensive Income (Loss)

  (39,754)  (1,177)

Total Shareholders' Equity

  456,837   433,368 

Total Liabilities and Shareholders' Equity

 $5,362,235  $4,726,378 

 

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

 

   

For The Three Months Ended March 31,

 
   

2022

   

2021

 

Interest Income:

               

Interest and Fees on Loans

  $ 40,183     $ 41,419  

Interest and Dividends on Non-taxable Securities

    1,044       1,045  

Interest and Dividends on Taxable Securities

    2,800       1,757  

Interest on Federal Funds Sold and Due From Banks

    95       41  

Total Interest Income

    44,122       44,262  

Interest Expense:

               

Interest on Deposits

    2,263       3,243  

Interest on Borrowings

    1,384       718  

Total Interest Expense

    3,647       3,961  

Net Interest Income

    40,475       40,301  

Provision for Loan Losses

    1,617       3,359  

Net Interest Income after Provision for Loan Losses

    38,858       36,942  

Other Income:

               

Service Charges on Deposit Accounts

    1,805       1,567  

Loss on Sales of Securities

    (31 )     (5 )

Gain (Loss) on Sales of Loans

    65       (21 )

Other Income

    4,057       3,307  

Total Other Income

    5,896       4,848  

Other Expenses:

               

Salaries and Employee Benefits

    19,703       14,926  

Occupancy and Equipment Expense

    4,413       3,717  

Other Expenses

    9,604       8,085  

Total Other Expenses

    33,720       26,728  

Income Before Income Taxes

    11,034       15,062  

Provision for Income Taxes

    2,303       2,733  

Net Income

  $ 8,731     $ 12,329  

Earnings Per Share:

               

Basic

  $ 0.42     $ 0.60  

Diluted

  $ 0.41     $ 0.59  

 

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

 

   

For The Three Months Ended March 31,

 
   

2022

   

2021

 

Consolidated Net Income

  $ 8,731     $ 12,329  
                 

Other Comprehensive Income (Loss):

               

Unrealized Loss on Investment Securities

    (48,985 )     (7,138 )

Unrealized Gain (Loss) on Share of Other Equity Investments

    (25 )     1,493  

Reclassification Adjustment for Losses on Sale of AFS Investment Securities Included in Net Income

    31       5  

Income Tax Effect

    10,402       1,185  

Other Comprehensive Income (Loss)

    (38,577 )     (4,455 )

Consolidated Comprehensive Income (Loss)

  $ (29,846 )   $ 7,874  

 

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(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, 2020

 $20,621  $299,540  $79,174  $10,628  $409,963 

Comprehensive Income:

                    

Net Income

  -   -   12,329   -   12,329 

Other Comprehensive Income (Loss)

  -   -   -   (4,455)  (4,455)

Cash Dividends Declared, $0.10 Per Share

  -   -   (2,062)  -   (2,062)

Stock Issuance

  115   1,317   -   -   1,432 

Surrendered Shares of Options Exercised

  (15)  (323)  -   -   (338)

Stock Based Compensation Cost

  116   379   -   -   495 

Stock Repurchase

  (32)  (631)  -   -   (663)

Balances at March 31, 2021

 $20,805  $300,282  $89,441  $6,173  $416,701 
                     

Balances at December 31, 2021

 $20,400  $292,271  $121,874  $(1,177) $433,368 

Comprehensive Income:

                    

Net Income

  -   -   8,731   -   8,731 

Other Comprehensive Income (Loss)

  -   -   -   (38,577)  (38,577)

Cash Dividends Declared, $0.12 Per Share

  -   -   (2,437)  -   (2,437)

Stock Issuance

  2,070   52,925   -   -   54,995 

Stock Based Compensation Cost

  95   662   -   -   757 

Balances at March 31, 2022

 $22,565  $345,858  $128,168  $(39,754) $456,837 

 

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

   

For The Three Months Ended March 31,

 
   

2022

   

2021

 

Cash Flows From Operating Activities:

               

Consolidated Net Income

  $ 8,731     $ 12,329  

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

               

Provision for Loan Losses

    1,617       3,359  

Depreciation and Amortization

    1,110       1,030  

Net Accretion of Purchase Accounting Adjustments

    (552 )     (3,021 )

Stock Based Compensation Cost

    757       495  

Net Amortization of Securities

    1,703       1,778  

Loss on Sales of Securities

    31       5  

(Gain) Loss on Sale of Loans

    (65 )     21  

Income on Other Equity Securities

    (12 )     (66 )

(Gain) Loss on Sale of Other Real Estate Owned, Net of Writedowns

    (8 )     165  

Increase in Cash Value of Life Insurance

    (370 )     (318 )

Deferred Income Tax Expense (Benefit)

    (345 )     1,507  

Changes in Assets and Liabilities:

               

(Increase) Decrease in Accrued Interest Receivable

    2,054       (2,015 )

(Increase) Decrease in Other Assets

    5,587       (622 )

Decrease in Accrued Interest Payable

    (678 )     (558 )

Increase (Decrease) in Other Liabilities

    (98 )     3,969  

Net Cash Provided by Operating Activities

    19,462       18,058  
                 

Cash Flows From Investing Activities:

               

Purchases of Securities Available for Sale

    (46,314 )     (122,981 )

Proceeds from Maturities / Sales of Securities Available for Sale

    26,351       11,023  

Proceeds from Paydowns of Securities Available for Sale

    29,348       22,423  

Net Cash Received in Acquisition

    163,460       -  

Purchases of Other Equity Securities

    (386 )     (85 )

Redemption of Other Equity Securities

    35       1,753  

Purchase from Purchase of Life Insurance

    -       (15,000 )

Net Increase in Loans

    (236,533 )     (49,969 )

Net Purchases of Premises and Equipment

    (3,899 )     (368 )

Loss on Disposal of Premises and Equipment

    717       -  

Proceeds from Sales of Other Real Estate

    196       983  

Net Decrease in Federal Funds Sold

    159,222       68,557  

Net Cash Provided by (Used in) Investing Activities

    92,197       (83,664 )

 

(CONTINUED)

 

 

   

For The Three Months Ended March 31,

 
   

2022

   

2021

 

Cash Flows From Financing Activities:

               

Net Increase in Deposits

    103,241       242,269  

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

    4,224       (406 )

Net Repayments on Federal Home Loan Bank Borrowings

    (2,940 )     (10,000 )

Net Repayments from Short Term Borrowings

    -       (5,000 )

Net Repayments from Long Term Borrowings

    -       (6,000 )

Proceeds from Issuance of Subordinated Debt

    -       52,500  

Net Proceeds (Expense) from Issuance of Common Stock

    (48 )     1,432  

Surrendered Shares of Options Exercised

    -       (338 )

Repurchase of Common Stock

    -       (663 )

Payment of Dividends on Common Stock

    (2,437 )     (2,062 )

Net Cash Provided by Financing Activities

    102,040       271,732  

Net Increase (Decrease) in Cash and Cash Equivalents

    213,699       206,126  

Cash and Cash Equivalents at Beginning of Period

    68,375       149,131  

Cash and Cash Equivalents at End of Period

  $ 282,074     $ 355,257  
                 

Supplemental Disclosures for Cash Flow Information:

               

Cash Payments for:

               

Interest on Deposits

  $ 2,771     $ 3,736  

Interest on Borrowings

  $ 1,335     $ 783  

Income Tax Payments

  $ 12     $ -  
                 

Supplemental Schedule for Noncash Investing and Financing Activities:

               

Change in the Unrealized Loss on Securities Available for Sale

  $ (48,954 )   $ (7,133 )

Change in the Unrealized Gain (Loss) on Equity Securities

  $ (25 )   $ 1,493  

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

  $ 10,402     $ 1,185  

Transfer of Loans to Other Real Estate

  $ 130     $ 948  

Acquisitions:

               

Fair Value of Tangible Assets Acquired

  $ 530,353     $ -  

Other Intangible Assets Acquired

    3,875       -  

Liabilities Assumed

    509,202       -  

Net Identifiable Assets Acquired Over Liabilities Assumed

  $ 25,026     $ -  

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 1 Basis of Presentation

 

The unaudited consolidated financial statements include the accounts of Business First Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, b1BANK (the “Bank”), and the Bank’s wholly-owned subsidiaries, Business First Insurance, LLC and Smith Shellnut Wilson, LLC. The Bank operates out of branch locations in markets across Louisiana, the Dallas/Fort Worth metroplex and Houston, 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, 2021.

 

Preparation of financial statements in conformity with U.S. 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. Critical accounting estimates that are particularly susceptible to significant change for the Company include the determination of the acquired loans and allowance for loan losses and purchase accounting adjustments (other than loans). Other estimates include goodwill, fair value of financial instruments, investment securities and the assessment of income taxes. 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 the Company’s markets, and changes in applicable banking regulations. Actual results may ultimately differ from estimates.

 

10

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 2 Reclassifications

 

Certain reclassifications may have been made to conform to the classifications adopted for reporting in 2022. These reclassifications have no material effect on previously reported shareholders’ equity or net income.

 

 

 

Note 3 Mergers and Acquisitions

 

Texas Citizens Bancorp, Inc.

 

On March 1, 2022, the Company consummated the merger of Texas Citizens Bancorp, Inc. (“TCBI”), headquartered in Pasadena, Texas, with and into the Company, pursuant to the terms of that certain Agreement and Plan of Reorganization (the “Reorganization Agreement”), dated as of October 20, 2021, by and between the Company and TCBI (the “Merger”). Also on March 1, 2022, TCBI’s wholly-owned banking subsidiary, Texas Citizens Bank, National Association, was merged with and into b1BANK. Pursuant to the terms of the Reorganization Agreement, upon consummation of the Merger, the Company issued 2,069,532 shares of its common stock to the former shareholders of TCBI. At February 28, 2022, TCBI reported $534.2 million in total assets, $349.5 million in loans and $477.2 million in deposits.

 

The following table reflects the consideration paid for TCBI’s net assets and the identifiable assets purchased and liabilities assumed at their fair values as of March 1, 2022.  The fair values are provisional estimates and may be adjusted for a period of up to one year from the date of acquisition if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.

 

Cost and Allocation of Purchase Price for Texas Citizens Bancorp, Inc. (TCBI):

(Dollars in thousands, except per share data)

 

Purchase Price:

    

Shares Issued to TCBI's Shareholders on March 1, 2022

  2,069,532 

Closing Stock Price on February 28, 2022

 $26.19 

Total Stock Issued

 $54,201 

Other Consideration, Including Equity Awards

  842 

Total Purchase Price

 $55,043 

Net Assets Acquired:

    

Cash and Cash Equivalents

 $163,460 

Securities Available for Sale

  370 

Loans and Leases Receivable

  336,699 

Premises and Equipment, Net

  2,776 

Cash Value of Life Insurance

  12,146 

Core Deposit Intangible

  3,875 

Other Assets

  14,902 

Total Assets

  534,228 
     

Deposits

  477,256 

Borrowings

  30,708 

Other Liabilities

  1,238 

Total Liabilities

  509,202 

Net Assets Acquired

  25,026 

Goodwill Resulting from Merger

 $30,017 

 

The Company has recorded approximately $811,000 and $515,000 of acquisition-related costs within merger and conversion-related expenses and salaries and benefits for the three months ended March 31, 2022 and year ended December 31, 2021.

 

11

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following is a description of the methods used to determine the fair values of significant assets acquired and liabilities assumed presented above.

 

Cash and Cash Equivalents: The carrying amount of these assets was a reasonable estimate of fair value based on the short-term nature of these assets.

 

Securities Available for Sale: Fair values for securities were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that were not in an active market or other inputs that were observable in the market. In the absence of observable inputs, fair value was estimated based on pricing models/estimations.

 

Loans and Leases Receivable: Fair values for loans were based on a discounted cash flow methodology that considered factors including, but not limited to, loan type, classification status, remaining term, prepayment speed, and current discount rates. The discount rates used for loans were based on current market rates for new originations of comparable loans and included adjustments for any liquidity concerns. The discount rate did not include an explicit factor for credit losses, as that was included within the estimated cash flows.

 

Core Deposit Intangible: The fair value for core deposit intangible assets was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, net maintenance cost of the deposit base, including interest cost, and alternative cost of funds. The CDI is being amortized over 10 years based upon the period over which estimated economic benefits are estimated to be received.

 

Deposits: The fair values used for the demand and savings deposits, by definition, equal the amount payable on demand at the acquisition date. Fair values for time deposits were estimated using a discounted cash flow analysis, that applied interest rates currently being offered to the contractual interest rates on such time deposits.

 

Borrowings: Fair values for borrowings were based on estimated market rates over the remaining terms of the subordinated debt issuances.

 

Pro forma tables for TCBI were impractical to include due to the cost versus benefit of including such disclosures.

 

Smith Shellnut Wilson, LLC

 

On April 1, 2021, the Company consummated the acquisition, through b1BANK, of Smith Shellnut Wilson, LLC (“SSW”), headquartered in Ridgeland, Mississippi, pursuant to the terms of the definitive agreement dated as of March 22, 2021. Pursuant to the terms of the agreement, upon consummation of the acquisition, the Company paid $7.3 million in cash and issued $3.9 million in subordinated debt, which is further described in Note 7, to the former owners of SSW. At March 31, 2021, SSW reported $3.6 million in total assets and $2.3 million in total liabilities. As part of the acquisition, the Company recorded $6.5 million in goodwill and $4.3 million in customer intangibles to be amortized over a 10 year period.

 

12

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 4 Earnings per Common Share

 

Basic earnings per share (“EPS”) represents income available to common shareholders divided by the weighted average number of common shares outstanding; no dilution for any potentially convertible shares is included in the calculation. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The potential common shares that may be issued by the Company relate to outstanding stock options and unvested restricted stock awards (“RSAs”), excluding any that were antidilutive. In addition, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of EPS pursuant to the two-class method.

 

   

For The Three Months Ended March 31,

 
   

2022

   

2021

 
   

(Dollars in thousands, except per share data)

 

Numerator:

               

Net Income Available to Common Shares

  $ 8,731     $ 12,329  

Denominator:

               

Weighted Average Common Shares Outstanding

    21,019,716       20,621,930  

Dilutive Effect of Stock Options and RSAs

    142,766       116,083  

Weighted Average Dilutive Common Shares

    21,162,482       20,738,013  
                 

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

  $ 0.42     $ 0.60  
                 

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

  $ 0.41     $ 0.59  

 

13

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 5 Securities

 

The amortized cost and fair values of securities available for sale as of March 31, 2022 and December 31, 2021 are summarized as follows:

 

  

March 31, 2022

 
  

(Dollars in thousands)

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

U.S. Treasury Securities

 $32,862  $-  $1,609  $31,253 

U.S. Government Agencies

  25,339   -   1,466   23,873 

Corporate Securities

  45,361   358   748   44,971 

Mortgage-Backed Securities

  553,826   390   30,003   524,213 

Municipal Securities

  354,306   225   17,483   337,048 

Total Securities Available for Sale

 $1,011,694  $973  $51,309  $961,358 

 

  

December 31, 2021

 
  

(Dollars in thousands)

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

U.S. Treasury Securities

 $22,751  $-  $437  $22,314 

U.S. Government Agencies

  27,867   2   376   27,493 

Corporate Securities

  45,876   812   106   46,582 

Mortgage-Backed Securities

  555,528   3,246   6,435   552,339 

Municipal Securities

  370,421   4,100   2,188   372,333 

Total Securities Available for Sale

 $1,022,443  $8,160  $9,542  $1,021,061 

 

14

 

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, 2022 and December 31, 2021, 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, 2022

 
  

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. Treasury Securities

 $31,253  $1,609  $-  $-  $31,253  $1,609 

U.S. Government Agencies

  23,873   1,466   -   -   23,873   1,466 

Corporate Securities

  14,425   748   -   -   14,425   748 

Mortgage-Backed Securities

  399,653   23,244   80,595   6,759   480,248   30,003 

Municipal Securities

  227,562   13,747   44,963   3,736   272,525   17,483 

Total Securities Available for Sale

 $696,766  $40,814  $125,558  $10,495  $822,324  $51,309 

 

  

December 31, 2021

 
  

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. Treasury Securities

 $22,314  $437  $-  $-  $22,314  $437 

U.S. Government Agencies

  24,980   376   -   -   24,980   376 

Corporate Securities

  7,350   106   -   -   7,350   106 

Mortgage-Backed Securities

  407,986   6,108   18,985   327   426,971   6,435 

Municipal Securities

  145,649   1,872   10,161   316   155,810   2,188 

Total Securities Available for Sale

 $608,279  $8,899  $29,146  $643  $637,425  $9,542 

 

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.

 

15

 

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, 2022 by contractual maturity are shown below. Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties.

 

  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(Dollars in thousands)

 

Less Than One Year

 $21,800  $21,805 

One to Five Years

  199,566   192,684 

Over Five to Ten Years

  413,793   395,399 

Over Ten Years

  376,535   351,470 

Total Securities Available for Sale

 $1,011,694  $961,358 

 

 

 

Note 6 Loans and the Allowance for Loan Losses

 

Loans receivable at March 31, 2022 and December 31, 2021 are summarized as follows:

 

  

March 31,

  

December 31,

 
  

2022

  

2021

 
  

(Dollars in thousands)

 

Real estate loans:

        

Construction and land

 $581,661  $548,528 

Farmland

  149,270   87,463 

1-4 family residential

  485,067   467,699 

Multi-family residential

  109,773   97,508 

Nonfarm nonresidential

  1,481,046   1,144,426 

Commercial

  817,093   721,385 

Consumer and other

  124,588   122,599 

Total loans held for investment

  3,748,498   3,189,608 
         

Less:

        

Allowance for loan losses

  (29,245)  (29,112)

Net loans

 $3,719,253  $3,160,496 

 

As of March 31, 2022 and December 31, 2021, $6.0 million and $5.4 million, respectively, of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans remain outstanding, all of which are included in the commercial loan portfolio.

 

16

 

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, 2022 and December 31, 2021.

 

Net deferred loan origination fees were $9.2 million and $7.7 million at March 31, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, overdrafts of $755,000 and $2.4 million, 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 $558.7 million and $461.8 million at March 31, 2022 and December 31, 2021, respectively. The Company had servicing rights of $1.8 million and $1.4 million recorded as of March 31, 2022 and December 31, 2021, respectively, and is recorded within other assets.

 

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 net unaccreted purchase discount. To the extent the calculated loss is greater than the remaining net unaccreted discount, an allowance is recorded for such difference. For purchased impaired credits, cash flow re-estimations are performed at least quarterly for each acquired impaired loan or loan pool.  Increases in estimated cash flows above those expected at the time of acquisition are recognized on a prospective basis as interest income over the remaining life of the loan and/or pool. Decreases in expected cash flows subsequent to acquisition generally result in recognition of a provision for credit loss.

 

17

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Total loans held for investment at March 31, 2022 includes $657.5 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, 2022 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 $65.7 million and acquired performing loans not accounted for under ASC 310-30 totaling $596.6 million with a remaining purchase discount of $4.8 million.

 

Total loans held for investment at December 31, 2021 includes $379.0 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, 2021 were acquired impaired loans accounted for under ASC 310-30 with a net carrying amount of $51.2 million and acquired performing loans not accounted for under ASC 310-30 totaling $331.3 million with a remaining purchase discount of $3.5 million.

 

The following tables set forth, as of March 31, 2022 and December 31, 2021, 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, 2022

 
  

(Dollars in thousands)

 
  

Real Estate:

      

Real Estate:

  

Real Estate:

  

Real Estate:

             
  

Construction

  

Real Estate:

  

1-4 Family

  

Multi-family

  

Nonfarm

      

Consumer

     
  

and Land

  

Farmland

  

Residential

  

Residential

  

Nonresidential

  

Commercial

  

and Other

  

Total

 

Allowance for credit losses:

                                

Beginning Balance

 $4,498  $721  $3,791  $774  $9,794  $8,358  $1,176  $29,112 

Charge-offs

  (6)  -   (3)  -   -   (1,496)  (163)  (1,668)

Recoveries

  1   -   1   -   3   125   54   184 

Provision

  (15)  477   37   42   785   239   52   1,617 

Ending Balance

 $4,478  $1,198  $3,826  $816  $10,582  $7,226  $1,119  $29,245 

Ending Balance:

                                

Individually evaluated for impairment

 $32  $-  $98  $-  $104  $147  $5  $386 

Collectively evaluated for impairment

 $4,446  $1,198  $3,728  $816  $10,478  $7,079  $1,114  $28,859 

Purchased Credit Impaired

 $-  $-  $-  $-  $-  $-  $-  $- 

Loans receivable:

                                

Ending Balance

 $581,661  $149,270  $485,067  $109,773  $1,481,046  $817,093  $124,588  $3,748,498 

Ending Balance:

                                

Individually evaluated for impairment

 $1,195  $147  $3,523  $-  $2,998  $3,248  $175  $11,286 

Collectively evaluated for impairment

 $579,540  $149,120  $462,650  $109,773  $1,441,331  $805,597  $123,479  $3,671,490 

Purchased Credit Impaired

 $926  $3  $18,894  $-  $36,717  $8,248  $934  $65,722 

 

18

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

  

December 31, 2021

 
  

(Dollars in thousands)

 
  

Real Estate:

      

Real Estate:

  

Real Estate:

  

Real Estate:

             
  

Construction

  

Real Estate:

  

1-4 Family

  

Multi-family

  

Nonfarm

      

Consumer

     
  

and Land

  

Farmland

  

Residential

  

Residential

  

Nonresidential

  

Commercial

  

and Other

  

Total

 

Allowance for credit losses:

                                

Beginning balance

 $3,584  $600  $3,453  $818  $7,369  $5,018  $1,182  $22,024 

Charge-offs

  (28)  (1)  (169)  -   (139)  (830)  (469)  (1,636)

Recoveries

  1   2   39   -   99   417   119   677 

Provision

  941   120   468   (44)  2,465   3,753   344   8,047 

Ending Balance

 $4,498  $721  $3,791  $774  $9,794  $8,358  $1,176  $29,112 

Ending Balance:

                                

Individually evaluated for impairment

 $26  $-  $110  $-  $83  $438  $37  $694 

Collectively evaluated for impairment

 $4,472  $721  $3,681  $774  $9,711  $7,920  $1,139  $28,418 

Purchased Credit Impaired

 $-  $-  $-  $-  $-  $-  $-  $- 

Loans receivable:

                                

Ending Balance

 $548,528  $87,463  $467,699  $97,508  $1,144,426  $721,385  $122,599  $3,189,608 

Ending Balance:

                                

Individually evaluated for impairment

 $1,358  $74  $3,627  $-  $2,959  $5,514  $289  $13,821 

Collectively evaluated for impairment

 $546,164  $87,387  $444,934  $97,508  $1,118,836  $708,346  $121,392  $3,124,567 

Purchased Credit Impaired

 $1,006  $2  $19,138  $-  $22,631  $7,525  $918  $51,220 

 

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 the Company’s market areas. Risks associated with these loans include fluctuations in the value of real estate, project completion risk and change in market trends. The Company is 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 the Company 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 cash flow from the borrower’s ongoing operations.

 

One-to-four family residential loans include first and second lien 1-4 family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences. The Company is 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.

 

Multi-family residential loans are generally originated to provide permanent financing for multi-family 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.

 

19

 

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 the Company’s 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 and other 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.

 

Within the commercial and consumer loans are 100% government guaranteed SBA PPP loans. These loans are separately reserved for within the Company’s allowance for loan losses.

 

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, 2022 and December 31, 2021, the credit quality indicators, disaggregated by class of loan, are as follows:

 

Credit Quality Indicators

 

  

March 31, 2022

 
  

Pass

  

Special Mention

  

Substandard

  

Doubtful

  

Total

 
  

(Dollars in thousands)

 

Real Estate Loans:

                    

Construction and land

 $578,059  $297  $2,110  $1,195  $581,661 

Farmland

  146,640   2,480   -   150   149,270 

1-4 family residential

  472,697   2,954   3,817   5,599   485,067 

Multi-family residential

  109,752   -   21   -   109,773 

Nonfarm nonresidential

  1,425,741   27,956   22,071   5,278   1,481,046 

Commercial

  795,533   9,553   8,196   3,811   817,093 

Consumer and other

  123,526   432   320   310   124,588 

Total

 $3,651,948  $43,672  $36,535  $16,343  $3,748,498 

 

 

  

December 31, 2021

 
  

Pass

  

Special Mention

  

Substandard

  

Doubtful

  

Total

 
  

(Dollars in thousands)

 

Real Estate Loans:

                    

Construction and land

 $545,071  $266  $1,850  $1,341  $548,528 

Farmland

  86,063   1,324   -   76   87,463 

1-4 family residential

  456,150   3,109   2,801   5,639   467,699 

Multi-family residential

  97,485   -   23   -   97,508 

Nonfarm nonresidential

  1,094,782   34,495   9,735   5,414   1,144,426 

Commercial

  704,755   7,886   3,137   5,607   721,385 

Consumer and other

  121,566   350   257   426   122,599 

Total

 $3,105,872  $47,430  $17,803  $18,503  $3,189,608 

 

20

 

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.

 

As of March 31, 2022 and December 31, 2021, loan balances outstanding more than 90 days past due and still accruing interest amounted to $26,000 and $222,000, respectively. As of March 31, 2022 and December 31, 2021, loan balances outstanding on nonaccrual status amounted to $10.8 million and $12.9 million, respectively. The Bank considers all loans more than 90 days past due as nonperforming loans.

 

The following tables provide an analysis of the aging of loans and leases as of March 31, 2022 and December 31, 2021. Past due and nonaccrual loan amounts exclude acquired impaired loans within pools, even if contractually past due or if the Company does not expect to receive payment in full, as the Company is currently accreting interest income over the expected life of the loans. All loans greater than 90 days past due are generally placed on nonaccrual status.

 

Aged Analysis of Past Due Loans Receivable

 

  

March 31, 2022

 
  

(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

 $2,286  $12  $419  $2,717  $578,944  $581,661  $- 

Farmland

  30   -   54   84   149,186   149,270   - 

1-4 family residential

  1,414   474   1,521   3,409   481,658   485,067   18 

Multi-family residential

  -   -   -   -   109,773   109,773   - 

Nonfarm nonresidential

  312   6,433   2,298   9,043   1,472,003   1,481,046   - 

Commercial

  33   20   1,923   1,976   815,117   817,093   - 

Consumer and other

  260   38   142   440   124,148   124,588   8 

Total

 $4,335  $6,977  $6,357  $17,669  $3,730,829  $3,748,498  $26 

 

  

December 31, 2021

 
  

(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

 $632  $16  $488  $1,136  $547,392  $548,528  $- 

Farmland

  83   -   -   83   87,380   87,463   - 

1-4 family residential

  917   534   1,496   2,947   464,752   467,699   107 

Multi-family residential

  -   -   -   -   97,508   97,508   - 

Nonfarm nonresidential

  222   627   1,767   2,616   1,141,810   1,144,426   - 

Commercial

  106   55   4,257   4,418   716,967   721,385   97 

Consumer and other

  392   144   271   807   121,792   122,599   18 

Total

 $2,352  $1,376  $8,279  $12,007  $3,177,601  $3,189,608  $222 

 

21

 

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, 2022 and December 31, 2021. Purchased performing loans are placed on nonaccrual status and reported as impaired using the same criteria applied to the originated portfolio. Purchased impaired credits are excluded from this table. The interest income recognized for impaired loans was $12,000 and $334,000 for the three months ending March 31, 2022 and the year ending December 31, 2021, respectively.

 

  

March 31, 2022

 
  

(Dollars in thousands)

 
      

Unpaid

      

Average

 
  

Recorded

  

Principal

  

Related

  

Recorded

 
  

Investment

  

Balance

  

Allowance

  

Investment

 

With an allowance recorded:

                

Real Estate Loans:

                

Construction and land

 $370  $414  $32  $168 

Farmland

  -   -   -   - 

1-4 family residential

  302   365   98   306 

Multi-family residential

  -   -   -   - 

Nonfarm nonresidential

  474   500   104   676 

Other Loans:

                

Commercial

  348   484   147   489 

Consumer and other

  9   9   5   64 

Total

 $1,503  $1,772  $386  $1,703 
                 

With no allowance recorded:

                

Real Estate Loans:

                

Construction and land

 $825  $860  $-  $1,113 

Farmland

  147   158   -   98 

1-4 family residential

  3,221   4,047   -   3,260 

Multi-family residential

  -   -   -   - 

Nonfarm nonresidential

  2,524   3,056   -   2,369 

Other Loans:

                

Commercial

  2,900   4,615   -   3,182 

Consumer and other

  166   299   -   178 

Total

 $9,783  $13,035  $-  $10,200 
                 

Total Impaired Loans:

                

Real Estate Loans:

                

Construction and land

 $1,195  $1,274  $32  $1,281 

Farmland

  147   158   -   98 

1-4 family residential

  3,523   4,412   98   3,566 

Multi-family residential

  -   -   -   - 

Nonfarm nonresidential

  2,998   3,556   104   3,045 

Other Loans:

                

Commercial

  3,248   5,099   147   3,671 

Consumer and other

  175   308   5   242 

Total

 $11,286  $14,807  $386  $11,903 

 

22

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

  

December 31, 2021

 
  

(Dollars in thousands)

 
      

Unpaid

      

Average

 
  

Recorded

  

Principal

  

Related

  

Recorded

 
  

Investment

  

Balance

  

Allowance

  

Investment

 

With an allowance recorded:

                

Real Estate Loans:

                

Construction and land

 $68  $70  $27  $27 

Farmland

  -   -   -   12 

1-4 family residential

  314   371   110   325 

Multi-family residential

  -   -   -   - 

Nonfarm nonresidential

  784   801   83   623 

Other Loans:

                

Commercial

  695   836   438   1,217 

Consumer and other

  91   92   36   80 

Total

 $1,952  $2,170  $694  $2,284 
                 

With no allowance recorded:

                

Real Estate Loans:

                

Construction and land

 $1,290  $1,356  $-  $1,050 

Farmland

  74   82   -   150 

1-4 family residential

  3,313   4,171   -   2,835 

Multi-family residential

  -   -   -   48 

Nonfarm nonresidential

  2,175   2,691   -   2,889 

Other Loans:

                

Commercial

  4,819   5,211   -   3,882 

Consumer and other

  198   467   -   184 

Total

 $11,869  $13,978  $-  $11,038 
                 

Total Impaired Loans:

                

Real Estate Loans:

                

Construction and land

 $1,358  $1,426  $27  $1,077 

Farmland

  74   82   -   162 

1-4 family residential

  3,627   4,542   110   3,160 

Multi-family residential

  -   -   -   48 

Nonfarm nonresidential

  2,959   3,492   83   3,512 

Other Loans:

                

Commercial

  5,514   6,047   438   5,099 

Consumer and other

  289   559   36   264 

Total

 $13,821  $16,148  $694  $13,322 

 

23

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

As discussed in Note 3, the Company acquired loans with fair values of $336.7 million from TCBI on March 1, 2022. Of the total $336.7 million of loans acquired, $315.2 million were determined to have no evidence of deteriorated credit quality and are accounted for under ASC Topics 310-10 and 310-20. The unamortized discount related to the acquired performing loans totaled $1.7 million at March 1, 2022. The remaining $21.5 million were determined to exhibit deteriorated credit quality since origination under ASC 310-30.

 

The following table presents the balances acquired on March 1, 2022 which were accounted for under ASC 310-30.

 

  

Purchased

 
  

Impaired Credits

 
  

(Dollars in thousands)

 
     

Contractually required payments

 $52,899 

Non-accretable difference (expected losses)

  (26,803)

Cash flows expected to be collected at acquisition

  26,096 

Accretable yield

  (4,622)

Basis in acquired loans at acquisition

 $21,474 

 

The following is a summary of changes in the accretable difference for loans accounted for under ASC 310-30 during the three months ended March 31, 2022:

 

Balance at December 31, 2021

 $20,659 

Additions

  4,622 

Transfers from non-accretable difference to accretable yield

  330 

Accretion

  (524)

Changes in expected cash flows not affecting non-accretable differences

  (3,733)

Balance at March 31, 2022

 $21,354 

 

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, 2022 and December 31, 2021, the concessions granted to certain borrowers generally included extending the payment due dates and offering below market contractual interest rates.

 

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.

 

24

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The Company had no troubled debt restructurings that had subsequently defaulted during the three months ended March 31, 2022 and three troubled debt restructuring that had subsequently defaulted in the amount of $154,000 during the year ended December 31, 2021. During the three months ended March 31, 2022, no loans were modified which were considered a troubled debt restructuring. During the year ended December 31, 2021, the Company did not modify any loans that were categorized as trouble debt restructurings.

 

As of March 31, 2022 and December 31, 2021, our loan portfolio included loans with outstanding principal balances of $520.7 million and $522.0 million, respectively, that had previously been granted payment deferrals due to the effects of the COVID-19 pandemic.  As of both March 31, 2022 and December 31, 2021, the Company had no loans with outstanding principal balances still in their pandemic-related deferral periods. Under Section 4013 of the CARES Act, as extended by the Consolidated Appropriations Act of 2021, and based on the interpretive guidance released by the FASB and the applicable banking regulators, the Company determined that none of the modifications associated with the COVID-19 pandemic were troubled debt restructurings at both March 31, 2022 and December 31, 2021.

 

Accrued interest receivable of $7.0 million and $6.0 million was outstanding as of March 31, 2022 and December 31, 2021, respectively, for all loan deferrals.

 

 

 

Note 7 Long Term Debt

 

On March 26, 2021, the Company issued $52.5 million in subordinated debt. This subordinated debt bears interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031. The subordinated notes were issued to provide additional capital support to the Bank, to support growth, to better position the Company to take advantage of strategic opportunities that may arise from time to time, repayment of existing Company borrowings, and for other general corporate purposes. The subordinated notes are redeemable by the Company at its options beginning in 2026.

 

On April 1, 2021, the Company consummated the acquisition of SSW as discussed in Note 3. Under the terms of the acquisition, the Company issued $3.9 million in subordinated debt to the former owners of SSW. This subordinated debt bears interest at a fixed rate of 4.75% through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031.

 

On March 1, 2022, the Company assumed, in connection with the TCBI acquisition, three tranches of subordinated debt with an aggregate principal balance outstanding of $26.4 million. One tranche in the amount of $10.0 million bears interest at a fixed rate of 6.25% until April 11, 2023, then will reset to a floating interest rate based on a benchmark rate plus 350 basis points, adjusting quarterly, until maturity on April 11, 2028. Another tranche in the amount of $7.5 million bears a fixed rate 6.38% until December 13, 2023, then will reset to a floating interest rate based on a benchmark rate plus 350 basis points, adjusting quarterly, until maturity on December 13, 2028. The third tranche in the amount of $8.9 million bears an adjustable interest rate plus 595 basis points, based on a benchmark rate, until maturity on March 24, 2027. These notes carry an aggregate $3.4 million fair value adjustment as of March 31, 2022.

 

25

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 8 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 $881,000 and $747,000 for the three months ended March 31, 2022 and 2021, respectively. At March 31, 2022, the Company had a weighted average lease term of 6.2 years and a weighted average discount rate of 2.52%.

 

Future minimum lease payments under these leases are as follows:

 

  

(Dollars in thousands)

 

April 1, 2022 through March 31, 2023

 $3,093 

April 1, 2023 through March 31, 2024

  3,442 

April 1, 2024 through March 31, 2025

  2,918 

April 1, 2025 through March 31, 2026

  2,528 

April 1, 2026 through March 31, 2027

  1,973 

April 1, 2027 and Thereafter

  5,048 

Total Future Minimum Lease Payments

  19,002 

Less Imputed Interest

  (1,444)

Present Value of Lease Liabilities

 $17,558 

 

 

 

Note 9 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 $1.0 billion and standby and commercial letters of credit of approximately $34.9 million at March 31, 2022.

 

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.

 

26

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 10 Fair Value of Financial Instruments

 

Fair Value Disclosures

 

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

 

 

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

 

 

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

 

 

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

 

Recurring Basis

 

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

 

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

 

27

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following tables present the balance of assets and liabilities measured on a recurring basis as of March 31, 2022 and December 31, 2021. 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, 2022

                

Available for Sale:

                

U.S. Treasury Securities

 $31,253  $-  $31,253  $- 

U.S. Government Agency Securities

  23,873   -   23,873   - 

Corporate Securities

  44,971   -   24,971   20,000 

Mortgage-Backed Securities

  524,213   -   512,627   11,586 

Municipal Securities

  337,048   -   308,490   28,558 

Loans Held for Sale

  15,988   -   15,988   - 

Servicing Rights

  1,971   -   1,971   - 

Total

 $979,317  $-  $919,173  $60,144 
                 
                 

December 31, 2021

                

Available for Sale:

                

U.S. Treasury Securities

 $22,314  $-  $22,314  $- 

U.S. Government Agency Securities

  27,493   -   27,493   - 

Corporate Securities

  46,582   -   26,582   20,000 

Mortgage-Backed Securities

  552,339   -   552,339   - 

Municipal Securities

  372,333   -   348,243   24,090 

Loans Held for Sale

  1,200   -   1,200   - 

Servicing Rights

  1,775   -   1,775   - 

Total

 $1,024,036  $-  $979,946  $44,090 

 

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.

 

28

 

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 3 assets measured using appraisals from external parties of the collateral less any prior liens and adjusted for estimated selling costs. Adjustments may be made by management based on a customized internally developed discounting matrix. Repossessed assets are initially recorded at fair value less estimated cost to sell, which is generally 10%. 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 3.

 

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 
  

(Dollars in thousands)

 

March 31, 2022

                

Assets:

                

Impaired Loans

 $16,440  $-  $-  $16,440 

Other Nonperforming Assets

  1,453   -   -   1,453 

Total

 $17,893  $-  $-  $17,893 
                 

December 31, 2021

                

Assets:

                

Impaired Loans

 $18,749  $-  $-  $18,749 

Other Nonperforming Assets

  1,427   -   -   1,427 

Total

 $20,176  $-  $-  $20,176 

 

 

The following table provides quantitative information for impaired loans measured at fair value on a nonrecurring basis using Level 3 inputs as of the dates indicated.

 

 

Valuation

 

Unobservable

 

Discounted Range (Weighted Average)

 
 

Technique

 

Input

 

March 31, 2022

  

December 31, 2021

 

Impaired Loans

Discounted Appraisals

 

Appraisal Adjustments

 10%to100%(22%)  10%to100%(20%) 

 

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 GAAP, 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.

 

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

 

29

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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, 2022 and December 31, 2021 are as follows:

 

  

Carrying

  

Total

             
  

Amount

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 
  

(Dollars in thousands)

 

March 31, 2022

                    

Financial Assets:

                    

Cash and Short-Term Investments

 $349,896  $349,896  $349,896  $-  $- 

Securities

  961,358   961,358   -   901,214   60,144 

Loans Held for Sale

  14,913   15,988   -   15,988   - 

Loans - Net

  3,719,253   3,681,685   -   -   3,681,685 

Servicing Rights

  1,815   1,971   -   1,971   - 

Cash Value of BOLI

  72,896   72,896   -   72,896   - 

Other Equity Securities

  23,034   23,034   -   -   23,034 

Total

 $5,143,165  $5,106,828  $349,896  $992,069  $3,764,863 
                     

Financial Liabilities:

                    

Deposits

 $4,657,738  $4,639,624  $-  $-  $4,639,624 

Borrowings

  219,531   220,713   -   220,713   - 

Total

 $4,877,269  $4,860,337  $-  $220,713  $4,639,624 

 

30

 

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, 2021

                    

Financial Assets:

                    

Cash and Short-Term Investments

 $295,419  $295,419  $295,419  $-  $- 

Securities

  1,021,061   1,021,061   -   976,971   44,090 

Loans Held for Sale

  1,200   1,200   -   1,200   - 

Loans - Net

  3,160,496   3,121,433   -   -   3,121,433 

Servicing Rights

  1,403   1,775   -   1,775   - 

Cash Value of BOLI

  60,380   60,380   -   60,380   - 

Other Equity Securities

  16,619   16,619   -   -   16,619 

Total

 $4,556,578  $4,517,887  $295,419  $1,040,326  $3,182,142 
                     

Financial Liabilities:

                    

Deposits

 $4,077,283  $4,078,558  $-  $-  $4,078,558 

Borrowings

  187,590   195,998   -   195,998   - 

Total

 $4,264,873  $4,274,556  $-  $195,998  $4,078,558 

 

 

 

Note 11 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 cancelable). 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 until January 2023 applicable to public companies that met the definition of a “smaller reporting company” based on the most recent determination prior to October 18, 2019. The Company met the requirements for this effective date delay and has elected to delay implementation of the standard. The Company has established an implementation team and engaged third-party consultants who have jointly developed a project plan to provide implementation oversight. The Company is in the process of developing and implementing current expected credit loss models that satisfy the requirements of ASU 2016-13. The future adoption of this ASU may have a material effect on the Company’s consolidated financial statements.

 

31

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The main amendments eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan.  The effective date for the amendments are the same as the effective date for ASU 2016-13.

 

32

 

Item 2.

Managements 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 Board of Governors of the Federal Reserve System, or the Federal Reserve (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 other acquired businesses, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, risks related to entering a new geographic market, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the ability to retain key employees and maintain relationships with significant customers, 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, the Dallas/Fort Worth metroplex and Houston;

 

 

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 and emerging non-bank competitors;

 

 

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

 

 

 

changes in the value of collateral securing our loans;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

risks associated with our acquisition and de novo branching strategy;

 

 

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

 

 

legislative or regulatory developments, including changes in the laws, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters;

 

 

government intervention in the U.S. financial system;

 

 

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

 

 

natural disasters and adverse weather, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, 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, 2021, filed with the SEC.

 

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.

 

 

MANAGEMENTS 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, 2021 to March 31, 2022, and its results of operations for the three months ended March 31, 2022. 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, 2021, including the audited consolidated financial statements and notes thereto, managements 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 financial 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-midsized 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, the Dallas/Fort Worth metroplex, and Houston. We currently operate out of banking centers and loan production offices across Louisiana and Texas. As of March 31, 2022, we had total assets of $5.4 billion, total loans of $3.8 billion, total deposits of $4.7 billion, and total shareholders’ equity of $456.8 million.

 

As a financial holding company operating through one reportable operating 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

 

Acquisition of Smith Shellnut Wilson, LLC (SSW)

 

On March 22, 2021, we, through b1BANK, entered into a definitive agreement to acquire SSW, a registered investment advisor with approximately $3.5 billion in assets under management, specializing in managing investment portfolios for corporations, foundations and individuals. The acquisition of SSW was consummated on April 1, 2021. At March 31, 2021, SSW reported $3.6 million in total assets and $2.3 million in total liabilities.

 

Sale of Oak Grove Banking Center

 

On October 1, 2021, we sold the Oak Grove banking center, located in Oak Grove, Louisiana, to Caldwell Bank & Trust Company headquartered in Columbia, Louisiana, in accordance with the Branch Purchase and Assumption Agreement dated June 29, 2021. The sale included $3.7 million in loans, $18.7 million in deposits and an estimated pre-tax gain on sale of $492,000.

 

 

Acquisition of Texas Citizens Bancorp, Inc. (TCBI)

 

On October 20, 2021, we entered into a definitive agreement to acquire TCBI, the parent bank holding company for Texas Citizens Bank, National Association, headquartered in Pasadena, Texas. The acquisition was consummated on March 1, 2022. At February 28, 2022, TCBI had fair values of approximately $534.2 million in total assets, $349.5 million in loans and $477.2 million in total deposits.         

 

COVID-19

 

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.

 

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

 

 

In anticipation of credit losses expected as a result of the COVID-19 pandemic, we recorded an additional provision for loan losses during the year ended December 31, 2020, of which a large portion of that provision still remained within the allowance for loan losses at March 31, 2022;

 

 

We continue to monitor borrowers who have deferred payments on loans under our COVID-19 Deferral Assistance Program, described in further detail below;

 

 

We participated in the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), as described in further detail below, including participation in round 2 of the PPP during the year ended December 31, 2021. During the year ended December 31, 2021, we sold approximately 2,000 PPP loans with an aggregate balance of $243.6 million at a gain of $9.2 million. As of March 31, 2022, we had approximately $6.0 million in SBA PPP loans remaining, of which $3.4 million were acquired from TCBI;

 

 

We continue to monitor those sectors particularly impacted by the pandemic—such as energy, hotels, restaurants, 1-4 family and retail—and have flagged those sectors for additional monitoring;

 

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 March 31, 2022, we had 1,445 loans that received deferrals with an aggregate outstanding balance of $520.7 million.

 

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 under Section 4013 of the CARES Act, as extended by the Consolidated Appropriations Act of 2021.

 

SBA PPP Participation

 

As of March 31, 2022, we held 43 PPP loans (including both round 1 and round 2 PPP loans and TCBI PPP acquired loans) with an aggregate balance of $6.0 million and an average loan balance of approximately $139,000. In June 2021, we sold approximately 2,000 PPP loans with an aggregate balance of $243.6 million at a gain of $9.2 million.

 

Financial Highlights

 

The financial highlights as of and for the three months ended March 31, 2022 include:

 

 

Total assets of $5.4 billion, a $635.9 million, or 13.5%, increase from December 31, 2021.

 

 

Total loans held for investment of $3.7 billion, a $558.9 million, or 17.5%, increase from December 31, 2021.

 

 

Total deposits of $4.7 billion, a $580.5 million, or 14.2%, increase from December 31, 2021.

 

 

Net income of $8.7 million for the three months ended March 31, 2022, a $3.6 million, or 29.2%, decrease from the three months ended March 31, 2021.

 

 

 

Net interest income of $40.5 million for the three months ended March 31, 2022, an increase of $174,000, or 0.4%, from the three months ended March 31, 2021.

 

 

Allowance for loan and lease losses of 0.78% of total loans held for investment, compared to 0.91% as of December 31, 2021, and a ratio of nonperforming loans to total loans held for investment of 0.29%, compared to 0.41% as of December 31, 2021.

 

 

Earnings per share for the first three months of 2022 of $0.42 per basic share and $0.41 per diluted share, compared to $0.60 per basic share and $0.59 per diluted share for the first three months of 2021.

 

 

Return on average assets of 0.71% over the first three months of 2022, compared to 1.15% for the first three months of 2021.

 

 

Return on average equity of 7.83% over the first three months of 2022, compared to 11.86% for the first three months of 2021.

 

 

Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 8.15%, 8.59%, 8.70% and 11.76%, respectively, compared to Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 8.14%, 9.04%, 9.17% and 11.94% for the quarter ended December 31, 2021.

 

 

Book value per share of $20.25, a decrease of 4.7% from $21.24 at December 31, 2021.

 

Results of Operations for the Three Months Ended March 31, 2022 and 2021

 

Performance Summary

 

For the three months ended March 31, 2022, net income was $8.7 million, or $0.42 per basic share and $0.41 per diluted share, compared to net income of $12.3 million, or $0.60 per basic share and $0.59 per diluted share, for the three months ended March 31, 2021. Return on average assets, on an annualized basis, decreased to 0.71% for the three months ended March 31, 2022, from 1.15% for the three months ended March 31, 2021. Return on average equity, on an annualized basis, decreased to 7.83% for the three months ended March 31, 2022, as compared to 11.86% for the three months ended March 31, 2021.

 

Net Interest Income

 

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

 

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

 

For the three months ended March 31, 2022, net interest income totaled $40.5 million, and net interest margin and net interest spread were 3.51% and 3.35%, respectively, compared to $40.3 million, 4.23%, and 4.06%, respectively, for the three months ended March 31, 2021. The average yield on the loan portfolio (excluding SBA PPP loans) was 4.75% for the three months ended March 31, 2022, compared to 5.53% for the three months ended March 31, 2021, and the average yield on total interest-earning assets was 3.83% for the three months ended March 31, 2022, compared to 4.65% for the three months ended March 31, 2021. For the three months ended March 31, 2022, overall cost of funds (which includes noninterest-bearing deposits) decreased 8 basis points compared to the three months ended March 31, 2021, primarily due to the maturing of higher yielding deposits, increased lower yielding deposits and offset by the deposit accretion recognized from the TCBI acquisition.

 

 

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, 2022 and 2021, 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 either over the remaining lives of the respective loans or expected cash flows. Averages presented in the table below, and throughout this report, are month-end averages.

 

   

For the Three Months Ended March 31,

 
   

2022

   

2021

 
   

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 (excluding SBA PPP loans)

  $ 3,382,325     $ 40,174       4.75 %   $ 2,643,668     $ 36,538       5.53 %

SBA PPP loans

    3,725       9       1.00       374,958       4,881       5.21  

Securities available for sale

    1,005,252       3,844       1.53       691,476       2,802       1.62  

Interest-bearing deposits in other banks

    221,148       95       0.17       101,233       41       0.16  

Total interest-earning assets

    4,612,450       44,122       3.83       3,811,335       44,262       4.65  

Allowance for loan losses

    (29,260 )                     (22,709 )                

Noninterest-earning assets

    336,915                       487,804                  

Total assets

  $ 4,920,105     $ 44,122             $ 4,276,430     $ 44,262          

Liabilities and Shareholders Equity

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 2,882,838     $ 2,263       0.31 %   $ 2,584,263     $ 3,243       0.50 %

Subordinated debt

    91,354       1,115       4.88       28,450       459       6.45  

Subordinated debt – trust preferred securities

    5,000       42       3.36       5,000       42       3.36  

Advances from Federal Home Loan Bank (“FHLB”)

    80,375       223       1.11       37,022       111       1.20  

Other borrowings

    19,666       4       0.08       31,696       106       1.34  

Total interest-bearing liabilities

    3,079,233       3,647       0.47       2,686,431       3,961       0.59  

Noninterest-bearing liabilities:

                                               

Noninterest-bearing deposits

    1,370,015                       1,146,950                  

Other liabilities

    24,854                       27,153                  

Total noninterest-bearing liabilities

    1,394,869                       1,174,103                  

Shareholders’ equity

    446,003                       415,896                  

Total liabilities and shareholders’ equity

  $ 4,920,105                     $ 4,276,430                  

Net interest rate spread(1)

                    3.35 %                     4.06 %

Net interest income

          $ 40,475                     $ 40,301          

Net interest margin(2)

                    3.51 %                     4.23 %

Overall cost of funds

                    0.33 %                     0.41 %

(1)

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

(2)

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

 

 

The following 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, 2022
compared to the Three Months Ended
March 31, 2021

 
   

Increase (Decrease) due to change in

 
   

Volume

   

Rate

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Interest-earning assets:

                       

Total loans (excluding SBA PPP loans)

  $ 8,773     $ (5,137 )   $ 3,636  

SBA PPP loans

    (928 )     (3,944 )     (4,872 )

Securities available for sale

    1,200       (158 )     1,042  

Interest-earning deposits in other banks

    52       2       54  

Total increase (decrease) in interest income

  $ 9,097     $ (9,237 )   $ (140 )
                         

Interest-bearing liabilities:

                       

Interest-bearing deposits

  $ 234     $ (1,214 )   $ (980 )

Subordinated debt

    768       (112 )     656  

Subordinated debt – trust preferred securities

                 

Advances from FHLB

    120       (8 )     112  

Other borrowings

    (2 )     (100 )     (102 )

Total increase (decrease) in interest expense

    1,120       (1,434 )     (314 )

Increase (decrease) in net interest income

  $ 7,977     $ (7,803 )   $ 174  

 

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 ConditionAllowance for Loan Losses.” The provision for loan losses was $1.6 million for the three months ended March 31, 2022 and $3.4 million for the same period in 2021. The lower provision for the three months ended March 31, 2022 compared to the same period in 2021 relates primarily to the improvement of the qualitative factors attributed to the general economy and energy sector, offset by reserves for new loan growth.

 

 

Noninterest Income (Other 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, fees and brokerage commission 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

 
   

2022

   

2021

    (Decrease)  
   

(Dollars in thousands) (Unaudited)

 

Noninterest income:

                       

Service charges on deposit accounts

  $ 1,805     $ 1,567     $ 238  

Debit card and ATM fee income

    1,501       1,336       165  

Bank-owned life insurance income

    369       318       51  

Gain (loss) on sales of loans

    65       (21 )     86  

Loss on sales of investment securities

    (31 )     (5 )     (26 )

Fees and brokerage commissions

    1,835       543       1,292  

Mortgage origination income

    209       229       (20 )

Correspondent bank income

    4       143       (139 )

Participation fee income

    62       12       50  

Gain on sales of other real estate owned

    8       46       (38 )

Gain (loss) on sales of other assets

    (717 )     117       (834 )

Pass-through income from SBIC partnerships

    115       53       62  

Other

    671       510       161  

Total noninterest income

  $ 5,896     $ 4,848     $ 1,048  

 

Total noninterest income increased $1.0 million, or 21.6%, from the three months ended March 31, 2021.  The increase was primarily due to the increase in fees and brokerage commissions income of $1.3 million, or 237.9%, due to the acquisition of SSW, offset by the reduction of $834,000 relating to the disposal of former branch equipment.

 

 

Noninterest Expense (Other 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

 
   

2022

   

2021

    (Decrease)  
   

(Dollars in thousands) (Unaudited)

 

Salaries and employee benefits

  $ 19,703     $ 14,926     $ 4,777  

Non-staff expenses:

                       

Occupancy of bank premises

    2,052       1,811       241  

Depreciation and amortization

    1,569       1,358       211  

Data processing

    2,116       1,823       293  

FDIC assessment fees

    743       509       234  

Legal and other professional fees

    543       741       (198 )

Advertising and promotions

    531       477       54  

Utilities and communications

    779       575       204  

Ad valorem shares tax

    813       700       113  

Directors’ fees

    202       188       14  

Other real estate owned expenses and write-downs

    14       379       (365 )

Merger and conversion related expenses

    811       10       801  

Other

    3,844       3,231       613  

Total noninterest expense

  $ 33,720     $ 26,728     $ 6,992  

 

Total noninterest expense increased $7.0 million, or 26.2%, from the three months ended March 31, 2021, primarily attributed to $4.8 million increase in salaries and employee benefits due to the acquisition of TCBI and additional staffing. The increase in noninterest expense was also partially due to $805,000 increase in merger and conversion related expenses due to the TCBI acquisition.

 

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, 2022, income tax expense totaled $2.3 million, a decrease of $430,000, or 15.7%, compared to $2.7 million for the same period in 2021. Our effective tax rates for the three months ended March 31, 2022 and 2021 were 20.9% and 18.1%, respectively. The increase in our effective tax rate for the three months ended March 31, 2022 is primarily due to having more taxable income in relation to total income than in the same period 2021. Our effective tax rate 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 $635.9 million, or 13.5%, from December 31, 2021 to March 31, 2022, due primarily from the acquisition of TCBI and the increase in our loan portfolio.

 

 

Loan Portfolio

 

Our primary source of income is interest on loans to individuals, professionals and small-to-midsized 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, 2022, total loans held for investment were $3.7 billion, an increase of $558.9 million, or 17.5%, compared to $3.2 billion as of December 31, 2021. The increase was primarily due to the acquisition of TCBI and growth in our Dallas/Fort Worth metroplex and New Orleans markets. Additionally, $14.9 million and $1.2 million in loans were classified as loans held for sale as of March 31, 2022 and December 31, 2021, respectively. For the quarter ended March 31, 2022, $13.6 million of the loans held for sale were attributable to former TCBI SBA loan sales in process.

 

Total loans held for investment as a percentage of total deposits were 80.5% and 78.2% as of March 31, 2022 and December 31, 2021, respectively. Total loans held for investment as a percentage of total assets were 69.9% and 67.5% as of March 31, 2022 and December 31, 2021, respectively.

 

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

 

   

As of March 31, 2022

(Unaudited)

   

As of December 31, 2021

 
   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 

Commercial

  $ 817,093       21.8 %   $ 721,385       22.6 %

Real estate:

                               

Construction and land

    581,661       15.5       548,528       17.2  

Farmland

    149,270       4.0       87,463       2.7  

1-4 family residential

    485,067       13.0       467,699       14.7  

Multi-family residential

    109,773       2.9       97,508       3.1  

Nonfarm nonresidential

    1,481,046       39.5       1,144,426       35.9  

Consumer and other

    124,588       3.3       122,599       3.8  

Total loans held for investment

  $ 3,748,498       100.0 %   $ 3,189,608       100.0 %

 

SBA PPP loans accounted for $6.0 million and $5.4 million of the commercial portfolio as of March 31, 2022 and December 31, 2021, respectively.

 

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 $95.7 million, or 13.3%, to $817.1 million as of March 31, 2022 from $721.4 million as of December 31, 2021, primarily due to the acquisition of TCBI.

 

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, the Dallas/Fort Worth metroplex and Houston, and are generally diverse in terms of type.

 

Construction and land loans increased $33.1 million, or 6.0%, to $581.7 million as of March 31, 2022 from $548.5 million as of December 31, 2021.

 

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 $17.4 million, or 3.7%, to $485.1 million as of March 31, 2022 from $467.7 million as of December 31, 2021.

 

 

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 $336.6 million, or 29.4%, to $1.5 billion as of March 31, 2022 from $1.1 billion as of December 31, 2021, primarily due to the acquisition of TCBI.

 

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 and other loans. None of these categories of loans represent a significant portion of our total loan portfolio.

 

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

 

   

As of March 31, 2022

 
   

One Year or Less

   

One Through Five

Years

   

Five Through

Fifteen Years

   

After Fifteen Years

   

Total

 
   

(Dollars in thousands) (Unaudited)

 
                                         

Commercial

  $ 294,945     $ 333,301     $ 187,976     $ 871     $ 817,093  

Real estate:

                                       

Construction and land

    251,034       270,869       54,461       5,297       581,661  

Farmland

    22,061       83,621       43,588       -       149,270  

1-4 family residential

    72,014       254,432       111,029       47,592       485,067  

Multi-family residential

    17,200       31,050       55,481       6,042       109,773  

Nonfarm nonresidential

    141,733       679,591       519,940       139,782       1,481,046  

Consumer and other

    51,527       57,254       15,525       282       124,588  

Total loans held for investment

  $ 850,514     $ 1,710,118     $ 988,000     $ 199,866     $ 3,748,498  
                                         

Fixed rate loans:

                                       

Commercial

  $ 102,588     $ 190,021     $ 132,507     $ -     $ 425,116  

Real estate:

                                       

Construction and land

    104,898       136,458       32,139       76       273,571  

Farmland

    11,592       35,049       32,243       -       78,884  

1-4 family residential

    41,648       210,100       50,673       5,638       308,059  

Multi-family residential

    4,531       29,246       51,730       15       85,522  

Nonfarm nonresidential

    80,493       607,834       400,875       8,200       1,097,402  

Consumer and other

    23,975       43,659       13,608       165       81,407  

Total fixed rate loans

  $ 369,725     $ 1,252,367     $ 713,775     $ 14,094     $ 2,349,961  
                                         

Floating rate loans:

                                       

Commercial

  $ 192,357     $ 143,280     $ 55,469     $ 871     $ 391,977  

Real estate:

                                       

Construction and land

    146,136       134,411       22,322       5,221       308,090  

Farmland

    10,469       48,572       11,345       -       70,386  

1-4 family residential

    30,366       44,332       60,356       41,954       177,008  

Multi-family residential

    12,669       1,804       3,751       6,027       24,251  

Nonfarm nonresidential

    61,240       71,757       119,065       131,582       383,644  

Consumer and other

    27,552       13,595       1,917       117       43,181  

Total floating rate loans

  $ 480,789     $ 457,751     $ 274,225     $ 185,772     $ 1,398,537  

 

43

 

   

As of December 31, 2021

 
   

One Year or Less

   

One Through Five

Years

   

Five Through

Fifteen Years

   

After Fifteen Years

   

Total

 
   

(Dollars in thousands)

 
                                         

Commercial

  $ 258,279     $ 300,346     $ 162,760     $ -     $ 721,385  

Real estate:

                                       

Construction and land

    228,988       265,097       53,254       1,189       548,528  

Farmland

    8,972       43,786       34,705       -       87,463  

1-4 family residential

    70,851       249,231       106,035       41,582       467,699  

Multi-family residential

    5,382       28,041       58,757       5,328       97,508  

Nonfarm nonresidential

    137,207       506,219       446,646       54,354       1,144,426  

Consumer and other

    49,774       57,543       14,997       285       122,599  

Total loans held for investment

  $ 759,453     $ 1,450,263     $ 877,154     $ 102,738     $ 3,189,608  
                                         

Fixed rate loans:

                                       

Commercial

  $ 116,784     $ 178,649     $ 119,198     $ -     $ 414,631  

Real estate:

                                       

Construction and land

    87,082       121,398       27,927       -       236,407  

Farmland

    5,091       32,370       30,072       -       67,533  

1-4 family residential

    39,375       201,921       44,721       5,032       291,049  

Multi-family residential

    3,516       15,478       57,938       -       76,932  

Nonfarm nonresidential

    88,677       451,885       356,772       6,850       904,184  

Consumer and other

    25,609       43,038       13,049       167       81,863  

Total fixed rate loans

  $ 366,134     $ 1,044,739     $ 649,677     $ 12,049     $ 2,072,599  
                                         

Floating rate loans:

                                       

Commercial

  $ 141,495     $ 121,697     $ 43,562     $ -     $ 306,754  

Real estate:

                                       

Construction and land

    141,906       143,699       25,327       1,189       312,121  

Farmland

    3,881       11,416       4,633       -       19,930  

1-4 family residential

    31,476       47,310       61,314       36,550       176,650  

Multi-family residential

    1,866       12,563       819       5,328       20,576  

Nonfarm nonresidential

    48,530       54,334       89,874       47,504       240,242  

Consumer and other

    24,165       14,505       1,948       118       40,736  

Total floating rate loans

  $ 393,319     $ 405,524     $ 227,477     $ 90,689     $ 1,117,009  

 

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 the timely resolution of problem assets. We had $12.3 million and $14.5 million in nonperforming assets as of March 31, 2022 and December 31, 2021, respectively. We had $10.8 million in nonperforming loans as of March 31, 2022 compared to $13.1 million as of December 31, 2021. The decrease in nonperforming assets from December 31, 2021 to March 31, 2022 is primarily due to chargeoffs.

 

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

 

   

As of March 31,
2022
(Unaudited)

   

As of December 31,
2021

 
   

(Dollars in thousands)

 

Nonaccrual loans

  $ 10,784     $ 12,868  

Accruing loans 90 or more days past due

    26       222  

Total nonperforming loans

    10,810       13,090  

Other nonperforming assets

    84        

Other real estate owned:

               

Commercial real estate, construction, land and land development

    1,251       1,348  

Residential real estate

    118       79  

Total other real estate owned

    1,369       1,427  

Total nonperforming assets

  $ 12,263     $ 14,517  

Restructured loans-nonaccrual

  $ 3,227     $ 3,275  

Restructured loans-accruing

    306       315  

Ratio of nonperforming loans to total loans held for investment

    0.29 %     0.41 %

Ratio of nonperforming assets to total assets

    0.23       0.31  
Ratio of nonaccrual loans to total loans held for investment     0.29       0.40  

 

   

As of March 31,
2022
(Unaudited)

   

As of December 31,
2021

 
   

(Dollars in thousands)

 

Nonaccrual loans by category:

               

Real estate:

               

Construction and land

  $ 1,195     $ 1,341  

Farmland

    150       76  

1-4 family residential

    3,522       3,601  

Multi-family residential

           

Nonfarm nonresidential

    2,495       2,614  

Commercial

    3,247       4,947  

Consumer and other

    175       289  

Total

  $ 10,784     $ 12,868  

 

As of March 31, 2022, our loan portfolio included 1,445 loans with an aggregate outstanding balance of $520.7 million that had previously been granted temporary payment deferrals of principal and/or interest due to the effect of the COVID-19 pandemic.  As of December 31, 2021, our loan portfolio included 1,574 loans with an aggregate outstanding balance of $522.0 million that had previously been granted temporary payment deferrals. In accordance with FASB and interagency regulatory guidance issued in March 2020, loans that were modified under the terms of our COVID-19 Deferral Assistance Program are not be considered as troubled debt restructurings to the extent that they meet the terms of such guidance under Section 4013 of the CARES Act. Loans under these deferrals remain in their current risk rating and/or past due status through the deferral period. None of these loans are currently in their deferral period at March 31, 2022 and December 31, 2021, respectively.

 

 

Potential Problem Loans

 

From a credit risk standpoint, we classify loans 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.

 

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, 2022

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Real estate:

                                       

Construction and land

  $ 578,059     $ 297     $ 2,110     $ 1,195     $ 581,661  

Farmland

    146,640       2,480             150       149,270  

1-4 family residential

    472,697       2,954       3,817       5,599       485,067  

Multi-family residential

    109,752             21             109,773  

Nonfarm nonresidential

    1,425,741       27,956       22,071       5,278       1,481,046  

Commercial

    795,533       9,553       8,196       3,811       817,093  

Consumer and other

    123,526       432       320       310       124,588  

Total

  $ 3,651,948     $ 43,672     $ 36,535     $ 16,343     $ 3,748,498  

 

   

As of December 31, 2021

 
   

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Total

 
   

(Dollars in thousands)

 

Real estate:

                                       

Construction and land

  $ 545,071     $ 266     $ 1,850     $ 1,341     $ 548,528  

Farmland

    86,063       1,324             76       87,463  

1-4 family residential

    456,150       3,109       2,801       5,639       467,699  

Multi-family residential

    97,485             23             97,508  

Nonfarm nonresidential

    1,094,782       34,495       9,735       5,414       1,144,426  

Commercial

    704,755       7,886       3,137       5,607       721,385  

Consumer and other

    121,566       350       257       426       122,599  

Total

  $ 3,105,872     $ 47,430     $ 17,803     $ 18,503     $ 3,189,608  

 

Allowance for Loan Losses

 

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

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

As of March 31, 2022, the allowance for loan losses totaled $29.2 million, or 0.78%, of total loans held for investment. As of December 31, 2021, the allowance for loan losses totaled $29.1 million, or 0.91%, of total loans held for investment.

 

The following tables present, 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, 2022
(Unaudited)

   

As of and For the Year

Ended December 31,
2021

 
   

(Dollars in thousands)

 

Average loans outstanding(1)

  $ 3,386,050     $ 3,037,020  

Gross loans held for investment outstanding at end of period

  $ 3,748,498     $ 3,189,608  

Allowance for loan losses at beginning of period

  $ 29,112     $ 22,024  

Provision for loan losses

    1,617       8,047  

Charge-offs:

               

Real estate:

               

Construction, land and farmland

    6       29  

Residential

    3       169  

Nonfarm nonresidential

          139  

Commercial

    1,496       830  

Consumer and other

    163       469  

Total charge-offs

    1,668       1,636  

Recoveries:

               

Real estate:

               

Construction, land and farmland

    1       3  

Residential

    1       39  

Nonfarm nonresidential

    3       99  

Commercial

    125       417  

Consumer and other

    54       119  

Total recoveries

    184       677  

Net charge-offs

    1,484       959  

Allowance for loan losses at end of period

  $ 29,245     $ 29,112  

Ratio of allowance to end of period loans held for investment

    0.78 %     0.91 %

Ratio of net charge-offs to average loans

    0.04       0.03  
Ratio of allowance to nonaccrual loans     271.19       227.27  

(1)

Excluding loans held for sale.

   

As of and For the Three Months Ended

 March 31, 2022 (Unaudited)

   

As of and for the Year Ended
December 31, 2021

 
   

Net Charge-offs

(Recoveries)

   

Percent of Average
Loans

   

Net Charge-offs
(Recoveries)

   

Percent of Average
Loans

 
   

(Dollars in thousands)

 
                                 

Commercial

  $ 1,371       0.04 %   $ 413       0.01 %

Real estate:

                               

Construction and land

    5       0.00 %     27       0.00 %

Farmland

    -       0.00 %     (1 )     0.00 %

1-4 family residential

    2       0.00 %     130       0.00 %

Multi-family residential

    -       0.00 %     -       0.00 %

Nonfarm nonresidential

    (3 )     0.00 %     40       0.00 %

Consumer and other

    109       0.00 %     350       0.01 %

Total loans held for investment

  $ 1,484       0.04 %   $ 959       0.03 %

 

 

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

 

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

 

   

As of March 31,
2022

(Unaudited)

   

As of December 31,
2021

 
   

Amount

   

Percent
to Total

   

Amount

   

Percent
to Total

 
   

(Dollars in thousands)

 

Real estate:

                               

Construction and land

  $ 4,478       15.3 %   $ 4,498       15.5 %

Farmland

    1,198       4.1       721       2.5  

1-4 family residential

    3,826       13.1       3,791       13.0  

Multi-family residential

    816       2.8       774       2.7  

Nonfarm nonresidential

    10,582       36.2       9,794       33.6  

Total real estate

    20,900       71.5       19,578       67.3  

Commercial

    7,226       24.7       8,358       28.7  

Consumer and other

    1,119       3.8       1,176       4.0  

Total allowance for loan losses

  $ 29,245       100.0 %   $ 29,112       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, 2022, the carrying amount of investment securities totaled $961.4 million, a decrease of $59.7 million, or 5.9%, compared to $1.0 billion as of December 31, 2021. The decrease was primarily due to unrealized losses in the first quarter. Securities represented 17.9% and 21.6% of total assets as of March 31, 2022 and December 31, 2021, 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, 2022

 
   

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair Value

 
   

(Dollars in thousands) (Unaudited)

 

U.S. treasury securities

  $ 32,862     $     $ 1,609     $ 31,253  

U.S. government agencies

    25,339             1,466       23,873  

Corporate bonds

    45,361       358       748       44,971  

Mortgage-backed securities

    553,826       390       30,003       524,213  

Municipal securities

    354,306       225       17,483       337,048  

Total

  $ 1,011,694     $ 973     $ 51,309     $ 961,358  

 

 

   

As of December 31, 2021

 
   

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair Value

 
   

(Dollars in thousands)

 

U.S. treasury securities

  $ 22,751     $     $ 437     $ 22,314  

U.S. government agencies

    27,867       2       376       27,493  

Corporate bonds

    45,876       812       106       46,582  

Mortgage-backed securities

    555,528       3,246       6,435       552,339  

Municipal securities

    370,421       4,100       2,188       372,333  

Total

  $ 1,022,443     $ 8,160     $ 9,542     $ 1,021,061  

 

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.

 

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, 2022

 
   

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. treasury securities

  $       %   $ 31,253       1.00 %   $       %   $       %   $ 31,253       1.00 %

U.S. government agencies

          %     23,873       0.76 %           %           %     23,873       0.76 %

Corporate bonds

          %           %     44,971       4.26 %           %     44,971       4.26 %

Mortgage-backed securities

    8,407       0.77 %     35,986       1.35 %     216,140       1.45 %     263,680       1.30 %     524,213       1.36 %

Municipal securities

    13,398       1.90 %     101,572       1.44 %     134,288       1.76 %     87,790       1.71 %     337,048       1.65 %

Total

  $ 21,805       1.46 %   $ 192,684       1.27 %   $ 395,399       1.87 %   $ 351,470       1.40 %   $ 961,358       1.57 %

 

   

As of December 31, 2021

 
   

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. treasury securities

  $       %   $ 22,314       0.77 %   $       %   $       %   $ 22,314       0.77 %

U.S. government agencies

    2,513       0.23 %     24,980       0.76 %           %           %     27,493       0.21 %

Corporate bonds

          %           %     46,582       4.37 %           %     46,582       4.37 %

Mortgage-backed securities

    10,701       1.19 %     37,870       1.42 %     221,494       1.34 %     282,274       1.20 %     552,339       1.27 %

Municipal securities

    16,720       2.09 %     97,129       1.41 %     149,951       1.76 %     108,533       1.94 %     372,333       1.74 %

Total

  $ 29,934       1.61 %   $ 182,293       1.24 %   $ 418,027       1.83 %   $ 390,807       1.41 %   $ 1,021,061       1.56 %

 

 

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 prepay. Monthly paydowns on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 5.98 years with an estimated effective duration of 55.48 months as of March 31, 2022.

 

As of March 31, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, the Company held other equity securities of $23.0 million and $16.6 million, respectively, comprised mainly of FHLB stock, small business investment companies (“SBICs”) and financial technology (“Fintech”) fund investments.

 

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, 2022 were $4.7 billion, an increase of $580.5 million, or 14.2%, compared to $4.1 billion as of December 31, 2021.

 

Noninterest-bearing deposits as of March 31, 2022 were $1.5 billion compared to $1.3 billion as of December 31, 2021, an increase of $253.2 million, or 19.6%.

 

Average deposits for the three months ended March 31, 2022 were $4.3 billion, an increase of $451.1 million, or 11.9%, over the full year average for the year ended December 31, 2021 of $3.8 billion. The average rate paid on total interest-bearing deposits decreased over this period from 0.47% for the year ended December 31, 2021 to 0.31% for the three months ended March 31, 2022. The decrease in average rates during the three months ended March 31, 2022 over the average for the year ended December 31, 2021 was primarily due to the maturing of higher yielding deposits, along with an offset from the accretion of deposit premium from the TCBI acquisition. In addition, the stability and continued growth of noninterest-bearing demand accounts served to reduce the cost of deposits to 0.21% for the three months ended March 31, 2022 compared to 0.32% for the year ended December 31, 2021.

 

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

 

   

For the Three Months
Ended March 31, 2022

(Unaudited)

   

For the Year Ended December 31,
2021

 
   

Average
Balance

   

Average
Rate

   

Average
Balance

   

Average
Rate

 
   

(Dollars in thousands)

 

Interest-bearing demand accounts

  $ 195,840       0.34 %   $ 177,196       0.49 %

Negotiable order of withdrawal (“NOW”) accounts

    584,493       0.10 %     511,231       0.13 %

Limited access money market accounts and savings

    1,420,381       0.24 %     1,176,858       0.29 %

Certificates and other time deposits > $250k

    197,748       0.66 %     204,892       1.12 %

Certificates and other time deposits < $250k

    484,376       0.63 %     534,648       0.93 %

Total interest-bearing deposits

    2,882,838       0.31 %     2,604,825       0.47 %

Noninterest-bearing demand accounts

    1,370,015       %     1,196,970       %

Total deposits

  $ 4,252,853       0.21 %   $ 3,801,795       0.32 %

 

The ratio of average noninterest-bearing deposits to average total deposits for the three months ended March 31, 2022 and the year ended December 31, 2021 was 32.2% and 31.5%, respectively.

 

 

The following table sets forth the contractual maturities of certain certificates of deposit at March 31, 2022:

 

   

Certificates of

Deposit

More Than

$250,000

   

Certificates of

Deposit of $100,000

Through

$250,000

 
   

(Dollars in thousands) (Unaudited)

 

3 months or less

  $ 57,993     $ 89,354  

More than 3 months but less than 6 months

    45,805       89,971  

More than 6 months but less than 12 months

    62,215       100,149  

12 months or more

    38,628       49,775  

Total

  $ 204,641     $ 329,249  

 

Federal Funds Purchased Lines of Credit Relationships

 

We maintain Federal Funds Purchased Lines of Credit Relationships with the following correspondent banks and limits as of March 31, 2022:

 

   

Fed Funds Purchase

Limits

 
   

(Dollars in

Thousands)

 

The Independent Bankers Bank

  $ 45,000  

PNC Bank

    38,000  

First National Bankers Bank (“FNBB”)

    35,000  

First Horizon Bank

    17,000  

ServisFirst Bank

    10,000  

South State Bank

    9,000  

Total

  $ 154,000  

 

We had no outstanding balances as of March 31, 2022 and December 31, 2021, respectively.

 

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, 2022 and the year ended December 31, 2021, 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, 2022 and December 31, 2021, we maintained six federal funds purchased lines of credit with correspondent banks which provided for extensions of credit with an availability to borrow up to an aggregate of $154.0 million. There were no funds drawn under these lines of credit outstanding as of March 31, 2022 and December 31, 2021, respectively.

 

 

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 $4.9 billion and $4.4 billion for the three months ended March 31, 2022 and the year ended December 31, 2021, respectively.

 

   

For the Three
Months Ended
March 31, 2022

   

For the Year
Ended
December 31,
2021

 
   

(Unaudited)

         

Sources of Funds:

               

Deposits:

               

Noninterest-bearing

    27.8 %     27.2 %

Interest-bearing

    58.6       59.2  

Subordinated debt (excluding trust preferred securities)

    1.9       1.5  

Advances from FHLB

    1.6       1.1  

Other borrowings

    0.5       0.7  

Other liabilities

    0.5       0.6  

Shareholders’ equity

    9.1       9.7  

Total

    100.0 %     100.0 %

Uses of Funds:

               

Loans, net of allowance for loan losses

    68.2 %     68.4 %

Securities available for sale

 

20.4

   

19.7

 

Interest-bearing deposits in other banks

    4.5       2.4  

Other noninterest-earning assets

    6.9       9.5  

Total

    100.0 %     100.0 %

Average noninterest-bearing deposits to average deposits

    32.2 %     31.5 %

Average loans to average deposits

    79.6       79.9  

 

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 net loans increased 12.1% for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to growth in our Dallas/Fort Worth metroplex and New Orleans markets, and the acquisition of TCBI. We predominantly invest excess deposits in overnight deposits with the Federal Reserve, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth. Our securities portfolio had a weighted average life of 5.98 years and an effective duration of 55.48 months as of March 31, 2022. As of December 31, 2021, our securities portfolio had a weighted average life of 5.87 years and an effective duration of 53.46 months.

 

As of March 31, 2022, we had outstanding $1.0 billion in commitments to extend credit and $34.9 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2021, we had outstanding $1.0 billion in commitments to extend credit and $35.3 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.

 

As of March 31, 2022 and December 31, 2021 we had cash and cash equivalents, including federal funds sold, of $349.9 million and $295.4 million, respectively. We had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature for either period.

 

Capital Resources

 

Total shareholders’ equity increased to $456.8 million as of March 31, 2022, compared to $433.4 million as of December 31, 2021, an increase of $23.5 million, or 5.4%. This increase was primarily due to the issuance of $55.0 million of common stock and equity awards in the acquisition of TCBI and net income of $8.7 million, offset with other comprehensive losses of $38.6 million resulting from the after tax effect of unrealized losses in our investment securities portfolio and dividends paid of $2.4 million.

 

On April 26, 2022, our board of directors (the “Board”) declared a quarterly dividend based upon our financial performance for the three months ended March 31, 2022 in the amount of $0.12 per share to the common shareholders of record as of May 15, 2022. The dividend is to be paid on May 31, 2022, 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 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 holding company and bank levels. As of March 31, 2022 and December 31, 2021, 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.

 

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, 2022

(Unaudited)

   

As of December 31, 2021

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 
   

(Dollars in thousands)

 

Business First

                               

Total capital (to risk weighted assets)

  $ 535,399       11.76 %   $ 478,794       11.94 %

Tier 1 capital (to risk weighted assets)

    396,046       8.70 %     367,431       9.17 %

Common Equity Tier 1 capital (to risk weighted assets)

    391,046       8.59 %     362,431       9.04 %

Tier 1 Leverage capital (to average assets)

    396,046       8.15 %     367,431       8.14 %
                                 

b1BANK

                               

Total capital (to risk weighted assets)

  $ 522,658       11.49 %   $ 468,834       11.71 %

Tier 1 capital (to risk weighted assets)

    492,734       10.83 %     438,898       10.96 %

Common Equity Tier 1 capital (to risk weighted assets)

    492,734       10.83 %     438,898       10.96 %

Tier 1 Leverage capital (to average assets)

    492,734       10.14 %     438,898       9.73 %

 

Long Term Debt

 

During the three months ended March 31, 2022, as part of the acquisition of TCBI, we assumed $26.4 million in subordinated debt. As part of this debt, we recorded a fair value adjustment premium in the amount of $3.4 million, to accrete over five-to-seven years. During the three months ended March 31, 2021, we issued $56.4 million in subordinated debt, and paid off $11.0 million in long term borrowings.

 

 

Contractual Obligations

 

The following tables summarize contractual obligations and other commitments to make future payments as of March 31, 2022 and December 31, 2021 (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, notes payable, 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 $80.0 million and $82.0 million at March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 1.13% and 1.08%, respectively, and mature within five years. The subordinated debt totaled $111.2 million and $81.4 million at March 31, 2022 and December 31, 2021, respectively. Of this subordinated debt, $25.0 million 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, $52.5 million of this subordinated debt bears interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031, $3.9 million of this subordinated debt bears interest at a fixed rate of 4.75% through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031. We acquired three separate notes as part of the TCBI acquisition totaling $26.4 million. Of those notes, $10.0 million bears interest at a fixed rate of 6.25% until April 11, 2023, then will reset to a floating interest rate based on a benchmark plus 350 basis points, adjusting quarterly until maturity on April 11, 2028, $7.5 million bears a fixed rate of 6.38% until December 13, 2013, then will reset to a floating interest rate based on a benchmark rate plus 350 basis points, adjusting quarterly, until maturity on December 13, 2028, $8.9 million bears an adjustable interest rate plus 595 basis points, based on a benchmark rate, until maturity on March 24, 2027. As part of valuing these three subordinated notes from TCBI, we incurred a fair value adjustment premium of $3.4 million that will accrete over five-to-seven years. We had a revolving line of credit with FNBB in the amount of $5.0 million at both March 31, 2022 and December 31, 2021, respectively. There was no balance on this line at either March 31, 2022 and December 31, 2021, respectively. This revolving line of credit bears a variable interest rate equal to the Wall Street Journal Prime and not to be less than 3.5%. This revolving line of credit is for one year and matures in November, 2022.

 

   

As of March 31, 2022

 
   

1 year or less

   

More than 1
year but less
than 3 years

   

3 years or
more but less
than 5 years

   

5 years
or more

   

Total

 
   

(Dollars in thousands) (Unaudited)

 

Non-cancelable future operating leases

  $ 2,789     $ 5,762     $ 4,147     $ 4,860     $ 17,558  

Time deposits

    564,135       110,118       24,453       15       698,721  

Subordinated debt (including premium)

    613       1,227       10,127       99,242       111,209  

Advances from FHLB

          23,000       56,957             79,957  

Subordinated debt - trust preferred securities

                      5,000       5,000  

Securities sold under agreements to repurchase

    23,345                         23,345  

Standby and commercial letters of credit

    9,921       24,615       404             34,940  

Commitments to extend credit

    489,530       318,987       130,826       110,390       1,049,733  

Total

  $ 1,090,333     $ 483,709     $ 226,914     $ 219,507     $ 2,020,463  

 

   

As of December 31, 2021

 
   

1 year or less

   

More than 1
year but less
than 3 years

   

3 years or
more but less
than 5 years

   

5 years
or more

   

Total

 
   

(Dollars in thousands)

 

Non-cancelable future operating leases

  $ 2,243     $ 3,994     $ 3,502     $ 4,565     $ 14,304  

Time deposits

    548,593       121,037       23,026             692,656  

Subordinated debt

                      81,427       81,427  

Advances from FHLB

          23,000       59,022             82,022  

Subordinated debt - trust preferred securities

                      5,000       5,000  

Securities sold under agreements to repurchase

    19,121                         19,121  

Standby and commercial letters of credit

    10,460       24,733       98             35,291  

Commitments to extend credit

    428,839       351,623       138,674       87,702       1,006,838  

Total

  $ 1,009,256     $ 524,387     $ 224,322     $ 178,694     $ 1,936,659  

 

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.

 

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 in the tables above. 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.

 

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 reviewed by the asset-liability committee of b1BANK, in accordance with policies approved by our board of directors. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.

 

We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as 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, 2022

   

As of December 31, 2021

 

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

      (2.60% )     2.39 %     (1.00% )     (4.45% )

+200

      (1.20% )     1.82 %     0.10 %     (3.99% )

+100

      (0.30% )     1.13 %     0.50 %     (1.57% )

Base

      0.00 %     0.00 %     0.00 %     0.00 %
-100       (2.90% )     (2.33% )     (3.30% )     2.83 %

 

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.

 

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, gains/losses on sales of securities, 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 certain intangible assets from book value and shareholders’ equity.

 

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

 

 

Core Net Income. Core net income, which excludes certain income and expenses, for the three months ended March 31, 2022, was $10.3 million, or $0.49 per diluted share, compared to core net income of $12.6 million, or $0.61 per diluted share, for the three months ended March 31, 2021. Notable noncore events impacting earnings for the three months ended March 31, 2022, included the incurrence of losses of $717,000 on disposals of former bank premises and equipment included in other income, $811,000 in acquisition-related expenses and $231,000 in expenses attributable to hurricane repairs (primarily related to Hurricane Ida in 2021), compared to losses of $350,000 in attributed to former bank premises expenses due to hurricane damage.

 

   

For the Three Months Ended March 31,

 
   

2022

   

2021

 
   

(Dollars in thousands, except per share data) (Unaudited)

 

Interest Income:

               

Interest income

  $ 44,122     $ 44,262  

Core interest income

    44,122       44,262  

Interest Expense:

               

Interest expense

    3,647       3,961  

Core interest expense

    3,647       3,961  

Provision for Loan Losses:

               

Provision for loan losses

    1,617       3,359  

Core provision expense

    1,617       3,359  

Other Income:

               

Other income

    5,896       4,848  

Losses on former bank premises and equipment

    717       -  

Losses on sale of securities

    31       5  

Core other income

    6,644       4,853  

Other Expense:

               

Other expense

    33,720       26,728  

Acquisition-related expenses (2)

    (811 )     (10 )

Occupancy and bank premises - hurricane repair

    (231 )     (350 )

Core other expense

    32,678       26,368  

Pre-Tax Income:

               

Pre-tax income

    11,034       15,062  

Losses on former bank premises and equipment

    717       -  

Losses on sale of securities

    31       5  

Acquisition-related expenses (2)

    811       10  

Occupancy and bank premises - hurricane repair

    231       350  

Core pre-tax income

    12,824       15,427  

Provision for Income Taxes: (1)

               

Provision for income taxes

    2,303       2,733  

Tax on losses on former bank premises and equipment

    151       -  

Tax on losses on sale of securities

    7       1  

Tax on acquisition-related expenses (2)

    48       2  

Tax on occupancy and bank premises - hurricane repair

    49       74  

Core provision for income taxes

  $ 2,558     $ 2,810  

Net Income:

               

Net income

  $ 8,731     $ 12,329  

Losses on former bank premises and equipment , net of tax

    566       -  

Losses on sale of securities, net of tax

    24       4  

Acquisition-related expenses (2), net of tax

    763       8  

Occupancy and bank premises - hurricane repair, net of tax

    182       276  

Core net income

  $ 10,266     $ 12,617  

Diluted Earnings Per Share:

               

Diluted earnings per share

  $ 0.41     $ 0.59  

Losses on former bank premises and equipment , net of tax

    0.03       -  

Losses on sale of securities, net of tax

    -       -  

Acquisition-related expenses (2), net of tax

    0.04       -  

Occupancy and bank premises - hurricane repair, net of tax

    0.01       0.02  

Core diluted earnings per share

  $ 0.49     $ 0.61  

 

(1)

Tax rates, exclusive of certain nondeductible acquisition-related expenses and goodwill, utilized were 21% for both 2022 and 2021. 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 and customer 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,

2022

   

As of December 31,

2021

 
   

(Dollars in thousands, except per

share data) (Unaudited)

 

Tangible Common Equity

               

Total shareholders’ equity

  $ 456,837     $ 433,368  

Adjustments:

               

Goodwill

    (89,911 )     (59,894 )

Core deposit and customer intangibles

    (15,617 )     (12,203 )

Total tangible common equity

  $ 351,309     $ 361,271  

Common shares outstanding(1)

    22,564,607       20,400,349  

Book value per common share(1)

  $ 20.25     $ 21.24  

Tangible book value per common share(1)

    15.57       17.71  

(1)

Excludes the dilutive effect, if any, of 142,766 and 132,032 shares of common stock issuable upon exercise of outstanding stock options and restricted stock awards as of March 31, 2022 and December 31, 2021, respectively.

 

Tangible Common Equity to Tangible Assets. Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit and customer 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,

2022

   

As of

December 31,

2021

 
   

(Dollars in thousands, except per

share data) (Unaudited)

 

Tangible Common Equity

               

Total shareholders’ equity

  $ 456,837     $ 433,368  

Adjustments:

               

Goodwill

    (89,911 )     (59,894 )

Core deposit and customer intangibles

    (15,617 )     (12,203 )

Total tangible common equity

  $ 351,309     $ 361,271  

Tangible Assets

               

Total assets

  $ 5,362,235     $ 4,726,378  

Adjustments:

               

Goodwill

    (89,911 )     (59,894 )

Core deposit and customer intangibles

    (15,617 )     (12,203 )

Total tangible assets

  $ 5,256,707     $ 4,654,281  

Common Equity to Total Assets

    8.5 %     9.2 %

Tangible Common Equity to Tangible Assets

    6.7       7.8  

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

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

 

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

 

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

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Controls over Financial Reporting

 

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

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

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

 

Item 1A.

Risk Factors

 

In addition to the other information set forth in this Report, we refer you to Item 1A. “Risk Factors” of our Annual Report on Form 10-K for December 31, 2021 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, 2021.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceed

 

(a)

Not applicable.

 

(b)

Not applicable.

 

(c)

Not applicable.

 

Item 3.

Defaults upon Senior Securities

 

Not applicable.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

Not applicable.

 

 

Item 6.

Exhibits

 

Number

Description

   

2.1

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)).

   

2.2

Agreement and Plan of Reorganization, dated October 20, 2021, by and between Business First Bancshares, Inc., and Texas Citizens Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on October 21, 2021 (File No. 333-200112)).

   

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)).

   
 

Instruments defining the rights of the long-term debt securities of Business First Bancshares, Inc. and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. Business First Bancshares, Inc. hereby agrees to furnish copies of these instruments to the SEC upon request.

   

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

Inline XBRL Instance Document*

   

101.SCH

Inline XBRL Taxonomy Extension Schema Document*

   

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document*

   

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document*

   

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document*

   

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document*

   

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


*

Filed herewith.

 

 

SIGNATURES

 

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

 

 

BUSINESS FIRST BANCSHARES, INC.

   

May 4, 2022

/s/ David R. Melville, III

 

David R. Melville, III

 

President and Chief Executive Officer

   

May 4, 2022

/s/ Gregory Robertson

 

Gregory Robertson

 

Chief Financial Officer

 

 

62