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BFST Business First Bancshares

Filed: 6 May 21, 2:35pm
 

 

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, 2021

 

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 30, 2021, the issuer has outstanding 20,792,597 shares of common stock, par value $1.00 per share.

 

 

 

 

BUSINESS FIRST BANCSHARES, INC.

 

PART I - FINANCIAL INFORMATION

3
   

Item 1.

Financial Statements

3
   
 

Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020

3
   
 

Unaudited Consolidated Statements of Income for the three months ended March 31, 2021 and 2020

4
   
 

Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020

5
   
 

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2021 and 2020

6
   
 

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020

7
   
 

Notes to Unaudited Consolidated Financial Statements

9
   

Item 2.

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

31
   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

57
   

Item 4.

Controls and Procedures

57
  

PART II - OTHER INFORMATION

58
   

Item 1.

Legal Proceedings

58
   

Item 1A.

Risk Factors

58
   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58
   

Item 3.

Defaults Upon Senior Securities

58
   

Item 4.

Mine Safety Disclosures

58
   

Item 5.

Other Information

59
   

Item 6.

Exhibits

59
  

Signatures

60

 

 

 

PART I FINANCIAL INFORMATION

 

Item 1.         Financial Statements

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

ASSETS

 
  

March 31, 2021

  

December 31,

 
  

(Unaudited)

  

2020

 

Cash and Due from Banks

 $355,257  $149,131 

Federal Funds Sold

  105,595   174,152 

Securities Available for Sale, at Fair Values

  721,224   640,605 

Mortgage Loans Held for Sale

  2,298   969 

Loans and Lease Receivable, Net of Allowance for Loan Losses of $25,251 at March 31, 2021 and $22,024 at December 31, 2020

  3,016,727   2,969,331 

Premises and Equipment, Net

  57,931   58,593 

Accrued Interest Receivable

  25,910   23,895 

Other Equity Securities

  12,584   12,693 

Other Real Estate Owned

  8,851   9,051 

Cash Value of Life Insurance

  60,348   45,030 

Deferred Taxes

  5,536   5,858 

Goodwill

  53,753   53,862 

Core Deposit Intangible

  9,406   9,734 

Other Assets

  8,166   7,456 

Total Assets

 $4,443,586  $4,160,360 
         

LIABILITIES

 

Deposits:

        

Noninterest Bearing

 $1,186,625  $1,164,139 

Interest Bearing

  2,672,109   2,452,540 

Total Deposits

  3,858,734   3,616,679 

Securities Sold Under Agreements to Repurchase

  21,419   21,825 

Short Term Borrowings

  20   5,020 

Long Term Borrowings

  0   6,000 

Federal Home Loan Bank Borrowings

  33,073   43,145 

Subordinated Debt

  77,500   25,000 

Subordinated Debt - Trust Preferred Securities

  5,000   5,000 

Accrued Interest Payable

  1,941   2,499 

Other Liabilities

  29,198   25,229 

Total Liabilities

  4,026,885   3,750,397 
         

Commitments and Contingencies (See Note 9)

          
         

SHAREHOLDERS' EQUITY

 

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

  0   0 

Common Stock, $1 Par Value; 50,000,000 Shares Authorized; 20,804,753 and 20,621,437 Shares Issued and Outstanding at March 31, 2021 and December 31, 2020, respectively

  20,805   20,621 

Additional Paid-in Capital

  300,282   299,540 

Retained Earnings

  89,441   79,174 

Accumulated Other Comprehensive Income

  6,173   10,628 

Total Shareholders' Equity

  416,701   409,963 

Total Liabilities and Shareholders' Equity

 $4,443,586  $4,160,360 

 

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,

 
  

2021

  

2020

 

Interest Income:

        

Interest and Fees on Loans

 $41,419  $24,143 

Interest and Dividends on Non-taxable Securities

  1,045   491 

Interest and Dividends on Taxable Securities

  1,757   1,240 

Interest on Federal Funds Sold and Due From Banks

  41   142 

Total Interest Income

  44,262   26,016 

Interest Expense:

        

Interest on Deposits

  3,243   4,686 

Interest on Borrowings

  718   1,119 

Total Interest Expense

  3,961   5,805 

Net Interest Income

  40,301   20,211 

Provision for Loan Losses

  3,359   1,367 

Net Interest Income after Provision for Loan Losses

  36,942   18,844 

Other Income:

        

Service Charges on Deposit Accounts

  1,567   931 

Gain (Loss) on Sales of Securities

  (5)  25 

Gain (Loss) on Sales of Loans

  (21)  177 

Other Income

  3,542   1,671 

Total Other Income

  5,083   2,804 

Other Expenses:

        

Salaries and Employee Benefits

  14,926   9,435 

Occupancy and Equipment Expense

  3,717   1,891 

Other Expenses

  8,320   5,317 

Total Other Expenses

  26,963   16,643 

Income Before Income Taxes

  15,062   5,005 

Provision for Income Taxes

  2,733   506 

Net Income

 $12,329  $4,499 

Earnings Per Share:

        

Basic

 $0.60  $0.34 

Diluted

 $0.59  $0.34 

 

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

 

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

 

  

For The Three Months Ended

March 31,

 
  

2021

  

2020

 

Consolidated Net Income

 $12,329  $4,499 
         

Other Comprehensive Loss:

        

Unrealized Loss on Investment Securities

  (7,138)  (577)

Unrealized Gain on Share of Other Equity Investments

  1,493   0 

Reclassification Adjustment for (Gains) Losses on Sale of AFS Included in Net Income

  5   (25)

Income Tax Effect

  1,185   126 

Other Comprehensive Loss

  (4,455)  (476)

Consolidated Comprehensive Income

 $7,874  $4,023 

 

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, 2021 AND 2020

(Dollars in thousands, except per share data)

 

              

Accumulated

     
      

Additional

      

Other

  

Total

 
  

Common

  

Paid-In

  

Retained

  

Comprehensive

  

Shareholders'

 
  

Stock

  

Capital

  

Earnings

  

Loss

  

Equity

 

Balances at December 31, 2019

 $13,279  $212,505  $56,700  $2,613  $285,097 

Comprehensive Income:

                    

Net Income

  0   0   4,499   0   4,499 

Other Comprehensive Loss

  0   0   0   (476)  (476)

Cash Dividends Declared, $0.10 Per Share

  0   0   (1,340)  0   (1,340)

Stock Issuance

  332   3,029   0   0   3,361 

Surrendered Shares of Options Exercised

  (173)  (4,148)  0   0   (4,321)

Stock Based Compensation Cost

  65   145   0   0   210 

Stock Repurchase

  (435)  (4,565)  0   0   (5,000)

Balances at March 31, 2020

 $13,068  $206,966  $59,859  $2,137  $282,030 
                     

Balances at December 31, 2020

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

Comprehensive Income:

                    

Net Income

  0   0   12,329   0   12,329 

Other Comprehensive Loss

  0   0   0   (4,455)  (4,455)

Cash Dividends Declared, $0.10 Per Share

  0   0   (2,062)  0   (2,062)

Stock Issuance

  115   1,317   0   0   1,432 

Surrendered Shares of Options Exercised

  (15)  (323)  0   0   (338)

Stock Based Compensation Cost

  116   379   0   0   495 

Stock Repurchase

  (32)  (631)  0   0   (663)

Balances at March 31, 2021

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

 

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,

 
  

2021

  

2020

 

Cash Flows From Operating Activities:

        

Consolidated Net Income

 $12,329  $4,499 

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

        

Provision for Loan Losses

  3,359   1,367 

Depreciation and Amortization

  1,030   378 

Net Accretion of Purchase Accounting Adjustments

  (3,021)  (67)

Stock Based Compensation Cost

  495   210 

Net Amortization of Securities

  1,778   379 

(Gain) Loss on Sales of Securities

  5   (25)

Income on Other Equity Securities

  (66)  (749)

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

  165   46 

Increase in Cash Value of Life Insurance

  (318)  (197)

Deferred Income Tax Expense

  1,507   471 

Changes in Assets and Liabilities:

        

(Increase) Decrease in Accrued Interest Receivable

  (2,015)  301 

(Increase) Decrease in Other Assets

  (601)  238 

Increase (Decrease) in Accrued Interest Payable

  (558)  40 

Increase (Decrease) in Other Liabilities

  3,969   (683)

Net Cash Provided by Operating Activities

  18,058   6,208 
         

Cash Flows From Investing Activities:

        

Purchases of Securities Available for Sale

  (122,981)  (21,398)

Proceeds from Maturities / Sales of Securities Available for Sale

  11,023   13,537 

Proceeds from Paydowns of Securities Available for Sale

  22,423   9,983 

Purchases of Other Equity Securities

  (85)  0 

Redemption of Other Equity Securities

  1,753   1,593 

Proceeds from Purchase of Life Insurance

  (15,000)  0 

Net Increase in Loans

  (49,969)  (61,656)

Net Purchases of Premises and Equipment

  (368)  (754)

Proceeds from Sales of Other Real Estate

  983   751 

Net Decrease in Federal Funds Sold

  68,557   32,237 

Net Cash Used in Investing Activities

  (83,664)  (25,707)

 

(CONTINUED)

 

 

  

For The Three Months Ended March 31,

 
  

2021

  

2020

 

Cash Flows From Financing Activities:

        

Net Increase in Deposits

  242,269   20,798 

Net Decrease in Securities Sold Under Agreements to Repurchase

  (406)  (53,261)

Net Advances (Repayments) on Federal Home Loan Bank Borrowings

  (10,000)  45,000 

Net Proceeds (Repayments) from Short Term Borrowings

  (5,000)  5,000 

Net Repayments from Long Term Borrowings

  (6,000)  0 

Proceeds from Issuance of Subordinated Debt

  52,500   0 

Proceeds from Issuance of Common Stock

  1,432   3,361 

Surrendered Shares of Options Exercised

  (338)  (4,321)

Repurchase of Common Stock

  (663)  (5,000)

Payment of Dividends on Common Stock

  (2,062)  (1,340)

Net Cash Provided by Financing Activities

  271,732   10,237 

Net Increase (Decrease) in Cash and Cash Equivalents

  206,126   (9,262)

Cash and Cash Equivalents at Beginning of Period

  149,131   89,371 

Cash and Cash Equivalents at End of Period

 $355,257  $80,109 
         

Supplemental Disclosures for Cash Flow Information:

        

Cash Payments for:

        

Interest on Deposits

 $3,736  $4,654 

Interest on Borrowings

 $783  $1,111 

Income Tax Payments

 $0  $0 
         

Supplemental Schedule for Noncash Investing and Financing Activities:

        

Change in the Unrealized Loss on Securities Available for Sale

 $(7,133) $(602)

Change in the Unrealized Gain on Equity Securities

 $1,493  $0 

Change in Deferred Tax Effect on the Unrealized Loss on

        

Securities Available for Sale

 $1,185  $126 

Transfer of Loans to Other Real Estate

 $948  $42 

 

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 subsidiaries, b1BANK (the “Bank”), and the Bank’s wholly-owned subsidiary, Business First Insurance, LLC. The Bank operates out of branch locations in markets across Louisiana and the Dallas/Fort Worth metroplex. 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, 2020.

 

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

 

Smith Shellnut Wilson, LLC (“SSW”) Acquisition. On March 22, 2021, Business First, 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 subsequently completed on April 1, 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. Estimates are used in accounting for, among other items, the allowance for loan losses, useful lives for depreciation and amortization, goodwill, fair value of financial instruments, taxes, and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for loan losses, accounting for business combinations, goodwill, and the assessment of income taxes, and therefore are critical accounting policies. Management does not anticipate any material changes to estimates in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, economic conditions in our markets, and changes in applicable banking regulations. Actual results may ultimately differ from estimates.

 

9

 

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 2021. These reclassifications have no material effect on previously reported shareholders’ equity or net income.

 

 

 

Note 3 Mergers and Acquisitions

 

On May 1, 2020, the Company consummated the merger of Pedestal Bancshares, Inc. (“Pedestal”), headquartered in Houma, Louisiana, with and into the Company, pursuant to the terms of that certain Agreement and Plan of Reorganization (the “Reorganization Agreement”), dated as of January 22, 2020, by and between the Company and Pedestal (the “Merger”). Also on May 1, 2020, Pedestal’s wholly owned banking subsidiary, Pedestal Bank, was merged with and into b1BANK. Pursuant to the terms of the Reorganization Agreement, upon consummation of the Merger, we issued 7,614,506 shares of our common stock to the former shareholders of Pedestal. At April 30, 2020, Pedestal reported $1.4 billion in total assets, $935.8 million in loans and $1.2 billion in deposits.

 

 

The following table reflects the consideration paid for Pedestal’s net assets and the identifiable assets purchased and liabilities assumed at their estimated fair values as of May 1, 2020.  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 Pedestal Bancshares, Inc. (Pedestal):

 

(Dollars in thousands, except per share data)

 

Purchase Price:

    

Shares Issued to Pedestal Shareholders on May 1, 2020

  7,614,506 

Closing Stock Price on May 1, 2020

 $12.96 

Total Purchase Price

 $98,684 

Net Assets Acquired:

    

Cash and Cash Equivalents

 $106,000 

Securities Available for Sale

  264,517 

Loans and Leases Receivable

  893,295 

Premises and Equipment, Net

  35,983 

Cash Value of Life Insurance

  11,522 

Core Deposit Intangible

  4,211 

Other Assets

  19,623 

Total Assets

  1,335,151 
     

Deposits

  1,177,137 

Borrowings

  59,399 

Other Liabilities

  5,189 

Total Liabilities

  1,241,725 

Net Assets Acquired

  93,426 

Goodwill Resulting from Merger

 $5,258 

 

The Company has recorded approximately $10,000 and $9.6 million of acquisition-related costs within merger and conversion-related expenses and salaries and benefits for the three months ended March 31, 2021 and year ended December 31, 2020.

 

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.

 

10

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 market values and market rates provided by the Federal Home Loan Bank (“FHLB”).

 

The following unaudited supplemental pro forma information is presented to reflect estimated results assuming Pedestal was acquired as of January 1, 2020 for the three months ended March 31, 2020. These unaudited pro forma results are not necessarily indicative of the operating results that the Company would have achieved had the acquisition been completed as of January 1, 2020 and should not be considered representative of future operating results.

 

  

For The Three Months Ended March 31,

 
  

2021

  

2020

 
  

(Dollars in thousands, except per share data)

 
         

Interest Income

 $44,262  $41,935 

Interest Expense

  3,961   7,521 

Net Interest Income

  40,301   34,414 

Provision for Loan Losses

  3,359   1,367 

Net Interest Income after Provision for Loan Losses

  36,942   33,047 

Noninterest Income

  5,083   6,378 

Noninterest Expense

  26,963   24,903 

Income Before Income Taxes

  15,062   14,522 

Income Tax Expense

  2,733   2,504 

Net Income

 $12,329  $12,018 
         

Earnings Per Common Share

        

Basic

 $0.60  $0.57 

Diluted

 $0.59  $0.57 

 

11

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

This pro forma information combines the historical consolidated results of operations of the Company and Pedestal for the periods presented and gives effect to the following adjustments:

 

Fair value adjustments: Pro forma adjustment to net interest income of $2.4 million for the three months ended March 31, 2020 to record estimated amortization of premiums and accretion of discounts on acquired loans, borrowings, and deposits.

 

Pedestals provision for loan losses: Pro forma adjustments were made to provision for loan losses of $650,000 for the three months ended March 31, 2020, to eliminate Pedestal’s provision for loan losses. The additional provision for loan loss on new loans over those periods was deemed immaterial and not adjusted for in the pro forma information.

 

Noninterest Expense: Pro forma adjustments for all periods presented include adjustments for the amortization of intangible assets acquired from Pedestal. Nonrecurring acquisition-related expenses of $1.2 million were removed for the three months ended March 31, 2020.

 

Provision for Income Taxes: Pro forma adjustments for the three months ended March 31, 2020 included a tax expense adjustment of 21%, as Pedestal was an S-Corp prior to its acquisition by the Company.

 

 

 

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,

 
  

2021

  

2020

 
  

(Dollars in thousands, except per share data)

 

Numerator:

        

Net Income Available to Common Shares

 $12,329  $4,499 

Denominator:

        

Weighted Average Common Shares Outstanding

  20,621,930   13,313,154 

Dilutive Effect of Stock Options and RSAs

  116,083   54,122 

Weighted Average Dilutive Common Shares

  20,738,013   13,367,276 
         

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

 $0.60  $0.34 
         

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

 $0.59  $0.34 

 

12

 

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, 2021 and December 31, 2020 are summarized as follows:

 

  

March 31, 2021

 
  

(Dollars in thousands)

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

U.S. Treasury Securities

 $7,394  $0  $7  $7,387 

U.S. Government Agencies

  2,554   5   0   2,559 

Corporate Securities

  40,763   652   97   41,318 

Mortgage-Backed Securities

  355,095   5,504   2,299   358,300 

Municipal Securities

  308,016   4,033   2,049   310,000 

Other Securities

  1,310   350   0   1,660 

Total Securities Available for Sale

 $715,132  $10,544  $4,452  $721,224 

 

  

December 31, 2020

 
  

(Dollars in thousands)

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

U.S. Government Agencies

 $2,567  $5  $0  $2,572 

Corporate Securities

  38,738   380   5   39,113 

Mortgage-Backed Securities

  288,373   6,893   247   295,019 

Municipal Securities

  296,262   6,097   106   302,253 

Other Securities

  1,440   208   0   1,648 

Total Securities Available for Sale

 $627,380  $13,583  $358  $640,605 

 

13

 

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, 2021 and December 31, 2020, 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, 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

 $7,387  $7  $0  $0  $7,387  $7 

U.S. Government Agencies

  0   0   0   0   0   0 

Corporate Securities

  6,311   97   0   0   6,311   97 

Mortgage-Backed Securities

  168,507   2,298   70   1   168,577   2,299 

Municipal Securities

  123,134   2,045   414   4   123,548   2,049 

Other Securities

  0   0   0   0   0   0 

Total Securities Available for Sale

 $305,339  $4,447  $484  $5  $305,823  $4,452 

 

  

December 31, 2020

 
  

Less Than 12 Months

  

12 Months or Greater

  

Total

 
  

(Dollars in thousands)

 
      

Gross

      

Gross

      

Gross

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

U.S. Government Agencies

 $0  $0  $0  $0  $0  $0 

Corporate Securities

  4,995   5   0   0   4,995   5 

Mortgage-Backed Securities

  44,680   246   17   1   44,697   247 

Municipal Securities

  18,421   106   0   0   18,421   106 

Other Securities

  0   0   0   0   0   0 

Total Securities Available for Sale

 $68,096  $357  $17  $1  $68,113  $358 

 

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.

 

14

 

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, 2021 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

 $20,345  $20,497 

One to Five Years

  132,401   134,124 

Over Five to Ten Years

  310,544   314,022 

Over Ten Years

  251,842   252,581 

Total Securities Available for Sale

 $715,132  $721,224 

 

 

 

Note 6 Loans and the Allowance for Loan Losses

 

Loans receivable at March 31, 2021 and December 31, 2020 are summarized as follows:

 

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 
  

(Dollars in thousands)

 

Real estate loans:

        

Construction and land

 $418,234  $403,065 

Farmland

  52,861   55,883 

1-4 family residential

  460,907   468,650 

Multi-family residential

  77,390   95,707 

Nonfarm nonresidential

  966,416   971,603 

Commercial

  962,099   886,325 

Consumer

  104,071   110,122 

Total loans held for investment

  3,041,978   2,991,355 
         

Less:

        

Allowance for loan losses

  (25,251)  (22,024)

Net loans

 $3,016,727  $2,969,331 

 

 

Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans accounted for $385.8 million and $313.9 million of the commercial loan portfolio as of March 31, 2021 and December 31, 2020, respectively. SBA PPP loans accounted for $105,000 and $1.6 million of the consumer loan portfolio as of March 31, 2021 and December 31, 2020, respectively.

 

15

 

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, 2021 and December 31, 2020.

 

Net deferred loan origination fees were $14.9 million and $10.2 million at March 31, 2021 and December 31, 2020, respectively, and are netted in their respective loan categories above. The majority of the fees, $10.7 million and $6.2 million, at March 31, 2021 and December 31, 2020, respectively, are associated with the SBA PPP loans. 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, 2021 and December 31, 2020, overdrafts of $763,000 and $623,000, respectively, have been reclassified to loans.

 

The Bank is the lead lender on participations sold, without recourse, to other financial institutions which amounts are not included in the consolidated balance sheets. The unpaid principal balances of mortgages and other loans serviced for others were approximately $399.6 million and $430.0 million at March 31, 2021 and December 31, 2020, respectively. The Company had servicing rights of $1.2 million and $1.4 million recorded as of March 31, 2021 and December 31, 2020, 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 unaccreted purchase discount. To the extent the calculated loss is greater than the remaining 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.

 

16

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Total loans held for investment at March 31, 2021 includes $582.5 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, 2021 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 $61.2 million and acquired performing loans not accounted for under ASC 310-30 totaling $528.2 million with a remaining purchase discount of $7.0 million.

 

Total loans held for investment at December 31, 2020 includes $750.6 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, 2020 were acquired impaired loans accounted for under ASC 310-30 with a net carrying amount of $64.3 million and acquired performing loans not accounted for under ASC 310-30 totaling $696.2 million with a remaining purchase discount of $9.8 million.

 

The following tables set forth, as of March 31, 2021 and December 31, 2020, 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, 2021

 
  

(Dollars in thousands)

 
  

Real Estate:

      

Real Estate:

  

Real Estate:

  

Real Estate:

             
  

Construction

  

Real Estate:

  

1-4 Family

  

Multi-family

  

Nonfarm

             
  

and Land

  

Farmland

  

Residential

  

Residential

  

Nonresidential

  

Commercial

  

Consumer

  

Total

 

Allowance for credit losses:

                                

Beginning Balance

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

Charge-offs

  0   0   (134)  0   (20)  (87)  (68)  (309)

Recoveries

  0   2   23   0   98   24   30   177 

Provision

  343   (119)  465   (162)  395   2,524   (87)  3,359 

Ending Balance

 $3,927  $483  $3,807  $656  $7,842  $7,479  $1,057  $25,251 

Ending Balance:

                                

Individually evaluated for impairment

 $26  $3  $117  $0  $129  $553  $103  $931 

Collectively evaluated for impairment

 $3,901  $480  $3,690  $656  $7,713  $6,926  $954  $24,320 

Purchased Credit Impaired (1)

 $0  $0  $0  $0  $0  $0  $0  $0 

Loans receivable:

                                

Ending Balance

 $418,234  $52,861  $460,907  $77,390  $966,416  $962,099  $104,071  $3,041,978 

Ending Balance:

                                

Individually evaluated for impairment

 $958  $236  $3,186  $0  $3,905  $6,392  $312  $14,989 

Collectively evaluated for impairment

 $416,249  $52,558  $431,898  $77,390  $934,545  $950,942  $102,175  $2,965,757 

Purchased Credit Impaired (1)

 $1,027  $67  $25,823  $0  $27,966  $4,765  $1,584  $61,232 

 

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

 

17

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

  

December 31, 2020

 
  

(Dollars in thousands)

 
  

Real Estate:

      

Real Estate:

  

Real Estate:

  

Real Estate:

             
  

Construction

  

Real Estate:

  

1-4 Family

  

Multi-family

  

Nonfarm

             
  

and Land

  

Farmland

  

Residential

  

Residential

  

Nonresidential

  

Commercial

  

Consumer

  

Total

 

Allowance for credit losses:

                                

Beginning balance

 $1,868  $229  $1,888  $226  $3,882  $3,414  $617  $12,124 

Charge-offs

  (26)  (2)  (387)  -   (232)  (849)  (467)  (1,963)

Recoveries

  10   0   53   0   12   203   150   428 

Provision

  1,732   373   1,899   592   3,707   2,250   882   11,435 

Ending Balance

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

Ending Balance:

                                

Individually evaluated for impairment

 $27  $93  $62  $0  $119  $609  $104  $1,014 

Collectively evaluated for impairment

 $3,557  $507  $3,391  $818  $7,250  $4,409  $1,078  $21,010 

Purchased Credit Impaired (1)

 $0  $0  $0  $0  $0  $0  $0  $0 

Loans receivable:

                                

Ending Balance

 $403,065  $55,883  $468,650  $95,707  $971,603  $886,325  $110,122  $2,991,355 

Ending Balance:

                                

Individually evaluated for impairment

 $924  $299  $2,957  $0  $3,525  $5,517  $335  $13,557 

Collectively evaluated for impairment

 $401,134  $55,516  $438,240  $95,707  $939,422  $875,611  $107,908  $2,913,538 

Purchased Credit Impaired (1)

 $1,007  $68  $27,453  $0  $28,656  $5,197  $1,879  $64,260 

 

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

 

Portfolio Segment Risk Factors

 

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

 

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

 

One-to-four family residential 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. We are exposed to risk based on fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship.

 

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.

 

18

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

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

 

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, 2021 and December 31, 2020, the credit quality indicators, disaggregated by class of loan, are as follows:

 

Credit Quality Indicators

 

  

March 31, 2021

 
  

Pass

  

Special Mention

  

Substandard

  

Doubtful

  

Total

 
  

(Dollars in thousands)

 

Real Estate Loans:

                    

Construction and land

 $414,941  $809  $1,526  $958  $418,234 

Farmland

  50,933   1,625   0   303   52,861 

1-4 family residential

  440,800   10,074   5,343   4,690   460,907 

Multi-family residential

  77,055   308   27   0   77,390 

Nonfarm nonresidential

  944,976   11,940   3,287   6,213   966,416 

Commercial

  933,997   17,311   5,975   4,816   962,099 

Consumer

  101,881   1,255   460   475   104,071 

Total

 $2,964,583  $43,322  $16,618  $17,455  $3,041,978 

 

  

December 31, 2020

 
  

Pass

  

Special Mention

  

Substandard

  

Doubtful

  

Total

 
  

(Dollars in thousands)

 

Real Estate Loans:

                    

Construction and land

 $400,027  $912  $1,202  $924  $403,065 

Farmland

  53,874   1,642   0   367   55,883 

1-4 family residential

  450,702   9,290   4,913   3,745   468,650 

Multi-family residential

  95,359   320   28   0   95,707 

Nonfarm nonresidential

  949,245   12,810   3,473   6,075   971,603 

Commercial

  859,851   16,832   7,325   2,317   886,325 

Consumer

  107,449   1,970   229   474   110,122 

Total

 $2,916,507  $43,776  $17,170  $13,902  $2,991,355 

 

19

 

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, 2021 and December 31, 2020, loan balances outstanding more than 90 days past due and still accruing interest amounted to $1.5 million and $1.5 million, respectively. As of March 31, 2021 and December 31, 2020, loan balances outstanding on nonaccrual status amounted to $12.0 million and $9.1 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, 2021 and December 31, 2020. 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, 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

 $530  $526  $1,008  $2,064  $416,170  $418,234  $73 

Farmland

  0   0   142   142   52,719   52,861   0 

1-4 family residential

  2,929   621   2,268   5,818   455,089   460,907   756 

Multi-family residential

  0   0   0   0   77,390   77,390   0 

Nonfarm nonresidential

  846   36   2,544   3,426   962,990   966,416   418 

Commercial

  769   473   3,977   5,219   956,880   962,099   228 

Consumer

  140   60   240   440   103,631   104,071   4 

Total

 $5,214  $1,716  $10,179  $17,109  $3,024,869  $3,041,978  $1,479 

 

  

December 31, 2020

 
  

(Dollars in thousands)

 
                          

Recorded

 
          

Greater

              

Investment Over

 
  

30-59 Days

  

60-89 Days

  

Than 90 Days

  

Total

      

Total Loans

  

90 Days Past Due

 
  

Past Due

  

Past Due

  

Past Due

  

Past Due

  

Current

  

Receivable

  

and Still Accruing

 

Real Estate Loans:

                            

Construction and land

 $874  $75  $972  $1,921  $401,144  $403,065  $72 

Farmland

  0   11   289   300   55,583   55,883   0 

1-4 family residential

  3,162   1,160   1,927   6,249   462,401   468,650   603 

Multi-family residential

  0   0   0   0   95,707   95,707   0 

Nonfarm nonresidential

  2,651   1,049   2,514   6,214   965,389   971,603   315 

Commercial

  2,618   549   1,925   5,092   881,233   886,325   511 

Consumer

  389   33   283   705   109,417   110,122   22 

Total

 $9,694  $2,877  $7,910  $20,481  $2,970,874  $2,991,355  $1,523 

 

20

 

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, 2021 and December 31, 2020. 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 $60,000 and $335,000 for the three months ending March 31, 2021 and the year ending December 31, 2020, respectively.

 

  

March 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

 $26  $27  $26  $18 

Farmland

  19   21   3   49 

1-4 family residential

  518   545   117   365 

Multi-family residential

  0   0   0   0 

Nonfarm nonresidential

  445   446   129   777 

Other Loans:

          -     

Commercial

  1,337   1,449   553   1,998 

Consumer

  131   153   103   124 

Total

 $2,476  $2,641  $931  $3,331 
                 

With no allowance recorded:

                

Real Estate Loans:

                

Construction and land

 $932  $975  $-  $926 

Farmland

  217   220   -   226 

1-4 family residential

  2,668   3,405   -   2,813 

Multi-family residential

  0   0   -   0 

Nonfarm nonresidential

  3,460   3,948   -   3,405 

Other Loans:

                

Commercial

  5,055   5,091   -   4,499 

Consumer

  181   217   -   192 

Total

 $12,513  $13,856  $-  $12,061 
                 

Total Impaired Loans:

                

Real Estate Loans:

                

Construction and land

 $958  $1,002  $26  $944 

Farmland

  236   241   3   275 

1-4 family residential

  3,186   3,950   117   3,178 

Multi-family residential

  0   0   0   0 

Nonfarm nonresidential

  3,905   4,394   129   4,182 

Other Loans:

                

Commercial

  6,392   6,540   553   6,497 

Consumer

  312   370   103   316 

Total

 $14,989  $16,497  $931  $15,392 

 

21

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

  

December 31, 2020

 
  

(Dollars in thousands)

 
      

Unpaid

      

Average

 
  

Recorded

  

Principal

  

Related

  

Recorded

 
  

Investment

  

Balance

  

Allowance

  

Investment

 

With an allowance recorded:

                

Real Estate Loans:

                

Construction and land

 $27  $27  $27  $2 

Farmland

  109   112   93   27 

1-4 family residential

  337   361   62   361 

Multi-family residential

  0   0   0   0 

Nonfarm nonresidential

  457   457   119   652 

Other Loans:

                

Commercial

  2,530   2,636   609   1,655 

Consumer

  133   145   104   158 

Total

 $3,593  $3,738  $1,014  $2,855 
                 

With no allowance recorded:

                

Real Estate Loans:

                

Construction and land

 $897  $939  $-  $520 

Farmland

  190   197   -   208 

1-4 family residential

  2,620   3,388   -   3,091 

Multi-family residential

  0   0   -   0 

Nonfarm nonresidential

  3,068   3,534   -   3,325 

Other Loans:

                

Commercial

  2,987   3,017   -   3,569 

Consumer

  202   239   -   324 

Total

 $9,964  $11,314  $-  $11,037 
                 

Total Impaired Loans:

                

Real Estate Loans:

                

Construction and land

 $924  $966  $27  $522 

Farmland

  299   309   93   235 

1-4 family residential

  2,957   3,749   62   3,452 

Multi-family residential

  0   0   0   0 

Nonfarm nonresidential

  3,525   3,991   119   3,977 

Other Loans:

                

Commercial

  5,517   5,653   609   5,224 

Consumer

  335   384   104   482 

Total

 $13,557  $15,052  $1,014  $13,892 

 

22

 

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 $893.3 million from Pedestal on May 1, 2020. Of the total $893.3 million of loans acquired, $818.7 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 $11.5 million at May 1, 2020. The remaining $74.6 million were determined to exhibit deteriorated credit quality since origination under ASC 310-30.

 

The following table presents the balances acquired on May 1, 2020 which were accounted for under ASC 310-30.

 

  

Purchased

 
  

Impaired Credits

 
  

(Dollars in thousands)

 
     

Contractually required payments

 $133,621 

Non-accretable difference (expected losses)

  (49,828)

Cash flows expected to be collected at acquisition

  83,793 

Accretable yield

  (9,202)

Basis in acquired loans at acquisition

 $74,591 

 

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, 2021:

 

Balance at December 31, 2020

 $15,853 

Transfers from non-accretable difference to accretable yield

  2,333 

Accretion

  (330)

Changes in expected cash flows not affecting non-accretable differences

  (1,421)

Balance at March 31, 2021

 $16,435 

 

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, 2021 and December 31, 2020, 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.

 

23

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following tables present informative data regarding troubled debt restructurings as of March 31, 2021 and December 31, 2020.

 

Modifications as of March 31, 2021:

           
     

Pre-Modification

  

Post-Modification

 
  

Number

  

Outstanding

  

Outstanding

 
  

of

  

Recorded

  

Recorded

 
  

Contracts

  

Investment

  

Investment

 
  

(Dollars in thousands)

 

Troubled Debt Restructuring

           

Real Estate Loans:

           

1-4 family residential

 4  $268  $214 

Nonfarm nonresidential

 5   4,627   3,377 

Other Loans:

           

Commercial

 7   5,150   2,644 

Consumer

 3   18   6 

Total

 19  $10,063  $6,241 

 

Modifications as of December 31, 2020:

           
     

Pre-Modification

  

Post-Modification

 
  

Number

  

Outstanding

  

Outstanding

 
  

of

  

Recorded

  

Recorded

 
  

Contracts

  

Investment

  

Investment

 
  

(Dollars in thousands)

 

Troubled Debt Restructuring

           

Real Estate Loans:

           

1-4 family residential

 4  $268  $215 

Nonfarm nonresidential

 5   4,627   4,204 

Other Loans:

           

Commercial

 7   5,150   4,094 

Consumer

 3   18   8 

Total

 19  $10,063  $8,521 

 

The Company had 0 troubled debt restructurings that had subsequently defaulted during the three months ended March 31, 2021 and one troubled debt restructuring that had subsequently defaulted in the amount of $34,000 during the year ended December 31, 2020. The Company modified no loans during the three months ended March 31, 2021, which were considered troubled debt restructurings. During the year ended December 31, 2020, the Company modified seven loans with outstanding balances of $4.0 million immediately prior to and immediately following the modifications.

 

Through March 31, 2021, we had agreed to deferrals on approximately 2,100 loans with an aggregate outstanding balance of $769.6 million, of which the majority of modifications occurred in 2020.  As of March 31, 2021, the Company had 105 loans with outstanding principal balances of $90.5 million still in their deferral periods, although $84.6 million were interest-only modifications to seasoned, highly rated clients. 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 our regulators, the Company determined that none of the modifications associated with the COVID-19 pandemic were troubled debt restructurings at March 31, 2021.

 

Payment deferrals with an outstanding principal balance of $829.1 million had been granted as of December 31, 2020, due to the effects of the COVID-19 pandemic.  As of December 31, 2020, the Company had 121 loans with outstanding principal balances of $98.1 million still in their deferral periods, although $94.8 million were interest-only modifications to seasoned, highly rated clients. Under Section 4013 of the CARES Act and based on the interpretive guidance released by the FASB and our regulators, the Company determined that none of the modifications associated with the COVID-19 pandemic were troubled debt restructurings at December 31, 2020.

 

24

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Accrued interest receivable of $8.0 million and $8.4 million was outstanding as of March 31, 2021 and December 31, 2020, respectively, for all loan deferrals related to the COVID-19 pandemic and Hurricane Laura.

 

 

 

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.

 

 

 

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 $747,000 and $693,000 for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, the Company had a weighted average lease term of 7.6 years and a weighted average discount rate of 2.86%.

 

Future minimum lease payments under these leases are as follows:

 

  

(Dollars in thousands)

 

April 1, 2021 through March 31, 2022

 $1,676 

April 1, 2022 through March 31, 2023

  2,065 

April 1, 2023 through March 31, 2024

  1,957 

April 1, 2024 through March 31, 2025

  1,759 

April 1, 2025 through March 31, 2026

  1,635 

April 1, 2026 and Thereafter

  5,232 

Total Future Minimum Lease Payments

  14,324 

Less Imputed Interest

  (1,451)

Present Value of Lease Liabilities

 $12,873 

 

 

 

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 $715.1 million and standby and commercial letters of credit of approximately $22.4 million at March 31, 2021.

 

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.

 

25

 

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

 

26

 

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, 2021 and December 31, 2020. 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, 2021

                

Available for Sale:

                

U.S. Treasury Securities

 $7,387  $0  $7,387  $0 

U.S. Government Agency Securities

  2,559   0   2,559   0 

Corporate Securities

  41,318   0   24,163   17,155 

Mortgage-Backed Securities

  358,300   0   355,001   3,299 

Municipal Securities

  310,000   0   289,449   20,551 

Other Securities

  1,660   0   1,660   0 

Mortgage Loans Held for Sale

  2,298   0   2,298   0 

Servicing Rights

  2,019   0   2,019   0 

Total

 $725,541  $0  $684,536  $41,005 
                 
                 

December 31, 2020

                

Available for Sale:

                

U.S. Government Agency Securities

 $2,572  $0  $2,572  $0 

Corporate Securities

  39,113   0   21,959   17,154 

Mortgage-Backed Securities

  295,019   0   295,019   0 

Municipal Securities

  302,253   0   274,067   28,186 

Other Securities

  1,648   0   1,648   0 

Mortgage Loans Held for Sale

  969   0   969   0 

Servicing Rights

  1,439   0   1,439   0 

Total

 $643,013  $0  $597,673  $45,340 

 

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.

 

27

 

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, 2021

                

Assets:

                

Impaired Loans

 $18,770  $0  $0  $18,770 

Repossessed Assets

  9,474   0   0   9,474 

Total

 $28,244  $0  $0  $28,244 
                 

December 31, 2020

                

Assets:

                

Impaired Loans

 $11,755  $0  $0  $11,755 

Repossessed Assets

  9,453   0   0   9,453 

Total

 $21,208  $0  $0  $21,208 

 

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, 2021

 

December 31, 2020

Impaired Loans

Discounted Appraisals

 

Appraisal Adjustments

 10%to100%(17%) 10%to100%(19%)

 

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.

 

28

 

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, 2021 and December 31, 2020 are as follows:

 

  

Carrying

  

Total

             
  

Amount

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 
  

(Dollars in thousands)

 

March 31, 2021

                    

Financial Assets:

                    

Cash and Short-Term Investments

 $460,852  $460,852  $460,852  $0  $0 

Securities

  721,224   721,224   0   680,219   41,005 

Mortgage Loans Held for Sale

  2,298   2,298   0   2,298   0 

Loans - Net

  3,016,727   3,018,067   0   0   3,018,067 

Servicing Rights

  1,203   2,019   0   2,019   0 

Cash Value of BOLI

  60,348   60,348   0   60,348   0 

Other Equity Securities

  12,584   12,584   0   0   12,584 

Total

 $4,275,236  $4,277,392  $460,852  $744,884  $3,071,656 
                     

Financial Liabilities:

                    

Deposits

 $3,858,734  $3,857,245  $0  $0  $3,857,245 

Borrowings

  137,012   143,461   0   143,461   0 

Total

 $3,995,746  $4,000,706  $0  $143,461  $3,857,245 

 

29

 

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, 2020

                    

Financial Assets:

                    

Cash and Short-Term Investments

 $323,283  $323,283  $323,283  $0  $0 

Securities

  640,605   640,605   0   595,265   45,340 

Mortgage Loans Held for Sale

  969   969   0   969   0 

Loans - Net

  2,969,331   2,969,619   0   0   2,969,619 

Servicing Rights

  1,439   1,439   0   1,439   0 

Cash Value of BOLI

  45,030   45,030   0   45,030   0 

Other Equity Securities

  12,693   12,693   0   0   12,693 

Total

 $3,993,350  $3,993,638  $323,283  $642,703  $3,027,652 
                     

Financial Liabilities:

                    

Deposits

 $3,616,679  $3,623,253  $0  $0  $3,623,253 

Borrowings

  105,990   127,171   0   127,171   0 

Total

 $3,722,669  $3,750,424  $0  $127,171  $3,623,253 

 

 

 

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 cancellable). The CECL should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Financial instruments with similar risk characteristics may be grouped together when estimating the CECL. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial estimate of expected credit loss would be recognized through an allowance for credit losses with an offset (i.e. increase) to the purchase price at acquisition. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. The ASU also amends the current available for sale security impairment model for debt securities whereby credit losses relating to available for sale debt securities should be recorded through an allowance for credit losses. The amendments will be applied through a modified retrospective approach, resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. On October 18, 2019, FASB approved an effective date delay 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 future adoption of this ASU may have a material effect on the Company’s consolidated financial statements.

 

30

 
 

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 Federal Reserve, other banking regulators, state and local governments; the adequacy of our allowance for loan losses in relation to potential losses in our loan portfolio; and the impact that all of these factors have on our borrowers, other customers, vendors and counterparties;

 

 

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

 

 

changes in the strength of the U.S. economy in general and the local economy in our local market areas adversely affecting our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral;

 

 

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

 

 

the ability to sustain and continue our organic loan and deposit growth, and manage that growth effectively;

 

 

market declines in industries to which we have exposure, such as the volatility in oil prices and downturn in the energy industry that impact certain of our borrowers and investments that operate within, or are backed by collateral associated with, the energy industry;

 

 

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

 

 

interest rate risk associated with our business;

 

 

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

 

 

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

 

 

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

 

 

changes in the value of collateral securing our loans;

 

 

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

 

 

 

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, 2020, 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, 2020 to March 31, 2021, and its results of operations for the three months ended March 31, 2021. 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, 2020, 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 and the Dallas/Fort Worth metroplex. We currently operate out of 43 banking centers in markets across Louisiana and Texas. As of March 31, 2021, we had total assets of $4.4 billion, total loans of $3.0 billion, total deposits of $3.9 billion, and total shareholders’ equity of $416.7 million.

 

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

 

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

 

Other Developments

 

Pedestal Merger

 

On January 22, 2020, we entered into an agreement and plan of reorganization to acquire Pedestal Bancshares, Inc. (“Pedestal”), and its banking subsidiary Pedestal Bank. The acquisition of Pedestal was consummated on May 1, 2020. At April 30, 2020, Pedestal had fair values of approximately $1.3 billion in total assets, $893.3 million in net loans, $1.2 billion in total deposits, and $93.3 million in total shareholders’ equity.

 

Smith Shellnut Wilson, LLC (SSW) Acquisition

 

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 subsequently completed on April 1, 2021.

 

 

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;

 

 

 

In sensitivity to our customers, we waived certain service fees, such as late fees, excessive withdrawal fees, etc. and increased daily limits on ATM withdrawals during the year ended December 31, 2020;

 

 

 

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 three months ended March 31, 2021;

 

 

 

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

 

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. Through March 31, 2021, we had agreed to deferrals on approximately 2,100 loans with an aggregate outstanding balance of $769.6 million, of which the majority of modifications occurred in 2020. As of March 31, 2021, we had 105 loans with outstanding principal balances of $90.5 million within the deferral periods, although $84.6 million were qualifying interest-only modifications to seasoned, highly rated clients.

 

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

 

During the three months ended March 31, 2021, we funded approximately 1,500 loans with an aggregate outstanding principal balance of $188.5 million under round 2 of the PPP. As of March 31, 2021, we held approximately 2,400 PPP loans (including both round 1 and round 2 PPP loans) with an aggregate balance of $385.9 million and an average loan balance of approximately $162,000.

 

Financial Highlights

 

The financial highlights as of and for the three months ended March 31, 2021 include:

 

•          Total assets of $4.4 billion, a $283 million, or 6.8%, increase from December 31, 2020.

 

•         Total loans held for investment of $3.0 billion, a $50.6 million, or 1.7%, increase from December 31, 2020.

 

•         Total deposits of $3.9 billion, a $242.1 million, or 6.7%, increase from December 31, 2020.

 

•          Net income of $12.3 million, a $7.8 million, or 174.0%, increase from the three months ended March 31, 2020.

 

•         Net interest income of $40.3 million, an increase of $20.1 million, or 99.4%, from the three months ended March 31, 2020.

 

•          Allowance for loan and lease losses of 0.83% of total loans held for investment, compared to 0.74% as of December 31, 2020, and a ratio of nonperforming loans to total loans held for investment of 0.44%, compared to 0.35% as of December 31, 2020.

 

 

•         Earnings per share for the first three months of 2021 of $0.60 per basic share and $0.59 per diluted share, compared to $0.34 per basic and diluted share for the first three months of 2020.

 

•         Return on average assets of 1.15% over the first three months of 2021, compared to 0.80% for the first three months of 2020.

 

•         Return on average equity of 11.86% over the first three months of 2021, compared to 6.31% for the first three months of 2020.

 

•         Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 8.37%, 10.64%, 10.79% and 13.95%, respectively. During the year ended December 31, 2020, we elected the Community Bank Leverage Ratio (“CBLR”) and had a ratio of 8.79% at December 31, 2020. We have since elected to return to risk-based regulatory capital reporting for 2021.

 

•          Book value per share of $20.03, an increase of 0.75% from $19.88 at December 31, 2020.

 

Results of Operations for the Three Months Ended March 31, 2021 and 2020

 

Performance Summary

 

For the three months ended March 31, 2021, net income was $12.3 million, or $0.60 per basic share and $0.59 per diluted share, compared to net income of $4.5 million, or $0.34 per basic share and $0.34 per diluted share, for the three months ended March 31, 2020. Return on average assets, on an annualized basis, increased to 1.15% for the three months ended March 31, 2021, from 0.80% for the three months ended March 31, 2020. Return on average equity, on an annualized basis, increased to 11.86% for the three months ended March 31, 2021, as compared to 6.31% for the three months ended March 31, 2020.

 

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, 2021, net interest income totaled $40.3 million, and net interest margin and net interest spread were 4.23% and 4.06%, respectively, compared to $20.2 million, 3.93%, and 3.55%, respectively, for the three months ended March 31, 2020. The average yield on the loan portfolio (excluding SBA PPP loans) was 5.53% for the three months ended March 31, 2021, compared to 5.55% for the three months ended March 30, 2020, and the average yield on total interest-earning assets was 4.65% for the three months ended March 31, 2021, compared to 5.06% for the three months ended March 31, 2020. For the three months ended March 31, 2021, overall cost of funds (which includes noninterest-bearing deposits) decreased 79 basis points compared to the three months ended March 31, 2020, primarily due to the federal funds rate cuts during the first quarter of 2020, along with lower yielding deposits and increased deposit and borrowing accretion recognized from the Pedestal acquisition. While we experienced significant loan growth in average loan balances, we anticipate continued pressure on our net interest margin and net interest spread in future periods based on the current yield curve.

 

 

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, 2021 and 2020, 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,

 
  

2021

  

2020

 
  

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)

 $2,643,668  $36,538   5.53% $1,740,189  $24,143   5.55%

SBA PPP loans

  374,958   4,881   5.21          

Securities available for sale

  691,476   2,802   1.62   286,660   1,731   2.42 

Interest-bearing deposits in other banks

  101,233   41   0.16   28,754   142   1.98 

Total interest-earning assets

  3,811,335   44,262   4.65   2,055,603   26,016   5.06 

Allowance for loan losses

  (22,709)          (12,203)        

Noninterest-earning assets

  487,804           201,184         

Total assets

 $4,276,430  $44,262      $2,244,584  $26,016     
                         

Liabilities and Shareholders Equity

                        

Interest-bearing liabilities:

                        

Interest-bearing deposits

 $2,584,263  $3,243   0.50% $1,342,213  $4,686   1.40%

Subordinated debt

  28,450   459   6.45   25,000   422   6.75 

Subordinated debt – trust preferred securities

  5,000   42   3.36          

Advances from Federal Home Loan Bank (“FHLB”)

  37,022   111   1.20   98,323   497   2.02 

Other borrowings

  31,696   106   1.34   67,125   200   1.19 

Total interest-bearing liabilities

  2,686,431   3,961   0.59   1,532,661   5,805   1.52 
                         

Noninterest-bearing liabilities:

                        

Noninterest-bearing deposits

  1,146,950           406,035         

Other liabilities

  27,153           20,550         

Total noninterest-bearing liabilities

  1,174,103           426,585         

Shareholders’ equity

  415,896           285,338         

Total liabilities and shareholders’ equity

 $4,276,430          $2,244,584         
                         

Net interest rate spread(1)

          4.06%          3.55%

Net interest income

     $40,301          $20,211     
                         

Net interest margin(2)

          4.23%          3.93%

Overall cost of funds

          0.41%          1.20%

 


(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, 2021
compared to the Three Months Ended
March 31, 2020

 
  

Increase (Decrease) due to change in

 
  

Volume

  

Rate

  

Total

 
  

(Dollars in thousands) (Unaudited)

 

Interest-earning assets:

            

Total loans (excluding SBA PPP loans)

 $12,487  $(92) $12,395 

SBA PPP loans

  4,881      4,881 

Securities available for sale

  1,640   (569)  1,071 

Interest-earning deposits in other banks

  29   (130)  (101)

Total increase (decrease) in interest income

 $19,037  $(791) $18,246 
             

Interest-bearing liabilities:

            

Interest-bearing deposits

 $1,559  $(3,002) $(1,443)

Subordinated debt

  56   (19)  37 

Subordinated debt – trust preferred securities

  42      42 

Advances from FHLB

  (184)  (202)  (386)

Other borrowings

  (118)  24   (94)

Total increase (decrease) in interest expense

  1,355   (3,199)  (1,844)

Increase in net interest income

 $17,682  $2,408  $20,090 

 

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 $3.4 million for the three months ended March 31, 2021 and $1.4 million for the same period in 2020. The higher provision for the three months ended March 31, 2021 compared to the same period in 2020 relates primarily to additional reserves of $1.4 million required on a $1.9 million outstanding principal balance energy loan which was transferred to nonaccrual during the quarter.

 

 

Noninterest Income

 

Our primary sources of noninterest income are service charges on deposit accounts, debit card and automated teller machine (“ATM”) fee income, income from bank-owned life insurance, brokerage commissions 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

 
  

2021

  

2020

  (Decrease) 
  

(Dollars in thousands) (Unaudited)

 

Noninterest income:

            

Service charges on deposit accounts

 $1,567  $931  $636 

Debit card and ATM fee income

  1,336   407   929 

Bank-owned life insurance income

  318   197   121 

Gain (loss) on sales of loans

  (21)  177   (198)

Gain (loss) on sales of investment securities

  (5)  25   (30)

Brokerage commission

  543   20   523 

Mortgage origination income

  229   115   114 

Correspondent bank income

  143   109   34 

Participation fee income

  247   68   179 

Gain on sales of other real estate owned

  46   151   (105)

Gain on sales of other assets

  117   14   103 

Pass-through income from SBIC partnerships

  53   380   (327)

Other

  510   210   300 

Total noninterest income

 $5,083  $2,804  $2,279 

 

Total noninterest income increased $2.3 million, or 81.3%, from the three months ended March 31, 2020.  The increase was primarily due to the increases in services charges of $636,000, or 68.3%, and debit card and ATM fee income of $929,000, or 228.3%, due to increased activity from the Pedestal acquisition, brokerage commission of $523,000, or 2,615.0%, due to the acquisition of Pedestal’s brokerage customers, and other income of $300,000, or 142.9%, offset by a reduction of pass-through income from SBIC partnerships of $327,000, or 86.1%, and a loss on the sales of loans of $21,000, compared to a gain of $177,000 for the three months ended March 31, 2020.

 

 

Noninterest Expense

 

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships, and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization, professional and regulatory fees, including Federal Deposit Insurance Corporation (“FDIC”) assessments, data processing expenses, and advertising and promotion expenses, among others.

 

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

 

  

For the Three Months Ended
March 31,

  

Increase

 
  

2021

  

2020

  (Decrease) 
  

(Dollars in thousands) (Unaudited)

 

Salaries and employee benefits

 $14,926  $9,435  $5,491 

Non-staff expenses:

            

Occupancy of bank premises

  1,811   1,060   751 

Depreciation and amortization

  1,593   601   992 

Data processing

  1,823   652   1,171 

FDIC assessment fees

  509   147   362 

Legal and other professional fees

  741   394   347 

Advertising and promotions

  477   306   171 

Utilities and communications

  575   317   258 

Ad valorem shares tax

  700   375   325 

Directors’ fees

  188   74   114 

Other real estate owned expenses and write-downs

  379   253   126 

Merger and conversion related expenses

  10   1,148   (1,138)

Other

  3,231   1,881   1,350 

Total noninterest expense

 $26,963  $16,643  $10,320 

 

Total noninterest expense increased $10.3 million, or 62.0%, from the three months ended March 31, 2020, due primarily to the acquisition of Pedestal on May 1, 2020 and the associated increases in branches and employees. The increase in noninterest expense was partially offset with lower merger and conversion related expenses, compared to the three months ended March 31, 2020, due to the acquisition of Pedestal.

 

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, 2021, income tax expense totaled $2.7 million, an increase of $2.2 million, or 440.1%, compared to $506,000 for the same period in 2020. Our effective tax rates for the three months ended March 31, 2021 and 2020 were 18.1% and 10.1%, respectively. The increase in our effective tax rate for the three months ended March 31, 2021 is primarily due to founder’s stock option exercises that occurred in 2020. 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 $283.2 million, or 6.8%, from December 31, 2020 to March 31, 2021, due primarily from the participation in SBA PPP and increases in cash and cash equivalents.

 

 

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, 2021, total loans held for investment were $3.0 billion, an increase of $50.6 million, or 1.7%, compared to $3.0 billion as of December 31, 2020. The increase was primarily due to the participation in the SBA PPP. Additionally, $2.3 million and $969,000 in mortgage loans were classified as loans held for sale as of March 31, 2021 and December 31, 2020, respectively.

 

Total loans held for investment as a percentage of total deposits were 78.8% and 82.7% as of March 31, 2021 and December 31, 2020, respectively. Total loans held for investment as a percentage of total assets were 68.5% and 71.9% as of March 31, 2021 and December 31, 2020, respectively.

 

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

 

  

As of March 31, 2021

(Unaudited)

  

As of December 31, 2020

 
  

Amount

  

Percent

  

Amount

  

Percent

 
  

(Dollars in thousands)

 

Commercial

 $962,099   31.6% $886,325   29.6%

Real estate:

                

Construction and land

  418,234   13.8   403,065   13.5 

Farmland

  52,861   1.7   55,883   1.8 

1-4 family residential

  460,907   15.2   468,650   15.7 

Multi-family residential

  77,390   2.5   95,707   3.2 

Nonfarm nonresidential

  966,416   31.8   971,603   32.5 

Consumer

  104,071   3.4   110,122   3.7 

Total loans held for investment

 $3,041,978   100.0% $2,991,355   100.0%

 

SBA PPP loans accounted for $385.8 million and $105,000 of the commercial and consumer portfolios, respectively, as of March 31, 2021 and $313.9 million and $1.5 million as of December 31, 2020, 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 $75.8 million, or 8.6%, to $962.1 million as of March 31, 2021 from $886.3 million as of December 31, 2020, primarily due to the participation in the SBA PPP.

 

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

 

Construction and land loans increased $15.2 million, or 3.8%, to $418.2 million as of March 31, 2021 from $403.1 million as of December 31, 2020.

 

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 decreased $7.7 million, or 1.7%, to $460.9 million as of March 31, 2021 from $468.7 million as of December 31, 2020.

 

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 decreased $5.2 million, or 5.3%, to $966.4 million as of March 31, 2021 from $971.6 million as of December 31, 2020.

 

Other loan categories. Other categories of loans included in our loan portfolio include farmland and agricultural loans made to farmers and ranchers relating to their operations, multi-family residential loans, and consumer loans. None of these categories of loans represent a significant portion of our total loan portfolio.

 

 

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

 

  

As of March 31, 2021

 
  

One Year
or Less

  

One
Through
Five Years

  

After Five
Years

  

Total

 
  

(Dollars in thousands) (Unaudited)

 

Commercial

 $187,602  $686,558  $87,939  $962,099 

Real estate:

                

Construction and land

  164,385   202,387   51,462   418,234 

Farmland

  11,465   28,651   12,745   52,861 

1-4 family residential

  79,613   240,820   140,474   460,907 

Multi-family residential

  3,217   25,951   48,222   77,390 

Nonfarm nonresidential

  126,180   549,011   291,225   966,416 

Consumer

  42,952   52,009   9,110   104,071 

Total loans held for investment

 $615,414  $1,785,387  $641,177  $3,041,978 

Amounts with fixed rates

 $311,987  $1,406,224  $339,006  $2,057,217 

Amounts with floating rates

  303,427   379,163   302,171   984,761 

 

  

As of December 31, 2020

 
  

One Year
or Less

  

One
Through
Five Years

  

After Five
Years

  

Total

 
  

(Dollars in thousands)

 

Commercial

 $218,443  $586,675  $81,207  $886,325 

Real estate:

                

Construction and land

  180,735   176,863   45,467   403,065 

Farmland

  10,802   31,489   13,592   55,883 

1-4 family residential

  78,087   246,550   144,013   468,650 

Multi-family residential

  21,292   25,863   48,552   95,707 

Nonfarm nonresidential

  123,708   521,687   326,208   971,603 

Consumer

  44,819   56,057   9,246   110,122 

Total loans held for investment

 $677,886  $1,645,184  $668,285  $2,991,355 

Amounts with fixed rates

 $344,021  $1,297,988  $353,314  $1,995,323 

Amounts with floating rates

  333,865   347,196   314,971   996,032 

 

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 $22.9 million and $20.0 million in nonperforming assets as of March 31, 2021 and December 31, 2020, respectively. We had $13.4 million in nonperforming loans as of March 31, 2021 compared to $10.6 million as of December 31, 2020. The increase in nonperforming assets from December 31, 2020 to March 31, 2021 is primarily due to a single, energy-related loan.

 

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

 

  

As of March 31,
2021
(Unaudited)

  

As of December 31,
2020

 
  

(Dollars in thousands)

 

Nonaccrual loans

 $11,956  $9,063 

Accruing loans 90 or more days past due

  1,479   1,523 

Total nonperforming loans

  13,435   10,586 

Other nonperforming assets

  623   402 

Other real estate owned:

        

Commercial real estate, construction, land and land development

  8,117   8,567 

Residential real estate

  734   484 

Total other real estate owned

  8,851   9,051 

Total nonperforming assets

 $22,909  $20,039 

Restructured loans-nonaccrual

 $3,376  $4,206 

Restructured loans-accruing

  2,865   4,315 

Ratio of nonperforming loans to total loans held for investment

  0.44%  0.35%

Ratio of nonperforming assets to total assets

  0.52   0.48 

 

  

As of March 31,
2021
(Unaudited)

  

As of December 31,
2020

 
  

(Dollars in thousands)

 

Nonaccrual loans by category:

        

Real estate:

        

Construction and land

 $958  $924 

Farmland

  303   367 

1-4 family residential

  2,972   2,603 

Multi-family residential

      

Nonfarm nonresidential

  3,352   3,119 

Commercial

  4,064   1,753 

Consumer

  307   297 

Total

 $11,956  $9,063 

 

As of March 31, 2021, we modified approximately 2,100 loans with outstanding balances totaling $769.6 million by granting temporary payment deferrals of principal and/or interest.  The payment deferrals were granted due to the effects of the COVID-19 pandemic.  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. Loans under these deferrals remain in their current risk rating and / or past due status through the deferral period.

 

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, 2021

 
  

Pass

  

Special Mention

  

Substandard

  

Doubtful

  

Total

 
  

(Dollars in thousands) (Unaudited)

 

Real estate:

                    

Construction and land

 $414,941  $809  $1,526  $958  $418,234 

Farmland

  50,933   1,625      303   52,861 

1-4 family residential

  440,800   10,074   5,343   4,690   460,907 

Multi-family residential

  77,055   308   27      77,390 

Nonfarm nonresidential

  944,976   11,940   3,287   6,213   966,416 

Commercial

  933,997   17,311   5,975   4,816   962,099 

Consumer

  101,881   1,255   460   475   104,071 

Total

 $2,964,583  $43,322  $16,618  $17,455  $3,041,978 

 

  

As of December 31, 2020

 
  

Pass

  

Special Mention

  

Substandard

  

Doubtful

  

Total

 
  

(Dollars in thousands)

 

Real estate:

                    

Construction and land

 $400,027  $912  $1,202  $924  $403,065 

Farmland

  53,874   1,642      367   55,883 

1-4 family residential

  450,702   9,290   4,913   3,745   468,650 

Multi-family residential

  95,359   320   28      95,707 

Nonfarm nonresidential

  949,245   12,810   3,473   6,075   971,603 

Commercial

  859,851   16,832   7,325   2,317   886,325 

Consumer

  107,449   1,970   229   474   110,122 

Total

 $2,916,507  $43,776  $17,170  $13,902  $2,991,355 

 

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, 2021, the allowance for loan losses totaled $25.3 million, or 0.83%, of total loans held for investment. As of December 31, 2020, the allowance for loan losses totaled $22.0 million, or 0.74%, of total loans held for investment.

 

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

 

  

As of and

For the Three Months
Ended
March 31, 2021
(Unaudited)

  

As of and For the Year

Ended December 31,
2020

 
  

(Dollars in thousands)

 

Average loans outstanding(1)

 $3,018,626  $2,613,422 

Gross loans held for investment outstanding at end of period

 $3,041,978  $2,991,355 

Allowance for loan losses at beginning of period

 $22,024  $12,124 

Provision for loan losses

  3,359   11,435 

Charge-offs:

        

Real estate:

        

Construction, land and farmland

     28 

Residential

  134   387 

Nonfarm nonresidential

  20   232 

Commercial

  87   849 

Consumer

  68   467 

Total charge-offs

  309   1,963 

Recoveries:

        

Real estate:

        

Construction, land and farmland

  2   10 

Residential

  23   53 

Nonfarm nonresidential

  98   12 

Commercial

  24   203 

Consumer

  30   150 

Total recoveries

  177   428 

Net charge-offs

  132   1,535 

Allowance for loan losses at end of period

 $25,251  $22,024 

Ratio of allowance to end of period loans held for investment

  0.83%  0.74%

Ratio of net charge-offs to average loans

  0.00   0.06 

 


(1)

Excluding loans held for sale.

 

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

 

 

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

 

  

As of March 31,
2021

(Unaudited)

  

As of December 31,
2020

 
  

Amount

  

Percent
to Total

  

Amount

  

Percent
to Total

 
  

(Dollars in thousands)

 

Real estate:

                

Construction and land

 $3,927   15.5% $3,584   16.3%

Farmland

  483   1.9   600   2.7 

1-4 family residential

  3,807   15.1   3,453   15.7 

Multi-family residential

  656   2.6   818   3.7 

Nonfarm nonresidential

  7,842   31.1   7,369   33.5 

Total real estate

  16,715   66.2   15,824   71.9 

Commercial

  7,479   29.6   5,018   22.8 

Consumer

  1,057   4.2   1,182   5.3 

Total allowance for loan losses

 $25,251   100.0% $22,024   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, 2021, the carrying amount of investment securities totaled $721.2 million, an increase of $80.6 million, or 12.6%, compared to $640.6 million as of December 31, 2020. The increase was primarily due to the increase in cash related to the SBA PPP forgiveness. Securities represented 16.2% and 15.4% of total assets as of March 31, 2021 and December 31, 2020, 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, 2021

 
  

Amortized
Cost

  

Gross
Unrealized
Gains

  

Gross
Unrealized
Losses

  

Fair Value

 
  

(Dollars in thousands) (Unaudited)

 

U.S. treasury securities

 $7,394  $  $7  $7,387 

U.S. government agencies

  2,554   5      2,559 

Corporate bonds

  40,763   652   97   41,318 

Mortgage-backed securities

  355,095   5,504   2,299   358,300 

Municipal securities

  308,016   4,033   2,049   310,000 

Other securities

  1,310   350      1,660 

Total

 $715,132  $10,544  $4,452  $721,224 

 

  

As of December 31, 2020

 
  

Amortized
Cost

  

Gross
Unrealized
Gains

  

Gross
Unrealized
Losses

  

Fair Value

 
  

(Dollars in thousands)

 

U.S. government agencies

 $2,567  $5  $  $2,572 

Corporate bonds

  38,738   380   5   39,113 

Mortgage-backed securities

  288,373   6,893   247   295,019 

Municipal securities

  296,262   6,097   106   302,253 

Other securities

  1,440   208      1,648 

Total

 $627,380  $13,583  $358  $640,605 

 

 

All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As of March 31, 2021, the investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.

 

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

 

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

 

  

As of March 31, 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) (Unaudited)

 

U.S. treasury securities

 $   % $7,387   0.79% $   % $   % $7,387   0.79%

U.S. government agencies

  2,559   0.23%     %     %     %  2,559   0.23%

Corporate bonds

     %     %  40,199   4.43%  1,119   7.35%  41,318   4.51%

Mortgage-backed securities

  1,676   1.34%  44,553   1.16%  145,360   1.73%  166,711   1.30%  358,300   1.46%

Municipal securities

  16,262   2.40%  82,184   1.52%  128,463   1.75%  83,091   1.93%  310,000   1.77%

Other securities

     %     %     %  1,660   0.57%  1,660   0.57%

Total

 $20,497   2.04% $134,124   1.36% $314,022   2.08% $252,581   1.53% $721,224   1.75%

 

 

  

As of December 31, 2020

 
  

Within One
Year

  

After One Year
but
Within Five Years

  

After Five Years but
Within Ten Years

  

After Ten
Years

  

Total

 
  

Amount

  

Yield

  

Amount

  

Yield

  

Amount

  

Yield

  

Amount

  

Yield

  

Total

  

Yield

 
  

(Dollars in thousands)

 

U.S. government agencies

 $   % $2,572   0.23% $   % $   % $2,572   0.23%

Corporate bonds

     %     %  38,089   4.41%  1,024   7.35%  39,113   4.49%

Mortgage-backed securities

  1,647   1.22%  46,881   1.17%  144,427   1.64%  102,064   1.34%  295,019   1.46%

Municipal securities

  17,167   2.39%  75,597   1.70%  118,381   1.78%  91,108   1.95%  302,253   1.84%

Other securities

     %     %     %  1,648   0.59%  1,648   0.59%

Total

 $18,814   2.29% $125,050   1.47% $300,897   2.04% $195,844   1.65% $640,605   1.82%

 

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 6.22 years with an estimated effective duration of 51.24 months as of March 31, 2021.

 

As of March 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, the Company held other equity securities of $12.6 million and $12.7 million, respectively, comprised mainly of FHLB stock and small business investment companies (“SBICs”).

 

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, 2021 were $3.9 billion, an increase of $242.1 million, or 6.7%, compared to $3.6 billion as of December 31, 2020, primarily due to the SBA PPP originations and tax deposits from municipalities we receive throughout the first quarter.

 

Noninterest-bearing deposits as of March 31, 2021 were $1.2 billion, compared to $1.2 billion as of December 31, 2020, an increase of $22.5 million, or 1.9%.

 

Average deposits for the three months ended March 31, 2021 were $3.7 billion, an increase of $940.6 million, or 33.7%, over the full year average for the year ended December 31, 2020 of $2.8 billion. The average rate paid on total interest-bearing deposits decreased over this period from 0.89% for the year ended December 31, 2020 to 0.50% for the three months ended March 31, 2021. The decrease in average rates during the three months ended March 31, 2021 over the average for the year ended December 31, 2020 was primarily due to the federal funds rate cuts that occurred in the three months ended March 31, 2020, along with the accretion of deposit premium from the Pedestal acquisition. In addition, the stability and continued growth of noninterest-bearing demand accounts served to reduce the cost of deposits to 0.35% for the three months ended March 31, 2021 compared to 0.63% for the year ended December 31, 2020.

 

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

 

  

For the Three Months
Ended March 31, 2021

(Unaudited)

  

For the Year Ended December 31,
2020

 
  

Average
Balance

  

Average
Rate

  

Average
Balance

  

Average
Rate

 
  

(Dollars in thousands)

 

Interest-bearing demand accounts

 $175,352   0.60% $121,612   0.75%

Negotiable order of withdrawal (“NOW”) accounts

  530,001   0.16%  383,695   0.31%

Limited access money market accounts and savings

  1,082,406   0.32%  682,611   0.43%

Certificates and other time deposits > $250k

  216,888   1.36%  215,416   1.90%

Certificates and other time deposits < $250k

  579,616   0.81%  574,961   1.47%

Total interest-bearing deposits

  2,584,263   0.50%  1,978,295   0.89%

Noninterest-bearing demand accounts

  1,146,950      812,332   %

Total deposits

 $3,731,213   0.35% $2,790,627   0.63%

 

The ratio of average noninterest-bearing deposits to average total deposits for the three months ended March 31, 2021 and the year ended December 31, 2020 was 30.7% and 29.1%, respectively.

 

The following table sets forth the contractual maturities of certain certificates of deposit at March 31, 2021:

 

  

Certificates of

Deposit

More Than

$250,000

  

Certificates of

Deposit of $100,000

Through

$250,000

 
  

(Dollars in thousands)

 

3 months or less

 $53,363  $64,972 

More than 3 months but less than 6 months

  45,408   85,896 

More than 6 months but less than 12 months

  66,292   145,845 

12 months or more

  43,791   82,538 

Total

 $208,854  $379,251 

 

 

Correspondent Bank Federal Funds Purchased Relationships

 

We maintain Federal Funds Purchased Relationships with the following financial institutions and limits as of March 31, 2021:

 

  

Fed Funds Purchase Limits

 
  

(Dollars in

Thousands)

 

Compass Bank

 $38,000 

First National Bankers Bank (“FNBB”)

  35,000 

The Independent Bankers Bank

  25,000 

First Horizon Bank

  17,000 

ServisFirst Bank

  10,000 

South State Bank

  9,000 

Total

 $134,000 

 

We had no outstanding balances as of March 31, 2021 and December 31, 2020, 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, 2021 and the year ended December 31, 2020, 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, 2021 and December 31, 2020, we maintained six lines of credit with commercial banks which provided for extensions of credit with an availability to borrow up to an aggregate of $134.0 million and $126.0 million, respectively. There were no funds under these lines of credit outstanding as of March 31, 2021 or December 31, 2020.

 

 

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 $4.3 billion and $3.4 billion for the three months ended March 31, 2021 and the year ended December 31, 2020, respectively.

 

  

For the Three
Months Ended
March 31, 2021

  

For the Year
Ended
December 31,
2020

 
  

(Unaudited)

     

Sources of Funds:

        

Deposits:

        

Noninterest-bearing

  26.8%  23.7%

Interest-bearing

  60.4   57.8 

Subordinated debt (excluding trust preferred securities)

  0.7   0.7 

Advances from FHLB

  0.9   3.3 

Borrowings from the PPPLF

     1.9 

Other borrowings

  0.9   1.4 

Other liabilities

  0.6   0.8 

Shareholders’ equity

  9.7   10.4 

Total

  100.0%  100.0%
         

Uses of Funds:

        

Loans, net of allowance for loan losses

  70.0%  75.8%

Securities available for sale

  16.2   14.1 

Interest-bearing deposits in other banks

  2.4   1.4 

Other noninterest-earning assets

  11.4   8.7 

Total

  100.0%  100.0%

Average noninterest-bearing deposits to average deposits

  30.7%  29.1%

Average loans to average deposits

  80.9   93.7 

 

Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average loans increased 73.4% for the three months ended March 31, 2021 compared to the same period in 2020, primarily due to the acquisition of Pedestal and our participation in the SBA PPP. 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 6.22 years and an effective duration of 51.24 months as of March 31, 2021. As of December 31, 2020, our securities portfolio had a weighted average life of 5.93 years and an effective duration of 45.79 months.

 

As of March 31, 2021, we had outstanding $715.1 million in commitments to extend credit and $22.4 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2020, we had outstanding $621.1 million in commitments to extend credit and $23.9 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. The increase is largely attributable to a newly formed financial institutions group.

 

As of March 31, 2021 and December 31, 2020 we had cash and cash equivalents, including federal funds sold, of $460.9 million and $323.3 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 $416.7 million as of March 31, 2021, compared to $410.0 million as of December 31, 2020, an increase of $6.7 million, or 1.6%. This increase was primarily due to net income of $12.3 million, offset with other comprehensive losses of $4.5 million and dividends paid of $2.1 million.

 

On April 22, 2021, our Board of Directors (the “Board”) declared a quarterly dividend based upon our financial performance for the three months ended March 31, 2021 in the amount of $0.12 per share to the common shareholders of record as of May 15, 2021. The dividend is to be paid on May 31, 2021, 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, 2021 and December 31, 2020, we and b1BANK were in compliance with all applicable regulatory capital requirements, and b1BANK was classified as “well-capitalized,” for purposes of prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all applicable regulatory capital standards applicable to us. For the year ended December 31, 2020, we elected to opt in to the CBLR framework. Pursuant to section 201(b) of EGRRCPA, the federal bank regulatory agencies adopted a final rule in 2019 imposing a minimum community bank leverage ratio requirement of 9.0%. On April 6, 2020, as mandated under the CARES Act, the federal bank regulatory agencies adopted an interim final rule that temporarily reduced the minimum community bank leverage ratio requirement to 8.0% and provided a two quarter grace period for banks with a leverage ratio between 7.0% and 8.0%. A transition interim final rule also adopted by the federal bank regulatory agencies on April 6, 2020 provides a graduated transition from the temporary 8.0% community bank leverage ratio requirement, to the 9.0% community bank leverage ratio requirement as established under the 2019 final rule. Specifically, the transition interim final rule provides that the community bank leverage ratio was 8.0% in the second quarter through fourth quarter of calendar year 2020, is 8.5% in calendar year 2021, and will be 9.0% thereafter. For the quarter ended March 31, 2021, we elected to revert to the risk weighted ratios detailed below.

 

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, 2021

(Unaudited)

  

As of December 31, 2020

 
  

Amount

  

Ratio

  

Amount

  

Ratio

 
  

(Dollars in thousands)

 

Business First

                

Total capital (to risk weighted assets)

 $455,373   13.95%  N/A   N/A 

Tier 1 capital (to risk weighted assets)

  352,346   10.79%  N/A   N/A 

Common Equity Tier 1 capital (to risk weighted assets)

  347,346   10.64%  N/A   N/A 

Tier 1 Leverage capital and/or CBLR (to average assets)

  352,346   8.37% $340,715   8.79%
                 

b1BANK

                

Total capital (to risk weighted assets)

 $437,388   13.40%  N/A   N/A 

Tier 1 capital (to risk weighted assets)

  411,861   12.62%  N/A   N/A 

Common Equity Tier 1 capital (to risk weighted assets)

  411,861   12.62%  N/A   N/A 

Tier 1 Leverage capital and/or CBLR (to average assets)

  411,861   9.79% $358,083   9.24%

 

Long Term Debt

 

During the three months ended March 31, 2021 we issued $52.5 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, 2021 and December 31, 2020 (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 $33.1 million and $43.1 million (both of which include remaining purchase premium) at March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021 and December 31, 2020, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 1.86% and 2.01%, respectively, and maturing within four years. The subordinated debt totaled $77.5 million and $25.0 million at March 31, 2021 and December 31, 2020, 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. The remaining $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. We had a revolving line of credit with FNBB with a balance of $5.0 million at December 31, 2020 which was paid off during the three months ended March 31, 2021. We acquired a note payable to FNBB in the Pedestal transaction in the amount of $7.0 million, of which $6.0 million was outstanding at December 31, 2020. This note was paid off during the three months ended March 31, 2021.

 

  

As of March 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) (Unaudited)

 

Non-cancelable future operating leases

 $1,861  $3,401  $2,977  $4,634  $12,873 

Time deposits

  518,911   175,620   74,557   722   769,810 

Subordinated debt

           77,500   77,500 

Advances from FHLB

  10,000      23,000      33,000 

Purchase premium on advances from FHLB

  73            73 

Subordinated debt - trust preferred securities

           5,000   5,000 

Securities sold under agreements to repurchase

  21,419            21,419 

Standby and commercial letters of credit

  21,828   544   20      22,392 

Commitments to extend credit

  421,272   221,198   28,270   44,389   715,129 

Total

 $995,364  $400,763  $128,824  $132,245  $1,657,196 

 

  

As of December 31, 2020

 
  

1 year or less

  

More than 1
year but less
than 3 years

  

3 years or
more but less
than 5 years

  

5 years
or more

  

Total

 
  

(Dollars in thousands)

 

Non-cancelable future operating leases

 $1,808  $3,294  $2,845  $4,985  $12,932 

Time deposits

  589,908   201,599   18,724      810,231 

Subordinated debt

           25,000   25,000 

Advances from FHLB

  20,000      23,000      43,000 

Purchase premium on advances from FHLB

  145            145 

Subordinated debt - trust preferred securities

           5,000   5,000 

FNBB revolving line of credit

  5,000            5,000 

FNBB note payable

  1,000   2,000   2,000   1,000   6,000 

Securities sold under agreements to repurchase

  21,825            21,825 

Standby and commercial letters of credit

  9,069   14,815   20      23,904 

Commitments to extend credit

  423,206   133,121   17,856   46,928   621,111 

Total

 $1,071,961  $354,829  $64,445  $82,913  $1,574,148 

 

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, 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.

 

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

 

We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Average lives of non-maturity deposit accounts are based on standard regulatory decay assumptions and are also incorporated into the model. Model assumptions are revised and updated as more accurate information becomes available. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various management strategies.

 

On at least a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Internal policy regarding interest rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 5% for a 100 basis point shift, 10% for a 200 basis point shift, and 12.5% for a 300 basis point shift. Internal policy regarding interest rate simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated fair value of equity at risk for the subsequent one-year period should not decline by more than 10% for a 100 basis point shift, 15% for a 200 basis point shift, and 25% for a 300 basis point shift.

 

 

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

 

   

As of March 31, 2021

  

As of December 31, 2020

 

Change in Interest

Rates (Basis Points)

  

Percent Change
in Net Interest
Income

  

Percent Change
in Fair Value of
Equity

  

Percent Change
in Net Interest
Income

  

Percent Change
in Fair Value of
Equity

 

+300

   (3.30%)  (0.83%)  2.50%  3.76%

+200

   (1.00%  (1.00%)  2.80%  2.51%

+100

   0.70%  0.41%  2.60%  2.30%

Base

   0.00%  0.00%  0.00%  0.00%
-100   (1.20%)  7.34%  (1.30%)  10.63%

 

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 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, 2021, was $12.6 million, or $0.61 per diluted share, compared to core net income of $5.0 million, or $0.37 per diluted share, for the three months ended March 31, 2020. Notable noncore events impacting earnings for the three months ended March 31, 2021, included the incurrence of $350,000 in occupancy and bank premises attributable to hurricane damage, compared to the incurrence of $126,000 in gains associated with the disposal of former bank premises and equipment in other income and $1.2 million in acquisition-related expenses during the three months ended March 31, 2020.

 

  

For the Three Months Ended March 31,

 
  

2021

  

2020

 
  

(Dollars in thousands, except per share data)

 

Interest Income:

        

Interest income

 $44,262  $26,016 

Core interest income

  44,262   26,016 

Interest Expense:

        

Interest expense

  3,961   5,805 

Core interest expense

  3,961   5,805 

Provision for Loan Losses:

        

Provision for loan losses

  3,359   1,367 

Core provision expense

  3,359   1,367 

Other Income:

        

Other income

  5,083   2,804 

(Gains) 1osses on former bank premises and equipment

  -   (126)

(Gains) 1osses on sale of securities

  5   (25)

Core other income

  5,088   2,653 

Other Expense:

        

Other expense

  26,963   16,643 

Acquisition-related expenses (2)

  (10)  (1,212)

Stock option exercises - excess taxes (founder's grants)

  -   (71)

Occupancy and bank premises - hurricane repair

  (350)  - 

Core other expense

  26,603   15,360 

Pre-Tax Income:

        

Pre-tax income

  15,062   5,005 

(Gains) 1osses on former bank premises and equipment

  -   (126)

(Gains) 1osses on sale of securities

  5   (25)

Acquisition-related expenses (2)

  10   1,212 

Stock option exercises - excess taxes (founder's grants)

  -   71 

Occupancy and bank premises - hurricane repair

  350   - 

Core pre-tax income

  15,427   6,137 

Provision for Income Taxes: (1)

        

Provision for income taxes

  2,733   506 

Tax on (gains) on former bank premises and equipment

  -   (26)

Tax on (gains) on sale of securities

  1   (5)

Tax on acquisition-related expenses (2)

  2   91 

Tax on stock option exercises (founder's grants)

  -   602 

Tax on occupancy and bank premises - hurricane repair

  74   - 

Core provision for income taxes

 $2,810  $1,168 

 

 

  

For the Three Months Ended March 31,

 
  

2021

  

2020

 
  

(Dollars in thousands, except per share data)

 

Net Income:

        

Net income

 $12,329  $4,499 

(Gains) losses on former bank premises and equipment , net of tax

  -   (100)

Losses (Gains) on sale of securities, net of tax

  4   (20)

Acquisition-related expenses (2), net of tax

  8   1,121 

Stock option exercises, net of tax (founder's grants)

  -   (531)

Occupancy and bank premises - hurricane repair, net of tax

  277   - 

Core net income

 $12,618  $4,969 

Diluted Earnings Per Share:

        

Diluted earnings per share

 $0.59  $0.34 

(Gains) losses on former bank premises and equipment , net of tax

  -   (0.01)

(Gains) losses on sale of securities, net of tax

  -   - 

Acquisition-related expenses (2), net of tax

  -   0.08 

Stock option exercises (founder's grants)

  -   (0.04)

Occupancy and bank premises - hurricane repair, net of tax

  0.02   - 

Core diluted earnings per share

 $0.61  $0.37 

 

(1)         Tax rates, exclusive of certain nondeductible acquisition-related expenses and goodwill, utilized were 21% for both 2021 and 2020. These rates approximated the marginal tax rates for the applicable periods.

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

 

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

 

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

 

  

As of March 31,

2021

  

As of December 31,

2020

 
  

(Dollars in thousands, except per

share data) (Unaudited)

 

Tangible Common Equity

        

Total shareholders’ equity

 $416,701  $409,963 

Adjustments:

        

Goodwill

  (53,753)  (53,862)

Core deposit and other intangibles

  (9,406)  (9,734)

Total tangible common equity

 $353,542  $346,367 

Common shares outstanding(1)

  20,804,753   20,621,437 

Book value per common share(1)

 $20.03  $19.88 

Tangible book value per common share(1)

  16.99   16.80 

 


(1)         Excludes the dilutive effect, if any, of 116,083 and 73,846 shares of common stock issuable upon exercise of outstanding stock options and restricted stock awards as of March 31, 2021 and December 31, 2020, respectively.

 

 

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

 

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

 

  

As of March 31,

2021

  

As of

December 31,

2020

 
  

(Dollars in thousands, except per

share data) (Unaudited)

 

Tangible Common Equity

        

Total shareholders’ equity

 $416,701  $409,963 

Adjustments:

        

Goodwill

  (53,753)  (53,862)

Core deposit and other intangibles

  (9,406)  (9,734)

Total tangible common equity

 $353,542  $346,367 

Tangible Assets

        

Total assets

 $4,443,586  $4,160,360 

Adjustments:

        

Goodwill

  (53,753)  (53,862)

Core deposit and other intangibles

  (9,406)  (9,734)

Total tangible assets

 $4,380,427  $4,096,764 

Common Equity to Total Assets

  9.4%  9.9%

Tangible Common Equity to Tangible Assets

  8.1   8.5 

 

 

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, 2020 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, 2020.

 

Item 2.         Unregistered Sales of Equity Securities and Use of Proceed

 

(a)

Not applicable.

 

(b)

Not applicable.

 

(c)

On December 13, 2018, our board of directors approved a resolution authorizing management to repurchase shares of its common stock with an aggregate purchase price of up to $15.0 million from time to time, subject to certain limitations and conditions. The stock repurchase program was effective immediately and provided for a term of 24 months. The stock repurchase program did not obligate Business First to repurchase any shares of its common stock. As of December 31, 2019, $12.5 million remained available to repurchase shares under the stock repurchase program. This plan was terminated on October 22, 2020. Between January 1, 2020 and October 22, 2020, $5.0 million was spent on repurchasing 434,781 shares of common stock under the 2018 stock repurchase program.

 

On October 22, 2020, the Company’s board of directors approved a resolution authorizing management to repurchase shares of its common stock with an aggregate purchase price of up to $30.0 million from time to time, subject to certain limitations and conditions. This 2020 stock repurchase program is effective until December 31, 2021. The 2020 stock repurchase program does not obligate the Company to repurchase any shares of its common stock. The Company repurchased 77,594 shares for $1.5 million under the 2020 stock repurchase program between October 22, 2020 and March 31, 2021.

 

Period

 

(a)

Total number

of shares

purchased

  

(b)

Average price

paid per share

  

(c)

Total number of shares

purchased as part of

publicly announced

plans or programs

  

(d)

Maximum number (or

approximate dollar

value) of shares that

may yet be purchased

under the plans or

programs

 

Month #1: January 1 through January 31, 2021

    $     $29,202,000 

Month #2: February 1 through February 28, 2021

  31,794   20.84   31,794   28,539,000 

Month #3: March 1 through March 31, 2021

           28,539,000 

Total

  31,794  $20.84   31,794  $28,539,000 

 

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)).

  

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.
  

10.1

Form of Subordinated Note Purchase Agreement dated March 26, 2021 by and among Business First Bancshares, Inc. and the Purchasers named therein (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K files by Business First Bancshares, Inc. on March 26, 2021 (File No. 001-38447)).

  

10.2

Supplemental Executive Retirement Plan Participation Agreement, dated as of January 7, 2021, between b1BANK and Gregory Robertson (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on January 13, 2021 (File No. 001-38447)).

  

31.1

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

  

31.2

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

  

32.1

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

  

101.INS

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 6, 2021

/s/ David R. Melville, III

 

David R. Melville, III

 

President and Chief Executive Officer

  

May 6, 2021

/s/ Gregory Robertson

 

Gregory Robertson

 

Chief Financial Officer

 

 

60