Business First Bancshares Inc.
Business First Bancshares Inc. details
Business First Bancshares, Inc., through its banking subsidiary b1BANK, formerly known as Business First Bank, operates 43 banking centers in markets across Louisiana and in the Dallas, Texas area. b1BANK provides commercial and personal banking, treasury management and wealth solutions services to small to midsize businesses and their owners and employees.
Ticker:BFST
Employees: 666
Filing
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-38447
BUSINESS FIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Louisiana 20-5340628
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
500 Laurel Street, Suite 101
Baton Rouge, Louisiana 70801
(Address of principal executive offices) (Zip Code)
(225) 248-7600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $1.00 per share BFST NASDAQ Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2022, the issuer has outstanding 25,105,136 shares of common stock, par value $1.00 per share.
Table of Contents
BUSINESS FIRST BANCSHARES, INC.
PART I - FINANCIAL INFORMATION
1
Item 1. Financial Statements
1
Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021
1
Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021
2
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021
3
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2022 and 2021
4
Unaudited Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2022 and 2021
6
Notes to Unaudited Consolidated Financial Statements
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3. Quantitative and Qualitative Disclosures About Market Risk
62
Item 4. Controls and Procedures
62
PART II - OTHER INFORMATION
63
Item 1. Legal Proceedings
63
Item 1A. Risk Factors
63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
63
Item 3. Defaults Upon Senior Securities
63
Item 4. Mine Safety Disclosures
63
Item 5. Other Information
63
Item 6. Exhibits
64
Signatures
65
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30, 2022 December 31,
(Unaudited) 2021
ASSETS
Cash and Due from Banks $ 152,671 $ 68,375
Federal Funds Sold 11,137 227,044
Securities Available for Sale, at Fair Values 884,960 1,021,061
Mortgage Loans Held for Sale 545 1,200
Loans and Lease Receivable, Net of Allowance for Loan Losses of $ 35,201 at September 30, 2022 and $ 29,112 at December 31, 2021 4,394,699 3,160,496
Premises and Equipment, Net 63,765 58,155
Accrued Interest Receivable 22,454 19,597
Other Equity Securities 39,390 16,619
Other Real Estate Owned 840 1,427
Cash Value of Life Insurance 88,743 60,380
Deferred Taxes 36,691 8,822
Goodwill 88,543 59,894
Core Deposit and Customer Intangible 14,567 12,203
Other Assets 7,686 11,105
Total Assets $ 5,806,691 $ 4,726,378
LIABILITIES
Deposits:
Noninterest Bearing $ 1,613,310 $ 1,291,036
Interest Bearing 2,972,795 2,786,247
Total Deposits 4,586,105 4,077,283
Securities Sold Under Agreements to Repurchase 22,072 19,121
Short Term Borrowings 5,009 20
Federal Home Loan Bank Borrowings 534,059 82,022
Subordinated Debt 110,902 81,427
Subordinated Debt - Trust Preferred Securities 5,000 5,000
Accrued Interest Payable 1,023 1,354
Other Liabilities 34,519 26,783
Total Liabilities 5,298,689 4,293,010
Commitments and Contingencies (See Note 10)
SHAREHOLDERS' EQUITY
Preferred Stock, No Par Value; 5,000,000 Shares Authorized; 72,010 and 0 Shares ($ 1,000 Liquidation Preference) Issued at September 30, 2022 and December 31, 2021, respectively 72,010 -
Common Stock, $ 1 Par Value; 50,000,000 Shares Authorized; 22,605,136 and 20,400,349 Shares Issued and Outstanding at September 30, 2022 and December 31, 2021, respectively 22,605 20,400
Additional Paid-in Capital 347,721 292,271
Retained Earnings 150,336 121,874
Accumulated Other Comprehensive Loss (84,670 ) (1,177 )
Total Shareholders' Equity 508,002 433,368
Total Liabilities and Shareholders' Equity $ 5,806,691 $ 4,726,378
The accompanying notes are an integral part of these financial statements.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For The Three Months Ended September 30, For The Nine Months Ended September 30,
2022 2021 2022 2021
Interest Income:
Interest and Fees on Loans $ 58,846 $ 37,900 $ 148,668 $ 118,454
Interest and Dividends on Non-taxable Securities 1,014 3,215 3,138 8,556
Interest and Dividends on Taxable Securities 3,186 383 9,049 1,060
Interest on Federal Funds Sold and Due From Banks 427 36 754 77
Total Interest Income 63,473 41,534 161,609 128,147
Interest Expense:
Interest on Deposits 6,286 3,060 11,106 9,538
Interest on Borrowings 3,707 1,180 6,986 3,069
Total Interest Expense 9,993 4,240 18,092 12,607
Net Interest Income 53,480 37,294 143,517 115,540
Provision for Loan Losses 3,273 1,147 7,835 6,747
Net Interest Income after Provision for Loan Losses 50,207 36,147 135,682 108,793
Other Income:
Service Charges on Deposit Accounts 2,116 1,763 6,007 5,013
Loss on Sales of Securities (7 ) (11 ) (46 ) (66 )
Gain on Sales of Loans 264 93 515 10,114
Other Income 5,742 4,266 14,556 13,063
Total Other Income 8,115 6,111 21,032 28,124
Other Expenses:
Salaries and Employee Benefits 21,906 16,791 63,017 48,470
Occupancy and Equipment Expense 5,122 3,912 14,449 11,893
Other Expenses 13,918 8,627 33,597 26,600
Total Other Expenses 40,946 29,330 111,063 86,963
Income Before Income Taxes 17,376 12,928 45,651 49,954
Provision for Income Taxes 3,576 2,617 9,363 9,886
Net Income $ 13,800 $ 10,311 $ 36,288 $ 40,068
Earnings Per Share:
Basic $ 0.61 $ 0.51 $ 1.65 $ 1.95
Diluted $ 0.61 $ 0.50 $ 1.64 $ 1.94
The accompanying notes are an integral part of these financial statements.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Consolidated Net Income $ 13,800 $ 10,311 $ 36,288 $ 40,068
Other Comprehensive Income (Loss):
Unrealized Loss on Investment Securities (27,588 ) (1,246 ) (106,774 ) (6,202 )
Unrealized Gain (Loss) on Share of Other Equity Investments (38 ) (185 ) 1,041 (43 )
Reclassification Adjustment for Losses on Sale of AFS Investment Securities Included in Net Income 7 11 46 66
Income Tax Effect 5,683 298 22,194 1,298
Other Comprehensive Loss (21,936 ) (1,122 ) (83,493 ) (4,881 )
Consolidated Comprehensive Income (Loss) $ (8,136 ) $ 9,189 $ (47,205 ) $ 35,187
The accompanying notes are an integral part of these financial statements.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Dollars in thousands, except per share data)
Accumulated
Additional Other Total
Preferred Common Paid-In Retained Comprehensive Shareholders'
Stock Stock Capital Earnings Income (Loss) Equity
Balances at June 30, 2021 $ - $ 20,741 $ 299,014 $ 104,382 $ 6,869 $ 431,006
Comprehensive Income:
Net Income - - - 10,311 - 10,311
Other Comprehensive Loss - - - - (1,122 ) (1,122 )
Cash Dividends Declared, $ 0.12 Per Share - - - (2,450 ) - (2,450 )
Stock Issuance - 10 140 - - 150
Surrendered Shares of Options Exercised - (7 ) (143 ) - - (150 )
Stock Based Compensation Cost - - 814 - - 814
Stock Repurchase - (360 ) (7,978 ) - - (8,338 )
Balances at September 30, 2021 $ - $ 20,384 $ 291,847 $ 112,243 $ 5,747 $ 430,221
Balances at June 30, 2022 $ - $ 22,579 $ 346,382 $ 139,232 $ (62,734 ) $ 445,459
Comprehensive Income:
Net Income - - - 13,800 - 13,800
Other Comprehensive Loss - - - - (21,936 ) (21,936 )
Cash Dividends Declared, $ 0.12 Per Share - - - (2,696 ) - (2,696 )
Preferred Stock Issuance 72,010 - - - - 72,010
Stock Issuance - 15 209 - - 224
Surrendered Shares of Options Exercised - (8 ) (179 ) - - (187 )
Stock Based Compensation Cost - 19 1,309 - - 1,328
Balances at September 30, 2022 $ 72,010 $ 22,605 $ 347,721 $ 150,336 $ (84,670 ) $ 508,002
The accompanying notes are an integral part of these financial statements.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Dollars in thousands, except per share data)
Accumulated
Additional Other Total
Preferred Common Paid-In Retained Comprehensive Shareholders'
Stock Stock Capital Earnings Income (Loss) Equity
Balances at December 31, 2020 $ - $ 20,621 $ 299,540 $ 79,174 $ 10,628 $ 409,963
Comprehensive Income:
Net Income - - - 40,068 - 40,068
Other Comprehensive Loss - - - - (4,881 ) (4,881 )
Cash Dividends Declared, $ 0.34 Per Share - - - (6,999 ) - (6,999 )
Stock Issuance - 235 2,975 - - 3,210
Surrendered Shares of Options Exercised - (96 ) (2,180 ) - - (2,276 )
Stock Based Compensation Cost - 99 1,960 - - 2,059
Stock Repurchase - (475 ) (10,448 ) - - (10,923 )
Balances at September 30, 2021 $ - $ 20,384 $ 291,847 $ 112,243 $ 5,747 $ 430,221
Balances at December 31, 2021 $ - $ 20,400 $ 292,271 $ 121,874 $ (1,177 ) $ 433,368
Comprehensive Income:
Net Income - - - 36,288 - 36,288
Other Comprehensive Loss - - - - (83,493 ) (83,493 )
Cash Dividends Declared, $ 0.36 Per Share - - - (7,826 ) - (7,826 )
Preferred Stock Issuance 72,010 - - - - 72,010
Stock Issuance - 2,094 53,376 - - 55,470
Surrendered Shares of Options Exercised - (8 ) (179 ) - - (187 )
Stock Based Compensation Cost - 119 2,253 - - 2,372
Balances at September 30, 2022 $ 72,010 $ 22,605 $ 347,721 $ 150,336 $ (84,670 ) $ 508,002
The accompanying notes are an integral part of these financial statements.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For The Nine Months Ended September 30,
2022 2021
Cash Flows From Operating Activities:
Consolidated Net Income $ 36,288 $ 40,068
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Loan Losses 7,835 6,747
Depreciation and Amortization 3,642 3,117
Net Accretion of Purchase Accounting Adjustments (4,109 ) (5,991 )
Stock Based Compensation Cost 2,372 2,059
Net Amortization of Securities 4,632 5,242
Loss on Sales of Securities 46 66
Gain on Sale of Loans (347 ) (9,179 )
Income on Other Equity Securities (792 ) (2,074 )
Loss on Sale of Other Real Estate Owned, Net of Writedowns 95 1,369
Increase in Cash Value of Life Insurance (1,405 ) (1,029 )
Deferred Income Tax Expense (Benefit) (2,651 ) 617
Changes in Assets and Liabilities:
(Increase) Decrease in Accrued Interest Receivable (254 ) 4,870
(Increase) Decrease in Other Assets 6,446 (5,503 )
Decrease in Accrued Interest Payable (550 ) (664 )
Increase in Other Liabilities 6,949 2,074
Net Cash Provided by Operating Activities 58,197 41,789
Cash Flows From Investing Activities:
Purchases of Securities Available for Sale (82,380 ) (499,686 )
Proceeds from Maturities / Sales of Securities Available for Sale 35,197 22,206
Proceeds from Paydowns of Securities Available for Sale 72,248 72,150
Net Cash Received (Paid) in Acquisition 163,460 (7,256 )
Purchases of Other Equity Securities (18,076 ) (3,084 )
Redemption of Other Equity Securities 3,215 2,549
Purchase of Life Insurance (15,000 ) (15,000 )
Proceeds from Death Benefit of Cash Value of Life Insurance 188 1,974
Proceeds from Sale of SBA PPP Loans - 243,607
Net Increase in Loans (897,943 ) (305,615 )
Net Purchases of Premises and Equipment (7,193 ) (1,050 )
Loss on Disposal of Premises and Equipment 717 -
Proceeds from Sales of Other Real Estate 646 6,873
Net Decrease in Federal Funds Sold 215,907 169,506
Net Cash Used in Investing Activities (529,014 ) (312,826 )
(CONTINUED)
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For The Nine Months Ended September 30,
2022 2021
Cash Flows From Financing Activities:
Net Increase in Deposits 31,587 152,298
Net Increase in Securities Sold Under Agreements to Repurchase 2,951 5,370
Net Increase in Federal Funds Purchased - 16,087
Net Advances on Federal Home Loan Bank Borrowings 451,162 5,000
Net Proceeds (Repayments) of Short Term Borrowings 4,989 (5,000 )
Net Repayments from Long Term Borrowings - (6,000 )
Proceeds from Issuance of Subordinated Debt - 52,500
Proceeds from Issuance of Preferred Stock 72,010 -
Proceeds from Issuance of Common Stock 427 3,210
Surrendered Shares of Options Exercised (187 ) (2,276 )
Repurchase of Common Stock - (10,923 )
Payment of Dividends on Common Stock (7,826 ) (6,999 )
Net Cash Provided by Financing Activities 555,113 203,267
Net Increase (Decrease) in Cash and Cash Equivalents 84,296 (67,770 )
Cash and Cash Equivalents at Beginning of Period 68,375 149,131
Cash and Cash Equivalents at End of Period $ 152,671 $ 81,361
Supplemental Disclosures for Cash Flow Information:
Cash Payments for:
Interest on Deposits $ 11,558 $ 10,134
Interest on Borrowings $ 6,865 $ 3,137
Income Tax Payments $ 8,065 $ 12,540
Supplemental Schedule for Noncash Investing and Financing Activities:
Change in the Unrealized Gain (Loss) on Securities Available for Sale $ (106,728 ) $ (6,136 )
Change in the Unrealized Gain (Loss) on Equity Securities $ 1,041 $ (43 )
Change in Deferred Tax Effect on the Unrealized (Gain) Loss on Securities Available for Sale $ 22,194 $ 1,298
Transfer of Loans to Other Real Estate $ 154 $ 1,343
Acquisitions:
Fair Value of Tangible Assets Acquired $ 531,510 $ 1,343
Other Intangible Assets Acquired 3,875 4,300
Liabilities Assumed 508,991 6
Net Identifiable Assets Acquired Over Liabilities Assumed $ 26,394 $ 5,637
Subordinated Debt Issued as Part of Consideration of Smith Shellnut Wilson $ - $ 3,927
The accompanying notes are an integral part of these financial statements.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation –
The unaudited consolidated financial statements include the accounts of Business First Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, b1BANK (the “Bank”), and the Bank’s wholly-owned subsidiaries, Business First Insurance, LLC and Smith Shellnut Wilson, LLC. The Bank operates out of branch locations in markets across Louisiana, the Dallas/Fort Worth metroplex and Houston, Texas. As a state bank, it is subject to regulation by the Office of Financial Institutions, State of Louisiana, and the Federal Deposit Insurance Corporation, and undergoes periodic examinations by these agencies. The Company is also regulated by the Federal Reserve and is subject to periodic examinations.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial results for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.
These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) have been omitted or abbreviated. These interim financial statements should be read in conjunction with the audited consolidated financial statements and footnote disclosures for the Company’s previously filed Form 10-K for the year ended December 31, 2021.
Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Critical accounting estimates that are particularly susceptible to significant change for the Company include the determination of the acquired loans and allowance for loan losses and purchase accounting adjustments (other than loans). Other estimates include goodwill, fair value of financial instruments, investment securities and the assessment of income taxes. Management does not anticipate any material changes to estimates in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, economic conditions in the Company’s markets, and changes in applicable banking regulations. Actual results may ultimately differ from estimates.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Reclassifications –
Certain reclassifications may have been made to conform to the classifications adopted for reporting in 2022. These reclassifications have no material effect on previously reported shareholders’ equity or net income.
Note 3 – Mergers and Acquisitions –
Texas Citizens Bancorp, Inc.
On March 1, 2022, the Company consummated the merger of Texas Citizens Bancorp, Inc. (“TCBI”), headquartered in Pasadena, Texas, with and into the Company, pursuant to the terms of that certain Agreement and Plan of Reorganization (the “Reorganization Agreement”), dated as of October 20, 2021, by and between the Company and TCBI (the “Merger”). Also on March 1, 2022, TCBI’s wholly-owned banking subsidiary, Texas Citizens Bank, National Association, was merged with and into b1BANK. Pursuant to the terms of the Reorganization Agreement, upon consummation of the Merger, the Company issued 2,069,532 shares of its common stock to the former shareholders of TCBI. At February 28, 2022, TCBI reported $534.2 million in total assets, $349.5 million in loans and $477.2 million in deposits.
The following table reflects the consideration paid for TCBI’s net assets and the identifiable assets purchased and liabilities assumed at their fair values as of March 1, 2022. The fair values are provisional estimates and may be adjusted for a period of up to one year from the date of acquisition if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
Cost and Allocation of Purchase Price for Texas Citizens Bancorp, Inc. (TCBI):
(Dollars in thousands, except per share data)
Purchase Price:
Shares Issued to TCBI's Shareholders on March 1, 2022 2,069,532
Closing Stock Price on February 28, 2022 $ 26.19
Total Stock Issued $ 54,201
Other Consideration, Including Equity Awards 842
Total Purchase Price $ 55,043
Net Assets Acquired:
Cash and Cash Equivalents $ 163,460
Securities Available for Sale 370
Loans and Leases Receivable 338,027
Premises and Equipment, Net 2,776
Cash Value of Life Insurance 12,146
Core Deposit Intangible 3,875
Other Assets 14,731
Total Assets 535,385
Deposits 477,277
Borrowings 30,708
Other Liabilities 1,006
Total Liabilities 508,991
Net Assets Acquired 26,394
Goodwill Resulting from Merger $ 28,649
The Company has recorded approximately $5.0 million and $515,000 of acquisition-related costs within merger and conversion-related expenses and salaries and benefits for the nine months ended September 30, 2022 and year ended December 31, 2021.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following is a description of the methods used to determine the fair values of significant assets acquired and liabilities assumed presented above.
Cash and Cash Equivalents: The carrying amount of these assets was a reasonable estimate of fair value based on the short-term nature of these assets.
Securities Available for Sale: Fair values for securities were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that were not in an active market or other inputs that were observable in the market. In the absence of observable inputs, fair value was estimated based on pricing models/estimations.
Loans and Leases Receivable: Fair values for loans were based on a discounted cash flow methodology that considered factors including, but not limited to, loan type, classification status, remaining term, prepayment speed, and current discount rates. The discount rates used for loans were based on current market rates for new originations of comparable loans and included adjustments for any liquidity concerns. The discount rate did not include an explicit factor for credit losses, as that was included within the estimated cash flows.
Core Deposit Intangible: The fair value for core deposit intangible assets was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, net maintenance cost of the deposit base, including interest cost, and alternative cost of funds. The CDI is being amortized over 10 years based upon the period over which estimated economic benefits are estimated to be received.
Deposits: The fair values used for the demand and savings deposits, by definition, equal the amount payable on demand at the acquisition date. Fair values for time deposits were estimated using a discounted cash flow analysis, that applied interest rates currently being offered to the contractual interest rates on such time deposits.
Borrowings: Fair values for borrowings were based on estimated market rates over the remaining terms of the subordinated debt issuances.
Pro forma tables for TCBI were impractical to include due to the cost versus benefit of including such disclosures.
Smith Shellnut Wilson, LLC
On April 1, 2021, the Company consummated the acquisition, through b1BANK, of Smith Shellnut Wilson, LLC (“SSW”), headquartered in Ridgeland, Mississippi, pursuant to the terms of the definitive agreement dated as of March 22, 2021. Pursuant to the terms of the agreement, upon consummation of the acquisition, the Company paid $7.3 million in cash and issued $3.9 million in subordinated debt, which is further described in Note 7, to the former owners of SSW. At March 31, 2021, SSW reported $3.6 million in total assets and $2.3 million in total liabilities. As part of the acquisition, the Company recorded $6.5 million in goodwill and $4.3 million in customer intangibles to be amortized over a 10 year period.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Earnings per Common Share –
Basic earnings per share (“EPS”) represents income available to common shareholders divided by the weighted average number of common shares outstanding; no dilution for any potentially convertible shares is included in the calculation. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The potential common shares that may be issued by the Company relate to outstanding stock options and unvested restricted stock awards (“RSAs”), excluding any that were antidilutive. In addition, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of EPS pursuant to the two-class method.
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(Dollars in thousands, except per share data)
Numerator:
Net Income Available to Common Shares $ 13,800 $ 10,311 $ 36,288 $ 40,068
Denominator:
Weighted Average Common Shares Outstanding 22,468,939 20,384,879 21,990,273 20,570,506
Dilutive Effect of Stock Options and RSAs 181,701 128,959 173,679 121,838
Weighted Average Dilutive Common Shares 22,650,640 20,513,838 22,163,952 20,692,344
Basic Earnings Per Common Share From Net Income Available to Common Shares $ 0.61 $ 0.51 $ 1.65 $ 1.95
Diluted Earnings Per Common Share From Net Income Available to Common Shares $ 0.61 $ 0.50 $ 1.64 $ 1.94
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Securities –
The amortized cost and fair values of securities available for sale as of September 30, 2022 and December 31, 2021 are summarized as follows:
September 30, 2022
(Dollars in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury Securities $ 32,810 $ - $ 3,020 $ 29,790
U.S. Government Agencies 50,305 - 3,365 46,940
Corporate Securities 47,428 - 2,268 45,160
Mortgage-Backed Securities 518,575 - 62,366 456,209
Municipal Securities 343,952 3 37,094 306,861
Total Securities Available for Sale $ 993,070 $ 3 $ 108,113 $ 884,960
December 31, 2021
(Dollars in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury Securities $ 22,751 $ - $ 437 $ 22,314
U.S. Government Agencies 27,867 2 376 27,493
Corporate Securities 45,876 812 106 46,582
Mortgage-Backed Securities 555,528 3,246 6,435 552,339
Municipal Securities 370,421 4,100 2,188 372,333
Total Securities Available for Sale $ 1,022,443 $ 8,160 $ 9,542 $ 1,021,061
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following tables present a summary of securities with gross unrealized losses and fair values at September 30, 2022 and December 31, 2021, aggregated by investment category and length of time in a continued unrealized loss position. Due to the nature of these investments and current prevailing market prices, these unrealized losses are considered a temporary impairment of the securities.
September 30, 2022
Less Than 12 Months 12 Months or Greater Total
(Dollars in thousands)
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
U.S. Treasury Securities $ 9,681 $ 411 $ 20,109 $ 2,609 $ 29,790 $ 3,020
U.S. Government Agencies 24,250 750 22,690 2,615 46,940 3,365
Corporate Securities 21,443 1,479 3,716 789 25,159 2,268
Mortgage-Backed Securities 207,213 20,895 248,650 41,471 455,863 62,366
Municipal Securities 185,801 19,234 90,757 17,860 276,558 37,094
Total Securities Available for Sale $ 448,388 $ 42,769 $ 385,922 $ 65,344 $ 834,310 $ 108,113
December 31, 2021
Less Than 12 Months 12 Months or Greater Total
(Dollars in thousands)
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
U.S. Treasury Securities $ 22,314 $ 437 $ - $ - $ 22,314 $ 437
U.S. Government Agencies 24,980 376 - - 24,980 376
Corporate Securities 7,350 106 - - 7,350 106
Mortgage-Backed Securities 407,986 6,108 18,985 327 426,971 6,435
Municipal Securities 145,649 1,872 10,161 316 155,810 2,188
Total Securities Available for Sale $ 608,279 $ 8,899 $ 29,146 $ 643 $ 637,425 $ 9,542
Management evaluates securities for other than temporary impairment when economic and market conditions warrant such evaluations. Consideration is given to the extent and length of time the fair value has been below cost, the reasons for the decline in value, and the Company’s intent to sell a security or whether it is more likely than not that the Company will be required to sell the security before the recovery of its amortized cost. The Company has developed a process to identify securities that could potentially have a credit impairment that is other than temporary. This process involves evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. When the Company determines that a security is deemed to be other than temporarily impaired, an impairment loss is recognized.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair values of securities available for sale as of September 30, 2022 by contractual maturity are shown below. Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties.
Amortized Fair
Cost Value
(Dollars in thousands)
Less Than One Year $ 22,460 $ 22,281
One to Five Years 227,810 212,962
Over Five to Ten Years 388,926 347,955
Over Ten Years 353,874 301,762
Total Securities Available for Sale $ 993,070 $ 884,960
Note 6 – Loans and the Allowance for Loan Losses –
Loans receivable at September 30, 2022 and December 31, 2021 are summarized as follows:
September 30, December 31,
2022 2021
(Dollars in thousands)
Real estate loans:
Construction and land $ 636,869 $ 548,528
Farmland 190,829 87,463
1-4 family residential 545,880 467,699
Multi-family residential 102,056 97,508
Nonfarm nonresidential 1,823,408 1,144,426
Commercial 1,012,778 721,385
Consumer and other 118,080 122,599
Total loans held for investment 4,429,900 3,189,608
Less:
Allowance for loan losses (35,201 ) (29,112 )
Net loans $ 4,394,699 $ 3,160,496
As of September 30, 2022 and December 31, 2021, $3.0 million and $5.4 million, respectively, of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans remain outstanding, all of which are included in the commercial loan portfolio.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The performing 1-4 family residential, multi-family residential, commercial real estate, and commercial loans, are pledged, under a blanket lien, as collateral securing advances from the FHLB at September 30, 2022 and December 31, 2021.
Net deferred loan origination fees were $12.7 million and $7.7 million at September 30, 2022 and December 31, 2021, respectively, and are netted in their respective loan categories above. In addition to loans issued in the normal course of business, the Company considers overdrafts on customer deposit accounts to be loans, and reclassifies overdrafts as loans in its consolidated balance sheets. At September 30, 2022 and December 31, 2021, overdrafts of $972,000 and $2.4 million, respectively, have been reclassified to loans.
The Bank is the lead lender on participations sold, without recourse, to other financial institutions which amounts are not included in the consolidated balance sheets. The unpaid principal balances of mortgages and other loans serviced for others were approximately $680.0 million and $461.8 million at September 30, 2022 and December 31, 2021, respectively. The Company had servicing rights of $2.0 million and $1.4 million recorded as of September 30, 2022 and December 31, 2021, respectively, and is recorded within other assets.
The Bank grants loans and extensions of credit to individuals and a variety of businesses and corporations located in its general market areas throughout Louisiana and Texas. Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans and, therefore, no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining net unaccreted purchase discount. To the extent the calculated loss is greater than the remaining net unaccreted discount, an allowance is recorded for such difference. For purchased impaired credits, cash flow re-estimations are performed at least quarterly for each acquired impaired loan or loan pool. Increases in estimated cash flows above those expected at the time of acquisition are recognized on a prospective basis as interest income over the remaining life of the loan and/or pool. Decreases in expected cash flows subsequent to acquisition generally result in recognition of a provision for credit loss.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Total loans held for investment at September 30, 2022 includes $541.9 million of loans acquired in acquisitions that were recorded at fair value as of the acquisition date. Included in the acquired balances at September 30, 2022 were acquired impaired loans accounted for under the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”) with a net carrying amount of $57.4 million and acquired performing loans not accounted for under ASC 310-30 totaling $488.4 million with a remaining purchase discount of $3.8 million.
Total loans held for investment at December 31, 2021 includes $379.0 million of loans acquired in acquisitions that were recorded at fair value as of the acquisition date. Included in the acquired balances at December 31, 2021 were acquired impaired loans accounted for under ASC 310-30 with a net carrying amount of $51.2 million and acquired performing loans not accounted for under ASC 310-30 totaling $331.3 million with a remaining purchase discount of $3.5 million.
The following tables set forth, as of September 30, 2022 and December 31, 2021, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.
Allowance for Credit Losses and Recorded Investment in Loans Receivable
September 30, 2022
(Dollars in thousands)
Real Estate:
Real Estate: Consumer
Real Estate: Construction and Land Real Estate: Farmland Real Estate: 1-4 Family Residential Multi-family Commercial Total
Nonfarm Nonresidential and Other
Residential
Allowance for credit losses:
Beginning Balance $ 4,498 $ 721 $ 3,791 $ 774 $ 9,794 $ 8,358 $ 1,176 $ 29,112
Charge-offs (6 ) - (3 ) - (51 ) (1,974 ) (400 ) (2,434 )
Recoveries 25 - 18 - 45 446 154 688
Provision 528 812 698 (17 ) 3,502 2,104 208 7,835
Ending Balance $ 5,045 $ 1,533 $ 4,504 $ 757 $ 13,290 $ 8,934 $ 1,138 $ 35,201
Ending Balance:
Individually evaluated for impairment $ 24 $ - $ 97 $ - $ 74 $ 125 $ 25 $ 345
Collectively evaluated for impairment $ 5,021 $ 1,533 $ 4,407 $ 757 $ 13,216 $ 8,809 $ 1,113 $ 34,856
Purchased Credit Impaired $ - $ - $ - $ - $ - $ - $ - $ -
Loans receivable:
Ending Balance $ 636,869 $ 190,829 $ 545,880 $ 102,056 $ 1,823,408 $ 1,012,778 $ 118,080 $ 4,429,900
Ending Balance:
Individually evaluated for impairment $ 832 $ 18 $ 3,672 $ - $ 2,861 $ 6,510 $ 169 $ 14,062
Collectively evaluated for impairment $ 635,117 $ 190,804 $ 526,120 $ 102,056 $ 1,787,246 $ 1,000,841 $ 117,161 $ 4,359,345
Purchased Credit Impaired $ 920 $ 7 $ 16,088 $ - $ 33,301 $ 5,427 $ 750 $ 56,493
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands)
Real Estate: Real Estate:
Real Estate: Construction Real Estate: Real Estate: Consumer
1-4 Family Multi-family Commercial Total
and Land Farmland Nonfarm Nonresidential and Other
Residential Residential
Allowance for credit losses:
Beginning balance $ 3,584 $ 600 $ 3,453 $ 818 $ 7,369 $ 5,018 $ 1,182 $ 22,024
Charge-offs (28 ) (1 ) (169 ) - (139 ) (830 ) (469 ) (1,636 )
Recoveries 1 2 39 - 99 417 119 677
Provision 941 120 468 (44 ) 2,465 3,753 344 8,047
Ending Balance $ 4,498 $ 721 $ 3,791 $ 774 $ 9,794 $ 8,358 $ 1,176 $ 29,112
Ending Balance:
Individually evaluated for impairment $ 26 $ - $ 110 $ - $ 83 $ 438 $ 37 $ 694
Collectively evaluated for impairment $ 4,472 $ 721 $ 3,681 $ 774 $ 9,711 $ 7,920 $ 1,139 $ 28,418
Purchased Credit Impaired $ - $ - $ - $ - $ - $ - $ - $ -
Loans receivable:
Ending Balance $ 548,528 $ 87,463 $ 467,699 $ 97,508 $ 1,144,426 $ 721,385 $ 122,599 $ 3,189,608
Ending Balance:
Individually evaluated for impairment $ 1,358 $ 74 $ 3,627 $ - $ 2,959 $ 5,514 $ 289 $ 13,821
Collectively evaluated for impairment $ 546,164 $ 87,387 $ 444,934 $ 97,508 $ 1,118,836 $ 708,346 $ 121,392 $ 3,124,567
Purchased Credit Impaired $ 1,006 $ 2 $ 19,138 $ - $ 22,631 $ 7,525 $ 918 $ 51,220
Portfolio Segment Risk Factors
Construction and land include loans to small-to-midsized businesses to construct owner-user properties, loans to developers of commercial real estate investment properties and residential developments and, to a lesser extent, loans to individual clients for construction of single-family homes in the Company’s market areas. Risks associated with these loans include fluctuations in the value of real estate, project completion risk and change in market trends. The Company is also exposed to risk based on the ability of the construction loan borrower to finance the loan or sell the property upon completion of the project, which may be affected by changes in secondary market terms and criteria for permanent financing since the time that the Company funded the loan.
Farmland loans are loans that can be, or are, used for agricultural purposes. These loans are usually repaid through permanent financing, cash flow from the borrower’s ongoing operations, development of the property, or sale of the property.
One-to-four family residential loans include first and second lien 1-4 family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences. The Company is exposed to risk based on fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship.
Multi-family residential loans are generally originated to provide permanent financing for multi-family residential income producing properties. Repayment of these loans primarily relies on successful rental and management of the property.
Nonfarm nonresidential loans are extensions of credit secured by owner-occupied and non-owner occupied collateral. Repayment is generally relied upon from the successful operations of the property. General economic conditions may impact the performance of these types of loans, including fluctuations in the value of real estate, vacancy rates, and unemployment trends.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Commercial loans include general commercial and industrial, or C&I, loans, including commercial lines of credit, working capital loans, term loans, equipment financing, asset acquisition, expansion and development loans, borrowing base loans, letters of credit and other loan products, primarily in the Company’s target markets that are underwritten on the basis of the borrower’s ability to service the debt from income. Commercial loan risk is derived from the expectation that such loans generally are serviced principally from the operations of the business, and those operations may not be successful. Any interruption or discontinuance of operating cash flows from the business, which may be influenced by events not under the control of the borrower such as economic events and changes in governmental regulations, could materially affect the ability of the borrower to repay the loan.
Consumer and other loans include a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. The risk is based on changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship, and fluctuations in the value of the real estate or personal property securing the consumer loan, if any.
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 September 30, 2022 and December 31, 2021, the credit quality indicators, disaggregated by class of loan, are as follows:
Credit Quality Indicators
September 30, 2022
Pass Special Mention Substandard Doubtful Total
(Dollars in thousands)
Real Estate Loans:
Construction and land $ 633,599 $ 509 $ 2,281 $ 480 $ 636,869
Farmland 188,721 2,083 - 25 190,829
1-4 family residential 532,752 4,346 3,546 5,236 545,880
Multi-family residential 102,038 - 18 - 102,056
Nonfarm nonresidential 1,780,039 24,927 13,978 4,464 1,823,408
Commercial 997,684 7,424 4,828 2,842 1,012,778
Consumer and other 117,273 241 322 244 118,080
Total $ 4,352,106 $ 39,530 $ 24,973 $ 13,291 $ 4,429,900
December 31, 2021
Pass Special Mention Substandard Doubtful Total
(Dollars in thousands)
Real Estate Loans:
Construction and land $ 545,071 $ 266 $ 1,850 $ 1,341 $ 548,528
Farmland 86,063 1,324 - 76 87,463
1-4 family residential 456,150 3,109 2,801 5,639 467,699
Multi-family residential 97,485 - 23 - 97,508
Nonfarm nonresidential 1,094,782 34,495 9,735 5,414 1,144,426
Commercial 704,755 7,886 3,137 5,607 721,385
Consumer and other 121,566 350 257 426 122,599
Total $ 3,105,872 $ 47,430 $ 17,803 $ 18,503 $ 3,189,608
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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 September 30, 2022 and December 31, 2021, loan balances outstanding more than 90 days past due and still accruing interest amounted to $1.1 million and $222,000, respectively. As of September 30, 2022 and December 31, 2021, loan balances outstanding on nonaccrual status amounted to $9.8 million and $12.9 million, respectively. The Bank considers all loans more than 90 days past due as nonperforming loans.
The following tables provide an analysis of the aging of loans and leases as of September 30, 2022 and December 31, 2021. Past due and nonaccrual loan amounts exclude acquired impaired loans, 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
September 30, 2022
(Dollars in thousands)
Recorded
Greater
30-59 Days 60-89 Days Total Total Loans Investment Over
Than 90 Days Current
Past Due Past Due Past Due Receivable 90 Days Past Due
Past Due
and Still Accruing
Real Estate Loans:
Construction and land $ 206 $ 106 $ 1,237 $ 1,549 $ 635,320 $ 636,869 $ 493
Farmland 50 - - 50 190,779 190,829 -
1-4 family residential 1,358 636 1,901 3,895 541,985 545,880 171
Multi-family residential - - - - 102,056 102,056 -
Nonfarm nonresidential 595 191 2,546 3,332 1,820,076 1,823,408 298
Commercial 434 143 1,738 2,315 1,010,463 1,012,778 75
Consumer and other 375 111 236 722 117,358 118,080 84
Total $ 3,018 $ 1,187 $ 7,658 $ 11,863 $ 4,418,037 $ 4,429,900 $ 1,121
December 31, 2021
(Dollars in thousands)
Recorded
Greater
30-59 Days 60-89 Days Total Total Loans Investment Over
Than 90 Days Current
Past Due Past Due Past Due Receivable 90 Days Past Due
Past Due
and Still Accruing
Real Estate Loans:
Construction and land $ 632 $ 16 $ 488 $ 1,136 $ 547,392 $ 548,528 $ -
Farmland 83 - - 83 87,380 87,463 -
1-4 family residential 917 534 1,496 2,947 464,752 467,699 107
Multi-family residential - - - - 97,508 97,508 -
Nonfarm nonresidential 222 627 1,767 2,616 1,141,810 1,144,426 -
Commercial 106 55 4,257 4,418 716,967 721,385 97
Consumer and other 392 144 271 807 121,792 122,599 18
Total $ 2,352 $ 1,376 $ 8,279 $ 12,007 $ 3,177,601 $ 3,189,608 $ 222
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of information pertaining to impaired loans as of September 30, 2022 and December 31, 2021. Purchased performing loans are placed on nonaccrual status and reported as impaired using the same criteria applied to the originated portfolio. Purchased impaired credits are excluded from this table. The interest income recognized for impaired loans was $193,000 and $334,000 for the nine months ending September 30, 2022 and the year ending December 31, 2021, respectively.
September 30, 2022
(Dollars in thousands)
Unpaid Average
Recorded Principal Related Recorded
Investment Balance Allowance Investment
With an allowance recorded:
Real Estate Loans:
Construction and land $ 66 $ 70 $ 24 $ 168
Farmland - - - -
1-4 family residential 521 566 97 321
Multi-family residential - - - -
Nonfarm nonresidential 746 786 74 697
Other Loans:
Commercial 3,624 3,768 125 1,535
Consumer and other 30 30 25 72
Total $ 4,987 $ 5,220 $ 345 $ 2,793
With no allowance recorded:
Real Estate Loans:
Construction and land $ 766 $ 786 $ - $ 822
Farmland 18 20 - 89
1-4 family residential 3,151 4,091 - 3,339
Multi-family residential - - - -
Nonfarm nonresidential 2,115 2,655 - 4,602
Other Loans:
Commercial 2,886 4,700 - 4,208
Consumer and other 139 340 - 155
Total $ 9,075 $ 12,592 $ - $ 13,215
Total Impaired Loans:
Real Estate Loans:
Construction and land $ 832 $ 856 $ 24 $ 990
Farmland 18 20 - 89
1-4 family residential 3,672 4,657 97 3,660
Multi-family residential - - - -
Nonfarm nonresidential 2,861 3,441 74 5,299
Other Loans:
Commercial 6,510 8,468 125 5,743
Consumer and other 169 370 25 227
Total $ 14,062 $ 17,812 $ 345 $ 16,008
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands)
Unpaid Average
Recorded Principal Related Recorded
Investment Balance Allowance Investment
With an allowance recorded:
Real Estate Loans:
Construction and land $ 68 $ 70 $ 26 $ 27
Farmland - - - 12
1-4 family residential 314 371 110 325
Multi-family residential - - - -
Nonfarm nonresidential 784 801 83 623
Other Loans:
Commercial 695 836 438 1,217
Consumer and other 91 92 37 80
Total $ 1,952 $ 2,170 $ 694 $ 2,284
With no allowance recorded:
Real Estate Loans:
Construction and land $ 1,290 $ 1,356 $ - $ 1,050
Farmland 74 82 - 150
1-4 family residential 3,313 4,171 - 2,835
Multi-family residential - - - 48
Nonfarm nonresidential 2,175 2,691 - 2,889
Other Loans:
Commercial 4,819 5,211 - 3,882
Consumer and other 198 467 - 184
Total $ 11,869 $ 13,978 $ - $ 11,038
Total Impaired Loans:
Real Estate Loans:
Construction and land $ 1,358 $ 1,426 $ 26 $ 1,077
Farmland 74 82 - 162
1-4 family residential 3,627 4,542 110 3,160
Multi-family residential - - - 48
Nonfarm nonresidential 2,959 3,492 83 3,512
Other Loans:
Commercial 5,514 6,047 438 5,099
Consumer and other 289 559 37 264
Total $ 13,821 $ 16,148 $ 694 $ 13,322
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As discussed in Note 3, the Company acquired loans with fair values of $338.0 million from TCBI on March 1, 2022. Of the total $338.0 million of loans acquired, $316.5 million were determined to have no evidence of deteriorated credit quality and are accounted for under ASC Topics 310-10 and 310-20. The unamortized discount related to the acquired performing loans totaled $1.7 million at March 1, 2022. The remaining $21.5 million were determined to exhibit deteriorated credit quality since origination under ASC 310-30.
The following table presents the balances acquired on March 1, 2022 which were accounted for under ASC 310-30.
Purchased
Impaired Credits
(Dollars in thousands)
Contractually required payments $ 52,899
Non-accretable difference (expected losses) (26,803 )
Cash flows expected to be collected at acquisition 26,096
Accretable yield (4,622 )
Basis in acquired loans at acquisition $ 21,474
The following is a summary of changes in the accretable difference for loans accounted for under ASC 310-30 during the nine months ended September 30, 2022:
Balance at December 31, 2021 $ 20,659
Additions 4,622
Transfers from non-accretable difference to accretable yield 4,602
Accretion (4,056 )
Changes in expected cash flows not affecting non-accretable differences (7,438 )
Balance at September 30, 2022 $ 18,389
The Bank seeks to assist customers that are experiencing financial difficulty by renegotiating loans within lending regulations and guidelines. The Bank makes loan modifications, primarily utilizing internal renegotiation programs via direct customer contact, that manage customers’ debt exposures held only by the Bank. Additionally, the Bank makes loan modifications with customers who have elected to work with external renegotiation agencies and these modifications provide solutions to customers’ entire unsecured debt structures. During the periods ended September 30, 2022 and December 31, 2021, the concessions granted to certain borrowers generally included extending the payment due dates and offering below market contractual interest rates.
Once modified in a troubled debt restructuring, a loan is generally considered impaired until its contractual maturity. At the time of the restructuring, the loan is evaluated for an allowance for credit losses. The Bank continues to specifically reevaluate the loan in subsequent periods, regardless of the borrower’s performance under the modified terms. If a borrower subsequently defaults on the loan after it is restructured, the Bank provides an allowance for credit losses for the amount of the loan that exceeds the value of the related collateral.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company had no troubled debt restructurings that had subsequently defaulted during the nine months ended September 30, 2022 and three troubled debt restructuring that had subsequently defaulted in the amount of $154,000 during the year ended December 31, 2021. During the nine months ended September 30, 2022, one loan with a pre-modification amount of $3.5 million and a post-modification balance in the amount of $3.3 million, was modified which was considered a troubled debt restructuring. During the year ended December 31, 2021, the Company did not modify any loans that were categorized as trouble debt restructurings.
As of September 30, 2022 and December 31, 2021, our loan portfolio included loans with outstanding principal balances of $438.3 million and $522.0 million, respectively, that had previously been granted payment deferrals due to the effects of the COVID-19 pandemic. As of both September 30, 2022 and December 31, 2021, the Company had no loans with outstanding principal balances still in their pandemic-related deferral periods. Under Section 4013 of the CARES Act, as extended by the Consolidated Appropriations Act of 2021, and based on the interpretive guidance released by the FASB and the applicable banking regulators, the Company determined that none of the modifications associated with the COVID-19 pandemic were troubled debt restructurings at both September 30, 2022 and December 31, 2021.
Accrued interest receivable of $5.6 million and $6.0 million was outstanding as of September 30, 2022 and December 31, 2021, respectively, for all loan deferrals.
Note 7 – Long Term Debt –
On March 26, 2021, the Company issued $52.5 million in subordinated debt. This subordinated debt bears interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031. The subordinated notes were issued to provide additional capital support to the Bank, to support growth, to better position the Company to take advantage of strategic opportunities that may arise from time to time, repayment of existing Company borrowings, and for other general corporate purposes. The subordinated notes are redeemable by the Company at its option beginning in 2026.
On April 1, 2021, the Company consummated the acquisition of SSW as discussed in Note 3. Under the terms of the acquisition, the Company issued $3.9 million in subordinated debt to the former owners of SSW. This subordinated debt bears interest at a fixed rate of 4.75% through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031.
On March 1, 2022, the Company assumed, in connection with the TCBI acquisition, three tranches of subordinated debt with an aggregate principal balance outstanding of $26.4 million. One tranche in the amount of $10.0 million bears interest at a fixed rate of 6.25% until April 11, 2023, then will reset to a floating interest rate based on a benchmark rate plus 350 basis points, adjusting quarterly, until maturity on April 11, 2028. Another tranche in the amount of $7.5 million bears a fixed rate 6.38% until December 13, 2023, then will reset to a floating interest rate based on a benchmark rate plus 350 basis points, adjusting quarterly, until maturity on December 13, 2028. The third tranche in the amount of $8.9 million bears an adjustable interest rate plus 595 basis points, based on a benchmark rate, until maturity on March 24, 2027. These notes carry an aggregate $3.1 million fair value adjustment as of September 30, 2022.
Note 8 – Federal Home Loan Bank (“FHLB”) Borrowings –
The Company had outstanding advances from the FHLB of $534.1 million and $82.0 million as of September 30, 2022 and December 31, 2021, respectively, consisting of:
One short term, seven -day, fixed rate loan of $483.0 million at September 30, 2022, with interest at 3.12%. Principal and interest was due, paid and renewed, at maturity in October 2022.
One fixed rate loan of $875,000 at September 30, 2022, that was acquired during the TCBI acquisition, with interest at 4.88% paid monthly. Principal is due at maturity in April 2025.
One fixed rate loan with an original principal balance of $60.0 million. The loan was made in 2021 and the balance at September 30, 2022 and December 31, 2021 was $50.2 million and $59.0 million, respectively, with interest at 0.89%. Monthly principal and interest payments are due monthly and the loan matures in November 2026.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
One fixed rate loan of $23.0 million at December 31, 2021, with interest at 1.59% paid monthly. Principal was due at maturity in June 2024 but was paid in full in June 2022.
Note 9 – 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 $3.6 million and $1.4 million for the nine months ended September 30, 2022 and 2021, respectively. At September 30, 2022, the Company had a weighted average lease term of 6.2 years and a weighted average discount rate of 2.62%.
Future minimum lease payments under these leases are as follows:
(Dollars in thousands)
October 1, 2022 through September 30, 2023 $ 1,090
October 1, 2023 through September 30, 2024 4,132
October 1, 2024 through September 30, 2025 3,758
October 1, 2025 through September 30, 2026 2,732
October 1, 2026 through September 30, 2027 2,178
October 1, 2027 and Thereafter 6,353
Total Future Minimum Lease Payments 20,243
Less Imputed Interest (1,632 )
Present Value of Lease Liabilities $ 18,611
Note 10 – Commitments and Contingencies –
In the normal course of business, the Bank is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of credit which are not included in the accompanying financial statements. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual amount of those instruments. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. The Bank uses the same credit policies in making such commitments and conditional obligations as it does for instruments that are included in the balance sheet. In the normal course of business, the Bank has made commitments to extend credit of approximately $1.3 billion and standby and commercial letters of credit of approximately $44.1 million at September 30, 2022.
In the normal course of business, the Bank is involved in various legal proceedings. In the opinion of management and counsel, the disposition or ultimate resolution of such proceedings would not have a material adverse effect on the Bank’s financial statements.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Preferred Stock –
On September 1, 2022, the Company entered into a securities purchase agreement with certain investors pursuant to which the Company offered and sold shares of its 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with no par value, for an aggregate purchase price of $72.0 million. Holders of the preferred stock will be entitled to receive, if, when, and as declared by the Company’s board of directors, non-cumulative cash dividends at a rate of 7.50% per share for the first five years following issuance and thereafter at a variable rate equal to the then current 3-month secured overnight financing rate (“SOFR”), reset quarterly, plus 470 basis points. The preferred stock has a perpetual term and may not be redeemed, except under certain circumstances, under the first five years of issuance. The preferred stock is non-convertible and no dividends have been declared, or paid, as of September 30, 2022.
Note 12 – Fair Value of Financial Instruments –
Fair Value Disclosures
The Company groups its financial assets and liabilities measured at fair value in three levels. Fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
● Level 1 – Includes the most reliable sources and includes quoted prices in active markets for identical assets or liabilities.
● Level 2 – Includes observable inputs. Observable inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) as well as inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).
● Level 3 – Includes unobservable inputs and should be used only when observable inputs are unavailable.
Recurring Basis
Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service. This pricing service provides information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications.
The fair values of loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics.
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the balance of assets and liabilities measured on a recurring basis as of September 30, 2022 and December 31, 2021. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.
Fair Value Level 1 Level 2 Level 3
(Dollars in thousands)
September 30, 2022
Available for Sale:
U.S. Treasury Securities $ 29,790 $ - $ 29,790 $ -
U.S. Government Agency Securities 46,940 - 46,940 -
Corporate Securities 45,160 - 25,160 20,000
Mortgage-Backed Securities 456,209 - 456,209 -
Municipal Securities 306,861 - 279,971 26,890
Loans Held for Sale 545 - 545 -
Servicing Rights 2,205 - 2,205 -
Total $ 887,710 $ - $ 840,820 $ 46,890
December 31, 2021
Available for Sale:
U.S. Treasury Securities $ 22,314 $ - $ 22,314 $ -
U.S. Government Agency Securities 27,493 - 27,493 -
Corporate Securities 46,582 - 26,582 20,000
Mortgage-Backed Securities 552,339 - 552,339 -
Municipal Securities 372,333 - 348,243 24,090
Loans Held for Sale 1,200 - 1,200 -
Servicing Rights 1,775 - 1,775 -
Total $ 1,024,036 $ - $ 979,946 $ 44,090
Nonrecurring Basis
The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis.
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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)
September 30, 2022
Assets:
Impaired Loans $ 18,614 $ - $ - $ 18,614
Other Nonperforming Assets 1,020 - - 1,020
Total $ 19,634 $ - $ - $ 19,634
December 31, 2021
Assets:
Impaired Loans $ 18,749 $ - $ - $ 18,749
Other Nonperforming Assets 1,427 - - 1,427
Total $ 20,176 $ - $ - $ 20,176
The following table provides quantitative information for impaired loans measured at fair value on a nonrecurring basis using Level 3 inputs as of the dates indicated.
Valuation Unobservable Discounted Range (Weighted Average)
Technique Input September 30, 2022 December 31, 2021
Impaired Loans Discounted Appraisals Appraisal Adjustments 10% to 100% (18%) 10% to 100% (20%)
Fair Value Financial Instruments
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. In accordance with GAAP, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Short-Term Investments – For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities – Fair value of securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans – The fair value for loans is estimated using discounted cash flow analyses, with interest rates currently being offered for similar loans to borrowers with similar credit rates. Loans with similar classifications are aggregated for purposes of the calculations. The allowance for loan losses, which was used to measure the credit risk, is subtracted from loans.
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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 September 30, 2022 and December 31, 2021 are as follows:
Carrying Total
Amount Fair Value Level 1 Level 2 Level 3
(Dollars in thousands)
September 30, 2022
Financial Assets:
Cash and Short-Term Investments $ 163,808 $ 163,808 $ 163,808 $ - $ -
Securities 884,960 884,960 - 838,070 46,890
Loans Held for Sale 545 545 - 545 -
Loans - Net 4,394,699 4,336,799 - - 4,336,799
Servicing Rights 2,033 2,205 - 2,205 -
Cash Value of BOLI 88,743 88,743 - 88,743 -
Other Equity Securities 39,390 39,390 - - 39,390
Total $ 5,574,178 $ 5,516,450 $ 163,808 $ 929,563 $ 4,423,079
Financial Liabilities:
Deposits $ 4,586,105 $ 4,576,621 $ - $ - $ 4,576,621
Borrowings 677,042 666,392 - 666,392 -
Total $ 5,263,147 $ 5,243,013 $ - $ 666,392 $ 4,576,621
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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Carrying Total
Amount Fair Value Level 1 Level 2 Level 3
(Dollars in thousands)
December 31, 2021
Financial Assets:
Cash and Short-Term Investments $ 295,419 $ 295,419 $ 295,419 $ - $ -
Securities 1,021,061 1,021,061 - 976,971 44,090
Loans Held for Sale 1,200 1,200 - 1,200 -
Loans - Net 3,160,496 3,121,433 - - 3,121,433
Servicing Rights 1,403 1,775 - 1,775 -
Cash Value of BOLI 60,380 60,380 - 60,380 -
Other Equity Securities 16,619 16,619 - - 16,619
Total $ 4,556,578 $ 4,517,887 $ 295,419 $ 1,040,326 $ 3,182,142
Financial Liabilities:
Deposits $ 4,077,283 $ 4,078,558 $ - $ - $ 4,078,558
Borrowings 187,590 195,998 - 195,998 -
Total $ 4,264,873 $ 4,274,556 $ - $ 195,998 $ 4,078,558
Note 13 – Subsequent Events –
On October 17, 2022, the Company completed an underwritten public offering of common stock. The Company issued 2,500,000 shares of its common stock at a public offering price of $20.00 per share. The net proceeds from the offering, after deducting the underwriting and offering expenses, are expected to be approximately $46.8 million.
Note 14 – Recently Issued Accounting Pronouncements –
Accounting Standards Adopted in Current Period
None
Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments introduce an impairment model that is based on current expected credit losses (“CECL”), rather than incurred losses, to estimate credit losses on certain types of financial instruments (ex. loans and held to maturity securities), including certain off-balance sheet financial instruments (ex. commitments to extend credit and standby letters of credit that are not unconditionally cancelable). The CECL should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Financial instruments with similar risk characteristics may be grouped together when estimating the CECL. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial estimate of expected credit loss would be recognized through an allowance for credit losses with an offset (i.e., increase) to the purchase price at acquisition. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. The ASU also amends the current available for sale security impairment model for debt securities whereby credit losses relating to available for sale debt securities should be recorded through an allowance for credit losses. The amendments will be applied through a modified retrospective approach, resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. On October 18, 2019, FASB approved an effective date delay until January 2023 applicable to public companies that met the definition of a “smaller reporting company” based on the most recent determination prior to October 18, 2019. The Company met the requirements for this effective date delay and has elected to delay implementation of the standard. The Company established an implementation team and engaged third-party consultants who jointly developed a project plan to provide implementation oversight. The Company has developed the model, including the inclusion of unfunded commitments, and is in the final stages of refining the model to satisfy the requirements of ASU 2016-13. The Company began to run parallel models during the second quarter of 2022 and has continued to run parallels thereafter. The future adoption of this ASU may have a material effect on the Company’s consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The main amendments eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. The effective date for the amendments are the same as the effective date for ASU 2016-13.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
When we refer in this Form 10-Q to “we,” “our,” “us,” the “Company” and “Business First,” we are referring to Business First Bancshares, Inc. and its consolidated subsidiaries, including b1BANK, which we sometimes refer to as “the Bank,” unless the context indicates otherwise.
The information contained in this Form 10-Q is accurate only as of the date of this form and the dates specified herein.
All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q (this “Report”) and other periodic reports filed by the Company, and other written or oral statements made by us or on our behalf, are “forward-looking statements,” as defined by (and subject to the “safe harbor” protections under) the federal securities laws. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and the banking industry in general. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions of a future or forward-looking nature. These statements involve estimates, assumptions, and risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements.
We believe these factors include, but are not limited to, the following:
● risks related to the integration of any other acquired businesses, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, risks related to entering a new geographic market, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the ability to retain key employees and maintain relationships with significant customers, the need for additional capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions;
● changes in the strength of the U.S. economy in general and the local economy in our local market areas adversely affecting our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral;
● economic risks posed by our geographic concentration in Louisiana, the Dallas/Fort Worth metroplex and Houston;
● the ability to sustain and continue our organic loan and deposit growth, and manage that growth effectively;
● market declines in industries to which we have exposure, such as the volatility in oil prices and downturn in the energy industry that impact certain of our borrowers and investments that operate within, or are backed by collateral associated with, the energy industry;
● volatility and direction of interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations;
● interest rate risk associated with our business;
● changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;
● increased competition in the financial services industry, particularly from regional and national institutions and emerging non-bank competitors;
● increased credit risk in our assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of our total loan portfolio;
● changes in the value of collateral securing our loans;
● deteriorating asset quality and higher loan charge-offs, and the time and effort required to resolve problem assets;
● the failure of assumptions underlying the establishment of and provisions made to our allowance for credit losses;
● changes in the availability of funds resulting in increased costs or reduced liquidity;
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● our ability to maintain important deposit customer relationships and our reputation;
● a determination or downgrade in the credit quality and credit agency ratings of the securities in our securities portfolio;
● increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;
● our ability to prudently manage our growth and execute our strategy;
● risks associated with our acquisition and de novo branching strategy;
● the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;
● legislative or regulatory developments, including changes in the laws, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters;
● government intervention in the U.S. financial system;
● changes in statutes and government regulations or their interpretations applicable to us, including changes in tax requirements and tax rates;
● natural disasters and adverse weather, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, epidemics and pandemics such as coronavirus, and other matters beyond our control; and
● other risks and uncertainties listed from time to time in our reports and documents filed with the U.S. Securities and Exchange Commission (“SEC”).
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. Additional information on these and other risk factors can be found in Item 1A. “Risk Factors” of this Report and in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC.
In the event that one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BUSINESS FIRST
The following discussion and analysis focuses on significant changes in the financial condition of Business First and its subsidiaries from December 31, 2021 to September 30, 2022, and its results of operations for the three and nine months ended September 30, 2022. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this report and should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and the notes thereto (the “Notes”) and (ii) our Annual Report on Form 10-K for the year ended December 31, 2021, including the audited consolidated financial statements and notes thereto, management’s discussion and analysis, and the risk factor disclosures contained therein. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that Business First believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Business First assumes no obligation to update any of these forward-looking statements.
Overview
We are a registered financial holding company headquartered in Baton Rouge, Louisiana. Through our wholly-owned subsidiary, b1BANK, a Louisiana state chartered bank, we provide a broad range of financial services tailored to meet the needs of small-to-midsized businesses and professionals. Since our inception in 2006, our priority has been and continues to be creating shareholder value through the establishment of an attractive commercial banking franchise in Louisiana and across our region. We consider our primary market to include the State of Louisiana, the Dallas/Fort Worth metroplex, and Houston. We currently operate out of banking centers and loan production offices across Louisiana and Texas. As of September 30, 2022, we had total assets of $5.8 billion, total loans of $4.4 billion, total deposits of $4.6 billion, and total shareholders’ equity of $508.2 million.
As a financial holding company operating through one reportable operating segment, community banking, we generate most of our revenues from interest income on loans, customer service and loan fees, and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest-earning assets and expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets.
Changes in the market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions, and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in our markets and across our region, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our markets.
Other Developments
Acquisition of Smith Shellnut Wilson, LLC (“SSW”)
On March 22, 2021, we, through b1BANK, entered into a definitive agreement to acquire SSW, a registered investment advisor with approximately $3.5 billion in assets under management, specializing in managing investment portfolios for corporations, foundations and individuals. The acquisition of SSW was consummated on April 1, 2021. At March 31, 2021, SSW reported $3.6 million in total assets and $2.3 million in total liabilities.
Issuance of Subordinated Debt
On March 26, 2021, we issued $52.5 million in subordinated debt. This subordinated debt bears interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031. The subordinated notes are redeemable by us at our option beginning in 2026.
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Sale of Oak Grove Banking Center
On October 1, 2021, we sold the Oak Grove banking center, located in Oak Grove, Louisiana, to Caldwell Bank & Trust Company headquartered in Columbia, Louisiana, in accordance with the Branch Purchase and Assumption Agreement dated June 29, 2021. The sale included $3.7 million in loans, $18.7 million in deposits and an estimated pre-tax gain on sale of $492,000.
Acquisition of Texas Citizens Bancorp, Inc. (“TCBI”)
On October 20, 2021, we entered into a definitive agreement to acquire TCBI, the parent bank holding company for Texas Citizens Bank, National Association, headquartered in Pasadena, Texas. The acquisition was consummated on March 1, 2022. At February 28, 2022, TCBI had fair values of approximately $535.5 million in total assets, $349.5 million in loans and $477.2 million in total deposits.
Preferred Stock Issuance
On September 1, 2022, we entered into a securities purchase agreement with certain investors pursuant to which we offered and sold shares of our 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with no par value, for an aggregate purchase price of $72.0 million. The preferred stock was structured to qualify as additional Tier 1 capital under applicable regulatory capital guidelines. Holders of the preferred stock will be entitled to receive, if, when, and as declared by our board of directors (the “Board”), non-cumulative cash dividends at a rate of 7.50% for the first five years following issuance and thereafter at a variable rate equal to the then current 3-month secured overnight financing rate (“SOFR”), reset quarterly, plus 470 basis points. The preferred stock has a perpetual term and may not be redeemed, except under certain circumstances, under the first five years of issuance. We intend to use the net proceeds from the preferred stock issuance to provide additional capital support to the Bank, to support growth, to better position us to take advantage of strategic opportunities that may arise from time to time, repayment of existing debt, and for general corporate purposes.
Common Stock Underwritten Public Offering
Subsequent to the end of the third quarter, we conducted an underwritten public offering of common stock, which closed on October 17, 2022. We issued 2,500,000 shares of our common stock at a public offering price of $20.00 per share. The net proceeds from the offering, after deducting the underwriting and offering expenses, are expected to be approximately $46.8 million. We intend to use the net proceeds from the common stock offering for general corporate purposes, which may include augmenting our capital, supporting future organic growth, funding potential acquisition opportunities, and redeeming certain of subordinated debt.
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:
● We participated in the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), as described in further detail below, including participation in round 2 of the PPP during the year ended December 31, 2021. During the year ended December 31, 2021, we sold approximately 2,000 PPP loans with an aggregate balance of $243.6 million at a gain of $9.2 million. As of September 30, 2022, we had approximately $3.0 million in SBA PPP loans remaining, of which $1.0 million were acquired from TCBI;
● We continue to monitor those sectors particularly impacted by the pandemic—such as energy, hotels, restaurants, 1-4 family and retail—and have flagged those sectors for additional monitoring;
COVID-19 Deferral Assistance Program
Beginning on March 25, 2020, we have taken proactive measures to help customers by deferring principal and/or interest payments. As of September 30, 2022, we had 1,199 loans that received deferrals with an aggregate outstanding balance of $438.3 million.
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In accordance with FASB and interagency regulatory guidance issued in March 2020, loans that are modified under the terms of our COVID-19 Deferral Assistance Program will not be considered as troubled debt restructurings to the extent that they meet the terms of such guidance under Section 4013 of the CARES Act, as extended by the Consolidated Appropriations Act of 2021.
SBA PPP Participation
As of September 30, 2022, we held 16 PPP loans (including both round 1 and round 2 PPP loans and TCBI PPP acquired loans) with an aggregate balance of $3.0 million and an average loan balance of approximately $186,000. In June 2021, we sold approximately 2,000 PPP loans with an aggregate balance of $243.6 million at a gain of $9.2 million.
Financial Highlights
The financial highlights as of and for the three and nine months ended September 30, 2022 include:
• Total assets of $5.8 billion, a $1.1 billion, or 22.9%, increase from December 31, 2021.
• Total loans held for investment of $4.4 billion, a $1.2 billion, or 38.9%, increase from December 31, 2021.
• Total deposits of $4.6 billion, a $508.8 million, or 12.5%, increase from December 31, 2021.
• Net income of $36.3 million for the nine months ended September 30, 2022, a $3.8 million, or 9.4%, decrease from the nine months ended September 30, 2021.
• Net interest income of $143.5 million for the nine months ended September 30, 2022, an increase of $28.0, or 24.2%, from the nine months ended September 30, 2021.
• Allowance for loan and lease losses of 0.79% of total loans held for investment, compared to 0.91% as of December 31, 2021, and a ratio of nonperforming loans to total loans held for investment of 0.25%, compared to 0.41% as of December 31, 2021.
• Earnings per common share for the first nine months of 2022 of $1.65 per basic common share and $1.64 per diluted common share, compared to $1.95 per basic common share and $1.94 per diluted common share for the first nine months of 2021.
• Return on average assets of 0.91% over the first nine months of 2022, compared to 1.23% for the first nine months of 2021.
• Return on average common equity of 10.84% over the first nine months of 2022, compared to 12.60% for the first nine months of 2021.
• Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 8.70%, 7.81%, 9.25% and 11.97%, respectively, compared to Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 8.14%, 9.04%, 9.17% and 11.94% for the year ended December 31, 2021.
• Book value per common share of $19.29, a decrease of 9.2% from $21.24 at December 31, 2021.
Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021
Performance Summary
For the three months ended September 30, 2022, net income was $13.8 million, or $0.61 per basic and diluted common share, compared to net income of $10.3 million, or $0.51 per basic common share and $0.50 per diluted common share, for the three months ended September 30, 2021. Return on average assets, on an annualized basis, increased to 0.97% for the three months ended September 30, 2022, from 0.95% for the three months ended September 30, 2021. Return on average common equity, on an annualized basis, increased to 12.47% for the three months ended September 30, 2022, as compared to 9.47% for the three months ended September 30, 2021. Earnings per common share and average assets were impacted by the TCBI acquisition on March 1, 2022.
For the nine months ended September 30, 2022, net income was $36.3 million, or $1.65 per basic common share and $1.64 per diluted common share, compared to net income of $40.1 million, or $1.95 per basic common share and $1.94 per diluted common share, for the nine months ended September 30, 2021. Return on average assets, on an annualized basis, decreased to 0.91% for the nine months ended September 30, 2022, from 1.23% for the nine months ended September 30, 2021. Return on average common equity, on an annualized basis, decreased to 10.84% for the nine months ended September 30, 2022, as compared to 12.60% for the nine months ended September 30, 2021.
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Net Interest Income
Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest sensitive assets and liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact net interest income. The variance driven by the changes in the amount and mix of interest-earning assets and interest-bearing liabilities is referred to as a “volume change.” Changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds are referred to as a “rate change.”
To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. We calculate average assets, liabilities, and equity using a monthly average, and average yield/rate utilizing a 30/360 day count convention.
For the three months ended September 30, 2022, net interest income totaled $53.5 million, and net interest margin and net interest spread were 4.05% and 3.67%, respectively, compared to $37.3 million, 3.71%, and 3.51%, respectively, for the three months ended September 30, 2021. The average yield on the loan portfolio (excluding SBA PPP loans) was 5.50% for the three months ended September 30, 2022, compared to 5.11% for the three months ended September 30, 2021, and the average yield on total interest-earning assets was 4.80% for the three months ended September 30, 2022, compared to 4.14% for the three months ended September 30, 2021. For the three months ended September 30, 2022, overall cost of funds (which includes noninterest-bearing deposits) increased 33 basis points compared to the three months ended September 30, 2021, primarily due to the federal reserve increasing interest rates during 2022.
For the nine months ended September 30, 2022, net interest income totaled $143.5 million, and net interest margin and net interest spread were 3.86% and 3.61%, respectively, compared to $115.5 million, 3.93%, and 3.75%, respectively, for the nine months ended September 30, 2021. The average yield on the loan portfolio (excluding SBA PPP loans) was 5.15% for the nine months ended September 30, 2022, compared to 5.25% for the nine months ended September 30, 2021, and the average yield on total interest-earning assets was 4.34% for the nine months ended September 30, 2022, compared to 4.36% for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, overall cost of funds (which includes noninterest-bearing deposits) increased 7 basis points compared to the nine months ended September 30, 2021, primarily due to the federal reserve increasing interest rates during 2022. Ratios for the nine months ended September 30, 2022 also include $1.0 million less discount accretion compared to the nine months ended September 30, 2021.
The following tables present, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however the balances are reflected in average outstanding balances for the period. 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.
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For the Three Months Ended September 30,
2022 2021
Average Outstanding Balance Interest Earned/Interest Paid Average Yield/Rate Average Outstanding Balance Interest Earned/Interest Paid Average Yield/Rate
(Dollars in thousands) (Unaudited)
Assets
Interest-earning assets:
Total loans (excluding SBA PPP loans) $ 4,278,184 $ 58,839 5.50 % $ 2,948,491 $ 37,666 5.11 %
SBA PPP loans 2,953 7 1.00 10,150 234 9.24
Securities 951,479 4,200 1.77 946,950 3,598 1.52
Interest-bearing deposits in other banks 54,730 427 3.12 110,472 36 0.13
Total interest-earning assets 5,287,346 63,473 4.80 4,016,063 41,534 4.14
Allowance for loan losses (33,215 ) (27,409 )
Noninterest-earning assets 448,181 365,231
Total Assets $ 5,702,312 $ 63,473 $ 4,353,885 $ 41,534
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits $ 3,009,565 $ 6,286 0.84 % $ 2,566,766 $ 3,060 0.48 %
Subordinated debt 110,953 1,332 4.80 81,427 1,026 5.04
Subordinated debt - trust preferred securities 5,000 68 5.44 5,000 42 3.36
Advances from Federal Home Loan Bank ("FHLB") 396,267 2,194 2.21 36,015 106 1.18
First National Bankers Bank ("FNBB") Line of Credit 5,000 70 5.60 - - 0.00
Other borrowings 22,381 43 0.77 26,350 6 0.09
Total interest-bearing liabilities 3,549,166 9,993 1.13 2,715,558 4,240 0.62
Noninterest-bearing liabilities:
Noninterest-bearing deposits 1,626,055 1,172,752
Other liabilities 60,310 30,175
Total noninterest-bearing liabilities 1,686,365 1,202,927
Shareholders' equity:
Common shareholders' equity 442,778 435,400
Preferred equity 24,003 -
Total shareholders' equity 466,781 435,400
Total liabilities and shareholders' equity $ 5,702,312 $ 4,353,885
Net interest rate spread (1) 3.67 % 3.51 %
Net interest rate income $ 53,480 $ 37,294
Net Interest margin (2) 4.05 % 3.71 %
Overall cost of funds 0.77 % 0.44 %
(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.
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For the Nine Months Ended September 30,
2022 2021
Average Outstanding Balance Interest Earned/Interest Paid Average Yield/Rate Average Outstanding Balance Interest Earned/Interest Paid Average Yield/Rate
(Dollars in thousands) (Unaudited)
Assets
Interest-earning assets:
Total loans (excluding SBA PPP loans) $ 3,850,321 $ 148,640 5.15 % $ 2,802,246 $ 110,320 5.25 %
SBA PPP loans 3,702 28 1.00 209,041 8,134 5.19
Securities 974,566 12,187 1.67 813,231 9,616 1.58
Interest-bearing deposits in other banks 132,685 754 0.76 91,466 77 0.11
Total interest-earning assets 4,961,274 161,609 4.34 3,915,984 128,147 4.36
Allowance for loan losses (30,806 ) (25,383 )
Noninterest-earning assets 400,884 452,806
Total Assets $ 5,331,352 $ 161,609 $ 4,343,407 $ 128,147
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits $ 2,958,005 $ 11,106 0.50 % $ 2,588,756 $ 9,538 0.49 %
Subordinated debt 104,471 3,746 4.78 63,768 2,499 5.23
Subordinated debt - trust preferred securities 5,000 163 4.35 5,000 127 3.39
Advances from FHLB 215,955 2,923 1.80 35,309 325 1.23
FNBB Line of Credit 2,778 91 4.37 - - 0.00
Other borrowings 22,325 63 0.38 27,651 118 0.57
Total interest-bearing liabilities 3,308,534 18,092 0.73 2,720,484 12,607 0.62
Noninterest-bearing liabilities:
Noninterest-bearing deposits 1,530,748 1,170,534
Other liabilities 37,666 28,412
Total noninterest-bearing liabilities 1,568,414 1,198,946
Shareholders' equity:
Common shareholders' equity 446,403 423,977
Preferred equity 8,001 -
Total shareholders' equity 454,404 423,977
Total liabilities and shareholders' equity $ 5,331,352 $ 4,343,407
Net interest rate spread (1) 3.61 % 3.75 %
Net interest rate income $ 143,517 $ 115,540
Net Interest margin (2) 3.86 % 3.93 %
Overall cost of funds 0.50 % 0.43 %
(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.
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The following tables present information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
For the Three Months Ended September 30, 2022 compared to
the Three Months Ended September 30, 2021
Increase (Decrease) due to change in
Volume Rate Total
(Dollars in thousands) (Unaudited)
Interest-earning assets:
Total loans (excluding SBA PPP loans) $ 18,288 $ 2,885 $ 21,173
SBA PPP loans (18 ) (209 ) (227 )
Securities 20 582 602
Interest-bearing deposits in other banks (435 ) 826 391
Total increase (decrease) in interest income $ 17,855 $ 4,084 $ 21,939
Interest-bearing liabilities:
Interest-bearing deposits $ 925 $ 2,301 $ 3,226
Subordinated debt 354 (48 ) 306
Subordinated debt - trust preferred securities - 26 26
Advances from FHLB 1,995 93 2,088
FNBB Line of Credit 70 - 70
Other borrowings (8 ) 45 37
Total increase (decrease) in interest expense 3,336 2,417 5,753
Increase (decrease) in net interest income $ 14,519 $ 1,667 $ 16,186
For the Nine Months Ended September 30, 2022 compared to the
Nine Months Ended September 30, 2021
Increase (Decrease) due to change in
Volume Rate Total
(Dollars in thousands) (Unaudited)
Interest-earning assets:
Total loans (excluding SBA PPP loans) $ 40,460 $ (2,140 ) $ 38,320
SBA PPP loans (1,540 ) (6,566 ) (8,106 )
Securities 2,018 553 2,571
Interest-bearing deposits in other banks 234 443 677
Total increase (decrease) in interest income $ 41,172 $ (7,710 ) $ 33,462
Interest-bearing liabilities:
Interest-bearing deposits $ 1,386 $ 182 $ 1,568
Subordinated debt 1,459 (212 ) 1,247
Subordinated debt - trust preferred securities - 36 36
Advances from FHLB 2,445 153 2,598
FNBB Line of Credit 91 - 91
Other borrowings (15 ) (40 ) (55 )
Total increase (decrease) in interest expense 5,366 119 5,485
Increase (decrease) in net interest income $ 35,806 $ (7,829 ) $ 27,977
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Provision for Loan Losses
Our provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for loan losses see “—Financial Condition—Allowance for Loan Losses.” The provision for loan losses was $3.3 million for the three months ended September 30, 2022 and $1.1 million for the same period in 2021. For the nine months ended September 30, 2022 and 2021, the provision for loan losses was $7.8 million and $6.7 million, respectively. The higher provision for both the three and nine months ended September 30, 2022 compared to the same period in 2021 relates primarily to the overall growth of the loan portfolio.
Noninterest Income (“Other Income”)
Our primary sources of noninterest income are service charges on deposit accounts, debit card and automated teller machine (“ATM”) fee income, income from bank-owned life insurance, fees and brokerage commission and pass-through income from other investments (small business investment company (“SBIC”) partnerships and fintech technology (“Fintech”) funds). The following tables present, for the periods indicated, the major categories of noninterest income:
For the Three Months Ended September 30,
2022 2021 Increase (Decrease)
(Dollars in thousands) (Unaudited)
Noninterest income:
Service charges on deposit accounts $ 2,116 $ 1,763 $ 353
Debit card and ATM fee income 1,667 1,532 135
Bank-owned life insurance income 561 356 205
Gain on sales of loans 264 93 171
Loss on sales of investment securities (7 ) (11 ) 4
Fees and brokerage commissions 1,620 1,335 285
Mortgage origination income 57 227 (170 )
Correspondent bank income 38 10 28
Gain (loss) on sales of other real estate owned 12 (558 ) 570
Gain on sales of other assets 1 14 (13 )
Pass-through income from other investments 572 398 174
Other 1,214 952 262
Total noninterest income $ 8,115 $ 6,111 $ 2,004
For the Nine Months Ended September 30,
2022 2021 Increase (Decrease)
(Dollars in thousands) (Unaudited)
Noninterest income:
Service charges on deposit accounts $ 6,007 $ 5,013 $ 994
Debit card and ATM fee income 4,825 4,645 180
Bank-owned life insurance income 1,405 1,029 376
Gain on sales of loans 515 10,114 (9,599 )
Loss on sales of investment securities (46 ) (66 ) 20
Fees and brokerage commissions 5,204 3,294 1,910
Mortgage origination income 427 697 (270 )
Correspondent bank income 52 276 (224 )
Gain (loss) on sales of other real estate owned 30 (1,087 ) 1,117
Gain (loss) on sales of other assets (716 ) 122 (838 )
Pass-through income from other investments 739 2,053 (1,314 )
Other 2,590 2,034 556
Total noninterest income $ 21,032 $ 28,124 $ (7,092 )
Total noninterest income increased $2.0 million, or 32.8%, from the three months ended September 30, 2021. The increase was primarily due to the loss of $558,000 on the sale of other real estate in the third quarter 2021 and additional income of $285,000, an increase of 21.3%, from fees and brokerage commissions from SSW, as well as the acquisition of TCBI.
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Total noninterest income decreased $7.1 million, or 25.2%, from the nine months ended September 30, 2021. The decrease was primarily due to the gain of $9.2 million on the sale of approximately 2,000 PPP loans in the second quarter 2021 and $1.3 million, or 0.6%, lower pass-through income from other investments, partially offset with additional income of $1.9 million, or 58.0%, from fees and brokerage commissions from SSW, given an additional quarter of income and subsequent growth, and the loss of $1.1 million on the sale of other real estate during the prior year period.
Noninterest Expense (“Other Expense”)
Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships, and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization, professional and regulatory fees, including Federal Deposit Insurance Corporation (“FDIC”) assessments, data processing expenses, and advertising and promotion expenses, among others.
The following tables present, for the periods indicated, the major categories of noninterest expense:
For the Three Months Ended September 30,
2022 2021 Increase (Decrease)
(Dollars in thousands) (Unaudited)
Salaries and employee benefits $ 21,906 $ 16,791 $ 5,115
Non-staff expenses:
Occupancy of bank premises 2,485 1,629 856
Depreciation and amortization 1,850 1,483 367
Data processing 2,155 1,994 161
FDIC assessment fees 839 581 258
Legal and professional fees 619 553 66
Advertising and promotions 1,144 612 532
Utilities and communications 833 678 155
Ad valorem shares tax 813 675 138
Directors' fees 288 201 87
Other real estate owned expenses and write-downs 133 103 30
Merger and conversion related expenses 3,244 145 3,099
Other 4,637 3,885 752
Total noninterest expense $ 40,946 $ 29,330 $ 11,616
For the Nine Months Ended September 30,
2022 2021 Increase (Decrease)
(Dollars in thousands) (Unaudited)
Salaries and employee benefits $ 63,017 $ 48,470 $ 14,547
Non-staff expenses:
Occupancy of bank premises 6,959 5,716 1,243
Depreciation and amortization 5,153 4,316 837
Data processing 6,157 6,105 52
FDIC assessment fees 2,243 1,526 717
Legal and professional fees 1,897 2,199 (302 )
Advertising and promotions 2,378 1,713 665
Utilities and communications 2,434 1,889 545
Ad valorem shares tax 2,438 2,050 388
Directors' fees 702 583 119
Other real estate owned expenses and write-downs 182 660 (478 )
Merger and conversion related expenses 4,670 249 4,421
Other 12,833 11,487 1,346
Total noninterest expense $ 111,063 $ 86,963 $ 24,100
Total noninterest expense increased $11.6 million, or 39.6%, from the three months ended September 30, 2021, primarily attributed to $5.1 million increase in salaries and employee benefits largely due to the acquisition of TCBI and additional staffing hired over the past year. The increase in noninterest expense was also partially due to the $3.1 million increase in merger and conversion related expenses relating to the TCBI acquisition.
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Total noninterest expense increased $24.1 million, or 27.7%, from the nine months ended September 30, 2021, primarily attributed to $14.5 million increase in salaries and employee benefits largely due to the acquisition of TCBI and additional staffing hired over the past year. The increase in noninterest expense was also partially due to the $4.4 million increase in merger and conversion related expenses relating to the TCBI acquisition.
Income Tax Expense
The amount of income tax expense is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
For the three months ended September 30, 2022, income tax expense totaled $3.6 million, an increase of $959,000, or 36.7%, compared to $2.6 million for the same period in 2021. For the nine months ended September 30, 2022, income tax expense totaled $9.4 million, a decrease of $523,000, or 5.3%, compared to $9.9 million for the same period in 2021. Our effective tax rates for the three months ended September 30, 2022 and 2021 were 20.6% and 20.2%, respectively. For the nine months ended September 30, 2022 and 2021, our effective tax rates were 20.5% and 19.8%, respectively. Our effective tax rate for both periods was affected by tax-exempt income generated by municipal securities, bank-owned life insurance and by other nondeductible expenses (including acquisition-related expenses).
Financial Condition
Our total assets increased $1.1 billion, or 22.9%, from December 31, 2021 to September 30, 2022, due primarily from the acquisition of TCBI and the increase in our loan portfolio.
Loan Portfolio
Our primary source of income is interest on loans to individuals, professionals and small-to-midsized businesses located in our markets. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning asset base.
As of September 30, 2022, total loans held for investment were $4.4 billion, an increase of $1.2 billion, or 38.9%, compared to $3.2 billion as of December 31, 2021. The increase was primarily due to the acquisition of TCBI and growth in our Dallas/Fort Worth metroplex and New Orleans markets. Additionally, $545,000 and $1.2 million in loans were classified as loans held for sale as of September 30, 2022 and December 31, 2021, respectively.
Total loans held for investment as a percentage of total deposits were 96.6% and 78.2% as of September 30, 2022 and December 31, 2021, respectively. Total loans held for investment as a percentage of total assets were 76.3% and 67.5% as of September 30, 2022 and December 31, 2021, respectively.
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The following table summarizes our loan portfolio by type of loan as of the dates indicated:
As of September 30, 2022 (Unaudited) As of December 31, 2021
Amount Percent Amount Percent
(Dollars in thousands)
Commercial $ 1,012,778 22.9 % $ 721,385 22.6 %
Real estate:
Construction and land 636,869 14.4 548,528 17.2
Farmland 190,829 4.3 87,463 2.7
1-4 family residential 545,880 12.3 467,699 14.7
Multi-family residential 102,056 2.3 97,508 3.1
Nonfarm nonresidential 1,823,408 41.1 1,144,426 35.9
Consumer and other 118,080 2.7 122,599 3.8
Total loans held for investment $ 4,429,900 100.0 % $ 3,189,608 100.0 %
SBA PPP loans accounted for $3.0 million and $5.4 million of the commercial portfolio as of September 30, 2022 and December 31, 2021, respectively.
Commercial loans. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. These loans are made based primarily on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally include personal guarantees.
Commercial loans increased $291.4 million, or 40.4%, to $1.0 billion as of September 30, 2022 from $721.4 million as of December 31, 2021.
Construction and land. Construction and land development loans are comprised of loans to fund construction, land acquisition and land development construction. The properties securing the portfolio are located primarily throughout Louisiana, the Dallas/Fort Worth metroplex and Houston, and are generally diverse in terms of type.
Construction and land loans increased $88.3 million, or 16.1%, to $636.9 million as of September 30, 2022 from $548.5 million as of December 31, 2021.
1-4 family residential. Our 1-4 family residential loan portfolio is comprised of loans secured by single family homes, which are both owner-occupied and investor owned. Our 1-4 family residential loans have a relatively small average balance spread between many individual borrowers and are generally offered as accommodations to existing customers.
1-4 family residential loans increased $78.2 million, or 16.7%, to $545.9 million as of September 30, 2022 from $467.7 million as of December 31, 2021.
Nonfarm nonresidential. Nonfarm nonresidential loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the portfolio are located throughout Louisiana and Texas and are generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry.
Nonfarm nonresidential loans increased $679.0 million, or 59.3%, to $1.8 billion as of September 30, 2022 from $1.1 billion as of December 31, 2021.
Other loan categories. Other categories of loans included in our loan portfolio include farmland and agricultural loans made to farmers and ranchers relating to their operations, multi-family residential loans, and consumer and other loans. None of these categories of loans represent a significant portion of our total loan portfolio.
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The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range as of the date indicated are summarized in the following tables:
As of September 30, 2022
One Year or Less One Through Five Years Five Through Fifteen Years After Fifteen Years Total
(Dollars in thousands) (Unaudited)
Commercial $ 391,307 $ 400,746 $ 220,406 $ 319 $ 1,012,778
Real estate:
Construction and land 241,393 338,683 51,471 5,322 636,869
Farmland 43,987 102,492 44,350 - 190,829
1-4 family residential 64,467 291,900 135,711 53,802 545,880
Multi-family residential 12,003 66,012 18,106 5,935 102,056
Nonfarm nonresidential 170,392 901,937 622,936 128,143 1,823,408
Consumer and other 50,441 53,125 14,237 277 118,080
Total loans held for investment $ 973,990 $ 2,154,895 $ 1,107,217 $ 193,798 $ 4,429,900
Fixed rate loans:
Commercial $ 107,946 $ 242,505 $ 154,802 $ - $ 505,253
Real estate:
Construction and land 85,509 221,460 30,360 2,202 339,531
Farmland 22,614 51,164 33,451 - 107,229
1-4 family residential 37,053 244,525 76,509 12,177 370,264
Multi-family residential 8,688 61,507 15,697 14 85,906
Nonfarm nonresidential 85,138 809,393 483,310 9,543 1,387,384
Consumer and other 21,925 42,913 13,011 162 78,011
Total fixed rate loans $ 368,873 $ 1,673,467 $ 807,140 $ 24,098 $ 2,873,578
Floating rate loans:
Commercial $ 283,361 $ 158,241 $ 65,604 $ 319 $ 507,525
Real estate:
Construction and land 155,884 117,223 21,111 3,120 297,338
Farmland 21,373 51,328 10,899 - 83,600
1-4 family residential 27,414 47,375 59,202 41,625 175,616
Multi-family residential 3,315 4,505 2,409 5,921 16,150
Nonfarm nonresidential 85,254 92,544 139,626 118,600 436,024
Consumer and other 28,516 10,212 1,226 115 40,069
Total floating rate loans $ 605,117 $ 481,428 $ 300,077 $ 169,700 $ 1,556,322
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As of December 31, 2021
One Year or Less One Through Five Years Five Through Fifteen Years After Fifteen Years Total
(Dollars in thousands)
Commercial $ 258,279 $ 300,346 $ 162,760 $ - $ 721,385
Real estate:
Construction and land 228,988 265,097 53,254 1,189 548,528
Farmland 8,972 43,786 34,705 - 87,463
1-4 family residential 70,851 249,231 106,035 41,582 467,699
Multi-family residential 5,382 28,041 58,757 5,328 97,508
Nonfarm nonresidential 137,207 506,219 446,646 54,354 1,144,426
Consumer and other 49,774 57,543 14,997 285 122,599
Total loans held for investment $ 759,453 $ 1,450,263 $ 877,154 $ 102,738 $ 3,189,608
Fixed rate loans:
Commercial $ 116,784 $ 178,649 $ 119,198 $ - $ 414,631
Real estate:
Construction and land 87,082 121,398 27,927 - 236,407
Farmland 5,091 32,370 30,072 - 67,533
1-4 family residential 39,375 201,921 44,721 5,032 291,049
Multi-family residential 3,516 15,478 57,938 - 76,932
Nonfarm nonresidential 88,677 451,885 356,772 6,850 904,184
Consumer and other 25,609 43,038 13,049 167 81,863
Total fixed rate loans $ 366,134 $ 1,044,739 $ 649,677 $ 12,049 $ 2,072,599
Floating rate loans:
Commercial $ 141,495 $ 121,697 $ 43,562 $ - $ 306,754
Real estate:
Construction and land 141,906 143,699 25,327 1,189 312,121
Farmland 3,881 11,416 4,633 - 19,930
1-4 family residential 31,476 47,310 61,314 36,550 176,650
Multi-family residential 1,866 12,563 819 5,328 20,576
Nonfarm nonresidential 48,530 54,334 89,874 47,504 240,242
Consumer and other 24,165 14,505 1,948 118 40,736
Total floating rate loans $ 393,319 $ 405,524 $ 227,477 $ 90,689 $ 1,117,009
Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is generally reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due, or interest may be recognized on a cash basis as long as the remaining book balance of the loan is deemed collectible. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
We have several procedures in place to assist in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our bankers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and the timely resolution of problem assets. We had $12.0 million and $14.5 million in nonperforming assets as of September 30, 2022 and December 31, 2021, respectively. We had $11.0 million in nonperforming loans as of September 30, 2022 compared to $13.1 million as of December 31, 2021. The decrease in nonperforming assets from December 31, 2021 to September 30, 2022 is primarily attributable to chargeoffs.
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The following tables present information regarding nonperforming assets at the dates indicated (purchased impaired credits are excluded):
As of September 30, 2022 (Unaudited) As of December 31, 2021
(Dollars in thousands)
Nonaccrual loans $ 9,843 $ 12,868
Accruing loans 90 or more days past due 1,121 222
Total nonperforming loans 10,964 13,090
Other nonperforming assets 180 -
Other real estate owned:
Commercial real estate, construction, land and land development 840 1,348
Residential real estate - 79
Total other real estate owned 840 1,427
Total nonperforming assets $ 11,984 $ 14,517
Restructured loans-nonaccrual $ 3,136 $ 3,275
Restructured loans-accruing 3,603 315
Ratio of nonperforming loans to total loans held for investment 0.25 % 0.41 %
Ratio of nonperforming assets to total assets 0.21 0.31
Ratio of nonaccrual loans to total loans held for investment 0.22 0.40
As of September 30, 2022 (Unaudited) As of December 31, 2021
(Dollars in thousands)
Nonaccrual loans by category:
Real estate:
Construction and land $ 833 $ 1,341
Farmland 18 76
1-4 family residential 3,658 3,601
Multi-family residential - -
Nonfarm nonresidential 2,287 2,614
Commercial 2,879 4,947
Consumer and other 168 289
Total $ 9,843 $ 12,868
As of September 30, 2022, our loan portfolio included 1,199 loans with an aggregate outstanding balance of $438.3 million that had previously been granted temporary payment deferrals of principal and/or interest due to the effect of the COVID-19 pandemic. As of December 31, 2021, our loan portfolio included 1,574 loans with an aggregate outstanding balance of $522.0 million that had previously been granted temporary payment deferrals. In accordance with FASB and interagency regulatory guidance issued in March 2020, loans that were modified under the terms of our COVID-19 Deferral Assistance Program are not be considered as troubled debt restructurings to the extent that they meet the terms of such guidance under Section 4013 of the CARES Act. Loans under these deferrals remain in their current risk rating and/or past due status through the deferral period. None of these loans are currently in their deferral period at September 30, 2022 and December 31, 2021, respectively.
Potential Problem Loans
From a credit risk standpoint, we classify loans in one of four categories: pass, special mention, substandard or doubtful. Loans classified as loss are charged-off. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. Ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk of loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk of loss).
Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.
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Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.
Credits rated doubtful have all the weaknesses inherent in those rated substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The following tables summarize our internal ratings of loans held for investment as of the dates indicated.
As of September 30, 2022
Pass Special Mention Substandard Doubtful Total
(Dollars in thousands) (Unaudited)
Real estate:
Construction and land $ 633,599 $ 509 $ 2,281 $ 480 $ 636,869
Farmland 188,721 2,083 - 25 190,829
1-4 family residential 532,752 4,346 3,546 5,236 545,880
Multi-family residential 102,038 - 18 - 102,056
Nonfarm nonresidential 1,780,039 24,927 13,978 4,464 1,823,408
Commercial 997,684 7,424 4,828 2,842 1,012,778
Consumer and other 117,273 241 322 244 118,080
Total $ 4,352,106 $ 39,530 $ 24,973 $ 13,291 $ 4,429,900
As of December 31, 2021
Pass Special Mention Substandard Doubtful Total
(Dollars in thousands)
Real estate:
Construction and land $ 545,071 $ 266 $ 1,850 $ 1,341 $ 548,528
Farmland 86,063 1,324 - 76 87,463
1-4 family residential 456,150 3,109 2,801 5,639 467,699
Multi-family residential 97,485 - 23 - 97,508
Nonfarm nonresidential 1,094,782 34,495 9,735 5,414 1,144,426
Commercial 704,755 7,886 3,137 5,607 721,385
Consumer and other 121,566 350 257 426 122,599
Total $ 3,105,872 $ 47,430 $ 17,803 $ 18,503 $ 3,189,608
Allowance for Loan Losses
We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in the loan portfolio. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. For additional information, see Note 6 to the consolidated financial statements.
In connection with our review of the loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:
• for commercial and industrial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category, and the value, nature and marketability of collateral;
• for commercial mortgage loans and multi-family residential loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral, and the volatility of income, property value and future operating results typical for properties of that type;
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• for 1-4 family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan to value ratio, and the age, condition and marketability of the collateral; and
• for construction, land development and other land loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, the experience and ability of the developer, and the loan to value ratio.
As of September 30, 2022, the allowance for loan losses totaled $35.2 million, or 0.79%, of total loans held for investment. As of December 31, 2021, the allowance for loan losses totaled $29.1 million, or 0.91%, of total loans held for investment.
The following tables present, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:
As of and For the
As of and For the
Nine Months Ended
Year Ended
September 30, 2022
December 31, 2021
(Unaudited)
(Dollars in thousands)
Average loans outstanding (1) $ 3,854,023 $ 3,037,020
Gross loans held for investment outstanding end of period $ 4,429,900 $ 3,189,608
Allowance for loan losses at beginning of period $ 29,112 $ 22,024
Provision for loan losses 7,835 8,047
Charge-offs:
Real Estate:
Construction, land and farmland 6 29
Residential 3 169
Nonfarm nonresidential 51 139
Commercial 1,974 830
Consumer and other 400 469
Total charge-offs 2,434 1,636
Recoveries:
Real Estate:
Construction, land and farmland 25 3
Residential 18 39
Nonfarm nonresidential 45 99
Commercial 446 417
Consumer and other 154 119
Total recoveries 688 677
Net charge-offs 1,746 959
Allowance for loan losses at end of period $ 35,201 $ 29,112
Ratio of allowance to end of period loans held for investment 0.79 % 0.91 %
Ratio of net charge-offs to average loans 0.05 0.03
Ratio of allowance to nonaccrual loans 357.62 226.24
(1) Excluding loans held for sale
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As of and For the Nine Months Ended September 30, 2022 (Unaudited) As of and for the Year Ended December 31, 2021
Net Charge-offs (Recoveries) Percent of Average Loans Net Charge-offs (Recoveries) Percent of Average Loans
(Dollars in thousands)
Commercial $ 1,528 0.04 % $ 413 0.01 %
Real estate:
Construction and land (19 ) 0.00 % 27 0.00 %
Farmland - 0.00 % (1 ) 0.00 %
1-4 family residential (15 ) 0.00 % 130 0.00 %
Multi-family residential - 0.00 % - 0.00 %
Nonfarm nonresidential 6 0.00 % 40 0.00 %
Consumer and other 246 0.01 % 350 0.01 %
Total net charge-offs (recoveries) $ 1,746 0.05 % $ 959 0.03 %
Although we believe that we have established our allowance for loan losses in accordance with U.S. generally accepted accounting principles (“GAAP”) and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in our loan portfolio. If we experience economic declines or if asset quality deteriorates, material additional provisions could be required.
The following table shows the allocation of the allowance for loan losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for loan losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category.
As of September 30, 2022 (Unaudited) As of December 31, 2021
Amount Percent to Total Amount Percent to Total
(Dollars in thousands)
Real estate:
Construction and land $ 5,045 14.3 % $ 4,498 15.5 %
Farmland 1,533 4.4 721 2.5
1-4 family residential 4,504 12.8 3,791 13.0
Multi-family residential 757 2.1 774 2.7
Nonfarm nonresidential 13,290 37.8 9,794 33.6
Total real estate 25,129 71.4 19,578 67.3
Commercial 8,934 25.4 8,358 28.7
Consumer and other 1,138 3.2 1,176 4.0
Total allowance for loan losses $ 35,201 100.0 % $ 29,112 100.0 %
Securities
We use our securities portfolio to provide a source of liquidity, an appropriate return on funds invested, manage interest rate risk, meet collateral requirements, and meet regulatory capital requirements. As of September 30, 2022, the carrying amount of investment securities totaled $885.0 million, a decrease of $136.1 million, or 13.3%, compared to $1.0 billion as of December 31, 2021. The decrease was primarily due to unrealized losses during the nine months ended September 30, 2022. Securities represented 15.2% and 21.6% of total assets as of September 30, 2022 and December 31, 2021, respectively.
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Our investment portfolio consists entirely of securities classified as available for sale. As a result, the carrying values of our investment securities are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. The following tables summarize the amortized cost and estimated fair value of investment securities as of the dates shown:
As of September 30, 2022
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
(Dollars in thousands) (Unaudited)
U.S. treasury securities $ 32,810 $ - $ 3,020 $ 29,790
U.S. government agencies 50,305 - 3,365 46,940
Corporate bonds 47,428 - 2,268 45,160
Mortgage-backed securities 518,575 - 62,366 456,209
Municipal securities 343,952 3 37,094 306,861
Total $ 993,070 $ 3 $ 108,113 $ 884,960
As of December 31, 2021
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
(Dollars in thousands)
U.S. treasury securities $ 22,751 $ - $ 437 $ 22,314
U.S. government agencies 27,867 2 376 27,493
Corporate bonds 45,876 812 106 46,582
Mortgage-backed securities 555,528 3,246 6,435 552,339
Municipal securities 370,421 4,100 2,188 372,333
Total $ 1,022,443 $ 8,160 $ 9,542 $ 1,021,061
All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio.
Management evaluates securities for other-than-temporary impairment, at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
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The following tables set forth the fair value, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized cost of the securities portfolio as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures.
As of September 30, 2022
Within One Year After One Year but Within Five Years After Five Years but Within Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
(Dollars in thousands) (Unaudited)
U.S. treasury securities $ - - % $ 29,790 1.01 % $ - - % $ - - % $ 29,790 1.01 %
U.S. government agencies - - % 46,940 1.51 % - - % - - % 46,940 1.51 %
Corporate bonds - - % 2,500 2.74 % 42,660 4.46 % - - % 45,160 4.36 %
Mortgage-backed securities 7,019 1.97 % 36,584 1.46 % 185,638 1.62 % 226,968 1.61 % 456,209 1.61 %
Municipal securities 15,262 1.84 % 97,148 1.45 % 119,657 1.78 % 74,794 1.88 % 306,861 1.70 %
Total $ 22,281 1.88 % $ 212,962 1.42 % $ 347,955 2.02 % $ 301,762 1.68 % $ 884,960 1.76 %
As of December 31, 2021
Within One Year After One Year but Within Five Years After Five Years but Within Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
(Dollars in thousands)
U.S. treasury securities $ - - % $ 22,314 0.77 % $ - - % $ - - % $ 22,314 0.77 %
U.S. government agencies 2,513 0.23 % 24,980 0.76 % - - % - - % 27,493 0.21 %
Corporate bonds - - % - - % 46,582 4.37 % - - % 46,582 4.37 %
Mortgage-backed securities 10,701 1.19 % 37,870 1.42 % 221,494 1.34 % 282,274 1.20 % 552,339 1.27 %
Municipal securities 16,720 2.09 % 97,129 1.41 % 149,951 1.76 % 108,533 1.94 % 372,333 1.74 %
Total $ 29,934 1.61 % $ 182,293 1.24 % $ 418,027 1.83 % $ 390,807 1.41 % $ 1,021,061 1.56 %
The contractual maturity of mortgage-backed securities, collateralized mortgage obligations and asset-backed securities is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and asset-backed securities are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly paydowns on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 5.78 years with an estimated effective duration of 54.27 months as of September 30, 2022.
As of September 30, 2022 and December 31, 2021, we did not own securities of any one issuer for which aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity as of such respective dates.
As of September 30, 2022 and December 31, 2021, the Company held other equity securities of $39.4 million and $16.6 million, respectively, comprised mainly of FHLB stock, small business investment companies (“SBICs”) and financial technology (“Fintech”) fund investments.
Deposits
We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits.
Total deposits as of September 30, 2022 were $4.6 billion, an increase of $508.8 million, or 12.5%, compared to $4.1 billion as of December 31, 2021.
Noninterest-bearing deposits as of September 30, 2022 were $1.6 billion compared to $1.3 billion as of December 31, 2021, an increase of $322.3 million, or 25.0%.
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Average deposits for the nine months ended September 30, 2022 were $4.5 billion, an increase of $687.0 million, or 18.1%, over the full year average for the year ended December 31, 2021 of $3.8 billion. The average rate paid on total interest-bearing deposits increased over this period from 0.47% for the year ended December 31, 2021 to 0.50% for the nine months ended September 30, 2022. The increase in average rates during the nine months ended September 30, 2022 over the average for the year ended December 31, 2021 was primarily due to the federal reserve raising interest rates during the nine months ended September 30, 2022. Cost of deposits was relatively unchanged at 0.33% for the nine months ended September 30, 2022 compared to 0.32% for the year ended December 31, 2021, with continued growth of noninterest-bearing demand accounts offsetting the impact of the rise in rates.
The following table presents the daily average balances and weighted average rates paid on deposits for the periods indicated:
For the Nine Months Ended For the Year Ended
September 30, 2022 (Unaudited) December 31, 2021
Average Balance Average Rate Average Balance Average Rate
(Dollars in thousands)
Interest-bearing demand accounts $ 250,895 0.66 % $ 177,196 0.49 %
Negotiable order of withdrawal ("NOW") accounts 552,330 0.18 % 511,231 0.13 %
Limited access money market accounts and savings 1,482,144 0.50 % 1,176,858 0.29 %
Certificates and other time deposits > $250k 196,614 0.66 % 204,892 1.12 %
Certificates and other time deposits < $250k 476,022 0.72 % 534,648 0.93 %
Total interest-bearing deposits 2,958,005 0.50 % 2,604,825 0.47 %
Noninterest-bearing demand accounts 1,530,748 - % 1,196,970 - %
Total deposits $ 4,488,753 0.33 % $ 3,801,795 0.32 %
The ratio of average noninterest-bearing deposits to average total deposits for the nine months ended September 30, 2022 and the year ended December 31, 2021 was 34.1% and 31.5%, respectively.
The following table sets forth the contractual maturities of certain certificates of deposit at September 30, 2022:
Certificates of
Certificates of
Deposit More Than
Deposit of $100,000 Through $250,000
$250,000
(Dollars in thousands) (Unaudited)
3 months or less $ 39,480 $ 71,671
More than 3 months but less than 6 months 49,785 91,205
More than 6 months but less than 12 months 59,031 89,832
12 months or more 51,331 61,021
Total $ 199,627 $ 313,729
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Federal Funds Purchased Lines of Credit Relationships
We maintain Federal Funds Purchased Lines of Credit Relationships with the following correspondent banks and limits as of September 30, 2022:
Fed Funds Purchase Limits
(Dollars in thousands)
The Independent Bankers Bank $ 45,000
PNC Bank 38,000
First National Bankers Bank ("FNBB") 35,000
First Horizon Bank 17,000
ServisFirst Bank 10,000
South State Bank 9,000
Total $ 154,000
We had no outstanding balances as of September 30, 2022 and December 31, 2021, respectively.
Liquidity and Capital Resources
Liquidity
Liquidity involves our ability to utilize funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the nine months ended September 30, 2022 and the year ended December 31, 2021, liquidity needs were primarily met by core deposits, security and loan maturities, and amortizing investment and loan portfolios. Although access to brokered deposits, purchased funds from correspondent banks and overnight advances from the FHLB have been utilized on occasion to take advantage of investment opportunities, we do not generally rely on these external funding sources. As of September 30, 2022 and December 31, 2021, we maintained six federal funds purchased lines of credit with correspondent banks which provided for extensions of credit with an availability to borrow up to an aggregate of $154.0 million. There were no funds drawn under these lines of credit outstanding as of September 30, 2022 and December 31, 2021, respectively.
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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 $5.3 billion and $4.4 billion for the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively.
For the Nine Months Ended September 30, 2022 For the Year Ended December 31, 2021
(Unaudited)
Source of Funds:
Deposits:
Noninterest-bearing 28.7 % 27.2 %
Interest-bearing 55.5 59.2
Subordinated debt (excluding trust preferred securities) 2.0 1.5
Advances from FHLB 4.0 1.1
Other borrowings 0.6 0.7
Other liabilities 0.7 0.6
Shareholders' equity 8.5 9.7
Total 100.0 % 100.0 %
Uses of Funds:
Loans, net of allowance for loan losses 71.7 % 68.4 %
Securities available for sale 18.3 19.7
Interest-bearing deposits in other banks 2.5 2.4
Other noninterest-earning assets 7.5 9.5
Total 100.0 % 100.0 %
Average noninterest-bearing deposits to average deposits 34.1 % 31.5 %
Average loans to average deposits 85.9 79.9
Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average net loans increased 28.0% for the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to growth in our Dallas/Fort Worth metroplex and New Orleans markets, and the acquisition of TCBI. We predominantly invest excess deposits in overnight deposits with the Federal Reserve, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth. Our securities portfolio had a weighted average life of 5.78 years and an effective duration of 54.27 months as of September 30, 2022. As of December 31, 2021, our securities portfolio had a weighted average life of 5.87 years and an effective duration of 53.46 months.
As of September 30, 2022, we had outstanding $1.3 billion in commitments to extend credit and $44.1 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2021, we had outstanding $1.0 billion in commitments to extend credit and $35.3 million in commitments associated with outstanding standby and commercial letters of credit. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. See “Off Balance Sheet Items” below for additional information.
As of September 30, 2022 and December 31, 2021 we had cash and cash equivalents, including federal funds sold, of $163.8 million and $295.4 million, respectively. We had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature for either period.
Capital Resources
Total shareholders’ equity increased to $508.0 million as of September 30, 2022, compared to $433.4 million as of December 31, 2021, an increase of $74.6 million, or 17.2%. This increase was primarily due to the issuance of $72.0 million in preferred stock, $55.0 million of common stock and equity awards in the acquisition of TCBI and net income of $36.3 million, offset with other comprehensive losses of $83.5 million resulting from the after tax effect of unrealized losses in our investment securities portfolio and dividends paid of $7.8 million. The preferred stock was structured to qualify as additional Tier 1 capital.
On October 26, 2022, our Board declared a quarterly dividend based upon our financial performance for the three months ended September 30, 2022 in the amount of $0.12 per share to the common shareholders of record as of November 15, 2022. The dividend is to be paid on November 30, 2022, or as soon as practicable thereafter.
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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 September 30, 2022 and December 31, 2021, we and b1BANK were in compliance with all applicable regulatory capital requirements, and b1BANK was classified as “well-capitalized,” for purposes of prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all applicable regulatory capital standards applicable to us. The increase in capital was primarily due to the issuance of preferred stock (accounted for as additional Tier 1 capital for us).
The following table presents the actual capital amounts and regulatory capital ratios for us and b1BANK as of the dates indicated.
As of September 30, 2022 (Unaudited) As of December 31, 2021
Amount Ratio Amount Ratio
(Dollars in thousands)
Business First
Total capital (to risk weighted assets) $ 639,543 11.97 % $ 478,794 11.94 %
Tier 1 capital (to risk weighted assets) 494,548 9.25 % 367,431 9.17 %
Common Equity Tier 1 capital (to risk weighted assets) 417,538 7.81 % 362,431 9.04 %
Tier 1 Leverage capital (to average assets) 494,548 8.70 % 367,431 8.14 %
b1BANK
Total capital (to risk weighted assets) $ 610,358 11.43 % $ 468,834 11.71 %
Tier 1 capital (to risk weighted assets) 574,485 10.76 % 438,898 10.96 %
Common Equity Tier 1 capital (to risk weighted assets) 574,485 10.76 % 438,898 10.96 %
Tier 1 Leverage capital (to average assets) 574,485 10.11 % 438,898 9.73 %
Long Term Debt
During the nine months ended September 30, 2022, as part of the acquisition of TCBI, we assumed $26.4 million in subordinated debt. As part of this debt, we recorded a fair value adjustment premium in the amount of $3.4 million, to accrete over five-to-seven years, with a remaining adjustment of $3.1 million as of September 30, 2022. During the nine months ended September 30, 2021, we issued $56.4 million in subordinated debt, and paid off $11.0 million in long term borrowings.
FHLB Advances
Advances from the FHLB totaled approximately $534.1 million and $82.0 million at September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022 and December 31, 2021, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 2.91% and 1.08%, respectively, and mature within five years. At September 30, 2022, $483.0 million in advances were short term with a rate of 3.12% and a weighted average stated rate of 2.82%. There were no short term advances at December 31, 2021.
Preferred Stock
On September 1, 2022, we entered into a securities purchase agreement with certain investors pursuant to which we offered and sold shares of our 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with no par value, for an aggregate purchase price of $72.0 million. The preferred stock was structured to qualify as additional Tier 1 capital under applicable regulatory capital guidelines. Holders of the preferred stock will be entitled to receive, if, when, and as declared by our board of directors (the “Board”), non-cumulative cash dividends at a rate of 7.50% for the first five years following issuance and thereafter at a variable rate equal to the then current 3-month secured overnight financing rate (“SOFR”), reset quarterly, plus 470 basis points. The preferred stock has a perpetual term and may not be redeemed, except under certain circumstances, under the first five years of issuance. We intend to use the net proceeds from the preferred stock issuance to provide additional capital support to the Bank, to support growth, to better position us to take advantage of strategic opportunities that may arise from time to time, repayment of existing debt, and for general corporate purposes.
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Contractual Obligations
The following tables summarize contractual obligations and other commitments to make future payments as of September 30, 2022 and December 31, 2021 (other than non-maturity deposit obligations), which consist of future cash payments associated with our contractual obligations pursuant to our FHLB advances, subordinated debt, revolving line of credit, notes payable, and non-cancelable future operating leases. Payments related to leases are based on actual payments specified in underlying contracts. The subordinated debt totaled $110.9 million and $81.4 million at September 30, 2022 and December 31, 2021, respectively. Of this subordinated debt, $25.0 million bears interest at a fixed rate of 6.75% through December 31, 2028 and a floating rate, based on a benchmark rate plus 369 basis points, thereafter through maturity in 2033, $52.5 million of this subordinated debt bears interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031, $3.9 million of this subordinated debt bears interest at a fixed rate of 4.75% through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031. We acquired three separate notes as part of the TCBI acquisition totaling $26.4 million. Of those notes, $10.0 million bears interest at a fixed rate of 6.25% until April 11, 2023, then will reset to a floating interest rate based on a benchmark plus 350 basis points, adjusting quarterly until maturity on April 11, 2028, $7.5 million bears a fixed rate of 6.38% until December 13, 2023, then will reset to a floating interest rate based on a benchmark rate plus 350 basis points, adjusting quarterly, until maturity on December 13, 2028, $8.9 million bears an adjustable interest rate plus 595 basis points, based on a benchmark rate, until maturity on March 24, 2027. As part of valuing these three subordinated notes from TCBI, we incurred a fair value adjustment premium of $3.4 million that will accrete over five-to-seven years. We had a revolving line of credit with FNBB in the amount of $5.0 million at both September 30, 2022 and December 31, 2021, respectively. During the nine months ended September 30, 2022, we utilized the $5.0 million and carried that balance at September 30, 2022. There was no balance on this line at December 31, 2021. This revolving line of credit bears a variable interest rate equal to the Wall Street Journal Prime and not to be less than 3.5% with the rate at 6.25% at September 30, 2022. This revolving line of credit is for one year and matures in November, 2022.
As of September 30, 2022
1 year or less More than 1 year but less than 3 years 3 years or more but less than 5 years 5 years or more Total
(Dollars in thousands) (Unaudited)
Non-cancelable future operating leases $ 972 $ 7,152 $ 4,462 $ 6,025 $ 18,611
Time deposits 507,922 132,050 29,707 20 669,699
Subordinated debt (including premium) 613 1,227 9,935 99,127 110,902
Advances from FHLB 483,000 875 50,184 - 534,059
Subordinated debt - trust preferred securities - - - 5,000 5,000
Securities sold under agreements to repurchase 22,072 - - - 22,072
FNBB Line of Credit 5,000 - - - 5,000
Standby and commercial letters of credit 19,132 24,461 475 - 44,068
Commitments to extend credit 593,315 403,671 184,028 159,564 1,340,578
Total $ 1,632,026 $ 569,436 $ 278,791 $ 269,736 $ 2,749,989
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As of December 31, 2021
1 year or less More than 1 year but less than 3 years 3 years or more but less than 5 years 5 years or more Total
(Dollars in thousands)
Non-cancelable future operating leases $ 2,243 $ 3,994 $ 3,502 $ 4,565 $ 14,304
Time deposits 548,593 121,037 23,026 - 692,656
Subordinated debt - - - 81,427 81,427
Advances from FHLB - 23,000 59,022 - 82,022
Subordinated debt - trust preferred securities - - - 5,000 5,000
Securities sold under agreements to repurchase 19,121 - - - 19,121
Standby and commercial letters of credit 10,460 24,733 98 - 35,291
Commitments to extend credit 428,839 351,623 138,674 87,702 1,006,838
Total $ 1,009,256 $ 524,387 $ 224,322 $ 178,694 $ 1,936,659
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized in the tables above. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. The credit risk to us in issuing letters of credit is essentially the same as that involved in extending loan facilities to our customers.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer.
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Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial futures contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Our exposure to interest rate risk is reviewed by the asset-liability committee of b1BANK, in accordance with policies approved by our board of directors. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.
We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as prepayment assumptions, maturity data and call options within the investment portfolio. Average lives of non-maturity deposit accounts are based on standard regulatory decay assumptions and are also incorporated into the model. Model assumptions are revised and updated as more accurate information becomes available. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various management strategies.
On at least a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Internal policy regarding interest rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 5% for a 100 basis point shift, 10% for a 200 basis point shift, and 12.5% for a 300 basis point shift. Internal policy regarding interest rate simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated fair value of equity at risk for the subsequent one-year period should not decline by more than 10% for a 100 basis point shift, 15% for a 200 basis point shift, and 25% for a 300 basis point shift.
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The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated:
As of September 30, 2022 As of December 31, 2021
Change in Interest Rates (Basis Points) Percent Change in Net Interest Income Percent Change in Fair Value of Equity Percent Change in Net Interest Income Percent Change in Fair Value of Equity
+300 (9.00 %) (5.88 %) (1.00 %) (4.45 %)
+200 (6.70 %) (4.21 %) 0.10 % (3.99 %)
+100 (4.70 %) (2.10 %) 0.50 % (1.57 %)
Base - % - % - % - %
-100 (2.90 %) 2.02 % (3.30 %) 2.83 %
-200 (4.30 %) 3.81 % (7.00 %) 18.80 %
The results are primarily due to the balance sheet mix and behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various strategies.
Impact of Inflation
Our consolidated financial statements and related notes included elsewhere in this statement have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.
Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.
Non-GAAP Financial Measures
Our accounting and reporting policies conform to GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.
This discussion and analysis section includes certain non-GAAP financial measures (e.g., referenced as “core” or “tangible”) intended to supplement, not substitute for, comparable GAAP measures. These measures typically adjust income available to common shareholders for certain significant activities or transactions that in management’s opinion can distort period-to-period comparisons of Business First’s performance. Transactions that are typically excluded from non-GAAP measures include realized and unrealized gains/losses on former bank premises and equipment, gains/losses on sales of securities, and acquisition-related expenses (including, but not limited to, legal costs, system conversion costs, severance and retention payments, etc.). The measures also typically adjust goodwill and certain intangible assets from book value and shareholders’ equity.
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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 September 30, 2022, was $16.4 million, or $0.72 per diluted common share, compared to core net income of $10.9 million, or $0.53 per diluted common share, for the three months ended September 30, 2021. Notable noncore events impacting earnings for the three months ended September 30, 2022, included $3.5 million in acquisition-related expenses and $265,000 in income attributable to insurance reimbursements from storm expenses, compared to the incurrence of losses of $392,000 on disposals of former bank premises and equipment included in other income and losses of $211,000 and $145,000 in expenses attributed to hurricane repairs and acquisition-related expenses, respectively, in the three months ended September 30, 2021.
For the nine months ended September 30, 2022, core net income was $41.2 million, or $1.86 per diluted common share, compared to core net income of $42.2 million, or $2.05 per diluted common share, for the nine months ended September 30, 2021. Notable noncore events impacting earnings for the nine months ended September 30, 2022, included the incurrence of losses of $717,000 on disposals of former bank premises and equipment included and $265,000 in insurance reimbursements from storm expenses, $5.0 million in acquisition-related expenses and $501,000 in expenses attributable to storm repairs, compared to the incurrence of losses of $932,000 on disposals of former bank premises and equipment included in other income and losses of $1.5 million in expenses attributed to hurricane repairs in the nine months ended September 30, 2021.
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For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
(Dollars in thousands, except per share data)
Interest Income:
Interest income $ 63,473 $ 41,534 $ 161,609 $ 128,147
Core interest income 63,473 41,534 161,609 128,147
Interest Expense:
Interest expense 9,993 4,240 18,092 12,607
Core interest expense 9,993 4,240 18,092 12,607
Provision for Loan Losses:
Provision for loan losses 3,273 1,147 7,835 6,747
Core provision expense 3,273 1,147 7,835 6,747
Other Income:
Other income 8,115 6,111 21,032 28,124
Losses on former bank premises and equipment - 392 717 932
Losses on sale of securities 7 11 46 66
Insurance reimbursement of storm expenditures (265 ) - (265 ) -
Core other income 7,857 6,514 21,530 29,122
Other Expense:
Other expense 40,946 29,330 111,063 86,963
Acquisition-related expenses (2) (3,521 ) (145 ) (5,040 ) (249 )
Occupancy and bank premises - hurricane repair - (211 ) (501 ) (1,499 )
Core other expense 37,425 28,974 105,522 85,215
Pre-Tax Income:
Pre-tax income 17,376 12,928 45,651 49,954
Losses on former bank premises and equipment - 392 717 932
Losses on sale of securities 7 11 46 66
Insurance reimbursement of storm expenditures (265 ) - (265 ) -
Acquisition-related expenses (2) 3,521 145 5,040 249
Occupancy and bank premises - hurricane repair - 211 501 1,499
Core pre-tax income 20,639 13,687 51,690 52,700
Provision for Income Taxes: (1)
Provision for income taxes 3,576 2,617 9,363 9,886
Tax on losses on former bank premises and equipment - 82 151 195
Tax on losses on sale of securities 1 2 10 14
Tax on insurance reimbursement of storm expenditures (55 ) - (55 ) -
Tax on acquisition-related expenses (2) 739 24 913 46
Tax on occupancy and bank premises - hurricane repair - 44 106 314
Core provision for income taxes $ 4,261 $ 2,769 $ 10,488 $ 10,455
Net Income:
Net income $ 13,800 $ 10,311 $ 36,288 $ 40,068
Losses on former bank premises and equipment , net of tax - 310 566 737
Losses on sale of securities, net of tax 6 9 36 52
Insurance reimbursement of storm expenditures, net of tax (210 ) - (210 ) -
Acquisition-related expenses (2), net of tax 2,782 121 4,127 203
Occupancy and bank premises - hurricane repair, net of tax - 167 395 1,185
Core net income $ 16,378 $ 10,918 $ 41,202 $ 42,245
Diluted Earnings Per Common Share:
Diluted earnings per common share $ 0.61 $ 0.50 $ 1.64 $ 1.94
Losses on former bank premises and equipment , net of tax - 0.01 0.02 0.04
Losses on sale of securities, net of tax - - - -
Insurance reimbursement of storm expenditures, net of tax (0.01 ) - (0.01 ) -
Acquisition-related expenses (2), net of tax 0.12 0.01 0.19 0.01
Occupancy and bank premises - hurricane repair, net of tax - 0.01 0.02 0.06
Core diluted earnings per common share $ 0.72 $ 0.53 $ 1.86 $ 2.05
(1) Tax rates, exclusive of certain nondeductible acquisition-related expenses and goodwill, utilized were 21% for both 2022 and 2021. These rates approximate the marginal tax rates for the applicable periods.
(2) Includes merger and conversion-related expenses and salary and employee benefits.
Tangible Book Value Per Common Share . Tangible book value per common share is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as shareholders’ equity less goodwill and core deposit and customer intangible assets, net of accumulated amortization, and (2) tangible book value per common share as tangible common equity divided by shares of common stock outstanding. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share.
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The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and presents tangible book value per common share compared to book value per common share:
As of September 30, 2022 As of December 31, 2021
(Dollars in thousands, except per share data) (Unaudited)
Tangible Common Equity
Total shareholders' equity $ 508,002 $ 433,368
Preferred stock (72,010 ) -
Total common shareholders' equity 435,992 433,368
Adjustments:
Goodwill (88,543 ) (59,894 )
Core deposit and customer intangibles (14,567 ) (12,203 )
Total tangible common equity $ 332,882 $ 361,271
Common shares outstanding (1) 22,605,136 20,400,349
Book value per common shares (1) $ 19.29 $ 21.24
Tangible book value per common shares (1) 14.73 17.71
(1) Excludes the dilutive effect, if any, of 173,643 and 132,032 shares of common stock issuable upon exercise of outstanding stock options and restricted stock awards as of September 30, 2022 and December 31, 2021, respectively.
Tangible Common Equity to Tangible Assets . Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit and customer intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common shareholders’ equity to total assets.
The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and total assets to tangible assets:
As of September 30, 2022 As of December 31, 2021
(Dollars in thousands, except per share data) (Unaudited)
Tangible Common Equity
Total shareholders' equity $ 508,002 $ 433,368
Preferred stock (72,010 ) -
Total common shareholders' equity 435,992 433,368
Adjustments:
Goodwill (88,543 ) (59,894 )
Core deposit and customer intangibles (14,567 ) (12,203 )
Total tangible common equity $ 332,882 $ 361,271
Tangible Assets
Total Assets $ 5,806,691 $ 4,726,378
Adjustments:
Goodwill (88,543 ) (59,894 )
Core deposit and customer intangibles (14,567 ) (12,203 )
Total tangible assets $ 5,703,581 $ 4,654,281
Common Equity to Total Assets 7.5 % 9.2 %
Tangible Common Equity to Tangible Assets 5.8 7.8
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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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Management evaluates our exposure to these claims and proceedings individually, and in the aggregate, and provides for potential losses on such litigation if the amount of the loss is estimable and the loss is probable. We are not currently involved in any pending legal proceedings other than routine, nonmaterial proceedings occurring in the ordinary course of business.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, we refer you to Item 1A. “Risk Factors” of our Annual Report on Form 10-K for December 31, 2021 filed with the SEC. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceed
(a) As previously reported, on September 1, 2022 we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors qualified as “accredited investors,” as such term is defined in Rule 501(a) of Regulation D (“Regulation D”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to which Business First offered and sold shares of its 7.50% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value (the “Series A Preferred Stock”), for an aggregate purchase price of $72,010,000. The offer and sale of the Series A Preferred Stock was made in reliance upon the exemptions from registration available under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D. We intend to use the net proceeds from the sale of the Series A Preferred Stock to provide additional capital support to the Bank, to support growth, to better position us to take advantage of strategic opportunities that may arise from time to time, repayment of existing debt, and for general corporate purposes.
(b) Not applicable.
(c) Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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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).
2.2 Agreement and Plan of Reorganization, dated October 20, 2021, by and between Business First Bancshares, Inc., and Texas Citizens Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on October 21, 2021).
3.1 Restated Articles of Incorporation of Business First Bancshares, Inc., adopted October 27, 2022*
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).
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).
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 Securities Purchase Agreement 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 filed by Business First Bancshares, Inc. on September 1, 2022).
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant hereby duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
BUSINESS FIRST BANCSHARES, INC.
November 3, 2022 /s/ David R. Melville, III
David R. Melville, III
President and Chief Executive Officer
November 3, 2022 /s/ Gregory Robertson
Gregory Robertson
Chief Financial Officer
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