UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECUTITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or
☐
TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-200112
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)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 5, 2017, the issuer has outstanding 6,932,570 shares of common stock, par value $1.00 per share.
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016
Unaudited Consolidated Statements of Income for the three months ended March 31, 2017 and 2016
Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2017 and 2016
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016
Notes to Unaudited Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
PART I – FINANCIAL INFORMATION
BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
March 31, 2017
(Unaudited)
December 31, 2016
Cash and Due from Banks
Federal Funds Sold
Securities Available for Sale, at Fair Values
Mortgage Loans Held for Sale
Loans and Lease Receivable, Net of Allowance for Loan
Losses of $8,183 at March 31, 2017 and $8,162 at
Premises and Equipment, Net
Accrued Interest Receivable
Other Equity Securities
Other Real Estate Owned
Cash Value of Life Insurance
Goodwill
Core Deposit Intangible
Other Assets
Total Assets
LIABILITIES
Deposits:
Noninterest Bearing
Interest Bearing
Total Deposits
Securities Sold Under Agreements to Repurchase
Short Term Borrowings
Long Term Borrowings
Federal Home Loan Bank Borrowings
Accrued Interest Payable
Other Liabilities
Total Liabilities
SHAREHOLDERS' EQUITY
Common Stock, $1.00 Par Value; 10,000,000 Shares Authorized; 6,932,570 and 6,916,673 Shares Issued and Outstanding at March 31, 2017 and December 31, 2016, respectively
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
The accompanying notes are an integral part of these financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For The Three Months Ended
March 31,
2017
2016
Interest Income:
Interest and Fees on Loans
Interest and Dividends on Securities
Interest on Federal Funds Sold and Due From Banks
Total Interest Income
Interest Expense:
Interest on Deposits
Interest on Borrowings
Total Interest Expense
Net Interest Income
Provision for Loan Losses
Net Interest Income after Provision for Loan Losses
Other Income:
Service Charges on Deposit Accounts
Gain on Sales of Securities
Other Income
Total Other Income
Other Expenses:
Salaries and Employee Benefits
Occupancy and Equipment Expense
Other Expenses
Total Other Expenses
Income Before Income Taxes
Provision for Income Taxes
Net Income
Earnings Per Share:
Basic
Diluted
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Consolidated Net Income
Other Comprehensive Income:
Unrealized Gain on Investment Securities
Reclassification Adjustment for Gains included in Net Income
Income Tax Effect
Other Comprehensive Income
Consolidated Comprehensive Income
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
Accumulated
Additional
Other
Total
Common
Paid-In
Retained
Comprehensive
Shareholders'
Stock
Capital
Earnings
Income (Loss)
Equity
Balances at December 31, 2015
Comprehensive Income:
Stock Based Compensation Cost
Exercise of Stock Warrants
Balances at March 31, 2016
Balances at December 31, 2016
Cash Dividends Declared, $0.05 Per Share
Stock Repurchase
Balances at March 31, 2017
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities:
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization
Amortization of Purchase Accounting Valuations
Noncash Compensation Expense
Net Amortization of Securities
(Gain) Loss on Sale of Other Real Estate Owned Net of Writedowns
Increase in Cash Value of Life Insurance
Provision for Deferred Income Taxes
Changes in Assets and Liabilities:
Decrease in Accrued Interest Receivable
Decrease in Other Assets
Increase (Decrease) in Accrued Interest Payable
Increase (Decrease) in Other Liabilities
Net Cash Provided by Operating Activities
Cash Flows From Investing Activities:
Purchases of Securities Available for Sale
Proceeds from Maturities / Sales of Securities Available for Sale
Proceeds from Paydowns of Securities Available for Sale
Purchases of Other Equity Securities
Redemption of Other Equity Securities
Life Insurance Proceeds
Net Increase in Loans
Purchases of Premises and Equipment
Proceeds from Sales of Other Real Estate
Improvements to Other Real Estate
Net Increase in Federal Funds Sold
Net Cash Used in Investing Activities
(CONTINUED)
Cash Flows From Financing Activities:
Net Increase in Deposits
Net Increase in Securities Sold Under Agreements to Repurchase
Net Advances (Repayments) on Federal Home Loan Bank Borrowings
Repurchase of Common Stock
Proceeds from Exercise of Stock Warrants
Payment of Dividends on Common Stock
Net Cash Provided by Financing Activities
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period
Supplemental Disclosures for Cash Flow Information:
Cash Payments for:
Income Tax Payments
Supplemental Schedule for Noncash Investing and Financing Activities:
Change in the Unrealized Gain on Securities Available for Sale
Change in Deferred Tax Effect on the Unrealized Gain on Securities Available for Sale
Transfer of Loans to Other Real Estate
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation –
The unaudited consolidated financial statements include the accounts of Business First Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, Business First Bank (the “Bank”), and its wholly-owned subsidiaries, Business First Insurance, LLC and American Gateway Insurance Agency, LLC. The Bank operates in sixteen full service banking centers, one loan production office, and one wealth solutions office in eight markets across Louisiana. As a state bank, it is subject to regulation by the state Office of Financial Institutions 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.
Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for loan losses, useful lives for depreciation and amortization, fair value of financial instruments, deferred taxes, and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for loan losses and the assessment of deferred tax assets and liabilities and, therefore, are critical accounting policies. Management does not anticipate any material changes to estimates in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, economic conditions in our markets, and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.
Note 2 – Reclassifications –
Certain reclassifications may have been made to conform to the classifications adopted for reporting in 2017. These reclassifications have no effect on previously reported net income.
Note 3 – Mergers and Acquisitions –
After the close of business on March 31, 2015, the Company merged with American Gateway Financial Corporation (“AGFC”), parent bank holding company for American Gateway Bank, pursuant to which the operations of AGFC merged with the Company. Prior to the merger, AGFC was a full service bank with ten branches located in the Baton Rouge metro region. Shareholders of AGFC received merger consideration of $10.00 in cash and 11.88 shares of the Company’s common stock in exchange for each share of AGFC common stock, representing an aggregate purchase price of $47.9 million. Including the effect of purchase accounting adjustments, assets acquired from AGFC totaled $371.5 million, which included loans of $143.2 million, securities available for sale of $108.4 million, and cash of $98.5 million. The Company also recorded a core deposit intangible asset of $2.8 million and goodwill of $6.8 million relating to the acquisition. The Company assumed liabilities totaling $330.5 million, which included $283.3 million in deposits, $41.2 million in Federal Home Loan Bank (“FHLB”) advances, and $4.3 million in securities sold under agreements to repurchase.
Note 4 – Earnings per Common Share –
Basic earnings per share (“EPS”) represents income available to common shareholders divided by the weighted average number of common shares outstanding; no dilution for any potentially convertible shares is included in the calculation. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The potential common shares that may be issued by the Company relate to outstanding stock warrants and stock options.
(Dollars in thousands, except per
share data)
Numerator:
Net Income Available to Common Shares
Denominator:
Weighted Average Common Shares Outstanding
Dilutive Effect of Stock Options and Warrants
Weighted Average Dilutive Common Shares
Basic Earnings Per Common Share From Net Income Available to Common Shares
Diluted Earnings Per Common Share From Net Income Available to Common Shares
Note 5 – Securities –
The amortized cost and fair values of securities available for sale as of March 31, 2017 and December 31, 2016 are summarized as follows:
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
U.S. Government Agencies
Corporate Securities
Mortgage-Backed Securities
Municipal Securities
Other Securities
Total Securities Available for Sale
The following tables present a summary of securities with gross unrealized losses and fair values at March 31, 2017 and December 31, 2016, 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.
Less Than 12 Months
12 Months or Greater
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.
The amortized cost and fair values of securities available for sale as of March 31, 2017 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.
Less Than One Year
One to Five Years
Over Five to Ten Years
Over Ten Years
Note 6 – Loans and the Allowance for Loan Losses –
Loans receivable at March 31, 2017 and December 31, 2016 are summarized as follows:
December 31,
Real estate loans:
Construction and land
Farmland
1-4 family residential
Multi-family residential
Nonfarm nonresidential
Commercial
Consumer
Total loans held for investment
Less:
Allowance for loan losses
Net loans
The performing 1-4 family residential, multi-family residential, commercial real estate, and commercial loans are pledged, under a blanket lien, as collateral securing advances from the FHLB at March 31, 2017 and December 31, 2016.
Net deferred loan origination fees were $1.0 million and $761,000 at March 31, 2017 and December 31, 2016, respectively, and are netted in their respective loan categories above. In addition to loans issued in the normal course of business, the Company considers overdrafts on customer deposit accounts to be loans, and reclassifies overdrafts as loans in its consolidated balance sheets. At March 31, 2017 and December 31, 2016, overdrafts of $154,000 and $232,000, respectively, have been reclassified to loans.
The Bank is the lead lender on participations sold, without recourse, to other financial institutions which are not included in the consolidated balance sheets. The unpaid principal balances of mortgages and other loans serviced for others were approximately $63.1 million and $55.5 million at March 31, 2017 and December 31, 2016, respectively.
The Bank grants loans and extensions of credit to individuals and a variety of businesses and corporations located in its general market areas throughout Louisiana. Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans and, therefore, no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent the calculated loss is greater than the remaining unaccreted discount, an allowance is recorded for such difference.
Acquired loans are those associated with our acquisition of AGFC. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses.
Total loans held for investment at March 31, 2017 includes $60.2 million of loans acquired in an acquisition that were recorded at fair value as of the acquisition date. Included in the acquired balances at March 31, 2017 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 $1.5 million and acquired performing loans not accounted for under ASC 310-30 totaling $60.9 million with a related purchase discount of $2.2 million.
Total loans held for investment at December 31, 2016 includes $65.3 million of loans acquired in an acquisition that were recorded at fair value as of the acquisition date. Included in the acquired balances at December 31, 2016 were acquired impaired loans with a net carrying amount of $1.8 million and acquired performing loans totaling $65.9 million with a related purchase discount of $2.4 million.
The following tables set forth, as of March 31, 2017 and December 31, 2016, 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
Real Estate:
Construction
1-4 Family
Multi-family
Nonfarm
and Land
Residential
Nonresidential
Allowance for credit losses:
Beginning Balance
Charge-offs
Recoveries
Provision
Ending Balance
Ending Balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Purchased Credit Impaired (1)
Loans receivable:
(1) Purchased credit impaired loans are evaluated for impairment on an individual basis.
Beginning balance
Management further disaggregates the loan portfolio segments into classes of loans, which are based on the initial measurement of the loan, risk characteristics of the loan and the method for monitoring and assessing the credit risk of the loan.
As of March 31, 2017 and December 31, 2016, the credit quality indicators, disaggregated by class of loan, are as follows:
Credit Quality Indicators
Pass
Special Mention
Substandard
Doubtful
Real Estate Loans:
The above classifications follow regulatory guidelines and can generally be described as follows:
●
Pass loans are of satisfactory quality.
Special mention loans have an existing weakness that could cause future impairment, including the deterioration of financial ratios, past due status, questionable management capabilities and possible reduction in the collateral values.
Substandard loans have an existing specific and well defined weakness that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.
Doubtful loans have specific weaknesses that are severe enough to make collection or liquidation in full highly questionable and improbable.
The following tables reflect certain information with respect to the loan portfolio delinquencies by loan class and amount as of March 31, 2017 and December 31, 2016. All loans greater than 90 days past due are generally placed on non-accrual status.
Aged Analysis of Past Due Loans Receivable
30-59 Days
Past Due
60-89 Days
Greater
Than 90 Days
Current
Total Loans
Receivable
Recorded
Investment Over
90 Days Past Due
and Still Accruing
The following is a summary of information pertaining to impaired loans as of March 31, 2017 and December 31, 2016. Acquired non-impaired loans are placed on nonaccrual status and reported as impaired using the same criteria applied to the originated portfolio. Purchased impaired credits are excluded from this table. The interest income recognized for impaired loans was $42,000 and $77,000 for the three months ending March 31, 2017 and 2016, respectively.
Unpaid
Average
Principal
Related
Investment
Balance
Allowance
With an allowance recorded:
Other Loans:
With no allowance recorded:
Total Impaired Loans:
The Company elected to account for certain loans acquired in the AGFC merger as acquired impaired loans under ASC 310-30 due to evidence of credit deterioration at acquisition and the probability that the Company will be unable to collect all contractually required payments. The expected cash flows approximated fair value as of the date of merger and, as a result, no accretable yield was recognized at acquisition for the AGFC purchased impaired credits.
The following table presents the changes in the carrying amount of the purchased impaired credits accounted for under ASC 310-30 for the periods presented.
Purchased
Impaired Credits
Carrying amount - December 31, 2015
Payments received, net of discounts realized
Transfer to other real estate
Carrying amount - December 31, 2016
Purchased impaired credit participation interest sales proceeds, net of discount realized
Carrying amount - March 31, 2017
The Bank seeks to assist customers that are experiencing financial difficulty by renegotiating loans within lending regulations and guidelines. The Bank makes loan modifications, primarily utilizing internal renegotiation programs via direct customer contact, that manage customers’ debt exposures held only by the Bank. Additionally, the Bank makes loan modifications with customers who have elected to work with external renegotiation agencies and these modifications provide solutions to customers’ entire unsecured debt structures. During the periods ended March 31, 2017 and December 31, 2016, the concessions granted to certain borrowers included extending the payment due dates, lowering the contractual interest rate, reducing accrued interest, and reducing the debt’s face or maturity amount.
Once modified in a troubled debt restructuring, a loan is generally considered impaired until its contractual maturity. At the time of the restructuring, the loan is evaluated for an asset-specific allowance for credit losses. The Bank continues to specifically reevaluate the loan in subsequent periods, regardless of the borrower’s performance under the modified terms. If a borrower subsequently defaults on the loan after it is restructured, the Bank provides an allowance for credit losses for the amount of the loan that exceeds the value of the related collateral.
The following tables present informative data regarding troubled debt restructurings as of March 31, 2017 and December 31, 2016. The Bank had no troubled debt restructurings that had subsequently defaulted during the three months ended March 31, 2017 and year ended December 31, 2016.
Modifications as of March 31, 2017:
Pre-Modification
Post-Modification
Number
Outstanding
of
Contracts
Troubled Debt Restructuring
Modifications as of December 31, 2016:
Note 7 – 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 following tables present the balance of assets and liabilities measured on a recurring basis as of March 31, 2017 and December 31, 2016. 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
Available for Sale:
U.S. Government Agency Securities
Nonrecurring Basis
The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the tables below. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis.
The fair value of the impaired loans is measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are Level 2 assets measured using appraisals from external parties of the collateral less any prior liens. Repossessed assets are initially recorded at fair value less estimated cost to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Bank records repossessed assets as Level 2.
Assets:
Impaired Loans
Repossessed Assets
Fair Value Financial Instruments
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. In accordance with generally accepted accounting principles, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Short-Term Investments – For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities – Fair value of securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans – The fair value for loans is estimated using discounted cash flow analyses, with interest rates currently being offered for similar loans to borrowers with similar credit rates. Loans with similar classifications are aggregated for purposes of the calculations. The allowance for loan losses, which was used to measure the credit risk, is subtracted from loans.
Cash Value of Bank-Owned Life Insurance (“BOLI”) – The carrying amount approximates its fair value.
Other Equity Securities – The carrying amount approximates its fair value.
Deposits – The fair value of demand deposits and certain money market deposits is the amount payable at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses, with interest rates currently offered for deposits of similar remaining maturities.
Borrowings – The fair value of FHLB advances and other long-term borrowings is estimated using the rates currently offered for advances of similar maturities. The carrying amount of short-term borrowings maturing within ninety days approximates the fair value.
Commitments to Extend Credit and Standby and Commercial Letters of Credit – The fair values of commitments to extend credit and standby and commercial letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure.
The estimated approximate fair values of the Bank’s financial instruments as of March 31, 2017 and December 31, 2016 are as follows:
Carrying
Amount
Financial Assets:
Cash and Short-Term Investments
Securities
Loans - Net
Cash Value of BOLI
Financial Liabilities:
Deposits
Borrowings
Note 8 – Recently Issued Accounting Pronouncements –
In January 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-16, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The provisions of this ASU require equity investments to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment. This ASU also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. It also eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities, and eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. ASU No. 2016-16 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. It also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU requires separate presentation of financial assets and financial liabilities by category and form on the balance sheet or the accompanying notes to the financial statements. In addition, this ASU clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in the update are effective for fiscal years beginning after December 15, 2017, including interim periods. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), Conforming Amendments Related to Leases. This ASU amends the codification regarding leases in order to increase transparency and comparability. The ASU requires companies to recognize lease assets and liabilities on the statement of condition and disclose key information about leasing arrangements. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. The ASU is effective for annual and interim periods beginning after December 15, 2018. The adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The ASU amends the codification to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The amendments also allow an accounting policy election to account for forfeitures as they occur. This ASU is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The Company elected an accounting policy to account for forfeitures as they occur upon adoption of this ASU. The adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments introduce an impairment model that is based on current expected credit losses (“CECL”), rather than incurred losses, to estimate credit losses on certain types of financial instruments (ex. loans and held to maturity securities), including certain off-balance sheet financial instruments (ex. commitments to extend credit and standby letters of credit that are not unconditionally cancellable). The CECL should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Financial instruments with similar risk characteristics may be grouped together when estimating the CECL. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial estimate of expected credit loss would be recognized through an allowance for credit losses with an offset (i.e. increase) to the purchase price at acquisition. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. The ASU also amends the current available for sale security impairment model for debt securities whereby credit losses relating to available for sale debt securities should be recorded through an allowance for credit losses. This ASU is effective for fiscal years beginning after December 31, 2019. 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. The Company is currently planning for the implementation of this ASU. It is too early to assess the impact this guidance will have on the Company’s consolidated financial statements.
On January 26, 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) which simplifies the accounting for goodwill impairment. The guidance in this ASU removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. The goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective for calendar year-end ending in 2020 for public business entities. Early adoption is permitted for any impairment tests performed after January 1, 2017. The adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial statements.
FORWARD-LOOKING STATEMENTS
NOTE: 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 subsidiaries, unless the context indicates otherwise.
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:
changes in the strength of the United States (“U.S.”) economy in general and the local economy in our local market areas adversely affecting our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral;
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 continuing low crude oil prices that impact certain of our borrowers and investments that operate within, or are backed by collateral associated with, the oil and gas industry;
changes in interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations;
changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;
increased competition for deposits and loans adversely affecting rates and terms;
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;
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;
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;
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 laws and regulations concerning taxes, banking, securities, insurance and other aspects of the financial securities industry, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and the extensive rule making required to be undertaken by various regulatory agencies under the Dodd-Frank Act;
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;
acts of terrorism, an outbreak of hostilities or other international or domestic calamities, weather, including the historic Louisiana flood of 2016, or other acts of God 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. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BUSINESS FIRST
The following discussion and analysis focuses on significant changes in the financial condition of Business First from December 31, 2016 to March 31, 2017, and its results of operations for the three months ended March 31, 2017. 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, 2016, including the audited consolidated financial statements and notes thereto, management’s discussion and analysis, and the risk factor disclosures contained therein. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that Business First believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Forward-Looking Statements,” “Risk Factors” and elsewhere in this Report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Business First assumes no obligation to update any of these forward-looking statements.
Overview
We are a registered bank holding company headquartered in Baton Rouge, Louisiana. Through our wholly-owned subsidiary, Business First Bank, a Louisiana state chartered bank, we provide a broad range of financial services tailored to meet the needs of small to medium-sized businesses and professionals. Since our inception in 2006, our priority has been and continues to be creating shareholder value through the establishment of an attractive commercial banking franchise in Louisiana. We consider our primary market to include the State of Louisiana. We currently operate out of eighteen offices, including sixteen full-service banking centers, one loan production office, and one wealth solutions office in eight markets across Louisiana. As of March 31, 2017, we had total assets of $1.2 billion, total loans of $854.0 million, total deposits of $963.3 million, and total shareholders’ equity of $116.2 million.
While we continue to prioritize organic growth, we also seek to capitalize upon other opportunities as they arise. After the close of business on March 31, 2015, we merged with American Gateway Financial Corporation (“AGFC”), parent bank holding company for American Gateway Bank, pursuant to which the operations of AGFC were merged with us and ten former American Gateway Bank branches were added to our branch network. Total assets acquired were $371.5 million, which included loans of $143.2 million, securities available for sale of $108.4 million, and deposits of $283.3 million. Shareholders of AGFC received merger consideration of $10.00 in cash and 11.88 shares of our common stock in exchange for each share of AGFC common stock.
As a bank holding company operating through one market segment, community banking, we generate most of our revenues from interest income on loans, customer service and loan fees, and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest earning assets and expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets.
Changes in the market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions, and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Louisiana, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target market and throughout the state of Louisiana.
Financial Highlights
The financial highlights for the quarter ended March 31, 2017 include:
•
Total assets of $1.2 billion, a $52.4 million or 4.7% increase from December 31, 2016.
Total loans of $854.0 million, a $42.9 million or 5.3% increase from December 31, 2016.
Total deposits of $963.3 million, a $30.5 million or 3.3% increase from December 31, 2016.
Net income for the three months ended March 31, 2017 of $2.0 million, a $572,000 or 40.7% increase from the quarter ended March 31, 2016.
Net interest income of $10.6 million for the three months ended March 31, 2017, a year-over-year increase of $1.1 million or 12.0%, from the three month period ended March 31, 2016.
An allowance for loan and lease losses of 0.96% of total loans held for investment and a ratio of non-performing loans to total loans held for investment of 1.47% as of March 31, 2017.
Return on average assets of 0.70% over the first three months of 2017.
Return on average equity of 6.91% over the first three months of 2017.
Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 9.62%, 10.34%, 10.34% and 11.12%, respectively as of March 31, 2017.
Book value per share of $16.76 as of March 31, 2017, an increase of 2.1% from $16.42 at December 31, 2016.
Results of Operations for the Three Months Ended March 31, 2017 and 2016
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 capital using a monthly average.
For the three months ended March 31, 2017, net interest income totaled $10.6 million, and net interest margin and net interest spread were 4.04% and 3.84%, respectively. For the three months ended March 31, 2016, net interest income totaled $9.4 million, and net interest margin and net interest spread were 3.69% and 3.53%, respectively. The positive change in net interest margin and net interest spread was primarily due to the sale of a 49% participation interest in one of our impaired credits acquired from AGFC which resulted in the recognition of the related $1.1 million purchase discount that is included in interest income for the three months ended March 31, 2017. Excluding this single transaction for the three months ended March 31, 2017, net interest margin and net interest spread were 3.60% and 3.40%, respectively, with an average yield on our loan portfolio of 4.80% and an average yield on total interest-earning assets of 4.19%. In addition, we experienced an overall increase in cost of funds of thirteen basis points. While we experienced significant growth in average loan balances, the market yields on new originations were below the average yield of amortizing or paid-off loans. Due to the continued impact of new loan growth and the runoff of higher yielding loan balances, we anticipate continued pressure on our net interest margin and net interest spread.
The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however the balances are reflected in average outstanding balances for the period. For the three months ended March 31, 2017 and 2016, interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield. The average total loans reflected below is net of deferred loan fees and discounts. Acquired loans were recorded at fair value at acquisition and accrete interest income over the remaining lives of the respective loans.
For the Three Months Ended March 31,
AverageOutstandingBalance
InterestEarned/InterestPaid
AverageYield/Rate
(Dollars in thousands) (Unaudited)
Assets
Interest-earning assets:
Total loans
Securities available for sale
Interest-bearing deposits in other banks
Total interest-earning assets
Noninterest-earning assets
Total assets
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits
Advances from Federal Home Loan Bank (“FHLB”)
Other borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Noninterest-bearing deposits
Other liabilities
Total noninterest-bearing liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest rate spread(1)
Net interest income
Net interest margin(2)
________________
(1)
Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(2)
Net interest margin is equal to net interest income divided by average interest-earning assets.
The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities, and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
For the Three Months Ended March 31, 2017compared to the Three Months EndedMarch 31, 2016
Increase (Decrease) due to change in
Volume
Rate
Interest-earning deposits in other banks
Total increase in interest income
Advances from FHLB
Total increase in interest expense
Increase in net interest income
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 $355,000 for the three months ended March 31, 2017 and $670,000 for the same period in 2016. The higher provision during the first quarter 2016 was to increase our general reserves related to our exposure to the energy sector which were not required during the first quarter 2017.
Noninterest Income
Our primary sources of noninterest income are service charges on deposit accounts, debit card fee income, income from bank-owned life insurance, and brokerage commissions.
The following table presents, for the periods indicated, the major categories of noninterest income:
Noninterest income:
Service charges on deposit accounts
Debit card fee income
Automated Teller Machine (“ATM”) fees
Gain on sales of other real estate owned
Bank-owned life insurance income
Gain on sales of investment securities
Brokerage commissions
Correspondent bank income
Total noninterest income
Noninterest income for the three months ended March 31, 2017 decreased $137,000 or 9.5% to $1.3 million compared to noninterest income of $1.4 million for the same period in 2016. The primary components of noninterest income were as follows:
Service charges on deposit accounts. We earn fees from our customers for deposit-related services, and these fees constitute a significant and predictable component of our noninterest income. Service charges on deposit accounts were $512,000 for the three months ended March 31, 2017, an increase of $18,000 over the same period in 2016. The increase for the three months ended March 31, 2017, over the same period in 2016, was primarily due to continued deposit penetration in our market area and the resulting increase in fee income.
Debit card fee income. We earn fees from our customers based upon debit card activity, and these fees constitute a significant recurring component of our noninterest income. Debit card fee income was $163,000 and $153,000 for the three months ended March 31, 2017 and 2016, respectively, representing an increase of $10,000 or 6.5%. The increase was primarily due to the continued growth of our deposit base.
ATM fees. We earn fee income as a result of noncustomer activity at our ATMs, and these fees represent a significant and predictable component of our noninterest income. ATM fees were $50,000 and $45,000 for the three months ended March 31, 2017 and 2016, respectively, representing an increase of $5,000 or 11.1%.
Bank-owned life insurance (“BOLI”) income. We invest in BOLI due to its attractive nontaxable return and protection against the loss of our key employees. We record income based on the growth of the cash surrender value of these policies as well as the annual yield. Income from BOLI was $150,000 for the three months ended March 31, 2017 as compared to $353,000 for the same time period in 2016, a decrease of $203,000. The decrease for the three months ended March 31, 2017, over the same period in 2016, was primarily due to receipt of a death benefit related to a former AGFC employee during the first quarter of 2016.
Gain on sale of investment securities. We had no sales of investment securities for the three months ended March 31, 2017 and $175,000 in gains on the sale of investment securities for the same period in 2016.
Brokerage commissions. We earn commissions from brokerage services provided by our Wealth Solutions Group. Brokerage commissions totaled $206,000 and $71,000 for the three months ended March 31, 2017 and 2016, respectively. The increase of $135,000 or 190.1% for the three months ended March 31, 2017, over the prior year period, was primarily due to recruiting a 4-person advisory team and completing the conversion of their book of business from the prior broker-dealer to Business First.
Correspondent bank income. During the first half of 2016 we renegotiated certain of our correspondent banking relationships. We received earnings credit income of $66,000 and $6,000 for the three months ended March 31, 2017 and 2016, respectively.
Other. This category includes a variety of other income producing activities, including wire transfer fees, mortgage-related income, insurance commissions, credit card income, participation fee income and rental income. Other income increased $42,000 or 37.5% for the three months ended March 31, 2017, compared to the same period in 2016, primarily due to mortgage-related income increasing $14,000, credit card income increasing $13,000 and rental income increasing $16,000.
Noninterest Expense
Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships, and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization, professional and regulatory fees, including Federal Deposit Insurance Corporation (“FDIC”) assessments, data processing expenses, and advertising and promotion expenses.
The following table presents, for the periods indicated, the major categories of noninterest expense:
For the Three Months EndedMarch 31,
Increase
Salaries and employee benefits
Non-staff expenses:
Occupancy of bank premises
Depreciation and amortization
Data processing
FDIC assessment fees
Legal and other professional fees
Advertising and promotions
Utilities and communications
Ad valorem shares tax
Directors’ fees
Other real estate owned expenses and write-downs
Total noninterest expense
Noninterest expense for the three months ended March 31, 2017 increased $365,000 or 4.3% to $8.8 million compared to noninterest expense of $8.4 million for the same period in 2016. The most significant components of the increase were as follows:
Salaries and employee benefits. Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $5.0 million for the three months ended March 31, 2017, an increase of $288,000 or 6.1% compared to the same period in 2016. The increase was primarily due to additional hires for new positions, our merit increase cycle, and higher commissions paid as a result of the increase in our brokerage services activity. As of March 31, 2017, we had 210 full-time equivalent employees compared to 200 as of March 31, 2016. Salaries and employee benefits included stock-based compensation income of $154,000 and expense of $106,000 for the three months ended March 31, 2017 and 2016, respectively. We had net stock-based compensation income for the three months ended March 31, 2017 due to the forfeiture of vested stock options for certain employees.
Legal and other professional fees. Other professional fees include audit, loan review, compliance, and other consultants. Legal and other professional fees were $284,000 and $365,000 for the three months ended March 31, 2017 and 2016, respectively. Legal and other professional fees were $81,000 or 22.2% lower during the three months ended March 31, 2017, compared to the same period in 2016, primarily due to the fees incurred in 2016 in our defense of the litigation related to the dissenting former AGFC shareholders who exercised their statutory rights of appraisal.
Directors’ fees. Directors’ fees were $161,000 and $89,000 for the three months ended March 31, 2017 and 2016, respectively. The increase for the three months ended March 31, 2017 of $72,000, or 80.9%, was primarily due to the March 31, 2017 issuance an aggregate of 4,410 shares of our common stock valued at $75,000 to our non-employee directors as non-cash compensation for their board service to Business First.
Other real estate owned expenses and write-downs. Expenses and write-downs related to other real estate owned totaled $23,000 and $91,000 for the three months ended March 31, 2017 and 2016, respectively. There was minimal new activity in 2017. The decline of $68,000 in the current year period compared to the prior year period was primarily due to a $59,000 write-down incurred in the first quarter of 2016 on a property which was subsequently sold in the second quarter 2016. No additional write-downs have been required on our other real estate owned.
Other. This category includes operating and administrative expenses including business development expenses (i.e. travel and entertainment, donations and club dues), insurance, supplies and printing, equipment rent, and software support and maintenance. Other noninterest expense increased $143,000 for the three months ended March 31, 2017 compared to the same period in 2016. The increase in other expenses for the three months ended March 31, 2017, compared to the same period in 2016, was primarily due to collections expense increasing $65,000 and software support and maintenance increasing $52,000.
Income Tax Expense
The amount of income tax expense is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
For the three months ended March 31, 2017, income tax expense totaled $767,000, an increase of $370,000 or 93.2% compared to $397,000 for the same period in 2016, primarily due to a higher level of taxable income. Our effective tax rates for the three months ended March 31, 2017 and 2016 was 28.0% and 22.0%, respectively. Our effective tax rate for both periods was affected primarily by tax-exempt income generated by municipal securities and BOLI and by other nondeductible expenses.
Financial Condition
Our assets increased $52.4 million or 4.7% from December 31, 2016 to March 31, 2017, primarily due to loan growth.
Loan Portfolio
Our primary source of income is interest on loans to individuals, professionals and small to medium-sized businesses located in Louisiana. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in our primary market area. Our loan portfolio represents the highest yielding component of our earning asset base.
As of March 31, 2017, total loans were $854.0 million, an increase of $42.9 million compared to $811.1 million as of December 31, 2016. The increase was primarily due to our continued loan penetration in our primary market area. Of these amounts, $180,000 in loans were classified as loans held for sale as of December 31, 2016. No loans were classified as held for sale as of March 31, 2017.
Total loans as a percentage of deposits were 88.7% and 87.0% as of March 31, 2017 and December 31, 2016, respectively. Total loans as a percentage of assets were 73.7% and 73.3% as of March 31, 2017 and December 31, 2016, respectively.
The following table summarizes our loan portfolio by type of loan as of the dates indicated:
As of March 31, 2017
As of December 31, 2016
Percent
(Dollars in
thousands)
Real estate:
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 $14.2 million or 6.7% to $227.3 million as of March 31, 2017 from $213.1 million as of December 31, 2016, primarily due to the efforts of our bankers who attracted new clients and leveraged existing bank relationships to fund expansion and growth opportunities.
Construction and land. Construction and land development loans are comprised of loans to fund construction, land acquisition and land development construction. The properties securing the portfolio are located primarily throughout Louisiana and are generally diverse in terms of type.
Construction and land loans increased $10.7 million or 11.3% to $105.1 million as of March 31, 2017 from $94.4 million as of December 31, 2016, primarily due to the opportunities to fund small residential land development projects with proven developers, who are existing customers of the Bank and have demonstrated a successful track record for many years.
1-4 family residential. Our 1-4 family residential loan portfolio is comprised of loans secured primarily by single family homes, which are both owner-occupied and investor owned. Our 1-4 family residential loans have a relatively small average balance spread between many individual borrowers.
1-4 family residential loans increased $674,000 or 0.5% to $129.7 million as of March 31, 2017 from $129.1 million as of December 31, 2016, primarily due to both the conversion of residential construction to in-house financed owner-occupied term debt and new financing of existing 1-4 family residential.
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 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 $13.0 million or 4.4% to $311.1 million as of March 31, 2017 from $298.1 million as of December 31, 2016, primarily due to the continued penetration into our market area by our bankers who attracted new clients and leveraged existing relationships to finance growth and expansion opportunities.
Other loan categories. Other categories of loans included in our loan portfolio include farmland and agricultural loans made to farmers and ranchers relating to their operations, multi-family residential loans, and consumer loans. None of these categories of loans represent a significant portion of our total loan portfolio.
The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range as of date indicated are summarized in the following tables:
One Yearor Less
OneThroughFive Years
After FiveYears
(Dollars in thousands)(Unaudited)
Amounts with fixed rates
Amounts with floating rates
Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
We have several procedures in place to assist in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our bankers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We had $13.9 million and $8.5 million in nonperforming assets as of March 31, 2017 and December 31, 2016, respectively. We had $12.5 million in nonperforming loans as of March 31, 2017 compared to $7.3 million as of December 31, 2016. The increase in nonperforming assets and nonperforming loans from December 31, 2016 to March 31, 2017 is primarily due to two relationships placed on nonaccrual status during the period ended March 31, 2017, one of which is in the energy sector and the other is in the gaming industry.
The following tables present information regarding nonperforming loans at the dates indicated:
As of March 31,2017(Dollars inthousands)(Unaudited)
As of December 31,2016(Dollars inthousands)
Nonaccrual loans
Accruing loans 90 or more days past due
Total nonperforming loans
Nonaccrual debt securities
Other real estate owned:
Commercial real estate, construction, land and land development
Residential real estate
Total other real estate owned
Total nonperforming assets
Restructured loans-nonaccrual
Restructured loans-accruing
Ratio of nonperforming loans to total loans held for investment
Ratio of nonperforming assets to total assets
Nonaccrual loans by category:
Potential Problem Loans
From a credit risk standpoint, we classify loans in our portfolio in one of four categories: pass, special mention, substandard or doubtful. Loans classified as loss are charged-off. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit as of each monthly reporting period. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. These credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.
Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.
The following tables summarize our internal ratings of loans held for investment as of the dates indicated.
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.
In connection with our review of the loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:
for commercial and industrial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category, and the value, nature and marketability of collateral;
for commercial mortgage loans and multifamily residential loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner occupied properties, the loan to value ratio, the age and condition of the collateral, and the volatility of income, property value and future operating results typical for properties of that type;
for 1-4 family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan to value ratio, and the age, condition and marketability of the collateral; and
for construction, land development and other land loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, the experience and ability of the developer, and the loan to value ratio.
As of March 31, 2017, the allowance for loan losses totaled $8.2 million or 0.96% of total loans held for investment. As of December 31, 2016, the allowance for loan losses totaled $8.2 million or 1.01% of total loans held for investment.
The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:
As of and
For the Three MonthsEndedMarch 31, 2017(Dollars in thousands)(Unaudited)
As of and For the Year Ended December 31,2016(Dollars in thousands)
Average loans outstanding(1)
Gross loans held for investment outstanding at end of period(1)
Allowance for loan losses at beginning of period
Provision for loan losses
Charge-offs:
Construction, land and farmland
Nonfarm non-residential
Total charge-offs
Recoveries:
Total recoveries
Net charge-offs
Allowance for loan losses at end of period
Ratio of allowance to end of period loans held for investment
Ratio of net charge-offs to average loans
Excluding loans held for sale.
Although we believe that we have established our allowance for loan losses in accordance with U.S. generally accepted accounting principles (“GAAP”) and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in our loan portfolio. If we experience economic declines or if asset quality deteriorates, material additional provisions could be required.
The following table shows the allocation of the allowance for loan losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for loan losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category.
As of March 31,2017
As of December 31,2016
Percentto Total
(Dollars inthousands)(Unaudited)
(Dollars inthousands)
Total real estate
Total allowance for loan losses
We use our securities portfolio to provide a source of liquidity, an appropriate return on funds invested, manage interest rate risk, meet collateral requirements, and meet regulatory capital requirements. As of March 31, 2017, the carrying amount of investment securities totaled $195.5 million, a decrease of $2.9 million or 1.4% compared to $198.3 million as of December 31, 2016. Securities represented 16.9%, and 17.9% of total assets as of March 31, 2017 and December 31, 2016, respectively.
Our investment portfolio consists entirely of securities classified as available for sale. As a result, the carrying values of our investment securities are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. The following tables summarize the amortized cost and estimated fair value of investment securities as of the dates shown:
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
U.S. government agencies
Corporate bonds
Municipal securities
Mortgage-backed securities
Other securities
All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As of March 31, 2017, the investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.
Management evaluates securities for other-than-temporary impairment, at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
The following tables set forth the fair value, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized cost of the securities portfolio as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures.
Within OneYear
After One YearbutWithin Five Years
After Five Years butWithin Ten Years
After TenYears
Yield
The contractual maturity of mortgage-backed securities, collateralized mortgage obligations and asset backed securities is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and asset-backed securities are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to pre-pay. Monthly pay downs on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 5.01 years with an estimated effective duration of 43.47 months as of March 31, 2017.
As of March 31, 2017 and December 31, 2016, 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.
We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits.
Total deposits as of March 31, 2017 were $963.3 million, an increase of $30.5 million compared to $932.8 million as of December 31, 2016, primarily due to an increase in the offering rates on interest-bearing demand accounts and certificates of deposit, in order to attract and retain deposit customers and thereby continue deposit penetration in our primary market area.
Noninterest-bearing deposits as of March 31, 2017 were $246.4 million compared to $223.7 million as of December 31, 2016, an increase of $22.7 million or 10.2%.
Average deposits for the three months ended March 31, 2017 were $944.5 million, a decrease of $532,000 or 0.1% over the full year average for the year ended December 31, 2016 of $945.0 million. The average rate paid on total interest-bearing deposits increased over this period from 0.71% for the year ended December 31, 2016 to 0.76% for the three months ended March 31, 2017. The increase in average rates during the three months ended March 31, 2017 was primarily due to a strategic increase in deposit pricing in order to improve liquidity. In addition, the stability and the continued growth of noninterest-bearing demand accounts served to reduce the cost of deposits to 0.57% for the three months ended March 31, 2017 and 0.55% for the year ended December 31, 2016.
The following table presents the daily average balances and weighted average rates paid on deposits for the periods indicated:
For the Three monthsEnded March 31, 2017
For the Year Ended December 31,2016
AverageBalance
AverageRate
Interest-bearing demand accounts
Negotiable order of withdrawal (“NOW”) accounts
Limited access money market accounts and savings
Certificates and other time deposits > $250k
Certificates and other time deposits < $250k
Total interest-bearing deposits
Noninterest-bearing demand accounts
Total deposits
The ratio of average noninterest-bearing deposits to average total deposits for the three months ended March 31, 2017 and the year ended December 31, 2016 was 24.7% and 23.4%, respectively.
The following table sets forth the amount of certificates of deposit that are greater than $250,000 by time remaining until maturity:
As ofMarch 31, 2017(Unaudited)
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
We utilize short-term and long-term borrowings to supplement deposits in funding our lending and investment activities. In addition, we use short-term borrowings to periodically repurchase outstanding shares of our common stock and for general corporate purposes. Each of these relationships are discussed below.
FHLB advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of March 31, 2017 and December 31, 2016, total borrowing capacity of $319.1 million and $321.1 million, respectively, was available under this arrangement, and $66.5 million and $47.1 million, respectively, was outstanding with a weighted average stated interest rate of 2.11% as of March 31, 2017 and 2.64% as of December 31, 2016. Our current FHLB advances mature within two years. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio.
As a result of the merger with AGFC, we assumed the outstanding FHLB advances of American Gateway Bank. These advances were recorded at fair value as of acquisition and totaled $41.2 million, resulting in a market value adjustment of $2.0 million which will be accreted over the life of the respective advances as a reduction of interest expense on borrowings.
The following table presents our FHLB borrowings at the dates indicated.
FHLBAdvances
Thousands)
Amount outstanding at quarter-end
Weighted average stated interest rate at quarter-end
Maximum month-end balance during the quarter
Average balance outstanding during the quarter
Weighted average interest rate during the quarter
Amount outstanding at year-end
Weighted average stated interest rate at year-end
Maximum month-end balance during the year
Average balance outstanding during the year
Weighted average interest rate during the year
First Tennessee Bank National Association (“FTN”) advances. FTN allowed us to borrow on a revolving basis up to $3.0 million. This line of credit, established on September 3, 2015, was unsecured, but we agreed that we would not pledge any of the capital stock of our wholly-owned subsidiary, Business First Bank, to secure any other obligation. The line of credit was established for the purpose of repurchasing shares of our common stock from certain of our shareholders and for general corporate purposes. This line of credit was paid off on September 12, 2016.
The following table presents the FTN advances at the dates indicated.
FTNAdvances
First National Bankers Bank (“FNBB”) long term advances. On September 12, 2016, we borrowed $3.0 million from FNBB with a maturity date of September 12, 2026. This advance is due in nine annual principal payments of $300,000 beginning on September 12, 2017 and one final principal and interest payment of $303,000 due on September 12, 2026. This advance is secured by a pledge of and security interest in the common stock of our wholly-owned subsidiary, Business First Bank. The balance outstanding was $3.0 million at both March 31, 2017 and December 31, 2016. This advance carries a variable interest equal to the Wall Street Journal Prime rate. The rate was 3.75% at both March 31, 2017 and December 31, 2016. This FNBB long term advance was established for the purpose of paying off the revolving line of credit with FTN.
The following table presents the FNBB long term advances at the dates indicated.
FNBBLong Term Advances
FNBB revolving advances. FNBB allows us to borrow on a revolving basis up to $5.0 million. This line of credit, established on September 12, 2016, is secured by a pledge of and security interest in the common stock of our wholly-owned subsidiary, Business First Bank. The balance on this line of credit was $862,000 at both March 31, 2017 and December 31, 2016. The line of credit bears a variable interest equal to the Wall Street Journal Prime rate. The rate was 3.75% at both March 31, 2017 and December 31, 2016. This FNBB line matures on September 12, 2017 and was established for the purpose of repurchasing shares of our common stock from certain of our shareholders and for general corporate purposes.
The following table presents the FNBB short term advances at the dates indicated.
FNBBShort Term Advances
Correspondent Bank Federal Funds Purchased Relationships
We maintain Federal Funds Purchased Relationships with the following financial institutions and limits as of March 31, 2017:
The Independent Banker’s Bank
FTN
FNBB
Compass Bank
ServisFirst Bank
Center State Bank
The following table represents combined Federal Funds Purchased for all relationships at the dates indicated.
Weighted average interest rate at quarter-end
Weighted average interest rate at year-end
Liquidity and Capital Resources
Liquidity
Liquidity involves our ability to utilize funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the three months ended March 31, 2017 and the year ended December 31, 2016, 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 and our FNBB revolving line are available and have been utilized on occasion to take advantage of investment opportunities, we do not generally rely on these external funding sources. As of March 31, 2017 and December 31, 2016, we maintained six lines of credit, respectively, with commercial banks which provide for extensions of credit with an availability to borrow up to an aggregate $109.5 million as of March 31, 2017 and December 31, 2016. There were no funds under these lines of credit outstanding as of March 31, 2017 and December 31, 2016.
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 assets totaled $1.1 billion for both the three months ended March 31, 2017 and the year ended December 31, 2016.
For the ThreeMonths EndedMarch 31, 2017
For the YearsEndedDecember 31,2016
Sources of Funds:
Noninterest-bearing
Interest-bearing
Uses of Funds:
Loans
Other noninterest-earning assets
Average noninterest-bearing deposits to average deposits
Average loans to average deposits
Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average loans increased 6.9% for the three months ended March 31, 2017 compared to the same period in 2016. 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 5.01 years and an effective duration of 43.47 months as of March 31, 2017. As of December 31, 2016, our securities portfolio has a weighted average life of 4.76 years and an effective duration of 44.72 months.
As of March 31, 2017, we had outstanding $212.6 million in commitments to extend credit and $12.0 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2016, we had outstanding $196.2 million in commitments to extend credit and $12.5 million in commitments associated with outstanding standby and commercial letters of credit. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.
As of March 31, 2017 and December 31, 2016, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. As of March 31, 2017, we had cash and cash equivalents of $50.0 million compared to $42.2 million as of December 31, 2016.
Capital Resources
Total shareholders’ equity increased to $116.2 million as of March 31, 2017, compared to $113.6 million as of December 31, 2016, an increase of $2.6 million or 2.3%. This increase was primarily the result of $2.0 million in net income.
On April 27, 2017, our Board of Directors (the “Board”) declared a quarterly dividend based upon our financial performance for the three months ended March 31, 2017 in the amount of $0.06 per share to the common shareholders of record as of May 15, 2017. The dividend is to be paid on May 31, 2017, or as soon as practicable thereafter.
The declaration and payment of dividends to our shareholders, as well as the amounts thereof, are subject to the discretion of the Board and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board. As a bank holding company, our ability to pay dividends is largely dependent upon the receipt of dividends from our subsidiary, Business First Bank. There can be no assurance that we will declare and pay any dividends to our shareholders.
Capital management consists of providing equity to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank holding company and bank levels. As of March 31, 2017 and December 31, 2016, we and Business First Bank were in compliance with all applicable regulatory capital requirements, and Business First Bank was classified as “well-capitalized,” for purposes of prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all applicable regulatory capital standards applicable to us.
The following table presents the actual capital amounts and regulatory capital ratios for us and Business First Bank as of the dates indicated.
Ratio
Business First Bancshares, Inc.
Total capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Common Equity Tier 1 capital (to risk weighted assets)
Tier 1 Leverage capital (to average assets)
Business First Bank
Long Term Debt
For information on our borrowings from FNBB, please refer to “Borrowings.”
Contractual Obligations
The following tables summarize contractual obligations and other commitments to make future payments as of March 31, 2017 and December 31, 2016 (other than non-maturity deposit obligations), which consist of future cash payments associated with our contractual obligations pursuant to our FHLB advances, revolving line of credit, long-term borrowings, and non-cancelable future operating leases. Payments related to leases are based on actual payments specified in underlying contracts. Advances from the FHLB totaled approximately $66.5 million and $47.1 million as of March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017 and December 31, 2016, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 2.11% and 2.64%, respectively, and maturities ranging from 2017 through 2018. The advance under the FNBB long-term borrowing totaled $3.0 million at both March 31, 2017 and December 31, 2016. This advance was secured by a pledge of and security interest in the common stock of our wholly-owned subsidiary, Business First Bank, bearing interest at a variable rate of 3.75% at both March 31, 2017 and December 31, 2016, and maturing in 2026. We also had a line of credit with FNBB with an outstanding balance of $862,000 at both March 31, 2017 and December 31, 2016. This line of credit was secured by a pledge of and security interest in the common stock of our wholly-owned subsidiary, Business First Bank, bearing interest at a variable rate of 3.75% at both March 31, 2017 and December 31, 2016, and maturing in 2017.
More than 1year but lessthan 3 years
3 years ormore but lessthan 5 years
5 yearsor more
(Unaudited) (Dollars in thousands)
Non-cancelable future operating leases
Time deposits
Advances from FNBB
Securities sold under agreements to repurchase
Standby and commercial letters of credit
Commitments to extend credit
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions which, in accordance with generally accepted accounting principles, or GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized below. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. The credit risk to us in issuing letters of credit is essentially the same as that involved in extending loan facilities to our customers.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer.
Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial futures contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Our exposure to interest rate risk is managed by the asset-liability committee of Business First Bank, in accordance with policies approved by our board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.
We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Average lives of non-maturity deposit accounts are based on standard regulatory decay assumptions and are also incorporated into the model. Model assumptions are revised and updated as more accurate information becomes available. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various management strategies.
On at least a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Internal policy regarding interest rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 5.0% 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 10.00% for a 100 basis point shift, 15.00% for a 200 basis point shift, and 25.00% for a 300 basis point shift.
The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated:
Change in Interest
Rates (Basis Points)
Percent Changein Net InterestIncome
Percent Changein Fair Value ofEquity
+300
+200
+100
Base
The results are primarily due to the behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. 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.
The non-GAAP financial measures that we discuss should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this statement when comparing such non-GAAP financial measures.
Tangible Book Value Per Common Share. Tangible book value per common share is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as shareholders’ equity less goodwill and core deposit intangible and other intangible assets, net of accumulated amortization, and (2) tangible book value per common share as tangible common equity divided by shares of common stock outstanding. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share.
We believe this measure is important to many investors in the marketplace who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing tangible book value.
The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and presents tangible book value per common share compared to book value per common share:
As of March 31,
As of December 31,
Tangible Common Equity
Total shareholders’ equity
Adjustments:
Core deposit and other intangibles
Total tangible common equity
Common shares outstanding(1)
Book value per common share
Tangible book value per common share
Excludes the dilutive effect, if any, of 1,011,105, 1,038,505, and 1,086,105 shares of common stock issuable upon exercise of outstanding stock options and warrants as of March 31, 2017, March 31, 2016, and December 31, 2016, respectively.
Tangible Common Equity to Tangible Assets. Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit intangible and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common shareholders’ equity to total assets.
We believe this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total shareholders’ equity and assets while not increasing our tangible common equity or tangible 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:
Tangible Assets
Total tangible assets
Common Equity to Total Assets
Tangible Common Equity to Tangible Assets
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.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on such evaluation, our principal executive officer and principal financial officer concluded our disclosure controls and procedures were effective as of the end of the period covered by this Report to provide reasonable assurance that the information we are required to disclose in reports that are filed or furnished under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, including to ensure that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, we cannot assure you that our disclosure controls and procedures will detect all errors or fraud.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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.
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, 2016 filed with the SEC.
On March 31, 2017, Business First issued an aggregate of 4,319 shares of common stock and 8,662 shares of restricted stock to certain executive officers and senior management employees of Business First Bank, pursuant to the terms of a restricted stock award agreement. The restricted stock will vest annually over a two-year period.
On March 31, 2107, Business First issued an aggregate of 4,410 shares of common stock to our non-employee directors as an inducement to their board service to Business First.
On March 31, 2017, Business First issued 1,000 shares of common stock to an employee as an inducement to his employment by Business First Bank.
None of the securities described above were registered under the Securities Act of 1933 (the “Securities Act”). These securities were issued pursuant to the exemption set forth in Section 4(a)(2) of the Securities Act for transactions not involving a public offering, and regulations promulgated thereunder. No proceeds were created by the grant of any securities described.
(b)
Not applicable.
(c)
On March 31, 2016, the Board approved a resolution authorizing management to repurchase a limited number of shares of our common stock prior to March 31, 2017. The authorization to repurchase shares through privately negotiated transactions in any calendar quarter is subject to a number of conditions and is limited to a number of shares having a maximum aggregate repurchase price equal to $1.0 million. Business First purchased 2,494 shares of our common stock under this delegated authority during the first quarter of 2017. On March 30, 2017, this delegated authority was renewed for an additional 12-month period to March 31, 2018.
Business First purchased equity securities during the three months ended March 31, 2017 as follows:
Period
(a)
Total number of shares purchased
Average price paid per share
Total number of shares purchased as part of publicly announced plans or programs
(d)
Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
Month #1:
January 1 through January 31, 2017
Month #2:
February 1 through February 28, 2017
Month #3:
March 1 through March 31, 2017
Item 3. Defaults upon Senior Securities
Description
3.1
Amended and Restated Articles of Incorporation of Business First Bancshares, Inc. (incorporated by reference to Exhibit 3.1 to Business First's Registration Statement on Form S-4 filed on November 12, 2014 (File No. 333-200112))
3.2
Bylaws of Business First Bancshares, Inc. (incorporated by reference to Exhibit 3.2 to Business First's Registration Statement on Form S-4 filed on November 12, 2014 (File No. 333-200112))
4.1
Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to Business First's Registration Statement on Form S-4 filed on November 12, 2014 (File No. 333-200112))
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
*
Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant hereby duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 12, 2017
/s/ David R. Melville, III
David R. Melville, III
President and Chief Executive Officer
/s/ Gregory Robertson
Gregory Robertson
Chief Financial Officer
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