Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

Commission file number: 333-200112

 

 

BUSINESS FIRST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

For the transition period from                      to                     

 

Louisiana		20-5340628
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
Business First Bank Plaza 8440 Jefferson Highway, Suite 101 Baton Rouge, Louisiana 70809		70809
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code: (225) 248-7600

 

 

Indicate by check mark whether the registrant: (i) 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 (ii) has been subject to such filing requirements for the past 90 days.    Yes  x    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of November 13, 2015 the issuer has 7,035,913 shares of common stock outstanding.

 

 

 

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BUSINESS FIRST BANCSHARES, INC.

 

PART I - FINANCIAL INFORMATION
Item 1.		Financial Statements
		Balance Sheets as of September 30, 2015 and December 31, 2014			2
		Statements of Income for the Three and Nine months ended September 30, 2015 and 2014			3
		Statements of Comprehensive Income for the Three and Nine months ended September 30, 2015 and 2014			4
		Statements of Changes in Stockholders’ Equity for the Nine months ended September 30, 2015 and 2014			5
		Statements of Cash Flows for the Nine months ended September 30, 2015 and 2014			6
		Notes to Unaudited Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			57
Item 4.		Controls and Procedures			57
PART II - OTHER INFORMATION
Item 1.		Legal Proceedings			58
Item 1A.		Risk Factors			58
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			58
Item 3.		Defaults Upon Senior Securities			58
Item 4.		Mine Safety Disclosures			58
Item 5.		Other Information			58
Item 6.		Exhibits			59
Signatures					60
Exhibit 31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
Exhibit 31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
Exhibit 32.1		Certification of Chief Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

 

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PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

		September 30, 2015				December 31, 2014
ASSETS
Cash and Due from Banks		$	45,965			$	26,015
Federal Funds Sold			10,570				817
Securities Available for Sale, at Fair Values			214,017				74,503
Loans and Lease Receivable, Net of Allowance for Loan
Losses of $7,171 at September 30, 2015 and $6,632 at December 31, 2014			738,170				551,754
Premises and Equipment, Net			12,251				2,180
Accrued Interest Receivable			2,572				1,772
Other Equity Securities			5,013				1,799
Other Real Estate Owned			3,817				3,028
Cash Value of Life Insurance			22,186				17,376
Goodwill			3,605				—
Core Deposit Intangible			2,624				—
Other Assets			5,986				5,258
Total Assets		$	1,066,776			$	684,502
LIABILITIES
Deposits:
Noninterest Bearing		$	204,415			$	108,965
Interest Bearing			659,880				478,287
Total Deposits			864,295				587,252
Securities Sold Under Agreements to Repurchase			2,349				—
Short Term Borrowings			3,000				—
Federal Home Loan Bank Borrowings			79,658				15,000
Accrued Interest Payable			544				416
Other Liabilities			4,825				2,989
Total Liabilities			954,671				605,657
STOCKHOLDERS’ EQUITY
Common Stock, $1 Par Value; 10,000,000 Shares Authorized; 7,205,913 Shares Issued and 7,035,913 Shares Outstanding at September 30, 2015; and 5,314,925 Shares Issued and Outstanding at December 31, 2014			7,036				5,315
Additional Paid-in Capital			86,230				57,225
Retained Earnings			19,288				16,948
Accumulated Other Comprehensive Loss			(449	)			(643	)
Total Stockholders’ Equity			112,105				78,845
Total Liabilities and Stockholders’ Equity		$	1,066,776			$	684,502

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

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands)

 

		For The Three Months Ended September 30,								For The Nine Months Ended September 30,
		2015				2014				2015				2014
Interest Income:
Interest and Fees on Loans		$	10,068			$	6,422			$	25,448			$	19,300
Interest and Dividends on Securities			937				395				2,348				1,266
Interest on Federal Funds Sold and Due From Banks			46				21				150				52
Total Interest Income			11,051				6,838				27,946				20,618
Interest Expense:
Interest on Deposits			972				934				2,875				2,763
Interest on Borrowings			163				79				427				232
Total Interest Expense			1,135				1,013				3,302				2,995
Net Interest Income			9,916				5,825				24,644				17,623
Provision for Loan Losses			150				400				450				700
Net Interest Income after Provision for Loan Losses			9,766				5,425				24,194				16,923
Other Income:
Service Charges on Deposit Accounts			467				137				1,056				429
Gain on Sales of Securities			2				—				2				6
Other Income			335				498				1,156				924
Total Other Income			804				635				2,214				1,359
Other Expenses:
Salaries and Employee Benefits			4,593				2,833				11,767				8,337
Occupancy and Equipment Expense			1,027				606				2,789				1,846
Other Expenses			3,634				1,234				7,564				3,788
Total Other Expenses			9,254				4,673				22,120				13,971
Income Before Income Taxes			1,316				1,387				4,288				4,311
Provision for Income Taxes			377				357				1,193				1,109
Net Income		$	939			$	1,030			$	3,095			$	3,202
Earnings Per Share:
Basic		$	0.13			$	0.19			$	0.47			$	0.60
Diluted		$	0.12			$	0.19			$	0.45			$	0.58

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

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

 

		For The Three Months Ended September 30,								For The Nine Months Ended September 30,
		2015				2014				2015				2014
Consolidated Net Income		$	939			$	1,030			$	3,095			$	3,202
Other Comprehensive Income (Loss):
Unrealized Gain (Loss) on Investment Securities			1,879				391				292				3,047
Reclassification Adjustment for Gains included in Net Income			2				—				2				6
Income Tax Effect			(640	)			(133	)			(100	)			(1,038	)
Other Comprehensive Income (Loss)			1,241				258				194				2,015
Consolidated Comprehensive Income (Loss)		$	2,180			$	1,288			$	3,289			$	5,217

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

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(Dollars in thousands)

 

														Accumulated
						Additional								Other				Total
		Common				Paid-In				Retained				Comprehensive				Stockholders’
		Stock				Capital				Earnings				Income (Loss)				Equity
Balances at December 31, 2013		$	5,315			$	56,740			$	12,915			$	(3,047	)		$	71,923
Comprehensive Income:
Net Income			—				—				3,202				—				3,202
Other Comprehensive Income (Loss)			—				—				—				2,015				2,015
Stock Based Compensation Cost			—				374				—				—				374
Balances at September 30, 2014		$	5,315			$	57,114			$	16,117			$	(1,032	)		$	77,514
Balances at December 31, 2014		$	5,315			$	57,225			$	16,948			$	(643	)		$	78,845
Comprehensive Income:
Net Income			—				—				3,095				—				3,095
Other Comprehensive Income (Loss)			—				—				—				194				194
Merger Consideration - net			1,891				30,519				—				—				32,410
Stock Based Compensation Cost			—				366				—				—				366
Stock Repurchase			(170	)			(1,880	)			(755	)			—				(2,805	)
Balances at September 30, 2015		$	7,036			$	86,230			$	19,288			$	(449	)		$	112,105

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

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

		For The Nine Months Ended September 30,
		2015				2014
Cash Flows From Operating Activities:
Consolidated Net Income		$	3,095			$	3,202
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
Provision for Loan Losses			450				700
Depreciation and Amortization			847				609
Amortization of Purchase Accounting Valuations			(1,540	)			—
Noncash Compensation Expense			364				373
Net Amortization of Securities			1,045				384
Gain on Sales of Securities			(2	)			(6	)
Gain on Sale of Other Real Estate Owned Net of Writedowns			(54	)			(262	)
(Gain) Loss on Sales of Other Assets			157				—
Increase in Cash Value of Life Insurance			(484	)			(428	)
Credit for Deferred Income Taxes			(926	)			(83	)
Changes in Assets and Liabilities:
(Increase) Decrease in Accrued Interest Receivable			(63	)			288
(Increase) Decrease in Other Assets			(503	)			242
Decrease in Accrued Interest Payable			(98	)			(56	)
Increase in Other Liabilities			216				1,012
Net Cash Provided by Operating Activities			2,504				5,975
Cash Flows From Investing Activities:
Purchases of Securities Available for Sale			(48,987	)			(1,108	)
Proceeds from Maturities / Sales of Securities Available for Sale			3,367				25,449
Proceeds from Paydowns of Securities Available for Sale			13,613				4,424
Net Cash Received in Merger			87,377				—
Purchases of Other Equity Securities			(3,038	)			(544	)
Proceeds from Sales of Other Equity Securities			1,902				1,866
Net Increase in Loans			(43,167	)			(6,769	)
Purchases of Premises and Equipment			(570	)			(190	)
Proceeds from Sales of Other Real Estate			682				337
Net Increase in Federal Funds Sold			(9,413	)			(11,380	)
Cash Paid in Dissenter Settlement			(243	)			—
Net Cash Provided by (Used in) Investing Activities			1,523				12,085

 

(CONTINUED)

 

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		For The Nine Months Ended September 30,
		2015				2014
Cash Flows From Financing Activities:
Net Increase (Decrease) in Deposits			(6,166	)			5,938
Net Increase (Decrease) in Securities Sold Under Agreements to Repurchase			(1,927	)			—
Net Advances on Federal Home Loan Bank Borrowings			23,821				—
Net Increase in Short Term Borrowings			3,000				—
Repurchase of Common Stock			(2,805	)			—
Net Cash Provided by Financing Activities			15,923				5,938
Net Increase in Cash and Cash Equivalents			19,950				23,998
Cash and Cash Equivalents at Beginning of Period			26,015				10,074
Cash and Cash Equivalents at End of Period		$	45,965			$	34,072
Supplemental Disclosures for Cash Flow Information:
Cash Payments for:
Interest on Deposits		$	2,828			$	2,819
Interest on Borrowings		$	705			$	232
Income Tax Payments		$	2,502			$	1,511
Supplemental Schedule for Noncash Investing and Financing Activities:
Change in the Unrealized Gain on Securities Available for Sale		$	294			$	3,054
Change in Deferred Tax Effect on the Unrealized Gain on Securities Available for Sale		$	(100	)		$	(1,038	)
Transfer of Loans to Other Real Estate		$	806			$	1,641

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

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

Note 1 – Basis of Presentation –

The unaudited consolidated financial statements include the accounts of Business First Bancshares, Inc. (the Company or Bancshares) 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 fifteen full service locations and two loan production offices in Louisiana (Baton Rouge metro region, Shreveport, Covington, Lafayette, Lake Charles, Houma (LPO) and New Orleans (LPO)). As a state bank, it is subject to regulation by the Office of Financial Institutions, State of Louisiana, and the Federal Deposit Insurance Corporation and undergoes periodic examinations by these agencies. The Company is regulated by the Federal Reserve and is also subject to periodic examinations.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company’s consolidated balance sheet, statement of income, comprehensive income, changes in stockholders’ equity and cash flows 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 accounting principles generally accepted in the United State of America (“U.S. GAAP”) have been omitted or abbreviated.

Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for loan losses, useful lives for depreciation and amortization, 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 2015. These reclassifications have no effect on previously reported net income.

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

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, into which the operations of AGFC merged with the Company. Prior to the merger, AGFC was a full service bank with 10 branches located in the Baton Rouge metro region. As part of the merger, the Company issued common stock, as well as cash, for the outstanding shares of AGFC. The Company believes with this merger, it will not only increase its presence in the Baton Rouge region, but also in Louisiana statewide, by being able to offer more services to its customers. The Company also believes that the merger with AGFC will increase the Company’s core deposits and allow the opportunity to further increase the loan portfolio. Results of operations include the revenues and expenses of the acquired operations from the acquisition date forward.

The following table provides the purchase price calculation as of the merger date and the identifiable assets purchased and the liabilities assumed at their estimated fair values. The purchase price calculation is an estimate, as the cash consideration to shareholders who have exercised their statutory rights of appraisal has not yet been finalized. The fair value measurements are subject to refinement for up to one year after the merger date based on additional information that may be obtained by us that existed as of the merger date.

Cost and Allocation of Purchase Price for American Gateway Financial Corporation (AGFC):

(Dollars in thousands, except per share data)

 

Purchase Price:
AGFC Shares Outstanding at March 31, 2015			217,944
Gross Business First Shares Issued for AGFC Shares			2,589,174
Exchange Ratio			11.88
Less: Shares Cashed Out Under Terms of Merger			698,186
Net Business First Shares to be Issued for AGFC Shares							1,890,988
Market Value per Share of Business First Stock							17.66
Aggregate Pro Forma Value of Business First Stock Issued in Merger						$	33,395
Aggregate Cash Consideration Paid in Merger							1,595
Cash Paid to Shareholders Exercising Appraisal Rights through September 30, 2015 *							9,419
Total Pro Forma Purchase Price						$	44,409
Net Assets Acquired:
Cash and Cash Equivalents						$	98,489
Securities Available for Sale							108,358
Loans and Leases Receivable							143,223
Premises and Equipment, Net							10,459
Cash Value of Life Insurance							4,326
Other Real Estate Owned							593
Core Deposit Intangible							2,762
Other Assets							3,381
Total Assets							371,591
Noninterest Bearing Deposits							80,865
Interest Bearing Deposits							202,442
Total Deposits							283,307
Borrowings							45,509
Other Liabilities							1,971
Total Liablilites							330,787
Net Assets Acquired							40,804
Goodwill Resulting from Merger						$	3,605

 

*	- Unsettled Appraisal Rights Shares at September 30, 2015 was 53,094.

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

The following table provides the unaudited pro forma results of operations for the three and nine month periods ended September 30, 2015 and 2014, as if the acquisition occurred on January 1 of each year. These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily comprised of AGFC’s loan, securities and deposit portfolios. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

 

		For The Three Months								For The Nine Months
		Ended September 30,								Ended September 30,
		2015				2014				2015				2014
		(Dollars in thousands, except per share data)
Interest Income		$	10,923			$	9,951			$	30,336			$	30,026
Interest Expense			934				1,406				3,153				4,191
Net Interest Income			9,989				8,545				27,183				25,835
Provision for Loan Losses			150				450				450				950
Net Interest Income after Provision for Loan Losses			9,839				8,095				26,733				24,885
Noninterest Income			786				1,222				2,857				3,738
Noninterest Expense			9,365				7,417				25,039				22,903
Income Before Income Taxes			1,260				1,900				4,551				5,720
Income Tax Expense			358				364				1,298				1,088
Net Income		$	902			$	1,536			$	3,253			$	4,632
Earnings Per Common Share
Basic		$	0.13			$	0.21			$	0.45			$	0.65
Diluted		$	0.12			$	0.21			$	0.43			$	0.62

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

Note 4 – Earnings per Common Share –

Basic earnings per share (EPS) represents income available to common stockholders 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.

 

		For The Three Months								For The Nine Months
		Ended September 30,								Ended September 30,
		2015				2014				2015				2014
		(Dollars in thousands, except per share data)
Numerator:
Net Income Available to Common Shares		$	939			$	1,030			$	3,095			$	3,202
Denominator:
Weighted Average Common Shares Outstanding			7,204,065				5,314,925				6,578,878				5,314,925
Dilutive Effect of Stock Options and Warrants			293,578				188,769				293,578				188,769
Weighted Average Dilutive Common Shares			7,497,643				5,503,694				6,872,456				5,503,694
Basic Earnings Per Common Share From Net Income Available to Common Shares		$	0.13			$	0.19			$	0.47			$	0.60
Diluted Earnings Per Common Share From Net Income Available to Common Shares		$	0.12			$	0.19			$	0.45			$	0.58

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

Note 5 – Securities –

The amortized cost and fair values of securities available for sale as of September 30, 2015 and December 31, 2014 are summarized as follows:

 

		September 30, 2015
		(Dollars in thousands)
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Government Agencies		$	14,169			$	49			$	13			$	14,205
Corporate Securities			11,184				15				53				11,146
Mortgage-Backed Securities			123,368				127				703				122,792
Municipal Securities			64,945				549				242				65,252
Other Securities			1,031				—				409				622
		$	214,697			$	740			$	1,420			$	214,017
		December 31, 2014
		(Dollars in thousands)
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Government Agencies		$	9,260			$	31			$	149			$	9,142
Corporate Securities			—				—				—				—
Mortgage-Backed Securities			34,591				51				616				34,026
Municipal Securities			30,324				562				226				30,660
Other Securities			1,302				—				627				675
		$	75,477			$	644			$	1,618			$	74,503

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

The following table is a summary of securities with gross unrealized losses and fair values at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time in a continued unrealized loss position. Due to the nature of these investments and current prevailing market prices, these unrealized losses are considered a temporary impairment of the securities.

 

		September 30, 2015
		Less Than 12 Months								12 Months or Greater								Total
		(Dollars in thousands)
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
U.S. Government Agencies		$	4,487			$	13			$	—			$	—			$	4,487			$	13
Corporate Securities			9,076				53				—				—				9,076				53
Mortgage-Backed Securities			69,568				311				25,764				392				95,332				703
Municipal Securities			27,701				153				4,016				89				31,717				242
Other Securities			—				—				622				409				622				409
		$	110,832			$	530			$	30,402			$	890			$	141,234			$	1,420

 

		December 31, 2014
		Less Than 12 Months								12 Months or Greater								Total
		(Dollars in thousands)
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
U.S. Government Agencies		$	—			$	—			$	8,003			$	149			$	8,003			$	149
Corporate Securities			—				—				—				—				—				—
Mortgage-Backed Securities			—				—				32,714				616				32,714				616
Municipal Securities			4,703				20				9,687				206				14,390				226
Other Securities			—				—				675				627				675				627
		$	4,703			$	20			$	51,079			$	1,598			$	55,782			$	1,618

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 developed a process to identify securities that could potentially have a credit impairment that is other than temporary. This process involves evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. When the Company determines that a security is deemed to be other than temporarily impaired, an impairment loss is recognized.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

The amortized cost and fair values of securities available for sale as of September 30, 2015 by contractual maturity are shown below. Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties.

 

		Amortized Cost				Fair Value
		(Dollars in thousands)
Less Than One Year		$	2,516			$	2,520
One to Five Years			37,529				37,824
Over Five to Ten Years			62,156				62,166
Over Ten Years			112,496				111,507
		$	214,697			$	214,017

Note 6 – Loans and the Allowance for Loan Losses –

Loans receivable at September 30, 2015 and December 31, 2014 are summarized as follows:

 

		September 30, 2015				December 31, 2014
		(Dollars in thousands)
Real estate loans:
Construction and land		$	105,387			$	61,062
Farmland			9,963				16,097
1-4 family residential			96,267				41,552
Multi-family residential			18,597				11,369
Nonfarm nonresidential			295,268				215,797
Commercial			193,226				185,291
Consumer			26,633				27,218
Total loans held for investment			745,341				558,386
Less:
Allowance for loan losses			(7,171	)			(6,632	)
Net loans		$	738,170			$	551,754

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

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.

The following table sets forth, as of September 30, 2015 and December 31, 2014, 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.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

Allowance for Credit Losses and Recorded Investment in Loans Receivable

 

		September 30, 2015
		(Dollars in thousands)
		Real Estate: Construction and Land				Real Estate: Farmland				Real Estate: 1-4 Family Residential				Real Estate: Multi-family Residential				Real Estate: Nonfarm Nonresidential				Commercial				Consumer				Total
Allowance for credit losses:
Beginning Balance		$	525			$	19			$	775			$	35			$	1,140			$	3,813			$	325			$	6,632
Charge-offs			—				—				(135	)			—				(44	)			(60	)			—				(239	)
Recoveries			34				—				67				—				12				129				86				328
Provision			59				5				90				12				123				146				15				450
Ending Balance		$	618			$	24			$	797			$	47			$	1,231			$	4,028			$	426			$	7,171
Ending Balance:
Individually evaluated for impairment		$	523			$	—			$	62			$	—			$	—			$	470			$	—			$	1,055
Collectively evaluated for impairment		$	95			$	24			$	711			$	47			$	1,231			$	3,558			$	426			$	6,092
Purchased Credit Impaired (1)		$	—			$	—			$	24			$	—			$	—			$	—			$	—			$	24
Loans receivable:
Ending Balance		$	105,387			$	9,963			$	96,267			$	18,597			$	295,268			$	193,226			$	26,633			$	745,341
Ending Balance:
Individually evaluated for impairment		$	3,016			$	—			$	3,082			$	—			$	3,947			$	5,230			$	—			$	15,275
Collectively evaluated for impairment		$	102,078			$	9,963			$	92,670			$	18,359			$	288,293			$	187,996			$	26,633			$	725,992
Purchased Credit Impaired (1)		$	293			$	—			$	515			$	238			$	3,028			$	—			$	—			$	4,074

 

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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

		December 31, 2014
		(Dollars in thousands)
		Real Estate: Construction and Land				Real Estate: Farmland				Real Estate: 1-4 Family Residential				Real Estate: Multi-family Residential				Real Estate: Nonfarm Nonresidential				Commercial				Consumer				Total
Allowance for credit losses:
Beginning balance		$	315			$	6			$	836			$	22			$	946			$	3,647			$	271			$	6,043
Charge-offs			—				—				(174	)			—				—				(10	)			—				(184	)
Recoveries			—				—				29				—				—				16				28				73
Provision			210				13				84				13				194				160				26				700
Ending Balance		$	525			$	19			$	775			$	35			$	1,140			$	3,813			$	325			$	6,632
Ending Balance:
Individually evaluated for impairment		$	505			$	—			$	—			$	—			$	—			$	41			$	—			$	546
Collectively evaluated for impairment		$	20			$	19			$	775			$	35			$	1,140			$	3,772			$	325			$	6,086
Loans receivable:
Ending Balance		$	61,062			$	16,097			$	41,552			$	11,369			$	215,797			$	185,291			$	27,218			$	558,386
Ending Balance:
Individually evaluated for impairment		$	2,772			$	—			$	977			$	—			$	4,358			$	3,714			$	47			$	11,868
Collectively evaluated for impairment		$	58,290			$	16,097			$	40,575			$	11,369			$	211,439			$	181,577			$	27,171			$	546,518

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.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

As of September 30, 2015 and December 31, 2014, the credit quality indicators, disaggregated by class of loan, are as follows:

Credit Quality Indicators

 

		September 30, 2015
		Pass				Special Mention				Substandard				Doubtful				Total
		(Dollars in thousands)
Real Estate Loans:
Construction and land		$	97,573			$	3,445			$	1,508			$	2,861			$	105,387
Farmland			9,963				—				—				—				9,963
1-4 family residential			88,189				1,890				3,489				2,699				96,267
Multi-family residential			17,278				945				374				—				18,597
Nonfarm nonresidential			263,292				12,437				18,008				1,531				295,268
Commercial			171,808				7,462				12,289				1,667				193,226
Consumer			26,220				381				32				—				26,633
Total		$	674,323			$	26,560			$	35,700			$	8,758			$	745,341

 

		December 31, 2014
		Pass				Special Mention				Substandard				Doubtful				Total
		(Dollars in thousands)
Real Estate Loans:
Construction and land		$	56,740			$	2,069			$	642			$	1,611			$	61,062
Farmland			16,097				—				—				—				16,097
1-4 family residential			39,702				912				786				152				41,552
Multi-family residential			10,463				906				—				—				11,369
Nonfarm nonresidential			190,356				16,410				7,812				1,219				215,797
Commercial			161,904				12,087				11,254				46				185,291
Consumer			26,654				517				47				—				27,218
Total		$	501,916			$	32,901			$	20,541			$	3,028			$	558,386

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.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

The following table reflects certain information with respect to the loan portfolio delinquencies by loan class and amount as of September 30, 2015 and December 31, 2014. All loans greater than 90 days past due are generally placed on non-accrual status.

Aged Analysis of Past Due Loans Receivable

 

		September 30, 2015
		(Dollars in thousands)
																										Recorded
										Greater																Investment Over
		30-59 Days				60-89 Days				Than 90 Days				Total								Total Loans				90 Days Past Due
		Past Due				Past Due				Past Due				Past Due				Current				Receivable				and Still Accruing
Real Estate Loans:
Construction and land		$	367			$	371			$	1,441			$	2,179			$	103,208			$	105,387			$	—
Farmland			—				—				—				—				9,963				9,963				—
1-4 family residential			1,601				224				779				2,604				93,663				96,267				—
Multi-family residential			—				—				—				—				18,597				18,597				—
Nonfarm nonresidential			119				506				255				880				294,388				295,268				—
Commercial			45				—				1,661				1,706				191,520				193,226				—
Consumer			5				—				—				5				26,628				26,633				—
Total		$	2,137			$	1,101			$	4,136			$	7,374			$	737,967			$	745,341			$	—

 

		December 31, 2014
		(Dollars in thousands)
																										Recorded
										Greater																Investment Over
		30-59 Days				60-89 Days				Than 90 Days				Total								Total Loans				90 Days Past Due
		Past Due				Past Due				Past Due				Past Due				Current				Receivable				and Still Accruing
Real Estate Loans:
Construction and land		$	—			$	—			$	182			$	182			$	60,880			$	61,062			$	—
Farmland			—				—				—				—				16,097				16,097				—
1-4 family residential			—				—				63				63				41,489				41,552				5
Multi-family residential			—				—				—				—				11,369				11,369				—
Nonfarm nonresidential			—				—				311				311				215,486				215,797				—
Commercial			41				—				—				41				185,250				185,291				—
Consumer			—				—				—				—				27,218				27,218				—
Total		$	41			$	—			$	556			$	597			$	557,789			$	558,386			$	5

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

The following is a summary of information pertaining to impaired loans as of September 30, 2015 and December 31, 2014. 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 insignificant.

 

		September 30, 2015
		(Dollars in thousands)
						Unpaid								Average
		Recorded				Principal				Related				Recorded
		Investment				Balance				Allowance				Investment
With an allowance recorded:
Real Estate Loans:
Construction and land		$	1,413			$	1,568			$	523			$	1,396
Farmland			—				—				—				—
1-4 family residential			109				110				62				12
Multi-family residential			—				—				—				—
Nonfarm nonresidential			—				—				—				—
Other Loans:
Commercial			1,661				1,661				470				743
Consumer			—				—				—				—
		$	3,183			$	3,339			$	1,055			$	2,151
With no allowance recorded:
Real Estate Loans:
Construction and land		$	1,603			$	1,608			$	—			$	1,431
Farmland			—				—				—				—
1-4 family residential			2,973				3,453				—				1,554
Multi-family residential			—				—				—				—
Nonfarm nonresidential			3,947				5,367				—				4,066
Other Loans:
Commercial			3,569				3,573				—				3,583
Consumer			—				—				—				19
		$	12,092			$	14,001			$	—			$	10,653
Total Impaired Loans:
Real Estate Loans:
Construction and land		$	3,016			$	3,176			$	523			$	2,827
Farmland			—				—				—				—
1-4 family residential			3,082				3,563				62				1,566
Multi-family residential			—				—				—				—
Nonfarm nonresidential			3,947				5,367				—				4,066
Other Loans:
Commercial			5,230				5,234				470				4,326
Consumer			—				—				—				19
		$	15,275			$	17,340			$	1,055			$	12,804

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

		December 31, 2014
		(Dollars in thousands)
						Unpaid								Average
		Recorded				Principal				Related				Recorded
		Investment				Balance				Allowance				Investment
With an allowance recorded:
Real Estate Loans:
Construction and land		$	1,428			$	1,428			$	505			$	1,345
Farmland			—				—				—				—
1-4 family residential			—				—				—				83
Multi-family residential			—				—				—				—
Nonfarm nonresidential			—				—				—				—
Other Loans:
Commercial			41				41				41				3
Consumer			—				—				—				—
		$	1,469			$	1,469			$	546			$	1,431
With no allowance recorded:
Real Estate Loans:
Construction and land		$	1,344			$	1,344			$	—			$	1,905
Farmland			—				—				—				—
1-4 family residential			977				1,020				—				1,090
Multi-family residential			—				—				—				—
Nonfarm nonresidential			4,358				5,264				—				5,069
Other Loans:
Commercial			3,673				3,673				—				3,753
Consumer			47				47				—				205
		$	10,399			$	11,348			$	—			$	12,022
Total Impaired Loans:
Real Estate Loans:
Construction and land		$	2,772			$	2,772			$	505			$	3,250
Farmland			—				—				—				—
1-4 family residential			977				1,020				—				1,173
Multi-family residential			—				—				—				—
Nonfarm nonresidential			4,358				5,264				—				5,069
Other Loans:
Commercial			3,714				3,714				41				3,756
Consumer			47				47				—				205
		$	11,868			$	12,817			$	546			$	13,453

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

The Company elected to account for certain loans acquired in the AGFC merger as acquired impaired loans under FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“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 following table presents the fair value of loans acquired with deteriorated credit quality as of the date of the AGFC merger. The expected cash flows approximated fair value as of the date of merger and, as a result, no accretable yield was recognized at acquisition.

 

		April 1, 2015
		(Dollars in thousands)
Purchased Impaired Credits:
Contractually required principal and interest		$	11,294
Nonaccretable difference			6,375
Cash flows expected to be collected			4,919
Accretable yield			—
Fair value of Purchased Impaired Credits		$	4,919

The following table presents the changes in the carrying amount of the purchased impaired credits from the April 1, 2015 merger date to September 30, 2015.

 

		Purchased
		Impaired Credits
		(Dollars in thousands)
Carrying amount - April 1, 2015 (acquisition)		$	4,919
Payments received, net			(845	)
Carrying amount - September 30, 2015		$	4,074

Total loans acquired in the AGFC merger included $142.8 million of performing loans not accounted for under ASC 310-30.

The Bank seeks to assist customers that are experiencing financial difficulty by renegotiating loans within lending regulations and guidelines. The Bank makes loan modifications, primarily utilizing internal renegotiation programs via direct customer contact, that manage customers’ debt exposures held only by the Bank. Additionally, the Bank makes loan modifications with customers who have elected to work with external renegotiation agencies and these modifications provide solutions to customers’ entire unsecured debt structures. During the periods ended September 30, 2015 and December 31, 2014, 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.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

The following tables present informative data regarding loan modifications occurring as of September 30, 2015 and December 31, 2014.

Modifications as of September 30, 2015:

 

						Pre-Modification				Post-Modification
		Number				Outstanding				Outstanding
		of				Recorded				Recorded
		Contracts				Investment				Investment
		(Dollars in thousands)
Troubled Debt Restructing
Real Estate Loans:
Construction and land			1			$	1,586			$	1,162
1-4 family residential			5				1,568				1,024
Nonfarm nonresidential			3				5,143				3,675
Other Loans:
Commercial			4				3,786				3,518
Total Loans			13			$	12,083			$	9,379

Modifications as of December 31, 2014:

 

						Pre-Modification				Post-Modification
		Number				Outstanding				Outstanding
		of				Recorded				Recorded
		Contracts				Investment				Investment
		(Dollars in thousands)
Troubled Debt Restructing
Real Estate Loans:
Construction and land			1			$	1,586			$	1,162
1-4 family residential			5				1,519				973
Nonfarm nonresidential			5				7,201				4,047
Other Loans:
Commercial			6				3,888				3,658
Consumer			2				139				47
Total Loans			19			$	14,333			$	9,887

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

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.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

The following tables present the balance of assets and liabilities measured on a recurring basis as of September 30, 2015 and December 31, 2014. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

 

						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable
						Assets				Inputs				Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
		(Dollars in thousands)
September 30, 2015
Available for Sale:
U.S. Government Agency Securities		$	14,205			$	—			$	14,205			$	—
Corporate Securities			11,146				—				11,146				—
Mortgage-Backed Securities			122,792				—				122,792				—
Municipal Securities			65,252				—				65,252				—
Other Securities			622				—				622				—
Total		$	214,017			$	—			$	214,017			$	—
December 31, 2014
Available for Sale:
U.S. Government Agency Securities		$	9,142			$	—			$	9,142			$	—
Corporate Securities			—				—				—				—
Mortgage-Backed Securities			34,026				—				34,026				—
Municipal Securities			30,660				—				30,660				—
Other Securities			675				—				675				—
Total		$	74,503			$	—			$	74,503			$	—

Nonrecurring Basis

The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis.

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

The fair value of the impaired loans is measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are Level 2 assets measured using appraisals from external parties of the collateral less any prior liens. Repossessed assets are initially recorded at fair value less estimated cost to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Bank records repossessed assets as Level 2.

 

		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(Dollars in thousands)
September 30, 2015
Assets:
Impaired Loans		$	18,270			$	—			$	18,270			$	—
Repossessed Assets			3,817				—				3,817				—
Total		$	22,087			$	—			$	22,087			$	—
December 31, 2014
Assets:
Impaired Loans		$	11,322			$	—			$	11,322			$	—
Repossessed Assets			3,028				—				3,028				—
Total		$	14,350			$	—			$	14,350			$	—

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.

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

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.

Deposits – The fair value of demand deposits and certain money market deposits is the amount payable at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses, with interest rates currently offered for deposits of similar remaining maturities.

Borrowings – The fair value of FHLB advances and other long-term borrowings is estimated using the rates currently offered for advances of similar maturities. The carrying amount of short-term borrowings maturing within ninety days approximates the fair value.

Commitments to Extend Credit and Standby and Commercial Letters of Credit – The fair values of commitments to extend credit and standby and commercial letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure.

The estimated approximate fair values of the Bank’s financial instruments as of September 30, 2015 and December 31, 2014 are as follows:

 

		Carrying Amount				Total Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(Dollars in thousands)
September 30, 2015
Financial Assets:
Cash and Short-Term Investments		$	56,535			$	56,535			$	56,535			$	—			$	—
Securities			214,017				214,017				—				214,017				—
Loans - Net			738,170				737,913				—				—				737,913
Cash Value of BOLI			22,186				22,186				—				22,186				—
		$	1,030,908			$	1,030,651			$	56,535			$	236,203			$	737,913
Financial Liabilities:
Deposits		$	864,295			$	858,439			$	—			$	—			$	858,439
Borrowings			85,007				85,861				—				85,861				—
		$	949,302			$	944,300			$	—			$	85,861			$	858,439

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

		Carrying Amount				Total Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(Dollars in thousands)
December 31, 2014
Financial Assets:
Cash and Short-Term Investments		$	26,832			$	26,832			$	26,832			$	—			$	—
Securities			74,503				74,503				—				74,503				—
Loans - Net			551,754				551,037				—				—				551,037
Cash Value of BOLI			17,376				17,376				—				17,376				—
		$	670,465			$	669,748			$	26,832			$	91,879			$	551,037
Financial Liabilities:
Deposits		$	587,252			$	581,239			$	—			$	—			$	581,239
Borrowings			15,000				14,986				—				14,986				—
		$	602,252			$	596,225			$	—			$	14,986			$	581,239

Note 8 – Recently Issued Accounting Pronouncements –

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-01, Investments – Equity Method and Joint Venture – Accounting for Investments in Qualified Affordable Housing Projects, which permits entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The new guidance also requires new disclosures for all investors in these projects. ASU No. 2014-01 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure, which clarifies when an in-substance repossession of foreclosure is deemed to occur, that is when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, and the loan should be derecognized and the real estate property should be recognized. This ASU clarifies that an in-substance repossession or foreclosure has occurred when either the creditor obtains legal title to the property or the borrower conveys all interest in the property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or similar legal agreement. ASU 2014-04 also requires the Company to disclose both the amount of foreclosed residential real estate property held and the investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure. This ASU is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

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BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

In August 2014, the FASB issued ASU No. 2014-14, Receivables – Troubled Debt Restructurings by Creditors – Classification of Certain Government-Guaranteed Residential Mortgage Loans Upon Foreclosure, which provides guidance concerning the classification of foreclosed residential mortgage loans held by creditors that are fully guaranteed under certain government programs. If certain conditions are met, a residential mortgage loan is derecognized and a separate other receivable is recorded upon foreclosure. ASU No. 2014-14 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern: Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

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Item 2.

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

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., unless the context indicates otherwise.

This Quarterly Report on Form 10-Q, or the “Report,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. 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 that these factors include, but are not limited to, the following: changes in the strength of the United States 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; 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 the total loan portfolio; 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 recently enacted 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; further 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 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 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.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BUSINESS FIRST

The following discussion and analysis is to focus on significant changes in the financial condition of Business First Bancshares, Inc. and its subsidiaries (Business First), from December 31, 2014 to September 30, 2015 and its results of operations for the nine months ended September 30, 2015. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this quarterly report on Form 10-Q, particularly the consolidated financial statements and related notes appearing in Item 1. 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 statement, 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

Business First is a bank holding company headquartered in Baton Rouge, Louisiana. Through its wholly-owned subsidiary, Business First Bank, a Louisiana state chartered bank, Business First provides a broad range of financial services tailored to meet the needs of small to medium-sized businesses and professionals. Since its inception in 2006, its priority has been and continues to be creating shareholder value through the establishment of an attractive commercial banking franchise in Louisiana. Business First considers its primary market to include the State of Louisiana. Business First currently operates out of its main office, fourteen branch locations and two loan production offices, all of which are located in Louisiana. As of September 30, 2015, Business First had total assets of $1.1 billion, total loans of $745.3 million, total deposits of $864.3 million, and total stockholders’ equity of $112.1 million.

After the close of business on March 31, 2015, Business First 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 Business First. Business First’s financial condition and results of operations as of and for the period ended September 30, 2015 were impacted as a result of this merger, as 10 former American Gateway branches were added to Business First’s branch network. Total assets acquired were $372.0 million, which included loans of $143.2 million, investment securities of $108.4 million, and deposits of $283.3 million. Shareholders of AGFC received merger consideration of $10 per share in cash, plus 11.88 shares of Business First common stock. See Note 3 to the Unaudited Consolidated Financial Statements for additional information regarding this merger.

As a bank holding company operating through one market segment, community banking, Business First generates most of its revenues from interest income on loans, customer service and loan fees, and interest income from securities. Business First incurs interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. Business First analyzes its ability to maximize income generated from interest earning assets and expense of its liabilities through its 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 Business First earns on interest-earning assets or pays on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and stockholders’ 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 Business First’s 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 its target market and throughout the state of Louisiana.

Financial Highlights

The financial highlights for the quarter ended September 30, 2015 include:

 

•

Total assets of $1.1 billion, a $382.3 million or 55.9% increase from December 31, 2014.

 

•

Total loans of $745.3 million, a $187.0 million or 33.5% increase from December 31, 2014.

 

•

Total deposits of $864.3 million, a $277.0 million or 47.2% increase from December 31, 2014.

 

•

Net income for the three months ended September 30, 2015 of $939,000, a $91,000 or 8.8% decrease from the quarter ended September 30, 2014.

 

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•

Net interest income of $9.9 million for the three months ended September 30, 2015, a year-over-year increase of $4.1 million or 70.2%, from the three month period ended September 30, 2014.

 

•

An allowance for loan and lease losses of 0.96% of total loans and a ratio of non-performing loans to total loans of 1.03% as of September 30, 2015.

 

•

Return on average assets of 0.41% over the first nine months of 2015.

 

•

Return on average equity of 3.75% over the first nine months of 2015.

 

•

Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 10.00%, 11.22%, 11.22% and 11.97%, respectively for Business First as of September 30, 2015.

 

•

Book value per share of $15.93 as of September 30, 2015, an increase of 7.4% from $14.83 at December 31, 2014.

Results of Operations for the Nine and Three Months Ended September 30, 2015 and 2014

Net Interest Income

Business First’s operating results depend primarily on its 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, Business First measures and monitors (1) yields on its loans and other interest-earning assets, (2) the costs of its deposits and other funding sources, (3) its net interest spread and (4) its 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 stockholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. Business First calculates average assets, liabilities, and capital using a monthly average.

For the nine months ended September 30, 2015, net interest income totaled $24.6 million, and net interest margin and net interest spread were 3.50% and 3.35%, respectively. For the nine months ended September 30, 2014 net interest income totaled $17.6 million and net interest margin and net interest spread were 3.56% and 3.36%, respectively. The change in net interest margin and net interest spread were primarily attributable to the change in rate environment where the average rate on the loan portfolio decreased four basis points from 4.83% as of September 30, 2014 to 4.79% as of September 30, 2015. In addition, the Bank experienced a decrease in borrowing costs of 18 basis points. For the three months ended September 30, 2015, net interest income totaled $9.9 million, and net interest margin and net interest spread were 4.04% and 3.89%, respectively. For the three months ended September 30, 2014 net interest income totaled $5.8 million and net interest margin and net interest spread were 3.48% and 3.28%, respectively. The change in net interest margin and net interest spread were primarily attributable to the change in rate environment where the average rate on the loan portfolio increased 66 basis points from 4.79% as of September 30, 2014 to 5.45% as of September 30, 2015. In addition, the Bank experienced a decrease in borrowing costs of 19 basis points. While Business First experienced significant growth in average loan balances, the market yields on new loan originations were below the average yield of amortizing or paid-off loans. However, this declining yield on new originations was partially offset by the accretion of the purchase discount related to the AGFC loan portfolio which positively impacted average loan yields for both the nine months and the three months ended September 30, 2015. In addition, the amortization of the market value adjustment for the AGFC FHLB advances for the nine months and three months ended September 30, 2015 served to lower Business First’s borrowing costs compared to the prior year periods. Due to the continued impact of new loan growth and the runoff of higher yielding loan balances, Business First anticipates continued pressure on its net interest margin and net interest spread.

 

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The following tables present, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The tables also set 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 nine and three months ended September 30, 2015 and 2014, 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.

 

 

		For the Nine Months Ended September 30,
		2015												2014
		Average Outstanding Balance				Interest Earned/ Interest Paid				Average Yield/ Rate				Average Outstanding Balance				Interest Earned/ Interest Paid				Average Yield/ Rate
		(Dollars in thousands) (Unaudited)
Assets
Interest-earning assets:
Total loans		$	708,238			$	25,448				4.79	%		$	533,326			$	19,300				4.83	%
Securities available for sale			167,062				2,348				1.87	%			97,093				1,266				1.74	%
Interest-bearing deposits in other banks			63,637				150				0.31	%			30,259				52				0.23	%
Total interest-earning assets			938,937				27,946				3.97	%			660,678				20,618				4.16	%
Allowance for loan losses			(7,122	)											(6,178	)
Noninterest-earning assets			86,572												38,689
Total assets		$	1,018,387			$	27,946							$	693,189			$	20,618
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits		$	650,516			$	2,875				0.59	%		$	484,761			$	2,763				0.76	%
Advances from FHLB			52,948				417				1.05	%			15,000				230				2.04	%
Other borrowings			3,481				10				0.38	%			228				2				1.17	%
Total interest-bearing liabilities			706,945				3,302				0.62	%			499,989				2,995				0.80	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			194,725												116,980
Other liabilities			6,720												3,611
Total noninterest-bearing liabilities			201,445												120,591
Stockholders’ equity			109,997												72,609
Total liabilities and stockholders’ equity		$	1,018,387											$	693,189
Net interest rate spread(1)											3.35	%											3.36	%
Net interest income						$	24,644											$	17,623
Net interest margin(2)											3.50	%											3.56	%

 

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

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

 

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		For the Three Months Ended September 30,
		2015												2014
		Average Outstanding Balance				Interest Earned/ Interest Paid				Average Yield/ Rate				Average Outstanding Balance				Interest Earned/ Interest Paid				Average Yield/ Rate
		(Dollars in thousands) (Unaudited)
Assets
Interest-earning assets:
Total loans		$	738,975			$	10,068				5.45	%		$	536,506			$	6,422				4.79	%
Securities available for sale			212,002				937				1.77	%			76,939				395				2.05	%
Interest-bearing deposits in other banks			30,077				46				0.61	%			55,807				21				0.15	%
Total interest-earning assets			981,054				11,051				4.51	%			669,252				6,838				4.09	%
Allowance for loan losses			(7,717	)											(6,390	)
Noninterest-earning assets			99,401												39,825
Total assets		$	1,072,738			$	11,051							$	702,687			$	6,838
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits		$	668,036			$	972				0.58	%		$	485,196			$	934				0.77	%
Advances from FHLB			60,752				157				1.03	%			15,000				79				2.11	%
Other borrowings			3,491				6				0.69	%			—				—				0.00	%
Total interest-bearing liabilities			732,279				1,135				0.62	%			500,196				1,013				0.81	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			221,043												124,249
Other liabilities			8,856												3,950
Total noninterest-bearing liabilities			229,899												128,199
Stockholders’ equity			110,560												74,292
Total liabilities and stockholders’ equity		$	1,072,738											$	702,687
Net interest rate spread(1)											3.89	%											3.28	%
Net interest income						$	9,916											$	5,825
Net interest margin(2)											4.04	%											3.48	%

 

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

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

 

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

 

		For the Nine Months Ended September 30, 2015 compared to the Nine Months ended September 30, 2014
		Increase (Decrease) due to change in
		Volume				Rate				Total
		(Dollars in thousands) (Unaudited)
Interest-earning assets:
Total loans		$	6,285			$	(137	)		$	6,148
Securities available for sale			983				99				1,082
Interest-earning deposits in other banks			79				19				98
Total increase (decrease) in interest income		$	7,347			$	(19	)		$	7,328
Interest-bearing liabilities:
Interest-bearing deposits		$	733			$	(621	)		$	112
Advances from FHLB			299				(112	)			187
Other borrowings			9				(1	)			8
Total increase (decrease) in interest expense			1,041				(734	)			307
Increase (decrease) in net interest income		$	6,306			$	715			$	7,021
		For the Three Months Ended September 30, 2015 compared to the Three Months ended September 30, 2014
		Increase (Decrease) due to change in
		Volume				Rate				Total
		(Dollars in thousands) (Unaudited)
Interest-earning assets:
Total loans		$	2,758			$	888			$	3,646
Securities available for sale			597				(55	)			542
Interest-earning deposits in other banks			(39	)			64				25
Total increase (decrease) in interest income		$	3,316			$	897			$	4,213
Interest-bearing liabilities:
Interest-bearing deposits		$	266			$	(228	)		$	38
Advances from FHLB			118				(40	)			78
Other borrowings			6				—				6
Total increase (decrease) in interest expense			390				(268	)			122
Increase (decrease) in net interest income		$	2,926			$	1,165			$	4,091

Provision for Loan Losses

Business First’s provision for loan losses is a charge to income in order to bring its allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by Business First’s management in determining the allowance for loan losses see “—Financial Condition—Allowance for Loan Losses.” The provision for loan losses was $450,000 for the nine months ended September 30, 2015 and $700,000 for the same period in 2014. For the three months ended September 30, 2015 and 2014, the provision for loan losses was $150,000 and $400,000, respectively.

Noninterest Income

Business First’s primary sources of recurring noninterest income are service charges on deposit accounts, gains on the sale of securities and other real estate owned, and income from bank-owned life insurance.

 

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The following tables present, for the periods indicated, the major categories of noninterest income:

 

		For the Nine Months Ended September 30,								Increase (Decrease)
		2015				2014
		(Dollars in thousands) (Unaudited)
Noninterest income:
Service charges on deposit accounts		$	1,056			$	429			$	627
Gain (Loss) on sales of other real estate owned			54				262				(208	)
Bank-owned life insurance income			484				428				56
Gain on sales of investment securities			2				6				(4	)
Other			618				234				384
Total noninterest income		$	2,214			$	1,359			$	855
		For the Three Months Ended September 30,								Increase (Decrease)
		2015				2014
		(Dollars in thousands) (Unaudited)
Noninterest income:
Service charges on deposit accounts		$	467			$	137			$	330
Gain (Loss) on sales of other real estate owned			35				262				(227	)
Bank-owned life insurance income			174				146				28
Gain on sales of investment securities			2				—				2
Other			126				90				36
Total noninterest income		$	804			$	635			$	169

Noninterest income for the nine months ended September 30, 2015 increased $855,000 or 62.9% to $2.2 million compared to noninterest income of $1.4 million for the same period in 2014. For the three months ended September 30, 2015, noninterest income increased $169,000 or 26.6% to 804,000 compared to $635,000 for the same period in 2014. The primary components of the increase were as follows:

Service charges on deposit accounts. Business First earns fees from its customers for deposit-related services, and these fees constitute a significant and predictable component of its noninterest income. Service charges on deposit accounts were $1.1 million for the nine months ended September 30, 2015, an increase of $627,000 over the same period in 2014. For the three months ended September 30, 2015, service charges on deposit accounts were $467,000, an increase of $330,000 over the same period in 2014. The increases were primarily due to an increase in the number of deposit accounts as a result of the merger with AGFC.

Gain (Loss) on sales of other real estate owned. Gain (Loss) on sales of other real estate owned was $54,000 and $262,000 for the nine months ended September 30, 2015 and 2014, respectively. During the three months ended September 30, 2015 and 2014, the gain was $35,000 and $262,000, respectively. There was minimal activity during both time periods.

Bank-owned life insurance income. Business First invests in bank-owned life insurance due to its attractive nontaxable return and protection against the loss of its key employees. Business First records income based on the growth of the cash surrender value of these policies as well as the annual yield. Income from bank-owned life insurance was $484,000 for the nine months ended September 30, 2015 as compared to $428,000 for the same time period in 2014, an increase of $56,000. Income for the three months ended September 30, 2015 was $174,000 compared to $146,000 for the same time period in 2014, an increase of $28,000. The increases were primarily due to the merger with AGFC.

Gain on Sale of Investment Securities. The gain on sale of investment securities was $2,000 and $6,000 for the nine months ended September 30, 2015 and 2014, respectively. The gain on sale of investments was $2,000 and zero dollars for the three months ended September 30, 2015 and 2014. There was minimal trading activity for both time periods.

 

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Other. This category includes a variety of other income producing activities, including wire transfer fees, mortgage related income, ATM fees, and debit card fees. Other income increased $384,000 or 164.1% for the nine months ended September 30, 2015, compared to the same period in 2014. For the three months ended September 30, 2015, other income increased $36,000. The increases were primarily due to the merger with AGFC and rental income associated with other real estate.

Noninterest Expense

Generally, noninterest expense is composed of all employee expenses and costs associated with operating Business First’s facilities, obtaining and retaining customer relationships and providing bank services. The major 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 FDIC assessments, data processing expenses, and advertising and promotion expenses.

The following tables present, for the periods indicated, the major categories of noninterest expense:

 

		For the Nine Months Ended September 30,								Increase (Decrease)
		2015				2014
		(Dollars in thousands) (Unaudited)
Salaries and employee benefits		$	11,767			$	8,337			$	3,430
Non-staff expenses:
Occupancy of bank premises			1,497				1,005				492
Depreciation and amortization			985				609				376
Data processing			773				524				249
FDIC assessment fees			535				276				259
Legal and other professional fees			1,524				554				970
Advertising and promotions			511				360				151
Utilities and communications			367				232				135
Other real estate owned expenses and write-downs			103				40				63
Other			4,058				2,034				2,024
Total noninterest expense		$	22,120			$	13,971			$	8,149
		For the Three Months Ended September 30,								Increase (Decrease)
		2015				2014
		(Dollars in thousands) (Unaudited)
Salaries and employee benefits		$	4,593			$	2,833			$	1,760
Non-staff expenses:
Occupancy of bank premises			524				372				152
Depreciation and amortization			441				205				236
Data processing			322				169				153
FDIC assessment fees			232				51				181
Legal and other professional fees			384				168				216
Advertising and promotions			281				138				143
Utilities and communications			149				75				74
Other real estate owned expenses and write-downs			37				13				24
Other			2,291				649				1,642
Total noninterest expense		$	9,254			$	4,673			$	4,581

Noninterest expense for the nine months ended September 30, 2015 increased $8.1 million or 58.3% to $22.1 million compared to noninterest expense of $14.0 million for the same period in 2014. For the three months ended September 30, 2015, noninterest expense increased $4.6 million or 98.0% to $9.3 million, compared to $4.7 million for the same period in 2014. 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 $11.8 million for the nine months ended September 30, 2015, an increase of $3.4 million or 41.1% compared to the same period

 

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in 2014. For the three months ended September 30, 2015, salaries and employee benefits were $4.6 million, an increase of $1.8 million or 62.1%, compared to the same period in 2014. The increase was primarily attributable to additional hires for new positions, the Banks’s merit increase cycle and the merger with AGFC. As of September 30, 2015, Business First had 188 full-time equivalent employees. Salaries and employee benefits included stock-based compensation expense of $364,000 and $374,000 for the nine months ended September 30, 2015 and 2014, respectively, and $121,000 and $125,000 for the three months ended September 30, 2015 and 2014, respectively.

Occupancy of bank premises. Expense associated with occupancy of premises was $1.5 million for the nine months ended September 30, 2015 and $1.0 million for the same period in 2014. For the three months ended September 30, 2015 and 2014, occupancy of bank premises expenses were $524,000 and $372,000, respectively. The increases of $492,000 and $152,000 for the nine months and three months ended September 30, 2015, respectively, can primarily be attributed to the addition of 10 banking centers in conjunction with the merger with AGFC.

Depreciation and amortization. Depreciation and amortization costs were $985,000 and $609,000 for the nine months ended September 30, 2015 and 2014, respectively. For the three months ended September 30, 2015 and 2014, respectively, depreciation and amortization costs were $441,000 and $205,000. This category includes leasehold, furniture, fixtures and equipment depreciation totaling $847,000 and $609,000 for the nine months ended September 30, 2015 and 2014, respectively, and $303,000 and $205,000 for the three months ended September 30, 2015 and 2014, respectively. The amortization of intangible assets was $138,000 for both the nine months and three months ended September 30, 2015. There was no amortization of intangible assets in either period for 2014.

Data processing. Data processing expenses were $773,000 for the nine months ended September 30, 2015 and $524,000 for the same period in 2014. For the three months ended September 30, 2015 and 2014, data processing expenses were $322,000 and $169,000. The increases of $249,000 for the nine months ended September 30, 2015 and $153,000 for the three months ended September 30, 2015, were attributable to the merger with AGFC.

FDIC assessment fees. FDIC assessment fees were $535,000 and $276,000 for the nine months ended September 30, 2015 and 2014, respectively. For the three months ended September 30, 2015 and 2014, the FDIC assessment fees were $232,000 and $51,000, respectively. The increase of $259,000 or 93.8% for the nine months ended September 30, 2015 and increase of $181,000 or 354.9% for the three months ended September 30, 2015, is primarily due to the merger with AGFC.

Legal and other professional fees. Other professional fees include audit, loan review, compliance, and other consultants. Legal and other professional fees were $1.5 million and $554,000 for the nine months ended September 30, 2015 and 2014, respectively. For the three months ended September 30, 2015 and 2014, these fees were $384,000 and $168,000, respectively. The increases of $970,000 for the nine months ended September, 30, 2015 and $216,000 for the three months ended September 30, 2015, can be attributed to Business First’s merger with AGFC and ongoing reporting obligations in connection with the registration of our common stock.

Other real estate owned expenses and write-downs. Expenses and write-downs related to other real estate owned were $103,000 and $40,000 for the nine months ended September 30, 2015 and 2014, respectively. For the three months ended September 30, 2015 and 2014, other real estate expenses were $37,000 and $13,000, respectively. There was very little new activity during both time periods. The increases of $63,000 for the nine months ended September 30, 2015 and $24,000 for the three months ended September 30, 2015 was due primarily due to expenses associated with one existing property as well as expenses incurred relating to the properties acquired in the merger with AGFC.

Other. This category includes operating and administrative expenses including business development expenses (i.e. travel and entertainment, donations and club memberships), insurance, security expenses, as well as nonrecurring post-merger and conversion related costs. Other noninterest expense increased $2.0 million for the nine months ended September 30, 2015 compared to the same period in 2014. For the three months ended September 30, 2015, other noninterest expenses increased $1.6 million compared to the same period in 2014. The increases in both periods were primarily due to the merger with AGFC, with post-merger and conversion related costs totaling $883,000 for both the nine months and three months ended September 30, 2015.

Income Tax Expense

The amount of income tax expense is influenced by the amounts of Business First’s 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 nine months ended September 30, 2015, income tax expense totaled $1.2 million, an increase of $84,000 or 7.6% compared to $1.1 million for the same period in 2014. For the three months ended September 30, 2015, income tax expense totaled

 

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$377,000, an increase of $20,000 compared to the same period in 2014. For both periods presented, the increase in income tax expense can be attributed primarily to increases in taxable income associated with the merger with AGFC. Business First’s effective tax rates for the nine months ended September 30, 2015 and 2014 were 27.8% and 25.7%, respectively. For the three months ended September 30, 2015 and 2014, the effective tax rates were 28.6% and 25.7%, respectively. Business First’s effective tax rates for both periods were affected primarily by tax-exempt income generated by municipal securities and bank-owned life insurance and by other nondeductible expenses.

Financial Condition

Business First’s assets increased $382.3 million or 55.9% from $684.5 million as of December 31, 2014 to $1.1 billion as of September 30, 2015. Business First’s asset growth was primarily driven by the merger with AGFC and loan growth.

Loan Portfolio

Business First’s primary source of income is interest on loans to individuals, professionals, small to medium-sized businesses and commercial companies located in Louisiana. Business First’s loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in its primary market area. Business First’s loan portfolio represents the highest yielding component of its earning asset base.

As of September 30, 2015, total loans were $745.3 million, an increase of $187.0 million compared to $558.4 million as of December 31, 2014. These increases were primarily due to the merger with AGFC and Business First’s continued loan penetration in its primary market area. There were no loans held for sale as of September 30, 2015.

Total loans as a percentage of deposits were 86.2% and 95.1% as of September 30, 2015 and December 31, 2014 respectively. Total loans as a percentage of assets were 69.9% and 81.6% as of September 30, 2015 and December 31, 2014, respectively.

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

 

		As of September 30, 2015								As of December 31, 2014
		Amount				Percent				Amount				Percent
		(Dollars in thousands) (Unaudited)								(Dollars in thousands)
Commercial		$	193,226				25.9	%		$	185,291				33.2	%
Real estate:
Construction and land			105,387				14.1	%			61,062				10.9	%
Farmland			9,963				1.3	%			16,097				2.9	%
1-4 family residential			96,267				12.9	%			41,552				7.4	%
Multi-family residential			18,597				2.5	%			11,369				2.0	%
Nonfarm nonresidential			295,268				39.7	%			215,797				38.7	%
Consumer			26,633				3.6	%			27,218				4.9	%
Total loans held for investment		$	745,341				100	%		$	558,386				100	%

Commercial loans. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. These loans are primarily made based 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 $7.9 million or 4.3% to $193.2 million as of September 30, 2015 from $185.3 million as of December 31, 2014. The increase in lending activity was due to loans acquired in the merger with AGFC and the efforts of Business First’s bankers who 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 throughout Louisiana and are generally diverse in terms of type.

Construction and land loans increased $44.3 million or 72.6% to $105.4 million as of September 30, 2015 from $61.1 million as of December 31, 2014. The increase was attributable to loans acquired in the merger with AGFC and 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.

 

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1-4 family residential. Business First’s 1-4 family residential loan portfolio is comprised of loans secured by single family homes, which are both owner-occupied and investor owned. Business First’s 1-4 family residential loans have a relatively small balance spread between many individual borrowers.

1-4 family residential loans increased $54.7 million or 131.7% to $96.3 million as of September 30, 2015 from $41.6 million as of December 31, 2014. This increase resulted from loans acquired in the merger with AGFC as well as 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 $79.5 million or 36.8% to $295.3 million as of September 30, 2015 from $215.8 million as of December 31, 2014. The increase was primarily driven by opportunities from existing customers to fund well supported loans as well as the merger with AGFC.

Other loan categories. Other categories of loans included in Business First’s 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 represents a significant portion of Business First’s total loan portfolio.

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

 

		As of September 30, 2015
		One Year or Less				One Through Five Years				After Five Years				Total
		(Dollars in thousands)(Unaudited)
Commercial		$	75,936			$	86,521			$	30,769			$	193,226
Real estate:
Construction and land			55,860				37,879				11,648				105,387
Farmland			2,503				6,593				867				9,963
1-4 family residential			10,584				43,715				41,968				96,267
Multi-family residential			164				12,741				5,692				18,597
Nonfarm nonresidential			41,800				123,118				130,350				295,268
Consumer			12,437				11,658				2,538				26,633
Total loans		$	199,284			$	322,225			$	223,832			$	745,341
Amounts with fixed rates		$	94,957			$	204,827			$	123,486			$	423,270
Amounts with floating rates		$	104,327			$	117,398			$	100,346			$	322,071
		As of December 31, 2014
		One Year or Less				One Through Five Years				After Five Years				Total
		(Dollars in thousands)
Commercial		$	69,025			$	77,459			$	38,807			$	185,291
Real estate:
Construction and land			32,493				21,203				7,366				61,062
Farmland			6,733				2,719				6,645				16,097
1-4 family residential			4,780				32,103				4,669				41,552
Multi-family residential			1,338				7,304				2,727				11,369
Nonfarm nonresidential			43,420				104,275				68,102				215,797
Consumer			11,747				13,537				1,934				27,218
Total loans		$	169,536			$	258,600			$	130,250			$	558,386
Amounts with fixed rates		$	75,376			$	166,007			$	102,878			$	344,261
Amounts with floating rates		$	94,160			$	92,593			$	27,372			$	214,125

 

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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.

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

Business First believes its conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. Business First had $11.5 million and $6.1 million in nonperforming assets as of September 30, 2015 and December 31, 2014, respectively. Business First had $7.7 million in nonperforming loans as of September 30, 2015 compared to $3.0 million as of December 31, 2014. The increase in nonperforming assets and nonperforming loans from December 31, 2014 to September 30, 2015 is directly attributable to loans acquired in the merger with AGFC.

The following table presents information regarding nonperforming loans at the dates indicated:

 

		As of September 30, 2015 (Dollars in thousands) (Unaudited)				As of December 31, 2014 (Dollars in thousands)
Nonaccrual loans		$	7,694			$	3,028
Accruing loans 90 or more days past due			—				—
Total nonperforming loans			7,694				3,028
Nonaccrual debt securities			—				—
Other real estate owned:
Commercial real estate, construction, land and land development			2,330				2,057
Residential real estate			1,487				971
Total other real estate owned			3,817				3,028
Total nonperforming assets		$	11,511			$	6,056
Restructured loans-nonaccrual		$	840			$	1,106
Restructured loans-accruing			8,538				8,781
Ratio of nonperforming loans to total loans			1.03	%			0.54	%
Ratio of nonperforming assets to total assets			1.08	%			0.88	%
		As of September 30, 2015 (Dollars in thousands) (Unaudited)				As of December 31, 2014 (Dollars in thousands)
Nonaccrual loans by category:
Real estate:
Construction and land		$	2,017			$	1,611
1-4 family residential			2,614				152
Multi-family residential			—				—
Nonfarm nonresidential			1,396				1,219
Commercial			1,667				46
Consumer			—				—
Total		$	7,694			$	3,028

 

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Potential Problem Loans

From a credit risk standpoint, Business First classifies loans in one of four categories: pass, special mention, substandard or doubtful. Loans classified as loss are charged-off. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. Business First reviews 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. Business First’s 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 Business First generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

The following table summarizes Business First’s internal ratings of its loans as of the dates indicated.

 

		As of September 30, 2015
		Pass				Special Mention				Substandard				Doubtful				Total
		(Dollars in thousands) (Unaudited)
Real estate:
Construction and land		$	97,573			$	3,445			$	1,508			$	2,861			$	105,387
Farmland			9,963				—				—				—				9,963
1-4 family residential			88,189				1,890				3,489				2,699				96,267
Multi-family residential			17,278				945				374				—				18,597
Nonfarm nonresidential			263,292				12,437				18,008				1,531				295,268
Commercial			171,808				7,462				12,289				1,667				193,226
Consumer			26,220				381				32				—				26,633
Total		$	674,323			$	26,560			$	35,700			$	8,758			$	745,341
		As of December 31, 2014
		Pass				Special Mention				Substandard				Doubtful				Total
		(Dollars in thousands)
Real estate:
Construction and land		$	56,740			$	2,069			$	642			$	1,611			$	61,062
Farmland			16,097				—				—				—				16,097
1-4 family residential			39,702				912				786				152				41,552
Multi-family residential			10,463				906				—				—				11,369
Nonfarm nonresidential			190,356				16,410				7,812				1,219				215,797
Commercial			161,904				12,087				11,254				46				185,291
Consumer			26,654				517				47				—				27,218
Total		$	501,916			$	32,901			$	20,541			$	3,028			$	558,386

Allowance for loan losses

Business First maintains 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, Business First estimates 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 discussion of Business First’s methodology, please refer to “—Critical Accounting Policies—Allowance for loan losses.”

 

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In connection with its review of the loan portfolio, Business First considers risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements Business First considers 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 of 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, experience and ability of the developer and loan to value ratio.

As of September 30, 2015, the allowance for loan losses totaled $7.2 million or 0.96% of total loans. As of December 31, 2014, the allowance for loan losses totaled $6.6 million or 1.19% of total loans. The decline in the allowance for loan losses as a percent of total loans is primarily as a result of the merger with AGFC. 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.

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

 

		For the Nine months Ended September 30, 2015 (Dollars in thousands) (Unaudited)				As of December 31, 2014 (Dollars in thousands)
Average loans outstanding(1)		$	708,238			$	535,725
Gross loans outstanding at end of period(1)		$	745,341			$	558,386
Allowance for loan losses at beginning of period			6,632				6,043
Provision for loan losses			450				700
Charge-offs:
Real estate:
Construction, land and farmland			—				—
Residential			135				174
Nonfarm non-residential			44				—
Commercial			60				10
Consumer			—				—
Total charge-offs			239				184
Recoveries:
Real estate:
Construction, land and farmland			34				—
Residential			67				29
Nonfarm non-residential			12				—
Commercial			129				16
Consumer			86				28
Total recoveries			328				73
Net charge-offs (recoveries)			(89	)			111
Allowance for loan losses at end of period		$	7,171			$	6,632
Ratio of allowance to end of period loans			0.96	%			1.19	%
Ratio of net charge-offs (recoveries) to average loans			(0.01	%)			0.02	%

 

(1)	Excluding loans held for sale.

 

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Although Business First believes that it has established its allowance for loan losses in accordance with accounting principles generally accepted in the United States 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 its loan portfolio. If Business First experiences economic declines or if asset quality deteriorates, material additional provisions could be required.

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

 

		As of September 30, 2015								As of December 31, 2014
		Amount				Percent to Total				Amount				Percent to Total
		(Dollars in thousands) (Unaudited)								(Dollars in thousands)
Real estate:
Construction and land		$	618				8.6	%		$	525				7.9	%
Farmland			24				0.3	%			19				0.3	%
1-4 family residential			797				11.1	%			775				11.7	%
Multi-family residential			47				0.7	%			35				0.5	%
Nonfarm nonresidential			1,231				17.2	%			1,140				17.2	%
Total real estate			2,717				37.9	%			2,494				37.6	%
Commercial			4,028				56.2	%			3,813				57.5	%
Consumer			426				5.9	%			325				4.9	%
Total allowance for loan losses		$	7,171				100	%		$	6,632				100	%

Securities

Business First uses its securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. As of September 30, 2015, the carrying amount of investment securities totaled $214.0 million, an increase of $139.5 million or 187.3% compared to $74.5 million as of December 31, 2014. Securities represented 20.1%, and 10.9% of total assets as of September 30, 2015 and December 31, 2014, respectively. The increase in securities from December 31, 2014 to September 30, 2015 is directly attributable to securities acquired in the merger with AGFC.

Business First’s investment portfolio consists entirely of securities classified as available for sale. As a result, the carrying values of its 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 stockholders’ equity. The following table summarizes the amortized cost and estimated fair value of investment securities as of the dates shown:

 

		As of September 30, 2015
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(Dollars in thousands) (Unaudited)
U.S. government agencies		$	14,169			$	49			$	13			$	14,205
Corporate bonds			11,184				15				53				11,146
Municipal securities			64,945				549				242				65,252
Mortgage-backed securities			123,368				127				703				122,792
Other securities			1,031				—				409				622
Total		$	214,697			$	740			$	1,420			$	214,017

 

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		As of December 31, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(Dollars in thousands)
U.S. government agencies		$	9,260			$	31			$	149			$	9,142
Corporate bonds			—				—				—				—
Municipal securities			30,324				562				226				30,660
Mortgage-backed securities			34,591				51				616				34,026
Other securities			1,302				—				627				675
Total		$	75,477			$	644			$	1,618			$	74,503

All of Business First’s mortgage-backed securities are agency securities. Business First does 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 its investment portfolio. As of September 30, 2015, 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 table sets forth the fair value, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized cost of the securities portfolio as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures.

 

		As of September 30, 2015
		Within One Year								After One Year but Within Five Years								After Five Years but Within Ten Years								After Ten Years								Total
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Total				Yield
		(Dollars in thousands) (Unaudited)
U.S. government agencies		$	—				—	%		$	7,383				1.60	%		$	4,830				2.51	%		$	1,992				1.50	%		$	14,205				1.90	%
Corporate bonds			—				—	%			6,616				1.67	%			4,530				1.40	%			—				—	%			11,146				1.56	%
Municipal securities			2,514				0.97	%			21,289				1.80	%			21,373				2.20	%			20,076				2.38	%			65,252				2.08	%
Mortgage-backed securities			6				(3.88	)%			2,536				1.33	%			31,433				1.51	%			88,817				1.61	%			122,792				1.58	%
Other securities			—				—	%			—				—	%			—				—	%			622				1.65	%			622				1.65	%
Total		$	2,520				0.96	%		$	37,824				1.71	%		$	62,166				1.82	%		$	111,507				1.75	%		$	214,017				1.75	%
		As of December 31, 2014
		Within One Year								After One Year but Within Five Years								After Five Years but Within Ten Years								After Ten Years								Total
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Total				Yield
		(Dollars in thousands)
U.S. government agencies		$	—				—	%		$	—				—	%		$	7,179				2.12	%		$	1,963				1.49	%		$	9,142				1.99	%
Corporate bonds			—				—	%			—				—	%			—				—	%			—				—	%			—				—	%
Municipal securities			262				1.29	%			9,236				2.00	%			9,556				2.25	%			11,606				2.71	%			30,660				2.35	%
Mortgage-backed securities			—				—	%			—				—	%			4,515				1.05	%			29,511				1.72	%			34,026				1.64	%
Other securities			—				—	%			—				—	%			—				—	%			675				1.53	%			675				1.53	%
Total		$	262				1.29	%		$	9,236				2.00	%		$	21,250				1.95	%		$	43,755				1.97	%		$	74,503				1.96	%

 

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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 Business First’s investment portfolio was 5.39 years with an estimated effective duration of 51.17 months as of September 30, 2015.

As of September 30, 2015 and December 31, 2014, Business First did not own securities of any one issuer for which aggregate adjusted cost exceeded 10% of the consolidated stockholders’ equity as of such respective dates.

Deposits

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

Total deposits as of September 30, 2015 were $864.3 million, an increase of $277.0 million compared to $587.3 million as of December 31, 2014. Deposit growth was primarily due to merger with AFGC and Business First’s continued deposit penetration in its primary market area.

Noninterest-bearing deposits as of September 30, 2015 were $204.4 million compared to $109.0 million as of December 31, 2014, an increase of $95.5 million or 87.6%.

Average deposits for the nine months ended September 30, 2015 were $845.2 million, an increase of $240.6 million or 39.8% over the full year average for the year ended December 31, 2014 of $604.6 million primarily due to the merger with AGFC. The average rate paid on total interest-bearing deposits decreased over this period from 0.75% for the year ended December 31, 2014 to 0.59% for the nine months ended September 30, 2015. The decrease in average rates was driven primarily by strategic reductions in limited access money market and certificate of deposit pricing during this time period. In addition, the continued growth of noninterest-bearing demand accounts resulted in further reductions to the cost of deposits from 0.60% for the year ended December 31, 2014 to 0.45% for the nine months ended September 30, 2015.

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

 

		For the Nine months Ended September 30, 2015								For the Year Ended December 31, 2014
		Average Balance				Average Rate				Average Balance				Average Rate
		(Dollars in thousands)
		(Unaudited)								(Dollars in thousands)
Interest-bearing demand accounts		$	31,019				0.24	%		$	8,641				0.58	%
NOW accounts			111,327				0.18	%			60,991				0.24	%
Limited access money market accounts and savings			213,699				0.39	%			173,335				0.42	%
Certificates and other time deposits > $100k			204,019				0.85	%			194,456				0.99	%
Certificates and other time deposits < $100k			90,452				1.10	%			48,294				1.63	%
Total interest-bearing deposits			650,516				0.59	%			485,717				0.75	%
Noninterest-bearing demand accounts			194,725				—	%			118,883				—	%
Total deposits		$	845,241				0.45	%		$	604,600				0.60	%

The ratio of average noninterest-bearing deposits to average total deposits for the nine months ended September 30, 2015 and the year ended December 31, 2014 was 23.0% and 19.7%, respectively.

 

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The following table sets forth the amount of certificates of deposit that are $100,000 or greater by time remaining until maturity:

 

		As of September 30, 2015 (Unaudited)				As of December 31, 2014
		(Dollars in thousands)
1 year or less		$	132,646			$	123,299
More than 1 year but less than 3 years			35,114				24,255
3 years or more but less than 5 years			11,542				15,453
5 years or more			6,271				3,764
Total		$	185,573			$	166,771

Borrowings

Business First utilizes short-term and long-term borrowings to supplement deposits to fund its lending and investment activities. In addition, Business First uses short-term borrowings to repurchased treasury stock and for general corporate purposes. Each of these relationships are discussed below.

Federal Home Loan Bank (FHLB) advances. The FHLB allows Business First to borrow on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2015 and December 31, 2014, total borrowing capacity of $280.9 million and $211.0 million, respectively, was available under this arrangement and $79.7 million and $15 million, respectively, was outstanding with a weighted average stated interest rate of 1.73% as of September 30, 2015 and 1.90% as of December 31, 2014. Business First’s current FHLB advances mature within five years. Business First utilizes these borrowings to meet liquidity needs and to fund certain fixed rate loans in its portfolio.

As a result of the merger with AGFC, Business First assumed the outstanding FHLB advances of American Gateway Bank. These assets were recorded at fair value as of acquisition which 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 its FHLB borrowings at the dates indicated.

 

		FHLB Advances
		(Dollars in Thousands)
September 30, 2015
Amount outstanding at quarter-end		$	79,658
Weighted average stated interest rate at quarter-end			1.73	%
Maximum month-end balance during the quarter		$	79,658
Average balance outstanding during the quarter		$	60,752
Weighted average interest rate during the quarter			1.03	%
December 31, 2014
Amount outstanding at year-end		$	15,000
Weighted average stated interest rate at year-end			1.90	%
Maximum month-end balance during the year		$	15,000
Average balance outstanding during the year		$	15,112
Weighted average interest rate during the year			1.90	%

First Tennessee Bank National Association (FTN) advances. FTN allows Business First to borrow on a revolving basis up to $3.0 million. This line of credit, established on September 3, 2015, is unsecured, but Business First has agreed that it will not pledge any of the capital stock of its wholly-owned subsidiary, Business First Bank, to secure any other obligation. As of September 30, 2015, there was no borrowing capacity available under the line, and $3.0 million was outstanding at a variable rate of 3-month LIBOR plus 2.5%. The rate was 2.83% at September 30, 2015, and adjusts quarterly beginning October 1, 2015. The FTN line matures in one year and was established for the sole purpose of repurchasing shares of Business First common stock from certain of its shareholders and for general corporate purposes. There was not a similar lending relationship in place as of December 31, 2014.

 

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The following table presents the FTN advances at the dates indicated.

 

		FTN Advances
		(Dollars in Thousands)
September 30, 2015
Amount outstanding at quarter-end		$	3,000
Weighted average interest rate at quarter-end			2.83	%
Maximum month-end balance during the quarter		$	3,000
Average balance outstanding during the quarter		$	913
Weighted average interest rate during the quarter			2.83	%

Correspondent Bank Federal Funds Purchased Relationships

Business First Bank maintains Federal Funds Purchased Relationships with the following financial institutions and limits as of September 30, 2015:

 

 

		(Dollars in Thousands)
The Independent Banker’s Bank TIB		$	25,000
First Tennessee National Bank		$	17,000
First National Bankers Bank		$	26,700
ServisFirst Bank		$	6,000
Center State Bank		$	9,000

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

 

 

		Fed Funds Purchased
		(Dollars in Thousands)
September 30, 2015
Amount outstanding at quarter-end		$	—
Weighted average interest rate at quarter-end			—	%
Maximum month-end balance during the quarter		$	6,493
Average balance outstanding during the quarter		$	1,324
Weighted average interest rate during the quarter			1.47	%
December 31, 2014
Amount outstanding at year-end		$	—
Weighted average interest rate at year-end			—	%
Maximum month-end balance during the year		$	—
Average balance outstanding during the year		$	—
Weighted average interest rate during the year			—	%

Liquidity and Capital Resources

Liquidity

Liquidity involves Business First’s ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the nine months ended September 30, 2015 and the year ended December 31, 2014, 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 are available and have been utilized on occasion to take advantage of investment opportunities, Business First does not generally rely on these external funding sources. As of September 30, 2015 and December 31, 2014, Business First maintained 5 lines of credit with commercial banks which provide for extensions of credit with an availability to borrow up to an aggregate $83.7 million as of September 30, 2015 and $84.7 million as of December 31, 2014. There were no funds under these lines of credit outstanding as of September 30, 2015 and December 31, 2014.

 

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The following table illustrates, during the periods presented, the mix of Business First’s funding sources and the average assets in which those funds are invested as a percentage of average total assets for the period indicated. Average assets totaled $1.0 billion for the nine months ended September 30, 2015 and $696.9 million for the year ended December 31, 2014.

 

		For the Nine Months Ended September 30, 2015				For the Years Ended December 31, 2014
		(Unaudited)
Sources of Funds:
Deposits:
Noninterest-bearing			19.1	%			17.1	%
Interest-bearing			63.9	%			69.7	%
Advances from FHLB			5.2	%			2.1	%
Other borrowings			0.3	%			0.0	%
Other liabilities			0.7	%			0.5	%
Stockholders’ equity			10.8	%			10.6	%
Total			100	%			100	%
Uses of Funds:
Loans			68.9	%			76.0	%
Securities available for sale			16.4	%			11.6	%
Interest-bearing deposits in other banks			6.2	%			6.7	%
Other noninterest-earning assets			8.5	%			5.7	%
Total			100	%			100	%
Average noninterest-bearing deposits to average deposits			23.0	%			19.7	%
Average loans to average deposits			83.0	%			88.6	%

Business First’s primary source of funds is deposits, and its primary use of funds is loans. Business First does not expect a change in the primary source or use of its funds in the foreseeable future. Business First’s average loans increased 32.8% for the nine months ended September 30, 2015 compared to the same period in 2014. Business First predominantly invests 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. Business First’s securities portfolio had a weighted average life of 5.39 years and an effective duration of 51.17 months as of September 30, 2015 and a weighted average life of 7.21 years and an effective duration of 56.06 months as of December 31, 2014.

As of September 30, 2015, Business First had outstanding $183.7 million in commitments to extend credit and $7.6 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2014, Business First had outstanding $134.4 million in commitments to extend credit and $8.2 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 September 30, 2015 and December 31, 2014, Business First had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. As of September 30, 2015, Business First had cash and cash equivalents of $46.0 million compared to $26.0 million as of December 31, 2014.

Capital Resources

Total stockholders’ equity increased to $112.1 million as of September 30, 2015, compared to $78.8 million as of December 31, 2014, an increase of $33.3 million or 42.2%. This increase was primarily the result of the merger with AGFC and $3.1 million in net income. To date, Business First has not declared or paid dividends on its common stock.

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. Business First is subject to regulatory capital requirements at the bank holding company and bank levels. As of September 30, 2015 and December 31, 2014, Business First 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 the prompt corrective action regulations. As Business First employs its capital and continues to grow its operations, its regulatory capital levels may decrease depending on its level of earnings. However, Business First expects to monitor and control its growth in order to remain in compliance with all regulatory capital standards applicable to it.

 

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The following table presents the actual capital amounts and regulatory capital ratios for Business First and Business First Bank as of the dates indicated.

 

		As of September 30, 2015								As of December 31, 2014
		Amount				Ratio				Amount				Ratio
		(Unaudited)
		(Dollars in thousands)
Business First Bancshares, Inc.
Total capital (to risk weighted assets)		$	113,991				11.97	%		$	86,437				13.36	%
Tier 1 capital (to risk weighted assets)			106,820				11.22	%			79,805				12.33	%
Common Equity Tier 1 capital (to risk weighted assets)			106,820				11.22	%			N/A				N/A
Tier 1 capital (to average assets)			106,820				10.00	%			79,805				11.24	%
Business First Bank
Total capital (to risk weighted assets)		$	114,506				12.04	%		$	83,637				12.96	%
Tier 1 capital (to risk weighted assets)			107,335				11.29	%			77,005				11.94	%
Common Equity Tier 1 capital (to risk weighted assets)			107,335				11.29	%			N/A				N/A
Tier 1 capital (to average assets)			107,335				10.06	%			77,005				10.87	%

Contractual Obligations

The following table summarizes contractual obligations and other commitments to make future payments as of September 30, 2015 and December 31, 2014 (other than deposit obligations), which consist of future cash payments associated with Business First’s contractual obligations pursuant to its FHLB advances, FTN revolving line of credit, and non-cancelable future operating leases. Payments related to leases are based on actual payments specified in underlying contracts. Advances from the Federal Home Loan Bank totaled approximately $79.7 million and $15.0 million as of September 30, 2015 and December 31, 2014, respectively. As of September 30, 2015 and December 31, 2014, the advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 1.73% and maturities ranging from 2015 through 2018. The advances under the FTN revolving line of credit totaled $3.0 million at September 30, 2015. These advances were unsecured bearing interest at a variable rate of 2.83% at September 30, 2015 and maturing in 2016.

 

		As of September 30, 2015
		1 year or less				More than 1 year but less than 3 years				3 years or more but less than 5 years				5 years or more				Total
		(Unaudited) (Dollars in thousands)
Non-cancelable future operating leases		$	1,312			$	1,161			$	2,017			$	5,641			$	10,131
Time deposits			190,412				54,153				24,594				8,616				277,775
Advances from FHLB			30,731				731				48,196				—				79,658
Advances from FTN			3,000				—				—				—				3,000
Securities sold under agreements to repurchase			2,349				—				—				—				2,349
Standby and commercial letters of credit			6,543				748				347				—				7,638
Commitments to extend credit			80,750				55,011				29,029				18,924				183,714
Total		$	315,097			$	111,804			$	104,183			$	33,181			$	564,265

 

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		As of December 31, 2014
		1 year or less				More than 1 year but less than 3 years				3 years or more but less than 5 years				5 years or more				Total
		(Dollars in thousands)
Non-cancelable future operating leases		$	1,121			$	983			$	1,669			$	559			$	4,332
Time deposits			165,669				33,756				19,917				4,760				224,102
Advances from FHLB			—				—				15,000				—				15,000
Other borrowings			—				—				—				—				—
Standby and commercial letters of credit			7,731				455				—				—				8,186
Commitments to extend credit			69,503				40,454				10,417				13,991				134,365
Total		$	244,024			$	75,648			$	47,003			$	19,310			$	385,985

Off-Balance Sheet Items

In the normal course of business, Business First enters into various transactions, which, in accordance with generally accepted accounting principles, or GAAP, are not included in its consolidated balance sheets. Business First enters into these transactions to meet the financing needs of its 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.

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

 

		As of September 30, 2015
		1 year or less				More than 1 year but less than 3 years				3 years or more but less than 5 years				5 years or more				Total
		(Unaudited) (Dollars in thousands)
Standby and commercial letters of credit		$	6,543			$	748			$	347			$	—			$	7,638
Commitments to extend credit			80,750				55,011				29,029				18,924				183,714
Total		$	87,293			$	55,759			$	29,376			$	18,924			$	191,352

 

		As of December 31, 2014
		1 year or less				More than 1 year but less than 3 years				3 years or more but less than 5 years				5 years or more				Total
		(Dollars in thousands)
Standby and commercial letters of credit		$	7,731			$	455			$	—			$	—			$	8,186
Commitments to extend credit			69,503				40,454				10,417				13,991				134,365
Total		$	77,234			$	40,909			$	10,417			$	13,991			$	142,551

Standby and commercial letters of credit are conditional commitments issued by Business First to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, Business First has 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 Business First in issuing letters of credit is essentially the same as that involved in extending loan facilities to its 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. Since 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. Business First evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by Business First, upon extension of credit, is based on management’s credit evaluation of the customer.

 

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Interest Rate Sensitivity and Market Risk

As a financial institution, Business First’s primary component of market risk is interest rate volatility. Business First’s asset liability and funds management policy provides management with the guidelines for effective funds management, and Business First has established a measurement system for monitoring its net interest rate sensitivity position. Business First manages its sensitivity position within its established guidelines.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of Business First’s 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.

Business First manages its exposure to interest rates by structuring its balance sheet in the ordinary course of business. Business First does not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of its operations, Business First is not subject to foreign exchange or commodity price risk. Business First does not own any trading assets.

Business First’s exposure to interest rate risk is managed by the asset-liability committee of Business First Bank, in accordance with policies approved by its 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.

Business First uses 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 life of non-maturity deposit accounts are based on standard regulatory decay assumptions and are incorporated into the model. 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, Business First runs 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 internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net 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.

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

 

		As of September 30, 2015								As of December 31, 2014
Change in Interest Rates (Basis Points)		Percent Change in Net Interest Income				Percent Change in Fair Value of Equity				Percent Change in Net Interest Income				Percent Change in Fair Value of Equity
+300			8.10	%			(12.42	%)			7.33	%			(12.35	%)
+200			6.10	%			(6.58	%)			7.80	%			(7.71	%)
+100			2.80	%			(3.02	%)			3.76	%			(3.73	%)
Base			0.00	%			0.00	%			0.00	%			0.00	%
-100			(0.80	%)			2.10	%			0.76	%			2.46	%

 

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The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. Business First has 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

Business First’s 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 Business First’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on its 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

Business First’s accounting and reporting policies conform to GAAP, and the prevailing practices in the banking industry. However, Business First also evaluates its performance based on certain additional non-GAAP financial measures. Business First classifies 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 its 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 Business First discusses 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 Business First calculates 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 Business First has 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. Business First calculates (1) tangible common equity as stockholders’ 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.

Business First believes 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.

 

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

 

		As of September 30,								As of December 31,
		2015				2014				2014				2013				2012
		(Unaudited)
		(Dollars in thousands, except per share data)
Tangible Common Equity
Total stockholders’ equity		$	112,105			$	77,514			$	78,845			$	71,923			$	71,014
Adjustments:
Goodwill			(3,605	)			—				—				—				—
Core deposit and other intangibles			(2,624	)			—				—				—				(521	)
Total tangible common equity		$	105,876			$	77,514			$	78,845			$	71,923			$	70,493
Common shares outstanding(1)			7,035,913				5,314,925				5,314,925				5,314,925				5,302,870
Book value per common share		$	15.93			$	14.58			$	14.83			$	13.53			$	13.39
Tangible book value per common share		$	15.05			$	14.58			$	14.83			$	13.53			$	13.29

 

(1)	Excludes the dilutive effect, if any, of 994,740, 962,850, 952,120, 919,350 and 962,910 shares of common stock issuable upon exercise of outstanding stock options as of September 30, 2015, September 30, 2014, December 31, 2014, December 31, 2013, and December 31, 2012, 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. Business First calculates 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 stockholders’ equity to total assets.

Business First believes 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 stockholders’ equity and assets while not increasing its tangible common equity or tangible assets.

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

 

						As of December 31,
		As of September 30, 2015				2014				2013				2012
		(Unaudited)
		(Dollars in thousands, except per share data)
Tangible Common Equity
Total stockholders’ equity		$	112,105			$	78,845			$	71,923			$	71,014
Adjustments:
Goodwill			(3,605	)			—				—				—
Core deposit and other intangibles			(2,624	)			—				—				(521	)
Total tangible common equity		$	105,876			$	78,845			$	71,923			$	70,493
Tangible Assets
Total assets		$	1,066,776			$	684,502			$	684,180			$	681,062
Adjustments:
Goodwill			(3,605	)			—				—				—
Core deposit and other intangibles			(2,624	)			—				—				(521	)
Total tangible assets		$	1,060,547			$	684,502			$	684,180			$	680,541
Tangible Common Equity to Tangible Assets			10.0	%			11.5	%			10.5	%			10.4	%

Critical Accounting Policies

Business First’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Business First bases its estimates on historical experience and on various other assumptions that Business First believes to be

 

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reasonable under current circumstances. These assumptions form the basis for its judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. Business First evaluates its estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.

Business First has identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of its financial statements to those judgments and assumptions, are critical to an understanding of its financial condition and results of operations. Business First believes that the judgments, estimates and assumptions used in the preparation of its financial statements are appropriate.

Investment Securities

Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them until maturity. Securities to be held for indefinite periods of time are classified as available for sale and carried at fair value, with the unrealized holding gains and losses reported in other comprehensive income, net of tax. Management determines the appropriate classification of securities at the time of purchase.

Interest income includes amortization of purchase premiums and discounts. Realized gains and losses are derived from the amortized cost of the security sold. Credit related declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses, with the remaining unrealized loss recognized as a component of other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of Business First to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans and Allowance for Loan Losses

Loans, excluding certain purchased loans which have shown evidence of deterioration since origination as of the date of the acquisition, that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Fees associated with the originating of loans and certain direct loan origination costs are netted, and the net amount is deferred and recognized over the life of the loan as an adjustment of yield.

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 losses 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 amount.

Certain acquired impaired loans, where there is evidence of credit deterioration since origination and it is probable Business First will be unable to collect all contractually required payments, are accounted for in accordance with FASB ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality. The expected cash flows for each loan meeting this criteria are estimated to determine the excess of the contractually required principal and interest at acquisition as an amount that should not be accreted (nonaccretable difference). The expected cash flows for the purchased impaired credits approximated fair value as of the merger date and, as a result, no accretable yield was recognized at acquisition. A discount was recorded on these loans at acquisition to record them at their estimated fair values. As a result, the purchased impaired credits are excluded from the calculation of the allowance for loan losses as of the acquisition date. Under current accounting principles, if Business First determines that losses arose after the acquisition date, the additional losses will be reflected as a provision to the allowance for loan losses.

The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured in accordance with the terms of the loan agreement.

The allowance for loan losses is an estimated amount management believes is adequate to absorb inherent losses on existing loans that may be uncollectible based upon review and evaluation of the loan portfolio. Management’s periodic evaluation of the allowance is based on general economic conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio.

 

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The allowance for loan losses is comprised of two components. The first component, the general reserve, is determined in accordance with current authoritative accounting guidance that considers historical loss rates for the last three years adjusted for qualitative factors based upon general economic conditions and other qualitative risk factors both internal and external to Business First. Such qualitative factors include current local economic conditions and trends including unemployment, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans, and changes in trends in volume and terms of loans. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in Business First’s historic loss factors. For purposes of determining the general reserve, the loan portfolio, less cash secured loans, government guaranteed loans and impaired loans, is multiplied by Business First’s adjusted historical loss rate. The second component of the allowance for loan losses, the specific reserve, is determined in accordance with current authoritative accounting guidance based on probable losses on specific classified loans.

The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries).

Due to the growth of Business First over the past several years, a portion of the loans in its portfolio and its lending relationships are of relatively recent origin. The new loan portfolios have limited delinquency and credit loss history and have not yet exhibited an observable loss trend. The credit quality of loans in these loan portfolios are impacted by delinquency status and debt service coverage generated by the borrowers’ business and fluctuations in the value of real estate collateral. Management considers delinquency status to be the most meaningful indicator of the credit quality of one-to-four single family residential, home equity loans and lines of credit and other consumer loans. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process Business First refers to as “seasoning”. As a result, a portfolio of older loans will usually behave more predictably than a portfolio of newer loans. Because the majority of its portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, Business First may be required to increase its provision for loan losses, which would adversely affect its results of operations and financial condition.

Delinquency statistics are updated at least monthly. Internal risk ratings are considered the most meaningful indicator of credit quality for new commercial, construction, and commercial real estate loans. Internal risk ratings are a key factor in identifying loans that are individually evaluated for impairment and impact management’s estimates of loss factors used in determining the amount of the allowance for loan losses. Internal risk ratings are updated on a continuous basis.

Loans are considered impaired when, based on current information and events, it is probable Business First will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Business First’s policy requires measurement of the allowance for an impaired collateral dependent loan based on the fair value of the collateral. Other loan impairments are measured based on the present value of expected future cash flows or the loan’s observable market price. At September 30, 2015 and December 31, 2014, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral.

From time to time, Business First modifies its loan agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by Business First that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. Business First reviews each troubled debt restructured loan and determines on a case by case basis if the loan is subject to impairment and the need for a specific allowance for loan loss allocation. An allowance for loan loss allocation is based on either the present value of estimated future cash flows or the estimated fair value of the underlying collateral.

Business First has certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based 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 include personal guarantees.

 

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Real estate loans are also subject to underwriting standards and processes similar to commercial loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing Business First’s real estate portfolio are generally diverse in terms of type and geographic location, throughout the state of Louisiana. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

Business First utilizes methodical credit standards and analysis to supplement its policies and procedures in underwriting consumer loans. Business First’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes risk.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Risk identification and management are essential elements for the successful management of our business. In the normal course of business, we are subject to various types of risk, including interest rate, credit, and liquidity risk. We control and monitor these risks with policies, procedures, and various levels of managerial and board oversight. Our objective is to optimize profitability while managing and controlling risk within board approved policy limits. Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets and liabilities. We use our asset liability management policy to control and manage interest rate risk.

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

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

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a – 15(e) and 15 d – 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report to provide reasonable assurance that information the we are required to disclose in reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms specified by the SEC. We note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving the stated goals under all potential future conditions.

Changes in Internal Controls over Financial Reporting

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

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our 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.

 

Item 1A.

Risk Factors

In addition to the other information set forth in this Report, we refer you to the risk factors disclosed in the section titled “Risk Factors” in our Registration Statement on Form S-4 filed with the Securities and Exchange Commission, as declared effective on February 18, 2015.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

Not applicable.

 

(b)

Not applicable.

 

(c)

Business First purchased equity securities during the three months ended September 30, 2015 as follows:

 

Period		(a) Total number of shares purchased				(b) Average price paid per share				(c) Total number of shares purchased as part of publicly announced plans or programs				(d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
Month #1: July 1 through July 31, 2015			—				—				—				—
Month #2: August 1 through August 31, 2015			—				—				—				—
Month #3: September 1 through September 30, 2015			170,000	(1)		$	16.50				—				—

 

(1)	On September 30, 2015, 170,000 shares were repurchased in a single negotiated transaction from two related shareholders of the Company.

 

Item 3.

Defaults upon Senior Securities

Not applicable.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

Not applicable.

 

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Item 6.

Exhibits

 

Number		Description
3.1		Amended and Restated Articles of Incorporation of Business First Bancshares, Inc.(1)
3.2		Bylaws of Business First Bancshares, Inc.(2)
4.1		Specimen common stock certificate(3)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certifications of Chief Executive Officer and Chief 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

 

(1)	Incorporated by reference from Exhibit 3.1 to Business First’s Registration Statement on Form S-4 filed on November 12, 2014

(2)	Incorporated by reference from Exhibit 3.2 to Business First’s Registration Statement on Form S-4 filed on November 12, 2014

(3)	Incorporated by reference from Exhibit 4.1 to Business First’s Registration Statement on Form S-4 filed on November 12, 2014

 

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SIGNATURES

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

 

				BUSINESS FIRST BANCSHARES, INC.
November 13, 2015				/s/ David R. Melville, III
				David R. Melville, III
				President and Chief Executive Officer
November 13, 2015				/s/ Steven Champney
				Steven Champney
				Chief Financial Officer

 

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