BUSINESS FIRST BANCSHARES, INC. FORWARD-LOOKING STATEMENTS
When we refer in this Form 10-Q to "we," "our," "us," the "Company" and "Business First," we are referring toBusiness First Bancshares, Inc. and its consolidated subsidiaries, including b1BANK, which we sometimes refer to as "the Bank," unless the context indicates otherwise.
The information contained in this Form 10-Q is accurate only as of the date of this form and the dates specified herein.
All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q (this "Report") and other periodic reports filed by the Company, and other written or oral statements made by us or on our behalf, are "forward-looking statements," as defined by (and subject to the "safe harbor" protections under) the federal securities laws. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and the banking industry in general. These statements are often, but not always, made through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "will likely result," "expect," "will continue," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and "outlook," and similar expressions of a future or forward-looking nature. These statements involve estimates, assumptions, and risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements.
We believe these factors include, but are not limited to, the following:
? the effects of the ongoing COVID-19 pandemic, including, among other effects:
the emergence of multiple COVID-19 variants and their potential impact on the
ongoing public health crisis; the extent and duration of closures of
businesses, including our branches, vendors and customers; the operation of
financial markets; employment levels; market liquidity; the impact of various
actions taken in response by
the
the adequacy of our allowance for loan losses in relation to potential losses
in our loan portfolio; and the impact that all of these factors have on our
borrowers, other customers, vendors and counterparties;
? risks relating to the proposed acquisition of
("TCBI") including, without limitation: the timing of consummation of the
proposed merger; the risk that any condition to closing of the proposed merger
may not be satisfied or waived; the risk that the merger may not be completed
at all; the diversion of management time on issues related to the proposed
merger; unexpected transaction costs, including the costs of integrating
operations; the risks that the businesses will not be integrated successfully
or such integration may be more difficult, time-consuming or costly than
expected; the potential failure to fully or timely realize expected revenues
and revenue synergies, including as the result of revenues following the
merger being lower than expected; the risk of deposit and customer attrition;
any changes in deposit mix; unexpected operating and other costs, which may
differ or change from expectation; the risk of customer and employee loss and
business disruptions, including, without limitation, as the result of
difficulties in maintaining relationships with employees; increased
competitive pressures on solicitations of customers by competitors; as well as
difficulties and risks inherent with entering new markets;
? risks related to the integration of any other acquired businesses, including
exposure to potential asset quality and credit quality risks and unknown or
contingent liabilities, the time and costs associated with integrating
systems, technology platforms, procedures and personnel, the need for
additional capital to finance such transactions, and possible failures in
realizing the anticipated benefits from acquisitions;
? changes in the strength of the
in our local market areas adversely affecting our customers and their ability
to transact profitable business with us, including the ability of our
borrowers to repay their loans according to their terms or a change in the
value of the related collateral;
? economic risks posed by our geographic concentration in
Dallas/Fort Worth metroplex;
? the ability to sustain and continue our organic loan and deposit growth, and
manage that growth effectively;
? market declines in industries to which we have exposure, such as thevolatility in oil prices and downturn in the energy industry that impact
certain of our borrowers and investments that operate within, or are backed by
collateral associated with, the energy industry;
? volatility and direction of interest rates and market prices, which could
reduce our net interest margins, asset valuations and expense expectations;
34
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Table of Contents ? interest rate risk associated with our business;
? changes in the levels of loan prepayments and the resulting effects on the
value of our loan portfolio;
? increased competition in the financial services industry, particularly from
regional and national institutions;
? increased credit risk in our assets and increased operating risk caused by a
material change in commercial, consumer and/or real estate loans as a
percentage of our total loan portfolio;
? changes in the value of collateral securing our loans;
? deteriorating asset quality and higher loan charge-offs, and the time and
effort required to resolve problem assets;
? the failure of assumptions underlying the establishment of and provisions made
to our allowance for credit losses;
? changes in the availability of funds resulting in increased costs or reduced
liquidity;
? our ability to maintain important deposit customer relationships and our
reputation;
? a determination or downgrade in the credit quality and credit agency ratings
of the securities in our securities portfolio;
? increased asset levels and changes in the composition of assets and the
resulting impact on our capital levels and regulatory capital ratios;
? our ability to prudently manage our growth and execute our strategy;
? risks associated with our acquisition and de novo branching strategy;
? the loss of senior management or operating personnel and the potentialinability to hire qualified personnel at reasonable compensation levels;
? legislative or regulatory developments, including changes in the laws,
regulations, interpretations or policies relating to financial institutions,
accounting, tax, trade, monetary and fiscal matters;
? government intervention in the U.S. financial system;
? changes in statutes and government regulations or their interpretations
applicable to us, including changes in tax requirements and tax rates;
? natural disasters and adverse weather, acts of terrorism, an outbreak of
hostilities or other international or domestic calamities, epidemics and
pandemics such as coronavirus, and other matters beyond our control; and
? other risks and uncertainties listed from time to time in our reports and
documents filed with the
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. Additional information on these and other risk factors can be found in Item 1A. "Risk Factors" of this Report and in Item 1A. "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC . In the event that one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 35
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BUSINESS FIRST
The following discussion and analysis focuses on significant changes in the
financial condition of Business First and its subsidiaries from December 31,
2020 to September 30, 2021 , and its results of operations for the three and nine
months ended September 30, 2021 . This discussion and analysis is intended to
highlight and supplement information presented elsewhere in this report and
should be read in conjunction with (i) the accompanying unaudited consolidated
financial statements and the notes thereto (the "Notes") and (ii) our Annual
Report on Form 10-K for the year ended December 31, 2020 , including the audited
consolidated financial statements and notes thereto, management's discussion and
analysis, and the risk factor disclosures contained therein. This discussion and
analysis contains forward-looking statements that are subject to certain risks
and uncertainties and are based on certain assumptions that Business First
believes are reasonable but may prove to be inaccurate. Certain risks,
uncertainties and other factors, including those set forth under
"Forward-Looking Statements," "Risk Factors" and elsewhere in this report, may
cause actual results to differ materially from those projected results discussed
in the forward-looking statements appearing in this discussion and analysis.
Business First assumes no obligation to update any of these forward-looking
statements.
Overview
We are a registered financial holding company headquartered in Baton Rouge,
Louisiana . Through our wholly-owned subsidiary, b1BANK, a Louisiana state
chartered bank, we provide a broad range of financial services tailored to meet
the needs of small-to-midsized businesses and professionals. Since our inception
in 2006, our priority has been and continues to be creating shareholder value
through the establishment of an attractive commercial banking franchise in
Louisiana and across our region. We consider our primary market to include the
State of Louisiana and the Dallas/Fort Worth metroplex. We currently operate out
of 42 banking centers in markets across Louisiana and Texas . As of September 30,
2021 , we had total assets of $4.4 billion , total loans of $3.1 billion , total
deposits of $3.8 billion , and total shareholders' equity of $430.2 million .
As a financial holding company operating through one market segment, community
banking, we generate most of our revenues from interest income on loans,
customer service and loan fees, and interest income from securities. We incur
interest expense on deposits and other borrowed funds and noninterest expense,
such as salaries and employee benefits and occupancy expenses. We analyze our
ability to maximize income generated from interest-earning assets and expense of
our liabilities through our net interest margin. Net interest margin is a ratio
calculated as net interest income divided by average interest-earning assets.
Net interest income is the difference between interest income on
interest-earning assets, such as loans and securities, and interest expense on
interest-bearing liabilities, such as deposits and borrowings, which are used to
fund those assets.
Changes in the market interest rates and the interest rates we earn on
interest-earning assets or pay on interest-bearing liabilities, as well as the
volume and types of interest-earning assets, interest-bearing and
noninterest-bearing liabilities and shareholders' equity, are usually the
largest drivers of periodic changes in net interest spread, net interest margin
and net interest income. Fluctuations in market interest rates are driven by
many factors, including governmental monetary policies, inflation, deflation,
macroeconomic developments, changes in unemployment, the money supply, political
and international conditions, and conditions in domestic and foreign financial
markets. Periodic changes in the volume and types of loans in our loan portfolio
are affected by, among other factors, economic and competitive conditions in our
markets and across our region, as well as developments affecting the real
estate, technology, financial services, insurance, transportation, manufacturing
and energy sectors within our markets.
Other Developments
Pedestal Merger
On January 22, 2020 , we entered into an agreement and plan of reorganization to
acquire Pedestal Bancshares, Inc. ("Pedestal"), and its banking subsidiary
Pedestal Bank . The acquisition of Pedestal was consummated on May 1, 2020 . At
April 30, 2020 , Pedestal had fair values of approximately $1.3 billion in total
assets, $893.3 million in net loans, $1.2 billion in total deposits, and $93.3
million in total shareholders' equity.
OnMarch 22, 2021 , we, through b1BANK, entered into a definitive agreement to acquire SSW, a registered investment advisor with approximately$3.5 billion in assets under management, specializing in managing investment portfolios for corporations, foundations and individuals. The acquisition of SSW was consummated onApril 1, 2021 . AtMarch 31, 2021 , SSW reported$3.6 million in total assets and$2.3 million in total liabilities. 36
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Sale of
OnOctober 1, 2021 , we sold theOak Grove banking center, located inOak Grove, Louisiana , toCaldwell Bank & Trust Company headquartered inColumbia, Louisiana , in accordance with the Branch Purchase and Assumption Agreement datedJune 29, 2021 . The sale included$3.7 million in loans,$18.7 million in deposits and an estimated pre-tax gain on sale of$495,000 . As ofSeptember 30, 2021 , the loans and deposits associated with theOak Grove banking center were included in consolidated loans and deposits on the balance sheet.
On
COVID-19 The COVID-19 pandemic has caused extensive disruptions to the global, national and regional economy. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief.
We have taken a number of actions in response to the COVID-19 pandemic:
? In anticipation of credit losses expected as a result of the COVID-19
pandemic, we recorded an additional provision for loan losses during the year
ended December 31, 2020 ;
? In sensitivity to our customers, we waived certain service fees, such as late
fees, excessive withdrawal fees, etc. and increased daily limits on ATM
withdrawals during the year ended December 31, 2020 ;
? We continue to monitor borrowers who have deferred payments on loans under our
? We participated in theSmall Business Administration ("SBA") Paycheck
Protection Program ("PPP"), as described in further detail below, including
participation in round 2 of the PPP during the nine months ended
2021;
? We continue to monitor those sectors particularly impacted by thepandemic-such as energy, hotels, restaurants, 1-4 family and retail-and have
flagged those sectors for additional monitoring;
Beginning onMarch 25, 2020 , we have taken proactive measures to help customers by deferring principal and/or interest payments. ThroughSeptember 30, 2021 , we had agreed to deferrals on approximately 1,800 loans with an aggregate outstanding balance of$656.2 million , of which the majority of modifications occurred in 2020. As ofSeptember 30, 2021 , we had no loans with outstanding principal balances that remain in their respective deferral periods. In accordance with FASB and interagency regulatory guidance issued inMarch 2020 , loans that are modified under the terms of ourCOVID-19 Deferral Assistance Program will not be considered as troubled debt restructurings to the extent that they meet the terms of such guidance under Section 4013 of the CARES Act, as extended by the Consolidated Appropriations Act of 2021. SBA PPP Participation As ofSeptember 30, 2021 , we held 53 PPP loans (including both round 1 and round 2 PPP loans) with an aggregate balance of$9.7 million and an average loan balance of approximately$183,000 . InJune 2021 , we sold approximately 2,000 PPP loans with an aggregate balance of$243.6 million at a gain of$9.2 million . 37
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Table of Contents Financial Highlights
The financial highlights as of and for the three and nine months ended
• Total assets of
December 31, 2020 .
• Total loans held for investment of
increase from December 31, 2020 .
• Total deposits of
December 31, 2020 .
• Net income of
• Net interest income of
2021, an increase of
30, 2020.
• Allowance for loan and lease losses of 0.92% of total loans held for
investment, compared to 0.74% as of December 31, 2020 , and a ratio ofnonperforming loans to total loans held for investment of 0.45%, compared to
0.35% as of December 31, 2020 .
• Earnings per share for the first nine months of 2021 of
and
the first nine months of 2020.
• Return on average assets of 1.23% over the first nine months of 2021, compared
to 0.67% for the first nine months of 2020.
• Return on average equity of 12.60% over the first nine months of 2021,
compared to 6.30% for the first nine months of 2020.
• Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based
and Total Risk-based Capital of 8.34%, 9.39%, 9.53% and 12.47%, respectively.
During the year ended
Leverage Ratio ("CBLR") and had a ratio of 8.79% at
since elected to return to risk-based regulatory capital reporting for 2021.
• Book value per share of
31, 2020.
Results of Operations for the Three and Nine Months Ended
Performance Summary Our performance for the nine months endedSeptember 30, 2021 was significantly impacted by the recognition of a gain of$9.2 million from the PPP portfolio sale that closed during the second quarter 2021. For the three months endedSeptember 30, 2021 , net income was$10.3 million , or$0.51 per basic share and$0.50 per diluted share, compared to net income of$9.6 million , or$0.47 per basic share and$0.46 per diluted share, for the three months endedSeptember 30, 2020 . Return on average assets, on an annualized basis, decreased to 0.95% for the three months endedSeptember 30, 2021 , from 0.98% for the three months endedSeptember 30, 2020 . Return on average equity, on an annualized basis, decreased to 9.47% for the three months endedSeptember 30, 2021 , as compared to 9.85% for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , net income was$40.1 million , or$1.95 per basic share and$1.94 per diluted share, compared to net income of$16.2 million , or$0.93 per basic and diluted share, for the nine months endedSeptember 30, 2020 . Return on average assets, on an annualized basis, increased to 1.23% for the nine months endedSeptember 30, 2021 , from 0.67% for the nine months endedSeptember 30, 2020 . Return on average equity, on an annualized basis, increased to 12.60% for the nine months endedSeptember 30, 2021 , as compared to 6.30% for the nine months endedSeptember 30, 2020 . Net Interest Income Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest sensitive assets and liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact net interest income. The variance driven by the changes in the amount and mix of interest-earning assets and interest-bearing liabilities is referred to as a "volume change." Changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds are referred to as a "rate change." 38
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Table of Contents
To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders' equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. We calculate average assets, liabilities, and equity using a monthly average, and average yield/rate utilizing a 30/360 day count convention. For the three months endedSeptember 30, 2021 , net interest income totaled$37.3 million , and net interest margin and net interest spread were 3.71% and 3.51%, respectively, compared to$36.9 million , 4.06%, and 3.81%, respectively, for the three months endedSeptember 30, 2020 . The average yield on the loan portfolio (excluding SBA PPP loans) was 5.11% for the three months endedSeptember 30, 2021 , compared to 5.65% for the three months endedSeptember 30, 2020 , and the average yield on total interest-earning assets was 4.14% for the three months endedSeptember 30, 2021 , compared to 4.67% for the three months endedSeptember 30, 2020 . For the three months endedSeptember 30, 2021 , overall cost of funds (which includes noninterest-bearing deposits) decreased 19 basis points compared to the three months endedSeptember 30, 2020 , primarily due to the maturing of higher yielding deposits, increased lower yielding deposits and the deposit and borrowing accretion recognized from the Pedestal acquisition. While we experienced significant loan growth in average loan balances, we anticipate continued pressure on our net interest margin and net interest spread in future periods based on the current yield curve. For the nine months endedSeptember 30, 2021 , net interest income totaled$115.5 million , and net interest margin and net interest spread were 3.93% and 3.75%, respectively, compared to$88.1 million , 3.97%, and 3.66%, respectively, for the nine months endedSeptember 30, 2020 . The average yield on the loan portfolio (excluding SBA PPP loans) was 5.25% for the nine months endedSeptember 30, 2021 , compared to 5.61% for the nine months endedSeptember 30, 2020 , and the average yield on total interest-earning assets was 4.36% for the nine months endedSeptember 30, 2021 , compared to 4.75% for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , overall cost of funds (which includes noninterest-bearing deposits) decreased 38 basis points compared to the nine months endedSeptember 30, 2020 , primarily due to the federal funds rate cuts during the second half of 2019 and first quarter of 2020, along with the maturing of higher yielding deposits, increased lower yielding deposits and the deposit and borrowing accretion recognized from the Pedestal acquisition. While we experienced significant loan growth in average loan balances, we anticipate continued pressure on our net interest margin and net interest spread in future periods based on the current yield curve. 39
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Table of Contents
The following tables present, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however the balances are reflected in average outstanding balances for the period. For the three and nine months endedSeptember 30, 2021 and 2020, interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield. The average total loans reflected below is net of deferred loan fees and discounts. Acquired loans were recorded at fair value at acquisition and accrete interest income either over the remaining lives of the respective loans or expected cash flows. Averages presented in the tables below, and throughout this report, are month-end averages. For the Three Months Ended September 30, 2021 2020 Interest Interest Average Earned/ Average Average Earned/ Average Outstanding Interest Yield/ Outstanding Interest Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) (Unaudited) Assets Interest-earning assets: Total loans (excluding SBA PPP loans)$ 2,948,491 $ 37,666 5.11 %$ 2,638,417 $ 37,250 5.65 % SBA PPP loans 10,150 234 9.24 399,366 2,668 2.67 Securities available for sale 946,950 3,598 1.52 564,630 2,474 1.75 Interest-bearing deposits in other banks 110,472 36 0.13 33,970 69 0.81 Total interest-earning assets 4,016,063 41,534 4.14 3,636,383 42,461 4.67 Allowance for loan losses (27,409 ) (19,329 ) Noninterest-earning assets 365,231 316,577 Total assets$ 4,353,885 $ 41,534 $ 3,933,631 $ 42,461 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing deposits$ 2,566,766 $ 3,060 0.48 %$ 2,262,774 $ 4,345 0.77 % Subordinated debt 81,427 1,026 5.04 25,000 422 6.75 Subordinated debt - trust preferred securities 5,000 42 3.36 5,000 45 3.60 Advances from Federal Home Loan Bank ("FHLB") 36,015 106 1.18 122,592 515 1.68 Paycheck protection program liquidity facility ("PPPLF") - - - 107,076 95 0.35 Other borrowings 26,350 6 0.09 35,437 107 1.21 Total interest-bearing liabilities 2,715,558 4,240 0.62 2,557,879 5,529 0.86 Noninterest-bearing liabilities: Noninterest-bearing deposits 1,172,752 957,090 Other liabilities 30,175 28,453 Total noninterest-bearing liabilities 1,202,927 985,543 Shareholders' equity 435,400 390,209 Total liabilities and shareholders' equity$ 4,353,885 $ 3,933,631 Net interest rate spread(1) 3.51 % 3.81 % Net interest income$ 37,294 $ 36,932 Net interest margin(2) 3.71 % 4.06 % Overall cost of funds 0.44 % 0.63 %
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(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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Table of Contents
For the Nine Months Ended September 30,
2021 2020
Interest Interest
Average Earned/ Average Average Earned/ Average
Outstanding Interest Yield/ Outstanding Interest Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands) (Unaudited)
Assets
Interest-earning
assets:
Total loans (excluding
SBA PPP loans) $ 2,802,246 $ 110,320 5.25 % $ 2,227,681 $ 93,699 5.61 %
SBA PPP loans 209,041 8,134 5.19 240,164 4,998 2.77
Securities available
for sale 813,231 9,616 1.58 444,237 6,380 1.91
Interest-bearing
deposits in other banks 91,466 77 0.11 43,965 291 0.88
Total interest-earning
assets 3,915,984 128,147 4.36 2,956,047 105,368 4.75
Allowance for loan
losses (25,383 ) (15,046 )
Noninterest-earning
assets 452,806 283,939
Total assets $ 4,343,407 $ 128,147 $ 3,224,940 $ 105,368
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing
deposits $ 2,588,756 $ 9,538 0.49 % $ 1,866,556 $ 13,826 0.99 %
Subordinated debt 63,768 2,499 5.23 25,000 1,266 6.75
Subordinated debt -
trust preferred
securities 5,000 127 3.39 2,778 79 3.79
Advances from Federal
Home Loan Bank ("FHLB") 35,309 325 1.23 116,785 1,538 1.76
Paycheck protection
program liquidity
facility ("PPPLF") - - - 61,326 167 0.36
Other borrowings 27,651 118 0.57 45,179 430 1.27
Total interest-bearing
liabilities 2,720,484 12,607 0.62 2,117,624 17,306 1.09
Noninterest-bearing
liabilities:
Noninterest-bearing
deposits 1,170,534 738,578
Other liabilities 28,412 26,834
Total
noninterest-bearing
liabilities 1,198,946 765,412
Shareholders' equity 423,977 341,904
Total liabilities and
shareholders' equity $ 4,343,407 $ 3,224,940
Net interest rate
spread(1) 3.75 % 3.66 %
Net interest income $ 115,540 $ 88,062
Net interest margin(2) 3.93 % 3.97 %
Overall cost of funds 0.43 % 0.81 %
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(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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Table of Contents
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 Three Months Ended September 30, 2021
compared to the Three Months Ended
September 30, 2020
Increase (Decrease) due to change in
Volume Rate Total
(Dollars in thousands) (Unaudited)
Interest-earning assets:
Total loans (excluding SBA PPP
loans) $ 3,961 $ (3,545 ) $ 416
SBA PPP loans (8,988 ) 6,554 (2,434 )
Securities available for sale 1,453 (329 ) 1,124
Interest-earning deposits in other
banks 25 (58 ) (33 )
Total increase (decrease) in
interest income $ (3,549 ) $ 2,622 $ (927 )
Interest-bearing liabilities:
Interest-bearing deposits $ 362 $ (1,647 ) $ (1,285 )
Subordinated debt 711 (107 ) 604
Subordinated debt - trust preferred
securities - (3 ) (3 )
Advances from FHLB (255 ) (154 ) (409 )
PPPLF - (95 ) (95 )
Other borrowings (2 ) (99 ) (101 )
Total increase (decrease) in
interest expense 816 (2,105 ) (1,289 )
Increase (decrease) in net interest
income $ (4,365 ) $ 4,727 $ 362
For the Nine Months Ended September 30, 2021
compared to the Nine Months Ended
September 30, 2020
Increase (Decrease) due to change in
Volume Rate Total
(Dollars in thousands) (Unaudited)
Interest-earning assets:
Total loans (excluding SBA PPP
loans) $ 22,620 $ (5,999 ) $ 16,621
SBA PPP loans (1,211 ) 4,347 3,136
Securities available for sale 4,363 (1,127 ) 3,236
Interest-earning deposits in other
banks 40 (254 ) (214 )
Total increase (decrease) in
interest income $ 25,812 $ (3,033 ) $ 22,779
Interest-bearing liabilities:
Interest-bearing deposits $ 2,661 $ (6,949 ) $ (4,288 )
Subordinated debt 1,519 (286 ) 1,233
Subordinated debt - trust preferred
securities 56 (8 ) 48
Advances from FHLB (750 ) (463 ) (1,213 )
PPPLF - (167 ) (167 )
Other borrowings (75 ) (237 ) (312 )
Total increase (decrease) in
interest expense 3,411 (8,110 ) (4,699 )
Increase in net interest income
42
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Table of Contents Provision for Loan Losses Our provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for loan losses see "-Financial Condition-Allowance for Loan Losses." The provision for loan losses was$1.1 million for the three months endedSeptember 30, 2021 and$2.5 million for the same period in 2020. For the nine months endedSeptember 30, 2021 and 2020, the provision for loan losses was$6.7 million and$9.3 million , respectively. The lower provision for the three and nine months endedSeptember 30, 2021 compared to the same period in 2020 relates primarily to the improvement of the qualitative factors attributed to the general economy and energy sector, offset by reserves for new loan growth. For the three and nine months endedSeptember 30, 2020 , the provision was impacted by the estimated impact of the COVID-19 pandemic on the general economy. Noninterest Income Our primary sources of noninterest income are service charges on deposit accounts, debit card and automated teller machine ("ATM") fee income, income from bank-owned life insurance, fees and brokerage commission and pass-through income from small business investment company ("SBIC") partnerships. The following tables present, for the periods indicated, the major categories of noninterest income: For the Three Months Ended September 30, Increase 2021 2020 (Decrease) (Dollars in thousands) (Unaudited)
Noninterest income: Service charges on deposit accounts $ 1,763 $ 1,592 $
171
Debit card and ATM fee income 1,532 1,399 133
Bank-owned life insurance income 356 237 119
Gain on sales of loans 93 - 93
Gain (loss) on sales of investment
securities (11 ) 95 (106 )
Fees and brokerage commission 1,335 281 1,054
Mortgage origination income 227 123 104
Correspondent bank income 10 45 (35 )
Participation fee income 250 136 114
Loss on sales of other real estate
owned (558 ) (104 ) (454 )
Gain (loss) on sales of other assets 14 (627 ) 641
Pass-through income from SBIC
partnerships 405 364 41
Other 932 676 256
Total noninterest income $ 6,348 $ 4,217 $ 2,131
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For the Nine Months Ended
September 30, Increase
2021 2020 (Decrease)
(Dollars in thousands) (Unaudited)
Noninterest income:
Service charges on deposit accounts $ 5,013 $ 3,686 $ 1,327
Debit card and ATM fee income 4,645 2,765 1,880
Bank-owned life insurance income 1,029 689 340
Gain on sales of loans 10,114 184 9,930
Gain (loss) on sales of investment
securities (66 ) 120 (186 )
Fees and brokerage commission 3,294 537 2,757
Mortgage origination income 697 364 333
Correspondent bank income 276 186 90
Participation fee income 737 182 555
Gain (loss) on sales of other real
estate owned (1,087 ) 28 (1,115 )
Gain (loss) on sales of other assets 122 (627 ) 749
Pass-through income from SBIC
partnerships 2,060 2,368 (308 )
Other 1,973 1,535 438
Total noninterest income $ 28,807 $ 12,017 $ 16,790
Total noninterest income increased $2.1 million , or 50.5%, from the three months
ended September 30, 2020 . The increase was primarily due to the increase in
fees and brokerage commission income of $1.1 million , or 375.1%, due to the
acquisition of SSW, and the loss on the sale of other assets in the three months
ended September 30, 2020 of $627,000 , offset by an increase in losses on the
sales of other real estate owned of $558,000 .
Total noninterest income increased $16.8 million , or 139.7%, from the nine
months ended September 30, 2020 . The increase was primarily due to the
increases in services charges of $1.3 million , or 36.0%, and debit card and ATM
fee income of $1.9 million , or 68.0%, due to increased activity from the
Pedestal acquisition and organic growth, gain on sale of loans of $9.9 million ,
due primarily to the sale of the majority of our SBA PPP loans, and the increase
in fees and brokerage commission income of $2.8 million , due to the acquisition
of Pedestal's brokerage customers and SSW, offset by an increase in losses on
the sales of other real estate owned of $1.1 million .
Noninterest Expense
Generally, noninterest expense is composed of all employee expenses and costs
associated with operating our facilities, obtaining and retaining customer
relationships, and providing bank services. The largest component of noninterest
expense is salaries and employee benefits. Noninterest expense also includes
operational expenses, such as occupancy expenses, depreciation and amortization,
professional and regulatory fees, including Federal Deposit Insurance
Corporation ("FDIC") assessments, data processing expenses, and advertising and
promotion expenses, among others.
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The following tables present, for the periods indicated, the major categories of
noninterest expense:
For the Three Months Ended
September 30, Increase
2021 2020 (Decrease)
(Dollars in thousands) (Unaudited)
Salaries and employee benefits $ 16,791 $ 15,430 $ 1,361
Non-staff expenses:
Occupancy of bank premises 1,629 1,394 235
Depreciation and amortization 1,720 1,322 398
Data processing 1,994 1,832 162
FDIC assessment fees 581 594 (13 )
Legal and other professional fees 553 555 (2 )
Advertising and promotions 612 320 292
Utilities and communications 678 789 (111 )
Ad valorem shares tax 675 673 2
Directors' fees 201 117 84
Other real estate owned expenses and
write-downs 103 171 (68 )
Merger and conversion related expenses 145 556 (411 )
Other 3,885 3,198 687
Total noninterest expense $ 29,567 $ 26,951 $ 2,616
For the Nine Months Ended
September 30, Increase
2021 2020 (Decrease)
(Dollars in thousands) (Unaudited)
Salaries and employee benefits $ 48,470 $ 42,486 $ 5,984
Non-staff expenses:
Occupancy of bank premises 5,716 3,824 1,892
Depreciation and amortization 4,999 2,996 2,003 Data processing 6,105 3,539 2,566 FDIC assessment fees 1,526 1,013 513 Legal and other professional fees 2,199 1,492 707 Advertising and promotions 1,713 960 753 Utilities and communications 1,889 1,751 138 Ad valorem shares tax 2,050 1,498 552 Directors' fees 583 291 292 Other real estate owned expenses and write-downs 660 475 185 Merger and conversion related expenses 249 3,430 (3,181 ) Other 11,487 7,636 3,851 Total noninterest expense$ 87,646 $ 71,391 $ 16,255 Total noninterest expense increased$2.6 million , or 9.7%, from the three months endedSeptember 30, 2020 , primarily attributed to$1.4 million increase in salaries and employee benefits due to additional staffing. The increase in noninterest expense was partially offset by lower merger and conversion related expenses in the current period, as compared to the three months endedSeptember 30, 2020 . Merger related expenses in the prior year period primarily related to the donation of vehicles, the removal of signage on buildings and legal fees for the Pedestal acquisition. Total noninterest expense increased$16.3 million , or 22.8%, from the nine months endedSeptember 30, 2020 , due primarily to the acquisition of Pedestal onMay 1, 2020 and the associated increases in branches and employees. The increase in noninterest expense was partially offset with lower merger and conversion related expenses, compared to the nine months endedSeptember 30, 2020 , due to the acquisition of Pedestal during the prior year period. 45
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Table of Contents Income Tax Expense The amount of income tax expense is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. For the three months endedSeptember 30, 2021 , income tax expense totaled$2.6 million , an increase of$519,000 , or 24.7%, compared to$2.1 million for the same period in 2020. For the nine months endedSeptember 30, 2021 , income tax expense totaled$9.9 million , an increase of$6.7 million , or 206.4%, compared to$3.2 million for the same period in 2020. Our effective tax rates for the three months endedSeptember 30, 2021 and 2020 were 20.2% and 17.9%, respectively. For the nine months endedSeptember 30, 2021 and 2020, our effective tax rates were 19.8% and 16.7%, respectively. The increase in our effective tax rate for the nine months endedSeptember 30, 2021 is primarily due to founder's stock option exercises that occurred in 2020. Our effective tax rate for both periods was affected by tax-exempt income generated by municipal securities, bank-owned life insurance and by other nondeductible expenses (including acquisition-related expenses). Financial Condition Our total assets increased$244.9 million , or 5.9%, fromDecember 31, 2020 toSeptember 30, 2021 , due primarily from the increases in our investment and loan portfolios, offset with decreases in cash and cash equivalents. Loan Portfolio Our primary source of income is interest on loans to individuals, professionals and small-to-midsized businesses located in our markets. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning asset base. As ofSeptember 30, 2021 , total loans held for investment were$3.1 billion , an increase of$74.9 million , or 2.5%, compared to$3.0 billion as ofDecember 31, 2020 . The increase was primarily due to the growth in ourDallas/Fort Worth metroplex,New Orleans andBaton Rouge markets, offset by the sale of the majority of our SBA PPP loans totaling$243.6 million . Additionally,$1.5 million and$969,000 in mortgage loans were classified as loans held for sale as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Total loans held for investment as a percentage of total deposits were 81.4% and 82.7% as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Total loans held for investment as a percentage of total assets were 69.6% and 71.9% as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. The following table summarizes our loan portfolio by type of loan as of the dates indicated: As of September 30, 2021 (Unaudited) As of December 31, 2020 Amount Percent Amount Percent (Dollars in thousands) Commercial$ 723,077 23.6 %$ 886,325 29.6 % Real estate: Construction and land 464,808 15.2 403,065 13.5 Farmland 85,898 2.8 55,883 1.8 1-4 family residential 464,462 15.1 468,650 15.7 Multi-family residential 107,551 3.5 95,707 3.2 Nonfarm nonresidential 1,111,771 36.3 971,603 32.5 Consumer and other 108,669 3.5 110,122 3.7 Total loans held for investment$ 3,066,236 100.0 %$ 2,991,355 100.0 %
SBA PPP loans accounted for
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Commercial loans. Commercial loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and effectively. These loans are made based primarily on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally include personal guarantees.
Commercial loans decreased$163.2 million , or 18.4%, to$723.1 million as ofSeptember 30, 2021 from$886.3 million as ofDecember 31, 2020 , primarily due to the sale of the majority of our SBA PPP loans, offset by new originations in theDallas/Fort Worth metroplex. Construction and land. Construction and land development loans are comprised of loans to fund construction, land acquisition and land development construction. The properties securing the portfolio are located primarily throughoutLouisiana and theDallas/Fort Worth metroplex, and are generally diverse in terms of type.
Construction and land loans increased
1-4 family residential. Our 1-4 family residential loan portfolio is comprised of loans secured by single family homes, which are both owner-occupied and investor owned. Our 1-4 family residential loans have a relatively small average balance spread between many individual borrowers and are generally offered as accommodations to existing customers.
1-4 family residential loans decreased
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 throughoutLouisiana andTexas 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$140.2 million , or 14.4%, to$1.1 billion as ofSeptember 30, 2021 from$971.6 million as ofDecember 31, 2020 , primarily due to ourDallas/Fort Worth metroplex,New Orleans andBaton Rouge markets. Other loan categories. Other categories of loans included in our loan portfolio include farmland and agricultural loans made to farmers and ranchers relating to their operations, multi-family residential loans, and consumer and other loans. None of these categories of loans represent a significant portion of our total loan portfolio. 47
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The contractual maturity ranges of loans in our loan portfolio and the amount of
such loans with fixed and floating interest rates in each maturity range as of
the date indicated are summarized in the following tables:
As of September 30, 2021
One
One Year Through After Five
or Less Five Years Years Total
(Dollars in thousands) (Unaudited)
Commercial $ 251,066 $ 322,357 $ 149,654 $ 723,077
Real estate:
Construction and land 192,430 218,655 53,723 464,808
Farmland 19,834 39,462 26,602 85,898
1-4 family residential 72,040 253,239 139,183 464,462
Multi-family residential 4,118 32,888 70,545 107,551
Nonfarm nonresidential 150,509 511,381 449,881 1,111,771
Consumer and other 43,955 52,245 12,469 108,669
Total loans held for investment $ 733,952 $ 1,430,227 $ 902,057 $ 3,066,236
Amounts with fixed rates $ 328,026 $ 1,020,690 $ 601,028 $ 1,949,744
Amounts with floating rates 405,926 409,537 301,029 1,116,492
As of December 31, 2020
One
One Year Through After Five
or Less Five Years Years Total
(Dollars in thousands)
Commercial $ 218,443 $ 586,675 $ 81,207 $ 886,325
Real estate:
Construction and land 180,735 176,863 45,467 403,065
Farmland 10,802 31,489 13,592 55,883
1-4 family residential 78,087 246,550 144,013 468,650
Multi-family residential 21,292 25,863 48,552 95,707
Nonfarm nonresidential 123,708 521,687 326,208 971,603
Consumer and other 44,819 56,057 9,246 110,122
Total loans held for investment $ 677,886 $ 1,645,184 $ 668,285 $ 2,991,355
Amounts with fixed rates $ 344,021 $ 1,297,988 $ 353,314 $ 1,995,323
Amounts with floating rates 333,865 347,196 314,971 996,032
Nonperforming Assets
Loans are considered past due if the required principal and interest payments
have not been received as of the date such payments were due. Loans are placed
on nonaccrual status when, in management's opinion, the borrower may be unable
to meet payment obligations as they become due, as well as when required by
regulatory provisions. Loans may be placed on nonaccrual status regardless of
whether or not such loans are considered past due. When interest accrual is
discontinued, all unpaid accrued interest is generally reversed. Interest income
is subsequently recognized only to the extent cash payments are received in
excess of principal due, or interest may be recognized on a cash basis as long
as the remaining book balance of the loan is deemed collectible. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
We have several procedures in place to assist in maintaining the overall quality
of our loan portfolio. We have established underwriting guidelines to be
followed by our bankers, and we also monitor our delinquency levels for any
negative or adverse trends. There can be no assurance, however, that our loan
portfolio will not become subject to increasing pressures from deteriorating
borrower credit due to general economic conditions.
We believe our conservative lending approach and focused management of
nonperforming assets has resulted in sound asset quality and the timely
resolution of problem assets. We had $16.5 million and $20.0 million in
nonperforming assets as of September 30, 2021 and December 31, 2020 ,
respectively. We had $13.7 million in nonperforming loans as of September 30,
2021 compared to $10.6 million as of December 31, 2020 . The decrease in
nonperforming assets from December 31, 2020 to September 30, 2021 is primarily
due to the sale of other real estate owned.
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The following tables present information regarding nonperforming assets at the
dates indicated:
As of September 30,
2021 As of December 31,
(Unaudited) 2020
(Dollars in thousands)
Nonaccrual loans $ 12,622 $ 9,063
Accruing loans 90 or more days past due 1,030 1,523
Total nonperforming loans 13,652 10,586
Other nonperforming assets 675 402
Other real estate owned:
Commercial real estate, construction, land and
land development 2,018 8,567
Residential real estate 134 484
Total other real estate owned 2,152 9,051
Total nonperforming assets $ 16,479 $ 20,039
Restructured loans-nonaccrual $ 3,479 $ 4,206
Restructured loans-accruing 344 4,315
Ratio of nonperforming loans to total loans held
for investment 0.45 % 0.35 %
Ratio of nonperforming assets to total assets 0.37 0.48
As of September 30,
2021 As of December 31,
(Unaudited) 2020
(Dollars in thousands)
Nonaccrual loans by category:
Real estate:
Construction and land $ 1,207 $ 924
Farmland 87 367
1-4 family residential 3,218 2,603
Multi-family residential - -
Nonfarm nonresidential 2,698 3,119
Commercial 5,199 1,753
Consumer and other 213 297
Total $ 12,622 $ 9,063
Through September 30, 2021 , we had agreed to deferrals on approximately 1,800
loans with outstanding balances totaling $656.2 million by granting temporary
payment deferrals of principal and/or interest. The payment deferrals were
granted due to the effects of the COVID-19 pandemic. In accordance with FASB
and interagency regulatory guidance issued in March 2020 , loans that are
modified under the terms of our COVID-19 Deferral Assistance Program will not be
considered as troubled debt restructurings to the extent that they meet the
terms of such guidance under Section 4013 of the CARES Act. Loans under these
deferrals remain in their current risk rating and / or past due status through
the deferral period. As of September 30, 2021 , none of these loans are currently
in their deferral period.
Potential Problem Loans
From a credit risk standpoint, we classify loans in one of four categories:
pass, special mention, substandard or doubtful. Loans classified as loss are
charged-off. The classifications of loans reflect a judgment about the risks of
default and loss associated with the loan. Ratings are adjusted to reflect the
degree of risk and loss that is believed to be inherent in each credit. Our
methodology is structured so that specific allocations are increased in
accordance with deterioration in credit quality (and a corresponding increase in
risk of loss) or decreased in accordance with improvement in credit quality (and
a corresponding decrease in risk of loss).
Credits rated special mention show clear signs of financial weaknesses or
deterioration in credit worthiness; however, such concerns are not so pronounced
that we generally expect to experience significant loss within the short-term.
Such credits typically maintain the ability to perform within standard credit
terms and credit exposure is not as prominent as credits with a lower rating.
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Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. Credits rated doubtful have all the weaknesses inherent in those rated substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The following tables summarize our internal ratings of loans held for investment as of the dates indicated.
As of September 30, 2021
Special
Pass Mention Substandard Doubtful Total
(Dollars in thousands) (Unaudited)
Real estate:
Construction and land $ 461,427 $ 291 $ 1,883 $ 1,207 $ 464,808
Farmland 83,686 2,125 - 87 85,898
1-4 family residential 451,318 4,248 3,433 5,463 464,462
Multi-family residential 107,239 288 24 - 107,551
Nonfarm nonresidential 1,082,929 13,535 9,793 5,514 1,111,771
Commercial 704,053 7,521 4,193 7,310 723,077
Consumer and other 107,532 349 432 356 108,669
Total $ 2,998,184 $ 28,357 $ 19,758 $ 19,937 $ 3,066,236
As of December 31, 2020
Special
Pass Mention Substandard Doubtful Total
(Dollars in thousands)
Real estate:
Construction and land $ 400,027 $ 912 $ 1,202 $ 924 $ 403,065
Farmland 53,874 1,642 - 367 55,883
1-4 family residential 450,702 9,290 4,913 3,745 468,650
Multi-family residential 95,359 320 28 - 95,707
Nonfarm nonresidential 949,245 12,810 3,473 6,075 971,603
Commercial 859,851 16,832 7,325 2,317 886,325
Consumer and other 107,449 1,970 229 474 110,122
Total $ 2,916,507 $ 43,776 $ 17,170 $ 13,902 $ 2,991,355
Allowance for Loan Losses
We maintain an allowance for loan losses that represents management's best
estimate of the loan losses and risks inherent in the loan portfolio. In
determining the allowance for loan losses, we estimate losses on specific loans,
or groups of loans, where the probable loss can be identified and reasonably
determined. The balance of the allowance for loan losses is based on internally
assigned risk classifications of loans, historical loan loss rates, changes in
the nature of the loan portfolio, overall portfolio quality, industry
concentrations, delinquency trends, current economic factors and the estimated
impact of current economic conditions on certain historical loan loss rates. For
additional information, see Note 6 to the consolidated financial statements.
In connection with our review of the loan portfolio, we consider risk elements
attributable to particular loan types or categories in assessing the quality of
individual loans. Some of the risk elements we consider include:
• for commercial and industrial loans, the operating results of the commercial,
industrial or professional enterprise, the borrower's business, professional
and financial ability and expertise, the specific risks and volatility of
income and operating results typical for businesses in that category, and the
value, nature and marketability of collateral;
• for commercial mortgage loans and multi-family residential loans, the debt
service coverage ratio (income from the property in excess of operating
expenses compared to loan payment requirements), operating results of the
owner in the case of owner-occupied properties, the loan to value ratio, the
age and condition of the collateral, and the volatility of income, property
value and future operating results typical for properties of that type;
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• for 1-4 family residential mortgage loans, the borrower's ability to repay the
loan, including a consideration of the debt to income ratio and employment and
income stability, the loan to value ratio, and the age, condition and
marketability of the collateral; and
• for construction, land development and other land loans, the perceived
feasibility of the project including the ability to sell developed lots or
improvements constructed for resale or the ability to lease property
constructed for lease, the quality and nature of contracts for presale orprelease, if any, the experience and ability of the developer, and the loan to
value ratio.
As of September 30, 2021 , the allowance for loan losses totaled $28.1 million ,
or 0.92%, of total loans held for investment. As of December 31, 2020 , the
allowance for loan losses totaled $22.0 million , or 0.74%, of total loans held
for investment. The increase was partially attributable to the reduction of SBA
PPP loans.
The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:
As of and
For the Nine
Months
Ended As of and For the
September 30, Year Ended
2021 December 31,
(Unaudited) 2020
(Dollars in thousands)
Average loans outstanding(1) $ 3,011,287 $ 2,613,422
Gross loans held for investment outstanding at
end of period $ 3,066,236 $ 2,991,355
Allowance for loan losses at beginning of period
12,124
Provision for loan losses 6,747 11,435
Charge-offs:
Real estate:
Construction, land and farmland 1 28
Residential 164 387
Nonfarm nonresidential 141 232
Commercial 680 849
Consumer and other 265 467
Total charge-offs 1,251 1,963
Recoveries:
Real estate:
Construction, land and farmland 2 10
Residential 31 53
Nonfarm nonresidential 99 12
Commercial 395 203
Consumer and other 99 150
Total recoveries 626 428
Net charge-offs 625 1,535
Allowance for loan losses at end of period
22,024
Ratio of allowance to end of period loans held for investment 0.92 % 0.74 % Ratio of net charge-offs to average loans 0.02 0.06
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(1) Excluding loans held for sale. Although we believe that we have established our allowance for loan losses in accordance withU.S. generally accepted accounting principles ("GAAP") and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in our loan portfolio. If we experience economic declines or if asset quality deteriorates, material additional provisions could be required. 51
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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,
2021 As of December 31,
(Unaudited) 2020
Percent Percent
Amount to Total Amount to Total
(Dollars in thousands)
Real estate:
Construction and land $ 3,818 13.6 % $ 3,584 16.3 %
Farmland 731 2.6 600 2.7
1-4 family residential 3,723 13.2 3,453 15.7
Multi-family residential 872 3.1 818 3.7
Nonfarm nonresidential 9,247 32.8 7,369 33.5
Total real estate 18,391 65.3 15,824 71.9
Commercial 8,717 31.0 5,018 22.8
Consumer and other 1,038 3.7 1,182 5.3
Total allowance for loan losses $ 28,146 100.0 % $ 22,024 100.0 %
Securities
We use our securities portfolio to provide a source of liquidity, an appropriate
return on funds invested, manage interest rate risk, meet collateral
requirements, and meet regulatory capital requirements. As of September 30,
2021 , the carrying amount of investment securities totaled $1.0 billion , an
increase of $393.9 million , or 61.5%, compared to $640.6 million as of
December 31, 2020 . The increase was primarily due to the deployment of excess
cash related to the SBA PPP forgiveness and portfolio sale. Securities
represented 23.5% and 15.4% of total assets as of September 30, 2021 and
December 31, 2020 , respectively.
Our investment portfolio consists entirely of securities classified as available
for sale. As a result, the carrying values of our investment securities are
adjusted for unrealized gain or loss, and any gain or loss is reported on an
after-tax basis as a component of other comprehensive income in shareholders'
equity. The following tables summarize the amortized cost and estimated fair
value of investment securities as of the dates shown:
As of September 30, 2021
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
(Dollars in thousands) (Unaudited)
U.S. treasury securities $ 22,762 $ - $ 135 $ 22,627
U.S. government agencies 27,899 3 53 27,849
Corporate bonds 41,813 1,079 45 42,847
Mortgage-backed securities 578,902 5,072 2,837 581,137
Municipal securities 354,869 4,878 1,197 358,550
Other securities 1,156 325 - 1,481
Total $ 1,027,401 $ 11,357 $ 4,267 $ 1,034,491
As of December 31, 2020
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
(Dollars in thousands)
U.S. government agencies $ 2,567 $ 5 $ - $ 2,572
Corporate bonds 38,738 380 5 39,113
Mortgage-backed securities 288,373 6,893 247 295,019
Municipal securities 296,262 6,097 106 302,253
Other securities 1,440 208 - 1,648
Total $ 627,380 $ 13,583 $ 358 $ 640,605
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All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As ofSeptember 30, 2021 , the investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.
Management evaluates securities for other-than-temporary impairment, at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
The following tables set forth the fair value, maturities and approximated
weighted average yield based on estimated annual income divided by the average
amortized cost of the securities portfolio as of the dates indicated. The
contractual maturity of a mortgage-backed security is the date at which the last
underlying mortgage matures.
As of September 30, 2021
After One Year
Within One but After Five Years but After Ten
Year Within Five Years Within Ten Years Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
(Dollars in thousands) (Unaudited)
U.S. treasury
securities $ - - % $ 12,295 0.74 % $ 10,332 0.80 % $ - - % $ 22,627 0.77 %
U.S. government
agencies 2,529 0.23 % 25,320 0.76 % - - % - - % 27,849 0.71 %
Corporate bonds - - % - - % 41,739 4.45 % 1,108 7.30 % 42,847 4.52 %
Mortgage-backed
securities 5,382 1.08 % 39,783 1.16 % 234,245 1.34 % 301,727 1.27 % 581,137 1.29 %
Municipal
securities 15,450 2.19 % 98,749 1.44 % 151,773 1.75 % 92,578 1.90 % 358,550 1.72 %
Other
securities - - % - - % - - % 1,481 0.51 % 1,481 0.51 %
Total $ 23,361 1.72 % $ 176,147 1.23 % $ 438,089 1.77 % $ 396,894 1.43 % $ 1,034,491 1.54 %
As of December 31, 2020
After One Year
Within One but After Five Years but After Ten
Year Within Five Years Within Ten Years Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
(Dollars in thousands)
U.S. government
agencies $ - - % $ 2,572 0.23 % $ - - % $ - - % $ 2,572 0.23 %
Corporate bonds - - % - - % 38,089 4.41 % 1,024 7.35 % 39,113 4.49 %
Mortgage-backed
securities 1,647 1.22 % 46,881 1.17 % 144,427 1.64 % 102,064 1.34 % 295,019 1.46 %
Municipal
securities 17,167 2.39 % 75,597 1.70 % 118,381 1.78 % 91,108 1.95 % 302,253 1.84 %
Other
securities - - % - - % - - % 1,648 0.59 % 1,648 0.59 %
Total $ 18,814 2.29 % $ 125,050 1.47 % $ 300,897 2.04 % $ 195,844 1.65 % $ 640,605 1.82 %
The contractual maturity of mortgage-backed securities, collateralized mortgage
obligations and asset-backed securities is not a reliable indicator of their
expected life because borrowers have the right to prepay their obligations at
any time. Mortgage-backed securities and asset-backed securities are typically
issued with stated principal amounts and are backed by pools of mortgage loans
and other loans with varying maturities. The term of the underlying mortgages
and loans may vary significantly due to the ability of a borrower to prepay.
Monthly paydowns on mortgage-backed securities tend to cause the average life of
the securities to be much different than the stated contractual maturity. During
a period of increasing interest rates, fixed rate mortgage-backed securities do
not tend to experience heavy prepayments of principal and, consequently, the
average life of this security will be lengthened. If interest rates begin to
fall, prepayments may increase, thereby shortening the estimated life of this
security. The weighted average life of our investment portfolio was 6.18 years
with an estimated effective duration of 54.58 months as of September 30, 2021 .
As of September 30, 2021 and December 31, 2020 , we did not own securities of any
one issuer for which aggregate adjusted cost exceeded 10% of our consolidated
shareholders' equity as of such respective dates.
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As ofSeptember 30, 2021 andDecember 31, 2020 , the Company held other equity securities of$15.3 million and$12.7 million , respectively, comprised mainly of FHLB stock and small business investment companies ("SBICs"). Deposits We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits.
Total deposits as of
Noninterest-bearing deposits were
Average deposits for the nine months endedSeptember 30, 2021 were$3.8 billion , an increase of$968.7 million , or 34.7%, over the full year average for the year endedDecember 31, 2020 of$2.8 billion . The average rate paid on total interest-bearing deposits decreased over this period from 0.89% for the year endedDecember 31, 2020 to 0.49% for the nine months endedSeptember 30, 2021 . The decrease in average rates during the nine months endedSeptember 30, 2021 over the average for the year endedDecember 31, 2020 was primarily due to the federal funds rate cuts that occurred in the three months endedMarch 31, 2020 and the maturing of higher yielding deposits, along with the accretion of deposit premium from the Pedestal acquisition. In addition, the stability and continued growth of noninterest-bearing demand accounts served to reduce the cost of deposits to 0.34% for the nine months endedSeptember 30, 2021 compared to 0.63% for the year endedDecember 31, 2020 .
The following table presents the monthly average balances and weighted average rates paid on deposits for the periods indicated:
For the Nine Months For the Year Ended December
Ended September 30, 2021 31,
(Unaudited) 2020
Average Average Average Average
Balance Rate Balance Rate
(Dollars in thousands)
Interest-bearing demand accounts $ 173,317 0.52 % $ 121,612 0.75 %
Negotiable order of withdrawal
("NOW") accounts 512,373 0.13 % 383,695 0.31 %
Limited access money market
accounts and savings 1,146,147 0.30 % 682,611 0.43 %
Certificates and other time
deposits >$250k 206,840 1.21 % 215,416 1.90 %
Certificates and other time
deposits < $250k 550,079 0.95 % 574,961 1.47 %
Total interest-bearing deposits 2,588,756 0.49 % 1,978,295 0.89 %
Noninterest-bearing demand
accounts 1,170,534 - % 812,332 - %
Total deposits $ 3,759,290 0.34 % $ 2,790,627 0.63 %
The ratio of average noninterest-bearing deposits to average total deposits for
the nine months ended September 30, 2021 and the year ended December 31, 2020
was 31.1% and 29.1%, respectively.
The following table sets forth the contractual maturities of certain
certificates of deposit at
Certificates of Certificates of
Deposit Deposit of $100,000
More Than Through
$250,000 $250,000
(Dollars in thousands)
3 months or less $ 37,781 $ 89,087
More than 3 months but less than 6 months 43,741 76,690
More than 6 months but less than 12 months 76,613 120,819
12 months or more 39,026 57,420
Total $ 197,161 $ 344,016
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Federal Funds Purchased Lines of Credit Relationships
We maintain Federal Funds Purchased Lines of Credit Relationships with the
following correspondent banks and limits as of
Fed Funds Purchase
Limits
(Dollars in
Thousands)
Compass Bank $ 38,000
First National Bankers Bank ("FNBB") 35,000
The Independent Bankers Bank 25,000
First Horizon Bank 17,000
ServisFirst Bank 10,000
South State Bank 9,000
Total $ 134,000
We had outstanding balances of
Liquidity and Capital Resources
Liquidity Liquidity involves our ability to utilize funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the nine months endedSeptember 30, 2021 and the year endedDecember 31, 2020 , liquidity needs were primarily met by core deposits, security and loan maturities, and amortizing investment and loan portfolios. Although access to brokered deposits, purchased funds from correspondent banks and overnight advances from the FHLB have been utilized on occasion to take advantage of investment opportunities, we do not generally rely on these external funding sources. As ofSeptember 30, 2021 andDecember 31, 2020 , we maintained six federal funds purchased lines of credit with correspondent banks which provided for extensions of credit with an availability to borrow up to an aggregate of$134.0 million and$126.0 million , respectively. There was$16.1 million drawn on these funds under these lines of credit as ofSeptember 30, 2021 and no funds under these lines of credit outstanding as ofDecember 31, 2020 . 55
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The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the periods indicated. Average total assets equaled$4.3 billion and$3.4 billion for the nine months endedSeptember 30, 2021 and the year endedDecember 31, 2020 , respectively. For the Nine For the Year Months Ended Ended September 30, 2021 December 31, 2020 (Unaudited) Sources of Funds: Deposits: Noninterest-bearing 27.0 % 23.7 % Interest-bearing 59.6 57.8 Subordinated debt (excluding trust preferred securities) 1.5 0.7 Advances from FHLB 0.8 3.3 Borrowings from the PPPLF - 1.9 Other borrowings 0.7 1.4 Other liabilities 0.6 0.8 Shareholders' equity 9.8 10.4 Total 100.0 % 100.0 % Uses of Funds: Loans, net of allowance for loan losses 68.8 % 75.8 % Securities available for sale 18.7 14.1 Interest-bearing deposits in other banks 2.1 1.4 Other noninterest-earning assets 10.4 8.7 Total 100.0 % 100.0 % Average noninterest-bearing deposits to average deposits 31.1 % 29.1 % Average loans to average deposits 80.1 93.7 Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average net loans decreased 0.9% for the nine months endedSeptember 30, 2021 compared to the same period in 2020, primarily due to the sale of the majority of our SBA PPP portfolio in the second quarter 2021. We predominantly invest excess deposits in overnight deposits with theFederal Reserve , securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth. Our securities portfolio had a weighted average life of 6.18 years and an effective duration of 54.58 months as ofSeptember 30, 2021 . As ofDecember 31, 2020 , our securities portfolio had a weighted average life of 5.93 years and an effective duration of 45.79 months. As ofSeptember 30, 2021 , we had outstanding$854.1 million in commitments to extend credit and$35.3 million in commitments associated with outstanding standby and commercial letters of credit. As ofDecember 31, 2020 , we had outstanding$621.1 million in commitments to extend credit and$23.9 million in commitments associated with outstanding standby and commercial letters of credit. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. See "Off Balance Sheet Items" below for additional information. The increase is largely attributable to a newly formed financial institutions group. As ofSeptember 30, 2021 andDecember 31, 2020 we had cash and cash equivalents, including federal funds sold, of$86.0 million and$323.3 million , respectively. We had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature for either period. Capital Resources Total shareholders' equity increased to$430.2 million as ofSeptember 30, 2021 , compared to$410.0 million as ofDecember 31, 2020 , an increase of$20.3 million , or 4.9%. This increase was primarily due to net income of$40.1 million , offset with other comprehensive losses of$4.9 million and dividends paid of$7.0 million . OnOctober 20, 2021 , our Board of Directors (the "Board") declared a quarterly dividend based upon our financial performance for the three months endedSeptember 30, 2021 in the amount of$0.12 per share to the common shareholders of record as ofNovember 15, 2021 . The dividend is to be paid onNovember 30, 2021 , or as soon as practicable thereafter. 56
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The declaration and payment of dividends to our shareholders, as well as the amounts thereof, are subject to the discretion of the Board and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board. As a holding company, our ability to pay dividends is largely dependent upon the receipt of dividends from our subsidiary, b1BANK. There can be no assurance that we will declare and pay any dividends to our shareholders. Capital management consists of providing equity to support current and future operations. Banking regulators view capital levels as important indicators of an institution's financial soundness. As a general matter,FDIC -insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the holding company and bank levels. As ofSeptember 30, 2021 andDecember 31, 2020 , we and b1BANK were in compliance with all applicable regulatory capital requirements, and b1BANK was classified as "well-capitalized," for purposes of prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all applicable regulatory capital standards applicable to us. For the year endedDecember 31, 2020 , we elected to opt in to the CBLR framework. Pursuant to section 201(b) of EGRRCPA, the federal bank regulatory agencies adopted a final rule in 2019 imposing a minimum community bank leverage ratio requirement of 9.0%. OnApril 6, 2020 , as mandated under the CARES Act, the federal bank regulatory agencies adopted an interim final rule that temporarily reduced the minimum community bank leverage ratio requirement to 8.0% and provided a two quarter grace period for banks with a leverage ratio between 7.0% and 8.0%. A transition interim final rule also adopted by the federal bank regulatory agencies onApril 6, 2020 provides a graduated transition from the temporary 8.0% community bank leverage ratio requirement, to the 9.0% community bank leverage ratio requirement as established under the 2019 final rule. Specifically, the transition interim final rule provides that the community bank leverage ratio was 8.0% in the second quarter through fourth quarter of calendar year 2020, is 8.5% in calendar year 2021, and will be 9.0% thereafter. During the first quarter of 2021, we elected to revert to the risk weighted ratios detailed below.
The following table presents the actual capital amounts and regulatory capital ratios for us and b1BANK as of the dates indicated.
As of September 30, 2021
(Unaudited) As of December 31, 2020
Amount Ratio Amount Ratio
(Dollars in thousands)
Business First
Total capital (to risk weighted
assets) $ 466,774 12.47 % N/A N/A
Tier 1 capital (to risk weighted
assets) 356,557 9.53 % N/A N/A
Common Equity Tier 1 capital (to risk
weighted assets) 351,557 9.39 % N/A N/A
Tier 1 Leverage capital and/or CBLR
(to average assets) 356,557 8.34 % $ 340,715 8.79 %
b1BANK
Total capital (to risk weighted assets)$ 453,375 12.13 % N/A N/A Tier 1 capital (to risk weighted assets) 424,585 11.36 % N/A N/A Common Equity Tier 1 capital (to risk weighted assets) 424,585 11.36 % N/A N/A Tier 1 Leverage capital and/or CBLR (to average assets) 424,585 9.94 %$ 358,083 9.24 % Long Term Debt
During the nine months ended
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Table of Contents Contractual Obligations The following tables summarize contractual obligations and other commitments to make future payments as ofSeptember 30, 2021 andDecember 31, 2020 (other than non-maturity deposit obligations), which consist of future cash payments associated with our contractual obligations pursuant to our FHLB advances, subordinated debt, revolving line of credit, notes payable, and non-cancelable future operating leases. Payments related to leases are based on actual payments specified in underlying contracts. Advances from the FHLB totaled approximately$48.0 million and$43.1 million (both of which include remaining purchase premium) atSeptember 30, 2021 andDecember 31, 2020 , respectively. As ofSeptember 30, 2021 andDecember 31, 2020 , the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 1.03% and 2.01%, respectively, and maturing within three years. The subordinated debt totaled$81.4 million and$25.0 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. Of this subordinated debt,$25.0 million bears interest at a fixed rate of 6.75% throughDecember 31, 2028 and a floating rate, based on a benchmark rate plus 369 basis points, thereafter through maturity in 2033,$52.5 million of this subordinated debt bears interest at a fixed rate of 4.25% throughMarch 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031. The remaining$3.9 million of this subordinated debt bears interest at a fixed rate of 4.75% throughApril 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031. We had a revolving line of credit with FNBB with a balance of$5.0 million atDecember 31, 2020 which was paid off during the first quarter of 2021. We acquired a note payable to FNBB in the Pedestal transaction in the amount of$7.0 million , of which$6.0 million was outstanding atDecember 31, 2020 . This note was paid off during the first quarter of 2021. As of September 30, 2021 More than 1 3 years or year but less more but less 5 years 1 year or less than 3 years than 5 years or more Total (Dollars in thousands) (Unaudited) Non-cancelable future operating leases $ 537 $ 3,743 $ 3,277$ 5,079 $ 12,636 Time deposits 571,246 118,110 23,283 - 712,639 Subordinated debt - - - 81,427 81,427 Advances from FHLB 25,000 23,000 - - 48,000 Purchase premium on advances from FHLB 2 - - - 2 Subordinated debt - trust preferred securities - - - 5,000 5,000 Securities sold under agreements to repurchase 27,195 - - - 27,195 Federal Funds Purchased 16,087 - - - 16,087 Standby and commercial letters of credit 11,715 23,470 131 - 35,316 Commitments to extend credit 397,576 280,306 106,961 69,238 854,081 Total$ 1,049,358 $ 448,629 $ 133,652 $ 160,744 $ 1,792,383 As of December 31, 2020 More than 1 3 years or year but less more but less 5 years 1 year or less than 3 years than 5 years or more Total (Dollars in thousands) Non-cancelable future operating leases $ 1,808 $ 3,294 $ 2,845$ 4,985 $ 12,932 Time deposits 589,908 201,599 18,724 - 810,231 Subordinated debt - - - 25,000 25,000 Advances from FHLB 20,000 - 23,000 - 43,000 Purchase premium on advances from FHLB 145 - - - 145 Subordinated debt - trust preferred securities - - - 5,000 5,000 FNBB revolving line of credit 5,000 - - - 5,000 FNBB note payable 1,000 2,000 2,000 1,000 6,000 Securities sold under agreements to repurchase 21,825 - - - 21,825 Standby and commercial letters of credit 9,069 14,815 20 - 23,904 Commitments to extend credit 423,206 133,121 17,856 46,928 621,111 Total$ 1,071,961 $ 354,829 $ 64,445 $ 82,913 $ 1,574,148 Off-Balance Sheet Items In the normal course of business, we enter into various transactions which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized in the tables above. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. The credit risk to us in issuing letters of credit is essentially the same as that involved in extending loan facilities to our customers. 58
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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management's credit evaluation of the customer.
Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest
rate volatility. Our asset liability and funds management policy provides
management with the guidelines for effective funds management, and we have
established a measurement system for monitoring our net interest rate
sensitivity position. We manage our sensitivity position within our established
guidelines.
Fluctuations in interest rates will ultimately impact both the level of income
and expense recorded on most of our assets and liabilities, and the market value
of all interest-earning assets and interest-bearing liabilities, other than
those which have a short term to maturity. Interest rate risk is the potential
of economic losses due to future interest rate changes. These economic losses
can be reflected as a loss of future net interest income and/or a loss of
current fair market values. The objective is to measure the effect on net
interest income and to adjust the balance sheet to minimize the inherent risk
while at the same time maximizing income.
We manage our exposure to interest rates by structuring our balance sheet in the
ordinary course of business. We do not enter into instruments such as leveraged
derivatives, financial options, financial futures contracts or forward delivery
contracts for the purpose of reducing interest rate risk. Based upon the nature
of our operations, we are not subject to foreign exchange or commodity price
risk.
Our exposure to interest rate risk is reviewed by the asset-liability committee
of b1BANK, in accordance with policies approved by our board of directors. In
analyzing the appropriate level of interest rate risk, the committee considers
the impact on earnings and capital of the current outlook on interest rates,
potential changes in interest rates, regional economies, liquidity, business
strategies and other factors. The committee meets regularly to review, among
other things, the sensitivity of assets and liabilities to interest rate
changes, the book and market values of assets and liabilities, unrealized gains
and losses, purchase and sale activities, commitments to originate loans and the
maturities of investments and borrowings. Additionally, the committee reviews
liquidity, cash flow flexibility, maturities of deposits and consumer and
commercial deposit activity. Management employs methodologies to manage interest
rate risk which include an analysis of relationships between interest-earning
assets and interest-bearing liabilities, and an interest rate shock simulation
model.
We use interest rate risk simulation models and shock analysis to test the
interest rate sensitivity of net interest income and fair value of equity, and
the impact of changes in interest rates on other financial metrics. Contractual
maturities and re-pricing opportunities of loans are incorporated in the model
as are prepayment assumptions, maturity data and call options within the
investment portfolio. Average lives of non-maturity deposit accounts are based
on standard regulatory decay assumptions and are also incorporated into the
model. Model assumptions are revised and updated as more accurate information
becomes available. The assumptions used are inherently uncertain and, as a
result, the model cannot precisely measure future net interest income or
precisely predict the impact of fluctuations in market interest rates on net
interest income. Actual results will differ from the model's simulated results
due to timing, magnitude and frequency of interest rate changes, as well as
changes in market conditions and the application and timing of various
management strategies.
On at least a quarterly basis, we run two simulation models including a static
balance sheet and dynamic growth balance sheet. These models test the impact on
net interest income and fair value of equity from changes in market interest
rates under various scenarios. Under the static and dynamic growth models, rates
are shocked instantaneously based upon parallel and non-parallel yield curve
shifts. Parallel shock scenarios assume instantaneous parallel movements in the
yield curve compared to a flat yield curve scenario. Non-parallel simulation
involves analysis of interest income and expense under various changes in the
shape of the yield curve. Internal policy regarding interest rate risk
simulations currently specifies that for instantaneous parallel shifts of the
yield curve, estimated net interest income at risk for the subsequent one-year
period should not decline by more than 5% for a 100 basis point shift, 10% for a
200 basis point shift, and 12.5% for a 300 basis point shift. Internal policy
regarding interest rate simulations currently specifies that for instantaneous
parallel shifts of the yield curve, estimated fair value of equity at risk for
the subsequent one-year period should not decline by more than 10% for a 100
basis point shift, 15% for a 200 basis point shift, and 25% for a 300 basis
point shift.
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The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated:
As of September 30, 2021 As of December 31, 2020
Change
in
Interest
Rates Percent Change Percent Change Percent Change Percent Change
(Basis in Net Interest in Fair Value of in Net Interest in Fair Value of
Points) Income Equity Income Equity
+300 (3.50 %) (7.33 %) 2.50 % 3.76 %
+200 (1.50 %) (5.84 %) 2.80 % 2.51 %
+100 (0.10 %) (2.54 %) 2.60 % 2.30 %
Base 0.00 % 0.00 % 0.00 % 0.00 %
-100 (2.40 %) 9.86 % (1.30 %) 10.63 %
The results are primarily due to the balance sheet mix and behavior of demand,
money market and savings deposits during such rate fluctuations. We have found
that, historically, interest rates on these deposits change more slowly than
changes in the discount and federal funds rates. This assumption is incorporated
into the simulation model and is generally not fully reflected in a gap
analysis. The assumptions incorporated into the model are inherently uncertain
and, as a result, the model cannot precisely measure future net interest income
or precisely predict the impact of fluctuations in market interest rates on net
interest income. Actual results will differ from the model's simulated results
due to timing, magnitude and frequency of interest rate changes, as well as
changes in market conditions and the application and timing of various
strategies.
Impact of Inflation
Our consolidated financial statements and related notes included elsewhere in
this statement have been prepared in accordance with GAAP. These require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative value of money over time
due to inflation or recession.
Unlike many industrial companies, substantially all of our assets and
liabilities are monetary in nature. As a result, interest rates have a more
significant impact on our performance than the effects of general levels of
inflation. Interest rates may not necessarily move in the same direction or in
the same magnitude as the prices of goods and services. However, other operating
expenses do reflect general levels of inflation.
Non-GAAP Financial Measures
Our accounting and reporting policies conform to GAAP, and the prevailing
practices in the banking industry. However, we also evaluate our performance
based on certain additional non-GAAP financial measures. We classify a financial
measure as being a non-GAAP financial measure if that financial measure excludes
or includes amounts, or is subject to adjustments that have the effect of
excluding or including amounts, that are included or excluded, as the case may
be, in the most directly comparable measure calculated and presented in
accordance with GAAP as in effect from time to time in the United States in our
statements of income, balance sheets or statements of cash flows. Non-GAAP
financial measures do not include operating and other statistical measures or
ratios or statistical measures calculated using exclusively either financial
measures calculated in accordance with GAAP, operating measures or other
measures that are not non-GAAP financial measures or both.
This discussion and analysis section includes certain non-GAAP financial
measures (e.g., referenced as "core" or "tangible") intended to supplement, not
substitute for, comparable GAAP measures. These measures typically adjust income
available to common shareholders for certain significant activities or
transactions that in management's opinion can distort period-to-period
comparisons of Business First's performance. Transactions that are typically
excluded from non-GAAP measures include realized and unrealized gains/losses on
former bank premises and equipment, gains / losses on sales of securities, and
acquisition-related expenses (including, but not limited to, legal costs, system
conversion costs, severance and retention payments, etc.). The measures also
typically adjust goodwill and certain intangible assets from book value and
shareholders' equity.
Management believes presentations of these non-GAAP financial measures provide
useful supplemental information that is essential to a proper understanding of
the operating results of the Company's core business. These non-GAAP disclosures
are not necessarily comparable to non-GAAP measures that may be presented by
other companies. You should understand how such other banking organizations
calculate their financial metrics or with names similar to the non-GAAP
financial measures we have discussed in this statement when comparing such
non-GAAP financial measures.
Core Net Income. Core net income, which excludes certain income and expenses,
for the three months ended September 30, 2021 , was $10.9 million , or $0.53 per
diluted share, compared to core net income of $11.0 million , or $0.53 per
diluted share, for the three months ended September 30, 2020 . Notable noncore
events impacting earnings for the three months ended September 30, 2021 ,
included the incurrence of $211,000 in occupancy and bank premises expenses
attributable to hurricane damage (primarily related to Ida 2021), $145,000 in
acquisition-related expenses and $392,000 in losses on the sales of former
premises and equipment within other income, compared to the incurrence of $1.2
million in acquisition-related expenses and $635,000 in losses on the sales of
former premises and equipment within other income during the three months ended
September 30, 2020 . For the nine months ended September 30, 2021 , core net
income was $42.2 million , or $2.05 per diluted share, compared to core net
income of $23.3 million , or $1.34 per diluted share, for the nine months ended
September 30, 2020 . Notable noncore events impacting earnings for the nine
months ended September 30, 2021 , included the incurrence of $1.5 million in
occupancy and bank premises expenses attributable to hurricane damage, $249,000
in acquisition-related expenses and $932,000 in losses on the sales of former
premises and equipment within other income, compared to the incurrence of $9.0
million in acquisition-related expenses and $509,000 in losses on the sales of
former bank premises and equipment within other income, during the nine months
ended September 30, 2020 .
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For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars in thousands, except per share data) (Unaudited)
Interest Income:
Interest income $ 41,534 $ 42,461 $ 128,147 $ 105,368
Core interest income 41,534 42,461 128,147 105,368
Interest Expense:
Interest expense 4,240 5,529 12,607 17,306
Core interest expense 4,240 5,529 12,607 17,306
Provision for Loan Losses: (b)
Provision for loan losses 1,147 2,491 6,747 9,301
Core provision expense 1,147 2,491 6,747 9,301
Other Income:
Other income 6,348 4,217 28,807 12,017
(Gains) 1osses on former bank premises
and equipment 392 635 932 509
(Gains) 1osses on sale of securities 11 (95 ) 66 (120 )
Core other income 6,751 4,757 29,805 12,406
Other Expense:
Other expense 29,567 26,951 87,646 71,391
Acquisition-related expenses (2) (145 ) (1,206 ) (249 ) (8,991 )
Stock option exercises - excess taxes
(founder's grants) - - - (71 )
Occupancy and bank premises - hurricane
repair (211 ) - (1,499 ) -
Core other expense 29,211 25,745 85,898 62,329
Pre-Tax Income: (a)
Pre-tax income 12,928 11,707 49,954 19,387
(Gains) 1osses on former bank premises
and equipment 392 635 932 509
(Gains) 1osses on sale of securities 11 (95 ) 66 (120 )
Acquisition-related expenses (2) 145 1,206 249 8,991
Stock option exercises - excess taxes
(founder's grants) - - - 71
Occupancy and bank premises - hurricane
repair 211 - 1,499 -
Core pre-tax income 13,687 13,453 52,700 28,838
Provision for Income Taxes: (1)
Provision for income taxes 2,617 2,098 9,886 3,227
Tax on (gains) losses on former bank
premises and equipment 82 133 195 107
Tax on (gains) losses on sale of
securities 2 (20 ) 14 (25 )
Tax on acquisition-related expenses (2) 24 241 46 1,607
Tax on stock option exercises (founder's
grants) - - - 601
Tax on occupancy and bank premises -
hurricane repair 44 - 314 -
Core provision for income taxes 2,769 2,452 10,455 5,517
Net Income:
Net income 10,311 9,609 40,068 16,160
(Gains) losses on former bank premises
and equipment , net of tax 310 502 737 402
(Gains) losses on sale of securities,
net of tax 9 (75 ) 52 (95 )
Acquisition-related expenses (2), net of
tax 121 965 203 7,384
Stock option exercises, net of tax
(founder's grants) - - - (530 )
Occupancy and bank premises - hurricane
repair, net of tax 167 - 1,185 -
Core net income $ 10,918 $ 11,001 $ 42,245 $ 23,321
Diluted Earnings Per Share:
Diluted earnings per share $ 0.50 $ 0.46 $ 1.94 $ 0.93
(Gains) losses on former bank premises
and equipment , net of tax 0.01 0.02 0.04 0.02
(Gains) losses on sale of securities,
net of tax - - - (0.01 )
Acquisition-related expenses (2), net of
tax 0.01 0.05 0.01 0.43
Stock option exercises (founder's
grants) - - - (0.03 )
Occupancy and bank premises - hurricane
repair, net of tax 0.01 - 0.06 -
Core diluted earnings per share $ 0.53 $ 0.53 $ 2.05 $ 1.34 (1) Tax rates, exclusive of certain nondeductible acquisition-related expenses
and goodwill, utilized were 21% for both 2021 and 2020. These rates
approximated the marginal tax rates for the applicable periods.
(2) Includes merger and conversion-related expenses and salary and employee
benefits.
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Tangible Book Value Per Common Share. Tangible book value per common share is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as shareholders' equity less goodwill and core deposit and customer intangible assets, net of accumulated amortization, and (2) tangible book value per common share as tangible common equity divided by shares of common stock outstanding. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share.
The following table reconciles, as of the dates set forth below, total shareholders' equity to tangible common equity and presents tangible book value per common share compared to book value per common share:
As of As of
September 30, December 31,
2021 2020
(Dollars in thousands, except per
share data) (Unaudited)
Tangible Common Equity
Total shareholders' equity $ 430,221 $ 409,963
Adjustments:
Goodwill (60,062 ) (53,862 )
Core deposit and customer intangibles (12,835 ) (9,734 )
Total tangible common equity $ 357,324 $ 346,367
Common shares outstanding(1) 20,383,504 20,621,437
Book value per common share(1) $ 21.11 $ 19.88
Tangible book value per common share(1) 17.53 16.80
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(1) Excludes the dilutive effect, if any, of 121,838 and 73,846 shares of common
stock issuable upon exercise of outstanding stock options and restricted
stock awards as of
Tangible Common Equity to Tangible Assets. Tangible common equity to tangible
assets is a non-GAAP measure generally used by financial analysts and investment
bankers to evaluate financial institutions. We calculate tangible common equity,
as described above, and tangible assets as total assets less goodwill, core
deposit and customer intangible assets, net of accumulated amortization. The
most directly comparable GAAP financial measure for tangible common equity to
tangible assets is total common shareholders' equity to total assets.
The following table reconciles, as of the dates set forth below, total
shareholders' equity to tangible common equity and total assets to tangible
assets:
As of As of
September 30, December 31,
2021 2020
(Dollars in thousands, except per
share data) (Unaudited)
Tangible Common Equity
Total shareholders' equity $ 430,221 $ 409,963
Adjustments:
Goodwill (60,062 ) (53,862 )
Core deposit and customer intangibles (12,835 ) (9,734 )
Total tangible common equity $ 357,324 $ 346,367
Tangible Assets
Total assets $ 4,405,217 $ 4,160,360
Adjustments:
Goodwill (60,062 ) (53,862 )
Core deposit and customer intangibles (12,835 ) (9,734 )
Total tangible assets $ 4,332,320 $ 4,096,764
Common Equity to Total Assets 9.8 % 9.9 %
Tangible Common Equity to Tangible Assets 8.3 8.5
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