PART I – FINANCIAL INFORMATION

 

Item  1.         Financial Statements

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

 

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

 

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(Dollars in thousands, except per share data)

 

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(Dollars in thousands, except per share data)

 

 

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

 

 

BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

 

(CONTINUED)

 

 

 

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

  

Note 1 – Basis of Presentation –

 

The unaudited consolidated financial statements include the accounts of Business First Bancshares, Inc. (the “Company”) and its two direct, wholly-owned subsidiaries, b1BANK (the “Bank”), and Coastal Commerce Statutory Trust I; and the Bank’s wholly-owned subsidiaries, Business First Insurance, LLC and Smith Shellnut Wilson, LLC. The Bank operates out of full-service banking centers and loan production offices in markets across Louisiana, the Dallas/Fort Worth metroplex and Houston, Texas. As a state bank, it is subject to regulation by the Office of Financial Institutions (“OFI”), State of Louisiana, and the Federal Deposit Insurance Corporation (“FDIC”) and undergoes periodic examinations by these agencies. The Company is also regulated by the Federal Reserve and is subject to periodic examinations.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial results for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.

 

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) have been omitted or abbreviated.  These interim financial statements should be read in conjunction with the audited consolidated financial statements and footnote disclosures for the Company’s previously filed Form 10-K for the year ended December 31, 2022.

 

Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Critical accounting estimates that are particularly susceptible to significant change for the Company include the determination of the acquired loans and allowance for credit losses and purchase accounting adjustments (other than loans). Other estimates include goodwill, fair value of financial instruments, investment securities and the assessment of income taxes. Management does not anticipate any material changes to estimates in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, economic conditions in the Company’s markets, and changes in applicable banking regulations. Actual results may ultimately differ from estimates.

 

Accounting Standards Adopted in Current Period

 

Effective January 1, 2023, the Company adopted ASU 2016-13, Financial Instrument – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments related to the impairment of financial instruments. This guidance, commonly referred to as Current Expected Credit Loss (“CECL”), changes impairment recognition to a model that is based on expected losses rather than incurred losses. The allowance for credit losses is established for current expected credit losses on the Company’s loan portfolio, including unfunded credit commitments. Prior to January 1, 2023, the allowance for credit losses was established based on an incurred loss model. Upon the adoption of CECL, certain loan classification and segmentation categories were changed to align with the requirements of the standard and more effectively model the CECL estimate. The updated CECL segmentation is reflected in the disclosures beginning January 1, 2023, and prior period classifications have been adjusted to reflect CECL segmentations. Results from periods prior to January 1, 2023, are presented using the previously applicable GAAP.

 

Upon adoption of the guidance on  January 1, 2023, the Company recognized an $827,000 reduction to retained earnings, after recording the related deferred tax asset adjustment at our effective tax rate. The Company and b1BANK are subject to various regulatory capital requirements.  Although the federal banking regulatory agencies have provided relief for an initial capital decrease at adoption of the CECL standard, the Company does not intend to opt into the relief as the impact of adoption was not significant to the Company’s regulatory capital.

 

The adoption of this guidance did not have a material impact on the Company’s available-for-sale securities as most of this portfolio consists of U.S. treasury and agency securities as well as highly rated residential agency mortgage-backed, corporate, and municipal securities. However, any subsequent estimated credit losses are required to be recognized through an allowance for credit losses associated with the applicable securities.

 

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The Company also adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023.  The standard modifies the criteria for identification of troubled debt restructurings as well as enhancing disclosure requirements. Additionally, the guidance requires vintage table disclosures and presentation of gross write-offs during the current period by year of origination for financing receivables within scope of the standard.  The implementation of the standard did not have a material impact of the identification of troubled debt restructurings and the vintage and charge-off disclosures have been presented in the footnotes below.

 

Allowance for Credit Losses

 

The Company calculates its allowance for credit losses utilizing a CECL methodology. CECL requires management’s estimate of credit losses over the full remaining expected life of loans and other financial instruments and for the Company, CECL applies to loans, unfunded commitments, and available for sale securities. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs, inclusive of recoveries. Management evaluates the appropriateness of the allowance for credit losses on a quarterly basis. The allowance considers expected losses for the remaining lives of the applicable assets. Forecasted economic scenarios are considered over a reasonable and supportable forecast period, currently one year, which incorporates Company and peer historical losses. After the forecast period, the Company reverts to long-term historical loss experience on a straight-line basis over a one-year period, adjusted for the composition of the current loan portfolio, to estimate losses over the remaining lives of the portfolio. The economic scenarios are updated at least quarterly and are designed to provide estimates that take into consideration the customer base of our loan portfolio. Loss estimates also consider factors affecting credit losses not reflected in the model, including trends in the portfolio, credit management and underwriting practices and economic conditions affecting our operating footprint.

 

The allowance recorded for loan losses utilizes forward-looking expected loss models to consider a variety of factors affecting lifetime credit losses. These factors include loan and borrower characteristics, such as internal risk ratings, delinquency status, collateral type and available valuation information, and the remaining term of the loan, adjusted for expected prepayments. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses. For each loan portfolio, model estimates are adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions that would affect the accuracy of the model. The results of the analysis are evaluated quarterly to confirm the estimates are appropriate for each loan portfolio. Expected loan loss estimates also include consideration of expected cash recoveries on loans previously charged-off, or expected recoveries on collateral dependent loans where recovery is expected through sale of the collateral. The allowance recorded for individually evaluated loans is based on an analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or when repayment is expected through the sale of collateral, the fair value of the collateral, less selling costs, for collateral-dependent loans.

 

The Company has elected to exclude accrued interest receivable from the amortized cost basis on its loan portfolio. The Company has also elected to not measure an allowance for credit losses on accrued interest for loans held-for-investment based on its policy to write off uncollectible interest in a timely manner, which occurs when a loan is placed on nonaccrual status. Generally, such elections are made no later than 90 days after a loan has become past due, although certain loans accrue interest after 90 days based on management’s evaluation of the borrower’s ability to continue making contractual payments. Such write-offs are recognized as a reduction of interest income. Accrued interest receivable for the loan portfolio is included within accrued interest receivable in the consolidated balance sheets.

 

Purchased Loans

 

Beginning January 1, 2023, when a loan portfolio is purchased, an allowance is established for those loans considered purchased with more-than-insignificant credit deterioration (“PCD”), and those not considered purchased with more-than-insignificant credit deterioration (“non-PCD”). The allowance established utilizes the same risk factors discussed above for our non-acquired allowance. The allowance established for non-PCD loans is recognized through provision expense upon acquisition, whereas the allowance established for loans considered PCD at acquisition is offset by an increase in the basis of the acquired loans. Any subsequent increases and decreases in the allowance related to acquired loans are recognized through provision expense, with future charge-offs recorded to the allowance.

 

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Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

 

The Company also assesses the credit risk associated with off-balance sheet loan commitments and letters of credit. The liability for off-balance sheet credit exposure related to loan commitments and other credit guarantees is included in other liabilities. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments.

 

The adoption of this guidance did not have a material impact on the Company’s available-for-sale securities as most of this portfolio consists of U.S. treasury and agency securities as well as highly rated residential agency mortgage-backed, corporate and municipal securities. However, any subsequent estimated credit losses are required to be recognized through an allowance for credit losses associated with the applicable securities.

 

Allowance for Credit Losses on Securities

 

In conjunction with the adoption of CECL, the Company also evaluates its securities portfolio for credit losses, as the CECL update modifies the debt security credit impairment model to recognize an allowance for estimated credit losses. Similar to the election on the loan portfolio, the Company has elected to exclude accrued interest receivable from the amortized cost basis of its investment portfolio analysis. Based on our assessments, expected credit losses were negligible and therefore, no allowance for credit losses was recorded.

 

Beginning January 1, 2023, the Company evaluates its available for sale securities portfolio on a quarterly basis for potential credit-related impairment. The Company assesses potential credit impairment by comparing the fair value of a debt security to its amortized cost basis. If the fair value of a debt security is greater than the amortized cost basis, no impairment is recognized.  If the fair value is less than the amortized costs basis, the Company reviews the factors to determine if the impairment is credit-related or noncredit-related.  For debt securities the Company intends to sell or is more likely than not required to sell, before the recovery of their amortized cost basis, the difference between fair value and amortized cost is impaired and is recognized through earnings. For debt securities the Company does not intend to sell or is not more likely than not required to sell, prior to expected recovery of amortized cost basis, the credit portion of the impairment is recognized through earnings, with a corresponding entry to an allowance for credit losses, and the noncredit portion is recognized through accumulated other comprehensive income.

 

Accounting Standards Not Yet Adopted

 

None

  

Note 2 – Reclassifications –

 

Certain reclassifications may have been made to conform to the classifications adopted for reporting in 2023. These reclassifications have no material effect on previously reported shareholders’ equity or net income.

 

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Note 3 – Mergers and Acquisitions –

 

Texas Citizens Bancorp, Inc.

 

On March 1, 2022, the Company consummated the merger of Texas Citizens Bancorp, Inc. (“TCBI”), headquartered in Pasadena, Texas, with and into the Company, pursuant to the terms of that certain Agreement and Plan of Reorganization (the “Reorganization Agreement”), dated as of October 20, 2021, by and between the Company and TCBI (the “Merger”). Also on March 1, 2022, TCBI’s wholly-owned banking subsidiary, Texas Citizens Bank, National Association, was merged with and into b1BANK. Pursuant to the terms of the Reorganization Agreement, upon consummation of the Merger, the Company issued 2,069,532 shares of its common stock to the former shareholders of TCBI. At February 28, 2022, TCBI reported $534.2 million in total assets, $349.5 million in loans and $477.2 million in deposits.

 

The following table reflects the consideration paid for TCBI’s net assets and the identifiable assets purchased and liabilities assumed at their fair values as of March 1, 2022.

 

Cost and Allocation of Purchase Price for Texas Citizens Bancorp, Inc. (TCBI):
(Dollars in thousands, except per share data)
Purchase Price:
Shares Issued to TCBI's Shareholders on March 1, 2022			2,069,532
Closing Stock Price on February 28, 2022		$	26.19
Total Stock Issued		$	54,201
Other Consideration, Including Equity Awards			842
Total Purchase Price		$	55,043
Net Assets Acquired:
Cash and Cash Equivalents		$	163,460
Securities Available for Sale			370
Loans and Leases Receivable			338,027
Premises and Equipment, Net			2,776
Cash Value of Life Insurance			12,146
Core Deposit Intangible			3,875
Other Assets			14,731
Total Assets			535,385
Deposits			477,277
Borrowings			30,708
Other Liabilities			1,006
Total Liabilities			508,991
Net Assets Acquired			26,394
Goodwill Resulting from Merger		$	28,649

 

The Company has recorded approximately $173,000 and $5.2 million of acquisition-related costs within merger and conversion-related expenses and salaries and benefits for the nine months ended September 30, 2023, and year ended December 31, 2022.

 

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The following is a description of the methods used to determine the fair values of significant assets acquired and liabilities assumed presented above.

 

Cash and Cash Equivalents: The carrying amount of these assets was a reasonable estimate of fair value based on the short-term nature of these assets.

 

Securities Available for Sale: Fair values for securities were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that were not in an active market or other inputs that were observable in the market. In the absence of observable inputs, fair value was estimated based on pricing models/estimations.

 

Loans and Leases Receivable: Fair values for loans were based on a discounted cash flow methodology that considered factors including, but not limited to, loan type, classification status, remaining term, prepayment speed, and current discount rates. The discount rates used for loans were based on current market rates for new originations of comparable loans and included adjustments for any liquidity concerns. The discount rate did not include an explicit factor for credit losses, as that was included within the estimated cash flows.

 

Core Deposit Intangible (“CDI”): The fair value for core deposit intangible assets was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, net maintenance cost of the deposit base, including interest cost, and alternative cost of funds. The CDI is being amortized over 10 years based upon the period over which estimated economic benefits are estimated to be received.

 

Deposits: The fair values used for the demand and savings deposits, by definition, equal the amount payable on demand at the acquisition date. Fair values for time deposits were estimated using a discounted cash flow analysis, that applied interest rates currently being offered to the contractual interest rates on such time deposits.

 

Borrowings: Fair values for borrowings were based on estimated market rates over the remaining terms of the subordinated debt issuances.

 

Pro forma tables for TCBI were impractical to include due to the cost versus benefit of including such disclosures.

 

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Note 4 – Earnings per Common Share –

 

Basic earnings per share (“EPS”) represents income available to common shareholders divided by the weighted average number of common shares outstanding; no dilution for any potentially convertible shares is included in the calculation. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The potential common shares that may be issued by the Company relate to outstanding stock options and unvested restricted stock awards (“RSAs”), excluding any that were antidilutive. In addition, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of EPS pursuant to the two-class method.

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2023				2022				2023				2022
		(Dollars in thousands, except per share data)
Numerator:
Net Income		$	20,455			$	13,800			$	55,219			$	36,288
Less: Preferred Stock Dividends			1,351				-				4,051				-
Net Income Available to Common Shares		$	19,104			$	13,800			$	51,168			$	36,288
Denominator:
Weighted Average Common Shares Outstanding			25,111,548				22,468,939				25,064,856				21,990,273
Dilutive Effect of Stock Options and RSAs			177,112				181,701				217,052				173,679
Weighted Average Dilutive Common Shares			25,288,660				22,650,640				25,281,908				22,163,952
Basic Earnings Per Common Share From Net Income Available to Common Shares		$	0.76			$	0.61			$	2.04			$	1.65
Diluted Earnings Per Common Share From Net Income Available to Common Shares		$	0.76			$	0.61			$	2.02			$	1.64

 

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Note 5 – Securities –

 

The amortized cost and fair values of securities available for sale as of September 30, 2023, and December 31, 2022 are summarized as follows:

 

		September 30, 2023
		(Dollars in thousands)
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury Securities		$	32,704			$	-			$	2,531			$	30,173
U.S. Government Agencies			50,237				-				2,762				47,475
Corporate Securities			49,405				-				6,831				42,574
Mortgage-Backed Securities			497,388				-				65,676				431,712
Municipal Securities			338,764				1				40,995				297,770
Total Securities Available for Sale		$	968,498			$	1			$	118,795			$	849,704

 

		December 31, 2022
		(Dollars in thousands)
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury Securities		$	32,783			$	-			$	2,668			$	30,115
U.S. Government Agencies			50,288				-				2,916				47,372
Corporate Securities			48,475				25				2,496				46,004
Mortgage-Backed Securities			506,671				267				55,213				451,725
Municipal Securities			347,382				11				31,858				315,535
Total Securities Available for Sale		$	985,599			$	303			$	95,151			$	890,751

 

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The following tables present a summary of securities with gross unrealized losses and fair values at September 30, 2023 and December 31, 2022, aggregated by investment category and length of time in a continued unrealized loss position.

 

		September 30, 2023
		Less Than 12 Months								12 Months or Greater								Total
		(Dollars in thousands)
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. Treasury Securities		$	-			$	-			$	30,173			$	2,531			$	30,173			$	2,531
U.S. Government Agencies			-				-				47,475				2,762				47,475				2,762
Corporate Securities			18,896				3,012				23,678				3,819				42,574				6,831
Mortgage-Backed Securities			33,496				2,461				388,178				63,215				421,674				65,676
Municipal Securities			49,404				4,980				246,136				36,015				295,540				40,995
Total Securities Available for Sale		$	101,796			$	10,453			$	735,640			$	108,342			$	837,436			$	118,795

 

		December 31, 2022
		Less Than 12 Months								12 Months or Greater								Total
		(Dollars in thousands)
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. Treasury Securities		$	9,702			$	374			$	20,413			$	2,294			$	30,115			$	2,668
U.S. Government Agencies			24,405				595				22,967				2,321				47,372				2,916
Corporate Securities			19,564				1,359				6,385				1,137				25,949				2,496
Mortgage-Backed Securities			115,692				7,473				324,043				47,740				439,735				55,213
Municipal Securities			143,035				10,206				131,944				21,652				274,979				31,858
Total Securities Available for Sale		$	312,398			$	20,007			$	505,752			$	75,144			$	818,150			$	95,151

 

As of September 30, 2023, no allowance for credit losses was recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to credit quality. This determination is based on the Company’s analysis of the underlying risk characteristics including credit ratings, historical loss experience, and other qualitative factors.  Further, the securities continue to make principal and interest payments under their contractual terms and management does not have the intent to sell any of the securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of amortized cost basis.  Therefore, the Company has determined the unrealized losses are due to changes in market interest rates compared to rates when the securities were acquired.

 

For the period ended December 31, 2022, management evaluated securities for other than temporary impairment. Consideration was given to the extent and length of time the fair value had been below cost, the reasons for the decline in value, and the Company’s intent to sell a security or whether it was more likely than not that the Company would be required to sell the security before the recovery of its amortized cost. The Company utilized a process to identify securities that could potentially have a credit impairment that was other than temporary. The process involved evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. The Company determined no other than temporary impairment existed at December 31, 2022.

 

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The amortized cost and fair values of securities available for sale as of September 30, 2023, by contractual maturity are shown below. Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties.

 

		Amortized				Fair
		Cost				Value
		(Dollars in thousands)
Less Than One Year		$	30,310			$	29,775
One to Five Years			238,059				219,241
Over Five to Ten Years			354,881				308,571
Over Ten Years			345,248				292,117
Total Securities Available for Sale		$	968,498			$	849,704

 

At September 30, 2023, the Company had pledged securities with a fair value of $368.1 million against our public deposit and repurchase agreements, and $375.6 million against our Bank Term Funding Program facility.

 

At September 30, 2023 and December 31, 2022, accrued interest receivable on securities was $3.8 million and $4.4 million, respectively, and included within accrued interest receivable on the consolidated balance sheets.

  

Note 6 – Loans and the Allowance for Loan Losses –

 

Loans receivable at September 30, 2023 and December 31, 2022 are summarized as follows:

 

		September 30,				December 31,
		2023				2022
		(Dollars in thousands)
Real Estate Loans:
Commercial		$	2,128,855			$	2,020,406
Construction			708,835				722,074
Residential			686,921				656,378
Total Real Estate Loans			3,524,611				3,398,858
Commercial			1,332,384				1,153,873
Consumer and Other			63,278				53,445
Total Loans Held for Investment			4,920,273				4,606,176
Less:
Allowance for Loan Losses			(41,129	)			(38,178	)
Net Loans		$	4,879,144			$	4,567,998

 

The performing 1-4 family residential, multi-family residential, and commercial real estate, are pledged, under a blanket lien, as collateral securing advances from the FHLB at September 30, 2023 and December 31, 2022. Commercial and agricultural loans are pledged against the Federal Reserve Banks’ (“FRB”) discount window as of September 30, 2023.

 

Net deferred loan origination fees were $12.8 million and $13.1 million at September 30, 2023 and December 31, 2022, respectively, and are netted in their respective loan categories above. In addition to loans issued in the normal course of business, the Company considers overdrafts on customer deposit accounts to be loans and reclassifies overdrafts as loans in its consolidated balance sheets. At September 30, 2023 and December 31, 2022, overdrafts of $1.2 million and $2.0 million, respectively, have been reclassified to loans.

 

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The Bank is the lead lender on participations sold, without recourse, to other financial institutions which amounts are not included in the consolidated balance sheets. The unpaid principal balances of mortgages and other loans serviced for others were approximately $727.4 million and $683.3 million at September 30, 2023 and December 31, 2022, respectively. The Company had servicing rights of $1.3 million and $1.7 million recorded as of September 30, 2023, and December 31, 2022, respectively, and is recorded within other assets.

 

The Bank grants loans and extensions of credit to individuals and a variety of businesses and corporations located in its general market areas throughout Louisiana and Texas. Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for credit losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.

 

Portfolio Segments and Risk Factors

 

The loan portfolio is disaggregated into portfolio segments and then further disaggregated into classes for certain disclosures. GAAP defines a portfolio segment as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally a disaggregation of a portfolio segment. The Company's loan portfolio segments are Real Estate, Commercial, and Consumer and Other. The classes and risk characteristics of each segment are discussed in more detail below. The segmentation and disaggregation of the portfolio is part of the ongoing credit monitoring process.

 

Real Estate Portfolio Segment

 

Real Estate: Commercial loans are extensions of credit secured by owner-occupied and non-owner-occupied collateral. Repayment is generally dependent on the successful operations of the property. General economic conditions  may impact the performance of these types of loans, including fluctuations in the value of real estate, vacancy rates, and unemployment trends. Real estate commercial loans also include farmland loans that can be, or are, used for agricultural purposes. These loans are usually repaid through permanent financing, cash flow from the borrower’s ongoing operations, development of the property, or sale of the property.

 

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

 

Real Estate: Residential loans include first and second lien 1-4 family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences. The Company is exposed to risk based on fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness, or other personal hardship. Real estate residential loans also include multi-family residential loans originated to provide permanent financing for multi-family residential income producing properties.  Repayment of these loans primarily relies on successful rental and management of the property.

 

Commercial Portfolio Segment

 

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

 

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Consumer and Other Portfolio Segment

 

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

 

The following table sets forth, as of September 30, 2023, the balance of the allowance for credit losses by loan portfolio segment. The allowance for credit losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

 

Allowance for Credit Losses and Recorded Investment in Loans Receivable

 

		September 30, 2023
		(Dollars in thousands)
		Real Estate:				Real Estate:				Real Estate:								Consumer
		Commercial				Construction				Residential				Commercial				and Other				Total
Allowance for Loan Losses:
Beginning Balance		$	14,702			$	5,768			$	5,354			$	11,721			$	633			$	38,178
Adoption of ASU 2016-13			4,823				933				(365	)			(2,483	)			(248	)			2,660
Beginning Balance After Adoption			19,525				6,701				4,989				9,238				385				40,838
Charge-offs			(1,827	)			(1	)			(42	)			(2,407	)			(1,113	)			(5,390	)
Recoveries			21				1				9				655				206				892
Provision			770				1,474				441				1,170				934				4,789
Ending Balance		$	18,489			$	8,175			$	5,397			$	8,656			$	412			$	41,129
Reserve for Unfunded Loan Commitments:
Beginning Balance		$	220			$	137			$	13			$	229			$	6			$	605
Adoption of ASU 2016-13			116				2,113				190				657				121				3,197
Beginning Balance After Adoption			336				2,250				203				886				127				3,802
Provision			7				(556	)			32				195				(103	)			(425	)
Ending Balance		$	343			$	1,694			$	235			$	1,081			$	24			$	3,377
Total Allowance for Credit Losses		$	18,832			$	9,869			$	5,632			$	9,737			$	436			$	44,506

 

Included within the above allowance are loans which management has individually evaluated to determine an allowance for credit losses. The following table summarizes, by segment, the loan balance and specific allowance allocation for those loans which have been individually evaluated.

 

		September 30, 2023								January 1, 2023
		Loan Balance				Specific Allocations				Loan Balance				Specific Allocations
		(Dollars in thousands)
Real Estate Loans:
Commercial		$	4,877			$	-			$	3,008			$	1,915
Construction			2,350				528				1,424				513
Residential			1,567				-				1,558				3
Total Real Estate Loans			8,794				528				5,990				2,431
Commercial			-				-				6,096				1,779
Consumer and Other			-				-				-				-
Total		$	8,794			$	528			$	12,086			$	4,210

 

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The following table sets forth, as of December 31, 2022 (prior to the adoption of ASU 2016-13), the balance of the allowance for credit losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually. The allowance for credit losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

 

		December 31, 2022
		(Dollars in thousands)
		Real Estate:				Real Estate:				Real Estate:								Consumer
		Commercial				Construction				Residential				Commercial				and Other				Total
Allowance for Loan Losses:
Beginning Balance		$	10,515			$	4,498			$	4,565			$	9,016			$	518			$	29,112
Charge-offs			(51	)			(16	)			(191	)			(2,139	)			(424	)			(2,821	)
Recoveries			50				25				20				739				167				1,001
Provision			4,188				1,261				960				4,105				372				10,886
Ending Balance		$	14,702			$	5,768			$	5,354			$	11,721			$	633			$	38,178
Ending Balance:
Individually Evaluated for Impairment		$	59			$	21			$	99			$	2,020			$	15			$	2,214
Collectively Evaluated for Impairment		$	14,643			$	5,747			$	5,255			$	9,701			$	618			$	35,964
Purchased Credit Impaired		$	-			$	-			$	-			$	-			$	-			$	-
Loans Receivable:
Ending Balance		$	2,020,406			$	722,074			$	656,378			$	1,153,873			$	53,445			$	4,606,176
Ending Balance:
Individually Evaluated for Impairment		$	3,053			$	992			$	4,028			$	6,442			$	192			$	14,707
Collectively Evaluated for Impairment		$	1,989,831			$	720,129			$	637,195			$	1,141,957			$	52,570			$	4,541,682
Purchased Credit Impaired		$	27,522			$	953			$	15,155			$	5,474			$	683			$	49,787

 

Credit Quality Indicators

 

We utilize a risk grading matrix to assign a risk grade to each of our commercial loans. Loans are graded on a scale of 10 to 80. Individual loan officers review updated financial information for all pass grade loans to reassess the risk grade, generally on at least an annual basis. When a loan has a risk grade of 60, it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” and subject to additional and more frequent monitoring by both the loan officer and senior credit and risk personnel. When a loan has a risk grade of 70 or higher, a special assets officer monitors the loan on an on-going basis.

 

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The following table sets forth the credit quality indicators, disaggregated by loan segment, as of September 30, 2023:

 

		September 30, 2023
						Criticized
		Pass				Special Mention				Substandard				Doubtful				Loss								Current Period Charge-
		(Risk Grade 10-45)				(Risk Grade 50)				(Risk Grade 60)				(Risk Grade 70)				(Risk Grade 80)				Total				offs
		(Dollars in thousands)
Real Estate: Commercial
Originated in 2023		$	165,134			$	-			$	86			$	-			$	-			$	165,220			$	-
Originated in 2022			733,458				1,699				-				-				-				735,157				-
Originated in 2021			423,682				6,150				71				-				-				429,903				357
Originated in 2020			154,433				3,573				10				-				-				158,016				-
Originated in 2019			148,044				9,774				382				937				-				159,137				1,447
Originated Prior to 2019			382,109				8,138				10,187				472				-				400,906				23
Revolving			80,333				-				183				-				-				80,516				-
Revolving Loans Converted to Term			-				-				-				-				-				-				-
Total Real Estate: Commercial		$	2,087,193			$	29,334			$	10,919			$	1,409			$	-			$	2,128,855			$	1,827
Real Estate: Construction
Originated in 2023		$	105,036			$	-			$	-			$	-			$	-			$	105,036			$	-
Originated in 2022			360,157				-				214				-				-				360,371				-
Originated in 2021			105,193				-				1,270				-				-				106,463				-
Originated in 2020			35,309				31				-				-				-				35,340				-
Originated in 2019			20,796				-				1,718				-				-				22,514				1
Originated Prior to 2019			21,460				421				351				345				-				22,577				-
Revolving			56,534				-				-				-				-				56,534				-
Revolving Loans Converted to Term			-				-				-				-				-				-				-
Total Real Estate: Construction		$	704,485			$	452			$	3,553			$	345			$	-			$	708,835			$	1
Real Estate: Residential
Originated in 2023		$	52,118			$	33			$	-			$	-			$	-			$	52,151			$	-
Originated in 2022			173,486				435				275				15				-				174,211				-
Originated in 2021			108,118				-				715				-				-				108,833				11
Originated in 2020			70,187				386				652				63				-				71,288				1
Originated in 2019			60,872				124				944				123				-				62,063				22
Originated Prior to 2019			103,755				1,248				5,811				325				-				111,139				7
Revolving			106,827				-				389				-				-				107,216				1
Revolving Loans Converted to Term			20				-				-				-				-				20				-
Total Real Estate: Residential		$	675,383			$	2,226			$	8,786			$	526			$	-			$	686,921			$	42
Commercial
Originated in 2023		$	232,137			$	278			$	9			$	-			$	-			$	232,424			$	-
Originated in 2022			282,674				272				897				-				-				283,843				97
Originated in 2021			148,156				5,599				913				16				-				154,684				15
Originated in 2020			57,448				4,064				1,004				44				-				62,560				27
Originated in 2019			34,623				544				707				250				-				36,124				1,453
Originated Prior to 2019			62,637				4,029				3,318				269				-				70,253				613
Revolving			489,138				2,953				377				28				-				492,496				202
Revolving Loans Converted to Term			-				-				-				-				-				-				-
Total Commercial		$	1,306,813			$	17,739			$	7,225			$	607			$	-			$	1,332,384			$	2,407
Consumer and Other
Originated in 2023		$	9,230			$	-			$	-			$	-			$	-			$	9,230			$	8
Originated in 2022			8,157				-				46				-				-				8,203				28
Originated in 2021			4,241				-				54				-				-				4,295				25
Originated in 2020			2,199				-				94				-				-				2,293				11
Originated in 2019			2,525				-				46				-				-				2,571				18
Originated Prior to 2019			2,968				-				101				-				-				3,069				58
Revolving			33,331				-				162				-				-				33,493				965
Revolving Loans Converted to Term			124				-				-				-				-				124				-
Total Consumer and Other		$	62,775			$	-			$	503			$	-			$	-			$	63,278			$	1,113
Total Loans		$	4,836,649			$	49,751			$	30,986			$	2,887			$	-			$	4,920,273			$	5,390

 

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The following table sets forth the credit quality indicators, disaggregated by loan segment, as of December 31, 2022 (prior to the adoption of ASU 2016-13):

 

		December 31, 2022
		Pass				Special Mention				Substandard				Doubtful
		(Risk Grade 10-45)				(Risk Grade 50)				(Risk Grade 60)				(Risk Grade 70)				Total
		(Dollars in thousands)
Real Estate Loans:
Commercial		$	1,972,611			$	35,054			$	10,478			$	2,263			$	2,020,406
Construction			716,071				3,496				2,157				350				722,074
Residential			643,763				3,780				7,925				910				656,378
Total Real Estate Loans			3,332,445				42,330				20,560				3,523				3,398,858
Commercial			1,137,555				6,646				6,960				2,712				1,153,873
Consumer and Other			53,041				-				404				-				53,445
Total		$	4,523,041			$	48,976			$	27,924			$	6,235			$	4,606,176

 

The above classifications follow regulatory guidelines and can generally be described as follows:

 

●

Pass loans are of satisfactory quality.

 

●

Special mention loans have an existing weakness that could cause future impairment, including the deterioration of financial ratios, past due status, questionable management capabilities and possible reduction in the collateral values.

 

●

Substandard loans have an existing specific and well-defined weakness that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.

 

●

Doubtful loans have specific weaknesses that are severe enough to make collection or liquidation in full highly questionable and improbable.

 

As of September 30, 2023, and December 31, 2022, loan balances outstanding more than 90 days past due and still accruing interest amounted to $247,000 and $335,000, respectively. As of September 30, 2023, and December 31, 2022, loan balances outstanding on nonaccrual status amounted to $16.0 million and $11.1 million, respectively. The Bank considers all loans more than 90 days past due as nonperforming loans.

 

The following tables provide an analysis of the aging of loans and leases as of September 30, 2023, and December 31, 2022. For the year ended December 31, 2022, past due and nonaccrual loan amounts exclude acquired impaired loans, even if contractually past due or if the Company does not expect to receive payment in full, as prior to the adoption of CECL, the Company accreted interest income over the expected life of the loans. With the adoption of CECL and deconstruction of acquired impaired accounting, those amounts are no longer excluded for the period ended September 30, 2023. All loans greater than 90 days past due are generally placed on nonaccrual status.

 

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Aged Analysis of Past Due Loans Receivable

 

		September 30, 2023
		(Dollars in thousands)
																										Recorded
										Greater																Investment Over
		30-59 Days				60-89 Days				Than 90 Days				Total								Total Loans				90 Days Past Due
		Past Due				Past Due				Past Due				Past Due				Current				Receivable				and Still Accruing
Real Estate Loans:
Commercial		$	468			$	1,995			$	3,739			$	6,202			$	2,122,653			$	2,128,855			$	127
Construction			365				624				2,993				3,982				704,853				708,835				117
Residential			2,237				324				4,115				6,676				680,245				686,921				-
Total Real Estate Loans			3,070				2,943				10,847				16,860				3,507,751				3,524,611				244
Commercial			4,678				420				1,241				6,339				1,326,045				1,332,384				-
Consumer and Other			276				59				210				545				62,733				63,278				3
Total		$	8,024			$	3,422			$	12,298			$	23,744			$	4,896,529			$	4,920,273			$	247

 

		December 31, 2022
		(Dollars in thousands)
																										Recorded
										Greater																Investment Over
		30-59 Days				60-89 Days				Than 90 Days				Total								Total Loans				90 Days Past Due
		Past Due				Past Due				Past Due				Past Due				Current				Receivable				and Still Accruing
Real Estate Loans:
Commercial		$	1,491			$	210			$	1,681			$	3,382			$	2,017,024			$	2,020,406			$	98
Construction			320				41				638				999				721,075				722,074				-
Residential			1,590				423				1,781				3,794				652,584				656,378				-
Total Real Estate Loans			3,401				674				4,100				8,175				3,390,683				3,398,858				98
Commercial			1,183				1,934				2,186				5,303				1,148,570				1,153,873				222
Consumer and Other			295				28				182				505				52,940				53,445				15
Total		$	4,879			$	2,636			$	6,468			$	13,983			$	4,592,193			$	4,606,176			$	335

 

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Upon adoption of ASU 2016-13, the Company eliminated the pooling of purchased impaired credit loans. As a result, $7.0 million of purchased credit deterioration loans were recognized as non-accrual loans as of January 1, 2023. The following table presents non-accrual loans by segment as of September 30, 2023, January 1, 2023, and December 31, 2022, respectively.

 

		September 30,				January 1,				December 31,
		2023				2023				2022
		(Dollars in thousands)
Real Estate Loans:
Commercial		$	4,009			$	5,847			$	2,644
Construction			3,161				2,421				992
Residential			7,277				6,518				4,080
Total Real Estate Loans			14,447				14,786				7,716
Commercial			1,338				3,045				3,150
Consumer and Other			244				257				188
Total		$	16,029			$	18,088			$	11,054

 

Accrued interest receivable of $4.5 million and $5.4 million was outstanding as of September 30, 2023, and December 31, 2022, respectively, for all loan deferrals, primarily attributable to the COVID-19 pandemic and, to a much lesser extent, hurricanes which occurred in 2020 and 2021. These loans are no longer within their deferral periods. The accrued interest on the loans is due at their maturity.

 

At September 30, 2023 and December 31, 2022, accrued interest receivable on loans was $24.3 million and $21.2 million, respectively, and included within accrued interest receivable on the consolidated balance sheets.

 

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Note 7 – Long Term Debt –

 

On March 1, 2022, the Company assumed, in connection with the TCBI acquisition, three tranches of subordinated debt with an aggregate principal balance outstanding of $26.4 million. One tranche in the amount of $10.0 million bears an adjustable interest rate, based on a benchmark rate plus 350 basis points, until maturity on April 11, 2028. This tranche is currently redeemable at the Company’s option. Another tranche in the amount of $7.5 million bears a fixed rate 6.38% until December 13, 2023, at which point the notes become redeemable at the Company’s option, then will reset to a floating interest rate based on a benchmark rate plus 350 basis points, adjusting quarterly, until maturity on December 13, 2028. The third tranche in the amount of $8.9 million had an adjustable interest rate plus 595 basis points, based on a benchmark rate, until maturity on March 24, 2027. The $8.9 million tranche was called on May 1, 2023 by the Company and has been fully extinguished. The Company recognized a $1.5 million gain on the extinguishment of this debt during 2023. These notes carry an aggregate $1.1 million fair value adjustment as of September 30, 2023.

  

Note 8 – Bank Term Funding Program (“BTFP”) –

 

On March 12, 2023, the Federal Reserve Board developed the BTFP, which offers loans to banks with a term of up to one year. The loans are secured by pledging the banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and any other qualifying assets. These pledged securities will be valued at par for collateral purposes. The Bank participated in the BTFP and had outstanding debt of $300.0 million and pledged securities totaling a fair value of $375.6 million at September 30, 2023. The securities pledged had a collateral value of $413.2 million.

  

Note 9 – Federal Home Loan Bank (“FHLB”) Borrowings –

 

The Company had outstanding advances from the FHLB of $214.2 million and $410.1 million as of September 30, 2023, and December 31, 2022, respectively, consisting of:

 

One fixed rate loan with an original principal balance of $60.0 million. The loan was made in 2021 and the balance at September 30, 2023 and December 31, 2022 was $38.3 million and $47.2 million, respectively, with interest at 0.89%. Principal and interest payments are due monthly and the loan matures in November 2026.

 

One fixed rate loan of $875,000 at both September 30, 2023, and December 31, 2022, that was acquired during the TCBI acquisition, with interest at 4.88% paid monthly. Principal is due at maturity in April 2025.

 

One fixed rate loan of $100.0 million at both September 30, 2023, and December 31, 2022, with interest at 3.53% paid monthly. Principal is due at maturity in October 2027. This advance has put options beginning in October 2023.

 

One fixed rate loan of $25.0 million at September 30, 2023, with interest at 4.89% paid monthly. Principal is due at maturity in July 2025.

 

One fixed rate loan of $25.0 million at September 30, 2023, with interest at 4.65% paid monthly. Principal is due at maturity in January 2026.

 

One fixed rate loan of $25.0 million at September 30, 2023, with interest at 4.56% paid monthly. Principal is due at maturity in July 2026.

 

One short term, seven-day, fixed rate loan of $262.0 million at December 31, 2022, with interest at 4.55%. Principal and interest was due, paid and renewed, at maturity in January 2023. This loan was rolled into the $230.0 million short term, overnight, fixed rate loan outstanding at March 31, 2023, which was paid off during the second quarter of 2023.

 

The Company had an additional $1.6 billion remaining on the FHLB line availability at September 30, 2023.

 

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Note 10 – Leases –

 

The Bank leases certain branch offices through non-cancelable operating leases with terms that range from one to ten years and contain various renewal options for certain of the leases. Certain leases provide for increases in minimum monthly rental payments as defined by the lease agreement. Rental expense under these agreements was $4.2 million and $3.6 million for the nine months ended September 30, 2023, and 2022, respectively. At September 30, 2023, the Company had a weighted average lease term of 6.0 years and a weighted average discount rate of 2.94%.

 

Future minimum lease payments under these leases are as follows:

 

		(Dollars in thousands)
October 1, 2023 through September 30, 2024		$	3,985
October 1, 2024 through September 30, 2025			3,294
October 1, 2025 through September 30, 2026			2,527
October 1, 2026 through September 30, 2027			2,356
October 1, 2027 through September 30, 2028			2,134
October 1, 2028 and Thereafter			4,067
Total Future Minimum Lease Payments			18,363
Less Imputed Interest			(1,669	)
Present Value of Lease Liabilities		$	16,694

  

Note 11 – Commitments and Contingencies –

 

In the normal course of business, the Bank is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of credit which are not included in the accompanying financial statements. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.

 

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual amount of those instruments. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. The Bank uses the same credit policies in making such commitments and conditional obligations as it does for instruments that are included in the balance sheet. In the normal course of business, the Bank has made commitments to extend credit of approximately $1.2 billion and $1.3 billion, and standby and commercial letters of credit of approximately $46.5 million and $45.6 million at September 30, 2023 and December 31, 2022, respectively. As discussed in Note 6, we have a reserve for unfunded loan commitments of $3.4 million and $605,000 at September 30, 2023 and December 31, 2022, respectively.

 

In the normal course of business, the Bank is involved in various legal proceedings. In the opinion of management and counsel, the disposition or ultimate resolution of such proceedings would not have a material adverse effect on the Bank’s financial statements.

 

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Note 12 – Preferred Stock –

 

On September 1, 2022, the Company entered into a securities purchase agreement with certain investors pursuant to which the Company offered and sold shares of its 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with no par value, for an aggregate purchase price of $72.0 million. Holders of the preferred stock will be entitled to receive, if, when, and as declared by the Company’s board of directors, non-cumulative cash dividends at a rate of 7.50% per share for the first five years following issuance and thereafter at a variable rate equal to the then current 3-month secured overnight financing rate (“SOFR”), reset quarterly, plus 470 basis points. The preferred stock has a perpetual term and may not be redeemed, except under certain circumstances, under the first five years of issuance. The preferred stock is non-convertible and dividends equivalent to $56.25 per share and $18.75 per share were paid during the nine months ended September 30, 2023, and the year ended December 31, 2022, respectively.

  

Note 13 – Fair Value of Financial Instruments –

 

Fair Value Disclosures

 

The Company groups its financial assets and liabilities measured at fair value in three levels. Fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

●

Level 1 – Includes the most reliable sources and includes quoted prices in active markets for identical assets or liabilities.

 

●

Level 2 – Includes observable inputs. Observable inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) as well as inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

 

●

Level 3 – Includes unobservable inputs and should be used only when observable inputs are unavailable.

 

Recurring Basis

 

Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service. This pricing service provides information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications.

 

The fair values of loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics.

 

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The following tables present the balance of assets and liabilities measured on a recurring basis as of September 30, 2023, and December 31, 2022. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis. The Company transferred $29.9 million of securities from Level 3 to Level 2 fair value measurement designation for the quarter ended September 30, 2023. Prior to 2023, the securities were not valued using observable market data.

 

		Fair Value				Level 1				Level 2				Level 3
		(Dollars in thousands)
September 30, 2023
Available for Sale:
U.S. Treasury Securities		$	30,173			$	-			$	30,173			$	-
U.S. Government Agency Securities			47,475				-				47,475				-
Corporate Securities			42,574				-				42,574				-
Mortgage-Backed Securities			431,712				-				431,712				-
Municipal Securities			297,770				-				297,770				-
Loans Held for Sale			652				-				652				-
Total		$	850,356			$	-			$	850,356			$	-
December 31, 2022
Available for Sale:
U.S. Treasury Securities		$	30,115			$	-			$	30,115			$	-
U.S. Government Agency Securities			47,372				-				47,372				-
Corporate Securities			46,004				-				27,004				19,000
Mortgage-Backed Securities			451,725				-				451,725				-
Municipal Securities			315,535				-				280,767				34,768
Loans Held for Sale			304				-				304				-
Total		$	891,055			$	-			$	837,287			$	53,768

 

Nonrecurring Basis

 

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

 

---

 

The fair value of the impaired loans is measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are Level 3 assets measured using appraisals from external parties of the collateral less any prior liens and adjusted for estimated selling costs. Adjustments may be made by management based on a customized internally developed discounting matrix. Repossessed assets are initially recorded at fair value less estimated cost to sell, which is generally 10%. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Bank records repossessed assets as Level 3.

 

		Fair Value				Level 1				Level 2				Level 3
		(Dollars in thousands)
September 30, 2023
Assets:
Impaired Loans		$	8,794			$	-			$	-			$	8,794
Servicing Rights			2,216				-				2,216				-
Other Nonperforming Assets			1,558				-				-				1,558
Total		$	12,568			$	-			$	2,216			$	10,352
December 31, 2022
Assets:
Impaired Loans		$	16,816			$	-			$	-			$	16,816
Servicing Rights			2,327				-				2,327				-
Other Nonperforming Assets			1,434				-				-				1,434
Total		$	20,577			$	-			$	2,327			$	18,250

 

Fair Value Financial Instruments

 

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. In accordance with GAAP, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

Cash and Short-Term Investments – For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Securities – Fair value of securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

 

Loans – The fair value for loans is estimated using discounted cash flow analyses, with interest rates currently being offered for similar loans to borrowers with similar credit rates. Loans with similar classifications are aggregated for purposes of the calculations. The allowance for credit losses, which was used to measure the credit risk, is subtracted from loans.

 

Cash Value of Bank-Owned Life Insurance (“BOLI”) – The carrying amount approximates its fair value.

 

Other Equity Securities – The carrying amount approximates its fair value.

 

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

 

---

 

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

 

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

 

The estimated approximate fair values of the Bank’s financial instruments as of September 30, 2023, and December 31, 2022 are as follows:

 

		Carrying				Total
		Amount				Fair Value				Level 1				Level 2				Level 3
		(Dollars in thousands)
September 30, 2023
Financial Assets:
Cash and Short-Term Investments		$	388,077			$	388,077			$	388,077			$	-			$	-
Securities			849,704				849,704				-				849,704				-
Loans Held for Sale			652				652				-				652				-
Loans - Net			4,879,144				4,737,488				-				-				4,737,488
Servicing Rights			1,267				2,216				-				2,216				-
Cash Value of BOLI			95,906				95,906				-				95,906				-
Other Equity Securities			32,591				32,591				-				-				32,591
Total		$	6,247,341			$	6,106,634			$	388,077			$	948,478			$	4,770,079
Financial Liabilities:
Deposits		$	5,190,723			$	5,182,806			$	-			$	-			$	5,182,806
Borrowings			642,486				615,349				-				615,349				-
Total		$	5,833,209			$	5,798,155			$	-			$	615,349			$	5,182,806

 

		Carrying				Total
		Amount				Fair Value				Level 1				Level 2				Level 3
		(Dollars in thousands)
December 31, 2022
Financial Assets:
Cash and Short-Term Investments		$	168,346			$	168,346			$	168,346			$	-			$	-
Securities			890,751				890,751				-				836,983				53,768
Loans Held for Sale			304				304				-				304				-
Loans - Net			4,567,998				4,443,577				-				-				4,443,577
Servicing Rights			1,712				2,327				-				2,327				-
Cash Value of BOLI			91,958				91,958				-				91,958				-
Other Equity Securities			37,467				37,467				-				-				37,467
Total		$	5,758,536			$	5,634,730			$	168,346			$	931,572			$	4,534,812
Financial Liabilities:
Deposits		$	4,820,345			$	4,810,263			$	-			$	-			$	4,810,263
Borrowings			560,123				544,564				-				544,564				-
Total		$	5,380,468			$	5,354,827			$	-			$	544,564			$	4,810,263

 

---

  

Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

When we refer in this Form 10-Q to “we,” “our,” “us,” the “Company” and “Business First,” we are referring to Business First Bancshares, Inc. and its consolidated subsidiaries, including b1BANK, which we sometimes refer to as “the Bank,” unless the context indicates otherwise.

 

The information contained in this Form 10-Q is accurate only as of the date of this form and the dates specified herein.

 

All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q (this “Report”) and other periodic reports filed by the Company, and other written or oral statements made by us or on our behalf, are “forward-looking statements,” as defined by (and subject to the “safe harbor” protections under) the federal securities laws. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and the banking industry in general. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions of a future or forward-looking nature. These statements involve estimates, assumptions, and risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements.

 

We believe these factors include, but are not limited to, the following:

 

●

risks related to the integration of any other acquired businesses, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, risks related to entering a new geographic market, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the ability to retain key employees and maintain relationships with significant customers, the need for additional capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions;

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

interest rate risk associated with our business;

 

●

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

 

●

increased competition in the financial services industry, particularly from regional and national institutions and emerging non-bank competitors;

 

●

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

 

●

changes in the value of collateral securing our loans;

 

●

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

 

●

the failure of assumptions underlying the establishment of and provisions made to our allowance for credit losses;

 

●

changes in the availability of funds resulting in increased costs or reduced liquidity;

 

 

●

our ability to maintain important deposit customer relationships and our reputation;

 

●

a determination or downgrade in the credit quality and credit agency ratings of the securities in our securities portfolio;

 

●

increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;

 

●

our ability to prudently manage our growth and execute our strategy;

 

●

risks associated with our acquisition and de novo branching strategy;

 

●

the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;

 

●

legislative or regulatory developments, including changes in the laws, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters;

 

●

government intervention in the U.S. financial system;

 

●

changes in statutes and government regulations or their interpretations applicable to us, including changes in tax requirements and tax rates;

 

●

natural disasters and adverse weather, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, epidemics and pandemics such as coronavirus, and other matters beyond our control; and

 

●

other risks and uncertainties listed from time to time in our reports and documents filed with the U.S. Securities and Exchange Commission (“SEC”).

 

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. Additional information on these and other risk factors can be found in Item 1A. “Risk Factors” of this Report and in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC.

 

In the event that one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

 

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, 2022 to September 30, 2023, and its results of operations for the three and nine months ended September 30, 2023. 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, 2022, including the audited consolidated financial statements and notes thereto, management’s discussion and analysis, and the risk factor disclosures contained therein. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that Business First believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Business First assumes no obligation to update any of these forward-looking statements.

 

Overview

 

We are a registered financial holding company headquartered in Baton Rouge, Louisiana. Through our wholly-owned subsidiary, b1BANK, a Louisiana state chartered bank, we provide a broad range of financial services tailored to meet the needs of small-to-midsized businesses and professionals. Since our inception in 2006, our priority has been and continues to be creating shareholder value through the establishment of an attractive commercial banking franchise in Louisiana and across our region. We consider our primary market to include the State of Louisiana, the Dallas/Fort Worth metroplex, and Houston. We currently operate out of banking centers and loan production offices across Louisiana and Texas. As of September 30, 2023, we had total assets of $6.5 billion, total loans of $4.9 billion, total deposits of $5.2 billion, and total shareholders’ equity of $604.4 million.

 

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

 

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

 

Other Developments

 

Acquisition of Texas Citizens Bancorp, Inc. (“TCBI”)

 

On October 20, 2021, we entered into a definitive agreement to acquire TCBI, the parent bank holding company for Texas Citizens Bank, National Association, headquartered in Pasadena, Texas. The acquisition was consummated on March 1, 2022. At February 28, 2022, TCBI reported $534.2 million in total assets, $349.5 million in loans and $477.2 million in total deposits.         

 

Preferred Stock Issuance

 

On September 1, 2022, we entered into a securities purchase agreement with certain investors pursuant to which we offered and sold shares of our 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with no par value, for an aggregate purchase price of $72.0 million. The preferred stock was structured to qualify as additional Tier 1 capital under applicable regulatory capital guidelines. Holders of the preferred stock will be entitled to receive, if, when, and as declared by our board of directors (the “Board”), non-cumulative cash dividends at a rate of 7.50% for the first five years following issuance and thereafter at a variable rate equal to the then current 3-month secured overnight financing rate (“SOFR”), reset quarterly, plus 470 basis points. The preferred stock has a perpetual term and may not be redeemed, except under certain circumstances, under the first five years of issuance.

 

 

Public Offering

 

On October 12, 2022, we entered into an underwriting agreement with Stephens, Inc., a representative of several underwriters, to issue and sell 2,500,000 shares of our common stock, $1.00 par value per share, in an underwritten public offering and a public offering price of $20.00 per share. After deducting underwriting discounts, commissions and offering expenses, the net proceeds of the offering was $47.2 million.

 

Bank Term Funding Program (“BTFP”)

 

On March 12, 2023, the Federal Reserve developed the BTFP, which offers loans to banks with a term of up to one year. The loans are secured by pledging the banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and other qualifying assets. These pledged securities are valued at par for collateral purposes. The Bank participated in the BTFP and pledged securities with a remaining par value of $413.2 million as of September 30, 2023.  The Bank had outstanding BTFP debt of $300.0 million at September 30, 2023.

 

Federal Reserve Bank’s Discount Window

 

On April 11, 2023, the Bank opened two new lines of credit for additional contingent liquidity, totaling $1.0 billion as of September 30, 2023, through the Federal Reserve discount window. The Bank has not yet drawn on either of the lines of credit as of the date of this report. 

 

Sale of Leesville Banking Center

 

On August 31, 2023, we sold the Leesville banking center, located in Leesville, Louisiana, to Merchants & Farmers Bank & Trust Company headquartered in Leesville, Louisiana, in accordance with the Branch Purchase and Assumption Agreement dated May 11, 2023. We maintained the loan portfolio and transferred those loans to other nearby banking centers. The sale included total deposits of $16.3 million and a pre-tax gain of $932,000.  

 

Changes in Critical Accounting Policies and Critical Accounting Estimates

 

Effective January 1, 2023, the Company adopted ASU 2016-13, Financial Instrument – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments related to the impairment of financial instruments. This guidance, commonly referred to as Current Expected Credit Loss (“CECL”), changes impairment recognition to a model that is based on expected losses rather than incurred losses. The allowance for credit losses is considered a critical accounting policy and a critical accounting estimate. The allowance for credit losses is established for current expected credit losses on the Company’s loan portfolio, including unfunded credit commitments. Prior to January 1, 2023, the allowance for credit losses was established based on an incurred loss model. Upon the adoption of CECL, certain loan classification and segmentation categories were changed to align with the requirements of the standard and more effectively model the CECL estimate. The updated CECL segmentation is reflected in the disclosures beginning January 1, 2023, and prior period classifications have been adjusted to reflect CECL segmentations. Results from periods prior to January 1, 2023, are presented using the previously applicable GAAP. For more information see Note 1 and Note 6 to the consolidated financial statements contained in this report.

 

Financial Highlights

 

The financial highlights as of and for the three and nine months ended September 30, 2023, include:

 

•

Total assets of $6.5 billion, a $498.3 million, or 8.3%, increase from December 31, 2022.

 

•

Total loans held for investment of $4.9 billion, a $314.1 million, or 6.8%, increase from December 31, 2022.

 

•

Total deposits of $5.2 billion, a $370.4 million, or 7.7%, decrease from December 31, 2022.

 

•

Net income available to common shareholders of $51.2 million for the nine months ended September 30, 2023, a $14.9 million, or 41.1%, increase from the nine months ended September 30, 2022.

 

•

Net interest income of $161.4 million for the nine months ended September 30, 2023, an increase of $17.9 million, or 12.4%, from the nine months ended September 30, 2022.

 

•

Allowance for loan losses of 0.84% of total loans held for investment, compared to 0.83% as of December 31, 2022, and a ratio of nonperforming loans to total loans held for investment of 0.33%, compared to 0.25% as of December 31, 2022.

 

 

•

Earnings per common share for the first nine months of 2023 of $2.04 per basic common share and $2.02 per diluted common share, compared to $1.65 per basic common share and $1.64 per diluted common share for the first nine months of 2022.

 

•

Return on average assets of 1.09% over the first nine months of 2023, compared to 0.91% for the first nine months of 2022.

 

•

Return on average common equity of 13.00% over the first nine months of 2023, compared to 10.87% for the first nine months of 2022.

 

•

Capital ratios for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 9.31%, 8.97%, 10.28% and 12.71%, respectively, compared to 9.49%, 8.68%, 10.07% and 12.75% at December 31, 2022.

 

•

Book value per common share of $21.01, an increase of 3.8% from $20.25 at December 31, 2022.

 

Results of Operations for the Three and Nine Months Ended September 30, 2023, and 2022

 

Performance Summary

 

For the three months ended September 30, 2023, net income available to common shareholders was $19.1 million, or $0.76 per basic and diluted common share, compared to net income of $13.8 million, or $0.61 per basic and diluted common share, for the three months ended September 30, 2022. Return on average assets, on an annualized basis, increased to 1.17% for the three months ended September 30, 2023, from 0.96% for the three months ended September 30, 2022. Return on average equity, on an annualized basis, increased to 14.16% for the three months ended September 30, 2023, as compared to 12.37% for the three months ended September 30, 2022.

 

For the nine months ended September 30, 2023, net income available to common shareholders was $51.2 million, or $2.04 per basic common share and $2.02 per diluted common share, compared to net income of $36.3 million, or $1.65 per basic common share and $1.64 per diluted common share, for the nine months ended September 30, 2022. Return on average assets, on an annualized basis, increased to 1.09% for the nine months ended September 30, 2023, from 0.91% for the nine months ended September 30, 2022. Return on average equity, on an annualized basis, increased to 13.00% for the nine months ended September 30, 2023, as compared to 10.87% for the nine months ended September 30, 2022.

 

Net Interest Income

 

Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest sensitive assets and liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact net interest income. The variance driven by the changes in the amount and mix of interest-earning assets and interest-bearing liabilities is referred to as a “volume change.” Changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds are referred to as a “rate change.”

 

To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. We calculate average assets, liabilities, and equity using a monthly average, and average yield/rate utilizing an actual 365-day count convention.

 

For the three months ended September 30, 2023, net interest income totaled $55.3 million, and net interest margin and net interest spread were 3.61% and 2.68%, respectively, compared to $53.5 million, 4.01%, and 3.65%, respectively, for the three months ended September 30, 2022. The average yield on the loan portfolio was 6.84% for the three months ended September 30, 2023, compared to 5.45% for the three months ended September 30, 2022, and the average yield on total interest-earning assets was 6.10% for the three months ended September 30, 2023, compared to 4.76% for the three months ended September 30, 2022. For the three months ended September 30, 2023, overall cost of funds (which includes noninterest-bearing deposits) increased 182 basis points compared to the three months ended September 30, 2022, primarily due to the federal reserve increasing rates during 2022 and 2023.

 

 

For the nine months ended September 30, 2023, net interest income totaled $161.4 million, and net interest margin and net interest spread were 3.66% and 2.79%, respectively, compared to $143.5 million, 3.87%, and 3.62%, respectively, for the nine months ended September 30, 2022. The average yield on the loan portfolio was 6.58% for the nine months ended September 30, 2023, compared to 5.16% for the nine months ended September 30, 2022, and the average yield on total interest-earning assets was 5.87% for the nine months ended September 30, 2023, compared to 4.36% for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, overall cost of funds (which includes noninterest-bearing deposits) increased 180 basis points compared to the nine months ended September 30, 2022, primarily due to the federal reserve increasing rates during 2022 and 2023.

 

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 ended September 30, 2023, and 2022, 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 are net of deferred loan fees and discounts. Acquired loans were recorded at fair value at acquisition and accrete/amortize discounts and premiums as an adjustment to yield. Prior to January 1, 2023, and the adoption of ASU 2016-13, acquired impaired loans accreted interest income based on their estimated expected cash flows. Averages presented in the table below, and throughout this report, are month-end averages.

 

		For the Three Months Ended September 30,
		2023												2022
		Average Outstanding Balance				Interest Earned/Interest Paid				Average Yield/Rate				Average Outstanding Balance				Interest Earned/Interest Paid				Average Yield/Rate
		(Dollars in thousands) (Unaudited)
Assets
Interest-earning assets:
Total loans		$	4,906,917			$	84,575				6.84	%		$	4,281,137			$	58,846				5.45	%
Securities			885,792				5,053				2.26				951,479				4,200				1.75
Interest-bearing deposits in other banks			278,420				3,694				5.26				54,730				427				3.10
Total interest-earning assets			6,071,129				93,322				6.10				5,287,346				63,473				4.76
Allowance for loan losses			(42,120	)											(33,215	)
Noninterest-earning assets			445,926												448,181
Total assets		$	6,474,935			$	93,322							$	5,702,312			$	63,473
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits		$	3,703,682			$	30,110				3.23	%		$	3,009,565			$	6,286				0.83	%
Subordinated debt			100,400				1,363				5.39				110,953				1,332				4.76
Subordinated debt - trust preferred securities			5,000				111				8.81				5,000				68				5.40
Bank Term Funding Program			300,000				3,422				4.53				-				-				-
Advances from FHLB			284,930				2,875				4.00				396,267				2,194				2.20
First National Bankers Bank ("FNBB") Line of Credit			-				-				-				5,000				70				5.55
Other borrowings			23,542				147				2.48				22,381				43				0.76
Total interest-bearing liabilities			4,417,554				38,028				3.42				3,549,166				9,993				1.12
Noninterest-bearing liabilities:
Noninterest-bearing deposits			1,399,293												1,626,055
Other liabilities			50,947												60,310
Total noninterest-bearing liabilities			1,450,240												1,686,365
Shareholders' equity:
Common shareholders' equity			535,211												442,778
Preferred equity			71,930												24,003
Total shareholders' equity			607,141												466,781
Total liabilities and shareholders' equity		$	6,474,935											$	5,702,312
Net interest rate spread (1)											2.68	%											3.65	%
Net interest income						$	55,294											$	53,480
Net interest margin (2)											3.61	%											4.01	%
Overall cost of funds											2.59	%											0.77	%

 

---

(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.

 

 

		For the Nine Months Ended September 30,
		2023												2022
		Average Outstanding Balance				Interest Earned/Interest Paid				Average Yield/Rate				Average Outstanding Balance				Interest Earned/Interest Paid				Average Yield/Rate
		(Dollars in thousands) (Unaudited)
Assets
Interest-earning assets:
Total loans		$	4,829,537			$	237,566				6.58	%		$	3,854,023			$	148,668				5.16	%
Securities			909,901				14,932				2.19				974,566				12,187				1.67
Interest-bearing deposits in other banks			150,995				6,164				5.46				132,685				754				0.76
Total interest-earning assets			5,890,433				258,662				5.87				4,961,274				161,609				4.36
Allowance for credit losses			(41,888	)											(30,806	)
Noninterest-earning assets			442,341												400,884
Total Assets		$	6,290,886			$	258,662							$	5,331,352			$	161,609
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits		$	3,482,797			$	72,718				2.79	%		$	2,958,005			$	11,106				0.50	%
Subordinated debt			106,555				4,003				5.02				104,471				3,746				4.79
Subordinated debt - trust preferred securities			5,000				317				8.48				5,000				163				4.36
Bank Term Funding Program			238,274				8,111				4.55				-				-				-
Advances from FHLB			368,542				11,755				4.26				215,955				2,923				1.81
FNBB Line of Credit			-				-				-				2,778				91				4.38
Other borrowings			22,177				389				2.35				22,325				63				0.38
Total interest-bearing liabilities			4,223,345				97,293				3.08				3,308,534				18,092				0.73
Noninterest-bearing liabilities:
Noninterest-bearing deposits			1,427,821												1,530,748
Other liabilities			41,392												37,666
Total noninterest-bearing liabilities			1,469,213												1,568,414
Shareholders' equity:
Common shareholders' equity			526,398												446,403
Preferred equity			71,930												8,001
Total shareholders' equity			598,328												454,404
Total liabilities and shareholders' equity		$	6,290,886											$	5,331,352
Net interest rate spread (1)											2.79	%											3.62	%
Net interest income						$	161,369											$	143,517
Net interest margin (2)											3.66	%											3.87	%
Overall cost of funds											2.30	%											0.50	%

 

---

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

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

 

 

The following 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 the purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

 

		For the Three Months Ended September 30, 2023 compared to the Three Months Ended September 30, 2022
		Increase (Decrease) due to change in
		Volume				Rate				Total
		(Dollars in thousands) (Unaudited)
Interest-earning assets:
Total loans		$	10,786			$	14,943			$	25,729
Securities			(375	)			1,228				853
Interest-bearing deposits in other banks			2,968				299				3,267
Total increase in interest income		$	13,379			$	16,470			$	29,849
Interest-bearing liabilities:
Interest-bearing deposits		$	5,643			$	18,181			$	23,824
Subordinated debt			(143	)			174				31
Subordinated debt - trust preferred securities			-				43				43
Bank Term Funding Program			3,422				-				3,422
Advances from FHLB			(1,123	)			1,804				681
FNBB Line of Credit			-				(70	)			(70	)
Other borrowings			7				97				104
Total increase in interest expense			7,806				20,229				28,035
Increase (decrease) in net interest income		$	5,573			$	(3,759	)		$	1,814

 

		For the Nine Months Ended September 30, 2023 compared to the Nine Months Ended September 30, 2022
		Increase (Decrease) due to change in
		Volume				Rate				Total
		(Dollars in thousands) (Unaudited)
Interest-earning assets:
Total loans		$	47,986			$	40,912			$	88,898
Securities			(1,061	)			3,806				2,745
Interest-bearing deposits in other banks			747				4,663				5,410
Total increase in interest income		$	47,672			$	49,381			$	97,053
Interest-bearing liabilities:
Interest-bearing deposits		$	10,957			$	50,655			$	61,612
Subordinated debt			78				179				257
Subordinated debt - trust preferred securities			-				154				154
Bank Term Funding Program			8,111				-				8,111
Advances from FHLB			4,867				3,965				8,832
FNBB Line of Credit			-				(91	)			(91	)
Other borrowings			(3	)			329				326
Total increase in interest expense			24,010				55,191				79,201
Increase (decrease) in net interest income		$	23,662			$	(5,810	)		$	17,852

 

Provision for Credit Losses

 

Our provision for credit losses is a charge to income in order to bring our allowance for credit losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for credit losses see “—Financial Condition—Allowance for Credit Losses.” The provision for credit losses was $604,000 for the three months ended September 30, 2023, and $3.3 million for the same period in 2022. For the nine months ended September 30, 2023, and 2022, the provision for credit losses was $4.4 million and $7.8 million, respectively. The lower provision for the both the three and nine months ended September 30, 2023, compared to the same periods in 2022 relates primarily to lower loan growth in 2023.

 

 

Noninterest Income (“Other Income”)

 

Our primary sources of noninterest income are service charges on deposit accounts, debit card and automated teller machine (“ATM”) fee income, income from bank-owned life insurance, fees and brokerage commissions and pass-through income from other investments (small business investment company (“SBIC”) partnerships and fintech technology (“Fintech”) funds). The following tables present, for the periods indicated, the major categories of noninterest income:

 

		For the Three Months Ended September 30,
		2023				2022				Increase (Decrease)
		(Dollars in thousands) (Unaudited)
Noninterest income:
Service charges on deposit accounts		$	2,540			$	2,116			$	424
Debit card and ATM fee income			1,581				1,667				(86	)
Bank-owned life insurance income			604				561				43
Gain on sales of loans			321				264				57
Loss on sales of investment securities			-				(7	)			7
Fees and brokerage commissions			1,933				1,620				313
Mortgage origination income			108				57				51
Correspondent bank income			137				38				99
Gain on sales of other real estate owned			85				12				73
Gain on sale of branch			932				-				932
Gain on extinguishment of debt			517				-				517
Pass-through income (loss) from other investments			(11	)			572				(583	)
Other			1,136				1,215				(79	)
Total noninterest income		$	9,883			$	8,115			$	1,768

 

		For the Nine Months Ended September 30,
		2023				2022				Increase (Decrease)
		(Dollars in thousands) (Unaudited)
Noninterest income:
Service charges on deposit accounts		$	7,234			$	6,007			$	1,227
Debit card and ATM fee income			4,797				4,825				(28	)
Bank-owned life insurance income			1,675				1,405				270
Gain on sales of loans			1,426				515				911
Loss on sales of investment securities			(62	)			(46	)			(16	)
Fees and brokerage commissions			5,537				5,204				333
Mortgage origination income			238				427				(189	)
Correspondent bank income			268				52				216
Gain on sales of other real estate owned			308				30				278
Loss on sales of other assets			(14	)			(716	)			702
Gain on sale of branch			932				-				932
Gain on extinguishment of debt			1,458				-				1,458
Pass-through income from other investments			2,974				739				2,235
Other			3,458				2,590				868
Total noninterest income		$	30,229			$	21,032			$	9,197

 

Total noninterest income increased $1.8 million, or 21.8%, from the three months ended September 30, 2022.  The increase was primarily due to the increase in service charges of $424,000, or 20.0%, the increase in fees and brokerage commissions of $313,000, or 19.3%, a gain of $932,000 from the sale of our Leesville, Louisiana banking center, the gain on extinguishment of debt of $517,000 related to the redemption of subordinated debt, offset with a small quarterly loss in pass-through income from other equity investments, a decrease of $583,000 from the prior year quarter.

 

Total noninterest income increased $9.2 million, or 43.4%, from the nine months ended September 30, 2022.  The increase was primarily due to the increase in service charges of $1.2 million, or 20.4%, the increase in the gain on sales of loans of $911,000, or 176.9%, primarily due to the sale of small business administration (“SBA”) loans, a gain of $932,000 from the sale of our Leesville, Louisiana banking center, the gain on extinguishment of debt of $1.5 million related to the redemption of subordinated debt, and the increase in pass-through income from other equity investments of $2.2 million, offset by the reduction of $716,000 relating to the disposal of former branch equipment in 2022.

 

 

Noninterest Expense (“Other Expense”)

 

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

 

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

 

		For the Three Months Ended September 30,
		2023				2022				Increase (Decrease)
		(Dollars in thousands) (Unaudited)
Salaries and employee benefits		$	22,487			$	21,906			$	581
Non-staff expenses:
Occupancy of bank premises			2,428				2,485				(57	)
Depreciation and amortization			1,690				1,850				(160	)
Data processing			2,024				2,155				(131	)
FDIC assessment fees			779				839				(60	)
Legal and professional fees			766				619				147
Advertising and promotions			1,202				1,144				58
Utilities and communications			758				833				(75	)
Ad valorem shares tax			965				813				152
Directors' fees			278				288				(10	)
Other real estate owned expenses and write-downs			14				133				(119	)
Merger and conversion related expenses			2				3,244				(3,242	)
Other			5,214				4,637				577
Total noninterest expense		$	38,607			$	40,946			$	(2,339	)

 

		For the Nine Months Ended September 30,
		2023				2022				Increase (Decrease)
		(Dollars in thousands) (Unaudited)
Salaries and employee benefits		$	68,002			$	63,017			$	4,985
Non-staff expenses:
Occupancy of bank premises			7,131				6,959				172
Depreciation and amortization			5,120				5,153				(33	)
Data processing			6,544				6,157				387
FDIC assessment fees			2,804				2,243				561
Legal and professional fees			2,340				1,897				443
Advertising and promotions			3,576				2,378				1,198
Utilities and communications			2,199				2,434				(235	)
Ad valorem shares tax			2,895				2,438				457
Directors' fees			817				702				115
Other real estate owned expenses and write-downs			183				182				1
Merger and conversion related expenses			173				4,670				(4,497	)
Other			15,204				12,833				2,371
Total noninterest expense		$	116,988			$	111,063			$	5,925

 

Total noninterest expense decreased $2.3 million, or 5.7%, from the three months ended September 30, 2022, primarily attributed to the reduction of merger and conversion related expenses of $3.2 million, offset by a $581,000, or 2.7%, increase in salaries and employee benefits.

 

Total noninterest expense increased $5.9 million, or 5.3%, from the nine months ended September 30, 2022, primarily attributed to a $5.0 million, or 7.9%, increase in salaries and employee benefits, a $1.2 million, or 50.4%, increase in advertising and promotions, and partially offset by the reduction of $4.5 million, or 96.3%, in merger and conversion related expenses.

 

 

Income Tax Expense

 

The amount of income tax expense is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

For the three months ended September 30, 2023, income tax expense totaled $5.5 million, an increase of $1.9 million, or 54.1%, compared to $3.6 million for the same period in 2022. For the nine months ended September 30, 2023, income tax expense totaled $15.0 million, an increase of $5.7 million, or 60.5%, compared to $9.4 million for the same period in 2022. Our effective tax rates for the three months ended September 30, 2023, and 2022 were 21.2% and 20.6%, respectively. For the nine months ended September 30, 2023, and 2022, our effective tax rates were 21.4% and 20.5%, respectively.

 

Financial Condition

 

Our total assets increased $498.3 million, or 8.3%, from December 31, 2022, to September 30, 2023, due primarily from the increase in our loan portfolio, as well as our cash and cash equivalents due to our increase in deposits.

 

Loan Portfolio

 

Our primary source of income is interest on loans to individuals, professionals and small-to-midsized businesses located in our markets. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning asset base.

 

As of September 30, 2023, total loans, excluding mortgage loans held for sale, were $4.9 billion, an increase of $314.1 million, or 6.8%, compared to $4.6 billion as of December 31, 2022. Additionally, $652,000, and $304,000 in loans were classified as loans held for sale as of September 30, 2023, and December 31, 2022, respectively.

 

Total loans held for investment as a percentage of total deposits were 94.8% and 95.6% as of September 30, 2023, and December 31, 2022, respectively. Total loans held for investment as a percentage of total assets were 75.8% and 76.9% as of September 30, 2023, and December 31, 2022, respectively.

 

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

 

		As of September 30, 2023 (Unaudited)								As of December 31, 2022
		Amount				Percent				Amount				Percent
		(Dollars in thousands)
Real Estate Loans:
Commercial		$	2,128,855				43.3	%		$	2,020,406				43.9	%
Construction			708,835				14.4				722,074				15.7
Residential			686,921				13.9				656,378				14.2
Total Real Estate Loans			3,524,611				71.6				3,398,858				73.8
Commercial			1,332,384				27.1				1,153,873				25.0
Consumer and Other			63,278				1.3				53,445				1.2
Total loans held for investment		$	4,920,273				100.0	%		$	4,606,176				100.0	%

 

SBA Paycheck Protection Program (“PPP”) loans accounted for $1.3 million and $2.8 million of the commercial portfolio as of September 30, 2023, and December 31, 2022, respectively.

 

Real Estate: Commercial loans are extensions of credit secured by owner-occupied and non-owner-occupied collateral. Repayment is generally dependent on the successful operations of the property. General economic conditions may impact the performance of these types of loans, including fluctuations in the value of real estate, vacancy rates, and unemployment trends. Real estate commercial loans also include farmland loans that can be, or are, used for agricultural purposes. These loans are usually repaid through permanent financing, cash flow from the borrower’s ongoing operations, development of the property, or sale of the property.

 

Real Estate: Commercial loans increased $108.4 million, or 5.4%, to $2.1 billion as of September 30, 2023, from $2.0 billion as of December 31, 2022.

 

 

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

 

Real Estate: Construction loans decreased $13.2 million, or 1.8%, to $708.8 million as of September 30, 2023, from $722.1 million as of December 31, 2022.

 

Real Estate: Residential loans include first and second lien 1-4 family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences. The Company is exposed to risk based on fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness, or other personal hardship. Real estate residential loans also include multi-family residential loans originated to provide permanent financing for multi-family residential income producing properties.  Repayment of these loans primarily relies on successful rental and management of the property.

 

Real Estate: Residential loans increased $30.5 million, or 4.7%, to $686.9 million as of September 30, 2023, from $656.4 million as of December 31, 2022.

 

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

 

Commercial loans increased $178.5 million, or 15.5%, to $1.3 billion as of September 30, 2023, from $1.2 billion as of December 31, 2022.

 

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

 

Consumer and other loans increased $9.8 million, or 18.4%, to $63.3 million as of September 30, 2023, from $53.4 million as of December 31, 2022.

 

 

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, 2023
		One Year or Less				One Through Five Years				Five Through Fifteen Years				After Fifteen Years				Total
		(Dollars in thousands)
Real Estate Loans:
Commercial		$	256,065			$	1,147,456			$	637,632			$	87,702			$	2,128,855
Construction			316,089				324,240				53,659				14,847				708,835
Residential			76,408				399,538				148,430				62,545				686,921
Total Real Estate Loans			648,562				1,871,234				839,721				165,094				3,524,611
Commercial			540,837				537,587				253,195				765				1,332,384
Consumer and Other			33,611				25,341				4,122				204				63,278
Total loans held for investment		$	1,223,010			$	2,434,162			$	1,097,038			$	166,063			$	4,920,273
Fixed rate loans:
Real Estate Loans:
Commercial		$	168,273			$	986,570			$	495,168			$	12,287			$	1,662,298
Construction			115,678				198,837				26,115				9,030				349,660
Residential			46,054				338,993				90,226				13,354				488,627
Total Real Estate Loans			330,005				1,524,400				611,509				34,671				2,500,585
Commercial			145,070				313,268				154,736				-				613,074
Consumer and Other			24,168				19,054				3,225				161				46,608
Total fixed rate loans		$	499,243			$	1,856,722			$	769,470			$	34,832			$	3,160,267
Floating rate loans:
Real Estate Loans:
Commercial		$	87,792			$	160,886			$	142,464			$	75,415			$	466,557
Construction			200,411				125,403				27,544				5,817				359,175
Residential			30,354				60,545				58,204				49,191				198,294
Total Real Estate Loans			318,557				346,834				228,212				130,423				1,024,026
Commercial			395,767				224,319				98,459				765				719,310
Consumer and Other			9,443				6,287				897				43				16,670
Total floating rate loans		$	723,767			$	577,440			$	327,568			$	131,231			$	1,760,006

 

 

		As of December 31, 2022
		One Year or Less				One Through Five Years				Five Through Fifteen Years				After Fifteen Years				Total
		(Dollars in thousands)
Real Estate Loans:
Commercial		$	229,679			$	1,024,273			$	645,257			$	121,197			$	2,020,406
Construction			274,027				381,218				59,813				7,016				722,074
Residential			69,444				370,483				157,849				58,602				656,378
Total Real Estate Loans			573,150				1,775,974				862,919				186,815				3,398,858
Commercial			455,809				462,414				235,333				317				1,153,873
Consumer and Other			23,391				24,823				5,021				210				53,445
Total loans held for investment		$	1,052,350			$	2,263,211			$	1,103,273			$	187,342			$	4,606,176
Fixed rate loans:
Real Estate Loans:
Commercial		$	124,261			$	885,532			$	508,455			$	9,339			$	1,527,587
Construction			95,358				242,554				35,137				3,674				376,723
Residential			41,512				321,796				96,648				12,341				472,297
Total Real Estate Loans			261,131				1,449,882				640,240				25,354				2,376,607
Commercial			146,321				286,908				164,383				-				597,612
Consumer and Other			15,113				19,147				3,884				164				38,308
Total fixed rate loans		$	422,565			$	1,755,937			$	808,507			$	25,518			$	3,012,527
Floating rate loans:
Real Estate Loans:
Commercial		$	105,418			$	138,741			$	136,802			$	111,858			$	492,819
Construction			178,669				138,664				24,676				3,342				345,351
Residential			27,932				48,687				61,201				46,261				184,081
Total Real Estate Loans			312,019				326,092				222,679				161,461				1,022,251
Commercial			309,488				175,506				70,950				317				556,261
Consumer and Other			8,278				5,676				1,137				46				15,137
Total floating rate loans		$	629,785			$	507,274			$	294,766			$	161,824			$	1,593,649

 

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 $17.8 million and $12.8 million in nonperforming assets as of September 30, 2023, and December 31, 2022, respectively. We had $16.3 million in nonperforming loans as of September 30, 2023, compared to $11.4 million as of December 31, 2022. The increase in nonperforming assets from December 31, 2022, to September 30, 2023, is primarily due to the adoption of CECL and the elimination of ASC 310-30 which excluded purchased impaired loans accreting interest income.

 

 

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

 

		As of September 30, 2023 (Unaudited)				As of December 31, 2022
		(Dollars in thousands)
Nonaccrual loans		$	16,029			$	11,054
Accruing loans 90 or more days past due			247				335
Total nonperforming loans			16,276				11,389
Other nonperforming assets			-				62
Other real estate owned:
Commercial real estate, construction, land and land development			1,199				1,199
Residential real estate			359				173
Total other real estate owned			1,558				1,372
Total nonperforming assets		$	17,834			$	12,823
Ratio of nonperforming loans to total loans held for investment			0.33	%			0.25	%
Ratio of nonperforming assets to total assets			0.27				0.21
Ratio of nonaccrual loans to total loans held for investment			0.33				0.24

 

		As of September 30, 2023 (Unaudited)				As of December 31, 2022
		(Dollars in thousands)
Nonaccrual loans by category:
Real Estate Loans:
Commercial		$	4,009			$	2,644
Construction			3,161				992
Residential			7,277				4,080
Total Real Estate Loans			14,447				7,716
Commercial			1,338				3,150
Consumer and Other			244				188
Total		$	16,029			$	11,054

 

Potential Problem Loans

 

From a credit risk standpoint, we classify loans in one of four categories: pass, special mention, substandard or doubtful. Loans classified as loss are charged-off. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. Ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk of loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk of loss).

 

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.

 

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

 

Credits rated doubtful have all the weaknesses inherent in those rated substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

 

The following tables summarize our internal ratings of loans held for investment as of the dates indicated. See Note 6 of the consolidated financial statements for the presentation of loans in their credit quality categories that is in compliance with the CECL standard.

 

		As of September 30, 2023
		Pass				Special Mention				Substandard				Doubtful				Total
		(Dollars in thousands) (Unaudited)
Real Estate Loans:
Commercial		$	2,087,193			$	29,334			$	10,919			$	1,409			$	2,128,855
Construction			704,485				452				3,553				345				708,835
Residential			675,383				2,226				8,786				526				686,921
Total Real Estate Loans			3,467,061				32,012				23,258				2,280				3,524,611
Commercial			1,306,813				17,739				7,225				607				1,332,384
Consumer and Other			62,775				-				503				-				63,278
Total		$	4,836,649			$	49,751			$	30,986			$	2,887			$	4,920,273

 

		As of December 31, 2022
		Pass				Special Mention				Substandard				Doubtful				Total
		(Dollars in thousands)
Real Estate Loans:
Commercial		$	1,972,611			$	35,054			$	10,478			$	2,263			$	2,020,406
Construction			716,071				3,496				2,157				350				722,074
Residential			643,763				3,780				7,925				910				656,378
Total Real Estate Loans			3,332,445				42,330				20,560				3,523				3,398,858
Commercial			1,137,555				6,646				6,960				2,712				1,153,873
Consumer and Other			53,041				-				404				-				53,445
Total		$	4,523,041			$	48,976			$	27,924			$	6,235			$	4,606,176

 

Allowance for Credit Losses

 

We maintain an allowance for credit losses, which includes both our allowance for loan losses and reserves for unfunded commitments, that represents management’s best estimate of the credit losses and risks inherent in the loan portfolio. In determining the allowance for credit 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 credit losses is based on internally assigned risk classifications of loans, 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 credit 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 Real Estate: Commercial loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral, and the volatility of income, property value and future operating results typical for properties of that type;

 

•

for Real Estate: Construction loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, the experience and ability of the developer, and the loan to value ratio;

 

•

for Real Estate: Residential real estate 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 Commercial 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;

 

As of September 30, 2023, the allowance for credit losses totaled $44.5 million, or 0.90%, of total loans held for investment. As of December 31, 2022, the allowance for credit losses totaled $38.8 million, or 0.84%, of total loans held for investment.

 

 

The following tables present, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data:

 

		As of and For the Nine Months Ended September 30, 2023 (Unaudited)				As of and For the Year Ended December 31, 2022
		(Dollars in thousands)
Average loans outstanding (1)		$	4,829,537			$	4,020,436
Gross loans held for investment outstanding end of period		$	4,920,273			$	4,606,176
Allowance for credit losses at beginning of period		$	38,783			$	29,936
Adoption of ASU 2016-13			5,857				-
Provision for credit losses			4,364				10,667
Charge-offs:
Real Estate:
Commercial			1,827				51
Construction			1				16
Residential			42				191
Total Real Estate			1,870				258
Commercial			2,407				2,139
Consumer and other			1,113				424
Total charge-offs			5,390				2,821
Recoveries:
Real Estate:
Commercial			21				50
Construction			1				25
Residential			9				20
Total Real Estate			31				95
Commercial			655				739
Consumer and other			206				167
Total recoveries			892				1,001
Net charge-offs			4,498				1,820
Allowance for credit losses at end of period		$	44,506			$	38,783
Ratio of allowance for credit losses to end of period loans held for investment			0.90	%			0.84	%
Ratio of net charge-offs to average loans			0.09				0.05
Ratio of allowance for credit losses to nonaccrual loans			277.66				350.85

 

---

(1) Excluding loans held for sale

 

 

		As of and For the Nine Months Ended September 30, 2023 (Unaudited)								As of and For the Year Ended December 31, 2022								As of and For the Nine Months Ended September 30, 2022 (Unaudited)
		Net Charge-offs (Recoveries)				Percent of Average Loans				Net Charge-offs (Recoveries)				Percent of Average Loans				Net Charge-offs (Recoveries)				Percent of Average Loans
		(Dollars in thousands)
Real estate:
Commercial		$	1,806				0.04	%		$	1				0.00	%		$	6				0.00	%
Construction			-				0.00	%			(9	)			0.00	%			(19	)			0.00	%
Residential			33				0.00	%			171				0.00	%			(15	)			0.00	%
Total Real Estate Loans			1,839				0.04	%			163				0.00	%			(28	)			0.00	%
Commercial			1,752				0.03	%			1,400				0.04	%			1,528				0.03	%
Consumer and Other			907				0.02	%			257				0.01	%			246				0.01	%
Total net charge-offs (recoveries)		$	4,498				0.09	%		$	1,820				0.05	%		$	1,746				0.04	%

 

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

 

 

The following table shows the allocation of the allowance for credit losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for credit 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, 2023 (Unaudited)								As of December 31, 2022								As of September 30, 2022 (Unaudited)
		Amount				Percent to Total				Amount				Percent to Total				Amount				Percent to Total
		(Dollars in thousands)
Real estate:
Commercial		$	18,832				42.3	%		$	14,922				38.5	%		$	15,056				42.0	%
Construction			9,869				22.2				5,905				15.2				5,098				14.2
Residential			5,632				12.6				5,367				13.8				5,368				15.0
Total real estate			34,333				77.1				26,194				67.5				25,522				71.2
Commercial			9,737				21.9				11,950				30.8				9,697				27.0
Consumer and Other			436				1.0				639				1.7				655				1.8
Total allowance for credit losses		$	44,506				100.0	%		$	38,783				100.0	%		$	35,874				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, 2023, the carrying amount of investment securities totaled $849.7 million, a decrease of $41.0 million, or 4.6%, compared to $890.8 million as of December 31, 2022. The decrease was primarily due to unrealized losses in the first nine months of 2023. Securities represented 13.1% and 14.9% of total assets as of September 30, 2023, and December 31, 2022, 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, 2023
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(Dollars in thousands) (Unaudited)
U.S. treasury securities		$	32,704			$	-			$	2,531			$	30,173
U.S. government agencies			50,237				-				2,762				47,475
Corporate bonds			49,405				-				6,831				42,574
Mortgage-backed securities			497,388				-				65,676				431,712
Municipal securities			338,764				1				40,995				297,770
Total		$	968,498			$	1			$	118,795			$	849,704

 

		As of December 31, 2022
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(Dollars in thousands)
U.S. treasury securities		$	32,783			$	-			$	2,668			$	30,115
U.S. government agencies			50,288				-				2,916				47,372
Corporate bonds			48,475				25				2,496				46,004
Mortgage-backed securities			506,671				267				55,213				451,725
Municipal securities			347,382				11				31,858				315,535
Total		$	985,599			$	303			$	95,151			$	890,751

 

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.

 

 

We evaluate our available for sale securities portfolio on a quarterly basis for potential credit-related impairment. We assess potential credit impairment by comparing the fair value of a debt security to its amortized cost basis. If the fair value of a debt security is greater than the amortized cost basis, no impairment is recognized.  If the fair value is less than the amortized cost basis, we review the factors to determine if the impairment is credit-related or noncredit-related.  For debt securities we intend to sell or are more likely than not required to sell, before the recovery of their amortized cost basis, the difference between fair value and amortized cost is impaired and is recognized through earnings. For debt securities we do not intend to sell or are more likely than not required to sell, prior to expected recovery of amortized cost basis, the credit portion of the impairment is recognized through earnings, with a corresponding entry to an allowance for credit losses, and the noncredit portion is recognized through accumulated other comprehensive income.

 

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, 2023
		Within One Year								After One Year but Within Five Years								After Five Years but Within Ten Years								After Ten Years								Total
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Total				Yield
		(Dollars in thousands) (Unaudited)
U.S. treasury securities		$	9,833				1.50	%		$	20,340				0.77	%		$	-				-	%		$	-				-	%		$	30,173				1.01	%
U.S. government agencies			-				-	%			47,475				2.01	%			-				-	%			-				-	%			47,475				2.01	%
Corporate bonds			29				-	%			1,011				3.98	%			41,534				4.61	%			-				-	%			42,574				4.59	%
Mortgage-backed securities			2,585				1.21	%			55,107				1.90	%			152,422				2.16	%			221,598				2.28	%			431,712				2.18	%
Municipal securities			17,328				1.28	%			95,308				1.56	%			114,615				1.90	%			70,519				2.38	%			297,770				1.87	%
Total		$	29,775				1.35	%		$	219,241				1.68	%		$	308,571				2.39	%		$	292,117				2.30	%		$	849,704				2.14	%

 

		As of December 31, 2022
		Within One Year								After One Year but Within Five Years								After Five Years but Within Ten Years								After Ten Years								Total
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Total				Yield
		(Dollars in thousands)
U.S. treasury securities		$	-				-	%		$	30,115				1.00	%		$	-				-	%		$	-				-	%		$	30,115				1.00	%
U.S. government agencies			-				-	%			47,372				1.63	%			-				-	%			-				-	%			47,372				1.63	%
Corporate bonds			151				-	%			2,500				4.08	%			43,353				4.49	%			-				-	%			46,004				4.45	%
Mortgage-backed securities			2,458				0.97	%			41,738				1.65	%			172,301				1.69	%			235,228				1.94	%			451,725				1.81	%
Municipal securities			15,299				1.76	%			97,064				1.44	%			120,905				1.79	%			82,267				2.13	%			315,535				1.77	%
Total		$	17,908				1.64	%		$	218,789				1.49	%		$	336,559				2.08	%		$	317,495				1.99	%		$	890,751				1.90	%

 

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 4.52 years with an estimated effective duration of 3.75 years as of September 30, 2023.

 

As of September 30, 2023, and December 31, 2022, we did not own securities of any one issuer for which aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity as of such respective dates.

 

As of September 30, 2023, and December 31, 2022, the Company held other equity securities of $32.6 million and $37.5 million, respectively, comprised mainly of FHLB stock, small business investment companies (“SBICs”) and financial technology (“Fintech”) fund investments.

 

Deposits

 

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

 

Total deposits as of September 30, 2023, were $5.2 billion, an increase of $370.4 million, or 7.7%, compared to $4.8 billion as of December 31, 2022. Total uninsured deposits were $2.0 billion, or 38.6%, of total deposits as of September 30, 2023 compared to $1.5 billion, or 31.9%, of total deposits as of December 31, 2022.

 

 

Noninterest-bearing deposits as of September 30, 2023, were $1.4 billion compared to $1.5 billion as of December 31, 2022, a decrease of $137.0 million, or 8.8%.

 

Average deposits for the nine months ended September 30, 2023, were $4.9 billion, an increase of $362.8 million, or 8.0%, over the full year average for the year ended December 31, 2022, of $4.5 billion. The average rate paid on total interest-bearing deposits increased over this period from 0.81% for the year ended December 31, 2022, to 2.79% for the nine months ended September 30, 2023. The increase in average rates was driven by the federal reserve raising rates during the year ended December 31, 2022, and continuing in the nine months ended September 30, 2023. In addition, the stability of noninterest-bearing demand accounts served to reduce the cost of deposits to 1.98% for the nine months ended September 30, 2023, compared to 0.54% for the year ended December 31, 2022.

 

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

 

		For the Nine Months Ended September30, 2023 (Unaudited)								For the Year Ended December 31, 2022
		Average Balance				Average Rate				Average Balance				Average Rate
		(Dollars in thousands)
Interest-bearing demand accounts		$	489,746				3.39	%		$	298,845				1.31	%
Negotiable order of withdrawal ("NOW") accounts			480,877				1.26	%			536,742				0.30	%
Limited access money market accounts and savings			1,417,294				2.52	%			1,483,763				0.81	%
Certificates and other time deposits > $250k			463,050				3.79	%			208,661				1.03	%
Certificates and other time deposits < $250k			631,830				3.38	%			479,871				0.98	%
Total interest-bearing deposits			3,482,797				2.79	%			3,007,882				0.81	%
Noninterest-bearing demand accounts			1,427,821				-	%			1,539,938				-	%
Total deposits		$	4,910,618				1.98	%		$	4,547,820				0.54	%

 

The ratio of average noninterest-bearing deposits to average total deposits for the nine months ended September 30, 2023, and the year ended December 31, 2022, was 29.1% and 33.9%, respectively.

 

The following table sets forth the contractual maturities of certain certificates of deposit at September 30, 2023:

 

		Certificates of Deposit More Than $250,000				Certificates of Deposit of $100,000 Through $250,000
		(Dollars in thousands) (Unaudited)
3 months or less		$	165,043			$	147,713
More than 3 months but less than 6 months			119,808				166,540
More than 6 months but less than 12 months			186,506				144,875
12 months or more			167,187				53,606
Total		$	638,544			$	512,734

 

 

Federal Funds Purchased Lines of Credit Relationships

 

We maintain Federal Funds Purchased Lines of Credit Relationships with the following correspondent banks and limits as of September 30, 2023:

 

		Fed Funds Purchase Limits
		(Dollars in thousands)
TIB National Association		$	45,000
PNC Bank			38,000
FNBB			35,000
First Horizon Bank			17,000
ServisFirst Bank			10,000
Total		$	145,000

 

We had $14.1 million in outstanding balances at December 31, 2022 and no outstanding balance as of September 30, 2023.

 

Liquidity and Capital Resources

 

Liquidity

 

Liquidity involves our ability to utilize funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the nine months ended September 30, 2023, and the year ended December 31, 2022, liquidity needs were primarily met by core deposits, security and loan maturities, and amortizing investment and loan portfolios. In addition, we also utilize brokered deposits, purchased funds from correspondent banks, bank term funding program, and overnight advances from the FHLB. As of September 30, 2023, and December 31, 2022, we maintained five 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 $145.0 million. There was $14.1 million drawn under these lines of credit at December 31, 2022 and none drawn at September 30, 2023. We had an additional $1.6 billion and $1.3 billion of availability through the FHLB at September 30, 2023, and December 31, 2022, respectively. As of September 30, 2023, we had $1.0 billion of availability through the Federal Reserve Discount Window.

 

 

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 $6.3 billion and $5.5 billion for the nine months ended September 30, 2023, and the year ended December 31, 2022, respectively.

 

		For the Nine Months Ended September 30, 2023 (Unaudited)				For the Year Ended December 31, 2022
Source of Funds:
Deposits:
Noninterest-bearing			22.7	%			28.1	%
Interest-bearing			55.3				55.0
Subordinated debt (excluding trust preferred securities)			1.7				1.9
Advances from FHLB			5.9				4.9
Other borrowings			0.4				0.6
Bank Term Funding Program			3.8				-
Other liabilities			0.7				0.7
Shareholders' equity			9.5				8.8
Total			100.0	%			100.0	%
Uses of Funds:
Loans, net of allowance for loan losses			76.1	%			72.9	%
Securities available for sale			14.5				17.5
Interest-bearing deposits in other banks			2.4				2.1
Other noninterest-earning assets			7.0				7.5
Total			100.0	%			100.0	%
Average noninterest-bearing deposits to average deposits			29.1	%			33.9	%
Average loans to average deposits			98.3				88.4

 

Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average net loans increased 25.0% for the nine months ended September 30, 2023, compared to the same period in 2022. We predominantly invest excess deposits in overnight deposits with the Federal Reserve, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth. Our securities portfolio had a weighted average life of 4.52 years and an effective duration of 3.75 years as of September 30, 2023. As of December 31, 2022, our securities portfolio had a weighted average life of 4.88 years and an effective duration of 4.09 years.

 

As of September 30, 2023, we had outstanding $1.2 billion in commitments to extend credit and $46.5 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2022, we had outstanding $1.3 billion in commitments to extend credit and $45.6 million in commitments associated with outstanding standby and commercial letters of credit. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. See “Off Balance Sheet Items” below for additional information.

 

As of September 30, 2023, and December 31, 2022 we had cash and cash equivalents, including federal funds sold, of $388.1 million and $168.3 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 $604.4 million as of September 30, 2023, compared to $580.5 million as of December 31, 2022, an increase of $23.9 million, or 4.1%. This increase was primarily due to net income of $55.2 million offset with other comprehensive losses of $20.0 million resulting from the after-tax effect of unrealized losses in our investment securities portfolio, and dividends paid on preferred stock and common stock of $13.1 million.

 

On October 26, 2023, our Board declared a quarterly dividend in the amount of $18.75 per preferred share to the preferred shareholders of record as of November 15, 2023. The dividend is to be paid on November 30, 2023, or as soon as practicable thereafter.

 

On October 26, 2023, our Board declared a quarterly dividend based upon our financial performance for the three months ended September 30, 2023, in the amount of $0.14 per common share to the common shareholders of record as of November 15, 2023. The dividend is to be paid on November 30, 2023, or as soon as practicable thereafter.

 

 

The declaration and payment of dividends to our shareholders, as well as the amounts thereof, are subject to the discretion of the Board and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board. As a holding company, our ability to pay dividends is largely dependent upon the receipt of dividends from our subsidiary, b1BANK. There can be no assurance that we will declare and pay any dividends to our shareholders.

 

Capital management consists of providing equity to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the holding company and bank levels. As of September 30, 2023, and December 31, 2022, we and b1BANK were in compliance with all applicable regulatory capital requirements, and b1BANK was classified as “well-capitalized,” for purposes of prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all applicable regulatory capital standards applicable to us.

 

The following table presents the actual capital amounts and regulatory capital ratios for us and b1BANK as of the dates indicated.

 

		As of September 30, 2023 (Unaudited)								As of December 31, 2022
		Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
Business First
Total capital (to risk weighted assets)		$	743,966				12.71	%		$	704,840				12.75	%
Tier 1 capital (to risk weighted assets)			602,032				10.28	%			557,088				10.07	%
Common Equity Tier 1 capital (to risk weighted assets)			525,102				8.97	%			480,158				8.68	%
Tier 1 Leverage capital (to average assets)			602,032				9.31	%			557,088				9.49	%
b1BANK
Total capital (to risk weighted assets)		$	724,873				12.39	%		$	657,588				11.91	%
Tier 1 capital (to risk weighted assets)			680,367				11.63	%			618,805				11.20	%
Common Equity Tier 1 capital (to risk weighted assets)			680,367				11.63	%			618,805				11.20	%
Tier 1 Leverage capital (to average assets)			680,367				10.53	%			618,805				10.55	%

 

Preferred Stock

 

On September 1, 2022, we entered into a securities purchase agreement with certain investors pursuant to which we offered and sold shares of our 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with no par value, for an aggregate purchase price of $72.0 million. The preferred stock was structured to qualify as additional Tier 1 capital under applicable regulatory capital guidelines. Holders of the preferred stock will be entitled to receive, if, when, and as declared by our Board, non-cumulative cash dividends at a rate of 7.50% for the first five years following issuance and thereafter at a variable rate equal to the then current 3-month secured overnight financing rate (“SOFR”), reset quarterly, plus 470 basis points. The preferred stock has a perpetual term and may not be redeemed, except under certain circumstances, under the first five years of issuance.

 

Long Term Debt

 

During the year ended December 31, 2022, as part of the acquisition of TCBI, we assumed $26.4 million in subordinated debt. As part of this debt, we recorded a fair value adjustment premium in the amount of $3.4 million, to accrete over five-to-seven years, with a remaining adjustment of $1.1 million as of September 30, 2023. We recognized $1.5 million in gains on the extinguishment of $8.9 million of debt during the nine months ended September 30, 2023.

 

FHLB Advances

 

Advances from the FHLB totaled approximately $214.2 million and $410.1 million at September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, and December 31, 2022, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 3.47% and 3.88%, respectively, and mature within five years. At December 31, 2022, $262.0 million in advances were short term with a rate of 4.55%.

 

 

Bank Term Funding Program (“BTFP”)

 

On March 12, 2023, the Federal Reserve launched the BTFP, which offers loans to banks with a term of up to one year. The loans are secured by pledging the banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and any other qualifying assets. These pledged securities will be valued at par for collateral purposes. The Bank participated in the BTFP and had outstanding debt of $300.0 million at September 30, 2023.

 

Contractual Obligations

 

The following tables summarize contractual obligations and other commitments to make future payments as of September 30, 2023, and December 31, 2022 (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, 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 $214.2 million and $410.1 million at September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, and December 31, 2022, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 3.47% and 3.88%, respectively, and mature within five years. We participated in the BTFP in March 2023 and as of September 30, 2023, had outstanding debt of $300.0 million, at a fixed rate of 4.38% and set to mature on March 22, 2024. The subordinated debt totaled $100.0 million and $110.7 million at September 30, 2023 and December 31, 2022, respectively, including premium. Of this subordinated debt, $25.0 million bears interest at a fixed rate of 6.75% through December 31, 2028 and a floating rate, based on a benchmark rate plus 369 basis points, thereafter through maturity in 2033, $52.5 million of this subordinated debt bears interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031, $3.9 million of this subordinated debt bears interest at a fixed rate of 4.75% through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031. We acquired three separate notes as part of the TCBI acquisition totaling $26.4 million. Of those notes, $10.0 million bears an adjustable interest rate plus 350 basis points, based on a benchmark rate, adjusting quarterly until maturity on April 11, 2028, $7.5 million bears a fixed rate of 6.38% until December 13, 2023, then will reset to a floating interest rate based on a benchmark rate plus 350 basis points, adjusting quarterly, until maturity on December 13, 2028, $8.9 million was called on May 1, 2023 and ceased bearing interest as of such date. This $8.9 million note was fully extinguished during the nine months ended September 30, 2023. As part of valuing these three subordinated notes from TCBI, we incurred a fair value adjustment premium of $3.4 million that will accrete over five-to-seven years, with $1.1 million and $2.9 million remaining at September 30, 2023 and December 31, 2022, respectively. We recognized $1.5 million in gains on the extinguishment of this debt during the nine months ended September 30, 2023.

 

		As of September 30, 2023
		1 year or less				More than 1 year but less than 3 years				3 years or more but less than 5 years				5 years or more				Total
		(Dollars in thousands) (Unaudited)
Non-cancelable future operating leases		$	3,985			$	5,821			$	4,490			$	4,067			$	18,363
Time deposits			1,114,789				221,000				40,575				21				1,376,385
Subordinated debt			-				-				10,000				88,927				98,927
Advances from FHLB			-				75,875				138,309				-				214,184
BTFP			300,000				-				-				-				300,000
Subordinated debt - trust preferred securities			-				-				-				5,000				5,000
Securities sold under agreements to repurchase			23,245				-				-				-				23,245
Standby and commercial letters of credit			45,122				1,178				141				25				46,466
Commitments to extend credit			695,341				280,353				126,544				106,478				1,208,716
Total		$	2,182,482			$	584,227			$	320,059			$	204,518			$	3,291,286

 

		As of December 31, 2022
		1 year or less				More than 1 year but less than 3 years				3 years or more but less than 5 years				5 years or more				Total
		(Dollars in thousands)
Non-cancelable future operating leases		$	4,135			$	6,496			$	4,247			$	4,298			$	19,176
Time deposits			601,980				145,606				38,971				20				786,577
Subordinated debt			-				-				8,900				98,927				107,827
Advances from FHLB			262,000				875				147,225				-				410,100
Subordinated debt - trust preferred securities			-				-				-				5,000				5,000
Securities sold under agreements to repurchase			20,208				-				-				-				20,208
Standby and commercial letters of credit			18,706				26,468				377				-				45,551
Commitments to extend credit			654,067				342,844				200,971				147,288				1,345,170
Total		$	1,561,096			$	522,289			$	400,691			$	255,533			$	2,739,609

 

 

Off-Balance Sheet Items

 

In the normal course of business, we enter into various transactions which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

 

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

 

Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. The credit risk to us in issuing letters of credit is essentially the same as that involved in extending loan facilities to our customers.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer.

 

Interest Rate Sensitivity and Market Risk

 

As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.

 

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

 

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. Other than back-to-back customer interest rate swaps, we do not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial futures contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

 

Our exposure to interest rate risk is reviewed by the asset-liability committee of b1BANK, in accordance with policies approved by our board of directors. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.

 

 

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

 

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

 

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, 2023								As of December 31, 2022
Change in Interest Rates (Basis Points)			Percent Change in Net Interest Income				Percent Change in Fair Value of Equity				Percent Change in Net Interest Income				Percent Change in Fair Value of Equity
+300				(7.50	%)			(6.03	%)			(8.60	%)			(5.55	%)
+200				(5.70	%)			(3.88	%)			(5.90	%)			(3.65	%)
+100				(4.00	%)			(1.71	%)			(3.50	%)			(1.94	%)
Base				-	%			-	%			-	%			-	%
-100				(1.50	%)			1.89	%			(0.70	%)			1.76	%
-200				(2.10	%)			3.57	%			(2.30	%)			3.38	%

 

The results are primarily due to the balance sheet mix and behavior of demand, money market and savings deposits during such rate fluctuations. The model also assumes no management intervention. 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 available to common shareholders, which excludes certain income and expenses, for the three months ended September 30, 2023, was $18.0 million, or $0.71 per diluted common share, compared to core net income available to common shareholders of $16.4 million, or $0.72 per diluted common share, for the three months ended September 30, 2022. Notable noncore events impacting earnings for the three months ended September 30, 2023, included $932,000 in a gain on the sale of our Leesville, Louisiana banking center, $517,000 in a gain on the extinguishment of debt due to the premium associated with the debt from the TCBI acquisition in 2022, which was attributed to the remaining $3.2 million of the $8.9 million subordinated debt redemption, compared to $3.5 million in acquisition-related expenses and $265,000 in income attributable to insurance reimbursements from storm expenses for the same period in 2022.

 

For the nine months ended September 30, 2023, core net income available to common shareholders was $49.5 million, or $1.96 per diluted common share, compared to core net income available to common shareholders of $41.2 million, or $1.86 per diluted common share, for the nine months ended September 30, 2022. Notable noncore events impacting earnings for the nine months ended September 30, 2023, included $932,000 in a gain on the sale of our Leesville, Louisiana banking center, $1.5 million in a gain on the extinguishment of debt associated with the TCBI acquisition in 2022, which was attributed to the $8.9 million subordinated debt redemption and $173,000 in acquisition-related expenses, compared to the nine months ended September 30, 2022, included the incurrence of losses of $717,000 on disposals of former bank premises and equipment, and $265,000 in insurance reimbursements from storm repairs included in other income, $5.0 million in acquisition-related expenses and $501,000 in expenses attributable to storm repairs (primarily related to storms in 2021) for the same period in 2022.

 

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2023				2022				2023				2022
		(Dollars in thousands, except per share data) (Unaudited)
Interest Income:
Interest income		$	93,322			$	63,473			$	258,662			$	161,609
Core interest income			93,322				63,473				258,662				161,609
Interest Expense:
Interest expense			38,028				9,993				97,293				18,092
Core interest expense			38,028				9,993				97,293				18,092
Provision for Credit Losses:
Provision for credit losses			604				3,273				4,364				7,835
Core provision expense			604				3,273				4,364				7,835
Other Income:
Other income			9,883				8,115				30,229				21,032
Losses on former bank premises and equipment			-				-				-				717
Losses on sale of securities			-				7				62				46
Insurance reimbursement of storm expenditures			-				(265	)			-				(265	)
Gain on sale of branch			(932	)			-				(932	)			-
Gain on extinguishment of debt			(517	)			-				(1,458	)			-
Core other income			8,434				7,857				27,901				21,530
Other Expense:
Other expense			38,607				40,946				116,988				111,063
Acquisition-related expenses (2)			(2	)			(3,521	)			(173	)			(5,040	)
Occupancy and bank premises - storm repair			-				-				-				(501	)
Core other expense			38,605				37,425				116,815				105,522
Pre-Tax Income:
Pre-tax income			25,966				17,376				70,246				45,651
Losses on former bank premises and equipment			-				-				-				717
Losses on sale of securities			-				7				62				46
Insurance reimbursement of storm expenditures			-				(265	)			-				(265	)
Gain on sale of branch			(932	)			-				(932	)			-
Gain on extinguishment of debt			(517	)			-				(1,458	)			-
Acquisition-related expenses (2)			2				3,521				173				5,040
Occupancy and bank premises - storm repair			-				-				-				501
Core pre-tax income			24,519				20,639				68,091				51,690
Provision for Income Taxes: (1)
Provision for income taxes			5,511				3,576				15,027				9,363
Tax on losses on former bank premises and equipment			-				-				-				151
Tax on losses on sale of securities			-				1				13				10
Tax on insurance reimbursement of storm expenditures			-				(55	)			-				(55	)
Tax on gain on sale of branch			(197	)			-				(197	)			-
Tax on gain on extinguishment of debt			(109	)			-				(308	)			-
Tax on acquisition-related expenses (2)			-				739				20				913
Tax on occupancy and bank premises - storm repair			-				-				-				106
Core provision for income taxes			5,205				4,261				14,555				10,488
Preferred Dividends
Preferred dividends			1,351				-				4,051				-
Core preferred dividends			1,351				-				4,051				-
Net Income Available to Common Shareholders:
Net income available to common shareholders			19,104				13,800				51,168				36,288
Losses on former bank premises and equipment , net of tax			-				-				-				566
Losses on sale of securities, net of tax			-				6				49				36
Insurance reimbursement of storm expenditures, net of tax			-				(210	)			-				(210	)
Gain on sale of branch, net of tax			(735	)			-				(735	)			-
Gain on extinguishment of debt, net of tax			(408	)			-				(1,150	)			-
Acquisition-related expenses (2), net of tax			2				2,782				153				4,127
Occupancy and bank premises - storm repair, net of tax			-				-				-				395
Core net income available to common shareholders		$	17,963			$	16,378			$	49,485			$	41,202
Diluted Earnings Per Common Share:
Diluted earnings per common share		$	0.76			$	0.61			$	2.02			$	1.64
Losses on former bank premises and equipment , net of tax			-				-				-				0.02
Losses on sale of securities, net of tax			-				-				-				-
Insurance reimbursement of storm expenditures, net of tax			-				(0.01	)			-				(0.01	)
Gain on sale of branch, net of tax			(0.03	)			-				(0.03	)			-
Gain on extinguishment of debt, net of tax			(0.02	)			-				(0.04	)			-
Acquisition-related expenses (2), net of tax			-				0.12				0.01				0.19
Occupancy and bank premises - storm repair, net of tax			-				-				-				0.02
Core diluted earnings per common share		$	0.71			$	0.72			$	1.96			$	1.86

 

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(1)	Tax rates, exclusive of certain nondeductible acquisition-related expenses and goodwill, utilized were 21% for both 2023 and 2022. These rates approximate the marginal tax rates for the applicable periods.

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

 

 

Tangible Book Value Per Common Share. Tangible book value per common share is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as shareholders’ equity less preferred stock, 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 September 30, 2023				As of December 31, 2022
		(Dollars in thousands, except per share data) (Unaudited)
Tangible Common Equity
Total shareholders' equity		$	604,366			$	580,481
Preferred stock			(71,930	)			(71,930	)
Total common shareholders' equity			532,436				508,551
Adjustments:
Goodwill			(88,391	)			(88,543	)
Core deposit and customer intangibles			(12,418	)			(14,042	)
Total tangible common equity		$	431,627			$	405,966
Common shares outstanding (1)			25,344,168				25,110,313
Book value per common shares (1)		$	21.01			$	20.25
Tangible book value per common shares (1)			17.03				16.17

 

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(1)	Excludes the dilutive effect, if any, of 217,051 and 184,015 shares of common stock issuable upon exercise of outstanding stock options and restricted stock awards as of September 30, 2023 and December 31, 2022, respectively.

 

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

 

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

 

		As of September 30, 2023				As of December 31, 2022
		(Dollars in thousands, except per share data) (Unaudited)
Tangible Common Equity
Total shareholders' equity		$	604,366			$	580,481
Preferred stock			(71,930	)			(71,930	)
Total common shareholders' equity			532,436				508,551
Adjustments:
Goodwill			(88,391	)			(88,543	)
Core deposit and customer intangibles			(12,418	)			(14,042	)
Total tangible common equity		$	431,627			$	405,966
Tangible Assets
Total Assets		$	6,488,781			$	5,990,460
Adjustments:
Goodwill			(88,391	)			(88,543	)
Core deposit and customer intangibles			(12,418	)			(14,042	)
Total tangible assets		$	6,387,972			$	5,887,875
Common Equity to Total Assets			8.2	%			8.5	%
Tangible Common Equity to Tangible Assets			6.8				6.9

 

 

Item 3.          Quantitative and Qualitative Disclosures about Market Risk

 

Risk identification and management are essential elements for the successful management of our business. In the normal course of business, we are subject to various types of risk, including interest rate, credit, and liquidity risk. We control and monitor these risks with policies, procedures, and various levels of managerial and board oversight. Our objective is to optimize profitability while managing and controlling risk within board approved policy limits. Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets and liabilities. We use our asset liability management policy to control and manage interest rate risk. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensibility and Market Risk” for additional discussion of interest rate risk.

 

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

 

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

 

Item 4.         Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on such evaluation, our principal executive officer and principal financial officer concluded our disclosure controls and procedures were effective as of the end of the period covered by this Report to provide reasonable assurance that the information we are required to disclose in reports that are filed or furnished under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, including to ensure that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The effectiveness of our, or any, system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, we cannot assure you that our disclosure controls and procedures will detect all errors or fraud.

 

Changes in Internal Controls over Financial Reporting

 

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

 

 

PART II. OTHER INFORMATION

 

Item 1.         Legal Proceedings

 

From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Management evaluates our exposure to these claims and proceedings individually, and in the aggregate, and provides for potential losses on such litigation if the amount of the loss is estimable and the loss is probable. We are not currently involved in any pending legal proceedings other than routine, nonmaterial proceedings occurring in the ordinary course of business.

 

Item 1A.         Risk Factors

 

In addition to the other information set forth in this Report, we refer you to Item 1A. “Risk Factors” of our Annual Report on Form 10-K for December 31, 2022, filed with the SEC. Other than the risk factors set forth below, there have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for December 31, 2022.

 

Adverse developments affecting the financial services industry.

 

Recent bank failures involving Silicon Valley Bank and Signature Bank have resulted in negative market volatility, especially in the financial services sector, which could continue to negatively impact the market price of our stock in the foreseeable future. The failures have also adversely impacted customer confidence in the soundness of smaller community and regional banks. In response, customers may choose to maintain deposits with larger financial institutions or invest their excess cash elsewhere. Significant withdrawals of deposits could stress our liquidity, funding capacity, earnings, and capital. These factors could also limit our access to capital markets and/or significantly increase the pricing of such sources. In addition, these events may result in adverse changes in laws or regulations that govern our operations.

 

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

 

(a)	Not applicable.

 

(b)	Not applicable.

 

(c)	Not applicable.

 

Item 3.         Defaults upon Senior Securities

 

Not applicable.

 

Item 4.         Mine Safety Disclosures

 

Not applicable.

 

Item 5.         Other Information

 

(a)	Not applicable.

 

(b)	Not applicable.

 

(c)	During the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading agreement,” as each term is defined in Item 408(a) of Regulation S-K.

 

 

Item 6.         Exhibits

 

Number	Description
2.1	Agreement and Plan of Reorganization, dated October 20, 2021, by and between Business First Bancshares, Inc., and Texas Citizens Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on October 21, 2021).
3.1	Restated Articles of Incorporation of Business First Bancshares, Inc., adopted October 27, 2022 (incorporated by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, filed by Business First Bancshares, Inc. on November 3, 2022).
3.2	Amended and Restated Bylaws of Business First Bancshares, Inc., adopted April 23, 2020 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on April 28, 2020).
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 filed by Business First Bancshares, Inc. on November 12, 2014).
4.2	Form of Series A Preferred Stock (incorporated by reference to Exhibit A to Exhibit 10.1 to the Current Report on Form 8-K filed by Business First Bancshares, Inc. on September 1, 2022).
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1	Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS	Inline XBRL Instance Document*
101.SCH	Inline XBRL Taxonomy Extension Schema Document*
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*	Filed herewith.

 

 

SIGNATURES

 

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

 

		BUSINESS FIRST BANCSHARES, INC.
November 2, 2023		/s/ David R. Melville, III
		David R. Melville, III
		President and Chief Executive Officer
November 2, 2023		/s/ Gregory Robertson
		Gregory Robertson
		Chief Financial Officer