Business First Bancshares, Inc. 10-K

ITEM 8. Financial Statements and Supplementary Data. CONTENTS Annual Audited Financial Statements: Report of Independent Registered Public Accounting Firm 77 Consolidated Balance Sheets 81 Consolidated Statements of Income 82 Consolidated Statements of Comprehensive Income 83 Consolidated Statements of Changes in Shareholders' Equity 84 Consolidated Statements of Cash Flows 85 - 86 Notes to Consolidated Financial Statements 87 - 127 76 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors, and Audit Committee Business First Bancshares, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Business First Bancshares, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2024, expressed an unqualified opinion thereon. Change in Accounting Principle As discussed in Notes 1 and 7 to the consolidated financial statements, effective January 1, 2023, the Company changed its method of accounting for credit losses due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. 77 Table of Contents Allowance for Credit Losses As described in Note 1 and Note 7 to the consolidated financial statements, the Company’s allowance for loan losses is a component of the allowance for credit losses. and was $40.4 million as of December 31, 2023. The allowance for loan losses is estimated utilizing forward-looking expected loss models which consider a variety of factors affecting lifetime credit losses. Loans sharing risk characteristics are grouped into pools to estimate expected credit losses. The Company incorporates forecasted economic scenarios over a reasonable and supportable forecast period, currently one year, which incorporates Company and peer historical losses. Loss estimates also consider qualitative factors affecting credit losses not reflected in the model. We identified the allowance for loan losses as a critical audit matter. The principal considerations for that determination included the high degree of judgment and subjectivity relating to assumptions used in the model, such as management’s determination of the reasonable and supportable economic forecast and the use of the qualitative factor adjustments. Auditing these assumptions required a high degree of auditor effort, specialized skills and knowledge, and significant auditor judgment. The primary procedures we performed to address this critical audit matter included: ● We obtained an understanding of the Company’s model and process for determining the allowance for loan losses, and evaluated the design and tested the operating effectiveness of controls relating to the allowance for loan losses, including: o Controls over the completeness and accuracy of data input into the model used to determine the allowance for loan losses, and o Controls over management’s review and approval of the allowance for loan losses, including management’s determination of a reasonable and supportable economic forecast and qualitative factor adjustments applied within the qualitative framework to address risks not already incorporated within the model. ● We evaluated management’s determination of reasonable and supportable economic forecasts, including comparing the factors to independent sources, as well as involving our internal specialists in testing the application of forecasts in the model calculation. ● We evaluated the reasonableness and adequacy of management’s qualitative factor adjustment framework (including substantively testing management’s identification of risks not already incorporated within the model), the application of qualitative factor adjustments within the framework, and the completeness and accuracy of data utilized in development of the qualitative factor adjustments. ● We evaluated the mathematical accuracy of the allowance for loan losses, including the mathematical application of the reasonable and supportable economic forecasts and qualitative adjustments on the loans sharing risk characteristics grouped into pools. /s/ FORVIS, LLP We have served as the Company’s auditor since 2019. Fort Worth, Texas March 1, 2024 78 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors, and Audit Committee Business First Bancshares, Inc. Opinion on the Internal Control over Financial Reporting We have audited Business First Bancshares Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2023 and 2022, and for each of the three years in the period ended December 31 2023, and our report dated March 1, 2024, expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definitions and Limitations of Internal Control o ver Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 79 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. /s/ FORVIS, LLP Fort Worth, Texas March 1, 2024 80 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) December 31, 2023 2022 ASSETS Cash and Due from Banks $ 226,110 $ 152,740 Federal Funds Sold 151,134 15,606 Securities Available for Sale, at Fair Values (Amortized Cost of $ 963,978 at December 31, 2023 and $ 985,599 at December 31, 2022) 879,571 890,751 Mortgage Loans Held for Sale 835 304 Loans and Lease Receivable, Net of Allowance for Loan Losses of $ 40,414 and $ 38,178 at December 31, 2023 and 2022, respectively 4,952,371 4,567,998 Premises and Equipment, Net 69,480 63,177 Accrued Interest Receivable 29,916 25,666 Other Equity Securities 33,942 37,467 Other Real Estate Owned 1,685 1,372 Cash Value of Life Insurance 96,478 91,958 Deferred Taxes 27,323 31,194 Goodwill 88,391 88,543 Core Deposit and Customer Intangible 11,895 14,042 Other Assets 15,419 9,642 Total Assets $ 6,584,550 $ 5,990,460 LIABILITIES Deposits: Noninterest Bearing $ 1,299,090 $ 1,549,381 Interest Bearing 3,949,700 3,270,964 Total Deposits 5,248,790 4,820,345 Federal Funds Purchased - 14,057 Securities Sold Under Agreements to Repurchase 18,885 20,208 Bank Term Funding Program 300,000 - Federal Home Loan Bank Borrowings 211,198 410,100 Subordinated Debt 99,990 110,749 Subordinated Debt - Trust Preferred Securities 5,000 5,000 Accrued Interest Payable 14,841 2,092 Other Liabilities 41,587 27,428 Total Liabilities 5,940,291 5,409,979 Commitments and Contingencies (See Notes 19 and 22) SHAREHOLDERS' EQUITY Preferred Stock, No Par Value; 5,000,000 Shares Authorized; 72,010 Shares ($ 1,000 Liquidation Preference) Issued and Outstanding at both December 31, 2023 and 2022 71,930 71,930 Common Stock, $ 1 Par Value; 50,000,000 Shares Authorized; 25,351,809 and 25,110,313 Shares Issued and Outstanding at December 31, 2023 and 2022, respectively 25,352 25,110 Additional Paid-in Capital 397,447 393,690 Retained Earnings 216,115 163,955 Accumulated Other Comprehensive Loss ( 66,585 ) ( 74,204 ) Total Shareholders' Equity 644,259 580,481 Total Liabilities and Shareholders' Equity $ 6,584,550 $ 5,990,460 The accompanying notes are an integral part of these financial statements. 81 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) Years Ended December 31, 2023 2022 2021 Interest Income: Interest and Fees on Loans $ 323,327 $ 218,032 $ 156,791 Interest and Dividends on Non-taxable Securities 4,340 4,131 4,274 Interest and Dividends on Taxable Securities 15,785 12,372 9,246 Interest on Federal Funds Sold and Due From Banks 9,875 1,579 127 Total Interest Income 353,327 236,114 170,438 Interest Expense: Interest on Deposits 106,908 24,413 12,183 Interest on Borrowings 31,290 12,124 4,371 Total Interest Expense 138,198 36,537 16,554 Net Interest Income 215,129 199,577 153,884 Provision for Credit Losses 4,483 10,886 8,047 Net Interest Income after Provision for Credit Losses 210,646 188,691 145,837 Other Income: Service Charges on Deposit Accounts 9,704 8,272 6,813 Gain (Loss) on Sales of Securities ( 2,565 ) ( 48 ) 378 Gain on Sales of Loans 1,972 574 10,117 Other Income 27,531 20,512 18,474 Total Other Income 36,642 29,310 35,782 Other Expenses: Salaries and Employee Benefits 90,611 85,222 65,825 Occupancy and Equipment Expense 20,859 19,367 15,750 Other Expenses 45,232 44,820 35,486 Total Other Expenses 156,702 149,409 117,061 Income Before Income Taxes 90,586 68,592 64,558 Provision for Income Taxes 19,543 14,337 12,422 Net Income 71,043 54,255 52,136 Preferred Stock Dividends 5,401 1,350 - Net Income Available to Common Shareholders $ 65,642 $ 52,905 $ 52,136 Earnings Per Common Share: Basic $ 2.62 $ 2.34 $ 2.54 Diluted $ 2.59 $ 2.32 $ 2.53 The accompanying notes are an integral part of these financial statements. 82 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) Years Ended December 31, 2023 2022 2021 Consolidated Net Income $ 71,043 $ 54,255 $ 52,136 Other Comprehensive Income (Loss): Unrealized Gain (Loss) on AFS Investment Securities 13,006 ( 93,418 ) ( 14,985 ) Unrealized Gain (Loss) on Share of Other Equity Investments ( 782 ) 874 ( 336 ) Reclassification Adjustment for Gains (Losses) on Sales of AFS Investment Securities Included in Net Income ( 2,565 ) ( 48 ) 378 Income Tax Effect ( 2,040 ) 19,565 3,138 Other Comprehensive Income (Loss) 7,619 ( 73,027 ) ( 11,805 ) Consolidated Comprehensive Income (Loss) $ 78,662 $ ( 18,772 ) $ 40,331 The accompanying notes are an integral part of these financial statements. 83 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS ’ EQUITY (Dollars in thousands, except per share data) Accumulated Additional Other Total Preferred Common Paid-In Retained Comprehensive Shareholders' Stock Stock Capital Earnings Income (Loss) Equity Balances at December 31, 2020 $ - $ 20,621 $ 299,540 $ 79,174 $ 10,628 $ 409,963 Comprehensive Income: Net Income - - - 52,136 - 52,136 Other Comprehensive Loss - - - - ( 11,805 ) ( 11,805 ) Cash Dividends Declared, $ 0.46 Per Share - - - ( 9,436 ) - ( 9,436 ) Stock Issuance - 262 3,302 - - 3,564 Stock Based Compensation Cost - 97 2,764 - - 2,861 Surrendered Shares of Options Exercised - ( 105 ) ( 2,887 ) - - ( 2,992 ) Stock Repurchase - ( 475 ) ( 10,448 ) - - ( 10,923 ) Balances at December 31, 2021 - 20,400 292,271 121,874 ( 1,177 ) 433,368 Comprehensive Income: Net Income - - - 54,255 - 54,255 Other Comprehensive Loss - - - - ( 73,027 ) ( 73,027 ) Cash Dividends Declared on Preferred Stock, $ 18.75 Per Share - - - ( 1,350 ) - ( 1,350 ) Cash Dividends Declared on Common Stock, $ 0.48 Per Share - - - ( 10,824 ) - ( 10,824 ) Preferred Stock Issuance, Net of Issuance Costs 71,930 - - - - 71,930 Stock Issuance, Net of Issuance Costs - 4,636 98,899 - - 103,535 Stock Based Compensation Cost - 119 3,577 - - 3,696 Surrendered Shares of Options Exercised - ( 45 ) ( 1,057 ) - - ( 1,102 ) Balances at December 31, 2022 71,930 25,110 393,690 163,955 ( 74,204 ) 580,481 Cumulative Effect of Change in Accounting Principle for Credit Losses - - - ( 827 ) - ( 827 ) Comprehensive Income: Net Income - - - 71,043 - 71,043 Other Comprehensive Income - - - - 7,619 7,619 Cash Dividends Declared on Preferred Stock, $ 75.00 Per Share - - - ( 5,401 ) - ( 5,401 ) Cash Dividends Declared on Common Stock, $ 0.50 Per Share - - - ( 12,655 ) - ( 12,655 ) Stock Based Compensation Cost - 242 3,757 - - 3,999 Balances at December 31, 2023 $ 71,930 $ 25,352 $ 397,447 $ 216,115 $ ( 66,585 ) $ 644,259 The accompanying notes are an integral part of these financial statements. 84 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Years Ended December 31, 2023 2022 2021 Cash Flows From Operating Activities: Consolidated Net Income $ 71,043 $ 54,255 $ 52,136 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 4,483 10,886 8,047 Depreciation and Amortization 4,670 4,818 4,163 Net Accretion of Purchase Accounting Adjustments ( 7,615 ) ( 7,949 ) ( 7,122 ) Stock Based Compensation Cost 3,999 3,696 2,861 Net Amortization of Securities 4,197 6,005 7,021 (Gain) Loss on Sales of Securities 2,565 48 ( 378 ) Gain on Sale Loans ( 671 ) ( 398 ) ( 9,179 ) Income on Other Equity Securities ( 3,045 ) ( 1,554 ) ( 2,399 ) (Gain) Loss on Sale of Other Real Estate Owned, Net of Writedowns ( 214 ) 92 1,404 Increase in Cash Value of Life Insurance ( 2,247 ) ( 1,931 ) ( 1,396 ) Deferred Income Tax Expense (Benefit) ( 2,052 ) ( 1,368 ) 586 Gain on Sale of Branch ( 945 ) - ( 492 ) Changes in Assets and Liabilities: (Increase) Decrease in Accrued Interest Receivable ( 4,250 ) ( 3,466 ) 4,298 (Increase) Decrease in Other Assets ( 1,683 ) 6,075 ( 3,500 ) Increase (Decrease) in Accrued Interest Payable 12,749 519 ( 1,145 ) Increase (Decrease) in Other Liabilities 11,443 ( 151 ) 1,538 Net Cash Provided by Operating Activities 92,427 69,577 56,443 Cash Flows From Investing Activities: Purchases of Securities Available for Sale ( 131,038 ) ( 102,809 ) ( 528,059 ) Proceeds from Maturities / Sales of Securities Available for Sale 91,981 38,951 29,945 Proceeds from Paydowns of Securities Available for Sale 53,916 95,019 96,408 Net Cash Received (Paid) in Acquisition - 163,460 ( 7,256 ) Net Cash Paid in Sale of Branch ( 14,506 ) - ( 13,727 ) Purchases of Other Equity Securities ( 15,573 ) ( 22,670 ) ( 4,438 ) Redemption of Other Equity Securities 21,361 10,327 2,575 Purchase of Life Insurance ( 2,273 ) ( 18,000 ) ( 15,928 ) Proceeds from Death Benefit of Cash Value of Life Insurance - 499 1,974 Proceeds from Sale of SBA PPP Loans - - 243,607 Net Increase in Loans ( 379,073 ) ( 1,070,354 ) ( 431,236 ) Net Purchases of Premises and Equipment ( 11,648 ) ( 7,781 ) ( 3,971 ) Loss on Disposal of Premises and Equipment - 717 4 Proceeds from Sales of Other Real Estate 1,240 682 7,640 Net (Increase) Decrease in Federal Funds Sold ( 135,528 ) 211,438 ( 52,892 ) Net Cash Used in Investing Activities ( 521,141 ) ( 700,521 ) ( 675,354 ) (CONTINUED) 85 Table of Contents Years Ended December 31, 2023 2022 2021 Cash Flows From Financing Activities: Net Increase in Deposits 444,780 265,827 480,124 Net Increase (Decrease) in Securities Sold Under Agreements to Repurchase ( 1,323 ) 1,087 ( 2,704 ) Net Increase (Decrease) in Federal Funds Purchased ( 14,057 ) 14,057 - Net Advances (Repayments) on Federal Home Loan Bank Borrowings ( 198,902 ) 327,203 39,022 Net Proceeds on Bank Term Funding Program 300,000 - - Net Proceeds (Repayments) from Short Term Borrowings - ( 11 ) ( 5,000 ) Net Repayments from Long Term Borrowings - - ( 6,000 ) Proceeds from Issuance of Subordinated Debt - - 52,500 Repayment of Subordinated Debt ( 8,900 ) - - Gain on Extinguishment of Debt ( 1,458 ) - - Proceeds from Issuance of Preferred Stock, Net of Issuance Costs - 71,930 - Proceeds from Issuance of Common Stock, Net of Issuance Costs - 48,492 3,564 Surrendered Shares of Options Exercised - ( 1,102 ) ( 2,992 ) Repurchase of Common Stock - - ( 10,923 ) Payment of Dividends on Preferred Stock ( 5,401 ) ( 1,350 ) - Payment of Dividends on Common Stock ( 12,655 ) ( 10,824 ) ( 9,436 ) Net Cash Provided by Financing Activities 502,084 715,309 538,155 Net Increase (Decrease) in Cash and Cash Equivalents 73,370 84,365 ( 80,756 ) Cash and Cash Equivalents at Beginning of Period 152,740 68,375 149,131 Cash and Cash Equivalents at End of Period $ 226,110 $ 152,740 $ 68,375 Supplemental Disclosures for Cash Flow Information: Cash Payments for: Interest on Deposits $ 104,811 $ 23,846 $ 13,249 Interest on Borrowings $ 20,638 $ 11,953 $ 4,450 Income Tax Payments $ 16,095 $ 13,550 $ 15,711 Supplemental Schedule for Noncash Investing and Financing Activities: Change in the Unrealized Gain (Loss) on Securities Available for Sale $ 10,441 $ ( 93,466 ) $ ( 14,607 ) Change in the Unrealized Gain (Loss) on Equity Securities $ ( 782 ) $ 874 $ ( 336 ) Change in Deferred Tax Effect on the Unrealized (Gain) Loss on Securities Available for Sale and Equity Securities $ ( 2,040 ) $ 19,565 $ 3,138 Transfer of Loans to Other Real Estate $ 1,339 $ 719 $ 1,420 Acquisitions: Fair Value of Tangible Assets Acquired $ - $ 531,510 $ 1,343 Other Intangible Assets Acquired - 3,875 4,300 Liabilities Assumed - 508,991 6 Net Identifiable Assets Acquired Over Liabilities Assumed $ - $ 26,394 $ 5,637 Subordinated Debt Issued as Part of Consideration of Smith Shellnut Wilson $ - $ - $ 3,927 The accompanying notes are an integral part of these financial statements. 86 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Nature of Operations – Summary of Significant Accounting Policies – The accounting principles followed by Business First Bancshares, Inc. and its wholly-owned subsidiary, b1BANK (the “Bank”), and the Bank’s wholly-owned subsidiaries, Business First Insurance, LLC and Smith Shellnut Wilson, LLC (“SSW”) are those which are generally practiced within the banking industry. The methods of applying those principles conform with generally accepted accounting principles (“GAAP”) and have been applied on a consistent basis. The principles which significantly affect the determination of financial position, results of operations, changes in shareholders’ equity and cash flows are summarized below. Principles of Consolidation The consolidated financial statements include the accounts of Business First Bancshares, Inc. and its wholly-owned subsidiary, b1BANK, and the Bank’s wholly-owned subsidiaries, Business First Insurance, LLC and SSW (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated. Nature of Operations The Bank operates out of full-service banking centers and loan production offices in markets across Louisiana, the Dallas/Fort Worth, Texas 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. On March 22, 2021, the Company, through b1BANK, entered into a definitive agreement to acquire SSW, a registered investment advisor with approximately $ 3.5 billion in assets under management, specializing in managing investment portfolios for corporations, foundations and individuals. The acquisition of SSW was consummated on April 1, 2021. At March 31, 2021, SSW reported $ 3.6 million in total assets and $ 2.3 million in total liabilities. On March 1, 2022, the Company completed the acquisition of Texas Citizens Bancorp, Inc. (“TCBI”), and its wholly-owned subsidiary, Texas Citizens Bank, National Association, located in Pasadena, Texas. 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. Estimates 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. The Bank’s loans are generally secured by specific items of collateral including real property, business assets, and consumer assets. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions in the Bank’s market area. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated. 87 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Acquisition Accounting Acquisitions are accounted for under the purchase method of accounting. Purchased assets and assumed liabilities are recorded at their respective acquisition date fair values, and identifiable intangible assets are recorded at fair value. If the consideration given exceeds the fair value of the net assets received, goodwill is recognized. The Company generally records provisional amounts of fair value at the time of acquisition based on the information available. The provisional fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Securities Management determines the appropriate classification of debt securities (held to maturity, available for sale or trading) at the time of purchase and re-evaluates this classification quarterly. Securities classified as available for sale are those debt securities the Bank intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Bank’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are recorded at fair value. Unrealized gains or losses are reported as a component of comprehensive income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Securities classified as held to maturity are those debt securities the Bank has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are recorded at cost adjusted for amortization of premium and accretion of discount, computed by various methods approximating the interest method over their contractual lives. The Bank has no securities classified as held to maturity at December 31, 2023 and 2022. Securities classified as trading are those securities held for resale in anticipation of short-term market movements. These securities are recorded at market value with any market adjustments included in earnings. The Bank has no securities classified as trading at December 31, 2023 and 2022. Other Equity Securities The Bank has invested in Federal Home Loan Bank (“FHLB”) stock, and other similar correspondent banks, which is reflected at cost in these financial statements. As a member of the FHLB System, the Bank is required to purchase and maintain stock in an amount determined by the FHLB. The FHLB stock is redeemable at par value at the discretion of the FHLB. The Bank has invested in certain equity investments which are accounted for under the equity method of accounting, which are considered to be variable interest entities (“VIE”). Loans, including acquired loans Loans Loans are stated at principal amounts outstanding, adjusted for deferred fees, costs and fair value adjustments, in the case of acquired loans, less the allowance for loan losses. Interest on loans is accrued daily based on the principal outstanding. Deferred fees, costs and fair value adjustments for acquired loans are recognized as an adjustment to yield over the life of the loan. Generally, the Bank discontinues the accrual of interest income when a loan becomes 90 days past due as to principal or interest. When a loan is placed on nonaccrual status, previously recognized but uncollected interest is reversed from interest income. Subsequent cash receipts on nonaccrual loans are generally accounted for on the cost recovery method until the loans qualify for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Prior to January 1, 2023, the Bank classified loans as impaired when it was probable the Bank would be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. 88 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Acquired Loans Purchased loans acquired in a business combination are initially recorded at their estimated fair value as of the acquisition date. Subsequent to acquisition, acquired loans are accounted for based upon a determination of whether they were purchased with more-than insignificant amount of credit deterioration (“PCD”) or an insignificant (“non-PCD”) amount of credit deterioration compared to origination. In either case, the difference between the estimated fair value of the acquired loan related to non-credit deterioration is treated as an adjustment to the contractual yield and accreted into interest income over the remaining life of the loan. 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 (ASU 2016 - 13 ). Prior to the adoption of Financial Instrument – Credit Losses (Topic 324 ), Measurement of Credit Losses on Financial Instruments , commonly referred to as the Current Expected Credit Loss (“CECL”), ASU 2016 - 13, acquired performing loans were accounted for under ASC 310 - 20 , Nonrefundable Fees and Other Costs , with the related discount or premium being recognized as an adjustment to yield over the life of the loan and acquired impaired loans were accounted for according to ASC Topic 310 - 30, “ Loans and Debt Securities Acquired with Deteriorated Credit Quality ( “ASC 310 - 30” ). Under this method, adjustments to cash flows from the original acquisition date estimates were accounted for as adjustments to accretion for these loans. Allowance for Credit Losses Allowance for Loan Losses Effective January 1, 2023, the allowance for credit losses is established for current expected credit losses on the Company’s loan portfolio, including unfunded credit commitments. Upon adoption of the guidance on January 1, 2023, we recognized an $ 827,000 reduction to retained earnings, after recording the relating deferred tax asset adjustment at our adjusted tax rate. 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. The Company subscribes to a third -party service to provide economic forecasts at both the national and state levels, including GDP and unemployment, and other relevant forecasts. National 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 qualitative factors affecting credit losses not reflected in the model, including trends in the portfolio, credit management and underwriting practices and forecasted economic conditions affecting our operating footprint. The allowance recorded for credit 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, with loans sharing risk characteristics grouped into pools to estimate expected losses. 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 qualitative factors 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 credit 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. Prior to the adoption of ASU 2016 - 13, the allowance for credit losses on loans was a contra-asset valuation account established through a provision for loan losses charged to expense, which represented management’s best estimate of inherent losses that had been incurred within the existing portfolio of loans. The allowance for credit losses on loans included allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” 89 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Allowance for loans acquired with credit deterioration 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) loans, 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. Allowance for unfunded credit commitments 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. Therefore 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, adjusted for an expectation of the actual utilization of the committed credit facility. Allowance on investment securities The allowance for credit losses encompasses potential expected credit losses related to the securities portfolio for credit losses. The assessment includes reviewing historical loss data for both our portfolio and similar types of investment securities to develop an estimate for the current securities portfolio. Additionally, our review of the securities portfolio for expected credit losses includes an evaluation of factors including the security issuer bond ratings, delinquency status, insurance or other available credit support, as well as our expectations of the forecasted economic outlook relevant to these securities, and our ability and intent to hold the security over a period of time sufficient to recover its value up to the amortized cost basis. The results of the analysis are evaluated quarterly to confirm that credit loss estimates are appropriate for the securities portfolio. Based on our assessments, expected credit losses on the investment securities portfolio as of December 31, 2023, was negligible and therefore, no allowance for credit loss was recorded related to our investment securities. Prior to the adoption of ASU 2016 - 13, declines in the fair value of available-for-sale securities below their cost that were deemed to be other than temporary were reflected in earnings as realized losses. In estimating other-than-temporary impairment losses prior to January 1, 2023, management considered, among other things, (i) the length of time and the extent to which the fair value had been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Accrued Interest The Company has elected to exclude accrued interest receivable from the amortized cost basis on its loan and debt securities portfolio. The Company has also elected to not measure an allowance for credit losses on accrued interest for loans held-for-investment or debt securities based on its policy to write off uncollectible interest in a timely manner. For loans, this occurs when a loan is placed on nonaccrual status. Generally, for loans, 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. For debt securities, the elections are made based solely on management’s evaluation of the ability of the security issuer, and any relevant entities, to continue making contractual payments. Such write-offs are recognized as a reduction of interest income. Accrued interest receivable for the loan and securities portfolio is included within Accrued Interest Receivable in the Consolidated Balance Sheets. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided at rates based upon estimated useful service lives using the straight-line method for financial reporting purposes. The costs of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal and the resulting gains or losses are included in current operations. Expenditures for maintenance and repairs are charged to operations as incurred. Costs of major additions and improvements are capitalized and expensed over their estimated depreciable lives. 90 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Real Estate Owned Real estate properties acquired through or in lieu of loan foreclosure or negotiated settlement are initially recorded at the fair value less estimated selling cost at the date of acquisition. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill and other intangible assets deemed to have an indefinite useful life are not amortized but instead are subject to review for impairment annually, or more frequently if deemed necessary. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives and reviewed for impairment. If impaired, the asset is written down to its estimated fair value. Our other intangibles include core deposit intangibles (“CDI”) representing the value of the acquired core deposit base are generally recorded in connection with business combinations involving banks and branch locations; and customer-related intangibles representing the value of a customer list consisting of customer contact information acquired through business combination. The Company’s policy is to amortize these intangibles on a straight-line basis over their estimated useful life. Core deposit and customer intangibles are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. The Company recognizes the rights to service mortgage and other loans as separate assets, which are recorded in other assets in the consolidated balance sheets, when purchased or when servicing is contractually separated from the underlying loans by sale with servicing rights retained. For loan sales with servicing retained, a servicing right, generally an asset, is recorded at fair value at the time of sale for the right to service the loans sold. All servicing rights are identified by class and amortized over the remaining service life of the loan. Income Taxes The provision for income taxes is based on amounts reported in the statement of income after exclusion of nontaxable income such as interest on state and municipal securities. Also, certain items of income and expense are recognized in different time periods for financial statement purposes than for income tax purposes. Thus, provisions for deferred taxes are recorded in recognition of such temporary differences. Deferred taxes are provided utilizing a liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the reported amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company files a consolidated federal income tax return. Consolidated income tax expense is allocated on the basis of each entity’s income adjusted for permanent differences. The Company evaluates all significant tax positions as required by accounting principles generally accepted in the United States of America. As of December 31, 2023 and 2022, the Company does not believe it has taken any positions that would require the recording of any additional tax liability, nor does it believe there are any unrealized tax benefits that would either increase or decrease within the next year. The Company files income tax returns in the U.S. federal jurisdiction and applicable states. With few exceptions, the Company is no longer subject to federal and state income tax examinations by tax authorities for years before 2020. Any interest and penalties assessed by income taxing authorities are not significant, and are included in other expenses in these financial statements, as applicable. 91 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Based Compensation As described in Note 16, the Company has issued stock options, stock grants and restricted stock awards which incorporate stock-based compensation. The Company has adopted a fair value-based method of accounting for these awards. The compensation cost is measured at the grant date based on the value of the award and is recognized over the requisite service period, which is usually the vesting period. Forfeitures are recognized as they occur. Statements of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand and due from banks. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities or other equity investments, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of comprehensive income are disclosed on the Consolidated Statements of Comprehensive Income for all periods presented. Advertising The Company expenses all costs of advertising and promotion the first time the advertising or promotion takes place. For the years ended December 31, 2023, 2022 and 2021, the Company expensed costs of $ 4.6 million, $ 3.9 million and $ 2.7 million, respectively. Recognition of Revenue from Contracts with Customers Service charges on deposit accounts, fee and broker commissions, ATM/debit card fee income (including interchange), and transactional income from traditional banking services, are the significant noninterest income sources of revenue from contracts with customers. The Company generally acts in a principal capacity in the performance of these services. The Company’s performance obligations are generally satisfied as the services are rendered and typically do not extend beyond a reporting period. Fees, which are typically billed and collected after services are rendered, are readily determinable and allocated individually to each service. In the normal course of business, the Company does not generally grant refunds for services provided. As such, the Company does not establish provisions for estimated returns. Accounting Standards Adopted in 2023 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 did not 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. 92 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Accounting Standards Not Yet Adopted ASU No. 2023 - 09, “ Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures. ” ASU 2023 - 09 requires public business entities to disclose additional information in specified categories with respect to the rate reconciliation for federal, state and foreign income taxes. In addition, the updates also require more details about reconciling items in the rate reconciliation in some categories if items meet a quantitative threshold. ASU 2023 - 09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold. ASU 2023 - 09 is effective for the Company starting January 1, 2025, though early adoption is permitted. ASU 2023 - 09 is not expected to have a significant impact on our financial statements. Note 2 – Reclassifications – Certain reclassifications may have been made to the prior years’ financial statements in order to conform to the classifications adopted for reporting in 2023. Specifically for the adoption of CECL, prior to January 1, 2023, the allowance for credit losses was established based on an incurred loss model. Upon adoption of ASU 2016 - 13 (i.e. ASC 326 ), 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. Results from periods prior to January 1, 2023 are presented using the previously applicable GAAP. These reclassifications have no material effect on previously reported shareholders’ equity or net income. 93 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $ 236,000 and $ 5.2 million of acquisition-related costs within merger and conversion-related expenses and salaries and benefits for the years ended December 31, 2023 and 2022, respectively. 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. 94 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Smith Shellnut Wilson, LLC On April 1, 2021, the Company consummated the acquisition, through b1BANK, of SSW, headquartered in Ridgeland, Mississippi, pursuant to the terms of the definitive agreement dated as of March 22, 2021. Pursuant to the terms of the agreement, upon consummation of the acquisition, the Company paid $ 7.3 million in cash and issued $ 3.9 million in subordinated debt, which is further described in Note 11, to the former owners of SSW. At March 31, 2021, SSW reported $ 3.6 million in total assets and $ 2.3 million in total liabilities. As part of the acquisition, the Company recorded $ 6.5 million in goodwill and $ 4.3 million in customer intangibles to be amortized over a 10 year period. 95 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Earnings per Common Share – Basic earnings per common 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. Years Ended December 31, 2023 2022 2021 (Dollars in thousands, except per share data) Numerator: Net Income $ 71,043 $ 54,255 $ 52,136 Less: Preferred Stock Dividends 5,401 1,350 - Net Income Available to Common Shares $ 65,642 $ 52,905 $ 52,136 Denominator: Weighted Average Common Shares Outstanding 25,079,106 22,633,478 20,502,249 Dilutive Effect of Stock Options and Restricted Stock Awards 217,094 184,015 132,032 Weighted Average Dilutive Common Shares 25,296,200 22,817,493 20,634,281 Basic Earnings Per Common Share From Net Income Available to Common Shares $ 2.62 $ 2.34 $ 2.54 Diluted Earnings Per Common Share From Net Income Available to Common Shares $ 2.59 $ 2.32 $ 2.53 Note 5 – Cash and Due From Bank – The Bank is required to maintain funds in cash or on deposit with the Federal Reserve Bank. The Bank had no required reserves as of December 31, 2023 and 2022. 96 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 – Securities – The amortized cost and fair values of securities available for sale as of December 31, 2023 and 2022 are summarized as follows: December 31, 2023 (Dollars in thousands) Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury Securities $ 17,690 $ - $ 1,451 $ 16,239 U.S. Government Agencies 10,258 - 848 9,410 Corporate Securities 49,609 - 5,770 43,839 Mortgage-Backed Securities 555,148 976 49,814 506,310 Municipal Securities 331,273 298 27,798 303,773 Total Securities Available for Sale $ 963,978 $ 1,274 $ 85,681 $ 879,571 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 97 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present a summary of securities with gross unrealized losses and fair values at December 31, 2023 and 2022, aggregated by investment category and length of time in a continued unrealized loss position. Due to the nature of these investments and current prevailing market prices, these unrealized losses are considered non-credit related. December 31, 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 $ - $ - $ 16,239 $ 1,451 $ 16,239 $ 1,451 U.S. Government Agencies - - 9,410 848 9,410 848 Corporate Securities 7,529 362 36,106 5,408 43,635 5,770 Mortgage-Backed Securities 21,436 895 375,891 48,919 397,327 49,814 Municipal Securities 8,013 63 270,467 27,735 278,480 27,798 Total Securities Available for Sale $ 36,978 $ 1,320 $ 708,113 $ 84,361 $ 745,091 $ 85,681 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 December 31, 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. 98 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amortized cost and fair values of securities available for sale as of December 31, 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 $ 17,287 $ 17,126 One to Five Years 181,791 171,117 Over Five to Ten Years 384,160 349,660 Over Ten Years 380,740 341,668 Total Securities Available for Sale $ 963,978 $ 879,571 Securities available for sale with a fair value of $ 629.7 million and $ 482.7 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law as of December 31, 2023 and 2022. At December 31, 2023 and 2022, accrued interest receivable on securities was $ 4.7 million and $ 4.4 million, respectively, and is included within accrued interest receivable on the consolidated balance sheets. There were $ 9,000 and $ 593,000 realized gross gains from sales or redemptions of securities for the years ended December 31, 2022 and 2021, respectively, and none for the year ended December 31, 2023. There were $ 2.6 million, $ 57,000 and $ 215,000 realized gross losses from sales or redemptions of securities for the years ended December 31, 2023, 2022 and 2021, respectively. 99 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Equity Securities and VIEs The Company has invested in the Federal Home Loan Bank of Dallas which is included in other equity securities and reflected at cost in these financial statements. The cost of these securities was $ 14.8 million and $ 19.7 million, respectively, at December 31, 2023 and 2022. The Federal Home Loan Bank stock is pledged to secure advances from the Federal Home Loan Bank of Dallas at both December 31, 2023 and 2022. The Company also has investments of $ 302,000 in TIB National Association, $ 562,000 in Bankers Insurance, LLC, and $ 2.2 million in First National Banker’s Bank at both December 31, 2023 and 2022. The Company also had an investment in Senior Housing Crime Prevention Foundation stock of $ 501,000 at December 31, 2022. These investments are carried at cost, less any impairment, due to the lack of a quoted market price and a ready market for these types of investments. VIEs are legal entities that either do not have sufficient equity to finance their activities without the support from other parties or whose equity investors lack a controlling financial interest. The Company has investments in certain partnerships and limited liability entities that have been evaluated and determined to be VIEs. Consolidation of a VIE is appropriate if a reporting entity holds a controlling financial interest in the VIE and is the primary beneficiary. The Company is not the primary beneficiary and does not hold a controlling interest in the VIEs as it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. Small Business Investment Companies (“SBIC”) and financial technology (“Fintech”) funds at December 31, 2023 and 2022 are summarized below. December 31, 2023 2022 (Dollars in thousands) McLarty Capital Partners SBIC, L.P. $ 457 $ 878 McLarty Capital Partners SBIC II, L.P. 2,520 2,437 Firmament Capital Partners SBIC III, L.P. 1,870 1,787 Firmament Capital Partners SBIC IV, L.P. 493 - Bluehenge Capital Secured Debt SBIC, L.P. 3,220 3,934 Bluehenge Capital Secured Debt SBIC II, L.P. 1,146 296 New Louisiana Agnel Fund 2, LLC 49 49 Pharos Capital Partners IV-A, L.P. 457 356 Valesco Fund II, LP 1,227 1,147 Valesco Fund III, LP 37 - GP Capital Partners, LP 624 277 BankTech Ventures, LP 284 77 Jam Fintop BankTech, LP 531 340 Ledyard Capital Managers, LLC 769 928 Mendon Ventures Banktech Fund I, LP 1,308 896 Castle Creek Launchpad Fund I, LP 607 211 Work America Capital Fund I, LP 425 629 $ 16,024 $ 14,242 100 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 – Loans and the Allowance for Loan Losses – Loans receivable at December 31, 2023 and 2022 are summarized as follows: December 31, 2023 2022 (Dollars in thousands) Real estate loans: Commercial $ 2,217,928 $ 2,020,406 Construction 669,798 722,074 Residential 682,394 656,378 Total real estate loans 3,570,120 3,398,858 Commercial 1,358,838 1,153,873 Consumer and other 63,827 53,445 Total loans held for investment 4,992,785 4,606,176 Less: Allowance for loan losses ( 40,414 ) ( 38,178 ) Net loans $ 4,952,371 $ 4,567,998 The performing 1 - 4 family residential, multi-family residential, commercial real estate, and commercial loans, are pledged, under a blanket lien, as collateral securing advances from the FHLB at December 31, 2023 and 2022. Commercial and agricultural loans are pledged against the Federal Reserve Banks’ discount window as of December 31, 2023. Net deferred loan origination fees were $ 12.6 million and $ 13.1 million at December 31, 2023 and 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 December 31, 2023 and 2022, overdrafts of $ 2.2 million and $ 2.0 million, respectively, have been reclassified to loans. The Bank is the lead lender on participations sold, without recourse, to other financial institutions which amounts are not included in the consolidated balance sheets. The unpaid principal balances of mortgages and other loans serviced for others were approximately $ 723.5 million and $ 683.3 million at December 31, 2023 and 2022, respectively. The Company has servicing rights of $ 1.1 million and $ 1.7 million recorded at December 31, 2023 and 2022, respectively, which are 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. 101 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 refinancing, 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. 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. 102 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth, as of December 31, 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 December 31, 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 ( 2,049 ) ( 36 ) ( 42 ) ( 2,813 ) ( 1,489 ) ( 6,429 ) Recoveries 26 1 18 672 327 1,044 Provision (Recovery) 174 ( 70 ) 520 3,327 1,010 4,961 Ending Balance $ 17,676 $ 6,596 $ 5,485 $ 10,424 $ 233 $ 40,414 Reserve for Unfunded Credit 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 (Recovery) ( 130 ) ( 704 ) ( 26 ) 486 ( 104 ) ( 478 ) Ending Balance $ 206 $ 1,546 $ 177 $ 1,372 $ 23 $ 3,324 Total Allowance for Credit Losses $ 17,882 $ 8,142 $ 5,662 $ 11,796 $ 256 $ 43,738 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. December 31, 2023 January 1, 2023 Loan Balance Specific Allocations Loan Balance Specific Allocations (Dollars in thousands) Real estate loans: Commercial $ 883 $ - $ 3,008 $ 1,915 Construction 2,334 513 1,424 513 Residential 1,533 - 1,558 3 Total real estate loans 4,750 513 5,990 2,431 Commercial - - 6,096 1,779 Consumer and other - - - - Total $ 4,750 $ 513 $ 12,086 $ 4,210 103 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 104 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the credit quality indicators, disaggregated by loan segment, as of December 31, 2023: December 31, 2023 Criticized Pass (Risk Grade 10-45) Special Mention (Risk Grade 50) Substandard (Risk Grade 60) Doubtful (Risk Grade 70) Loss (Risk Grade 80) Total Current Period Charge- offs (Dollars in thousands) Real Estate: Commercial Originated in 2023 $ 228,902 $ - $ 84 $ - $ - $ 228,986 $ - Originated in 2022 751,649 1,909 - - - 753,558 - Originated in 2021 427,269 6,103 492 - - 433,864 357 Originated in 2020 151,848 3,551 8 - - 155,407 - Originated in 2019 149,946 5,556 372 932 - 156,806 1,447 Originated Prior to 2019 379,503 1,313 7,970 335 - 389,121 245 Revolving 99,723 226 237 - - 100,186 - Revolving Loans Converted to Term - - - - - - - Total Real Estate: Commercial $ 2,188,840 $ 18,658 $ 9,163 $ 1,267 $ - $ 2,217,928 $ 2,049 Real Estate: Construction Originated in 2023 $ 131,617 $ - $ - $ - $ - $ 131,617 $ - Originated in 2022 322,032 647 62 - - 322,741 - Originated in 2021 85,438 2,601 1,229 - - 89,268 - Originated in 2020 22,515 31 16 - - 22,562 - Originated in 2019 19,402 - 1,675 - - 21,077 1 Originated Prior to 2019 20,180 413 588 345 - 21,526 35 Revolving 60,612 395 - - - 61,007 - Revolving Loans Converted to Term - - - - - - - Total Real Estate: Construction $ 661,796 $ 4,087 $ 3,570 $ 345 $ - $ 669,798 $ 36 Real Estate: Residential Originated in 2023 $ 76,662 $ - $ - $ - $ - $ 76,662 $ - Originated in 2022 170,229 433 410 14 - 171,086 - Originated in 2021 98,329 - 708 - - 99,037 11 Originated in 2020 68,281 386 520 57 - 69,244 1 Originated in 2019 54,902 1,112 1,061 119 - 57,194 22 Originated Prior to 2019 97,716 1,230 6,000 299 - 105,245 7 Revolving 103,252 - 654 - - 103,906 1 Revolving Loans Converted to Term 20 - - - - 20 - Total Real Estate: Residential $ 669,391 $ 3,161 $ 9,353 $ 489 $ - $ 682,394 $ 42 Commercial Originated in 2023 $ 303,160 $ 1,439 $ 709 $ - $ - $ 305,308 $ - Originated in 2022 267,678 698 1,196 - - 269,572 247 Originated in 2021 136,291 5,483 928 16 - 142,718 25 Originated in 2020 48,990 448 921 42 - 50,401 49 Originated in 2019 21,137 584 640 231 - 22,592 1,632 Originated Prior to 2019 61,166 3,843 341 251 - 65,601 658 Revolving 499,642 2,128 573 28 - 502,371 202 Revolving Loans Converted to Term 275 - - - - 275 - Total Commercial $ 1,338,339 $ 14,623 $ 5,308 $ 568 $ - $ 1,358,838 $ 2,813 Consumer and Other Originated in 2023 $ 11,245 $ - $ - $ - $ - $ 11,245 $ 8 Originated in 2022 7,219 - 27 - - 7,246 78 Originated in 2021 3,372 - 55 - - 3,427 29 Originated in 2020 1,850 - 88 - - 1,938 11 Originated in 2019 2,359 - 40 - - 2,399 18 Originated Prior to 2019 18,280 - 92 - - 18,372 61 Revolving 18,814 100 160 - - 19,074 1,284 Revolving Loans Converted to Term 126 - - - - 126 - Total Consumer and Other $ 63,265 $ 100 $ 462 $ - $ - $ 63,827 $ 1,489 Total Loans $ 4,921,631 $ 40,629 $ 27,856 $ 2,669 $ - $ 4,992,785 $ 6,429 105 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 (Risk Grade 10-45) Special Mention (Risk Grade 50) Substandard (Risk Grade 60) Doubtful (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 December 31, 2023 and 2022, loan balances outstanding more than 90 days past due and still accruing interest amounted to $ 127,000 and $ 335,000 , respectively. As of December 31, 2023 and 2022, loan balances outstanding on nonaccrual status amounted to $ 16.9 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 December 31, 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 December 31, 2023. All loans greater than 90 days past due are generally placed on nonaccrual status. 106 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Aged Analysis of Past Due Loans Receivable December 31, 2023 (Dollars in thousands) 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans Receivable Recorded Investment Over 90 Days Past Due and Still Accruing Real Estate Loans: Commercial $ 240 $ 536 $ 2,954 $ 3,730 $ 2,214,198 $ 2,217,928 $ 44 Construction 279 1,320 3,198 4,797 665,001 669,798 - Residential 1,792 1,207 4,058 7,057 675,337 682,394 20 Total Real Estate Loans 2,311 3,063 10,210 15,584 3,554,536 3,570,120 64 Commercial 1,101 71 1,622 2,794 1,356,044 1,358,838 52 Consumer and Other 280 252 188 720 63,107 63,827 11 Total $ 3,692 $ 3,386 $ 12,020 $ 19,098 $ 4,973,687 $ 4,992,785 $ 127 December 31, 2022 (Dollars in thousands) 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans Receivable Recorded Investment Over 90 Days Past Due 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 The Bank seeks to assist customers that are experiencing financial difficulty by renegotiating loans within lending regulations and guidelines. The Bank makes loan modifications, primarily utilizing internal renegotiation programs via direct customer contact, that manage customers’ debt exposures held only by the Bank. Additionally, the Bank makes loan modifications with customers who have elected to work with external renegotiation agencies and these modifications provide solutions to customers’ entire unsecured debt structures. During the periods ended December 31, 2023 and 2022, the concessions granted to certain borrowers included extending the payment due dates and offering below market contractual interest rates, and were not significant to the consolidated financial statements. 107 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 2023, January 1, 2023, and December 31, 2022, respectively. December 31, January 1, December 31, 2023 2023 2022 (Dollars in thousands) Real Estate Loans: Commercial $ 3,280 $ 5,847 $ 2,644 Construction 3,543 2,421 992 Residential 7,352 6,518 4,080 Total Real Estate Loans 14,175 14,786 7,716 Commercial 2,395 3,045 3,150 Consumer and Other 373 257 188 Total $ 16,943 $ 18,088 $ 11,054 Accrued interest receivable of $ 4.2 million and $ 5.4 million was outstanding as of December 31, 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 December 31, 2023 and December 31, 2022, accrued interest receivable on loans was $ 25.2 million and $ 21.2 million, respectively, and included within accrued interest receivable on the consolidated balance sheets. Note 8 – Premises and Equipment – Bank premises and equipment at December 31, 2023 and 2022 consist of the following: 2023 2022 (Dollars in thousands) Land $ 7,545 $ 7,831 Buildings and Leasehold Improvements 56,513 52,167 Furniture and Equipment 35,252 33,913 Right of Use Asset 20,836 17,477 Total Bank Premises and Equipment 120,146 111,388 Less: Accumulated Depreciation ( 50,666 ) ( 48,211 ) Total Bank Premises and Equipment, net $ 69,480 $ 63,177 The provision for depreciation and amortization attributable to bank premises and equipment charged to operating expenses was $ 4.7 million, $ 4.8 million and $ 4.2 million for the years ended December 31, 2023, 2022 and 2021, respectively. 108 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 - Goodwill and Other Intangible Assets – Goodwill was recorded as a result of acquisitions. The carrying amount of goodwill as of December 31, 2023 and 2022 was $ 88.4 million and $ 88.5 million, respectively. In 2023, goodwill was reduced by $ 153,000 due to the sale of the Leesville branch. In 2022, the increase of $ 28.6 million in goodwill was the result of the acquisition of TCBI. The Company performed the required annual goodwill impairment test as of October 1, 2023. The Company’s annual test did not indicate any impairment as of the testing date. Following the testing date, management determined no triggering event had occurred though December 31, 2023. Core deposit and customer intangible assets were acquired in conjunction with the business combinations. A summary of the core deposit and customer intangible assets as of December 31, 2023 and 2022 is as follows: 2023 2022 (Dollars in thousands) Gross Carrying Amount $ 21,100 $ 17,225 Adjustment for Sale of Branch ( 50 ) - Acquired in TCBI Acquisition - 3,875 Less: Accumulated Amortization ( 9,155 ) ( 7,058 ) Net Carrying Amount $ 11,895 $ 14,042 Amortization expense on the core deposit and customer intangible assets totaled approximately $ 2.1 million, $ 2.0 million and $ 1.6 million during the years ended December 31, 2023, 2022 and 2021, respectively. The following table presents the estimated aggregate amortization expense for the periods indicated: December 31, (Dollars in thousands) 2024 $ 2,093 2025 1,885 2026 1,816 2027 1,816 2028 1,539 Thereafter 2,746 Total Core Deposit and Customer Intangible $ 11,895 109 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 – Deposits – Deposit accounts at December 31, 2023 and 2022 are summarized as follows: 2023 2022 (Dollars in thousands) Noninterest Bearing - DDA $ 1,299,090 $ 1,549,381 Noninterest Bearing Deposits 1,299,090 1,549,381 Interest Bearing - DDA 502,077 455,117 NOW and Super NOW Accounts 496,845 579,789 Money Market Accounts 1,425,808 1,136,597 Savings Accounts 223,871 312,884 Certificates of Deposit Over $250,000 623,336 279,781 Other Certificates of Deposit 677,763 506,796 Interest Bearing Deposits 3,949,700 3,270,964 Total Deposits $ 5,248,790 $ 4,820,345 Approximately 79.0 % of certificates of deposit as of December 31, 2023 have stated maturity dates during 2024 and the remaining 21.0 % have stated maturity dates during 2025 and beyond. At December 31, 2023 and 2022, total deposits for the top three customer relationships was approximately $ 168.3 million and $ 168.9 million, respectively, which represented 3.2 % and 3.5 % of total deposits, respectively. Brokered and reciprocal deposits were approximately $ 1.0 billion and $ 550.2 million at December 31, 2023 and 2022, respectively. Included in these brokered and reciprocal deposits are public fund deposits of approximately $ 145.9 million and $ 131.9 million at December 31, 2023 and 2022, respectively. Other public fund deposits were approximately $ 511.6 million and $ 504.1 million at December 31, 2023 and 2022, respectively. 110 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 – Borrowings – The Bank had outstanding advances from the FHLB of $ 211.2 million and $ 410.1 million at December 31, 2023 and 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 December 31, 2023 and December 31, 2022 was $ 35.3 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 December 31, 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 $ 25.0 million at December 31, 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 December 31, 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 December 31, 2023, with interest at 4.56 % paid monthly. Principal is due at maturity in July 2026. One fixed rate loan of $ 25.0 million at December 31, 2023, with interest at 4.13 % paid monthly. Principal is due at maturity in October 2028. This advance has put options beginning in October 2024. One fixed rate loan of $ 25.0 million at December 31, 2023, with interest at 3.92 % paid monthly. Principal is due at maturity in October 2030. This advance has put options beginning in October 2024. One fixed rate loan of $ 25.0 million at December 31, 2023, with interest at 3.72 % paid monthly. Principal is due at maturity in October 2033. This advance has put options beginning in October 2024. One fixed rate loan of $ 25.0 million at December 31, 2023, with interest at 3.57 % paid monthly. Principal is due at maturity in October 2033. This advance has put options beginning in October 2024. One fixed rate loan of $ 100.0 million at December 31, 2022, with interest at 3.53 % paid monthly. Principal is due at maturity in October 2027. This advance had put options beginning in October 2023 and was paid off in October 2023. 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. These advances are collateralized by the Company’s investment in FHLB stock and a blanket lien on qualifying loans in the Bank’s loan portfolio. The blanket lien totaled approximately $ 1.8 billion at December 31, 2023 with unused availability for advances and letters of credit of approximately $ 1.2 billion. The Company has outstanding lines of credit with several of its correspondent banks available to assist in the management of short-term liquidity. These agreements provide for interest based upon the federal funds rate on the outstanding balance. Total available lines of credit as of December 31, 2023 and 2022 were $ 145.0 million and $ 154.0 million, respectively. The Company purchased $ 14.1 million on these lines at December 31, 2022 and was not in a purchased position on these lines at December 31, 2023. The Company had a line of credit with First National Banker’s Bank (“FNBB”) and was allowed to borrow on a revolving basis up to $ 5.0 million. This line of credit, established on November 3, 2021, was secured by a pledge of and security interest in the common stock of the Bank and established for general corporate purposes. The Company drew down the full amount in 2022 and did not have a balance on the line of credit at December 31, 2021. The line of credit carried a variable interest rate equal to the Wall Street Journal Prime Rate with a minimum rate of 3.50 %, and matured in November 2022. This FNBB line was paid in full at maturity, and was not renewed, in November, 2022. 111 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On March 12, 2023, the Federal Reserve launched the Bank Term Funding Program (“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 December 31, 2023. These loans bear a fixed interest rate of 4.38 % and mature on March 22, 2024. In December 2018, the Company issued subordinated notes in the amount of $ 25.0 million. The subordinated notes bear a fixed rate of interest at 6.75 % until December 31, 2028 and a floating rate thereafter through maturity in 2033. The balance outstanding at both December 31, 2023 and 2022 was $ 25.0 million. The subordinated notes were issued for the purpose of paying off the long term advance and line of credit with FNBB, for general corporate purposes and to provide Tier 2 capital. The subordinated notes are redeemable by the Company at its option beginning in 2028. In the Pedestal acquisition, the Company assumed Pedestal’s junior subordinated debentures, which are associated with $ 5.0 million in trust preferred securities acquired from Pedestal. Interest on the junior subordinated debentures is accrued at an annual rate equal to the 3 -month LIBOR, as determined in the indenture governing the debentures, plus 3.05 %. Interest is payable quarterly. The indenture allows the Company to defer interest payments for up to 20 consecutive quarterly periods without resulting in a default. The trust preferred securities do not have a stated maturity date, however, they are subject to mandatory redemption on September 17, 2033, or upon earlier redemption. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the trust preferred securities subject to the guarantee agreement and the indenture. Principal and interest payments on the junior subordinated debentures are in a superior position to the liquidation rights of holders of common stock. On March 26, 2021, the Company issued $ 52.5 million in subordinated debt. This subordinated debt bears interest at a fixed rate of 4.25 % through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031. The subordinated notes were issued to provide additional capital support to the Bank, to support growth, to better position the Company to take advantage of strategic opportunities that may arise from time to time, repayment of existing Company borrowings, and for other general corporate purposes. The subordinated notes are redeemable by the Company at its option beginning in 2026. On April 1, 2021, the Company, through b1BANK, consummated the acquisition of SSW as discussed in Note 3. Under the terms of the acquisition, the Company issued $ 3.9 million in subordinated debt to the former owners of SSW. This subordinated debt bears interest at a fixed rate of 4.75 % through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031. The subordinated notes are redeemable by the Company at its option beginning in 2026. 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, and was callable beginning April 11, 2023. Another tranche in the amount of $ 7.5 million bears an adjustable interest rate, based on a benchmark rate plus 350 basis points, until maturity on December 13, 2028, and was callable beginning December 13, 2023. 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 carried an aggregate $ 1.1 million and $ 2.9 million fair value adjustment, respectively, as of December 31, 2023 and 2022. Note 12 – Securities Sold Under Agreements to Repurchase – At December 31, 2023 and 2022, the Bank had sold various investment securities with an agreement to repurchase these securities at various times within one year. These securities generally remain under the Bank’s control and are included in securities available for sale. These pledged securities have coupon rates ranging from 0.9 % to 8.0 % and maturity dates ranging from 2025 to 2041. The related liability to repurchase these securities was $ 18.9 million and $ 20.2 million at December 31, 2023 and 2022, respectively. 112 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13 – Income Taxes – The consolidated provision (credit) for income taxes consists of the following at December 31, 2023, 2022 and 2021: 2023 2022 2021 (Dollars in thousands) Provision for Current Taxes - Federal $ 17,491 $ 12,969 $ 13,008 Provision (Credit) for Deferred Taxes 2,052 1,368 ( 586 ) Total Provision for Income Taxes $ 19,543 $ 14,337 $ 12,422 The provision (credit) for federal income taxes differs from the amount computed by applying federal statutory rates to income from operations as indicated in the following analysis at December 31, 2023, 2022 and 2021: 2023 2022 2021 (Dollars in thousands) Federal Statutory Income Tax $ 19,023 $ 14,404 $ 13,557 Tax Exempt Income ( 188 ) ( 690 ) ( 815 ) Stock Based Compensation 197 16 ( 220 ) Goodwill Write-off for Branch Sale 32 - 35 Other - Net 479 607 ( 135 ) Total Provision for Income Taxes $ 19,543 $ 14,337 $ 12,422 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the deferred tax assets and liabilities are as follows: 2023 2022 (Dollars in thousands) State NOL $ 2,885 $ 2,285 State NOL Valuation Allowance ( 2,885 ) ( 2,285 ) Net Operating Loss Carryforward 583 1,700 Unrealized Loss on Securities 17,835 20,040 Acquired Loans Fair Market Value Adjustment 2,596 5,705 Allowance for Loan Losses 8,539 8,067 Lease Liability 4,472 3,731 Deferred Compensation 2,231 1,589 Stock Awards 1,277 1,135 Other 1,156 940 Deferred Tax Assets 38,689 42,907 Right of Use Asset 4,402 3,693 Core Deposit Intangible 2,513 2,967 Depreciation 2,409 2,512 Acquired Securities Difference in Basis 1,209 1,477 Other 833 1,064 Deferred Tax Liabilities 11,366 11,713 Net Deferred Tax Asset $ 27,323 $ 31,194 The Company acquired certain deferred tax attributes and liabilities as a result of a merger during 2015, including a net operating loss (“NOL”) carryforward of $ 287,000 and alternative minimum tax (“AMT”) credit carryforwards of $ 984,000 . The Company is limited in the amount it may deduct against current taxable income each year. As of December 31, 2023 the NOL carryforward was $ 28,737 and expires in 2033. The AMT credit carryforward was exhausted in 2019. Additionally, the Company acquired certain deferred tax attributes and liabilities as a result of the 2022 TCBI acquisition, including a federal NOL carryforward of $ 8.8 million and a federal charitable contribution carryforward of $ 229,000 . The amount of the NOL carryforward the Company is allowed to deduct against current taxable income each year is limited, and the Company may not offset more than 80% of taxable income in any year. As of December 31, 2023, the NOL and charitable contribution carryforward was $ 2.7 million to be carried forward indefinitely until utilized. 113 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14 – Accumulated Other Comprehensive Income (Loss) – The following is a summary of the changes in the balances of each component of accumulated other comprehensive income (loss) for the years ended December 31, 2023 and 2022: 2023 2022 (Dollars in thousands) Unrealized Gains (Losses) on AFS Investment Securities and Equity Method Investments: Balance at Beginning of Year $ ( 74,204 ) $ ( 1,177 ) Other Comprehensive Income (Loss) on AFS Investment Securities Before Reclassifications - Net of Tax 10,258 ( 73,679 ) Other Comprehensive Income (Loss) on Equity Method Investments - Net of Tax ( 616 ) 690 Reclassification Adjustment for Gains (Losses) on Sale of AFS Investment Securities Realized - Net of Tax ( 2,023 ) ( 38 ) Other Comprehensive Income (Loss) 7,619 ( 73,027 ) Balance at End of Year $ ( 66,585 ) $ ( 74,204 ) Note 15 – Shareholders ’ Equity and Regulatory Matters – Shareholders’ Equity of the Company includes the undistributed earnings of the Bank. The Company pays dividends from its assets, which are provided primarily by dividends from the Bank. Certain restrictions exist regarding the ability of the Bank to pay cash distributions. Louisiana statutes require approval to pay distributions in excess of a bank’s earnings in the current year plus retained net profits for the preceding year. The Company paid quarterly common stock dividends totaling $ 0.50 per share and $ 0.48 per share for the years ended December 31, 2023 and 2022, respectively, based upon quarterly financial performance. The Company paid full quarterly preferred stock dividends totaling $ 75.00 per share for the year ended December 31, 2023 and, $ 18.75 per share for the year ended December 31, 2022, following issuance of the preferred stock on September 1, 2022. Common Stock Repurchase Plan On October 22, 2020, the Company’s board of directors approved a resolution authorizing management to repurchase shares of its common stock with an aggregate purchase price of up to $ 30.0 million from time to time, subject to certain limitations and conditions. The stock repurchase program expired on December 31, 2021. The stock repurchase program did not obligate the Company to repurchase any shares of its common stock. The Company repurchased $ 10.9 million and $ 798,000 of shares for the years ended December 31, 2021 and 2020, respectively. On May 23, 2023, the Company’s board of directors approved a resolution authorizing management to repurchase shares of its common stock with an aggregate purchase price of up to $ 30.0 million from time to time, subject to certain limitations and conditions. The stock repurchase program expired on December 31, 2023. The stock repurchase program did not obligate the Company to repurchase any shares of its common stock. The Company did not repurchase any shares under this plan. 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 are 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 $ 75.00 per share and $ 18.75 per share were paid during the years ended December 31, 2023 and 2022, respectively. 114 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Regulatory Matters The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum regulatory capital requirements can initiate certain mandatory, and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines involving quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios. As detailed below, as of December 31, 2023 and 2022, the Bank met all of the capital adequacy requirements to which it is subject. As of December 31, 2023 and 2022, each of the Company and the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. For the years ended December 31, 2023 and 2022, each of the Company and the Bank was required to maintain minimum total capital, Tier 1 capital, risk-based common equity Tier 1, and Tier 1 leverage ratios at the levels disclosed in the table below to be categorized as well capitalized. There are no conditions or events since the most recent notification that management believes have changed the prompt corrective action category. The following is a summary of the Company’s (consolidated) and the Bank’s actual capital amounts and ratios at December 31, 2023 and 2022. Business First Bancshares, Inc. (Consolidated) Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) December 31, 2023: Total Capital (to Risk-Weighted Assets) $ 754,990 12.85 % $ 470,215 8.00 % $ 587,769 10.00 % Tier 1 Capital (to Risk-Weighted Assets) 614,975 10.46 % 352,661 6.00 % 470,215 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) 538,045 9.15 % 264,496 4.50 % 382,050 6.50 % Tier 1 Leveraged Capital (to Average Assets) 614,975 9.52 % 258,407 4.00 % 323,008 5.00 % December 31, 2022: Total Capital (to Risk-Weighted Assets) $ 704,840 12.75 % $ 442,391 8.00 % $ 552,988 10.00 % Tier 1 Capital (to Risk-Weighted Assets) 557,088 10.07 % 331,793 6.00 % 442,391 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) 480,158 8.68 % 248,845 4.50 % 359,442 6.50 % Tier 1 Leveraged Capital (to Average Assets) 557,088 9.49 % 234,859 4.00 % 293,574 5.00 % 115 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS To Be Well Capitalized Under For Capital Prompt Corrective b1BANK Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) December 31, 2023: Total Capital (to Risk-Weighted Assets) $ 730,117 12.43 % $ 469,751 8.00 % $ 587,188 10.00 % Tier 1 Capital (to Risk-Weighted Assets) 686,379 11.69 % 352,313 6.00 % 469,751 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) 686,379 11.69 % 264,235 4.50 % 381,672 6.50 % Tier 1 Leveraged Capital (to Average Assets) 686,379 10.63 % 258,203 4.00 % 322,754 5.00 % December 31, 2022: Total Capital (to Risk-Weighted Assets) $ 657,588 11.91 % $ 441,833 8.00 % $ 552,292 10.00 % Tier 1 Capital (to Risk-Weighted Assets) 618,805 11.20 % 331,375 6.00 % 441,833 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) 618,805 11.20 % 248,531 4.50 % 358,989 6.50 % Tier 1 Leveraged Capital (to Average Assets) 618,805 10.55 % 234,679 4.00 % 293,348 5.00 % Note 16 – Stock Based Compensation – Equity Incentive Plan The Company previously granted options to its employees under its 2006 Stock Option Plan which expired on December 22, 2016. On June 29, 2017, the Company’s shareholders approved its 2017 Equity Incentive Plan (the “Plan”). The Plan provides for the grant of various types of equity grants and awards, including incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares and other stock-based awards to eligible participants, which includes the Company’s employees, directors and consultants. During the year ended December 31, 2022, Company shareholders approved an additional 400,000 shares to be reserved for future awards under the Plan. In addition, the number of shares issuable under the Plan were increased by 143,908 shares as a result of the assumption of options to purchase shares of TCBI common stock that were converted into options to purchase shares of Company common stock upon the TCBI acquisition on March 1, 2022. In total, the Plan has reserved 1,043,908 shares of common stock for grant, award or issuance to eligible participants, all of which may be subject to incentive stock option treatment. The Plan is administered by the Compensation Committee of the Company’s board of directors, which determines, within the provisions of the Plan, those eligible participants to whom, and the times at which, grants and awards will be made. As of December 31, 2023, 745,620 awards have been granted under the Plan and 298,288 shares of common stock remain available for grant. Restricted Stock Awards The Company issues restricted stock under various plans for certain officers and other key employees. The restricted stock awards may not be sold or otherwise transferred until certain restrictions have lapsed. The holders of the restricted stock receive dividends and have full voting rights with respect to those shares as of the date of grant. The compensation expense for these awards is determined based upon the market value of the Company’s common stock at the grant date applied to the total number of shares awarded and is recognized over the requisite service period. During the years ended December 31, 2023, 2022 and 2021, the Company issued shares of restricted stock which vest in three equal installments over the requisite service period. For the years ended December 31, 2023, 2022 and 2021, respectively, the Company recognized $ 4.7 million, $ 4.3 million and $ 2.6 million in compensation costs related to restricted stock awards. At December 31, 2023, 2022 and 2021, respectively, unrecognized share-based compensation associated with these awards totaled $ 3.4 million, $ 3.7 million and $ 2.4 million. The $ 3.7 million of unrecognized share-based compensation at December 31, 2023 is expected to be recognized over a weighted average period of 2.0 years. 116 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below summarizes the restricted stock award activity for the period presented. Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 Weighted Average Weighted Average Weighted Average Shares Grant Date Fair Value Shares Grant Date Fair Value Shares Grant Date Fair Value Balance, at Beginning of Period 131,624 $ 24.45 94,245 $ 21.60 53,756 $ 24.49 Granted 280,101 20.29 141,646 26.34 111,687 20.73 Forfeited ( 2,738 ) 19.51 ( 6,709 ) 27.13 ( 989 ) 24.11 Earned and Issued ( 177,951 ) 16.97 ( 97,558 ) 24.20 ( 70,209 ) 22.43 Balance, at End of Period 231,036 $ 21.43 131,624 $ 24.45 94,245 $ 21.60 Stock Grants During the years ended December 31, 2022 and 2021, the Company issued a total of 11,700 and 7,301 shares of common stock, respectively, to non-employee directors as compensation for their board service. There were 2,442 shares issued during the year ended December 31, 2023 to employees. The shares were issued with weighted average grant date fair values of $ 20.48 per shares for the year ended December 31, 2023, $ 23.08 per share for the year ended December 31, 2022, and $ 23.35 per share for the year ended December 31, 2021. The total stock-based compensation expense was determined based upon the market value of the Company’s common stock at the grant date applied to the total number of shares granted. These grants resulted in an expense of $ 50,000 for the year ended December 31, 2023 and director fees expense of $ 120,000 and $ 276,000 for the years ended December 31, 2022 and 2021, respectively. Stock Options In 2006, the Company established a stock option plan with 1,500,000 shares available to be granted as options under the plan. Under the provisions of the plan, the option price cannot be less than the fair value of the underlying common stock as of the option grant date, and the maximum option term cannot exceed ten years. The 2006 Stock Option Plan expired on December 22, 2016 and the Company is no longer permitted to issue additional stock options under this plan. However, the Company did grant 143,908 stock option awards under the 2017 Equity Incentive Plan to former TCBI employees in conjunction with the acquisition during the year ended December 31, 2022. The Company used the Black-Scholes option pricing model to estimate the calculated value of the various share-based awards for the year ended December 31, 2023. The following is an analysis of the activity related to the stock options: Years Ended December 31, 2023 2022 2021 Number of Weighted Average Number of Weighted Average Number of Weighted Average Options Exercise Price Options Exercise Price Options Exercise Price Outstanding Options, at Beginning of Period 130,924 $ 18.59 113,547 $ 17.06 385,300 $ 14.67 Granted - - 143,908 22.01 - - Exercised ( 7,500 ) 17.11 ( 67,060 ) 19.93 ( 261,753 ) 13.62 Forfeited or Expired ( 2,816 ) 22.38 ( 59,471 ) 22.45 ( 10,000 ) 15.00 Outstanding Options, at End of Period 120,608 $ 18.59 130,924 $ 18.59 113,547 $ 17.06 Exercisable, at End of Period 111,032 $ 18.24 118,958 $ 18.18 113,547 $ 17.06 At December 31, 2023, options for 111,032 shares at a weighted average exercise price of $ 18.24 were vested and exercisable. The aggregate intrinsic value of both exercisable and outstanding awards at December 31, 2023 and 2022 is $ 731,000 and $ 472,000 with a weighted average remaining contractual life of 1.9 years and 2.9 years, respectively. 117 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Employee Benefit Plans – Defined Contribution Plan The Bank has a defined contribution plan qualified under Internal Revenue Code 401 (K) for those employees who meet the eligibility requirements. Contributions may be made by eligible employees subject to Internal Revenue Service limits. The Bank contributes a matching contribution up to 4 % of wages which totaled $ 2.4 million, $ 2.3 million and $ 1.8 million and is included in salaries and employee benefits for the years ended December 31, 2023, 2022 and 2021, respectively. Deferred Compensation The Company has established certain unfunded nonqualified deferred compensation agreements for the purpose of providing deferred compensation as retirement benefits for a select group of management. At December 31, 2023 and 2022, the Company had recorded accrued liabilities of $ 3.5 million and $ 3.0 million, respectively. The expense related to the deferred compensation agreements was $ 586,000 , $ 507,000 and $ 408,000 for the years ended December 31, 2023, 2022 and 2021, respectively. Note 18 – Other Income and Expenses – An analysis of Other Income is as follows for the years ended December 31, 2023, 2022 and 2021: 2023 2022 2021 (Dollars in thousands) Debit Card and ATM Fee Income $ 6,590 $ 6,407 $ 6,199 Cash Value of Life Insurance Income 2,247 1,931 1,396 Fees and Brokerage Commissions 7,247 6,964 5,015 Pass-Through Income from SBIC Partnerships 1,946 1,347 2,615 Gain on Extinguishment of Debt 1,458 - - Gain on Sale of Branch 945 - 492 Swap Fee Income 964 - - Other 6,134 3,863 2,757 Total Other Income $ 27,531 $ 20,512 $ 18,474 An analysis of Other Expenses is as follows for the years ended December 31, 2023, 2022 and 2021: 2023 2022 2021 (Dollars in thousands) Advertising and Promotions $ 4,628 $ 3,949 $ 2,712 Communications 2,290 2,561 1,976 Ad Valorem Shares Tax 3,160 3,400 2,499 Data Processing Fees 9,034 8,358 8,137 Directors' Fees 1,079 972 790 Insurance 2,028 1,655 1,091 Legal and Professional Fees 3,173 2,359 2,679 Office Supplies and Printing 1,215 1,159 1,131 Regulatory Assessments 4,119 3,124 2,440 Taxes and Licenses 299 61 120 Merger and Conversion Costs 236 4,808 515 Other 13,971 12,414 11,396 Total Other Expenses $ 45,232 $ 44,820 $ 35,486 Note 19 – Financial Instruments with Off-Balance-Sheet Risk – 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. 118 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 standby and commercial letters of credit of approximately $ 45.2 million at December 31, 2023. As discussed in Note 7, we have a reserve for unfunded loan commitments of $ 3.3 million and $ 605,000 at December 31, 2023 and 2022, respectively. Note 20 – Concentrations of Credit – The majority of the Bank’s business activities are with customers in the Bank’s market area, which consists primarily of Louisiana, the Dallas / Fort Worth, Texas metroplex, and Houston, Texas. The majority of such customers are depositors of the Bank. The concentrations of credit by type of loan are shown in Note 7. The Bank, as a matter of policy, does not extend credit to any single borrower or group of related borrowers in excess of the Bank’s legal lending limits. Most of the Bank’s credits are to individuals and businesses secured by real estate. A substantial portion of their ability to pay on their debt is dependent on the local economy and industries in the areas. Within the loan portfolio, the Bank has a concentration of credits secured by real estate. The Bank had extended credit secured by non-farm non-residential real estate totaling approximately $ 2.0 billion and $ 1.8 billion, which accounted for 39.8 % and 39.7 % of total loans held for investment at December 31, 2023 and 2022, respectively. Additionally, the Bank had extended credit secured by construction and land development totaling approximately $ 669.8 million and $ 722.1 million, respectively; these loans represented 13.4 % and 15.7 % of total loans held for investment at December 31, 2023 and 2022, respectively. The Bank maintains amounts on deposit and federal funds sold with correspondent banks which may periodically exceed the federally insured amount. Note 21 – 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 $ 5.6 million, $ 4.9 million and $ 2.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. The Company had a weighted average lease term of 6.5 years and 6.0 years and a weighted average discount rate of 3.24 % and 2.63 % as of December 31, 2023 and 2022, respectively. Future minimum lease payments under these leases are as follows: December 31, (Dollars in thousands) 2024 $ 4,429 2025 3,693 2026 3,473 2027 3,362 2028 3,064 2029 and Thereafter 5,617 Total Future Minimum Lease Payments 23,638 Less Imputed Interest ( 2,474 ) Present Value of Lease Liabilities $ 21,164 119 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 22 – Commitments – SBIC Capital Commitment The SBIC is a program initiated by the U.S. Small Business Administration ("SBA") in 1958 to assist in the funding of small business loans. The program is a joint venture between investors with venture capital, the SBA, and small business borrowers. Investors are responsible for funding the first portion of the capital requirements, with the remaining requirement being funded by the SBA. The funds are then lent to small business borrowers. The Bank has agreed to participate as an investor with McLarty Capital Partners SBIC, L.P. (“McLarty”), McLarty Capital Partners SBIC II, L.P. (“McLarty II”), Firmament Capital Partners SBIC III, L.P. (“Firmament III”), Firmament Capital Partners SBIC IV, L.P. (“Firmament IV”), Bluehenge Capital Secured Debt SBIC, L.P. (“Bluehenge”), Bluehenge Capital Secured Debt SBIC II, L.P. (“Bluehenge II”), New Louisiana Angel Fund 2, LLC (“New Louisiana”) and Pharos Capital Partners IV-A, L.P. (“Pharos”). As part of the TCBI acquisition, the Bank acquired investments in and committed to invest further in Bluehenge Capital Secured Debt SBIC, L.P. (included with prior Bluehenge investments), Valesco Fund II, LP (“Valesco II”), Valesco Fund III, LP (“Valesco III”), and GP Capital Partners, LP (“GP Capital”). Details of these commitments at December 31, 2023 are below. Total Capital Commitment Capital Called Remaining Unfunded Capital Commitment McLarty $ 2,000 $ 1,802 $ 198 McLarty II 2,500 2,222 278 Firmament III 2,500 1,873 627 Firmament IV 2,500 517 1,983 Bluehenge 2,500 2,312 188 Bluehenge II 2,500 1,188 1,312 New Louisiana 50 50 - Pharos 1,000 495 505 Valesco II 1,000 795 205 Valesco III 2,000 119 1,881 GP Capital 1,000 636 364 $ 19,550 $ 12,009 $ 7,541 Fintech Fund Commitment The Company has agreed to invest in certain Fintech funds. As part of the TCBI acquisition, the Company acquired investments in and committed to invest further in any remaining unfunded capital commitments in Work America Capital Fund I, LP and SBRE I, LLC. During the year ended December 31, 2022, SBRE I, LLC was fully redeemed. Details of these commitments at December 31, 2023 are below. Total Capital Commitment Capital Called Remaining Unfunded Capital Commitment BankTech Ventures, LP $ 500 $ 235 $ 265 Jam Fintop BankTech, LP 1,000 508 492 Ledyard Capital Managers, LLC 1,000 1,000 - Mendon Ventures Banktech Fund I, LP 1,500 1,355 145 Castle Creek Launchpad Fund I, LP 1,500 682 818 Work America Capital Fund I, LP 700 700 - $ 6,200 $ 4,480 $ 1,720 120 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Federal Home Loan Bank Letters of Credit The Bank had outstanding letters of credit on behalf of others from the FHLB of $ 301.7 million and $ 173.7 million at December 31, 2023 and 2022, respectively. The outstanding letters of credit as of December 31, 2023 are as follows: Twelve letters of credit totaling $ 93.2 million expire in January 2024. Four letters of credit totaling $ 162.7 million expire in February 2024. One letter of credit of $ 403,000 expires in March 2024. Eleven letters of credit totaling $ 28.9 million expire in April 2024. Nine letters of credit totaling $ 7.1 million expire in May 2024. Two letters of credit totaling $ 4.6 million expire in June 2024. Two letters of credit totaling $ 3.4 million expire in August 2024. One letter of credit of $ 251,000 expires in September 2024. Two letters of credit totaling $ 675,000 expire in November 2024. One letter of credit of $ 329,000 expires in December 2024. Note 23 – Related Party Transactions – In the ordinary course of business, the Bank has granted loans to directors, officers and their affiliates. Such loans were made on substantially the same terms as those prevailing at the time for comparable transactions with other customers. Such loans amounted to $ 19.5 million and $ 66.8 million at December 31, 2023 and 2022, respectively. Related party deposits totaled $ 51.2 million and $ 58.0 million as of December 31, 2023 and 2022, respectively. Note 24 – 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. 121 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. The following tables present the balance of assets and liabilities measured on a recurring basis as of December 31, 2023 and 2022. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis. Fair Value Level 1 Level 2 Level 3 (Dollars in thousands) December 31, 2023 Available for Sale: U.S. Treasury Securities $ 16,239 $ - $ 16,239 $ - U.S. Government Agency Securities 9,410 - 9,410 - Corporate Securities 43,839 - 35,871 7,968 Mortgage-Backed Securities 506,310 - 506,310 - Municipal Securities 303,773 - 282,926 20,847 Loans Held for Sale 835 - 835 - Total $ 880,406 $ - $ 851,591 $ 28,815 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 $ 53,768 122 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy. The tables below provide a reconciliation for assets measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs, for the year ended December 31, 2023. Municipal Corporate Securities Bonds (Dollars in thousands) Balance at December 31, 2022 $ 34,768 $ 19,000 Realized Gains (Losses) Included in Net Income - - Unrealized Losses Included in Other Comprehensive Loss ( 2,228 ) ( 1,532 ) Purchases - - Sales - - Maturities, Prepayments, and Calls ( 1,798 ) - Transfers Into Level 3 - - Transfers Out of Level 3 ( 9,895 ) ( 9,500 ) Balance at December 31, 2023 $ 20,847 $ 7,968 The following table provides quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured at fair value on a recurring basis at December 31, 2023. Estimated Valuation Unobservable Range of Fair Value Technique Inputs Discounts (Dollars in thousands) December 31, 2023 Municipal Securities $ 20,847 Present Value of Expected Future Cash Flow Model Liquidity Premium 1 % Corporate Securities 7,968 Present Value of Expected Future Cash Flow Model Liquidity Premium 2 % 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/individually evaluated 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. 123 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value Level 1 Level 2 Level 3 (Dollars in thousands) December 31, 2023 Assets: Impaired/Individually Evaluated Loans $ 4,750 $ - $ - $ 4,750 Other Nonperforming Assets 1,685 - - 1,685 Total $ 6,435 $ - $ - $ 6,435 December 31, 2022 Assets: Impaired Loans $ 16,816 $ - $ - $ 16,816 Other Nonperforming Assets 1,434 - - 1,434 Total $ 18,250 $ - $ - $ 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 loan losses, which was used to measure the credit risk, is subtracted from loans. Cash Value of Bank-Owned Life Insurance (“BOLI") – The carrying amount approximates its fair value. Other Equity Securities – The carrying amount approximates its fair value. Deposits – The fair value of demand deposits and certain money market deposits is the amount payable at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses, with interest rates currently offered for deposits of similar remaining maturities. Borrowings – The fair value of FHLB advances and other long-term borrowings is estimated using the rates currently offered for advances of similar maturities. The carrying amount of short-term borrowings maturing within ninety days approximates the fair value. Commitments to Extend Credit and Standby and Commercial Letters of Credit – The fair values of commitments to extend credit and standby and commercial letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure. 124 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated approximate fair values of the Bank’s financial instruments as of December 31, 2023 and 2022 are as follows: Carrying Total Amount Fair Value Level 1 Level 2 Level 3 (Dollars in thousands) December 31, 2023 Financial Assets: Cash and Short-Term Investments $ 377,244 $ 377,244 $ 377,244 $ - $ - Securities 879,571 879,571 - 850,756 28,815 Loans Held for Sale 835 835 - 835 - Loans - Net 4,952,371 4,849,503 - - 4,849,503 Cash Value of BOLI 96,478 96,478 - 96,478 - Other Equity Securities 33,942 33,942 - - 33,942 Total $ 6,340,441 $ 6,237,573 $ 377,244 $ 948,069 $ 4,912,260 Financial Liabilities: Deposits $ 5,248,790 $ 5,243,326 $ - $ - $ 5,243,326 Borrowings 635,073 613,464 - 613,464 - Total $ 5,883,863 $ 5,856,790 $ - $ 613,464 $ 5,243,326 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 Cash Value of BOLI 91,958 91,958 - 91,958 - Other Equity Securities 37,467 37,467 - - 37,467 Total $ 5,756,824 $ 5,632,403 $ 168,346 $ 929,245 $ 4,534,812 Financial Liabilities: Deposits $ 4,820,345 $ 4,810,263 $ - $ - $ 4,810,263 Borrowings 560,114 544,564 - 544,564 - Total $ 5,380,459 $ 5,354,827 $ - $ 544,564 $ 4,810,263 Note 25 – Litigation and Contingencies – 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. Note 26 – Subsequent Events – The Company acquired Waterstone LSP, LLC ("Waterstone") on January 31, 2024. Waterstone works with community banks and small business owners to implement and manage the SBA's loan programs. 125 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 27 – Financial Statements – Parent Company Only – The balance sheets and statements of income for Business First Bancshares, Inc. (Parent Company) are as follows: BALANCE SHEETS AS OF DECEMBER 31, 2023 AND 2022 (Dollars in thousands) 2023 2022 Assets: Cash $ 12,382 $ 35,684 Investment in Subsidiaries 714,971 641,491 Fintech Funds 3,924 3,080 Goodwill 5,704 5,704 Income Taxes Receivable 10,840 8,739 Other Assets 1,610 1,794 Total Assets $ 749,431 $ 696,492 Liabilities: Accrued Interest Payable $ - $ 80 Subordinated Debt 99,990 110,749 Subordinated Debt - Trust Preferred Securities 5,155 5,155 Other Liabilities 27 27 Total Liabilities 105,172 116,011 Shareholders' Equity: Preferred Stock 71,930 71,930 Common Stock 25,352 25,110 Additional Paid-in Capital 397,447 393,690 Retained Earnings 216,115 163,955 Accumulated Other Comprehensive Income (Loss) ( 66,585 ) ( 74,204 ) Total Shareholders' Equity 644,259 580,481 Total Liabilities and Shareholders' Equity $ 749,431 $ 696,492 126 Table of Contents BUSINESS FIRST BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 (Dollars in thousands) 2023 2022 2021 Income: Dividend Income From Subsidiaries $ 13,000 $ 10,000 $ 13,000 Interest Income 19 13 5 Other Income 1,147 43 - Expenses: Interest Expense 5,753 5,477 3,793 Other Operating Expenses 6,102 6,097 4,374 Income (Loss) Before Income Taxes and Equity in Undistributed Net Income of Subsidiaries 2,311 ( 1,518 ) 4,838 Income Tax Benefit ( 2,059 ) ( 2,400 ) ( 1,916 ) Income Before Equity in Undistributed Net Income of Subsidiaries 4,370 882 6,754 Equity in Undistributed Net Income of Subsidiaries 66,673 53,373 45,382 Net Income 71,043 54,255 52,136 Preferred Stock Dividends 5,401 1,350 - Net Income Available to Common Shareholders $ 65,642 $ 52,905 $ 52,136 127 Table of Contents ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.